Franklin Covey Co (FC) 2015 Q3 法說會逐字稿

Welcome to the FranklinCovey third-quarter 2015 earnings conference all. My name is Jeanette 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 Derek Hatch. Mr. Hatch, you may begin.

Thank you. On behalf of the Company I'd like to welcome everyone to our call this afternoon to discuss the third-quarter fiscal 2015 financial results.

Before we begin this afternoon I'd 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 Company's -- 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 product; changes in the training and spending policies of our clients and other factors identified and discussed in the Company's most recent annual report on Form 10-K and other periodic reports filed with the Securities and Exchange Commission.

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

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

With that out of the way we'd like to turn the tide over to our Chairman and Chief Executive Officer, Mr. Bob Whitman.

Thanks, Derek. Hello, everyone. Happy July. Thanks so much for joining us and I'm happy to have a chance to report on our fiscal third-quarter results. First, I thought it might be helpful to provide just some quick third-quarter highlights. I'll just do that now.

Our third-quarter revenue of $48.3 million was the highest ever for a third quarter even after absorbing more than $1.3 million in foreign exchange impact. Our prospective business pipelines really grew significantly setting the stage for what we expect to be our highest ever revenue for both the fourth and first quarters.

Our operating results were solid, muted somewhat by the combination of a $0.5 million negative foreign exchange impact and the increased staffing and training investments in our education practice necessary to prepare for the delivery of the significant booked revenue in the fourth quarter.

We are making significant progress in each of our key growth initiatives and have made some meaningful refinements to our business model, which we expect to increase our profitability and flow through and scalability both in the fourth quarter and particularly in fiscal 2016.

After utilizing $5.9 million during the quarter to repurchase stock, we still ended the quarter with $13.8 million in cash and our full $30 million credit facility undrawn, so our cash flow is strong.

It was also a strong quarter in terms of meeting our own expectations. The primary differences to our expectations were that: one, we expected a significant amount of revenue from some large third-quarter contract wins to be -- some of that revenue to be realized in the third quarter.

And while we were thrilled that these contracts were awarded, a delay in the timing of these awards or in the start of their implementation shifted revenue and this revenue will now be recognized in the fourth and some in the first and first maybe even in the second quarter because some of them are large.

The other difference to our own expectation was that our third-quarter speed of trust marketing events generated a higher than expected pipeline of larger on-site delivery and roll out opportunities versus normal certification of new facilitators, which is good news.

Normally the facilitator revenue is recognized in the quarter for the quarter while these larger assignments get moved into the following quarters. And this resulted in approximately $1 million less revenue than expected being recognized in the third quarter in the four geographic offices in the US.

That $1 million, however, and almost $2 million of additional speed of trust opportunities were added to our fourth-quarter pipeline. So other than those two things we really had -- felt like it was a great quarter and met our expectations on almost every front.

You may have seen the release that we've reset our adjusted EBITDA guidance range to $34 million to $36 billion, down from $36 million to $39 million to reflect: one, the full $3 million expected adjusted EBITDA impact of the ongoing foreign-exchange headwinds.

And two, that, as I've noted, the extremely large number of training days already scheduled for delivery in the fourth quarter will utilize nearly all of our fourth-quarter delivery resources in some of our practice areas. And as a consequence some of the revenue related to the contracts which we won, or are winning, and had hoped would start to deliver in the third quarter or now and which we expected would offset some of that unrelated foreign-exchange impact in our foreign operations may not be able to be fully delivered until the first quarter.

That'll be good news for our first quarter. I'll say this, that our teams are working and we're pulling on additional delivery resources to get as much of it in as possible. And so we may get in more than we think, but we want to at least provide for that.

Now I'd like to address some of these points in some additional detail. First our third-quarter revenue and pipeline growth. As noted, our third-quarter revenue was the highest ever for a third quarter, reaching $48.3 million. This level was achieved even after absorbing more than $1.3 million in foreign exchange impact. This represents growth of 2.5% compared with $47.1 million in last year's third quarter.

Excluding the impact of FX, revenue growth in the quarter would have been $2.5 million representing growth of about 5.2% in the third quarter, which is often a staging quarter for us for the fourth quarter.

As you can see in slides 3 and 4, excluding the impact of foreign exchange nearly all of the Company's major delivery channels and practices grew compared with the prior year, including 18% growth in our government services region, 18% growth in the education practice and, as I noted, after adjusting for FX 9% growth in our international direct offices and 4% growth from our international licensing partners in this quarter.

Year to date these licensing partners have grown 9% excluding foreign exchange and have grown 12.5% for the trailing four quarters. Again, excluding the impact of foreign-exchange our year-over-year revenue was flat for our four geographic offices which serve the US and Canada.

As you know, they were up against, as expected, last year -- a tough comp last year -- or a great comp last year where we had 7 Habits launch. But we are really pleased that the revenue for these offices, despite comping against that launch, were up $1.9 million, or 10% compared to the second quarter. So we good sequential growth, as expected.

In our second-quarter conference call we noted that: one, our direct offices in the US were up against some tough year-over-year comps in the second, third and fourth quarters due to last year's successful launch of the re-created 7 Habits offering.

