Franklin Covey Co (FC) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2012 Franklin Covey earnings conference call. My name is Ann, and I will be your coordinator for today's call. As a reminder this conference is being recorded for replay purposes.

At this time all participants are in listen only mode. (Operator Instructions). We will be facilitating a question and answer session following the presentation. I would now like to turn the presentation over to your host for today's call, Mr. Derek Hatch. Please proceed, sir.

Thank you. Good afternoon everyone and welcome to our conference call this afternoon to discuss the third-quarter financial results. Before we get started this afternoon I would like to remind everyone that this presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements are based upon management's current expectations and are subject to various risks and uncertainties including, but not limited to, the ability of the Company to stabilize and grow revenues; the ability of the Company to hire productive sales professional; 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 policy of the Company's clients, and other factors identified and discussed in the Company's most recent annual report on Form 10-K and other periodic reports filed with the Securities and Exchange Commission.

Many of these conditions are beyond our control or influence, any one of which may cause results -- future results to differ materially from the Company's current expectations. And there can be no assurance the Company's actual future performance will meet management's expectations.

These forward-looking statements are based on management's current expectations and we undertake no obligation to update or revise these forward-looking statements to reflect events or circumstances after the date of today's presentation, except as required by law.

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

Thanks, Derek. Hello, everyone. I would like to welcome you to our 2012 third-quarter conference call, and we really appreciate you joining us. We are happy to report that we had a very strong third quarter. It turned out to be the strongest third quarter ever for our current business. So we continue to feel very good about the business, about our momentum and about our outlook for the year and beyond.

We also feel confident about the prospects for continued growth in each of our channels and practice areas, and we will talk about that a little bit more, and the expected trajectory of our business over the next several years. Consequently, as you may have seen, we recently raised our full-year adjusted EBITDA guidance range to $26 million to $27 million from our previous guidance range of between $24 million and $26 million.

Today I would like to just touch on two topics, first, our financial results for the quarter and, second, a review of our momentum, pipeline and outlook for the year.

On the first point, the overview -- I will start with cash flow. Our cash flow was very strong during -- for the third quarter and for the trailing four quarters. Our net cash generated, which you see the definition of there in slide 3, as shown grew 59% during the third quarter to $5.1 million, which was up from $3.2 million in the third quarter of fiscal 2011, and up from $1.8 million in the third quarter of fiscal 2010.

For the trailing four quarters our net cash generated increased to $18.8 million, which is an increase of $2.8 million or 17% compared with the $16 million trailing four quarters net cash generated for the same period a year ago, and up -- you know, this represents net cash generated per outstanding share of approximately $1.06.

Second, a high and increasing percentage of our revenue flowed through to increases in adjusted EBITDA, income from operations and net income, as you can see in slide 4. Adjusted EBITDA increased 10% for the third quarter to $5.8 million, which is up $500,000, or as I mentioned, 10% from the $5.2 million in adjusted EBITDA achieved for the third quarter of fiscal 2011. This also made the fiscal third-quarter adjusted EBITDA our best ever for our current business.

As you know or may recall from our previous calls, we were up against a big comp quarter from last year where adjusted EBITDA increased $3.2 million, which is 161% compared to the third quarter of 2010, reflecting in significant part the recognition of income from an ongoing government agency contract in last year's third quarter. So we were very pleased to exceed this and grow adjusted EBITDA 10% for the quarter.

I might just make a note, because in the last several quarters we have talked about the effect of the big government contract, which has been a great thing. I am happy to report that in this last quarter -- at the end of last quarter we won the rebid for that contract. And so going forward, at least over this next 12 months, it ought to be pretty steady and not something we have to talk about each quarter.

Income from operations increased 19% for the third quarter to $3.4 million, up from $2.9 million for the third quarter of fiscal 2011. And net income for the third quarter more than doubled to $1.6 million or $0.09 a share, up from $700,000 or $0.04 a share in the third quarter of 2011. This reflected both the strength of our operating performance and an improvement in our effective tax rate. And so for the trailing four quarters ended May 26, net income increased $6.1 million to $7.4 million compared with the $1.3 million trailing four quarters net income for the same period a year ago.

Third, our adjusted EBITDA margin also expanded during the third quarter with a significant flow-through of increased revenue to adjusted EBITDA. Our adjusted EBITDA as a percentage of sales increased to 13.9% in the third quarter from 12.8% in the third quarter of fiscal 2011, and from 6.6% in the third quarter of fiscal 2010.

For the trailing four quarters ended May 26, our adjusted EBITDA as a percentage of sales increased to 14.6% from 13.4% for the trailing four quarters a year ago. And with expected future revenue growth and continued high flow-through of incremental revenue to adjusted EBITDA, we expect our adjusted EBITDA as a percentage of sales to continue to increase, and believe it should reach approximately 18% over the next two years.

Finally, we were pleased to achieve -- to have achieved revenue of $41.3 million during this year's third quarter, making our third-quarter revenue the highest ever for our current business. Also, this exceeded by a small amount, $400,000, the record revenue level of revenue we achieved during last year's third quarter, largely as a result of this large contract where our revenue grew $10.4 million last year in the quarter from $30.5 million to $40.9 million or 34%. So we were very pleased to be able to exceed what was already a very big quarter from last year.

And as shown in slide 5, just to normalize the effect of that contract, looking back on a two-year basis in order to normalize this, the $41.3 million revenue achieved in this year's third quarter represented $10.8 million or a 35% increase compared with the third quarter of fiscal 2010 and a compounded average annual growth rate of 16%, all of which was organic.

