Franklin Covey Co (FC) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the FranklinCovey Investor Relations conference call. My name is Katrina and I will be your coordinator for today. (OPERATOR INSTRUCTIONS). I would now like to turn the presentation over to your host for today's call, Mr. Richard Putnam with Investor Relations. Please proceed.

Good morning shareholders and interested parties. I would like to welcome you to the FranklinCovey first quarter of fiscal 2007 conference call and webcast. My name is Richard Putnam. I am Vice President of Investor Relations for FranklinCovey.

You are currently in a listen only mode to prevent background noise. We will give you instructions for asking questions at the end of Mr. Whitman's presentation. If you would like to ask a question, you will need to call in 1-866-831-6267 with the access code of 69956850.

I would like to introduce those that will be participating that are in the room with us, Mr. Bob Whitman, CEO and Chairman of the Board; Bill Bennett, President of our Organizational Solutions Business; Sarah Merz, President of our Consumer Solutions Business Unit; and Mr. Steve Young, Chief Financial Officer.

Before I turn the time over to Mr. Young to review the financials, and in light of Regulation FD, this presentation is being webcast and can be accessed at the www.gotomeeting.com/join/448438714.

We would note that this presentation may contain forward-looking statements as defined in securities law, and that they are based upon certain assumptions that are subject to certain risks and uncertainties that would cause results to vary from management's current expectations.

We would encourage you to become familiar with these risks and uncertainties, which are also outlined in our Form 10-K filed with the SEC for the year ended August 31, 2006, and any subsequent 10-Q and 8-K filings. Copies of all of our recent filings with the SEC and additional information about FranklinCovey are available on our website, FranklinCovey.com.

Some of the numbers that we will discuss this morning have not been audited by KPMG, the Company's external auditors, and we assume no obligation to update the matters discussed in this call. It is also illegal to record this call without the Company's permission. There are a number of slides that we will be reviewing this morning and discussing during the call that can be accessed at the website identified earlier.

I would now like to turn the time over to Mr. Young, Chief Financial Officer of FranklinCovey.

Good morning everyone. I'm very pleased to be speaking to you this morning about our financial results. For those who follow the Company, you'll remember that out of our past 16 quarters, excluding this quarter, we had financial improvement each of 15 of 16 quarters. So since the financial result of this first quarter is down compared to the prior year, and since some of the elements of our financial information is a little bit complicated, it means it might be a little bit difficult for some of us to understand exactly what it all means and put our financial result in context of our results of the past, and how we should view this current result as it would relate to the future.

I'm going to spend just a couple of minutes talking about our year-end results and then a few more minutes talking about our first quarter results. As an overall view, I would simply say that in our results there are some very positive things. There are things that are easily explained as to differences from year-to-year, and I'll just go from there.

First of all, if we look at last year, and jump down to net income available to common shareholders, you'll see that the increase was about $30 million. While that is great, that is a little bit too great to really view as the result of the Company. You'll see that, particularly in our income tax provision last year, we recorded a significant benefit, a $14.9 million benefit where you would normally expect to see a tax expense. The reason for that is that our improved results over the past several quarters caused us to conclude that it is more likely than not that our allowance against our net operating losses would -- the allowance would not be needed, and that we will most likely recognize the benefit of that net -- those net operating losses, the benefit of which is not recorded in in our financial statements. And so in the fourth quarter we took that benefit.

What that means going forward, and we will see it in the first quarter, is that we will have a "normal" tax effective rate going forward, where in the past we have benefited from net operating loss carryforwards without having those recorded, in effect as a benefit.

That is a fairly significant issue to remember in last year, but more importantly is that in our FY '06 results compared to FY '05, we did have an improved operating income of about $5.6 million. If you look at that improvement it comes from many areas. One is that we have increased sales in our Organizational Solutions Business Unit, and we have increase in sales in our Consumer Business Unit, if you exclude the impact of closed stores, which would account for a decrease of about $12.5 million in '06 compared to the result of '05.

A closed store now is one that we always need to remember as we are looking year-over-year to remember the impact of closing stores. While strategically good for the Company and good for our operating result, it is an important issue to remember as we compare revenues quarter-to-quarter and year-to-year.

Last year we had some very good things going on in revenue. Our margins held up. Our costs were good. We had operating improvements. We had some unusual benefits that we recorded that won't repeat, and think we just had a positive result last year.

