Universal Technical Institute Inc Q3 FY2024 Earnings Call

Good day and welcome to the Universal Technical Institute Third Quarter 2024 Earnings Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Matt Kempton, VP, Corporate Finance. Please go ahead.

Hello, and welcome to Universal Technical Institute's fiscal third quarter 2024 earnings call. Joining me today are CEO, Jerome Grant; and CFO, Troy Anderson. Following our prepared remarks, we will open the call for your questions. A replay of this call, its transcript, and our investor presentation will be archived on the Investor Relations section of our website at investor.uti.edu, along with our earnings release issued earlier today and furnished to the SEC. During this call, we may make comments that contain forward-looking statements as defined in the Private Securities and Litigation Reform Act of 1995, which by their nature address matters that are in the future and are uncertain. These statements reflect management's current beliefs and expectations and are subject to a number of factors that may cause actual results to differ materially from those statements. These factors include, but are not limited to those discussed in our earnings release and SEC filings. These statements do not guarantee future performance and therefore undue reliance should not be placed upon them. We do not intend to update these forward-looking statements as a result of new information or future developments, except as required by law. Please note, unless otherwise stated, all comparisons in this call will be against our results for the comparable period of fiscal 2023. The information presented today also includes non-GAAP financial measures. These should be viewed in addition to and not as a substitute for the company's reported results prepared in accordance with U.S. GAAP. All non-GAAP financial measures referenced in today's call are reconciled in our earnings press release to the most directly comparable GAAP measure. For more information regarding definitions of our non-GAAP measures, please see our earnings release, financial supplement, and investor presentation. With that, I will turn the call over to Jerome Grant, CEO of Universal Technical Institute, for his prepared remarks. Jerome?