And you can see quarter by quarter that this makes it on a two-year basis, which kind of smoothes it out, we have good growth over the last few years in every quarter, but this is one of the biggest quarters.

Just reporting -- breaking out that revenue -- in our direct offices in the US, including our government [rebid], revenue was up 1% for the quarter compared to last year, and up 48% compared with the third quarter of 2010. Excluding our Government Services region which had a planned decline in revenue, as we have talked about related to maturation of that large contract last year, the other four direct offices in the US and Canada had revenue growth of 5% for the quarter, on top of what for them was also a very strong year last year where they achieved revenue growth of 27% in last year's third quarter.

In our National Account practices revenue grew 13% in the third quarter compared with last year, and was up 40% compared with the third quarter of 2010.

Our international licensee partner royalty revenue grew 6% for the third quarter compared with last year, and grew 20% compared with the third quarter of 2010. This growth reflects continued penetration in India, China, Singapore and other emerging markets, as well as general growth worldwide.

Year-to-date 22 of our 35 licensees have achieved year-over-year revenue growth, and most of the rest are very close. There is some areas like in Egypt where there have been a lot of unrest where their decline has been a little more significant. But overall this is -- the growth is significant. Their plans are to double over the next four years and most are on track to do that.

In our international direct offices revenue grew 6% for the quarter compared with last year, and 20% compared with the third quarter of 2010, primarily as a result of strength in our Japanese operations.

In our seven major practices, which you can see in slide 7, three of the seven practice areas are experiencing exciting growth, real exciting growth, with year-to-year -- year-to-date revenue growth of 39% in our Education practice, 32% in our Productivity practice, reflecting the launch of our new 5 Choices to Extraordinary Productivity offering, which we announced last fall, and 16% in our Sales Performance practice compared with fiscal 2011.

Three other practices were essentially flat year-to-date compared with 2011, with Customer Loyalty up 2%, Leadership down 2%, and Execution down 2%. The final practice, our Trust practice, is down 12% year-to-date compared with fiscal 2011, caused largely by the planned decrease in fiscal 2012 volume in the large government contract.

The small decline in Leadership and Execution, really for Leadership again relates to the size of the government contract last year. With Execution, this just ebbs and flows a bit. We had a very large implementation in the first three quarters of last year. We except expect that Execution for the year will be up, but just this particular period -- comp period was down a little bit. The pipeline is very good. So in terms of overall results, we are very pleased and encouraged by these strong results.

Second, and finally, I would like to make a few comments about our momentum and outlook for the year. As we have mentioned, momentum in our business continues to be very strong and broad-based. As you can see in slide 8, our pipeline of booked days and awarded revenue, which is as you know actual business booked or awarded, grew to $38.1 million at the end of the third quarter, reflecting a $7 million or 23% year-over-year increase, and a quarterly sequential growth from the second quarter of $8.9 million or 30%, compared with our $29.3 million pipeline of booked days and awarded revenue at the end of this year's second quarter.

Growth in our corporate business made our corporate pipeline the largest ever for any quarterly period. And I am happy to say, also, our total pipeline is also the largest ever, and we have continued to add to that pipeline in June with very good momentum.

We have talked in the last couple of quarters about our prospective business pipeline, and this relates really to our five direct salesforces in North America and our direct offices in the UK, Japan and Australia. We track this prospective business pipeline, which is a measure of the amount of potential new revenue currently being discussed with and proposed to existing and potential clients.

This prospective business pipeline is one stage earlier in our business development process than our pipeline of booked days and ordered revenue. This has been a strong predictor of the strength of our bookings and revenue in coming months and quarters from these offices.

The lesson of this point is that at the end of their fiscal second quarter we announced that our prospective business pipeline at that time was significantly larger than the same time in the prior year. A significant portion of this pipeline subsequently translated into bookings that increased our pipeline of booked days and awarded revenue by the end of the third quarter and contributed meaningfully to the big increase there.

We are encouraged that our prospective business pipeline at the end of the third quarter was again significantly larger than that at the same time last year, indicating strong and accelerating momentum which we expect will convert to increased bookings and contractual commitments and then revenue in coming months and quarters.

Importantly, perhaps, as noted a moment ago, the conversion of this large prospective business pipeline at the end of the third quarter has already begun to translate into significant new contractual bookings and revenue in June.

So, as I said earlier, given the strength of our third-quarter performance and momentum we are continuing to see in the business with respect to both the size of our pipeline of booked days and awarded revenue and the magnitude of our prospective business pipeline, we are increasing our full-year adjusted EBITDA guidance range to $26 million to $27 million from our previous guidance range of between $24 million and $26 million.

I might just make note that the pipeline of booked days and awarded revenue about which I just spoke really relates only to our US and Canada operations and it does not include the bookings in our international offices, nor does it capture anything in, of course, our licensees. And so in the future we will have the ability to have a consistent report across all those things. But normally there is probably another $10 million of -- in the range of $10 million of additional booked pipeline in those international direct offices.

So to summarize, we are very pleased with the results and the momentum of the business. We expect to be able to continue to achieve both strong top and bottom line growth during the fiscal 2012 fourth quarter and beyond. And we thank each of you for your continued support and guidance. So I would now like to turn the time over to Steve Young, our CFO, for some brief remarks, and then open it to your questions.

Thank you, Bob, and good afternoon everyone, it is nice to be with you. Like, Bob, I am also pleased with this quarter's results and look forward very much to the future.

Bob has given highlights about our income statement, so let me just say a few words about our balance sheet and cash flows. Our balance sheet remains strong in my opinion. Balances are generally within expected ranges, meaning that we often expect to see fluctuations in these balances a little bit. At this quarter end, as an example, receivables are up a little bit. Payables and accrued liabilities are down a little bit, causing our cash balance to be down a little bit. But all materially within expected ranges and what we would think that we would see.

