Universal Technical Institute, Inc. (UTI) Q3 2012 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the Universal Technical Institute, Inc. Third 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 alternately, the call will be available through August 13, 2012, by dialing (877) 344-7529 or (412) 317-0088 and entering passcode 10016842. 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 for our third quarter ended June 30, 2012. We will then open the call up for your questions. The company's earnings release was issued after the 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 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 questions related in any way to any projection or forward-looking statement are subject to this Safe Harbor statement. In the prepared remarks you'll 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 reconciled 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 today. I'm joined by Eugene Putnam, our President and Chief Financial Officer. Eugene and I will be discussing a high-level overview of the quarter, including our financial results and an update on marketing and admissions, as well as an update on key outcomes in the business operations. We will close with our outlook for the remainder of the year with preliminary expectations for fiscal 2013. Key student outcomes through our first 3 quarters of fiscal 2012 show that approximately 9,400 new students started their training at a UTI campus while 8,100 students graduated as technicians ready to work in fields that require highly trained, highly skilled professionals. Overall, we are very proud that, considering the challenging macroeconomic environment we face, outcomes for our students continue to be positive and are trending similarly to last year when 85% of our graduates found employment in their chosen field of study. However, as we've seen in recent quarters and consistent with peer companies in our space, we continue to have fewer overall students in school which is negatively impacting our revenues, net income and operating margins. With that said, our leading indicators in the quarter were generally positive with new student inquiries and show rate up, new student applications down slightly and new student starts flat on a year-over-year basis. Given our highly fixed cost structure, we remain very focused on rebuilding our student population by increasing awareness of our brand and educational offerings, and helping students who are interested in becoming technicians, pursue a UTI education. We are just as focused on helping those who do begin school to stay in school and graduate and ultimately, gain employment in their field of study. Before I turn it over to Eugene, I'd like to take a moment and talk about the report that was released this week by Senator Harkin. As you know, this was the culmination of a 2-year-long investigation of 30 for-profit schools. While quite damaging in its allegations about the sector as a whole, the report did validate our higher rates of student completion and successful employment outcomes. And while it did call out our programs as being expensive, we do feel they offer great value to our students, and the overall positive student outcomes are a reflection of that value. At UTI, our teams work hard every day to ensure the success of our students while they're in school and after they graduate. In the face of constant negative headwinds, both Eugene and I are very proud of the high levels of service our employees provide to help ensure continued positive outcomes for our students and our employers. And now I'd like to turn it over to Eugene to discuss the financial results, and then we can come back and cover some of the specific business drivers and operating trends in the quarter in more detail. Eugene?

