Franklin Covey Co (FC) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2012 Franklin Covey earnings conference call. My name is Larry, and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session.

(Operator Instructions).

I would now like to turn the conference over to your host for today, Mr. Derek Hatch, Corporate Controller. Please proceed.

Good afternoon, everyone, and happy New Year. On behalf of FranklinCovey, I would like to welcome you to our first quarter conference call for fiscal 2012. Before we begin today's presentation, we would like to simply remind you that our presentation today contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based upon Management's current expectations, and are subject to various risks and uncertainties, including but not limited to, the ability of the Company to stabilize and grow revenues, the ability of the Company to hire productive sales professionals, general economic conditions, competition in the Company's targeted marketplace, market acceptance of new products or services and marketing strategies, changes in the Company's market share, changes in the size of the overall market for the Company's products, changes in the training and spending policies of the Company's clients, and other factors identified and discussed in our 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 statement are based on Management's current expectations, and we undertake no obligation to update or revise these forward-looking statements to reflect events or circumstances after the date of today's presentation. With that out of the way, we would like to turn the presentation over to Mr. Bob Whitman, our Chief Executive Officer and Chairman of the Board.

Good afternoon, everyone. We are delighted to have you with us. We're delighted to report that we had a very strong first quarter. Hopefully, you've seen the press release on that. It turned out to be the strongest first quarter ever for our current business, and one that also somewhat exceeded our expectations. We continue to feel very good about the business, about our backlog, pipeline, momentum, and our outlook for the second quarter of the year, and the expected trajectory of our business over the next several years.

Today I am going to keep my remarks relatively brief to allow time -- plenty of time for questions. So I would like to touch on three topics. First, some key headlines regarding the financial performance of the business during the first quarter. Second, our outlook for the year and what we see as a very positive trajectory for the business, and our growth and earnings potential over the next several years. And then finally, the potential for further accelerating our growth, with a specific focus on one particular growth opportunity.

So first, some first quarter headlines. First of those, is that our revenue was very strong during the quarter. Our revenue during the first quarter increased to $39.5 million, with a $4 million or 12% increase in revenue from other areas of the business, more than offsetting the planned $3.9 million year-over-year decline in revenue related to the large government services contract, which, as you know, last year at this time was in it's initiation phase -- or during the first quarter was. We are pleased that our total revenue somewhat exceeded our expectations, and made first quarter the best quarter -- the first quarter ever for our current business.

Our results slightly exceeded the strong first quarter we posted last year, which was driven by the substantial revenue we received as part of the initial launch phase of that contract. And then for the trailing four quarters ended November 26, our revenue of $160.9 million was -- represented a $16.6 million increase, 11.5% increase, compared to the $144 million in trailing four quarters revenue we had a year ago. We were pleased that our growth also during the fourth quarter was very broad-based, with revenue growth of 9% in our four US and Canadian geographic direct offices. Revenue growth of 24% in our national account practices, with sales performance practice growing 37% in the quarter, the education practice growing 23%, and customer loyalty growing 11%. We had revenue growth of 22.8% for the international licensee partner offices. And we are excited that 18 of our 20 largest licensee partners posted revenue growth for the quarter. And we also had a small amount of revenue growth in our international direct offices. So that's kind of the first headline for the quarter.

Second headline is that a high and increasing percentage of revenue flowed through to increases in adjusted EBITDA, operating income, net income and free cash flow. And maybe touch on each of those. Our adjusted EBITDA grew 12.2% for the first quarter to $6.4 million, which is up from $5.7 million for the first quarter fiscal 2011. This exceeded our expectations, and also made the first quarter our best first quarter ever for adjusted EBITDA. We really felt particularly good about this, since we were up against a very tough comp from last year, where our adjusted EBITDA had increased by 63% or $2.2 million, compared to the first quarter 2010, driven by the initiation of that government contract.

Interesting for us is, historically, the only quarter in a year in which we've really ever achieved adjusted EBITDA of $6 million has been in our seasonally strong fourth quarter. And just two years ago, we had what we viewed as a very strong first quarter, when we achieved $3.7 million in adjusted EBITDA. So for us to exceed $6 million in adjusted EBITDA in our first-quarter was very encouraging. For the trailing four quarters ended November 26, adjusted EBITDA increased to $21.8 million, an increase of $5.2 million or 31% compared to the $16.6 million in trailing four quarters adjusted EBITDA at the same time a year ago.

Net income grew 109% for the first quarter to $1.7 million, which was up from $800,000 in the first quarter of 2011. This resulted largely from a positive change which we have been hoping for in our improved effective tax rate, which is now here. For the trailing four quarters ended November 26, net income increased to $5.7 million, which was a $5.6 million increase compared to the small net income that we had for the trailing four quarters at the same time a year ago.

Finally, on free cash flow, free cash flow grew 4.2% during the first quarter to $3.5 million, up from $3.4 million in Q1 of 2011. And for the trailing four quarters ended November 26, our free cash flow increased to $13.2 million, against a $21 million of EBITDA, which is an increase of 24% or $2.5 million compared to the $10.6 million in trailing four quarters free cash flow at the same time a year ago. So in all the key metrics of adjusted EBITDA, operating income, net income, free cash flow, we feel very good, both about the quarter, and certainly, the trailing four quarters momentum.

The final headline is that our adjusted EBITDA margins also expanded meaningfully in the first quarter, with a significant flow-through of revenue to adjusted EBITDA. Our adjusted EBITDA-to-sales percentage increased to 16.1% for the first quarter from 14.4% in last year's first quarter. And for the trailing four quarters, it increased to 13.6% from 11.5% for the trailing four quarters a year ago. We have expected future revenue growth, and continued high flow-through incremental revenue to adjusted EBITDA. We expect our adjusted EBITDA and sales -- to sales margins to increase to approximately 18% over the next few years. So we are very pleased and encouraged by these strong results, as we hope you are.

