Franklin Covey Co (FC) 2009 Q3 法說會逐字稿

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

Thank you, Wayne. Good afternoon.

Before we begin our presentation this afternoon, I'd like to start off with our forward-looking statement slide and the information on it. We remind everybody that this presentation 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, but not limited to the ability of the Company to stabilize and grow revenues, the ability of the Company to hire productive sales professionals, general economic conditions, competition in the Company's target market, market acception of new products or services and marketing strategy, changes in the Company's market share, changes in the size of the overall market for the Company's products, changes in the 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 and influence, any one of which may cause future results to differ materially from the Company's 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. 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 remainder of the call or this portion of the call over to Bob Whitman, our Chairman and Chief Executive Officer. Go ahead, Bob.

Thanks, Derek. Appreciate everyone joining us this afternoon. And we look forward to answering your questions after a short review of the results reported here just an hour ago.

In Q3, our operating performance was actually meaningfully better than that we achieved in Q2. As you will note, we had very unusual tax provision which Steve will address that was several million dollars. But otherwise, the quarter reflected good continued progress on each of our major objectives. Despite hitting our target, our cost targets, however, it fell somewhat short of our expectations as more revenue than expected shifted from Q3 to Q4. We'll talk to that. Our operating loss of $1.2 million reflected $2.2 million improvement, compared to that achieved in Q3. But still reflected a loss. We expect to generate an operating profit in the fourth quarter, and hopefully every quarter thereafter.

Operating EBITDA, which is in previous calls, we've identified as excluding severance or restructuring charges which were $900,000 during the quarter, so excluding those costs, operating EBITDA was $1.7 million positive during the quarter, which reflected a $3.2 million improvement compared to Q2. But fell just approximately $2 million short of our expectations. All because of this revenue shifting which we'll speak to.

We were successful in meeting our cost reduction targets and the gap, therefore, was primarily due to revenue expected to be recognized in the quarter that shifted into Q4 a little bit into Q1. It's still on our books, thankfully, but due to clients who themselves are struggling to meet their quarters and might in a given month all of a sudden shut the door to all training, even if it was planned and then reschedule it for the next month, the start of the next quarter, those kinds of things that affected us on the margin. This shift of revenue was definitely a disappointment, but I don't believe it reflects any fundamental weakness in the business. In fact, as we'll talk about here in a minute, we showed progress during the quarter on each of the key initiatives outlined in the previous quarters and I'll speak to those one by one.

As we mentioned, this shift reflects the difficulty really of predicting precisely when we will deliver and recognize training revenue in the current economic environment, because of the kind of things that clients are doing and needing to do, but most of the revenue that shifted is still in our revenue backlog, and it is expected to be realized primarily in Q4 with some shifting until after the summer into Q1. It's important to emphasize as I did that most of this reflects a shift in timing with respect to our customers as our cancellation rates have really remained pretty much in line with our historical trend.

While predicting the exact timing of certain revenue may continue to be difficult in this environment, we are still moving up the mountain, using a metaphor from last time, so expect to achieve our stated summit, so-to-speak, of getting back to a run rate of operating EBITDA without our consumer business unit, which is equivalent to that we achieved when the consumer business unit results were included. However, with this slippage of certain of our revenues in this quarter, it's likely to be a few months later if that were to continue into the next quarter. As I'll explain below, we have and are taking additional business model improvement actions that will help to mitigate further shifts, and so that whatever that impact of shift wag be, it would be muted, to some extent, by these other cost reductions that we have undertaken in the last month or so.

In addition, we're grateful we continue to win multi-year contracts in our various practices, and our quarter-to-quarter volatility, we hope will therefore lessen overtime as there's more contractual revenues represented. To give you some visibility into what we're seeing in the business, I'd like to briefly review each of the four key objectives which we've outlined in the past few quarters. First is to continue to build our revenue momentum and pipeline. We felt that although we may not be able to predict the exact date on which things will happen, we want to be building momentum and backlog and that we're continuing to do.

First, as to reported revenue, if you'll note in slide four, that while the revenue for the quarter was down versus last year and was expected to be down, our trend did improve markedly versus Q2. In slide four, you can see adjusted for the planned decline in public programs which as you know are just marketing, it's really just marketing dollars that we get paid for as we put people into programs in hotels and other things that give them public exposure, in this environment we cut that way back. It has little or no effect on the bottom line because it's kind of a breakeven proposition.

But aside from that, which was planned from quarters back, and the effect of FX, revenue declined 9%, compared to last year during Q3, which compares to a year-over-year decline of 15% in Q2. We expect an even smaller, in fact, very small year-over-year decline in Q4. And so that this revenue trend is improving quarter by quarter, and we feel good about that.

