Franklin Covey Co (FC) 2013 Q1 法說會逐字稿

Welcome to the Q1 2013 Franklin Covey earnings conference call. My name is Trish, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded.

I would now like to turn the call over to Derek Hatch, Corporate Controller. Please go ahead.

Thank you. On behalf of the Company, I'd like to wish everyone a happy new year, and welcome you all to our first-quarter conference call to discuss earnings.

Before we get started, with our annual shareholders meeting coming up on January 25, we would like to encourage you, if you are a shareholder of record, to please vote your shares in at your earliest possible convenience so that your shares may be tabulated and counted in time for our annual shareholders meeting. We value your vote and would encourage you to please vote your shares as soon as possible.

With that out of the way, we'd 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 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 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, we'd like to turn the time over to the Company's Chief Executive Officer and Chairman of the Board, Mr. Bob Whitman.

Thanks, Derek. I'd like to welcome everyone to our fiscal first-quarter 2013 conference call. Wish you a happy new year and we really appreciate you joining us.

Hopefully you all have received copies of the press release that went out about an hour ago. We're pleased to report that we had a strong first quarter; it's actually the strongest first quarter ever for our current business with both revenue and profitability growing substantially over the prior year. And we continue to feel very positive about Franklin Covey's business and comfortable about our prospects for achieving continued strong growth in each of our channels and practice areas, which we'll discuss a little further as we go through. We are encouraged by our momentum, the expected trajectory of the business in the coming quarters, and our outlook for continued growth through the balance of fiscal 2013 and beyond.

So today I'd like to just briefly touch on three topics. First, provide an overall summary of our financial results for the first quarter and for the trailing 12 months; second, provide a summary of our results in each of our channels and practice areas; and third, give an update on our momentum, business pipeline and outlook for fiscal 2013.

We'd like to start with an overview of our financial results for the first quarter and for the trailing 12 months. First, on the revenue line, we achieved strong revenue growth in both the first quarter and for the trailing 12 months. As you saw in the release, in the first quarter, revenue increased $4.5 million to $44.1 million, an 11.4% increase compared to the $39.5 million in revenue achieved in the first quarter of 2012. All of this growth was organic, and we were pleased. The results show a very broad base with growth in all of our major channels.

We also achieved strong revenue growth for the trailing 12 months with revenue increasing $14 million or 8.7%, again, all of which represented organic growth. We feel like, as we will talk about later, that the pipeline is growing, our revenue engine is strong, and we feel like we've got good momentum building.

Second, a high percentage of our revenue continued to flow through to increases in adjusted EBITDA, income from operations, and net income. As a result as you can see in slide three, the adjusted EBITDA for the first quarter increased $700,000 or 11.5% to $7.1 million compared to $6.4 million in the first quarter of fiscal 2012. We are pleased with this growth and particularly so in light of the fact that, one, it was achieved at the same time the Company made significant investments in the quarter in R&D, hiring new client partners and sales support personnel, marketing investments, training infrastructure; and secondly, last year's first-quarter results included an almost $1 million contribution to adjusted EBITDA from what we refer to as self-funded marketing related to a one-time, long-term book and audio licensing agreement, which did not repeat in this year's first quarter.

For the trailing 12 months, adjusted EBITDA increased $5.9 million to $27.8 million, a 27.2% increase compared to the $21.8 million in the adjusted EBITDA achieved for the same 12-month period last year, and the adjusted EBITDA for both the first quarter and for the trailing months are the best ever for those periods for our current business.

Income from operations, as you can see on slide four, increased $1.6 million for the first quarter to $5.3 million, a 42.9% increase compared to the $3.7 million in income from operations achieved in the first quarter of fiscal 2012. For the trailing 12-month period, income from operations increased $7.8 million to $19.2 million, an increase of 68.6% over the $11.4 million income from operations achieved from the same 12-month period last year.

The net income line, as you can see on slide five, for the quarter, net income increased $1.2 million to $2.9 million, or $0.15 a share, a 74.3% increase compared to the $1.7 million or $0.09 a share in net income achieved in the first quarter of fiscal 2012.

For the trailing 12-month period, net increase income increased $3.4 million to $9.1 million, a 59.9% increase compared to the $5.7 million of net income achieved for the same period last year.

As I noted a moment ago, we were particularly pleased that these strong operating results are being achieved while continuing to make significant ongoing growth investments in the business, including investments for research and development, practice, leadership, marketing, substantial ramp-up in the hiring of new client partners, training consultants and event marketing people and in building the mentoring and training infrastructure for our direct offices to continue their growth, as well as helping to accelerate the growth of our international licensee partner network.

For the trailing 12-month period, these growth investments totaled more than $17 million, almost all of which were expense. We see significant opportunities for continued growth and believe that we will be able to continue to make high return investments in each of these areas in the future so we can expect to continue to make significant ongoing growth investments and an increasing amount this year.

Third, our cash flow continued to be strong for the first quarter and for the trailing 12 months. Our net cash generated, as you can see in slide six, for the quarter increased just $100,000 to $4.8 million, up 2% from the $4.7 million of net cash generated in the first quarter of 2012. This was made up of several factors. The adjusted EBITDA increased to $700,000, as we noted. There was also a decrease in curriculum development of $600,000. These two benefits to net cash generated were offset by an increase of about $800,000 in cash paid for taxes and also by a $400,000 increase in the purchase of property, plant and equipment during the quarter.

For the trailing 12 months, our net cash generated increased to $22.2 million, an increase of $6.7 million or 42.8% compared with the $15.6 million achieved during the same period last year. In case you know, our net cash generated tends to follow our adjusted EBITDA pretty closely in terms of pattern and tends to be the highest in our fiscal fourth quarter.

Finally, in terms of overview, our adjusted EBITDA margin also remained very strong for the quarter and expanded significantly for the trailing 12 months.

As you can see in slide seven, we're pleased that despite significant year over year -- these ongoing staffing investments and new client partners, etc. and the non-repeat of this very high margin audio and book deal we had in last year's first quarter, our adjusted EBITDA at a sales percentage remained a very strong 16.1% for the first quarter. For the trailing 12 months, the significant flow through of increased revenue to adjusted EBITDA resulted in an increase in our adjusted EBITDA as a percentage of sales to 15.9%, up from 13.6% for the same period one year ago and up from 11.5% for the period 12 months prior to that.