Now let's move on to the first quarter of this year. Those who have looked at our financials, remember that overall our sales in the first quarter increased compared to the prior year. I would say most importantly the OSBU sales increased $4.6 million as both the domestic and the international training continue to gain traction.

I will just pause right there and say that to my view as we look at the financial statement that is one of the, or maybe the most, important result of the first quarter is that increase in training sales.

We also in the first quarter had a decrease in our consumer, primarily product, sales of about $1.4 million. That is a combination of several things, as I talked about a minute ago. We have a decrease of more than that amount due to closed stores. We also, however, benefited from the fact that our first quarter of this year had five additional business days compared to the first quarter of last year. And those five additional business days happen to be the days immediately after Thanksgiving. So include those days.

Our our sales were up because of the additional days; down because of closed stores; down in some other areas just due to the some of the business being down that we will talk about a little bit later. But overall revenue increased the $3.2 million, and I view that as positive.

Another positive thing about our result is that gross margin held even at 61.4% year-over-year. That is considering, or in spite of, the fact that we had anticipated that our gross margin might even slip a little bit due to some extremely good operating benefits that were recorded in the order of last year, totaling a little bit over $1 million. But that decrease, if you will, or anticipated decrease in margin, was more than offset by good operations of this current year, both in our purchasing and in our operations, combined with a positive mix shift in the Consumer Business Unit and a positive mix shift between the Consumer Business Unit and the Organizational Solutions Business Unit. I would view it positive that our margin remained good at 61.4% compared to the prior year.

Again, for those who follow the Company in our past quarters if our revenues were up and our margins were up, we would certain be that our operating income would be up, because our costs were decreasing so significantly and so rapidly. But in this particular quarter our costs increased compared to the same quarter of last year, causing us to have a decrease in operating income of about $1 million.

Let me talk just for a minute about the cost increases. First of all, since just like the Company benefited from five additional business days and the impact that would have upon revenues, the five additional business days result in our SG&A costs being higher than the prior year. Associate costs alone was $1.5 million more than the prior year. And other costs would also be higher, just because of those five additional days.

In addition to that this was the first year that we went through the KPMG process related to Sarbanes-Oxley 404 testing and compliance. That work was primarily done in the first quarter, so our accounting, auditing and consulting cost related to Sarbanes-Oxley were at $1 million more in the first quarter than they were in the first quarter of last year.

Also, we had some increases of commissions and other variable costs related to the $4.6 million more in OSBU sales that we had this quarter. Additionally to those three items, we had some additional investments in new CPs and we had some contractual increases incurred in the quarter. We had some increases into marketing. And we had some benefit in the prior year that didn't repeat. The combination of all those things is another $1 million of SG&A increase of this year over the other.

Some of those we -- of all these items that I talked about, obviously the $1.5 million increase in associate cost tied to the number of days is a nonrepeating issue, except as the number of days each quarter might change a little bit. The SOX 404, we don't anticipate the same amount in the first quarter of next year related to SOX. We hope that we have increases every quarter in our commissions related to increased sales, so we hope that does repeat. And of our additional investments in CPs we do -- in our client partners -- we do anticipate that to increase. But there are other benefits that we incurred due to our significantly good operations that we don't expect to increase in future quarters, and those are benefits recorded in prior quarters. Then of course we benefit from -- benefit -- I say we have decreased cost due to the fewer number of stores also. All of that combined had about a $1 million decrease in our operating results compared to the prior year.

As you have looked at our financial result you can also see that our tax expense in this current quarter is related to what I was talking about a few minutes ago, is higher than it has been for quite some time. But it is the normal effective rate associated with this quarter. And we would expect this type of a rate to continue in the future as a percentage of our pretax income. Our effective rate might decrease a little bit as we go on. It is quite high now, but it is just our normal effective rate.

And then, of course, we had a decrease in our preferred dividends due to our redemption of preferred stock, which we redeemed a total of $50 million in preferred stock.

The result, while $1 million less than last year in operating result, there is some very positive things in there, primarily associated with the areas where revenue grew, and margins holding, and costs changes clearly understood. We would anticipate that in our second quarter many of the same things that I just talked about, particularly our benefits in Q2 of last year due to some things that would not repeat, plus some investments, plus some contractual increases we anticipate will cause our SG&A costs to be higher than last year, even though as always we are working very diligently every day to control our costs. And that increase in SG&A, all things considered, year-to-year could be a couple of million dollars in the second quarter.