I think you noticed in our press release we included the balance sheet for the first time. I really don't see any unusual amounts on that balance sheet, other than our cash balance as being a little bit lower than what we had anticipated.

I would say that if you are newer to our story, I would strongly encourage you to call me and talk about the balance sheet, particularly our financing obligation that is really like a capital lease, our tax net operating loss carryforwards and foreign tax credit, our share count and our real estate operations. Conversations about these items are generally very positive conversations and shed light on some often misunderstood accounts. So we think our balance sheet continues to be in good shape.

As far as cash flows go you will continue to see that we continue to generate cash from our operations. We continue to invest cash in our curriculum and in growth. We have invested $1.7 million year-to-date in our world-class courses, and we will continue to invest.

Also, I like to note to everyone that we continue to benefit from our tax net operating loss carryforwards. So our cash paid for taxes is only $1.7 million year-to-date. And we have net operating loss carryforwards and unused foreign tax credits that should save us more than $10 million of cash on tax payments in the future.

You will notice as you read our report that over time our net operating loss carryforwards that we talk about the most have decreased and our foreign tax credits have increased. So now we are to a point that that $10 million benefit will come mostly from foreign tax credits. You all see that as we grow our working capital will grow a little bit, but we continue to generate cash.

Last quarter we were happy to report that the Board of Directors has authorized a stock purchase plan under which we can purchase up to $10 million of the Company stock, based upon our cash balance being at $10 million, and certain other conditions being met, which we are currently meeting. So we would expect in our fourth quarter to go over that $10 million cash mark and be in a position to buy Company stock, so long as the other conditions are being met at that time.

So, in conclusion, I am pleased with our performance for the quarter, pleased with our strategic direction. We continue to generate cash and invest cash in growth. And I'm looking forward to the future.

So, Bob, that is the brief -- those are the brief comments.

Thanks, Steve. I think we are ready to start our Q&A session. What I thought I would do maybe first is that there is some slides in your deck, starting with slide 9, I believe, that one of the questions that we are asked most frequently is for a deeper understanding of the math behind the ramp up of new salespeople and other existing, what we call, alumni salespeople.

And so we prepared just a few slides here to try to respond to that question first. And that will probably give rise to some others, but this gives you a brief review of this initiative from its inception in 2005 to date. And then kind of lays out why it is we believe that we have got a lot of headroom for growth on top of the 117 salespeople that we have today.

The magnitude of the opportunity, which we think is north of 500 salespeople, and what our intentions are with respect to that. So I will just go quickly through these slides, and maybe it will give you at least a basis for a deeper understanding of this key initiative.

As you see on slide 9, in 2005 we began our Reach initiative. This is -- we called it Reach, which is expanding our reach around the world. To key elements of this initiative were to increase the size and productivity of our direct office and Education salesforces at that time. Subsequently we could add to that, and we are doing similar things in our Sales Performance practice and Customer Loyalty, but at that time it was in our direct offices. And this other was to increase the size and productivity of our international licensee network.

As you can see in that slide, the growth has been significant in each of these areas. Our direct offices have grown at a compounded average growth rate of 7.5% for that whole period. And for the last three years that has been closer to about 11.5% to 12% compounded annual growth rate as we have accelerated hiring and the ramp up has occurred there.

Our National Account practices have averaged 12.8% annual growth since then. And our licensee royalties, their gross revenues are shown here, which have grown from about $23 million to a little over $70 million during this -- through 2011. And further this year we think they will top $80 million this year. That is a compounded average growth rate of 14.4%.

Underpinning -- you know, with all the investments we have made in content and practices and so forth, fundamentally the point at the end of this spear is our salesforces, including our licensee salesforces being out there, and this reflects the growth of the size and productivity of our forces. So that Reach initiative is to expand those.

The next slide shows the assumptions that we made at that time when we laid this initiative out for the Board, and some of our webcast calls back in that time where (inaudible), with respect to what we call the alumni client partners. Somebody who had been there with us -- who was with us than in 2004 and in the future anybody who had fully ramped up and was with us five years or more.

Our assumption was that we would be able to increase -- they would be able to increase their productivity at about 5% a year once they hit their $1.2 million ramp rate, which was the anticipated ramp at that time. And that we would be able to retain about 95% of those people in any given year.

The second key assumption regarding the hiring of new client partners or salespeople was that we had basically hired 15 to get 10. So we would retain about two-thirds ultimately. And that their economics would be as shown here, where they would -- an individual salesperson would have $200,000 of revenue in their first year, growing to $500,000, $800,000, $1.1 million and $1.2 million. And then we show the net economics for every 10 net salespeople then you would invest $600,000 in the first year. They would generate $2 million, you would have a net investment of $600,000 approximately in the first year.

The second-year you would get all that money back, plus $1 million. And by year five they would be generating about $5 million -- a little over $5 million of EBITDA contribution.

The next slide then shows the actual results against this. I repeated here the key assumptions. So we thought we could do 5% compounded average growth rate for the alumnis, those with us already in 2004 or subsequently who had been with us five years or more, with a retention rate of approximately 95%. The actual results have been a little bit better than that. The productivity has been -- growth of this group has been 12.6%, including the government contract. Without the government contract -- specific government contract -- it has been 8.5%.

And so with the addition of these new practices and the marketing and other things that we've done, we have been able to help them develop their business unit a little better than we had thought.

