Franklin Covey Co (FC) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Franklin Covey Company (inaudible) quarter one earnings conference call. I'll be your coordinator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions). As a reminder, this call is being recorded for replay purposes. I would now like to hand the call over to your host for today, Mr. Derek Hatch, Corporate Controller, please proceed, sir.

Thank you. Good afternoon, everybody, and Happy New Year. Welcome to our call this afternoon. Before we get started, however, we'd like to read the forward-looking statements pack -- page that you'll find in your packet. This says 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 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 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 over with we'd like to turn the time over this afternoon to our Chairman and CEO, Bob Whitman.

Thanks, Derek. We'll delighted to have everyone join us today, and Happy New Year to everyone. We just, from an overview perspective, say that we felt very good about Q1's results. Revenue exceeded our expectations, our gross margin percentage improved, our SG&A costs were significantly lower than both last year and our budget expectation, our EBITDA of $3.82 million was $2.7 million higher than in last year's Q1, and also significantly higher than we had budgeted, we reported our second consecutive quarter bottom-line profitability, and so overall we felt very good about the results and about the momentum that lead to those. I would like to briefly speak to each of these elements at a high level.

Revenue is expected -- was -- continued to strengthen during the first quarter. Revenue was up $1.5 million compared to our original expec -- or budget expectation, and excluding the planned reduction in public programs, which we've talked about in previous quarters, which, as you know, are fundamentally self-funding marketing programs, we consciously cut those back in last year's -- in the middle of last year's first quarter, but excluding public programs, the revenues from our training and consulting business were actually up 2.8% compared to last year, so that's been the first quarter in a number of quarters where we've actually had an increase in revenue in our consulting and training businesses, so we felt great about that. That continues a trend that has been improving quarter by quarter. This represented a strengthening, as I mentioned, of revenue trend compared to Q4, which itself is an improvement from Q3, which in turn was an improvement from Q2, so we feel good about the trend. We expect that we will achieve positive year-over-year revenue growth in Q2 on an overall basis, and even more in our on consulting and training business and for the year as a whole.

As we'll discuss in more detail in a moment the strengthening in the year-over-year revenue trend was very broad-based, which we're excited about, with revenues strengthening in all of our key channel, including our direct office, our licensees and our practices -- international account practices. As a result of strong bookings our contractual pipeline increase in Q1. If you'll go to Slide Four, the contractual pipeline as shown here is just over $15 million at the end of Q1.This compared to $10.7 million at the end of Q1 last year and was also higher than the $13.6 million at the end of Q4. So that has continued to strengthen. The size and depth of our new business pipelines also grew during Q1 and our booking momentum was strong throughout the quarter and has continued to be strong in December. As shown in Slide Five, through December our year-to-date revenue from our license facilitator is up $800,000, which is up 10.4%, and our bookings for on-site delivery, where our consultants go inside and deliver the training, it was up 5.5%. So overall revenue we feel good about both the result and the trend.

Our gross margin percentage improved also during the quarter from -- to 63.5% from 61.8% during Q1 of 2009, an improvement of 170-basis points. Our selling, general, administrative expenses during Q1 were $2.9 million lower than in last year's first quarter and also lower than budget. Our cost improvement here again was very broad-based, with cost lower in every major area except for in our practices, where we are making new investments. Here the costs came in as planned and as I'll note later, even after these additional staffing investments, the EBITDA contributed by these practices increased significantly during Q1.

In terms of profitability, as noted our Q1 EBIT -- EBITDA for the first quarter was $3.82 million. This was $2.5 million or $2.7 million better than in last year's first quarter and significantly higher also than our budget. Almost all of this improvement in EBITDA flowed through with the result that operating income was $2.6 million higher than in last year's first quarter and pretax income was $2.7 million higher than in last year's first quarter and moved from a loss to a profit. We also had positive net income even with a very high nominal tax rate of 79%. Steve Young will cover this in more detail in a few minutes, but utilizing a normal tax rate of, say, 41% we would have earned approximately $0.04 a share in the first quarter. Finally, our net cash provided by operating activities was positive $1.6 million during the quarter. We expect this to accelerate further in coming quarters. So at an overall level, we felt very good about our Q1 results.

We're also feeling good about the prospects for the second quarter's performance. Five weeks into our second quarter our momentum is good and we expect that the performance for the second quarter will also be strong. As noted above, our revenue momentum was strong in December. Revenue trends continue to strengthen, and while clients are still cautious in the economy we expect to achieve year-over-year revenue growth in the second quarter and also in our third and fourth quarters from what we can tell now. Gross margins are expected to continue to be strong. Our selling, general, administrative costs are expected to come in well below last year, and as a consequence, EBITDA is expected to be substantially better than in last year's second quarter, and in line with our expectations. As you'll recall, in last year's second quarter we had -- actually had negative EBITDA and we expect positive EBITDA, of course, during this year's second quarter.

