Franklin Covey Co (FC) 2013 Q2 法說會逐字稿

Welcome to the Q2 2013 FranklinCovey 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. Derek, you may begin.

Thank you, Trish. On behalf of FranklinCovey I would like to welcome you to our investor webcast this afternoon to discuss the financial results through the end of our second quarter of fiscal 2013.

Before we begin 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 higher productive sales professionals; general economic conditions; competition in the Company's targeted marketplace; market acceptance of new products or services and marketing strategies; changes in the Company's market share; changes in the size of the overall market for the Company's products; changes in the training and spending policies of the Company's clients; and other factors identified and discussed in the Company's most recent Annual Report on Form 10-K and other periodic reports filed with the Securities and Exchange Commission.

Many of these conditions are beyond our control and influence, any one of which may cause future results to differ materially from the Company's current expectations, and there can be no insurance 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 to time over to Mr. Bob Whitman, the Company's Chairman and Chief Executive Officer. Bob?

Thanks, Derek. We'd like to welcome everyone to the conference call today. We really appreciate you joining us.

We'll start out today talking specifically about our second-quarter results and go through those in detail, and then turn the time to Steve Young with the thought that maybe we then could have a Q&A on anything related to this. And then I'd like to then spend some time on updating, to the extent we have time then, to talk about our strategic initiatives and the progress of those.

So maybe we can turn to slide 3. As you know, and is shown on slide 3, over the past year we've been fortunate to be able to achieve both significant and steady growth in revenue, adjusted EBITDA, our adjusted EBITDA margins, operating income, net income, and net cash generated. And while any given quarter's performance may have been higher or flatter, on a trailing 12-month basis the growth in all the factors has been strong and consistent.

And we were pleased to be able to continue these trends in the second quarter, achieving growth on all of these key metrics.

I'm going to give just some headlines and then we'll go into detail on the discussion.

The financial headlines were that revenue grew 4.7% for the quarter and 7.7% for the trailing four quarters. With -- and that base we split into two [kind of] groupings -- with revenue in the Company, other than government sales performance in Japan, grew 16% during the quarter. So from that perspective our -- as we'll go into the detail, our direct offices in the US that are geographic, many of our national account practices had terrific growth.

This was partially offset by revenue declines in the government region and our Sales Performance Practice, and by a primarily foreign exchange-related decline in revenue in Japan. . It was basically flat in Japan, in US -- other than in US dollars. I'll give more detail on this later.

Adjusted EBITDA grew 4.6% for the quarter and 19% for the trailing four quarters; again, with much higher growth in the balance of the Company, partially offset by declines in government and sales performance. Japan actually grew its EBITDA in the second quarter despite its exchange rate related decline in revenue.

Adjusted EBITDA margins stayed high at 13.8% for the quarter and increased to 15.9% for the trailing four quarters. Income from operations grew 16.9% in the quarter and up 55% for the trailing four quarters. Net income was up 37% for the quarter and 46% for the trailing four quarters.

Net cash generated was up 8.9% for the quarter and up 33.7% for the trailing four quarters. And cash flow from operating activities increased 22.4% for the quarter.

We expect to achieve accelerated growth on all of these metrics and measures during the back half of this year, as we'll discuss.

Some strategic headlines include that our -- the ramp of our new sales people, client partners, continues on pace, accelerated by our sales wheel structure that includes this lead generation, sales management and [test] substitution and we will talk about in the strategic section today.

It's been exciting to see the growth in our domestic offices as this has taken hold. And they grew 16% in this last quarter, [17% and] 21% in the previous quarter. We added 10 net new sales people, client partners during the quarter. That makes 17 to the first six months, so we now have a total of 137 client partners at the end of Q2. And we do expect to meet our net hiring goal of 30 for the year, which will increase our total to 150 at year end.

We have accelerated our marketing and hiring investments to accelerate this hiring and growth. Our Education, Execution, Trust and Productivity Practice all grew more than 15% for the quarter. And then other strategic headlines -- the management stock loan program was repaid with 3.3 million shares being retired and returned to the treasury. We also completed the purchase of the NinetyFive 5 sales training company, which will roughly double the size of our Sales Performance Practice and create, we think, very good momentum going into the future.

Also headlines regarding our outlook, just might as well hit this up front, based on the strength of our second quarter, for the vast majority of the Company, the strength and momentum of the pipeline of book days in order revenue and our other pipelines, and the number of new hires we've added who are starting to ramp up, we are reaffirming our expected adjusted EBITDA guidance range for the year of $30 million to $32 million with the goal of ending up in the upper half of that range.

So with those headlines, I'd now like to briefly touch on each of these areas for the second quarter and for the latest 12 months.

Revenue -- as you can see on slide 4, in the 3.5 years since the end of our fiscal 2009, which was a time when many of the performance improvement -- many in our industry have struggled to grow, we have been fortunate that our revenue has grown from $123 million to $176 million, which is an increase of $53 million, or 43% during that time period.

Revenue for the quarter increased $1.8 million to $40.4 million, an increase of $4.7 million compared to the $38.6 million we achieved in the second quarter of 2012. As you know, because of the holiday season and the fact that many companies do their corporate kickoff events in the early part of January, there were just fewer trading days. And so our second quarter or tends to be our lowest revenue quarter. For our trailing four quarters, revenue grew $12.7 million, or 7.7%.

As I noted before, many of our direct offices and practices grew substantially faster than the Company itself. And in total, as we said, revenue in the balance of the Company grew 16% during the quarter, offset, as previously noted, by the year-over-your declines in Government Services, sales performance, and by the foreign exchange.