Thank you, Matt. Good afternoon, everyone. Before we jump into the quarter, I think it's important for us to reflect on the progress our organization has made since we first began this leg of our journey in November of 2017. At that time, we put in place a very specific strategy focused on unlocking the true potential of Universal Technical Institute. We focused on profitably growing the business and creating durable shareholder value, all while continuing to ensure the highest levels of student outcomes and industry satisfaction. When I became CEO in October of 2019, we further enhanced that strategy, accelerating our efforts to grow and diversify the company. As we have executed on our plan, which we internally coined our North Star Strategy, we made significant strides in improving the business. It's very rewarding to see our market capitalization near the $1 billion threshold and to have delivered an approximately 400% increase in the company's stock price. While we are certainly not finished yet, I'm incredibly proud of how much work our entire organization and all our stakeholders have done to help us get to this point. Now, as I'm sure you've seen in the recent headlines, macro data is indicating a weaker economy, including fewer jobs being added than expected and the unemployment rate rising. Though the economy may be lagging in certain sectors, demand for skilled labor across transportation, skilled trades, and healthcare remains robust, with ample job opportunities and anticipated job growth across all of our focus areas over the next 10 years. When people look to reskill or upskill themselves, as a leading workforce solutions provider, we can offer them the industry-aligned education they need to achieve positive outcomes as exemplified by our 80% plus in-field employment rates across both divisions. With that noted, let's jump into our performance for the quarter. Building on our robust growth in the first half of the year, we continue to see strong operational momentum across our key metrics with results consistently meeting or exceeding expectations in the third quarter. We achieved nearly 16% growth in revenue to $177.5 million and a 13% increase in our average undergraduate full-time active students year over year underscoring the execution of our North Star Strategy. Net income grew to $5 million with diluted earnings per share of $0.09. Adjusted EBITDA was $18.4 million, which is an impressive 61% increase. All of these metrics landed in line or exceeded our expectations and improved significantly compared to the prior year period. Total student starts increased by 5% year over year. This is also in line with our expectations and is positioning us nicely to achieve the higher end of our start guidance by the end of the fiscal year. Concorde benefited from favorable start timing in the quarter, particularly in our clinical start opportunities, which contributed to their nearly 35% year-over-year growth in starts. The UTI division experienced a year-over-year decline in starts in the quarter, primarily due to a shift in students from the last start in June to the first start in July versus last year. Regardless, we anticipate double-digit start growth for UTI in the fourth quarter and approximately 10% growth for the fiscal year. We are also happy to see that both our company and industry continue to garner attention from national media outlets such as CNBC, Forbes, and the Wall Street Journal, which underscores the success of our strategic direction and the high level of demand for skilled workforce in the U.S. To that end, I want to extend my gratitude to our divisional and corporate teams for their ongoing leadership as well as our faculty, staff, partners, and students. Their hard work and dedication have not gone unnoticed and we are proud to be recognized by these national publications. Now, diving into our divisional-specific highlights for the quarter, the Concorde division continues to outperform expectations across the board. The benefits from our increased marketing spend and focus on overall marketing and admissions effectiveness, which have endured throughout the year, are key contributors. Clinical programs show very strong growth due to sonography and dental hygiene program expansions, along with the expansion of our associate degree programs, and an overall shift in start opportunities between the third and fourth quarters relative to the prior year. We also continue to see good performance from our core and shorter cash pay programs like phlebotomy and sterile processing, which we are working to expand across the Concorde campus footprint. The expansion of our dental hygiene program in San Diego remains on track with students beginning clinical coursework later this year. We're also excited to announce the upcoming launch of the nursing program in Jacksonville, Florida, in early fiscal 2025. Moreover, in Dallas, we have also been approved to expand our nursing program, which we expect to add approximately 60 average active students in fiscal 2025. The team at Concorde is also dedicated to enhancing graduates' employment opportunities and improving accessibility and affordability through the programs by expanding Concorde's partnership network. One example of a great partner is our relationship with Heartland Dental. We're thrilled to announce the expansion of our existing relationship to now include groundbreaking new initiatives to open co-branded campuses that will initially serve as cash pay training centers for dental hygienists and dental assistants. Our first location is slated to open in the fall of 2025 in Fort Myers, Florida. Under this first-of-its-kind partnership model, Heartland, the nation's largest dental service organization or DSO, will fund the cost of construction of the co-branded campus, including durable equipment and initial supplies. Heartland will also provide financial support to students while our team will manage the campus and be responsible for training students and monitoring outcomes. Once Concorde growth restrictions are lifted, which is targeted to be in fiscal 2026, students will also be able to qualify for Title IV funding, further increasing the appeal for students and operating leverage. The new campus will serve as a direct feeder school into Heartland's over 1,700 locations nationwide as their offices have significant and growing demand for well-trained dental hygienists and dental assistants. From a financial perspective, we anticipate this location to add over $4 million in annual revenue and to be solidly accretive to Concorde's EBITDA margin within two years after the first start and expanding from there. Finally, it's important to underscore that this campus in Fort Myers is merely the first of what we jointly envision to become several more over the next five years. Corporate partnerships have long been a distinguishing characteristic and competitive edge for the UTI division and we're thrilled to bring this differentiator to Concorde as well. Now, turning to the UTI division, the UTI division also performed well. Overall, program expansions continue to be in the forefront of our efforts. The HVACR program expansions at the Avondale and Long Beach campuses had their first classes start in June and July, respectively. The first cohort in Bloomfield is currently enrolling students and will be starting in September, and our Sacramento program is on track to start early next fiscal year. Furthermore, the 14 new programs we've launched at the end of fiscal 2023 have sustained their encouraging growth as market demand continues to strengthen. With nearly 700 student starts year-to-date in these programs, we remain confident we will comfortably exceed 1,000 new student starts in this first fiscal year for the programs. As discussed in previous calls, these program launches mark the beginning of expanding and synthesizing the MIAT-sourced aviation, skilled trades, and energy programs across UTI's division's campuses. The ongoing unification of the UTI and MIAT operations in Houston into a single operating campus is progressing as planned and is set to be completed by the end of this calendar year. In fact, we've completed transitioning the first wave of programs to the UTI division in May. This consolidation exemplifies our strategic focus on optimization, aiming to boost operational efficiencies while also enhancing the student experience and maintaining superior outcomes. Further, it's a key element of our broader brand unification strategy, which we recently announced. Driven by stakeholder input and aimed at leveraging Universal Technical Institute's strong national brand, we are streamlining branding to the UTI campus brand. For MIT Canton, Motorcycle Mechanics Institute, Marine Mechanics Institute, and NASCAR Technical Institute. Although all of the division's campuses will be known as UTI by mid-2025, our partnership with some of the most revered names in transportation, skilled trades, and energy continue to be a key driver of success and we're constantly looking at new and innovative ways to expand our extensive partner ecosystem. With the announcement of the exciting new Heartland partnership at Concorde, I thought it'd be beneficial to provide a brief recap of the extensive nature of UTI division partnerships. This year, we expect to derive over $30 million in revenue from these partnerships with solid year-over-year growth and significantly more economic benefit through joint marketing and donations of products, equipment, and cash. In the auto and diesel space, we currently have 29 manufacturer-specific advanced training program instances, or MSATs, with nine different major manufacturers across the UTI campus footprint, another three manufacturer programs at nine of their locations that we run on their behalf including Mercedes and Porsche, and three on-base military programs partnering with BMW and Daimler Trucks. We expect nearly 3,000 students to start across these programs this year, reflecting growth from increased marketing efforts and expansion of the number of program instances over the past few years. We also provide dealer training for several manufacturers and have major manufacturer programs for motorcycle and marine, along with running programs for both industry and government agencies. And last but certainly not least, we have over 70 business alliance relationships that include cash products, branding, and other partnership benefits. It's important to note that these are deep and long-term relationships, some spanning 25 years. Combined, this is an amazing portfolio of assets that uniquely positions us in the industry. And while these partnerships are currently focused in the transportation space, we see great opportunity to expand the model to include MIAT-sourced programs centered around skilled trades in aviation, similar to what we've done at Concorde and Heartland. Overall, I'm pleased with the continued momentum we experience across both divisions. As a result, we're reaffirming our guidance for fiscal 2024 with the expectation that we will hit the upper end of our revenue and new student start ranges. Before I hand the call over to Troy, I want to spend some time looking at the bigger picture and discussing the next phases of our strategy, which we announced yesterday. With the close of fiscal 2024, we will successfully complete the first phase of our North Star Strategy, one that has been marked by significant achievements including the launch of two new UTI locations, the completion of two strategic acquisitions, and significant program expansions which together have nearly tripled our campus locations and more than doubled the number of students we serve across transportation, the trades, and healthcare. Financially, we will have more than doubled our revenue and seen adjusted EBITDA increase by more than five times during this period, all while continuing to ensure strong student outcomes. With these accomplishments, we're now poised to begin Phase 2 of our North Star Strategy, once again focusing on addressing the critical need for highly trained skilled workers in America. As you may have seen in yesterday's press release, pending regulatory approval, we plan to launch a minimum of six new programs annually on UTI and/or Concorde campuses beginning in fiscal 2025. We also plan to open at least two new campuses each year starting in fiscal 2026 through the beginning of fiscal 2029, initially with UTI campuses and then expanding the Concorde campuses once the Department of Education growth restrictions are lifted. With the momentum built in this first phase of the strategy and the benefits from the second phase, we anticipate achieving a compound annual revenue growth rate of approximately 10% between fiscal 2024 and fiscal 2029. In addition to growth, we'll be focusing on realizing efficiencies in student acquisition, facilities utilization, and educational delivery, resulting in an adjusted EBITDA margin for the company approaching 20% by the end of 2029. Our experienced team, coupled with growing markets eager to hire our well-trained, industry-aligned graduates, positions us well for continued success and mission fulfillment in the coming years. As preliminary approvals and site selections are complete, we'll announce locations and targeted launch dates for any new campuses and programs. In addition to our organic initiatives, we also remain active and will continue to opportunistically pursue strategic acquisitions. With that, I'll turn the call over to Troy to review our financial results and guidance in more depth.