With our expected strong, continued growth in revenue and continued high flow through of this 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% on a full-year basis within the next 18 to 24 months.

Now I'd like to briefly review the revenue performance for each of our channels and practices. Hopefully, you'll find that helpful.

As shown on slide eight, in our direct offices in the US and Canada, revenue grew 18% in the first quarter. We're really pleased with this as it showed the ongoing of the investment we made in hiring new client partners; the new investments we're making in marketing, many of which won't fully flow through into income or revenue until coming quarters, but we had each of our geographic offices achieve substantial growth; and we were also pleased that we achieved revenue growth of 9.5% in our government services region where we had expected a small declined due to the maturation of a large government agency contract.

We also achieved strong revenue growth in our direct offices in the US and Canada for the trailing 12 months with revenue also including government for the trailing 12 months, with revenue from these offices collectively growing at 9%.

In our national account practices, first-quarter revenue grew $700,000 to $6.2 million, reflecting growth of 13% compared to the $5.5 million in revenue achieved in the first quarter of 2012. For the trailing 12 months, revenue in international account practices grew $4.2 million to $28.1 million, growth of 18%. And I'll give you a little detail on that in a moment.

Our international licensee partner revenue grew -- royalty revenue grew 10% in the first quarter and also grew 10% for the trailing 12 months. This growth reflects our continued penetration in China and Singapore, India, and other emerging markets, as well as general growth worldwide. Our first quarter represents the largest revenue quarter ever for our licensee partners. We continue to see significant opportunities for growth in our licensee operations, and those areas of growth include, first, organic growth as existing licensee countries continue to increase the size and productivity of their own sales forces. Second, adding more of our newer practice area content to their existing mix of offerings. We have mentioned in prior calls that historically a very, very significant portion of all the revenue in our international licensee partner network has come primarily from the leadership practice. And over the last year, we've increased -- started to expand our new practices into these offices. For example, during the first quarter, our productivity practice revenues and our licensee product partner network grew 70% over what was achieved in the prior year's first quarter. It was off a small base, but thanks to our new five choices solution, which is now available globally, this practice is growing everywhere. There was particular success, for example, in our Nordic region, which had 250% growth, and with our largest partner in China, which had 53% growth.

The productivity practice now accounts for 8% of our revenue among our international licensee partners. And so that is 8% of, say, around $80 million of grossed up revenues. So it is starting to become -- take hold and become a significant product line in many of our licensee partners' offices.

Our trust practice grew 23% in the first quarter over prior year with our international partners. India achieved a 200% growth, again, off a small base; Thailand, 110%, and Indonesia at 92%. Trust now represents 5% of our international partners revenue, up from 1% just a couple of years ago.

Over the past year our execution practice, which is relatively new among our international partners, grew by 21% and now represents 7% of our total revenue among the partners. And in our Mexico and Central America operations, execution now accounts for 40% of their revenues. So this gives you some idea of the potential we think we have in many countries.

Finally, our fastest-growing practice, education, grew 164% in fiscal 2012, driven in part by -- internationally -- driven in part by a large new education partnership in Brazil with Abril Education, one of the preeminent education providers in Brazil. Abril is committed to taking our signature education transformation solution, which is what we call The Leader in Me, to thousands of schools in Brazil. It may be interesting to you all to know that because of the youth of -- relative youth of Brazil's population, they have essentially the same number of K-12 schools in Brazil as we have in the US and Canada combined. So this is a big opportunity for us. The education practice now accounts for approximately 8% of our international partner's revenue compared with just 3% two years ago.

So you can see that the collection that these different practices now represents has gone from essentially nothing to more than 30% of our total international licensee partner revenue. And it is concentrated in a relatively small number of countries. So we see big opportunities for continued growth from just expanding these practices.

A third opportunity for growth in our licensee network lies in activating countries currently covered by license agreements but where revenues currently are extremely small. For example, in Chile, Norway, and Finland, all three of these countries represent inactive countries with relatively large economies that are currently covered by a license agreement, but where there's essentially no revenue coming from them.

To activate Chile, we worked with our licensee partner to hire a new general manager who had lived in Chile and now who does live in Chile; incented this new general manager with a profit-sharing plan; hired several new associates and salespeople; established a physical office and set new growth targets. As a result, Chile grew 105% last year. They had had some revenue before, but they moved from a small amount of revenue of $300,000 to more than double that.

In Norway and Finland, we are in the process of finding new general managers and implementing the same procedures done in Chile. We foresee that these countries will also have significant growth in revenues going from maybe $400,000 or so in revenue in the last year to $3 million within the next five years.

We see dozens of other countries in which we can implement similar plans.

In other cases, Sean and his team have worked to break up multi-country licenses and award them to single country licensees in order to increase focus. This has been the case in Africa where we have new single-country partners in South Africa, Uganda, Tanzania, Botswana, Zambia, Rwanda, and Burundi.

So we've had good growth among our international licensee partner network for years. It has averaged more than -- well, almost 13% compounded average growth rate for the last seven years. We see opportunities for accelerating this.

Finally, from a channel standpoint, our international direct offices also grew. They grew revenue 11% in the first quarter, primarily as a result of strong revenue growth in our Australian operations, which had in the last year been lagging some. They grew 21% in the quarter, and our Japanese operations, which have been strong over the past six quarters, which grew 12%.

We are encouraged by the growth of our Japan and Australia offices. These offices have been implementing the same sales go-to-market approach that we are taking in our other direct offices in the US and Canada. Specifically, the client-partners in these offices have been engaged in much higher numbers of face-to-face meetings with clients. They are running the marketing events, which provide increased client exposure to our content. And as a result of these activities, their pipelines are growing. They have resulted in lots of increased sales discussions, growing pipelines and increased revenue.

Revenue in our UK office was flat for the quarter where we are just beginning to implement these same programs.

For the trailing 12 months, our international direct offices grew a total of 8%.

