Universal Technical Institute, Inc. (UTI) Q2 2012 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the Universal Technical Institute, Inc. Second Quarter 2012 Conference Call. [Operator Instructions] As a reminder, today's conference call is being recorded. A replay of this call will be available for 60 days at www.uti.edu, or alternatively, the call will be available through May 9, 2012, by dialing (877) 344-7529 or (412) 317-0088 and entering passcode 10012983. At this time, I would like to turn the conference over to Mr. John Jenson, Vice President and Corporate Controller of Universal Technical Institute. Please go ahead.

Hello, and thank you for joining us today for Universal Technical Institute's quarterly conference call. During the call, we will discuss the results of our second quarter ended March 31, 2012. We will then open the call up for your questions. The company's earnings release was issued after market closed today and is available on UTI's website at www.uti.edu. Before we begin, we would like to remind everyone that except for historical information presented, the matters discussed today may contain forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934 and Section 27A of the Securities Act of 1933 as amended. I'll refer you to today's news release for UTI's comments on that topic. The Safe Harbor statement in this release, which I will not repeat here in the interest of time, also applies to all statements made during this conference call. Information in this conference call, including the initial statements by management, as well as answers to the questions related in any way to any projection or forward-looking statement, are subject to this Safe Harbor statement. In our prepared remarks you will hear today, we will make reference to EBITDA. EBITDA, for all periods discussed during our remarks, is a non-GAAP measure representing net income, exclusive of interest, income taxes, depreciation and amortization. The schedule provided in the earnings release reconciles EBITDA to the nearest corresponding GAAP measure net income. At this time, I would like to turn the call over to Kim McWaters, Chief Executive Officer. Kim?

Thank you, John. Good afternoon, ladies and gentlemen, and thank you for joining us. On today's call, I will begin with a high level overview of the quarter, and then turn it over to Eugene to discuss our financial results. Following his commentary, I will spend a few minutes discussing marketing and student recruitment trends, and Eugene will follow with an update on business operations and our outlook for 2012. With the second quarter of 2012 behind us, we are now more than halfway through the year, and we have helped approximately 6,700 students begin their training to become professional technicians. During the same 6 months, we graduated 5,700 technicians who are prepared to go to work in fields that require highly trained, highly skilled people. Overall, their futures look bright as last year, 85% of UTI's graduates went to work. While the ultimate measure of our success is the success of our graduates, there are key operating and financial measures that are very important as well. With fewer overall students in school, our revenues, net income and operating margins are negatively impacted. We continue to try and strike the delicate balance between keeping our cost structure in line with our student population while investing in our future. This is challenging given our highly fixed cost structure, yet rebuilding our student population is the key to regaining steady and improving financial performance. With that said, we're beginning to see some positive signs with student inquiry growth and improving admission deficiencies, relatively stable and persistent show rates, as well as graduate employment rates. We do expect to see new student growth in the second half of the year, which will be the first time since the third quarter of 2010. However, it will take a while to rebuild our average student population, which means 2012 will still be challenging from a financial results perspective. Let me turn it over to Eugene now to discuss the financial results in greater detail, and then we can cover some of the specific business drivers and operating trends in the quarter. Eugene?