Thank you, Jerome. Through the third quarter, we continued to deliver positive operational and financial performance, meeting or exceeding expectations across our key metrics. In the third quarter, total average undergraduate full-time active students grew 13.4% versus the prior year period. The total new student starts increased 5% year-over-year, both in line with our expectations. The Concorde division generated a 14% increase in average undergraduate full-time active students, while new student starts increased by 34.8%, partially due to timing shifts of clinical start opportunities between the third and fourth quarters relative to the prior year. This is a function of the start frequency and cohort sizes that we are approved for by the various programmatic accreditors. Clinical starts grew a staggering 64% year-over-year in the quarter, while starts for the combined core and short programs grew 20.6%. For the fourth quarter, we expect overall Concorde start growth in the mid-single-digit range, which is notably lower than the third quarter due to the timing shift of the clinical starts. The UTI division drove a 13% increase in average undergraduate full-time active students. For new student starts, we saw more students in the first start in July instead of the last start in June versus the prior year, resulting in a 12.5% decrease in new student starts during the third quarter. We anticipated we would see this shift in our overall start phasing. For reference, our UTI division starts were down year-over-year in June by approximately 480 starts, but are up year-over-year by approximately 570 starts in July. We expect UTI to show double-digit growth in starts in the fourth quarter and approximately 10% start growth for the fiscal year. For the fourth quarter overall, we now expect year-over-year growth in new student starts in the mid to high single-digits given the dynamics I described previously and driven by baseline growth along with the ongoing ramp of recent program expansions and new program rollouts. For the year, this would put total new student starts on the higher end of our 25,500 to 26,500 guidance range. Turning to our financial results, revenue on a consolidated basis was $177.5 million, reflecting 15.8% year-over-year growth and exceeding our expectations. The UTI division's revenue of $117.1 million increased 16.1% and Concorde's revenue increased 15% to $60.3 million. Both of these reflect the strong growth in the respective average undergraduate student populations along with a few points of average tuition rate improvement. For the fourth quarter, we expect low double-digit revenue growth reflecting the ongoing growth momentum in our average undergraduate student population. And as a result, for the fiscal year, we expect to be in the higher end of our revenue guidance range of $720 million to $730 million. In addition to positive results across our student metrics and revenue, we also saw considerable year-over-year increases in profitability. Consolidated net income was $5 million compared to a net loss of $0.5 million in the prior year quarter. This translated to $0.09 of diluted earnings per share for the quarter. At the end of the third quarter, we had 53.8 million common shares outstanding. Adjusted EBITDA was $18.4 million, an increase of 60.9% year over year. Our profitability performance was in line with expectations driven by revenue and student expansion and improved operating leverage that have amplified the returns on our growth investments and optimization efforts. For net income, diluted earnings per share, and adjusted EBITDA, in the fourth quarter, we continue to expect significant year-over-year growth to close out the year as our profitability is seasonally most pronounced in the fourth quarter. Overall, we expect to end the year comfortably within our guidance ranges across our profitability metrics which are as follows: net income of $37 million to $41 million, diluted earnings per share of $0.68 to $0.73, and total adjusted EBITDA of $102 million to $104 million which translates to adjusted EBITDA margin of 14.2% at the midpoint or roughly 350 basis points of margin expansion versus last year. As of the end of the third quarter, our total available liquidity was $148.5 million, which includes $33 million of available capacity from our revolving credit facility. We paid down an incremental $4 million this quarter and ended the quarter with net working capital of $2.8 million. At this time, we expect to pay down another $10 million to $15 million on the revolver as of the end of the fourth quarter. Year to date, operating cash flow was $18.4 million and adjusted free cash flow was $10.9 million, both showing significant improvement versus the prior year. Year to date, capital expenditures were $16.8 million. Included in CapEx are the program expansion investments across both divisions along with spending associated with curriculum and equipment refresh and upgrades, facility and leasehold improvements and IT investments. Given our year-to-date cash flow performance and estimates on profitability and cash flow for the remainder of the year, we expect to deliver adjusted free cash flow solidly within our previous guidance range, which is $62 million to $66 million and includes total CapEx spend of approximately $30 million. We also remain confident in the initial fiscal 2025 projections we announced last quarter. We estimate revenue of nearly $800 million for the year, representing approximately 10% growth and we estimate adjusted EBITDA margin of approximately 15% or at least 100 basis points of margin expansion compared to this year. We plan to provide formal guidance for the year when we report our fourth quarter and fiscal 2024 results in November. And finally, as Jerome mentioned, we are entering Phase 2 of our North Star Strategy with the launch and ramp of our previously announced initiatives well underway, continued low to mid-single digit baseline new student start growth, and the new organic growth initiatives Jerome outlined. We expect our next growth phase to deliver the following: approximately 10% revenue CAGR through fiscal 2029, an overall adjusted EBITDA margin approaching 20% by fiscal 2029. This would translate to revenue of approximately $1.1 billion and adjusted EBITDA of approximately $200 million in fiscal 2029. In terms of phasing, we expect revenue growth to begin accelerating in fiscal 2027 as the benefits of the initial elements of the strategy begin to be realized. For adjusted EBITDA, we anticipate modest absolute dollar growth from fiscal 2025 through fiscal 2027 as we begin the investment period with significant margin expansion and absolute dollar growth in the later years. In support of the new growth initiatives, we expect CapEx of at least $50 million per year beginning with fiscal 2025, funded through operating cash flow. As we stated in previous quarters, we will continue evaluating and opportunistically pursuing strategic acquisitions and we'll adjust our longer-term expectations as appropriate if a transaction is completed or if we foresee any changes in our organic trajectory. As always, we encourage everyone to review our press release, financial supplement and investor presentation as well as the 10-Q once it is filed as these materials include the most current information on our consolidated and segment actual results, our strategic roadmap, and our guidance. I'd like to thank our students, investors, partners, and team for their unwavering support. I'll now turn the call back over to Jerome for closing remarks.

