Good afternoon, and welcome to Universal Technical Institute's First Quarter 2013 Conference Call. [Operator Instructions] As a reminder, today's conference call is being recorded. A replay of the call will be available for 60 days at www.uti.edu, or through February 8, 2013, by dialing 1 (877) 344-7529 or 1 (412) 317-0088 and entering pass code 10023737. At this time, I'd like to turn the conference over to Mr. John Jenson, Vice President and Corporate Controller of Universal Technical Institute. Please go ahead.

Hello, and thanks for joining us. During today's call, we'll review the results of our first quarter, discuss our strategic direction and take your questions. Before we begin, we must remind everyone that, except for historical information presented, the matters discussed today may contain forward-looking statements as defined by Section 21E of the Securities Exchange Act of 1934 and Section 27A of the amended Securities Act of 1933. 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 won't 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 reconciles EBITDA to the nearest corresponding GAAP measure, net income. At this time, I'd like to turn the call over to Kim McWaters, Chief Executive Officer. Kim?

Thank you, John, and good afternoon, everyone. Thank you for joining us. The first quarter was a difficult one for Universal Technical Institute. I'll let Eugene Putnam, our President and Chief Financial Officer, share more of the details with you, as well as some color on our performance. But first, I'd like to give you an overview of UTI's plan to navigate through the current environment and to drive meaningful improvements in our results and deliver long-term value to our shareholders. At UTI, we use these tough times to take a very close and very honest look at our business. We validated a number of strengths we can build on, things like our position as a niche player and a market leader, our unmatched industry relationships and our strong and long-term record of delivering solid student outcomes. But we also found some things that just aren't working as well as they should. Like everyone in our industry, we're challenged with persistent economic headwinds and changes to regulations. But the reality is that in key areas of the business, we simply can and need to execute better. And we developed plans to make that happen. Finally, we identified new ways of thinking and doing business that we believe can improve our operations and drive growth. Our plan is not about reinventing our business. In fact, it addresses areas you'll be very familiar with, that we've been working on and talking about for some time. That's because the levers that drive UTI haven't changed, but the environment we're operating in continues to change. Our reinvigorated strategy simply guides us on which levers to pull and with what intensity and in what direction. It's about managing the basics with the focus on execution and efficiency, making data-driven decisions and developing innovative approaches to…

Thank you, Kim. Good afternoon, everyone. In the first quarter of 2013, we saw economic weakness continue, and we saw prospective students that seemed even less willing to take on debt or make an investment in their education. In round numbers, we began the quarter with 1,500 fewer students than in the same quarter last year. Overall, student starts were down by more than 18% compared to the first quarter of last year. This was driven by fewer students scheduled to start and a 334-basis-point decrease in our show rate. The result was a 7.5% decrease in revenues, which came in at $98.4 million. Partially offsetting lower enrollment was $1.7 million from an additional earning day in the quarter and an increase in tuition rates. During the first quarter of 2013, average revenue per student was up about 3.5% to approximately $6,000 per student. Tuition excluded $5.8 million related to our loan program compared to $2.6 million in the first quarter of last year, which reflects our efforts to ensure that the program is accessible to our students. As a reminder, revenue from this program is only recognized when payments are received. We continue to manage our variable costs to align with our student population. But our high fixed cost structure, combined with the weakening top line, resulted in a decline in our operating results. Operating income was $6 million and was down 17.8% compared to the $7.3 million in the same period last year, while our operating margin was 6.1% compared to 6.9%. With revenue pressures, it's imperative that we make good progress on trimming expenses. As a result of our work to reduce and better target our marketing investments, we had a $2.1 million decline in advertising expense, which came in at $8.4 million for the quarter. And…

