Franklin Covey Co (FC) 2016 Q1 法說會逐字稿

Welcome to the Franklin Covey's Q1 2016 Franklin Covey earnings conference call.

My name is Anna 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.

Derek, you may begin.

Thank you.

Good afternoon and happy new year, everyone.

On behalf of Franklin Covey, I would like to welcome you to our earnings call this afternoon.

And before we get started, I would like to remind everyone that this presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements are based upon management's current expectations and are subject to various risks and uncertainties including but not limited to the ability of the Company to stabilize and grow revenues; the ability of the Company to hire productive sales professionals; general economic conditions; competition in the Company's targeted marketplace; market acceptance of new products or services and marketing strategies; changes in the Company's market share; changes in size of the overall market for the Company's products; changes in training and spending policies of the Company's clients and other factors identified and discussed in the Company's most recent in your 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 that the Company's actual future performance will meet management's expectations.

These forward-looking things are based on management's current expectations and we undertake 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 this afternoon to Mr. Bob Whitman, our Chairman and Chief Executive Officer.

Thanks, Derek.

Thanks, everyone, for joining us today.

We hope everyone had a good holiday; back at it hard, I know.

We appreciate the opportunity to report on our results for the first quarter which somewhat exceeded our expectations.

I will start with a review of the overall results for the quarter, then highlight several areas of the business about which we are very encouraged that we've talked about in the past; and then finish with an update on our guidance for the year as a whole.

Let me just start out with a quick review of the results.

For the first quarter, revenue was $45.2 million compared with $47.9 million for the first quarter of fiscal 2015.

This reflected that a $1.1 million increase in revenue for the rest of the business during the quarter was more than offset by the combined $3.7 million impact on revenue of the following two factors, both of which were expected for the quarter.

First was the non-repeat during the quarter of a $2.7 million intellectual property contract with a large federal government agency.

This contract has been renewed every year for the past several years and was renewed in last year's first quarter.

However, due to administrative change at the agency, it has not yet been open for renewal in fiscal 2016.

By the way, I just note there is no assumption of it renewing during this year built into our annual adjusted EBITDA guidance range, although it could happen.

This resulted in a $2.7 million reduction in our government units revenue, which was only partially offset by the $425,000 or 19.6% year-over-year increase in revenue achieved in the balance of the government business.

So we feel good about the government business generally.

This contract will be a factor here for the first quarter and the second quarter as well.

The second item is a $1 million reduction in revenue due to the year-over-year impact of changes in foreign exchange rates compared with the first quarter of last year.

Because the major changes in foreign exchange rates relative to the dollar occurred primarily during last year's fiscal second, third and fourth quarters for us, at current exchange rates the impact to foreign exchange on our operations in the second, third and fourth fiscal quarters of this year would be much less than in the first quarter, as you can see in slide 3.

In fact, as you can see, the sum of the impact for the next three quarters would be only approximately the same as the $1 million impact in the first quarter.

So that is again at constant exchange rates at current exchange rates.

From an adjusted EBITDA standpoint, adjusted EBITDA for the first quarter was $4.5 million, somewhat above our expectation of $4 million.

As expected, this was below the $5.9 million of adjusted EBITDA achieved in last year's first quarter, due primarily to the same two factors just discussed, a non-repeat of the federal government agency contract and the impacts of changes in foreign exchange.

As you can see in slide 4, adjusted for these two factors last year's first-quarter revenue would have been $44.1 million, and last year's first-quarter adjusted EBITDA would have been $3.2 million.

Compared with these adjusted Q1 fiscal 2015 numbers, so adjusted for FX in the contract during the first quarter, revenue grew $1.1 million to $45.2 million, and adjusted EBITDA grew $1.3 million to $4.5 million.

So that was 2.5% revenue growth and 40% growth in adjusted EBITDA.

This increase in adjusted EBITDA was primarily attributable to the combination of an increase in gross margin percent from 65.2% to 66.5% during the quarter, resulting from an increase in the mix of facilitator and intellectual property contracts other than the government, from decreased costs and incentives associated with marketing events, and from decreased costs associated with the delivery of online and digital content resulting from changes to online program operations during the first quarter of fiscal 2016.

