Franklin Covey Co (FC) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the first quarter 2011 Franklin Covey earnings call. My name is Melanie, and I will be your coordinator today. At this time, all participants are in a listen-only mode. We will accept your questions at the end of this conference. (Operator Instructions). As a reminder, today's call is being recorded. I would now like to turn the call over to Mr. Derek Hatch, Corporate Controller. Please proceed.

Thank you, Melanie. On behalf of the Company, I'd like to also welcome you to our first quarter fiscal 2011 earnings call today, and hope you enjoy today's presentation.

Before we get started, I would like to begin with our forward-looking statement presentation, and 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, marketing strategies, changes in the Company's market share, changes in the size of the overall market for the Company's products, changes in training and spending policy of the Company's clients and other factors identified and discussed in the Company's most recent annual report on Form 10-K, and other periodic reports filed with the Securities and Exchange Commission. Many of these conditions are beyond our control and influence, any one of which may cause future results to differ materially from the Company's current expectations, and there can be no assurance that the Company's actual 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 day of today's presentation.

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

Thanks, Derek. I'm glad to have a chance to talk to all of you today and appreciate you joining us. Hope each of you had a chance to read the press release that was issued about an hour ago. I'd like to address some detail behind that.

I'd like to organize my comments today around kind of four headlines or themes. First, that we're very pleased with the Company's strong performance and results in the first quarter. Second, we are encouraged by the strong booking trends and momentum we're continuing to see in the business. Third, based on these trends, we expect to achieve significant continued improvement in both revenues and profitability during 2011 and beyond. And fourth, we believe we have the opportunity to significantly accelerate our growth in the future, perhaps beyond what we've talked about in the past and I'll hit some headlines there.

So I'd just like to now maybe provide some detail behind each of these themes. On the first one, being pleased with the Company's performance and results in the first quarter. As you saw from a revenue perspective, revenue for the first quarter totaled $39.4 million, which is an increase of $7.5 million or 23.5% from the $31.9 million we achieved during the first quarter of fiscal 2010. As expected, our strong bookings during the third and fourth quarters, and our pipeline that we talked about at our last call translated into significant revenue growth during the first quarter.

As you see in slide four, which is the sales detail by region and type, we were pleased to have achievedgrowth in almost all of our major channels. I'll just address these quickly. Revenue in our Government Services Group grew by $5.7 million in the first quarter, reflecting the previously announced government services contract that was awarded the beginning of last year's fourth quarter, and other contracts won by that group. The significance of this contract was and is, we also achieved significant growth during the quarter in other key channels. In fact, six of our eight direct offices, both domestic and international grew revenues during the first quarter, as did every field support practice for international licensee partners in two of three of the national account practices.

Revenues in our geographic direct offices in the US, the four of them, excluding the Government Services region, grew $900,000, or 7% during the quarter, reflecting the delivery of the training related to the strong bookings achieved during the third and fourth quarters, and four of the five domestic offices grew revenues during the quarter. Revenues in our international direct offices also grew, and actually grew 16% for the quarter, with the big news being that Japan has continued to gain momentum and generated actually 30% revenue growth during the first quarter.

We also achieved growth in Australia. Revenues in our UK office, however, declined $200,000 during the quarter, but based on bookings, we expect UK's revenues to be back and to be at least flat to LY for the last year, during the second quarter. Our international licensee partner revenues also grew, and grew by 10% during the quarter, with their royalty portion growing 15%, and wholesale growing or actually declining a little bit, with most of our international licensee partners growing over the prior year, including nine of our ten largest licensees.