In terms of booking pace, the amount of revenue we booked during Q3 was strong. It was up a little bit compared to last year. Last quarter, we said that we expected our facilitator revenue, which as you remember, is revenue from our licensed facilitators that work inside client companies where they order materials, to do training on their own, that after being down by more than 20% in Q2, we expected the facilitator would rebound and it did, and facilitator revenue actually was up 9% during Q3, and so after being down 20%, as we had said before, primarily driven not by a failure by existing facilitators for the materials but the failure of more by the failure of companies to send new people to be certified.

That reversed in the third quarter. We had a lot of new certifications. We feel that's a very good sign for future orders. It also affected the quarter and we had both good materials orders and good certifications in Q3 as expected.

Our revenue backlog is very solid. We have a little more than $3 million more revenue on the books to be delivered over the coming quarters than we had at this time last year. And our current booking pace, we expect the backlog will grow further during Q4. Our bookings were holding up well.

Our pipeline of sales opportunities is significant, and we're actually beginning to see some deepening in that with a meaningful increase in the amount of potential business we're discussing with existing and potential clients. There's also a sense of firming in the delivery schedule associated with our bookings, although a given client on any quarter end could say we're going to cut this off this month and move it to next month. Nevertheless, it feels that that's happening less across the thousands of clients that we have. And as noted earlier, everything we see suggests that revenue will strengthen further during Q4, compared to Q3, and with the revenue backlog and bookings, that should carry forward into Q1 where we would hope to see continued improvement in that regard.

So in terms of revenue, the basics that we've been focused on are good. We were disappointed in the slippage. A lot of it occurred in four or five key clients that moved revenues into June or July, and in one case into September, but have reconfirmed their commitments to us.

The second key focus for us has been to get our business model in line so that we can hit EBITDA to sales targets in the mid-teens. We took a lot of costs out during the year. As I mentioned, we've done other things to address the business model at current revenue levels, and let me just speak to each of those. In terms of the reduction in central costs, as you know, a portion of this cost reduction effort entailed dismantling the holding Company structure and other central costs we had when we operated multiple divisions before the sale of the consumer business last year.

Last quarter, we provided an outlook for our central cost structure for Q3, Q4 and Q1. And two of next year and slide five provides an update to that forecast. As you see in slide five, we met our target for central cost for Q3 and since we've already completed the necessary cost reductions to meet the targets that are outlined here, so this is just running it through, we're very confident in our ability to meet the central cost targets for Q4, Q1, Q2 and Q3 of next year that are set forth in slide five. As shown, we expect the central cost in Q4 to be more than $4 million less than last year.

That will help us obviously a lot in the fourth quarter, in addition to the revenue momentum and over the next four quarters we expect it to be approximately -- expect our central cost to be approximately $8.5 million lower, even than this year as we annualize these cost reductions. And so on that one we feel good, the costs have been -- the cost adjustments have been taken, were taken before, so we've always had confidence in that number. In terms of further business model adjustments, in addition to these central cost reductions, we're also actually significantly reducing the central administrative and sales support costs associated with our domestic direct office operations.

Over the years, in addition to providing the common central support and guidance functions for our 38 international licensee operations and our eight direct operations, we've also assumed certain central operating functions on behalf of our domestic direct office, such as contract processing, collections, accounting, et cetera. Over time, a duplication of certain of these functions has occurred, happening both centrally and in the field and really at this point, we were going to take that out, complete the decentralization, have those costs in the field and we expect an approximate -- additional $5 million of central costs which don't relate to central overhead but sales support and administration that's being duplicated or in one way or another centrally here, and we expect as I say, another $5 million that will result in approximately another $5 million in year-over-year cost reductions in next fiscal year.

And this is part of our commitment that with the slide in the shift in revenues, we've just confirmed, just rededicated ourselves, saying if that's where the revenue levels are, we're going to go ahead and get the cost levels to the level necessary to get to this business model that we've been targeting and expect that revenues will increase some next year but if not, that we can still be in there on the cost structure and so from the cost side, we feel good. We've had been able to meet our cost targets over the years and in this year and so we feel solid about that. And good about the revenue momentum that's building.

Third objective has been to monetize our balance sheet in three ways. One, by reducing our receivables, days sales outstanding, two, by reducing inventories, and three, selling our Canadian office warehouse building and we've made good progress in each of those fronts. Receivables, since the end of Q1 our overall receivables balance has been reduced from $26.4 million to $19.9 million. Our team has done a great job, and our goal is to achieve days sales outstanding of 42 days within the next four to six months which would bring that down several million dollars further.

Inventories have also been reduced, approximately $700,000 over the last quarter or so, and we expect to be able to reduce these inventories further in the coming quarters. And on July 2nd, we did close the sale of our Canadian office warehouse building for approximately $2 million US. And so the principal objectives there moving forward, it's not the easiest time obviously to collect from others as they have challenges, but our team has actually done tremendous job in terms of the receivables that are significantly past due are really very, very small now.

