Franklin Covey Co (FC) 2011 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the third quarter 2011 FranklinCovey earnings conference call. My name is Alicia and I will be your coordinator today.

At this time, all participants are in listen-only mode. We will conduct a question-and-answer session toward the end of the conference.

(Operator Instructions) I would now like to turn the call over to Mr. Derek Hatch, Corporate Controller. Please proceed.

Good afternoon, ladies and gentlemen, welcome to our earnings call this afternoon. Before we get started, if I could just remind you that today's 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 size of the overall market for the Company's products, changes in the training and spending policies of the Company's clients and other factors identified in this 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.

We would also like to remind you that there are some non-GAAP presentations in here having to do with adjusted EBITDA and there are reconciliations available in today's presentation and on our website. With that out of the way, we would like to turn the time over to our Chairman and Chief Executive Officer Mr. Bob Whitman.

Thanks, Derek. Thanks to everyone for joining us today. I'm delighted to have a chance to talk with all of you and appreciate very much your joining us.

I'd like to organize my comments today around the following three headlines theme. First that we're very pleased with the Company's strong performance and results for the third quarter. We'll talk about that in detail of course.

Second that we're very encouraged by the strong momentum we are continuing to see in the business. And third based on our performance during the quarter and year to date, we now expect -- while we always expect our full-year results to be very strong, we now expect them to be toward the higher end of our previously adjusted EBITDA guidance and we expect to continue to achieve strong growth in both revenue and profitability in the future.

As a result, we also expect our adjusted EBITDA to grow significantly again in 2012. So those are the headlines, I'd like to maybe now just provide you some detail behind each of these things.

The first in terms of performance for the quarter. Revenue for the third quarter totaled $40.9 million which is an increase of $10.4 million or 34% compared to the $30.5 million in revenues achieved during the third quarter of fiscal 2010. As expected, our strong bookings during the first and second quarters that were in our pipeline that we've reported on before translated into significant revenue growth during the third quarter.

As you can see on slide 3, we were pleased to have achieved growth in all of our major channels during the quarter. Revenues in our government services group grew $3.6 million in the third quarter reflecting in part the continued bookings and revenue related to the significant government services contract awarded to us at the end of last year's third quarter.

However, we also achieved significant growth in all of our other key channels. In fact seven of our eight direct offices both in the US and internationally grew revenues during the third quarter as did all four of our field support practices, our international licensee partner group and two of our three national account practices. Maybe I'll just summarize briefly our performance in each of these channels.

In terms of our geographic offices in North America, they grew revenues during the quarter by $3.7 million or 29%. This reflects the delivery of the training engagements booked during the first and second quarters and was as expected.

Revenue in our international direct offices grew 14% in the quarter including Japan where revenue grew 23% and this is really quite remarkable. We mentioned at the last call -- of course it was just right after the tsunami and earthquake -- and expressed that we felt that notwithstanding that, the resiliency of the people there and really their own team, that they had good bookings and between bookings and publishing sales, our revenue did grow 23% during the quarter.

We also achieved growth in our Australian office as expected. Revenue at our UK office is essentially flat for the quarter. However based on bookings, we expect that their revenues will be up somewhat during the fourth quarter.

Our international licensee partners revenues grew 13% in the quarter with all but five of our 38 international licensee partners growing over the prior year including nine of our 10 largest licensee partners. Finally revenue for our national account practices grew 24% in the quarter.

The sales performance practice growing $1 million or 75%, the customer loyalty practice growing at 10% and the education practice posting a slight decline of $100,000 which really primarily represents a timing difference in the delivery of training programs during the quarter. As noted above and as shown you can see in slide 4, revenues in six of our seven practice categories grew during the quarter. It's only again this slight decline in education where in terms of our content areas we didn't grow during the quarter and we expect of course to grow substantially for education for the year as a whole.

In terms of profitability, as you would expect, these increased revenues translated into significant flowthrough to profitability. Our gross margin dollars grew $6.6 million or 34% for the quarter with our overall gross margin percentage of 63 remaining equal to that achieved in last year's third quarter. So we were happy that we were able to maintain our gross margin percentages in all of our major offering categories and that the mix stayed really about where we thought it would.

From an SG&A -- our SG&A expenses as a percentage of sales declined to 51.4% during the third quarter. This compares to 57.5% of sales in the third quarter of 2010.