Let me just talk about those briefly. The Government business -- we've had this large contract that has been maturing a little bit, quarter by quarter and some just secular decline in that business. But with all the discussion of sequester, as it relates to the kind of training and so forth, there was a feeling on the part of government executives that it was just bad form to be doing a lot of training or doing much at all when they were talking about laying people off or furloughing them.

And until they can get a budget set where they actually had spending authority that they were going to defer a lot of that revenue, and that is what happened to the Government business. Since then, as the budgetary issues have started to firm up, they've now been able to make firm commitments in coming quarters.

We won't make up all that we lost in the last quarter in the coming quarters. We expect that we'll continue to have a year-over-year decline from the Government business in those quarters, but at least it's starting to firm up and with the prospect that things could get better than we're thinking right now. But even if it didn't, we at least feel like we have good transparency in the coming quarters.

For the Sales Performance Practice, we mentioned last quarter -- as you know, this is a practice that has grown from $3 million to about $8.5 million over the last four years, generally been good on the annual numbers. But in certain quarters, as a large contract rolls off into a stabilized phase and new ones are starting to ramp up, we've had a number of quarters that have been lumpy.

We think actually the acquisition of NinetyFive 5 will help that, because they have a subscription-based service model. It has more stable revenues. That's not the reason we acquired it. We think that will be a byproduct of having acquired it.

But even without that, we believe that -- believed and believe that during the back half of the year, we would have substantial year-over-year growth in the Sales Performance Practice, resulting in an overall positive or slightly positive growth for the year as a whole. And so for us, this quarterly number for Sales Performance, although it was a big one, about a $800,000 decline, wasn't a particular surprise. And we think it will be made up.

And so if you net the two, Government and Sales Performance, both were down in this quarter. We think in the coming quarters that the positives from the Sales Performance side will offset, more or less offset declines that will be in Government so that that part of the business kind of is flat. And with things up and it really -- across the board, almost across the board in all the other operations, we expect substantial growth in the back half.

Breaking out the revenue for each of our channels, you can see it on slide 5, this tree chart, like to just briefly give you some detail -- I'll do it quickly. But you can see there that revenue in our five direct offices in the US and Canada grew 10% in the second quarter and 11% for the trailing four quarters. With revenue in our four geographic offices in the US, excluding Government, growing 17% in the second quarter on top of 21% growth in the first quarter, and 13% for the trailing four quarters.

I'd say the basic story here is twofold. One, with the investments we've made in sales support marketing, etc., our pipelines are growing. Those pipelines are being translated into revenue. The productivity of our sales force is growing and we're adding a lot of people.

As noted, we talked about the Government Services regional decline which was $800,000 in the quarter, and which was about 20% for the trailing 12 -- for the trailing 12 months or four quarters, Government Services actually increased 3%.

If you go to the next section, royalty revenue from our international licensee partners continued to grow during the quarter. As you know, our licensee partner network includes 40 partners representing over 140 countries. Their revenue grew 9% in both the second quarter and for the trailing four quarters, reflecting continued momentum in our licensee partner network with [net of] 70% of our licensee partners growing over the prior year, including seven of our top 10 licensees.

If you look at where this growth is occurring, it reflects continued penetration in our Asia-Pacific region, particularly in China, Indonesia, and Thailand as well as strong performance in Germany, the Nordic region, and Egypt, which is now recovering and restarting to do business.

Our licensee network has been, as you know, one of our most consistent areas in the Company, having grown significantly in 13 consecutive quarters, and having grown very substantially from around $27 million in 2004 to over $80 million for the trailing four quarters. We continue to have significant opportunities for growth in our licensee operations as they continue to implement best practices, expanding the size of their sales forces, and adding more of our newer practice area content to their existing mix.

And several quarters ago we said we were also going to pursue growth in new areas that were either covered by a license and not active, or that weren't yet covered by a license. And we are currently pursuing new opportunities and we have new partners in Russia, and with France and Africa now, to take advantage of growth opportunities in these economies.

Next week we have our world conference, worldwide conference of the international licensee partners here in Salt Lake. And so we'll have, as an executive team, the chance under Sean Covey's leadership to be talking with each of these partners. But there's a lot of excitement about them wanting to implement the same things that are happening in our own US direct offices and now increasingly in our international direct offices.

Going down the chart, revenue at our three national account practices increase $300,000, or 5%, to $6 million in the second quarter and grew 12% in the trailing four quarters, as previously noted. And we had this decline in the Sales Performance Practice, which partially offset the significant growth achieved in our Education Practice. As you can see on slide 5 there, revenue in our Education Practice increased $1.2 million, which is 57% in the second quarter, and $5.8 million or 52% for the trailing four quarters.

Our Education Practice has now signed up over 1100 The Leader in Me schools in 25 countries, which are using our total school transformation solution. During the quarter we were excited to start our first The Leader in Me school in China, and we expect significant growth there. So we are very excited about that.

In our Customer Loyalty Practice we had revenue growth, small revenue growth of 2% in the quarter. And that really reflects the transition where, as we mentioned in previous quarters, there was a large account that matured, outsourced a lot of the data collection revenue. And so we had big revenue declines in the last several quarters, notwithstanding the fact that they won a lot of the new big accounts.

Finally in this quarter, as expected, the revenue from the new accounts offset on the trailing four quarters -- you know, the decline in the other, and that will continue in these coming quarters. And I think we've already talked about probably Sales Performance Practice enough, but with the acquisition of NinetyFive 5, we now have a complete offering, one that is subscription-based, as well as stand up, one that has, we think, a very powerful combined offering.

