Franklin Covey Co (FC) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2009 Franklin Covey earnings conference call. I will be your operator for today. (Operator Instructions). I would now like to turn the conference over to your host for today, Mr. Boyd Roberts, Corporate Director of Finance. Please proceed.

Thank you. Good afternoon. 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 including 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 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 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 or influence any one of which may cause future results to differ material from the Company's current expectations and there can be no assurance of the Company's actual future performance will meet management expectations. These forward-looking statements are based on managements 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 said, I will now turn the time over to Bob Whitman, Chairman and CEO.

Thanks very much, Boyd. Thanks to everyone for joining us today we are glad to have the chance to talk to you today about our fourth quarter results and our outlook for Q1 and also about the key factors we believe will drive top and bottom line growth this year and make us a real growth company in the year's ahead. I am happy to be able to report after seral quarters where revenues slipped from expectations due to customers postponing training and consulting engagements, the revenues did firm up during the last half of Q4. As a result, the Q4's revenue came in pretty much as expected with revenues of $34.5 million, and adjusted EBITDA, adjusted for the write off of our note from Franklin Covey products, and restructuring and other special costs of $3.3 million, which is both a big increase relative to our third quarter and to other quarters last year as well as to last year. Steve will discuss this in more detail in a few minutes.

To give you a sense for the revenue trends, just refer you to slide four. You can see that it looks back to Q3, and shows that beginning in Q3 we started to have sequentially quarterly improvements in revenue after things dropped off significantly in Q2. Revenues in Q3 increased a small amount compared to Q2, and in Q4 they grew substantially -- at least improved substantially compared to Q3 and grew 12.5% or $3.9 million compared to Q3. After adjusting for public programs, which is the right hand side of the chart. As public programs are really just paid for marketing programs that have very little impact on the bottom line. We consciously began cutting those back in Q1 of last year. So, adjusted for that, Q3's revenues increased about $1 million compared to Q2, and in Q4 revenues increased by almost $4 million or 13% compared to Q3.

In slide four, you can also see that the year-over-year revenue gap narrowed in Q3 compared to Q2 and as expected improved quite a lot further in Q4. In fact, in August, our year-over-year revenues were actually up 5% compared to last year, and that is reflective both of the traction we got during the second half of the quarter, as well as the fact that we historically have at the end of August a particular push on our facilitator manuals at the end of our fiscal year. We do that every year but this year it was a little larger than it had been in previous years and that contributed to overall revenues actually being up year-over-year in August. During our planning and budgeting sessions this past summer we expected that once you adjusted for public programs which we expect will be down another $1.5 million this year because we did more public programs in Q1 of this year than we will do -- or last year than we will in this year's Q1, we'll hold it pretty well even thereafter.

We explained that the year-over-year gap would narrow even further in Q1 and disappear all together in Q2. We knew it wouldn't completely disappear in Q1, or at least we thought it wouldn't since the first half of last year's Q1 was relatively strong, and particularly in our international operations and among our licensees. Through the first two months of Q1 however, we are happy to report that revenues have been even stronger than expected, for the first two months of revenues were up $2.3 million compared to what we expected for those months, and even up slightly for the first two months to last year exclusive of public programs. So, even when compared to a very strong Q1 internationally last year, we are tracking well in revenues, and what's perhaps most encouraging is that we are seeing strength in each of our major channels. It is not all in one or one making up for the other, really across all major channels we are seeing things solidified.

As shown in Slide five, because our bookings in -- because of strong bookings, in Q3, and particularly in Q4, we started off our fiscal year in September, with bookings -- revenue on the books which was about $3.9 million higher, than when we began last year's Q1. And our revenue momentum during the first two months has also continue to be strong, for example licensed facilitator purchases, these are facilitators who were certified and work inside client companies which last year we reported were down for the first quarter and which through October were down almost 24% last year. Or up 32% today, during our Q1 to date this year which is well over $1 million to date. So on the revenue front, we are feeling that while we are not saying that the world is all now a rosy place that we feel we're gaining traction, the pipelines of business that we're proposing working on are deeper. The willingness to make a decision about these kinds of things has gotten a little better. So we are feeling better about our ability to meet our revenue targets. And that's as I said being reflected in our first two months of this year's performance as well as in August. On the cost side, as you know from our previous quarterly calls, we reduced cost significantly in fiscal '09 compared to '08. In our central cost centers for example our central general administrative expenses declined by $12 million in '09, compared to '08, and the annualized impact of these reductions will also benefit this year. These benefit have been substantial to be in the first two months of this fiscal year as well.

We have consistently met our cost targets over the years and with the combination of the significant cost reductions completed during the first half of fiscal '09 and the completion of additional business model adjustments during Q4 we started the fiscal year with almost all of the cost reductions necessary to meet this year's targets already in place. As a result, we are very confident we will meet our cost targets for this fiscal year, 2010. So from an outlook perspective what does all this mean for the future? Say in the statement, we expect to be a real growth company, moving forward. Over the past years we have taken many actions which have allowed us to exit non core businesses and activities, significantly reduce our capital intensity, and increase our profitability. These actions however have also resulted in a reduction in our reported revenues, because we closed more than 100 retail stores in the past, distributed products on a royalty or wholesale basis resident through our own channels, converted the Mexican and Brazilian offices to licensees, and sold entire business units such as premier and the consumer business unit.