In our national account practices, our education practice grew revenues by 16%, the customer loyalty practice grew by 10%. The sales performance practice, which achieved 37% revenue growth in 2010, as expected, saw a decline in revenue during the first quarter, to $700,000. And that was expected. During last year's first quarter, the sales performance group was awarded a large new multi-year sales training contract, with a major technology firm. Last year the revenue associated with the launch of this new contract was a $1.3 million during the first quarter alone, and while this contract continues to be very significant and actually generated approximately $450,000 during the first quarter, this was $900,000 lower than during last year's launch year. So other than that, we grew, and despite this decline, we still expect the sales performance practice to achieve revenue growth of approximately 20% for fiscal 2011 as a whole. So it's in good shape.

Profitability, adjusted EBITDA for the first quarter was $5.3 million, which was an increase of 58%, and $2 million compared to last year's first quarter. And this was after covering approximately $800,000 in extra expense relating to our once every three years worldwide sales and delivery conference, which we held this September. So we felt very good about the growth and profitability. I'll touch more on that.

Our gross margin dollars increased by $4.5 million or 22% for the quarter. Our gross margin percentage, however, decreased to 63%, compared to 64.6% in the first quarter of fiscal 2010. We maintained gross margin percentages in all of our major operating categories, so this overall reduction in gross margin percentage primarily reflected a shift in our mix of delivery method, with more of our delivery during this quarter being on site or higher percentage being on site, and a lesser percentage being facilitator orders than in last year's first quarter.

SG&A declined to 50.2% of sales during the first quarter, compared to 54.1% of sales in the first quarter 2010. In absolute dollar terms, SG&A expenses increased approximately $2.5 million during the quarter compared to the first quarter of 2010, primarily due to a $1 million increase in commission costs resulting -- associated with the increased revenue. And this $800,000 previously noted conference cost for our annual sales and delivery conference, which I noted is held every three years. So otherwise, even with that $800,000, our SG&A as a percentage of sales declined as noted above.

Adjusted EBITDA for the quarter was $5.3 million. As we said, reflected 58% growth over the $3.3 million achieved in last year's first quarter. Income from operations increased $2 million during the first quarter to $3.4 million, more than doubling the prior year performance. Pre-tax income improved to $2.7 million in the first quarter, which was up $2 million, compared to the $700,000 achieved in the first quarter of last year. So overall, we felt very good about the Company's first quarter financial performance, it was strong in almost every quarter.

And we're also pleased that as of today, our cash balances of $5.8 million exceed our outstanding balance on our credit line, as expected, and that we are, therefore, in a position to pay off our credit facility. We would expect to continue to have a credit facility of approximately $10 million available in the future, which can be kind of the rainy day line. Occasionally, you'll dip into it. But we had said several times that we expected by year end to be essentially out of the line, and that happened instead on the fifth of January, but pretty close. So again, the first point, we are pleased with the performance in the first quarter on really all fronts.

Second, we continue to be excited and encouraged by the trends we're seeing in the business. We were very encouraged by the continuing strong momentum in our bookings during the first quarter. A key metric we referred to as booked days which are commitments for the future delivery of training engagements on site at our clients' locations is shown in slide five. Last year's first quarter we booked approximately 1350 days for future delivery. This year's first quarter we booked approximately 2300 days for future delivery, an increase of 70%, but even without the benefit of the bookings, or the large government contracts, our booked days grew by 21% during the first quarter.

As you can see on slide six, this strong booking momentum and the addition of new contracts during the quarter resulted in our having $11 million more in our pipeline of booked day and awarded contract revenue at the end of the first quarter, which would be delivered in coming months and quarters than we had at that time a year ago. We also grew our total pipeline by about $1 million relative to where we were at year end. We expect that, as usual, that the bulk of these bookings will be delivered over the next two to three quarters. I'd note that a portion of this pipeline relates to the large government contract and delays in the approval of federal government budget could impact a portion of this revenue or at least shift the timing thereof, if the government didn't somehow get a budget approved sometime soon.

Third, observation, based on these trends, we expect to achieve significant continued improvement in both revenues and profitability during fiscal 2011. As a result of this booking momentum and the strength of our other lead measures such as number of face-to-face meetings with clients, number of, we call them solution recommendations, these are proposals that we issue, these kind of lead measures, we believe we are positioned to achieve continued growth in revenue and profitability during the second quarter and beyond.