Finally, our cash flow and liquidity position.

Our cash flow liquidity and balance sheet position all remained strong during the first quarter.

Cash provided by operating activities increased $9 million during the quarter to $7.1 million, compared with net cash used for operating activities of $1.9 million in the first quarter of fiscal 2015.

We ended the quarter with $22.3 million in cash compared with $16.2 million as of the end of our fiscal year in August.

We had no borrowings under our credit facility.

As you know, we expect to utilize a significant portion of this liquidity to complete the pending Dutch auction tender offer next week.

I'd just like to quickly address -- touch on a few areas of the business about which we are very encouraged.

I will name five.

The first is that after a somewhat disappointing fourth quarter, the education division's revenue grew $2.1 million or 35% during the first quarter.

This growth included $335,000 of revenue from a large contract which had been expected to close in the fourth quarter, $600,000 from the recognition of deferred revenue related to our significant coaching and intellectual property sales in the fourth quarter, and $1.3 million from new sales booked and recognized during the quarter.

We expect continued strong growth during the second quarter, though as a growth rate percentage the growth rate percentage itself will be less than in the first quarter.

We expect good growth for the year.

Second is the continued growth in our international licensee division.

Licensee division revenue of $4.7 million for the first quarter represented growth of 3.2% compared with first quarter of fiscal 2015.

But excluding the $366,000 of negative foreign exchange impact in the quarter, revenue growth would have been 11.3% in constant currency.

We expect continued strong growth in the licensee division for the year and at current exchange rates, as I've noted, the impact of changes in foreign exchange on the results in future quarters would be significantly less than in the first quarter.

Third and importantly, the strong momentum in our US direct offices.

After having year-over-year revenue be relatively flat for several quarters and down for September and October this year, when we reported year-end results in November we felt confident that given the size and momentums of the bookings and pipeline we would have strong year-over-year revenue growth in November and that these US direct offices would get back closer to their historical growth rates over the next couple of quarters.

We are very encouraged about the following: one, revenue in these offices grew $1.2 million in November or 16.8%; that revenue growth in these offices continued in December with revenue growing $766,000 or 17.4%; the size of our pipelines, both what we call gross pipelines -- that includes every opportunity and probability adjusted for the stage of the pipeline it is in -- for January and February are substantially larger than at the same time last year, supporting our expectation of continued revenue growth for these offices in the balance of the second quarter and the third quarter.

And finally, both the number of opportunities that are in the pipelines and the average size of the opportunity are up substantially; the size of opportunity even more so than the number, but both strong.

This is reflecting that we are back to selling larger, more pervasive engagements as we have been working toward over the last quarters.

It has been a few quarters coming but given our strong start, our strong bookings and the size and momentum of our pipelines, we expect the second and third quarters to show strong year-over-year growth as we said in November.

Fourth, the positive start in our new strategic markets division.

The strategic markets division includes our government business, federal, state and local, our sales performance practice, customer loyalty practice and our new Global 50 accounts team.

Excluding the $2.7 million revenue impact of the non-renewal of the large government agency contract in the first quarter, revenue in the strategic markets division would have been up slightly for the quarter, 2% for the quarter.

Some things about which we feel good in the division include that, one, the government business including -- excluding the nonrenewal of the agency contract grew 19.6% for the quarter.

We feel like we are building a good foundation in stuff other than just this one contract.

Second, the sales performance practice continues to grow every quarter, grew well for the trailing 12 months.

We expect this growth to accelerate in the second and third quarters; continue to build the sales force and pipeline there.

While the customer loyalty practice's revenue declined during the quarter due to the expiration of one large contract, we believe we are positioned to replace most of that business this year and at higher margins.

Finally, our Global 50 team which is a new special team focused on penetrating 50 of the largest accounts in the world is off to a strong start.

We would expect that it would likely take this team several quarters to build the pipeline and begin to generate revenue and, therefore, with only minimal revenue for this first year.

We now expect much more than that, including revenue in the second quarter.

So we are excited about the prospects for that.

Finally, of the five things, the prospect of using our strong liquidity and balance sheet to create additional value.

