Franklin Covey Co (FC) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter with 2009 Franklin Covey Company earnings conference call. I will be your coordinator for today. At this time, all participants are in a listen only mode. We will be facilitating a question-and-answer session toward the end of this conference. (Operator Instructions). I would now like to turn the presentation over to our host for today's call, the Corporate Controller, Derek Hatch. You may proceed.

Good afternoon, everyone, and thank you for joining us. Before we begin, we would just like to remind everyone that our presentation this afternoon contains forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward looking statements are based upon Management's current expectations and are subject to various risks and uncertainties including but not limited to; the ability of the Company to stabilize and grow revenues, the ability of the Company to hire productive sales specials, general economic conditions, competition in the Company's targeted marketplace.

Market acceptance of new products or services and marketing strategies, changes in the Company's market share, changes in the size of the overall market for the Company's products, changes in he training and spending policies of the Company's clients and other factors identified and discussed in the Company's most recent annual report on form 10-K and other periodic reports filed with the Securities and Exchange Commission. Many of these conditions are beyond our control or influence. Any one of which may cause future results to differ materially from our current expectations and there can be no assurance that the Company's actual future performance will meet Management's expectations. These forward-looking statements are based on Management's current expectations and we undertake no obligation to update or revise these forward looking statements to reflect events or circumstances after the date of today's presentation.

With that, out of the way, we would like to turn the time over today to our Chairman and Chief Executive Officer, Bob Whitman.

Welcome, everyone, and I'm glad to have a chance to speak with you today and thank you for making the time to join us. I would like to start out just making a few comments about Q2 and then I will provide a broader overview of our business overall during the quarter and as we see it going forward. And then I will have Steve take you through a more detailed explanation of Q2 and then open it up for questions.

In our Q2 though soft in terms of absolute results came in approximately as we expected it to. You see that the revenue for the quarter was down approximately $7.4 million. But approximately 60% of that amount had little to do with the fundamental strength of the business in the quarter related to other things I will speak about now. An additional 20% of that was as expected and discussed in our previous calls.

The first item of revenue I would note that obviously didn't -- had very little to do with the quarter was that as a result of softer bookings than last year's Q3s and Q4s we noted in last quarter's call, we knew we were starting Q1 and Q2 with less revenue on the books to be delivered during each of the quarters than we had last year. So we started Q2 with approximately $750,000 less in booked day revenue to be delivered during the quarter than we had last year. Because of strong bookings during Q1 and Q2, however, we started off our Q3, a month ago with in place bookings higher than last year. And I will discuss that in more detail. That was the first item of $750,000.

Second, public program represented about a $1.7 million decrease during Q2. And that was as planned. As you know, public programs are basically paid for, marketing events where we put on a program at a hotel and it generates revenue, but is basically break even on profit. As we also talked about in last quarter's call we have significantly reduced the program -- the number of public programs we are holding this year since they are harder to fill in this environment in terms of people responding to a director or companies being willing to send their employees there. And that will impact our revenue -- it impacted in second quarter and will rest of the year but essentially no impact on our profitability. So that is one that doesn't have a particular impact on the business.

The third item, is that we had in last year's second quarter, we had a couple of transactions which were for the sale or licenses of intellectual property. One which totaled about $2 million is noted. One for a $1.5 million was to a client in Japan which was completed in last year's second quarter. Per the terms of the agreement, we knew it wouldn't repeat in this year's Q2, however, it will or is expected to renew in the third quarter in the amount of approximately $800,000 with half of that to be recognized in Q3 and the balance in Q4. So we will see a significant portion of that benefit come into the third and fourth quarter which will serve to further strengthen of course our Q3 and Q4 results.

The other license which was sold during last year's Q2 to a large US company. And that license is still in affect and won't produce additional revenue in this year although the contract is ongoing. So that was the $2 million piece. Finally, our facilitator business continued to be soft during the second quarter. As expected. We expected this to decline -- it was actually a little more than probably $300,000 more than we had expected the decline to be and represented $1 million difference compared to last year.

Interestingly the vast majority of this decline was due to the clients not sending new people to become certified rather than them not ordering manuals and materials to support their existing trained personnel which they are still doing at about the rate as in prior years. To address this decline in new certifications we have just completed a series of 30 face to face North American -- what we call facilitator enhancement days, which were attended by approximately 900 individual facilitators which represents about 9% of our active facilitator base.

We expect that approximately 40% of these 900 participants will cross certify in additional categories as a consequence of these meetings. And we expect that to result in more than $700,000 of new facilitator revenue during Q3 and Q4 in addition to whatever we would normally receive. This Monday we are also beginning a series of virtual certification events to reach the other approximately 9,000 active facilitators who couldn't attend the live event. And we expect significant participation in these events and additional significant revenue to flow from these in Q3 and Q4. Therefore, really softening the impact of just what has otherwise been soft in Q1 and Q2.