It's a partner that we'd worked with for years; it had licensed rights to some of our content. In combining these we've lost no people. It grows our sales force; it grows our offering.

We have an existing base of accounts. And we had about -- you know, for the trailing 12 months we've had about $8.5 million of revenue in the Sales Performance Practice; NinetyFive 5 is roughly the same size. And so we would expect to get good profitable growth from these combined entities moving forward.

Finally, in terms of revenue, our direct offices in Japan, the UK, and Australia declined 10% during the second quarter with a small net benefit of a 8% increase in revenue in the UK and a 6% decrease in revenue in Australia, being more than offset by the 15% largely foreign exchange-related decline in revenue in Japan. So in yen, Japan's revenue was roughly flat. It was [off a percent], while EBITDA in yen grew 27%. We're obviously not going to be able to control what the yen does in the coming quarters.

I anticipate that that may affect our top line some in the coming quarters, but they actually achieved revenue growth in both US dollars and in yen, so we'd expect to -- that Japan, as it did this quarter, will contribute to our EBITDA growth in the future.

Just quickly hit the other key metrics -- adjusted EBITDA, as we said, increased 4.6% for the quarter to $5.6 million compared to $5.3 million in the second quarter fiscal 2012. As you can see in slide 6, for the trailing 12 months adjusted EBITDA increased $4.5 million to $28 million, which is a 19% increase compared to the $23.5 million of adjusted EBITDA we had for the same four-quarter period last year.

Adjusted EBITDA for both the second quarter and for the trailing four quarters was the best ever for our current business. Obviously, the previously-discussed revenue declines in Government and Sales Performance affected -- had their effect on EBITDA contributions. We think there -- the reduction in EBITDA just related to those two things during the quarter was around $1 million of decline in EBITDA.

We had additional expenses that were not insubstantial related to the acquisition of NinetyFive 5, but also as period expenses no longer capitalize under new accounting rules.

Our income from operations increased $0.5 million for the second quarter to $3.3 million, which is a 17% increase compared to the $2.8 million in income from operations achieved in the second fiscal quarter last year. For the trailing four quarters, income from operations increased $7 million to $19.6 million, which is an increase of 55% compared to the $12.7 million of income from operations achieved for the same four-quarter period last year.

And then finally, [in net] income increased $400,000 for the quarter, as you can see on slide 8, to $1.6 million, or $0.08 a share or a 37% increase compared to the $1.2 million, or $0.06 a share net income achieved in the second quarter fiscal 2012. And that is even after [covering] approximately $360,000 in after-tax expenses related primarily to the resolution of the management stock loan program as a non-cash charge. But nevertheless, it affected the expenses and made about $0.02 a share difference.

For the trailing four-quarter period, net income increased $3 million to $9.5 million, which is up 45.5% compared to the $6.5 million net income for the same period of last year. And again, this is after swallowing these additional expenses associated with the management stock loan program and the acquisition of NinetyFive 5.

Going to slide 9, our net cash generated for the quarter increased by $400,000 to $4.5 million, which is up 9% from last year's second quarter. For the trailing four quarters, net cash generated increased to $22.6 million, an increase of $5.7 million, or 33.7% compared with the $16.9 million during the same period last year.

Our cash flow from operating activities, which you can see in slide 10, for the quarter increased $1.9 million to $10.5 million, which is an increase of 22.4% compared to cash flow from operating activities of $8.6 million in the second quarter of 2012.

The final metric is our EBITDA margin. Our adjusted EBITDA margin remained strong for the quarter, equal to the highest we've ever achieved in this quarter. It was at 13.8%.

And for the trailing four quarters, with the significant flow through of increased revenue to adjusted EBITDA, we had adjusted EBITDA as a percentage of sales grew to 15.9%, up from 14.4% a year ago and 12% in the year before. With expected continued strong revenue growth and continued high-flow through of incremental revenue to adjusted EBITDA, we expect our to adjusted EBITDA as a percentage of sales to continue to increase and believe it should reach approximately 18% on a full year basis in the next 18 months or so.

Further topics -- ongoing investments -- we're pleased that these operating results are being achieved while continuing to make significant ongoing growth investments in the business. We always are questioned -- do we hire the right number of people to really accelerate growth in future quarters, or do we hold them back and get higher EBITDA in the current quarter?

We made the decision, as you can see on slide 12, to add substantial number of people over the last 12 months with heavy emphasis in the fourth and first quarters. And you can see from this chart where they were added. That slide 12 shows that between client partners and the direct support around -- that 52 included the client partners -- and so primarily we've added client partners.

But we've also added new sales managers to mentor these new client partners, to help them to ramp up; field administration support, six; and then in our R&D and practice leadership, five; and then the whole corporate administration, only six. You can see that our investment is heavily focused right where the revenue meets the road, which is on hiring salespeople and the people who help them directly to book appointments and book revenue, et cetera.

We absorbed a lot of that, almost as you add that up, almost 80 people in the last year. And although the investment has been made, we don't anticipate making significant additional investment in these outer rings in the coming quarters, but we'll continue to add to specific client partners. And so as the ramp up occurs, we'll see revenue and flow through increase in these coming quarters.

The total of all these growth investments was more than $17 million for the trailing four quarters. And so for us to be able to still to swallow those investments and still grow adjusted EBITDA, operating net income during that same period, I think for us that's the first time that we've stepped out that aggressively in adding. But we think it's going to add significantly to our growth potential in the future.

