Franklin Covey Co (FC) 2015 Q1 法說會逐字稿

Welcome to the first-quarter 2015 FranklinCovey earnings conference call. My name is Bakiba and I will be your operator for today's call. (Operator Instructions). Please note that this conference is being recorded. I will now in the call over to Derek Hatch, the Corporate Controller. Derek, you may begin.

Thank you, Bakiba. Good afternoon, ladies and gentlemen, and Happy New Year. On behalf of the Company I would like to welcome you to our first-quarter fiscal 2015 earnings conference call this afternoon.

Before we begin I would like to remind everybody 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; changes in the training and spending policies of the Company's clients and other factors identified and discussed in the Company's most recent annual report on Form 10-K and other periodic reports filed with the Securities and Exchange Commission.

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

Thanks, Derek. I would like to welcome everyone to the call and appreciate you joining us. As you know, in November we reported our strongest fourth quarter and fiscal year ever for our current business and we were pleased to have continued to build on that momentum in the first quarter of fiscal 2015.

With the positive momentum we have continue to have in the business and the expected positive impact from our first-quarter growth investments, which, as you know, are quite front-end loaded, we are very excited and confident about the both the direction and performance for the business overall. For that reason we feel confident reaffirming our previously announced annual adjusted EBITDA guidance of $37 million to $40 million for fiscal 2015.

I'd like to just briefly today discuss the quarter and provide some detail on the factors that impact the first quarter and how we expect these factors to reverse or moderate in the coming quarters. Second, review our progress on our key growth initiatives including our sales force growth and productivity. And finally, address the momentum and the underpinnings of our confidence in the guidance.

So first a discussion of the quarter. We are really pleased to have achieved revenue growth of 10.3% in the first quarter getting to $47.9 million, which is our highest ever first-quarter revenue for the business. We were particularly pleased actually to achieve this growth after absorbing more than $700,000 revenue impact caused by foreign exchange fluctuations.

Had foreign-exchange remained neutral year-over-year revenue for the first quarter would have grown to approximately $48.6 million which would represent a growth of 12%. So we felt very good coming out of the block strong on top of a very strong fourth quarter.

Our revenue growth also was very broad-based. As you can see on slide 3, despite the negative impact of foreign-exchange revenue grew in all of our major channels, both for the quarter and for the trailing four quarters, including in our direct office in the US, our international direct offices, National Accounts practices and international licensee partner operations.

As you can see on slide 4, revenue also grew in each of our practice areas for the quarter with sales performance growing 26%, customer loyalty 16%, education 13%, execution 2%.

We were also pleased that after putting disproportionate focus on the launch of our re-created 7 Habits 4.0 offering in last year's second, third and fourth quarters, all of the practices in what we call the HR suite, which include our leadership trust and productivity practices, achieved strong growth during the first quarter with the trust practice growing 14% and the leadership and productivity practice each growing 9%.

For the trailing four quarters we achieved revenue growth in almost all of our practice areas as well including customer loyalty which grew 33%, education which grew 25%, sales performance which grew 22%, including one quarter of that four quarter period which was impacted by the acquisition.

Execution revenue declined 1%. Revenue in our HR suite practice in the aggregate grew 11% for the trailing four quarters led by 23% growth in our leadership practice reflecting successful re-launch last year of the re-created 7 Habits offering, which of course impacted our productivity and trust practices during the second and third quarters.

As you -- finally, as you can see on slide 5, over the past five years while revenue in some quarters has grown more rapidly than in others, of course we're pleased to have achieved year-over-year trailing four quarters revenue growth in every quarter. We were really pleased that this trend continued in the first quarter where trailing four quarters revenue grew 10.2%.

As you can see if you look at that left side, the first quarter has grown from $122 million to $144 million -- the trailing 12 ended our first quarter going from $122 million to $144 million to $160 million, $175 million, $190 million and then to $209 million. So we would expect this pattern to continue frankly for the -- hopefully for the -- for a long time in the future but certainly for this year.

Focusing on adjusted EBITDA, adjusted EBITDA for the quarter was $5.9 million. [I'd expect] that this result was essentially flat with the $6 million in adjusted EBITDA we achieved in last year's first quarter.

I think we felt particularly good about achieving this result after absorbing the more than $700,000 of negative foreign-exchange impact on adjusted EBITDA during the quarter and our significant investments in hiring 16 new client partners during the quarter, holding additional marketing overview events and investing heavily in the marketing support to support a huge increase in marketing events in the second quarter.

While we expect foreign-exchange weakness to continue to have an impact on our operations in future quarters, at the current exchange rate its impact on future quarterly results would be meaningfully less than in the first quarter.

As shown on slide 6, over the past five years, while adjusted EBITDA in some quarters has grown more rapidly than others, we were pleased again to have achieved year-over-year trailing four quarters EBITDA growth in every quarter. We were pleased that this trend continued in the first quarter where trailing four quarters adjusted EBITDA grew 13%.

