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Edited Transcript of UTI.N earnings conference call or presentation 4-Feb-21 9:30pm GMT

·42 min read

Q1 2021 Universal Technical Institute Inc Earnings Call PHOENIX Feb 5, 2021 (Thomson StreetEvents) -- Edited Transcript of Universal Technical Institute Inc earnings conference call or presentation Thursday, February 4, 2021 at 9:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Jerome A. Grant Universal Technical Institute, Inc. - CEO & Director * Jody Kent Universal Technical Institute, Inc. - VP of Communications & Public Affairs * Troy R. Anderson Universal Technical Institute, Inc. - Executive VP & CFO ================================================================================ Conference Call Participants ================================================================================ * Austin William Moldow Canaccord Genuity Corp., Research Division - Associate * Eric Martinuzzi Lake Street Capital Markets, LLC, Research Division - Head of Research & Senior Research Analyst * Rajiv Sharma B. Riley Securities, Inc., Research Division - Analyst * Steven Bruce Frankel Colliers Securities LLC, Research Division - Senior VP & Director of Research ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Hello, and welcome to the Universal Technical Institute Fiscal First Quarter 2021 Earnings Conference Call. (Operator Instructions) Please note today's event is being recorded. I now would like to turn the conference over to Jody Kent. Ms. Kent, please go ahead. -------------------------------------------------------------------------------- Jody Kent, Universal Technical Institute, Inc. - VP of Communications & Public Affairs [2] -------------------------------------------------------------------------------- Before we begin, we want to remind everyone that today's call will contain forward-looking statements within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Please carefully review today's press release for additional information and important disclosures about forward-looking statements. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes and circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. As a reminder, the section entitled forward-looking statements in today's press release also applies to everything discussed during this conference call. During today's call, we'll refer to adjusted operating income or loss, adjusted EBITDA and adjusted free cash flow which are non-GAAP financial measures. Adjusted operating income or loss is income or loss from operations adjusted for items that affect trends and underlying performance from year-to-year and are not considered normal recurring cash operating expenses. Adjusted EBITDA is net income or loss before interest expense, interest income, income taxes, depreciation, amortization and adjusted for items not considered as part of the company's normal recurring operations. Adjusted free cash flow is net cash provided by or used in operating activities less capital expenditures adjusted for items not considered as part of the company's normal recurring operations. Management internally uses adjusted operating income and loss, adjusted EBITDA and adjusted free cash flow as performance measures, and those figures will be discussed on today's call. As a reminder, we have provided reconciliations of these non-GAAP measurements to the most directly comparable GAAP financial measurements in today's press release, and we encourage you to carefully review those reconciliations. Starting with the third quarter of fiscal 2019 and through fiscal 2020, we have reported operating metrics such as student applications and starts, excluding our Norwood, Massachusetts campus. As we have shared previously, Norwood stopped accepting new student applications in the second quarter of fiscal 2019, and the campus was fully closed in July 2020. So we believe it is important to exclude its impact. It is now my pleasure to turn the call over to our CEO, Jerome Grant. -------------------------------------------------------------------------------- Jerome A. Grant, Universal Technical Institute, Inc. - CEO & Director [3] -------------------------------------------------------------------------------- Thank you, Jody. Good afternoon, everyone, and thank you all for joining us today. To begin, I'd like to once again applaud the tremendous effort of our staff and students during the quarter. We were able to make progress on a number of strategic initiatives while keeping all of our campuses fully operational starting 1,927 students, a nearly 21% increase over Q1 2020 and graduating 1,510 students despite a significant spike in COVID-19 cases throughout the country. As with most postsecondary institutions around the world, we did experience some temporary effects related to the pandemic this past quarter. Troy will share more of our metrics and full financial results with you a bit later in the call. You may recall from our last update that in addition to keeping UTI open and moving forward in this challenging environment, our focus is in 3 key areas that we believe will be driving the evolution of UTI: student outcomes; innovation; and our long-term growth and diversification strategy. Student outcomes continue to be the foundation or platform on which UTI is built. UTI's past and future is inexorably tied to this measure because we only succeed when our students succeed. Ensuring the highest level of outcomes is a team effort. The foundation of that team, our world-class instructors, support staff and curriculum design specialists. Additionally, one of UTI's most unique and critical outcomes-oriented value propositions is our relationship with our employment, military and OEM partners. This quarter, we continue to build those partnerships to maximize the success rate of our students. One excellent example is the announcement we made in November of our collaborative new hands-on training program at Fort Bliss in El Paso, Texas. This innovative 3-way partnership between UTI, Premier Truck Group, a wholly owned subsidiary of Penske Automotive Group, and the U.S. Army is the first on-base diesel commercial vehicle technician career skills program in the history of the U.S. Army. A second example of how partnership drives outcomes is the announcement we made in December, featuring the expansion of our exclusive relationship with Daimler Trucks of North America, or DTNA, the #1 heavy-duty truck manufacturer in North America. We're thrilled to be expanding DTNA's Finish First program to Orlando campus in the summer of 2021. The program trains students to maintain, diagnose and repair DTNA's industry-leading brands, including Freightliner, Western Star and Detroit. Orlando will become the third UTI campus to be offering this exclusive program, joining our campuses in Avondale, Arizona and Lisle, Illinois. These partnerships underscore that UTI's education model has