Finally, as shown on slide nine, in the first quarter, four of our seven practice areas achieved very strong growth with revenue of 63% year over year in our education practice; 38% in our productivity practice where we continue to gain significant traction from the introduction of our new 5 Choices to extraordinary productivity offering; and 29% growth in our Trust practice; and 16% in our Execution practice.

The Leadership practice revenue grew 3%. We had declines in the first quarter in our customer loyalty and sales performance practices, which we believe primarily reflects transition of some key accounts in both practices where revenue from certain large, maturing accounts declined year over year in the quarter, and where even though they've got many new contracts, they were still in their early ramp-upstages.

For example, in our Sale Performance practice, several of our long-term clients in the professional services and high-tech industries pushed sales training out of Q1 -- out of the first quarter for different business reasons to other quarters. At the same time, new clients have been added in manufacturing and services industries and show a lot of potential for the practice, including three new major accounts which we expect will generate roughly $800,000 in revenue in the coming quarters and 24 other new accounts which will generate more than $1 million in revenue in the coming quarters.

Similarly, in the Customer Loyalty practice, while revenue from one large account has declined significantly, we have added four significant new accounts, one with the potential to be over $1 million annually, and these are in the ramp-up phase. So we expect with each of our practice areas we will grow for the year and despite a couple of them being off in the first quarter.

For the trailing 12 months, among our practices, four of our seven practices again experienced growth with revenue growth of 48% in education; 32% in productivity; 16% in execution; and 15% in trust. We had the same impact in our sales performance and Customer Loyalty practices affected by those declining large accounts that are maturing and not being fully offset in the period with the increase of new clients although we are winning a number of new accounts.

Finally, in the channel of self-funded marketing, as noted above, during last year's first quarter, we completed a multi-year agreement for the distribution of audio books and other materials, which added approximately $1 million of very high-margin revenue during last year's first quarter. You can see the decline year over year. This was a one-time multi-year deal whose revenue did not repeat this year. It also produced nearly $1 million of EBITDA contribution. So, again, we were pleased that in the first quarter we were able to overcome that and still grow meaningfully, despite the nonrepeat of that.

So overall, we are very pleased and encouraged by the strong results achieved in the first quarter and for the trailing 12 months.

I'd just like to make a few comments about our momentum and outlook for the year. The momentum in our business continues to be strong and broad-based. As you can see on slide 10, our pipeline of booked days and awarded revenue, which is business already booked through awarded in our five direct offices in the US and Canada and among our national account practices, grew to $33.9 million at the end of the first quarter, reflecting a $3.9 million, or 13% year-over-year increase compared with the $30 million size pipeline of booked days and awarded revenue we had at the end of the first quarter in 2012.

The pipeline of booked days and awarded revenue was our largest ever for the end of a first quarter and reflects continued strength going into our second quarter.

Second, our prospective business pipeline, which is -- we track this -- it's a measure of the amount of potential new revenue currently being discussed with and proposed to existing and potential clients and is one stage earlier in our business development process than our pipeline of booked days and awarded revenue. Historically it has been a very strong predictor of the strength of our bookings and revenue in the coming months and quarters in these offices. And here again, we're very encouraged that our prospective business pipeline at the end of the first quarter was significantly larger than at the same time last year, indicating strong and accelerating momentum.

Our total pipeline in our US and Canada geographic regions of this prospective business pipe is approximately 20% higher than at the same time last year. This increase is attributable to the increase in the number of CPs, the increase in the productivity of our CPs and the positive impact there of marketing efforts and the number of product showcase events has had in our lead generation. We expect a significant portion of this large pipeline of perspective business to convert to increased bookings and contractual commitments in the coming months and quarters. And, in fact, the conversion of -- a portion of this happened -- has already happened in the first month of our second quarter.

In terms of our sales force growth and ramp-up, as you know, one of the most important factors underpinning our continued growth trajectory is our ability to continue to increase the productivity of our seasoned client partners into higher and ramp-up new client partners or salespeople. In our fourth-quarter and full-year conference call in November, we reported that during fiscal 2012 we increased our cumulative net new hires by 21 client partners with 15 additions in the US and Canada and six additions in our international direct offices, bringing our total CP count to 120 as of August 31.

We also reported that collectively our various classes of new client partners has achieved a revenue ramp-up that was ahead of our targeted model, generating $29.9 million in revenue in fiscal 2011 -- fiscal 2012, actually, compared to our ramp-up revenue of $25.2 million for the year.

We also said in that call we expect the hire of 30 net new client partners during fiscal 2013. Toward this goal, we have hired seven net new client -- we had seven net new client partner additions during the first quarter. With these hires, our total number of client partners at the end of the first quarter was 127. We have a very good pipeline of people with whom we are speaking at the current time, and we expect we will meet or exceed our goal of having 30 net new hires for the year.

Over the past years, we have worked hard on building the organizational capability to mentor and help to ramp up these new client partners. A key part of this infrastructure is the role of sales manager, a new role we've added whose full-time responsibility is the ramp-up of client partners. And I want to just mention that we are very encouraged by the early results we see from this increased attention which these sales managers are providing to new client partners.

Just as an example, in our Western region, we recently hired an experienced sales manager to work directly with that region's new client partners. And this sales manager provides each of the client partners under her stewardship increased coaching, accountability, forecasting attention, account planning, and really helps on a day-to-day basis with client partner development. As a result, each of the new client partners in this region exceeded their ramp-up goals for the first quarter, and each has a pipeline that suggests the second quarter will also be achieved as well.

Our outlook, given the strength of our first-quarter results, the momentum we're continuing to see in the business and the continued growth in the size and productivity of our sales forces both in our direct offices and among our international licensee partners, we're excited about the positive momentum and trajectory of our business and what we believe it indicates for the coming quarters and for fiscal 2013 as a whole and beyond.

As a consequence, with it being only our first quarter in our new fiscal year, at this point we are reaffirming our fiscal 2013 full-year adjusted EBITDA guidance of between $30 million and $32 million and hope that we will be able to perhaps tighten that range toward the upper end as we move through the year.