Thanks, Kim. Turning to the financial results. As we anticipated, for the third quarter of this year, our results were down from last year, mostly as a result of a lower student population. This decrease was mitigated to some extent by the focus placed on efficiencies and managing variable costs during the quarter. Revenues for the third quarter were $99.6 million, an 8.6% decrease compared to last year's third quarter. The decrease in revenue primarily relates to a decrease in average student enrollments of 11%, partially offset by an increase in tuition income. During the third quarter of fiscal 2012 and 2011, tuition, excluded $3.8 million and $1.7 million, respectively, related to students participating in our loan program. Notwithstanding, average revenues per student for the quarter increased 2.5% to approximately $6,500. Operating income for the third quarter was $1.5 million compared to $6.7 million in the same period last year. The margin for this year's third quarter was 1.5% compared to 6.2% last year. While we continue to be successful in managing variable costs according to our student population, our high fixed cost structure, the changes that were required to admission representative salaries and investments in advertising continue to contribute to a decline in operating margin. Our advertising expense increased $2 million to $10.1 million as a result of our continued investment in a blend of media to improve the quality and quantity of the inquiries for the remainder of the year. This increase is also related to developing student starts for the fourth quarter of 2012 and into 2013. Our advertising expense for the third quarter as a percentage of revenues increased to 10.1% versus 7.4% last year. Compensation and related expenses declined approximately $4.5 million this quarter. As a reminder, during the same quarter last year, we implemented a reduction in our workforce as well as modified compensation plans in response to the new regulations, which became effective July 1 of last year. Our bad debt expense as a percentage of revenues this quarter was 1.3% and is running 1.4% on a year-to-date basis. EBITDA for the quarter was $7.6 million compared to $13.2 million in the same period last year. And for the first 9 months of this year, it was $31 million compared to $54.5 million in the same 9 months last year. Net income for the quarter was $1 million or $0.04 per diluted share versus $4 million or $0.16 per share last year. And year-to-date, our net income is $7.4 million or $0.30 per share versus $21.3 million or $0.86 per share last year. Our return on equity for the trailing 4 quarters was 9.1%, which is down from 11.5% for the trailing 4 quarters ended March 31, 2012. Looking at our balance sheet, we have cash, cash equivalents and investments of roughly $105 million at June 30 compared to roughly $117 million at March 31 and $110 million at September 30. We've generated cash from operations of $9.2 million over the first 9 months of this year compared to $31.6 million for the first 9 months last year. The decline was driven primarily by our decline in our student population. And we continue to have no debt on our balance sheet. As you know, we paid a $0.10 per share dividend this quarter, and we did not make any purchases under our share repurchase plan. We invested $3.4 million in fixed assets, which was down from almost $8 million in the same quarter last year. We continue to be very focused on managing our capital expenditures, as well as our operating expense during this period of lower student population levels. And now I'd like to turn it back to Kim to discuss our marketing and admission efforts in a little bit more depth.

Thanks, Eugene. Let's start with marketing. For the last year, we've been sharing with you the continued assessment and adjustment to our marketing mix to generate higher quality increase from students, those students who are truly interested in a UTI education and are willing and able to pursue their training with us. I'm pleased to announce that the number of student inquiries grew 9% year-over-year for the quarter. However, that growth came at a much higher cost than we would like to see. As Eugene mentioned, advertising cost increased $2 million or 24.3% year-over-year. The primary drivers of the higher cost include a significant increase in competition, specifically in the digital space for both paid search and display media, as well as our intentional shift toward more relevant but more expensive television programming. Further we continue to invest in local market advertising as well as many branding efforts. At this time, we know that we're not fully optimized and we're working hard to find the right balance of relevant messaging and creative across multiple media channels, as competition from both direct and indirect competitors intensifies. We do believe that we will see improved efficiencies over time and believe that advertising expense as a percentage of revenue will normalize once we see our student population rebuild and revenue growth resume. Meanwhile, we are aggressively pursuing more efficient ways to create greater brand awareness, to communicate and engage with prospective students and to ultimately grow the number of student inquiries at a reasonable cost. For the full year, we continue to expect advertising costs to run in the 10% to 11% range as a percentage of revenue. Now let's move on to admissions. While we continue to make good progress in many areas of admissions, we have yet to see the total number of new student applications increase year-over-year. For the quarter, student applications were down around 3% year-over-year due entirely to an 11% decline in the number of adult learner applications. Student applications from our high school admissions teams were up approximately 5%, and applications from our military team increased 18%. During the quarter, all of the teams put forth strong efforts but we know we're not functioning consistently at the level we desire. So there is more work to do from student inquiry generation to how we respond, engage and help prospective students pursue their training with us. No doubt there have been significant headwinds for our teams to overcome and we are still trying to find our equilibrium. We have implemented many new tools and training programs and are just beginning to see results that we can measure and use to self correct. We are optimistic that the work done in this area will improve both the effectiveness and efficiency of our admissions teams and their efforts to help prospective students. This quarter, 2,700 new students started school, which was consistent with the number of new students we had start school last year during the same period. We saw a marked improvement in our show rate, which was up 170 basis points year-over-year. As we look ahead to the fourth quarter, we anticipate our new student starts will continue to be flat year-over-year. We recognize it may appear as though we're being a little conservative in this regard, but we are so for a couple of reasons. First, the vast majority of students scheduled to start during the fourth quarter are recent high school graduates and it's always difficult to predict how this population will actually show to school. It is our most volatile student segment given their age and the long period between their application process and when they actually begin school. The second reason is we did not see year-on-year growth for the adult learner segment during this quarter, and that will have some impact on Q4. Please know that this remains a top priority and focus for the organization. And while we are hopeful that we will see new student growth next quarter, we still thought it a bit premature to declare victory. Eugene, can you discuss some of the key student metrics and operating results? And then we'll wrap up with the look forward to 2013.

