ITT Educational Misses Overall

ITT Educational Services, Inc. ( ESI - Snapshot Report ) second quarter 2012 earnings of $1.96 per share missed the Zacks Consensus Estimate of $2.16 by 9.4%. The earnings for the quarter also dropped 31.2% year over year due to lower revenue.

Quarterly revenue totaled $330 million, down 15.0% from prior-year quarter due to weak enrollments. The total revenue also missed the Zacks Consensus Estimate of $339 million.

Quarter in Detail

The company witnessed a 15.7% year-over-year decline in total enrollment to 66,397 students. The overall decline in enrollment mainly resulted from a 9.5% drop in new enrollment to 15,698 students, largely in the criminal justice and drafting/design programs. New student enrollment witnessed a decline of 85% in School of Criminal Justice and a 40% fall in the School of Drafting and Design.

Of late, most of the education companies have been crippled by poor new enrollment growth. The company's closest competitors, Apollo Group Inc. ( APOL - Analyst Report ) , reported a decline in third-quarter enrollments at the University of Phoenix -- the company’s wholly owned subsidiary -- which pulled down its total revenues for the quarter.

However, ITT Educational’s revenue per student grew 0.5% from the prior-year quarter to $4,637 benefiting from enrollment increases in the electronics technology, business and healthcare-related programs in a number of institutes.

Student persistence rates declined 180 basis points to 71.3% in the quarter since the number of continuing students in the quarter also dipped 17.4%. Student persistence is calculated by dividing the number of continuing students in any academic term by total student enrollment in the preceding academic term.

During the quarter, ITT Educational witnessed a 2.9% decrease in advertising expenditures as management focused on improving efficiencies in the student enrollment processes by reducing expenses. Bad debt expense increased 130 basis points to 5.2% as a percentage of revenue due to a decline in funds available to students from private educational loan programs and increase in internal financing of the students.

The company continues to expand geographically and plans to start a new campus by the end of 2012. During the second quarter of 2012, the company started operations at the new ITT technical campus at San Antonio, Texas. The company intends to open 8 to 10 new locations during 2013.

Share Repurchase

In the quarter, share repurchase activity was aggressive with the company repurchasing $928.5 million shares at a total cost of $61.3 million. The company has 7.8 million shares remaining under its current repurchase authorization.

Outlook

The company is optimistic that the enrollment trends would be positive during the second half of the fiscal 2012.

We currently have a Neutral recommendation on ITT Educational Services, Inc. The stock carries a Zacks #3 Rank (a short-term Hold rating).

Overall, we appreciate ITT Educational’s focus on regional campus expansion, program diversification, and the introduction of new degree programs. However, the persistent declines in enrollment trends remain matters of concern.