a long track record of distilling students the key skills that leading employers nationwide require. A great example of how this all comes together for both students and industry is Kevin Smith. Kevin graduated from the auto, diesel and Ford program at our Houston campus in 2004, and he's built a successful 17-year career. He tells us that UTI helped create the foundation that his success has been built upon, giving him work-ready skills needed to succeed as a level 1 technician, and then grow over time to become General Manager at Rush Truck Center in Haines City, Florida, which is just outside of Orlando. Kevin now regularly interviews prospective technicians from UTI's Orlando campus for positions at his location. He does so because he says they received the state-of-the-industry training needed to immediately hit the ground running. And because throughout their UTI education, they've been held to a high level of professionalism, which translates to more successful and reliable employees. In the past few years, Kevin's hired many technicians from UTI in Orlando, and their demand for technicians continues to be strong. Kevin also told us that UTI's shift to a blended learning model is a benefit to both students and employers because it aligns more seamlessly to the continuous learning technicians already do on the job. He said it's another step that UTI takes to better prepare students for the real world. Kevin's story embodies the lifelong value of our strategic partnership and also sheds light on a key area where we're innovating to better prepare our students for today's job market. That area is our blended learning approach. To continue to build on both our history and promise for successful outcomes for our students, we must challenge ourselves to innovate, to better align our platforms, our model and our overall offerings with our market. I think it's important to take a step back here and remind everyone that our blended learning model was not nearly developed in response to COVID-19. More limited iterations of this model were developed years ago and had already rolled out in stages across a number of our campuses. The onset of the global pandemic last year necessitated a rapid expansion to a full blended learning model across our system in the first half of 2020. We are seeing the advantages of blended learning come to fruition as time progresses and are confident its value will live on to serve as yet another durable advantage for UTI. Thus, we will continue to invest appropriately in content, technology and people to fuel its growth. It's also important to note that blended learning is much different than the purely online learning approach used around much of the U.S. right now. The skills our students need require substantial hands-on instruction, and our blended learning approach allows our students to complete the classroom portion of the curriculum online, while still receiving all of their hands-on labs in person. None of that's virtual, so no crucial hands-on training is omitted. Not only does the approach offer students more flexibility and convenience, it also enables us to reduce, repurpose and consolidate previously used classroom space to enhance our overall efficiency. For example, we recently announced the purchase of our Avondale, Arizona campus, and the relocation of our motorcycle programs to Avondale from their current location in North Phoenix. This move comes with substantial financial benefits to UTI and its shareholders and was facilitated through the efficiencies realized through our blended learning approach. Kevin from Rush Truck is not alone in recognition and praise of our new innovative learning model. Numerous employer partners have also expressed immense gratitude for the computer skills we're now providing to our graduates. The reality is that while the majority of jobs for which we train are centered around hands-on skills, digital literacy is also essential in these fields. We're confident that our blended learning model will continue to evolve to better serve the needs of our students and employment partners alike, while unlocking further efficiency opportunities that just were not feasible under our traditional operating model. A second area of innovation I'd like to highlight is with our marketing approach, where throughout the last several months, we've strategically directed time and capital to further drive the efficiency and effectiveness of our campaigns. While we continue to support our national brand appeal, we've begun to allocate more resources to potential students living near our campuses. In the current environment of high unemployment, restrictive travel and health and safety modifications, this emphasis makes sense and is supportive of our students and their families. As a management team, we felt that it was our responsibility to ensure that the local communities, in which we operate across this country, fully understood and maximize the benefits of what we had to offer. This could not be fully realized with a predominantly national approach to advertising. You see, it's really a win-win opportunity: less costly for students and their families in terms of relocation and living expenses; increased flexibilities to complete their education, utilizing our blended learning model while working at the same time; more cost-effective for us; and enabling our students to spend more time with their families. As stakeholders in our communities, these are critical opportunities and students that we must do our best to connect with and serve. As we mentioned last quarter, we've altered our messaging to both acknowledge the sharp increase in unemployment of the 16- to 24-year old population in the U.S. and more concretely highlight the incredible robust job opportunities in prospective student local markets. Many of our advertisements now include information on the number of open jobs, program length and starting salaries within the campus communities, which are all backed by concrete and publicly available data. We want people to know from the start what they can achieve by enrolling in our programs and exactly how long it takes to reach their goals. We're seeing the impact of our more locally focused advertising and share up in messaging through an impressive increase in lead flow, heightened conversion rates and improved start rates, all of which are effectively improving the return on our marketing investment. Finally, before I turn the call over to Troy, I'd like to provide a brief update on our growth and diversification efforts and how we're moving forward to shape the future of UTI. Program expansion serves as one of the tenets of our plan, and it should be underscored that although we're looking at organic and inorganic means to bring more programs to UTI, substantial opportunity remains to grow through the channels in which we currently operate. To that end, we plan to continue to expand