The second topic then, of the three that I would like to discuss is to share our outlook for the year, and what we see as the positive trajectory for the business, and our growth and earnings potential over the next several years. Our outlook for the balance of the year, first. As you can see in slide 3, during the first quarter, our pipeline of booked days and awarded revenue, which are commitments made by customers -- contracts and commitments, grew $3.9 million or 15%, compared to the same time last year. This reflects both growth in bookings from existing clients and our winning of a number of important new engagements.

I'll just share couple of observations about this pipeline. First is, the vast majority of our clients are focused on growing their businesses, and they are continuing to make essential investments, including investments in training, connected to key strategic imperatives that they have. In fact, getting more and better results from their huge existing investment that companies have in their people, is one of the biggest opportunities for improvements for almost any organization. As a result, our pipeline of booked days and awarded revenue increased during the first quarter. And as of November 26, as you see on slide 3, this key metric increased to almost $30 million, from $26.1 million at the same time last year. This is an increase of $3.9 million or 15%.

It's worth noting that this $3.9 million pipeline increase was after deducting more than $3 million in year-over-year pipeline value related to the government contract. In other words, as you see that -- our corporate pipeline grew $7.2 million or 42% compared with the same quarter, offset by a decline of around $3 million in our government -- this particular government contract. While this metric only captures booking data for our US operations, and excludes the predictable revenue from the more than 10,000 licensee -- licensed [facilitators] we have inside client companies, it provides a good insight into the likely strength of our revenue for at least the next two or three quarters, and is very positive, we believe. We also estimate that our international direct offices have an additional pipeline of booked days and committed revenue of somewhere between $8 million and $10 million.

The pipeline of booked days and awarded revenue metric is, as I mentioned, of actual bookings and client commitments. We also track what we call our perspective business pipeline, which is a measure of the magnitude of potential revenue, which is currently being discussed with, and proposed to, clients. We track this every week, and the size of that pipeline is also significantly larger than at this time last year, indicating strong momentum which we expect will convert to bookings and contractual commitments in the coming months and quarters.

So in summary, the strength of our first quarter performance, the momentum we're continuing to see in the business is reflected in both the increasing size of our pipeline of booked days and awarded revenue, and the magnitude of our prospective business pipeline, all increase our confidence in our previously provided adjusted EBITDA guidance range of $24 million to $26 million. We are clearly focused on hitting the high end of that range, and look forward to updating our guidance in future quarters.

On a longer-term perspective, we -- maybe discuss what we see as a positive trajectory for the business, and our growth in earnings potential over the next several years. We've said before that we expect to be able to continue to achieve strong revenue growth in the future of least -- at least double digit levels. And we're pleased that our revenue growth over the past two years has been higher than this. We've also said that we expect that between 30% to 40% of our increased revenue should flow through to increases in adjusted EBITDA. And we're again pleased that our revenue flow through over the past few years has also been higher than this. Achieving these economics should drive aggressive growth in adjusted EBITDA earnings and free cash flow, while significantly expanding our adjusted EBITDA margins in coming years.

The power of our operating model can be seen in this -- slide 4. As shown, assuming that we achieved, say, 10% compounded average growth rate in revenue over the next three years, and that 35% of that increase in revenue flowed through to adjusted EBITDA, our adjusted EBITDA would increase to between $38 million and $40 million. This would translate into a compounded annual growth rate of adjusted EBITDA of approximately 22% each year. The percentage of growth rate in operating income and net income would obviously be even more significant and free cash flow generation would be very substantial. Under this scenario, our adjusted EBITDA-to-sales margin percentage would increase to approximately 18% for the end of fiscal 2014.

As also indicated in slide 4, you can see the range is -- any acceleration in the rate of revenue growth beyond the 10% that I used, or the flow through percentage, or a combination of the two, would have a compounded impact on growth in adjusted EBITDA, as well as on free cash flow, operating income, net income, et cetera. And you can see what those different growth rates would be. But even at 10%, you would be generating 22% or so of compounded annual growth rate in adjusted EBITDA, under this example.

Stepping back from the data for a minute, while the range of possible outcomes included in slide 4 shouldn't be considered as formal guidance, we are offering this degree of insight into the future, one, to provide you with an idea of the growth and earnings potential that we see in the business over the next several years. And second, because we are actually committed to achieving results of this magnitude.

The data included in slide 4 actually brackets the general parameters of our current three-year plan. And this plan isn't just a typical Excel spreadsheet, this is a plan which has been backed up by a detailed -- at the cost center level -- three-year budget, which has been signed off on, and committed to, by all of our top 20 leaders. Every one of us is focused on achieving something very close to $40 million of adjusted EBITDA by approximately the end of fiscal 2014.

Our short and long-term compensation plans are actually tied to the achievement of the key metrics included within the performance parameters outlined on this slide. And much of the compensation is tied to realizing the kind of increase in share price which this level of growth should warrant. We have confidence, and with the strength of our offerings, practices, channels, and our leaders, we can achieve it. And this confidence is actually supported by the trajectory of our revenue and adjusted EBITDA results over the past few years, which were, themselves, part of a prior multi-year plan, which we are grateful to have been able to achieve and exceed. So I hope that is at least somewhat helpful.

The final topic I'd like to discuss today, then, is to focus on the potential for further accelerating our growth, potentially moving it up on that grid, some. I would like to give a specific emphasis on one particular growth opportunity, rather than giving too much information on too many. But first, as significant as the growth prospects outlined in slide 4 are, we actually do believe we have the opportunity to accelerate this growth.

In our letter to shareholders, which hopefully most of you have received, we identified four key factors that differentiate us from others in the training and performance improvement industry. These factors have driven our growth over the past years and will, we believe, will be key drivers of our growth in the future. And we believe we have significant opportunities for growth, and for accelerating growth in each of these areas. These four factors are first, our world-class intellectual property, the impact of which is reflected in our strong gross margins, which on average are in the high 60s for our offerings. The durability and longevity of our offerings, measured -- our offerings and our content -- the longevity is measured, not in months or even in years, but in decades. And finally, the magnitude of the world-wide revenue, which each of our practice area offerings can generate.

