Universal Technical Institute Inc Q1 FY2021 Earnings Call

Hello, and welcome to the Universal Technical Institute Fiscal First Quarter 2021 Earnings Conference Call. Please note today's event is being recorded. I now would like to turn the conference over to Jody Kent. Ms. Kent, please go ahead.

Before we begin, we want to remind everyone that today's call will contain forward-looking statements within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Please carefully review today's press release for additional information and important disclosures about forward-looking statements. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes and circumstances that are difficult to predict and many of which are outside of our control.

Thank you, Jody. Good afternoon, everyone, and thank you all for joining us today. To begin, I'd like to once again applaud the tremendous effort of our staff and students during the quarter. We were able to make progress on a number of strategic initiatives while keeping all of our campuses fully operational, starting 1,927 students, a nearly 21% increase over Q1 2020 and graduating 1,510 students despite a significant spike in COVID-19 cases throughout the country. As with most postsecondary institutions around the world, we did experience some temporary effects related to the pandemic this past quarter. Troy will share more of our metrics and full financial results with you a bit later in the call.

Thank you, Jerome. As Jerome outlined, we experienced growth across a number of our key performance indicators during the fiscal first quarter, and we are pleased with our operating performance in light of the broader macro environment. We started 1,927 students in the first quarter, an increase of 20.9% over the prior year pre-COVID first quarter with strengthened starts across all 3 channels. Scheduled starts increased 18.3% year-over-year in the quarter. As of the most recent data, students scheduled to start in the second quarter are currently pacing at an even stronger clip from a year-over-year perspective. Show rate improved 110 basis points year-over-year in the quarter. And notably, we achieved the fourth straight year of first quarter year-over-year show rate improvement.

Thanks, Troy. We continue to feel optimistic about the remainder of the year and the future for UTI and feel these short-term revenue pressures, primarily attributable to the current health crisis in America, are just minor bumps in the road on our path to success. We are seeing extremely strong demand at the front end of our lead funnel that we are more efficiently converting to scheduled starts than we ever have. The job market for our graduates has remained resilient and is expected to see further expansion over the coming months and years. We're confident that our blended learning is the premier way to be educated within our field, and we're seeing tangible results from our ambitious marketing strategy. Our financial position remains rock solid, which offers us optionality moving forward. Our team has a clear vision of both how UTI must execute on the fundamentals in 2021 while aggressively pursuing the growth and diversification path to achieving our fullest potential in the future. I'd now like to turn the call over to the operator for Q&A.

And the first question comes from Austin Moldow with Canaccord.

You mentioned some negative impacts from COVID, but do you believe you're experiencing any improvements in demand from recessionary trends and high unemployment yet?

Yes. Austin, it's Troy. Thanks for the question. We've been talking about the front-end strength on our inquiry flow for a few quarters now. We were up 25% in both the last 2 quarters of fiscal '20 and 11.5% this quarter, and that includes a down month with October because of the election. So we're seeing demand. Clearly, the unemployment rate in our primary demographic is very elevated, even with some of the more recent improvements. So, it's hard to call. But clearly, the enrollments and starts this quarter were very strong. We see, as I commented on, we see strength in our Q2 enrollments, which are actually pacing stronger currently based on data than our Q1 enrollments, and we continue to build the book for the back half of the year. So we're encouraged by the front-end strength we see, and we'll continue to do everything we can to maximize the opportunity and support our prospective students.

Great. Can you go into a little more depth on the advertising environment? And I think you mentioned something about localizing ad messages. Can you just kind of go through that initiative?