And then our final area of focus of course has been to successfully launch several new revenue and strategic initiatives. One is in our practices. We have a number of these practices. Our customer loyalty practice continues to grow with the addition of several significant new clients this year and a pipeline that's deepening. With the customer loyalty portal and data collection revenue, a significant portion of that revenue is both contractual and recurring and we expect to build that.

Second, our execution practice has continued to do well in this environment. It's been something that is actually on the minds of CEOs a lot. The conference board in this survey of approximately 3,000 CEOs found that execution is their top priority, out of 92 topics, and our execution methodology, the four disciplines of execution is being adopted inside a number of lodging, supermarket, retailing and manufacturing companies.

We're also doing a lot of significant execution work with the Department of Defense and other government entities. We see continued significant growth opportunities in that area. Sales, training, our sales training practice is focused on complex professional service type sales. We have a number of very large accounts in this area. And several of the major engagements, which we signed earlier this year, have now finally begun to generate revenue. During this quarter, a little bit and scheduled additional blocks of additional training for Q4 and Q1. So we would anticipate some significant growth in the sales training area as these contracts really ramp up into fourth quarter and first quarter of next year.

Also in our practice, the education practice, including our new Leader In Me K through 12 school solution has now been launched, and because it's easier to do much of the training of teachers, administrators when schools are not in session, we expect to generate significant amount of revenue from this program in the fourth quarter, and we have a deep pipeline, more than 130 schools who are in various stages of the sales or implementation pipeline, and that should then continue into other quarters after this launch and has a recurring revenue component and portal revenue component with it as well.

We introduced two other products, one called Live Clicks, which is our proprietary webinar platform, it's our answer to the need for high quality effective training delivered by the Internet in one or two hour chunks. Through Live Clicks webinars we provide affordable and and time efficient workshops on high demand topics in the marketplace, such as time management for Microsoft Outlook, project management fundamentals, financial intelligence, this project will reach an audience who heretofore has not been able to access our training solutions because of the time, distance or budget constraints. We launched this new platform in January and have already trained over 4,000 people. We'll do about $1 million in sales this first year and expect that number to grow significantly in the coming years as we expand the topics we cover as well as through our improved marketing efforts, and this new platform is easily translatable and is being adopted by our partners in countries around the world.

Insights just launched a couple of weeks ago. It's an exciting -- we think exciting web-based tool that lets team leaders access a library of 63 award-winning video-based learning modules. These modules are short, 20 to 30 minute segments so leaders can use them as part of their normal team meetings. People can view the videos and participate either in person or remotely, similar to WebEx. The modules contain a video, a set of provocative questions and a process to set and track goals. There's also an online forum and assessment that recommends which modules to take. We just launched this product, and are very encouraged by our clients' initial reactions, so we just signed our first deal, which opened a week or so ago, $200,000 for a school district. We think this opens training for a lot of front line people who for us have never had that chance, but does it in a way that is uniquely Franklin Covey, with these very, very high quality video segments that are excerpted from our own films, et cetera.

So overall, we're excited about what the future holds for Franklin Covey. Our practices are picking up momentum. We improved the value propositions to our customers and truly are helping them to work on very, very mission-critical problems in execution, loyalty, sales and profitability performance in this environment.

While the current environment has made it more difficult on the margin to predict when we will deliver our revenues than it maybe has been in the past, nevertheless, most of the revenues are predictable. It's really on the margin, the 10% or so that's shifting that the expectations, and we're -- thankfully those shifts are being delivered, either will be delivered or are in our backlogs and will add to our fourth quarter and first quarter sales. So we've made significant progress as I mentioned in our cost reduction initiatives, and took additional acts that will deliver further savings in fiscal 2010. Having just in conclusion, having exited the consumer business, we really believe our business model will be quite compelling.

Our direct offices as we mentioned, have low fixed costs, high variable costs. In 2005 to 2008 they achieved revenue growth of 42% and EBITDA growth of 92%. We think they're well positioned with a lot more strong salespeople even than we had during that period of time, and that we will resume that growth, and I think that as we see each quarter's revenue improving, we think that's starting -- is really in process now.

Our licensee model is good. We grew royalties from $4.2 million to $10.2 million over those same four years, 2005 to 2008. Of which, apples-to-apples, 4.2 to 8.8 because a couple of offices were converted, but that means that their sales grew from approximately $25 million to $75 million, and these licensees are getting larger, they're gaining momentum and really are large enough to make some impact, so as those revenues grow, with lower central costs that we already had, and with the additional cost reductions steps we've taken this year and are undertaking this summer, we think we'll have good flow-through, so we're basically encouraged by the underlying trends in our business and expect to report continued progress in the fourth quarter and beyond. I'm going to turn the time over to you, Steve, to talk about this tax provision and anything else you would like to talk about and then let's open up for questions.