Some of the investors have asked us to provide some insight on the expected seasonality of our revenues, so I thought I'd do that and Slide Six gives you the percentage of revenues that have occurred in each of the quarters -- each of our four quarters on average over the last three years, so this is the mean of the last three years. It shows that our business is not that seasonal, or not highly seasonal, but there are quarter-to-quarter variances that I'd like to highlight. As you can see, because companies tend not to do much training during the holidays -- during the last two weeks of December and the first week in January -- our revenues during Q2 are typically a little lower than in other quarters. On the other hand, our revenues tend to be a little higher in the fourth quarter, reflecting the fact that substantial revenues from our education practice are recognized in the fourth quarter,which, as you know, is the summer when teachers aren't teaching, and can therefore be trained more easily. And the second reason why the fourth quarter is typically a little higher is that we have our one big facilitator promotion during August of each year and that's the time when they can buy facilitator training materials. If they buy ten they get one additional manual free and that's a promotion that people look forward to.

But overall it's not that seasonal. We would expect because of the holidays this year, of course, during the second quarter that the revenue for Q2 will follow this historical pattern pretty closely. We also believe that given our strong bookings and pipelines the revenues in Q3 and Q4 are likely to be somewhat stronger than the strict application of this historical trend might apply. So hopefully that's helpful for those who are trying to get a sense of the seasonality. So in terms of looking to the future, in our last quarterly call we presented a model that showed directionally where we believe the business could go over the next few years. This model reflected our belief that we can achieve substantial top and bottom-line growth over an extended period of time. Following last quarter's call several of you called and asked that I walk you through the model, so I thought it might be helpful to take everyone through that model just briefly once again, so I'll refer you to Slides 7 through 10 and it's just a build up that goes slide to slide.

First, as shown in Slide Seven, because of the business model improvements and cost-reduction efforts in fiscal 2009 if we were able to achieve just very modest revenue growth over the year -- versus last year, in our direct offices among our licensees, reflecting the impact of a 2% price increase that we implemented at the end of August and a little growth in the offices that grew last year, and if we were able to achieve just the same $5.5 million in revenue growth in our national account practice business we achieved last year, because of the business model improvements EBITDA would increase to more than $16 million during that period.

Next as shown in Slide Eight is just a build up. On that same revenue base, with the pro forma impact of further business model improvement actions, which we've either already implemented, or which are in process, which would result in further improvement in our costs, but whose full effect won't be felt this year, as those cost reductions are fully implemented the EBITDA would increase to $21.4 million on just those same revenues. These kinds of costs include, for example, transitioning our IT to a new, less-complex platform, which we'll be doing here just in a couple of months, and we expect it will save us $1 million this year, but would save us $2 million next year, so there are things like this in this. The next Slide Nine just shows that whenever our revenues in our direct offices -- in our field of -- eight direct offices and our licensees return to the level they achieved in 2008, again with this new business model, EBITDA would increase to $30 million in this model, and that's without additional growth in our national account practice revenues.

And then finally in Slide 10, if after we got to that level we were in the ensuring four years able to achieve similar growth in revenues and EBITDA that we did in 2005 through 2008 in our direct offices and licensees, again with no further growth in our practices, it could take you to over $40 million in EBITDA. So -- but this isn't a time-bounded forecast or some of you were saying this is our projection for any particular period. We're just trying to give an idea that because of the business model improvements, we expect a very substantial increase in profitability during the course of this year. We expect -- [although] we won't get back to the 2008 revenues, and if we can continue our cost and business model that will get us in the $30 million range, and we think the same things that allowed us to grow in 2005 to 2008 -- which we'll talk about in a minute -- our bet's that while we can't be sure of it we feel pretty darn good about it because we were able to do it before and we feel we were getting traction there.

As shown in Slide 11, there have been the key drivers of growth, which I've summarized into four, that should drive this model, at least directionally. One is the significantly reduced cost structure and improved business model, which we now have in place. Second, the growth and the size, reach, and strength of our sales and delivery forces in our eight direct offices. Third, the growth in the size and strength of our 38 licensee partner operations. And fourth the growth in our practices and our technology platforms, and I'm going to ask members of our executive team to address each of these briefly, so Steve -- Steve Young, as you know as our CFO, will take on this first issue of the significantly-reduced cost structure and improved business model.