Given the strong growth in our education practice, much of whose revenue is recognized in the late spring and summer when school is out and teachers and administrators have more time to go through training, and with the growth of our base of certified client-employed facilitators, which is now more than 12,000 -- and these people tend to purchase a disproportionate amount of their materials during our fiscal fourth quarter -- we would expect a somewhat disproportionate amount of our growth in revenue and EBITDA for the year to occur late in our third quarter and in our fourth quarter.

So we're pleased with the results and momentum of the business and, as just mentioned, expect to be able to continue to achieve both strong top- and bottom-line growth during fiscal 2013 and beyond.

I want to thank each of you for your continued support and guidance, and I'd now like to turn the time over to Steve Young for some brief remarks. As you know, Steve is our CFO. Steve?

Thank you, Bob. It's nice to be with you this afternoon, and happy new year from me also. Let me just take a second to mention a little bit about our balance sheet, our cash flows and some of our other expenses.

First of all, our balance sheet remains strong, and our balances are generally within expected ranges.

As an example, when you look at our cash balance, we expected our cash balance to decrease in Q1, and we expect a significant increase in our cash balance in Q2. In fact, even though that cash balance decreased to $7.3 million in the quarter, as of today, our cash balance is already over $13 million. So this is a pattern that we expect every year. That's because in Q1, remembering that we had a very solid Q4 and what I would term a good year last year, it is in Q1 when we pay our fourth-quarter commissions, our fourth-quarter bonuses, and our annual bonuses. So our decreasing cash is primarily a result of these payments. And our increase in Q2 will be primarily a result of decreased accounts receivable and related party receivables as those balances convert to cash.

Additionally, we continue buying under our board-authorized $10 million stock buyback plan and purchased another $400,000 worth of stock under that plan.

If you are new to our story, I still strongly encourage you to call me to talk about the balance sheet. Particularly, our financing obligation that is really a capital lease; our tax NOLs and credits, our future share count, and our real estate operations. Conversations about these items continue to be very positive and shed light on often-misunderstood accounts.

I make this invitation every quarter because the conversations are still important, and even though many of you who have been through this in great detail, it's still good to, if you have any questions about our balance sheet, to give me a call.

Just a couple of additional points. In our first quarter, our share-based compensation was $473,000, down from $1.191 million in the first quarter of last year. We still expect our share-based compensation for the year to be about $2.5 million. The amount of amortization in cost of sales was a similar number, about $471,000. We expect that overall amortization to be about $2.3 million for the year. Depreciation and amortization last year was $5.5 million. We expect it to be about the same this year, and our net interest and discounting costs totaled about $600,000 for the quarter. We expect that to be less than $2.7 million for the year. And I mentioned what I mentioned before, we expect our effective tax rate to be between 42% and 44%, which is down from prior years, even though we do expect to pay more cash out in taxes.

So I mention all of those things again just so you can see that the pattern of Q1 versus what we expect for the year in these measures that we don't talk about very much.

So I'm also pleased with the quarter, pleased with our strategic direction. As Bob said, we continue to invest in growth, and we expect to continue to generate cash. So, thank you.

Thanks, Steve. I guess at this time, we turn it back to the operator to set up our question-and-answer session.

(Operator Instructions) Jeff Martin, ROTH Capital.

Bob, can you talk to the curriculum development plans for the year? Are there any specific practice areas you're working on at the time, or is it fairly broad based?

Yes, I'll make a note of it and then maybe ask Sean to give further detail. There's ongoing development in each of our practice areas every year, but we also every year or so pick a particular area we're making a concentrated investment as we did for the previous two years in the productivity practice.

For us going forward, the Leadership practice area is going to receive the biggest emphasis. We will be redoing the 7 Habits content, signature content in this coming year and making additional investments in leadership.

Sean, do you want to add any color commentary to that?

Sure. Yes, so the big focus for probably the next 12 months is going to be on the 7 Habits of Highly Effective People workshops. And that is flagship for us. It's a very important part -- a big part of our business. Internationally, it's half of our business. And it's not broken; it's doing really well. But we feel like there's a lot we can do to enhance it -- make it more relevant, to create longer-term revenue streams from them, from the products. And so that is undergoing a thorough review right now. We do a lot of research upfront from clients and from our own salespeople, and we get the best ideas together and we put it together.

So that will be coming out in probably about a year.

We also have, as Bob mentioned, ongoing development in all of the practices. In particular this year, there's a lot of development going on in the sales performance group, updating and codifying the product there so that we can create a stronger centerline so we can sell it more broad-based internationally, as well in the education practice. The Leader in Me is getting an upgrade as well in terms of creating long-term revenue streams, and a powerful new Web community will be part of that.

So we have a commitment at the Company. We always spend about 4% of revenue on R&D each year, and this has been a really good thing for us. We've been doing this for 10 years, and it is paying dividends in big ways today.

Great. That is excellent. I appreciate it.

And then can you also touch on your sales support team, how much that is built out, if there is more to go? Just trying to get a sense for modeling out SG&A.

Yes, we have added a lot. And I have -- I don't know if Shawn Moon is traveling today, Shawn, are you on the call?

I am here, Bob.

Let me just make a note, and then why don't you give detail of it.

The key areas of investment that we want to build infrastructure on this year were our central marketing team, which was in place by mid-year last year. And so we continue to make investments -- there's some increase in the investment in that team. But we basically got that in place. We've implemented a marketing and list, purchasing and management capability, which is primarily done again during the back half of last year, and that was one area of investment. The second was in sales managers for each of the regions. And the third was in terms of continued addition of new salespeople and also event marketing people who help to fill these events so that more of our salespeople's time can be spent face-to-face with clients.

We've made good progress in each of those. And Shawn, maybe you want to just give the details of that.

We have made really good progress, and then we are excited about the direction they are going. I would just say in a question relative to do we have a whole lot more infrastructure to add, the answer is no. We have that essentially in place, which is one of the reasons why we are encouraged that in the first quarter, despite the investment we were able to achieve these growth targets, it takes some time for the investments to pay off. As we hold these marketing events, there is a sales cycle that our clients go through.

