Franklin Covey Co (FC) 2013 Q4 法說會逐字稿

Welcome to the Q4 2013 FranklinCovey Co. earnings conference call. My name is Robert and I will be your operator for today's call. (Operator Instructions). Please note that this conference is being recorded. I will now turn the call over to Mr. Derek Hatch, Corporate Controller. Please go ahead.

Thank you. Good afternoon, ladies and gentlemen. On behalf of FranklinCovey Company I would like to welcome you to our fiscal 2013 fourth-quarter and full fiscal year earnings call.

Before we begin I would like to remind everyone that this presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based upon management's current expectations and are subject to various risks and uncertainties including, but not limited to, the ability of the Company to stabilize and grow revenues; the ability of the Company to hire productive sales 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 and services; changes in training and spending practices 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, I'd like to turn the time over to our Chairman and Chief Executive Officer, Mr. Robert Whitman.

Thanks, Derek. We'd like to welcome everyone to the fourth-quarter and fiscal 2013 conference call. We appreciate all of you joining us.

Over the past years and quarters, as you know, we've been pleased to be able to achieve both significant and consistent growth in revenue, adjusted EBITDA, our adjusted EBITDA margin, operating income, net income, and net cash generated. As you can see in slide 3, we were very pleased that these trends continue to be strong in the fourth quarter and for fiscal 2013 as a whole, with growth on all of the key metrics.

We really did have a very, very strong quarter and strong year. We were delighted with the results, and not only for the results themselves, but for the foundation that it shows the different initiatives are working; the marketing and sales ramp up initiatives are working. And we will dive into those in a minute.

The headlines for the quarter include the following. Revenue growth accelerated, with revenue growth of 20.7% to $61.6 million in the fourth quarter, making it our largest quarter ever for the current business; and revenue growth of 12% to $190.9 million for the year.

Adjusted EBITDA increased significantly, growing 29.8% to $12.5 million in the fourth quarter and growing 16.1% to $31.4 million for the full fiscal year. Our adjusted EBITDA margin also expanded, increasing to 20.3% in the fourth quarter and to 16.4% for the year.

Income from operations grew significantly, increasing 17% to $9 million in the fourth quarter and growing 22.9% to $21.6 million for the year. Net income growth also accelerated, increasing a large percentage, 127.1% to $7.7 million in the fourth quarter and growing 82.6% to $14.3 million for the year. And then finally diluted net income per share also grew significantly, increasing 161% in the fourth quarter to $0.47 a share, and growing 86% to $0.80 a share for the year.

So we are very pleased with the year, the quarter, the momentum in virtually every operation, every channel, almost every practice, the fact that the key basic strategic initiatives were working, and so we're pleased with the results.

As you know, we have three over-arching imperatives. First is to grow top- and bottom-line revenue year after year. We just reported on that. The second is to deliver quality results for clients and the third is to increase the size and productivity of our sales and delivery forces worldwide.

Just provided the financial headlines and give a brief update on our growth objectives, and I'd like to now just share some headlines regarding our quality results for clients and sales force growth and productivity objectives. And I'll start with a brief report on our sales force growth and productivity.

As you know, this initiative is focused on significantly increasing the size, capability and productivity of our sales and delivery forces worldwide. As many of you know, we have hundreds of as-yet unfilled sales territories in the US and Canada, and in our direct offices in Japan, the UK, and Australia and in our national account practices. A similar opportunity for growth exists among our global licensee partners.

This provides us with a lot of headroom for continued and accelerating growth. The key metrics by which we measure the success of this initiative include the following.

First, increasing the size of our sales force. Our number of client partners increase to 120, as you know, in last fiscal year and then moved to 145 by the end of October. So at this time we are sitting at about 145 client partners.

Of these 145 client partners, 72 are still in their ramp up period. This is important because this group of ramping client partners not only generates current revenue, but it also creates significant embedded future growth as they complete their ramp up over the next few years. In fact, if we were to stop hiring salespeople, we'd expect the existing ramping class to generate more than $30 million of increased revenue in the coming years just from the ramp up alone.

As noted in our previous reports, our goal is to add approximately 30 net new client partners per year. We have a very detailed office-by-office plan for meeting this goal in our direct office and national account practices for each of the next several years.

In this year, as I noted, we are at 145. So we were net 25 in the last 12 months or so. We expect that we will make up the 5 net that we missed last year and add another 30 on top of that in this year. Sometimes just the start dates and somebody falls out or gets sick or something, the net number changes a little bit month to month.

So the first idea is to increase the size of our sales force. We're doing that and expect to continue to do that at around 30 each year.

Second, to have the new client partners ramp up according to the plan. As you can see in slide 4, we are pleased that during fiscal 2013 revenue from client partners and ramp up again exceeded expectations with these ramping client partners generating $41.3 million in revenue in fiscal 2013, compared with our target of $34.7 million.

With the addition of our new sales manager positions in fiscal 2013, who then -- the exclusive of focus which is to help new client partners ramp up, we made really exceptional and accelerated progress in both the ramp up and retention of new client partners in fiscal 2013.

I will just note that the exhibit on page 4 is a ramp up of just client partners in the US, Canada and in our education region. It doesn't include our international direct offices and some of the other specialized sales forces. This is one that we usually measure and report on.

A third metric for our growth initiative is to have the productivity of fully ramped client partners, those that have been with us at least five years, continue to increase. From fiscal 2004, when we began this hiring initiative, through fiscal 2013 our average revenue per seasoned client partner, alumni client partner, those with us five years, has increased from $816,000 in 2004 to more than $1.7 million in 2013. That represents a compounded average growth rate of 8%, which somewhat exceeded the original target productivity expectation that we set in 2005.

Our retention rate for these fully-ramped client partners has also been very strong. In 2005 we had established a goal of having an annual retention rate of 95% of these fully-ramped client partners. And we have been fortunate that it has been very close to that at 94.5%.

The fourth and final metric for this initiative is having the productivity of our international licensee partners also continue to increase. As you can see in slide 5, the gross revenue from our international licensee partners on which we own a royalty of [5.15%] has increased on the left-hand side, and as you can see from approximately $24 million in 2004 to $80.5 million in 2013.