Thanks, Kim. As anticipated, our financial outcomes were down from last year for the second quarter of 2012 as a result of the lower student population as the year began. This decrease was mitigated to some extent due to the focus placed on efficiencies and managing costs during the quarter. Revenues for the second quarter were $106.2 million, a 6.9% decrease compared to last year. The decrease in revenues primarily relates to a decrease in average student enrollment some 11%, partially offset by one additional earning day in the quarter and an increase in tuition rates. During the second quarter, tuition excluded $3.7 million and $1.5 million last year related to students participating in the company's Proprietary Loan Program which will be recognized as revenue when payments are received. Average revenue per student for the quarter increased 4.7% to approximately $6,300 per student. Operating income for the second quarter was $2.9 million compared to $11.4 million last year. The margin for the second quarter was 2.7% compared to 10% in the second quarter of last year. While we have been successful in managing variable costs according to our student population, our high fixed cost structure, changes in our admission salaries and investments in advertising continue to contribute to a decline in operating margin. Advertising expense increased $2.9 million to $11.7 million for the quarter as a result of our continued investment in a blend of media to improve the quality of our inquiries. Advertising expense for the second quarter as a percentage of revenue increased from 7.7% last year to 11% this year. Bad debt expense as a percentage of revenues was only 1.3% for this quarter and is 1.9% on a year-to-date basis. EBITDA for the quarter was $9.4 million compared to $17.9 million last year. And for the first half of this year, it was $22.6 million compared to $41.1 million last year. Finally, net income for the quarter was $1.9 million or $0.08 per diluted share versus $7 million and $0.28 per diluted share last year. Year-to-date through the first 6 months, net income is $5.9 million or $0.24 per share versus $17.3 million or $0.70 per share last year. ROE for the trailing 4 quarters ended March 31 was 11.3% versus 15.6% for the 4 quarters ended December 31. Looking at our balance sheet, we had cash, cash equivalents and investments of roughly $117 million at March 31 as compared to $113 million at December 31 and $110 million at our fiscal year ended September 30. We generated cash from operations of $15.6 million for the first 6 months compared to $28.9 million last year. The decline was primarily driven by the decrease in our student population. As a reminder, we continue to have no debt on our balance sheet. Also during quarter, we implemented 2 financial strategies that are intended to enhance shareholder value. As you probably know, we initiated a $0.10-per-share quarterly dividend, and we also purchased about 126,000 shares at an average price of just under $13 under our new share repurchase program. During the quarter, we invested $2 million in fixed assets, which was down from $11.7 million in the same period last year when we are invest -- when we were investing heavily in our new curriculum. And now I'd like to turn it back to Kim to discuss our marketing initiative efforts in a little bit more depth. Kim?

Thank you, Eugene. Let's start with marketing. As a reminder, it was one year ago that we began adjusting our marketing mix to generate higher-quality student inquiry sources and eliminated all student lead aggregators. I am pleased that the number of student inquiries grew 2% year-over-year this quarter, having fully replaced the 30% of inquiries traditionally generated by lead aggregators. If we exclude the lead aggregator sources from last year's inquiry volume and compare apples-to-apples, we actually grew inquiries 27% during the quarter. We continue to fine tune our media mix and strategy, which does cost us more on the front end, but we believe the investment will be worth it from a student outcome perspective. As Eugene mentioned, the advertising costs increased $2.9 million or 33.5% year-over-year. In addition, we did accelerate some of our advertising spend for the year given our desire to improve first and second quarter new student starts and to build momentum going into our third and fourth quarter. For the full year, we continue to expect advertising costs to run in the 10% to 11% range as a percentage of revenue. As our new national campaign builds, we do expect to see improved efficiency and believe that advertising expense as a percentage of revenue will normalize as revenue growth resumes. Now let's move on to admissions. Last quarter, I shared my optimism regarding our admissions team's implementation of new plans, processes and procedures. We continue to see good progress, despite the challenging environment and significant changes they've had to integrate into their role. The total number of student applications received during the quarter was down only 2% year-over-year, where last quarter applications were down 4% year-over-year. We're also seeing efficiency gains with our military and adult segment representatives as a result of the greater volume of higher-quality prospective students, new tools and training resources that we've recently rolled out and team stability. During the quarter, the number of military channel student applications increased 19% year-over-year. The number of adult channel student applications were down 6%, which is an improvement from the previous quarter's year-over-year decline of 8%. High school student applications were relatively flat, off 1% from the prior year. Our military channel student application growth relates to our coverage in military installations. Overall, those students receiving veteran benefits as a percentage of our total student population is 18% and has been growing compared to last year. While we've not yet reached optimum performance levels in our admissions teams since dealing with the many changes we've experienced last year, we are making steady progress in a relatively challenging marketplace. Before I hand the call back to Eugene, I'd like to make a few comments about new student starts and our show rate for the quarter. This quarter, 3,400 new students began school. This was about 200 students fewer than the same quarter last year and was what we expected and discussed on our last call. Our show rate was slightly better, up 10 basis points year-over-year, so it was nice to see an improvement in this metric. Looking ahead to the second half of our year, we believe we will begin to see growth in new student starts on a year-over-year basis. While this is in line with our previous guidance, as a reminder, we do expect to see some fluctuations in volatility on a quarterly basis. Meanwhile, we remain diligent in our efforts to help prospective students show to school, stay in school and graduate into a career as a skilled technician. Now I'll hand it back to Eugene to discuss some of our key student metrics and operating results. Eugene?

