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In-Line 3Q for Universal Technical

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Universal Technical Institute’s (UTI - Free Report) fiscal 2012 third quarter earnings of 4 cents per share were in line with the Zacks Consensus Estimate. Quarterly earnings however declined sharply from the prior-year quarter results of 16 cents per share due to lower-than-expected revenue and contraction in margins.

Net revenue for the quarter declined 8.6% to $99.6 million from the prior-year quarter, due to seasonality and a decline in average student enrollment. The third quarter is generally the most challenging one for the company. Revenues were in line with the Zacks Consensus Estimate.

Quarter in Detail

The educational institute, which provides professional automotive, diesel, collision repair, motorcycle and marine programs, reported a 10.8% fall in average undergraduate full-time enrollment to 15,300 in the third quarter of 2012. The enrollment has been trending down consistently since the last few quarters and is the result of macroeconomic headwinds and continued challenges in obtaining student financing.

Student starts, also referred to as new student growth, were flat in the quarter at 2,700 on a year-over-year basis. The new student starts were better than the 5.6% decline seen in the second quarter.

Average revenue per student at Universal Technical moved up 2.5% to approximately $6,500 as the decline in student enrollment was offset by increased tuition fees in the quarter.

The company reported a 3% year-over-year fall in the number of student applications received due to a decline in the number of adult applications. However, the number of military applications surged 18%, while high school applications were up approximately 5%. The graduate employment rate remained consistent at 80%.

Universal Technical informed that EBITDA in the quarter tumbled 42.4% to $7.6 million. Operating income plunged to $1.5 million from $6.7 million in the year-ago period, whereas operating margin shriveled 470 basis points to 1.5%. The fall in operating margin was due to lower top-line growth, higher fixed costs, and a rise in advertising costs.

The company is ramping up its advertising activities to generate higher quality student inquiry sources. It has shifted from lead aggregator marketing channels (like Internet) to the costlier non-aggregator channels (like television). Advertising expense climbed 24.3% to $10.1 million in the quarter, and now represents 10.1% of total revenue, up from 7.4% in the third quarter of fiscal 2011. Management expects advertising expense to range between 10%–11% of total revenue for fiscal 2012.

2012 Outlook

Amidst the macroeconomic uncertainties and regulatory pressures, Universal Technical is pushing hard to manage costs effectively to counter the sluggish student enrollment environment. It is also honing its marketing efficiency and launching new curriculum. Universal Technical further intends to make its loan programs more accessible to students and enhance the count of need-based scholarships in fiscal 2012 to attract new students.

Though average enrollments are declining, the company has seen improvements in the new student starts in all the three quarters of 2012 (from prior quarters) due to these efforts. However, new student starts are expected to remain flat in the fourth quarter on a year-over-year basis. This is in contrary to prior expectations of the new student starts turning positive in the fourth quarter. The company is less optimistic about the new student start growth due to the decline in adult applications in the third quarter and the large population of high school students who have uncertain show rates.

Management however continues to warn that the average number of students for fiscal 2012 will drop at a low-teens rate versus the 2011 levels, and will consequently result in a mid-to-high single-digit revenue decline. Subsequently, operating margin and net income for fiscal 2012 are also expected to drop from 2011 levels.

Other Financial Details

Universal Technical boasted a debt-free balance sheet, and ended the quarter with cash and cash equivalents of $109.6 million versus $116.9 million at the end of the second quarter of 2012.

Our Recommendation

We currently have a Neutral recommendation on Universal Technical. The stock carries a Zacks #3 Rank in the near term (‘Hold’ rating).

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