Franklin Covey Co (FC) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Franklin Covey Company second quarter and fiscal year 2010 financial results conference call. My name is Alicia, and I will be your coordinator today. At this time, all participants are on a listen-only mode. We will conduct a question-and-answer session toward the end of the conference. (Operator Instructions).

As a reminder this conference is being recorded for replay purposes. I would now like to turn the call over to Mr. Derek Hatch, Corporate Controller. Please proceed.

Good afternoon, everyone. Thanks for joining us today, on our call today.

Before we begin the call, we would like to read the usual forward-looking statements release here. We remind you that this presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based upon management's current expectations and are subject to various risks and uncertainties 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 product, 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 said, I would like to turn the time over this afternoon to Bob Whitman, our Chairman of the Board of Directors and Chief Executive Officer. Mr. Whitman?

Thanks, Derek. We're delighted to have everyone join us today and hope everyone received the press release about an hour ago, and has had a chance to go through it. I'm delighted to report that our second quarter met or exceeded our expectations on essentially every measure. I want to give you some headlines, then go into the details, and we'll have other members of the executive team share some perspective.

Revenue grew during the quarter. We achieved revenue growth of $1.9 million, which is 6.2% up, versus second quarter last year. This somewhat exceeded our expectation for the quarter. Excluding self-funded marketing events, including public programs and speeches, the year-over-year revenue grew $2.7 million, which was 9.8%, which we felt very good about. Our gross margins improved for the quarter. We were at 63.6% compared to 62.5% during last year's second quarter, also slightly exceeding our expectations.

Our selling, general, and administrative expenses declined. Total SG&A for the quarter was 18.9 versus 20.2 during the second quarter of last year, and excluding approximately $954,000 of nonrecurring charges during the quarter, which we talked about in our last quarterly call, and we didn't have any nonrecurring expenses in the first quarter. We don't anticipate any in the subsequent quarters, but we knew we would have some in this quarter. That would have put SG&A expenses for the quarter at $18 million which would have been the reduction of more than $2.3 million compared to last year, and that's even after incurring additional commission expenses resulting from increased revenues during the quarter, and reflecting additional expenses in support of building our practices.

Our adjusted EBITDA, which is adjusted only for the nonrecurring charges, which Steve will detail in a moment, our adjusted EBITDA for the quarter was $2.2 million, a little over $2.2 million, a $3.8 million improvement, compared to last year's adjusted EBITDA loss of 1.57 million. In Q1, we saw adjusted EBITDA increase by $2.7 million, and this was obviously a $3.8 million, even better than that. So even though, as we mentioned in our last call, the second quarter revenues were slightly lower than the first quarter due to the seasonality of the holidays, we expected that our improvement in adjusted EBITDA would exceed that achieved even in the first quarter, which we felt very good about, substantially exceeded that.

Even without eliminating the nonrecurring charges, EBITDA was up $2.8 million so it also exceeded the improvement in the first quarter, even at that level. Most all of that improvement flowed through so that operating income for the quarter improved $2.7 million even including the nonrecurring charges Net cash provided by operating activities was positive $2.2 million. Our balance sheet also improved during the quarter. We paid down our credit facility to $10.5 million at the end of the quarter. So those are kind of the headlines.

I will now just give some additional detail on each of these, then turn the time over to the executive team members. Revenue, as we noted, continued to strengthen during Q2. I've already given the basic numbers but revenue increased $1.9 million, 6.2%, and without the self-funded marketing programs, public programs and speeches, revenues increased 9.8%. So this is a significant milestone for us. It reflects an ongoing pattern where we had positive revenue growth everyall in Q2, Q1 we had positive revenue growth in the training and consulting side, but not overall. Here, we did.

So the revenue trend continues to strengthen. Q2 was better than Q 1. Q1 was stronger than Q4, which was stronger than Q3, which was stronger than last year's Q2. So we feel good about the trend. We expect positive year-over-year revenue growth in both Q3 and Q4 and for the year as a whole.

As will you note in the press release and attachment, our revenue improvement was very broad based. As shown in slide four, for those following, revenues in our direct offices in the US and Canada grew by $1.5 million, which was positive 12% growth. The revenues in our direct international offices declined by $500,000 overall, which was 6%, but that reflected revenue increases in the UK and Australia which were slightly more than offset by declines in our Japanese office where the economy continues to struggle. Internationally, the primary place where there's continued struggle and the economy continues to be soft, and we think we're making progress, but nevertheless it continues to be the one area that we haven't seen the improvement that we would hope. International licensee royalty revenues grew 17%, $300,000. Revenues in our national account practices grew by $1.5 million or 61%. As noted, the self-funded marketing programs in other revenue declined -- or other expenses declined as discussed above.