We would anticipate our margins to hold good, and we will talk about revenues. But the impact of all that is we would expect our second quarter to be a result similar or maybe even -- or probably even a greater decrease in our operating result than in the first quarter. And then all of those things that we have talked about either reverse or restabilize, or whenever word you would want to use, so that we anticipate improved results year-over-year in the third quarter.

And in the fourth quarter we anticipate that those increases will more than offset the decreases of the first and second quarter such that we have an improved operating result for this year compared to last year. And our position for -- as long as our business issues related to revenue comes through -- position for good results in the future.

I hope that is helpful in understanding that while some complicated items in our results and some things we would like to be a little bit better, there are some very positive things in our financial results.

This is Bob Whitman. Next slide. Just maybe give you an overview of how we think we are positioned going forward. We really think there are three factors that position us for accelerated growth in both topline bottom line going forward. And we thought it might be useful to share with you what those fundamental -- the way at least we view it, and where we are in each of those three factors.

The first is that our breakeven point has dropped by more than half since 2001, and is expected, despite growth, to remain relatively flat moving forward.

Second, our revenue growth. We have moved from declining revenues to growth, and that growth is accelerating. And the most important strategic bets on which that growth depends are tracking, and tracking well. And we expect in the third and fourth quarters of this year to see the result of that, particularly. We are seeing it actually in every quarter, it is just offset in these first two quarters by these investments about which Steve spoke.

And then third, that our recapitalization efforts have increased a portion of profits, any profits which we do generate, which will flow on to common shareholders. We would just like to touch on each of these points.

First, on the point that our breakeven point has dropped by more than half, we expect to remain relatively flat. Steve, maybe I'll just ask you to just take everybody through these next couple of charts.

This will be easy and straightforward. As you can see, our breakeven point has decreased significantly from our highest level in FY '01, which we called a runrate on that year. So just huge and significant decreases in our breakeven point.

The decrease in our breakeven point is a combination of a couple of very important things. One on the next slide is that our fixed cost have decreased significantly, by approximately $120 million during that period of time. You would expect fixed cost to decrease significantly if your breakeven point is decreasing significantly, and that is what we see here.

We also have a positive situation, or a positive result, that our gross margin has continued to improve over at that time and our front line flow-through, if you will, or the benefit that we get from a sales dollar has improved over that time. If we're decreasing our fixed cost, increasing our margins, and increasing our flow-through, then our breakeven point is dropping significantly.

The change in fixed cost has been a major part of that. As you can see from this chart, we don't anticipate the same changes in fixed cost decreases in the future than we have seen in the past. Our future benefits will come from, hopefully, increased sales and increasing margins and improving mix. We are going to spend the same amount of effort that we have in the past in the future on controlling our cost, but we expect to spend a few dollars on investing in growth. We will have some inflation, some salary increases. We will buy some equipment. And so our fixed cost will increase -- we would anticipate could increase a little bit over the coming years, but still the -- hopefully a fairly significant reduced percentage of our revenues.

We have had a very positive result as it impacts our breakeven point and our positioning ourselves to go forward.

The net of it is that -- and we appreciate that explanation underlying it -- the breakeven point is expected to remain relatively flat as a result of those factors, even though -- even in the face of what we hope will be a significant topline growth.

And of course the main point is to the extent that we can achieve revenue growth, a lot of it should drop through. And that notwithstanding these first two quarters where the costs on a year-over-year basis are increasing, as Steve mentioned, one of the things that make give this nonrepeating benefit -- there were certain benefits received in the first two quarters of last year that offset SG&A and made it appear lower. In effect it was lower, but we got this these benefits, manufacturing variances, etc., that almost all came in the first couple of quarters.

So this front-line flow-through is not as evidence in the first two quarters where we actually had very positive front-line contribution. It was more than offset in the first quarter than will be, we expect, in the second quarter by these costs. But of course those then don't repeat we don't believe in the third and fourth quarters. In fact, there were some things last year that hit us in the third quarter relating to our international operations which actually went the other way and which should benefit us this year.

But the main point, of course, is revenue growth. If we move to slide -- the next slide -- I would like to really focus on this question, because it seems to us that if we can -- we have demonstrated this team has been very good. I really admire all that they have done to get these costs down and control them. It is really become a way of life and a culture here to really focus on cost. The key has been can we get the topline growing and keep it growing?