Thank you, Bob, and good afternoon, everyone. The sale of our CSBU was extremely important. It represented the final step in our multi-year effort to exit all businesses or activities not central to our training and consulting business, and it also allowed us to reduce central operating costs and improve our overall business model by, one, collapsing our holding company structure, and moving to a streamlined central organization, and two, completing the consolidation of direct offices in North America, both of which we completed during fiscal 2009. During the year we also identified and implanted other cost reduction and business model improvement actions to ensure that in the future, even at reduced revenue levels of fiscal 2009, we would earn attractive levels of profitability. These actions reduced our central cost by $12.8 million in fiscal 2009 compared to fiscal 2008, as you can see in slide 12, and the annualization of these actions will also provide additional year-over-year cost benefits for fiscal 2010, and beyond. These benefits were substantial during Q1 and we are very confident that we will meet our cost targets for the fiscal year of 2010. Bob?

Thanks, Steve. A key strategic advantage and growth driver for us is the size, reach, strength, and growth of our various sales and delivery channels, and as we'll discuss more the sales and delivery capability, which includes our direct offices, licensees, and national practice accounts provides us with the unique ability to serve truly global clients. It also allows us to attract content from key thought leaders who are interested in accessing our distribution capabilities, so I'd like to ask Stephan Mardyks, our Co-Chief Operating Officer of our global operations, to report on our direct office and licensee operations, and then I'll ask Sean Covey to report on our licensee and technology platforms. Stephan.

Thank you, Bob, and good afternoon. I will begin by presenting the growth and the size, reach, and strength of our sales and delivery forces in our eight direct offices. We have five direct offices in North America and we have three direct offices internationally; one in Japan, one in the UK, and one in Australia. Between fiscal year 2005, and fiscal year 2008 revenues in our eight direct offices grew significantly in percentage and in general terms. Our direct offices contribution to operating net income grew even more substantially. The key drivers of this growth were, number one, the significant increase in the size, capability, and productivity of our sales and delivery forces in these offices, and number two, our business model cost structure, which is highly valuable with our client partners, who are paid mostly on commission, and our delivery consultants, who are paid mostly on (inaudible) for delivering (inaudible).

During this year we invested heavily into equipment and training of these client partners. Our investments in training and the additional new offerings also had to increase so productivity of our alumni sales force by more than 29% during these years. What we mean by alumni was client partners who were already in place at the beginning of fiscal year 2005. The weakness in the economy has resulted in a decline in productivity of the average client partners during fiscal 2009, but we expect the growth in the size and productivity of our sales and delivery forces to continue to be a key driver of our overall global growth infrastructure. In our five domestic direct offices, during Q1 revenue continued to remain solid. Revenues were down 4% compared to Q1 of last year, but if you exclude the public program impact, revenues were down less than 2% compared to Q1 of last year. This was, indeed, ahead of expectations.

Booking and (inaudible) orders were strong in Q1 and as Bob noted earlier these trends continue in December. Our revenue per booked days in Q1 also greatly increased over the previous year. Most of our client partner teams out-performed relative to either their budget after last year, or both. Almost all of those which did not out-perform in Q1 (inaudible) plans that suggest a significant growth for them during Q2. Our domestic offices are currently expecting to grow revenue and EBITDA compared to last year in Q2. In our three international direct offices during Q1 Australia's results were up [from last year's budget] and up (inaudible). Australia's operations are expected to be (inaudible) budget and (inaudible) year in Q2. UKs revenue were up [from last year's budget] but down 6.6% compared to last year. However, because of cost controls UKs EBITDA increased (inaudible) prior year. In Q2 we're expecting double-digit growth on the top and the bottom line.

Japan appears (inaudible) most impacted by our global economic environment. Japan was down versus last year by 21%. (inaudible) Q1 of last year, which included $900,000 of revenue that rolled over from Q4 of fiscal year 2008. We currently believe that Japan's revenue will be down compared to the prior year in Q2, but that the variance will be less than it was for Q1. And due to cost reductions EBITDA will be flat, or a little bit higher than prior year. Overall we are very optimistic about our Q2. We believe revenues in our international direct offices will be slightly down compared to prior year, but that our EBITDA will be a little bit higher than prior year.

I will now go over our growth in the size and strengths of our associate international licensee partners operations. Slide 15, as you can see on Slide 15, between fiscal year 2005 and fiscal year 2008, our international licensee partners royalties received increase from $4.3 million to $9.2 million, which is a 124% increase. This is without considering the conversion of our direct offices in Brazil and in Mexico to licensees in fiscal 2008. When including the conversion of those offices the increase is from $4.3 million to $10.2 million. Using our average licensee royalty percentage, we suggest that our international licensee partners gross revenue grew from approximately $13 million to approximately $60 million during those years. Our international licensee partners operations have grown largely because of the same factors that (inaudible) our direct offices. Specifically these factors includes growth in the size, the capabilities and the productivity of their sales and delivery forces. In the past years we have made significant investment to provide resources and support to our licensee partners in the training and development of their people. We have also made significant investment in the development of offerings that can be customized to their local needs much more easily.