These actions, combined with the fact that the accounting treatment was often not on a discontinued operations basis of mass effect, that our core training and consulting business was actually -- has actually been the significant growth business even during those years. As shown on slide six, in the years 2005 to 2008, revenues from our eight direct offices -- five in North America and three international. Offices grew from $79 million in revenue to $112 million, an increase of $33.2 million which is 42%, and a compounded annual growth rate of a little over 9%, and their EBITDA contribution grew from $17.8 million to $34.1 million an increase of 92% or $16.3 million. As you will see later during these same years, the royalties which we received from our international licensee partners, grew from $4.3 million to $9.2 million on an apples to apples basis which is 114% and including the conversion of Brazil and Mexico grew to $10.2 million which is 135%. So this kind of growth was really -- we'll talk about the things that grow back growth and the things we think will drive growth in future, but, I wanted to give you an idea of just directionally where we think the business can go the next few years, and I will do that through a series of slides kind of buildup different assumption so you can see what underpins our confidence going forward.

On slide seven, you can see that because of our business model improvement and cost reduction efforts in fiscal 2009, this isn't a forecast but if we were able to just hold direct office and licensee revenues at slightly more than even with what we did last year -- and I say slightly more than even because if you just take into account the pricing -- the same volume of business that we did last year, but with the pricing -- 2% price increase that we implemented the end of August, and then the fact that we had a couple of offices that actually grew last year --and we just assumed that if you grew those the same amount that they grew last year. Then the course with, we had good growth in our practices which I will speak to later -- $5.5 million in revenue growth during 2009 in our practices. If they just achieve that same amount, of course their margins are not as high, but you would have over $16 million of EBITDA, without real revenue, without really much of an increase in the level of sales activity from what we had actually in 2009. I thought that might be a useful reference point to just say well, if things stayed the same as they were in '09, we had the same basic business activity that we had last year because of the cost reductions, operations would improve like to around $16 million.

The next slide eight, shows the pro forma impact of other business model improvement actions which we have already taken or which are in process, which would add another $5 million of EBITDA when they're fully annualized. These costs include for example, transitioning our IT system to a new less complex platform, which we expect to implement mid year this year and it will save us $1 million in this year but then it'll save $2 million next year, and actions similar to those. So with no additional revenue, but just with the pro forma impact of other business model actions that have already been set in motion, we would add, that would add another $5 million or that would be approximately $21 million.

The next slide shows that if field revenues, whenever field revenues, this means our direct office, and licensee revenues will return to the level they were at in '08. We are not saying that would happen in this year, and we are not forecasting it would but when ever it returns to that level that would add another $9 million given our current cost structure that would add $9 million to EBITDA meaning that on revenues that we have done before, with the exception of the practices, there would be almost $30 million of EBITDA., Then finally, if after achieving this level, we were in the ensuing years able to achieve the same kind of growth that we did just in our direct offices and licensees in 2005 through 2008, had no more growth in our practices and assume we actually had some additional costs associated with this growth, that would take the EBITDA to more than $40 million.

So the idea, again with, while this isn't time bounded or giving specific forecast by year or by quarter, the idea is that without doing very much more than what we have done in the past in these business units because of the cost and business model changes we think that the growth in EBITDA over the coming years can be really substantial. We also have some new growth initiatives which we will talk about now, that we hope can accelerate this, both the timing of achieving this, and maybe allowing us to move beyond that going forward.

So I refer you to the next slide, 11 which you recall -- six key drivers of growth. These are really the six factors that we think will drive -- that are underpin our confidence that we can grow and grow rapidly in the future. First our significantly reduced and flexible cost structure I'll have to ask Steve Young to speak to that. Second, our large and loyal client customer base will give you some idea about the recurring revenue that comes from those customers and we discussed that. Third the growth in the size and capabilities of our direct sales force is one of the major drivers of our growth in 2005 to 2008 and the continuation of something we expect in the future. Fourth, the growth and the size in the number of our international licensee partners. Fifth the growth in our new practices, things like customer loyalty, education et cetera, and finally growth for our new technology delivery platforms which are -- were introduced just at the very end of last fiscal year and are all of their revenues is still ahead of us. We would like to turn some time to Steve just to speak maybe specifically of the cost structure. Steve will give a more detailed analysis of financials here in a minute but maybe you can just speak, Steve, to the cost structure issues.

Okay. Thank you, Bob. To begin with let me just repeat some of Bob's words because they were such beautiful words as they relate to cost. We have demonstrated in our history a willingness and ability to control spending to whatever that control is needed. During this past year our spending did decrease more than $12 million compared to the year before, and lastly, yes as we go forward, and to continue to implement our business model and to benefit from the business model changes already implemented we will gain an additional $5 million of earnings from the -- primarily the cost side as those efforts are completed. Additionally, in this past year, we saw some impairment expenses and restructuring expenses and other special expenses totaling more than $7 million we don't expect a repeat of impairment and restructuring costs like that in the coming year. The number next year should be, should be very, very low for those types of costs as we see it now.