Final topic on this, the flow-through of incremental revenue to incremental adjusted EBITDA -- as you know, over time our expectation has been that we would generate 35% incremental revenue with flow-through to increase as an adjusted EBITDA. Historically we have been a little ahead of that. For the trailing four quarters it was a little ahead, too, at 35.3%.

During the first half of fiscal 2013, however, the calculated flow-through has been just 15.4%. Some have asked, well, if that is just a fundamental change in the business model. We think the answer is no. That while a portion of this reduction reflects the increased cost we've talked about in hiring, the salesforce infrastructure, et cetera, the biggest impact really was the decline in revenue in the Government reach and in the Sales Performance Practice in this first half, which we think will rebound as it relates to the Sales Performance Practice during the back half.

So with the expected increase in revenue from the people we've already hired; with the curtailment of the lack of need to hire a lot of other support people, now that we've gotten this big group and in, we expect to have normal flow-through of revenue related to the sales growth in the back half of the year, and that that will be our norm. 30%-plus flow-through will be the norm going forward.

We had two exciting developments during the second quarter. One was the resolution of our management stock loan program. As previously announced, during the second quarter our share price increased [the point] -- the value of the management stock loan program participants' shares slightly exceeded the [amount laid out] of the Company.

As a consequence, they surrendered 3.3 million shares in full repayment of their outstanding loan balances. And that was a terrific thing for everybody. Because this occurred late in the second quarter, the weighted average number of shares outstanding for the quarter, the second quarter did not really reflect the benefit of the share retirement.

Also during the quarter, all of the remaining warrants were exercised on the cashless exercise. As a consequence of these combined events, the actual number of shares currently outstanding is now 16.3 million, approximately the same normalized share count -- that which we been speaking for years and which some of you, as analysts, have estimated.

At a price of $14 a share, the fully diluted number of shares is slightly higher at 16.4 million, so it is 100,000 shares more. But it's basically this number of 16.3 million, 16.4 million now is our share count. And we think in future quarters this will significantly reduce the complexity, from what many of you have experienced in trying to calculate the Company's numbers, number of shares outstanding in the past.

We also, of course, increased all of the per-share calculations relating to our performance, earnings per share, [set] EBITDA per share, et cetera.

We also help new investors have a clearer understanding of the true multiples at which we're trading. As you can see on slide 22, at the revised number of shares outstanding even at $14 a share, the valuation multiple, if we were to hit the midpoint of our guidance range this year of [31 million], the adjusted EBITDA would be approximately 6.9 times. And given the significant growth we've had and continue to have, we feel like that's -- hopefully will be attractive to many.

A final -- the other thing we mention was the acquisition of NinetyFive 5. I think I've talked about that. We can answer further questions about that in the Q&A.

Finally, our momentum is strong and our outlook is positive. As you can see on slide 23, our pipeline of booked days and order revenue, which is business already booked or awarded, this measures metrics for our five direct offices in the US and Canada and our national account practices. It grew $3.8 million during the second quarter to $33.1 million, reflecting a 13% year-over-year increase compared with the $29.3 million we had at the end of the second quarter.

This makes it the largest ever pipeline for the end of the second quarter. And may be worth noting that that increase is after a pretty significant decline in the pipeline related to Government. So instead of -- it says that our corporate business is really growing. The contracts are building.

Our prospective business pipeline which, as you know, measures new revenue currently being discussed but not yet contracted, is really up significantly compared to the last year and has historically been a very strong predictor of the likely strength of our bookings and revenue in the coming quarters.

To be specific, in our five direct sales offices in North America, and this includes government, the prospective business pipeline as of the second quarter was about 20% larger than at the same time last year. This is attributable to the increase in the number of client partners; the significant increase in the number of hours they are spending face to face with our prospective clients; the increase in the productivity of our salespeople; and the positive impact that we're having as our lead generation engine has cranked up. We expect, again, a lot of this to come through.

In our international direct offices, we showed growth approximately 8% higher than at the same time last year. As you know, in these offices they have been later to adopt and we have been later to push the adoption of the same marketing programs and facilitator programs that we have in the US. They are now starting to do that and start to build their pipelines.

Our national account practices, which include Education, their pipelines are more than 50% higher. This includes both Sales Performance and Education. They're more than 50% higher than at the same time last year.

Our certified facilitator -- or as you know, one of our unique assets is our base of facilitators who are employees of our client companies. The order materials -- hundreds of thousands of training manuals or PDF files or whatever. And it really is a big metric that has grown.

And this continues to grow. Over the past three years facilitate orders from clients serviced by our direct offices just in the US have increased from $30.2 million in 2009 to $34.6 million in 2012, and are up 32% year to date through the second quarter. So we're encouraged here that the content that we are developing, the new offerings such as The 5 Choices, are really hitting the mark.

In this coming year our major product development effort will be in the leadership category. So with the strength of this, with the momentum we're continued to see in the business, we believe it will continue to play through these coming quarters and beyond.

As a consequence, as I noted earlier, we're reaffirming our fiscal 2013 full-year adjusted EBITDA guidance range of between $30 million and $32 million, with the goal of ending up in the upper half of that range.

As we noted, maybe last quarter given the strong growth in our Education Practice, much of the revenue which is recognized in the late spring and summer when school is out, and teachers and administrators have more time to go through training. And that growth at our base of certified, you know, and facilitators that we just spoke about, they tend to purchase a disproportionate amount of their materials during our fiscal fourth quarter when we have our annual Buy 10, Get One Free offer that has become a tradition. With that in our booking patterns, we would expect a significant portion of our expected growth in revenue and adjusted EBITDA to be in the back half of the year and particularly in the fourth quarter.