We are grateful that with the combination of our $22 million in cash at the end of the first quarter, our undrawn $30 million credit line and an additional $20 million approved term loan facility, which we expect to close in the next couple of weeks, we will have plenty of liquidity with which to complete the Dutch tender, continue to purchase stock in the market thereafter and still have liquidity for opportunistic acquisitions as those make sense.

So finally, I will just move on to our outlook for the second quarter and the full fiscal year.

Given our somewhat stronger than expected first-quarter results and the strength and momentum of our bookings and pipelines, we continue to feel very good about our full-year adjusted EBITDA guidance range of $34 million to $36 million at foreign exchange rates that were in place at the end of fiscal 2015.

And we reaffirm our guidance and we feel good about the prospect of the second quarter showing good growth in revenue and adjusted EBITDA.

So with that, I will now turn over the time for questions.

I think maybe just open it up for questions to the team and turn it back to our operator.

(Operator Instructions).

Tim McHugh, William Blair.

This is actually Sam calling in for Tim.

Just wanted to touch upon the US direct offices, some of the momentum you talked about in November and December; some pretty strong growth there.

And you also talked about the pipeline for January and the second quarter.

Could you just maybe touch on -- I know you said you kind of had some bigger accounts, but is there anything that changed substantially on your end that kind of has driven some of that strong growth?

No, not really, and I think this is what we have been anticipating for several quarters.

As you know, we had a lot of additional events a year ago to start building the pipelines.

By summer and fall, early fall, we were seeing the average size of the opportunity in the pipeline to be bigger, but it really isn't because of any particularly big contract.

It is really just more that whereas we have mentioned in the past, for about a year when we were launching the Seven Habits 4.0 and some of the other facilitator-oriented offerings, our average sale, the average sales size was smaller.

Because if people are buying 30 manuals, no services associated with them.

So the average sale dropped for those products down to around $6500 or $7000 versus our more normal revenue in the $11,000 or $12,000 per transaction range and, of course, a lot bigger ones.

We mentioned in the report in November that the size of opportunities in our pipeline had increased, which meant really it had moved back more to normal and had increased somewhat beyond that.

So there wasn't any particular factor.

It is just the ongoing given that now for one year, we haven't been launching any of these new products.

We have been building the pipeline to have longer sale cycles.

This is just starting to now -- the maturation of the pipeline is now starting to move from D to C to B and now to A, which is A pipeline is what gets recognized as revenue.

So it is the natural moving through the system of the pipeline as we have been building here for the last year.

Okay, thank you.

That is really helpful.

Was that responsive; is that understandable?

Yes, no, definitely.

That is fine, thank you.

And then just for your EBITDA guidance for the rest of the year, for the fiscal year, is there a certain growth target that you need to achieve that EBITDA or the midpoint, the $35 million?

Yes.

At our cost structure and our normal gross margins, we would need to have revenue growth in the range of 5% for the year to meet those expectations.

We think we will do better than that, but at the same time you will have some things they didn't count on.

So that is why we feel good that we think our revenue growth will be stronger than that for the year as a whole.

That will give us some cushion so that we can be safe in that range.

I don't know, Steve, if you wanted to add anything to that, but that's really --fundamentally, it takes about 5% revenue growth to deliver the midpoint of the range.

Okay, that is great.

And then just one follow-on.

That is excluding foreign exchange, incremental foreign exchange impact.

Okay.

And then just finally on the expense side, you talked about some lower expenses this quarter with more facilitator sales.

Is that something that you kind of see sustainable throughout the rest of the year, or was that kind of just like a one-off?

No, I think -- let me just break that question if I can, Sam, into two components.

So on one side, we had higher gross margins and that related to just a mix shift toward facilitator and smaller intellectual property sales.

We think that will continue.

That is kind of just a general shift in our business mix.

So the gross margins we think will continue to be strong.

On the cost side, I think we have mentioned in a couple of conference calls that over the last -- we had lots of investment for two or three years building up the infrastructure necessary to grow the business and to build the sales force.

Now that we have completed that phase, we are just seeing -- and we refined the investments we have made on the margin, we think now that we have got a good cost structure that should flow through.