And lastly, this business model that is percentage based that we have implemented and are refining is a very powerful tool to help us even more in the future to easily direct and control our spending. As our revenues go up or as our revenues change, our model will drive our spending and it will be very clear and understood. So I am very comfortable as we have been in the past of the cost side of the business and our ability to control costs.

Thanks, Steve. The next topic, and I think probably goes without saying that even during the summer because additional business model actions were taken during the summer, that on a similar level of revenue, if we were to have a similar level of revenue in the first quarter it would generate more to the bottom line even in the first quarter than it did in the fourth quarter as a consequence. I would like to ask Jen Colosimo, who is our Chief Learning Officer but also in charge of all of our customer initiatives as released to our consultants and delivery of our different offerings around the world to talk about this second point of the large and loyal client and customer base.

Thanks, Bob. As you can see on slide 14, we measure loyalty in terms of those customers returning to us to buy our solutions year-over-year, and even in the midst of the difficult year we had last year in the economy, both the percentage of revenue from our returning customers and the average revenue per returning customer grew. A clear indicator for us of loyalty driving growth and also increases our referrals because our happy loyal customers refer us to others. In addition as Bob mentioned previously a component of our business is certifying facilitators to lead our processes and teach our content in their own organizations.

We have more than 9500 active facilitators and while at the beginning of last fiscal year we saw a bit of a decrease in what they were buying, we'd had a huge fiscal year '08 - August, and they'd really stocked up on materials. So we saw a decrease by the time we got to the end of the year we had increased the number of manuals purchased during the year which means they are teaching our content, they continue to buy, and they're finding value in our solutions. So from a customer standpoint, we are seeing growth in our two major indicators -- percent of repeat customers; average revenue per repeat customer; as well as the facilitator channel.

Thanks, Jen. For those with whom we've spoken about this before, the difficulty last year has thankfully ended up not being and keeping our existing customers and keeping them happy -- although that's always an issue -- but it really came with a difficult it was more difficult to attract new customers and our facilitator side while they bought more manuals, new companies sent fewer new people to be certified in the early part of the year.

That picked up again in the back half, but we are grateful to the chance to work with these customers, and for the fact they have found what we're doing to be useful for them even in the difficult times. There were a number of hotel chains and others, who had very difficult years, who eliminated all other training except for ours, and just felt it was mission critical to what they were doing. While we had, of course some things eliminated as well that may have been less strategic. In most of our strategic areas, we were able to retain the business and in fact grow it as you saw on that slide. The third driver and this has been a big one in the past is growth in the size and capabilities of our direct sales forces. Like David Covey who is Co-Chief Operating Officer for our global operations with Stephan Mardyks to talk about that.

Thanks, Bob. So if you look on Page 16, you can see what our model is for direct sales force. We have a five year model on how we want to ramp up our sales people. You can see it goes from 200,000 in the first year, up to 1.2 million in year five. You can also see in year one even though it is 200,000, we only lose 48,000. So it is just a slight loss but in year two, we make $159,000 of EBITDA if we do $500,000 of revenue. So we think that's still a very good investment to make. We have made 70 or 80 of these investments over the last five years. Last year we did not make hardly any hires. We had a few hires and replacement but we did not stay on the same ramp plan that we had in fiscal '05 through '08. I am happy to report that we are back on that ramp plan for fiscal 2010.

So, that is kind of the model on page 16. Page 17 shows where we are at as it relates to that model. So you can see on the left hand side is the new client partner revenue in terms of where were at through fiscal 2008, to the right of that is the new client partner ramp. That was the earlier slide that we showed. If you go to slide number 18, this shows you kind of where we are getting that growth from. As Bob mentioned in an earlier side, our revenues have grown -- grew 42% from fiscal '05 to fiscal '08 in revenue and it grew 92% in EBITDA. So from the revenue point of view you can see we are getting that from the top 20% of our sales people. They increased 65%. That was a significant improvement for us. The middle 60% improved 47%, and then bottom 20% contributed 87%, so we are getting it from all three groups. We have a number of people from our earlier investments that we are in year two, year three, that we're going start to receive that ramping up this fiscal year. We are excited about that.

David, you might just also speak to -- how what your seeing among the sales force right now. You and Stephan just came back from a long trip and --

Yeah, well, I think that we're seeing a rebound in terms of bookings -- Just last week we've had our highest booking so far this fiscal year. And we are seeing customers in the past we are having appointments, talking with customers and we were thinking that we were progressing the business along and they were saying no well you can have another appointment. Which was fun and nice to have another appointment, but we wanted to close more business and we are seeing now business start to progress a little bit quicker than what we have seen last fiscal year, which is exciting; we're seeing customers -- like Jen said, we have a lot of loyal customer, but we are adding a lot of new customers, and we're gaining -- we are winning a lot of new contracts. And that's been happening in the last three or four months.