Thank you, Troy. Moving into this final quarter of the fiscal year, our consistently strong performance has positioned us to continue making significant strides in delivering durable shareholder value. The core tenets of our mission, growth, diversification, and optimization, remain the foundation for Phase 2 of our North Star Strategy. Organically, our initiatives are focused on expanding our campuses to greenfield geographies, broadening the reach of our existing programs, and adding new in-demand program offerings. We'll also continue to forge new partner relationships across the programs. Inorganically, our efforts remain centered around opportunistically exploring strategic acquisition opportunities with an emphasis on enhancing our presence in healthcare and program offerings that complement Concorde. As we close out the fiscal year, we will continue to focus our efforts around ramping recent campus and program launches to further boost enrollment, revenue, and profitability, enhancing marketing and admissions efforts to optimize lead generation and inquiry conversion, and improving workforce and facility utilization to increase program availability, margin expansion, and operating leverage. We remain steadfast in our commitment to driving growth and innovation for both our students and our investors. We believe we are well positioned to capitalize on the increasing market opportunities to maximize shareholder value and expand the UTI brand. Thank you for your continued support, and we look forward to providing further updates on our exciting trajectory over the coming quarters. As always, we welcome the opportunity to showcase our campuses and all the exciting initiatives we're working on, so please don't hesitate to reach out if you're interested in a campus tour. I'd now like to turn the call over to the operator for Q&A.