I'll just give one example of where we're seeing distraction start to occur. Bob gave the example of the sales manager in the West region. We have three of those now in place. They are all now in place. And in the case of the West region where this individual was given all new client partners, every single one of them hit their revenue goal -- exceeded their revenue goal, and it looks like they'll hit at least for the second quarter and possibly more in the second quarter.

But in our event registration team, we're seeing some exciting things happen there. We anticipated that we would get about one registration per every two hours with this team, and we've just about beat that by twice our expectation.

In the case of our UK office, which as Bob noted, their revenue was flat over the year, but we believe they are building infrastructure to grow in the out quarters. They have a team of four people that are feeling events that were not doing this last year. And they have already exceeded by about 5 times in the first quarter the number of total participants they had in events all of last year.

So that is indicating to us that the play that we're calling is actually the right play, and it is leveraging the time with the client partners. So they can spend more of their time actually in face-to-face sales discussions.

So the infrastructure we believe is in place. There may be two or three of these event registration partners that we still need to add, but beyond that, the structure is set.

Great. That's helpful. Thank you. And then do you have a number or do you have a metric for tracking the number of events and how much that is up year over year and what the outlook is for growth and events for the rest of the year?

We do. We haven't historically recorded it, but let me just give you an example. Last year, for fiscal 2012, in fact, Scott Miller is here, the head of our marketing. Scott, do you want to just respond to this?

Yes, last fiscal year we had about 650 live marketing events in the US and Canada, and this year we're expecting to more than double that. And we have a pretty tight algorithm on exactly all the inputs and outputs. We know exactly how many invitations need to be sent; how many people need to show up; how many people need to actually progress to a sale; what that average purchase will be. So we have all that pretty tightly knitted. The expectation is that it will come in probably roughly more than double the number of events this year from last year. In fact, right now we are looking to have, Bob, probably more like 1400 events. That excludes all of our licensee operations.

And Jeff, the revenue from one of these events tends to -- when you track it back, it tends to play out over about 20 months. It is a pattern of revenue that recurs from one of these events. Some of it happens immediately in certain kind of things. But on average, this will build for 20 months.

And so what we're trying to do -- and I think you referenced it -- is obviously if we chose not to invest the $17 million or $18 million in growth or if we had chosen one quarter to hold back on the hiring, we could pop the results for one quarter by $0.5 million or $1 million as we could have in this first quarter. But I think feeling confidence in the results that come from these investments on a -- we are really increasingly confident, not perfectly so, by any means, but we are certainly directionally confident about these and are gaining precision on them. It feels like the right thing is to make these investments now to front-end load them so that we can have an impact in our third and fourth quarters and moving into next year.

And by that nature, would you expect the high teens growth rate that you saw in Q1 for US and Canada direct to continue or maybe even accelerate?

I think on a long-term basis, we have said to you we think the overall Company ought to be growing low double digits to maybe as we continue to increase that we may be able to increase a couple of points. Because we have some areas like our self-funded marketing that tends not to grow very much and we have some other areas like rental of income in our real estate that tend not to grow much. That obviously implies that we'd be able to grow more rapidly otherwise.

And so I think the idea that 18% was a very, very strong growth rate for our direct offices. In some cases, you'll have accounts that were large accounts that make it non-comparable year over year. But on a general base, if we can continue to add the salespeople and continue to do the marketing investments, we think that for those offices achieving mid-double-digit growth ultimately is a good target for us.

Okay. Glad to see you doing well.

Thanks for all your support, Jeff. Thanks.

Joe Janssen, Barrington Research.

Yes, congratulations, and thanks for taking my call.

Thanks, Joe.

Bob, just for clarity, acknowledging flow through in the quarter was down due to the investments you guys were talking about just a second ago, but it sounds like this could be below the 35% to 45% range for the next few quarters. Is that a fair statement?

I don't know -- let's take a look at the flow through in the first quarter. If you take last year's performance, which was about $6.4 million of adjusted EBITDA in the first quarter, approximately $1 million of that came from this book and audio deal. So if you really look at $5.3 million, the $5.3 million grew to the $7.1 million. And so on the revenue growth of $4.5 million, actually our flow through I think was mid -- it would have been mid-30s kind of flow through on the revenue that we generated other than this non-repeat of the contract last year.

So I think our investments we have been making on a consistent, ongoing basis. I think our first -- absent the comp on the book and audio deal last year, which uncharacteristic -- most of our self-funded marketing is not very high margin, it is what it says, it covers its expenses. In this one case, the book and audio deal was very profitable. It was an intellectual property sale.

I think aside from that, our flow through was in the mid-30s, and we would expect that -- our investments are kept in the range on an ongoing basis we would expect flow through in that range. And so we figure for the year if we're suggesting that adjusted EBITDA increases in the range of $3 million to $5 million because of -- you might have a couple of things like this first quarter when it would make it non-comparable, we'd expect that that would represent something like a -- 32% to 37% flow through on the normal increases in revenue otherwise.

Okay. That helps. I appreciate that.

Shifting gears a bit, focusing in on licensing operations, that 10% growth in the quarter, can you give me a sense of where the growth was coming from? For example, you mentioned new practices, organic reactivating or inactive territories, getting them to grow again, or was it fairly balanced across the board?

Let's ask Sean Covey to get this.

Okay. It is fairly balanced. Let me just give you a sense for breakdown by region. Maybe that would help a little bit.

So Asia-Pacific was generally about flat for the quarter. Europe was down about [1%]. Middle East, Africa is up about 20%, and the Americas was way up because of the large deal we had with Abril Education that Bob mentioned. So the Americas was way up. Overall about 10%.

We get a lot of ups and downs by quarter, by different countries. Generally, as Bob mentioned before, about 70% of our revenue is coming from Leadership practice, and we are very young in the other practices. So that represents a big opportunity. That is always increasing. So by the end of this year, it will probably be more like 66%, 67% coming from leadership and the rest coming from new practices. So the object here is to keep growing the Leadership practice at a reasonable rate while we rapidly increase the growth of other practices.

Education is the fastest-growing practice internationally. Execution has got a lot of opportunity as do Productivity and Trust.