In 2005 and 2006, right after we initiated this -- started this initiative we had a purge internally where we eliminated salespeople who we thought weren't going to make it up the ramp, and to open up territories. In those days we had geographic territories; today we just have assigned accounts which makes it much easier. But we replaced a lot of those.

But since 2007 we have retained on average 94.5% a year, and that has been pretty steady each year, which means that you lose one person a year to retirement or health issues or whatever. We, thankfully, have rarely lost one otherwise. But for health or retirement or other reasons we maybe would lose one or so a year.

So that -- the assumptions regarding our alumni client partners and new people who ramp up and then get to the original $1.2 million level, we think those are, as we will show later, are still intact.

For new client partner -- the new client partners that we have hired since then, the ramp pre-assumption, which we just reviewed on the previous chart where they would go from $200,000 to $500,000 to $800,000 to $1.1 million and then $1.2 million in their fifth year, which it doesn't show. And would we hire 15 to get 10.

The actual ramp, as you see, has been a little better than that. Through 2011 we would have expected client partners that still in the ramp to have done about $25 million of revenue in that year. They did a little better than that, $29.9 million in that year, so just a little higher. And our success rate, including through the recession, which was a little worse, has been 54%. And so over this period of time we would have to hire 18 to net 10. But the economics for 10 really remained the same.

And so as you see the revised assumptions on the next chart, going forward we expect alumni client partners to continue to -- those with us five years or fully ramped to continue to be about 5%. Even though it has been higher, we just say for modeling purposes of internally, and maybe for you too, the 5% a year or so. We expect to retain about 95%. And that might go up a little bit because as we add new client partners who hit their ramp, they won't have the retirement issues that our older -- some of our older salespeople have.

And the economics are pretty close to what we originally thought. Our assumptions are still $200,000, $500,000, $800,000, but instead of topping out at $1.2 million, we are now saying $1.3 million. We have, again, done a little better than that. But it says the economic model is intact. If we can add 10 -- for every 10 net client partners that we add in five years, they are profitable by the second year and very profitable by the time they get ramped.

Just two more slides. The number -- when we talk about this potential for $500,000, here is what underpins that. There are 93,000 -- a little north of 93,000 organizations or organizational units that employ more than 200 employees. This is just in the United States. With around 250 sales organizations -- of those kinds of sales organizations assigned to a client partner, that is what determines a territory rather than a geographic -- I mean, they tend to be within a geography, but people don't own real estate, so to speak anymore. They don't own Utah or own California, they own 250 accounts.

And so with that their implied number of territories in the US is 374. Currently among this group this just includes our direct -- our geographic direct offices and only in the US -- there are 74 of those territories currently filled. A number of those people, roughly 30, are still in ramp up. So there is a lot of opportunity just to grow in what we already have done.

That implies an additional growth opportunity of 300, which obviously gives us a lot of headroom and forces us to think always how we can accelerate our growth.

In education there are roughly 143,000 schools -- primary schools in the US and Canada -- this includes Canada. We have a larger assignment of schools just because it is a narrower offering line. And today we have implied number of territories as, say, on the low-end 50, on the high-end 70, and with 15 current territories covered, that would give us growth opportunities -- another 36 salespeople in -- 36 to 55 salespeople in Education alone.

And we have these same kind of economics in our direct offices in the UK, Japan and Australia. The same opportunity, in fact, even less penetration in some cases. And we have a similar opportunity among our licensees.

So, obviously, the issue is how do we accelerate the ramp up -- hiring and ramp up of salespeople? We -- as shown on the next slide, our net hiring pace has increased over the past several years. Just in these offices, which don't reflect the overall -- when we talk about net 20 a year we will have exceeded that, including our international offices, our direct offices in the last two years -- each of the last two years. But here we showed that we added 14 in these domestic offices.

And there, as it says here, here, we have about 39 domestic and Education client partners in the ramp process that will be still in the ramp process at the beginning of fiscal 2013. So there will be those that have graduated and are now alumni, but the rest of them will be in ramp. And you can just see the power that is in the continued ramp, even if we weren't to add -- even without adding additional salespeople what the power of that is with 10 -- those people add an extra incremental $11 million of revenue in 2013, an incremental almost $20 million in 2014, and $26 million in 2015. And we have similar amounts -- or not similar -- probably half of those amounts or not quite in our international direct offices.

So there is a lot of built-in growth potential and growth expectation based on our past results in those. Nevertheless, our biggest issues as a Company are how to accelerate this. And the final slide it shows this wheel. And I'm going to ask Jon Moon, who heads our direct sales offices and oversees several of our practices, to just talk about what that wheel is and just briefly talk about what we are doing to try to further accelerate our ability to ramp up people.

Good afternoon. Thanks, Bob. Good afternoon everybody. Good to spend some time with you. As Bob mentioned, this really is our priority as we look at the years ahead. And we are excited about the traction we have, but we know that there is a lot more effort that is required to really make sure that we hit these ramps and are able to accelerate the hiring of our client partners.

So you see that this wheel, if you are on the slide that shows the wheel, slide number 16, it starts at step three. Let me just explain what step one and two were, then I will walk through step three and step four.

At the center of the wheel you see client partner expectation of face-to-face hours of 500 hours per year. That really represents a redefinition of the client partner's role, where of all the things they could be doing, we are saying the thing that is most leverage, most valuable and most important to your ability to hit your quota is being face-to-face selling with clients. Not doing administration, not doing (inaudible) or prospecting or cold calling, but it is actually taking leads that are [warm], and going through the sales discussions and methodology to progress the client.