Thanks, Eugene. As I mentioned earlier, UTI has used the challenges of the current environment to take a deep, honest look at our business, the hurdles we're facing and the opportunities that lie ahead of us. We've created a new path forward for UTI, and we're working against a plan to leverage our strengths, improve our operations and make targeted, thoughtful investments to create greater competitive advantage and deliver solid, long-term shareholder returns. As you know, we've done a great deal of work to align our cost structure with the number of students enrolled at UTI. Now we're building on that work by reviewing all our major business processes with the goal of eliminating costs and waste, driving efficiency and making it easier for our students, our industry customers and our employees to work with UTI. We're beginning to see the benefits of that work in marketing, where a process review led to last quarter's wholesale restructuring of the department. The changes to our organization and the way we work drove down operating costs in the first quarter, while new shared goals and processes are creating better alignment between our marketing and our admissions team. From here, we're moving on to other key business processes, and we'll revise them to make it easier for prospective students to work with us and to deliver greater efficiency, better results and lower costs. While it's too early to estimate the total financial benefits of process improvement, this work has the potential to make our entire operation leaner and stronger. We believe that effective and efficient processes give us a solid foundation, one we can build on with strategies and initiatives to grow our student population and meet our industry customers' expectations for our graduates. Our work to better understand prospective students has led…

Thanks again, Kim. With work underway to attract high quality students, we've focused on ensuring we offer a product that delivers substantial value. And that means training that works for students and prepares them to meet industry's needs. Our blended learning curriculum creates a significant competitive advantage for UTI and for our students. By combining lecture and hands-on learning in the lab with interactive web-based programs, we're training our students the way industry trains and providing them a more dynamic and flexible education. At our Avondale campus, we recently completed our first phases of courses with very positive outcomes and feedback. While we believe our blended learning curriculum will reduce costs once it's supplemented across all of our auto campuses, the next few years will require further capital investment, as we've discussed, and some higher-than-usual operating expenses as we complete the transition from our legacy curriculum to our new curriculum. Our strong industry relationships are critical to our ability to deliver quality training, and I'm pleased to tell you that during the first quarter, we renewed our Manufacturer Specific Advanced Training agreement with Volvo and started a Mercedes-Benz elective at our Houston campus. Our many industry relationships continue to provide a key differentiator for us and for our graduates. Our strategy focuses the entire organization on student outcomes, which have long been a hallmark of UTI's performance and continue to be a meaningful measure of the values we provide. Compared to the same period last year, we have seen a slight decrease in student persistence of about 99 basis points. However, about 1/3 of our campuses are improving their performance as it relates to persistence. Every campus remains focused on this metric, and we realize that the small improvement in these percentage points can make a big impact both for…

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

So I just wanted to get a little bit more clarity around starts and kind of what happened there. I know you mentioned a few things on the call, but if you can elaborate a little bit on what caused the weakness?

Yes. I can add some color there, David. The -- I think the balance of the start decline was driven by an insufficient number of new student applications for the quarter. Some of that was due to the elimination of ATB students, especially when you consider that this quarter is primarily filled with adult-type students not coming right out of the high schools. And then, of course, we had some show rate decline, which is again attributed to some of the challenges with affordability and the aversion to debt and all of the things that we've been talking about for numerous quarters. And as we've mentioned in our last call and on this call, I think that there were some execution challenges as well in terms of how we served the students, which we're currently addressing.

Okay. Now that's helpful. And is it possible to provide any insight into how things look for January?

January, although it's not closed out, I'd say that our application trend is relatively the same. We've not really lapped the year in terms of the ATB issues, so our adult segment is still feeling the pressure that we spoke of. Our show rate, although again not finalized, is relatively flat to slightly better, but it's 1 month in the quarter at this point.

Okay. And a last question. You guys talked a little bit about trying to drive efficiencies in terms of costs. And -- but given your relatively high fixed cost base, I mean, in terms of absolute dollars, how much do you think you can actually take out of the system in 2013 or fiscal '13?

Well, I think, at this point, David, the majority of what we expect to take out would be variable costs associated with increases or declines of student population, vis-à-vis, what our expectations are. So we were down fairly significantly in costs this quarter versus last quarter, but that was primarily a result of a reduction in our workforce. So I think, typically, you will see about a 20%, 25% decline in expenses in terms of variable cost that might go away from lower students. But I think we -- those costs don't necessarily adjust as quickly as ups and downs in students. So I think that's really what we're kind of looking for, is that marginal cost to go away. Obviously, we're going to look at -- continue to look at specific areas where we have discretionary spend that we might be able to address. But I think we did the lion's share of that last year in the September, October time frame.