Two, that as a result of the success of the 7 Habits re-launch and its relatively shorter sales conversion cycle when compared with other offerings, our pipeline had been reduced somewhat. In other words, a lot of what we booked last year was delivered in the quarter, for the quarter and it didn't build up the same amount of pipeline.

And so in the second quarter we said, as you know, that as a consequence we had significantly increased our number of marketing events and face-to-face calls in the second quarter, as we also did in the third quarter. And that as a result of our increased volume of these calls and marketing events, we were pleased that our prospective business pipeline for those four offices had increased $8.1 million during the second quarter compared to the same time in the prior year -- noting that approximately of that $8 million, approximately 30% to 35% would be expected to convert to revenue in the following couple of quarters.

As a consequence, we felt that these offices would be in the position to achieve strong sequential revenue growth in the third quarter and strong sequential and year-over-year revenue growth in the fourth quarter. Pleased to report that as expected a portion of this conversion -- pipeline conversion -- did occur resulting in revenue growth of 10%, or $1.9 million for these offices during the third quarter to $21.1 million compared to $19.2 million in the second quarter.

For us the really good news is that, as expected, the growth of our pipeline for these four offices has continued to grow with all of the marketing investments and sales calls and at an accelerating rate during the fourth quarter. Our prospective business pipeline at present for the fourth and first quarters is now $17 million higher for these four offices than it was at this same time last year, as you can see on slide 5.

With approximately 30% to 35% of this increased pipeline amount typically converting to revenue, we expect strong growth in these offices for both the fourth and first quarters and really beyond. As you can see in slide 6, these four offices have achieved significant and consistent revenue growth over a number of years. The four-year compounded average growth rate has been 12.6% and since 2012 through 2014 was 13.7%.

So with these investments in building our pipeline back after these big launches, we're really confident that these offices have and are regaining their growth position and will do so in the fourth quarter and beyond. Working in those offices we're getting a greater number of large, important potential client engagements than ever and feel very good about these offices' expected performance, as I said, for the fourth quarter and beyond.

As you can see on slide 7, for the trailing four quarters our revenue growth was 6% after absorbing more than $3.6 million in negative foreign-exchange impact. Excluding the impact of FX revenue growth for the trailing four quarters was 7.8%, that (inaudible) the 7 Habits launch last year. Our continued growth this quarter even after the impact of FX will allow us to continue our multiyear trailing four quarter growth trend.

Secondly, we briefly also addressed our operating results. Our adjusted EBITDA for the quarter was $4.9 million after absorbing $500,000 in negative foreign-exchange impact on EBITDA. And after also absorbing significant investments in the increased staffing and staffing-related costs in our education practice necessary to prepare for the delivery was expected to be very significant revenue in the fourth quarter.

Excluding the impact of the $500,000 FX charge adjusted EBITDA was $5.35 million compared to $5.1 million in last year's third quarter. For the trailing four quarters adjusted EBITDA was $31.2 million representing 3.2% growth compared to the same four quarter period last year after absorbing approximately $2.3 million in negative foreign-exchange impact.

Excluding FX again adjusted EBITDA for the trailing four quarters grew 10.8% continuing the pattern of growth established over the years. And we expect a significant increase in both sequential and year-over-year operating results during the fourth quarter resulting from a combination of, number one, significant increases in revenue across all channels including in our education practice where approximately 60% of the revenue for the year is expected to be recognized in the fourth quarter.

Second, increased gross margin percentage resulting from the historical increase in high-margin sales of training materials to our thousands of certified client employee facilitators in the fourth quarter. Third, flat central costs. And fourth, the fact that any cost increases will primarily be compensation including commissions that are tied to increased performances. So this is a quarter in which we have -- last year had more than 50% of incremental revenue flowing through the increases in adjusted EBITDA and we expect that or better this year.

In addition, business model refinements we've implemented over the last two quarters, which I'll discuss in more detail in a moment, should result in significantly increased flow-through of any increased revenue to adjusted EBITDA in the fourth quarter and for fiscal 2016 as a whole.

So at this point we're feeling very good about the strength of the quarter minus just -- other than those two things which were the timing differences on revenue. Feel like we're very well positioned with our pipelines for a strong fourth quarter. Being a month into it, the pipelines are building further and we're feeling very good about our bookings and the business that's firmed up for the fourth quarter. And so will expect to report a really good fourth quarter and year when we talk again in the fall.

Now I'd like to just shift briefly to address four things we're really excited and confident about in the business generally. The first is that our key strategic initiatives are working. As you know, our key strategic initiatives we always talk about are to have best-in-class solutions in each of our practice areas. And two, to significantly increase the size and productivity of the channels through which we sell and deliver them.

We feel that we're making really great progress on both fronts. As our best-in-class solutions are providing us with pricing power our gross margins remained high at 65.8% for the trailing four quarters.

Repeat revenue, as you can see on slide 8 -- over the past years the percent of revenue from customers in one year which repeats in the next has increased from 69% to 90% just in a five-year period. Also, growth in our average revenue per customer engagement has increased more than 20% over the last five years.

So we feel very good about this idea that our best-in-class solutions are providing impact for our customers that allows us both pricing power, retention of the customers and expansion within those customers. Also the size and productivity of our sales and delivery channels continues to grow. The size of our sales force has grown to 181 client partners.