As I noted in our letter to shareholders, two of our core practice offerings have generated more than $1 billion each in revenue to date. And our new practice area offerings have already, collectively, generated more than $200 million of revenue over the past few years. We expect each of our practice area offerings to only become $500 million to $1 billion offerings, in terms of cumulative revenue. And we are off to a very strong start, with our new 5 Choices to Extraordinary Productivity world launch tour. We think this one has the real potential to be a real blockbuster offering for us.

The second thing that sets us apart is our focus on helping clients achieve these transformational organizational results, while providing clients with a highly flexible continuum of delivery options. We note in the -- that the strength of this fact is reflected in our increasing revenue from existing clients, which was up 12% last year, and the increasing portion of our delivery, which is either technology-delivered or technology-assisted. Three years ago, approximately $7 million of our revenue fit into those categories. In the trailing 12 months, approximately $40 million of our revenue is either technology-delivered or technology-assisted, in one way or another. So our investments and focus on our continuum of delivery options is significantly increasing our scalability.

Third, our global footprint, which is reflected in the increasing size and productivity of our sales forces world-wide, and our increasing number of global clients. And then fourth, the depth and breadth of our influence, reflected in the large and growing number of book titles reaching top 30 status, which we have three right now -- three of the 30; the millions of individuals who are consumers of our content each year. So each of these unique differentiators, provides us with opportunities that cause our margins, and growth rates, and the nature of our business to be different than the typical industry participant. And each has growth -- really plenty of growth opportunity, and we've got specific initiatives in each. But I would like to just briefly focus on one particular area of opportunity, which is further accelerating the already strong growth of our international licensee partner network.

As you can see on slide 5, over the past seven years, our 35 international licensee partner's gross revenues have increased from approximately $29 million in fiscal 2004 to approximately $75 million in fiscal 2011. This growth resulted in a more than doubling of our license royalties and other licensee revenue from $5 million to $12 million, with licensing royalties themselves growing from just under $4 million to approximately $10.5 million. During fiscal '11, our international licensee royalty and related revenue grew 14% compared to the prior year. And this increased 22% in the first quarter compared to the first quarter of fiscal '11.

To help drive -- to continue to drive this, we now include eight of our top licensee partners -- the leaders of our licensee partners in our business unit leader and general manager meetings. So they are really part of the team. They're learning everything at the same time, so that we can more systematically, roll this out. And we're working with them closely to accelerate their growth. Even without a change in the current trajectory, we would expect our licensee partner revenues and our royalties to double over the next four to five years, and we are very encouraged and excited about that. But in addition to this organic growth, we see opportunities for further accelerating the growth of our international licensee partner channel, including the following -- and I am just going to touch on them, and in the Q&A we can go into more detail -- or off-line.

The first opportunity is to increase our penetration within licensee, what we call home countries. As noted, we have 35 international licensee partners, who have rights to represent us in 141 countries. As these licensees have built their businesses, they've generally focused their efforts primarily on their home country, say, Germany, Belgium, Panama, et cetera. And with this focus, approximately two-thirds of all our licensee revenue comes from just these 35 countries. But even in these countries, we have -- the fact that they have grown well, but they started just relatively recently, they still have relatively low penetration, even in their home countries.

And relative to our own direct offices in North America, where we still have very low penetration, relative to potential, if we could just, over time, get these existing licensees in the home countries to where they have the same penetration level we already have with our relatively low penetration at our direct offices, that would increase our licensee's gross revenues by almost $100 million, and increase our royalties by $14 million. So that's a big opportunity. And we are on that, everyday. They are adding salespeople, they are doing their thing -- I'll just touch on the others. The second opportunity lies in activating non-home countries that are covered by existing licenses. And this is -- only $25 million of the current licensing revenue comes from non-home countries. These licensees -- the penetration in these non-home countries is even less than in the home countries, so the potential is huge.

Third, the sale of new geographic licenses. With our focus on helping our existing licensees to grow their businesses, we have not added many new licensees over the past few years. But we have now identified 19 new countries in which we are actively pursuing new licensee partners, and we expect to see some of those landed here in the coming quarters. Fourth, opportunities to expand various practice offerings into our licensees. It's interesting, 74% of our existing international licensee partner revenue is coming from just one of our seven practice categories, that of leadership.

A significant portion of our growth in North America has been driven over the last year by the other six practice categories, and expanding these practice categories is a huge opportunity for accelerating their growth. As an example of that potential can already be seen in our new 5 Choices to Extraordinary Productivity launch, where for the first time, we had a simultaneous uniform, coordinated, go-to-market launch in almost all of the home countries in the world, and in many of the non-home countries.

Finally, there are opportunities for helping certain key licensees to accelerate their growth by helping them to recapitalize their businesses. Several of our most rapidly growing licensee partners have extraordinary growth opportunities. They've already grown really rapidly, but are constrained because they don't have the working capital to grow. So helping them to find ways to relieve these constraints could also allow them to further accelerate their growth. For example in India, our team started about six years ago, with 7 employees. They have 185 today, but they are still just scratching the surface. We're very focused on taking advantage of these additional growth opportunities to accelerate the growth of our licensee network. And, again, be happy to amplify any of these opportunities in the Q&A, or off-line.

So in conclusion, to summarize again, our first-quarter financial highlights were the revenue growth was very broad-based, with sales increases in our direct offices in North America, our direct international offices, and in our international licensee channel, and our national account practices, and in our books and royalties. Adjusted EBITDA increased 12% to $6.4 million, compared to $5.7 million in the prior year. And on the trailing four quarters is up 31% compared to a year ago. And our margins increased -- our EBITDA margins increased to 16.1% from 14% a year ago. We are very pleased with the result and the momentum of our business, and expect to be able to continue to achieve both strong top and bottom line growth in fiscal 2012 and beyond. We also believe that the differentiating factors discussed a minute ago, will both help us to achieve this growth, and continue to set us apart, and reinforce our strategic position and strength in the marketplace.