In absolute dollar terms, SG&A expense increased approximately $3.5 million during the quarter compared to the third quarter of 2010 primarily due to increases in associate costs resulting from increased commissions on the improved sales revenues compared to prior year. Finally as a result to actual flowthrough, as a result of the strong revenue growth and our improvement in the SG&A as a percentage of sales, as you can see on slide 5, adjusted EBITDA for the quarter was $5.2 million.

This is an increase of $3.2 million compared to the $2 million in adjusted EBITDA achieved in last year's third quarter. So, roughly it was a very significant increase in profitability on the growth in revenue.

Our income from operations increased $3 million during the quarter to $2.9 million. Our pretax income also increased $3.1 million during the quarter to $2.2 million.

So all in all we feel very good about the Company's third-quarter performance on essentially every major metric. I want to thank our tremendous team, our executive team members here and all of our teams throughout the world for their tremendous results and efforts that they made during the third quarter and of course in the quarters leading up to it.

The second point I'd like to make about us being very encouraged by the strong momentum we're seeing in the business, I'd like to spend a minute on this. One of our key lead metrics is what we refer to as our pipeline of booked days and awarded revenue which we present and we report in these calls.

While this metric only captures booking data for our US operations and therefore excludes the approximately 50% of our revenue which is recognized in our international direct offices and our international licensee offices and from sales of materials to our license facilitators domestically, it typically does provide pretty good insight into the likely strength of our revenue for at least the next couple of quarters. So I would like to share just a few observations about this pipeline.

At the end of our second quarter, our pipeline of booked days and awarded revenue was $29.9 million. This amount was approximately $12 million higher than at the end of last year's second quarter.

A significant portion of this $12 million of incremental pipeline was converted into revenue in the third quarter with the result as noted above, that our revenues for the third quarter increased by more than $10 million from $30.5 million in last year's third quarter to $40.9 million in this year's third quarter.

Second point about the pipeline is that as you can see in slide 6, due to the strong bookings we had during the third quarter and continued bookings of contracts and so forth, we were able both to replenish the $10 million of our second-quarter pipeline which had flowed through to revenue in the third quarter and still increase our total pipeline of booked days and awarded revenue by $1.2 million.

So there's really -- for us, we felt very good that while we were able to bring that revenue through into the quarter, we were also able to replace it and more during the quarter in our pipeline so that we ended up the third quarter with a pipeline of $31.1 million at the end of the third quarter. This pipeline balance is the largest we've ever had in any quarter and so it's really significant, this momentum that's continued to build.

Since most of the pipeline at least historically has been converted to revenue and most of it in at least the following two quarters, we expect that this third-quarter pipeline should translate into strong revenue during both the fourth and first quarters. The third and final point is that if you look at slide 7, you can see that starting in the fourth quarter of last year, the amount of corporate or non-government bookings in our total pipeline has increased both in dollar terms and as a percent of our total pipeline.

You can see that corporate pipeline was 62% in the fourth-quarter pipeline of last year. That increased to 65%, to 78% and then remained at 78% during Q3 this year.

And that's important because it's saying that -- and the size of the government contracts is important and great as that is and we believe we'll get ongoing revenue from it, that the strength of our bookings is -- has spread well beyond the impact of that contract and the contracts have not left much impact. So I'd just say that during the fourth and first quarters as a result of these strong bookings during the fourth and first quarters and beyond, we think our -- we expect very strong growth in our geographic offices in North America and international account practices.

I should note that although their bookings are not included in our pipeline, we also expect strong growth in the international direct offices and among our international licensee partners in the fourth and first quarters and beyond. Just a note on this government contract.

As you know, the large government contract awarded to us at the end of last year's third quarter added significantly to both the overall size of our pipeline at the end of last year's third and fourth quarters and to our revenue growth in the fourth and first quarters. It's continued to provide revenue and we expect it will in the future but it had a big impact in those quarters.

So on a year-over-year basis, the pipeline at the end of third quarter, the gap would be smaller because last year we added -- we were comparing against this big initial launch of the contract. We expect to continue to receive significant revenues from this contract in this year's fourth and first quarters and beyond.

As we have discussed in prior quarters, however, while we expect our fourth-quarter revenue to be higher, we think our overall revenues will be higher than in any other year except in last year's fourth quarter when the government contract was launched. Because of the magnitude of the startup revenues from that contract recognized in last year's fourth and first quarters, we don't expect and haven't expected as we said in prior quarters that the fourth-quarter revenue would quite match the revenues of last year's fourth quarter. It might come reasonably close but it won't fully match it.