I think for us we feel positive about that for two or three reasons. One is that in fact we have been growing. If you look at the next slide each, a few years ago our big issue was could we actually stem the declines, then could we stabilize, and then ultimately of course could we get growing?

What you see in that slide is that from the low point -- and the low point may have been different in certain of these channels, so it is not a specific date -- but from their low point over the last for five years to where we are now, most of our major channels have seen growth, some pretty substantial. And in our store sales, which we don't have the percentage growth, it showed it went from 9% annual declines at one point on same-store sales to positive 1% last year. That is of course -- it stabilized, and then it is headed back the other way too.

So the key for us is, number one, that we actually have been growing. There's kind of a momentum building, and we're doing the things that we need to grow. But the more important thing is that the key strategic bets on which that depends, both our lead indicators and the key bets on which it depends, are really working. And I'm going to go to the next slide on that one and turn the time over to Bill Bennett.

Good morning everyone. This is Bill Bennett. One of the lead indicators that we keep an eye on in order to determine whether or not the bets are working is what we call our momentum indicator. For us momentum is defined as all the revenue that is booked, regardless of the delivery period. So whether or not this is an order for this month to delivery in this month or to deliver 12 months from now, we tally that up in order to get an indication of how the booking rate is changing.

As you can see from the chart, we are ahead of prior year through December by $8 million domestically. We are very excited about that, obviously, and it is being driven by a few factors. One of which is our booked days, or the days that we reserve on the books via our contract with a client to deliver at some point in the future, are up substantially for the year. Through December they are up 26% over the prior year.

Also, in that indicator is of course large contracts that have been signed which we have obtained during the first quarter -- or through December. Finally, a key component of that is our facilitator business. Or in other words, the revenue that is derived from client-employed traders delivering our material and then paying us a royalty for that. That was actually a little bit off through the first quarter of the year, which we had anticipated because we had a large certification event in December.

In other words, an event in which we certified a high number of our client facilitators in the new version of our leadership content that came out. That came off as planned in December. It was very successful in terms of revenue generation for the Company, and even more importantly setting us up for a good facilitator business in the future. At that point the certification revenue jumped up substantially, and now the facilitator revenue is catching up quickly as a result.

The bets that this is leveraged on can be seen on the next slide. Primarily there is two. The first bet is that both domestically and internationally we can add a certain number of new client partners every year, and have them over a five-year period meet or exceed the revenue ramp rate that we have built into place for our business model.

And the second bet is to do that while continuing a steady growth of client partners that we refer to as alumni, or the client partners that were in place prior to this new effort beginning in September 1, 2004, which was the beginning of our fiscal '05 year.

As you can see from the chart, we are ahead of both of those bets, both domestically and internationally. The anticipation is that 10 people will be added per year domestically, 10 new client partners, 10 people added -- net added -- internationally a year. We have been able to stay on track on the number added, as well as being able to stay on track on the ramp rate, and been able to maintain that ARE alumni base exceeding our anticipated growth year-over-year.

The economics of how this works can be seen on the next page. This is an example of a single client partner. And this particular example is of the -- traditional corporate client partner results might be a little higher or a little lower based on the vertical that they are in or the particular country they are in. But this is a domestic U.S. client partner economic model.

For the first 12 months after they are hired, as you can see, we're anticipating $200,000 in sales. And you can work down to the economics, and it is obvious, and would be expected, we incur a loss on a client partner in the first year that they are here. At one point during year two they hit the breakeven point. And as you can see from looking forward in the economics, in year three we really begin to experience the break out in terms of flow through of that revenue down through the division.

Look at this chart and then you can extend that out, imagining adding 10 people doing this domestically and 10 people doing this internationally each year for the last couple of years and going forward for the next several years.

Now the results of this, being able to stay ahead of the bets, has given us topline revenue results that we are pleased with. In Q4 of last year our domestic group grew 15% over prior year. International also grew, but not as much. In the Q1 of this year domestic grew 8.3%, but international surged at 26% year-over-year. For December, which would [brand] Q2 very strong, we have got domestic up 42% year-over-year, and international also up. And so we feel positive that the bets that we have lined up for the division seem to be working and seem to be creating the end result that we were hoping for.