Thanks to each of you for your continuing support and guidance. And I will now turn the time over to Steve Young for some brief remarks. And then, we'll take your questions. Thanks very much.

Thank you, Bob, and hello, everyone, and happy New Year. I'll add to Derek's happy New Year. I'm also pleased with our first-quarter result, and I look forward to exciting things in the future. Bob gave a wonderful summary of our earnings, so I will just mention, really three quick points, related to our balance sheet, our taxes, and our share count.

First, our balance sheet. Our balance sheet remains strong. I don't think that when you review our balance sheet you will see any unexpected amounts or unexpected changes in those balance sheet accounts. We know that in our first quarter of each year, our accrued liabilities will decrease significantly, due to our payment of fourth quarter and annual revenue and earnings-based compensation. So that cash is always used in Q1. So you'll see that, and that is normal. And I think that you will see everything related to our balance sheet is clean, and our balance sheet remains strong.

Second, our taxes. Our income statements reflect a significant decrease in effective tax rate that Bob spoke of. For several years, we were unable to record the benefit of foreign tax credits. In some quarters, our tax expense actually exceeded our pre-tax income. Now, fortunately, we are able to reflect the benefit of current foreign tax credits. So the current tax rate of about 46%, is more typical of the effective tax rate that we will see for the remainder of this year and in the near future. Please, also, as you think of taxes, remember that we do still have net operating loss carryforwards and unused foreign tax credits that will give us about $12 million-plus dollars of tax relief in the future, related to cash for taxes.

And third, our share count. Again, as you look at our income statement, you'll see the outstanding share count has increased by about 700,000 shares compared to last year. You will remember that this increase is due primarily to the exercise of 1.9 million warrants last year. So as you think of our share count, please remember, that in our future, hopefully, when our share price gets a little bit over $15.00 -- right now it's $15.12 -- that our share count will decrease significantly as the management loan program is resolved. And 3.4 million shares will come out of our outstanding share count. In the meantime, please don't be surprised because you know that there is still 4.3 million warrants outstanding that could be exercised for the next 14 or 15 months. That exercise, if it happens, and depending on the price, would, of course, increase our outstanding shares. So we don't want you to be surprised if the count goes up, and then we want you to be pleasantly surprised when and if the share count goes down significantly.

Sorting through all of that, a lot of people ask us, what we see related to share count? And what we see is, if we get to a point that the management stock loan program is resolved, and if the warrants were exercised at an exercise price similar to the warrant exercise last year, and if we get to a share count that our share-based compensation that is tied to share count is -- those shares are awarded, then we see a share count of about 16.5 million. Of course, that could be higher or lower, depending on a lot of variables. And we'd love to talk about that. But that's kind of the way we see it. So, Bob, those are just a couple of extra points. As I've said, I'm also excited about the quarter and excited looking into the future. So, thank you.

Thanks, Steve. I think we would now like to open up for questions, and I guess, turn it back to the operator to tell us how we do that.

(Operator Instructions). Joe Janssen of Barrington Research.

Gentlemen, congratulations on a good quarter.

Thank you.

My first question, maybe this is for Bob. I'm trying to get a sense of the quality of your pipeline, in terms of like the visibility. Can you provide -- and you've talked about this in the past, you gave us some -- some color on the conversations with clients in the new pipe? In your prepared remarks, you mentioned that they are committed to help growing the business, but can you maybe take it a step further, and dive a little deeper?

In terms, of our pipeline you're saying?

The quality of the pipe. Like you've put out -- like what you are seeing in RFPs, in terms of taking sales calls, you've given some metrics in the past. And I just kind of want to get a feel for where that is trending.

Great. In fact, Shawn Moon, who leads all of our direct sales force, maybe we'll just have Shawn make some comments, and I will follow up with those, Joe, if that's okay?

Yes. That's great.

Hi, Joe. Good to talk with you. We feel encouraged by the strength of our pipeline. And the visibility in the pipeline, we feel like it is better than it has been in the past. And the utilization of tracking tools is better than it's been in the past. One of the things that is encouraging to us, is the nature of large deals.

Okay.

They are bigger, and more prevalent than they have been in the past. So that allows us to be a little more predictive. As an example, the large government contract that Bob referenced, that's a three year contract, and very predictable -- well, mostly predictable quarter by quarter. So that gives much more visibility into how we are able to track that and predict.

What was the average revenue per client in the quarter? I think last quarter it was up -- or I think last year, it was up 12%, you said -- larger -- I think you quantified them as $100,000 plus, that was also growing. Are we still seeing these same trends?

We are. We are, actually Joe. We did in fact, if you were in our conference in here, you would see that we've got a list of about 30 large accounts on the books that we are working on. So last year, excluding the government contract, which would have skewed the data, we had about just over 12% growth in revenue per client. And that has continued in the first quarter. So we have had -- again, when we exclude, as we said earlier, we had little over 12% growth in revenue from our geographic offices during the first quarter. And the only place that declined really was the government contract which we knew. And so that, most of that, some that of course, is new clients which we -- but most of the new clients are being driven -- a lot of new clients in the first quarter were driven by the new 5 Choices launch. So not a lot of those converted to a lot of revenue in the first quarter. So primarily, I would say that -- the exact number we could provide, but it's roughly in the range of 11% to 12% revenue growth per client also during the first quarter.

Right.

Just stepping back though, because you're asking kind of the visibility question. Let me say there are four stages in the question. We have actual bookings, which is this pipeline of booked days and awarded revenue, and we've given that. The pipeline of potential stuff is currently being discussed with clients, we know how big that is, and we have percentages applied to different categories of these -- so a, b, c, d percentage that gives us a weighted average. The pipeline there, this stuff is currently being discussed, that ultimately would go in to the pipeline. We mentioned that, that's also much larger than it was at this time last year.

The third element is the -- is our marketing event pipeline. A lot of what we do, nothing sells for us like an experience with our content. We have these two hour marketing overviews, where the right targeted buyers are invited. We've got more than double the number of those scheduled this year. One, because we have proven that they really work. But the number of those, that will drive new opportunities into the potential business, which eventually will translate. And then we've also got something, a number of face-to-face calls on clients that we track. And so when you look at that whole thing, the visibility from the -- from what's already been booked is 2 to 3 quarters out.