As a result of strong bookings, our contractual pipeline increased in Q2 compared to both Q2 of last year and into the first quarter. We expect to achieve revenue growth in Q3 and Q4 as I mentioned, and that contractual pipeline puts us in a good position to do. So as shown in slide five at the end of the second quarter our contractual pipeline was just over $17.6 million compared to $15.7 million at the end of the second quarter last year, and $15 million at the end of this year's first quarter. Bookings have been particularly strong in our field offices which is where most of the declines occurred last year. In March alone, in our field offices domestically we booked 735 new training days. That means days that we ultimately will deliver in coming months. So 735 in March of this year compared to 397 days in March of last year.

So this 330-day improvement translates into approximately another $1.8 million of booked revenue in March alone that will be delivered in future periods. As shown in slide six, both our facilitator business and our bookings, both of which in our field offices are up year to date. So on the revenue side, we see strength in almost every area, and in Japan, while the declines have moderated some, that's the only challenge we continue to have. And we think we'll have further moderation in Q3 there in that we will talk about later that overall even our international direct offices will show growth in the third quarter, even net of the decline in Japan.

Gross margins, as we mentioned, improved to 63.6% from 62.5% for the second quarter, an improvement of 110 basis points. I mentioned before that our SG&A expenses during the second quarter were $1.3 million lower than in last year's second quarter, then adjusted for the nonrecurring charges they declined to $18 million, an improvement of $2.3 million compared to the second quarter of last year, even after accounting for increased commission costs resulting from our increased revenue and our investments in our practices. Our cost improvement was very broad-based with lower costs in every major area except for our practices, where we're making new investments and where, as we noted, commissions were growing as a result of increased revenues. As will be noted in a few minutes, EBITDA contributed by these national account practices increased significantly during the second quarter.

On the profitability metrics, excluding the $954,000 in nonrecurring charges, adjusted EBITDA was $2.2 million, representing a $3.8 million improvement compared to the second quarter of last year. I've already reviewed most of this but EBITDA was $1.26 million even including these nonrecurring charges which represented $2.8 million improvement and operating income was $2.7 million better than last year's second quarter. Pretax was also $2.5 million higher than in the second quarter, even including these non-repeating expenses. Finally, our net cash provided by operating activities was $2.2 million during the quarter, and we expect this to increase in coming quarters. So overall, really, on almost every line item and through almost every operation we felt very good about the second quarter's results.

We're also feeling good about Q3's expected performance, five weeks into Q3 our momentum is good, our backlog is good, we expect that Q3's performance will also be strong. As I noted previously, our revenue momentum was very strong also in March, our first month of the third quarter with field bookings of 735 new training days booked versus 397 last year. The revenue trends continue to strengthen while clients are still cautious, we expect to achieve year-over-year growth in revenues, as I mentioned, in Q3 in the third and fourth quarters. Our pipelines are deeper, our conversion rates are better, and cancellation rates are substantially less than they were once things were put on the books.

We expect gross margins to continue to be strong. Our central SG&A expense will continue to be low, and our field SG&A expenses will increase somewhat to reflect increased commissions relating to growth in revenues. We will also have some increases in expense related to our practices, but we expect all of these increases in costs in the practices in the field to be more than covered by growth in revenues, and so overall, any increases in costs we expect we'll still have very good flow-through from increased revenues.

EBITDA in the third quarter is expected to be substantially better than in last year's third quarter. We don't expect any nonrecurring charges during the third or fourth quarters. As shown in slide seven, as we discussed in last quarter's report, our business is really not very seasonal. There are some quarter to quarter variances that are worth highlighting. Slide seven shows the average seasonality of our current business by quarter over the past three years. As noted, because companies tend to not do much training during the last two weeks in December and the first week in January, our revenues during the second quarter typically are a little lower than in other quarters. On the other hand, our revenues tend to be higher in the fourth quarter reflecting the fact that substantial revenues for education practice are recognized in the fourth quarter, which is obviously when the teachers aren't teaching and can therefore be trained more easily.

Second, historically we have our one big facilitator promotion during August of each year which adds a lot of revenue late in the year. Revenue for second quarter was, as I mentioned, somewhat better than this historical pattern, and we also believe if you look at that slide seven, that our revenues in the third and fourth quarter is likely to be somewhat stronger than the strict application of the historical trend might imply, with substantial profit flow-through from each incremental dollar of revenue. So as we noted last quarter, the key factors underpinning our expected future growth are as follows.