And then we always have some outstanding performances each year by certain countries that last year we had (technical difficulty). And then this year -- last year in Thailand, for example, we had floods. Okay? And that wipes us out for much of the year. So Thailand has had tremendous growth. They are a big operation for us. They grew 62% this first quarter. And Egypt also last year had a coup. That didn't help too much. This year they are growing rapidly as they get back together somewhat.

So I hope that gives you a little bit of flavor for what is happening there. Our largest partner, China, they seem to be pretty steady all the time at around 10% or 15%.

And then one other thing to keep in mind is a lot of -- we have some protection and we have contractual growth in place. Meaning we've got with all of our partners, they've got to hit a certain level or they pay regardless. And so that helps -- gives us a safety net, so to speak, to get the growth steady all across the board. It's a really nice thing to have. It helps smooth out some of the natural ups and downs you will get when you've got 140 countries operating.

Okay. That helps. And one last question. It is regarding the stock loan program. Given that March 30 deadline is approaching, I'm just curious maybe you can shed some light what the Board is thinking here, let us call it the $15, the breakeven price. If it's not reached, is it fair to assume that the likely outcome is you are going to extend the agreement?

This is something the Board can make a final decision on exactly what the options are. But as you know, one of the options is to just take back these shares and cancellation of the loans, and that is a right that we have.

We feel good about the progress the Company is making. The impact on the individuals involved in the program can be significant if we didn't extend it. And so I think -- it's a topic of more discussion, but I think a reasonable thing to think about would be to say, well, gosh, it appears that we're going to continue to be on a track or even at the same multiple we'll get there within a reasonable period of time. It might be a wise thing to extend for a period time, just to get it completed. You are going to get 3.35 million shares back one way or the other. If it's a few months later, it might not make a lot of difference. But I think that's a decision that hasn't been formally resolved by the board. And we have a meeting later this month, and it will be a topic at that meeting.

Would you announce that through NHK or something at that time?

Probably not. I think probably because we get close to the -- I think we will probably wait -- we will be reporting the second quarter within a day or two of the expiration of the due date here, and I think most likely it will be around that date.

Okay. Appreciate it. Good job and I will jump back in queue. Thanks.

Marco Rodriguez, Stonegate Securities.

Wondered if we could talk a little bit more about the sales strategy. I believe on the last conference call, you guys had mentioned that you had extended the last offer to an area director. Was that offer accepted?

It was. And I think, Shawn, you mentioned, we have each of those in place now.

Yes, they are in place.

Okay, perfect. And then in terms of that overall strategy there, you brought in some nice color in terms of the Western region and how that is progressing positively. I'm wondering if you might be able to shed any other color on different regions.

Yes, I use the example of the West region because this particular area director sales manager had an entire team of brand-new client partners. But the same pattern is happening elsewhere. That was just the extreme case. We are seeing increased focus and attention with these guys. They are engaging in a process that we call plan and review sessions, Marco. I think I might have talked with you about that. It is the weekly accountability and strategic planning session where they go through all of the key lead and lag indicators with their business, and it is achieving a higher level of focused attention.

And really what I am most concerned about, this idea of mentoring. That we haven't had as well established in the past, and it has a much higher level of focus and attention.

Give you another example. In the central region, we have a great new sales manager there. And this individual, like the others, but he is spending his time on Mondays in the plan and review sessions, and the rest of the week he is face-to-face meetings with the client partners -- coaching them, sometimes doing the meetings themselves, sometimes having them do the meetings and doing the curbside coaching after.

So this is happening across all of the regions, and we are encouraged by the higher level of touch and attention that we are achieving.

Okay. Great.

Just one other comment on that. The whole purpose of this infrastructure is to make sure that our sales force ramps up well. As we've reported in the past, thankfully over the last seven years actually collectively our salesforce, the sales hires have ramped up a little bit faster than we projected, and we've done well. We've also been able to accelerate our hiring.

But the key constraint we think and we talked about it for years is mentoring. For a few years, we had people who were player-coaches do the mentoring, and that worked well. But at some point, your best player coaches who were also good mentors have been utilized, and you want to grow faster than them.

So the addition of the sales management function, the addition of these event schedulers -- which, again, they are not massive investments, but the event schedulers, we hired a little over 20 of them. And that will be an annual cost of around $800,000. But the effect of those is to significantly increase both the number of people we book into these events and also to free up time for the sales force to work them. So we think it's a pretty easy investment to swallow.

But having invested in that infrastructure in the first quarter, we've hired more than 20 of these people -- having more than 20 support people in the first quarter. In the second quarter, that will probably be an addition of five or 10. And we will tail off in the out quarters though we think these are investments that will just help us predictably be able to hire to ramp up these 30 net salespeople this year.

Marco, I would add one more thing to the sales manager question. And that is implementing a process whereby your -- cross-pollination is probably the wrong word, but we're doing some cross training and cross-best practice sharing between this group, which is really an activity at this level has not happened before. We have regular coordination and planning session, meetings with our general manager. But now we're having a cross-section of sales manager and area director role that are coming together. So the good things that are happening in the West can be replicated in the Central and the Northeast and in London and in other places. So there's a process now for sharing what is working and what is not working across all ages.

Got it. That's helpful.

And then in terms of the overall strategy that you've implemented here from the sales side, are there any, I guess for lack of a better phrase, wrinkles that have come up that might need to be ironed out over the next few quarters?

Well, yes. I mentioned the planner review process. That is a new process that we're doing. So there is uneven implementation of that at this very moment. So that is one of the major topics that we are addressing with all of the team altogether. Here is the template that you use. Here is how you activate it and track it in salesforce so that at any given moment in time any one of us can get a view as to what any client partner is doing and is happening region by region by region in the exact same way.

So it's the same kind of thing that would happen in the implementation of any new strategy. It's the codification and center lining of all of the key behaviors that need to happen in the same way with the difference being across the different regions.

Got it.

Marco, just one maybe -- not to belabor this -- I think our strategy has been bullets before cannonballs. And so most of these strategies have been tried for years in pockets. And so we've proven it up in one or two regions. And once we feel it is codified to the level, then there is the implementation rollout. But that is what I think -- none of the parts of this strategy are we wondering about today as to whether or not they are going to be stable or going to work. We've proven them in the past. They are being implemented, as Sean mentioned. There is always uneven implementation in the early months, but ultimately thankfully we've been able to get there on all the other components.