The ramp up of new client partners continues to be at or ahead of model. The productivity of our ramped up client partners continues to be strong and our international licensing partner revenue has also increased significantly over the years, as you can see on slide 9, and as we just reported for the trailing four quarters more than 12% in local currency.

Second thing we're excited about is that our business model is increasingly compelling, at least from our standpoint. Our repeat revenue, as I mentioned, has increased from 69% to a little more than 90%, as noted above. Let me repeat this.

Increasing our repeat revenue from 69% to 90% over the last five years is really significant for us and for our business model and indicates the kind of impact we're having in clients with our number one focus being quality results for our clients.

Second, in terms of the business model, as a result of the strength of our content more than $90 million of our revenue now comes from content only sales. Now why is that important? Let me just say first of all what it is. Content only sales means purchases of training materials, content licensing agreements, subscription services, coaching revenue and digital content delivery.

These content sales increase both the impact and sustainability of our offerings inside our customers because they're taught how to implement this themselves and they're simplifying content from us with trained [champions] who can implement it. It also increases the scalability and profitability of our own business. That's important. And with more than 90% of this $90 million of revenue repeating, it's really a major factor in the business model now and in the future.

Our adjusted EBITDA margins have also increased consistently, as you can see in slide 10, and this has been despite significant investments in content and infrastructure and some potholes in the last couple years like government sequestration, shutdown and the foreign exchange issues of last year and this year.

We also expect additional increases in our adjusted EBITDA margins as a consequence of recent refinements in our field and central cost structure, which we've refined and analyzed over the years and now implemented a refinement in the number and type of marketing events we're holding, so there we'll be a higher yield on each of those.

We've consolidated offices from four to three, or will do in September, in the US. And we've increased the span of control for our regional practice leaders, all of which have refined our business model some.

The third important thing that we are excited about is that we really believe our growth opportunities are even bigger than we had previously contemplated and we can look at that a few different ways. While our past growth and progress have been significant, we really believe that our most important growth and opportunities lay ahead of us, that we've achieved a great -- we are now at the base camp of another mountain.

The capabilities, solutions and processes that have been put in place to get us to where we are have also established the foundation for what we believe will be accelerated growth, progress and impact in the years and quarters ahead.

And it's kind of like when you climb up a mountain all of a sudden you have new perspectives. Well, having climbed to where we are we have a new perspective. And these opportunities that we see now as being bigger than we had previously thought -- I'll just note in bullet point form, four of them.

First, the opportunity to significantly increase the number of organizations with whom we do business. We've noted this before, you can see it in slide 11. That while we have more than 2,500 organizational clients in the US alone, there are more than 90,000 additional companies in the US alone that we haven't yet reached, only approximately 8,000 of whom are even assigned to one of our sales people.

So we have this same opportunity in every major country around the world. This gives us huge headroom for growth and is a key reason why we're determined to hire these net new -- at least 30 new salespeople a year and to increase that further as we can.

The second opportunity that has become more apparent in recent years is not only the number of organizations, but within these organizations we may never get to the head of training or something or a decision-maker in these companies where they really want to buy something, but nevertheless they have lots of decision-makers, lots of managers who can make decisions.

In the US workforce alone there are more than 14 million managers. We believe that at least a third of these managers have the spending authority to make a decision to purchase a $5,000 training class or something for their own team whether or not their company ever decides to make an overall organizational training decision. This provides us with another big opportunity.

This year we hired -- in the fall of last year we hired 15 new what we call area client partners to focus on this group. Their entire responsibility is to populate a marketing event every six to eight weeks with just such decision-makers, people who are just rank-and-file managers in their companies.

And we've learned that a very significant portion of these people can make a decision and do so right on the spot, become certified to teach our content or hire us to come and deliver it. The ramp of these new area client partners is on track and we plan to hire another group of these area client partners of similar size before Christmas this year, so that's the second opportunity.

Third, we have an opportunity to achieve much broader radiation of our solutions within our existing client organizations. We have a number of clients where our solutions have been implemented pervasively throughout their organizations and with huge impact. With other clients our solutions have only been implemented at the team or regional levels.

For several years we've focused the efforts of a certain number of our client partners on increasing our radiation within a smaller number of clients by assigning them a smaller number of clients and just saying try to go deeper and this has been met with very encouraging results.

As a result of this multiyear test and the success of it, in which our total average revenue per client has increased 20% overall in the US directed offices just as a result of the impact of these small number of client partners who have been doing it, we've now as a consequence reduced the number of accounts with whom some of our top client partners work. We call these client partners enterprise client partners.

With this focus we have full confidence that these enterprise client partners will be able to have an increased impact on broadening our solution's reach within their existing clients. And that gives us, without a lot of new prospecting or anything else -- it allows them to go deep and have an impact there.

And finally, we believe there is a big opportunity to, quote, own the solutions to specific different organizational challenges like sales performance, customer loyalty, whole school transformation, merger integration, etc., each of which presents a huge opportunity on its own where it's very specific to a circumstance in which an organization finds itself and where we can build a targeted sales effort toward that, as we've done in sales performance, in customer loyalty and in education.