Sure. As we have been discussing in the last couple of quarters, we believe affordability of our training to be a large challenge for our prospective and for our continuing students. The cost of education, and more specifically, affordable options for financing students' education is a main topic of their concern and their families' concerns. The recent regulatory changes affecting the amount of financial aid available has made it much more difficult for our students to pursue an education. While the change may not directly impact our revenues, it has put pressure on our admissions performance as well as our show rates and requires alternative solutions to help our students. We're continuing to make certain that our students know of all the financing resources available to them whether it be grants, loans or scholarships. We also continue to offer both merit and need-based scholarships, and we've increased the amount of need-based scholarships this year by over 10%. We also are making our loan program more accessible to students who may not understand that this is a viable alternative for them. Along with increasing awareness of the program, we've removed some qualification barriers for dependent students. In short, we've made it easier for them to participate in the program. We continue to consider, and will continue to consider, making modifications that we believe improve the loan program to be more advantageous for the student. For the 9 months ended June 30, we've extended approximately $14.5 million under the -- in loans this program -- under this program as compared to $4.7 million for the same period of 2011 and compared to $8.2 million for all of 2011. This has increased the amount of tuition we've excluded from revenues for both the quarter and year-to-date periods as compared to the same periods last year. And as a reminder, our loan program helps students who don't have sufficient access to traditional credit-based loan products, yet -- who are, otherwise, fully qualified to attend UTI. The average individual loan amount is about $5,000 and we do expect that the number of loans provided to increase as we finish up this year. Since the start of this program, we have not recognized tuition and interest revenues, totaling $42 million, through June 30. With that said, our cash collections do continue to improve. During the third quarter, we recorded about $410,000 in revenue and interest payments from cash payments that were received. Year-to-date, we recorded $1.1 million versus about $600,000 in the prior year and since inception, we've collected about $2.3 million on this program. Moving to persistence. On a year-to-date basis, we've seen a slight increase in persistence of about 30 basis points. During the quarter, we graduated approximately 2,400 students, that's a decrease of 12% year-over-year, reflecting our lower student body population. And over the past 12 months, we've graduated a total of approximately 11,700 students with either degrees or certificates. And that leads to another area where we have seen continuation of positive outcome this quarter. At June 30, our overall graduate employment rate is roughly 80%. We're currently running at that rate, which is encouraging given that the high number of graduates we have and the continuing economic weakness that's going on in our country. We are on track to roll out our new blended learning curriculum at our Avondale campus later this year. And while we ultimately believe our blended curriculum will help us reduce costs once it's fully implemented, the next few years will require further capital investment and some higher-than-usual operating expense as we complete the transition. Finally, I'm pleased to share with you that during our third quarter, we renewed our elective program and dealer training with Mercedes-Benz. Our many industry relationships continue to provide a key differentiator for us in the marketplace and for our students as they seek careers in the industry. As we look to the remainder of 2012, we expect our new student starts for the fourth quarter to be relatively flat versus last year. As a result, we continue to anticipate our student population for 2012 to be down into the low teens. We expect these lower levels of enrollments will result in a mid to high single-digit decline and full-year revenues for 2012 and obviously, an overall decline in operating margin and net income compared to last year. We expect 2013 to be a year of rebuilding the student funnels and we will continue to balance our objectives for long-term growth, cost control, while maintaining our commitment to delivering a quality education and improving our student outcomes. And now operator, I think we're ready to open the lines for questions, please.