Royalties from these international partners has increased commensurately from $4.5 million to $12.9 million in 2013. Our royalty and new licensee revenue from the licensees continued to increase in fiscal 2013, growing 9.5%.

So that first big initiative of increasing the size and capability of our -- and productivity of our sales force continues to be on track. We believe we have put the infrastructure place to continue to hire and ramp up 30 or so client partners a year in our direct offices and national account practices in the coming years.

We think that most if not all of the basic infrastructure bets are working; investments are working in terms of marketing, sales managers, regional practice leaders, et cetera. And so we feel at this point we've got a good structure. It is working well in our US offices in the US -- and the national account practices in the US.

It is beginning to work also -- these same things have started to be implemented in our direct offices outside the United States, as well as in a few of our international licensee partner operations, since we've got a big opportunity for accelerating the growth where these things are just being implemented. Now I will just give a brief review of our progress on our quality results for clients' objective.

This initiative, the focus of this initiative is to ensure that our content of solutions are best in class and have a measurable, seismic, so to speak, lasting impact on our clients' results. We had made significant progress on our quality objective over the past years and this progress continued during the fourth quarter and for the full fiscal year.

We measure progress on the objective along four dimensions -- high revenue renewal rates; pricing power; growth across our content delivery modalities or methods of delivery; and growth of our various practices. Let me just hit those briefly.

First, revenue renewal rates, we were pleased that our revenue renewal rate remained very high in fiscal 2013 with approximately 90% of our revenue from fiscal 2012 repeating in fiscal 2013.

Second, pricing power, the quality of our best-in-class branded solutions continues to provide us with pricing power across all of our various delivery modalities. That doesn't mean that is typically expensive, but it is premium-priced within the modality. But if somebody wants to have it online, of course, it will be premium-priced for that modality but much less expensive than having it delivered on site.

As a result of this, having these best-in-class print solutions, you can see on slide 6, our gross margins have increased steadily over the past years and quarters. This trend continued in fiscal 2013 with our gross margin increasing to 67.6% from 66.1% in fiscal 2012. And this increase reflected our normal annual price increases of 2% or 3% and an increase in the mix of client employee facilitated purchases.

The third metric for this initiative is growth across our various delivery modalities. We have made very good progress in increasing the flexibility and scalability of our content delivery options over the years. And we have showed -- continued to show strong growth in each of these delivery options.

We utilize a variety of different modalities to reach people from electronic to live, to facilitator-led delivery in 2013 revenue increase to each of these modalities. Revenue from our onsite delivery where an organization hires our training consultants to deliver this on-site, increased 19.7% to 11,000 training days in the US and Canada in 2013 compared to 9200 training days or training engagements in 2012.

These on-site training days often marked the starting point for what become large, pervasive client implementations that include clients licensing in-house trainers who then purchase content in the form of either training manuals, PDF files, IP licenses, electronic or digital delivery in order to embed it. And so we had good growth on site.

Among our licensed facilitators inside companies, revenue from our more than 12,000 active licensed client employee trainers increased 27.8% during fiscal 2013 to $44.4 million, up from $34.8 million in fiscal 2012 reflecting both increased purchases from existing facilitators and the addition of more than 5000 new facilitators inside companies, which we expect will positively impact our results in future periods.

Our technology-assisted delivery also continues to increase significantly throughout the Company. More than 85% of our new licensed client employee trainers now become certified to teach virtually, either online or through Web-based methods. Approximately 60% of our revenue in our execution practice now includes the purchase of a licensee utilize our quote, My 4DX, unquote software to assist in driving pervasive implementation of The 4 Disciplines execution methodology.

In fiscal 2014 this software is being hard-bundled into and included in the pricing of the vast majority of our execution engagements, which will both increase the stickiness impact of our execution offering and create additional recurring subscription service revenue in the future.

Next with the acquisition of NinetyFive 5 in March for our sales performance practice, more than 50% of our sales performance practice revenue is expected to include technology-based implementation tools in the future, including our 5 Online subscription service in the coming years. And in our education practice, more than 1000 Leader in Me online subscriptions were sold in fiscal 2013 compared with 750 in the previous year.

The Leader in Me online subscription provides a school with the tools to continue to make The Leader in Me their school operating system. It creates recurring subscription service revenue and is attached to an ongoing coaching package which aids the school been driving The Leader in Me solution deep into the fabric of how the school operates.

And then the final metric on this initiative of making an impact on clients is the growth in our various practices. As you can see in slide 7, since 2005 each of our seven practice areas has grown significantly. This growth continued in fiscal 2013.

As you can see also in slide 8, we achieved significant revenue growth across most of our practice areas during last year with education growing 64%; trust, 31%; execution, 27%; productivity, 22%; and sales performance, 12%.

Revenue in our customer loyalty practice decreased 7% in 2013, reflecting this multi-quarter decline in revenue related to one large contract which was partially offset by expansion of other clients winning new accounts. We expect that the customer loyalty practice will actually show revenue growth in fiscal 2014.

Revenue in our leadership practice decrease 11% in fiscal 2013, reflecting both the Company's emphasis on our trust practice during the year. The decline in the leadership practice revenue also related to the expected decline in revenue from large government agency contracts and the focus of leadership practice team on the refinement then pending launch at the end of our second quarter of our new leadership offerings, which we well talk about in a few minutes. We expect the launch of our new leadership offerings to drive really significant growth in our leadership practice revenues during the second half of 2014 and beyond.

One additional note on our ongoing R&D efforts, we are committed -- we have a reputation for having best-in-class solutions in each of our practice areas. And we're committed to continue to earn that reputation.

We invest approximately 4% of revenue each year on research and research and development, and have done so each year for the past decade. We invest in additional approximate 3% of revenue each year in practice leadership to ensure their offerings are connected to the right client jobs to be done and that they can be easily implemented by clients. As a result we have relevant, up-to-date, world-class solutions that allow higher gross margins and consistently produce great results for our clients, which leads to the 90%-plus revenue repeat.