Because of the expenses associated with the startup of the contract in last year's fourth quarter however, expect that our adjusted EBITDA for the fourth quarter will be very close to that achieved in last year's fourth quarter. We also expect strong revenue growth in fiscal 2012 driven by the continued strength across all of our channels but expect that that growth will be offset somewhat during the first quarter by a reduction in the magnitude of revenues received from the government services contract which was still in its major launch phase last year.

After the first quarter, we expect the full impact of our strong corporate bookings and the strength in all of our channels will be fully felt [unique] to the quarters and we'll see a significant growth in those quarters. So in summary, we feel very good about the momentum we're seeing in the business, expect that momentum to continue to grow in both -- to generate growth in both revenue and profitability in 2012 and beyond.

We're also happy that the government contract itself continues to be an in-place contract. We think we're getting -- we've won additional business in that contract recently and expect that it will continue to provide good revenues for us going forward. Final observation about our results is my third one is based on our performance during the quarter and year to date, we expect our full-year results to be very strong and towards the higher end of our previously provided adjusted EBITDA guidance and we expect to continue to achieve strong growth in both revenue and profitability in the future. As a result, we expect our adjusted EBITDA to grow significantly again in 2012.

I would just refer you to slide 8. As you can see in slide 8, for the trailing 12 months ended May 31, our revenues were $160.5 million which is an increase of $34.9 million or 28% compared to the same 12-month period ended last May. Our adjusted EBITDA for the trailing 12 months is $21.4 million which is an increase of $11.3 million compared to the same period last year. So we feel very, very good about where we are standing right now.

As a result of this strong year-to-date performance and the strength of our pipeline of booked days and awarded revenue, we expect to finish the year with our adjusted EBITDA toward the higher end of our previously provided guidance and adjusted EBITDA guidance of $18 million to $21 million. We also expect significant growth in fiscal 2012 and beyond.

And with our fiscal 2012 budgets essentially complete now, we currently expect to grow our adjusted EBITDA by approximately 20 to 25% again in fiscal 2012 and we will give more refinement on that of course as the year moves forward. So in summary, we're very encouraged by our results, by the momentum we're seeing in the business and third, by the potential to achieve strong growth in future quarters and years, and we look forward to reporting to you on our continued progress.

I would now like to turn some time to Steve Young to discuss other elements of our third-quarter performance.

Thank you, Bob. Hello, everyone. Nice to be with you. I'm also very pleased with the result of this past quarter and our year-to-date result and our past 12-month result; pleased with the amount of the growth and also with the broad-based nature of the growth.

So different topic, let me tell you a little bit about the balance sheet. We don't take much time in these webcasts to discuss our balance sheet or our tax provisions.

The reason for that is that our improving operating results and the understanding of our focus and strategy to drive future growth is a more meaningful part of our story and rightfully consumes our time on these calls. Our balance sheet to use my word is clean but does take some time to explain and understand.

So if you're new to our story and on the call, please note that we have a very high effective tax rate, a financing obligation of nearly $30 million and an escrow program including more than 3 million shares. Then please give me a call because I love to talk about these items. We actually have an attractive tax position.

Our remaining $24 million of net operating loss carryforward and nearly $10 million of unused foreign tax credits, our financing obligation is really like a capital lease and our escrow program is a way to potentially reduce our number of outstanding shares. So please give me a call and I'm more than happy to talk about the balance sheet and all of these items.

Bob talked and referred to our adjusted EBITDA slide and talked about the quarter's result. Please note also that there was a $7 million improvement in adjusted EBITDA over last year for the three quarters.

Like Bob mentioned with the quarter, those improvements to adjusted EBITDA also flow down to operating income and to pretax income. In fact, operating income year-to-date increased $7.9 million compared to last year and pretax income year to date increase $7.8 million compared to last year. So I think this is a very good result.

Then you're if you're looking at our income statement, you'll notice that our reported improvement to net income is significantly muted by our tax provision. So that is the point, you can give me a call and we talk about the amount of taxes that we actually pay which is low and the consistency in the amount of taxes we pay year to year and about the tax benefits that we actually have available to us.

Additionally, please note on slide number 9 that we are generating cash from our operating activities. And in this quarter we did invest quite -- in these three quarters we've invested quite heavily in curriculum and course development and we also moved our offices in Japan and incurred some leasehold improvements and some IT improvements.