The first question today comes from Jasper Bibb with Truist Securities. Please go ahead.

Hi, good afternoon, guys. Apologies for any background noise here. I wanted to ask about the North Star Strategy and the 20% target for '29. Just curious what that contemplates as far as the underlying segment margin potential for the UTI and Concorde segments.

Yes. Hi, Jasper, it's Troy. Thanks for the question. We're not going into the segment-level detail just yet. We're setting a longer-range marker out there. As far as the expectations from a growth perspective as Jerome commented on and as you know from prior discussions and others know, currently we have growth restrictions on Concorde due to the change in ownership through the Department of Education. So, initially, the initiatives will be more skewed toward UTI, but we expect as we get into '27 and beyond that we would be more evenly distributed between UTI and Concorde as far as campuses and programs and therefore they would kick in as well as we get into the latter part of the five-year trajectory.

Thanks, that's helpful. And just to maybe follow up on the margin goals. I guess, how are you thinking about capacity as part of the North Star plan, both I guess in-place capacity and potentially moving some coursework online?

We anticipate a steady level of baseline growth in the low to mid-single digits, although this growth will not be uniform across all locations, as some campuses have higher occupancy than others. Capacity is not fixed; we are continually improving our educational delivery and how we utilize our space. Over the next few years, a major focus for us will be to enhance our efficiency and flexibility in space utilization to increase our capacity. Many of our campuses have available shifts that we can take advantage of. We will strive to maximize the use of our current facilities with existing programs while also introducing new programs, upgrading our technology, and refining our delivery model. There may not be a significant shift in the ratio of online to in-person courses, but we anticipate incorporating more virtual reality training tools, which require less physical space. Technology and teaching methods will evolve over time, but fundamentally, a substantial part of our growth, as illustrated in our investor presentation slide, comes from organic growth and the introduction of new programs and campuses as we move from an initial projection of $800 million to $1.1 billion, based on a 10% compound annual growth rate.

Makes sense. Last one for me. Just want to ask what your experience has been with some of the FAFSA issues that have been reported, I guess, at both segments and to what level that might have contributed to the timing shift on new enrollments in the quarter?

