ITT Educational's Q2 Earnings & Revs Lag

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ITT Educational Services Inc's. (ESI) earnings of 89 cents per share in the second quarter of 2013 lagged the Zacks Consensus Estimate of 91 cents by 2.2%.  Earnings declined 54.6% from the year-ago earnings of $1.96 per share. The double-digit decline in revenues and margin contraction took a toll on the bottom line.

Quarterly revenues totaled $259.9 million, down 21.2% from the prior-year quarter due to weak total enrollments. Total revenue also lagged the Zacks Consensus Estimate of $274 million by 5.2%.  

ITT Educational reported total enrollment of 58,617 students for the second quarter of 2013, down 11.7% year over year. However, new enrollments witnessed an increase of 7.5% to 16,883 students in the quarter.

New enrollment growth was driven by a double-digit increase in new enrollments in drafting and design, electronics engineering and network administration. New enrollment was also driven by growth in nursing programs and the bachelor program in project management.

New enrollments were further driven by 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 $50.4 million in institutional scholarships and awards during the second quarter of 2013, much higher than $16.9 million in the prior year quarter. About 70% of the students received a scholarship/award during the second quarter of 2013. The company’s revenue per student decreased 8.2% from the prior-year quarter to $4,259.

During the quarter, student persistence rates declined 290 basis points (bps) to 68.4% due to a 17.7% 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 $35.2 dipped 54.5% year over year due to a weak top line and higher bad debt expenses. Operating margin dipped 1,000 bps to 13.5%.
 
Cost of educational services in the second quarter of 2013 came in at $123.8 million, down 12.1% 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 increased 490 bps to 47.6% owing to a decline in revenues.

Student services and administrative (:SSA) expenses declined 9.5% to $100.9 million in the second quarter of 2013. However, as a percentage of revenues, SSA expenses increased 500 bps to 38.8% owing to lower revenues and higher bad debt expenses.

Fiscal 2013 Outlook

For 2013, the company maintained its prior guidance. Earnings per share are expected in the range of $3.50 – $4.00. The company expects earnings per share in the range of 45 cents to 55 cents per share for the third quarter of 2013 and 83 cents to $1.23 for the fourth quarter of 2013.

Revenue per student in 2013 is expected to decline in the range of 4.0% to 6.0%.

The company continues to expect earnings before interest, taxes, depreciation and amortization (:EBITDA) to range between $165 million and $190 million in fiscal 2013.

ITT Educational Services carries a Zacks Rank #3 (Hold).

Education stocks such as ATA, Inc. (ATAI), Capella Education Co. (CPLA) and TAL Education Group (XRS) are currently performing well and are worth considering. All the three companies carry a Zacks Rank #1 (Strong Buy).
 

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