Right.

The -- or 1 to 3 quarters. What is in the pipeline is 2 to 4 quarters. The marketing events drives that from 2 to 4 or 5 quarters. And the face-to-face meetings get started, and those will move to more than a year. And so, increasingly as Shawn said, we feel like we have some visibility where we can think of a three year plan, and say, well, we have good visibility for a quarter or two, and good visibility about the lead metric out beyond that. So that we can really be thinking, as we sit in the meeting, and say, well, gosh, we think that this month might be looking a little soft, or this one looks really great, and what can we do about it a year out? And that is helping us in our predictability. Is that responsive to your question?

No it does. It's very helpful, I appreciate that.

Thanks, Joe.

I will jump back in queue.

Okay. Thanks.

John Lewis of Osmium. Please proceed.

Hi.

Hi, John.

I have a question for Steve. What percent of EBITDA should equate to free cash flow, in a -- just in a steady-state environment? Not, obviously, you've had some growth, but just trying to get a feel for that.

Okay, so -- in the slides, there's a packet that I didn't really refer to, but it is slide number -- page number 9, which shows for the quarter and for the year, net cash generated, which is our view of free cash flow. So if it's -- John, it's probably easier to talk about it on a year basis. So if you look at the 4 trailing quarters, we are at 13.1 -- we are at $13.1 million to $13.2 million of net cash generated on between 21 and 22 adjusted EBITDA. So that is kind of the relationship that you would see going forward.

I understand that. I guess my question is, is in a steady-state environment, because -- I guess my understanding that the business model was going to become less capital intensive. And you picked up the government contract, so the capital intensity has gone up. So I'm just kind to connect the dots to what a steady-state EBITDA to free cash flow ratio should look like, because my understanding is the ratio has declined, given this government contract and the revenue growth, being taken up with working capital.

Well, the -- the free cash flow as a percentage of adjusted EBIT, as a percentage of adjusted EBITDA will change -- the percentage will change consistently, as they both increase. I think it's the gap between the two, that will remain consistent. So if -- as an example, just say that right now, we're -- relationship is for example $21 million of adjusted EBITDA to $13 million. If the $21 million goes up by 5 to 26, then we would expect the free cash flow to go up by 5, from 13 to 18. That percentage will be less, but it is like all of the increase in adjusted EBITDA is flowing through to free cash flow. Does that --?

That's helpful. We can talk more off-line about that. So I appreciate your insights there. My next question was, in light of success factors in Element K transactions in the fourth quarter, clearly there is a ton of demand out there from customers, given their growth rates and the multiples that strategic buyers pay for these businesses. And I am just curious, what is your strategic focus? You talked a little bit about it, but really to meaningfully drive this distribution channel with live clicks, insights, and other offerings, and I am just curious on what's going on in that front?

Maybe I will respond to that, John. Probably a little different than some of the companies -- and I am not saying whether it's better or worse -- but it is different, is that there is some companies who have picked the modality through which they are going to deliver their content. They are going to be a technology-based delivery mechanism, where they are going to be a subscription service. And then what they do, is the best deal -- is the best they can to deliver the results for whatever, having chosen the modality. We have had a different view, which is more a continuum of delivery that would say, that we want to be sure that those people who, those customers who have picked -- if they want to pick a modality, we want to make sure we can deliver in the modality. But more often than not, for us, we are looking at a continued delivery that meets -- that where a company is engaging us, to try to get some kind of a transformational result. And so for them, the result is the question, and they want to make sure we can address that at wide range -- in a wide range of ways.

And so, what we have done is to develop this continuum, that has on one hand, self-serve, where they can buy the technology, it's self-paced, the person can take it. And that is great for many of their front-line employees. There may be, middle level employees, where because they're leaders, middle line leaders, who will go through and will want to have some on-site delivery with blended delivery, to make as much impact as they can, but to scale it across lots of leaders. And then at the top, they may want to have a very hands-on help -- which would be a fully -- a premium service for us. And so I think what happening, John, really for us, is we are not, per se -- I recognize the multiples of those companies. And it will be great if they are able to maintain that -- those multiples, if the reality turns out to be as high as their multiples. We will probably not be one of those companies, that's trying to just be -- pick a modality.

On the other hand, if we can deliver for a major client across the range of modalities, and really hit a big -- and make a big impact, for us the revenue per client is bigger, the revenue goes on for a long time. And so for us, as we've said, we have moved the portion of our revenue to this technology-delivered or technology-assisted as part of the engagement, has gone from roughly $7 million to roughly $40 million, over the last three years really. And so for us that's -- but that's only a very small portion of that is driven because we said, we want to find out much technology stuff we can deliver. There is about $6 million of it that's been driven by that. But the rest of the growth has come from saying what want to do is have these strong value propositions, transforming your results. And we've got a -- we're platform-agnostic. We want to design it, so it can meet your needs.

It turns out, that the way -- with our delivery options, we can meet any pricing competitive. So for us we don't lose -- we are not losing deals to these people who are only modality-driven, because we, with intellectual property sales, or technology, or et cetera, we can compete head-to-head with them. We're playing a different game than they are, but very cognizant of the fact that this technology investment allows us to be very scalable. So I think we are continuing the investment every year in the technology side. We've got a big focus on integrating everything that we can, anything that can to be delivered technologically, we want to make sure it's available. But rather than telling, trying to sell the customer on the modality, we want to sell them on results, and tell them that we have it available through any modality. So I don't know if that is helpful at all.

That's is very helpful, and I completely understand that. I guess my -- so basically what you're saying is clearly, there's a lot of customer demand for the modality to be delivered, some kind of online component if it's a webinar, clearly, you said $7 million to $40 million. So there is the consumer demand there. I guess my next question is, given the enormous growth rates and the interest out there just industry-wide, do you have the right distribution to sell-in with client partners? Or do you need more people in inside sales force, or how do continue to grow the modalities that customers are interested in, given the economics, presumably are significantly better than consulting?

