Franklin Covey Co. (FC) Q3 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Third Quarter 2011 Franklin Covey Earnings Conference Call. My name is Amnesia and I'll be your coordinator today. At this time all participants are in a listen-only mode. We will conduct a question-and-answer session toward the end of the conference. (Operator Instructions) I would now like to turn the call over to Mr. Derek Hatch, Corporate Controller. Please proceed.

Good afternoon ladies and gentlemen, welcome to our earnings call this afternoon. Before we get started I’d like to just remind you that today’s presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based upon management's current expectations and are subject to various risks and uncertainties including, but not limited to, the ability of the company to stabilize and grow revenues, the ability of the company to hire productive sales professionals, general economic conditions, competition in the company’s targeted marketplace, market acceptance of new products or services and marketing strategies, changes in the company’s market share, changes in the size of the overall market for the company’s products, changes in the training and spending policies of the company’s clients, and other factors identified and discussed in the company’s most recent Annual Report on Form 10-K and other periodic reports filed with the Securities and Exchange Commission. Many of these conditions are beyond our control or influence, any one of which may cause future results to differ materially from the company’s current expectations. And there can be no assurance that the company’s actual future performance will meet management’s expectations. These forward-looking statements are based on management’s current expectations and we undertake no obligation to update or revise these forward-looking statements to reflect events or circumstances after the date of today’s presentation. We also like to remind you that there are some non-GAAP presentations in here in lieu with adjusted EBITDA and there are reconciliations available in today's presentation and on our website. With that out of the way, we like to turn the time over to our Chairman and Chief Executive Officer, Mr. Bob Whitman.

Thanks Derek. Thanks everyone for joining us today. I’m delighted to have the chance to talk with all of you and appreciate very much for joining us. I’d like to organize my comments today around the following three headlines theme; first, that we are very pleased with the company’s strong performance and results for the third quarter, I will talk about that in detail of course. Second, that we are very encouraged by the strong momentum we are continuing to see in the business. And third, based on our performance during the quarter and year-to-date, we always expected our full-year results to be very strong. We now expect them to be toward the higher end of our previously provided adjusted EBITDA guidance and we expect to continue to achieve strong growth in both revenue and profitability in the future. As a result we also expect our adjusted EBITDA to grow significantly again in 2012. So those are the headlines, I'd like to maybe just provide you some detail behind each of these things. First, in terms of the performance for the quarter. Revenue for the third quarter totaled 40.9 million which is an increase of 10.4 million or 34% compared to the 30.5 million in revenues achieved during the third quarter of fiscal 2010. As expected our strong bookings during the first and second quarters that are within our pipeline that we referred on before translated into significant revenue growth during the third quarter. As you can see in Slide 3, we were pleased to have achieved growth in all of our major channels during the quarter. Revenues in our government services grew 3.6 million in the third quarter reflecting in part the continued bookings in revenue related to the significant government services contract awarded to us at the end…

Thank you, Bob. Hello everyone, nice to be with you. I’m also very pleased with our results of this past quarter and our year-to-date result and our past 12 month result. I’m pleased with the amount of the growth and also with the broad based nature of the growth. So, different topics, let me tell you little bit about the balance sheet. We don’t take much time in these webcast to discuss our balance sheet or our tax provision. The reason for that is that our improving operating result and the understanding of our focus and strategy to drive future growth is more meaningful part of our story and rightfully consumes our time on these calls. Our balance sheet to use my word is clean but does take some time to explain and understand. So, what’s new to our story and on the call, please note that we have a very high effective tax rate, our financing obligation are nearly 30 million and an escrow program including more than 3 million shares. Then please give me a call because I love to talk about these items. We actually have an attractive tax position, a remaining $24 million of net operating loss carry forward and nearly $10 million of unused foreign tax credits, our financing obligation is really like a capital lease and our escrow program is a way to potentially reduce our number of outstanding shares. So, please give me a call and I’ll be more than happy to talk about the balance sheet and all of these items. Bob talked and referred to our adjusted EBITDA slide and talked about the quarters results. Please note also that there was a $7 million improvement in adjusted EBITDA over last year for the three quarters. Like Bob mentioned with the quarter,…