We should have good flowthrough of incremental revenue.

So I don't think -- it is not really a one-time thing.

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

It is just really we've got a cost structure that is not dramatically different than it what it has been, but the additions to it are dramatically different.

We are not adding much to it other than our investments in sales force growth, and that is pretty much it.

Okay, thank you.

Thanks for your good questions.

Marco Rodriguez, Stonegate Capital.

Good afternoon, guys.

Thank you for taking my questions.

Real quick, just kind of a housekeeping item.

I didn't quite catch when you were talking about the education practice, you had outlined a certain dollar amount of a contract that I guess was pushed from Q4 into this quarter.

What was that dollar amount again?

Yes.

So there was $335,000 related to a specific contract from the fourth quarter that pushed to the first.

And then the rest was the $600,000 from the recognition of deferred revenue which we mentioned in the fourth quarter, that the amount of deferred revenue or the amount of intellectual property and coaching contracts that we sold in the fourth quarter was a lot higher than we had thought, resulting in more deferred revenue.

That hurt us in the fourth quarter, but will benefit us every quarter from here on in.

Got it.

And then kind of shifting gears here now towards the strategic markets division, you had mentioned on the government business that you had, I guess, the potential to replace the $2.7 million contract that didn't repeat with additional type business that was higher margin.

I was wondering if you could talk a little bit about that opportunity or opportunities, and how that kind of might play out through the fiscal year.

Thanks, Marco.

I apologize that I wasn't very clear in my comments; let me just break that out.

As it relates to the government contract itself, we are not anticipating the replacement of that contract this year.

But when I was talking about the customer loyalty business -- obviously not very clearly, I apologize -- I was saying that there was one large contract with a major retailer that expired under its terms this last year.

They had gone through the whole process.

Now it is part of how they do business, so it is kind of the natural maturation of some of these contracts.

And I was saying there we are positioned to replace most of that business this year and at higher margins.

So we have a pipeline of opportunity of clients in the customer loyalty space where they are way down the road in terms of advanced stages of discussions on the pipeline.

And the nature of the business being talked about with them is at somewhat higher gross margin than the business we just lost.

So that was really just the comment; not related to the government.

We are not anticipating that contract will be replaced this year.

We have some hope it might be, but that is really dependent on this agency's own administrative schedule.

But in the customer loyalty space, we do expect to replace a substantial portion of what we lost on the top line and almost all of what we might have lost on the bottom.

Thanks for that clarification.

Then in terms of the strategic market division, the sales performance practice area, you had some fairly positive commentary in regard to that and your expectations for this fiscal year.

Can you maybe provide a little more color around what is driving that?

Sure.

In fact, I'm going to just invite Shawn Moon who oversees that division to just make a couple of comments on that.

Hi, Marco.

We are actually quite bullish about what is happening with the sales performance practice.

The first quarter we had a good strong start, both in terms of revenue and pipeline.

The pipeline was particularly encouraging.

As we look to our current quarter, we are pleased with the traction that we are getting.

The new contracts and new opportunities, and really it is a function of a little bit bigger team, a little bit more experienced team, a little bit longer time in the saddle with a more exclusive focus than we have had in the past.

We are not distracted by some of the organizational issues that had preceded this relative to the acquisition of NinetyFive 5 and some of the work that we have done with the field.

So that focus is really starting to bear fruit and we are pleased with the direction that we are going there.

We are encouraged.

Got it.

And is there anything you are doing from a marketing perspective that might be slightly different, or is it just again the experience of the team members there?

Well, it is both.

We are doing some things different from a marketing perspective where we are targeting some specific buyers in specific organizations.

That is a little bit different than we have done in the past.

We have found in the sales performance practice that some of our traditional marketing approaches that we have done in the field relative to our standard organizational development training suite don't always apply in the sales performance arena.

The buyer there is a C-suite buyer and very often it is a chief sales leader or sometimes a sales manager.

And these are folks that don't traditionally take time away from their schedules to go attend an overview session like a head of HR or a training director might.

So we are targeting those people in a little bit different way, going to them face to face rather than having them come to us in an overview setting.

And that has been an effort for the last year or so, and it is generating some traction for us.

