Q3 2022 Universal Technical Institute Inc Earnings Call
Of Concord career colleges.
Needless to say Im extremely proud of what our team has accomplished in the quarter.
Moving onto our results from the third quarter revenue and adjusted EBITDA exceeded our expectations for the quarter revenue was $101 million, reflecting a growth rate of 21% compared to the year ago period, and adjusted EBITDA was $11 million, which represents growth of 53% year over year.
Our year to date results and our outlook for the fourth quarter, we now expect to come in in the higher range of our guidance for revenue and adjusted EBITDA, which are $410 million to $420 million and 52% to $55 million respectively.
Troy will go deeper into the context for our strong revenue and EBITDA results in just a few minutes.
New student starts were roughly in line with our expectations and grew 25% versus the prior year quarter.
As far as new student starts growth expectations for the balance of the year, we're now expecting year over year start growth and low to mid single digits I would like to spend a few minutes talking about students starts and there are some important initiatives and dynamics at play that both fueled the impressive growth for the quarter and provide context for our full year expectations.
First due to the cadence of the MAA start schedule. This was the first quarter that they had to start periods in the same quarter. Since we closed the acquisition in November .
As previously noted we successfully opened our Austin, Texas campus this quarter and we're pleased with the results so far which are in line with our expectation.
Third is the impressive performance of our high school channel in the quarter for UTI only excluding Austin, we grew 78% year over year.
Year to date this channel has grown 28%.
This is after 6% growth for the full year 2021.
A portion of our year to date growth relates to some important work we've been doing to optimize the start schedules for our incoming high school students more specifically a year ago, we began working with high school students to encourage them to start school right. After their graduation, rather than taking the summer off and starting in August and September it.
It is important to note that this approach will shift the overall contour of start growth from this key market going forward as we will see a larger number of high school students starting in the third quarter compared to historical norms.
Our efforts around this optimization program are positive for our business as it reduces potential capacity constraints that we experienced in the fourth quarter at various campuses. It also provides benefits for a graduating high school students as these earlier starts ultimately enable them to complete their program and join the workforce sooner.
With a career path already in hand.
We plan to continue this effort in 2023 and beyond.
Finally, we are seeing some pressure on our ability to generate growth in the adult job change your segment.
Recent macroeconomic factors that include extremely type job market inflation rates that we've not seen in 40 years, along with more recent recession uncertainty are fueling these headwinds.
I'll share some further thoughts on this in a few minutes importantly, we continue to see strong inquiry performance as our digital marketing optimization yields positive results.
Thus the adult issue is more of a conversion challenge than a decrease in interest for a reference for UTI only excluding the new Austin campus, we saw 10% year over year decline in the adult channel in the quarter year to date. This group is down 12% overall for the year, we are expecting a double digit decline.
And our adult channel, excluding MAA and the new campuses.
As far as the economy, we're operating in a macroeconomic environment. There is no shortage of uncertainties and challenges to navigate for companies and people alike.
And no shortage of jobs in the field, we're providing training in.
It is important to note that challenging macroeconomic factors such as inflation wage growth and unemployment do not affect all of our prospective student channels uniformly.
Prospective students in the adult population, which make up nearly half of our new students starts has been most impacted by the current economic conditions and uncertainties that exist, creating a challenging environment for prospective adults looking to retraining in order to change jobs in contrast, and serving as somewhat of a counterbalance our resolve.
Across the high school channel, which make up much of the other half of our students starts tend to be less affected by broader economic factors and have performed more consistently regardless of the economy and thus we really don't anticipate significant impact from our current conditions for this channel.
As we said in the past, we cannot predict nor do we budget for a recession or other economic conditions.
They buy the strictest definition of the word we're in a recession, that's being debated all around the country.
Many believe that this recession in fact, we will deepen and unemployment rates will be affected sometime in the next few quarters now if theyre right in past recessionary patterns hold true we should see some headwinds facing our adult channel subside potentially providing start upside in the second half of 2023 fiscal year.
In order to both prepare for the growth associated with our strategic initiatives and these potential counter cyclical tailwind, we're working diligently to optimize our adult admissions organization.
We're also working to optimize our high school admissions organization by immediately adding field based resources in preparation for the coming school year, we believe that the pandemic related high school access issues experienced throughout 2021, and the first half of 2022 are behind us now.
Now in addition to having impact on some of our students and prospects the inflationary cost pressures seen widely across the economy have been present internally for UTI as well.
We do expect to experience some ongoing effects of this due to the persistent and higher than expected inflation levels, everyone as witnessed in this past year.