And so that redefinition really represents step one and step two. And step one is to announce the fact that the face-to-face our focus is really what we are going to be asking them to do. And step two is then to begin measuring that. And we have done that and seen some progress and improvements as we have -- as we put the metrics to it.

In order to help leverage that process, however, step three represents sales management. That is really providing personal clarity around what the job is, what our expectations are, and then a weekly accountability and daily accountability process to ensure that any of the right types of -- the right number of meetings are happening, and B., that the right things are happening in those meetings.

So we are implementing some -- we are reinforcing and then implementing some new things there to help better manage. We have in the past few years created a role called area director, which is essentially a player/coach role. So we had some of our more experienced people serve as mentors to our new client partners, and we have seen that have a very positive impact.

As we take a look at our new people in our efforts to help accelerate that process, we will be implementing a new goal, which is a sales manager role who will have -- will own the quota of the team that they are working with. They won't have an individual quota, but they will have the collective quota. And their job, and their only job, is to work with these client partners to ramp them, mentor them, coach them, go on meetings, but it is to help them hit their number and go through all the learning processes that are part of that.

We believe that this is critical to accelerating the ramp rate. We are excited about the fact that we are ahead of the ramp, but we think we can do better. So this step three is a critical component to that.

With step four, a lot of the things that the client partners historically have been spending time on, like prospecting and other similar type activities, are still very, very important. However, we believe that we can leverage the client partner by engaging other people at a much, much lower cost than our client partners' salary range to do some of the cold calling.

So this really represents things like an inside sales team that is about the business of lead generation and lead qualification, engaging the market around our event strategy. We have a number of events. We will have over 900 events next year. And this inside sales team will be responsible in partnership with our marketing team to fill those events.

We have been piloting this over the last year, about 1.5 year, and we are very excited about the impact this has already had. And we believe that as we accelerate this across all of our direct offices that we will be able to have more people in the market exposed to who we are and what we do, and therefore more qualified leads for our client partners to begin their face-to-face meeting and sales process.

So those two steps are critical. The fifth step is our marketing engine, our go to market approach, which includes all of the events and the processes around that so that our inside sales team can engage the market and the perspective clients into some kind of experience.

Thanks, Shawn. Yes, so I think just maybe that was helpful, I hope, for those of you who are wondering how this works. But with these three steps we believe we will have then a permanent structure where we can dramatically expand the number of hires and ensure their ramp up and success. And we made -- most of the investments that will be needed for those good have already been made in this year. We will continue to make investments in new client partners and new sales management jobs, but the other part we have largely been doing this year.

So now with that I will just open it generally to questions and answers. I guess, our operator will tell us how to do that.

(Operator Instructions). Joe Janssen, Barrington Research.

I appreciate the color on the salesforce, and I think as we look at the growth and the productivity in both new and existing has been materially improved over the past couple of years, which I think is very impressive.

Now a big picture, I am curious from your perspective is it possible like in terms of efficiency, not adding more sales, but if you accelerate that ramp would they become a more profitable clicker or are you up against the wall where you have started it too hard and you are kind of getting the diminishing returns effect?

Well, I suppose, there could be some point where you could accelerate beyond that, but no, the actual answer is that we have seen a significant acceleration by doing two things. The more that we narrow the focus of the sales person on the specific set of offerings and a specific set of customers, and the more marketing activity we put in there so that they are inviting -- let's say if you are execution-oriented client partner around our Execution practice, where we are inviting multiunit operators to your marketing event, a two-hour luncheon where people self-select to come to it. They think they have got an issue in their organization. We have a very predictable conversion rate of business that comes from those, and it really helps the salesperson.

So we have seen in some of these practice areas where we have narrowed the focus on salespeople. We internally -- while this -- our schedule is $200,000, $500,000, $800,000 and so forth, I think we are all thinking that a realistic number can be, and our target should be, it goes to $300,000, $600,000, $900,000 and $1.2 million and get them to that full ramp, where there would be no net investment the first year.

And so in some cases, in our Education salesforce, for example, we have had salespeople ramp above $1 million in one year with a narrow focus -- narrowly focused offering on a narrow target market like K-6 schools. And that might be one extreme, because you've got a very narrow offering to a very narrow target. But we think some -- as we narrow the target and give marketing support, we hope that we can both accelerate the ramp, increase the endpoint of the ramp, and allow us to have the confidence to increase the hiring rate.

Bob, I would just add to that that the go to market approach that we have with the event strategy and the marketing that we have been doing has also, Joe, been helpful in the acceleration of that ramp. It gives the clients an opportunity to engage with our content and material in the sales process quicker than we've had in the past, and that is having an impact.

Just one last to respond. When we showed it -- the slide where we showed that our ramp of the new salespeople had been several million ahead of where we thought it would be, a lot of that has happened in the last -- a lot of that excess -- the $29 million versus the $25 million, a lot of that excess has occurred just in the last two years, and it is reflecting this narrower focus.

Great, I appreciate that. And just switching gears a bit, within the Education practice, and you have had some considerable growth in what some might characterize as a difficult environment given state budgets, have you seen -- are you seeing like any pushback, any pricing pressure, or is the value proposition so overwhelming that it doesn't matter in these conversations?

Let me tell you -- Sean Covey is traveling, but I think he has joined us.

Yes, I am here.

Thanks, Sean, do you want to respond?

Yes, sure. Yes, things -- the environment is pretty tough in education right now. We keep hearing about state budgets being slashed and so forth. I think we have got such a strong offering we are not finding much resistance.

And the other thing that is happening is we have a lot of outside funding coming in. So this year alone we will have over $5 million of community funding or Chamber of Commerce funding or foundation funding coming to us. So thus far -- you know, it is always an issue. (inaudible) is going right against the grain of it. We are growing at 39%, which is about -- we could grow faster. It is about as fast as we can go right now to keep the quality high.