our current offerings, such as welding technology across the footprint. Just last week, we announced the February launch of our 6th welding technology program in Lisle, Illinois along with the planned launch in Bloomfield, New Jersey later this year. We also announced our intention to bring 2 more welding programs to our campuses in 2022, which will bring the total to 9 campuses and represent nearly a complete rollout of this highly successful program. You see we want to be able to offer the best solution possible for the many people who want a postsecondary education but feel that a typical college degree just isn't right for them. Our teams also continue to make substantial progress on a number of other strategic initiatives supporting our growth and diversification plan as well. We have worked diligently in collaboration with the UTI Board of Directors to solidify the plan of how our capital will be deployed and when. Although we have no announcements on this front today, we expect that we'll be able to share more soon. With that said, I'd now like to turn the call over to Troy for a discussion of our key accomplishments, operating and financial metrics as well as guidance for the balance of the year. After which, I'll return to provide some closing thoughts and open the call up for questions. Troy? -------------------------------------------------------------------------------- Troy R. Anderson, Universal Technical Institute, Inc. - Executive VP & CFO [4] -------------------------------------------------------------------------------- Thank you, Jerome. As Jerome outlined, we experienced growth across a number of our key performance indicators during the fiscal first quarter, and we are pleased with our operating performance in light of the broader macro environment. We started 1,927 students in the first quarter, an increase of 20.9% over the prior year pre-COVID first quarter with strengthened starts across all 3 channels. Scheduled starts increased 18.3% year-over-year in the quarter. As of the most recent data, students scheduled to start in the second quarter is currently pacing at an even stronger clip from a year-over-year perspective. Show rate improved 110 basis points year-over-year in the quarter. And notably, we achieved the fourth straight year of first quarter year-over-year show rate improvement. We saw a continued strength in media-driven inquiries with an 11.5% year-over-year increase in the quarter. As we commented in our last call, we saw a slowdown in media-driven inquiries in October leading up to the election, and that we reduced our advertising spending during that time frame, given the market dynamics and diminishing returns. Inquiries quickly bounced back to strong double-digit year-over-year growth in November and December, which also continued in January. Our media inquiry conversion rate, or the rate that we convert inquiries into enrollments, was higher year-over-year throughout the quarter, and this also continued through January. In summary, the front end metrics for our business clearly demonstrate that momentum is building. On the revenue side, we continue to see impacts from the COVID-19 pandemic on our students and their families, thus affecting their ability to fully engage in this environment. This is reflected in our revenue for the first quarter, which decreased 12.7% to $76.1 million compared to $87.2 million in the prior year period. This includes a $2 million net revenue deferral for students who are still completing makeup labs, which is down from $6 million at the end of last quarter and $11 million 2 quarters ago. The decrease in the revenue deferral is a result of the continued improvement in the number of students fully caught up on their labs, which is now 84%, and a decrease in online-only students to less than 1%. We saw a 1.8% year-over-year increase in average students in the quarter, which is a positive sign for student engagement and overall revenue growth. Revenue per student reflects our normal sequential seasonal decrease due to our annual holiday closure in December. We would like to have seen revenue per student a bit higher in the quarter, but the COVID spike put pressure on leaves of absence, or LOAs, in late November and throughout December and also contributed to higher withdrawals in the quarter. Additionally, we continue working with a subset of students who are experiencing higher course retake and fail rates, particularly those who enrolled pre-COVID. We have multiple initiatives underway to further assist students and increase their likelihood for a successful outcome, including mentoring programs, increased lab days, conversion to a new learning management system with improved student experience and performance measurement capabilities and a streamlined re-enrollment process for students who previously withdrew and desire to reengage and complete the program. We have seen improvements as the current quarter has progressed. As of the last course rotation, LOAs were more consistent with our expectations. And overall, we are seeing better student persistence and engagement as those initiatives are rolled out. We are confident that we will see ongoing improvements to the variables within our control as the year progresses. We were able to offset the majority of the revenue impact for the quarter through diligent cost control, with operating expenses for the quarter decreasing $7.6 million or 9.2% versus the prior year to $75.3 million. The decrease was across both education services and facilities and SG&A, and was primarily attributable to productivity improvements resulting in lower headcount and related compensation and benefit expenses, along with lower occupancy expenses from our real estate rationalization efforts and lower advertising and travel expenses. Headcount at the end of the quarter was 1,590, down approximately 50 from the prior year period. Operating income and adjusted operating income for the quarter were $0.8 million compared to $4.3 million and $6.5 million in the prior year quarter, respectively. Adjusted EBITDA was $4.3 million for the quarter as compared to $10.1 million in the prior year period. For our adjusted profitability results, we have no adjustments in the current quarter, and for the prior year reflects adjustments for our CEO transition in the Norwood, Massachusetts campus closure. Net income for the quarter was $1.1 million compared to $4.7 million in the prior year comparable period. Basic and fully diluted loss per share were both $0.01. Total shares outstanding as of the end of the quarter were 32,685,000, slightly higher than the prior quarter. Our balance sheet remains strong and provides a solid foundation as we continue to navigate the pandemic and pursue our growth and diversification strategies. We ended the quarter with available liquidity of $72.1 million, which includes $44.2 million of cash and cash equivalents and $27.9 million