Sure. It's still not perfect. We've been working through our backlogs. I wouldn't say it's a direct contributor to the shift we saw with UTI from June to July, but because we focused on working the backlogs, we didn't spend as much time on students transitioning into the late June start. This start occurs right before the 4th of July, and many students are just finishing school a few weeks prior. It has always required some effort to enroll students in that start. If they signed up for a later start and we tried to move them to the earlier one, they would have had to switch back to the old FAFSA instead of the new one. So, there was quite a bit of confusion in the system. Overall, I would say we are close to normal. There are some differences, and it’s not easier for students and their parents; it’s a bit more complicated. However, we are continuing to address these issues, and it does not impact us from a full-year perspective.

Thanks for the context there, looking forward to seeing everyone in California next week.

Great. Thanks for the questions.

The next question comes from Mike Grondahl with Northland Securities. Please go ahead.

Hi guys, thanks. Could you kind of provide an update on maybe your marketing channels? And just at a high level, how each one is doing, maybe kind of strongest to strong, if you will?

Hi Mike, it's Jerome. With our two divisions serving distinct demographics—transportation, trades, and energy, alongside the UTI division and healthcare—the marketing groups operate differently. In healthcare, we’re targeting individuals aged 25 to 35 who are considering job changes and seeking stability, and we’re observing promising results in our media spend for that demographic. The UTI channel is also performing well, exceeding our expectations with strong media generation results for the same budget. For the UTI division, around 65% of our fourth-quarter students are recent high school graduates. Our lead generation strategy focuses on delivering presentations at high schools, and the increase in our field representatives over the past two years has led to notable growth. This aligns with Troy and my earlier comments about anticipating a double-digit increase in the fourth quarter, fueled by strong performance among high school students. Additionally, we are witnessing favorable outcomes from our media spend across various platforms, including streaming media, paid search, and social media, with nearly double-digit improvements compared to our expectations this year. Overall, marketing has delivered exceptional performance this year.

Great to hear. And then just one more. Your two new locations in 2026, one, roughly when do you think you'd announce those? And the slide has that campus size a range between 600 and 1,200. Do you think those two locations will be at the smaller end, the larger end? So just sort of rough announcement dates and size.

Yes, we are not ready to share the specific details regarding the product mix and the structure of the divisions. However, as we've mentioned in previous calls, we now have significantly more options across different markets and product mixes. In 2026, the focus will predominantly be on the UTI side as we will be concluding the growth restrictions in Concorde, which means we cannot open a campus there until 2027. We are actively exploring locations that would be suitable for a skilled trades and aviation campus, as well as sites for the new version of UTI that integrates transportation, skilled trades, and energy. We expect to implement both models as soon as possible. It won't be long before we share details about at least the first location, with the second to follow shortly after. We aim to secure a few approvals from state agencies before officially announcing a specific city, but we do not expect this to take much longer.

Got it. Thanks, guys.

Thank you, Mike.

The next question comes from Steve Frankel with Rosenblatt. Please go ahead.

Good afternoon. Jerome, just diving into the growth restrictions again, just the exact timing on Concorde. And is there any difference in program expansion versus new campuses as to when you can do those?

No, whenever you buy something in this space, the Department of Education likes to see two full years of financials of the new combined company prior to allowing you to either start new campuses or add previously unapproved programs on those existing campuses. Last year and going into this year, we've been launching new programs on the Concorde campuses that were previously approved prior to the merger and launching new programs that are cash-paid. We talked about things like sterile processing, et cetera, where non-Title IV new programs can be launched. You also can launch new campuses that are not Title IV dependent. And so you saw our Heartland partnership where we'll be opening a co-branded campus in Fort Myers, Florida, prior to the growth restrictions being lifted because there are no Title IV funding requirements for that campus initially. Once the restrictions are lifted and that we are anticipating sometime in mid to late 2026, we will be able to offer Title IV funding on that campus pending approval, of course, at that time. And that's when we'll be able to start announcing new Concorde campuses and continued program expansions across the 17, now 18 with the Heartland campus that will be out there. So we're getting ready, we're loading it all up. It's part of our North Star Strategy and we're getting ready for it.

That's great. It's really exciting, new concept. Help me understand the economics. Given that Heartland is putting up the capital, does your share of the profits look different under that model than it does when you're the one putting up the capital? And will it change when it moves from cash pay to a combination of cash pay and Title IV?