We have been successful thus far largely offsetting these impacts with increased efficiencies and other cost saving measures and are striving to continue to do so.
All of that said, we're enthusiastic about the performance for the year and confident in our previously issued subsequently updated 2022 financial guidance and longer term roadmap next.
Next.
I'll give a quick update on the initial steps we've taken in our growth and diversification plan.
We're very pleased with the progress we've made to date with our pending acquisition of Concord career colleges I want to reiterate our positive outlook for the growth prospects of the health care industry as everyone at Universal Technical Institute remains incredibly excited to diversify our core educational offerings into areas like dental and other allied.
Health professions, as well as patient care and nursing through the addition of Concord, which we now expect to close in early 2023.
This acquisition is another key step for the company as we continue to make substantial progress in the early stages of our growth and diversification strategy.
The integration continues to go well and it's nearly complete enabling us to move on to the primary objective of this acquisition. The addition of more than a dozen programs to the UTI campuses nationwide.
In June we announced our initial plans for the programs and locations, we intend to launch in 2023 and 2024 and.
And we continue executing on this plan.
To remind you we believe that we can more than double the size of the acquired business over the next three years with a combination of program expansions and modest organic growth.
Since our Austin, Texas campus opened in the third quarter, we've welcomed 230 students through July .
We're thrilled with the warm welcome we have received from both the community as a whole and more pointedly the large employers in Austin and San Antonio.
Additionally, our new Miramar, Florida campus is on track to open during the fourth quarter of this year and we expect to welcome. The first cohort of students next week.
Our new Exton, Pennsylvania welding program, which opened in July with a full first class is also receiving a very enthusiastic response.
New disciplines, new campuses and continued program expansion fueled my optimism and excitement about the future. We will continue to pursue growth and diversification opportunities, regardless of health or economic challenges or tailwind that come our way.
We're pleased with our performance to date across all of these dimensions.
As we've outlined in the past with the steps we've taken thus far we are on track to reach our longer term growth targets of at least $700 million in revenue and approximately 20% EBITDA margin by 2025.
Again I'd.
I'd like to thank all of our faculty and staff for their unwavering commitment to enhancing the futures of our learners.
With that I'll turn the call over to Troy to discuss our operational and financial performance for the quarter.
Roy.
Thank you Jerome we're fortunate to have delivered another quarter of strong financial and operational performance, despite an increasingly challenging macro environment.
Spend a few minutes covering our quarterly results before I give a brief review of our balance sheet and liquidity and then we'll close out by reviewing our fiscal 2022 guidance. Some early thoughts on 2023, and our longer term strategic roadmap expectations.
Total revenue for the third quarter was $101 million compared to $83 8 million in the prior year quarter for 25% year over year growth.
The growth was driven by an 11, 4% increase in average undergraduate fulltime active students.
Which resulted from new student demand paired with more campus and program offerings across our ecosystem, including the addition of <unk>.
Our revenue growth also benefited from higher revenue per student, which reflects continued normalization to pre COVID-19 operating levels.
Adjusted EBITDA was $11 million compared to $7 2 million in the year ago period the.
The increase in adjusted EBITDA was driven primarily by the increased revenue and revenue per student.
We continue to drive operating efficiencies in our cost structure, while we are seeing some inflation in tight job market impacts to our labor cost and certain variable expenses like welding supplies.
Net income for the quarter was <unk> 8 million compared to $3 million in the prior year quarter, while adjusted net income was $5 7 million compared to $3 3 million.
Our adjustments in the quarter are consistent with prior quarters, primarily reflecting onetime costs associated with acquisitions and integration and the startup of our new campuses.
Loss per share for the quarter was one <unk>.
Versus <unk> <unk> of earnings per share in the prior year period.
Our ending share count was $33 million 767000, which includes 724000 common shares that resulted from the conversion of approximately 24000 preferred shares by one of the preferred shareholders.
We don't anticipate other preferred holders requesting to convert their shares but I'll remind you that the remaining preferred shareholders are able to convert at any time with the shares held by Coliseum capital and their affiliates being subject to a conversion cap related to potential education regulatory approvals.
We are optimistic that we will achieve the trigger for the company conversion option in the not too distant future, but can't predict when that may occur.
Our effective tax rate expectation remains approximately 4% for the year as we adjust out the impacts of the valuation allowance reversal that occurred last quarter.
Turning to the balance sheet at quarter end, our total available liquidity was $70 7 million, we closed the financing for the Lisle campus purchase in April which allowed us to retire the acquired debt and fund approximately $20 million of the initial 28 million net cash outlay.
Our combined term debt for the while in Avondale campus purchases is $67 8 million a gross debt to adjusted EBITDA leverage ratio of slightly above one to one.