And so we expect, as I mentioned, declines in Government that are likely to be offset by gains in Sales Performance. Everything else has been growing and we expect it will continue to do so. And these -- any declines in Government would be offset, more or less offset by gains in Sales Performance.

And so for us, we expect a good second half with most of the growth occurring in the fourth quarter. And with that, I'm going to turn the time to Steve.

Thanks, Bob. Good afternoon, everyone. It's nice to be with you today.

My opportunity is normally to talk about the balance sheet and some hidden treasures and misunderstood items. So, now and in the future, now that our management stock loan escrow program is resolved and the warrants are all exercised, and we are able to utilize our foreign tax credits now, and everyone pretty much understands our finance obligation, our balance sheet discussion will be pretty straightforward and focus primarily on cash.

So, one of the ways that we'll know that the strategy that we're pursuing is working is in the change in our cash balance. To that end, we're happy that the cash balance increased $8.3 million to $15.5 million this quarter. That's an unusually high increase for us compared to other quarters.

Our second quarter is always the quarter of highest increase, so that was expected due to a decrease in accounts receivable plus operations. But we do expect to be a Company that generates cash. In our Q3 we will have some earnout and acquisition payments. But again, it will be pretty much a straightforward discussion of the balance sheet, we expect, and a focus on cash.

Just a few numbers that we normally talk about. First of all, the amount of amortization in our cost of sales this quarter was about $500,000. We expect that to be about $2.3 million for the year.

Depreciation and amortization expense last year was about $5.5 million. We now expect that to be closer to $6 million this year, change resulting from the NinetyFive 5 acquisition and the amortization of intangibles related to that acquisition.

Our net interest and discounting costs totaled $600,000 again this quarter. We expect those to be less than $2.8 million for the year. And we expect our effective tax rate to be less than 43%.

The amount of share-based compensation in this quarter, which is included in SG&A but not in adjusted EBITDA, is about $1 million. The amount of share-based compensation expected for the year will be around $3 million, or just a little bit higher.

And so, in conclusion, I am pleased with our strategic direction, our continued investment in growth. And we expect to be profitable and generate cash.

Okay, Steve. With that, why don't we now open it to questions, particularly about any of the results of the quarter. But if you've got questions about strategy [at such] going forward, we will address those. And we have a few additional slides that might be useful if we get to questions about how the growth initiatives are going.

So we'll open it to questions at this point if we can have the moderator do that.

(Operator Instructions). Jeff Martin, ROTH Capital.

Bob, I was hoping you might go into a little more detail on what specifically gives you conviction with the improvements in Sales Performance Practice in the back half of the year.

Yes, the main thing really is that we tend to have a relatively small number of large contracts, Jeff. Unlike in our corporate business, where we have a relatively large number of smaller contracts, here in the Sales Performance Practice we have large sales forces from these large technology and professional services firms. And so what gives us confidence, I can ask Shawn Moon, I think, if Shawn is on the call.

Yes, I am.

Okay, Shawn, just -- in fact, why don't you just take it from here so we don't waste time. Just go ahead and --.

Jeff, good to talk with you. There's a couple of reasons why we have good confidence in the back half of the year with the Sales Performance Practice. As Bob was saying, the way the Practice has historically acquired clients is they are targeting these large organizations of $5 billion in revenues plus. They have very large sales forces.

The good news when that happens, when we acquire these large, multi-year deals, they are very pervasive and deep. The problem is if you don't have the volume of the smaller deals to offset the timing of the coming and going of those deals. So one of the things that we have been working on and we'll be focusing on in the fourth quarter is a rollout of a facilitator offering within that, that accesses an entire new market. And we have a very aggressive launch plan associated with that.

And so what that gives us, Jeff, is the ability to continue the large client acquisition, which we are continuing to do at a healthy pace -- we're encouraged by that -- while focusing on rounding that out, like we have done in our other practice areas. Speed of Trust is an example; our Leadership Practice is another example of rounding out the bigger deals with smaller deals that are a little bit quicker to be done.

The second thing that encourages us is with the acquisition of NinetyFive 5. They have an online coaching capability that is very accessible to a broad base of organizations, far deeper than what we had before. So we have an existing client base that we can go after and upsell our services. But we could also go after a new market based on our relationship with them.

So those are two key areas that we feel like give us a lot of confidence that the traction that we're seeing in our large accounts will be augmented by a more balanced approach to the portfolio.

Jeff, one additional thing is that our pipeline just of contractual business, forgetting the client-facilitated option, is also larger -- independent of the NinetyFive 5 than it was last year. And of course, with NinetyFive 5 it's larger by a significant amount.

So I think the pipeline usually gets delivered in the next couple of quarters. That, plus the 50-city product launch of this for the client-facilitated option, which we've never had, feels like we have more upside on our forecast than down for (multiple speakers)

Yes.

Okay. And then you mentioned, Bob, that NinetyFive 5 is partly a subscription model. Was hoping you could give us some insights there into how much of the $8 million to $9 million is subscription-based; whether that is higher margin; what sort of impact that has on the business and the margin structure. And then also, if that's something you plan to take to the existing Sales Performance Practice.

It is. In fact, maybe I should make one comment. As stated, there is just -- NinetyFive 5 is merged in -- and the day after the acquisition there is just now one practice, which is the Sales Performance Practice.