As you know, while historically we've not provided guidance, we decided, when we did our annual update, we decided to provide adjusted EBITDA guidance this year, to give you some additional clarity on how we see the trajectory of our business unfolding in fiscal 2011. As we said during our last web cast, based on the strong pipeline of booked days and awarded contracts and other operating assumptions, we expect the Company will grow adjusted EBITDA from $13.4 million in fiscal 2010 to between $18 million and $21 million in 2011, which would represent growth of between 35% and 57%. This first quarter, we made good progress toward that. Given the solid first quarter and historically our strongest quarter is the fourth quarter, we would expect and you should expect more, on an absolute basis, more modest results during the second and third quarters, although still improving, with the third quarter likely to be stronger than the second quarter, which is our normal seasonal pattern and also we know some specific revenue that we intend to make that the case this year.

Finally, just say that we believe we have the opportunity to significantly accelerate our growth in the coming quarters and particularly in the coming years. Our growth, as you know, over the past several years, has been driven by two key initiatives. First, growth in the size and productivity of our sales forces. And in both our direct offices and in our licensee offices. And second, the growth in our practices, both those we call field support, where the revenue is reflected in field numbers, and the national account practices that these revenues are identified separately.

As you can see on slide seven, the combination of these initiatives has resulted in significant growth over the last five to six years. As you see from 2004 to 2010, driven by increases in the size and productivity of our sales and delivery forces, revenue in our direct offices grew by 28%, and that's even after the effects of the recession. EBITDA also grew 67%.

As you can see in slide eight, during these same years, royalty revenue from our international licensee partners more than doubled from $4.3 million to $9.2 million. And during the same years, our national account practice revenue almost doubled from $9.8 million to $19.5 million. So we continue to be excited about these initiatives and believe in them, and we're excited to share with you that we now believe, we're in a position in the coming years to significantly accelerate the growth of these two initiatives.

Let me just hit headlines on that. With respect to increasing the size and productivity of our own direct and delivery forces, we used to think in terms of having potential to increase the size of our direct office sales force from approximately 100 to approximately 220 client partners, adding approximately 10 client partners net per year, and having new salespeople cover their costs in year two after their hire, and ramping up to more than $1 million in revenues in four to five years.

Based on our experience and analysis, we now believe that we have the potential to ultimately have more than 500 client partners in our direct offices, versus approximately 100 at present. We believe we have the potential to have more than 1,000 client partners in our licensee offices, versus approximately 200 at present. We believe with all that we've done, we can now accelerate our hiring of new client partners from 10 per year to 20 next year, then approximately 30, then 40 and maybe getting as much as 50 a year over the next several years.

We believe that a new salesperson can fully cover his or her costs in their first year rather than over two years, and that the ramp-up to the $1 million plus level can occur in three to four years rather than four to five years. Obviously, achieving this potential will require great execution on our part but we thought it was important to announce the shift in our goals with respect to growing the size and capabilities of our sales force.

With respect to our -- growing our practices, we now believe that our six largest practice areas, execution, education, speed of trust, sales performance, and then our two newest practices, leadership and productivity, which already have a substantial base but did not have a practice leader in the past, each have the potential in the coming years to grow significantly and ultimately to become $50 million plus practices, even at relatively low levels of penetration of the defined markets.

As an example, there are 124,000 K through six schools in US and Canada. The average school in our leader and me program spends approximately $60,000 with us over a period of three to four years, and so for every 1% penetration that we can get of the elementary school market in North America, that's worth $70 million of revenue. Now, that's -- we're at 400, we've crossed over the 400 school mark now. We've got a long way to go to penetrate the market. But we have confidence in our ability to do that. As you may recall, at one point we owned Premier School Agendas where we built 120 salesperson sales force just in education. We sold that business in 2001. But we have an idea of what's possible in terms of building sales forces.