Got it. And then the last quick question I have, in terms of marketing, if my memory serves me correctly, I believe you hired a new marketing team or at least head of marketing last year, and you were either in the process or kind of finishing off a rebranding or an image change for Franklin Covey. And I was wondering where you stand in that process, if that has been finished and rolled out nationwide or Companywide yet?

I will ask Scott Miller to address that.

Yes, so we are still in the process. It's an ongoing effort. Minimal things like just updating our fonts and adding a tagline and those types of things are in place worldwide now. I think at this point we are focusing on helping the marketplace understand how we are organized into seven practices. So it is both the education of our internal sales force and our client base that Franklin Covey has a different value proposition for each of our seven practices and that these seven practices really are key face to the client. So that's an ongoing project.

But in terms of the logistical aspect of the rebranding, business cards, letterhead, things like that, that's going very well. Now it's really a reeducation campaign internally and externally so that all of our partners can speak to the seven practices. They have the capacity and clients think of us from that point of view as well, too. So, so far we're doing well on that.

Not surprisingly, part of the rebranding is also the launch of best-selling books that put a new face on Franklin Covey out there. The 4 Disciplines of Execution, the fact that it has become a bestseller has been a good thing I think for the brand. We did some advertising such behind that during the launch. This is now teaming good traction. And each of those additions of intellectual property and so forth also helps to rebrand the Company as people start to recognize us for a broader portfolio of offerings. It's amazing how the -- we're having big marketing events around -- featuring the authors of the book holding these marketing events. And where we normally might have 30 to 50 people that we target to have an event, the size of these events is a multiple of that. Always over 100 and sometimes upward of 200.

So I think each of these things, it is going to be a fabric that is woven, each practice driving it home. The fact that we are more than 1000 schools now in Leader in Me is now gaining in that market a positioning. And so our view is we have this over-arching branding strategy around Franklin Covey, but we also have the purpose branding strategy around each practice to drive home the efficacy of what we're doing in each area.

All right. Well, thanks a lot, guys.

Thank you, Marco.

Aram Fuchs, Fertilemind Capital.

Yes, it is Aram Fuchs. It was wondering if you could focus on this education practice. The growth was quite impressive. Are you committing roughly that the amount of that growth in salespeople and other human capital as you are to what we're seeing on the sales line, or is that starting to scale ahead of the costs already?

Well, I think -- we have a target set for the operating margin for each unit. And to Joe's earlier, even with our growth investments, we expect our direct offices in the US and Canada to maintain a 35% EBITDA margin. And they do. And so they swallow these investments in bites that allow them to do that.

The same in our practices. They have a targeted EBITDA contribution margin, and they make investments that allow them to stay within that, while still taking advantage of the opportunities. So we might for a couple of years as we did in education say we're going to break that model for 2011 and 2012 and double down the investment to get accelerated growth. But with that, they are actually back on model again this year.

Sean, I don't know if you want to add to that?

Yes, sure. So education is growing fast and rapidly, and I think part of it is because years ago we have committed to hiring every year. And so we've been doing that. The same sales strategy has been used in education. We're hiring and ramping client partners successfully. We have the entire US and Canada divided into two pods of about $2 million a piece or about 2000 schools a piece. And we've got 16 pods filled out right now. We've got another 80 or so that we can fill out over the next two years. So we've got it all broken down in terms of how we can grow this.

And part of the reason we're growing well is because we're getting a lot of external funding as well -- funding support from large corporations, from foundations, from communities, Chambers of Commerce -- they are pitching in. So everybody wants to change schools.

So what we are learning is, even though budgets are down across the board in federal and state budgets, there's a ton of money looking for something that works, and our focus has always been on quality results. And because of that, I think they talk in education. And so we do well in one school. And they talk to the superintendent and it spreads to other schools and so forth.

But the sales strategy and the investments commitment is there. It just happens to be extra hot right now. So I think we've got -- we also feel like there's an opportunity right now to get -- to move fast and get a first-mover advantage in terms of school transformation. So anyhow, hope that helps.

Yes, specifically around the financing, maybe we can take there because I've been sort of skeptical -- as everyone knows that it's tough to get money there. So are you getting this from the straight operating budget? Or when you mention third party, is there a specific third party that is really keen on this idea? Maybe you can dig deeper there.

About a third -- well, maybe we can break it out in three categories. So title -- Sean, do you want to just -- they're funding cogs within the government for tougher schools and turn around schools, etc. That money has continued to be available even though budgets are tight. There is some that is directly funded from the operating budget there.

A second group comes from the communities who see what is happening in some of these key schools and decide to help support if there will be some money from the operating budget of the school, that they'll support it also with Chambers of Commerce. And then we also have at this point, what, eight or 10 larger funding sources where they may be companies who have decided within their community and within their state to do something or a few on a more broader basis, who have agreed to fund -- large foundations, etc. that are starting to see this.

So we think actually the funding question is a lot more certain today than it was -- even despite the economic uncertainty, it's a lot more clear to us today how you navigate it than it was when we started. So this is not a temporary thing.

I think we feel more secure than we did a year ago and more secure -- way more secure than a couple of years ago in terms of the potential here that it's not going to dry up.

So, for example, if a school wants to do this, they want to get into the leader in me, two out of three times they can find the money themselves. If they can't, and they really want to do it, we will say, okay, here are some options. Here are some funding sources. Here are some fund-raising activities. Here's a foundation you can apply to that has been supporting The Leader in Me. So that is happening a lot.

And then in a lot of cases, we will have large corporations that say, I love what you're doing. I am going to fund 25 schools in this region, and if it goes well, I'll do more.

And so we always have the school pitch in some money, so there is skin in the game. But the object here is to never have a school be denied because they can't find funding. But again, two out of three of the times they are finding it on their own in their own budgets.

We also just recently won a large federal grant that will help a lot in the next three years that schools will have access to.

That you could dip into when needed during those one-third of the time when they can't find the money?

This will support a massive district that has applied for the Scranton and won it. So it will be about it's like a 100 schools in the district. Does that make sense?

