ITT Educational Services and Financial Results and Public Companies and Education & Workforce Development

ITT profit soars despite drop in new-student enrollment

October 21, 2010

ITT Educational Services Inc.’s third-quarter profit handily beat the expectations of Wall Street analysts, but the company suffered its first decline in new student enrollment since the recession began.

The Carmel-based operator of for-profit colleges Thursday morning reported quarterly profit of $93.2 million in the three months ended Sept. 30, an increase of 25 percent compared with the same quarter a year ago.

ITT earned $2.82 per share in the quarter, far higher than the $2.74 per share predicted by analysts, according to a survey by Thomson Reuters.

Revenue for the quarter grew 18 percent to $400.6 million but fell short of analysts’ expectations of $408.2 million.

ITT reiterated its full-year profit forecast of $11 to $11.35 per share.

New-student enrollment fell to 26,664, down 3.9 percent compared with the same quarter last year. Total enrollment stands at 88,000 at ITT’s campuses in 38 states.

ITT has enjoyed stellar growth as the recession sent a flood of out-of-work adults to school to acquire new skills. But new-student growth has been decelerating, from 27 percent a year ago to 10 percent in the second quarter of this year.

An even larger problem for ITT and its peers are new rules proposed by the U.S. Department of Education that would slow growth even more.

The government wants to require for-profit colleges to ensure that at least 45 percent of former students be actively paying down their loans four years after leaving school.

If schools’ former students fail to achieve that threshold, the government would not allow a for-profit education program to get student-loan funding to raise its enrollment levels. And if repayment rates fall below 35 percent, the government would cut off student-loan funding entirely for any new students.

The Department of Education believes the repayment rates are an indication of whether students at for-profit schools graduate at all and whether the degrees they earn lead to “gainful employment.”

According to data released by the government in August, ITT’s repayment rate is just 31 percent.

“There has been a shot across the bow of the entire industry,” Alex Paris Jr., a for-profit education analyst at Barrington Research in Chicago, said in an interview on Wednesday. ITT “is going to be one of the most affected by proposed gainful employment regulations.”

Paris and other analysts do expect ITT to slash its tuition costs by 25 percent to 50 percent in order to comply with another part of the proposed regulations.

Under that provision, graduates’ annual payments on their student loans would be divided by the annual income that gets reported to the Social Security Administration. If the ratio is higher than 8 percent, a for-profit degree program would be restricted from growing its enrollment. If that ratio is above 12 percent, new students in that program would be ineligible for federal student loans.

Deutsche Bank analyst Paul Ginnochio estimates that ITT’s bachelor’s degree graduates are paying roughly 16 percent of their starting salaries in loan payments. ITT’s associate’s degree graduates are paying just under 12 percent of their incomes to repay student loans.

It’s expensive to earn a degree at ITT—about $56,000 for a bachelor’s and about $30,000 for an associate’s. On average, federal student loans cover 80 percent of those costs for ITT students. Federal loans are often the only source of financing available to ITT students, who on average are 29 years old with annual incomes of $17,000 when they enroll.

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