Thanks again, Kim. As we've been discussing, students who are scheduled to begin school have many hurdles that they face, and our teams continue to work diligently to assist them. One area of concern for our students and their families continues to be the cost of education, and more specifically, affordable options for financing their education. We know that the elimination of year-round Pell and any additional cuts in the program will make it more difficult for our students to pursue an education. While the change may not directly impact our revenues, it should create pressure on our show rates and require alternative solutions to help our students. Our teams make certain that our students know of all the financing resources available to them, whether it be grants, loans or scholarships. And we continue to offer both merit- and need-based scholarships, and we have increased the amount of need-based scholarships awarded this year. We are also making our loan program more accessible to students who may not understand this as an alternative. Along with increasing awareness of the program, we're also removing some qualification barriers for our dependent students. In short, we're making it easier for students to participate in the loan program. As a reminder, that loan program helps students who don't have sufficient access to traditional credit-based loan products and who are otherwise fully qualified to attend UTI. As of quarter end, we had committed to provide approximately $45.2 million since the inception of the program. The average individual loan amount is now about $5,100. Since inception of the program, we have now recognized tuition and interest totaling $37.5 million. For the first 6 months of 2012, we have extended approximately $11 million under the program compared to $3 million for the first 6 months of last year and $8.2 million for the full year of 2011. This has increased the amount of tuition we have excluded from revenues for both the quarter and year-to-date periods as compared to the same periods last year. Also, our collections -- our cash collections continue to improve. During the second quarter, we recorded $409,000 in revenues and interest from payments, which was up from $210,000 in the previous year. Year-to-date, that total amounts to $730,000 versus $315,000 last year. Since inception, we have collected almost $2 million on the program. While our support for students continues while they are in school, on a year-to-date basis, we've seen a slight increase in student persistence, totaling 50 basis points, with all of our campuses improving their performance. And during the quarter, we graduated about 2,700 students, which is a decline of about 2% year-over-year. But over the past 12 months, we have graduated a total of 12,000 students with either their degrees or certificates. Looking at our new curriculum, we intend to roll it out at are Avondale campus during this calendar year. And while we ultimately believe that our blended curriculum will help us reduce costs once it's fully implemented across our system, the next few years will require further capital investment and some higher-than-usual operating expenses as we transition to all of our auto campuses. Finally, switching to enrollment, that's another area where we have seen a continuation of positive outcomes. Our overall graduate employment rate is running consistent with the rate at the same time last year, which we view as a positive given the economic headwinds that we face. Although we experienced a slight drop in automotive and diesel employment when compared to the same period last year, we're seeing some improved outcomes in both motorcycle and collision repair, as well as we're seeing some improvement in certain geographical locations. I'm pleased to share with you that during our second quarter, we also renewed our manufactured-specific advanced training agreements with both BMW and Navistar. Our many industry relationships continue to provide a key differentiator for us in the marketplace, and more importantly, for our students as they seek careers in the industry. As we look to the remainder of 2012, our expectations have not really changed since the last call. We are seeing the rate of decline in applications improve, and in fact, improve more so than we had anticipated during our second quarter. During the second half of the year, we expect our new student starts will improve on a year-over-year basis. And as is typical, we expect our third quarter starts to be lower than our second quarter starts. Given our current enrollment levels, the macroeconomic headwinds and continued student financing challenges, we still anticipate that the average student population for 2012 will be lower by a rate in the low teens than those in 2011. We expect these lower levels of enrollment will result in a mid- to high single-digit decline in revenues in 2012 and an overall decline in our operating margin and net income compared to 2011. Furthermore, due to the seasonality of our business, with normal fluctuations in the student populations, we expect our third quarter net income to be lower than our second quarter, and as is consistent with our historical trends, the lowest quarter for the year before improving in the fourth quarter. Given these trends and the fact that due to regulatory changes, we have a higher fixed component in our admissions cost structure, we must and will remain focused on efficiencies and managing costs in addition to rebuilding our student population to meet the industry demand and ensuring quality outcome for our students. And operator, I think we're now ready to open the line for questions, please.

