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Universal Technical Institute, Inc.’s (UTI - Analyst Report) first-quarter fiscal 2014 adjusted earnings of 7 cents per share lagged the Zacks Consensus Estimate of 11 cents by 36%. Earnings also declined 50.0% year over year due to lower revenues, weak margins and higher taxes.

Net revenue of $97.0 million declined 1.4% from the prior-year quarter due to a decline in enrollments. However, revenues beat the Zacks Consensus Estimate of $94 million by 3.2%.

Quarter in Detail

The mechanical training institute reported 6.7% decline in average undergraduate full-time enrollment to 15,400 in the first quarter. Revenue per student improved 5.7% in the quarter, better than 1.5% in the fourth quarter of 2013.

As expected, student starts (new student enrollments) declined 18.5% to 2,200 in the quarter, after growing slightly in the past two quarters. This quarter, one less start date and lower show rates hurt starts.

Enrollments have been trending down consistently over the past few quarters as a result of macroeconomic headwinds; sluggish demand due to reluctance in taking loans and continued challenges in obtaining student financing; changing regulatory requirements; increased price sensitivity and affordability concerns and increased competition.

Though these macro challenges continue, the improving auto/transportation market is in turn increasing the demand for skilled auto technicians. Accordingly, the company witnessed positive growth in student applications and the quality of student inquiries for the third quarter in a row.

Total new applications improved 3% in the quarter with growth seen across all channels — high school, adult and military. High school applications grew 3%, adults grew more than 5% while military applications went up more than 4% in the quarter.

However, conversion rates from applications to new students have been below management’s expectations which is leading to lower show rates and thus hurting starts.

Operating margin declined 300 basis points (bps) from the prior-year quarter to 3.1% due to lower revenues and higher operating costs. Advertising expenses, as a percentage of revenues, increased 50 bps in the quarter to 8.5% due to competitive market pressures.

Fiscal 2014 Outlook

In the second quarter, management expects starts to improve in a high single-digit rate. In fact, management expects starts to remain positive over the next six months; expecting it to grow in a low single-digit rate over the remaining nine months of the fiscal year.

In order to drive new student growth, Universal Technical is making several marketing/advertising investments and offering scholarships to improve the value proposition and affordability of its programs. Universal Technicalis improving its marketing efficiency by generating higher-quality inquiries using a new media-mix model. It is also developing new marketing materials which are designed to help potential students and their families understand the true cost and the value of a UTI education.

The efforts to improve affordability through scholarships will, however, hurt revenue per student. Management, thus, believes that in 2014 “it could be challenging to meet or exceed last year's revenue and operating results”. Previously, management was expecting low single-digit revenue growth in fiscal 2014.

Other Stocks to Consider

Universal Technical carries a Zacks Rank #3 (Hold). Other better-ranked stocks in the education industry include Apollo Education Group, Inc. (APOL - Analyst Report), Bridgepoint Education, Inc. (BPI - Snapshot Report) and New Oriental Education & Technology Group Inc. (EDU - Snapshot Report). All these have a Zacks Rank #2 (Buy).

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