In this coming fiscal year we are working on several projects which will support continued growth. Some of these include a new updated version of The 7 Habits of Highly Effective People signature program. And this is a major redo which we believe maintains all of the great things that are in it now, but updates everything else. That is our largest single solution that is sold throughout the world. And this will launch in March.

We're also working on new learning modules for our sales performance practice, expanding The Leader in Me solution and updating our Communication Advantage series while developing several new online learning applications. We believe our product development capability is a key competitive advantage for us and we are committed to keeping it so.

So finally, I'd just like to give a few comments on our outlook. Each of our key momentum indicators continues to be very positive. And the momentum in our business has never been stronger. It continues to be both strong and broad based.

Our corporate pipeline, booked days and order revenue continues to be strong. During our very strong fourth quarter, in which we grew 20.7%, more than $10 million, a significant portion of our pipeline of booked days that had been on the books at the end of the third quarter was actually converted into revenue in the fourth quarter, which is great. That was a fast conversion cycle.

Despite the tremendous amount of revenue delivered during the fourth quarter, strong new bookings resulted in our corporate pipeline of booked days and awarded revenue into the fourth quarter remaining equal to that we had at the same time last year, but despite that we had $10 million more revenue in this year's fourth quarter, as you can see in slide 9.

With strong continued bookings to date in our fiscal first quarter, our pipeline of booked days and awarded revenue has increased to $29.6 million as of the end of October and we expect continued additions during November.

In the green part of that same slide 9 our government contract pipeline of booked days and awarded revenue related to a specific large government agency contract. And it declined to zero at the end of 2013, only because there was a change in the contracting timeframe. So the old contract ended and the new one -- the government didn't rebid this contract until the first quarter.

The contract renewal process occurred in the first quarter, in September, and we were very pleased to be awarded renewal of that contract. As a result, as you can see in slide 9, approximately $4.5 million of awarded revenue related to that contract was added to our pipeline of booked days and awarded revenue as of the end of October.

Our prospective business pipelines, which as you know is a measure of the amount of potential new revenue currently being discussed with and proposed to existing potential clients, increased significantly during the fourth quarter compared with last year and reached record levels in our US geographic offices, and in our direct offices in Japan, Australia, and the UK and in our national account practices. These prospective business pipelines are one stage earlier in our business development process than our pipeline of booked days and awarded revenues and have historically been very strong predictors of the likely strength of our bookings and revenue in the coming months and quarter.

In fact, the conversion of this large prospective business pipeline at the end of the fourth quarter has already begun to translate into significant new contractual bookings and revenue in our first quarter of fiscal 2014. So we are very encouraged by the strength in our 2013 results, by the momentum we're continuing to see in the business, by the continued growth in the size and productivity of our direct sales forces, by the growth in our international licensee partner operations.

And despite continued softness in our government business, which we expect will turn some this year with the awarding of the new contract, we believe it indicates very strong growth for the coming quarters and for fiscal 2014 as a whole and beyond.

We are setting our fiscal 2014 full-year adjusted guidance range at this time at between $35 million and $37 million. It provides a similar range as we did last year, the low end of the range being up about 10.8% and the higher end of the range being about 18%. And we will provide additional updates of course, as the year moves forward, but we feel comfortable that our results should fall within that range.

To provide some insight, just as part of this outlook, on the likely spread of our expected increase in revenue and adjusted EBITDA, maybe just ask you to refer to slide 10, which as you can see provides an overview of our historical spread of business throughout our fiscal year. This historical spread suggests that a disproportionate amount of our total adjusted EBITDA and our growth in adjusted EBITDA would be expected to occur in our fiscal second, third, and fourth quarters. This normal pattern actually is likely to be even more pronounced in fiscal 2014 due to five factors.

First, the very large fourth quarter we just had in fiscal 2013 included some revenue that we had anticipated might have been recognized in the first quarter was just due to the timing of contracting came into the fourth quarter. And that will reduce the growth rate in the first quarter some.

Second, the impact of the temporary government shutdown. Although we won the rebid of the major government contract in mid-September, while the shutdown was relatively short, the startup has taken a long time. Because of that and the time required just to get the government functioning basically again, and rebooking postponed training dates, despite winning the contract we were not able to recognize any of that awarded revenue in September and October. And while we haven't lost it, it will still be there, we expect that we will begin to recognize revenue from that contract through November, but we will have lost those two months that we might have had booked.

Third, impact on the first quarter will be the year-over-year decline in the yen relative to the dollar that started in last year's second quarter means that despite expected solid revenue growth in our Japan direct office in local currency, in yen, there's likely to be a decline in revenue in US dollars during the first quarter.

Fourth, we tend to hire a lot of our new salespeople at the start of our fiscal first quarter so they can begin sales school and attend our sales kickoff meeting at the end of September. So the expense associated with increasing our number of new client partners has a disproportionately large impact in Q1.

And finally, a tenant vacancy in our campus during the first quarter will reduce other revenue and the contribution to adjusted EBITDA from leasing. Consequently, we would expect that almost all of the strong growth in adjusted EBITDA we expect to achieve in fiscal 2013 will occur in our second, third and fourth quarters, with our first-quarter adjusted EBITDA being essentially flat or slightly down or slightly up compared to last year's first quarter, depending on the timing of the government getting going and a couple of other contracts.

Importantly, we expect that some of these factors which will flatten the first quarter will actually provide a very positive tailwind for us in the future quarters including the following. One, we expect the revenue ramp up of new client partners hired at the end of last year in our first quarter to really begin to bear fruit in the second, third and fourth quarters increasing revenue and the increase of flow-through also. Their revenue will flow through because they have pretty much fixed costs in their first year.

Second, government, after two years of revenue declines in the government business primarily related to the expected maturation of a particularly large government contract, but also affected by other governmental things that have been going on, we now expect with renewal of this large contract another opportunities we have been pursuing and winning in the government, our government business will grow again during the balance of fiscal 2014.