Okay. Thank you, Bob. Nice to be with you, everyone. And probably it's best to get this tax provision discussion out of the way first. It is a -- we consider it unusual to show a $2.9 million tax expense following a $2.2 million pretax loss. You would expect a several hundred thousand dollar tax benefit instead of the $2.9 million tax loss. If you look at our earnings per share, that is significantly impacted by this tax provision.

The tax provision is a result of several things. First of all, please remember that we do have a very significant NOL carry-forward that's high 20 millions. So our taxes paid during any year is very small, and our tax provision is primarily an adjustment to deferred taxes. In this year, at the end of Q3, we determined it reasonable to adjust our year-to-date tax provision to be a number that would be consistent with what we would experience if we closed our books after three quarters. We decided to make that change, realizing that if we did not make the change in Q3, then this unusual tax provision would most likely occur in Q4. So we adjusted our provision again to make our year-to-date provision reasonable as if we had closed our books. That's what we did.

The reason it is an unusual amount is because please remember that we -- even though we don't show interest income on our management loan shares, the interest income is taxable interest. We are unable to benefit from our foreign tax credits until our net operating loss forward is consumed and we are experiencing international profits while as a Company overall we're showing a pretax loss. So the combination of all of those things, the simple math required us to take a $2.9 million provision, even though it was a $2.2 million pretax loss and given our tax structure, we would have -- in a, quote, normal circumstances, you would expect a several hundred thousand dollar tax benefit associated with a $2 million pretax loss. So I hope that that's a meaningful explanation.

Now please let me go back and Bob mentioned the key things, key points related to our balance sheet and our P&L. Let me just mention a couple of others. Accounts receivable, we are pleased about how the balance has come down, and we are targeting a days sales outstanding that we consider to be very good, especially in these economic conditions. Please remember that as we reach that days sales outstanding number, that our receivables will then still go up and down as our sales go up and down, particularly in the last month of a quarter. Either compared to the -- so as our receivable -- as our revenues hopefully go up quarter-to-quarter, and year-over-year, our receivables could increase even when the days sales outstanding is decreasing, but we're very, very pleased with our effort of reducing receivables, especially given the current economic condition.

You'll note as you study our balance sheet that we moved the receivable from an equity method investment of $3.6 million to long-term from short-term. That's to reflect modification of the note that we accepted during this quarter and is most likely going to result in that note being collected after a year period, rather than during the year, so we moved that to long-term. We believe that the note is collectible and we will collect on that money as the Franklin Covey Products has EBITDA come in in future years.

You'll also notice on the balance sheet that our accrued liability number decreased by about $5 million. I mention that because of the cash impact that that has. That decrease in accrued liability is associated primarily with commissions and bonuses that are usually high at the end of a year, August, and are lower at this time and a little bit lower based upon the financial result. So we had a decrease in our accrued liabilities.

We also had a line of credit of $16 million at the end of the quarter. Based upon our discussions with JPMorgan Chase, modification of our line there, our revolving credit agreement on June 30th was -- the available amount was reduced from $25 million to $20 million. Then August 31st will be reduced to $18 million then on November 30th, to $13.5 million. And those are what we view -- I think are the key points on the balance sheet, in addition to the things that Bob mentioned.

On our income statement, the tax provision is the key item. Please understand that in our $18 million of selling, general and administrative expense, we have $900,000 of primarily severance, related to actions we are taking to reach our business model. So I would obviously concur with Bob, that we're pleased with our ability to control costs and go toward an acceptable business model. We have significant reductions there. I'm also pleased with our gross margin, that it is holding up. We see some change related to mix but the gross margin on the different elements of our revenue are holding up good. We're pleased about that.

So overall, we do look to reduce cost in the future, as Bob mentioned, optimistic about revenues and so Bob, those are the points that I had related to -- I'm sorry, one additional thing. You'll probably notice as you look at our weighted average number of common shares, 13.4 million, please remember that in a time of net loss, we deduct from the number of outstanding shares the 3.5 million shares held in the management loan escrow program. And the difference in the share count from last year to this year is a reflection of a few shares that we've entered, that we have issued in our ESSP plan and some shares granted to Board members under our disclosed plans, reduction is primarily the impact of the tender offer.

So Bob, those are the comments I have related to the P&L and the balance sheet.

Great. Maybe I'd just highlight two things, Steve, thanks so much. One, with respect to the reduction in availability under the credit facility, that was something that was agreed to a year ago in principle when we sold the products company. We had an outstanding facility of $25 million. We had a bank group that was involved, and actually at that point our lead bank and only bank, JPMorgan Chase, said they would be very happy to take the whole thing but asked whether it would be comfortable for us to reduce that over time, which we believed it would, and this reflects a more gentle reduction of that than had originally been anticipated a year ago, but it reflects the fact that we expect to retire our credit facility through operations and continued improvement of the balance sheet and that we're just not a capital intensive business.