In a minute we open this up to your questions and answers from us, but before doing that we just address three questions all right and we’d like to share with you. One, when C&I thought you and other prospective shareholders, we've been told by certain of you that it would be really helpful for us to provide you with the simple summary of our investment thesis on Franklin Covey just in terms of both point to think about. And I thought it might be hopeful to briefly share a version of that today and I’d like to just briefly touch on these points. I’d be happy as Steve would be to get your advise on how we might change this and make it simple to understand our story. But looking into three bullet points, in terms of what that the investment thesis might be; one, strong business fundamentals. Second, a large and expanding strategic moats around various parts of the business, and that’s people. And so, let me just take you through there. Just three slides and I think maybe you will find it helpful and if not it will be short. On the first slide, in terms of strong business fundamentals, I’d like to just summarize, what seems like my viewpoint about the business itself. As you have seen our multi-year growth efforts are accelerated with the trailing four quarters revenue up significantly and profitability up significantly. We are able to achieve and sustain high gross margins, 63% for the business overall. We have high and growing recurring revenues, we have moved our recurring as the percentage of revenues in any given year that repeat in the following year from 42 to 62% on the weight of what we hope will become (inaudible) around 70 to 75%. We…

No.

Okay.

Just to say that it is the most prestigious professional services firms that are there that we have the presence with.

A very strong presence with. And we have the same in our execution business where two of the country’s largest multi-unit operators were our anchor clients and we’re adding many others as a consequence. So that become a strategic advantage for us because once you’ve tied down and they see value in what you’re doing, it helps us sell through that. And then finally, the claim of best people, (inaudible) unless you spend time with our people. But we have a goal inside the company which we think actually is an essential actually in our kind of business is a real strategic advantage. We have a goal to be the workplace of choice for achievers with heart. So we want the best performers, we want people who care deeply for the clients and about each others. Instruments that we use to help clients measure their own cultures, our own instrument, the XQ, and the employee Net Promoter Score developed by Bain as they have the transportational issue we have the, in our culture today the highest XQ scores of any organization that we have surveyed. We have about 68% of our employees who give us a 9 or 10, and the next biggest group is 8. And we’re constantly trying to do things that will move all the 8s to 9s. But in many organizations, they say we got your 98% of our employees are satisfied, well, we have 97% that are today. The real point is no they’re satisfied. The question is are they loyal and are they all in. And most organizations might have 15% to 20% of their employees give a 9 or 10 for the company and we’re fortunate that we’ve got a lot higher than that. And finally, this Redwood Structure, we call it the…

(Operator Instructions) And the first question comes from the line of Bill Gibson with Anderson & Strudwick. Please proceed. Bill Gibson - Anderson & Strudwick: Yeah. I think I understand why direct sales were up so much more than everything else. And I’m assuming that’s the government contract driving that. Is there more behind that than that factor?

I’m going ask Shawn Moon, who runs our direct offices to respond to it.

Yeah, thanks, Bill. It’s a good question. And actually, I’m very pleased to say that it is not simply the government contract that is driving up the direct offices. Every one of our direct offices is up except for our UK operation, which is flat, but has a good runway for growth in the first quarter. So it’s pretty well-rounded growth. If you look at the business outside of the government contract, the direct offices were up 20%. So it’s more than that.

And so, Bill, domestic direct offices other than government were up 29% for the quarter. The international direct offices were up 14%. So that’s really where the momentum is building. And I hope that one slide showing the pipeline growing, but how the corporate pipeline is really what’s been growing. It now makes up 78% of our total pipeline and will continue to grow hopefully is that helpful at all on that question? Bill Gibson - Anderson & Strudwick: Actually that helps a lot. One thing, one follow-up and this relates I believe India is just starting out on the education front where they're going to your licensee over there will institute that practice. All of a sudden, I just had visions of that potentially getting really big. Has there been any progress on that front?