So in summary, we're very encouraged by the results in the quarter, the momentum we're seeing in the business, and the potential to accelerate our growth in the future quarters and years. I look forward to reporting on our continued progress as we go through the year. I'd now like to turn the time over to Steve Young, as you know, our CFO, to discuss our financial results in more detail. Steve?

Thank you, Bob. I hope that you all enjoyed Bob's report as much as I did. It's nice to have good numbers to talk about. I am also pleased with the first quarter operating results.

When you review our balance sheet, you'll notice a few things. You'll see that the accounts receivable balance was $5.3 million higher than at year end, and incidentally, $11.4 million higher than last November. This increase is due to increased sales, and unusually high balances from just a few large customers, which have now been reasonably collected. You'll also see that accrued liabilities decreased significantly in the quarter, nearly $4 million. As a result, or an impact on cash of increased receivables and decreased accrued liabilities, our line of credit was still $11.3 million at quarter end, with $1.7 million in cash. So we are very pleased that today, Bob could announce that our cash balance exceeds our credit balance.

So as you can see, we have collected a significant amount of cash in the past six weeks. November and December seem always to be our highest collections months, by quite a bit. If you look at the slide titled "Selected Cash Information", you'll see a summary of cash generated by these operations. You'll see that net cash generated in Q1 was $3.4 million, even after we paid $300,000 for capital additions and $1 million for curriculum development. I should say $1 million for very exciting and important curriculum development.

At the end of Q1, we still have $31 million of domestic net operating loss carry-forward and additional unused foreign tax credits. The amount we pay for domestic income taxes will, therefore, be significantly less than statutory rates for some time. Our tax provision is, however, an unusually high rate at 71%. This high tax provision makes it look like we have a bad tax situation in the Company, and it does hurt our calculation of earnings per share.

But we really have a favorable tax situation, with such a large net operating loss carry-forward and unused foreign tax credits. For some time, we will continue to have a high effective tax rate on our income statement, but happily, we will also continue to pay a relatively small amount of cash that actually goes out for taxes. If you're new to FranklinCovey and have interest, then please call me and I would love to talk more about this tax provision, and also our financing obligation, which is really capitalized rent, and 3.4 million outstanding shares that are held in escrow related to our management loan program.

So in summary, we're pleased with our first quarter result. We're pleased with our current momentum. We expect to invest in growth and to grow in the future. As we grow, we expect to generate increased cash from operations. We expect our balance sheet to remain strong. We expect our liquidity position to be strong. And again, we're just pleased with a good quarter and if you have any balance sheet or other questions, please call. Thanks, Bob.

Thanks, Steve. Before we go to questions and answers, I'd just like to invite Shawn Moon, who as you know, runs all our -- oversees all of our direct offices, and all of our field support practices, as well as some of our national account practices to just share a couple of views on what's going on out in the field, and also ask Jen Colosimo, who is our Chief Operations Officer, also leads our leadership practice, to just give a quick update, and then we'll go to questions and answers.

Thank you, Bob. Good to be with you all. Good afternoon. As Bob mentioned in his discussion earlier, our direct offices achieved significant revenue growth in the first quarter.

Revenues from our eight direct offices were $28.1 million, which was $8 million or 40% higher than the prior year, with our domestic offices growing at 51%, and international offices growing at 16%. As Bob noted, the large part of this growth was a result of the government services contract. However, it's not limited to that. Our growth was broad-based, as six of our eight locations grew over the prior year with over 50% growth in our southeast and government regions.

Furthermore, our product growth was broad-based. It wasn't just in one area. Each of the major product lines, which includes our individual effectiveness lines, productivity, leadership, execution and trust, all grew over the prior year. Our domestic growth was primarily a result of 23% increase in the number of days delivered. Not including the days in connection with the government services contract. So these are in addition to. These days were largely a result of the strong bookings we had in the third and fourth quarters of the prior fiscal year, and we're also pleased to report that our strong booking pace has continued through the first quarter of our current fiscal year.