As expected, in addition to the impact of foreign-exchange, adjusted EBITDA for the quarter was impacted by two other factors whose effect is expected to reverse, be eliminated or be largely offset in future quarters. We thought it might be useful just to review those factors in some detail.

The first factor is the absorption of the significant growth investments in the first quarter whose benefit is expected to be reflected in later quarters. As you know, after several years of increasing our overall level of growth investments each year we expect actually that our growth -- the level of growth investments will be flat or even slightly down in fiscal 2015.

That said, we still invest more in the first quarter because we know that those investments that are made early exit have a yield still in the quarter. As a result we expect high flow through of incremental revenue to increases in adjusted EBITDA in the back half of fiscal 2015.

Because we front-end load our investments in hiring new client partners and making marketing investments to begin filling events for future quarters, and because our first quarter is typically not our largest revenue quarter, there's a larger than proportionate share of the impact of the growth investments we make each year.

The flow-through of the incremental revenue related to these growth investments increases in each subsequent quarter -- kind of you can see visually how that worked -- this isn't an exact audit quality thing -- in slide 7. This pattern has been actually accentuated with the growth of our education practice where almost half are even more than half of this revenue occurs in our fourth quarter in the summer which of course when most teachers and administrators are out of school and available to be trained.

Our largest incremental growth investment in the first quarter was in the hiring of 16 new client partners. As shown on slide 8, during the first quarter after having been hired and new client partners going through training and is focused on filling content overview events for potential clients and filling his or her prospective business pipeline.

Consequently new client partners typically generate very little revenue during their first quarter. Thereafter however the gross margin contribution from the revenue they do generate increases to the point that they more than cover their costs and begin to contribute meaningfully to adjusted EBITDA.

In accordance with this general model the hiring of 16 new client partners during the first quarter represented a substantial investment. By the third and fourth quarters, however, these new client partners are expected to not only cover all their costs, but make a significant positive contribution to adjusted EBITDA.

The second factor impacting the first quarter was a decline in our gross margin percent during the quarter. We tried to lay that out for you transparently in slide 9. As you can see, assuming that we had had the same gross margin percentage as we had in the first quarter of fiscal 2014 but applied to 2015's revenue, our gross profit in the first quarter would have been approximately $1.9 million higher than that we actually achieved.

This decline a gross profit was not due to a change in pricing or to pricing pressure. In fact, our sales price per manual increased 8% year-over-year during the first quarter. Rather the change in gross margin percent during the first quarter reflected several factors, the impact of which is expected to reverse completely, be eliminated entirely or be much less impactful for the year as a whole.

As you can also see in slide 9, the first two of these factors had an impact on gross margin percentage but no net impact on profitability in the quarter. These were what we're referring to as absorbed SG&A and mix a $560,000. This amount simply reflects our classification of cost between cost of goods sold and SG&A. As noted, these amounts did not have any net impact on profitability.

The second item also had an impact on gross margin but no impact on adjusted EBITDA. The $209,000 related to a licensee -- international licensee partner conference which we held in September where the costs of the conference were paid by FranklinCovey and then fully reimburses by our international licensee partners. This is a zero margin event, didn't have any net impact on profitability, but did affect gross margin somewhat.

The items that did have an impact on adjusted EBITDA during the quarter included the other ones. The first is increased amortization of capitalized curriculum costs of $450,000. This relates to increased amortization of capitalized curriculum development costs primarily associated with the re-created 7 Habits of highly effective people 4.0 curriculum which was re-launched last year.

We expect that the combination of a price increase for the 7 Habits content resulting from the termination of most of last year's promotional pricing and a meaningful reduction in actual cost of producing the 7 Habits training will more than offset this increased amortization expense during the balance of fiscal 2015 and beyond. And actually beginning in the third quarter we already had this amortization expense in last year.

The next item is the delivery consultant underutilization in Japan of $223,000. This simply relates to under absorption of the fixed costs of our salaried consultants in Japan during the first quarter. In the US almost all delivery consultants are on a pay per day basis, whereas in Japan these training consultants are salaried.

The $223,000 in under absorption is expected to fully reverse within the fiscal 2015 as higher revenue quarters allow the more than full absorption of these consultant salaries in future periods. So we think has no net effect on gross margin during the year and can potentially actually be improved if -- increase the gross margin because of these fixed costs.

Finally, we had had the same issue in education coaching of $220,000. [Maybe just] contextually, our topical as a Company is to deliver quality results for our clients. Nowhere is this more important than in The Leader in Me schools where quality results means improving school culture, increasing teacher and parent satisfaction, impacting student development and achievement.

So to achieve these results we've hired some of the best talent in education to help us develop a school coaching process which is now in full implementation. This new coaching process is receiving superb feedback and is making a big difference in the schools in which we coach. Currently about 50% of all Leader in Me schools have a coach and our goal is to get this to 90% or higher over the next couple of years.