of short-term, held-to-maturity securities. This is reflective of the $45.2 million net cash outlay for the purchase of our Avondale campus in late December. In the quarter, we generated operating cash flow of $7.8 million and adjusted free cash flow of $5.8 million. Adjusted free cash flow reflects an adjustment for the Avondale campus purchase in the current year, and for our CEO transition and Norwood campus closure in the prior year. Just a quick recap regarding Avondale. As we disclosed, we expect to complete the consolidation of our Phoenix MMI campus into Avondale by the end of fiscal 2022 and estimate a total annualized adjusted EBITDA benefit of approximately $6.5 million as a result of the purchase and consolidation. We will see the initial benefit from the purchase transaction on occupancy expense in the second quarter. Post consolidation, Avondale will be our largest campus in terms of size, number of students and program diversity. We also made further progress on our previously announced Orlando campus consolidation and have finalized leases to secure the necessary space. This consolidation will bring all of our Orlando operations into one site and reduce the overall footprint by approximately 75,000 square feet. As a result, we estimate an annual adjusted EBITDA benefit of approximately $1.9 million beginning in fiscal 2022. Our strong balance sheet and ability to consistently generate cash from our core operations will support our strategic initiatives as we move forward. As Jerome mentioned, we're making good progress on this front and we expect to release more details in the coming months. I'd now like to turn briefly to our guidance for fiscal 2021 before handing the call back to Jerome. Despite the additional pressure we saw in revenue this quarter from COVID, we are pleased with the progress we are making across our business by the strength of the various leading indicators mentioned in my earlier comments and by the continued progress of our students and success of our graduates. Given this, we are maintaining our full year fiscal 2021 guidance. This assumes the current environment in relation to the pandemic does not worsen, and thus, we see steady performance improvement throughout the remainder of the year. Briefly recapping the guidance. For the full fiscal year, we expect year-over-year student start and revenue growth of 10% to 15%; net income of $14 million to $19 million; adjusted EBITDA of $30 million to $35 million; and adjusted free cash flow of $20 million to $25 million, which assumes capital expenditures of $15 million to $20 million, excluding the Avondale campus purchase made in the first quarter. With that, I would like to thank the entire UTI team for their efforts during the quarter. Now I'll turn the call back over to Jerome for closing remarks before he opens up the call for questions. Jerome? -------------------------------------------------------------------------------- Jerome A. Grant, Universal Technical Institute, Inc. - CEO & Director [5] -------------------------------------------------------------------------------- Thanks, Troy. We continue to feel optimistic about the remainder of the year and the future for UTI and feel these short-term revenue pressures, primarily attributable to the current health crisis in America, are just minor bumps in the road on our path to success. We are seeing extremely strong demand at the front end of our lead funnel that we are more efficiently converting to scheduled starts and starts than we ever have. The job market for our graduates has remained resilient and is expected to see further expansion over the coming months and years. We're confident that our blended learning is the premier way to be educated within our field, and we're seeing tangible results from our ambitious marketing strategy. Our financial position remains rock solid, which offers us optionality moving forward. Our team has a clear vision of both how UTI must execute on the fundamentals in 2021, while aggressively pursuing the growth and diversification path to achieving our fullest potential in the future. I'd now like to turn the call over to the operator for Q&A. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) And the first question comes from Austin Moldow with Canaccord. -------------------------------------------------------------------------------- Austin William Moldow, Canaccord Genuity Corp., Research Division - Associate [2] -------------------------------------------------------------------------------- You mentioned some negative impacts from COVID, but do you believe you're experiencing any improvements in demand from recessionary trends and high unemployment yet? -------------------------------------------------------------------------------- Troy R. Anderson, Universal Technical Institute, Inc. - Executive VP & CFO [3] -------------------------------------------------------------------------------- Yes. Austin, it's Troy. Thanks for the question. We've been talking about the front-end strength on our inquiry flow for a few quarters now. We were 25% both in the last 2 quarters of fiscal '20, 11.5% this quarter, and that includes a down month with October because of the election. So we're seeing demand. Clearly, unemployment rate in our primary demographic is very elevated, even with some of the more recent improvements. So it's -- again, always hard to call. But clearly, the enrollments this quarter and the starts this quarter were very strong. We see, as I commented on, we see strength in our Q2 enrollments, which are actually pacing stronger currently based on current data than our Q1 enrollments and we continue to build the book for the back half of the year. So we're encouraged by the front end strength we see, and we'll continue to do everything we can to maximize the opportunity and support our prospective students. -------------------------------------------------------------------------------- Austin William Moldow, Canaccord Genuity Corp., Research Division - Associate [4] -------------------------------------------------------------------------------- Great. Can you go into a little more depth on the advertising environment? And I think you mentioned something about localizing ad messages. Can you just kind of go through that initiative? -------------------------------------------------------------------------------- Jerome A. Grant, Universal Technical Institute, Inc. - CEO & Director [5] -------------------------------------------------------------------------------- Sure. Austin, thanks for calling in anyway. It's Jerome. So a couple of things. Number one, in terms of the environment as a whole. One of the alterations we've made is to start to more localize our advertising. Most of UTI's advertising over the last number of years has been sort of national brand awareness advertisement that would bring someone to inquire about what they may want to do. We're