If you look at slide eight, really four things. Significantly reduced cost structure, improved business model which we have in place now. Second, the continued growth in 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 partners' operations. And fourth, a growth in our practices and technology platforms.

So I'm just going to ask Steve maybe to take on the first one, which is our cost structure and improved business model.

Good afternoon, everyone.

As we've previously talked about, the sales of the CSBU was extremely important to us. It represented the final step in our multi-year effort to exit all businesses and activities not central to our training and consulting business. It also allowed us to reduce central operating costs and improve our overall business model by doing a couple of things. One is 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 2009.

During that year, we also identified and implemented other cost reduction and business model improvement actions to ensure that in the future, even at the reduced revenue levels of 2009, we would have attractive levels of profitability. These actions reduced our central cost by 12.8 million in fiscal 2009, compared to fiscal 2008. And the annualization of these actions and other actions has provided and will provide additional year-over-year cost benefits in fiscal 2010 and beyond.

At the same time that our central costs are declining, we have made investments, that Bob mentioned, in the support of our practices, and with the increased revenue and profit, our commissions and other variable pay also increased. While we expect that all of these investments will be more than covered by increased practice revenues, our net SG&A is and will be increased by these investments. Bob?

Thank you, Steve. Just moving to these other keys, obviously a key strategic advantage and growth driver for us is the size, reach, strength, and growth of our various sales and delivery channels. The scope of our distribution, including our direct offices, licensee offices, national practice accounts, provides with us a unique ability to serve global clients and allows us to attract content. Some key thought leaders were interested in accessing our distribution capabilities. So I would like to ask David Covey, co-Chief Operating Officer for our global operations, to report on our direct offices, then ask Stephan to talk about our licensee operations.

Thanks, Bob. As Bob said, we had really good second quarter for the US and Canada direct offices. Our revenues continue to strengthen, and they were up as mentioned, by 12% versus prior year, which was a little bit ahead of expectations, which is always a good thing. Both bookings and facilitators' orders were strong. Bookings were up 5%. We had a pretty strong booking last year, so that was significant growth for us.

Facilitator orders were up 25% during the second quarter, and so we were very happy to see that, and that was probably a little bit of exceeding expectations in that area. Most of our client partner teams are outperforming relative to either their budget or their last year result, which is great, to get back on track and see about two-thirds of our folks to be back on target against their goals, and our domestic offices are currently expected to grow both revenues and EBITDA compared to last year in Q3 and Q4. So we don't think this is going to be a flash in the pan for a quarter. We think that we have turned the corner, and we're expected to see further revenue increases over prior years both in the next two quarters.

For the three international direct offices, as Bob mentioned, two of the offices, Australia and the UK, Australia was up significantly versus prior year and the UK was as well higher than budget and last year so we're excited to see continued growth from both of those offices in Q3 as expected. As Bob mentioned, Japan continues to be impacted the most in terms of all of our direct offices, and we saw a decline by about 18% in the second quarter, which was slight improvement over Q1, which was down 21%, but we expect that Japan's revenues in Q3 will strengthen a little, but we don't expect to see growth over prior year in Japan. Overall, however, we feel good about the operations in Q2, and we think our outlook for Q3, in all the offices, except for Japan, is going to continue on the same trajectory. Despite Japan's relative softness, revenues are expected to be up slightly, then EBITDA is also expected to be up slightly over Q3. Stephan?

Thank you David and Bob. Both in the size and strength of our [associated] international licensee partners operations, as Bob said earlier, during Q2 our licensee revenues of $2.1 million were up 17% compared to Q2 of last year. We have just returned from a a great trip to India with Bob Whitman, and our partners there have grown significantly from where they began seven years ago. We feel really good about the operations and future prospects. We continue to see positive indicators among our licensees' operations worldwide, and believe that we'll also achieve significant growth compared to last year during Q3. Bob?

Thanks, Stephan. I guess when operations are up 17%, you get to be very short and sweet.

Finally, just a note on our practices, as you know, over the past couple years, to ensure our market leadership in each of our content areas and markets, we've created practices. You think of them as product lines or vertical markets or what we say jobs to be done, content areas, jobs to be done that our clients have. We currently have five practices. Education, sales performance, speed of trust, execution and customer loyalty. We're also in the process of developing other practice areas, including a practice on on-line learning.

Practices are in charge of growing their respective businesses. Each practice is responsible for such things as creating thought leadership, building relevant products and solutions, developing the go-to-market strategies and building the capabilities of our sales and consulting teams to sell and deliver these offerings. Practices also have the responsibility to sell directly in developed business with their own client base which includes selective national accounts.

