Franklin Covey Co (FC) 2012 Q2 法說會逐字稿

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

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Derek Hatch, Corporate Controller. And you have the floor, sir.

Thank you, Jeff. On behalf on Franklin Covey, we would like to welcome everybody to our investor call this afternoon to discuss the financial results through the quarter ended February 25, 2012. However, before we get started, I'd like to remind everybody that this presentation will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based upon Management's current expectations and are subject to various risks and uncertainties, including but not limited to -- the ability of the Company to stabilize and grow revenues; the ability of the Company to hire productive sales professionals; general economic conditions; competition in the Company's targeted marketplace; market acceptance of new products or services and marketing strategies; changes in the Company's market share; changes in the size of the overall market for the Company's products; changes in the training and spending policies of the Company's clients; and other factors identified and discussed in the Company's most recent annual report on Form 10-K and other periodic reports filed with the Securities and Exchange Commission.

Many of these conditions are beyond our control or influence, any one of which may cause future results to differ materially from the Company's current expectations. There can be no assurance that the Company's actual future performance will meet Management's expectations. These forward-looking statements are based upon Management's current expectations and we undertake no obligation to update or revise these forward-looking statements to reflect events or circumstances after the date of today's presentation. With that said, we would like to turn the time over to our Chief Executive Officer and Chairman of the Board, Mr. Bob Whitman.

Thanks, Derek. Hello, everyone. We're -- appreciate you all joining us today and having so many of you join us today as well. We assume that you all saw the press release. We are delighted to report that we had a very strong second quarter. It's actually the strongest second quarter ever for our current business. We continue to feel very good about the business, about our momentum and our outlook for the year and beyond. We are also feeling confident about the prospects for continued growth in each of our channels and practice areas and about the expected trajectory of our business over the next several years. So today I'm going to keep my remarks relatively brief to allow plenty of time for questions you might have. I like to just touch on three topics -- first, the headlines regarding the financial performance of the business during the second quarter; second, our momentum and outlook for the year and what we see as a very positive trajectory for the business and our growth and earnings potential for this year and next several years; and finally, our announced $10 million common stock repurchase program. So, starting with the headlines about our second quarter's result.

First headline is our free cash flow or at least our net cash generated and cash flow from operations were extremely strong during the quarter and for the trailing four quarters. Our net cash generated, which is -- there is an exhibit that shows the calculation of that -- grew 48% during the second quarter to $4.1 million, up from $2.8 million in the second quarter of 2011 and as you can see in slide 3, for the trailing four quarters ended February 25, our net cash generated increased to $16.9 million, which is an increase of $2.2 million or 15% compared with the $14.7 million in trailing four quarters of cash flow generated in the same period a year ago. This represents net cash generated per outstanding share of approximately $0.95. Our cash flow from operating activities was also very strong. It was $8.6 million for the second quarter. It was unusually high. Our second quarter is typically higher than other quarters due to the timing and receipt of our government receivables cash and other cash. As you can also see, for the trailing four quarters, our cash flow from operating activities increased to $16.5 million, which is an increase of $5 million or 43% compared with the $11.5 million in the trailing four quarters cash flow that we had from operating activities a year ago. This strong cash flow add was to fully repay the outstanding balance on our credit facility, invest in key growth initiatives, and still increase our quarter-end cash balances to $8.2 million.

Second headline is that a high and increasing percentage of revenue flowed through to increases in adjusted EBITDA, income from operations net income. As you can see in slide 4, adjusted EBITDA increased 46.9% for the second quarter to $5.3 million, up $1.7 million from the $3.6 million in adjusted EBITDA we achieved in the second quarter of fiscal 2011. This also made the second quarter's adjusted EBITDA our best second quarter ever for the business and we were particularly pleased with it in as much as we were up against very tough comp quarter from last year where adjusted EBITDA increased $1.6 million or 78% compared to the second quarter of 2010. So, for us that was a good mark to exceed and to exceed it so much. For the trailing four quarters ended February 25, our adjusted EBITDA increased to $23.5 million or approximately $1.33 per outstanding share, which is an increase of $5.3 million or 29% compared with the $18.2 million we generated in the trailing four quarters for the same period a year ago. So, again, for us, a key metric adjusted EBITDA, we felt really good about not only the quarter but the trailing four quarters continues to track well.