We put these bets in place and say in any given quarter due to a big contract coming, or in this case the heavy facilitator sales that we had domestically in the fourth quarter and then again in December, it made the first quarter look a little flatter for our domestic. In any quarter they might be off, but on the cumulative basis what we look at every day is -- actually every Monday afternoon at 4 o'clock we review every client partner in the world to see where we have opportunities for improvement. And so that is the key revenue bet for the OSBU. And we feel good about it, and we continue to make those investments.

I think what is obvious is that if you combine the charts that Steve showed, where we had these fixed costs reducing dramatically, and they are now flattening, we're then now making these very heavy investments in hiring new client partners which generate negative results for the very first year and then kind of flattish for the second year, that we think the last year or so, even though we have had overall improvements on a given quarter you might be down -- and they had been a little flatter than some of the improvements we had in prior years that were driven by the cost reductions.

If our assumptions are right and our bets continue, you would see this reverse in the future. With cost remaining flat, the flow through from these new client partner ramp ups occurring. And other than in the first two quarters of this year with these unusual costs, the cost flattening out, and hopefully a lot of it flowing through.

On the CSBU side, I'm going to ask Sarah Merz to just cover the key bets that she has on how we're tracking on those as well.

Good morning everyone. This is Sarah Merz. We are going to work off of the summary slide as I talk two the different pieces of the Consumer Business Unit. There are really 3 key bets for the Consumer Business Unit. The first is to stabilize our retail stores division, the second is to grow consumer direct. My third is to grow the wholesale operation. I will take each one of those in turn.

Starting with retail stores, we closed out fiscal year '06 very strong, as Bob and Steve referenced earlier. We were successful in stabilizing retail. We believe that '06 was the year to hold the line. In fact, we're delighted that retail grew 1% over prior year on a comp store basis.

Going into fiscal '07, we continue to work on top and bottom line growth. And as we measure our stores on a comparable store basis per store week, we continue to see sales growth at the topline, and EBITDA growth at the bottom line. But as Bob mentioned earlier, we were definitely benefited by the five extra days that came at the end of the fiscal quarter.

We track very closely our core products. Those are our planners, binders and software as an indicator of the strength of the business. And it is the most profitable portion of the business, and we were very happy that our core products grew as a percent of sales from 75% last year to 87% this year. And, of course, we saw benefits on the bottom line from the more profitable business.

Our busy season is -- it ramps up slowly in October/November but then really climbs December and January. This year we did see a softer start in December, and did not see the surge of sales until the first week of January. And that was a trend that we understand. It has been industrywide and experienced by some of our wholesale partners.

At this point in time it is unclear exactly how the quarter will end up. We certainly are hoping that the late surge in sales and strong sales over prior year that we have seen in the last few weeks will compensate for the softer December, but it remains to be seen. As Steve Young referenced at the beginning of the call, we are anticipating that overall profitability will be down because of closed stores.

When you think about the profitability analysis and the decision to close a store or leave it open, the second quarter, or the busy season, is the wrong quarter of the year when those questionable stores really do deliver sales and very nice profit. So while overall in the year they may not be profitable and we may choose to close them, this is the quarter where we feel the pain of that because we did benefit in the prior years from it.

We have seen our overall profit level decline as expected, but we are confident that the retail division is strong, and we believe it can continue to grow.

As the we move out of the busy season, the drivers of growth really will be outreach. And we track that against some specific indicators, one of which is our ability to sell an integrated system. We measure that every day as a percent of transactions. And have set a goal for ourselves, and we're tracking ahead of that goal so far this year, and expect to continue to beat that goal going forward. We also are tracking as another lead indicator our ability to sell public program workshop seats, and are tracking well ahead of that goal.

Now as we move into the slower parts of the year, we will continue that focus on outreach, public program seats and systems selling, and anticipate that we will execute strongly against it.

So now as I move on to consumer direct, consumer direct for our business is the blend of the call center and e-commerce. We had a key bet to grow that business, and in fact we did grow it in fiscal '06. We have a strategy of transitioning our calls into the call center to click onto the website, because it benefits us from a business model profitability standpoint. And we were delighted that as the calls transitioned to clicks we also saw such strong e-commerce growth that we saw topline growth overall, as well as bottom line growth in fiscal '06.

The same trends have continued in fiscal '07. We have enjoyed top and bottom line growth. And we in this busy season broke prior year records on traffic and sales as we went into the busy season. We will continue to invest to grow our e-commerce business and to optimize the profitability of consumer direct overall, particularly as we start to look more internationally and there will be more opportunities to leverage the investments we made domestically.