Okay, great. And if I can squeeze in one last question, marketing expense as a percentage of revenue expectations for the year?

For the year, I'd say it's probably towards the upper range that we mentioned, around 10%.

The next question comes from Peter Appert of Piper Jaffray.

So Eugene, just sticking on the costs for a second, are there any timing or seasonal issues we should be aware of in terms of thinking about the -- how the costs flow through the year?

Well, the costs tend to flow with our population, which tends to be higher in our fiscal first and fourth quarter, and lower populations in our second and third quarter. So I think you would expect that type of trend to follow with expenses on a year-over-year basis. So if you look at the first quarter and view that as a run rate in both terms of revenue and expense, I think you can -- that will give you a pretty good indication.

Sorry, I asked the question poorly. I meant to ask more about year-to-year rates of change. And specifically, because it seemed to me that in the context of the revenue weakness, you guys have done a great job in terms of managing costs, even acknowledging the high fixed cost base. And so I'm wondering if the year-to-year rate of decline in costs in the context of an assumption around similar enrollment trends would be -- would the first quarter be indicative of what we could look for, percentage-wise in terms of [indiscernible]...

I think it will be until you get to the fourth quarter. In the fourth quarter -- with 2 caveats. One, you have to exclude any one-time costs this year or last year from a comparison standpoint. When we get to the fourth quarter of this year, you'll start lapping where we did reduce some staff. So I would expect what you saw this quarter to somewhat replicate itself in the second and third quarter, and then maybe moderate a little bit in the fourth quarter.

Got, it. What do you think -- in terms of competitive dynamics, how big a factor do you think that is, if at all, in terms of what's impacting you in the adult market?

That's a very good question, Peter. I think that the competition that we're facing is really focused on the need to move to a non-ATB population by a variety of educational institutions out there. And so where we've seen the competition is really on the front end, over the Internet, in terms of key search terms. So all of that competition, to try to get a student who is qualified to go to technical schools, well, even 4-year, our non-direct competition has increased. And that has been steadily increasing since the spring of last year. As far as the traditional competition or what I call, our direct competitors, I don't think we've seen the dynamic change significantly, except for the focus on trying to recruit a higher quality student.

And then lastly, can you remind me what you specifically did on pricing this year? And what was the time frame in terms of the implementation?

I'd say mostly the -- it's 2.5% to 3% that we do in the late fall, early part of the calendar year. And we did the same thing this past year. So that price increase will be something that we'll roll through obviously over the next 1.5 years. I would expect that to be the normal run rate.

And just for modeling purposes, we should assume that the revenue per student could grow at roughly that rate. It wouldn't be offset by higher scholarships?

I'd say, generally, yes. But we are continuing to test and balance scholarship programs. And if we find one that works better than we've seen, we would continue to invest in it. But generally, yes. I don't see any significant changes to that.

The next question comes from Corey Greendale of First Analysis.

Kim, I was actually going to ask you about testing pricing elasticity, given that affordability seems to be a big component of the challenge right now. So can you just elaborate on what you were saying, that you have tested that and not finding it to make a big difference in terms of driving demand?

Yes -- well, there's 2 -- I guess, 2 dimensions on that. On our last call, we talked about our efforts to really research pricing and demand elasticity in relationship to our profitability, as well as looking at students and their return on educational investment. And we have completed the first part of that process and continue to believe that wholesale price decreases are not in the best interest of the organization, nor do we think it would really offset or stimulate enough demand to make it worthwhile. We do believe that continuing to focus on our targeted approach and scholarship program is really where the answer is at, and that is creating a win that's good for the student and a win that's good for UTI. Now some segments have a higher need for scholarship, and yet there are diminishing returns. And so that's the fine balance that we're constantly evaluating as we calculate a breakeven. So we're getting smarter about how to help the right student, but it takes time to, I guess, push and pull the levers that really are truly benefiting the student and the organization.

Okay. And then, Eugene, in your commentary, you said that you expect the macro pressures to intensify a bit as the year goes on. Can you just clarify what you mean by that? Are you saying you think the unemployment rate is going to come down as the year goes on?