Sure. Austin, thanks for calling in anyway. It's Jerome. So a couple of things. Number one, in terms of the environment as a whole. One of the alterations we've made is to start to more localize our advertising. Most of UTI's advertising over the last number of years has been sort of national brand awareness advertisements that would bring someone to inquire about what they may want to do. We're getting far more pointed in our advertising right now. You'll see social media ads in the New York area saying there are 66,000 open jobs. And in 51 weeks, you'd be certified to be able to apply for one of those. And we really believe that a little deeper mining in our local areas brings some of the results we've seen in the first quarter, a beginning of a shift to more local enrollments, which convert at a higher rate and actually show at a higher rate. And then also a bit of a compressed time frame between enrollment and start, which leads to your first question for Troy, which is that the compressed time frame, which is usually about 4 months between inquiry and start, is indicative that you have people who don't have jobs and are ready to get retrained right away. So a lot of that messaging is much more focused on being there for people. And then a significant amount of the focus is really reaching out to people who are local, therefore, they can make a decision quickly and start school right away.

Great. That's really helpful. And if I could sneak in one quick one, you mentioned computer skills. Any thought around leaning further into that kind of computer science or coding, short-term type boot camp coursework?

We have not really gone deep into the notion of coding and boot camps. What we have been doing is we have been looking much more deeply into how the evolution of digital literacy starts to apply to ongoing continuing education, the B2B markets as well as the transition from combustion to hybrid to electric vehicles. We think that those digital skills are going to become much more at a premium, and therefore, we're leaning into them.

And the next question comes from Raj Sharma with B. Riley.

I wanted to clarify that in the last call, the percentage of students completing regular coursework was 80%, and that has now improved to 84%. What accounts for this change? Additionally, Jerome mentioned there are around 1,500 graduates. What is the typical number we would expect for this quarter? Essentially, does the difference indicate that the graduating students are not making sufficient progress, which may have impacted our revenue? I'm trying to better understand the pace of course completion.

Sure. Thanks for your question. This is Troy. I'll share a few points. First, in looking at our Q1 compared to Q4, we always see a seasonal impact from the holiday closure, as we are closed for a week in late December. This leads to lower revenue per student in Q1 compared to Q4, and our revenue remained roughly the same despite typically having more students in Q1. The comparison between this last Q4 and Q1 is quite similar to what we experienced last year in a pre-COVID context. However, we didn't see the improvement we were anticipating, which we discussed in the previous call, regarding bringing more students back to catch up on their labs and related activities. We observed some increase in leave of absences, withdrawals, and retakes that offset the progress we aimed to achieve. We had made strides leading up to the last call, and we noted specific improvements during the last 5 to 6 weeks of the quarter. The first 5 weeks of this quarter show a reversal of that trend. Essentially, we didn’t gain as much as we hoped but also didn’t decline, and we do see ongoing improvement. The initial strength was significant, and we expect that to continue into Q2. We will keep focusing on everything we can to drive performance improvements, which we believe we can accomplish.

Was there a regional aspect to the delays and the hesitation in completing the coursework?

There are definite variances across the campus footprint. I mean, a campus doesn't turn overnight, right? If a campus has a higher leave of absence rate than the other campuses, it takes longer to bounce back. So we definitely have some regional variation. Off the top of my head, I mean, I know there's one or two of our California schools that have been behind throughout. We've seen Arizona, and some of the hotspots are where we've seen some of the most pressure. But it's not 100% consistent. So there's some puts and takes around there, keeping in mind. Again, we have a younger demographic in our schools than broadly speaking is most affected by COVID. So again, I wouldn't point it to any one specific thing. I think it's just what you see out in the macro headlines. We saw some effect from that, but we also see that the actions we've been taking will continue to drive improvement.

I have one final question about that. I notice that you reiterated the guidance. Clearly, you are performing well in terms of starts and interest, and the show rates are improving. However, the annual revenue guidance will only be achieved if there is a noticeable increase in the recognition of this revenue. Are you anticipating that this will be more pronounced in the second half of the year? When do you expect the completion of coursework to fully catch up?

Yes. The make-ups are part of it, right? Having a more normalized leave of absence rate and a more normalized retake rate all contribute to this. We do expect to see improvements, and our guidance includes expectations for improvement throughout the year. It was back-end loaded when we initially provided it, and it remains a bit more back-end loaded now. I want to emphasize that it is a range, and we are comfortable with that range given our initiatives, the strength we see at the front end, and the anticipated improvements throughout the year.