As you know, our new practice categories have grown significantly since their inception. Internally we categorize our practices as follows. One, field support practices. Those are those practices where almost all the revenues are recognized in the revenues of our direct offices or licensee offices, and these include the execution, speed of trust, and on-line learning in technology platforms areas. The practice leaders were really leveraging the worldwide network we have and almost all the revenues are recognized there.

We have others where they're more focused on specific target markets, and we call them national account practices. This is where almost all the revenues recognized in the practice of themselves, these practices include customer loyalty, sales performance and education. The revenue from these national account practices that actually have revenue recognized has become quite substantial, and even in 2009's difficult environment, international account practice revenues grew by $4.4 million which is 42%. During the second quarter, revenue in our international account practices grew by $1.5 million, which was 60.9% coming off a relatively small base. The gross margin percentage was up compared to budget and EBITDA contribution was up even further.

As you see in slide nine, year to date in 2010 the national account practice revenues have increased $3.2 million which is up 58% year to date, gross margins up, and EBITDA contributions up even further. So as previously discussed, we believe this new practice structure will offer us new growth opportunities that we've never had before, will give the focus we need to become market leaders in every practice area in which we choose to focus, and each one of our practices from trust to execution to sales performance to on-line learning is experiencing significant growth and creating really tremendous client results. In this last quarter, we've had a number of very large clients go into full rollout with some of their offerings, and while those aren't necessarily in contractual totals now, the commitments will ultimately show up in those contractual totals, and we think will be very significant to future periods.

So in conclusion, all in all, we feel very good about Q2's results. We believe the combination of our lower cost structure and improved business model, together with the strength and factors we discussed above, lead us to very good results in the third and fourth quarters and for the year as a whole. Let me now turn the time over to Steve Young to discuss our financial results in a little more detail.

Steve, just before you do, on a personal note I might mention that some of you in the coming weeks and months may see some Form 4 filings reflecting the sale of a small number of shares by me. These are pursuant to a 10b-5-1 plan which has been in place for some time that provides for the sale of a relatively small number of shares, 12 to 15 or 16,000 shares in each of the next six months. I mention that, one, to just be aware. Two, to emphasize that it's in no way reflecting a lack of commitment.

Obviously I have, with outright stock ownership, warrants, and options, I have more than 3.5 million shares, so I'm one of the largest if not the largest individual shareholders, and the sale of these shares really won't affect my net ownership, to any real degree, because each year a significant portion of my compensation comes in the form of new stock grants, which are typically more than these shares. This simply provides some additional liquidity for some philanthropic and other activities in which our family is involved.

Steve with that, I will turn the time to you.

Thanks, Bob. So as Bob discussed in his overview, we are very pleased that operating profit was $2.7 million higher than last year, even after absorbing the $950,000 of nonrecurring charges that we mentioned in Q1 would be occurring in Q2. So we're very pleased with that result, particularly, as Bob mentioned, that revenue increased $1.9 million over the prior year. I also agree with what Bob was talking and echo the same information that our balance sheet is straightforward, and I believe it's under control, and we are generating cash. But to me, from the whole overview, to me the most important point this quarter is that revenue grew over the prior year. That's a very important factor.

I just want to mention a few key points. Included in the webcast slide is a reconciliation of net loss to adjusted EBITDA as you can see in slide ten. This slide, when we present it, will typically reflect EBITDA without certain non-repeating and unusual costs. As you can see from this slide, adjusted EBITDA increased $3.8 million in the quarter and $5.6 million for the first half of the year. We're very pleased with this increase.

Additionally, slide 11 is a newer presentation for us. This slide shows the amount of cash generated by those activities that are directly related to the statements of operations. You can see that this slide begins at the top with our reported income or loss, and then we add back the amount of noncash expenses included in that income, and then deduct the cash paid for capitalized development and capitalized expenditures. Some call this a free cash flow, or a cousin to free cash flow. This result shows that we generated $1.6 million of cash in this quarter and have generated $4.8 million of cash in these two quarters by the P&L related activities. Please note that still the amounts that we paid in the quarter for capital expenditures and capitalized development are unusually low and in coming quarters, will increase, as we spend more on capitalized development -- and capitalized development of curriculum, primarily. But I think this is a very important slide intended to just show that our operations generate cash.