To achieve these results an experienced FranklinCovey education coach is assigned to oversee and coach a certain number of schools through a cycle of continuous improvement during each school year. These coaching services generate kind of mid 40s gross margins during the school year in the US and Canada.

In the summertime however, which are our fiscal third and fourth quarters, these same coaches whose costs have been covered by the coaching contracts help to facilitate training for new Leader in Me schools at significantly enhanced margins so that for the year as a whole their weighted average gross margin contribution ends up in the mid-60%s.

So as a consequence the lower coaching margins achieved in the first two quarters are replaced by higher-margin activities in the third and fourth quarters. So net-net we -- with the impact of these factors that are going to either be reversed or eliminated or offset, we expect that -- we don't normally give kind of gross margin guidance, but we just say that we expect our overall gross profit dollars in dollar terms will increase by 10% in fiscal 2015 as a whole compared to fiscal 2014, so despite where they were in the first quarter.

Jumping now to our progress on strategic objectives. As you know, our overarching strategic objectives are: first, to have best-in-class solutions in each of our practice areas, solutions which generate high-impact results for our clients; and second, to build a large and highly effective sales and delivery organization to bring these solutions to clients and prospective clients throughout the world.

We made very strong progress in each of these strategic objectives during the quarter and for the trailing four quarters. I'll start with a brief report on our sales force growth and productivity initiative.

As many of you know, we believe we have the opportunity to add many hundreds of additional client partners in the US and Canada and in our direct offices in Japan, the UK and Australia and in our national account practices.

We believe that we have more than 900 client partners in the US alone. And with the current client partner count of 178 worldwide, we believe that our current goal of adding 30 net new client partners per year gives us a lot of headroom for continued and accelerating growth for many years to come.

As shown on slide 10, adding 30 net new client partners per year in our direct offices each year for just five years, and having them ramp up according to our expectations, would potentially add more than $100 million in additional revenue by the fifth year with only the first year's hires having by that time achieved full ramp.

So we measure our progress on this initiative in three ways. Bullet point one, increasing the size of our sales force and our number of client partner -- net number of client partners increased from approximately 147 at this time last year to 178 client partners as of today and a net increase of 31 client partners in the past 12 months.

As stated, our goal is to add approximately 30 net client partners per year and we have detailed office-by-office hiring plans for meeting this goal in our direct offices and our national account practices -- both of those for each of the coming years. We expect our total net number of client partners to be approximately 210 by the time we report our full-year fiscal results in -- 2015 results in November.

This group of new client partners together with the approximately 75 previously hired client partners who are still in their ramp up period create both strong current revenue and the expectation of significant embedded future growth as they complete their ramp up over the next few years.

Second, our new client partners are ramping up according to plan and they continue to be a little bit ahead of that schedule. We've had real success with this new group of 16 and it looks like they are all on or ahead of schedule for the first few months. And they are generating revenue a little earlier in December than we might have thought.

On January 3 the productivity of our international licensee partners also continues to increase and the partner network continues to expand. Our number of international licensee partners including education licensees is now 57 and their productivity and strength has continued to grow.

The opportunity for our international partners to grow through adding new client partners is as attractive as it is a direct offices and many of our international licensee partners are now consistently hiring and ramping up new client partners each year.

Now a new paragraph on our progress on our quality results. We made significant progress on that over the past years and this progress continued during the first quarter and for the trailing four quarters. Our revenue renewal rate remained very high in fiscal 2014 with approximately 90% of our revenue from fiscal 2013 repeating in 2014. And for the trailing four quarters ended in our first quarter, just over 90% of our revenue from the same period last year repeated again during the trailing four quarters.

Finally, our outlook. Each of our momentum indicators continues to be very positive and the momentum in our business continues to be both strong and broad based.

As shown on slide 11, our pipeline of booked days and awarded revenue, which is, as you know, a measure of business already booked or awarded in our five direct offices in the US and Canada and in our national account practices was $26.9 million at the end of fiscal 2014 in August. This pipeline grew $5.4 million to $32.3 million at the end of the first quarter. This is a growth of 20%. This was helped by the government contract pipeline of days in order revenue which represented $3.75 million of that growth.

Our prospective business pipelines, which measure the amount of potential new revenue currently being discussed with (inaudible) existing and potential clients which we track every week. Every office and every practice knows how much they need to add each week in pipeline and that has been increasing significantly during the first quarter and beyond and reached its highest level ever in our US geographic offices and our direct offices in Japan, Australia and UK and in our national account practices.

As you know, these prospective business pipelines are a stage earlier in our business development process than our pipeline of booked days and awarded revenue and have historically been strong predictors of the likely strength of our bookings and revenue in the coming months and quarters. (Inaudible) pleased that the conversion of this large perspective business pipeline at the end of the first quarter has already begun to translate into significant new contractual bookings and revenue in our second quarter.