[Operator Instructions] And the first question comes from David Chu of Bank of America Merrill Lynch.

So just returning to your commentary around starts, how realistic is it or how possible is it for starts to turn positive in this upcoming quarter based on what you're seeing so far in April?

I would say that, again, as we said with quarter fluctuations we will see some of that, but based on where we're seeing our applications come in for the second half of the year, and assuming that our show rate stays relatively stable, as we've seen this year, we believe that that's likely to happen.

So -- okay, based on current trends, you're assuming that starts actually turn positive in 3Q?

I don't know if I want to be as specific as the third quarter but definitely by the fourth.

Okay. And just the improvements in the show rates, is it largely a macroeconomic kind of phenomenon? Or are there kind of initiatives in place that you're seeing that's really helping in that area?

Well, I think it's a combination of both. As the unemployment rate improves, families do have more resources and ability to relocate to go to school, so I do think that, that is helping a little bit. Certainly, we have had a number of initiatives underway, as -- some Eugene mentioned with scholarships that are both need- and merit-based, as well as helping students understand our Proprietary Loan Program to help them cover some gap tuition funding. And again, the focus on the local markets with students within closer proximities, it's helping as well. And then I'd say we've seen some improvement with adult students inside of the last quarter, specifically with -- some in motor cycle.

Great. And just one last follow-up, if I may. Can you just comment on show rates by segment? So just like you mentioned there, kind of high school versus adults versus military.

Military is the highest, currently. Adult, even though it's been under pressure, still shows at a higher rate than high school. And high school has been relatively steady. Again, this quarter, we saw some improvement with the adult, and we continue to see improvement with our military students.

And the next question comes from Gary Bisbee of Barclays.

It's Zac Fadem for Gary. Can you give us a little bit more color on the increase in revenue per student this quarter? It came in a little bit higher than we had expected. Is that primarily tuition increases or is there something else going on there?

Well, it's a combination of tuition increases, as I think you -- everybody knows we -- the last tuition increase we did was in November of last year, but as more and more of those student starts in school, the mix of those students that are at higher tuition rates is beneficial to that. Additionally, depending upon the mix of students in terms of what classes or what programs they take, that's a factor as well. But it's primarily driven by higher tuition rates, as well as the fact that there was an additional earnings day this quarter.

Okay. And doing more institutional loans now, does that mean you're lowering the admissions criteria or credit standards, or is it really more based on need?

Well, I -- it's -- we're not lowering any admission standards. We are making the loan slightly more -- the student does not have to go through as many hoops to get the loan as they may have previously. So if that's what you're referring to, the lowering of standards, I guess, that would be factual. It's really, I think, based upon our strategy of making sure the student is aware of the loan option earlier in the process so that as they're going through and knowing that they have an ability to solve that gap financing that they had, whereas I think in the past, our feeling is some students might have -- might have thrown in the towel early because they just didn't know how they were going to be able to overcome the tuition deficit between our tuition rates and what's available to them from federal sources.

Okay. And I just have another quick numbers question. What is your tax rate for '12?

It should run 39%, give or take a tad.

And next, we have a question from Peter Appert of Piper Jaffray.

Eugene, just following up on the loans. Do you have a number in mind in terms of how much capital you're going to make available on the expanded program?

Well, the loan program is not -- we're not a bank. It's not there to make money specifically on the loans, it's to solve a student's financing problems. So we intend to continue that program. I don't have a total amount. We look at it every quarter and look at how we feel about putting that out there, what it's doing to revenue, what other alternatives are out there, what's happening to the absolute gap based upon what the federal government and state governments make available. So we'll continue to evaluate it on at least a quarterly basis, but at this point in time, I don't expect to see any reduction to our willingness to make that available to students.

And how about -- I realize you don't have a ton of repayment experience. But can you just remind us where you are on that?

Well, we are fairly early in the process. We're not quite in equilibrium in terms of students being in repayment, mirroring the typical outcomes that we see in terms of graduations and employments. That said, I think we're running, the latest data I saw, close to 40% on collection rates there. And that's probably something that we've got some ability to improve upon, and I think we will both as we get a little bit better in the collection efforts and we get a little bit better with sample size and data.