Our income from operations increased was obviously even more -- 86.9% for the second quarter to $2.8 million up from $1.5 million in the second quarter of fiscal '11. Our operating income for the trailing four quarters ended February 25, increased $12.7 million, which was an increase of 46% or $4 million compared with the $8.7 million we generated a year ago. And finally, net income was up a lot; it almost quadrupled to $1.2 million or $0.06 share from $300,000 or $0.02 a share in the second quarter of 2011. This reflected both a strong operations and also an improvement in our effective tax rate. So for the trailing four quarters, net income increased to $6.5 million, an increase of $5.8 million compared to the $700,000 in trailing four quarters net income for the same period a year ago. So the leverage of the operating model, I think, is being reflected well in the flow-through from increased revenue and having it flow all the way through.

Third headline is our adjusted EBITDA margins also expanded significantly in the second quarter showing that flow-through. Our adjusted EBITDA-to-sales margin increased to 13.8% in the second quarter, up from 10.2% in the second quarter of 2011. For the trailing four quarters, that ratio increased to 14.4% from 12.1% for the trailing four quarters a year ago. So we expect future revenue growth and with the continued high flow-through, we expect our adjusted EBITDA-to-sales margin will increase to approximately 18% over the next couple of years. Final headline, is that we were pleased to achieve strong and really very broad-based revenue growth during the second quarter. I'll give just a little detail on that. Our revenue during the second quarter increased to $38.6 million, which is a $3.1 million or 9% increase in revenue, all of which was organic. It has made, again, the second quarter's revenue the highest ever for any second quarter. For the trailing four quarters, our revenue was $164 million, up 9.3% or $14 million compared with $150 million last year. And, as I said, it was very broad-based and our direct offices in the US, including our government region, revenue was essentially flat for the quarter and up 3% for the trailing 12 months. That, as you will recall, is after a significant decline over the last 12 months in the government side.

Excluding our government services region, we had planned decline in revenue in that related to the maturation of this large government contract but the other direct ops in the US and Canada had revenue growth of 4% on top of a tough year-over-year comp, where we had revenue growth of 17% last year and for the trailing four quarters, these offices have grown 12%. In our National Account practices, revenue grew 34% in the second quarter, and is up 29% for the trailing 12 months, obviously on a smaller base. Our international licensee partner offices, revenue grew 14% for the second quarter, is up 17% for the trailing four quarters and this growth reflects -- you know, it was very broad-based across our licensee partners, two-thirds of them and reflects our continued penetration in China, Singapore, and other major emerging markets. In our international direct offices, revenue grew 14% for the quarter and up 9% for the trailing 12 months and we were really pleased with the strong revenues out of our Japan operations. So that is kind of the end of the headlines but we are very pleased and encouraged by these results and feeling of this continues the momentum we've been seeing over the past 12, well last 12 quarters, I guess, really.

Second, I'd like to make a few comments about our momentum and outlook for the year. The momentum in our business continues to be very strong and broad-based. I'll give you these four little bullet points. One, our pipeline of booked days in ordered revenue, which as you know is the actual business book to rewarded, was $29.3 million at the end of the second quarter, reflecting a small year-over-year decline in our government pipeline. Thankfully it is a pretty small one. And then a growth in our pipeline of corporate business. So our corporate pipeline is the largest ever for any quarterly period at this point and we would expect that would flow through in the coming quarters. Our second metric is this thing that we introduced last time. We have always measured it, but we introduced it to you all last quarter, we call it our prospective business pipeline, which is business that we are discussing with our clients and proposing, et cetera. And for our five direct sales offices in North America and our direct offices the UK, Japan, and Australia, we had a very significant -- our pipeline at the end of business they were discussing with clients was up very significantly for the period ended the quarter. And that has already started to flow through in March, which is the first month of our third quarter to date, at we least up through yesterday. Our new bookings are up for the month more than 30% compared to last March and last March was a good quarter for us.

Finally, maybe just a word about the power of this operating model, which I think is becoming evident in the flow-through. You should look at slide 7. We have said that we expect to be able to continue to achieve strong organic revenue growth in the future in the range on average of at least low double-digit levels. We are pleased that our organic revenue growth over the past two years has actually been higher than this. We've also said that we expect between 30% and 40% of this increased revenue should flow through to increases in adjusted EBITDA and again, we are encouraged that the revenue flow-through in the second quarter and over the past two years has also been higher than this, but with these kind of economics, as we get future revenue growth, it should drive aggressive growth in adjusted EBITDA earnings, cash flow, while significantly expanding our adjusted EBITDA margins.