Third, the effect of foreign-exchange, the yen, the big increase in the value of the US dollar relative to the yen occurred during our fiscal second quarter last year and has impacted each quarter since. After December of this year, however, the negative impact of that devaluation on our otherwise strong and growing Japan operations, which grew 17% in local currency last year, is likely to be much less than last year, possibly even turning positive later in the year.

So all in all, with the success -- with the traction we've had, the size of our pipeline, the launch of 7 Habits, these factors that should be going for us during the second, third and fourth quarters, we feel very good about the momentum, about what we are seeing in the business and our expected growth during fiscal 2014 and beyond.

Want to thank each of you for your continued support and guidance and like to now turn the time over to Steve Young, our CFO, for some brief remarks.

Thank you, Bob. Good afternoon, everyone. I'm pleased to be able to give you some bit of a summary of our financial results. So, for those of you who like numbers, here are some additional numbers to the ones that Bob talked about.

So our revenue, slide 11, in the four years since the end of our fiscal 2009, a time when many in the performance improvement industry have struggled to grow, we're pleased that our revenue has grown from $123 million to $191 million, an increase of $68 million, or 55% during that period.

For FY 2013, revenue increased $20.5 million to $190.9 million, an increase of 12% compared to last year. In the fourth quarter revenue grew $10.6 million, or 20.7% compared to the prior year's fourth quarter. A breakout of revenue for each of our channels is shown in slide 12.

Adjusted EBITDA, slide 13, for the fourth quarter adjusted EBITDA increased $2.9 million to $12.5 million, a 29.8% increase compared to last year's fourth quarter. For the year, adjusted EBITDA increased 16.1% to $31.4 million compared with the $27.1 million of adjusted EBITDA last year. Adjusted EBITDA for both the year and the fourth quarter were the highest ever for our current business.

Income from operations on slide 14, for the fourth quarter income from operations increased 17% or $1.3 million to $9 million. For the year, income from operations increased 22.9%, or $4 million, to $21.6 million.

Net income, slide 15, for the fourth quarter net income increased 127%, or $4.3 million to $7.7 million compared with the $3.4 million in net income achieved last year. For the year, net income increased 83%, or $16.5 million to $14.3 million. This increase in net income is due to the significant increase in operations and a significant decrease in the effective tax rate.

Diluted net income per share for the fourth quarter, diluted net income per share increased 161%, or $0.29 per share, to $0.47 a share compared to $0.18 per share last year. For the year, diluted net income per share increased 86%, or $0.37 a share to $0.80 a share compared to $0.43 a share last year.

Cash flow, net cash generated, slide 16, for the fourth quarter our net cash generated increased 25% or $2.1 million to $10.4 million compared to last year's fourth quarter. For the year, net cash generated increased 10.6% or $2.3 million to $24.5 million.

Our adjusted EBITDA to sales margin, which is slide 17, shows that our adjusted EBITDA margin expanded for both the fourth quarter and the year. For the fourth quarter the flow-through of increased revenue to adjusted EBITDA resulted in an increase in our adjusted EBITDA as a percentage of sales to 20.3%, up from 18.9% for the same quarter a year ago. For the full year, despite significant year-over-year staffing investments, the things that Bob talked about, our adjusted EBITDA as a percentage of sales expanded to 16.4%, up from 15.9% last year and 13.2% in 2011.

With the expected continued strong revenue growth and high flow-through of incremental revenue to adjusted EBITDA, we expect our adjusted EBITDA as a percentage of sales to continue to increase and should reach approximately 18% on a full-year basis in a year or so.

Our ongoing investments -- we are particularly pleased that these operating results are being achieved while we continue to make significant investments in growth for R&D, fastest leadership, marketing, hiring our new client partners, training consultants and event marketing people, and building our -- and training infrastructure for direct offices as well as helping our international licensee partner growth. While these investments totaled more than $18 million in FY 2013, we are pleased that we're still able to see significant growth in all the areas of our financial statement.

We see significant opportunities for growth. We believe that we will be able to continue the high returns from our continued investments in all of these areas.

For the fourth quarter, our flow-through of incremental revenue to incremental adjusted EBITDA increased 27%, as Bob and I both mentioned before. We expect that our flow-through will be sufficient over the next year or so that we can reach the stated target of 18% adjusted EBITDA to sales margins, which is something important to us.

Additionally, if you look at slide 20, you will see the certain financial -- or the 2014 estimates that we normally give at this time, we just put on slide 20 rather than taking the time to talk about them. So we're pleased with our results for this quarter and for this year.

Like to now invite Shawn Moon, who heads all of our direct offices and our execution, trust and sales performance practices, and also Sean Covey, who heads our education and productivity practices, our international licensee partner network and our innovations group to give us comments about the major channels. Mr. Shawn Moon.

Thank you, Steve. Good afternoon. Revenue in our five direct offices in the US and Canada, including our government services region, grew 9.9% in the fourth quarter and 11.9% in the full fiscal year 2013.

Revenue in our four geographic offices which excludes our government team, grew 22.8% in the fourth quarter and 18.4% for fiscal 2013 as a whole. Revenue in our government services region decreased $1.9 million or 28% during the fourth quarter and $2.1 million, or 11% for the year. As Bob previously alluded, the federal government shutdown was very disruptive to our government services business.

Revenue in our direct offices in Japan, the UK, and Australia increased 14.1%, or $1.1 million in the fourth quarter despite a $1.6 million negative impact on revenue on the year-over-year decline in the yen, as Bob mentioned.

For fiscal FY 2013 as a whole, revenue in the international direct offices grew 2.7% with a 13.6% increase in revenue in Australia; 1.6% increase in revenue in the UK; and a 0.8% increase in revenue in Japan despite the negative foreign-exchange rate related to the impact of the $3.1 million in Japan.

In yen, interestingly, Japan's revenue grew 16.9%, and EBITDA 38.2%. So excluding this foreign-exchange-related decline, revenue for the year in these direct offices grew 14.5% or $4.2 million.