So just so I'm sure on the accounting, you recognize no revenue, obviously, from payments you receive from these loans, correct?

No, that the only revenue we do recognize is when we actually get a payment in after.

I'm sorry. Right, at the time -- but right, it's deferred revenue, essentially?

Yes, essentially, that's correct.

And there's no deferral of costs associated with these students, correct?

That is correct. The costs of -- that they are expense as incurred.

Got it. Okay. And then also on the expense side, Eugene, so you are able to show modest improvement in the gross margin in the quarter, which is pretty impressive in the context of declining revenues. I'm just wondering how much more room there is on the cost side of the equation. And are you deferring some spending that we might have to see, I guess, call it catch-up, for a lack of better word, in some future quarters as revenue growth turns positive again?

Well, we're certainly not intentionally deferring any expense for the purposes of just deferring the expense. We're continuing to invest in the business. And really the big driver on a quarter-to-quarter basis in the expense is -- as Kim talked to, was advertising and marketing. And as we continue to invest to get better quality leads there and identify the appropriate channels and segments to go after, that's going to be a large driver. I don't ever want to say, from an efficiency standpoint, that we can't do better. I think we can. But we're also trying to balance that with the understanding that we are expecting our populations, or at least our starts, to start growing into the second half of the year. While we do have the ability to flex some of our staff, it's not that great, so we have to kind of retain some of the staffing that we believe is necessary to fulfill the needs of our students that we expect to start here in the next 6 months.

And the last thing, can you share with us what the media mix is currently?

Yes. The advertising budget for television is roughly about 45% of our spend, with the vast majority of the balance going into some internet advertising activities. But 80% of all student inquiries come through the Internet, which is driven both by advertising on the Internet, as well as on television.

And the next question is from Jerry Herman of Stifel, Nicolaus.

Kim, I just wanted to get some further clarification on the starts. It sounds like you guys are more confident about the fourth quarter experiencing positive starts. And I was just wondering if you can help us with the visibility that you have into that, i.e. do you have a number of apps that compare favorably to a year ago or just general visibility into that quarter?

We just -- we have application data for both the third and fourth quarter, and it is trending slightly favorable in both quarters to last year. The big question mark is the show rate and how steady the continued improvement comes from our campus-based representative dealing with the adult population. So if all things stay on the track they're on, I think you could see improvement in the third quarter. But it's just -- it's very early to say, and we don't have too much already on the books in the third quarter as far as actual new students recorded. Applications are up. It's just not significant enough to be overly confident about it, I guess.

Okay, great. And then just a high-level, big-picture question about the industry supply-demand dynamics. Could you maybe speak to what you are seeing with regard to industry supply? And then conversely, it appears that the BLS has ratcheted down growth expectations for automotive technicians. Could you maybe just address those supply-demand dynamics in the industry?

I think with the new BLS data, and I don't have it in front of me, but we actually saw some improvement than what we had seen in the previous years. And certainly, we're seeing that in terms of our employment results and what our advisors are telling us, that there is -- it's still a very challenging market out there, but employers are forward-looking and trying to hire a higher-quality tech, so I'd say that there has been positive movement there. And Eugene had mentioned earlier that we had renewed some contracts with our OEM partners, and I'd say the feedback from our OEMs and manufacturers, that the outlook is good and positive, and we're starting to have that sense, which we haven't had for a number of years. So I'd say that the data looks favorable, as well as some of the qualitative feedback.

And next, we have a question from Corey Greendale of First Analysis.

Kim, can you just speak to lead to or inquiry to apps conversion rates? And given trends you've seen there, should we expect that we should start to see more convergence between changes in inquiries changes in starts, assuming the start rate is kind of flat year-over-year?

Our hope is that we continue to see improvements in that regard as -- again, we've been trying to acquire higher-quality inquiry sources. It still is a little early in the process to give hard data on how the new advertising strategies and media buys are converting to applications and starts. But I will tell you that -- and I talked about this on our call last quarter as well, that our representatives score student inquiries, and better than 90% of them are getting a quality rating, which is better than last year, when it was in the mid-80% range. So that's positive. And when you look at the campus admissions team -- and again, this is a team that deals with the adult students that is primarily driven from advertising, we're seeing a 4% efficiency gain year-over-year with roughly 10% fewer representatives. So I think those signs are positive. It's certainly attributed to our higher-quality inquiry, but it is also reflective of improving efficiencies with some of the tools and training, as well as some of the seniority on the team at this point in time.