So this has been a very -- it's not a punitive or difficult thing. It's actually been a very responsive thing from them. Also, for those who are new on this management stock loan program, we talked about it before, but there is effectively a receivable which doesn't appear on the balance sheet and then there are these shares and I think many, at least with whom I've spoken to, have recognized that there either ought to be receivables of around $50 million on the balance sheet and the shares, or in purpose of analysis, not having the receivable and not having the shares and so the 13 million or so may actually be a good number to use. At this point we'll turn it over to questions and answers and look forward to talking with you.

We'll ask our host to make that possible. Is our host available?

Yes, I'm here, actually.

We would like to open it for questions and answers, now, please.

We have someone in queue, actually. (Operator Instructions). We have Hamed Khorsand from BWS Financial. Please proceed, sir.

Hamed, how are you?

Good. This is actually Mahid calling in for Hamed.

Hi, how are you?

Good. I note you mentioned that the July 2nd, you guys closed the property sale in Canada.

Yes.

What effect is that going to have -- what effect does that have on EBITDA and what would the EBITDA look like without the property?

Okay. Steve, do you want to go ahead?

Essentially, no impact. We've had the assets -- the sales price was $2,250,000 Canadian. We've had the asset held for sale for a quarter or two. There's a -- it's a building that we owned, so we had depreciation and interest, historically, on that building. We have a small amount of expense there as we were just keeping it open, but nothing material or significant.

Okay. And were there any new Fortune 100 customers won in this quarter?

Let's see. Yes, we have a couple. We don't name them, but we have one in our sales performance practice and one in our customer loyalty that are Fortune 100. We probably -- I mean, the answer probably is that we've had significant probably number of new training things but in terms of major engagements that would involve the C-suite of the Fortune 100 Company, we have had a couple of new engagements. We do a lot of training in the Fortune 100, Fortune 5 and Fortune 1000. In most of them, we do some training, but in terms of winning major strategic engagements we have a couple in the quarter where they're at the C level.

And I think maybe I misheard this, if you could clarify. Were bookings in the third quarter higher than in the second quarter?

They were. And they were also higher than in the third quarter last year.

What was the biggest difference that propelled the increase from earlier in the calendar year?

Maybe respond to it in two ways. One, by channel, they happen primarily -- the biggest growth occurred in the practices, which included as we talked about before, customer loyalty, execution, sales performance, education, those kind of things, so in terms of practices, they were there. In terms of offerings, that relate to those things, that are the strategic things, execution and sales related, although actually our bookings on a year over year basis, the bookings in our normal training were also pretty solid and off a little bit versus last year, but not much.

So it was a more solid quarter, I think the facilitator business being actually up is I think a good indication that the training business, which that makes up approximately -- facilitator business domestically is $30 million a year, approximately, which represents almost half the direct office's training revenues and so for that to come back we think is an indication that people are opening their pockets a little bit and allowing people to be trained and certified for future training and while they may move, the revenue may move around a little bit, it's a pretty good indication we think on the training business.

Okay. I know you went over the objectives, the four objectives, you kind of touched on EBITDA. Is EBITDA $24 million run rate by the first quarter still on the table?

So what I said in the report is with the slippage in this quarter, I would say -- let me first of all go back and -- the run rate we've talked about is to get to EBITDA of somewhere around -- trailing 12 months EBITDA of $17 million or so, we would be on a run rate for the $23 million of EBITDA that we had before. And so our goal has been within that period of around 15 months from the sale, which would have been the end of the first quarter, to get to that run rate, which would be in the $17 million operating EBITDA range. My comment was that with the slippage in this quarter by a couple of months, that that -- if that were to continue, that would put us a few months later in getting to that goal but we still expect to get there. Any slippage would be mitigated to some extent by these additional cost reductions that we're doing but I think we would say it would be a little later.

Okay. Is that a -- are you saying that's a worst case or is that something that should be expected?

I would say just that right now, given that there was more slippage than we had expected in this quarter, even though it's still in our backlog, I think it's possible there would be slippage again in this quarter, which we're forecasting slippage in what we're thinking about now but I think if slippage continued for the next couple of quarters, it could put us a few months later.

Okay. Those were my questions. Thank you.

Thanks.

Okay. Thank you, sir. Our next question will be from John Lewis from Osmium Partners. Plead proceed.

Hi, how you guys doing?

Great. How are you?

Good, good. Just to understand, I had problems hearing, did you say the real estate in Canada sold in early July and how much was it for?

Go ahead. Closed on July 2nd, which was last Thursday for approximately $2 million US. I think it was $2.2 million Canadian, Steve. Yes, $2,250,000 Canadian.

And did you also collect part of the note from Peterson?