They both had, interestingly, the same content base, because years ago, the guys who founded NinetyFive 5 came to us and asked if they could get a license right to sort of our content including our Sales Performance content because they thought our content was the best. They helped to develop it, by the way. But they felt it was the best, but they wanted to create this set of tools and coaching and the five online services, et cetera that they have.

And so the sales forces are integrated. We're picking up accounts that our existing consultants can do more work in. They are picking up accounts that they can do more services in.

The actual subscription service portion of the revenue of the, say, $8.5 million of revenue, so it's about $1 million today -- and so it's a portion. It's an important portion. It's kind of like our [My 40X] software is in the Execution Practice. It is significant, but not dominant.

It doesn't change the whole business model, but it does smooth out, have very high gross margins, and give a stickiness to our offerings so that they are ongoing. When we finish training, what has been happening, as Shawn said, you get a big boom and then it drops off. We don't have ongoing coaching services or other online services to provide an ongoing bridge of revenue.

And so we think, effectively, immediately we'll get some additional revenue and EBITDA contribution. Over time, we'll be able to build larger, more strategic, and lasting accounts.

And just one final note on that, Jeff. The deal size as we look at similar size organizations and similar type engagements, the NinetyFive 5 portion of the deal size is about twice what the Sales Performance Practice deal size has been. So we believe this will positively impact the size of deals as we move forward, as well.

And reduce the steepness of the bell curve on the revenue.

Okay. And then can we shift gears to the Leadership Practice real quick? Not a lot of discussion to this point, but it did have a decline year-over-year. I was hoping you could shed some perspective on that and what your expectation is for the balance of the year.

Yes, let me just mention, maybe this is for context, but we have three practices that are sold by their own -- as you know, these national account practices have their own sales forces. But leadership, trust, execution and productivity are all sold by the same salespeople. And so in some cases, if you sell more of one you might sell less of another.

We've had a big push in our Productivity Practice over the last couple of years with the creation of The 5 Choices, and then the re-creation of our project management content, to get out there and let existing clients and new clients know about these new offerings. As you can see, the growth in the Productivity Practice has been substantial.

We've also done a lot of the marketing and such in the Trust practice, because it's newer and has had the newer content. And it has also grown substantially; execution, same way.

And so I think what has gotten the -- while leadership has a very strong base and continues to be our largest practice, the growth rate -- we've not had the marketing focus, the new product launch, the new tools, et cetera. And as a consequence -- and we have had that, and the marketing growth everywhere else. And so it's more a substitution issue.

As I mentioned, it remained strong in our largest and for the year as a whole [and the] trailing four quarters, while it was down 6%, it's been up actually in certain of our offices and sectors. And certainly we have some big accounts there.

The focus here as we now have named a new Leadership Practice initiative leader, Catherine Nelson, who is leading this, we are doing the same thing we did for years in building up the others, which is out there doing final marketing events. We've done a few dozen of those now.

And by this time next year, approximately this time next year, we'll have the new 7 Habits course with all of the surround sound and stuff that will go with that. This is a very, very big effort that -- really our biggest ever effort -- and new product development.

And it will be accompanied with a 200-city tour, 200-plus city tour; marketing events; all the salespeople being trained how to do this. So it's really a question of focus. But we didn't want to put the focus there until we had the new offering to go with it. So that's really what is happening there.

Okay, thanks. I had better yield to the callers. I'll come back to you. Thanks.

Jim Larkins, Wasatch Funds.

Just a couple of quick details. You mentioned that there was $0.02 of costs that came in from the stock loan retirement. Where did that hit in the income statement?

$500,000 of that is in share-based compensation, which is included in SG&A; excluded from adjusted EBITDA. The rest is cost related to the NinetyFive 5 acquisition and legal costs, et cetera. And those would hit in SG&A.

But the total -- the after-tax effect is the $0.02, Jim.

Yes, you take $600,000 of direct costs, and the number that Bob talked about was $360,000, which is the after-tax amount, which is about $0.02 share.

Okay, great. And did you buy any stock back in the quarter?

We didn't buy any back in the quarter. Primarily we are anticipating this NinetyFive 5 acquisition and our earnout related to Covey Lincoln. We didn't buy any in the quarter, which I think the next question is, do we plan to? And the answer is yes. We have our $10 million in place and we plan to look at that every quarter and buy shares.

Yes. Okay, just a note on that, we -- to date -- we haven't bought a ton of shares to date, but of course at the end of the first quarter, because we were funding the big growth in the back half of last year, we also only had $7 million of cash, which is below our threshold.

In this quarter, we went above. But as we were negotiating that NinetyFive 5 acquisition, it wasn't clear at the time how much cash we were going to need to close it. We thought it was strategic.

What we ended up negotiating was a series of four payments. And the primary reason for that is so that we could keep our liquidity high, so that we could in fact continue to buy shares at 6.9 times EBITDA. So we would expect to be buying them this next quarter.

Yes.

Or in the current quarter.

Okay, perfect. And then you said tax rate for the year should be a little below 43%. Did I get that right?

Yes. To some people that might not be as exciting as it is to us, since it has been in the 60%'s and 70%'s in the past, but yes, that's what we said.

Okay, great. Thank you.

Thanks, Jim.

Marco Rodriguez, Stonegate Securities.

(technical difficulty)

Maybe Marco will be back.

Anthony Cambeiro, Anthology Capital.

My question has to do with when do you think you will start to see accelerating revenue growth? So, not just positive growth, but you go from growing 6% a year to 10% to 12%. Just from -- based on the math of the new hires and their ramp up, can you shed any clarity on -- assuming the model works the way you've got it, when you start to show accelerating revenue growth?