So, Bob, in summary of this short part, I'd conclude that we're very pleased with our performance in this quarter, pleased with our strategic direction. We continue to invest in growth. We have a clean balance sheet and we look forward to the future.

Great summary. In a minute, we will open this up to your questions and answers from us. But before doing that, we would address three questions or items that we'd like to share with you.

One, when Steve and I talked to you and other prospective shareholders, we've been told by some of you that it would be really helpful for us to provide you with a simple summary of our investment thesis on FranklinCovey just in terms of bullet points to think about. And I thought it might be helpful to briefly share a version of that today and I'd like to just briefly touch on these points. I'll be happy as Steve would be to get your advice on how we might change this to make it simpler to understand our story.

But I've broken it into three bullet points as to kind of what the investment thesis might be. One, strong business fundamentals. Second, a large and expanding strategic moat around various parts of our business [and that's people]. So maybe just let me just take you through; there are just three slides and I think maybe you'll find it helpful and if not, it will be short.

On the first slide, in terms of some strong business fundamentals, in terms of just summarize what seems like might be points about the business itself, as you've seen, our multiyear growth efforts are accelerating with trailing four quarters revenue up significantly and profitability up significantly. We were able to achieve and sustain high gross margins, 63% for the business overall. We have high and growing recurring revenue.

We've moved our recurring percentage of revenues in any given year that repeat in the following year from 42 to 62% on the way to what we hope will be become (inaudible) 70% to 75%. We gain significant revenue and profitability from our international licensee partners whose total revenues in gross terms are around $75 million to $80 million.

They pay us royalties. Their businesses are significant and growing. We've had eight of them here this prior week along with the other senior leaders of the Company and these are very significant capable partners who are investing in their own growth.

Next, 40% plus or minus of incremental EBITDA -- of revenue growth flows through to EBITDA. And this continued flowthrough should drive EBITDA to sales of -- a target number of EBITDA sales about 17% over the next couple of years which is our goal.

We have low ongoing capital expenditures and so 70% of all EBITDA and because of our tax benefit, 70% of EBITDA flows through to after-tax free cash flow at this point with 80% of incremental EBITDA flowing through to free cash flow. So as we grow, there's a very significant flowthrough to cash of incremental EBITDA that's generated.

When we -- if we were to grow revenues $15 million with that formula, we would expect to flow through roughly say 40% or $6 million of that in EBITDA. We would invest only about $2 million of -- we'd only expect to have approximately $2 million of that tied up -- $2 million to $3 million incremental working capital.

And so really the increment with our -- we have pretty much a fixed budget. We increased a little bit with revenue on our R&D. But essentially on incremental capital, we have very high payback and we also have a business model that allows us to add to the size of our sales force with essentially a one-year payback or so.

So I don't know if those points are helpful, but it maybe is a summary of how we see the business fundamentals. Second, as a business, we believe we really do have some large and expanding strategic moats.

Not the least of which is our focus on delivering what we call transformational results for clients. We are very happy when clients go through our training and like the training. But for us, the standard is are they going to give us a 9 or a 10 on the impact that it had on their organization. And we take this very seriously. That is ultimately the biggest strategic barrier that any training company can build is the fact that it works, that it changes the results.

Second, our approach to our offerings which are productized training offerings are to have the best in class branded solutions. So our courses in their segments are usually the best known course in that area.

It's synonymous with the answer, solution to that problem. Its branding is driven by best-selling book, by speeches, scholarly articles etc that help us build branded solutions that in our niches make it very hard -- much harder to compete against this.

Third is our worldwide sales and delivery capability. More and more clients are becoming -- are either already global or moving global. And more and more they are also trying to have similar or the same training solutions for their populations around the world.

Our ability to deliver -- sell and deliver solutions in more than 100 countries is a huge advantage for global sales. We have a major initiative focused on these global accounts.

Fourth is our ability to deliver training through a wide range of modalities, modality meaning ways in which we can deliver it. Some position themselves as e-learning companies and that's been a good thing and it's particularly good for technical training and things like that.

But we have the ability to deliver on-site at a customer's location, to train their trainers and deliver materials, to do it through blended solution that has certain elements that are electronic, others live delivery through their own consultants, their trainers or our own. We can do full technology delivery. We can do remote Web delivery.