As noted, the investments we have made in the US geographic offices including investments in new sales hires, the addition of a sales manager position in each region to help ensure and accelerate the new client partner ramp up, marketing events, regional practice leaders, et cetera, resulted in revenue growth in these offices of 22.8% in these offices in the fourth quarter and growth of 18.4% for the full fiscal year, 2013.

We have started the implementation of these investments in our international direct offices and expect to drive accelerated growth in these offices in the coming quarters and years.

Revenue in our sales performance practice increased 82%, or $1.4 million in the fourth quarter, reflecting partially an increase in revenue related to the acquisition of NinetyFive 5 at the beginning of the third quarter. For the full year, FY 2013 revenue in the sales performance practice increased 12%, or $1 million. As you know, shortly after the end of our fiscal second quarter we announced the acquisition of the sales for transformation company, NinetyFive 5, as a strategic addition to FranklinCovey's sales performance practice.

We believe this acquisition positions FranklinCovey sales performance practice to be one of the world's largest and best sales enablement companies. Not only did this acquisition almost double the size of our sales performance practice, it also added that technology-based subscription service component to support and implement Franklin Covey's award-winning sales methodology.

In as much as NinetyFive 5 has been a successful licensee of FranklinCovey sales and leadership training content for the past six years, the integration of both companies' methodologies and organizations are expected to be highly synergistic for our clients.

Sean Covey.

Can you hear me okay?

We can. Loud and clear.

I am at an airport if you hear some planes taking off you will know why. So good afternoon, everyone.

Let me begin by talking about the education practice. And our education practice continues to generate great results. And revenue in our practice grew by 66% or $4.9 million in the fourth quarter, and for the year we grew by 64%, or $9.2 million. That is for fiscal year 2013 overall.

And over the past five years our education practices grown from approximately $5 million to over $23 million. And we anticipate that we can continue this rapid growth over the next foreseeable future at least.

We've now signed up over 1600 schools in our whole school transformation process that we called The Leader in Me. And we believe the primary reason for the growth is due to the performance results that schools are consistently reporting, including things like increased test scores, increased student self-confidence, greater teacher and parent satisfaction, declining discipline referrals, and school cultures that people want to be a part of.

We are now also beginning to penetrate large urban school districts such as the Boston public, the Chicago public, and New York City public school systems. And we believe we have a relatively inexpensive, unique solution that's perfectly meets the challenges that school systems are struggling with right now.

Mainly we're seeing a lot of burned-out teachers and administrators; low test scores; kids who are either dropping out of school or they are graduating but they are unprepared for the demands of the 21st century.

And we are also finding that these kinds of challenges are not unique to the United States. They are very global, and as a result, we now have The Leader in Me moving into many other countries. We are in over 25 countries now outside the US.

And we continue to sign up distribution partners in these countries to help us implement and scale faster. In Brazil, for example, we've partnered with a company called Abril Education. They are one of the largest education companies in Brazil. And they currently have The Leader in Me installed in over 100 schools with plans to take it to several thousand schools.

We also have signed up distribution partners in Taiwan, Angola in Africa, China, the Netherlands, and we have many others.

I've been asked the question a lot, well, where do the schools find the money to pay for it The Leader in Me? And we find many of the schools find their own funding. They get it from Title I grants or other school-based sources.

But we also get a lot of help for schools -- we help them get access to funding from education foundations, chambers of commerce, large organizations who are very interested in community development, higher education institutions, and also federal grants. As well, we discount our solutions to make it more affordable and scalable as much as we can.

We believe the work we are doing in education is very inspiring to our Company. It's also inspiring to our corporate clients who see what we're doing and are excited by it. And it helps drive our mission, which is to enable greatness in people and organizations everywhere.

So our big picture mission and vision is to significantly help transform the education system in the United States and beyond. And we hope to start and education movement around the world with students and also leadership.

So a brief update now on the international partner network. Our international licensee partner network now includes 50 partners. This time last year we had 44. And this represents operations in over 150 countries. And as was mentioned, each licensee partner pays us a 15% royalty on top line revenue.

Royalties from these partners grew 13.4% in the fourth quarter and 9.5% for fiscal year 2013 as a whole. This growth reflects our continued penetration in our Asia-Pacific region, particularly in China, Indonesia, India and Thailand as well as real strong growth in Brazil, Mexico and Central America, and the Middle East region.

We have found it more difficult to grow in Europe over the past several years. This has probably been because of the softness of the European economies. But more so, it is the fact that we don't have many strong licensee partners in many of the major European economies at this point. And we will be working to strengthen and expand our licensing network in Europe in the coming years.

Also excited about the growth we are experiencing in Africa and the seven new partners we have signed up during the last year including partners in Kenya, and Botswana, Uganda, and Tanzania. Our partner network has been one of our most consistent areas in the Company and we've had strong annual growth for the past nine years.

We continue to have significant opportunities for growth of licensee revenue in each of the following three areas. First, building untapped markets. We have plans to activate and build each and every market.

There are currently many large markets we have barely even touched that present large growth opportunities. This would include markets like Russia, France, and Italy -- big markets but we're doing very little there at this point. As well, we're just beginning operations throughout Africa, as I mentioned, throughout the entire continent, which is showing a lot of promise.

Second, growing our sales force. We're teaching our partners how to implement best practices around expanding the size and increasing the productivity of the sales forces, just like we are doing it in the US. And the best practices that we refine in the US are just starting to be implemented among our partners and represent a lot of low-hanging fruit.

And then finally, we believe we can grow significantly by expanding our practices with our partners. We are helping our partners expand into new practice areas. And the majority of our revenue right now is coming from one practice, which is our leadership practice, and so we see a lot of room for growth as we begin to build out the other six practice areas.

This coming year in particular, we're going to be focused on growing our execution practice, education practice and our sales performance practice with our partners. And we will move to the other ones down the road.

So that wraps it up for the partners, as well. Thank you.

Thanks, Sean, and we will now open it up for questions.

(Operator Instructions) Joe Janssen, Barrington Research.

First off, congratulations on a great quarter and a great year. Just want to get a little more visibility into the sales force given this is a very important part, piece of the puzzle, to the overall story. You talked about your net is about 145 client partners, of which you had 25 new in the year. And then you also talked about 72 that are in the ramp up right now. Does this 72 include the 25 net new hires?