So that's exciting Stephan and I just came back from China, and Japan. Japan is one of our direct offices, China is our largest licensee, and we are starting to see an up tick in our business there as well. I don't think we are out of the woods yet. We would like to say that we are fully rebounded and headed back to the same levels of growth but I think we can see a path on how we are getting there.

The next driver -- just hit growth in the size and number of our international licensee partners, I would like to turn the time to Stephan Mardyks, who is Co-Chief Operating Officer with David, of our global sales operations, sale and delivery operations, Stephan?

Thank you Bob, on page 19 and 20, as you can see, our international licensee partners, we have 34 licensee -- master licensees who are covering 143 countries, so if we move countries under US embargo and some countries in Central Africa, we are in all major countries in the world, and that delivering all our content in local languages, which is a great competitive advantage of course. I will echo what Bob said on the financial side, we went in 2004 loyalties from $4.3 million to 2008 to 9.2 comparing apples to apples, but with the conversion of brazil and Mexico we went from 4.2 to 10.2. In gross revenue we went from $26 million to $66 million which is $40 million gross of course. Comparing apples to apples that would be $30 million gross with Brazil and Mexico conversion.

So our partners are doing well and what is very interesting is even in last year, I mean 2009, we were doing better than our competitors. Our big bet our -- of course our big countries - Brazil, India and China -- and I am very pleased to report that we are on track on our market penetration. As we just said we are back from China, which for sure is becoming a key market in our industry, and we have the perfect partners and the revelant solutions to have -- for the years to come to be a key player in China, same for India. Of course our European partners are also going year of year. So -- and our partner enjoying years of growth and content is extremely relevant specifically on the execution we are going to talk very soon about. Thanks Stephan. The fifth area is the growth in practices. We introduced the concept about a year or so ago. Talking that in addition to our sales field forces, we have these practiced leaders who are content matter experts, who are focused on specific solutions.

They really have two jobs, one is to help the field to be good at selling these solutions and that revenue is reflected in our field revenues and was a help in the last year's to increase in the productivity of our sales force. The other is they have certain national accounts where they have revenue responsibilities themselves, they split that revenue with the field. This is reflecting, what we show here is just the revenue that actually flows to the practice themselves from their national account activities, but even there -- so while the impact is perhaps multiplied in the field sales, never the less, they've had some good growth themselves, in 2000 -- in slide 23, from 2008 to 2009, they saw $5.6 million increase in revenues during the year which was 54% obviously they're coming off of a relatively small base.

But we think this is also important thing because we have taken specific problems things like customer loyalty, sales effectiveness, education, speed of trust, execution that are specific topics, where we in addition to taking a general approach with our geographic sales forces we can take a specific or vertical market approach in some of these areas and we think that achieve really significant growth. In each of these areas we believe that over the coming years each of these practices can be between a $10 million and $30 million practice in the coming years. We have got good leaders who are the content matter experts in their areas in each of these areas. I would like to just mention that in customer loyalty, we grew, we added eight new clients in the last three months. These clients are in their early stages. They go through a phase where they do a calibration phase and the revenue takes several months and sometimes quarters to build up But that is off to a very good start. In our four disciplines of execution practice, David you might just speak to what has been going on there.

Yes, last year we had significant growth in our execution practice even though as a whole we were down as a Company, we grew significantly there. We have now expanded that practice all across the US and we are looking to expand that to China and India and our key international direct offices. So we are expecting this year to have anywhere between 50% and 80% growth. If the first two months are an indicator we are at 80%, we're at the higher end of that and so we are going to have significant growth in execution practices. It is really a consulting practice for us and we are helping clients get tremendous results and making it happen at one tenth the cost that a traditional consulting company would charge. We are doing it within four to six months. We are looking to really expand that practice and grow that and have significant growth this year.

I think this is an important area. On the conference boards list of the top -- they ask to seek at 3,000 CEOs every year what are the biggest topics on their minds. There's 92 topics the first two are execution. Execution is the first one. Execution of strategy was the second one. I'm not sure exactly what the difference of distinction between those two but they are both execution related. There are a lot of companies out there who are actually are creating some tools that help people get aligned on goals and other things that are getting tremendous multiples and interest in the market. Even though many of them arent yet making money,

There's the prospect of the Companies will on a wholesale business, do anything and buy anything that has a chance of helping the matter a little bit on execution. Our approach has been a much deeper one where we are expecting not 7%, or 8%, or 9% increases in a factor that you are trying to drive but really very big changes. 30% and 40% breakthrough kind of results. We also have a new electronic tool set that will go with that. We believe that on the real issue of helping organizations to execute with excellence when you have some of the major consulting firms partnering with us and bringing us in as their partner to help implement the strategies which they have designed for clients, when you have major clients or referring us to others that are in related industries.

Because they are saying the impact is so significant and what we saw this year in tough industries like retail and lodging where when they cut out every other kind of training and consulting, we were able to keep these engagements. So we really feel like we are having an impact in this. In our education area we have also had a big year. Shawn Moon is the Co-Practice Lead for Education along with Sean Covey, who is travelling today. He is going to give us just a quick report on that and our sales effectiveness of practices.