Okay. And then on the cost side, I think last quarter you talked about at expense being more in the 9% to 10% range and this quarter you're talking about 10% to 11%. Am I getting that right? And I'm assuming if there's a change, it's on the cost side. And it sounds like there's anything in the revenue side that's kind of holding in. So could you just speak to if I got that right and what changed there?

You are correct. And we did say that we wanted to accelerate the spend to help drive improvement in the latter half of the year. And if we started to see positive results, we would likely spend more and -- or continue that. And so what you'll see is that will happen into the next quarter, and that's what's driving it up from the 9% to 10% range versus the 10% to 11% range.

Okay. And then just one big picture question, if I could. You've been quite rigorous in the past about discussing the correlation between the labor market and your start growth rate. Could you just kind of speak to us about how you're viewing the economy right now, and if we do start to see more of a drop in employment given that this recession is different from what we've seen in the past, do you think that's a good thing or a bad thing for your business?

Well, I think anytime employments -- or let's say it differently. If unemployment worsens, typically, there is a strong correlation that we'll see improved starts. However, as you said, this recession and cycle is quite different than we've seen before, and we thought that we've kind of hit the tipping point. So I think a slight improvement would help us as family members, whether it be parents or spouses, again, have confidence that they have an income source and are willing to support students. So it's really difficult to comment on it given that it's unlikely anything we've seen, but I tend to think that an improvement would help us. And either way, it's a tough environment. We're going to have to work hard regardless.

And I think, Corey, just to add to that, while there has been sporadic data to suggest employment gains, I don't think we're seeing anything to suggest that the employment gains are in that -- in our target market of young males. So they're not choosing another alternative rather than schools. So to Kim's point, the improvement in the economy helps them be a little bit more confident. It's not like we're seeing any indication that construction job is a proxy or coming back and that they're postponing their education for some short-term employment.

And the next question is from Jeff Silber of BMO Capital Markets.

I just want to double check on a numbers question. I think you said that veterans were 18% of your student base, was that correct?

Yes, that is correct.

And I'm assuming most of those folks fund their education from the GI Bill. Do you have a rough estimate, in terms of the percentage of revenue, how much that income source generates?

I don't.

As a percentage of revenue?

A rough number, I mean, until today.

Yes, a rough -- it's in single digits.

Single digits. That's much smaller. And I know there has been some issues with this executive order that was signed last week that, to my understanding, it's the refund policy for [indiscernible] now it's to be the same as the Title IV Ref Policy. Is that what you expect to be done in different refund policies? And if so, how different are they?

You were breaking up a little bit, Jeff. I think the question is are the refund policies any different between veterans and nonveterans. Assuming that, that was the question, I'm pretty sure that, that does not have any material impact on us.

Okay. Yes, that was the question and I appreciate that. Just a couple of other quick numbers questions. In terms of ATB students as a percentage of the total enrollment?

ATBs are less than 5% of our total enrollments.

All right. Great. And then what should we be modeling for capital spending for the year?

For the full year, I would still model something in the $20 million range. I know we're low on that right now on a run rate basis, but I would still model that.

And next is a question from Kelly Flynn of Crédit Suisse.

I just want to check in on the gainful employment data that's supposed to be released, I guess, in the next couple of months. First of all, are you hearing anything or do you have any updated view on the timing of that release? And also do you expect that your thesis on the company's gainful employment exposure will be unchanged after the release of that data?

Our thesis? I'm not sure what our thesis is, but I -- you go ahead.

Well, I think you've talked in the past about not having [indiscernible].

Yes. I don't -- to the first part of your question, no, we haven't heard anything to suggest the confirmation or a change in timing or methods or anything like that, quite honestly, other than what people on the Street write about. And in terms of our thesis, again, given that we haven't heard anything different, I would expect everybody's repayment rates -- assuming that the methodologies are identical, I would expect them to be slightly worse than they were when they were published, whenever it was, last year just because of the economy. But I certainly don't expect to see anything different for UTI-specific, assuming that the department does what it says in a method and methodology that I think we're all anticipating.