I'm pleased to note that in March our facilitator revenue even without the benefit of any of these things was up actually more than double digits versus last March. And we also know of several big facilitator orders one of which will be recognized tomorrow and another one later in this month which total over $500,000. So we believe that in this quarter we will see a moderation certainly and maybe substantial elimination of the decline in our facilitator revenue.

The one unexpected decline in revenue for the quarter really was a $700,000 decline in our international licensee royalties where softness really began to appear in January and February. As you recall they were up 12% during the first quarter. Had started off in December looking strong. But in January and February, as the impact of the economy hit their countries really around the world, it softened. We are grateful that the forecast for this month and this quarter aren't for substantial declines and look like they will be flat. But we did have a decline particularly related to January and February.

So those are the main differences on the revenue side, which, of course had an impact on the bottom line that was significant but not -- most of it expected. Aside from this, actually our business momentum remained strong through Q2. We were very pleased with that. During our year end conference call we outlined three objectives. I think we reiterated them in the Q1 call. One was to continue generate strong bookings. If we could do that, we felt confident that with our cost reductions and such that we would have a strong back half of the year. The second was to continue to reduce cost and the third was to generate cash flow and monetize the assets on our asset sheet. I'd say that in Q2 we stated we feel very good about the progress we made on all these fronts.

Let me first talk first about -- in terms of revenue momentum. Bookings during Q2 were up more than 30% compared to Q1 and Q1 we felt very good about. Most of this new business is scheduled to be delivered in Q3 and Q4, a little bit rolls over into Q1. We won approximately 1,200 new assignments during Q2 compared to approximately 800 new assignments in Q1, which again we also felt good about. As shown in slide four which is called sustained momentum, our latest 12 month revenue momentum is up approximately $4.2 million as of the end -- over last year as of the end of Q2. Which means that over the next months we expect, just on the basis of what we have already have booked, that we will have $4 million more revenue to be delivered in the coming months than we had at the same time last year for last year's revenue. So we feel that things are solid in that regard.

What is driving that momentum is a lot of assignments around execution, customer loyalty, sales performance, the new trust practice that we acquired is having strong bookings. And in general, there are a lot of very strategic pieces of business that are being done that are both large and expect to be recurring. So revenue momentum for the quarter as I said we felt good about and was really as good -- good or better than we had anticipated and hoped for.

On the cost side, you can see that in slide five which is called central overhead cost, our cost reduction efforts have really been very substantial. And these -- while these are projections essentially all of these have been implemented. There is probably less than a million of it that hasn't already been implemented and that is in 27 different projects that people are working on. We are partially there. But it is just uncertain as to exactly what the number will be. We are confident that overall the costs will come out as expected.

During Q3 we expect our central overhead cost to be approximately $2.2 million, lower than last year. You see in Q4, that that increases to about $4.5 million during Q4. And that reflects both the ongoing cost reductions as well as the fact that in last year's fourth quarter, we had some overhead costs though not specifically deal related that nevertheless were non-recurring. They were somewhat deal related in terms of settling up of our long-term incentive programs and other things that occurred in the fourth quarter. Nevertheless on a year-over-year basis, we will receive the benefit of those in the fourth quarter.

The majority of all of these costs will also move forward and continue into 2010. As you see in the exhibit, we have -- every Friday forecast out four quarters. And we expect that each of the first two quarters will also have a couple million less cost than we had even in this last year. And so as a result of these cost reductions, we expect central overhead levels for the next three quarters to be approximately $9.5 million lower than during the same quarters last year. The reason I focus on central cost reductions is those are real cost reductions that are unrelated to volume increases or decreases. We also -- we have made some overhead investments in our new practices and customer loyalty and execution and trust and some of these other areas, but the business model of these covers all of these costs. So the addition of cost are also with an addition in net contribution.

Next is to cash flow and balance sheet. Despite the decline in our revenue and profits during the quarter we still generated approximately $4.5 million in cash flow from operations during Q2. This reflects primarily our efforts to reduce our outstanding receivable balances and Steve will talk more about that later. We currently have the sale of our Canadian warehouse building under contract and it is expected to, is scheduled to close very early in the fourth quarter, in early June. In addition to our efforts to monetize assets on our balance sheet the expected performance for the balance of the year, which I will discuss in a minute, should also generate very significant amounts of cash flow which we will use to add to our liquidity and pay down our credit facility.