We've made some recent realignments to our organization to ensure that we are able to execute on these opportunities including dividing our business and government-oriented direct sales forces into two groups, one we're calling the direct office group and the other a new strategic markets group.

The direct office group includes our geographically organized direct offices and sales delivery teams in the US, Canada, the UK, Japan and Australia. And this team is tasked with realizing the huge potential we just talked about and increasing our number of clients, reaching an increased number of decision-makers and in the penetration of existing accounts. This same mission is also handled through our licensing network.

This direct office group will now be headed by Paul Walker. Some of you know Paul; Paul has been leading our Central Region for many years and during this time the Central Region's revenue has grown from $10.5 million to $30 million.

Two years ago we asked Paul to also take on, in addition to the Central Region, the leadership of the UK office. And with the remarkable efforts of our great team there and under Paul's leadership, the UK's revenue has increased 62% over the past two years with its EBITDA growing 100%.

So Paul is a terrific leader who has proven himself time and again in every role he's been asked to take on. And we have a lot of confidence in him to be able to take the play that we're running in our direct offices and make sure it's run systematically throughout the world.

The strategic markets division, as we -- focusing on specific problems for specific customers will include the government region, our sales performance practice, the customer loyalty practice, a new special sales team focused on named global accounts who are not -- accounts that are not currently assigned to other salespeople, and very likely some new acquisitions.

This group will be tasked with taking very specific solutions to very specific customers and trying to own those solutions. It will be headed by Shawn Moon. When we talked about creating this new growth division with government, sales performance, customer loyalty, global accounts and the opportunity to grow through additional acquisition, it had Shawn's name all over it.

Government and sales performance already have been reporting to him and he is overseeing the three acquisitions we've made over the past five years, specifically the Trust Practice, NinetyFive-5 and sales performance in [Red Tree].

Shawn has been responsible for some of the largest, most strategic deals we've conducted as a company. And we recognize if we didn't just separate this group of activities and focus on it we'd never really take advantage of the opportunity. And Shawn raised his hand; we raised our hand and we're excited about what he's doing there.

Our education and international licensee groups will continue to be led extremely capably by Sean Covey who has led the growth in both groups over the past many years in addition to our innovations group. And so there won't be any changes there, but we have great teams in both of those areas. Sean has done a fantastic job of growing those.

And so, we think by segmenting the markets a bit more we'll be able to get increased top focus, increased marketing and other focus from Scott Miller and his team here to help us penetrate those markets.

Just to mention the last thing about which we are excited is that we think our strong cash flow and liquidity will give us some new opportunities for value creation in the future. As I noted earlier, we're in a strong position with $14 million in cash, no borrowings under our $30 million credit facility and the expectation of generating an additional $30 million in after-tax cash flow in the next 12 months.

This provides us with the opportunity to repurchase stock and make some thoughtful, disciplined bolt-on acquisitions as they become available and as we focus on them.

Finally again, just some notes on the outlook. In last year's fourth quarter we generated revenue of $68.1 million with an overall gross margin of 68.9%. With the perspective quarter pipeline that is $17 million higher than at the same time last year when we did that, we have real confidence that even after the impact of FX our Q4 revenue will be our highest ever.

Consequently, because of the very high flow through in the fourth quarter we also expect and are confident our Q4 adjusted EBITDA will also be our highest ever. As discussed, we've reset our adjusted EBITDA guidance range to try to account for a combination of the full impact of the approximately $3 million of EBITDA impact associated with FX.

Plus the possibility that with the magnitude of training days, which are already scheduled to be delivered in the fourth quarter, which may consume nearly all of our fourth-quarter delivery resources because the magnitude is so big -- and were scrambling and we've got contract consultants and others to help, it may be that some of that shifts and so we just wanted to provide a cushion for that.

Nevertheless, we feel great about the fourth quarter and anything that doesn't get into the fourth quarter, as good as we expect it to be, will help us get a good start on the first quarter. So I want to think each of you for support. Honestly, our opportunities for growth have never been better. We've never been better prepared to take advantage of them.

We feel like as a team and as an organization we've got tremendous people in every position, excited to move forward and we look forward to being singularly focused on meeting the strategic goals of our multiyear plan, finishing up strong for this year and getting off to a fast start next year.

So with that, just want to call your attention -- if any of you have any questions about any specific accounting issues you can see on slide 14, as we do each quarter, Steve is here, of course, and can answer any questions about those items. At this point I think what is open this for questions and be delighted to talk to you.

(Operator Instructions). Tim McHugh, William Blair.

I guess one numbers question. The impairment charge -- maybe I missed it if it was detailed, but what's the impairment this quarter?

There's two components to the impairment. We had a set of discussions related to related party receivable and the long-term cash flow related to the collection of the long-term portion of that receivable. And while the set of discussions benefits us somewhat currently, the long-term view caused us to impair that receivable from a related party by between $500,000 and $600,000.

In addition to that we had some changes in content that caused us to impair a portion of amounts that we had capitalized in a couple of content areas. And the sum of those two things is the $1 million that's reflected in the financials.

Okay. I guess as you think about the deals slipping relative to your expectations, maybe just elaborate on what's happened there. Because you tell a story about more and more of the revenue coming from repeat customers and from intellectual property, but there seems to have been a number of things slipping in the last year. So trying to I guess triangulate the visibility with these items slipping.