And the next question comes from Steven Frankel with Colliers.

I wonder if you could just dig in a little bit on exactly what the LOA number was, what happened to that sequentially and where you think that goes this quarter.

Yes, certainly. Last quarter, we mentioned that we anticipated operating 1 to 2 points above pre-COVID levels, which can fluctuate. We experience spikes, as noted in previous discussions, particularly during spring break and holiday seasons. Our program runs continuously apart from the one-week break in December. Therefore, being 1 to 2 points above a normalized level translates to approximately 600 to 800 leaves of absence, depending on the time of year. During the last call, we recorded around 700, falling within that range. In December, we exceeded 1,000 for a significant period, and we had two strong cycles for return from leave of absence, one on January 11th and another just this past Monday. Currently, we are much more aligned with our expectations for this quarter and may even surpass them slightly.

So now you're back to somewhere around 700 again?

Yes. In that normalized range. Again, it's going to vary month by month, but definitely something in a more normalized range of what we would expect.

How difficult is the issue of the failure rate? How many students are impacted, and what is the timeline for helping those students get back on track before they withdraw?

We've seen that if a student cannot finish a course after two or three attempts, they usually struggle to pass that course. We have implemented several initiatives, including mentoring and early identification of at-risk students. While not entirely new, these programs are evolving in the current environment we've been in recently. We've added more focus and introduced new programs, such as mentoring, and we are transitioning from Google Classroom to Blackboard to provide a comprehensive curriculum and student management support system. From our pilot programs, we have noticed improvements, and we're now expanding these initiatives. It's important to note that while we didn’t regress, our progress wasn’t as significant as we hoped due to some challenges we faced towards the end of the quarter.

Yes, Jerome here. One of the challenges in providing a definitive answer regarding the withdrawal issue is the fact that we have several students who either get sick or have to quarantine, don’t contact us, miss a couple of weeks, and then return for the third week only to fail the course. They often think that they should attempt a retake or maybe pause for a while. This situation is somewhat related to COVID, but there are additional factors at play as well. In the second quarter, we have observed a significant re-enrollment rate, which gives us confidence to reaffirm our guidance for the rest of the year.

Okay. And with the high rate of unemployment, have you seen a significant mix shift more towards 18- to 24-year-olds than you had pre-COVID?

Yes. That's a really great question. There's a couple of ways to answer that. One, we've seen a mix shift in our major metropolitan areas where a lot of the service jobs went away with the closing of restaurants, closing of retail things, et cetera, along those lines. We've seen a compression in the number of days it takes someone to start from when they inquire. Again, something that's indicative of people who are readily available to start work. And more than the 20- to 25-year-olds, I think there are a lot of 18- to 19-year-olds that graduated from high school last year who didn't find that job they thought they would find when they decided they weren't going to go to school. And so if anything, what we saw in this last quarter was a more pronounced number of that 18- to 19-year-old who left school last September but didn't find anything to do. And so if we look at what sort of stacks up in terms of the last quarter, we had some pent-up demand. Remember, when we talked to the quarter before, we had said that there were a number of students who were fearful of starting in the back-to-school season. That came through in November and December of more of those starts, and those are the younger students. And then also, we saw more local students, again, people who were readily available. And then the lead volume, I think that it also fueled that as well. So as Troy said, it's hard to say, yes. This is all unemployment because there still was the notion of a delay because of COVID. But I think there are anecdotally a lot of students that just weren't able to find that unskilled labor job when they left high school last year.

Okay. And then one more. What changes are you making to your high school recruitment efforts, given the challenges of COVID?