Yes, in fact, if it's easier for you slide 18, I don't know how the system works, is it easy for you to do that?

Sure.

Slide 18, for everybody who would like to follow along, shows the impact on revenue of adding -- on top of what we have now, and the growth in productivity and the ramp of people we have now -- if you hire net 20 a year, for five straight years, all of a sudden you have an extra $78 million; or 30 net hires, which is what we've announced we will do this year, and you get to $117 million by the fifth year.

And so the effort we have been making -- when we put the stake in the ground last year and said, we're going to start hiring net 30 a year, we had to build the pod structure around it that you saw on that target, bull's-eye target thing. And our goal there, frankly, for those offices who were running it, 25 of those hires will be in the US offices.

The revenue growth has already started. As I mentioned, 21% last quarter; 15% this quarter, absent Government -- just leave that aside for a second, which hasn't really been playing the same game. And so with the acceleration of new hires, we were hoping that in the next year, year or so, year and a half, that we've got -- that we're adding [400 million] -- we are mid-teens growth rate in the US offices, say, excluding Government.

We've started the same process. We will be hiring five a year in the three offices in -- this year, at least -- in Japan, Australia, and the UK. But with marketing support and starting to build their pods, we need to get them from the low single-digit growth to high single digit to the low double digit. And we think we can.

The licensee business, Shawn, you may want to talk what the acceleration plans there -- how long it will be before you think you'll -- you have been growing at 13% compounded, so that has been darn good, but --.

Yes, well, we think we can continue to grow. [Lap] that year has been 13%. And we think we can continue that and maybe even accelerate it through the same thing we are doing here -- with the direct offices, which is hiring more client partners, [support] people and ramping them more effectively.

In addition, there are several large economies we have yet to really engage fully -- like we mentioned before, France and Russia are coming on board. And the opportunities for new practices to grow with our international partners is huge. We are still -- 65% of our revenues internationally is coming from just one practice leadership. Here in the US, it's more like it's about 35%.

And so, the opportunity for Trust and Execution, Education and Productivity to grow internationally while continuing to grow Leadership, are tremendous. So anyhow, we generally we think we can continue what we've done in the past. It would be great. And we'd love to accelerate it.

Was any of that helpful?

Yes, thank you. And good luck.

Thanks very much.

Marco Rodriguez, Stonegate Securities.

Sorry about that, little technical difficulties on my end.

I'm sorry about that.

I had just a couple of quick follow-ups. I'm sorry if I missed this in your prepared remarks, but the forex hit to revenues as well as the Government Services decline in revenues, can you quantify that as far as the dollar figures?

Yes, for Japan, it was around $700,000 in the quarter with the FX impact. In local currency, in yen, they were basically flat. It was down 1% actually, technically.

And they grew EBITDA in US dollars and the yen, but it was about $700,000 in the quarter [four]. For Sales Performance, it was closer to $900,000 decline in revenue for the quarter, all obviously in US dollars. It wasn't a foreign exchange issue.

Got it.

Government Services was about $800,000 of revenue.

Yes, Government Services was also $800,000. And so you basically had -- and Government Services and Sales Performance, between the two of them, it cost us a $1 million basically of EBITDA for the quarter.

Like I said, we think the growth in the Sales Performance in the back half will offset any decline in Government. But we don't expect an increase in Government, but it's possible the decline would be less than we're including in our forecast.

Okay, perfect. That's helpful.

And then the NinetyFive 5 acquisition, can you discuss any sort of integration issues or where you are in terms of the overall integration?

Sure. Shawn Moon, do you want to respond to that?

Yes. The teams actually -- one of the things that's working in our advantage, Marco, is that these teams know each other. They have -- the founders of the NinetyFive 5 were individuals that had been part of the creation of the content in the first place many years ago. And so the integration so far has been pretty seamless.

We have the teams working together now as fully integrated teams. We have chosen not to run them independent. We've actually have them become the new Sales Performance Practice. So their salespeople have integrated with our salespeople, same with their delivery people and our delivery people.

They had some capabilities in terms of coaching and technical expertise that we didn't have, and so there was not any overlap there. The only overlap came in areas where we actually needed additional resource, which was in sales and delivery. So we are marching forward.

The team is actually meeting together. They met together last week for a couple of days and we have our leadership team in town this week -- excuse me, next week. And the plan is all about hitting the [quarter].

So, anytime you bring organizations together there are bumps in the road, but so far we have not experienced any big bumps yet. And people are pretty energized about what is happening.

One of the things that helps us, frankly, is that we ran into each other quite a bit in the marketplace. And so both organizations perceive this as a barrier being removed. We're not competing against each other around the same content. So that has helped a lot. There was great celebration on both sides when this was announced in terms of territory conflict.

Okay, that's helpful. And are the existing FranklinCovey salespeople on the Sales Performance side -- do they need special training or education to cross-sell this, or is it pretty simple?

Well, there's some, to be honest. And that is actually taking place now. Again, the good news, though, is that is around our content. And so it's just a matter of understanding how this integrates, how the additional services integrate.

But I would also say the practice prior to the acquisition had identified a couple of key areas where we knew we were deficient. And one was in technological support. And the other was in the support of coaching. And so they actually had what we've were working toward building, and setting money aside to invest in that in future years we won't have to do that.

So the ramp up around those things is maybe less than it otherwise would be.