And I guess associated with that, when you talk about seeing a strong Q4 and then Q1 I think you made the comment it would be a record year, I guess. But if you we're growing every quarter is a record year. So what's the growth rate that you think about as you go into [20] if you say this pipeline sets you up for the following year -- what's the target at this point?

Yes, so I should take that last question first and then go back to the shifting economics; would that be helpful, Tim?

Yes, that's great.

Okay. So as it relates to our growth rate, we've said our long-term expected growth rate year-after-year has been -- our goal is to grow revenue at least 10% a year and to try to have flow through of incremental revenue -- of that incremental revenue of approximately 25% to 30% flow through to adjusted EBITDA.

As you know, the last couple of years has been a little noisy because of the government shutdown and sequestration and last year's -- plus $1 million of FX hit us by $4 million of EBITDA and saw that we increased adjusted EBITDA by $3 million in the year. That flow through would have been more like what we thought but for that. But again, those things happen. This year it's more FX-related.

But in general -- and to try to actually adjust that we've done some -- as I mentioned, some refinements in the business model to provide ourselves some additional cushion so that whatever that pothole is next year, that might be a few million dollar pothole, that we're still able to meet at least a 10% revenue growth number and with the flow through of 25% to 30% to EBITDA. So is that responsive on the first question?

Yes.

Then as it relates to shifting economics, let me just say we've got kind of two bases of revenue. We've got a normal base of revenue that's 90% repeat revenue that flows relatively consistently, but not every client renews exactly the same time every year and it's not always that -- it might not be a gap between one division finishing some training and somebody new starting. But that's kind of the normal flow of the business we deal with.

Increasingly in the last couple of years we've had opportunities for some large contracts. And these are -- I think with the economy coming back partly, people are now recognizing that they have some money to invest in leadership development and training, so they're putting out large proposals. Or they're large clients with whom we've worked historically who are now doing something big.

They want to do something big. They don't have a specific timeline for doing it. And so they set up a process and say they have a certain time they want to do. We win the contract, but then life happens and they might start the contract two or three months later. That's still good news for us. But sometimes when we think we have a specific start date and it moves off a month or so that's I think the nature of what happens there.

But beyond that I think the only other thing in the last year that's been a little bit -- has pushed us a little bit more than normal from quarter to quarter is that with the launch of 7 Habits last year, the 7 Habits product, because it was primarily purchased by people -- these decision-makers who became certified facilitators, they made that purchase decision quickly.

And when that purchase decision is made we ship the materials and so that's a good thing in that quarter, but also drained our pipeline some because the normal flow -- there's a faster conversion cycle in last year's second quarter than normal.

That caused us maybe -- not to belabor this, but during the second quarter our pipeline we felt like at the end of the first quarter was a little lighter than we wanted it to be to build for the third and fourth quarter when we made those investments.

But I'd say that it's primarily those two things that I think we are now back to what we think is more business as usual. We'll still have some of these big contracts that come up and they get awarded, but then something happens with the client. But that's just kind of the normal ebb and flow.

But thankfully over the last year we've still been able to maintain kind of this adjusted for currency pretty solid growth rate and expect to be able to do so going forward. Is that responsive -- push -- (multiple speakers) if I'm missing it?

No, that's fine. And then I guess I missed -- did you give the client/partner number for the end of the quarter?

It was 181.

Okay.

So as we mentioned last year, we are now hiring in classes. And so we used to hire throughout -- we still do a little bit of that, but generally we're trying to hire in classes at a specific time. We find that it's actually a good thing for people to be part of a class. There's the collegiality, the competition, etc., that comes with that.

And so, on the corporate side we're hiring now one big time a year and then filling in with any replacements during the course of the year. And so that big hiring was in the fall last year and we'll expect to be in the late fall this year, probably right before Christmas when we'll hire the next big class there.

Education has the same idea, but they do theirs in the summer and have just hired a group of client partners for next year there. So the 181 we expect by about the time we report year end in November that we will have hired a number that will get us into the 200s, 205 to 208 range, which was the target. But it's a couple of months later than the original target.

Now that we're recognizing that instead of hiring those people right at the -- that class, right at the same time we're kicking off all of the New Year and all of the effort that's done with managing existing and meeting with all the existing people, we were better off to give those people kind of their own time in the sun unclouded by everyone else. And so we're going to be hiring those folks in late November, early December so that they get trained and are ready to go in January.

Okay, thank you.

Marco Rodriguez, Stonegate Capital Partners.

I was wondering if you could help quantify the revenue or the impact to revenue and adjusted EBITDA from the large contracts that got pushed in Q4. Into Q4 that is.

Yes, I think we can. As you know, we get good flow through from additional contracts. And so, we thought there would be about $1 million of revenue delivered in third quarter, which would've contributed after gross margin and commissions about half that amount. So probably $0.5 million got pushed there of EBITDA.

And then as I mentioned, the conversion cycle from our marketing events in Trust this quarter -- the good news is we positioned this -- Trust as more a strategic thing and then just training facilitators. That was a good thing, but it also meant that we built up a little bit more pipeline. There was about $1 million less revenue there, probably another $0.5 million.