Added one additional piece of information on slide 12 on our marketing events. One of the most important drivers of our prospective business pipeline is the large number of live marketing overview events we hold in cities across the world in country each year.

As many of you know, potential clients are invited to a 2.5 hour content overview luncheon in which a common business challenge such as improving execution of strategy or winning customer loyalty, improving sales performance or building a winning culture is framed and a specific FranklinCovey solution category is introduced as a potential solution for that organizational problem.

Each event typically generates a significant amount of new prospective business pipeline, we have tracked that for years and feel like we understand what that is. And a quite predictable amount of that pipe is ultimately converted to revenue which allows us to then kind of decide how much pipeline we need to add every single week.

During fiscal 2014 we held 464 of these marketing overview events. As you can see on slide 12, the total number of scheduled marketing overview events in fiscal 2015 has increased by 230 to almost 700. More than 180 of these incremental events are scheduled to be held in the second and third quarters alone. So in the first quarter we made investments to start filling these events.

And because the events were bigger -- there are a lot more events in the second quarter than there were in last year's second quarter, we spent a lot of money doing, but our events are filling and we feel every good about it. We expect these events to contribute significantly to the increased pipelines which will drive accelerated revenue growth in the second, third and fourth quarters.

So for us there is just a decision recognizing if we will invest early in both client partners and marketing, we will then build the pipelines, have the client partners contribute during the year, whereas if we wait until later -- you invest too late in the market event, they will be held in the summer when people aren't as likely to come. So we made the decision to double down on our first quarter.

We are very encouraged by the momentum we continue to see in the business, by the continued growth and the size and productivity of our direct sales forces, by the growth in our international licensee partner operations and by the overall momentum and trajectory of our business. As noted before, we therefore feel confident in reforming our fiscal 2015 full-year adjusted EBITDA guidance between $37 million and $40 million.

Given the significant growth in revenue achieved in last year's second quarter in conjunction with the launch of our re-created 7 Habits offer, which really exceeded expectations, we would expect substantially all of our expected increase in adjusted EBITDA for the year to occur in this year's third and fourth quarters as we continue to build these pipelines.

One final note is we currently have excess cash and expect to generate substantial additional cash between now and the end of the year and beyond. And we are planning to use this excess liquidity as an additional lever for creating shareholder value in various ways. So at this point, Steve, is there anything you would like to add?

I agree.

Okay. So we will now turn the time over for questions and we have the executive team members here with the exception of Sean Covey who is in the Netherlands at a conference this week. So we'll turn it over to questions.

(Operator Instructions). Tom (sic) McHugh.

Hey, Tim.

This is Matt Hill in for Tim McHugh. Couple of questions. The nice growth you saw in the UK office, I think it was $1.6 million, can you give any type of size on how big that office is compared to the other international direct offices?

Sure. First of all, about a year and half ago we began to -- maybe -- almost 2 years -- a year and a half ago anyway, we began to implement the same hiring and event strategies in the UK that we had been doing in the US and do it at an accelerated level.

And so, the underpinnings of the growth that we achieved in the UK started really in last year and we had our best year ever in the UK last year. That momentum continued during the first quarter. And so that growth was substantial and was part of the question what caused that. And I think the other question was how did that compare with the other offices. Do I have that right?

Yes.

Thanks. So we had growth in the UK office. In Australia we were down slightly for the quarter. And in Japan we were affected by the -- we had good -- a good quarter they're continuing to launch the 7 Habits in local currency, but were impacted significantly by the yen devaluation. Total revenue --.

It is about half of Japan and twice of Australia.

Yes, so the total for fiscal 2015 -- or fiscal 2014, Japan is around $18 million, the UK in 2015 might be around $9 million, and Australia is probably $5 million.

All right, great. And then with the guidance is there -- do you have any indication at this point -- are you feeling strongly one way or another? I know the [rates will be changed], but is there any outlook you have about which way it might be swinging? And then are there any practices when you said that initial guidance that maybe you're doing better or worse than you had originally set that guidance?

Yes, first as to the guidance range, I think we were conscious of setting that what is maybe -- seems like a wide range but it is really only about a 10% range. So I think at this point saying that we feel confident in the range we'll probably just leave it at that right now. I think it's early after the first quarter to say where it will be.

I can tell you that our -- when we sit around our table the goal isn't to hit the bottom end of the range. So certainly our -- all of our thinking is to -- how do you plan to hit the top end so that anything that happens to you gives you some cushion. To help in that we -- in that effort, we have not included in that guidance assumptions about renewals of major contracts unless we know they are renewing.

We haven't assumed big wins of contracts that have typically happened. On the other hand, the yen -- the foreign-exchange devaluation has been worse than we thought. And we are hoping that that trade -- we're thinking the trade of what we haven't included versus the things that are going to happen to us that we don't know about will swing to the positive side for the year as a whole.