We also get many questions about the number of shares used in the calculation of earnings per share. When calculating earnings per share in a loss position, we must deduct the management loan shares of 3.4 million held in escrow from the share count. Therefore, you see 13.4 million shares used in the calculation, even though our number of outstanding shares is about 17 million. Additionally, as we show on slide 12, which is modified just a little bit from the past, as you consider outstanding shares, please remember the potential impact of the management stock loan program shares that are currently being held in escrow and would come back to us when our share price equals the sum of principal plus interest, and the impact of our outstanding warrants and options.

And all of these things, if we need any additional information, always please feel very comfortable to call. You're all very good, obviously, at reading through P&L, so I won't just go down the P&L, just to repeat that we're pleased with revenue, we're pleased that our margins are good, we think our margins will hold up, will modify just with mix but still be good. Our SG&A, we've mentioned that the cost control efforts of this year and past year are very broad based, meaning all administration and support and field functions in areas have participated.

But as we think of SG&A, please remember that we have cost control efforts going on, we have the benefit of '09 of these efforts -- in this year of efforts that we undertook in 2009. We're still conducting cost reduction efforts and then please remember we will invest in our practices and we hope that our commissions and our bonuses continue to grow, because that means we have revenue growth and we have profit. Depreciation will remain pretty much the same as it has been. A little increase as we capitalize some systems and that sort of thing. Our interest will go down a little bit as our revolving line goes down, but our interest is primarily related to our financing obligation. So that will remain about the same, just down a little bit. And then just please always remember our tax provision is typically higher than our income taxes calculated at statutory rates.

When we have a benefit, the benefit is higher also. For example, in this quarter, the tax benefit is 73% of the pretax loss. So we expect our tax provision to be a similarly high percentage of pretax income in the future. But due to the impact of our NOL carry forwards, we expect our taxes paid to be only the taxes paid primarily in our international locations.

During this quarter, we did obtain a modification and a one-year extension of our line of credit facility. Under the terms of that modification the line of credit remains at $13.5 million until December 31st, and then it reduces to $10 million for the remainder of the term, which is mid-March. The interest rate is primarily changed to LIBOR plus 3.5%. Subsequent to the quarter end, we paid $3.2 million to the former owners of Coveylink for the first of five potential earn-out payments for the speed of trust practice, which is doing very well.

Bob, I think that's enough to go over at this time. Just summarize again by doing the wave that revenue increased and we're very pleased with the year-over-year change in our profitability.

Thanks very much Steve. We'll now open it for questions. I want to note that on Tuesday in New York, for those of you who may not have heard, we're having an investor day. We'd like to invite you to that. If you have questions, hopefully each of you on the phone has been notified of this. But if you need any of the details, we'll get it to you, but it's from 9 to 1 next Tuesday at the Waldorf Astoria, and it will be a full presentation by management, similar to the one we had out here because the field trip we had out here. So this point, turn it back to the operator to set up for questions.

(Operator Instructions). And the first question comes from the line of Alex Paris with Barrington Research.

It's actually Joe Jansen from Barrington Research filling in for Alex. Couple questions for you. Looking for some clarity. In your prepared remarks, you mentioned March was a strong month and bookings were up about 85%. How should I look at this? What do you attribute this to?

I'll let David Covey respond to this.

We had a pretty weak third quarter last year, so I wish could I say that it's a sign of things to come for 85%. But, yes, I think -- I asked my team this, we just had our team meeting on Monday, and everybody is saying we just feel like things are starting to open up. We're seeing a lot more bidding that we're doing. So clients in the past maybe would have called us up and ordered now are doing a request for proposal where we are bidding for business. And we actually saw some of the proposals that we had won, particularly in the northeast, where our business had -- has suffered a little bit more in that area. That part of the world, that part of the country for us. We actually won a bid and we got a number of days that we got from that.

So that was part of what was won in March. The other part of it was we had a pretty weak March of last year that we were comparing to. It was our second highest month. I don't want to discount it as not being a successful month. It was our second highest booking month, and that typically doesn't happen in March. So I attribute it to us turning the corner and starting to see a lot more activity in getting back to pre-recession bookings.

Stephan, do you want to add anything to that?

We start to see many parts of the world, also business larger count, looking to talk to us about very deep engagements, same way we went 2007, 2008, before the recession outside of the US. So, frankly, we're not out of the woods, but we started to talk to clients about very large deals.

Is that why you continue to say customers continue to be cautious just beg conservative?

That's right. They're not -- we're seeing some different behaviors. We're actually thinking about maybe even hiring somebody to help us fulfill the request for proposal that we're seeing now because our business was not like that two years ago. We think the clients being more -- they need help. They still need training, and they believe that Franklin Covey's training could help them, but they're more cautious.