Thank you. I'm very excited to report on education. Education is being, is seeing some pretty exciting growth. We went from $4.8 million in '08 to $6.2 million last year. We're on a path to hit $7.5 million this year, year-to-date in the first two months we're up 78%, so we are excited about the trajectory of our growth. It is really being fueled by the leader in the process. We have learned over the years, that we can be very effective at taking these leadership concepts and helping implement them with executives, and military leaders, and government leader, and et cetera The question is can we bring this down to the elementary school level. Well, we can and we have. We started last year at this point of the year with about 20 schools that have implementing The Leader in Me process which again is taking these concepts and driving them down into the elementary school level. So about 20 schools last year at this point in time. We are currently at 195 and think we will exceed 300 schools this year. We are very excited about that, what it is fueling. It is the fuel to our growth in education and it is having clearly a tremendous impact.

Also excited to talk about our sales performance team. The sales performance team over the last couple of years have had some tough years. Last year they slipped but we are excited that year-to-date they are at 62% growth over last year. So that is an encouraging trajectory there. The focus of sales performance really is around very large technology companies. We are working with some of the largest technology companies in the world as well as other professional services firms. The target there is organizations that have a large sales force, that train their entire sales force. They are involved in a very complex sales with multiple stakeholders. We believe we have the premier product and tools available to them and are excited about our growth trajectory there. A good start to the year.

Shawn you might also speak to this last area in terms of the new technology platform. Shawn heads up our special sales areas for the Company and selling in the technology platforms is a specialized selling effort which also reports to Shawn.

Yes, this is an area we are just launching this year, and I'm very excited about it, it's called -- technology platform's headed by a product we call Insights which is a subscription based service that allows leaders within organizations access to all of the full range our intellectual property in bite sized chunks. So that during the course of the day without requiring people to leave the office for multiple days or purchase expensive materials, they are able to train their sales force, their people, not just their sales force, but people across the entire organization in 15, 20, 30 minute chunks.

Now the cumulative impact of which over the course of the year is a very robust leadership development process It is a very innovative approach now that allows us to access new buyers, allows us to scale in different ways and maybe most importantly for this discussion, it brings a recurring revenue model that we haven't had in the past, as it penetrate these new markets, then we'll be able to have revenue on the books for years to come based on these relationships. So, this is something we are launching now. We anticipate this being a $20 million business for us in the coming years.

And I would just say a comment on that Bob?. The key selling proposition on Insight is also directed to Generation X and Generation Y. We think the Gen X and Gen Y are not going to be training in the same way that the baby boomers have. We have shown that. We still have a lot of baby boomer clients and they are doing a lot of great work with this. But to get the new generation we have got to be able to reach them in different ways. This is a product that is really specifically designed to do that as well. We are excited about reaching the younger people with this new product.

I know I have spent more time on the growth initiatives today than I have historically have but I think it is important now that the dust has cleared for you all to understand the major underpinnings and the strategies that we'll have. We would intend to report on each of these each quarter. Probably spend a little less time on them but we will have some slides that report on our progress in each of these areas. We feel good about them. We spent a lot of time and effort over the years building the foundation for these and many of them have already been successful, others are on the cusp. We're confident that we can move these forward.

I just will say in conclusion that we have had the opportunity over the last six or seven weeks to be out visiting and doing kick off meetings with all of the associates in our direct offices in North America and it has been great. In these meetings we have had a chance to celebrate those who did have winning performances last year and to personally hand out our Presidents Club award and to acknowledge not only the fact that really despite the severity of the storm last year most of our associates kept pressing towards the summit the entire year. As a consequence, while some of them didn't have great years. Many didn't have great years, many of them are starting out this year with a platform and a pipeline that is much deeper. As a consequence, like I said most of the pipelines are deeper than any other time in the past year. There is a feeling of commitment, enthusiasm and positive energy among our people that is palpable. We are off to a good start. Our teams are optimistic about the business for 2010 and beyond. So are we.

So I would just say that again, it is good to be in a position where we feel like we have got more visibility to what is going on and gaining more traction. Certainly I think this is going -- continue to be a challenging environment in the coming year but we seem to be able to -- we're starting to get our footing. In the last 90 to 120 days our footing has become -- we have become more sure footed on predicting and being able to hit our revenue targets. We feel good about where we are in costs. Strategically we feel we are well positioned to resume the growth that we actually saw in 2005 to 2008 in our core business. We will answer any questions in a minute. I would like to turn the time to Steve Young to go over the fourth quarter results and add any other comments you would like to, Steve

Thank you, Bob. Why don't we just draw attention to slide number 26 which is entitled pro forma financial information and is the reconciliation of non-GAAP earnings. What this slide reflects is what operations would have been adjusted for certain special and non repeating costs, and is presented using a 41% tax rate. Our pro forma result for the quarter as presented on this slide is after those adjustments, the $3.3 million of EBITDA on $34.5 million of sales, and generating a pretax income of about $600,000 using the 41% tax rate, that generates a net income of $356,000. We show this presentation to give a better understanding of what we feel is really going in the business, and what the fundamental baseline economics of the business are. Excluded to get to this pro forma FY 2009 Q4. Is primarily the Franklin Covey products note impairment and certain restructuring, severance, and other transition costs. During the latter part of FY 2009, Franklin Covey products experienced a deterioration in their financial result after year-end, and that deterioration accelerated based upon these facts, and the expected cash flow. We evaluated the collectibility of the note and determined that the note should be impaired as of August 31st of year end.