We did not collect a part of the note. We have ongoing receivables payable to them that we continue to have activity on and collections and we continue to orders from them, so there are month to month ongoing transactions with Peterson Partners, but we did not collect any on the note.

The note itself, which was due last January, we talked about I think as you know in the last couple of quarters that obviously the retail business was hit hard as many retail operations were, and so they needed us to -- needed our cooperation and we were already subordinate to their bank debt anyway but we were happy to cooperate. While we're confident they'll get it paid, really their high season won't be until December, January. Depending on the level of performance they achieve, they can either pay us a portion of that at that time, or more likely as Steve said, it's more likely, unless things -- the economy were to rebound significantly and affect retail, that the collection would really begin in significant amounts the following year.

Okay. And so -- okay. That's helpful.

We accrue interest at I think 8% on that and we expect to ultimately collect it all.

Got it. Can you talk at all about the customer loyalty portals and what kind of -- how many customers you have?

Yes, we can. We won't name them but we have -- again, the target here is retailers with more than 1,000 units. We have lots of opportunities to do small things, so we could have 50 accounts right now if we were willing to take customers with 50 or fewer units but we're not. We're trying to focus on big, multi-unit operators who have a CEO who's committed to the process and to doing all the execution things that are needed, so in that category, at least -- not necessarily all of our engagements are for a full 1,000 stores to start with, but our target is to have 1,000 stores, each paying us at least $100 a month for the portal so these are $1 million accounts.

To date we have a practice that is going to be approximately $5.5 million this year and it includes around eight accounts. So that includes ones where we have -- we're just starting up, as well as ones we're in full roll-out. But all of them have the potential to be large accounts, generating $0.5 million plus to $1 million plus a year and that's our target, is really have big, strategic relationships because the nature of what we do is I think particularly -- it's not that much easier to sell to a small client and the impact of having a Fortune 1000 CEO really committed we think can help us grow the practice a lot faster.

So you'll do about $5.5 million in customer loyalty portal revenue for 2009?

Yes. Yes, in this fiscal year, Yes. And then we expect to grow it next year.

Do you have any specific number of clients you're shooting for for 2010 or -- ?

We'll finish our final plan but I would say that we would hope to add another eight to 10 accounts next year. There's a lot of work that goes into these and getting them starting up and so if we could add eight to 10 clients, each of them had the potential in the ensuing 12 months or by the end of the 12 months to be on a run rate of $0.5 million to $1 million a year, we would feel good about that in terms of the practice and that would give us significant growth in that practice.

Essentially double.

Yes, we should -- that's the idea would be to do that and we think each of these practices has the potential, within four to six years, to be a $15 million to $20 million practice or else we don't start it.

Can you talk at all about -- I know you gave a little bit of color on Live Clicks and Insights but can you just talk about how customers are reacting to that product so far.

I can. Live Clicks, we've seen a little more than 4,000 people since January which is ahead of our -- what we anticipated when we launched it. That will continue to be something that I think can have good growth. I don't see that as much of a growth engine as Insights should be. Insights really allows us and we're focusing in our execution practices and customer loyalty on multi-unit operators with tens and tens of thousands of front line employees who historically have not really been able to go through traditional training, and many of whom would never necessarily go home and take the training online. And so these little modules where in their team meetings they can look at a five minute film of John Wooden talking about leadership, stop and ask two or three poignant questions about what this means and our team really opens a big market for us. It also does in schools and other things.

Everywhere there are lots of distributed workforces, this is a product that allows us to get to these front line training and it also involves the leader in the training rather than using an HR person. So we've only had it available actually for sale here for the last 10 or 12 days, and we're glad that we landed this first for a couple hundred thousand dollars. But for us this should be a big product. For us, we anticipate that these products, if we launch a new product with the development costs, et cetera, it needs to be able to add more than $10 million of revenue a year within a few years and we think this one has that potential.

Both in terms of new clients that maybe would not have been able to do training with us, one. Number two, worldwide intellectual property contracts with existing clients where they see this as a resource and third, really as an add on to training that we have, because we have the ability if we sell a Seven Habits course, we have six of the film modules that actually support that course where we could actually sell them an add-on for a few thousand dollars to help support the training. So we think this will be -- this platform will be with us for a long time. We'll keep adding to it.

I'm sure it will get segmented into various things that support certain courses, as well as certain problems but for us this is an area where we think it's a -- the reaction has been tremendous. The pricing point for what they're getting is very attractive and so in our premarketing and demonstration area, we're getting a lot of interest. We suspect this will be a good product. It will also increase the recurring revenue because 1/12th of whatever we sell will be recognized in each month as long as the contract exists so it will help us in our effort to move recurring revenue up from the high 40s to the mid-60s over the next three or four years, we think.

Great. I'll jump back into the queue and --

I hope that was responsive.

That was. That was. Appreciate it.