Social media is a big part of how we access them, particularly LinkedIn, and that has been useful.

Paul, (multiple speakers) also on Marco's question just some of the things that are happening on the direct office side that actually are supportive of this sales performance.

Yes, thanks, Bob.

Hey, Marco.

So we have a good partnership in the divisions, between the direct office division and Shawn's strategic market division as it relates to the sales performance practice.

And there are a number of our client partners in the field who have traditionally sold our organizational development suite of products who are also increasingly becoming adept at selling the sales performance practice solutions.

So as they are out there calling, we have talked in the past about having this group of enterprise client partners whose job it is to go after a narrow group of clients and to go broad and deep inside those organizations.

And as they do that, and they move laterally across an organization, they do bump into the sales organization in there and they have an opportunity to position those sales performance practice solutions.

And then we partner up with Shawn's team and our experts there, and we have been able to drive some nice synergies there and some nice deals over the last quarter or so.

Got you.

That is very helpful.

Can you update us, is there an updated goal, if you will, for client partners for the end of this fiscal year?

Yes.

In November we had said that we expect to be at 203 by the time we started Sales Academy, which starts next week.

We are at 198 today.

We have two offers out.

We are hoping those will get accepted here before we start next week and expecting that we will.

So we should be at 200 starting next week.

We will add a few more during the course of this spring, some of which will be replacements and others of which will happen in the strategic markets division, and then some in the summer for education.

Okay, so low 200s for the remainder of the fiscal year, you are thinking?

Well, at least for this point.

I would say probably by the -- we normally measure kind of these training years, but we would expect at net 30 this coming year.

So by this time next year we would expect to be at 230 net, maybe slightly ahead of that.

So the actual timing, Marco, it might be that we are at 200 now and by March, it might be 203 or something.

And then by the end of summer, more in the 210 or 211 range approximately.

Then we will gear up our hiring in the November period for the Sales Academy which happens in January.

Got you.

And last quick question and I will jump back in queue; just trying to get a little bit better of a handle on what the balance sheet might look like after this tender offer.

Any kind of color you can provide there?

No, other than the -- if we are fully allocated and all of the shares come in that we hope come in, we will spend $35 million.

And we will use a combination of cash, our revolving line and a potential term loan.

So we won't have $35 million of cash, so we will have some either revolver or term loan on the balance sheet.

But we would plan to use a significant portion of our cash first.

Got you.

I was just going to point out that during the year, of course, we would expect to generate a lot more cash flow this year which would then allow us to reduce the debt if we chose to do that.

Got you.

I think in the past, you guys have talked about a minimum sort of $10 million threshold in cash.

Should that be the way maybe we should think through how much cash you potentially use for the tender, and then what comes from the revolver and potentially for the term?

We've talked a lot about $10 million cash.

We also talked about having $10 million of cash plus $10 million of unused revolving line, so $20 million of liquidity.

So I think that $20 million of liquidity is the concept that we would intend right now not to go below.

Got you.

Thanks a lot, guys.

Appreciate it.

Kevin Liu, B. Riley.

Good afternoon.

Bob, you addressed the gross margin performance in Q1 and kind of how mix impacted that.

Now with your direct offices picking up some momentum here, do you expect much shift in terms of that revenue mix from a margin profile perspective?

We really don't.

I think really, as you know, in our fourth quarter we tend to have an even higher mix of facilitator and intellectual property sales in the corporate side than we do in other quarters.

But in the first, second and third quarters, the mix ought to remain very similar.

As you know, in our education business the gross margins shift around.

Typically, in the first three quarters, our gross margins aren't that strong.

We had some strength in the first quarter because we've got this one larger contract in that we talked about that was pretty much all an intellectual property sale.

We also have good flowthrough on this deferred revenue.

But otherwise, we hire these coaches and in the first, second and third quarters, we tend to have lower gross margin and then high gross margin there in the fourth quarter.

And then the other units are pretty much the same throughout the year.

Got it.

And I think you mentioned that large government contract might have a little bit of a headwind to growth in Q2 as well.

Could you just remind us what that number is?

Yes.

For the year we had about $5.5 million of revenue from the contract.