[Operator Instructions] The first question comes from Gary Bisbee of Barclays.

It's Zach Fadem for Gary. I've got a question about your ad spend. Given the current heightened levels but lower adult applications, do you plan to make any adjustments to your ad spend mix to better target the adult learners?

Yes, Zach, that's what we're doing on a daily basis, I would actually say on an hourly basis given how much focus is on the digital space. So we are trying to figure out the best way to communicate in relevant messaging creative, as well as the best mediums to connect with the adult audience. And then once we -- make connection with them and engage to provide the level of service necessary to help the adult students come to school. As you heard, Eugene mention, many of the students do face difficulty from an affordability standpoint, and this segment specifically has more challenges than high school students or our military students. So we are working on that every single day and trying to optimize to the point you raised.

Okay. And when will you see a return on the marketing investments? Or when do you think you'll start to realize return -- and what would make you decide that the extra expense has been successful?

I think what we'd like to see, certainly, is an increased number of applications. That's the first sign. But ultimately, it is about the number of students who begin and start school. And we have seen some of that indication with some of the television programmings that we have made. So it may cost us more to advertise on a specific program, but those students are enrolling and starting at a higher rate. What we've sacrifice on the front end is the larger volume that everybody is accustomed to seeing. So I think we are making those changes and we need 5 to 6 months from the time that we make the advertising adjustments to see if the student inquiries actually translate into student starts and then how they perform in school. So I'd say we're just starting to see some of that from a start standpoint and we'll be able to give better color on our call at end of the calendar year.

Okay. And what's your current mix of the high school, military and working adults?

The -- in school, I'd say it's roughly 50% adult, 40% high school and 10% military from an application standpoint, so coming from those divisions.

The next question comes from David Chu of Bank of America.

So costs in the absolute have been relatively flat year-over-year over the past few quarters. I mean do you think that it's reasonable that you can take cost out of the system going forward? Or is the high fixed cost nature make this difficult?

Well, certainly the high fixed cost makes it more difficult. That's not to say that depending upon our student loads, will we take variable costs out. I think clearly our variable costs are what they are. They will rise and fall as student population levels do. I do believe that there are some opportunities to take some additional cost out but it's not overly significant. And when you look at what the big driver of our cost is right now, it's really that advertising expense. So if that continues at the 10% level that we expect it to, that's going to overshadow our ability to tweak minor costs out of the business. But that said, we'll continue to focus on that. But advertising is an expense, it's an investment for the future and that's not something that we can cut just in order to improve short-term earnings.

Sure, sure. And also, Kim, I think you mentioned that there is increased competition in the digital space. Could you elaborate a little bit?

Yes. I think as the new rules and regulations went live July 1, specific to the ATB population, we've seen increased competition in both a pay-per-click and display advertising as -- I mean let's just say lead aggregators are not able to deliver ATB students. And schools are requiring a higher quality of student which is increasing the competition on keywords and all sorts of other search terms, even our own branded terms. So we saw a 30% increase in pay-per-click on search engines, and about the same on display. So it's very intense competition from direct, indirect, as well as lead aggregators right now in the digital space.

When did you see this trend really start? I mean how long has it been up 30%?

It started in April, where we started to see some increased competitions, but June was where we saw it in a full-blown way. So it continued to ramp up from April, building in May and all through June. It wasn't until the end of June that we were able to kind of stabilize some of the student inquiries coming from social media spaces. So it's still in great flux with intense competition out there.

Okay, got it. And last question, can you just give us an update on the capacity utilizations and where you stand today?

We have plenty of available capacity at virtually all of our campuses. We're running on average in the low 60% range.

And is that pretty consistent with what -- where you've been over the last few quarters?

Well, no. I mean our third quarter is always our lowest level of utilization. It's our lowest level of enrollments -- or average enrollments. So it's -- that would be down from where we are, and we would clearly expect that to pop back up a little bit in Q4 and Q1. But we still expect those 2 quarters to have enrollment levels below where they -- certainly where they peaked.