In terms of performance, actually, right now -- and it is interesting, it is timely. Every week we have a review with every unit, a brief review with each of our major units; we have been doing that today. I think all of our units are on track to have a good year, a really good year.

I mean forgetting foreign-exchange, everybody's plans are to grow, each channel grew -- and despite foreign-exchange during the first quarter every practice grew with the exception of execution which was a little anemic which relates more to a specific couple of -- two specific clients, everybody grew close to double-digits.

So I think at this point we are feeling that -- the thing -- we feel generally good about everybody. I would say that said, we have our list of things that aren't going as well, ones that we feel need more help. But we have been adding that help in terms of resources that might go to an international direct office to help out and that has really helped us in the UK. Or we have got marketing resources, we are hiring coaches or things to help out.

But at this point we feel that the year is likely to be -- have broad-based growth, revenue growth which occurred in the first quarter which happened for the trailing four quarters has really happened pretty much across the board for each of our operations over the years.

And so, like I say, we have -- most of our time it spent on things that aren't going as well as we think they can, but there aren't very many things that aren't going quite well. I don't know if that is responsive. Please push on -- push harder if you would like.

No, that is great. And then just one final numbers question. With the client partners -- you are saying 178 or -- you know?

Yes.

With the new -- I think you said 16 were added. And for the fourth quarter I had 176 for client partners. Is it just the timing? Am I looking at it wrong for the new 16 that were added?

Yes, so, I mean some of these numbers are I probably mess -- not mess up in actuality, but by reporting them at the time we are actually reporting our earnings versus the end of the quarter. So there might be some of that.

In the first quarter we added 16. We also lost a client partner to death, one to retirement, we had one that was a client that has historically been a contract client partner who then became full-time for a year that went back to contract status so we don't count him even though he is still doing work for us. There was some flux in that.

And I think there were two claim partners who just didn't make it from the prior year also. So there is a little moving around. We can -- if you'd like to we'd be happy to just reconcile. That is one thing we reconcile every week and we can give you a clear reconciliation for any period you'd like on that, Matt, if you'd like to go into more detail.

Okay. So the 16 is more of a -- the gross additions, not (multiple speakers)?

Yes, that is the number of new client partners we hired, that is just not the net number added. And we can give you precise at the end of each quarter on any period you want.

Okay, got it (multiple speakers).

(Multiple speakers) the basic idea is we have increased by 31 -- over the last 12 months net we've increased by 31. We expect to do roughly the same over the next 12 months. And we feel like we're in a good track of being able to handle that 30 or so net hires a year.

Okay, thank you for taking my questions.

Jeff Martin, ROTH Capital Partners.

Bob, can you give us an update on the 7 Habits conversion? That is something you have talked about on previous quarters. I would be curious to hear how that is going.

Yes, the 7 Habits conversion is continuing to go well. So we have kind of two elements to it. One was the conversion of people who were already 7 Habits 3.0 customers and that is what we refer to sometimes as the conversion -- converting those folks over. About two-thirds of those people have converted to date.

Ones who hadn't converted either had lots -- had a lot of inventory in 3.0 or they had built a worldwide training network around 3.0 and didn't want to convert over until we had it in every language. Or there may be -- or they have trained so many -- they've got affiliate partners that they have trained it and it would be a big effort.

And so that other third will come in probably over the next year to 18 months. But we had a very good -- the conversion of that initial group was substantial, it drove the big results in second and third quarter.

The second part of the course of the launch is the ongoing -- the 10 million managers in the United States who can make a decision about buying some training for their team even if their Company hasn't decided to do an overall initiative.

And beginning even in the second quarter when we were trying to convert a lot of people we had about half of the people who came to events even in that quarter were these new -- brand-new clients to the Company. That increased to 70% plus in the third quarter into about 75% in the fourth. We didn't have a lot of US domestic events in 7 Habits this first quarter because there was such an emphasis last year. But in this second and third quarter we'd expect that the 70% plus continues.

Japan got off to a -- they didn't launch until summer. They had a very strong first-quarter launch, they had a good second quarter. About a third of our sales in Japan come through an affiliated partner, sales partner in Japan, that has happened for years and they represented a (inaudible) of a certain number of companies. They are now just getting ready to launch.

And among our licensee partners the events are really just starting for many of them, they have just done translation. But generally I would say there has been a tremendous response from both -- both from a sale side as well as a response from customers. It has raised the bar on our offerings. And so, we expect -- exceeded our expectations as we reported I think at year end, doing about $21 million in our direct offices versus the high end of our expectations was in the $17 million range. So we exceeded that.

We think it is now going to settle in and it will continue to launch among our licensee partners this year. And then the events now will just go on and this now will hopefully, as you saw in the first quarter, really all of -- two years ago, three years ago we launched 5 Choices -- two years ago we launched 5 Choices, we launched Trust -- re-launched Trust about three years ago.