Well, I think we're seeing -- just 1 day or 2 ago, you saw the GDP contract it. Whether that leads to a recession or not, I'll leave to the economists. But I think that combination, along with people's willingness or lack thereof for -- to take on debt, I think you have a wildcard, with the fiscal events going on in DC through sequestration in terms of any potential impact on student funding. While nobody anticipates it to be significant, I saw some article that suggested it might impact people by $750, which doesn't sound a lot, but anytime you get those negative perceptions out there, they're out there, and they stick in people's minds. So I don't think we're forecasting anything significant. Maybe a better way to say it is we see more headwinds than we see things getting significantly better or going back to the way that they were, maybe 3 or 4 years ago.

And given that historically, higher unemployment was better for your enrollment, I mean, what macroeconomic scenario are you rooting for?

Well, just to be clear, what our enrollments are closely correlated with is the change in unemployment rates, specifically to young males in the 17 to 24 age group. And as that group's unemployment rates increase, we tend to see more enrollments. As it decreases, we tend to see a slowdown in enrollment growth or an acceleration in enrollment reductions. So I don't want to say we're rooting for anything, but when students have -- potential students have an ability to the find work easily, they tend to put off an investment in their education. Simultaneously, when students can't find part-time work because the economy is soft or their spouse or significant other or parents have economic weakness and can't support them as well, that is an additional hurdle for us to overcome from enrollment. So the economic scenario that closely correlates with high degrees of enrollment is declining -- or increasing unemployment rates for our subsegment, while a strong economy for them to get part-time jobs, a strong economy for the auto industry and those that hire for us and a reasonably good overall economy that gives people consumer confidence and allows them to make the choice to invest in their education for the future.

The next question comes from Jeff Silber of BMO Capital Markets.

Can I just get a little bit more color on the decline in show rates? It seemed a little bit steeper than what we've seen in the past.

There's nothing really new to talk about there. It's, I think, in large part due to the economy, aversion to debt, some processing issues given the complexity of completing the paperwork and going through the process. It's the same story, unfortunately.

You also had a hurricane hit the East Coast. So I don't want to overplay that, but that impacted a couple of our campuses.

Again, just to add a little color, a lot of it was related, again, to the students who had to relocate. But we did see pressure across all student segments across the country, which leads me to believe that there is some greater focus on the execution miss than perhaps a significant change in the macro environment, with the exception of what Eugene mentioned, where we did feel some of that pressure on the East Coast.

Okay, that's helpful. Shifting gears a bit to your dividend, it's a pretty hefty dividend when you look at it in terms of the payout ratio. Now I know the company has a very strong balance sheet. But is this something that you may want to rethink in terms of the size of the dividend that's out there?

Well, we're not on automatic. We always consider it before we declare it. The board spends time looking at it, spends time looking at projections, and I think our belief is we want to continue to return capital as appropriate to shareholders. Obviously, that's dependent upon how much internal capital we're generating. But I expect to see a continuation of the dividend and/or share repurchases for some time into the future. The absolute makeup of those 2, I think, is always something that we will take a look at. But there's nothing that is under immediate consideration at this point, to the leading point of your question there, Jeff.

Okay, I appreciate that. Then just a couple of numbers questions. First of all, were there any restatements? In looking at last year's press release, it looks like the number for the December '11 quarter are a little bit different?

There was. I might need to get you off-line on this, but if you'll recall, I think in the -- either the third quarter or the fourth quarter, we revised some of the quarterly numbers in 2012. And John is just telling me that it's in Table 1.

A table in the Q.

It's a table on the Q, which will be out tomorrow.

Okay, and that'll be really helpful.

But there were some slight revisions to the quarterly numbers from the initial press releases. So if you're using initial press releases, yes, it will look a little bit off. But we'll clarify it for you in the Q that you'll see tomorrow after the close of business.

All right, that'll be great. And then just what -- for modeling purposes, what should we be using for the tax rate going forward for this year and for capital spending?

I would use around 40% for the tax rate, or I'd use 40%, if you'll allow us a little give or take from that. Capital expenditures, I would assume that we'd be somewhere in the $18 million to $20 million range.

