Universal Technical Institute, Inc. (NYSE:UTI) Q2 2024 Earnings Call Transcript May 8, 2024
Universal Technical Institute, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and welcome to the Universal Technical Institute Second Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Matt Kempton, Vice President of Corporate Finance. Please go ahead.
Matt Kempton: Hello, and welcome to Universal Technical Institute’s fiscal second quarter 2024 earnings call. Joining me today are CEO, Jerome Grant and CFO, Troy Anderson. Following our prepared remarks, we will open the call for your questions. A replay of this call, its transcript, and our investor presentation will be archived on the Investor Relations section of our website at investor.uti.edu, along with our earnings release issued earlier today and furnished to the SEC. During this call, we may make comments that contain forward-looking statements as defined in the Private Securities and Litigation Reform Act of 1995, which, by their nature, address matters that are in the future and are uncertain. These statements reflect management’s current beliefs and expectations and are subject to a number of factors that may cause actual results to differ materially from those statements.
These factors include, but are not limited to, those discussed in our earnings release and SEC filings. These statements do not guarantee future performance and, therefore, undue reliance should not be placed upon them. We do not intend to update these forward-looking statements as a result of new information or future developments, except as required by law. Please note, unless otherwise stated, all comparisons in this call will be against our results for the comparable period of fiscal 2023. The information presented today also includes non-GAAP financial measures. These should be viewed in addition to and not as a substitute for the company’s reported results prepared in accordance with U.S. GAAP. All non-GAAP financial measures referenced in today’s call are reconciled in our earnings press release to the most directly comparable GAAP measure.
For more information regarding definitions of our non-GAAP measures, please see our earnings release, financial supplement, and investor presentation. With that, I will turn the call over to Jerome Grant, CEO of Universal Technical Institute, for his prepared remarks. Jerome?
Jerome Grant: Thank you, Matt. Good afternoon, everyone. We carried our operational momentum into the second quarter of 2024. Across our key metrics, we performed consistent with, and in most cases, better than our expectations. We had 5,480 new student starts in the quarter, which is an 18.5% increase. And our second quarter revenue grew 12.4% to $184.2 million. Both of these were above our expectations. For profitability, net income was $7.8 million. Diluted earnings per share was $0.14, and adjusted EBITDA increased 17.8% to $22.6 million. All right in line with our expectations. Our performance through the first half of fiscal ’24, continues to demonstrate the strength of our execution on our growth, diversification, and optimization strategy.
I’d like to thank our divisional and corporate teams for their continued leadership, as well as our faculty, staff, partners, and students for their hard work and commitment. As another point of pride, we were prominently featured in a recent Wall Street Journal article, How Gen Z Is Becoming the Toolbelt Generation. The article highlights one of our welding graduates as a case study for young workers’ increased interest in trade professions, or what we refer to as skilled collar jobs. This trend has received more visibility of late, including a recent study funded by the Gates Foundation that, found that students are both increasingly skeptical about the ROI of a traditional 4-year college education, and are becoming more aware of their alternatives to college.
As traditional higher education enrollments decline, and as an older generation of skilled tradespeople retire, we believe we are optimally positioned to address the rising demand for technical training among the new generation of workers. Our advantage also extends to the healthcare fields we serve, which has experienced even greater job demand momentum. According to the U.S. Bureau of Labor Statistics, job growth in healthcare support occupations is projected to outpace all other occupational groups, growing at an estimated 15.4% between 2022 and 2032. So, as we welcome and train the next generation of students in both divisions, facilitating superior graduation rates and employment outcomes remains core to our growth strategy. I’d now like to review the recent performance and highlights by division.
Starting with our healthcare division, Kevin Prehn and his Concorde division have continued to outperform our growth expectations, with student start growth of approximately 17% and revenue growth of 8%. Concorde’s newest program rollouts came in ahead of schedule as the necessary regulatory approvals for the two planned dental hygiene programs were obtained in February and the programs officially started in April. Combined, these programs had approximately 50 students in their first cohorts. Concorde also continues to make progress with the expansion of its San Diego dental hygiene program, which remains on track to launch later this year. As Troy will discuss later in the call, start performance also benefited from our new phlebotomy and sterile processing technician programs.