getting far more pointed in our advertising right now. You'll see social media ads in the New York area saying there are 66,000 open jobs. And in 51 weeks, you'd be certified to be able to apply for one of those. And we really believe that a little deeper mining in our local areas bring some of the results we've seen in the first quarter, a begin of a shift to more local enrollments, which convert at a higher rate and actually show at a higher rate. And then also a bit of a compressed time frame between enrollment and start, which sort of leads to your first question that you had to Troy, which is the compressed time frame, which usually is about 4 months between an inquiry and a start, is really indicative that you've got people who don't have jobs and are ready to get retrained right away. So a lot of that messaging is much more focused on being there for people. And then a significant amount of the focus is really reaching out to people who are local, therefore, they can make a decision quickly and start school right away. -------------------------------------------------------------------------------- Austin William Moldow, Canaccord Genuity Corp., Research Division - Associate [6] -------------------------------------------------------------------------------- Great. That's really helpful. And if I could sneak in one quick one, you mentioned computer skills. Any thought around leaning further into that kind of computer science or coding, short-term type boot camp, coursework? -------------------------------------------------------------------------------- Jerome A. Grant, Universal Technical Institute, Inc. - CEO & Director [7] -------------------------------------------------------------------------------- We have not really gone deep into the notion of coding and boot camps. What we have been doing is we have been looking much more deeply into how the evolution of digital literacy starts to apply to ongoing continuing education, the B2B markets as well as the transition from combustion to hybrid to EV. We think that those digital skills are going to become much more at a premium, and therefore, we're leaning in on them. -------------------------------------------------------------------------------- Operator [8] -------------------------------------------------------------------------------- And the next question comes from Raj Sharma with B. Riley. -------------------------------------------------------------------------------- Rajiv Sharma, B. Riley Securities, Inc., Research Division - Analyst [9] -------------------------------------------------------------------------------- So I just wanted to understand, last call, the regular -- the students on regular coursework were 80%, and that has improved to 84% now, what was the differential? So the number of -- there are also the number of graduates around, I think, Jerome mentioned 1,500. What was the normal number that we would have expected during this quarter? In other words, is the delta, unless he is graduating, not enough progressing, that has caused the shortfall in the revenue. Just trying to understand that better, the pace of the course completion. -------------------------------------------------------------------------------- Troy R. Anderson, Universal Technical Institute, Inc. - Executive VP & CFO [10] -------------------------------------------------------------------------------- Yes. Sure. Thanks, Raj. Appreciate your question. A few comments. This is Troy. I'll make a few comments. First, as you look at Q1 -- our Q4 to Q1, we always have a seasonal effect of this holiday closure. We're closed a week in the latter part of December. And so that always -- we always have a lower revenue per student in Q1 than we do in Q4, and our revenue was roughly flat, even though typically, we have higher students in Q1 than Q4. So everything, as you look at this last Q4 to this Q1 looks very similar to exactly what happened last year, which was a pre-COVID environment. What didn't happen, which we were counting on or expecting to some degree was some improvement, as we talked about in the last call, as we brought more students back in getting caught up on their labs and things of that nature, because we saw some spike activity with the LOAs, with some withdrawals, with some retakes that basically counter set against the improvements we were trying to make. And we had progress making -- leading into the last call. So we see those improvements happening. And we can point very specifically to, clearly, the effect that happened really the last 5 to 6 weeks of the quarter. And then we also see the first 5 weeks here of this quarter a reversal. And so that's really the long and short of it. I didn't get quite the lift we were hoping for. But we didn't go backwards, is really how we're looking for it. And we see that improvement. Again, the front end strength was tremendous. We see that strength continuing into Q2, and we're going to continue working on everything that we can within our control to keep driving the performance improvements, which we have confidence we can achieve. -------------------------------------------------------------------------------- Rajiv Sharma, B. Riley Securities, Inc., Research Division - Analyst [11] -------------------------------------------------------------------------------- Any sort of -- was it regional specific at all these sort of delays and the reticence in wanting to complete the coursework? -------------------------------------------------------------------------------- Troy R. Anderson, Universal Technical Institute, Inc. - Executive VP & CFO [12] -------------------------------------------------------------------------------- There are definite variances across the campus footprint. I mean, we have a -- and the -- a campus doesn't turn overnight, right? If a campus was -- has a higher LOA rate than the other campuses, it takes longer to bounce back. So we definitely have some regional variation. Off the top of my head, I mean, I know there's 1 or 2 of our California schools have been behind throughout. We've seen Arizona. Some of the hot spots are -- where we've seen some of the most pressure. But it's not 100% consistent. So there's some puts and takes around there, keeping in mind. Again, we have a younger demographic in our schools, than broadly speaking, is most affected by COVID. So again, I wouldn't point it to any one specific thing. I think it's just what you see out in the macro headlines. We saw some effect from that, but we also see that the actions that we've been taking will continue to drive improvement. -------------------------------------------------------------------------------- Rajiv Sharma, B. Riley Securities, Inc., Research Division - Analyst [13] -------------------------------------------------------------------------------- So just one last question on that. I see that you reiterated the guidance. Obviously, you guys are