It does.

It does. And the majority of that 72, just for my modeling purposes, are in year one, year two, year three and it trails off in year four and five.

Yes, you have 25 of the 72, about a third of them in their first year and the rest are spread across the ramp in different stages. But if you go back, we hired 25 net last year; 22 net the prior year; 18 the year before; and 12 -- so you can get the relative buildup of how that would go.

Appreciate that. And then the 70 or so that are seasoned, can you talk -- is there any -- you seem to have been able to move the needle in terms of productivity or has that still been holding the line? Or anything you can do there? Or is it a function of they just have -- they are seasoned, they have enough contacts out there, it's just too much to handle?

No, in fact, their productivity has grown a lot -- that's a great question. The productivity of that group has already ramped up. It's gone from a little over $800,000 in 2004 to $1.7 million this last year.

And really, that is compounded average growth rate of a little over 8%. Their productivity growth has been good every year. Some years above 8%; very few below; a couple below. But it has been good.

And so I think really their capacity -- we think there's a lot of opportunity for growing the productivity of the existing people. Once they get to full ramp up they will continue to grow. I don't know, Shawn, if you want to add to that. But our top salespeople are doing more revenue now than they have ever done.

Yes, [the 8%] is when they were growing and then once they hit maturity can you give any kind of color of what that looks like five years in?

I didn't do a good job. During the ramp up, obviously the revenue growth is a lot faster than that. The 8% is after they are fully ramped. So once they've gone through the whole ramp-up period and get to the $1.3 million target, then their average annual productivity growth has been 8% thereafter. Does that help?

Yes, that does. I appreciate that.

Sorry, I didn't make that very clear.

Joe, our nomenclature around that is if they have been around for over five years we call them our alumni group. And our alumni group has been at 8%.

Compounded for all those years.

And then I just wanted to focus on Sean's commentary, he talked about Europe with the licensee, the partners over there has been weak, maybe not the right word, difficult to penetrate, weak partners that you have. I would think Europe that has got to be ripe for the offerings that you guys offer to these potential clients.

Are you looking for -- is it a marketing -- in terms of attracting new partners -- the existing partners you have there, it sounds like they are maybe performing, underperforming to expectations potentially, given the environment. Is there anything there you can do to reach out to new partners? What is the marketing effort there?

Sure. Well, it's a combination of some of the partners not performing well and having to replace a couple and then the fact that we really are just quite young. We focused more on Asia where the bigger economies are and haven't focused as much here.

But so I think like right now we are looking for new partners in a few countries, in France and Italy, both large economies. We have a brand-new partner in Russia. The partner we had there for many years, we finally felt that they weren't growing fast enough, didn't have the right setup to succeed. So we had to replace a partner. So we are starting over there.

But we see no reason why we can't grow Europe like we're growing everywhere else. I think that the economies are struggling some more, especially in the South. But that's not the reason for the lack of growth.

We are so underpenetrated, I'm not worried about economies right now. It's just getting big key players in place in these bigger economies and replacing two or three of our partners.

We have partners in the Nordic region and in the Netherlands that are great. They are superstars and they are growing consistently, and they are part of the reason we have been growing a lot. So we know it can be done.

How big is Europe in terms of licensee revenues?

Well, the $80 million we do, Europe is about 30%, so about $25 million. And so we think there's still a lot of opportunity here and we're going to focus on it. So it's finding two or three new key partners and then getting our other established ones to continue to grow.

Okay, and two more questions if I can, before I jump back in the queue. Big picture, last year I think you gave out -- you thought you could get the licensee business to $30 million by 2020. You grew that business 8% to 9% in 2013. Is that still an achievable goal?

Yes, we think it is. Our goal is to get to $200 million in 2020. And we're going to need to grow at about 14% to do it. This year we didn't quite meet that. And it was -- a lot of it was due to a particular partner that hurt us pretty badly.

But we believe we can continue to grow at double digits based on the three areas I mentioned -- new practices, getting operations in every country, and the sales force ramping. We are trying -- we're taking our best practices learned in the US and we are continually applying them. We are going country by country and we're seeing great promise as we codify these best practices and implement them in different countries.

Brazil, for example, has been doing terrific and they are adopting all of the US best practices. It's working well. Still a young business for us but they are about a $7 million business. We believe they can grow to be a $25 million business -- see no reason why we couldn't get there. I hope -- does that help?

Yes, it does. And one last question, I will jump in real quick, maybe just update on any interesting acquisition potential candidates out there? And secondly, the $10 million buyback, did you buy any shares during the quarter? And at these levels is it still interesting?

So in terms of acquisitions I think that's something -- we think in a subsequent quarter we can give a little bit of an overview of our thoughts about acquisitions. At all times we're having people contact us, bringing us things that might be of greater or lesser interest.

What tends not to have very much interest, since we can hire and ramp up salespeople get all your money back from a one-year payback on our investment, we tend not to be that interested in acquiring just more distribution for existing offerings. But from time to time you get an interesting offering that could fit within our portfolio, also have some distributable capability with it. And I would expect as time goes on there will be additions as we have had a couple over the years that we'll have additional pieces added, bolt-on acquisitions to existing practices and perhaps the acquisition of an add-on practice.

Steve, on the last question on the buybacks issue.

Joe, even though we didn't buy shares on the market under our buyback program, we did spend, when you see our cash flow statement, $1.3 million on shares during the year. What that is primarily, when the warrants came due and when certain share-based awards are available, we again, spent $1.3 million essentially, to reduce the outstanding share count, though not in the open buy program.

In terms of the attractiveness for us, we think the repurchase would be very attractive at current levels. It's more you see where the capital has been invested this year we made the acquisition.

We have payments under the previous acquisition; primarily funding working capital in the fourth quarter, third and fourth quarter with the big revenue increase. So we will end up with a lot of cash about the end of December, early January. So stayed tuned on the stock buybacks.

Maybe we ought to -- thanks, Joe, so much for all your questions.

Jeff Martin, ROTH Capital Partners.