We can sell an intellectual property contracts or we can then customize the materials for them themselves. They can customize it themselves. So we can find a way to deliver our training in almost any circumstance from an aircraft carrier in the US Navy who might use their intranet and their own Navy knowledge online system to deliver training to five minute film segments for frontline retailers to of course executives in an off-site meeting where they've been discussing strategy for several days.

And finally -- this is a bold statement because it starts with the word unprecedented. But we have -- it's not unprecedented to have a very, very strong list of industry-leading in each of our practices. Our goal is to win in each of our segments the industry-leading clients.

So in our sales performance area, if you look at the largest technology and professional services firms, you would find many of them on our client list. Because we don't share client names, some of our clients allow us to and others prefer not, but you'd see a list that includes many of the most important names and, Shawn, you can tell me whether or not you can share any of those names.

Just to say that it is the most prestigious professional services firms that are there that we have a presence with.

A very strong presence with. We have the same in our execution business where two of the country's largest multiunit operators were our anchor clients and we are adding many others as a consequence.

So that becomes a strategic advantage for us because once you've tied down and they see value in what you're doing, it helps us sell through that. And then finally, the claim of best people, hard one to prove unless you spend time with our people.

But we have a goal inside the Company which we think actually is an essential -- actually in our kind of business is a real strategic advantage. We have a goal to be the workplace of choice for achievers with heart.

So we want the best performers but we want people who care deeply for the clients and about each other. Instruments that we use to help clients measure their own cultures, our own instrument, the XQ, and the employee Net Promoter Score developed by Bain as they have (inaudible) we have in our culture today the highest XQ scores of any organization that we have surveyed.

We have about 68% of our employees who give us a 9 or 10 and the next biggest group is 8. So we're constantly trying to do things that will move all the 8s to 9s. But in many organizations, they say -- well, gosh, 90% of our employees are satisfied -- well, we have 97% that are.

The real point is not are they satisfied. The question is are they loyal and are they all in. And most organizations might have 15 to 20% of their employees give a 9 or 10 for the company and [reports should have] a lot higher than that.

And finally this Redwood structure, we call it the Redwood. We have quarterly meetings we call the Redwood Council which are our top 35 leaders around the world including our -- those of our largest licensee partners.

The idea is that we want the strength to be in the field. Redwood metaphor is that each of our leaders has a genetic predisposition to grow large, to be enduring, to build an enduring enterprise and to gain strength from the interlocking root structure.

So this metaphor is good but what it says for us is this isn't about me, it's not about the central office, it's about them. It's about the client-facing partners, each of whom shares a profit -- has share of the profits. In our licensees case, they share all the profits.

They don't pay us in royalties. But all of our Redwoods have profit-sharing components in their operations. So that's one topic I wanted to discuss. And hopefully that leads to provide the summary of things that you all have heard before.

Second, is that last quarter we -- Steve and I gave a summary in response to questions on how we look at valuation of the Company. I won't spend as much time on that as I did last time on that. But I've been asked by several of you if we would remind reviewing that in this quarter.

So just maybe to hit the headlines of it, that we think that -- as I've said, we feel great about the business, we feel great about the business's fundamentals, about its business model etc. One way of assessing value, our current market capitalization, reflects not much more than the value of at least what we've been told our international licensee business alone might be worth.

This is a tremendous network of strong partners who have more than doubled their revenues -- their own revenues or almost tripled their own revenues in the last five years, six years, who expect to double their revenues again in the next four years who are gaining momentum, gaining strength, the business model works.

They pay us royalties equal to approximately 15% of their growth revenues. They have very strong people in their own markets. I was surprised and amazed really at a recent tour that I did in Scandinavia.

And really the very top CEOs of the very top companies in Sweden and Denmark were there at the meetings we held, the speeches. They stayed after, it was clear they had the kind of credibility that our partners had there and it's the same everywhere you go.

So with the growing strength -- strong people with growing strength of the organization, expanding product lines, their capabilities to sell wherever our solutions are going, they expect to double their business, low capital intensity, high royalty. One way to think about it is that business itself is very, very valuable.

Whatever multiple you put on it, it says that an investor -- at least we view an investor in FranklinCovey stock has significant downside protection and gets an option on everything that's been growing so much that we've talked about today. We talked about last time that we believe investors often struggle with which peer group to compare us.

As you see on slide 13 (inaudible) corporate training business, we're just in the broader business services business industry. On one end of the spectrum there are companies that are sometimes referred to as body shops where most of the training and consulting is customized and conducted or delivered by consultants and therefore viewed as less scalable over these [refining firms].