The next question comes from Peter Appert of Piper Jaffray.

Eugene, in your prepared comments, you mentioned that fiscal '13 you were looking at as a year of rebuilding. Can I interpret that as back to positive start and enrollment growth in 2013?

Well, just to be clear, I said it's a year of rebuilding the front end of the funnel. So we've been struggling to -- with all the competition from an advertising expense, to get sufficient enrollments and then insufficient starts given the challenges of financing. So my comment was we've seen the decline. It seems to have stabilized now and now our efforts are on growing it. What certainly, our goal is to grow it, but it's a tad bit premature to give you any guidance in terms of how aggressive one should model whatever growth there might be.

Okay, fair enough. And then in terms of thinking more about the ad spend dynamic, so the TV budgets will be, I would imagine, pretty significantly impacted in the third and fourth calendar quarters by the -- Olympic, election cycle. So I assume that's factored into your expectations, but does that cause you to shift mix here on a near-term basis? And then somewhat related to that, I think Eugene, you or Kim mentioned getting back to normalized levels that's been -- I guess a sense of what you think the normalized levels should be?

So first on the Olympic spend. We've not really felt any of that impact to our ad buys, and the increases in television spending are really directly related to our choice of programming, a higher quality programming. And most of those programs are not dealing with some of the Olympics and the elections and some of the things that others might be facing out there. In this quarter, we actually did spend less on television and migrated more to the Internet and digital media advertising, but we also saw significant increases there as well. So I think that as the dust settles and people understand new algorithms with Facebook and Google and all that, we will find a new normal but we're not there yet. And so it's difficult to predict what that percent would be. But I would like it to be in the 6% to 8% range. And we are working towards that, but we need to rebuild our student population and need to see revenue growth and also improved efficiencies on our overall marketing efforts for that to happen.

Okay. And one last thing, you mentioned that the issue of tuition pricing -- or affordability rather, which obviously was in the Harkin report as you noted. But how do you guys think about the pressure on pricing and the ability to continue to get tuition pricing as you look ahead over the next couple of years?

Well, we're always looking at pricing for the reasons that you just mentioned, Peter. And the -- I think our thought is that we will see a 2.5% increase as we go into next year, as we have seen in general. We are looking at ways to help those students who need help through our loan program and through need-based scholarships that, I would say, would be more strategic pricing. So at this point, we do see that we would have the normal tuition increase and we would address those student segments on an individual basis.

But the effective -- even with the discounting, you think you can get effective revenue per student up in this 2.5 range next year?

We -- close to that range, Peter, yes. I don't want to say it's 2%, 2.5% but we expect to see some continued growth in revenue. Obviously, the usage of the loan program will impact that, one way or the other. If it continues to grow that will add more pressure on it. But that pressure has been there over the last several quarters. So I feel reasonably comfortable that we will continue to see very slight increases in revenue per student.

The next question comes from Corey Greendale of First Analysis.

Actually, I'll start with that same topic. It's just -- on the scholarships, I think you said scholarships are up 10% this year versus last year. I was hoping you might be able to put some dollar parameter around that, like what the dollar amount of scholarships is this year?

Let us get that to you offline because it gets a little complicated about when they're hitting revenue and when they're actually granted to somebody. So let us get you that offline, if you don't mind.

That's fine. And one quick numbers question. I apologize, Kim, I just missed this. But what was the year-over-year increase in inquiries in the quarter?

9%.

9% percent. Then on the show rate -- so I realize you were working off a pretty easy year-ago comparison, but anything you'd point to as being responsible for the nice improvement in the show rate this quarter?

I'd say it's all segment-driven with different income levels from the adult, and I'd say, young adult students. And military as a mix -- in the mix helped to lift the show rate. So I'd say it's largely driven by income levels and the same things that we typically talk about. But it's a student mix as far as the number of starts that drove the improvement there.

And that's something that you are intentionally targeting? People with -- at higher income levels?