We find that if we focus on getting great results it just spreads like wildfire. So that has been our focus the last couple of years is we start with two or three schools in a district. We have great success and then they want to do it with 20 other schools.

So we are -- we feel like we're going right -- we are swimming upstream right against the current of what is happening and don't anticipate there being big pushback on funding for some time.

That gap funding you are kind of talking about, are you helping the schools find that funding or is that just a school goes out to its alumni and finds people -- we will call them angel investors for lack of a better word -- to help fill that gap or are you facilitating that?

We help facilitate a lot of it. A lot of it is on our website. If you go to our web, it will give schools a whole bunch of ideas on different ways they can go and raise funds. Our most successful source has been Chambers of Commerce. And we have organized events all over the country all the time where we get schools and the Chambers together, and it is very hard for a chamber to turn down a needy school in their backyard.

We find that there is so much money looking for a good cause. And you just got to have good results and prove it. So we get principals in front of these Chambers and we have great success with them.

How many schools are you at right now? I might have missed that number (multiple speakers).

We have about over 800 schools now doing the Leader in You process, which is a three-year implementation, and then it is -- we consider it a 20-year operating system. So the economics are really good over a long period of time.

We also have, say, 100 schools inside the United States and Canada. We also have another 100 or so in 20 different countries, including we have got some big new partnerships going in Brazil and other countries, where we think we can match what we have done in the United States in just the next four or five years.

Great. And switching gears, another practice, Speed of Trust, it has been lagging versus some of the other practices. And I know, Bob, you mentioned the government contract contributing to some of that. Outside the government contract, what is -- the end markets that you serve, like the C level and the M&A advisory space, are you seeing any weakness in that or is it just --?

No, in fact, excluding the government contract, year-over-year comp from the government contract, the Trust practice would be up otherwise. And so you have seen the practice go from 2.5 to 8 to around 11.5 to 15.6, and it will be down maybe a little bit -- it will be down a little bit for this year due to the year-over-year comping. But otherwise the growth is good and the success rate of our events there has been very good too. So we don't see any of the practices that shouldn't be growing long-term.

In our pipeline of the Speed of Trust practices, it is encouraging.

Yes.

And what was the total pipeline of booked days, the actual dollar amount (multiple speakers)?

It is approximately $37 million of booked days and awarded revenue.

Okay, one last question, tax rate for Q4. It is probably a Steve question.

If you look at our year-to-date tax rate it is about 45%, and that is what we expect it to be for the fiscal quarter.

For Q4 or for the full year?

For both.

Okay, great. I will jump back in queue. Great quarter. Thanks, guys.

Gunnar Hansen, Sidoti & Company.

Congratulations. I just have a few quick questions. First off, maybe just talk about some of the success you guys have had both in the international and direct and licensee channels, and I guess if you are able to attribute that to anything in particular?

Sean, do you want to speak to licensees?

Yes, sure. Well, the licensee channel, just as a reminder, we have got now 37 partners in about 140 countries. And we are pretty young, so we are just maturing as an organization. We're activating. So many of the countries have not been really activated in terms of having managers that live there, a bunch of salespeople and so forth.

And so it is a combination of selling off countries that don't currently have licenses, activating countries that have just been sitting by the wayside. Many -- if you look at the product mix internationally with the partners, the majority of it is in Leadership. And so as we get into Speed of Trust and Productivity and Education, as those expand the whole pie expands.

So we feel like the growth potential is still very great. We are still very young, which is encouraging, because it is like where the US was 10 years ago. So there is just a lot of opportunity. Our penetration is pretty low still. And we also got huge potential in the big BRIC countries -- India and China, Brazil. Germany we haven't done much there yet. So we are still pretty young.

Again, Sean, just maybe piggyback on that for you, Gunnar, you take a country like -- countries like Austria and Switzerland -- you have the effect -- effectively one salesperson covering both those countries. One in Chile, effectively one salesperson in Russia.

And so for us we invite these -- the largest licensees to our quarterly Redwood Council meetings, we call them. They are our top 35 leaders. And the real focus -- these people have not yet had marketing events, which we didn't have in the US 10 years ago or even five years ago. The sales ramp up process is now being codified for them as well. The same sales kits, the same marketing tools, the same now practice involvement we are expanding out.

And as Sean mentioned, about 80% of our revenue to date comes from only 35 home countries. So while we have 100 under license, they for good reason understandably focus primarily in their home country. And so for us, there is the organic growth that has been like 14.5% of a year compounded over the period of time. But these other things that Shawn spoke to we think can accelerate the growth.

Got you. Great. And then --.

International direct you asked about too. Shawn Moon, do you want to speak?

Yes, the international direct countries are -- we are very encouraged by Japan. Japan had -- just over a year ago they had the earthquake and tsunami and we weren't quite sure what that is going to do for us. They ended up having a great quarter, ended up a great year, and they're up considerably this year.

The UK is slightly up and Australia is struggling. We have had some turnover at their client partners. We think we have corrected that problem, and we look for growth in the coming year.

Again there, we -- most of these international countries have not done all the marketing and other things that we have historically done. They have begun -- they began this last year, but we think seeing each of these countries become as big as our -- bigger than our -- each of our domestic offices a reality. In fact, the Japan office is among the largest offices now. It will step over $20 million in revenue this year -- this coming year.

It is where we are seeing -- we are seeing success as we are taking the model, the go to market model that we have applied, and had success with our North American direct offices and ensuring that that is inherent across the world with consistency. And not buying into the idea that, well, this is a different country, a different culture, that won't work here. We are actually finding that the go to market approach is working, and is working universally.