The next question comes from Gary Bisbee of Barclays.

So, I guess, can you give us the mix, just among the population, of high school versus military versus a working adult? Is that -- I don't think I've I heard that in a while.

Mix of what, of starts or current students?

No, of students. I mean, starts -- if you want to give trailing 12-month starts. I know there's real seasonality so I'm -- just in terms of students.

I'd say it's still around 50% that's recent high school graduates. About 15% to 18% in school military, and then the balance would be the adult career changers in approximate.

Okay, great. How are the job placement prospects for your graduates? I don't know if it's just in the New York market, or maybe it's because I read The Post, which I probably shouldn't, but I've seen a couple of stories like sort of hinting at the fact that maybe there's either less turnover or -- despite the fact that we've had increases in auto sales, there's actually less staffing because maybe the recent couple of generations of cars don't break down as much. Are the prospects still as good? And is that something that you're using to aggressively try to get prospective students in the door?

I think, Gary, the -- it differs by category. The auto prospects are reasonably good and reasonably flat. And honestly, for the first time, we've begun to see a little bit of, at least, starting wage growth there. So I'm not familiar with the Post article that you saw, but it sounds like we would counter that a little bit. Diesel is extremely good, both in terms of demand and absolute wage rate, especially down South. Motorcycle is struggling somewhat. The demand for motorcycle techs is the weakest of our sector. So I would say that is where we're seeing pressure and that is what would bring down our overall rates. But for our core curriculums of auto and diesel, demand for those techs is still pretty strong.

If I can jump in there as well, I think, recently, we've seen articles talking about demand in the aging workforce, which kind of helps to balance out the equation of cars that are breaking down less. And it's been the first time in probably a decade where I started to see the word "shortage" used. Coming from the major domestic manufacturers, I think they were -- at least GM and Mercedes-Benz were quoted in a USA Today article talking about that and the skill level and technology requirements for the workforce. And even in the proprietary conversations we're having with our partners and the manufacturers looking forward, those tend to be pretty positive conversations in terms of the outlook for the demand for our graduates. So that is a good story, and it's one that we certainly use to create awareness about the opportunities in the sector.

Okay, great. And then just -- I guess I wondered, given the big campus footprint, the legacy model of the company, what would it take to get you to consider more aggressive downsizing from existing facilities moving to smaller ones so that maybe the -- at a fully -- full box might not be as profitable as the big box but would allow you to have lower facility costs in light of the lower revenue level? Is that something that's on the table? Or would it have to get a lot worse before you start to take that kind of aggressive action as a serious potential?

I think it depends upon the location. I think we have a location or 2 where clearly we'd like to be smaller. And I think the prospects of either subleasing something and/or moving to a smaller facility are something that we are starting to consider but not something that I view as imminent. I think our ability to maybe utilize some of that space in a different way, whether it's subleased or whether there are appropriate other disciplines that could leverage some of that space through a business development effort, is something that we will absolutely look at and work, as Kim said, with some of our OEM partners that are looking and asking for more output than we're currently providing and some of the challenges matching up geographic locations. So that's some of the work. But if your question is are we going to go into a wholesale, "Let's shrink some of the campuses and close them down and open them across the street in a smaller facility," that's not very likely.

Okay. And then just lastly, the comments that some of the OEMs are talking about, shortages or lack of skills, is there any possibility to get them to foot a bit more of the bill than just part or all of their specific class that you might have? Or is that really not -- a nonstarter for the industry?

Well, I think it all depends on the supply and demand dynamics, and there was a time when the automotive industry was very invested in education at the secondary level and hit some hard times, and that's probably not where it was in the past. But as they, I think, look forward to what their needs are and where they can get that supply of technicians, that there is certainly opportunity to partner with industry and educational institutions. And we certainly believe there is opportunity and believe that we're in the best position to do that with the relationships that we have. So it might be a difficult conversation at first, but I think as reality starts to change, it's one that we will entertain and certainly that they're looking at. What Nissan does today with scholarships for relocations to help students in funding their education is pretty significant. And that support continues to grow and hopefully it will serve as a model to others in how they can support students considering this sort of career path.