So in terms of the outlook and guidance, I recognize that given the first half performance, it may be difficult to understand how we will achieve a significant increase in profitability in the second half. I can assure you that every Friday and again in preparation for today's call we model a wide range of scenarios of booking paces and facilitator revenues and have a big grid that shows, what if bookings are down this far and facilitators fell off further or whatever. But under all the scenarios that we went through today, and it is quite a range that is substantially below the current levels we are currently booking at, we really stand and feel confident about our original guidance that as we said last year within approximately 15 months after the sale of our consumer business unit we would achieve a run rate of operating EBITDA that when annualized would equate to the $23 million of operating EBITDA we achieved last year when we still had the business consumer unit.

In January, I said that we felt at that point there was a chance we could achieve that run rate even a little earlier than the 15 months, maybe by the end of this fiscal year. I would say that given the impact of the economy on our international licensee businesses, and just the general environment, it has probably pushed us back a month or two so that it is really back on our original guidance. But it appears more likely that we will achieve that original 15 month guidance during next year's Q1. Obviously I can't predict exactly how the economy will unfold but our modeling takes into account the scenarios as I mentioned that have bookings and facilitators revenues well under our current pace. And under any of the scenarios that we model, we remain confident that we are on track to meet our original guidance.

So, I hope this discussion helps somewhat in the understanding of how we see the strength of the business playing out over the next six months. As I noted, we expect to have more than $9 million less costs over the next three quarters with most of that all but a couple million of that happening in the next two quarters. We have a little more than $4 million more on the books to be delivered than we had this time last year and expect to continue solid to strong bookings.

Some of the largest contracts that we signed up in the first and second quarters, while it took a quarter to get them organized to deliver -- because obviously when it is a large company and they are planning to a whole sales force, to train their whole sales force, it takes a few months to get things scheduled. But we have begun to delivering on a number of those big contracts.

In fact, almost a million of revenue came in during the month of March related to some of these contracts that have not produced that much revenue in the past. And really our February and March as back end loaded as this forecast is, our February and March results suggest that we are on track. Our revenues came in as expected in February and we think so in March. Obviously, we just finished last Saturday but -- we don't have everything closed. But it looks like it will be as expected. We expect our costs to be in line with our expectations.

In fact, each month we have been a little better on our costs than projected. . We achieved positive EBITDA in February and fully expect that it will be significant and positive in March as well. We expect Q3 will have very substantial positive operating EBITDA with Q4 being even higher due obviously in part -- partially to the extra $2.5 million of expense reduction versus last year. But also due to the fact that our booking patterns historically and also in this year have a lot -- have somewhat of an uplift during Q4.

So with that overview and recognizing we will have time for questions in a few minutes, I will turn the time now over to

Thank you, Bob. Good afternoon, everyone. I will now talk a little more about the operating results of our second quarter. I suggest, of course, that you read our filed earnings release and quarterly report for additional information.

Our quarterly result is difficult to compare to last year due to the sale of CSBU in the fourth quarter last year. This is especially true in Q2 because our results last year include the CSBU Christmas season. So it is their biggest quarter. Please remember also that we retained a 19.5% voting interest in the products company. The results of that operation are and will be reflected in equity and earnings of investee. My comments now relate to the comparison of current year results to the prior year excluding CSBU.

First to our income statements. Bob mentioned the sales decrease and also explained the change so I won't talk anymore about revenue. Revenue, of course, the makeup of the revenue is the primary reason for a 380 basis point decrease in our gross margin percentage. The intellectual property deals that Bob talked about are essentially all margin. The licensee revenue that Bob talked about is essentially all margin. So decreases in those two items alone make up the majority of the decrease in our gross margin percentage.

Additionally we also have the remainder due to other mix, that of facilitator sales being down, as Bob mentioned, and amortization costs which are fixed is therefore a higher percentage of sales. So the summary of all that is gross margin percentage down due to mix. With each component of the revenue pretty much holding its gross margin percentage.

On the positive side, SG&A was down $900,000 compared to last year. Some of that decrease was due to decreased sales. But more importantly, as Bob mentioned, our restructuring efforts and cost control efforts resulted in a $2.2 million decrease in central overhead. We expect this trend to continue for the remainder of the year. Still on the positive side we added $1 million of cost to create the practices business model and as mentioned the practices are doing very well.

We always get questions about our tax rate being near 80% year to date. This tax rate, as you remember, is high due to unrecorded interest on the management loan program and our current ability -- inability to benefit from foreign tax credits. Please remember also as it relates to taxes that we have an NOL carry forward at the end of Q2 in excess of $25 million which will help reduce our actual cash out for taxes in the near future.