So but for those two factors -- and again, they're just part of business. We're not trying to say there extraordinary events; we're just trying to give context on what -- versus our own expectations it would have been about another $1 million of EBITDA contribution on those items, which we don't think we've lost -- we'll still get it.

Part of it will increase our fourth quarter and part of it may push into the -- because of our really significant pipeline that we have to deliver in the fourth quarter, some may -- because of either our schedules or client schedules, some of that may push into the first quarter.

Got it. And then I was wondering if you could maybe elaborate and go back a little bit more in terms of these realignments that you've made in the business here. One of the prior questions, it sounded like your answer was you wanted to kind of give yourselves a little bit more of a cushion to meet the top line of 10% and the flow-through of 25% to 30%.

But unless I misunderstood you, it kind of sounded like some of the issues, at least this year, that have been impacting are kind of transitory in terms of FX and just some business moving from Q3 to Q4. So I'm just trying to understand what's kind of really driving this realignment that you're discussing in the business?

Yes, you've got it exactly right. What's driving the realignment is nothing to do with cost. It's just as a result -- we've also been working on the business model. But the realignment is really to make sure that we have intense focus on one or two direct objectives rather than multiple ones.

And so, the idea of setting up a strategic markets group and asking Shawn Moon to head it is the idea that some of our fastest growth areas and biggest opportunities are in things like sales performance and customer loyalty. And some of these vertical market things that we're doing even in healthcare and other things where we haven't -- don't talk about it a lot here, but they are fast-growing small initiatives.

We feel that without real leadership on those things we won't put the kind of organizational muscle behind it to make these things successful. These tend to be big deals. They tend to be things that when people train their entire sales force worldwide, etc., this is something where you need a special set of skills. Shawn Moon has run these groups over the years.

And so, the main idea was if we can do that, organize that group, in addition identify a number of select accounts that we've never really even been in on -- they might be 100 really significant companies that have big opportunity. But where they're one of 60 accounts another salesperson is focusing on and we'll now have a salesperson who might be focusing on three or four of those accounts.

Also we believe in some of these vertical markets there are some opportunities for some small bolt-on acquisitions that could increase our potential in sales performance say or in merger and integration or some of these things that we do. And without the focus of a leader who could both integrate these things and we'd have confidence, we just wouldn't do them.

So the first reason for setting up strategic markets was to -- and also in our government business, to get a particular focus independent of the large contracts that we've had. We have a terrific general manager there, [Preston Luke], who's done a fantastic job over the years. He's reported to Shawn. But we think there is a big opportunity both in federal and in municipal and local governments, which we've never focused on.

And so it's really to organize ourselves to take advantage of segments. It's for accelerated growth, not for cost-reduction. Our direct offices, having all of them focused on one play instead of having multiple plays because there were other pieces of this like government and sales performance in it, having one set of please being run by all of the offices in the same way we think is the right idea.

Paul Walker has been -- we have all great general managers and Paul has been one of those. Paul has been really out in front in many things and we've ask him to lead that. The reasons are both just to accelerate progress on implementing plays we already know work, but which we feel like we need increased top-level focus on. Is that helpful?

Yes, that's very helpful. And last quick question and I'll jump back queue. I was wondering if you could talk a little more about the international licensee revenue in the quarter. It looks like it declined year-over-year. Can you talk a little bit about the drivers there?

Yes, I'll ask Sean Covey just to respond.

Sure, so for the fourth quarter with FX taken out, FX impact, which was negative, we grew at 4%. If you look into it, growth has been pretty steady. This quarter it dropped primarily because of three partners, three large partners, that had a bad quarter. One of them in particular had a large deal last year, Puerto Rico, that didn't repeat this year. I don't think it's anything systemic and I expect that we'll get back to the 10% to 12% range we've been in.

If you look at the last three quarters so far this year, so year to date we're at 9% growth and the last year if that 12.5%. If you look at the 9% growth this year, if you look at just the gross revenue, so just grossed up revenue of all the partners in their local currency, it's also at 12%. But we reported 9% just because there are some direct sales we had last year in Korea and some other markets that are reported in that number.

So, I think generally we feel this 10% to 12% growth rate with the partners that we've had for the last many years is still in place. It was an off quarter primarily because of three larger partners that had -- just had an off quarter.

Sean, you might just speak to your expectation for the fourth quarter and for the year for the licensed (multiple speakers).

Yes, so we think that the FX will be about the same as it has been. It's been hitting us pretty hard. And it usually takes down your percentage growth by -- it's been anywhere from 8% to 10% each quarter. We expect that to continue. We expect our growth rate in local currency to continue at the same rate it's been at. We think the third quarter again is an anomaly and will be in the 10% to 12% range. Does that help?

Absolutely. Thanks a lot, guys. Appreciate it.

Jeff Martin, ROTH Capital Partners

Bob, Could you shed some light on the revenue recognition in terms of accounting of large contracts and if there's any risk of not -- if you don't complete those contracts you won't be able to recognize revenue for some of them in the fourth quarter?

Yes, let's talk about the different nature of contracts. There are really kind of two -- there are three generic ways it can happen. One is it is just a contract where they sign it up and they ask us to do on-site delivery. That's the least frequently occurring, but that way it's just we do that one class at the time and one course at a time. And so that's recognized just as it's delivered over a period. But they sign a master contract for you doing that.