What we really want to see is -- what happened in the first quarter is that all of them grew double-digits. Now they will settle in and we will have roughly the same number of events in each content category moving forward except in the licensees which will be -- for this year will be heavy on 7 Habits. Is that helpful at all, Jeff?

Very helpful. Could you give us kind of a status report? You are doing quite a few more events this year. How are you tracking to your schedule there? Is it a lot to handle? I would imagine close to 50% bump in the number of events is not an easy thing to manage through, so (multiple speakers).

No, it isn't. In fact, maybe I'll just ask Scott Miller, who heads our marketing, to talk about the -- what is happening and how that is going.

Yes, but I think we are more than on track. Bob's report says 700, I think we will actually end up closer to 750 this year. And I feel very confident that we are putting a big focus on increasing our database in terms of both size and quality of prospects, refining our messaging. We have hired about a 20% outbound calling team to complement both our direct mail and or email strategy. We have a strong effort focused on our current clients to refer in other individuals in their organizations to network.

So we feel by all measures that [a lot of the] marketing strategy is working extremely well in all of our direct offices and now becomes a crucial part of our international partner operation as well too. One of the key measures of our national partners is to put on several hundred events this year.

So from all of our signs it is a key focus of ours, not without challenges as you say, but we feel very bullish about the quality of prospects coming in, the quality of the pipeline coming out and the conversion of revenues. So we are very, very pleased about that.

Shawn, do you want to add --?

Yes. Jeff, the one thing I would add to that is as we bring on new client partners -- this is Shawn Moon. As we bring on new client partners, their primary job, their job one as part of their getting up to speed is to work these events.

It becomes a very doable thing for them right out of the gates to prospect, get people to come, give them an experience in or content and then set up the opportunity for broader discussions. And so, the infrastructure with our new client partners and the addition of our new client partners actually allows us the ability to add these events in the way that we have.

Jeff, your question is really perceptive. This has not been an easy thing, but we started several years ago. When we -- knowing that these events were -- it just drove us nuts that we had 54 events in the whole central region three years ago. And our constraints were that we didn't have a database sufficient to mail to, we had 1 million names in the whole Company and that is after three years of activity on it.

Today we have closer to 5 million and we are not happy with that, we are figuring now we are investing in names every -- in every event. But that was one whole thing, is the whole strategy for name acquisition, doing archaeological digs on who it is that actually comes and buys, trying to profile those people and get it. So it has been a three-year effort getting there.

We recognize that salespeople spend way too much time trying to make initial calls on people who respond to the emails. And so we built this calling team to which Scott referred. So it has been a major effort building the event coordinators out in the field. These are pay per day people, but still you have got to have good people who represent you.

And so, it has taken years to get to the point where we felt comfortable kind of amping this up. But because we spent the years and we've got great people here it has gone quite smoothly. But it was a significant -- you know, still trying to fill that many additional events in Q2 certainly had an impact on Q1.

Yes, okay. And then last question. You referred to excess cash. Historically I think you have mentioned over $10 million cash on the balance sheet would be considered excess cash. How do you look at timing of cash flows this year and remind us what your share repurchase authorization is.

Yes, so, our share repurchase authorization a couple of years ago was $10 million and then we made these acquisitions, so we've used most of our excess cash in completing the buyout or earn-out of the trust practice -- speed of trust and making the acquisition of NinetyFive 5.

But our threshold was $10 million above that and we -- so today we have more than $10 million of cash and we have also -- we [didn't] at quarter end. We had big collections as expected. Of course in December it was our biggest collection month ever. And so, we are above the $10 million, we expect to be a lot above the $10 million by year end if we didn't do something with it.

There are lots of choices for what you do with it, but I suspect one of those will be buying back some shares. Certainly at today's multiples we would expect we would be buying -- taking advantage of the chance to buy some shares.

Okay, thank you very much.

Kevin Liu, B. Riley & Company.

I guess first question here, just looking at your international growth rates, certainly the direct business continues to grow strongly. The licensee growth was a little bit more muted in the period. So I was wondering if that was more disproportionately hit by the FX impact you saw or if there was some other factor that drove lower growth there relative to the rest of your international business?

Yes, it was actually. I mean we had -- the impact of FX hit us kind of in three ways. One is the balance sheet. So to the extent we have receivables or cash whatever, as you know, on the balance sheet and our direct offices we got whacked there. The other was on the actual operations which was both in our direct offices and in our international licensee partners.

So the impact to international licensee partner operations was about $225,000 during the quarter, that of course affected the growth rate significantly given that these were royalties. And so if you had added $225,000 we would've been more in the range.

We expect in local currency that we will grow north of 10%, we will hope to find ways also with our new licensees that we've added this last year to get to 10% even with the FX impact. But it did affect us in the first quarter for sure.

Got it. And you've highlighted some of the issues around utilization within the quarter that are kind of self-correcting over the rest of the year. Education I would assume kind of turns naturally in the fourth quarter when a lot of your book days come through.