We also get questions about the number of shares used to calculate earnings per share. Please remember that when calculating earnings per share in a loss position, we must deduct the management loan shares of 23.5 million that are held in escrow. Therefore, 13.4 million shares is used in the calculation even though 16.9 million shares approximately are outstanding. So I hope that adds a little more understanding to the -- to our income statement.

Now, a little bit on the balance sheet. Receivables are down more than $5 million this quarter due a little bit to sales, but primarily due to our collection effort in this quarter. You will see a tax receivable of $4.5 million recorded at the end of the quarter. This amount will be used to off set future taxes due. Bob mentioned the assets held for sale that is clearly identified on the balance sheet and broken out. You will also see that we have our receivable from Franklin Covey products is $4.9 million. The note portion of this balance totaling $3.6 million was due in January. However, to accommodate our partner, we extended that due date and expect payment in January of 2010.

Payables and accrued liabilities decreased quite significantly due to the payment of accrued restructuring costs and transaction costs at the end of the year and also lower accrued bonuses and commissions and the timing of our EDS payments. We also paid, as we disclosed, about $1 million for the trust practice, primarily resulting in an increase to intangible assets. As a result our outstanding balance under the revolving credit agreement was $17.7 million. We still expect this amount to decrease significantly by year end, of course, depending on operations coming through as expected.

Now, a little bit on our cash flow statement. Cash flows from operations in this quarter as mentioned was a positive $4.5 million. Resulting primarily from collections of receivables and operations off set by decrease in payments of payables and decrease in accrued liabilities. But we are pleased with the $4.5 million cash flow provided by operations. We expect to also generate positive cash flows from operations in the future. We may hold some actual cash balances while still having balances borrowed under the revolving credit line.

We do not anticipate at this time any significant capital additions other than IT projects that we have talked about and our normal capitalized development costs. So we expect to have future earning out payments related to acquisitions as we have described in the Q. Overall, we expect to generate cash. So I hope that adds a little bit of understanding to our financials as you review them. Again, I would suggest that you look at our earnings release and our quarterly report for additional information.

Thank you.

I think we would like to now open it for questions if we can get some help on doing that.

Thank you, very much, sir. (Operator Instructions). Our first question comes from the line of [Amit Corsand] Amit, you may proceed.

Hi. Just a couple questions here. One is where are you seeing the strength coming from from your bookings you are seeing the month over month increases?

The bookings are coming -- I mean obviously given that we have 1200 new ones, they are coming from a lot of different places. But if you take -- I'd say there are four areas in terms of content areas or practice areas where we are having very significant growth. One is what we call the execution practice where organizations at these times are recognizing they have taken a bunch of steps. They have great plans for reducing expenses and doing other things and yet how do you get everybody in the organization moving on the same page towards that.

And so this four disciplines of execution manager certification process takes medium and large sized companies -- our clients tend to be a little larger size typically -- and where they might have a thousand units, thousands stores or hotels or whatever else and it helps to get everybody in the whole organization aligned around the one or two things they are going to do to execute on the plan. So that has been an area of significant growth this year.

Out customer loyalty practice, interestingly, although retailers, of course, have been perhaps some of the most hardest hit, they also recognize that -- one of our observations analysis over the years is that the biggest difference between great performers in customer loyalty and other areas and average performers isn't that they both have variability. Of course, they do. But it is that the best performers -- their distribution curve of performance is righter and tighter. On average they are better and there is less variability among their operations.

And so while most manager and leaders just accept the variability they have as a given, just because they know there is going to be variability, they assume they have to accept the particular shape of their curve. We can show them how to move the needle significantly on the customer loyalty and other scores. That has been something where the recognize that it use to be and not -- the ones that are righter and tighter used to be more profitable. Now the ones who are looser and left might not be in business. And so that is something despite the environment on behalf of large private equity firms and others we are getting assignments to work on their portfolio companies.

Sales performance, again maybe not surprisingly, but we have a particular sales performance methodology that is particularly attractive for technology or professional services firms. While we don't name our clients, if you listed the largest technology firms, probably seven of the ten largest -- let's say four of the seven largest are clients of ours where they are engaged in -- we have received assignments to train their entire sales forces. Also, other professional services firms in consulting and accounting and so forth find this methodology particularly useful for them. So , Amit I don't know if that's useful. But those are the areas where you have the biggest growth.

There is softness in the traditional business of going to HR professionals who in -- that segment of HR professionals who are simply buying a course to fill out a competency in their map, a lot of those people are doing less than they were. And so that part of the business is non strategic and you are coming in simply to sell based on features or whatever, that's kind of a losing proposition. But if you can layout -- I mean the big issues facing companies today -- not to extend this too long, but one is strategy execution, right? Or executing on priorities. The conference board did a study where of 93 topics, execution rates number one and number two. Not surprising we are there.