doing well on the starts and the interest and the continued -- the show rates are improving. But the revenue -- the yearly revenue guidance would have to be met only if there was obviously a pickup in the pace of this revenue recognition. So are you expecting this more to be the back half? When are you expected -- when do you expect the pace of completion of coursework to have caught up entirely? -------------------------------------------------------------------------------- Troy R. Anderson, Universal Technical Institute, Inc. - Executive VP & CFO [14] -------------------------------------------------------------------------------- Yes. It's -- the make ups are a piece of it, right? Having a more normalized LOA rate, having a more normalized retake rate. So all of those things contribute. And so we do expect to see improvements -- that guidance contemplates improvement throughout the year. Certainly, it is back -- it was back-end loaded when we gave it. It's a little more back-end loaded now. It is a range. So I want to emphasize that it's a range. And we're comfortable with the range, with the initiatives we have in place, the front-end strength that we see and the expected improvements throughout the year. -------------------------------------------------------------------------------- Operator [15] -------------------------------------------------------------------------------- And the next question comes from Steven Frankel with Colliers. -------------------------------------------------------------------------------- Steven Bruce Frankel, Colliers Securities LLC, Research Division - Senior VP & Director of Research [16] -------------------------------------------------------------------------------- I wonder if you could just dig in a little bit on exactly what the LOA number was, what the -- and what happened to that sequentially and where you think that goes this quarter. -------------------------------------------------------------------------------- Troy R. Anderson, Universal Technical Institute, Inc. - Executive VP & CFO [17] -------------------------------------------------------------------------------- Yes, sure. We -- when we talked last quarter, we said we were expecting to run 1 to 2 points above pre-COVID levels. That could -- and it varies. We get spikes, as we've talked about in the past around, say, spring break, we get spikes around the holidays, anyway, just normal course. Because our program doesn't have breaks other than this 1 week that we've referenced in December. Other than that, it's straight through from start to finish. And so 1 to 2 points above a normalized level, that would be roughly 600 to 800 LOAs, again, depending upon the time of the year. We were in the 700 at the time of the last call, so we were in that range. We spent much of December over 1,000, and we had 2 really strong LOA return cycles, both with our January 11th cycle as well as just this past Monday. And we're much more normalized so far this quarter, get back to where we would have thought to be, if not even a little bit better on that. -------------------------------------------------------------------------------- Steven Bruce Frankel, Colliers Securities LLC, Research Division - Senior VP & Director of Research [18] -------------------------------------------------------------------------------- So now you're back to somewhere around 700 again? -------------------------------------------------------------------------------- Troy R. Anderson, Universal Technical Institute, Inc. - Executive VP & CFO [19] -------------------------------------------------------------------------------- Yes. In that normalized range. Again, it's going to vary month by month, but definitely something in a more normalized range of what we would expected. -------------------------------------------------------------------------------- Rajiv Sharma, B. Riley Securities, Inc., Research Division - Analyst [20] -------------------------------------------------------------------------------- And how challenging is this failure rate issue? Is this -- maybe how many students are affected? And how long does it take you to get your arms around that and get those students back on track before they drop out? -------------------------------------------------------------------------------- Troy R. Anderson, Universal Technical Institute, Inc. - Executive VP & CFO [21] -------------------------------------------------------------------------------- Well, it's a few cycles. I mean if a student is unable to complete a course within 2 or 3 tries, they're typically not going to make it past that course. So we've, as I mentioned, have a number of initiatives, mentoring, identifying. And again, not all this is new. It's evolving, right, in this newer environment that we've been operating in the last number of months. But we had put even more incremental emphasis and do have some new programs. The mentoring is a newer program for us, but identifying at-risk students earlier, the efforts around our transition from Google Classroom to Blackboard, so we'll have a fully integrated suite of student curriculum and student management support. So all of those initiatives, we see when we pilot them, improvements and now we're rolling them out more broadly. So really, again, we didn't -- I would emphasize, we didn't go backwards. We just didn't move forward as much as we would like to have seen because we were going into a headwind there in the latter part of the quarter on some of these metrics. -------------------------------------------------------------------------------- Jerome A. Grant, Universal Technical Institute, Inc. - CEO & Director [22] -------------------------------------------------------------------------------- Yes. Steve, one of -- it's Jerome here. I mean, one of the challenges and giving you a definitive answer on the withdraw thing is also the notion of -- we have a number of students who either get sick or have to quarantine, don't call us, just miss a couple of weeks and then come back for the third week and fail the course. And think, oh, you know what, I better try a retake or maybe I'll just pause for a little while, along those lines. And so it's not unrelated to COVID in and of itself. There are other factors involved with that, too, but it's not unrelated to COVID in and of itself. And so what we've been seeing so far in the second quarter is a significant re-enrollment rate, which again gives us confidence in reiterating our guidance for the balance of the year. -------------------------------------------------------------------------------- Steven Bruce Frankel, Colliers Securities LLC, Research Division - Senior VP & Director of Research [23] -------------------------------------------------------------------------------- Okay. And with the high rate of unemployment, have you seen a significant mix shift more towards 18- to 24-year olds than you had