The next question is from Barry Lucas of Gabelli & Company.

I just have a few. Kim, you provided a fair amount of color on both the adult learners and the military market. Maybe you could just flesh out the high school market and what your expectations are and what gives you confidence or not?

The high school team has continued to be relatively stable and steady. We're basically flat on a year-over-year basis in terms of number of reps. The retention of our reps is good. We did see a slight decline in an efficiency standpoint during the quarter of about 2% but nothing that is overly concerning. I'd say that this team is certainly more seasoned than our other teams and is probably having the greatest amount of adjustments to the new environment, and we're making steady progress. So I feel good about the high school market and the efforts there, and we're looking forward to the close of this school year and coming out with a good solid opening in September.

Okay. And just coming back to the expense question, where you've had several questions on advertising. Given the fact that you've suggested that the advertising has been front-end loaded to drive momentum into the second half of the year, should we expect G&A to be down both on an absolute basis versus the first half and down on a percentage of revenues?

I do not believe so. And if you're talking specifically from a marketing standpoint as a percentage basis from a revenue perspective, I would expect that to stay pretty much the same. So we end the year at 10% to 11% of revenue. From an absolute standpoint, you may see it tick down on a quarter-over-quarter basis. Yes, I'd say it will probably be down in Q3 from Q2 roughly $1 million, but I'd model it the same. Keep it steady.

But revenue will be done in Q3 as well. So on a percentage, Q3, I would expect it to be equal or slightly higher before it kind of bounces back to more historical ranges in Q4 with the higher revenue base there.

Okay. That's great. Last question, just coming back to the employment issue. Are you seeing -- Luis [ph] had mentioned something of a tick-down in employment rates at the auto side. I just was wondering, is that a lag effect? I mean, given what, again, looks like another good SAAR number, $14 million-plus coming out of the last month, more activity at dealer showrooms, one would suspect that there are more cars coming through the service space, whether it's an auto dealership or an independent repair shop, so what is -- what might you get [ph]?

I wouldn't -- I honestly, Barry, wouldn't read too much into it. It is a -- there's some seasonality in that number. It deals with the cohorts that have actually graduated, which is a very high number of graduates that we're dealing with right now. I would not read that comment in any way to read any weakness in either the auto or especially the diesel market. The diesel market is doing extremely well, and I think those minor basis point declines are from -- still very high rates. I think the news in the quarter was we actually saw some improvement in motorcycle and collision, which were at fairly low rates for us and dragging our overall rates down. And to see some pickup there was somewhat encouraging to us.

Next, we have a follow-up question from Corey Greendale of First Analysis.

For modeling purposes, so the share repurchases in the quarter, still a lot of capacity on the repurchase authorization. Should we -- how are you thinking about that? As these are capital, and should we assume there's going to be some steady trickle of repurchases going forward or what would you suggest?

Well, I think we'll -- we have changed somewhat by putting in the ongoing quarterly dividend so that there is a yield for investors out there. We have a fair amount of capacity, almost the full 25 million shares -- I'm sorry, $25 million of capacity out there, so most of that remains. We will continue to be opportunistic about it when we're able to be in the markets, which will happen in a few days, but we'll look at markets and market conditions and -- or trends and approach that opportunistically.

Okay. I got a quick question. It's just I realized you've probably given the guidance you're going to give on the margin, but if your expectation for ad expense of percent of revenue had gone up, in terms of your internal modeling, is there any offset to that? Or would your internal expectations for operating margin be lower than it would have been at the beginning of the year at this point?

Well, internally, we're trying to offset, but you guys can do the math. We don't have the ability to fully offset those marketing dollar increases, and what we're trying to do is offset some of it so that the lag effect between spending the dollars on marketing is actually converting into higher streams of revenue is less than, but we've overshot our internal estimates the first 2 quarters, and we're doing our best to kind of keep that. But it will be a struggle based upon our internal estimates to have third and fourth quarter margins to -- as high as we had previously hoped.

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Kim McWaters for any closing remarks.

Thank you very much for your questions, everyone. We certainly appreciate your time and interest in Universal Technical Institute, and we look forward to updating you on our next earnings call, which is scheduled for Thursday, August 2. Have a great evening.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.