A second would be where they purchase an intellectual property license and that, again, is done when they purchase the license; they get the rights. That revenue is recognized, there is no ongoing obligation there unless they also buy services, coaching services or something in association with that, which again are fulfilled on a piecemeal basis.

And then the third would be if they decide to certify a champion inside the company and then buy materials from us. So I think the revenue recognition, the size of the contract doesn't really change the nature of what we do. The revenue recognition is pretty straightforward for any of those three. We do it lots of times with smaller contracts, so there's nothing unique in most of these larger contracts that changes revenue recognition or risks the recognition of that revenue.

Okay. And then you hinted at acquisitions. Could you shed some perspective there? Are these mostly tuck-ins that you are talking about and what specific practices are you looking to add to?

This idea -- we've got -- our practices have each grown to the $20 million plus range, which means that in any one of the content categories we're in the top -- if we are not the top practice in the industry in that content category we're one of the three or four.

But in some of these vertical practices there are other people out there who are kind of equivalent size. And so, as you know, in the past we've done some tuck-in acquisitions where it was like 5 Online, or NinetyFive 5 where we bought this tool set basically, plus got a group of really good people. Red Tree we got some content and some great people. Speed of Trust was the largest acquisition, which was a new category for us.

But I think as we enter in some of these vertical markets, instead of just trying to say what is the greatest amount of revenue we can get just using our own content, the real question we want to focus on, which we have done in these areas, is to say, what does it take to solve the problem.

And if there is a toolset we don't have or a capability we don't have, or there's somebody else who has reach into a client segment that we want, that kind of a thing in sales performance, for example, or customer loyalty, as an example, or in healthcare could be good acquisitions where you're making a $10 million or $12 million, $15 million acquisition that fits in nicely with what we're doing and gives us additional capabilities.

We're not thinking about making kind of a transformational kind of an acquisition and risking a lot of things on that. But I think we just think there's some good things to do that could increase, for example, in sales performance, the acquisition of one or two of those people could put us into -- being that would be equal or equivalent to any of the top 2 or 3 sales training companies -- we are in the top 8 or 10 now.

We could move up into the top tier with an acquisition there in customer loyalty. It wouldn't take much to move into that top-tier. And so, I think those are some of the things we're thinking about is taking our content, other people's content and/or distribution and really trying to own some of these content categories.

Okay. And then could you talk about the ramp in client partners? That's a big part of the thesis here is that the ramp and adding more each year, or at least having stepped it up last year and this year would create some higher visibility into some consistent growth that's in that 8% to 10% range.

Let me say first of all that we've been doing, as you know, for years hiring and ramping salespeople and have reported that each year the key metrics for us with respect to new salespeople: are they hitting the ramp; and two, do we retain the right percentage of those new people.

As it relates to hitting the ramp, the people we've kept have hit the ramp and have been ahead of the ramp consistently and are again this year. We usually report on this in November kind of after the year is over because these classes come in in the fall and then get through their first year and others are on that schedule where their ramp metrics are set kind of on these annual bases.

But on the ramp up with the addition of sales manager position a couple or three years ago, the regional practice leaders who help people present these events and close sales, other sales support that we provide centrally, while we've increased our investment certainly the ramp up has been good and we have no concerns about the ability to ramp up salespeople.

In terms of retention, again, we originally thought that we had hired 15 to net 10. In our first six years of doing this we had to hire 17 to net 10. That included a couple of tough periods like 2009 when fewer people were successful selling.

But generally now we think it's in the range of still you've got to hire 16 to net 10. But that's been pretty good, been pretty consistent. And the addition of sales managers has really helped us retain those people. Hiring in classes we think is helpful. So all those things work well.

The number of hires you mentioned, we get this net 30 a year. In the last couple years we made two shifts that may have fouled up your modeling math. One is that we used to higher evenly throughout the year and now we higher in a class. And second, we've moved that class back this year to, as I mentioned, the end of the fall rather than the start of the fall. But other than that we think that works well.

The other key element of this of course is the retention and productivity of people who are already ramped up. Historically over a 10-year period that's averaged about 5.6% a year compounded annual productivity growth for those people and we've retained about 94% of that group as a whole. In this last fall we had one death of a client partner, tragically; we had a retirement, and then we asked a couple others to take management positions different places in the world.

And so, as a group that affected their growth a little bit. But in general this program -- this is working and that's a key bet that we have and it doesn't change with the segmentation of the sales force. We have the same ramp up for those folks as well.

Okay. So if we're going to characterize this in summary fashion, you had a depleted pipeline going back about four or five months ago. You've worked to fill the pipeline and now you feel good about where you're at in terms of getting back to a 10-ish percent growth rate. Is that accurate?

It is. In these four offices -- it's primarily in four direct offices in the US, which of course constitute around $85 million of revenue. These offices, I think we showed on one of the slides -- slide 6 -- averaged over a four-year period 12.6% growth and then over the two-year period, 13.7%. So it was really I think just the launch of 5 Choices and then 7 Habits.