Market demand remains impressive for Concorde’s growing core and clinical program offerings. The division more broadly, Kevin and his team, have continued to identify and execute on optimization and efficiency opportunities, as well as evaluate other growth avenues, such as expanded online offerings and additional program expansions. The team at Concorde is also focused on deepening and expanding their partnership network. These relationships not only benefit graduates’ employment opportunities, but also enhance the accessibility and affordability of Concorde’s programs. One great partner example is Marquis Companies, a fifth-generation family-owned senior living healthcare company based in Portland, Oregon. For the last three years, Marquis has partnered with Concorde to meet the growing demand for workers.
Marquis subsidizes tuition for its employees who want to up-skill to become vocational or practical nurses, with tuition subsidies ranging from 25% to 100% based on the student’s commitment to stay with the company. We appreciate Marquis’ generous support of our students and look forward to making additional partnership progress. The UTI division also had a strong quarter, with year-over-year student start and revenue growth of approximately 20% and 15% respectively. From a program standpoint, Tracy Lorenz and her team, are making great progress on the second phase of the division’s program expansions. Two of the four heating, ventilation, air conditioning, and refrigeration program expansions, which we announced last fall, are now enrolling students at the Avondale and Long Beach campuses.
These classes are expected to begin in June and July respectively. As for UTI’s other two HVAC program expansions, the Bloomfield campus is now enrolling students, with the first cohort expected to start in September, while the Sacramento campus is on track to start its first cohort of students early next year, pending regulatory approval. The other 14 new programs, which were launched primarily in late fiscal 2023, have continued to grow nicely, with over 550 combined new student starts between Q4 last year, and Q2 this year. Market demand for these new programs continues to build, and we remain confident in having at least 1,000 new students start in these programs this fiscal year. As we’ve also discussed on previous calls, the most recent program launches are just the first step towards expanding the MIAT sourced aviation skilled trades and energy programs across the UTI division footprint.
Unification process of UTI’s division’s two Houston operations into a single campus remains on track, to complete later this calendar year, with the phase transition process now underway. The Houston unification project is a prime example of our strategic focus on optimization, which is designed to drive greater operating efficiencies while enhancing the student experience and outcomes. The UTI team has also grown the division’s extensive partnership base. During the second quarter, UTI announced a new partnership with Hawaiian Airlines and continued to expand its employment program partners. The division has also announced a 5-year renewal of alliance with Interstate Batteries, a leading automotive replacement battery brand, and the exclusive battery provider to all UTI automotive, diesel, and marine technician training programs, across our footprint.
We appreciate this long-running alliance and look forward to building on the division’s industry relationship for years to come. Turning to our expectations for the balance of 2024, and thoughts on fiscal 2025, we are announcing positive adjustments to our starts, revenue, and profitability guidance for 2024. For new student starts, based on our results to-date and expectations for the upcoming quarters, we now feel confident in increasing our prior range to between 25,500 and 26,500 starts for this fiscal year. We also expect to generate between $720 million and $730 million in revenue and between $102 million and $104 million in adjusted EBITDA for the fiscal year. Troy will provide additional layers of commentary on these adjustments, and expected quarterly phasing for the second half of the year.
With our confidence in our strategy and solid execution in 2024, we’ve developed our initial projections for fiscal 2025. Based upon our currently announced program expansions, low to mid-single-digit baseline student start growth, and currently planned optimization initiatives, we’re estimating 2025 revenue of nearly $800 million, with approximately 10% year-over-year growth. And adjusted EBITDA margin of approximately 15%, which represents at least 100 basis points in margin expansion. Our robust and proven multidivisional model, we are well-positioned for continued growth, diversification, and optimization. I’d now like to turn the call over to Troy, to review our financial results and our guidance in more depth. Troy?