Second is everybody is trying to do more with less. And so the productivity offerings that we have even with management and things like that have enough edge to them saying well gosh, if I have to do more than less it would be nice if each one of my people knowing what the one or two things that are important to do to get aligned around it. There is enormous anxiety out in the market right now. Companies have gone through these big layoffs, they have done all of this stuff, but 30 to 40% of their employees' time at work is either unproductive or less productive because the are really so worried about their own situation. And so we have found clients hiring us to do some of the seven habits principles to people bring their own weather with them. Focus on the the things they can effect and they are seeing an impact in cultures.

We have some very large fortune 500 companies who have mandated this trust -- the speed of trust thing throughout the entire organization recognizing that boy in times like this when trust is low and people are uncertain that getting people -- not just teaching them about trust, but showing the two or three things they can do as a manager, being more transparent, et cetera, those are the things that are winning. So I hope that is helpful and

Just a follow-up. Are you seeing a deviation on the revenue per customer? You said bookings?

Yes. We haven't changed our pricing. We haven't been under pressure particularly to do that. You do see some difference in certain assignments. Actually hasn't -- if you look at the revenue per engagement, it is actually up this year. But that is primarily because it includes other elements, some of these portals and other things. But you certainly have in some pockets where people who are training are fewer people. Fewer people are coming to the class than they used to. But on average it has kind of been off set by these bigger more strategic engagements.

Okay. And then also, in the last quarter when you reported Q1 results you said that bookings were strong. And this time you are saying bookings are strong again. But it didn't get reflected in your revenues. What constitutes that you are going to have a great Q3 in operating income versus an operating loss in Q2?

Yes, well obviously I mean I can't guarantee that. But I hope that if anyone wants to go back to the transcript of the previous calls, I hope what we said was because we had strong bookings in Q1 and Q2 we felt that the back half of the year when those were scheduled to be delivered would be strong. I think there was a specific question where we recognized that very little of the business that we booked in the first quarter actually would come into the second quarter but some did. But mostly the bigger contracts and a lot of our -- the booking pattern scheduled stuff out into third and fourth quarters.

What we are booking now is heavily -- I mean it is somewhat third quarter but heavily fourth quarter and some in first quarter. So I think that is the natural pattern for us. Barring lots of cancellations we feel pretty good about where we stand right now relative to our expectations.

Lastly on your cost savings, could you just repeat the cost savings? I mean what kind of decline SG&A could we expect in Q3?

Yes, I think in my comments I mentioned that we think we will be -- and again, when you say costs, let's take a look at our central costs. Because it is cheating a little bit on our part to claim the costs if sales are down and commissions are down and so we are not including that. Just in the fixed cost structure, the central office and central support function, it will be down a little more than $2 million in the third quarter and a little more than $4.5 million. So it's really $2.5 million and $4.5 million so about $7 million over the next two quarters. WIth an additional about $2.5 million in the first quarter. So $9.5 million over three quarters, $7 million over two quarters.

Okay. Thank you.

Thanks, Amit.

(Operator Instructions). And our next question comes from the line of [Jamie DeYoung] from DeYoung Capital Management. Jamie you may proceed.

Hi, Bob.

Hi, Jamie. How are you?

Really nice job on the cost side this quarter.

Thanks. Yes, major effort.

Wanted to ask you if you could elaborate a little bit on the customer satisfaction portal and the progress you are making there on bookings? I'm down in south Florida right now and I have had an opportunity to go into about eight different Advanced Auto Parts stores and managers I have spoken with have said that that portal is really -- has really been incredibly valuable in helping them with going back to that existing customer base and driving additional revenue from customers. And they have just been very complimentary about your services.

I'm grateful both to them and to you for making the effort to go visit some of our customer locations. And so I appreciate that. I think just generally, I mean the reason why it is going well -- forget what we are selling -- I mean the fundamental result we are selling is one that basically everybody needs. Which is one, most people don't actually know where their pockets of great performance are. That sounds weird. You think if the big idea is there is all this value in moving the middle 60% toward where their top performers are. Actually it is harder than most people think to understand where your pockets of great performance are.

Let me just quickly, not give a long answer. But in this Coke study we did on behalf of Coca-Cola and the supermarket council a few years ago. They gave us a list of their best stores, nine different chains. And they looked like they were their best performers, just on an absolute financial performance that is how they ranked them. Ones we put Annie econometric over it to see how they performed to the relative to the strategic hand they had been dealt, relative to the quality of the real estate, competition, et cetera, over half of those they thought were great managers weren't. They were just basically -- the real estate was so good they were just doing what anyone could have done.