They put it out to bid. They try to get a low price. They send their procurement people to try to beat us down on price. That's happened a few times. So it's a little bit different behavior but we're seeing interest and activity, not exactly the same way but definitely there.

Maybe one thing to that, I think it's been well answered, but the other dimension, I think, that's starting to kick in partially in March, but you'll see this in this coming months as well is that a number of -- the way we go into a new engagement and execution or something, they start with five stores or five hotels, whatever, they can go to 20, and finally gets to maybe 60 or 80, then hopefully it rolls out. We're seeing a number of these now move into that phase of full rollout, and so part of the booking momentum will be as those start to schedule new days going forward.

Also, our pipelines are just deeper. If you look at the amount of business that we're talking about with people and proposing independent of these RFPs, it's up. Our conversion rates are a little better, and the other thing is our retention rate of stuff that we get put on the books is also higher. I think it's just a general increase in traction so probably you've got more answer than you needed. Was that helpful?

Yes. You brought up conversion rates. What kind of increase are we talking about?

Part of it is driven by our process, so it's a little hard to say. Execution, if somebody who goes to one of our marketing presentations who invites to us come in and give a presentation there, we call at buyer presentation. The conversion rate, David, is almost 50% there. Otherwise, in terms of we call solution recommendations, where we've talked to somebody about the business that they ask to us put something in writing and send them a proposal, even if it's not real formal.

It might be an e-mail that has the amounts and so forth. We close about a third of those. So about a third of those are converting now, and that's higher than maybe it would have been in the mid-20s last year, and so it's moved into the low 30s now. So it's measurably different, and the average revenue per win is also up some. So the combination of those things is helping us.

All right. One more question for you. International direct. You mentioned it was good except for Japan. I think down about 6%. And then I'm reading the national account practices was up about 61%. How do I interpret those?

Well, I think percentages skews it a lot. If you look at the absolute dollars, our national account practices, in total, prior to last year we had about $10 million of revenue in those national account practices. That grew to almost $15 million last year. Even though the percentage growth is high, the dollar amount is substantial but not huge, where as in the international, or the direct offices, you have almost $120 million of revenue across all the direct offices around the world, or not quite, but say $110 million to $112 million, so a smaller percentage. So I would say that, I don't know if that's helpful, but in our national account practices, they tend to be very large national account where, the revenue per win is high, where they tend -- recurring contracts that repeat year after year, and so when you build -- and there's a lot of focus there, starting off a small base. So I don't think we're thinking that we can grow 61% a year compounded in the practices and grow 9 or 10% in the direct offices, the domestic direct, but nevertheless, I think we're winning on both fronts.

Great, thanks, guys.

Thanks, Joe.

And the next question comes from the line of Mr. James Maher with ThinkEquity LLC. Please proceed.

Good afternoon, guys.

Hi, James.

Maybe we could drill down a little bit within the education practice. I see that obviously you're getting some momentum across the board. We talked about in more detail Leader In Me, that practice last time. Can you give us some details on the revenue for the quarter?

Yes, we haven't typically broken out exactly by practice. In fact, I don't have that sitting here in front of me, but we can give you an idea of the bookings. But overall, the first quarter was up like 60% for the Leader In Me year-over-year. The second quarter is also up significantly, but not at the same pace, just because a lot of the revenue can't be recognized during the second and third quarters because the teachers are still in school. Our bookings have continued very, very strong in Leader In Me, and our biggest issue there right now, which is kind of a nice problem, but it's more a capacity question, and being able to deliver everything in the period of time that people wanted. But I think we reported last quarter that we had around 200 schools signed up.

We've added another 60 or 70 schools domestically during the quarter, and so it's been a very substantial -- the momentum is building. There's been good funding, but I would say that if you really are trying to look at the actual revenue for the quarter we're probably up close to 40% for the second quarter year-over-year on Leader In Me, and education practice. We expect the fourth quarter will be a very big quarter for us as a lot of the revenue will be recognized then.

That's very helpful. Thank you. Couple of housekeeping items, please. Could you tell know cash balance at the end of the quarter?

$3.2 million. $3.162 million.

Okay. And I think you had said the line of credit balance, but I missed that.

It's at $10.5 million.

Okay.

Which is down from quarter end and down from last year.

Year end, it was, Steve --

Year end, August 31st, it was $12.9 million, and our cash balance was $1.7 million. So our cash balances has gone up well over $1 million, and our revolving line has gone down well over $2 million.

Okay, that's great. Can you remind us again of your CapEx plan for the fiscal year?