But what gives you confidence on kind of the turnaround in the Japanese operations? Do you already see that within kind of your book days pipeline and can we see that improve as soon as the second quarter here?

Yes. It is a combination -- in fact, we know the seasonality of Japan. Our biggest quarter in Japan also turns out to be the fourth quarter. But second and third quarters tend to be bigger than our first quarter. So some of it will get absorbed in the second and third quarter, but certainly by the fourth quarter it will have flipped over and it will be contributing positively, we will have fully absorbed their costs and be -- and have very high margins. So I think part of it is just a normal seasonality.

Part of it also is that some of these consultant -- I mentioned that we have this third-party sales partner in Japan. They have had difficult challenges in the business, but they've got some new leadership there. Shawn Moon has just been over and met with their President. They're making big efforts on the re-launch of 7 Habits. That actually helps us because our delivery consultants also deliver all the content, (inaudible) is a sales partner but we deliver there.

So I think it could -- I expect some positive impact during the second quarter, certainly by the third and fourth it will have reversed just on seasonal -- seasonality alone. But we are also driving a lot of business. Most of these consultants are 7 Habits consultants, and so the launch of -- ongoing launch will help accelerate that absorption. So we feel quite confident (multiple speakers).

Yes, and I would just add two other things. Like we are doing in the US, we are continuing to hire aggressively there. So our -- they are going to have new client partners, they have had new client partners that are in ramp and we'll continue to do that, that is one area --.

And they absorb -- and therefore they absorb the consultant (multiple speakers).

Right. Because the more they book the more the consultants deliver. And we are doubling the number of events that we did from last year to this year in Japan, which also drives additional days that then helps the absorption of the consultant costs. So the same play we are running here we are running there which has the impact on that absorption number.

Got it. Thanks for taking the questions.

Yes, Kevin, maybe one other thing I would just note that may be of interest to you and if not it will be too late after I tell you this. But to everyone, is that one thing that I think has been a mistake is that we have not -- our fourth quarter has been so big that we have -- and our big -- and we always have our kickoffs in the first quarter. We have not over the last years had the same number of events in the first quarter that we have in the second and third. And there is no practical reason for not doing so.

And so we are already now -- we have identified the schedule; we have could have included on that exhibit also our first quarter. Next year's first quarter will look a lot like this year's second quarter in terms of events so that we are absorbing more of this faster, we are getting out of the blocks a little faster. We would like to not have the first and second quarters be such a -- so burdened and have it all come in the third and fourth, that may be of interest. Thanks, Kevin.

Thank you.

Ian Robertson, Osmium Partners.

So, Bob, I guess a few questions have already been answered, but I was curious to hear more about the cash flows for 2015 and looking back you have had some pretty heavy investments in content and you alluded to this already on the call briefly. But curious to hear what portion of EBITDA you think could flow through to cash flow and what we should expect you guys to put on the balance sheet over the course of 2015, if you can.

Great. Steve, do you want to --?

So, Ian, we are not prepared to say exactly what we think our cash balance is going to be at the end of the year. Just to say that we believe it is going to increase and increase quite significantly especially as compared to the increase that we've seen over the prior 12 months for the reasons that you mentioned.

During the last 12 months we have had a significant amount that we have spent or cash out that wouldn't be repeated in the coming year. You mentioned the additional amount that we invested in the development of 7 Habits, that was several million dollars. We had what was reflected as a share repurchase for $4 million.

We had acquisition-related earn-out payments related to acquisitions that have come to an end related to The Speed of Trust. We also had a very interesting tax thing that I won't go into, but cash was $2 million that will actually reverse in this year. We also unfortunately did not see a decrease in our days sales outstanding.

So the combination of all of that is we were generating a meaningful amount of cash and it was being consumed by these activities which we think are valuable and good activities, they are just ones that won't repeat in the coming year unless of course we decide to buy shares or something like that.

But as Bob said, our highest collection month ever was the month of December and we expect our days sales outstanding to be similar during the year. And so, we expect to have -- we expect to have enough excess cash to do anything that we can envision choosing to do with excess cash. Is that (multiple speakers)?

That's helpful. And the comments on a buyback are encouraging as well. I know we were looking at some of the annual letters going back to 2006 and 2007 and right around the time of the financial crisis.

And, Bob, you kind of repeatedly talked about how there are two real levers to running the business in terms of how you think about day-to-day decision making to ramp client partner hiring and to meaningfully reduce the share count. It sounds like at the current valuation you are still looking at the world through that lens, is that fair to say?

That is correct. As you will recall of course -- as you know well, we did the 3 million share repurchase in 2009, but then since then have not done a lot -- we have done some. But, yes, I think our view is now having the excess cash, or expecting to have it, having it and expecting to have more of it -- and there may be acquisitions, small acquisitions from time to time. But certainly right now it appears to us that this would be a good use of cash.