These companies have tended to trade around 10 times EBITDA. At the other end of the spectrum are subscription services, consulting light or productized consulting and training companies who primarily sell product or services with a third or less of their revenue coming from consultant billings.

These companies often trade between 15 and 22 times EBITDA. It's interesting that we believe that we're currently valued at a lower multiple than at the lower end of the body shops when in fact our mix of business is much closer to that of the subscription services or consulting light or productized consulting companies.

More than 60% of our revenues come from training product subscriptions, training materials, online contact etc. and our on-site trainers are often just the first step in the training process that ultimately results in the company certifying its own FranklinCovey trainers of which there are more than 9,500 active presently. These on-site trainers who are employees of their companies order materials, deliver training pursuant to intellectual property contracts and the like.

So as you see in 13, perhaps you could measure at least something to reference in looking at the relative scalability of our business on this scale of body shops to subscription services to look at revenue per employee. As you can see in slide 13, some great companies which provide consulting services on the left-hand side might generate revenue of $137,000 whereas Corporate Executive Board or Gartner might be in the high 200s, we actually fall in pretty much in that group.

Our revenue per employee is much closer to that being achieved by Corporate Executive Board and Gartner than it is to the more consulting oriented companies although our multiple is either that ir below that of kind of the more bodyshop oriented people. Finally, most of you who've known the Company probably think this way already but value in FranklinCovey on an EPS basis has the negatives that we have this large depreciation and amortization charge every year which is $7 million to $8 million and yet our CapEx spending is only $1 million, the disconnect from legacy assets that we owned.

And the way in which they're accounted -- for which they're accounted now. But in looking at free cash flow or EBITDA, we think there's a better -- is more reflective of the value. And so for us, we believe on that basis that particularly down to free cash flow given our tax benefit that Steve spoke about that our multiple of free cash flow is we believe quite conservative. So for those who requested that, I hope that that summary was helpful.

Final thing I just wanted to mention is that in the coming days, we will be filing an 8-K that talks about a stock incentive plan for our Redwood council members, these top 35 leaders. It's structured in an interesting way so that the only way in which value will come to them is if the stock price actually increases substantially over a finite period of time.

So these are not options that will be outstanding for a long time. Regardless of happens to the share price, they're not full value shares that will vest without the performance of the stock.

And so while most of their pay is based on the performance of the business, this particular grant will be based on the performance of the stock. It's such that it will not vest -- the basic grant will fully vest if within the next three years the stock price -- our stock price achieves $17 per share.

If it does not within three years, it will be cut in half and will expire in total if the stock price for some reason were not at $17 within five years. We want to have yield, we want to basically be able to translate our operating results to shareholder value in a recognized way of value per share.

So I hope I did an okay job of explaining it. But the basics are again not fully -- these are shares granted whose vesting is contingent on the stock price getting to $17, at least this initial grant. We anticipate there might be other grants that would then be again keeping the stock price moving forward.

But we think it aligns all of our leaders. I'm the only leader who will not participate directly in that program because I already have substantial other options, warrants and shares and we wanted to make sure we can put as much of this as possible in the hands of our great team.

But we think it's a very positive thing and hopefully you'll view it that way also, that at least there are 35 people who are waking up everyday focused on how do you get to $17 (inaudible) by three years from now or sooner and who have signed up on a three-year plan that even at today's what we think are maybe low multiples would take us there in valuation within that period of time. As I mentioned, I won't be participating myself in that program because of the other shareholdings I have and so forth.

But I'd just like to make one note in that regard. For nine years -- the last 10 years, for three of them I took no compensation or stock awards or anything. For eight of those, I took no stock awards and during that time, I also bought a substantial amount of number of shares myself.

Nevertheless, about a year ago, I explained that I was going to begin a 10B51 program to sell a certain number of shares. I didn't anticipate reducing my actual shareholdings because new grants and other things I have would keep it about constant.

But I think -- and so I had very good intentions of saying I'm not going to reduce my shares outstanding. I'm mostly going to try to sell a little bit each month so that way it wouldn't move the stock price or anything else.

But I'll tell you, that's probably been -- I think I made a big mistake by doing it that way because of course every few days, you all are getting a notice that I sold some shares or whatever. So I'm going to change that approach.

First of all, I'm going to not do it monthly. I'll just do a couple of sales; one now, one in July and one in January. And then I would expect to terminate any future sales for the foreseeable future. I have not wanted to be a seller but felt like I should in order to meet these other obligations.