Yes. In fact, John, just we really do no consulting, just so you know. We actually do not -- about 5 years ago, we did have an organizational consulting group that had about 20 people, that we disbanded and sold off. So we actually do no -- (Multiple speakers).

Right, just training --

-- just to reference that. For us, it's a question on the continuum, do you want a premium service like I can get at Gartner. Gartner, they are reporting every quarter on, and very proud of the fact, that in addition to the no hands-on, self-serve model, that they also have an increasing amount of business that is in the -- that is a premium service that includes some -- where they have a human being that's involved. So that's how we see it. And so I'd say this, again, it depends on the lens you're looking through. We don't visit many customers who are saying, I have a demand for online learning, what can you do for me? There are some. More, they have an execution problem, and they want to know how you can make this available to them across the range of their whole thing. And so for that question, our practice led -- the way we scale this, is through adding salespeople, front end -- you mentioned some great points, which is increasingly, we will have front-end marketing people on the phones, and e-mail programs and so forth, that are driving them to events, that drive them into this pipeline.

But for us, if we can get people committed to solving a problem, and then have the modalities available so that whatever they want to do, we can deliver at a cost -- at a quality and cost that is competitive with anybody who is primarily modality focused, that's really our strategy. And there is no lack of opportunity there. I mean, you think of -- there are people like Element K who have gone to sell -- who are a great Company, we love them, and they are selling a modality into the education space. So I wouldn't -- I don't think -- I don't know that I would trade their value proposition for ours in that space. I think it is a wonderful offering, but going into transform a school, has allowed us to get to more than a -- we've just crossed over our 700th school, Shawn?

Yes.

And so, I don't know if that's helpful. But --

That's helpful. I mean, it's fair. And then I appreciate the color, and I will leave at that, we can talk more off-line. But I will leave it as --

It's was a really insightful question, so John, we would be delighted to -- (Multiple Speakers).

Sure, I appreciate it. I guess just the point in value differences, Elements K got 47 times EBITDA, and 2 times sales, just because they had the online learning components. And clearly, there is a lot of interest in the marketplace, given the economics. (Multiple speakers).

Well, I do too. I think we need to do a better job, John, at explaining. I mean, this is the first day that we've ever said we have $40 million of revenue of -- that is either technology delivered or technology assisted. And your point I think, if I understand one of your points is, fine, you may have this strategy, but let's make sure people understand the extent to which you have this technology based delivery. Because it gets a lot higher valuation if people understand that you've got the scalability, than if they think you are kind of a body shop that does a bunch of consulting. And we really need to do a better job of explaining that.

I appreciate that, thank you.

Thanks, John.

Our next question comes from the line of [James DeYoung] of Credit Suisse. Please proceed.

Good afternoon, Bob and Steve.

Hi, Jim. How are you?

Doing well, thank you. Just had a couple observations and questions. The international licensee royalty, grew really nicely in the quarter. I think it was up 23% year-over-year.

Yes.

If you could expand upon that a little bit. What percentage of revenue is coming from time management versus other products?

Great. In fact, Sean Covey is here, I am going to ask him -- as you know Sean heads up the international licensee effort.

Hi, this is Sean. How are you?

Hi, Sean. How are you today>

Good, thank you. Yes, so our international partners, the revenue primarily, is right now coming from our leadership practice, which is about 74% of it. So very little comes from time management, about $5 million total, of the 75. So with the launch of this new productivity solution, that we've just spent the last couple of years building, we think this is a huge opportunity for us to get this going internationally. So, yes, it's a small piece, and that's one of the big opportunities we have. They -- the licensing network is pretty young, relatively speaking. And so like Franklin Covey direct, many years ago, we kind started with 7 Habits and other leadership offerings, and then began to grow through other practices. They are kind of on the same trajectory. Starting with 7 Habits, our other leadership solutions and so forth. And so again, we think the opportunity is huge for productivity, time management, and also other our offerings, execution and other practices. Does that help?

Yes, that's helpful. It leads into my next question, which is it seems like a lot of these new practices and products that you have developed over the last couple of years really are in their infancy, in terms of being introduced internationally. So when I look at -- and I greatly appreciate the visibility that you shared on the call with where you hoped to get to -- I think the $40 million in EBITDA exiting 2014, gets you around $2.50 a share in EBITDA. But it's hard for me not to think that, that's incredibly conservative number, because I think you grew EBITDA as a Company almost 59% last year, and $24 million to $26 million this year suggests 14% to just under 24% EBITDA growth. And when -- you lay out the pipeline that you do. And then you talk about internationally just scratching the surface, it seems to me that $50 million is really the number for 2014. And it's one thing to be conservative, and not want to miss numbers, but it's another thing to be so conservative that it's hard to take you seriously. So I would challenge you to, really get out there and put some numbers out there, that are believable.

And the last question I had was, can you expand a little bit on the sales performance practice, that had a very good quarter, extremely strong last 4 quarters? And give a better sense of kind of what you think the longer range opportunity is to expand that offering?

Well, Sean, then do you want to --

Yes, hi, Jim. We are really excited about what's happening with the sales performance practice. In fact, Shawn and I spent a couple hours this morning having this very discussion on, on how do we expand this practice and it's capabilities more into our international licensee operations. We -- one of the key things that we've done on the last little bit, around our sales performance practice is really mainstreamed it into the main body of Franklin Covey. And made the designation that we are going to not focus, on a lot of things that are not important, and we are going to focus on a few key things that are important. Sales performance practice, being one of those, and we are pleased that we've had very significant growth. We think our path forward is going to be accelerated, as we continue to grow within our domestic offices. And we've, over the last couple of years we have doubled the size of a sales force, and doubled the size of the delivery force. And we are seeing that start to bear fruit, and that is exciting.