Fiscal year 2009 was a difficult year, of course, for many of our licensee partners, but moving forward, we are really confident that our licensee partners organization will continue to drive our global growth for years to come. We are especially confident with our (inaudible) of our licensee partners, their ability to increase the size and productivity of their sales force and their (inaudible) untapped potential retail markets. During Q1 our licensees revenue were $2.4 million, which is $400,000 or less, [or 15% lower] than Q1 of last year. Having said that, these results exceeded our budget expectations. By the way, Q1 of last year was a weaker quarter for us. As you may remember this was before the recession outside of the US, which only started to impact our international operations towards the end of November of last year. In Q1 (inaudible) that the royalties we see from some of our larger licensees in greater China and Korea and in (inaudible) Asia actually grew over the prior year. We continue to see positive indicators among our licensee operations and believe that they will achieve double-digit growth compared to last year during Q2.

Bob?

Thanks very much. And Sean, would you just give an update on the practices and our technology platform?

Absolutely. Good afternoon, everyone, this is Sean Covey and I'll talk a little bit about our practices and technology platforms. Over the past couple of years to ensure market leadership in the content areas in the markets that we are choosing to compete in, we've created a new structure of what -- we call these practices and you can think of the practices as a product line, or a vertical market, or it's a job to be down content area, and we currently have five practices, which include education, sales performance, the speed of trust, execution, and customer loyalty. We're also in the process of developing some other practices that will be coming on shortly, like on-line learning, that are in process right now.

Now practices are in charge of growing their respective businesses, so think of each practice having responsibility for everything, including things like thought leadership, building the relevant products and solutions, developing the go-to-market approach and strategy, and then building the sales and capabilities of our consulting teams -- building the capability of our sales and capabilities teams to sell and deliver the solutions. Practices also have the responsibility to sell directly and to develop business with their own client base, which includes selected national accounts, so they are not just fully dependent upon our existing sales force, they have the option to go direct, as well.

Now our new practice categories have grown significantly since their inception and much of the revenue, which they generate, is recognized in revenues of our direct offices or licensees. The practice's own share of revenue can come from their national account efforts, and this also has become very substantial. If you take a look at Slide 16, even in fiscal year 2009 you can see the growth from 2008 to 2009, our practice national account revenue grew by $5.5 million, or 54%. So during Q1 of this year, our practice national account revenue increased by 72%, or $2.2 million. So we had a very good first quarter from the practice perspective. Their gross margin percent was also up slightly over budget, and the EBITDA contribution was $815,000, which compared to last year was significant of $145,000 last year, so $145,000 to $815,000 in Q1 alone, and also up significantly over budget.

I'd like just to say a few things about a couple of our practices. There's many things we could say, but let me say a couple of things about education. Education is a vertical market practice focused on two markets, the K-12, kindergarten through 12th grade market, which is elementary, middle and high school, and then the higher education market, and currently in this practice, we're focusing on a solution, a new one we've built, called "The Leader in Me" and this is for elementary schools. "The Leader in Me" is a three-year process designed to help transform elementary schools, including improving everything from academic achievement of the students, improving the school culture, increasing parent satisfaction and so forth, and the offering costs about $30,000 to implement this process in the first year, and about $10,000 each year thereafter. This solution consists of about seven to ten days of training, some materials for the staff and students and a web community.

Now in virtually every school that has engaged thus far, we're seeing off-the-chart significant results. We now have "The Leader in Me" in over 200 schools and we have a great pipeline building. As a result, our first quarter revenue improved by $600,000, or 60% year over year, and our EBITDA for the quarter grew nearly $500,000 year over year because much of that went to the bottom line and we also achieved some cost savings. Now given that there are over 100,000 elementary schools in the US alone, we believe this will be a significant and meaningful growth area to us in the coming years.

Another practice we have that's under development is "Online Learning" and this is basically delivering our solutions through technology platforms. Over the past couple of years we have made significant investments to develop these solutions through which we can train and consult with organizations. We believe these new platforms can significantly increase our reach and introduce us to a whole new set of people and populations and organizations that may be reluctant to use traditional training and to take people offline for one, two, three, five days. A couple of these new offerings include our insights offering, and insights is a web-based product that draws from a large library of our films, which teach our principals on different competencies. And specifically insights is a web-based product with 63 bite-sized modules that can be used in a lot of different ways. For example, a manager could use these bite-sized models at the start of a meeting, or the end of the meeting, or he could use one of these models as a stand-alone unit, or these modules could be used individually and then discussed with other team members. The concept is basically a small nugget of learning. INstead of a day-long program it's a 20 to 30-minute program that can be used within the seams of work.