We understand the types of students who are in position and -- to pursue our type of training, and so we are targeting the students that we think are able and willing to pursue a UTI education. I wouldn't say we're great at targeting yet, but we do understand the various income levels and their ability to be successful in school.

Okay. And then a question -- actually Eugene, about the cash flow. So I think the cash flow from operations in the quarter was about negative $6 million or so. If I look back historically, at least over the period you've been a public company, you've had periods of operational weakness before but I don't think there's ever been a kind of a meaningfully negative cash flow from ops number like this. So is there anything else going on other than the operational weakness in terms of the working capital that's driving this more negative than it would have been in the past?

No. It's just timing of payables and deferred revenue and accruals like that. There's nothing that is a true use of cash. It's just changes in the balance sheet.

The next question comes from Jason Anderson of Stifel, Nicolaus.

You've provided a lot of color on your guidance for next quarter on the flat starts, but I was just wondering is there more that's changed since last quarter? You appeared a bit more -- I guess I felt you were a bit confident in the fourth quarter. Any other color you can provide? In particular, have you felt any impacts of increased negative publicity, more on the sector maybe not so much on yourself?

Good question. I don't believe that we have been feeling the negative publicity as a reason to maybe not sound as optimistic about new student growth in Q4. But the 2 primary drivers are, that it is a large population of high school students who are very difficult to predict in terms of their show rate. And because it is such a large population and we did not see continued improvement with the adult segment, it causes us some concern about whether or not we will be able to continue the trend through the next couple of months with new applications written for that quarter. It's not that dissimilar than what we were looking at in Q3. It's just that now we have 2 months left in the quarter and we need the adult students' applications to be written for the quarter, and for the students to be in position to actually start school in the quarter. And that's what's causing us to just temper it as being flat.

And I think also the -- a few months ago, the economy was kind of -- I think there was some positive momentum out there. I think we're just being a little cautious about whether the support mechanisms for the high school students, which is basically their parents, have -- really in the same position as they were 2 or 3 months ago, or whether the continual dismal recovery that we're seeing here is causing them to rethink their support or actually continue to lose jobs and things like that. So I think we're just being a little bit cautious about the show rates that we might see out of that population this quarter, combined with what Kim said, the ability of the adult learner to supplement as needed there.

Okay. And one more, I had a -- could you give some color on rep productivity, sales force size by the different segments? Has turnover been any issues in there?

Sure. We're basically flat year-over-year for the entire admissions team with roughly 155 campus, 145 high school and 16 military. We saw a 3% decline overall with productivity but it is all driven by the adult channel, as I spoke of. We saw improvement with military and our high school teams both in terms of application growth as well as efficiency gains. So in that respect, it's very positive, it's just the adult segment and trying to help those students overcome some of the hurdles that they face. So that I think is the drag on the efficiencies for the adult admissions team.

[Operator Instructions] The next question comes from Trace Urdan of Wells Fargo Securities.

I just -- I wanted to ask a question about the marketing spend and the return on that in a slightly different way. You guys are -- moved away from aggregators, as you've mentioned many in the group have, and there's a presumption that, that results in a higher quality of students, presuming that they complete at higher rates and maybe pay back their loans at higher rates. Do you guys have a building body of evidence to show that that's in fact the case? And do you have any reason to doubt your confidence in that thesis?

We did have evidence to show that, that was the case and that drove our decision and desire to invest in different media outlets. I will say, however, that they are reinventing themselves in light of the changing environment, and it's something that we constantly are evaluating as an efficient source for student inquiries that again are willing and able to pursue a UTI education. So it's something that we're evaluating all the time. But given what we knew a year ago, we had evidence that we should not be investing in it.

And just to clarify that a little bit, Kim, does it -- was it your sense that, that just from a regulatory standpoint that there were too many vendors that were no longer kind of trustworthy? Or was it literally that you felt like you could -- you wanted to get a better outcome by driving that demand yourself?