Revenues have also increased as we have realized more revenue per day delivered than in the prior year. The favorable delivered day trends were partially offset by a decrease in product sales to lead client facilitators. The Company's client base continues to be strong. This is an indicator we watch closely. The Company had double digit increase in its client base. We define a client as an entity that purchases more than $30,000 worth of products or services in the preceding 12 months. That increase maintaines over 60% of our business, being generated from repeat customers, which indicates a loyal customer base. We're also seeing an increase in the average revenue generated from each client.

Furthermore, as we discussed in previous web casts, we sold our Japanese consumers products business during the fourth quarter of fiscal year 2009, as we put our full attention on growing Japan's trading business, which had been unfavorably impacted by their difficult economic conditions, and we're pleased to report that we've had 30% growth in Japan, our Japanese operations during the quarter. And expect to see double-digit growth in the second quarter.

Just a final note, Bob mentioned that we had in September, our once every three year sales and delivery conference. This is an opportunity where we're bringing all of our clients sales partners, consultants, operational personnel, and licensees. This was an opportunity for us to present to them our growth strategies, and make sure that everyone is on the same page, and it was a terrific event, and we feel like everyone left that marching to the same beat, and the results that we're seeing now are evidence that that in fact happened. So that's a report from the direct office of the practices.

Thank you so much, Shawn. Jen?

Yes, of course you say Jen the minute the pilot speaks. Right? It's been silent until then. Hello, everyone. As many of you know, I wear a variety of hats. I have two practices reporting in to me. The national winning customer loyalty practice and the field-based leadership practice. I also have our operations from order to cash and quality, and our internal on-boarding and learning function.

I just have three things to share. Number one, as Bob mentioned, our winning customer loyalty practice grew 10%. We're excited about that. That's a result of expanding our customer base and retaining our biggest customers, so we're thrilled about that growth. The leadership practice has been integral into our field, both international and domestic, growing. And an exciting thing happening with the leadership practice, we have a keynote session coming at the training 2011 conference on effectiveness, engagement and execution.

We're really being recognized as a leader in leadership, recently within Training Magazine's E-newsletter so we're seeing growth on both the winning customer loyalty and the leadership fronts, and from an operational internal standpoint, we have for years collected quality data from our participants of all of our training and consulting, and that continues to be high. We continue to get excellent participant experience, and we have started to delve into getting very scientific buyer experience.

Of course, we had qualitative. We had their experiences they share with us, and now we're going with the same organization we work with, with our customer loyalty practice, to go out and find from our buyers the results. So beyond experience, getting more results, focused more scientifically, and quantitatively over time. We're excited about that happening, and that we'll be able to even better meet the needs of our clients, ramp up those client partners that Bob mentioned, and be better at hitting their exact circumstances. So Bob, there's mine.

Thanks, Jen. Have a safe flight.

Thank you.

We're now prepared to go to question and answer. Just before we do, one of the questions of course that's been on the table, been on your minds and our minds, has been when do we get to the point where we have excess cash and liquidity, what are we going to do with that liquidity. That's been a topic of discussion over the months, at our most recent Board meeting. It will be something that the discussions will continue on.

As you probably know, there are a couple of things that we're trying to take into account in deciding what that answer is. One is just the fact the seasonality of our actual cash flow, even with the businesses [not] seasonal, seems like our cash flow is somewhat seasonal because of our big third and fourth quarters, and our big first quarter, you end up using a lot of working capital to fund the increases in sales during those quarters that you don't really collect until later. So if you look at something, that might be in the order of $14 million in free cash flow this year, we really have used $12 million of that to pay down our credit facility recently, and so for us, while the issue is an important one, it will likely be later in this year, maybe even at the end of this year, to early next year when we have substantial excess liquidity.