Finally, the third part of our business is wholesale. Wholesale had a strong finish in fiscal '06. We grew double digits at the bottom line. We look very closely at the bottom line for wholesale because a very large portion of that business is royalty-based, so you won't see the full impact of the business on the topline, it really flows through at gross margin and at the bottom line.

The wholesale business really has three unique piece parts to it. There is the contract stationer business, and that is serving corporations, businesses of all size that will order via the Internet or phone. There is the third-party retailer business, the office superstores and the mass-market retailers. And then there is the government depot business. We really tend to analyze wholesale in those three piece parts.

If we take each one of those in turn, starting with the contract stationer business, we found in fiscal '07 that the contract stationer business has not been the strongest piece of wholesale. We are watching our partners really manage their channel, their pipeline, very closely and suspect they are feeling the same impact as our retail business with the slower build up to busy season.

Our depot business was hurt by a decision by the government purchasing group, GSA, where they decided not to carry in inventory any product that had a specific date printed on it. And our planner business is very much a dated business. The government made that decision because of obsolescence. And we hope to come up with some solutions to counteract that, but that did hurt our government business.

The bright spot really has been the third-party retailers or office superstores and the mass-market retailers, where we continue to strengthen our relationships and increase our distribution. The economics look a little funny in that you'll see the topline was soft but the bottom line was very strong. And that is because we took a large piece of business last year where we sold in the product and moved it a royalty base this year. While it is recorded as softness on the topline, it came through as very strong business on the bottom line. So in that we did see bottom line growth for wholesale.

Those are the three parts of the consumer business. Overall the revenue levels were lower than prior year, as Steve and Bob mentioned, due to closed stores. But on as profitability basis and per store we continue to see opportunity for growth, and we will continue to work on it as we move into the second and third quarters.

Just netting it out if you -- going forward we think that with the fixed costs remaining flat, relatively flat, we won't expect from the CSBU to have much topline growth overall, because it continues -- the final closure of the final stores that we had planned. But we think the operations and the flow through is good because the costs are so well controlled in that business. And then OSBU, of course, is where we -- the unit from which we expect most of the revenue growth.

So the three points we had made -- we made two. One is our breakeven point has dropped a lot. And the second is that revenue growth, we're feeling good about the bets. The third point, and final one, is just that because of the recapitalization efforts we have undertaken over the past years, the portion of any profits we do generate which flow through to common shareholders, obviously increased a lot, as we have paid off debt and redeemed preferred shares. So we are in a position where if we can deliver on the topline bet there should be good leverage overall, and particularly for the common shareholders.

That said, we have four areas where we think we have opportunities to accelerate our progress. One is with this significant -- that on being able to continue to hire and ramp up client partners. We need to build a capability that is even more institutionalized internationally because we have many international partners also for whom this is also their biggest bet. And of course although we only get royalty revenue, and so we have a muted impact on the topline, the bottom line impact is really significant.

We believe that we had made lots of investments over the last year to build this central capability and a field capability to recruit and train these new salespeople and to mentor them. Without having to add much additional cost, we believe we can expand what we have learned and create a better worldwide training capability for both consultants and for client partners, which for those of you we have used that term a lot, but is our sales force. So that is one area where, again, that is just more investment and refinement, but we continue to focus on that because it underpins such an important bet.

The second is we believe there's a lot of opportunity in our international business. And while it has already grown a lot, both top and bottom over the last four or five years, we have some real opportunities we believe for expansion and increases in profitability. We've got a couple of countries in which we operate where it is questionable whether we really ought to remain in those countries with direct offices. And we will be addressing those questions very soon.

We also think there're some opportunities in some big growing economies where it might make sense to have our own direct offices, either by joining with one of our existing partners or however we got into that. But we believe there are opportunities there.

We also are just barely scratching the surface in that as much as our international licensing business has grown, they are doing the same things we are doing, which is they're making new investments in their salesforces. They are investing in product development and translation efforts in their own countries, which have muted to some extent their results. We see big opportunities for growth internationally, both on the organizational side as well as on the consumer side. We have -- very, very few of our offices have significant product businesses internationally. We have almost no wholesale business. So we see those as opportunities.

Third, we see some opportunities, and have entered into some partnerships to go after certain vertical markets, or specific needs such as customer loyalty, etc. We have partnerships into which we have entered, or about to enter, in other areas which we think can extend our reach both domestically and internationally in certain vertical markets.