When you over laid then the customer loyalty score only about 23% of those original great managers were still great. When you put over the other screen the other lens of did they also win the engagement and commitment from their employees, there were only about 17 remaining. And so what this process does is someone is trying to move their operations righter and tighter. It is number one, really important to understand where your pockets are. And so with our big clients, this is a huge eye opener for them as they rank their stores.

And so I would say that piece of it which we call calibration is coming in and just helping people understand where they are so they can start to improve. It gives every store manager through the portal. They get their data every month. There are interviews going in all of the time. All the stores are ranked. And so it puts real attention behind it. Something that is reported up to Boards of Directors, et cetera.

The next question of course is once you have the scores, how do you improve it? Using the four disciplines of execution, we then take on what we call a wildly important goal, those stores that are under performing on the customer loyalty metric or some other metric take that on as a goal. So with that, that is kind of what we do. And the we add through -- we have a new offering called insights that can also go into the portal. Where it gives bite sized segments of training so that these same people, these store managers who don't have a lot of time for meeting because they are running the stores, can in five and seven minute segments get the best of our film library with questions they can discuss it with their team.

So that's what we are offering. And I'd say the reception has been very good. These engagements tend to be large and our target is retailers -- I mean we are focusing on retailers and lodging as primary segments. Because they both have lots of units. They have lots of front line employees.

They both have relatively high turn over among front line employees, so it is important to keep training, et cetera. And our target is people who have at least a hundred stores, but target may be more like 1,000. These are big engagements, they take a while to ramp up. We have won two new ones in the last month and a half that are significant and we have several more in the pipeline. And so I think while it is a relatively new practice, we expect to do quite a lot of revenue this year and it is a very high growth area.

Well that is great, Bob. The two that you mentioned that you have got as new bookings, are they also multi million dollars deals like the Advanced Auto Part deal?

I will say this, most of these start out with a pilot that is less than multi million. But they are each hundreds of thousands of dollars in the initial phase with the expectation that if we get through the calibration phase and the pilot phase that it will go bigger. And thankfully thus far most are moving forward -- have moved forward. But usually takes -- you come in. The deal takes two or three months to win the first phase. They test it out and then it rolls out. So we have obviously high hopes and the expectation, these are all CEO level sales. And they are not messing around with it. They are doing it -- to test it and make sure it is working right and the we hope that they will roll out.

And are gross margins are well above the corporate average?

Well the gross margin, interestingly on our customer loyalty business it is two pronged. On the portal itself, obviously those are extremely high margins for the things they get there. There is a data collection element that is low margin. Actually, which getting them their customer loyalty data scores et cetera, because to do it accurately as much as we would like to get away from e-mail -- as much as we would like to get away from phone calls, et cetera, we find we can't get a reliable metric that allows them to rank their stores appropriately without it. And so just as our practice head was the head of customer loyalty, Sandy Rogers at Enterprise Rent a Car, they still use the telephone as well/ So that is relatively low margin. But it is what makes it sticky is getting the scores every month. On the portal itself, obviously, it is very profitable.

Well, that's great. It sounds like you have a couple great new wins in the bookings here. The other thing I wanted just to touch on was. You did a great job given the cost side, the operating cash flow was quite good in the quarter. Now that you have strong bookings that should show up in the second half of the year and you have further cost improvements coming. And then you've got that Canadian business that is under contract, the operating cash flow barring some unforeseen disaster should accelerate in the second half of the year. So what are the plans then for this excess cash that you are going to be throwing off as we move into the second half of the year?

Yes, I would think, Jamie, obviously in the past, I hope we have exhibited that when we -- even though we haven't always done it when everybody wanted us to do it, that ultimately we bought back hundreds of millions of senior securities. Now, to balance that -- and so at the point when we feel confident that we have our credit line paid down and we've got -- things are on track with where we are headed, we would expect that in the future rather than just utilizing to repurchase shares that we'd probably have some mix of a dividend and repurchases at some point in the future. So we -- assuming we come in as we expect to, I would imagine in our fourth quarter, we would be having to have a board discussion as to what the right use of cash is.

Okay. And my final question -- I will jump into queue here is given you had reiterated your guidance -- your 15 month guidance and the strong bookings, is your confidence such that you have plans to get out on the road and meet with institutional [bi-side] firms and attend some conferences and hopefully get more coverage here as we move in the second half?

We do and I appreciate the question. Actually, beginning in the first week of May, because we will be in an open window then, for the month of May we have quite a lot of events and investor meetings and some presentations at conferences that we are doing during the course of May. So hopefully we will get a chance to get out there. And of course, even though this is back end loaded, we are actually through the first month now of our third quarter, so I think by the time we are out there, even though we won't be able to divulge new information about where we stand in the middle of the quarter, nevertheless, I think the fact that we are actually in the quarter that we believe will be the turn to positive EBITDA and significantly so.