pre-COVID? -------------------------------------------------------------------------------- Jerome A. Grant, Universal Technical Institute, Inc. - CEO & Director [24] -------------------------------------------------------------------------------- Yes. That's a really great question. There's a couple of ways to answer that. One, we've seen a mix shift in our major metropolitan areas where a lot of the service jobs went away with the closing of restaurants, closing of retail things, et cetera, along those line. We've seen a compression. In the number of days, it takes someone to start from when they inquire. Again, something that's indicative of people who are readily available to start work. And more than the 20- to 25-year olds, I think there are a lot of 18-, 19-year olds that graduated from high school last year who didn't find that job they thought they would find when they decided they weren't going to go to school. And so if anything, what we saw in this last quarter was a more pronounced number of that 18-, 19-year old who left school last September, but didn't find anything to do, right? And so if we look at what sort of stacks up in terms of the last quarter, we had some pent-up demand. Remember, when we talked to the quarter before, we had said that there are a number of students who were fearful of starting in the back-to-school season. That came through in November and December of more of those starts, and those are the younger students. And then also, we saw more local students, again, people who were readily available. And then the lead volume, I think that it also fueled that as well. So we're -- as Troy said, it's hard to say, yes. This is all unemployment because there still was the notion of a delay because of COVID. But I think they're -- anecdotally, we're seeing a lot of students that just weren't able to find that unskilled labor job when they left high school last year. -------------------------------------------------------------------------------- Steven Bruce Frankel, Colliers Securities LLC, Research Division - Senior VP & Director of Research [25] -------------------------------------------------------------------------------- Okay. And then one more. What changes are you making to your high school recruitment efforts, given the challenges of COVID? -------------------------------------------------------------------------------- Jerome A. Grant, Universal Technical Institute, Inc. - CEO & Director [26] -------------------------------------------------------------------------------- Yes. We've -- that's a great question. One, we are getting more access to the high schools than we originally expected when we thought through the year of how we were going to -- of how we're going to navigate. So one, we're actually somewhat pleased with the amount of high schools we are getting access to, either virtually or in person. That's great. But we've also started much more events-based outdoor, events-based recruiting efforts on weekends, et cetera, car shows, bringing people to our campuses and the parking lot, socially distance, of course, all that sort of stuff. And we're seeing really our virtual events with -- whether they're racecar drivers or whether they're people that are in the employment community. And that events-based approach is actually bringing more people to us as they think through. We also think things are -- if you look at the FAFSA data in the United States, we think that things are just a bit delayed as well. The early FAFSA numbers were double digits down early on in the year, and we're beginning to start to see a bit of a catch-up, I think, as students were just sort of surviving in that September, October time frame, not thinking about what I'm going to do next year, but how I'm going to learn online or with hybrid or what this all means. But whereas by March or April, pretty much everyone's decided what they're going to do. We really don't see the year going that way this year. We think that the decisions are going to go a little later as people pivot from surviving their senior year to thinking about what I have to do next. -------------------------------------------------------------------------------- Operator [27] -------------------------------------------------------------------------------- And the next question comes from Eric Martinuzzi with Lake Street. -------------------------------------------------------------------------------- Eric Martinuzzi, Lake Street Capital Markets, LLC, Research Division - Head of Research & Senior Research Analyst [28] -------------------------------------------------------------------------------- Yes. I wanted to drill down on one of the segments in the channel, the new student starts by channel. It looks like the military has been pretty strong here the last 2 quarters. Could you explain what's behind that trend? -------------------------------------------------------------------------------- Jerome A. Grant, Universal Technical Institute, Inc. - CEO & Director [29] -------------------------------------------------------------------------------- A couple of things. One, we're anecdotally hearing that a number of the people who are enrolling and starting are people who may have wanted to go directly out into the workforce, but the job market just isn't robust enough for them to do it. So I would attribute some of that to the unemployment rate that's out there that folks are thinking more about that. I'd also -- when we look at where our enrollments are coming from in the military channel, our on-base programs are generating more leads and more enthusiasm towards UTI. Therefore, we're doing our part with the military to train people on their bases or their camps. But the folks that aren't able to participate in that, those are great leads for us to bring into our campuses once they rotate out. So we're starting to see some movement off of that as well. -------------------------------------------------------------------------------- Eric Martinuzzi, Lake Street Capital Markets, LLC, Research Division - Head of Research & Senior Research Analyst [30] -------------------------------------------------------------------------------- I didn't understand your first comment about the unemployment versus military. Could you recap that for me? -------------------------------------------------------------------------------- Jerome A. Grant, Universal Technical Institute, Inc. - CEO & Director [31] -------------------------------------------------------------------------------- Well, so when someone is rotating out of their service, there's a number of things they can do. They can take advantage of the GI Bill and they can go on to higher education or they can go out into the job market. And a significant portion of them don't take advantage of the higher education benefit that they get and go out into the job market. And I think what we've been seeing is a number of people who are rotating