Another technology that we are very excited about is called "Live Clicks." "Live Clicks" is a webinar platform and these workshops are one to two-hour courses. We have about 25 different topics at this point and they are delivered over the internet right to a clients' desk with a live instructor on the other end. They can be taught by Franklin Covey consultants,they can be taught by a licensed certified client consultant. This platform we've created with "Live Click" we believe to be a market-leading innovation. These webinars aren't just a PowerPoint and discussion, instead they're very interactive. hey utilize video, interaction, polling so you can do surveys on the spot and see how people feel about different things, and other really innovative tools to make them very engaging and very interactive. Thus far with these two platforms in the first quarter, our revenue increased over 100% year over year, and we have a very solid pipeline building for the future.

So overall we believe that this practice structure has offered -- it's new growth opportunities we would not have had had we not built this structure and it also is allowing us the opportunity to become real market leaders and to really focus on becoming experts in these areas we chose to focus on these jobs to be done, content area we are focusing on. So each of our practices from trust, to execution to sales performance to online learning is experiencing high growth, and creating very good client results.

Thank you, Sean. So just in conclusion for the overview we'll just say that all in all we feel very good about Q1s results. We recognize the economic environment remains challenging. We feel that the combination of our lower cost structure and improved business model gives us the strength and factors discussed above will lead us to a very good result in Q2 and for the year as a whole. I just say out of caution, that it's easy -- because we mentioned several times that we beat our budget in Q1 and that somebody might want to extrapolate that we're going to blow away all of our numbers, but we already expect very substantial improvement year over year so I would think that we will be able to meet our expectations, but wouldn't expect that we will have as much variance, at least in these next couple of quarters, as we did in the first.

We have reasonable transparency on certain things. A lot of the education revenues will come into our fourth quarter. We had good revenues in the first quarter, but because of being in the middle of the school year a lot of these revenues won't hit until the fourth quarter, so our big sales training revenues that hit in the first quarter are in and done and won't be as big until later in the year. So we feel good about being able to meet our expectations and those expectations are quite substantial as they are without everyone assuming that we're going to continue to beat those.

I'll now turn the time over to Steve Young to discuss our financial results in more detail and then we'll open it to questions.

Okay, thanks again, Bob. So as Bob and Stephan and Sean discussed in the overview we are pleased that operating profit was $2.6 million higher than last year, we're also are pleased that we have positive earnings for the quarter, we're pleased that our cost control and business model measures are working well, and we're pleased with the good revenue start for the year. They've also talked about a lot of numbers and given a lot of good overview of the P&L information, so maybe I'll just go with a few reminders and call it good. I usually have more time to talk when the numbers are bad.

First of all, as you review our financial information now and in the future, please always note these three points that will be with us for some time. The first one is, that our income tax provision is typically higher than income taxes calculated at statutory rates. The tax rate is high, due primarily to the interest on management loan program -- on the management loan program and our current inability to benefit from foreign tax credits. In this quarter, as example, our provision is 69% of pre-tax. Our tax provision will typically be something like tax calculated at statutory rates plus about $2 million of expense per year. So additionally, please remember that even though our tax provision is a very high percentage of pre-tax income, our amounts paid for taxes is primarily only the amount paid in international jurisdictions, primarily Japan, and that's the amount of our overall payment, so typically in good profit times that will be less than our tax at statutory rates, and this benefit in the amount we actually pay is due to our NOL carry forward still totaling more than $30 million.

Additionally, we also get many questions about the number of shares we use in the calculation of earnings per share. When calculating earnings per share in a -- when we're in a loss we must reduct the management loan shares of 3.5 million from the share count. Therefore, you'll see 13.4 million used in the prior year, even though our outstanding shares is about 16.9 million. Additionally, as you can see in Slide 17, which we have presented in the past but we think it's important to keep in front of everyone, when you consider our outstanding shares please remember the potential impact of our management stock loan program shares and our outstanding warrants. And if you want to talk further and how those work and how they behave, please give me a call. I'll be happy to talk about that.

And the third item we think is important to always remember is that we have a financing obligation of more than $31 million when you consider the long-term and short-term portion on our books. This financing arrangement is the capitalization of our rent obligation [we sent] to our corporate offices here in Salt Lake City. We pay just over $3 million per year in rent for these facilities. Since the transaction is reflected as a financing obligation, even though it's like rent, our ob -- and the financing obligation is on the balance sheet, the rent doesn't appear in SG&A. The payment that we make is reflected as interest expense and a reduction in long-term debt. So please remember that and determine how you want to handle that in valuing the Company.