I'd like to echo compliments on the quarter. Can you give us some insight into education? I know it was a really big number in the quarter. Just curious how that plays out, from a seasonality point of view, if education is going to really move to the next level or if there's something anomalous to Q4.

You want to take it?

Yes, sure. 52% of our revenue hits in the fourth quarter consistently. So we grew for the year about the same rate that we grew in the fourth quarter, about 65% or so. So education is doing really well. It will continue to grow fast.

The opportunities are immense. Our market penetration is 1%. So we think we can continue to grow.

But the fourth quarter is an anomaly. And what happens is we do a lot of the selling during the school year and then, because there's not a lot of professional development days available in the school year, we do a lot of our training in the summer in June, July, and August, which is our fourth quarter. And hence we have a big spike in the fourth quarter.

As well, all of our renewals for things like coaching and our Leader in Me online comes in the fourth quarter. So it's been consistent for the last five years. About 50% of revenue hits in the fourth quarter. We expect it to continue to be like that.

And then staying with education, as this program becomes more and more successful, are you anticipating some copycat programs out there? Are you seeing any competitive threats out there? I think at some point you could come across that.

Yes, we expect it. We are starting to see some, but there's so much to this. I think we've got some pretty big moats built around it -- a sophisticated process, The 7 Habits which is like the Intel Inside, a lot of momentum. I think it would be pretty hard to copy.

But in Boston school systems we recently saw somebody come in claiming to be similar to us. We looked into it and didn't feel like it was too much of a threat. But we're expecting more to come.

But right now, given this is an elongated, integrated process with some real unique branded content, we think it's going to be quite difficult to copy. I don't think that's our biggest worry right now. Our biggest worry is just maintaining the quality, because we find if we can go into school districts and take five schools and do well with them that we'll have access to another 100 schools.

So, currently we are in New York City. We started with one school out of -- there are 750 schools. And then got to -- it was named the number 1 school in the district. And then we went to 15 more. Now we have an opportunity to get to 180. So the key is continuing to drive quality results and that just -- you write your own ticket if you do that.

Jeff, just context real quickly, there are about 101,000 K-through-6 schools in the US and Canada. And so although it is in a lot of schools, we've now crossed over 1% penetration mark. And so we're really trying to make sure that pod by pod, we're doing a good job, school by school, district by district.

And -- that way be a winning strategy whether are not others might join to take some -- to pursue these other 100,000 schools we don't have.

Sure. I know we're running short on time. Let me just ask one more question and then I will hop off.

Bob, as we look at SG&A, understandably you made quite an investment in the sales infrastructure this year. The SG&A as a percent of revenue did pick up. Do you expect quite a bit of leverage in 2014 and 2015 on the SG&A line?

We do. Yes, we do. And we're budgeting for it. So I think you should expect to see a -- really, the short answer is this. With the addition of every new salesperson there's some infrastructure. There's a fractional client service coordinator; a fractional regional practice leader; a fractional IBP.

But what we did last year with the addition of little over 100 people, only about 25 of which were salespeople, we added the 75 support people in event registration and internal business partners and marketing and so forth. This coming year, we think it will be more like 1 to 1. So if you add 25, 30 salespeople, you will add 30 total support people.

And by next year, you add 30, you will add probably maybe two-thirds -- one-half to two-thirds of a person. And so we think it will be very leveraged going forward. It has been in the past.

We just decided if we were to step up to the next plateau of growth at 30, move to the next level to be able to higher 30, we needed to make the investment. We think now actually to move up to 40 or 50, you won't have that big one-time. You'll just have to continue to invest incrementally in these positions.

Okay, great. Keep up the good work, guys.

Marco Rodriguez, Stonegate Securities.

I have just a couple here real quick, high-level type questions.

First, Bob, maybe you can talk from a strategic standpoint, curious here as to where you are spending the most of your time today versus last year.

Great. The two big priorities I would say are these. The first is we don't want to lose sight of the fact that of the 93,000 companies or company units that have at least 200 employees in the US and Canada, we currently have 3700 as customers.

And so the number one thing, we're not claiming victory in the US. We are claiming progress. And with 18% to 20% growth in our direct offices in each of the last quarters, the number one priority is to make sure we refine the system and accelerate the growth in the US.

The second is very similar to it, which is to institutionalize the same system in our direct offices internationally and among our international licensee partners. So the topic we're spending almost all of our time on is that hiring in ramping up of salespeople, whether it be in the US or otherwise. And then the other big focus is on making sure -- so that's the one side. Those are the first two channel priorities.

And on the other side it is content side, making sure the thing we talk about every day with our practice leaders is quality results for clients. It's the number one goal. And so those are the two things. Have great serum, delivered well, make sure that it works for the patient and then dramatically expand our ability to distribute it.

Got it. And Shawn, wondering if you can maybe provide us a quick update here. You guys have spent a lot of time last year building the infrastructure to support all the client partners. Where is that team with regard to your expectations and what are the top couple items that you are focusing on now with them?

We are pleased with the direction that it is headed. In fact, as you look at one of the things I think you and I talked about before was the sales management role, sales manager role. And one of the dilemmas that we have was we've looked at span of control and how we provide the right kind of coaching and mentoring and development, so that we actually get a return on this pretty massive investment of our client partners.

And so we're actually -- believe we're a little bit ahead of schedule. If you look at the production per client partner and the production of our new client partner relative to what our goal was and what it had been, we're encouraged by that. But it also represents -- we have a lot of opportunity for continued progress there, Marco.

And so that represents probably the biggest area. How do you maintain and actually grow 30 client partners a year? One of our GMs recently said to me, actually as recent as yesterday, he's looking at the map, he's looking at the model and seeing the impact of this, seeing the success of our plan.

We call it the sales go-to-market wheel which represents what the client partners do and how do we support them, such that they can actually ramp up and continue to grow both our new and our alumni client partners. And he is looking at this and saying, gosh, I actually think I could add more client partners than the plan.