But in addition to that, doing the same kind of mainstreaming efforts with our licensee partners, that are eager to have this, and heretofore have not had access to it. So that includes a process of certification, it includes the process of ensuring that we have strict centerline, and ensure quality of delivery, as we take this out. It's a little bit more skill-based. And in some cases, a little bit more sophisticated and complex than some of our other offerings, so there is some work to do there to ensure we maintain the high standards of quality that we have. But we are excited as we look forward with sales performance, and our ability to scale that with our licensees.

Right now, we only have -- this is Sean Covey -- of our 35 partners, only one of them is doing anything significant right now with our sales performance practice. So we think the opportunity there alone, is a very, very big.

So Jamie, to your point, obviously, there are harder and easier ways to grow, but one of the big -- one of easiest ways to grow is to get these centerline -- these offerings expanded around the world, because each of them has a ton of potential. And so for us, the last few years, we have been spending -- kind of getting everything codified. Here is what the marketing event looks like, here is what the product looks like, here is what the translation is into your country. Here is the platform that allows you to easily scale this.

We've gone through the phase of working on joint contracts together, but we're really -- as I said, we stepped across this -- we really stepped across the chasm on 5 Choices launch this fall. And we'll continue to say, look, we are going to be world-wide from day one on the new productivity offering. We are going to expand execution. We've got eight new countries right now involved in a big execution efforts, to get them up to speed this coming year. And then we will cell divide, and do this, and each year it will grow from there. And so in addition to the organic growth, our intention is to accelerate. So we accept your challenge.

And I appreciate that. I'm just encouraged by all the opportunity you have in front of you. One last question, if I may. So when you talk about selling in internationally to places like Brazil or India and China, is more of the opportunity today, taking one of your existing large customers, like Marriott or Frito-Lay and converting that business internationally into additional sales? Or is it more greenfield opportunity at this point?

I'd say, the way you posed your question, I'd say it's more greenfield than that is expansion, but there's big opportunity in both. We are looking in these countries -- it's interesting, in my last trip to India, every evening we had events with business people. And of course, you would have a handful of those that are the US companies and customers, who came because they already know our offerings, or are already doing it. There are many more who came, because they knew the Company, and they knew Franklin Covey. And they were aware of our thought leadership, but were interested in the topic of execution or the topics (inaudible). And so what we are really doing, we have a global sales initiative, that focused on these truly global accounts. And it involves our team from our licensees, the team from our direct officers, coordinated by Shawn Moon and Sean Covey. And they worked together on a number of large global deals, and the number that we are winning is going up a lot.

And so there is a big opportunity for expansion around the globe. And we figured out how to get that seamless, so there's just -- we know exactly how you handle that. But still, relative to any individual country's business, it probably represents less than 10% of their business. They're going out and getting the local company, and hitting those. And so there's enormous numbers of accounts that are being addressed by the licensee network outside of the US.

All right. Thank you very much.

But it also doubled in the last year and half, our number of global sales -- global deals has doubled. We again, we think that's a big opportunity, as we get the international partners to coordinate with the direct offices here in the US.

And the nature of our offering. The more strategic we are in our solutions, the more pervasive they are going to be across [marginalization], which by nature goes across boundaries.

And just last point, our last -- we call it Redwood Council meeting which is our top 20 leaders -- we invited -- the person who made the buying decision for a large client in Europe, where we now have a global deal, to come over and beat us up and tell us what we did well, and what we didn't do so well. Thankfully, it was mostly stuff, -- he was nice, and did mostly stuff that we did well. But we wanted -- we had to push to what we need to do better, because we have a unique footprint, our global footprint is unlike anybody else in our industry, where you can actually win these things. And so, as Sean said, we doubled it, there is a big opportunity for growth there. But I think the big, of the two, much more of our growth will be driven by penetrating local markets, than it will be just expanding. But we are going to work on both. Thanks Jamie. I know that our time is about up. Are there other questions? We are happy, of course, to continue to the extent you all are.

Yes. Our next question comes from the line of [Bill Gibson] of Legend Merchant. Please proceed.

Hi, Bill.

Hi. You went over for most of what I wanted to understand, but I do have one question. And that relates to Europe. Are you seeing any impact from problems there?

So far, no. Europe is going healthy. We've had problems in particular countries that have had issues, but generally so far we have not seen much impact. We've had healthy growth in the first quarter, and we had healthy growth last year. We've had problems in the Middle East a little bit, with Egypt, obviously, and Libya. But so far we haven't felt it. We're watching carefully for what's going to happen. But Europe is even younger than our presence in Asia and in Latin America. And so, we think there are big opportunities still in Europe, and we've got still an impact.

Yes. And I think the real -- probably the reason for that, Bill, we all know the economy is not great in Europe, but we -- as we tell our own people, if we were GE or somebody, who already has a 40% or 50% market share, then yes, we probably ought to be affected by -- the GDP of these countries will effect it. But with the competitive advantages we have, and the small penetration we have, our job is to go out and take market share -- if the economy is going to grow more slowly, we need to win greater market share. And so I think the world is having an impact, but our share of it is increasing in some of these countries, and we are not feeling it.

Good. Thank you.

Thank, Bill. Any other questions?

Our next question comes from Joe Janssen of Barrington Research. Please proceed.

Just one follow question. With these potential 19 new partnership agreements, where like geographically, where are you seeing these opportunities?

Most of them, most of the world is already licensed. Most of these are in Africa.

Okay.

We have a new licensee done in South Africa, which is a good sized economy, but most of it's in Africa and Mongolia, We see a lot of opportunities with some of our current partners that have maybe more territory than they can handle, and stripping off some pieces, and giving more focus to particular countries. But they are generally smaller economies. So the bigger opportunity is just penetration with the partners we already have in their home countries and in their satellite countries.

But as Sean said, I think the other is, in the -- so it's 19 new licenses that are in smaller economies, but we also have this opportunity since two-thirds of our licensee revenue comes from just 35 of the 141 countries under license. This opportunity is -- either figure out how to grow fast there, or to find a way to work out a reasonable deal with our licensee partners, where we do a win-win agreement, where we get some of those countries back, and it helps them, and helps us, there is an opportunity for growing there too.

