ITT Educational Services Inc. (ESI), one of the leading providers of technology-based post-secondary degree programs in the U.S., reported first quarter 2012 earnings per share of $2.38 which beat the Zacks Consensus Estimate of $2.11. Better-than-expected revenues and share repurchases led to the earnings beat in the quarter. However, earnings for the quarter dropped 18.2% from the year-ago figure of $2.91 per share due to lower revenue.
Quarterly revenue totaled $341.8 million, down 10.8% from prior-year revenue of $383.2 million due to weak enrollments in the quarter. Total revenue however beat the Zacks Consensus Estimate of $333.0 million.
Quarter in Detail
ITT Educational witnessed a 15.4% decline in total enrollment to 71,123 students in the quarter compared with 84,030 students in the prior-year period. The overall decline in enrollment mainly resulted from a 17.0% drop in new enrollment to 18,067 students, largely in the criminal justice and drafting/design programs. New student enrollment declines at the School of Criminal Justice and the School of Drafting and Design comprised 65% and 30%, respectively, of the overall reduction in new student enrollment.
Most of the education companies have of late been crippled by poor new enrollment growth. Last month, the company's nearest competitor Apollo Group Inc. (APOL) reported a 12.2% decline in total second-quarter enrollments at the University of Phoenix, the company’s wholly owned subsidiary, which pulled down its total revenues by 7.5%. Very recently, another education company DeVry Inc. (DV) also reported a 3.9% decline in revenues due to a 3.7% reduction in total post secondary enrollments across all its programs.
Revenue per student was however up 3.1% from the prior-year quarter to $4,666 benefiting from the gradual rollout of the company’s new technology and healthcare-related programs in a number of institutes. Student persistence rates declined 110 basis points to 72.4% in the quarter as the number of continuing students in the quarter declined. Student persistence is calculated by dividing the number of continuing students in any academic term by the total student enrollment in the immediately preceding academic term. Placement rates for graduates were up nearly 225 basis points from the year-ago period. Also, average annual salary of its 2011 employed graduates showed an improvement of 2.4% from last year.
During the quarter, ITT Educational witnessed a 5.8% increase in advertising expenditures. Bad debt expense increased 130 basis points to 4.6% as a percentage of revenue due to a decline in funds available to students from private educational loan programs. The company is working to make available a new third-party private lending facility to its students after its PEAKS Private Student Loan Program exhausted in July last year. However, management refrained from providing any fixed timeline of the new loan arrangement.
The company continues to expand geographically with four new ITT technical institutes opened in the quarter with plans to start operations at four to six new places by the end of 2012.
Share Repurchase
In the quarter, the share repurchase activity was aggressive with ITT Educational repurchasing $2.1 million shares at a total cost of $146.7 million. Thereafter, in April, the company repurchased another $0.9 million shares and thus has 2.8 million shares remaining under its repurchase authorization. The company’s board of directors authorized a new repurchase program of 5 million shares in April.
Outlook
ITT Educational upped its earnings expectations for 2012 from a range of $7.50–$8.00 to $8.00–$9.00. The Zacks Consensus Estimate for 2012 is $8.21, within the guidance range. The company expects new student enrollments to improve in the second half of 2012. However, at the same time, management warned that enrollment trends are much more volatile than historical trends.
Our Recommendation
We currently have a Neutral recommendation on ITT Educational. The stock carries a Zacks #3 Rank in the near term (‘Hold’ rating).
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