In last quarter's webcast, we used a slide which is shown here in 7, a version of it was used last time, which provided a model of how this kind of growth and flow-through could translate into gains in profitability and cash flow in the future. We also in this one included -- so this is about two and half years from now, these results would be for fiscal 2014, under a range of different scenarios. This one is a little different. We also included for that year, the net cash -- under our definition of net cash generated, what the cash flow would be as well. And so, as you see in slide 7, assuming that we achieve, say, a 10% compounded average growth rate in revenue over the next two and a half years, and that 35% of that increase in revenue flowed through to adjusted EBITDA, our adjusted EBITDA would be expected to increase to between $38 million and $40 million or to approximately, depending on the exact share count at that time, $2.25 to $2.50 per share that time, representing a compounded annual growth rate in adjusted EBITDA of approximately 22%. And obviously the percentage of growth in operating income and net income would be even greater, as is shown. The cash flow would also be substantial and so if you take that 10% and 35% as a middle point of the chart, in that year, you would expect to generate approximately $28 million of cash flow.

And so, partially we are sharing this data just so you can kind of see what we see as the basic operating model for the business. And I think you are already seeing it in the result. But, we are not -- the range of possible outcomes shouldn't be considered formal guidance but we are trying to give this insight as to what the earnings and cash flow potential is and because we are committed to achieving these kinds of results. So, finally, on this point, with the strength of our second quarter performance and the momentum we are continuing to see in the business, as reflected in these pipelines and our bookings, we now expect that this year performance will be toward the higher end of our previously announced adjusted EBITDA guidance range of 24% to 26%. Noting that we had extremely strong performance in last year's third quarter where we achieved revenue growth of 34% and adjusted EBITDA growth of 158%, we would expect greater growth in the fourth quarter than in the third quarter but growth in both quarters.

Finally, I would like to make a few comments about our announced authorization to repurchase up to $10 million of our common stock. As noted, we had very strong cash flow in the second quarter and as we mentioned, it was $8.6 million in cash flow from operating activities and for the trailing four quarters, $16.9 million -- or $16.5 million in cash flow from operating activities, and as shown in that previous exhibit, we expect our operation to generate significant amounts of additional cash flow over the next 12 months and in the coming years. In November, I shared our thinking about a retention of cash and said that we had determined to build up our cash balances to $15 million while maintaining $10 million of availability under our credit facility before deciding what to do with the excess cash and, two, there would likely be somewhere around the second quarter of next year toward the end of the calendar year before we expected to achieve that level of liquidity.

In light of our very strong operating performance in the second quarter year-to-date and for the trailing four quarters, the continued momentum we are seeing in our business, the expected continued strength of our business and cash flow in the coming quarters and years, and the reduced uncertainty in the external environment, we recently made two decisions. One was to lower liquidity threshold to $10 million of cash and we are going to keep our $10 million of availability under our credit line open. And second, to utilize the cash in excess of that $10 million to fund an authorized $10 million share repurchase program. So given the expected strength of our business and cash flows, we would expect to begin purchasing shares under the share repurchase program sometime later in this quarter or early next quarter.

So in conclusion, our organic growth revenue is very broad-based across all of our practices, major practices for the last 12 months also, and all major channels. The flow-through is great with this adjusted EBITDA growth of 47% and for the quarter and for the 29% for the trailing 12 months. Cash flow was good, the margins expanded. So, we are pleased with the results and momentum of our business, expect to be able to continue to achieve both strong top and bottom line growth in fiscal 2012 and beyond. So, just want to thank each of you for your continuing support and guidance. I am going to now turn the time over to Derek Hatch, our Corporate Controller, for some brief remarks. Normally, I'm turning it over to Steve Young, but Steve, last week, our CFO, had knee replacement surgery. He is doing very well but will be out of the office but on the phone and e-mails for the next couple of weeks. And so I'm going now turn the time over to Derek.

Thanks, Bob, just to follow up on a couple comments regarding the financial statements. As Bob mentioned, we had a very good quarter, which produced some nice result in our income statement through increased sales and good gross margins flowing through to increased EBITDA, adjusted EBITDA, which then of course, rolled through to improved pre-tax earnings and then to net income. We are also happy to have our income tax rate stay generally consistent for the second quarter in a row, right around 46%. That is a significant improvement over our prior-year percentages, which were as high as 64% for this quarter last year. Once again, it is due to the same general conditions that we had with permanent differences and if you have any questions regarding the impact of income taxes, please give me a call. I'd be happy to explain them to you.

All of these improvements, as Bob mentioned, led to improved cash flow from operations, which has really served to strengthen our financial position. Our balance sheet is in great, great shape. At the end of the quarter, we had $8.2 million in cash and cash equivalents. Our working capital increased to $22.2 million compared with $16.7 million at August 31, 2011. We had no balances outstanding on our line of credit facility. We are on time making our payments, of course, with our term loan that we have and we owe about $4 million left on that. We also recently renewed our line of credit facility with our lender and extended that due date out, the maturity out until the end of March in 2013. So as a result of all those things, our balance sheet is in fantastic shape. We don't see any significant issues or impairments coming down the road and our financial position looks very, very strong. As Bob mentioned, our cash flows were very good and have been good over the trailing four quarters.