Hopefully it will play out. We have also had some additional analysts -- we appreciate, Amit's on the efforts to cover the Company. There have been some other analysts, one of whom -- whose conference we are speaking at in May who have suggested that they would like to take on coverage. I don't know, of course, we don't control that, but it seems that they are making the efforts where sometime in the coming month or months that we should have some additional coverage out there which I think will be useful.

Thank you, Bob, congratulations on the great progress.

Thanks very much. Standing here and talking about our guidance, obviously I had a background in mountain climbing and I sometimes feel a little bit like that. Some of these climbs you just are very glad to get to the summit and -- but you are not able to predict you will be able to get there exactly -- you might be two hours late getting there and people are mad who are waiting around for you. But you have avalanches and other things in the way.

That's a little bit how we feel here. Is that we really are very determined to try to hit this guidance and feel like under a range of alternatives, we really can. At the same time on a given day you have somebody call you from the UK office and this deal got moved off and instead of happening in March, it will now come in April 23rd. You are still happy you are moving toward the summit. But on any given day it can move around a week or two as to when you think you are actually going to hit the number. But, like I say we think we will hit it -- we will get to that run rate level sometime during the first quarter. Thanks, Amit. Jamie.

And our next question comes from the line of John Lewis from Osmium Partners. John you may proceed.

Hi, Bob. Hi, Steve. How are you guys doing?

Good.

John.

Great, great. Just a couple of quick questions. You mentioned that you have the Canadian real estate. I think you said you have a contract and it should close in I guess, June, early Q4. I was just curious what was the amount that you could sell it for?

Well -- Steve you can talk about what the book value is.

We expect to sell this building at basically a break even with all of our costs and commission and everything else at our book value.

And I think in the Q it is about $1.7 million?

About $1.7 million, book value. Okay, great. A lot of good questions have already been asked, so let me hit a couple others that we have. I guess as long-term shareholders we see the stock price where it is as a significant opportunity for the Company to repurchase shares. And we understand what, Bob was just saying about the need to preserve liquidity and we are excited that the Board can hopefully consider that in early June. And just a lot of things have been moved around and Bob like you were saying the mountain climbing analogy. But I think we were originally looking for something like $20 million to $25 million in cash from operations and maybe $16 million in free cash flow. And given I guess that the Peterson note, I guess that is pushed out if I understand correctly until January 2010.

So I guess what I'm trying to figure out, I guess one of the big bets we have internally on the Company is when you are going to collect this cash? And then how are you -- I guess the opportunity to buy back stock. So I guess in round numbers given all the numbers we have discussed, or you guys have discussed so far, I mean do you think ballpark $20 million -- a little over $20 million in cash flow or cash from operations is realistic for 2009?

I'm not sure exactly how much you are forecasting will come in from additional reduction in receivables on that. So I don't know exactly how to respond. But let's just go back and make sure we are clear on what we mean in terms of the guidance.

Because what we've said in the past -- so if we get back to a run rate of operating EBITDA within this 15 month window equivalent to what we had before, that would say we are on a run rate to hit $23 million a year when annualized. That when annualized would be at $23 million of EBITDA. We think that number, we have said in the past means something like somewhere in the $18 million range of actual EBITDA, actual operating EBITDA is probably a little bit ahead of the run rate. Actually, it is probably a number a little lower than that, 16.5 or 17 would get you to the run rate. But we've kind of talked in terms of 18. So when we say where we think we will be, the guidance in our minds at least in my mind that's what we are talking about is $18 million in operating EBITDA by the end of the first quarter.

And so with that if you didn't have any improvement in the balance sheet -- just you had the same days sales outstanding that would be for the year -- say for the months through the end of the percent quarter that would be $18 million. You have some cap ex spending. We don't have much in the way of taxes, but we have some cap ex spending, we have some foreign taxes that we pay. And rent and interest and so forth. So to get to a number like $20 million, that would require something other than just operations in the EBITDA sense.

And -- but -- so the question is we started off the year with a lot of extra receivables as we talked about. We had $7.2 million from -- relating to the sale of Franklin Covey products. About half of that has been collected. We had receivables that were -- we had lots of days outstanding. That has been reduced substantially. But we have a significant opportunity to reduce that more. We had the sale of this Canadian building but we also used $1 million to buy the trust practice. So I would think there is cash flow from operations could certainly be more significant than the net of operating EBITDA minus cap ex. But whether it gets to that level depends on how well we monetize the assets on the balance sheet.