And so we have reflected that as a $3.5 million -- $3.6 million impairment. Collection of all or part of that note is still possible. the note is not written off. It's impaired, but we feel like that impairment is necessary. They other primary costs included are restructuring, severance and other costs like that, that we do not anticipate to repeat and accelerated depreciation on assets in the Company some that were in development and not implemented. But the $600,000 of income before taxes I believe is a fair representation of what the quarter would have been without those types of costs. As you look at our financial information our tax provision is quite difficult to understand why the percentage is so high and isn't the normal 41% we might expect. If you have questions on that I would ask you to please give me a call and take a little while to explain that. But it might be important.

Also, the number of shares that we use in calculating earnings per share might be of interest to some. I'd invite you to call and we can go over that. So lastly, let me just mention that our balance sheet is something that I view as quite straightforward. We have seen improvement this year in our accounts receivable day sales outstanding, and in our inventory turns, we expect to see a little more improvement there. We expect to apply our operating cash in additional improvements that we get through the elements of working capital to our revolving line so the only thing that will be a little bit different on our balance sheet from in the past is that we will have an earn out payment based on the acquisition of the Speed of Trust business. That earn out payment is anticipated to be made in February - March and could be a significant amount of cash out based upon how well that operation is doing. So, it could be between $2 million to $3 million of cash out for that business which is doing very well. So I guess you could say we are excited about the future and we will be happy to answer any questions related to our financial position.

Great Steve. With that, why don't we open it to questions now.. I know we have taken quite a bit of time with the presentation today, but hopefully it was helpful. We will now take questions.

(Operator Instructions). Our first question comes from the line of John Rolfe with Argand Capital. Please proceed.

Hi. Just in a side guys, when I try to click through to the length to the presentation on your website it is only pulling up a single page .pdf which is just the title page for the presentation. So you may want to repost that at some point.

So were you not able to get any of the information we spoke through today then?

I wasn't able to look at the slides as you guys were going through them, no.

Okay. Thank you very much John.

Sure. Steve just quickly, on the pro forma adjustments, could you just give me a little more granularity? The $1.4 million add back on the SG&A line, what is that? I am assuming that the cost of sales adjustment was the accelerated depreciation but what was the $1.4 million on the SG&A line?

First of all, the adjustments in that $1.4 million there are some bonuses that were paid with respect to this entire restructure that was going on during this period of time our normal LPIP long-term incentive pay was discontinued. We didn't make a payment for a year. Based upon all of the restructuring activity that was going on we paid a restructuring bonus of about $600,000 that would not repeat. Additionally we looked at reimbursement of some costs that are again sparked by everything going on and everything that has been going on we looked at some costs that should be reimbursed that we did reimburse of about $500,000 in the quarter. Then there are just some other miscellaneous costs that are restructuring-types of costs in different offices but not reflected as restructuring severance. So again, all of the costs that are included in there, and we didn't include all of the ones that we thought we could that might not be recurring. Included in there are those costs that we incurred in the fourth quarter that we would not expect to repeat next year or would not repeat if we completed the fourth quarter again.

Okay, okay. My only other question, just in terms of -- I missed the final question you made on the tax rate but I know you are using a 41% tax rate on those pro forma financials. Is that the rate that you expect to be booking on a consolidated GAAP basis going forward?

We expect that at a future point in time when our net operating loss carry forwards are consumed and we are able to utilize our foreign investment tax credits. At that point we do expect to be between 40%-42% on our tax rate. In the meantime we have a very high tax provision expense as a percentage of our pre-tax number but please know that even though our tax expense number is very high the amount we pay out in actual cash paid out for taxes is very low because our net operating loss carry forward. So this net operating loss carry forward kind of goes both ways. It causes us to be unable at this time to utilize in our provision our foreign investment tax credit. So we have a high expense but it is non-cash expense in that even if we were -- our net operating loss carry forward is more than $30 million right now. So we have a fairly significant amount of domestic earnings that we can generate with very little tax paid on those earnings. So if I was to look at our tax provision in the short-term going forward I would look at about 41% plus a couple of million dollars of expense no matter what our pre-tax level is. Was that helpful? .

Yes, that's very helpful. Thank you very much.

Our next question comes from the line of Alek Gasiel with Barrington Research.

Yes. This is Alek Gasiel for Alex Paris who is traveling. I apologize, you may have answered this during your presentation, but with the current economic environment are you seeing stabilization within the existing clients in your businesses?