Slide 18 is a new presentation for us. This slide shows the amount of cash generated by those activities that are directly related to the -- to our statement of operations. You can see in this slide that we start with reported net income of $248,000, then we add back the amount of non-cash expenses, which are depreciation, and amortization; amortization of capitalized curriculum, deferred income taxes, and share-based compensation, and then deduct cash paid for capitalized developed, and capitalized expenditures. The result shows that nearly $3.2 million of cash is generated this quarter by P&L-related activities, and we just felt it would be interesting to show the difference between $248,000 of net income and the cash that is actually being provided in the quarter by those activities. Please do note that in this particular quarter the amount that was spent on the purchase of property and equipment and curriculum development cost is quite low. That amount almost be higher in coming quarters, particularly in our third and forth quarter. So our ongoing benefit wouldn't be quite the gap that we show here, but still significant in most every quarter.

Also, in the slides, we include in the webcast slide typically a pro forma financial information, as you can see on Slide 19. This slide, when presented, will typically show the operating results without certain one-time non-repeating and unusual cost. We put this in just to show that we didn't haven't have any of those in this particular quarter. When we make this presentation we will typically present income taxes at a 41% rate just for this pro forma presentation as opposed to the 79% or whatever it would show on the face of our statement of operations, and that's the only amount that we have to talk about during this quarter. We do not expect significant pro forma adjustments in this year like we have had some restructuring costs in others in the past. We just won't have -- we don't anticipate restructuring and other type costs like that in this year. We do expect in Q2 to have almost $1 million of non-repeating, or non-operating and non-repeating costs related to reimbursement of airfare and compensation, and we'll talk about those more in Q2. But I think good results shown in the pro forma information that goes down to a $690,000 pro forma net income for the quarter.

As we talked about our P&L I think we have gone over that enough. We've talked a lot about revenue. We're pleased with the good start for the year. Our margins are good, we think they are going to be good, that are -- they're dependent on our mix and we're comfortable with that. Our SG&A, we're very pleased with the broad-based changes in SG&A, meaning that all areas of administration and support participated and reflects a good focus on our business model. And very important, I believe, is that our reductions we do not believe in any way reduce our ability to grow the business, so we haven't cut into the flesh engines of growing business today and I think that that's very important, so -- and we expect that these kind of trends will continue somewhat in the future. At some point in time, obviously, the dollar reductions will turn as we hopefully -- revenue grows a little bit, but we're very comfortable with our P&L this month.

On the balance sheet -- and just mention a little bit about the balance sheet, because our balance sheet is also pretty straightforward. Collections these days are a little more strung out, perhaps due to the economy, but still we have receivables in inventory that are in good shape and we have some room for improve, meaning reduction of those balances. We're always going to buy some fixed assets and some computer equipment, but we're not capital intensive and we don't see how we would be. We're going -- and we're in the future capitalize our curriculum development costs. We also anticipate looking at the balance sheet that our line -- our line of credit, which expires in March of this year we expect will be renewed with a new credit line before that date, and we expect our borrowings under that line of credit to decrease significantly throughout the year, even to zero sometime next year, maybe even early in next year. We do expect to have an increase in goodwill over the coming years, depending on the performance of the acquired Speed of Trust business, and the resulting earn-out payments that we will make. And as I said, we expect the borrowings under our revolving line to increase and we expect all that of that that I just talked about --

To decrease?

Did I say the wrong word?

Yes.

Okay. We expect our borrowings to decrease under the resolving line, sorry. As a result of that e expect those results to convert in to cash flows, which obviously will be most impacted by operations, but as you think of cash flows our interest expense will be similar to what it's been in the past or reduced a little bit as our revolving of credit reduces. We expect our taxes paid will be the $2 million to $3 million, depending on our profit in international jurisdictions, similar to what it's been in the past. We expect to spend our $4 million, more or less, in our CapEx and capitalized development. We expect to make the earn-out payments that we talked about. We expect our day sales outstanding and our inventory turns to improve somewhat. And we ex -- we do expect our payables balance to decrease from what it is at the end of this quarter. And over time we will apply some money to our working capitals, as out business grows, and our receivables correspondingly increase. But that will be a happy day, and we do expect to provide cash from operations, so we're quite pleased with this quarter.

Bob?

Thank you, Steve. I'll now turn the time over for -- to the -- to you all for questions. I just want to express appreciation to each of you for your patience and continued faith in what we're doing and also to our executive team and to all of the Franklin Covey associates who have stayed before and that do such brilliant work every day. So let's turn it over for questions.