Thanks.

Thank you, sir. (Operator Instructions). Our next question will be from the line of John Lewis from Osmium Partners. Please proceed.

I think last time, I guess a quarter or two ago, one of the I think ideas that you were going to revisit was the potential for a buyback and/or a dividend policy and given what's happened, I guess that obviously would probably be pushed out a quarter or two. Can you just give any kind of thoughts on how you see those two opportunities?

Sure. Sure, John. I think you're right, in terms of the timing, it's likely to be something we think about after the next couple of quarters but I think philosophically hopefully it's been -- we've shown over the years as we've redeemed -- paid off senior debt, redeemed $87 million of preferred and bought back close to $45 million of common, that we have a business that we think is not very capital intensive. We don't anticipate doing very many acquisitions, which maybe is a negative, but we don't.

We think our capital intensity in the basic business will be reduced from somewhere around -- working capital to sales of 20%, our target to be in the 17% or even less, and so as a consequence, as we get -- as revenues solidify with our cost structure, we anticipate we'll generate a lot of cash, and beyond maintaining a cash reserve that is sufficient to make sure that we can weather anything that we see on the horizon, that and probably keeping some credit line out for the same reason, we would expect to return the capital to shareholders one way or the other. Or maybe a combination, so all I do is reaffirm. I don't know what the right mix is.

Some would argue we just ought to buy common stock, even though the float is already not very big, and that just we should take the -- look at this as not a private Company but look at it and make good investments and buy back stock. Others are concerned about the effect that might have on the ability of shareholders to invest. We'll look at some balance and my guess is that it will be some balance of those two and we'll be something that we'll be thinking about in the -- probably in our Fall or Winter Board meetings.

Great. I saw an article in Investors Business Daily, I don't know, about a month and-a-half ago, where Steven Covey laid out some -- I guess he said his target of the Company reaching $1 billion in training and consulting revenue over the next decade. I was just curious, what do you guys -- I mean, I guess what are your thoughts overall in terms of short and long-term growth and given all these products, all the new products that you're releasing, it's tough to get a feel but it seems like it should be fairly decent topline growth.

Yes, I mean, I think if you look at the last four years, the four years, 2005 through 2008 as we started to add salespeople in our eight direct offices, those direct offices added 40%, 42% revenue growth which was around $32 million of revenue and had huge flow-throughs so that EBITDA increased by 92%. We have in place a bigger sales force than we had then. We have still a lot of opportunities for hiring new salespeople. And so whenever things stabilize in the world, we don't see any reason why what we accomplished in a time when we were trying to figure it out, how to hire people, figuring out our mentorship programs, all of which we now have in place, not that it would be easy but we don't know why it would at least be possible to do that in our direct offices and have at least that kind of growth going forward, our licensees we talked about grew more than doubled during that period of time and most of them are now gaining stride and gaining strength.

Many of them were start-ups at the time and so they were going through their start-up problems. Many are now quite significant. Our licensee partners in I'd India have more than 300 people on the ground. In China, 80. All of them are growing rapidly. We think there's lots of opportunity there and then we didn't have in the past years these practices which in addition to supporting field sales in both our direction offices and licensee offices, also go out and make national account sales themselves and like I say, we wouldn't be -- these we think can be over four to six years, $15 million plus, each of them and so we do believe and are positioning ourselves and have been positioning ourselves with these new platforms to have significant topline growth through what we think is an attractive field model between the direct office and licensee models with low central fixed costs that we hope will not increase at all and I think we feel good about our ability to make that -- at least keep the cost down and feel optimistic about our ability to grow the revenue.

Last quick question would be -- and I guess you hit on it briefly, just international, what do you see over there? Sounds like India's --

International, now, if you gross up the revenues from our licensee partners and add -- they're around $75 million of revenue and our direct offices generated another $38 million so actually we have more -- we now have more revenues, although not reported revenues, because license fees, but more revenues coming internationally than domestically. Our direct offices only cover countries that have around 500 million population really and so our growth really will be international. We think we can grow a lot domestically because we're only -- our penetration level is small relative to the number of sales territories that we have. So we think we've got lots of opportunity domestically but clearly internationally there are enormous opportunities and we're reorganizing some of our functions this simpler to put more emphasis on certain key countries and really treat our top 10 licensee partners almost as though they're direct offices with the same kind of interaction and work with them as we have with our direct offices because of our potential's so significant.

In a country like China, I mean, we've got less -- as -- they've been growing very rapidly and they're a wonderful partner, but the revenue we have from China today represents less than one of our direct offices domestically and so the kind of growth opportunity there and in India we think is particularly robust, in Brazil, in Mexico, and in Europe, really. We have a lot of wonderful partners who are just gaining stride so we're optimistic about their ability. They haven't been unaffected by what's going on in the world. But nevertheless, they're holding their own as well.