Troy Anderson: Thank you, Jerome. Continue to deliver positive operational and financial performance through the second quarter, meeting or exceeding expectations across our key metrics. As an important reminder, this marks the first quarter with a full year-over-year comparison for Concorde since we closed the acquisition in December 2022. New student starts, we saw double-digit year-over-year growth from both divisions during the quarter, where we delivered 5,480 total starts, representing 18.5% growth, which was above our expectations. UTI Division delivered 2,840 new student starts and grew 19.6%. Same campus, same program growth was a big contributor, and we continue to see the benefits from our new program launches. Concorde Division delivered 2,640 new student starts and grew 17.2%.
We also saw strong same-campus, same-program growth with Concorde, with a modest contribution from the recent new program launches, as the start cohorts are smaller and less frequent than those of the UTI programs. Technical starts grew 24.9%, while core starts grew 12.4%. Both reflect the benefits of increased marketing investments and grant programs. Additionally, as Jerome mentioned, our core program start growth includes contributions from the phlebotomy and sterile processing technician programs, which are shorter cash-paid programs we are working to expand across the Concorde campus footprint. We look ahead to the third and fourth quarters. I’m sure many of you have heard about the Department of Education’s FAFSA Simplification initiative and recent challenges with the implementation.
We are keeping a watchful eye on these developments and doing everything we can to support our students, as we jointly navigate through the new process. This is particularly important for our incoming high school students. Turning to our financial results, revenue on a consolidated basis was $184.2 million, which also exceeded our expectations and reflects an increase of 12.4% year-over-year. UTI Division’s revenue of $123.3 million increased 14.7%, and Concorde’s revenue of $60.9 million increased 8.2%. Consolidated net income was $7.8 million, which more than doubled versus the prior year quarter. This translated to $0.14 of diluted earnings per share, which now reflects the full benefit of the December 2023 preferred share conversion. At the end of the second quarter, we had 53.8 million total shares outstanding.
Adjusted EBITDA was $22.6 million, an increase of 17.8% year-over-year. Overall, our profitability performance was in line with our expectations and continues to reflect the improved operating leverage associated with our growth in students and revenue, as well as cost efficiencies as we generate higher yield from our growth investments and optimization efforts. As of the end of the second quarter, our total available liquidity was $145.1 million, which includes $29 million of available capacity from our revolving credit facility. As I noted last quarter, we are now managing the revolver to maintain a modest level of positive working capital at the end of each quarter, which translated to a net paydown of $19 million for the quarter. We continued to pace ahead of last year in terms of operating and adjusted free cash flow generation, which reflects our improved profitability and lower level of growth investments in CapEx spend.
Year-to-date operating cash flow was $8.3 million, and adjusted free cash flow was $3.7 million. Year-to-date capital expenditures were $9.8 million. Our CapEx spend has been running lighter than planned during the first half of the year, and we expect it to be higher in the second half. Overall, we believe we have ample liquidity to fund continued organic growth initiatives, such as additional program expansions and new campuses. As Jerome mentioned, we are positively adjusting our new student start, revenue, and profitability guidance for fiscal year 2024, reflecting our current visibility and continued confidence in our execution. The updated guidance ranges are as follows: total new student starts of 25,500 to 26,500, a 1,000 start increase to the midpoint.
Total revenue of $720 million to $730 million, which increases the midpoint by $10 million. Net income of $37 million to $41 million, an increase of $1 million to the midpoint. Diluted earnings per share of $0.68 to $0.73, an increase of $0.01 at the midpoint. And total adjusted EBITDA of $102 million to $104 million, which narrows the range and increases the midpoint by $1.5 million. This translates to adjusted EBITDA margin of 14.2% at the midpoint, or roughly 350 basis points of margin expansion versus last year. We remain highly confident in our prior adjusted free cash flow guidance of $62 million to $66 million, which includes total CapEx spend of approximately $30 million. We will continue to evaluate our guidance throughout the remainder of the year as we gain further insight into our actual, and expected performance and make adjustments accordingly.