(Operator Instructions). And your first question comes from the line of Joe Jensen of Barrington Research. Please proceed, sir.

Hey, guys. Joe Jensen from Barrington Research filling in for Alex Paris.

Hey, Joe, how are you?

I'm doing well, thank you. First off, congratulations on a good quarter.

Thanks.

Now my question when you look at your core business and having been able to stabilize your business during these economic times that we have gone through, what are overall top-line expectations investors should be looking for this year, and going forward? I say that excluding the Slide 7 through 10 because those are more like hypothetical scenarios, but from a modeling perspective can you guys give me some guidance on that?

Yes. And we -- I'll just say in general, Joe, although we don't give specific guidance, the num -- the idea that -- as we mentioned, our consulting and training revenues, excluding public programs, actually grew 3% -- approximately 3% during the quarter. We would expect in the second quarter that revenues would grow, even including public programs, and just overall revenues would grow and grow in the other quarters as well. But I think the existing environment continues to be difficult, we're not expecting that we'll return to 2008 levels this year.

Right.

But we had a 2% price increase that we applied across the board early in the year. We had about $2 million of additional growth last year in direc -- in sort of our direct office, which we think they can do again this year, and we would expect a little bit of growth. Maybe we'll get a little bit more, but we would expect a little bit of growth in our direct offices and our licensees above that. Our practices grew by $5.5 million last year and we would expect to be able to repeat that. If you take $130 million of revenue from last year and expect a couple of percent from price increases and some growth in the practices you'd expect to be north of that number this year, and that's probably as far as we'd go at this point. That's probably not as helpful as you wanted me to be, but those are the factors I'd consider, that we'll get our price increase, we'll get a little bit of growth beyond that, and we'll get some growth in our practices.

Great, I appreciate that. On your last call you mentioned possibly another $5 million additional cost takeout going forward. When do you think we'll see some of that come through? And for SG&A, the $17 million, should I be -- is that, do you think, a steady run rate here?

The other $5 million really was a -- the time we first talked about that was in our July conference call, and felt that we would get -- it's a combination (inaudible) business model improvements that included some additional cost reductions, also included some gross margin improvement activities and so forth. I think -- so those you should be -- you do see in the first quarter. They're included in the first quarter results, and we expect those will continue. Our gross margins were higher, our costs were lower than originally had been budgeted, reflecting the fact that these costs were there. As I mentioned in that one buildup slide that's the vision slide, so to speak, there are some of those costs that will benefit us in this year, like the IT, $1 million in the back half of the year that we'll get this year, it will be $2 million next year that'll be on top of that. But the $5 million we felt like we had identified and implemented by year end and that they'll be part of this if the -- you think on that vision side, if EBITDA increased to something in the order of $16 million or so this year that would certainly be included in that.

The $5 million that we talked about is business model improvement, which included cost reduction and what we refer to as covering of costs, and we expect to achieve that, as Bob mentioned, just wanted to emphasize that. As revenues go up that we hope we're paying a lot more in SG&A on commissions and bonuses that are tied to profitability, and maybe investing in other areas of growth. So it seems like we always have two different concepts going on as we're thinking of SG&A as reported and that's all of the cost reductions and good things we're doing to pursue the business model, and then other things that we choose to do to grow the business going the other way, and having some commissions increasing as a result of that.

And that's why we reflected -- the slide we showed, we showed the central costs, which we don't -- aren't typically affected much by commissions went down by $12.8 million. That we think will sustain and go down further, as noted. We're investing in our practices, but with the investment in SG&A, the EBITDA is going up from them because they're covering that, and the flow through on additional revenue, if you take gross margins in the high 60s overall on field revenue and -- to close to 70%, and direct selling costs, including commissions around 15%, even though those will grow, the flow through is still quite substantial.

Great. Thanks, guys.

Thanks very much, Joe.

And your next question comes from the line of Kevin Henehan of KMH Capital Advisors. Please proceed.

Kevin, how are you?

Hello, Bob, how are you?

Great, good to talk to you.

Thanks, thanks for taking my question. I want to congratulate you on getting some coverage. I was on the call probably a year or two ago saying you've got to get some coverage, and you've gotten some so I think that's great and I hope you will continue to go out and tell the story, because the story's changed a little bit, and I think your margins will improve a little bit through all you did in your restructurings. So I hope you'll be on the road and talking to investors. And I wonder if you could give us any color, it looks like you will have a little bit of free cash flow, that's what Steve was talking about. He didn't exactly say that, but he kind of talked around it. If there was free cash flow this year and maybe more next year, what would be some of the uses of your cash flow that you would pursue?

