ITT Educational Services Inc.'s (ESI) earnings of 80 cents per share significantly beat the Zacks Consensus Estimate of 54 cents by 48.1% in the third quarter of 2013 but declined 56.3% from the year-ago earnings of $1.83 per share. The double-digit decline in revenues and margin contraction took a toll on the bottom line.
Quarterly revenues totaled $259.4 million, down 17.6% from the prior-year quarter, due to weak total enrollments and increase in institutional scholarships and awards. Total revenue also beat the Zacks Consensus Estimate of $251 million by 5.5%.
Revenues and Margins
ITT Educational reported total enrollment of 60,997 students in the third quarter of 2013, down 7.1% year over year. However, new enrollments witnessed an increase of 5.2% to 20,307 students in the quarter. The company’s revenue per student decreased 7.2% from the prior-year quarter to $4,399.
New enrollment growth was driven by ahigh single-digit increase in new enrollments in drafting and design and double-digit growth in electronics engineering. New enrollment was also driven by network administration, nursing programs and the bachelor program in project management and a significant increase in scholarships compared to the prior-year quarter, which led to greater conversion of student applications into new enrollment.
The company provided $47.4 million in institutional scholarships and awards during the reported quarter, much higher than $16.6 million in the prior-year quarter mainly due to introduction of the Opportunity Scholarship at most of the ITT Technical Institute campuses.
During the quarter, student persistence rates shrank 40 basis points (bps) to 69.4% due to a 12.2% dip in the number of continuing students. Student persistence rate is calculated by dividing the number of continuing students in any academic term by total student enrollment in the immediately preceding academic term.
Operating earnings of $120.0 million dipped 51.7% year over year due to a weak top line and higher bad debt expenses. Operating margin dipped 1,030 bps to 14.9%.
Cost of educational services in the third quarter of 2013 came in at $121.9 million, down 8.9% year over year, owing to a decline in compensation costs and course supplies expenses due to reduced student enrollment. However, as a percentage of revenues, cost of educational services shrank 440 bps to 47.0% owing to a decline in revenues.
Student services and administrative (:SSA) expenses dipped 9.9% to $99.1 million in the third quarter of 2013. However, as a percentage of revenues, SSA expenses increased 320 bps to 38.2% owing to lower revenues and higher bad debt expenses.
Fiscal 2013 Outlook
Following year to date results, the company raised its earnings guidance for 2013. Earnings per share are now expected in the range of $4.00–$4.20 compared to a range of $3.50–$4.00.
The company continues to expect a decline of 4.0% to 6.0% in Revenue per student for fiscal 2013.
The company continues to expect earnings before interest, taxes, depreciation and amortization (:EBITDA) to range between $185 million and $195 million in fiscal 2013.
ITT Educational Services carries a Zacks Rank #1 (Strong Buy).
Education stocks such as New Oriental Education, Inc. (EDU), Capella Education Co. (CPLA) and TAL Education Group (XRS) are currently performing well and are worth considering. While New Oriental Education carries a Zacks Rank #1, TAL Education and Capella Education carry a Zacks Rank #2 (Buy).