The second is that with the expectation of now being able to accelerate our growth, while we don't think we'll have to fund losses to do that, as I said, we think we'll be able to get salespeople ramped up in the year, nevertheless the working capital needs associated with that, with the success of the speed of trust practice, we have buyout obligations, earn-out obligations there. We're going to continue to address it at this meeting and finalize an answer at our strategy that fits with our revised growth plan in our spring strategy retreat which will occur in May.

And so -- but I'm sure there will be some additional questions on that. I wanted to at least make you aware that this is a topic on our minds as well as it's on yours. We think it's an important -- obviously a critically important one. Historically we've had a predilection to return all excess cash that we could to the shareholders, even in the form of buy-outs, paying off the senior debt or buying back stock. We're considering the prospect of a dividend as well in the future. But want to make sure, I think the exciting perhaps change in the perspective over the last while has been that we actually have more opportunities for investment in the business than we might have thought, and we want to make sure that our plan appropriately addresses those various needs as well as the seasonality of the cash flow. At this point, I'll now turn the time over to you all for questions and let our moderator tell us how we do that.

(Operator Instructions).

I assume that our phone system's working and that we either -- who has the first question?

We do have a question coming in. The first one comes from the line of Joe Jansen with Barrington Research. Go ahead.

Guys, congratulations on a great quarter.

Thanks so much.

I just need a bit of clarification here. In the press release you mentioned direct offices was up 45%, and you mentioned largely owing to several large contracts and then Shawn had mentioned something of 50%, excluding certain things here. I'm trying to get what -- excluding those several large contracts, what, on a year-over-year basis, what direct offices did.

Yes, so in my comments, sorry if we were confusing, let's take the government services group out separately, and say that it grew revenues $5.7 million during the quarter, and that's like 280% growth. If you exclude that, and not all of that was due to the contract, because it has a number of broad-based contracts. If you take those out, the regional offices grew revenues 7%. The geographic offices grew revenue 7% in the quarter, and that's reflecting that three of the four regional US offices grew by 13% on average. And one declined during the quarter, it's one of our largest, most profitable offices, and it will grow for the year. It just had a year-over-year contract that was smaller in this first quarter.

Okay.

Does that -- keep going with the question if I've not answered.

No, no, no, it does. That growth rate in -- this quarter, in Q4, has really started to accelerate. As this government contract works its way through, are we looking to slow down here, deceleration?

Well, first of all, we've had government contracts for many, many years in this Company and they may be different branches of the government but we do a lot of work in the Department of Defense and the Agency and so forth. So this is a business for us that we expect to be ongoing. We hope it will win contracts that will replace this. We expect this contract will have a reasonably long tail on it and other work will come from it.

We have a very precise strategy about going after other large contracts like this. So we hope this will be part of the business but even if it were to tail down, I think the news has been that over the last quarters, independent of the government quantities of these particular contracts, we've had other substantial contracts we've signed in the execution business in our schools, and other things, all of our practices, and booked days unrelated to this contract were up 21% during the first quarter. So I think the bookings are consistent, even independent of the government contract, are pretty consistent with the revenue growth that we think we can -- at least in those other offices, we can keep bookings up 21% ultimately, we'll have good at least we think double-digit growth in these direct offices.

That leads me to my next question. With reporting Q1 and seeing December's bookings, are you more confident that your EBITDA guidance could be at the high end of the range?

I think we're just confirming the range. I think as you know, it's -- while the world is thawing, we're doing strategic business, the timing of which could change. You've got this government funding issue there, and so we're just -- we're reaffirming the 18% to 21% range. I think the first quarter is in line with what we would have hoped it would be. We thought it would be good.