Yes, that's a great question. We are getting more access to high schools than we initially anticipated as we planned for the year. We are actually somewhat pleased with the number of high schools we are reaching, whether virtually or in person. Additionally, we have ramped up our events-based outdoor recruiting efforts on weekends, such as car shows, to attract people to our campuses, while ensuring social distancing. Our virtual events featuring racecar drivers and employment community leaders are effectively bringing more individuals to us as they consider their options. We also observe that the FAFSA data in the U.S. indicates a slight delay in decision-making. The early FAFSA numbers were significantly down at the start of the year, but we are beginning to see a rebound. This delay seems to stem from students focusing on getting through the September and October period rather than planning for the next year. However, by March or April, most students will have made their decisions. We anticipate that this year will follow a different trajectory, with decisions occurring later as students transition from managing their senior year to contemplating their next steps.

And the next question comes from Eric Martinuzzi with Lake Street.

Yes. I wanted to drill down on one of the segments in the channel, the new student starts by channel. It looks like the military has been pretty strong here the last 2 quarters. Could you explain what's behind that trend?

We are noticing that many individuals enrolling and starting with us are those who initially intended to enter the job market directly, but due to a less favorable job market, they are reconsidering their options. This shift seems connected to the current unemployment rate. Additionally, our on-base programs in the military channel are generating increased interest and leads for UTI. We're actively working with the military to provide training on their bases, and those who are unable to participate in these programs represent strong prospects for enrollment at our campuses once they transition out. We are beginning to see positive movement from this as well.

I didn't understand your first comment about the unemployment versus military. Could you recap that for me?

Well, so when someone is rotating out of their service, there are a number of things they can do. They can take advantage of the GI Bill and they can go on to higher education, or they can go out into the job market. A significant portion of them don't take advantage of the higher education benefit that they get and go out into the job market. And I think what we've been seeing is a number of people who are rotating out of the military aren't finding jobs. And therefore, they then choose to exercise their GI benefits to learn a skill and move forward.

No. I mean, I think we'll see some trending up within the guidance. If you do the math around there, you'll get to some higher expense levels as we get into the back half of the year. We have obviously the higher students as we get into the back end of the year with the start strength. And as we stabilize, the student base will add students particularly heavily in the fourth quarter as usual. So definitely a spike up there. You'll see a little bit of some investment in a few areas that may show up in the SG&A side. Not significant, but that will trend up a little bit. So I think, generally speaking, you would model that increasing throughout the year.

Okay. But if we were at $75 million, I think that was the number in which you...

$75 million, yes.

$75 million in Q1. Are you suggesting it might rise to the $80 million to $82 million range over the year, or could it be something larger than that?

Yes, probably something in the low 80s by the time you get to the end of the year.

Okay. All right. And then last question, use of cash here. Obviously, you guys made a big decision to go ahead and buy the facility. That's $45 million that went to own it versus lease it. Just wondering the logic there versus maybe keeping more dry powder for acquisitions of other education-related businesses. What was the thinking at the Board level on that one?

Sure. We have been actively pursuing opportunities for growth and diversification, as mentioned in this call, the last one, and since last year. Timing plays a significant role in this process. Even if we announced an acquisition today, the funds wouldn't be released immediately due to various diligence processes, including reviews from the Department of Education and the ACCSC, which can take 6 to 9 months. For example, when it comes to new campuses or our recent welding announcement, we had to make those decisions now because they require lead time for implementation, and these initiatives generally have shorter lead times. As we explore opportunities, we view ourselves as opportunistic in real estate. We own properties in Dallas and Houston and have previously sold and leased back campuses when cash was needed. The Avondale site presented a considerable opportunity, and we are making a significant strategic commitment there, having negotiated a favorable deal. In the upcoming quarterly filing, which will be submitted tomorrow, we will discuss our financing options to replenish cash at a low rate. We don't sense any limitations in our strategy, as we believe we have numerous options available. More details will emerge as we progress further with our strategic initiatives.

And that does conclude the question-and-answer session. I would like to return the floor to Mr. Grant for any closing comments.

Thanks a lot. Well, so as we've consistently underscored in the past, Troy and I believe in a very open and transparent partnership with the investment community. To that end, we look forward to meeting with as many of you as possible over the coming days and months. So thanks, everyone, for joining us, and that concludes our call for the day. Thank you.

Thank you. As mentioned, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.