out of the military aren't finding jobs. And therefore, they then choose to exercise their GI benefits to learn a skill and move forward. -------------------------------------------------------------------------------- Eric Martinuzzi, Lake Street Capital Markets, LLC, Research Division - Head of Research & Senior Research Analyst [32] -------------------------------------------------------------------------------- Got you. Okay. Troy, I wanted to ask about the operating expenses in the business. What should we anticipate? Are we kind of level set here as we go into Q2, Q3? Or is there a step up as the business comes back? -------------------------------------------------------------------------------- Troy R. Anderson, Universal Technical Institute, Inc. - Executive VP & CFO [33] -------------------------------------------------------------------------------- No. I mean, I think we'll see some trending up within the guidance. If you do the math around there, you'll get to some higher expense levels as we get into the back half of the year. We have obviously the higher students as we get into the back end of the year with the start strength. And as we stabilize, the student base will add students particularly heavily in the fourth quarter as usual. So definitely a spike up there. You'll see a little bit of some investment in a few areas that may show up in the SG&A side. Not significant, but that will trend up a little bit. So I think, generally speaking, you would model that increasing throughout the year. -------------------------------------------------------------------------------- Eric Martinuzzi, Lake Street Capital Markets, LLC, Research Division - Head of Research & Senior Research Analyst [34] -------------------------------------------------------------------------------- Okay. But some -- if we were $75 million, I think that was the number in which you... -------------------------------------------------------------------------------- Troy R. Anderson, Universal Technical Institute, Inc. - Executive VP & CFO [35] -------------------------------------------------------------------------------- $75 million, yes. -------------------------------------------------------------------------------- Eric Martinuzzi, Lake Street Capital Markets, LLC, Research Division - Head of Research & Senior Research Analyst [36] -------------------------------------------------------------------------------- $75 million in Q1. Does that -- you're saying it might trend up into the $80 million to $82 million range over the year? Or is it something bigger than that? -------------------------------------------------------------------------------- Troy R. Anderson, Universal Technical Institute, Inc. - Executive VP & CFO [37] -------------------------------------------------------------------------------- Yes, probably something in the low 80s by the time you get to the end of the year. -------------------------------------------------------------------------------- Eric Martinuzzi, Lake Street Capital Markets, LLC, Research Division - Head of Research & Senior Research Analyst [38] -------------------------------------------------------------------------------- Okay. All right. And then last question, use of cash here. Obviously, you guys made a big decision to go ahead and buy the MML (sic) [MMI] facility. That's $45 million that went to own it versus lease it. Just wondering the logic there versus maybe keeping more dry powder for acquisitions of other education-related businesses. What was the thinking at the Board level on that one? -------------------------------------------------------------------------------- Troy R. Anderson, Universal Technical Institute, Inc. - Executive VP & CFO [39] -------------------------------------------------------------------------------- Sure. I mean, we are -- as we've been commenting this call, last call and since last year, I mean, we're aggressively pursuing our opportunities for growth and diversification. So I think we've also talked about -- there's timing around that, right? Even if we announced an acquisition today, it would not -- the money would not leave our hands given the diligence process, the preacquisition review process, the Department of Ed, the ACCSC, the various steps we have to go through for 6 or 9 months. And so -- we're of, say, a new campus or even the welding. We made a welding announcement last week, well that's '22, 2 programs in '22. But we have to announce it now because we have all that lead time to implement, and those are relatively shorter lead time-type initiative. So as we were looking at opportunities, we think of ourselves as opportunistic in the real estate side. We own Dallas and Houston. We've owned other campuses in the past and then done sale leasebacks when the company needed cash. Avondale, there was a great opportunity there. We're clearly making a huge strategic commitment to that site. And we were able to negotiate what we felt was a pretty good deal. And we are -- you'll see in the Q, which will be filed tomorrow. We are looking at our financing options there, so we can replenish that cash at a pretty low rate, I think as you probably know. And so we don't think of it as limiting at all. We think we have plenty of options. And again, we'll have more to talk about as we go forward here as we get further down the path on our strategic options. -------------------------------------------------------------------------------- Eric Martinuzzi, Lake Street Capital Markets, LLC, Research Division - Head of Research & Senior Research Analyst [40] -------------------------------------------------------------------------------- Yes. I appreciate the explanation. I have to be reminded about the time lines in education-related M&A. So I appreciate the color. -------------------------------------------------------------------------------- Operator [41] -------------------------------------------------------------------------------- And that does conclude the question-and-answer session. I would like to return the floor to Mr. Grant for any closing comments. -------------------------------------------------------------------------------- Jerome A. Grant, Universal Technical Institute, Inc. - CEO & Director [42] -------------------------------------------------------------------------------- Thanks a lot. Well, so as we've consistently underscored in the past, Troy and I believe in a very open and transparent partnership with the investment community. To that end, we look forward to meeting with as many of you as possible over the coming days and months. So thanks, everyone, for joining us, and that concludes our call for the day. Thank you. -------------------------------------------------------------------------------- Operator [43] -------------------------------------------------------------------------------- Thank you. As mentioned, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.