Because these were shorter-term sales you saw our revenue drop off a little bit in some of these longer-term contracts. We've been building that back up in almost every office. We expected, as you said, the sequential growth in the third quarter, which we got minus the $1 million that we didn't get and which is about 4% that we didn't get in the quarter. But the 96% of what we thought we did get.

And now the fourth-quarter pipeline is so much bigger that we feel like on an overall basis we're right there. We've got one office whose pipeline still isn't quite where we'd like it to be, but they're also adding at the most rapid rate. So we feel like in the fourth quarter and certainly by the first quarter we'll be in a very good position to just have a more consistent growth in these offices.

Got it. Thanks for your time, Bob.

Kevin Liu, B. Riley.

First question, just in terms of the near-term visibility, from what I gathered on this call it sounds like a lot of your trading days are already booked up for the current quarter. So even if you were to close some large deals you wouldn't necessarily deliver them in Q4.

So is the implied Q4 guidance based on your full-year numbers basically pretty much in hand just given all the number of booked days? Or is there still some dependence on some large deals within the pipeline closing this quarter?

Yes -- let me just say again, there are two kinds of large deals. There are some that are intellectual property deals and we have a couple of those still to close and those are recognized in the quarter. Other large deals would be for delivery late in the fourth quarter and in the first quarter.

So our guidance really reflects business that's already on the book, a couple of intellectual property contracts that we have been told we're getting and expect to get. But more than anything the variability for us then is just really on our large client facilitator business in the fourth quarter, which is usually August.

You can see that if you look back at our numbers on the previous fourth quarters, let's say last year the four direct offices in the US did $21 million approximately in the third quarter and then did $26 million in the fourth quarter because of this uplift. And so we're expecting that kind of an uplift again in those direct offices. We've been doing that for a lot of years and have confidence in that.

But as you say, most of our booked days are booked and to be delivered -- we still for the next three or four weeks can affect that and influence new bookings that we can still deliver. But our guidance range anticipates mostly what's on the books or things that we are in a stage of the pipeline where there's an 85% plus chance they'll get on the books. Or this facilitator stuff -- facilitator sales that occur in the fourth quarter, or in the -- August.

Understood. And then I think earlier in the year you guys had talked a little bit about underutilization impacting the gross margin in the business. With the number of days you have filled for Q4 already, how meaningful of a pickup should we see in the gross margin line as you absorb that capacity [to deliver]?

Let me give you an example. We mentioned in first and second quarters that for example in education business we had our coaches whose focus is on trying to make sure that every school -- we deliver quality results in every school. Those coaches were not billing out at high rates because they're schools. We want to make sure that it's a service to those schools.

And so, our margins, including materials and service and everything else, were only 45% for those coaches during the first two quarters and really into the third quarter as well.

Those same coaches, on the other hand, are now delivering training in new schools in the fourth quarter and, as we mentioned in previous quarters, the gross margin and the flow through on that is very high. So their gross margins are in the high 60%s in the fourth quarter where they were in the 40%s during the earlier.

So I think there's a pickup there. There's a pickup in gross margin typically because of the significant amount of material sales to licensed facilitators that occur in the fourth quarter. And also a number of our large intellectual property contracts that organizations buy and renew each year also happen to happen -- usually tend to happen in our fourth quarter where they get some kind of a pricing advantage for doing so.

So our gross margin in last year's fourth quarter was around 69% for the Company as a whole in the fourth quarter compared with the annual average more in the mid-60s. And so, there's quite an uplift in gross margin, so there's a lot of flow-through from incremental revenue in the fourth quarter.

Got it. That's all I had. Thanks a lot.

Peter Van Roden, Spitfire.

I'm just a little bit confused on the sales, or the client partner side. I just want to make sure that I understand it. And so let me walk you through what I understand. So you guys ended the fourth quarter at 169 people and you are at 181 today. And then you still want to end the fourth quarter September 30 at about 200?

Yes. What we've said kind of generally is that by the time we report our fourth quarter -- in the last couple years when we've had all the hires done, so for the next year, so we basically the number we give of 205 to 210 was kind of our target by the end of this year.

That includes the hiring of the next class for the following year. And so, that'll happen like I say kind of in the November period, the hiring. They'll be trained in December and begin in January. So we will expect to hire 20 to 25 new people between now and say the end of November -- mid-November.

Got it. Okay, so what's really happening is, you're going to kind of get to that net 30 for the year then also add some additional people to start the build for 2016?

Yes. Apologize for the confusion. It's really what's happened the last couple years as well is that we were at 145 or so salespeople I believe literally at August 31 last year, or something like that. So we added a large number in the first quarter last year.

They were added as part of our target for the growth, but they were just added in the class that came in in the fall. So this isn't particularly a new thing. The only new thing I think is that we're hiring now as a class and we're moving that class back a couple of months.

Okay. Got it. Thank you.

We can give you a summary. If you want to call and we just walk you through year-by-year so you can see how that's played out.

Okay, great. Thanks, guys.

And we have no further questions at this time. I will now turn the call back over to Bob for closing remarks.

Thanks. We really appreciate you joining us today. We appreciate your support and great questions. Of course delighted to answer any questions you have. Hope everyone has a great holiday weekend and we look forward to talking to you soon. Thanks so much.

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