Yes, and it is probably -- maybe as some of you were not able to pull up the slides, but one of the slides we presented Alek, was a slide that showed that among our existing clients there were two things that happened this last year.. One, they actually increased their average spends a little bit. Second, a higher percentage of them repeated the business with us, or at least a higher percentage of our revenues were accounted for by repeating business from these clients than there were in prior years. So that was one thing that was happening. This is kind of the larger training clients, these are ones that spend at least $30,000 a year with us. In the smaller ones, among our facilitators, even though it was a tough year, the 9,500 facilitators actually ordered a few more manuals -- few thousand more manuals this year than they did last year. It is just that new customers did not send as many new people be there. Among our existing clients there was a lot of repeat business, the growth in their -- in the amount that they spend, which is a reflection of the fact that many more of our clients are now involved in these practice areas where it is really mission critical to what they are doing..

Okay.

I don't know if that's responsive. But --

No, yeah, that definitely helps. I know you talked about your EBITDA, are you still -- I know your goal is to hit a $23 million adjusted run rate EBITDA. Are you still thinking that could hit by fiscal second quarter 2010?

If you look at that buildup, I didn't give time dimensions on it, but the factors that would be necessary to get back to that level, as you saw, if revenues were able to keep more or less flat with the same business activity we had last year, with the business model implementation we have already done plus the annualization of other actions already taken, as I showed, that would be above $21 million so obviously it would depend on what the revenues are and the timing of the implementation which we didn't give specific guidance on. I think we feel good that we had a business model discussion on our last quarterly call. We are a little ahead of our expectations thus far. That doesn't mean we will stay ahead all year. But we feel good about that and about the pipelines we have. So for us, our targeted business model is to be north of 15% EBITDA to sales and that would get us above the $20 million. What we had hoped to be is you want a run rate by mid this year if it will get us to that level and we are hopeful we will be able to do that.

Last question, would you be able to provide CapEx, and depreciation and amortization for fiscal 2010 at all?

Sure. Steve, do you want to -- -

Depreciation and amortization will be quite straight forward and the CapEx isn't.

We anticipate having just over about $4 million of CapEx and capitalized curriculum spending during the year. The CapEx spending is primarily related to our IT systems that Bob talked about that we are just in the middle of a system transition. So depreciation will begin primarily on that project midyear. Then we most always have a couple of million dollars more or less range of capitalized curriculum costs that we have put on the balance sheet. So I think we will have about $4 million of spending between those two items.

Then for D&A, is that the same run rate as last year?

Pardon?

For depreciation and amortization will they be similar to this year that just ended?

It would be similar to this past year, with just added depreciation on those items, given three year -- a three year rate. I don't have the exact depreciation and amortization numbers sitting in front of me. But it would be $7 million, $8 million between the two reported next year.

All right. Well, thank you so much.

Thank you.

Thanks Alek.

Our next question comes from the line of John Lewis with Osmium Partners Please proceed.

Hi guys,.

Hey, John, how are you?

Good. Just to understand if you were to frame all the practices and the growth opportunities, I guess you guys gave a lot of percentage -- the year-over-year growth you were seeing. I think you gave execution is up 50% - 80%, education is up 75% or so. But if you were to aggregate up all the practices and you we're to look, -- I mean are we talking in terms of high growth opportunities are we talking about $10 million? $5 million? $20 million? What do you see for 2010?

Last year we had $5.5 million of growth in the practices. That was on the one slide which you may not be able to see. I think that kind of growth seems like, again as a base case, having that kind of growth again this year we would see every indication that you have to be able to do at least that well. I think as you heard we are probably a little ahead of that in this first couple of months. Whether or not we stay above that all year is hard to say. But I think idea that it could grow north of $5.5 million or maybe north of $6.5 million this year and maybe a couple of million more than that would be a reasonable range. If things really take off. Obviously because we are coming off a small base the percentage growth could be even more significant. These come in large chunks when they come in some of the practices. I think we feel good about the momentum and where we are. I don't know if we are predicting exactly everything we will win but we feel good about at least sustaining what we did last year and probably a little better.

Let's say we are just looking at education you said you have 195 in terms of Leader in Me customers. I think the average price is $25,000?

Yes John, this is Shawn Moon. It is between $25,000 to $30,000 depending on the size of the school but in that range.

That almost gets you right to $5 million right there, right?

Yes.

So just to understand Bob, in 2009 -- for 2009 fiscal year the growth practices kind of defined as execution, education, customer loyalty, trust, in aggregate that is something around $5 million and you are looking to add, I'm sorry I just want to make sure I fully understand that.

Let me just go back John, the thing about the practices is this isn't a measure of the whole product line because the product lines we expect will grow substantially more than that perhaps. In the aggregate across the world. What we put into our practice revenue is only the national account activity that they own themselves. So if the Speed of Trust practice goes out and helps the sales force sell big deals, which they do all the time, with other clients, that revenue typically flows, almost all of it flows, through the field operations, not the practice. So on the other hand when the practice goes out and finds an account on its own, lands it, it ensures the revenue the portion that it doesn't share is showing up here. So while the practices themselves because they are national account activity or vertical market activity in the case of education, you'll keep that much revenue, we are hoping these practices grow more than that in the aggregate. That is why it is a little hard to say exactly what the growth of the practice will be because you don't know the mix that will flow through the field versus what will show for the practices. We are holding the practice leaders accountable for their own revenue numbers so we are pretty certain they will do at least the kind of growth we did last year and probably a little more. That is why maybe it is a little hard to say. We think overall these practice areas can grow more than that. We just don't know how much will be reflected in the field versus in the practice itself.