I'm hoping that that may answer your questions. If not, then I apologize. But the net of it is I'll sell just in two sales six months apart at the end of which I would then terminate the program and anticipate no further sales in the foreseeable future. So I hope that's helpful in that regard.

We'll now with those issues addressed, we will now open it to questions from you all. And again, thank you very much for being on the call today.

(Operator Instructions) Bill Gibson, Anderson Strudwick.

I think I understand why direct sales were up so much more than everything else. And I am assuming that is the government contract driving that. Is there more behind that than that factor?

I'm going to ask Shawn Moon who runs our direct offices to respond to that.

Yes, thanks, Bill. It's a good question and actually I'm very pleased to say that it is not simply the government contract that is driving up the direct offices.

Every one of our direct offices is up except for our UK operation which is flat but has a good runway for growth in the fourth and first quarter. So it's pretty well-rounded growth. If you look at the business outside of the government contract, the direct offices were up 20%. So it's more than just that.

So, Bill, domestic direct offices other than government were up 29% for the quarter, the international direct offices were up 14%. So that's really where the momentum is building.

And I hope that one slide showing the pipeline growing -- how the corporate pipeline is really what's been growing, it now makes up 78% of our total pipeline and will continue to grow hopefully -- is that helpful at all on that question?

Actually that helps a lot. One thing, one follow-up and this relates -- I believe India is just starting out on the education front where they're going to -- your licensee over there will Institute that practice. All of a sudden, I just had visions of that potentially getting really big. Has there been any progress on that front?

There has been. Approximately a year ago, several of us were in India and had a chance to meet with the Minister of Education of Indian, Mr. Singh. And we told him about what was going on in United States. He was very interested in that.

That very day they had instituted for the very first time in the history of India mandatory free education for every child from 6 to 14. And so it's a whole new world for them in terms of saying everybody has to go to school but what do we do, how do we make sure the schools are preparing the kids in India to be able to actually contribute to a society that needs their contribution?

When he heard what we were doing in the US, he called in another minister and asked whether we would be willing to take a large number of schools immediately and try to do them. I told him I appreciated it but honestly, we didn't have the capacity and we wanted to do a good job.

But they have begun and I believe the number is 25 schools that we have begun in in Delhi. There's a lot of attention on this and you can imagine the opportunity given the age of -- not only the size of the population but the age of the population in India. They have almost 700,000 grade schools compared to our 100,000.

So the opportunity there is great but I think you may -- Bill, another point you might think of is that our licensees today generally up until three years ago, they were licensees primarily in what we'd call our leadership content. And that's really all that they sold.

And so in addition to their growth and their historical leadership areas, every one of our licensees has the potential to add execution as now a new product line which has had such growth in the United States (inaudible) education to add customer loyalty, to add sales performance. So as they certify and are willing to make the investments necessary to build, they have those opportunities to build the business not only by expanding the number of salespeople, but by expanding the product lines as we've done here. So we think there's a good opportunity in India certainly but all around the world to expand practice as well as expand sales force.

Joe Janssen, Barrington Research.

Great quarter. Just want to clarify something. In your press release, you mentioned plans like that include introduction of new offerings. Is that outside the practices or a new practice? Just some comment around that?

(multiple speakers) it's part of the existing practice but we have a big launch this fall that maybe, Shawn, you want to speak about. It's in our -- our productivity has always been an important practice category for us or at least a course category for us.

Only recently we made it a practice (inaudible) practice leadership etc. and have invested behind it a lot this year. But we have a major new offering that -- we've always been the leader in time management. So this takes it well beyond that. Shawn, I don't know if you want to talk about what the launch will be this (multiple speakers) Sean Covey I apologize is not on the phone today. He's on a family trip in Ireland and is not able to join us tonight.

The productivity practice is relatively new as Bob said though we have been in the world of time management for many, many years. Our first offering that is sort of the foundation to that will be launched in the coming weeks actually on September 7.

We have identified an 180-city worldwide launch plan that is being executed right now in terms of registrations. We're very, very encouraged frankly by the amount of interest that we are gathering on that initially.

As an example we just had the SHRM, the big HR conference that concluded this morning. And we had over 3000 people register at that event to come to this preview which is a buying presentation around the launch. So we're excited about what this productivity offering is and very encouraged by the enthusiastic response we've gotten.