So we will take a look at that. We're not going to grow faster than we'd -- we are not going to run faster than we can walk, but we're pleased that that is reaction from people, rather than saying, gosh, slow down I can't do enough. This is too fast for me.

The infrastructure is not perfect. We're constantly refining, as Bob said, spending all of our time on this, and we do spend all of our time on this. But we are pleased with the progress that we're making, the adoption, the buy-in, and then the results we're getting from it. So that's a long answer to your short question.

The short answer is, we see great progress and we have more work to do.

Got it. Thanks a lot, guys.

Sarkis Sherbetchyan, B. Riley & Co.

To start off with a housekeeping question, is it possible to break out the cost of revenues between training and consulting services versus products? And I think you had a third line item of leasing which is probably smaller.

Yes, in fact it is. Go ahead, Steve.

On our K, when you see our K filed next week, we will have that. I don't have it sitting in front of me, but you will be able to see that, yes, when we file our K.

Okay, thank you. I was just trying to see if I could get that right now.

And then next, can you give us some color on what you're seeing real time out there as it relates to training budgets?

Sure. Shawn, do you want to --?

I will be happy to provide my perspective. If you go back a few years there was this belief that training budgets would continue to decrease over time and that there would be more and more demand on e-learning. In fact that instructor-led training, or ILT would virtually go away.

And we're seeing that actually that is not the case, that there is as high a percentage of training budgets being spent on instructor-led as there ever has been. And there's more and more pressure on quality e-learning delivery, so that if you do take the modality, it delivers the kind of results that you need.

We're seeing the budgets themselves -- they are maintaining. We are not seeing a massive decline in the training budgets, nor are we seeing a massive increase.

I think it was 5% to 6% last year was the report, industry report, so it's modest. For us, there are two opportunities, though, I think. One is competing for the portion is outsourced which is the minority, is the smallest portion of the training budget. The bigger portion is what is done inside.

So for us, we design our offerings so on one hand they can be integrated solutions that are delivered throughout an organization, that would be part of it. And oftentimes, actually, those don't even fit within the training budget. Those are out of the operating budget of companies.

So our goal is to move to operating budgets versus training budgets, even though they are growing, and second, to be able to integrate our content by selling people intellectual-property licenses that they can now integrate our content into their big part of the training budget, which is what they do inside.

And so for us, having best-in-class content is the lead, gives us an ability to operate outside of whatever the normal training industry is doing. And our execution practice, our sales performance practice, and are customer loyalty practice, none of that comes out of training budgets. It's all in operating budgets, trying to improve some business outcome. And so I think -- I don't know, hope that is responsive.

I think Bob noted in his earlier piece that as you look at the internal delivery and that which represents our biggest competitor, the product or offering we have that serves that is our client facilitators. And I think you noted that we actually grew that base by 5000 additional facilitators this year.

I think Steve has the answer to your earlier question.

If you have a pencil, I can give you the numbers you asked about earlier.

To break down our $190.9 million, it is $178.7 million training and consulting; and $8.1 million products; $4.2 million leasing. And the cost of sales is $56.9 million training and consulting; $3.1 million products and $1.9 million leasing.

Thank you very much. Those are both helpful. And then one final one, if I may sneak that in, I know we're running short on time.

So with regards to the government shutdown, you did mention that it has an impact heading into this Q1. Did you see any revenues get pulled into Q4 from Q1? And also if you can maybe describe magnitude if that is possible.

Yes, two things. On the government side, we didn't have first quarter revenue pulled into fourth quarter and the impact was bigger than you would have thought in the first quarter, just because the government shutdown -- with the shutdown they stopped training. And when they started back up they were just doing normal -- getting the business back running in before they started scheduling.

In terms of the overall Company, the pull forward, you never know when you're working on big contracts exactly the date when they are going to get hit. We probably had about $1.5 million of revenue in our fourth quarter that would have been in the first quarter; it was high-margin revenue but it is something of that magnitude.

One other note on the government shutdown, not only does it have an impact on our revenues from the government specifically, but other revenues we have with other government contractors.

Okay, understood. Thanks and good luck for the next quarter.

Jim Larkins, Wasatch.

My questions have largely been answered. Just wondered if you could give some guidance on tax rate and if that reflects also your true cash taxes you are paying.

Our tax rate, our reduced tax rate is more reflective of the amount of cash that we actually pay, because we are still benefiting from unused foreign tax credits. So when we elect to use our foreign tax credits is the time that it benefits our effective tax rate.

So we went through three quarters of the year looking at around 40% effective rate. And then it ends up being over 26% for the year, which is a positive. That is a result of us in our fourth quarter being able to elect to use previously unrecorded foreign tax credits.

So as we go throughout next year, we will begin the first three quarters most likely in a similar fashion of recording 40%, 41% effective tax rate. And then if it is beneficial to us and the facts and circumstances support it as being acceptable, then we could in our fourth quarter elect to use some of our unused foreign tax credits again and see a decrease in that rate in the fourth quarter.

And is that -- do you have sufficient amount of credits in that bucket that that is something that could repeat for a number of years? Or does it get regenerated every year and it just -- it really depends on the circumstances?

Our normal foreign tax credits are included in our effective rate of about 40%. The unused tax credits that allow us to record 26% rather than 40% is a pool of credits that will diminish within a couple of years.

Okay. All right, great. I think that's all I have. Thanks a lot.

And we have no further questions at this time.

Great. Well, sorry that we've gone over a bit, but we appreciate all of your great questions; appreciate your support. Again as we had our kickoff meeting here a month or so ago we, on one hand, we're celebrating a great year and a great series of years.

But we really -- our message was we're not -- it's not like we're at the finish line. We're just at the starting line of the new game which is -- the new game is we've spent all this time investing in infrastructure, strategy, people, et cetera. We're now in the -- we hope in the inflection point for growth which was shown in our US direct offices, these high-teens growth rates for the year and higher than that in the fourth quarter.

We think that's the model we are looking for in the future. So we're hopefully we're at the start of an inflection point that will allow us to really grow and just an execution bet now on what we already are doing.

So thanks to each of you and we will look forward to answering any of your questions if you want to call us directly. Thanks.

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