Then the final area of focus is in completing our recapitalization efforts. As a consequence of the efforts over the past years, as you know, we've gotten the right to repurchase preferred and redeem it, and we have done so. We have separated the warrants from the -- instead of having it be a convertible security, we've also repurchased some common shares. Our right to redeem the remainder of the preferred expires December 2007. So certainly a piece of a recapitalization to complete -- we would anticipate doing is to sometime between now and then complete the redemption of the preferred.

We also expect, if our plan -- and we have been generating positive cash flow -- if our plan continues to work and the things about which we have spoken today work, we will obviously generate lots more cash in the future. And while we're showing expenses -- tax expense on our financial statements, in fact for the next several years we will pay very little tax domestically. So we expect to generate a lot of additional cash.

The alternatives for utilizing that cash are the focus of a special committee that was formed a couple of years ago called the recapitalization committee that a number of our Directors serve on, and which meets as frequently as necessary, and certainly no less frequently than quarterly. And so as this committee reviews the various options we anticipate doing more things on the recapitalization front.

At that point I will end my comments and turn it back to Richard.

Thank you, Bob, and all that have participated. We will now turn the time back to our moderator to give us instructions as far as asking questions.

(OPERATOR INSTRUCTIONS). [Al Douglas], Merrill Lynch.

Gentlemen, nice to talk to you, thank you very much for having a call. I have been a shareholder for many years, and I still have shares in my account that are under water. But I would like to say to you that I think you have all done a great job in refocusing the Company, creating the business model and moving the Company forward. So I am very happy about that.

I'm very happy that you are having a conference call, because I truly believe FranklinCovey is an undervalued situation, and that calls like this will help the Street come to understand the value in FranklinCovey's stock and as a Company.

I would like to tell Richard that next time he has a call like this some of us out here at Merrill Lynch and other places that cannot access Go To -- or the system in which you have presented your charts. So I've been sitting here without charts. And next time I would hope you would consider those investors out here that are on systems that will not allow you to download things into them to be able to access it. So hopefully you will come up with a better system next time.

My main question is, and you started to address some of these -- some of the answers to this question, and that is we have a Company in FranklinCovey that I think is quite undervalued. We have a Company doing $280 million in revenue, with 20 million shares outstanding at $7 a share. We can buy this whole Company for $140 million. And so with an enterprise value of -- being treated at $140 million and a revenue base of 280 we are selling at 0.5 times revenue. And so I was surprised that you were not able to buy any more shares. And I would think that you would aggressively be trying to buy shares at this time with this kind of evaluation. So why don't I stop there and ask Bob to give us an idea of why we're not more aggressively trying to buy stock.

First, thanks for your comments and questions. As you know, the authorization to purchase stock, which we had in place for a lot of the last year, has certain restrictions on it, which of course are always in place when you're just doing a stock buyback. You, of course, are very familiar with all of those. And so it is not for a lack of effort. It is just that is the number of shares that we could purchase following the conditions.

So in terms of why we were not more aggressive in the past, we were as aggressive as the rules allowed us to be, given what -- the volume of trading. As I mentioned, the recapitalization committee has on its agenda, of course, the fact that if you're going to have lots of cash, and you don't have lots of places to put it, what are the options for utilizing it? And in addition to buying preferred, repurchasing common stock is obviously one of the things that should be and continues to be on the agenda, as well as other options. So I think it is a topic that is talked about all the time. And actually we have taken as much action as we could, given the authorization we had.

John Lewis, Osmium Partners.

This is Oliver Richner. I'm standing in for John Lewis. I have a couple of questions. The first one is related to your cash position. Historically you have -- you always wanted the cash position to be about $30 million minimum, sort of as a buffer or safety net. And I see that that is below -- the current quarter is below that $30 million threshold. I'm wondering if the thinking has changed regarding this cash position looking forward?

I think it has to some extent. Because for us the main point was to make sure that none of the investments we need to make going forward, or no opportunity, would be foreclosed for a failure to have the capital available, on one hand. And then second is to make sure in this restructuring period that you didn't risk running out of cash before you were really certain about the direction of the business.

As we have continued to have our basic bets track and have operations continue to improve, then you get more of a pressure in thinking, gosh, there's a lot of cash as -- these shareholders expect a higher rate of return on that cash than the 4 or 5% we're getting in the bank, and what should we be doing with it?