I think we were paying lower cost on the front end, but sometimes the students were not even students that were interested in the programs that we offered, and that as the population of the total number of inquiries continue to grow and it was a waste of downstream resources. And so that was the primary driver in terms of -- we need to be talking with students who are interested in automotive, motorcycle training, not health care who happen to land on a page that was all about post-secondary training. And that is improving, and so I don't want to say never, but it has not made sense for us to do so for the past year.

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

Two questions, one maybe has to do with placement. And again, I think, we saw domestic autos with about 14 million SAR [ph] rate. So the Japanese are back in the market selling cars post the tsunami. What have you seen in placement that you can share in terms of dealerships? And is that sort of what's contributing to the improved outcomes?

Sure, Barry. I think placement is mix by discipline. And I guess from a hierarchy standpoint, our diesel graduates are in great demand, both in terms of the number of job openings as well as the salaries. I would follow that with the auto students that is -- clearly the demand for them is better than it was 1 year or 18 months ago, maybe not so much on the salary standpoint it's more stable, but certainly demand is doing well. Motorcycle is improving but lower than both diesel and auto. Marine is a struggle right now for us. So that's the one that has the biggest challenge and the biggest opportunity. But the core of our programs, the auto and diesel which amount to 60-plus percent of our students, are doing very well especially given the fragile state of the economy out there right now.

Right. And just secondary on the use of cash, given the -- I don't want to say, shortfall, but the weak funds from operation. How much did that contribute to decision not to buy back any stock in the period? And or conversely, are you thinking more of the use of cash as investing in scholarships and other areas to -- that's more important than to drive student population?

Well, I think, we think of all those things. But honestly, the shortfall in cash that was generated this quarter had 0 to do with any decision to buy back or not buy back stock. We have sufficient cash on hand to, obviously, run our business; make our capital investments; run our scholarship programs; run our loan programs; and do, for lack of a better word, capital management activities. So we'll continue to pay our dividend. We'll continue to look at stock repurchases, given conditions in the markets, given our outlooks and honestly, given what's going on with the sector as a whole.

The next question is a follow-up from Corey Greendale of First Analysis.

I remembered my last question. I wanted a follow-up on a comment that you made, Kim, when you were describing the start guidance for Q4. I think you said, something to the effect that it may appear conservative. So I was hoping you can elaborate that -- on that, and maybe comment on how many applications you have for Q4 starts right now versus a year ago?

Yes. As far as our applications, the commentary is exactly the same as we had in Q3 that we are -- we have more applications. We're pacing better than we were last year but it's not significant enough to say we are clearly going to be positive. At this point, we think it could go either way, 1% or 2%, and that's what we want to make certain that we're just giving as much transparency or being as transparent as possible. So the only thing that has changed is the show rate potential for this high school population as we look at it relative to the other segments, and what we've seen over the last year. That's driving...

The show rate will be the driver, Corey. And it's just -- it's -- we have great visibility as to the number of contracts that are written and the applications that are there. The show rate visibility is nowhere near as great and we're just -- we want to be as transparent as we can with people. We're not trying to sandbag anybody, but it's close enough, that we think flattish is the appropriate guidance at this point.

And remember that this quarter, it's -- 40% of our starts and the vast majority of them are just out of high school. And that's the word of caution.

Yes.

That's very transparent. And just one quick numbers question. Eugene, I know you think you're being as efficient as you can on capital, but the CapEx has been running below what I think had been discussed so what's your CapEx expectation for Q4 and also tax rate expectation?

The tax rate should be consistent at kind of that 39%, 40% range. CapEx, I would expect a quarter pretty similar to where we were this quarter, maybe up $0.5 million or so.

This concludes our question-and-answer session. I would like to turn the conference back over to the management for any closing remarks.

We just like to thank you all for joining us today and for your questions. We appreciate your time and interest in Universal Technical Institute and we look forward to updating you in our next earnings call, which is scheduled for Tuesday, November 27. Hope you have a great evening. Thank you.

This conference is now concluded. Thank you for attending in today's presentation. You may now disconnect.