Great. Thanks again, Bob.

Thank you, John.

(Operator Instructions). And our next question will be from the line of Julian Allen from Spitfire Capital. Please proceed.

Hi, good afternoon.

Hi, Julian. How are you?

Great, thank you. Could you spend just a minute and review some of the cost reduction numbers you gave on the call. I think I heard that you mentioned that there was an $8 million plus run rate, cost reduction, that you would be having the benefit of from 2010, but then I think there was another number of about $5 million of additional cost reduction identified. If you could just sort out those numbers for me.

Thanks, Julian. You got exactly right. I probably didn't say it very clearly. The first, I think it's slide five, just shows the quarter by quarter comparison of our central costs, so these are the actual costs of running central operations in our headquarters offices and the year-over-year and I think that adds up to around -- should add up to about $8.5 million just in the coming quarters. So that was the first number and just the run rate impact into next year. Is that the first half of your question?

Right. Exactly.

And so that's one thing and then I was just saying that the other thing we've taken on this summer is that we've had other redundant costs that are handled centrally, but they're really what I would call domestic direct office support costs so the five direct offices that we have in North America, unlike our offices in Japan, the UK and Australia, which are self-contained, they do their own accounting, contract processing, collections, et cetera, we have historically done those functions on behalf of the offices centrally in Salt Lake and of course it makes sense that you would think it would be less expensive, but over the years we've also started to move some of those functions back into the field and we've been kind of straddled, where in some offices we have financial -- the financial functions in the office and some of the contract processing in the offices, while we're still maintaining systems, et cetera, centrally.

Our IT costs are much, much higher in supporting these five offices on a per office basis than the systems we use internationally which are very good, and do fine. So we're just saying that we're -- in addition to the central costs already under -- that are already reflected in that chart which were implemented in Q1 and Q2, so those really are things that have already happened and therefore, we have good visibility that they -- what those costs will be in the future. In addition to that, we are taking out what I would estimate will be approximately another $5 million of costs as we really complete the decentralization of our -- the functions that are currently supporting our five direct offices in the US.

And so just reducing duplicate costs, reducing layers of sales support and just letting those offices operate as our international direct offices do and as our licensee partner's offices do, we just want to make sure that we're very clear that our central office is there to support all 46 of our licensee and direct office partners, that we're really not in the business of running domestic operations. Did that help at all?

Great. Thank you.

Thanks.

Thank you. Our next question will be from the line of John Gruber with Gruber & McBaine Capital Management. Please proceed.

Hello, John.

Hi. I just -- the slippage you saw last quarter, how much was that and since the quarter's half over already, almost, what have you seen further slippage so far this quarter and if you saw the slippage, why isn't that helping this quarter, not hurting this quarter?

I think it is helping this quarter. So we did see slippage. The nature of it was primarily in terms of a smaller number -- there's slippage of little things all the time that goes on in the business, but the things that were more noticeable were some of these larger sales contracts and some of the other practice contracts that shifted for one reason or another, either because they're reorganizing their sales force and wanted to wait until the reorganization was complete before they did the training or were trying to. Were still committed to the training and needed to move it to July or whatever. But that's the nature of the slippage. And it just comes in a lot of different forms. But it's primarily large contracts that for one reason or another have deferred but retained a commitment.

To your second point, being five weeks into the quarter, we have seen some slippage but we benefited from some of the slippage from the third quarter. We're benefiting from that and we'll expect to benefit from that in the fourth quarter. And right now some of the slippage, I can think of three contracts that have slipped a little but they've slipped within the quarter from a June to a July or a July to August and so the dollars involved have not been as significant as what we saw in the third quarter. But I think it's still possible, John, there would be --

How much was the slippage in the quarter? You didn't say.

It was a couple million, probably $3 million, close to $2.8 million of slippage.

Thank you very much.

And I think it could -- we could have a number like that in the fourth quarter, although we're not seeing it.

So if it was 2.8, slippage again, the 2.8 you will then make what your originally thought about before.

We'll pick that back up in the fourth. So we would expect the fourth as I mentioned, the revenues, the revenue improvement would be significant in the fourth quarter with our cost reductions in the fourth quarter, the EBITDA impact and operating income impact should also be very positive and significant.

Thank you.

Thanks.

And at this time we have no additional questions. I'll turn the call over to the speakers for final remarks.

Just thank everyone very much for making the time late in the day where many of you are to be on the call. We appreciate your interest and want to assure you that the slippage is painful for us too, every day, but I think on the other hand, we don't see it as a fundamental problem and we expect that our new offerings and our continued efforts in these practices will allow us to catch up on the revenue line here in the coming quarters, so thanks very much and appreciate all your efforts on our behalf. Thank you.

We thank you participants and our speakers for joining the call today. This concludes today's presentation. You may now disconnect. Have a great day.