ITT Educational Services, Inc. ESI reported disappointing third-quarter 2015 results with the company missing expectations on both fronts.
Quarter Details
ITT Educational Services’ earnings per share of 7 cents missed the Zacks Consensus Estimate of 10 cents by 30%. Moreover, earnings per share decreased 84.1% from 44 cents in the prior-year quarter owing to declining revenues.
The company reported revenues of $203.2 million, which lagged the Zacks Consensus Estimate of $213 million by 4.6%. Revenues also fell 16.2% year over year due to a decline in enrollment levels.
Total enrollment of 48,231 students was down 15.5% year over year owing to declines in continuing students, new student enrollment and persistence rate.
New enrollment of 14,943 students declined 18.4% year over year, within the company’s expected decline in the range of 15% and 20%. In the quarter, the company made a change in the definition of a new student. The change in definition resulted in the exclusion of 488 students, who would have otherwise qualified as new students. Including these students, the decline in new enrollment would have been 15.8%.
Continuing students declined 14.2% year over year. Persistence rate declined 40 basis points (bps) to 69.5% owing to a decline in student retention.
Operating margin increased 340 bps to 6.2% on the back of a massive decline in bad debt. As a percentage of revenue, bad debt expense improved 350 bps to 3.4% during the year owing to a decline in internal students financing in the form of Opportunity Scholarship, and other institutional scholarships and rewards.
Financial Details
ITT Educational Services also updated details regarding its payments for two private educational student loan programs – PEAKS Trust Student Loans and CUSO Student Loans.
ITT Educational Services has been facing trouble filing earnings results since the fourth quarter of 2013 owing to uncertainties related to the accounting treatment of the PEAK and CUSO programs in the company’s statements. These loans created a lot of unwanted controversies in the past, which finally ended with the SEC pressing fraud charges against ITT Educational Services and two of its executives in May 2015. The SEC claimed that the post-secondary education company had concealed its actual financial status from its investors, particularly in relation with the abovementioned student loan programs.
However, ITT Educational Services seems to be sorting its issues and has finally completed filling with the SEC for all previous quarters by mid-Jun 2015.
ITT Educational Services revealed the aggregate payments that are expected to be made under the PEAKS and CUSO programs. The company expects to pay $5.5 million in fourth-quarter 2015, $25.3 million in 2016, $13.4 million in 2017, and $86.1 million in 2018 and later.
Outlook
Adjusted earnings before interest, taxes, appreciation and amortization (EBITDA) for fiscal 2015 are expected between $90 million and $110 million.
For the fourth quarter of 2015, the company expects new enrollment to decline about 15% to 20%.
ITT Educational Services has a Zacks Rank #3 (Hold).
Stocks to Consider
Some better-ranked stocks in the education industry include New Oriental Education & Technology Group Inc. EDU, Grand Canyon Education, Inc. LOPE and TAL Education Group XRS. While New Oriental Education & Technology Group and TAL Education Group sport a Zacks Rank #1 (Strong Buy), Grand Canyon Education holds a Zacks Rank #2 (Buy).
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