That's helpful. Last question for me. If you take a long-term view again, we have seen EBITDA margins go from low-single-digits now to the teens. And where are we headed over the long run? What do you feel comfortable laying out as a long-term three-year out target for what sort of profitability you think the business can achieve?

We have always said that we would trade off an increase in EBITDA margin for accelerated growth if we thought we were holding back the growth just for that reason. But right now we don't feel like we are doing that. And if we are able to flow through incrementally 25% to 30% of incremental revenue to impact -- increases in adjusted EBITDA, of course that will continue to move it up.

We'd said a year or so ago that we thought that in this period we would get to 18% or so. Hitting our guidance of this year would kind of get us in that range. And we think that is probably not the end of it. So I suspect it continues to move toward 20% over the next few years and we will try to have it not do that by finding ways to accelerate our growth. But it may be that just organizationally all that we can say grace over will result in the EBITDA margins continuing to increase.

Great, guys. Thank so much.

Peter van Roden, Spitfire Capital.

Just a quick question going back to the consultant count. Can you talk through kind of how we get from the 176 at the end of Q4 to 178? Today I was a little bit -- just having trouble figuring that out.

Yes. Oh, thanks. Steve, go ahead, you've got --.

So, in the discussion we always have a number of CPs at the time that we are talking on the webcast and then we have a number that is a different number at the end of the quarter that we are reporting. So when we did our year -- during our yearend call as we were talking about the number of CPs we said at that time we had 176 I believe is right, and as of right now we have 178. So some of the terminations that Bob talked about net of the adds we've added has -- have added to since we reported.

We ended the year at more like 169 at the end of the quarter, so there was more of an increase in the quarter than there is an increase in the time between the two calls. So given that I think the key number is that over the last 12 months apples-to-apples in time period we have added 31.

And while we might have a little bit of confusion, we will try to avoid as to whether we're talking about the quarter end we are reporting or the time that we are reporting. I think the key thing is that we are intending apples-to-apples to add 30 net per year.

Okay. Perfect, thanks, guys.

Joe Janssen, Barrington Research.

The marketing events, I'm just curious, one, what that number looked like in 2013? And then historically has attendance kind of growth been in line, correlated to -- I know it is correlated, but have you seen similar growth rates in terms of actual marketing events growth? Or given the number in managing that process are these becoming like smaller attendants and kind of mortgage more narrowly focused?

No, no they are not. In fact, Scott Miller, do you want to go ahead and respond?

I mean, the vast majority of events spread across our four or five main practices, although we are increasing the number of events aimed at industries. For example, we have an event next week in California focused on the high-tech sector, but generally they spread across our five main practices. Was that your question?

Well, it was also how much -- I think, Joe, let me say it back and then Scott can respond.

Sure.

So one, your question was what was the number of events in 2013 if we went to $440 million and change in 2014. I think the answer was in the low $300 millions in 2013, we can get you the number. But is approximately call it $330 million or something, so we increased it some.

Second I think was what is the connection between all of these events and revenue? Is there a strong connection? And is it getting less? Are we starting to have them in secondary cities more than primary cities? Was that kind of the gist?

Yes, yes -- just more nichey in focus.

Yes, they are not so much honestly. We define an event in our minds of having 18 organizations attending on average and that is kind of the target minimum number of organizations which usually include something like 26 to 30 participants because some organizations bring more than one. So that standard hasn't changed.

And in fact with our author tours, with the launch of 4 Disciplines of Execution, which is ongoing author tours, those tend to be bigger events. The Speed of Trust author tours tend to be bigger with Stephen M.R. Covey. And we are just starting now with the 5 Choices, which by the way we were happy to see that it ranked number four on business books.

We just -- our new book 5 Choices to Extraordinary Productivity, I saw report yesterday that -- I know I saw the report. I can't certify its veracity, I just saw it. But it is doing -- it is out of the blocks in a good way. But those author tours tend to be bigger.

So we actually know what we -- what we track, Joe, is the amount of pipeline that is added for every event, it is tracked, we have a defcon system we call it -- if X number of weeks out we haven't had a certain amount of pipeline, a certain amount of revenue we talk about it, we go back over it. So it is quite predictable.

I would say so, yes, so the accelerated -- the acceleration of events we think over -- the revenue comes in from that event over 11 to 13 months with a big bulge in that four- to seven-month area.

Having these events really starts to build your pipeline, but it isn't -- it doesn't do it -- I mean it affects in the quarter, it certainly affects the quarter in the quarter -- and the quarter for the quarter but it affects certainly the next two quarters a lot.

And so, as we amp this up we would expect that it starts to build a bulge where, for the offices that are holding this, they start to have a much easier time hitting their ongoing 12% revenue growth goal, so --.

Okay, I appreciate it, thanks for the color.

Thank you. And at this time we have no additional comments.

All right. We'll just think everyone very much for joining the call today. Thanks even more for your long-term support and ongoing efforts on our behalf. We appreciate it and Happy New Year. Thanks.

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