Right, great, thanks. And then also in terms of the $700,000 incremental in new marketing initiatives maybe talk a little bit about that, and if they are related to any particular practice and what geographic regions have you guys been talking targeting?

There are probably two things there. One, is these marketing initiatives, the increase in the number of marketing events held, that is part of it. And we have a predictable return from those. The other is the launch events certainly and the activities around our new 4 Disciplines of Execution book launch, which came out from Simon & Schuster about six weeks ago, and thankfully hit the number one on Wall Street Journal and Amazon and a couple of other important lists.

We have done a significant amount of promotion around that, because for us the book always follows the offering. We have had the practice going for nine years, but once you refine it and have enough case studies, and you really know that it works, we then try to drive the practice forward with a best-selling book that gets thought leadership out there.

And we have had early returns just, for example, from that book. And we have had nine different CEOs of major companies pick up the book in an airport or we have them sent to them, call Amazon and order it for the rest of their executive team or in some cases for hundreds of managers. And then invite our practice -- just pick up the phone and call our practice and invite them to come.

So it is around -- it makes sense for us, we think, to spend money investing in these kind of initiatives to get this book positioned well as a thought leadership piece. And also we will be sending the book -- copies of the book to hundreds of CEOs of our target kinds of companies so that they get a chance to read it. And expect that will be a good business to -- an early investment in business development for next year and beyond.

Right, great. Thanks, guys, that is all I have.

Marco Rodriguez, Stonegate Securities.

Thanks for taking my questions. I was wondering if you could first talk a little bit about your year-to-date EBITDA flow-through. It was well above the guided range that you guys normally talk about. I was wondering if you can maybe discuss the dynamics that might have created that?

Sure. Steve, I don't know if you want to address that first or if you would like me to.

Whichever you would rather. It was a good year-to-date. We are experiencing a good result in flow-through.

I think the primary drivers of it were these. One, we have continued -- we have kind of gotten the model down now, we think, where our central costs just don't increase very much. And in fact, we have ongoing -- there are probably 50 different projects that Steve and the team are running to reduce our telephony costs or our data costs or other things where we have got 50 different projects that continue to -- without reducing staff, centrally chip away at those costs. So as a result, our central costs have gone down slightly year-to-date centrally.

Our business model in the field is such that we always say that we want around 40% to flow-through, but in fact with 68% field gross margins and about 15% commissions, and some additional marketing costs, the flow-through there has been higher year-to-date because of that.

We have also had with the significant growth in our licensees and a couple of large intellectual property contracts that have been significant flow-through, those have also driven some.

But I think basically the cost model is in place, and so it is driven by gross margin, which is then driven by the mix. And I think with the mix of licensees have been very strong in particularly the first two quarters. And also had another good quarter this year -- or this quarter, a couple of big intellectual properties. For us hundreds of thousands is a good-sized contract. We have had a number of large intellectual property contracts.

And then we have also in our international direct offices had increased flow-through because there they hadn't hit their model before their revenue -- you know, we had all the investment in the fixed costs, but now on the margin the flow-through will be more significant for the next couple of years in those offices now because we have had fixed investment.

Got it, okay. And then switching gears here to the international licensing, I was wondering if you could talk a little bit about the major initiatives that you're targeting there, specifically increasing the home country penetration, as well as increasing practice offerings, is there anything you can provide as far as a quantification as to how you're moving that?

Sean, you want to shoot for that?

Yes, sure. Yes, so in terms of practices, we are just doing them practice by practice. Right now again in United States, Canada we are about 20 -- about 30% is Leadership, internationally it is about 80%. And so, for example, we think we can achieve massive growth in Education. And we have hired a person to focus internationally, so we are going to take this one country at a time and try to build up that practice. We are doing the same with Speed of Trust, with Execution.

So what we do is we typically will certify countries to be able to run the practice. And we are just inching our way forward bit by bit. We think that about half the growth -- our goal is to, and our expectation is to double the network in four years and to triple it in eight years. And so we think about half of this growth is going to come through organic growth and activating countries and about half of it is going to come through expanding the practices.

So that is the basic idea there. I think in terms of what we are doing to help activate countries is just we're just going to every license and we are making every partner accountable for each country. So, for example, our licensee partner in Panama runs Mexico and Central America, but Chile has been sitting there to the side. It is a good-sized economy. And so basically going to each partner and saying -- hey, either get Chile going and moving, and producing or we are going to take it away and sell it to somebody else. And so if you look at a home country (multiple speakers).

We say it nicer than that, Marco.

If you look at the home countries, it is just in many cases we have got dozens of countries right now that are really not activated yet. And so we are just going through partner by partner and negotiating new deals and setting new expectations.

And one of the things we do that has worked pretty well so that people don't sit on opportunities is we require minimum royalty payments. And so we are redoing those across the board where we say -- okay, great, you can have access to Chile, but we expect you to -- here is a minimum royalty payment you need to make to ensure that you're not going to sit on this opportunity.

Our partnerships are strong. We get along very well. We treat them like we would as if they were direct offices. We don't want to treat them any differently.

So we can -- there is a lot of push and pull back and forth. But I think that is one of the strengths we have is we have got really strong partners that (technical difficulty) are treated as partners. And we are able to push pretty hard if they are not performing, or if a country is not kicked in gear and so forth.

I think this is different than where we have been in the past. I think we are maturing as a group, and we are just not allowing opportunities to sit there. Does that help out?