So where we had $2.7 million of headwind in the first quarter, it will be approximately $1.7 million -- well, it will be $1.7 million in the second quarter and then a couple of million dollars in the third quarter.

And then the contract's term ended at the end of our third quarter last year, so we didn't have any flowing into the fourth quarter.

The gross margin on the revenue in the second and third quarter isn't nearly as high as it was in the first quarter, however.

We had a $2.1 million impact on EBITDA of the decline in revenue in the first quarter from the government contract.

And for the balance of the year -- because it had the intellectual property component, whereas the $1.7 million and the $2 million will be closer to a 50% gross margin impact.

And you will offset that with a little commission savings.

So you might be 40% or 50% of that number is the size of the headwind.

So compared with the $2 million headwind in the first quarter, the EBITDA headwind in the second and third quarters is significantly lower, in the range of say $600,000 or $700,000 of EBITDA to cover in the second quarter, and a little more than that in the third.

Thanks, that is helpful.

Just lastly, it sounds like you are kind of on track with where you want to be from a client partner hiring standpoint.

In terms of your marketing events, now that you are seeing the momentum building in the pipeline, any plan changes in terms of the number that you were planning for this year?

Thanks.

I'm going to invite Paul Walker just to address that.

No real changes in the planned number for the year.

We do continue to look at the types of events that we are holding.

We have been holding a number of what we call internally these culture events, which we will have 13 of those this year.

And they are geared at a very senior level, C-suite type individual in an organization.

We are holding them around the country.

Those have been great for us so far.

It's driving a lot of pipeline.

So we continue to try to figure out exactly -- we know the events work; we know the events are what drive a lot of our opportunity.

And we are just looking to make sure that we put the right kinds of events on to drive the size of deals that we want and fully represent all of our product offerings.

Kevin, just for perspective, the events themselves drive about one-third of our total pipeline.

The other two-thirds is driven by the normal face-to-face calling effort, so just so that it is in perspective.

We oftentimes talk a lot about the events, because it is a way that you can, with a constant set of outbound sales calls, it is the one thing you can use to if you increase those, you can boost the pipeline.

But now that the pipeline is back in the area of where we want it to be, then now we can just stabilize that number of events.

Understood.

Thanks for taking the questions.

Jeff Martin, ROTH Capital Partners.

Good afternoon, Bob, Steve.

Bob, can you give us an update on what your content development efforts are going to be focused on this year?

And then secondly, can you give us an update on leadership and how the second year of the 7 Habits is progressing?

Sure.

Thanks, Jeff.

In terms of the product development budget, let me just give context.

Over the last four or five years, we have done a lot of investment in two areas.

One, in refreshing all of the content that we historically had, our historical core content like 7 Habits 4.0 and the replacement of our time management suite with the 5 Choices Productivity, other productivity offerings like project management and presentation advantage.

So it has been very course related.

But we have also during that same time invested heavily in the execution, in the execution product line which is a process, and The Leader in Me which is a process, in the sales performance area which is more process oriented, and customer loyalty which is more process oriented.

Going forward, our primary investments over the next -- not just this year but the following year, will be less core centric and more just say resource centric, where we are taking the existing content that we have, making it accessible in new forms, trying to increase the flexibility for a client to disseminate that content throughout an organization.

We are selling it in some respects in more flexible forms where intellectual property and other things, where people can get rights to intellectual property in different forms.

So getting that offering right is where a lot of our investment is going now.

So it is less in these big pursuits of reconstruction and redevelopment, huge new film libraries, than it is at continuing to invest in the process-oriented things of The Leader in Me, execution, sales performance and customer loyalty on that side.

And then also at the same time integrating the contents, so the leadership product, sort of the leadership offering which includes 4.0, 7 Habits, continue to grow.

As it relates specifically to the second year of leadership, the 7 Habits continues to do well, particularly -- a lot of that increase is showing up in the licensee side now because the rollout of US happened in 2014 and 2015, early 2015, and the licensees more during the back half.

In fact, Sean, you may just speak to what is happening in the licensee area.

Yes.

So we feel good up out the licensees.

We had good growth in the first quarter at 11% adjusted, taking out FX impact, and things are looking really solid.