Our cash flows from operating activities for the two quarters ended February 25, 2012 were $9.2 million compared to $8.3 million in fiscal 2011 for the same period. Large part of that was due, as Bob mentioned, to the receipt of cash, I mean the receipt of cash, and to the improved operating results. We've been able to keep our cash flows used for investing activities in check. And we have spent $1.7 million for capitalized curriculums and development activities and $1.0 million dollars for purchases of property and equipment, which are primarily computer hardware and software items.

Our cash used for financing activities totaled about $1.3 million. $1.5 million of that was used to pay down principal on our financing obligation and our term loan and they were partially offset by cash received from participants in our employee stock purchase plan. But overall we had, thanks to good, strong financial results for the quarter and for fiscal 2012 thus far, two quarters in, we have had great cash flows and you can see the improvements and the increases all the way through our financial statements for the period ended February 25, 2012. Hopefully that was helpful. If you have any questions in Steve's absence, please feel free to give me a call, Derek Hatch, the Controller, and I'd be happy to answer any questions you might have regarding our financial statements. With that said, I'd like to turn the time back over to Bob Whitman to continue the discussion.

Thanks, Derek. I think at this point, I would just turn the time to the operator to tell us how to start the question-and-answer period.

(Operator Instructions) Our first question comes from the line of Joe Janssen with Barrington Research. Please proceed.

Hello, Joe.

Yes, thank you for taking my call. Good quarter. I will start with the sensitivity analysis that you presented on slide 7. I appreciate the color and just for clarification, that, assuming the different variables, is that incorporating your additional sales force that you plan to hire in the next two years or is that looking at it in kind of in arrears?

Well, it's a good question. I mean, this is just showing what would happen if we grew it, but maybe, in fact, I included a slide at the back, Joe, and maybe I would ask Shawn Moon who heads our direct sales forces, I think slide 10, maybe, Shawn, why don't you just respond to it. I think there is a slide in the deck.

Yes, thanks, Bob. Hello, Joe. Would refer you to slide 10, the growth opportunities sales force addition slide and there are really two factors in the productivity of our sales force, as we see, moving forward. First is increasing the productivity of our existing salespeople or what we call our client partners. And then the second is actually increasing the number of client partners. So in this slide you can see that the typical expected ramp rate for the new sales people hired, for every 10 net sales people that we bring on in a given year, we call this our class, right? Our net investment for that year?

Is this slide 9? Is this slide 9?

Slide 9, I'm sorry, slide 9. Forgive me. You can see that the ramp rate for those folks and we factored those in that hire but don't make it so we have that included. The investment required for that is about $600,000 in the first year. You can see there in year two that we typically recover all of the year one investment plus an additional $1 million and then by year five, each class of 10 net new hires should generate about $13 million in revenue and contribute more than $5.5 million, almost $6 million in additional EBITDA contribution.

And then on slide 10, you can see that we've been hiring a class of new client partners each year over the past few years and we have client partners who are in different stages of the ramp so we felt that as a consequent, it is probably worth noting that even without hiring -- and I think this speaks to your question, Joe -- additional sales people. Just with those that we have, we could increase revenue by $44 million. That is almost the same amount of revenue increase outlined in slide 7 without adding new people. And this would come with substantial flow-through since we don't have an incremental investment with the new people. So in addition to continuing our ramp with our existing classes of client partner, we also have also increased the number of our new client partners over the past few years. In 2011 we hired 14 net new client partners. In FY 2012, we've already hired an additional 18 new client partners, and we expect to be able to increase our hiring to 30 a year and then on to 40 a year over the next several years.

Are you done hiring for fiscal 2012?

No.

No.

No.

No.

Is 20 still the number?

Yes, we will probably go a little ahead of that, wouldn't you think, Shawn?

Yes.

I mean, we've got some needs that we will probably get filled, it will probably go a little north of that.

Yes. There is so much leverage in both these priorities, Joe -- the ability to increase the productivity of our existing folks and the ability in that context to continue to add as we have outlined before. Really, this is my highest priority.

Okay. Okay.