Yes, I think, Steve, you might want to just speak to this. One of the things that Steve just talked about is we currently have a balance on our credit facility of around $11 million, and we would expect, as Steve said, to pay that off during this year, so one of the uses of our free cash flow is to pay off the debt. Following that, I think we've had a history of using excess cash flow -- of two things. One, making sure we had plenty of liquidity, and then anything above that using it to either pay down debt, which we did, redeemed for stock or buy back common. And so I think as -- we have -- you missed, perhaps, a couple of the last calls, but I think our plan going forward, although there's no specific plan around it, would be -- we don't believe we're capital intensive, we do believe that if we can hit these -- if we can meet our plan we will certainly generate significant amounts of -- that would result in generation of significant amounts of free cash flow, and we would expect to return that to shareholders in some way through additional share repurchases or dividending or a combination of both.

Okay, thanks a lot, Bob.

Thanks, Kevin.

And your next question comes from the line of Patrick Retzer of Retzer Capital Management. Please proceed, sir.

Hi, guys, I wanted to congratulate you on an excellent quarter. I heard the explanation on the high tax rate. The question I have is does that onerous tax rate for GAAP purposes go away at some point? And if so, when does it more or less normalize?

We hope that the extremely high rate does go away, but it 'l be contingent upon two things happening. One our resolution of the management stock program, because under that program there's interest expense accruing and it's that interest expense to the participants, interest income to us, that we're not reflecting in our financial statements that causes the additional tax expense, so when the management loan program is resolved, that will go away. It's really -- at about the same time, or based upon the same results we will eventually consume our net operating loss carry forward and be able to utilize our foreign investment tax credits, and then at that point in time, the other part will go away and we'll be left with pretty much a reasonable rate at 40% to 42%.

Okay. And as far as the employee loan amount that contributes to that, that's a fixed amount, so as the income continues to grow the rate in percentage terms should drop, right?

Yes --

Okay.

-- it would. And as we mentioned, the result of those two things might be viewed as simply $2 million a year of additional tax expense that, yes, would be a smaller percentage of a larger number.

Okay.

And, again, just maybe a footnote on that, just to -- and Steve talked about the three things that are a little complex, including the share count. There's more than a $50 million receivable -- or approximately $50 million receivable from the participants in the management stock loan program that we wrote off years ago and that will never come back on, so there's a $50 million asset. For those who try to value using -- look at the multiple and then subtract other assets and liabilities, there's an asset -- there either is a bigger asset there, I would argue, or there are fewer shares and we get in our presentation the worst of both. No asset and yet all the shares associated with it. Those shares are sitting in escrow and at such point as the share price around -- gets to around $14, then those will automatically come back to the Company, those shares will go out of the denominator. In the meantime, the interest on those, as Steve said, comes in as interest income for tax purposes. About $0.5 million a quarter is the tax expense, although it's offset against our NOL, so that's what's fouled it up. But for those who have been patient enough to go through, most of you recognize that on a normalized basis that won't be there, the shares won't be there, and arguably.

Okay, so you're saying there's a hidden asset equivalent to about $3 a share?

Well, I'd say there -- I'd really say the other way. The asset will be just be canceled when the shares come back to us, but I would suggest the shares were overstated. You've either got to -- you ought to show the asset, which we can't do, and the shares, or eliminate both, which is probably what I would think is (inaudible).

Okay, okay. And can you comment on the growth you saw on the customer loyalty program?

I can. We didn't share specific numbers and I probably won't, but we had good growth in the customer loyalty practice during the first quarter in the order of 12% or 13%. It came primarily from the expansion of existing customers, and there were some new customers acquired during the first quarter, eight new customers that are in pilot phase, but during the pilot phase it doesn't add an enormous amount to revenue but some. But the expectation would be that several of those would become -- would go into full rollout. But each of the practice areas that Sean talked about really -- I don't think we had any practice area that didn't grow and grow quite substantially during the quarter in terms of their national account business and overall.

Okay. Thank you.

Thanks, Patrick.

(Operator Instructions). And ladies and gentlemen, there are no further questions at this time. I would now like to turn the call back over to Mr. Bob Whitman for closing remarks.

My closing remarks would just be this to thank you again for making the time be on the call today, for your interest in what we're doing. We feel good about our prospects, our team, and the fundamental strategy is simple. It's really, we feel moving forward, the execution is at least around things that we feel like we know; growing the size and capability of our sales force, continuing to build the strength and size of our licensee operations, and taking these [targeted] practices and continuing to move them forward. that and a good cost basis we think should allow us to have good top and bottom-line growth for the foreseeable future. Thanks very much.

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