Yes, those are good questions, Steve. This is Troy. In our appendix in our Investor slide, we have a dental hygiene illustrative program launch and time horizon. And so that campus will be dental hygiene and dental assisting. So it's not exactly representative of what will be in that campus, but generally speaking, the ramp of the program will look similar to that. We will run the program. We are administering the student finances, et cetera. Heartland will be providing financial assistance to the students, both in the form of scholarships as well as backing the student loans similar to what Department of Ed and Title IV, but there will be private loans. And we keep all the economics once it's open. So the deal is we run it, we staff it, we're responsible for all the regulatory requirements, et cetera. We'll monitor outcomes. We'll ensure we're meeting the outcome standards and all the things required around that, and then we keep the economics there. The economics will change once we are Title IV eligible as we are offering more of a discounted because it's cash pay and dental hygiene is an average $85,000 or so two-year program, dental assisting obviously much less expensive. But once it will be discounted relative to that under the cash pay model, and then we'd flip back to more of our standard pricing for dental hygiene and dental assisting post Title IV.

One more question.

Yes, that does. That's really helpful. And then on the North Star next phase, you talked about six program expansions per year. Is that a total of six or it's six across a number of campuses?

Well, it's a minimum of six. And thrilled that Troy let me put the word minimum in there. It's a minimum of six and it is across both divisions and it's an average. Obviously, we won't be launching as many programs in Concorde earlier, but over that time period we just wanted to put a marker out there for that you could see. Obviously in the later years, we'll be looking at being more aggressive across both of the divisions. There's still a lot of opportunity to bring the MIT programs onto the UTI campuses, which will be most of what's initially launched in '25, '26, '27. And then the opportunity to bring new programs onto the Concorde campuses is something that we're looking forward to. Specifically nursing, because nursing is only on a few of their campuses right now. So that's what's built into that.

Great. Thank you so much. I'll jump back into the queue.

Great.

Thank you, Steve.

The next question comes from Raj Sharma with B. Riley. Please go ahead.

Thank you for taking my questions and congratulations on the strong results. My first question is about the starts. You had projected overall starts to be around 5% for Q3, and they appear to be on track. However, the UTI is lower than your guidance. Can you discuss the enrollment trajectory and the current environment? It seems the shift is around 580 to 600 students from June to July. Are you indicating that you are compensating for the losses in Q3 based on your guidance that you will meet the top line? Additionally, how much of this start shift could you have predicted, or is it something unexpected?

Thanks for the question, Raj. It's Troy. We anticipated it. Is it exactly what we anticipated? Probably a little bit more than we anticipated, but we saw it building as we were working, our last call 90 days ago beginning of May. We have pretty good insight into the funnel and we could see the enrollments piling up more in July than again in that last June start to the question I answered earlier. That's just a hard start to get high school students specifically really focused on given the just finishing school, given going into the July 4th holiday, et cetera, et cetera. So anyway, we put a lot of effort into trying to fill that start in prior years and our resources were really focused on working down the FAFSA simplification rollout and the backlogs associated with that. So it is entirely made up in July. In fact, it's more than made up in July for UTI specifically. And again, we see approximately 10% for the full year, will be double digit in the fourth quarter, was I think 16% and 17% in Q1 and Q2. So it's 100% a timing shift and literally last start in June to first start in July and again we anticipated that. On the Concorde side, just to complete the thought, we have a little bit of a different dynamic where the certain clinical programs have more starts in the third quarter and they don't have starts or they have fewer starts in the fourth quarter. And so we saw that significant uplift in the Concorde clinical starts in the third quarter. And again, overall though, still very strong growth for the year for Concorde just timing. And you're going to hear that more from us. We didn't spend a lot of time on that last year. We didn't have the year-over-year compares and really until the last quarter, but those clinical starts are very uneven. So any given quarter you're going to hear from us a really strong quarter or even a decline quarter on the clinical side with Concorde.

Raj, I think the one thing that Troy alluded to in his comments that on the whole notion of that June-July piece was the new FAFSA was for students who started July 1 and beyond. And so all of these thousands of students went through the new FAFSA process in April, May, and June—that painful process that was late and filled with errors, quite frankly. And we got them settled in with the new process in July. And traditionally what we do then is then start moving them back to June to get them started a little early, help us with our capacity, help us with a whole number of things. This year, because it was the brand new FAFSA, that would have meant asking them and their families to go back and fill out the old FAFSA again so that we could get them started the last week in June. And after what they had gone through on the new one, we just weren't going to do that. We're afraid we'd potentially lose them or something like that. So as Troy said, more than made up in July. We're happy with the trajectory we're having, but this was a particular year because of the FAFSA change that can we say that that's because of the delays? No. But we can say it's because of the complications and because of the transition.