For that reason we made a decision six or eight months ago, when we stepped up and repurchased a lot of preferred stock, that we could feel comfortable with a lower threshold. I continue to be conservative, as does our whole team, about the levels, but they have been -- kind of our target level has been reduced from that level. That is one point.

The second point is our low point of cash in any year is the end of our first quarter, because of course that is the quarter in which we build up inventory. Well, two things happen. One, our organizational sales tend to be high in the fourth quarter, and so we have receivables -- a higher level of receivables and a little less cash. And second is the build up of inventories for our consumer business, both in our own channels as well as in our -- for our third-party partners occurs during that quarter. So that is always the low point.

And so it is just that, well, yes, we're more -- we're probably -- the threshold has dropped some. You will see our cash position come back up, and already has as of the end of December. I don't know the exact number, but let's just say it is mid-30s -- mid $30 million range, and we expect it to go higher. So we have excess cash even above our threshold and expect to continue to have -- to do so. Does that response suit your question?

Yes. My next question actually is sort of a follow-up. What are your plans to redeploy the excess capital? How would you rank your ideas on redeployment of the excess capital?

I think the thinking on it is twofold. The two factors are of course, one, you might think that buying common stock would have priority in terms of the return on capital. We have on the other hand, -- depending what you believe about the future.

And then the second issue, second would be buying preferred. We all have also the consideration of the expiration of the ability to buy the preferred. And so I think we basically do the analysis, and the recap committee does the analysis frequently to try to look at all the alternatives for investing capital, and kind of rank them according to attractiveness as well as the timeliness.

As I mentioned, I would hope that we would utilize cash this year to redeem the remainder of the $37 million -- $37.3 million of preferred. We would expect to still have some extra cash available to do something else. And of course buying common stock, dividending, going to one of our licensee partners and offering to acquire their business -- there are a bunch of things you could do that could be alternative uses of cash. That committee meets frequently enough that it is not like we're not focusing on this. I suspect in the next month it will become more clear where we have come out on that question.

My last question is regarding -- in the latest 10-Q you have a compensation table that shows in the next four or three years the cumulative operating income as slightly above $82 million. At least that is what I guess you're stating. This sort of assumes quite aggressive growth rates in the OSBU side. Could you be a little more specific on what you see growth rate on the OSBU side?

As you note -- whether we're right or wrong, and we will be wrong at some level, the management of the Company has been wanting to signup for an incentive program that does in fact require extremely aggressive bottom line growth and relatively aggressive topline growth. In light of the fact that we're still closing stores, and that our main objective -- when we face an opportunity to increase profitability, if it means going to a royalty model or a licensee model instead of growing revenue, that hurts us on the revenue growth but helps us on the bottom line. I think the management team has been willing to signup for an incentive program that requires aggressive growth. As I mentioned earlier, it is primarily driven on the OSBU side on the revenue side, and it is driven on both -- for both on the profit side.

So I think the easiest way to answer the questions is if you just do variations of the math that is on the one chart that Bill shared, if we are on the ramp rate, and we have been hiring as we disclosed at least 10 new client partners a year net domestically and internationally since 2005, I think you can do the math. And if we expect to continue to hire them on that rate -- again whether we get the exact ramp rate going forward or not, we don't know yet, obviously.

We are in the third year of the ramp and we are on track now. Most of the big surge comes from things we haven't yet experienced with these client partners. Although our other client partners, the other 80 or so client partners that we have that are in the alumni group have all hit the -- on the average hit those levels or above. That is what is driving it.

So you can do the sensitivities if you -- we have given you -- in fact, trying to be helpful in giving you all our expected fixed costs over the next few years, and showing you the contribution of client partners. I think if you just do various sensitivities, which we have not done for you because we just don't -- I think anybody can make their assumptions. If we do anything good, it will -- anything close to the expected ramp should drive significant increases in profitability in coming years. That is kind of -- that is probably as specific as I will be.

(OPERATOR INSTRUCTIONS).

For Al Douglas, I might just note that for those who were not able to get these slides as you went through the webcast, they are -- you will be able to get them on our website. And you will be able to go there, I think, immediately following this or soon. Immediate may be a couple of hours, but you can get all those slides.

There are no further questions at this time.

All right. We thank you -- thanks to all of you for joining today, and thanks for your continued support and interest in what we're doing, and we will continue to try to focus and make these bets -- and deliver on these bets. Thanks very much.

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. Good day.