We reported at the end of the fourth quarter that we had $11.5 million more revenue to be delivered in future quarters than we had at the time, that time last year and so the fact that little over half of that came through, a little more than half of that difference came through in the first quarter, was pretty well what we would have expected. So we're sticking with our range and feel, we reaffirmed that range but we didn't slip off our pace in the first quarter, which is good.

Great, guys. Thanks, Bob, thanks, guys.

Thanks very much.

Our next question comes from the line of Julian Allen with Spitfire Capital. Go ahead.

Hi, Julian.

Good morning. Thanks for taking my question.

Thank you.

You mentioned an increase and an acceleration in some of your longer term growth targets, specifically client partners, perhaps a long-term target being 500 instead of 200, with faster ramp. Could you give us some context to that increase in target? Is it cyclical? Is it product-based? Is it client-based? Any context to that increase would be appreciated, and thanks for taking my questions.

Sure, thanks, Julian. The foundation for this, we've been talking about in webcasts for several quarters, which has been that we have -- we've tried to go from what I would call a net approach, where we have client partners who are representing all of our solutions to all customers, to one where they're focused on a narrower set of solutions, focused on a narrower and more targeted group of clients. That's happened in all of our practice areas in the past years, and even through the recession, we've seen the growth of those practices be significant, not only double-digit, but high double-digit growth, where we've actually picked a specific problem or job to be done, and targeted a specific sales force against it.

So the constraints, at the 200 level, there were four constraints that we're removing. One is the idea that a client partner owns a geography forever and that -- take an example, just a state like Ohio. There are -- we have a wonderful client partner there who is one of our top client partners, and will always be one of our top client partners. There are 3,780 companies or company units with more than 500 employees, and another 5,000 that have more than 100 employees. We have some very good strategic business there, but our business there is done with 70 of those clients.

And so I think, as we have analyzed this, and understand the prospects that a client partner like that one can do in terms of penetrating existing clients, recognize the number of new clients that he will likely attract every year, even as good as he is, you just see the opportunity, as we have seen, with the separate educational effort, or that client partner might be able to have other client partners working with him, that could penetrate these markets. One element of it is just the recognition now, understanding who our target markets are and recognizing that there is a significant potential, as you target specific clients, that are kind of non-geography based that you can do. That's one thing.

Second is that, we have seen, as we've narrowed the scope of the offerings that our client partners represent, and narrowed the range of clients to whom they're presenting, so they have more repetitions and more experience of going after a specific target client with a specific solution, we've learned that their conversion rates are much higher, their ramp rate is higher, and one of the constraints to growing faster has been, you're trying to grow earnings every year and growing cash flow, and even though we had a fast pay back of investments in new client partners, it was still having $1 million investment or so, hiring new client partners, has been some kind of a constraint which we think we've removed that, and have ramped in the year would accelerate.

The third and perhaps the most important constraint has been mentorship. You have to get -- to get client partners ramped up, and to hire new client partners, one of our constraints as we talked about in discussions that we raised in the past, is the constraint of having enough mentors, and that we were trying to develop mentors and mentorship models. Again, these practices are affording us a very significant boost to our mentorship capability, as we now have in certain practices, regional practice leaders, who are there -- while you have a general manager and area directors and so forth, which we'll continue to have, if I'm a new client partner in the central region out of Chicago, assigned to work primarily on the execution practice with multi-unit operators, I now have -- in the past I had to count on getting some mind share of my senior client partner. Now I've got a practice leader who is riding shotgun with me, and as we've done that for the last few years, we've seen the conversion rates increase, success at penetration.

It's really a combination of those factors, that we've already been doing. It's just the natural result of that is that there are 115,000 companies or organizational units in the country that have at least 500 employees, there are another 130,000 that have more than 100, all of those can fit in our target. About 4,000 of those are currently clients. And given the substantial amount of business we do with existing clients each year and the penetration of that, we're just not going to -- we're just not going to get to those others very fast without amping this up, and we now think we understand how to do that. It's not to say there won't be execution issues related to it.