Got it. That's very helpful. Thank you. Regarding the North Star Strategy and the timeline for the new campuses, I understand you haven't announced the dates yet. That's in relation to the new campuses that are already on track. I also wanted to discuss your guidance. You're indicating a revenue growth of about 10% CAGR. However, if we consider mid-single-digit growth and the tuition increases you've experienced in the past, that alone contributes roughly 8%. So, I'm curious if the 10% CAGR is a conservative estimate, especially if we factor in adding two new campuses each year along with six new programs.

There are a couple of points to consider. First, our organic growth is generally not expected to exceed low to mid-single digits, so we do not incorporate 5% organic growth into our models—it’s below that. However, if you consider the low to mid-single digits along with the addition of six programs and two campuses, it brings us close to the 10% mark. One significant update is that while we previously indicated that the combination of UTI and Concorde would yield an EBITDA in the mid to high teens, we now believe it is closer to 20. This reflects an improvement as we progress.

Yes, the one thing I'll add, Raj, is that if you consider the trajectory from '24 to '25, we've already communicated that it's about 10%. We anticipate that any programs we launch in '25 would be very late in the year, with hopes for maybe one in the second quarter of '26 and then another in the third or early fourth quarter. This won't have a significant impact on '26. Programs will gradually phase in, so we might slightly adjust our expectations for the '26 and '27 period. Then we expect acceleration. It's not necessarily a consistent 10% each year; it could be 10%, followed by 7%, 8%, or 9%, and then rising to 11% or 12%. This acceleration would likely happen in the '27, '28, and '29 timeframe to reach that 10% compound annual growth rate.

Got it. Thank you. Very helpful. I'll take my questions offline. Thank you.

Right. Great. Thank you.

The next question comes from Eric Martinuzzi with Lake Street. Please go ahead.

Yes. Just interested in your thoughts on the most recent unemployment report. Job growth a little bit below what people were expecting, unemployment a little bit higher. That's the macro. But from your perspective on the micro side, are you seeing anything not necessarily with your high school pipeline, but with your adult learner pipeline?

Hi, Eric, it's great to hear from you. One thing we've mentioned is that typically, there's a delay of about 90 to 160 days before we start to see an impact when the unemployment rate begins to rise. We're picking up signals that conditions are tightening, but it's still too early to attach a specific number to that. Our interest levels are increasing, with strong double-digit growth in inquiries and very robust conversion rates, which gives us confidence. However, I can't definitively say that the uptick we just observed has already taken effect. It's more of a leading indicator, suggesting that our segment of the market is likely to shift in that direction.

Got it. As far as the North Star, this is an organic plan, this Phase 2, curious to know what is your expectation? And I know it can change based on a single phone call, but M&A is part of that build from $800 million to $1.1 billion. Is there anything that closes that gap significantly that's maybe somebody you've had conversations with that have started to heat up?

First of all, I want to clarify that our M&A activities are separate from the $800 million to $1.1 billion target. This target is based on our organic growth plan that we have implemented in the market. Everything we have indicated reflects the successful strategies we have employed over the past five years, such as opening new campuses, launching new programs, and enhancing our marketing efficiency to drive margin expansion. Any M&A activities would simply add to our current plans. I want to emphasize that none of our projections include any potential acquisitions. Currently, we are engaged in discussions with various parties, but there is no news to report at this time. We aim to approach potential opportunities strategically and opportunistically. Our focus remains on finding complements to our existing operations, particularly in healthcare, where we have noted a strong desire to expand our nursing programs both organically as growth restrictions ease and inorganically in the near term. While there's nothing to announce at this moment, we are actively in talks and will inform you if anything develops.

Got it. Thanks for taking my questions.

Sure. Thank you, Eric.

This concludes our question-and-answer session. I would like to turn the conference back over to Jerome Grant for any closing remarks.

Thank you very much and appreciate those great questions and the attention. Sorry, we took a little more time. We wanted to spend a little more time talking about our longer-range plans. With that, we'll close the call. We look forward to meeting with all of you over the next couple of days and reporting back again in three months. Thanks and have a great evening.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.