CapEx spending is about $2.2 million to $2.4 million that shows up in the CapEx line. We have some capitalized development costs. Those are amortized and reflected in our cost of goods sold, James. So our total capital spending would be slightly over $4 million, but really the CapEx budget I think that you're talking about is just over $2 million, because it's kind of the IT and ongoing spend and that's been very stable.

I think you mentioned it was a little light in this particular quarter, but that obviously fluctuates from one to the next. Okay. I think you have talked about how some of the practices, or some of the client focus has been on large retailers and also large hospitality clients. Are they starting to get -- if you could describe just the general tone, or they starting to get a little more positive or a little more comfortable and confident? I'm just looking to see if you're beginning to see on those particular clients more of a focus on growing than just surviving.

I think you've said it very well. Last year, we were very pleased that we were engaged by them during their worst days, because, we really showed the depth of their commitment to what we were doing, at least the depth of their hope that what we were doing would really be helpful to them. Now that they've gotten through, and I think psychologically, even if operations, for example, in the lodging industry, it continues, revenue per available room that continued to decline some, and they're not expecting -- the industry in general isn't expecting to have much of a bump up in REVPAR until the late fourth quarter.

So while the reality hasn't changed and they actually can see that bookings are increasing, that they're going to be coming out of it, what was maybe used more as a defensive weapon last year, saying, we've got to do something to retain our customers, to deliver more out of what we've got, now they're seeing this as an opportunity to, what a difference it's made in our operations in this difficult time and have now got a renewed commitment saying, gosh this is going to become the operating system for our whole company to help us win in better times. So I think we are seeing in that a couple of our large lodging clients. One particular we're into full-scale rollout across all of North America, a major supermarket chain, similar thing, not in full rollout but it's moved to more than 600 stores in North America.

And we continue to see -- a key part of our value proposition in the execution space is that one of the big opportunities everybody -- everybody has pockets of great performance. Everybody also has variability, but the real difference between great performers and lesser performers is the extent of that variability. The best performers operations are simply righter and tighter. On average, they're better, and there's variability among them. That idea is one that drives all of these clients, because they know they know how to do well in pockets. They just don't know how to institutionalize it. Our execution methodology is really targeted getting large numbers of front-line people who need to do something differently or better to do it.

And I think the results are particularly -- the value proposition is very easy to prove or disprove in that kind of a retail setting. So we continue to feel that even though that industry is still having difficulties, most all these multiunit operators are having difficulties at some level except for health care and they've got different kinds of problems that there is a real hopefulness among the clients that things have bottomed out, and an expectation that what we're doing can help them win. I don't know, David, if you want to add anything to that.

No, that was great.

Thank you very much.

Thanks, James.

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

Hey, guys, good afternoon.

John.

Just a couple quick questions. First off, on international, can you talk about what geographies are showing the greatest strength?

Sure, I'd be happy to. Stephan and David, do you guys want to take that on?

Yes, I would love to. Asia is much stronger on specifically, of course, India, China, are still growing a lot. Europe, I mean, Continental Europe is a little bit soft. We start to see in England, in the UK, especially in Q2, now in Q3, we have a much stronger pipeline, so it sounds like, with the election coming up, on May 6th, people are starting to be more optimistic about their business and are starting to give us larger engagement, as I said earlier.

Japan is soft, no question about it. I was in Japan last week again. The economy there is very soft, and as you might know, their fiscal year starts on April 1st in Japan, and so we will know soon more about budget and everything for the new fiscal year will have better -- but Japan no, question is soft, but Brazil is doing well. So BRIC countries, Brazil, India, China are doing well. Continental Europe soft, and Asia strong, and Australia very strong.

Great. And I saw recently you guys just unveiled your execution practice in India. Do you plan to move that to any other geographies, I think that was one of the relatively newer practices that have been rolled out geographically. Can you talk about that?

Absolutely. India is number one. Australia and China are going to follow -- and the UK, to follow in the weeks and months to come. Then, of course, when we expand geography by geography.

Thank you for that, Stephan. Couple other quick questions. Great to hear Leader In Me is doing well. On the customer loyalty practice, can you talk about a number of clients, at least in the pipeline, or secondarily, how many are live?

We have 17 that are live now and in various stages. As we've talked about before, perhaps others on the phone would find this interesting, the initial phase of the customer loyalty tends to be something we call a calibration study where most people already have some kind of a customer metric in place, and what we're showing them is the metric they have doesn't actually ring their stores, doesn't tell them what percentage of their customers are delighted, and it just turns out that it's true. And so that is a statistical process that starts out with a $30,000 to $70,000 initial engagement. Once that's done, at least to date, people have recognized the existing metric they have doesn't really give them reliable basis for trying to get righter and tighter because it doesn't measure the stores or delight.