We have -- our strategy is to continue to run the play, meaning just the best practices that we have developed in the US, we continue to run internationally; including such things as just holding really good events, hiring a lot of CPs and building the practices.

That is the core.

So we continue to see tons of opportunities to continue to grow the licensees.

And again, as I have mentioned before, most of these partners are pretty small.

So the opportunity we think to double them in size over the next four to five years is really good.

Okay, that is great.

And then you mentioned, Bob, in your discussion on gross margins that there was some online digital content delivery.

Is that a strategic focus?

Is that something we should anticipate more of in the future?

Just looking for a little bit of relative perspective there.

I would just say relatively I would say this, Jeff.

We have invested over the years a lot in the technology-based delivery of a lot of what we have done, so that people have that option.

What we haven't often done, though, is give people the -- we have kind of had people choose upfront more, are you going to do it with us delivering; or are you going to do it with training and facilitator yourself; or are you going to do it digital delivery?

So I think the change is that giving people options to combine those delivery capabilities under a current pricing umbrella where they could buy a particular course and have all of the delivery options available in it is perhaps a shift that gives us a little bit more value on the intellectual property side on the margin.

And I think -- but the reason we're doing it isn't primarily for that because we are happy to increase our gross margins.

It is really to recognize that we want to work with our enterprise client partners, which we had talked about two years ago.

The idea is them focusing on a smaller number of accounts.

The big objective for them is to find people who want to have greater impact in their organization and provide lots of ways for them to do that.

So the reason we are combining these into an offering is to allow people -- somebody who is in charge of learning and development to look at all of the different needs they have and instead of having to pick one path, recognize they have the flexibility of a lot of paths.

So people are seeming to respond well to that.

And it is new, it is a new effort; it is kind of in the early stages.

We are not fully rolling out across the sales force now, but it did have a little bit of impact in the first quarter; expect it will have some going forward.

Just on the product development question you asked me before, just one other thing to consider is we have got -- in addition to a lot of things we are doing to develop new products and services, we have a lot of new books in development.

And books has been a key part of our product development package in terms of thought leadership and helping to drive marketing and such.

For example, the 4 Disciplines of Execution, the 7 Habits, Speed of Trust, are all bestsellers.

And we have several books in development for the customer loyalty practice, for the education practice, sales performance practice and the leadership practice, that will all be coming down the road.

We are not exactly sure when, but they are all in development right now and I think will really help us.

Jeff, sorry for the long answer to your short question.

But one other thing that is maybe one new area of development this year beyond this integration is that we are -- in fact, by the end of the year we will have ready a customer loyalty training offering for the first time.

Historically, our customer loyalty has all been around data collection and metrics and, therefore, the margins haven't been strong.

A lot of our customers now have good, strong capabilities there and are looking for opportunities to increase the front-line performance.

So that is one new area.

It is not a massive development area effort, but we are investing in the portal and in the training content for the customer loyalty practice.

Okay, great.

Last question, you mentioned some intellectual property sales in the quarter.

Can you quantify that and what was both the revenue and EBITDA impact of that?

Yes, it was more what I was talking about just this last thing, Jeff, is that it is integrating options for delivery.

So we just call it kind of where people buy rights and intellectual property, and they can then print manuals themselves or buy them from us individually.

So the impact during the quarter wasn't huge.

I would say that we had around $0.5 million of revenue in that particular thing, in addition to a couple of hundred -- maybe the total was $900,000.

That is not materially different than it is in most quarters, but it might have added -- it added a little bit, a couple of hundred thousand to probably the gross margin for the quarter.

Okay, great.

Thanks very much.

Trent Ketterer, Spitfire Capital.

Good afternoon.

Just a quick question on your CapEx guidance.

So if I look at your guidance of $7 million for this year, how much of that is for the ERP implementation that you guys are currently going through?

I looked at Derek; he said a lot.

It is a major portion of that, approximately $4 million.

Okay, got it.

Is that implementation something that you guys expect to be done by the end of the year, or could that feasibly trickle into next year?

We intend to implement early next year, but most of the cost will be incurred this year so that we would be ready to go early next year.