For certain contracts, like in terms of timing, like I mean -- do they agree to certain (Multiple Speakers). -- for X number of years, or is that all negotiated? (Multiple Speakers).

-- these tend to be 5 year agreements, and so we have a chance to re-look at this stuff. And they have -- and there is motivation on their part. If they are not going to penetrate the country, they have to pay a minimum royalty payment in that country. So it's a reasonable thing to say, look, you've been there for 4 or 5 years. Can we agree on a plan for you to penetrate country X? And if not, you won't have to pay the minimum royalty payment for something you can't farm, so to speak. And we can get it back, and get a team in place that can grow it. And we are aggressively pursuing doing that.

Yes. Just to give you feel for this -- most of our partners are $1 million to $5 million businesses. We've got a few that are a lot bigger, most are in the 1 to 5 range. And so they are -- picking a lot of low hanging fruit, in terms of growing in penetrating a lot of these countries. And getting from $1 million to $5 million, to $10 million to $50 million businesses is the opportunity. And we can do that in many countries across the world, over the next 4 or 5 or 6 years.

And that's what really has driven a lot of the growth, is these small startups becoming -- eight or 10 of them have become pretty good sized businesses, $5 million to $20 million businesses that -- $5 million to $15 million businesses, I guess. And they are now really gaining strength. So we've got plenty of opportunities to either get back, or to help them make the investment necessary to grow in some of these ancillary countries.

Now just for clarity Bob, just want to -- you last quarter, you referenced -- increased visibility -- or not visibility, but an acquisition strategy. Is this what you are referring to?

Yes, I just mentioned there'd opportunities to -- I did mention last call that there would be some opportunities to help [grow the license]-- one, in some cases, you have to -- you might decide to re-acquire a license in the country.

Okay. Just wanted to clarify that.

And in other cases, you might find ways to provide some capital to help some of these licensees who were constrained by cap, where their growth is constrained, not by opportunity, but by capital, to try to figure out some ways. So that's what I was referring to last time. It's not huge amounts of capital, and we're not trying to become more capital intensive. But small investments of few hundred thousand here and there, could add up to a couple million dollars -- it could really help accelerate growth in some of these circumstances.

I appreciate the color, thank you.

Our next question comes from the line of George Santana of Ascendiant. Please proceed.

Hi. I will keep it quick, considering the time. Considering the sales cycle, and you've addressed this in a couple different ways, but are you seeing a lengthening or shortening of that sales cycle at all? And a follow up question, any guidance for the current quarter? Thanks.

Thanks. I'll have Shawn --

I'll speak to the sales cycle. We are actually seeing an acceleration of the sales cycle as a byproduct of our go-to-market strategy, Bob talked about the event strategy. And one of the things that we know through our many years here, is that when people have an opportunity to experience the content. And not just to get an intellectual understanding, but to get an intellectual understanding and a visceral understanding of how this IP solves problems in -- on the teams and the organizations, and in their personal lives, it does accelerate how they buy. And Bob mentioned the dramatic increase in the number of events, as part of our go-to-market efforts this year over last year. And so, we are starting to see more activity there.

On the second half your question, we don't give guidance specifically by quarter, I think we expect top and bottom line growth in the quarter.

Okay. Thank you.

Thanks.

Our last question comes from the line of Julian Allen of Spitfire Capital. Please proceed.

Hi, Julian.

Hi, Bob, good afternoon. Just looking gears for one quick question, can you talk a little bit about your residual exposure to the legacy products business? I noticed that on the balance sheet, the third party receivable is now up to about $6.4 million. Could you give just a quick comment on, A, how that business is doing and what the residual exposures are; B, they to the EDS, sublease, or other contracts? Thanks very much.

Yes. I will give you a headline thing, and would be happy to go into detail if anybody wants to go into it. But the short answer is the residual liability has gone down dramatically over the last few years. They are down to -- the residual liability came in one of three forms. Retail stores, they are now down to less than 12 stores left. And a year from now, they will have essentially no stores remaining. And so that liability has gone, from having 60 leases, down to 12, to that will be close to zero. We've had the second, which was the EDS warehouse agreement, we worked out a new deal with them, and half that liability is now resolved. And we expect the rest of it to be resolved through the leasing out of the existing warehouse. And then the final area is just office space here, which is relatively small exposure -- I mean it's a small amount per year. And we had some good success at finding new tenants.

So I would say just a general idea is that the liability has shrunken down dramatically. The receivable that is outstanding, we have allowed their payable to us, to increase in certain times to allow them to get some of these things resolved, where they bought out of store leases on things like that. Today I think we received a $3 million payment or so from them, which will significantly reduce that. And so we expect that liability to continue to decline. This is the time of year when they have the most cash, of course. The business generally is holding it's own, Julian. They've -- with the restructuring and so forth that has gone on, they're basically on a basis where the cash -- they continue to generate around $3 million or so of positive cash flow and EBITDA. There are no real big -- from them, that's just a steady-state thing, that eventually continues to distribute out. And we get a share of that cash flow, starting in about 6 months, it will further reduce that liability. So I don't know, Steve, if you want to add anything to that?

Well, I agree, the balance we expect to be significantly lower when we report our second quarter.

And a year from now, Julian, we'd expect to essentially have no balance outstanding.

Current balance. Just current -- just 30 balance between the companies for stuff we buy from them, et cetera. So that's risk, we never viewed as a huge risk, but whatever it was before, it's much, much smaller. And we think will be essentially gone a year from now.

Terrific. Thank you very much.

Thanks, Julian. Well, all right, I think that's it probably for questions then, unless -- to the operator, is there any more in waiting?

There are no other questions at this time.

All right. We'd just express appreciation to each of you for being on the call today, and for your continued support and great questions. We're very happy and delighted to follow up on any questions off-line here. And we appreciate everything that you are doing to help us. Thanks very much.

Ladies and gentlemen, that concludes today's conference. Think you for your participation. You may disconnect at this time. Have a great day.