The next question comes from Jerry Herman of Stifel, Nicolaus.

Kim, I'm wondering if you would give us a little bit more color on the analysis that you did with regard to price elasticity or demand elasticity? And what factors in particular led to the conclusion that lowering price would not stimulate enough demand and not be in the best interest to the organization? I mean -- I guess, it seems to conflict in some way with debt aversion and taking on more absolute dollars in whatever form?

I understand. And certainly, I think that's what we felt initially, which is why it warranted a little bit more research and in-depth analysis. And some of the models are far too complex for me to talk about, but there is certainly a population that is willing and able to fund this sort of education and believes and sees the return on educational investment. And then there is a population who definitely sees the opportunity but cannot -- may not be Pell-eligible, and falls into that middle-income category and just gets kind of stuck in how they might be able to finance this education. And trying to understand that population, or the incremental student, and how best to help them, we believe that, that is in the best interest of both the organization and the students. I don't know that we want to give away too much information, because we've spent some time and money getting there, to figure out whether or not we're priced correctly and what actions we should take, but the conclusion is that we're not going to make any wholesale reductions and we're going to use a more targeted approach with our scholarships and institutional grant-type programs, as well as helping to guide students in terms of what educational path and course or program is best for their personal circumstances.

Okay. And let me just sort of broaden Gary's question with regard to consolidation. Could you -- can you maybe share some thoughts on what you believe to be the prospects for overall industry consolidation? And then separately, last quarter, you alluded to some investigation of diversification. And if you could just address those 2 issues?

So I think from a consolidation -- and I'll let Eugene maybe hop in on the diversification comments and what we've been looking at. But from a consolidation standpoint, at least in terms of what we see out there, is some of the smaller schools are certainly struggling just from a scale standpoint and inability to adapt to some of the regulatory environment, and may not be able to make the investments necessary to deliver the student outcomes in a way that is required in today's environment. And so we expect to see some sort of consolidation just like we did a couple of decades ago when this started to happen. I do think that now, it's really far more focused on quality, and that will be the criteria in terms of how this consolidation actually takes place. And how we're looking at it is, typically, we've been an organic growth company, and there's been better opportunities and return for kind of a greenfield approach. But there may be opportunities out there now that make sense. And it's going to come down to location and quality and how that aligns with our footprint today. So I don't -- there's not a whole lot more I can add on that in terms of consolidation other than, I think we all believe that there's going to be opportunity there. And we're more open to looking at that than we probably have been in the past, seeing what we can pursue. You want to comment on...?

Well, I'll stand by what I said to Gary's question. I think we clearly believe that in some locations, we have fixed assets that could be leveraged. We have an admissions force that could be leveraged. And I think to the extent that we can find companies, divisions, curriculums, et cetera, that are similar to our brand in terms of quality, relationships with manufacturers, et cetera, we would be interested in that, more so than we were 4 or 5 years ago. If the number of books that we are seeing from potential sellers is any indication of consolidation, you'd have to say their consolidation is coming. When and what that consolidation looks like, I think, remains to be seen. I don't think there's equilibrium yet between sellers' expectation and a buyers' willingness to pay and -- but that will happen at some point in time, and I think we want to be cognizant of where we provide, what our core competencies are, what we can leverage and what our brand stands for, and to the extent that we can add something positively to that, we'll be interested in it.

The next question comes from Trace Urdan of Wells Fargo.

I didn't quite follow the logic behind your feeling that the fourth quarter might result in a change in start performance. I wonder if you could elaborate on that a little bit? Where -- how much confidence do you have, where the confidence comes from, what you think the drivers will be at that point in time?