Got it.

Okay.

Thanks, guys.

Go live date is December 1 of next year -- or this year.

Craig Pieringer, Wells Capital Management.

Hello, everybody.

My question pertains to the Global 50 team, which for some reason I'm just not all that familiar with.

But it strikes me if this is a new effort going after the 50 largest accounts in the world, and you are already getting traction if you expect revenue in the second quarter.

But on the longer-term basis, it would seem that larger accounts in the world would connote larger average size contracts and could shift revenue growth rate to a higher trajectory.

Is that one way to look at it?

Yes.

One of the reasons we have created this team was that even though we've reduced the scope of our enterprise client partners to 40 to 60 accounts, in some cases 10 to 20 accounts, the idea is that we are still not always entering as high in the organization as we would like.

So we have put together a team under Shawn Moon's leadership -- I will let Shawn maybe make a couple of points, or ask him to make a couple of points.

But the idea was exactly what you are suggesting, that there are a bunch of accounts we don't penetrate deeply.

And the idea was if we had the right stature of client partner focused on a very, very small number of accounts, meaning 2 to 5 accounts each, that you would by necessity be entering very high.

And with these sales people who have an ability to discuss things very strategically, that in fact this would be a whole new area of growth for us.

That plus adding the state municipal government to the government division, which we have never really approached, were two of the things where we think there are whole new markets for us.

So I think these are things that we would hope would, in fact, ratchet up the growth we would otherwise get from the other parts of the business.

This would be incremental.

Shawn?

Bob, I think you said it well.

One of the key differentiators here is the type of client partner that we are targeting in this.

It is a very senior level with a lot of experience.

So yes, we do anticipate that the nature of these deals will be different.

They will be at higher levels and larger contracts.

Is this virgin territory, accounts you have never been at before?

Yes, the metaphor we use is to point the bat.

We are calling our shot on these accounts and going after organizations where we feel like we should have a presence, but we don't currently have a presence.

So it is a greenfield approach, and so that is why the getting started phase, it takes a little bit of time.

And we are frankly encouraged by the early traction that we are getting.

We are getting some early traction and we are finding access to senior levels, that there is awareness of the brand and an eagerness to talk.

So we feel like it is working.

These accounts are ones that were not assigned -- in almost every case, they were unassigned accounts because we still have lots and lots -- with the number of salespeople we have and the ultimate 900 plus that we could have in the US, there are lots of accounts that aren't assigned anyway.

But in some cases, we may have traded out another account because the current client partner didn't see opportunity there and the Global 50 team did see.

So this is definitely an incremental effort at a greenfield that we have historically not had much business in.

Just one other comment about that.

The intent behind that is that we want to make sure we disrupt the field as little as possible.

So we worked very hard to make sure that we didn't do that, while also creating a brand-new incremental opportunity for us.

What happens if one of these accounts resides in an international licensee territory?

The plan is to coordinate -- under our direction coordinate with our licensee partner in the country.

So we access the local talent and the local delivery capability and synergize with them, while maintaining sort of the global leadership view.

In fact, a lot of these will.

That is the hope for.

We had a three-day meeting here at the start of December where we had representatives from 10 of the largest -- 8 of the largest licensee partners with us.

We already have this issue come up frequently with global accounts, even though they are not part of this group's.

The only thing, there is real excitement now with the point of the spearheading these few top salespeople, this now creates an entry point that will benefit not only this division but also the international licensee partners.

Yes, it really will become something that we all learn from.

Yes, that we are all working together on these.

In fact, we need them to be partners in it to deliver globally, and that is one of our greatest strategic advantages is that we in fact can go and say, you know what, we can deliver globally.

So this is a cooperative effort and an exciting effort I think on both sides.

Excellent.

Thanks for that color.

That is all for me.

We have no further questions at this time.

I would like to turn the call over to Bob Whitman for closing remarks.

Great.

Thanks very much.

I just wanted to thank everyone for attending today and for your great questions.

We are deep into the second quarter and working hard and feeling very good about the direction, and we will certainly be giving everybody an update next week when we close the Dutch auction, or we anticipate closing the Dutch auction.

All right, thanks very much.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.