Absolutely, that was very, very helpful. Then switching over to your -- the direct salesforce and the initiative there to increase the size, I was just wondering if you might be able to provide a makeup of like maybe percentagewise who are the -- how much is alumni? Who is into that 3- to 4-year period, and who is a kind of new?

Roughly, for 2011, going back to the last full year, about 40% of the revenue for 2011 from the US offices and so say roughly $90 million of the revenue last year, which is kind of what we measured in these slides here. It is the US salesforce plus Education. So say it is mid-$90 million revenue. About 40% of that came from people that have been hired into this new initiative since 2005.

We showed this one slide, and I'm not sure if it is exactly on point, but the people who are still in ramp, how much incremental revenue we would expect them to produce each of these next years. So if you take those who have already ramped up in the US, these US offices, which we were just talking about, generate roughly $58 million to $60 million -- just call it $58 million to $60 million of revenue, which mean -- so the other is $40 million, so call it $100 million. That 58% -- that $58 million we expect to grow as we have shown here at $5 million a year, and you will lose a little bit of that from retirements and illness or whatever happens, 5% a year. You will -- but that will -- that stream will continue to grow.

But you will then ramp up all the people who are in existing ramp, and we have shown what that looks like over the next three years. And then you will add hopefully, and we're moving toward -- for the whole Company it is more than 20, but this year including international offices -- but let's say we are moving toward 30 next year. And we think we can -- that is our next plateau, and hopefully we can move then to 40 with the support structure.

And so I think if you add up and say you have got $55 million to $60 million growing at 5%, and losing a little bit of that each year from retirement, you're growing this other very rapidly for the people who are in ramp, then the new salespeople each class starts its own ramp. You don't have to hire very many people to keep -- to hit your 10% growth goal.

Okay, let me rephrase. I guess, what I was trying to get across was, I believe you have about -- is it about 120 salespeople?

Yes, 117.

117 salespeople. So of those 117, how any of those would you consider your alumni that are five years plus? How many are in that year one, year two phase, and how many are in the year three, year four phase?

Steve, do you have the breakout?

Well, of the 117 there is 89 that are US direct and Education. Of those 89 the -- let's see -- 28 plus 6 -- 34 of those have made it -- have been here more than five years at the beginning of the year. And then another -- what, Scott, five or six will go into the alumni -- go beyond the ramp this year.

Okay, that is helpful. And then just a last housekeeping item here. I just wanted to make sure I understood from your press release, cash flow from operations for the year-to-date period was $8.7 million, is that correct?

Yes.

And what was CapEx and capitalized development costs for the year-to-date period?

CapEx is $1.4 million. We have not disclosed (inaudible) will be $1.8 million.

Got it, great. Thanks a lot, guys.

Julian Allen, Spitfire Capital.

A quick follow-up on the salesforce ramp. So it sounds as if they're about 39 or 40 salespeople in the ramp process. Could you let us know how many of those have been hired within this fiscal year, so how many of them would be quote unquote year one hires out of that group of 39?.

There are -- of that 39, so we are just counting the US -- this is 39 of the 89, you are saying?

Yes.

Of those 14 were hired this year in 2012, and maybe 15 depending how we count it, because we have netted out any that we think might not make it, and 14 from last year. So a significant portion of those are in their earlier part of the ramp.

Okay, so given that sort of plus or minus, let's say 14 or so hired this year, if I look at SG&A year-over-year, this year it is about $21.4 million, last year $21 million, so about $400,000 difference. About how much of that is due to this cohort of hiring, and how much of that expense have you managed to offset by some of your expense reductions elsewhere?

Roughly $1.4 million say would be directly related to the payroll -- roughly $100,000 including benefits and such would be related to those 14.

Okay.

And so the offset would be about that -- you know, the difference.

Got it. Okay. And then -- thank you. The next question, if I look at CapEx and curriculum development expense, this year it totals about $0.5 million. Last year it is about $1.8 million, so pretty significant fall-off. Is that primarily due to the completion of the productivity product refresh a year ago?

Steve, you have the detail, but the answer would be yes. Go ahead.

Yes, it is the completion of the 5 Choices program.

Okay, and then so expectations going forward is $0.5 million a quarter a decent run rate or would you expect it to be somewhat higher?

Steve.

I would expect it to be between $2 million and $3 million, I think is what we would expect per year.

Okay, got it. And then last question from me, receivables from third parties, up to [63], I assume that is the legacy products business. Can you break that down by major category, i.e., least guarantees, EDS payments, et cetera?

Really, I think it is all just comes in one receivable. These contingent liability thankfully are essentially -- are very, very low now. There are hardly any store leases left. As of this coming January there will only be one left. And so the stores are basically gone. The warehouse liability that we had originally has also been -- basically it is down to $100,000.

So most of this -- it relates to that, but some of this is just the seasonal working capital that they in their offices they have been able to finish paying us, and we think that will all come back to us toward the end of the year. And we expect after that they will be pretty much on their -- able to fund all the working capital on their own.

Got it. And by end of year, Bob, you mean end of calendar year?

End of calendar year. For them that is their big time. Yes, sorry.

Got it. Great, that is very helpful. Thanks so much for catching up. Thank you.

Ladies and gentlemen, there are no further questions in the queue. This concludes our question and answer session. I would now like to turn the call back over to Mr. Bob Whitman for closing remarks.

Just we would just like to thank each of you for your continued support and interest and for attending the call today. And we will be, of course, available and delighted to answer any other questions you might have (inaudible). Thanks so much.

Thank you.

Ladies and gentlemen, we thank you for your participation in today's conference. This concludes the presentation, and you may now disconnect. Have a good day.