Year to date, our capital expenditures, excluding the Lisle campus purchase were $41 1 million driven primarily by the Austin in Miramar, New campus build outs, new welding program launches and our campus optimization initiatives all of which are expected to be largely completed during fiscal 2022.
We are expecting capex at the lower end of our $55 million to $60 million range, primarily as a result of the timing of spend associated with the MIP program expansion.
Which will defer some capex into next year.
Overall, even with the MIP program expansion plans in full swing in fiscal 2023, we expect capex to be significantly less than in 2022.
As we continue to invest in our business and yield the benefits of our growth and efficiency initiatives. We are confident in our ability to generate significant organic cash flow.
This will allow us to be agile in our approach to capital allocation and will allow us to act, where we deemed needed to grow our business organically and inorganically.
That said, we also think it's good hygiene to ensure we have ready access to additional capital through building strong relationships with the investment in banking communities and anticipate we will establish a credit facility at some point in time.
Jerome discussed earlier, our new student start growth trajectory and how we started more high school students in the quarter than historical norms and.
And also we'll be more focused on that channel for growth in the near term given how the current macroeconomic environment is creating some inertia with the adult job change your population.
Overall, we are very pleased with what we're seeing in the high school channel and for the adult channel, while we're expecting a double digit decline this year, excluding MIP and the new campuses that comes on the heels of more than 25% growth in 2021.
Also we have seen strong inquiry volume and the adult channel, but still have the opportunity to increase conversion rates and our roll more of those prospective students as the macro dynamics evolve.
For the third quarter, the shift and start timing for a portion of our high school students along with the launch of Austin and having two starts contributed to our strong new student start growth.
We still expect to start the vast majority of high school students in the fourth quarter.
And we expect total starts in the fourth quarter to be roughly flat to the prior year with growth in high school and military offset by a decline in adult.
Overall, we now expect year over year growth for total new student starts in the low to mid single digits for the year.
For our financial guidance metrics, while we are holding to our previously issued ranges revenue adjusted EBITDA and adjusted net income are trending to the higher end of their respective ranges.
Strategically we remain very excited about the Concorde career colleges acquisition and believe we are tracking to an early calendar 2023 close subject to completing the regulatory review process and satisfying other customary closing conditions.
While we're not ready to give formal guidance for fiscal 2023, we have enough data points currently that we can share some initial high level thoughts for UTI excluding Concorde.
I'll begin with 2023, new student starts.
The growth trajectory this year lapping of the acquisition timing of our MIP program expansion efforts.
The near term emphasis on high school growth much of which will be in the fourth quarter next year.
And finally without any recessionary tailwind that could materialize primarily in the adult channel.
We should see positive year over year growth each quarter next year with growth accelerating in the back half of the year and the strongest growth in the fourth quarter.
Translating that to 2023 revenue will start growth being low to mid single digits for 2022, and the strongest 2023 start growth in the back half of the year.
Along with revenue per student now more normalized and the lapping of the <unk> acquisition.
We should see modest year over year growth the first half of the year and accelerating growth in the back half of the year.
It is too soon to provide much commentary on adjusted EBITDA as there are many variables at play as we noted we are not immune to the inflationary pressures being experienced across all aspects of the economy.
Although we have been successful so far this year driving efficiencies to largely offset that.
We also continue to make investments in the business, including key personnel to support our growth and diversification strategy.
Our expectation for fiscal 2023 will be highly dependent upon where we land with revenue with our clear goal being to achieve margin expansion and overall adjusted EBITDA growth.
These are our current high level thoughts around fiscal 2023.
We will refine them over the next three months and provide more details and formal guidance. When we report our fourth quarter and year end results in November .
Lastly, looking at our strategic roadmap, we have high confidence in our ability to achieve at least $700 million in revenue in fiscal 2025 with adjusted EBITDA margin of approximately 20%, which includes the Concord acquisition.
Our strong year to date performance in fiscal 2022, along with successful execution on the early stages of our growth and diversification strategy have positioned us well to close out this year on a positive note and move into 2023 with continued momentum.
I'd like to thank the UTI team and our students for another quarter of their commitment and hard work I'd now like to turn the call over to Jerome for closing remarks.
Thank you Troy as we discussed we are pleased with our operating results from the quarter and are very optimistic about the future.
We are in the beginning stages of our growth and diversification strategy and our early initiatives on this front helped contribute to the strong results for this quarter, providing us with momentum, which we believe will carry into 2023.
Delivering strong student and employment outcomes remains our core focus as we provide opportunities for individuals in markets that have substantial and growing opportunities for well trained skilled workers.