So looking at fourth quarter, as you know, it is highly populated by high school students who have a long period from the enroll-to-show time frame. And we certainly had a large number of those students scheduled to start in the fourth quarter. And as we really examined what happened in the fourth quarter, what was micro, macro factors, servicing issues, we definitely found the opportunity to improve the level of service for this population over that longer time frame. And so the confidence comes from seeing the high school admissions representatives' progress to date, as well as understanding what we're doing to improve the level of service for this population and the time in which we have to really implement the changes, which have already started at this point. And I think it goes back to some of the things we talked about on the last quarter, which was the complexity of meeting government -- the expectations on the tax transcripts and verification processes. And also, PLUS Loan denials slowed things down quite a bit. And the significant volume we had in Q4, just -- it did now allow us to get through all of those students in a timely manner to help them get through the processes effectively as we could have. And that's what will be different about Q4 for next year, and we're confident that it will make an impact.

Okay. Two related questions then, Kim. The first is I guess, is what happens to them? What do they do instead? And is there not any prospect of sort of focusing in on that particular population, which is between a traditional high school graduate and a working adult student who has trouble -- is reluctant to come?

Well, I think we've seen historically a couple of things happen. One is they do nothing for a period of time. They just simply get frustrated with the entire process, and they do nothing. And there in lies some opportunity to go back and help the student and the family through the process, which we will certainly do. The second is that they find employment and they put off education for a longer period of time, and so they're not an immediately addressable segment. And the third is that we, together, get them excited about the opportunity in this industry. And because they cannot finance it, they will pursue it at a local community college. And so to me, those are the 3 big buckets. And we will continue to work this population that, in my opinion, was not served as well as it could be, not only those that we missed in the last quarter, and potentially some in this quarter, to help really -- I'm sorry, to hopefully recover some of that inside of this year and to certainly make certain that we're in better position for fourth quarter. So I guess, worst-case scenario is they're frustrated and we don't get anything -- any sort of response back from them. And best-case scenario is we can recover those who really want this type of eduction with a different way of helping them fund it.

And do you guys perceive any difference in terms of how the employment market perceives the graduates in terms of whether they're sort of freshly minted young people or grizzled 25-year olds? I mean, do they employ at different levels of success?

I think it's been different over a number of years. And sometimes, we'll have employers who would like a student who has had more work experience. There's a high preference for those with a military background, certainly. And then you'll have others who are looking at costs and culture, and they will look for the younger student that they can help shape in terms of their culture and may not have to pay as high a cost, especially when they come out with a higher technical understanding. So I'd say it's mixed. But certainly -- our average student population is around 22. So they're definitely employing the younger students. But I think it depends on the employer.

[Operator Instructions] The next question comes from Kelly Flynn of Crédit Suisse.

Did you give the starts x ATB?

We didn't. But the starts -- typically, the starts would have been about 4%, 4% to 5% of the total number of new applications or students scheduled to start.

Okay. All right, great. And then to sum the execution issues that you've talked about, I just want to clarify in a bit more detail what exactly happened there? And then do you consider that a glitch that has been fixed? Or is this kind of a longer-term issue that will need to be addressed over time?

I see it more as a glitch than a longer-term issue because some of the changes that were put into place that were government-driven, we simply did not anticipate the length of time that it may require a student and family to go through, or the frustration factor. And so those things fully being considered with the high volumes that we get in the fourth quarter now have been -- we've adjusted for that. So I don't know if you have a differing opinion, Eugene, but...

No, I agree.

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

I just had 2 quick follow-ups. Do you expect the start decline to narrow in Q2?

Yes.

Okay. And the other one is also on the employment front. What do you kind of take away from the fact that the absolute number of graduates that you have is down, but the employment rate is only up slightly? So in other words, the number of students who are getting jobs, the absolute number seems to be down. One would think, with less competition from other UTI graduating students, maybe a higher would be able to get jobs?

The -- as far as that, the graduates increasing, typically, the graduate employment services are working a lag population, or a year back. And some of them, they're still trying to help find jobs because we're really focused on that year time frame. I'd say what you're suggesting is true. With fewer graduates, you would expect to see that up. I would say that it's probably more a reflection of our resources and staffing versus some macro factor.

This concludes our question-and-answer session. I would like to turn the conference back over to Kim McWaters, Chief Executive Officer, for any closing remarks.

Thank you very much for joining us. We appreciate your interest in Universal Technical Institute, and we look forward to updating you on our next earnings call, which is scheduled for Tuesday, April 30. Have a great evening.

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