Yes. Great. Thanks a lot. I appreciate it.

I think the big picture is, when you start looking at this, you say it's more -- is there opportunity here to keep growing. We have 1100 schools now. Our target is to get to 10,000. We think we can really help change education in a significant way if we can get there, and we're finding that there is a lot of people that want to join this cause. And there's a lot of money looking for something that works that is the right opportunity and for a cause. Anyhow --

Thank you.

Kevin Leary, Spitfire Capital.

Most of my questions have been answered, but I just have a couple of follow-ups from Steve's comments.

So, Steve, you mentioned that there were about $400,000 worth of repurchases in the quarter. Do you have the average pricing of these?

I don't have it right with me. Our average price for those purchases were --

Around $11.

Just over $11.

Okay, thanks. And then the second question, on the balance sheet, so looking at the related party receivable, it was up about $0.5 million sequentially from August to December. But then, Steve, you mentioned that part of the increase in cash since December has been payment from a related party receivable. Can you maybe talk about how much of that has been from the related party and then maybe expand that into how we should think about this receivable over the year or so? Thank you.

Okay. In Q2 we expect to receive about $3 million from acquired against our related party receivable. That's the amount of cash we will receive.

Remember, the receivable balance itself continues to have activity each month because it is -- that related party owes us an example for rent and other things that we provide for them. So it will continue to go up as rent is due and as warehousing costs are due, etc. But a $3 million payment in Q2 we believe to be significant.

And then in Q3 and Q4, the balance for that related party will increase like it did last year. And then again in a little bit in Q1 and primarily Q2 of next year, it will decrease again. So the balance at the end of Q2 next year will be a little -- every year the balance from that related party will be a little less at the end of each quarter. And then we will just follow that sign curve, if you will, a sign curve that is generally going down.

Did that answer it okay?

Yes, that was helpful. Thanks a lot, guys.

[Carter Dunlap], [Dunlap Equity Management].

While I was on the call, I got a call from one of your event bookers. So that is pretty good turn --

And are you going?

Yes, it is the Hansen thing in Palo Alto.

Just a couple of quick clarifications. When you were talking about pipeline, you then switched to the perspective business pipeline, and I heard a number of 20%. Is that apples-to-apples? Is that US-Canada direct, or is that a broader footprint?

No, it is the same footprint. It's just a percentage of the prospective business pipeline ultimately converts to the pipeline of booked days and awarded revenues. And so we are encouraged -- the fact that the prospective pipeline is up 20% doesn't necessarily mean that all the revenue is going to be up 20%. Because we have an increased focus on the predictability, and so we are trying to get the numbers to be better. So I think we are getting a higher percentage of the pipeline going in this year than last. But nevertheless, on an apples-to-apples basis, it's a good increase quarter over quarter.

Okay. And then pardon my ignorance, but can you clarify the self-funded marketing? What triggers the lumpiness in that? I --

Historically, we haven't had that much lumpiness. The thing that has made up historically it is made up of speeches that we do where we get paid for a speech -- not we, but there are people out there in the world that work for us that get paid for speaking. It is public programs where we're holding events, the Marriott Hotel inviting people to come and give them an exposure to the content, book royalties, etc.

And so historically, it has been pretty steady. Honestly, not fast-growing. But from time to time, we will have a new book launch where we might get a special royalty agreement on a new book. Or in the case of last year's first quarter, we had this one-time sale of a lot of intellectual property. It was packaged for distribution as audio and electronic books, etc. that just made that particular quarter lumpy. But historically it is pretty low-margin, pretty steady revenue, not much fluctuation historically.

And much of it is just on book launches, advances on books. And they tend to be lumpy every year we might have a new book or every two years or every 18 months, whatever. That is upfront and causes these spikes.

And lastly, and I was off the call for a moment, at your analyst meeting, you spoke about the Brazilian prospect in education that had such strong plans. Is there any update on where that business lies?

Sure. This is Sean. Yes, so Abril Education, a big education provider in Brazil, they have -- this is just -- it is brand-new. And so about three months ago, we had them all up here. We trained and certified their whole team, had them travel around the country and visit our best schools to really understand deeply what The Leader in Me is all about.

So they are starting this year with a handful of schools. The idea is to go slow so you can go fast later in a range of 25 schools going to 100, going to hopefully hundreds and hundreds and thousands beyond that.

They are taking this very seriously. They believe they can get to -- right now they are into about half the schools in the country. And they have roughly the same number of K-12 schools we have in the US, so about 100,000. And their object is to really do this well, get the credibility behind it, and over the next four to five years get to thousands of schools.

They have set a target to -- the personal goal as a company is try to beat the US. And we said great, power to you.

And yes, so it's just starting. It started with 25 schools, do it well, do it right and then expand from there.

The big payments we got that are showing up in our international numbers are for advances on this partnership we have.

Got it. Thank you.

Thanks.

And we have no further questions in queue.

Okay. Well, thanks to everyone. Maybe just concluding, again express appreciation for the support and guidance that each of you gives us. Maybe just make one last statement. There have been a couple of questions about the effects of accelerated growth in our business model. And I think it is maybe worth repeating that we have we think, we hope a pretty disciplined approach to this where we measure everything and we expect each of our 30-plus leaders has a model that they are operating to. And so I think the main thing is where we have been able to flow through in the high 40s over the last several years, we always said we think our stable flow through is in the 35% to 40% range. We expect that with these investments, we will be able to do that on a normalized basis.

Again, aside from this lumpy item like this book and audio contract a year ago that we expect -- otherwise, we did achieve it, and we expect we'll continue to achieve it. So I don't think you should expect that we will decide one year to spend away all of our profit with the hope that it will come in. We think we can grow at the levels we're talking about, which are 30-plus additions to new client partner counts and continue to make marketing investments while also maintaining our flow through. And that is driven by our basic business model with high good gross margins, pretty predictable direct marketing costs, controlled central costs. So that when we make these additional investments in R&D or marketing in a given year, it might lift the operating margins 500 basis points, if not dramatic.

Thanks to each of you, and we will look forward to answering any other questions you all might have one on one, and have a good day. Thanks so much.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.