So hopefully, that is response. So I think your question, maybe it was a long answer to a short question but it was -- but Shawn, I think, did a particularly good job of it. Shawn, thanks. It was just to say that the numbers that are in that sensitivity chart, if we just ramp up the people we have, we could get, I think, that would -- if my math is right, we would get to $204 million of that $208 million of revenue. So there would be $4 million shy, if you didn't hire anybody but given that we are hiring and accelerating that, we would hope there is some upside.

Are you seeing any more efficiency in that? I remember. a year ago, those numbers looked a bit different in terms of the ramp of the salespeople? Are you still seeing some improvements in efficiency and--?

We are, Shawn, maybe you want to speak to that, too.

Yes, we are.

Revenue per salesperson on the ramp.

Per person has gone -- continues to go up from about $800,000 in 2004 to about $1.15 million in 2011 and that is up from 2010.

Okay, I appreciate it.

There is some increase in efficiency, yes.

Well, and Shawn, you might just speak to what the objectives are for the ramp rate also which is a little bit faster than what is shown on the slide 9, I believe.

Yes. The ramp rate is -- we are hoping to trim a full year off of the ramp rate where before it's taken them five years to get up to $1.1 million. Our minimum expectation now with a client partner is to get up to $1.4 million. We have client partners that do well above that, but the $1.4 million is the number we think is attainable and so that is -- and there are several things that are going into that but we are seeing our pathway to that number.

Okay. Just, I know I have been on for a while. Two quick questions. Just, regard to the guidance, given the performance you have had in Q1, Q2, seems that the momentum moving forward, guidance seems -- I know you guided to the higher end of guidance, now, but am I expecting anything, should I be looking at anything in Q3, Q4?

Yes, I think just as I mentioned, I mean last year we had a huge -- we had a 35% revenue growth in the third quarter and more than 100% EBITDA of growth. So, I think that basically our view is we've got -- the high-end would be increasing EBITDA for the year around $5 million. We have done about half of that in the first two quarters. As I mentioned, the third-quarter, we expect to grow in the third and fourth quarter but would expect the third to be -- the growth in the third given that very tough comp -- to be less than in the fourth. And it maybe appropriate at the end of the third quarter to adjust our guidance further, but I think trying to give some direction at this point, that would be -- in light of, you recall, Joe, that we had year-over-year because of the first quarter declined in that government contract, which had been planned, we are up a little -- it's up against a tougher comp because you got to make up for that $4.5 million and grow but we feel confident we can move toward that upper end.

And just one last question. Make a quick, on my end. Update on India with the schools and Leader in Me?

One more time?

The going on in India with Leader and Me?

So the first -- we begun with the first 20 schools, which is the first group that we have contract and it is underway. And we are building the team up there so they can handle more, but domestically, over in the US operations, we continue to expand and are now over -- more than 750 schools that are Leader in Me schools. We are now in the first 20 in India and I think as we have said, there are around 120,000 K through 6 schools in North America. There are 746,000 K through 8 schools, they have a little different format, but in India, so there is a huge opportunity just in that one -- the expansion of the [practice] into India and that is maybe indicative that frankly, as we've said before, among our licensees, typically our international licensee partners today are licensees only in a couple of our different content categories. As we can take these new practices in, even in existing licensee, there's a big opportunity both for organic growth but also adding these new practices and this is one example of it.

All right, I will jump back in queue.

Thanks, Joe.

Good quarter and send Steve my best.

Thanks.

(Operator Instructions) Up next, we have Bill Gibson with Legend Merchant. Please proceed.

Hello, Bill.

Hello, Bob. Say, I would like to zero in on probably your smallest practice, which is Customer Loyalty. It was growing at a pretty good clip, but it seems like it's starting to lag a little. What is going on there? What are the challenges?

Yes, thanks. I think, generally, I will say, answer two ways. One, we've actually had really good growth, continued growth, and they've added a lot of new clients. It was one of their larger clients has modified their offering of what they are doing internally. It includes part of what we were doing before and so the principle slow down there has just been the reduction in that one contract but all of the customers they have ever worked with are still customers. They've added seven or eight new customers this year. Some are in the pilot phase. Others are in rollout. But I would expect that once we get over this little couple of quarter comparison with this one reduction or contract size reduction that we expect to continue to see that grow.

Good, thanks, Bob.

Yes, thanks, Bill. Be well.

All right, ladies and gentlemen, that will conclude the question-and-answer portion for our call today. I'd now like to turn the presentation back over to Mr. Bob Whitman for closing remarks.

Great. I just appreciate everyone being on the call with us today. Appreciate your continued support and guidance. And again we feel very good about the quarter and about the momentum and we will look forward to seeing many of you in the coming weeks and to reporting on third quarter. So, thanks very much.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a wonderful day.