As Steve mentioned the tax receivable, that -- some of that will be monetized as it offsets income. Assuming we hit our numbers, we will have taxes to pay and it will off set that. So I think you have to add back from the operating EBITDA minus cap ex, minus some of these other things and then add back the change in the balance sheet to get your estimate. So I don't know exactly which ones you are using. But I think it would require maybe $8 million, of which we had $4.5 million this quarter, it might require something like $8 million improvement in monetization of the balance sheet to get into the range that you are talking about. Which doesn't seem unreasonable. It is just I don't know what assumptions you are thinking about

So if I were to be a little more conservative, something like $20 million in cash from operations and you have done I guess I think $2.8 million from the first half So call it $17 million . So it could be something like $8.5 million; $8.5 million in cash from

Yes, I'm still focusing on this 15 month window, John, just so that -- I mean the numbers I used.

Right, I understand.

By the end of the first quarter or something like that probably is a realistic view if we were able to hit what we think. And like I say, within quite a range. It is interesting, given the bookings, I mean how far out they get booked, it has less affect than you might think if bookings are 15% lower, it has a lot more affect on first and second quarters than it does on third and fourth actually. So, but we are not seeing that and we hope we won't.

I know this is looking out I mean we're I guess we are almost halfway through the year for you guys, I mean looking out to 2010, I mean do you think something like in terms of cash from ops given all the dynamics of your business, do you think $8 million a quarter is sustainable? I guess that could be a a little aggressive. But somewhere in that range per quarter?

Let's just again, think of what might be under pinning it. You can do the math better than any of us can. You are very sharp on that. But if were able -- if we said in the first couple of quarters, we think we will have at least $2.5 million to $2 million less in central overhead in each of the first two quarters than we had this year. Obviously, then by the time you get to third and fourth quarters of next year you won't have as much benefit from additional cost reductions because you will be annualized on those. If our bookings continue where they are now we will have then increases in EBITDA in both the first and second quarters.

So that ultimately if we are on a run rate of $23 million of EBITDA by the end of the first quarter then obviously it would imply that during the year you could get there. And so at $23 million of EBITDA we would still have some -- we'd have cap ex and the other things we mentioned. You would also have some continued tax laws carry forwards. And so the question again is how much more you are expecting to get from improving the balance sheet? Because if it was $23 million or $24 million, you wouldn't be getting $8 million a quarter of free cash flow unless you are also improving the balance sheet a lot.

And at some point the balance sheet -- you have everything out of receivables that you consider additional and your receivables will actually then increase as your sales increase.

Right. No, that makes sense. Thanks, that has been very helpful. I guess just one really last quick question, it looked like -- I guess you did that one acquisition with the Speed of Trust. Do you see other attractive niche practices out there that are interesting in terms of potential M&A or do you think you are pretty well situated?

I think we are pretty well situated generally. I think there are a couple. We are not so anxious that we go out and spend a lot of money or go into debt to buy one. The way we structure this purchase of the Covey link operation was an up front payment of $1 million and their chance to earn it out over five years. That kind of structure where going in you are maybe paying two times their latest 12 months EBITDA. Up front is a down payment. And where they can earn three times -- they can get three times multiple on future EBITDA so that we know that under any scenario it is accretive, if it can add to a practice area. We have had one we are looking at that is like that. But again, it is small amounts of capital required, so it is not going to be a major theme, I don't think, John. But there is one additional one that we've been talking with that could end up happening here in the third quarter, might add a few million of revenue and half a million of EBITDA or something in the year -- I mean in the next -- in the ensuing 12 months. SO they are not big things but they fill out certain content categories that we think help our offerings and so if they have significant strong sponsorship behind them, they're are some attractive things to do.

Great. Thank you very much. I will jump back.

Thank you very much. I know our hour is about up. Are there any other questions?

(Operator Instructions). At this time, we are showing no further questions available. Mr. Whitman, you may proceed.

Thanks very much. I just want to again express appreciation to each of you for one, for joining the call today, for your great questions.

I hope that we are making an attempt to be as transparent as we can for people. We've historically we have given no guidance. We felt this year particularly we needed to since there was such a fundamental change in the business, number one because of the sale of consumer business last summer. And two because of the nature of the downturn and the assumption that in this environment we wouldn't be booking 1,200 new assignments. So, I hope this is helpful.

We recognize the risk that we have in going out and reaffirming. But we feel good -- we actually feel confident from everything we can see today. But this will need to play out. We are glad it is less back end loaded when we said it a year ago. A lot less when we said it then and less than the end of the year or first quarter. At least there are some signs of flowers springing in the winter landscape. So, hopefully we will be on track here as we move forward. And hopefully you also understand the basic story and if we get to the summit an hour early or an hour late, but still get there, we hope you will still include us in the summit photo.

Thanks, very much, to everyone, and have a great rest of the week. Thanks.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.