I'd now like to turn the call over to the operator for Q&A.
Thank you we will now begin the question and answer session to ask a question in My Press Star then one on your Touchtone phone.
You are using a speaker phone we ask that you. Please pickup your handset before pressing the keys.
Your question. Please press Star then two.
Today's first question comes from Erik Morton Lindsay with Lake Street. Please go ahead.
Yes, congratulations on the Q3 results.
The outlook for the remainder thanks Herb.
Hey, I wanted to dive into the new student start the pressure here the reset to the low to mid single digits.
As we go back to we entered the year with kind of an outlook for I think it within the 10% to 15% range now.
<unk>.
Low single digits.
Yes.
Low to mid single digits.
Pretty big reset here.
You talked about the headwinds in the adult section.
In the adult part of the.
Driven by are we seeing kind of as expected and high school is that should we take that for granted.
Yes, it's a good question Erik Thanks, and when we look back at the original guidance, which was which was 14% to 19% growth and then we dropped to eight to 12 last quarter and of course as you said now low to mid single digits, we really attribute that entirely to the adult channel.
We had some challenges in the latter part of Q1 early part of Q2 with Omicron as we talked about in the prior quarter, which again was primarily at all keep in mind that first second and third quarter are primarily are where we get most of the adult students and then the high school kicks in more in the latter part of the third quarter and then the fourth quarter.
So.
We've had strong inquiry flow all year, we commented on some conversion rate pressure last quarter as well again, which we thought was more attributable to omicron as we transitioned into.
May June July frankly, we've seen that that conversion rate pressure continue and frankly pick up a little bit again in the adult side. The high school side is pretty much on budget pretty much as we expected we were hoping frankly, we could do a little bit more.
That work largely has done in the first and second quarter with.
Lead generation with the high school students and then really the third and fourth quarter is finishing bringing those students to enrollment. So the pipeline build was before we really had the insight that we have now into how the adult channel was performing.
It was really frankly too late to really move the needle too much on high school to offset that.
And were military.
Military is off a bit I mean, those numbers are much smaller I mean, they are 10% to 15% overall and you can get some other volatility in military tied to for instance, there is recent headlines about all.
Branches being shorted, they're recruiting goals. So they may go a little heavier on re enrollment incentives and things like that so you can get a little bit of the economy and there you could get just the factors affecting military specifically.
We've seen strong growth factor, we're expecting growth in military in the fourth quarter. So, it's a little bit up and down quarter by quarter there'll be a down a little bit this year overall.
Okay and then.
You have got the insight on the adult conversion, what what does it boil down to as far as levers you can pull to improve the conversion.
Well, we're looking at some optimization.
Optimizations in terms of the how we do lead routing and how we treat local students versus relocating students again keep in mind about half of our students overall.
Relocate and on the adult side.
We have certain programs at our national only programs like the MMA programs for example, our marine and motorcycle.
So we want to make sure that we start tailoring.
Our lead flow and rep engagement to really those specific students with students where local get them into the campus do a tour work with the wrap on campus spin.
<unk> spent less time trying to pre enroll the student just get them into the campus due to tour and we think things like that which we've done a bit of here and there, but we're going to do more consistently and more in a more focused way will help offset some of the near term pressure.
Okay and then.
Jerome you talked about kind of the impact.
Impac not immune to or maybe maybe it with Troy I can't remember not immune to the inflationary pressures.
You are still talking about the big picture were $700 million in around 20% adjusted EBITDA margin.
What what specifically is your.
Two or three points obtain an inflationary pressures.
Well are you talking about on the cost side are you talking about on the on the demand side.
On the cost side.
On the cost side.
I mean, obviously, we're not immune to.
Wage pressures ourselves in terms of although we are doing better this year in terms of.
Overall attrition of R.
Our instructor and support population.
We are finding it a little more difficult to find people paying a little more money for people when we're when we're bringing bring them in so.
On the on that side of the equation we are seeing.
Really the same kind of pressure a lot of people are saying seeing out in the market and then as Troy said there are some materials as part of supply chain issues and inflationary issues in their welding materials some of the.
No.
Petroleum materials things along those lines that are tied to gas prices and things like that that are bringing some price pressure I have got to give our team some some.
Some great praise for really looking at the offsets that we can make so we really haven't seen net net.
A lot of pressure, there, but but we're not immune to some of those things that are you are reading about in the paper as well, yes, and some of it.
Sorry, Eric is.
As we look at different categories. So for example, coming into last year early part of this year Pcs. We were we were buying well in advance to secure better pricing and that we're already seeing the PC constraints lift we get each new student for most of our programs.