As far as phasing expectations over the next two quarters, for new student starts, we expect low to mid-single-digit growth each quarter, slowing from what we’ve seen the first two quarters as we begin to lap the many initiatives in the UTI program expansions we implemented last year, with a smaller relative impact from both the UTI and Concorde new program expansions launching this year. For revenue, we expect low double-digit growth each quarter, reflecting the ongoing ramp of our recent program expansions, and the student start growth momentum we are seeing in both divisions. As a reminder on seasonality, we typically see revenue decrease from the second to third quarter, and then measurably increase in the fourth quarter as a result of higher start volumes and growth in the student population.
This is more pronounced for UTI than it is for Concorde. Earning to net income diluted earnings per share and adjusted EBITDA, we continue to expect significant year-over-year growth each quarter, with third quarter profitability down relative to the second quarter, similar to revenue. And the fourth quarter being the highest profitability quarter for the year by far. Since our last earnings call, we’ve spent time evaluating the trajectory of the business as well as potential new growth investments over the next few years. While we don’t have anything to announce on the latter point just yet, we are sharing our initial projections for fiscal year 2025, which Jerome also touched upon. In that regard, we currently estimate revenue of nearly $800 million for the year, representing approximately 10% growth, and we estimate adjusted EBITDA margin of approximately 15%, or at least 100 basis points of margin expansion versus fiscal 2024.
These projections reflect the momentum we expect to carry out of fiscal 2024, based upon our updated guidance, our currently completed and announced program expansions, ongoing baseline new student start growth of low to mid-single-digits, and increasing the yield on our growth and optimization investments, as we gain further operating leverage and enhance the efficiency of our operational infrastructure. While not considered official guidance, we feel it is important to provide a longer-term view to the investment community along with the rationale behind it. We expect to provide formal fiscal 2025 guidance in November, along with our fiscal 2024 results, consistent with our normal cadence. As always, we encourage everyone to review our press release, financial supplement, and investor presentation, as well as the 10-Q once it is filed, as these materials include the most current information on our consolidated and segment actual results, our strategic roadmap, and our guidance.
We are excited about our performance for the first half of the year, and believe we are entering the second half of fiscal 2024 on very sound footing. I would like to thank our team, students, partners, and investors for their continued engagement and support. I’ll now turn the call back over to Jerome for closing remarks.
Jerome Grant: Thank you, Troy. In the coming quarters, we intend to make additional progress on our three strategic tenets, growth, diversification, and optimization. We’re actively pursuing organic initiatives in three primary ways. First, we are continuing to consider expansion of our campus locations into new geographies. We are also continuing to expand the geographic reach of our existing programs, as well as exploring adding new in-demand program offerings to our portfolio. And finally, we’ll continue to add new partner relationships across our programs. From an inorganic perspective, we remain active opportunistically in pursuing additional strategic M&A targets. As we discussed previously, we intend to bolster our healthcare presence, as well as program offerings to complement our current conquered business.
Although we have nothing to announce today, we believe our current and future diversification pathways, will strengthen our industry leadership, especially as market demand continues to grow across our fields. And of course, in the second half of 2024, we’ll continue driving the key operational focus areas that you’ve come to expect. These include ramping the most recent campus and program launches in both divisions to drive enrollment, revenue, and profitability growth, enhancing the yield of our marketing and admission investments, to optimize lead generation and inquiry conversion, and optimizing our workforce and facilities utilization to drive greater program availability, margin expansion, and improved operating leverage. To date, our company’s strategic progress has enhanced our capabilities as a leading workforce solutions provider, all while maintaining our focus on facilitating superior outcomes for an expanding range of in-demand fields.
We look forward to providing further updates, on our exciting trajectory over the coming quarters. And I’d now like to turn the call over to the operator for Q&A. Operator?
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