Right. Okay. So on the customer loyalty portal I think the last call you did you had around eight and were looking to add around eight to ten in 2010. You said you added eight last quarter. So in terms of just customer loyalty portal customers I guess you are up to 16 or so now?

Yes, that would be true. Like I say eight of them we are in the first stage, which we call the calibration phase.

Right.

So they are kind getting the data, analyzing their existing data, getting the thing set, and so that generates some revenue during that portion but most of the revenue starts after they move into a rollout. We hope those eight will but you don't know exactly. Our hope is still to be by the end of the year we would have eight clients that were in full rollout. That were committed to full rollout. But it may not be all of the eight that we have now. Some of those might fall out and might defer complete rollout. It is encouraging we have added a lot in this last quarter and more than we added the previous two quarters. So we feel we have some good segments in which we are focusing right now and the message is resonating.

Right. So basically when those go, if they go through the calibration phase and go live, that should be about $1 million of targeted minimum of 1,000 or so?

The potential for any one of the engagements would be somewhere the target would be $1 million. A $1 million engagement. Then again as these come up out of the calibration and they may take on a division or so. So ultimately we would hope each customer has at least $1 million of opportunity. That will tend to build during the course of a year to 18 months.

I guess in your September 2009 PowerPoint I think you show execution, sales performance, customer loyalty, all the kind of growth practices and 2012 you are shooting for kind of like somewhere between $70 million in incremental revenue and as much as $105 million by 2014 So I guess there should be some pretty considerable growth but when you look at that what assumptions do you make about the core business today in terms of holding flat or shrinking? In terms of what are the overall top line expectations that investors should look for this year and going forward?

Well, John, maybe my analysis and little presentation probably wasn't as helpful as it needed to be. We are trying to kind of give some ranges there so people can figure out since we don't know exactly where we will be. On the one hand we believe we ought to be able to hold the level of business activity about even or at least even. That's one benchmark this year. That would mean that we had expected in the first quarter it would be down some because of the strength in international last year. Thus far it hasn't been, in the first two months. But some idea it could be slightly better than flat I think would hope to be a very conservative thing for the year. That might end up being the realistic one with the growth in practice. If that's the case, then the first bar on that EBITDA chart would be in the range if we're able to do that. If the progress to date were to continue and the booking pace and so forth were to continue and the practices were to continue then obviously some of those other bars you get closer to some of them. The idea is that over the next period, the next couple of years we ought to be able to get this thing back to the level of revenue we had in 2008. I would certainly think in the next two years we would think that. Directionally that gets you into that $30 million range. So somewhere in between those two is kind of the target for this year and next. I think as we get into the year we will continue to report on how we have done in the recent months and how we are doing in the quarter so we would hope that in January report we would obviously tell you exactly how we did the first quarter and tell you how things are looking for Q2. We will probably be able to tell you whether we are closer to the one book end or the other. I expect in this year over the next couple of years that seems like a reasonable range to be in which would represent very significant growth opportunities.

Okay. Let's see what I was going to ask you -- I think you have right around -- under $13 million on your line at the end of August. When do you think you will be I guess out of that line? Is that how you are looking in kind of a Q2 or Q3 2010? What are your thoughts there?

Again, depending on the range of performance under the conservative end you would retire the line somewhere close to the end of the year We tend to build up a lot of receivables at the end of the year. So when we say year-end, the lowest point on our cash is either right before summer or right after early fall when we collect on those. So that would be maybe the conservative view. Obviously improvements above that lower baseline would accelerate that. Somewhere in the late third to early first quarter would be the range when normal operations would retire that. We have some possibility of capital transactions or something small that would accelerate that but nothing big on the horizon.

Okay. Thank you.

Thanks, John.

That's all the time we have for questions. I would now like to turn the call back over to Mr. Bob Whitman.

Thank you very much everyone for joining today. I apologize if our presentation went so long you didn't get a chance to answer questions, but we are also sensitive to the fact that for many of you it is late. So we thanks again for joining. As a final note, we will begin next quarter reporting a break out of our revenue in terms of domestic direct, international direct offices, licensee, and practices so that the things that we've laid out for you here today we'll be able to report on going forward, so you'll be able to track our progress.

I want to express appreciation to each of you who have had the confidence to invest with us and to believe in the story when it was even less obvious that perhaps it is today. I am glad that today perhaps some of that is directionally showing to be moving in a direction we have all talked about. We feel it is here. . We are optimistic about what we can do and really mostly optimistic because we have such great people. We have great partners, and I expressed my appreciation to all of them for sticking out through a tough year and for the great things they're doing already this year. Thanks very

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.