Joe, maybe at the heart of your question, in terms of -- we think within the practices we have now that each of these practices with relatively low levels of penetration in their targeted markets can be $50 million to $100 million just within North America within a five to seven-year period, I mean different for each practice.

But there's that kind of potential if we can build the organization to do it. In some we already have the organization such as in productivity and leadership where we -- our salespeople are already there and they know how to access these people; and others like execution and education, sales performance, we're building that out.

But we believe without ever leaving those seven categories for example in execution, today our narrow focus is on multiunit operators. Now that's a big group; lodging companies, supermarket companies, retailers, restaurants etc., literally tens of thousands of targets for this.

And we have an offering that hits exactly on moving the middle 60% of their operations closer to that already being achieved by the top 20%. But our execution offering has also done extremely well in manufacturing over time.

We have a deep capability actually in manufacturing. We're implementing people who are already doing Six Sigma, use our process to drive home specific goals.

So we see more staying within the seven practice categories, adding content and so forth on the margin where you are making investments that refine our offering, make implementation easier at a client. So I don't think you'll see a lot of new categories of offerings in the coming future although honestly there are another 10 that have that same potential but we're going to mind where we are today.

It's not our intention to add seven new practices next year and dilute our focus. We are going to go within the established practices and if we fail to reach certain thresholds, then we will think of adding.

A modeling question; I know for your tax rates for 2012, should I be looking at 2011 for guidance or is like 2012 going to be a different tax rate here for modeling purposes?

I don't have the exact number in front of me, Joe, but our effective rate next year should be lower than this year, I just don't know by how much. But the general idea is that you can take our pretax income, apply the 40 to 42% to that and then adjust that by about $2.5 million and that will come close and we can refine that as we go into next year.

One more question and I will jump back in queue. Did you guys give any -- I didn't see in your little slide deck here booked days. You gave total revenues but you usually kind of give like booked days.

I could give you the booked days. As I started to try to explain that, you recognize that booked days represent such a small part of the total business that until we have it for our international offices -- we've been getting every quarter and that increased just this last quarter. And we had about a 9% increase in what we call booked days in our geographic direct offices and in national account practice in North America.

But as you get down to it, it represents only about 26% of the total revenue and so it's not as good a guide as we originally thought it would be. The pipeline is double that but we did have strong -- we had very strong bookings last year third quarter. We exceeded those this year and had about 9% growth in those booked days per se which is one way of delivery.

As you know, booked days is only one way of delivery. We had more growth in contract and other things than we did just in that. So we -- my thoughts as I spent about an hour trying to figure out how to explain, I'm giving you a slide that is only explaining 26% of the revenue at most and it felt like maybe it's not as helpful a one but we can -- but those are the numbers basically.

I lied, one last question. For Q3 last year, if you strip out the government contract, what did the pipe look like then?

Well we added about -- to the pipeline if you subtract about $7 million, I believe void $8 million, so last year's pipeline without the government contract was $8 million less than it is -- than it showed. So it would've been around $21 million.

Not sure if either -- if someone's asking questions, we're not hearing it on this end. I'm assuming perhaps that we have taken any questions -- there are a couple minutes more if you'd like to ask a question.

Well then why don't we wrap up here and we will be of course happy to talk to anyone who would like to speak either today or in the coming days. But again, I think stepping back from the business, for us, this is not a quarter by quarter issue.

We have been on a march from 2004 with the exception of two quarters bent in 2009 with the recession, we've been on a growth curve with the business that's remaining since 2004. We've been honing our ability to hire and ramp up salespeople. We now feel like we can accelerate that.

We started practice categories. We're now -- those are clearly now a success accounting for many, many of our large deals and we're expanding those into leadership and productivity. We have fundamentally changed the economics of the business in terms of the profitability, flowthrough etc. and converted it from what was at one time quite a capital intensive business to one that isn't very capital intensive.

So we'd anticipate maybe one question that wasn't asked here that I think many of you have is what are we going to do with the excess cash the business generates. And we expect that we will have that excess cash. As you see, we've been investing a lot in working capital to support the increased sales at this point.

But that tips over starting in about September-October and begins to bring in more cash than we go out and then it reverses itself. So we would expect to have substantial cash inflows in the late part of the first quarter and I would anticipate that we would announce a plan to do something with the excess cash.

Thanks very much for joining us. We appreciate the chance to talk and appreciate your continued support. Thanks very much.

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