Chromebook laptop and so I think some of this just again is the headline say.
We overcorrected in some areas and things have flared up in some areas that we think will come back over time and.
We're just trying to be transparent about some of the things that we're seeing.
I understand.
That covers it for me thanks for taking my questions.
Thanks, everyone. As a reminder, if you'd like to ask a question. Please press Star then one.
Today's next question comes from Steve Frankel at Rosenblatt. Please go ahead.
So to go back in the third.
Issue again.
Does this make you wanted.
Or pullback on adult recruiting in the short run to.
Another way of saving money or do you just keep plugging added assumed in that.
The economy starts to tip when more people are going to want to change shops.
Well as as Troy outlined it.
It has us fine tune their home the way we look at adult.
Job changers number one.
Those who don't have to relocate convert at a higher rate than those who do have to relocate so.
If you are coming from Seattle to Avondale, It's a much bigger decision financially than if you're coming from Glendale to Avondale.
And making it so.
Ben sort of honing in pointing our adult recruiting in a more local fashion and we have been seeing some benefit some benefits and some blunting of headwinds.
Headwinds out of that.
We're evolving the way, we do adult admissions to make it more flexible and scalable.
As.
As the market comes back and I think the more and more important issue is we believe we can pull the lever harder in high school.
Where we can add resources into the high school go deeper into the high school and bring that population that is significantly less affected by the inflationary pressures to the school.
Youll note high school had a very good year this year.
Better access.
We've done some refinement to our territory alignments now that we can bring more people into the organization through that refinement, we're going to pull those levers for the fall. So we are anticipating a very strong high school performance when.
When we step off in the fall of this year.
And speaking of that so one of the things you talked about when you buy the MAA MAA.
Was that they were less mature in.
High school recruitment process.
Are you fully ramped up now so that when the school year starts up.
In September .
They're going to hit the ground running.
Yes, and again number one because many of them may be listening. They have some really great high school reps at NIH. They just didnt have very many of them right and.
Whereas we have nearly 150 reps are up around the country for their two campuses I think they had six to eight reps that were that were selling into it. So.
We're ramped up now as we go into this school year remember we closed in the middle of the school year last year.
For high school year last year, as we ramp and this year our reps are fully trained they understand the product line. They understand it very well because we're putting over a dozen programs on the UTI campuses through 2023, so that product line has been has been.
Fully embraced by our high school channel and we expect to see the results of that in 'twenty.
<unk> 'twenty two 'twenty three school year.
Hey, Steve one other point I would make.
Back on adult real quick is on the media side right. So most of the lead generation on the adult side is through media spend and so we continue to optimize the media spend as well. So we're not to your point just throwing money into the market, that's not going to be productive.
So making sure we're getting the optimal return on the media side, and then trying to refine on.
Rep side to get the conversion rates back to where we'd like them to be.
And given.
Where we are in terms of the online AD market I assume.
You've seen.
Yes.
Much better rates for the online me that you've been buying right for these campaigns.
Yes, I think we've done a combination of things I mean, obviously the market itself fluctuates up and down depending on time of the year and who the buyers are and of course now people pulling back a bit as <unk> heard from some of the larger players in that space on <unk> reports.
Also are looking at different lead sources.
We've looked at agencies that we work with.
Enhancing our analytics, so that we can get better more real time data on responses and conversions and the like so it's all facets of it beyond even just looking purely at the.
The cost itself.
Okay, and then just remind me.
Where and when will the first NIH.
Class open on the UTI footprint.
We're well win is probably Q2 of fiscal 'twenty three latter part of Q2 fiscal.
<unk> three but.
But I don't remember.
Yes.
Q2 fiscal 'twenty, three but there are three or four programs across campuses that are all sort of neck and neck buying for first opening right now right.
So.
Well as we as we get closer to that date, we start recruiting into the specific campuses than we will we will be able to let you. Let you know where that is there's a bit of variability because all of them are going through the same approval process, but a different pacing.
Because of our structure with the department of Ed.
And they have to typically go through the state in AC CSC first and then go to department of Ed. So we're just now getting the department of Ed submissions done.
And so we're.
Confident that it will be early 'twenty three.
But it could vary a little bit depending upon when we clear that and then we need time to market.
Market the programs and do the lead generation.
Once we know we have the approval and a start date confirmed.
Yeah.
Okay, great. Thank you I'll hop back in queue.
Ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to the management team for final remarks.
Thank you very much everyone for joining us today. This concludes our conference call for the third quarter 2022, we look forward to talking to you again next quarter, Thanks and have a great day.
Thanks, everyone. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.