Obviously, any time you make a big jump like that, no matter how much you've prepared, we will take it, because we're not going to go from 10 to 50 in a year in one jump. We expect to move to say 15 this year, 20 next year, 30 the following year, hope that at that point, we'll see our way clear to even go higher. That's the kind of ramp that we think we can get to, and the same thing works in our international licensee partners. They have a couple of hundred client partners today, and their major growth initiative will be the same, and be driven by the same factors. Our practices will have that reach internationally as well. So hopefully that's -- is that helpful at all, Julian?

Yes. And just my only follow-up is it sounds as if that -- the growth bias is towards practices, versus call it the traditional type training business. Is that a fair assumption?

Let me maybe make one distinction. What we're really saying is, there's a lot of business we do that will be in the traditional training business. For example, we have formed a new leadership practice, and we've formed -- we are forming, we're kind of in the middle of forming a new productivity practice which hit our historical core offerings. So we actually -- we have good starts in both of those areas. What we're really doing though is narrowing the circumstances and problems that we're trying to address with those, so that we can get specific things, for example, in one of our practices, one of the major circumstances that we've gotten hired to address, is when there's been a major organizational change, either because there's been a change in the top leader in the divisional level or up, or there's been a merger or business combination or restructuring.

What these leaders are in the circumstance are needing to establish a new foundation for what they're doing, we now can identify 1,000 leadership changes a month in our direct offices and target those clients. And so I think what's happening is these practices, or the way in which we go to market, our historical content is often part of the solutions that are offered, but it's just a different way of going to market.

Great. Thanks so much.

Thank you, Julian.

Our next question comes from the line of Kevin Hanrahan with KMH Capital Advisors. Go ahead.

Hey, Kevin.

Good evening, Bob. Congratulations on a fine quarter. I just had a question which I probably asked in the past. And I heard you say the word dividend near the end of your comments, before the questions started. So I wonder if you can juxtapose for us, share buybacks, what you've done in the past and how you did the share buybacks and the big Dutch Auction just before Lehman Brothers went down. Juxtapose the share buyback versus the dividend, or possibly both, with your excess free cash flow that you expect to have going forward.

Yes, I mean, I suppose there's a strong argument that the buyback creates more long-term value for shareholders to stay in for the long term. There's a lot of research that might suggest that. At the same time, in a world where liquidity's important, where certain funds can't participate unless there is a dividend, there's at least broadening the shareholder base, there's some push on that side, so I don't know where we'll come out on the balance. My background would orient me more toward buybacks than dividends, but at the same time, I think recognizing where the world is, and so as we think about it, things that are discussed or a prospect of having some meaningful but minimal level of dividend that wouldn't preclude buybacks at such time as we have liquidity levels that we think is appropriate for our growth plans, and so I don't know if that was helpful at all. I stated the obvious.

That's helpful. I've asked that question to other companies recently, especially because the dividend tax cuts got extended. But then the CEOs usually answer, well, the buyback is more efficient in terms of taxation, because there's no tax whereas the dividend's going to get taxed at 15%. But that is helpful. I really appreciate it.

And ladies and gentlemen, I show no further questions at this time. I'd like to turn the call back over to Mr. Whitman for any closing remarks. Please proceed.

Well, again, we just thank each of you for making the time to be on the call today. Thank you for your continued interest and support of the Company. I think I've said enough about the business, but we do feel optimistic about what's going on and feel like we built a foundation. Most of these things that we've been investing in are now -- trees that we've been planting are now out of the ground and growing.

And we think we can -- we'll probably spend most of our time trying to help the trees we already planted grow and grow rapidly, especially now that I'm investing in new planting and trees with new people and new client partners. Look forward to talking to you again in a few months and individually between now and then. Thanks very much.

Ladies and gentlemen, thank you for your participation in today's conference. That does conclude the presentation. You may disconnect. Have a wonderful day.