So at that point, you're hoping you then get a big assignment. In some cases, despite the fact that people know that, they're so wed to the old methodology and have been reporting to others so long on how great they are on customer loyalty that they don't want to go back and change the system out, or it's going to take them some time. Others move into roll-out. At this point, we've had good success, particularly in the last two quarters targeting CEOs directly. There are many what don't care maybe, don't care that much about getting a reliable metric, but those who respond tend to care.

So we've got a number of new assignments. Most of those will be not ready to roll out for three to six months. Hopefully we'll win, one or two of those will move into roll-out. They're large when they do. We've retained all of our clients from the prior year, which is great. And several of those have expanded with us. So this is a business where once you adopt the new methodology, it's hard to get it out, because this is now with the Board of Directors and shareholders and employees, the new way of measuring it.

The next phase, of course, implement our execution practice in that -- in those same customers, and companies to really improve the score, once they get a reliable score. So we're up significantly tin number of clients that we have that are active. We have a good pipeline of proposals out there right now, John, I'd say eight, that are proposals that are out for us the proposals are reasonably technical in coming up with the architecture, et cetera, so we feel good about it. We're hoping to convert some of these pilots or calibration studies into full rollouts before the end of the year.

Great. I guess my last follow-up question on the customer loyalty portal is, the clients that have rolled this out and gone live, how would you gauge their user satisfaction on having this metric, and how is it impacting and helping their business?

First of all, we have a very high net promoter score from our customers in the customer loyalty practice. So I would say with the exception of two early on, where it didn't -- I mean, they're using the metric, but it wasn't ever adopted as a strategic imperative. There are a couple where it was early on, and I think the way we position it early on, we were so happy to get the assignment that we didn't force it to be as strategic as it needed to be. I would say otherwise, one, it's expanding in every one of the other clients. Two, several of those clients have recently been interviewed by others. I'm not exactly sure how people found out they had been having methodology but have been big spokespeople for the fundamental difference it's making in their business.

I'm trying to move my operation right and tight on customer loyalty, and you find out that you don't even know which stores actually have the best loyalty or not, it's hard to figure out which may have yours you're trying to replicate. So for them, by having an accurate metric and having a clear idea of which customers or which stores generating the highest level of satisfaction, it gives them the basis for them identifying behaves your which are driving that result and trying to replicate it throughout the company, and that's what our practice does. So I would say it's very high satisfaction, and the nice thing is high satisfaction at the board and CEO level, not just at the staff level.

Great. Nice work, guys, and thanks for your time.

Thank you, John.

And the next question comes from the line of Mr. John Roth with Argon Capital.

My questions have been answered, thank you.

Oh, thanks, John, for joining.

Ladies and gentlemen, this concludes the question-and-answer session for today's call. I would now like to hand the call over to Mr. Bob Whitman for any closing remarks.

First of all, were there any other questions in the queue? We'd be happy to answer if there were other questions. Did we cut people off, operator?

No, sir, there are no questions at this time.

Fine. We'll, of course, be happy to talk to any of you personally who would like to follow up. We appreciate your interest on being on the call today. More over, the support and interest you've had in the company over the last quarters, we're really delighted internally. Obvious we feel their nor mouse responsibility to keep everything moving, but feel real confident that bets that we have on the table are ones on which we can execute. The last quarters have shown that we are executing.

We have a really great, great team. Honestly, our executive team is superb group of people who really are driving the business day to day. We also, what we call the Redwoods, our top 25 leaders around the world, are remarkable.

We had this India trip last week where we were in Delhi, Mumbai, and Bangalore. Each evening they had between 170 and 230 senior business leaders that our team there was able to put together. The fact that they were able to invite heads of really major companies, both domestic Indian companies as well as the Indian operations of multinationals, we really had CEO-level people there. It was really quite impressive. And meeting the teams and being with them.

So we feel like that right now we primarily have got -- we don't have a lot of new bets to put on the table. The things we've got going, we've got great opportunity where we are. We think things like the education practice and execution practice can really explode over the coming years. We've been spending a lot of time laying the foundation for that and have have had good growth during the foundation, the speed of trust is going well. Our field offices are improving.

So we don't have very many things in our weekly meetings where we're feeling like we've got a lot of fixer-uppers with the exception of the economy in Japan, I think we're feeling good about things overall. So we appreciate your support and look forward to talking to you soon. Hopefully we will see many of you at the investor and analyst day next week. Thanks very much.

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