Got it. And then lastly, in terms of your guidance for this fiscal year, you didn't make any adjustments to it, given the acquisition. And given the commentary, and the excitement level that it sounds like you guys have for this acquisition, just wondering what might be behind that, the not changing guidance upwards?

Yes, I think basically -- the government decline and uncertainty on the government is likely to at least -- again, as I mentioned, we're hopeful that the momentum will continue to build and that we'll find out, as we did last year by the end of our third quarter, that in fact our pipeline was so significant that we thought we'd be in the upper end of the range where last year we increased guidance. And we'd love to be in that same position this year.

Given the transparency we have right now, and the -- of the pipeline, it looks to us like we ought to -- keeping it in that range gives us a good shot of -- even if Government were to not improve at all, we think we can still hit the range and with possibly some upside.

The acquisition itself won't add a ton of EBITDA in this first year. There are some integration costs. You've got some development costs that are being expensed and things. But it will still be accretive in this year.

Got it. Thanks a lot, guys.

Thanks, Marco.

Carter Dunlap, Dunlap Equity Management.

Thank you. Everybody else has hit all my questions. Thank you.

Well, thanks, Carter. Thanks very much.

Jeff Martin, ROTH Capital.

Could you give us some perspective of what the trailing 12-month revenue base is tied to Government?

Yes. So let's see, I think I've got a slide on that. Yes, slide 5, Jeff, let's take a look at that.

Okay.

For Government Services for the trailing four quarters, if you see that in that first box on the right.

I see it, yes.

The (multiple speakers) is $19 million -- yes, for the four quarters ended March 2, 2013, $19 million. So roughly 10% of total revenue.

Okay. Can you give some perspective on how long you foresee a decline in Government? Is this something that could take a year to resolve? Is it too uncertain? Do you have any views at this point on it?

Shawn, do you want to just address it from your perspective?

Sure. It is a little uncertain, Jeff, right now, given the budgetary woes that we are experiencing, but it is settling down. And the uncertainty -- when you have a new administration coming in and the leadership teams that follow within each of the agencies -- the agencies where we have our large government contract, the administration has not formalized all of the leadership team there, so there is some uncertainty there.

We anticipate that over the course of the next 12 months that we will see some increased traction there. We are seeing a willingness and a desire on the part of the buyer. When the uncertainty settles down, we anticipate that over the next 12 months being able to get some traction back.

Okay. (multiple speakers) And then one other thing I want to. Sorry, go ahead.

No, go ahead with your other question then.

My other question was on China and the Education Practice and getting the first school on board. I would imagine that's a huge potential market for you. I was just curious if you can shape what that make it market opportunity is and if that could come on fairly quickly.

Yes, Sean Covey.

Sure. Well, it is a big opportunity and we are excited to get our foothold in there. Our plan is to go direct, not work with our partner in China, our international partner, or licensee partner, but to go direct and to look for partners already established in China. So this first school is part of a partner there in China that's already established. They just have one little niche in a certain city.

The plan would be to get a partner or multiple partners to go to market with and to try to get literally -- start with a few thousand and get hundreds and even thousands of schools eventually.

In Brazil we found a great partner named Abril we talked about last quarter. And they are one of the biggest education companies in Brazil. And because of that partnership, will be able to penetrate very fast in Brazil.

In like manner, we are thinking really big about China. We hope to get to thousands of schools, not just a few here or there. We know that quality is the key. If we do the first few schools very well and right, it will spread fast.

In education, people talk. Word of mouth is the best marketing. So the plan is to start small, start smart, go with partners and with the end in mind of getting really big and getting to thousands of schools, and hopefully millions and millions of kids.

Great. Thanks, guys.

Jeff, just to focus on the question on government, I'd say that we -- on the one hand, this government thing is obviously, interrupted the quarter and such. But given the size of the government and the really small amount of revenue that we get, and the success we've had in certain pockets, we're not accepting this idea that well you know, government is just going to be tough for a long time.

If you look at the number of multi-unit operators in government, all of them -- in the Veterans Administration there are 85 hospitals that are run virtually identical. And we do no execution work in any of those. And yet in our corporate business we are winning lots and lots of multi-unit operators like lodging chains and restaurant chains, et cetera.

We'd just have not -- in that business, we've had our hands full servicing the business that we've had. We've now been adding people. But we anticipate -- look, let's say it's a very, very tough world for a long time.

Focusing on execution and things that we are able to do in the Department of Defense -- when they lost their whole budget in 2002/2003 with the Iraq war, and yet we did more business in the Department of Defense in the coming years than we had done in the previous years, all around execution. So on the agency side, we need to go out and win that business. We've got plans to do so.

Marketing events are occurring now. And so I think it will take a few quarters for that to build in the pipeline, but we are not -- let's say the government never recovers as a general thing. That won't be the case in terms of the government itself expenditures -- we expect, with the offerings that we have, we ought to be able to win more than our fair share and grow that business. We're not accepting lack of growth anywhere.

Okay, that's great perspective. Thanks, Bob.

Thanks.

I know we're past our time. We're delighted to continue to answer any questions if there is interest on the part of any of you all to do so.

Okay. We actually have no further questions at this time. So I'll now turn it back to you, Bob, for any closing remarks.

All right. My closing remarks would be to thank you all for being on the call today; invite you -- there's some additional slides that might give perspective that are part of the deck there, that gives progress on the ramp up of the sales force, the hiring, the sales wheel et cetera. But I think they are pretty much self-explanatory. We used those for reference for today.

We appreciate all of your support. We are committed to growing every business, every quarter. And glad that we could, despite some of these other challenges, grow in this past quarter. Thanks very much.

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