There has been. Approximately, a year ago, several of us were in India and has chance to meet with Minister of Education of India, Mr. Singh. And we told him about what was going on in the United States. He was very interested in that. That very day they have instituted for the very first time in the history of India mandatory pre-education for every child from six to 14. So it’s a whole new world for them in terms of everybody has to go to school, but what do we do and how do we make sure these schools are preparing the kids in India to be able to actually contribute to a society that needs their contribution. When he heard what we were doing in the U.S. he called another ministers and asked whether we’d be willing to take a large number of schools immediately and try to do them. I told him I appreciated it but honestly, we didn’t have the capacity and we wanted to do a good job. But they have begun and I believe the number is 25 schools that we’ve begun in Delhi. There’s a lot of attention on this. And you can imagine the opportunity given the age of not only the size of the population, but the age of the population in India, They have almost 700,000s grade schools compared to our 100,000s. So the opportunity there is great. But I think you may Bill, another point you might think of is that our licensees today generally up until three years ago, they were licensees primarily in what we’d call our leadership content. And that’s really all that they sold. And so in addition to their growth in their historical leadership areas, every one of our licensees has the potential to add execution as now a new product line which has had such growth United States has education to add customer loyalty, to add sales performance. And so as they certify and are willing to make the investments necessary to build, they have those opportunities to build the business not only by expanding the number of sales people, but by the expanding the product lines as we’ve done here. And so we think there’s a good opportunity in India certainly but in all around the world to expand practice as well as expand sales force. Bill Gibson - Anderson & Strudwick: Thanks, Bob.

Thanks very much, Bill.

And our next question comes from the line of Joe Janssen with Barrington Research. Please proceed.

Hey, guys. Great quarter.

How are you?

I’m doing good. I just want to clarify something. In your press release, you mentioned plans like that include introduction of new offerings. Is that outside the practices or a new practice? Just some comment around that?

It’s part of the existing practice but we have a big launch this fall that maybe Shawn you want to speak about. It’s in our productivity has always been an important practice category for us, but or at least a course category for us. Only recently we made it a practice as to practice leadership, etcetera, and an investment behind it a lot this year. But we have a major new offering that we’ve always been the leader in time management. So this takes it well beyond that. Shawn I don’t know if you want to talk about what the launch will be this (inaudible). He’s not on the phone today. He’s on a family trip in Ireland and is not able to join us now.

The productivity practices is relatively new as Bob said though we have been in the world of time management for many, many years, our first operating that is the foundation to that will be launched in the coming weeks actually on September 7th. We have identified 180 cities worldwide launch plan that is being executed right now in terms of registrations. We are very, very encouraged frankly by the amount of interest that we are gathering on that initially as an example. We just had the SHRM, the big HR conference that concluded this morning and we had over 3000 people registered that event to come to this preview which is a buying presentation around the launch. So, we are excited about what this productivity offering is, and we are very encouraged by the enthusiastic response we have gotten.

Maybe at the heart of your question. In terms of we think within the practices we have now that each of these practices with relatively low levels of penetration in their targeted market could be 50 to $100 million just in North America within 5 to 7 year offering that has also done extremely well in manufacturing all the time. We have the deep capability actually in manufacturing where implementing, people who are already doing six sigma use our process to drive home specific goals and so we see more staying within the seven practice categories, adding content and so forth on the margin we are making investments that we find our offering, make implementation easier at our clients. So, I don’t think you will see a lot of the new categories of offerings and they are coming in future. Although, honestly there are another 10 to have that same potential belief and we remind where we are today.

It's not our intention to add, seven new practices next year, we believe our focus, we are going to grow within the established practices and if we fail to reach certain thresholds, then we will think of adding.

A modeling question; I know for your tax rates for 2012, should I be looking at 2011 for guidance or is like 2012 going to be a different tax rate here for modeling purposes?

I don’t have the exact number in front of me, Joe, but our effective rate next year should be lower than this year, don’t know by how much, but the general idea is that you can take our pretax income apply to 40 to 42% to that and then adjust that by about $2.5 million, and that will come close. And we can refine that as we go into next year.

Okay. One more question and I will jump back in queue. Did you guys give any, I didn't see in your little slide deck here booked days. You gave total revenues but you usually kind of give like booked days.

Yes, to give you the booked days, at certain time we explained that you recognize that booked days represents such a small part of the total business that until we have it for our international offices, we have been giving it every quarter and it increased this last quarter. And we had about a 9% increase in what we call booked days in our geographic direct offices in and international contracts in North America. But as you get down to it represents only about 26% of the total revenue. And so it's not as good a guide as we usually thought it would be. The pipeline is double that, it did have strong, we had very strong bookings last year, third quarter, we exceed those this year and had about 9% growth in those booked days per se which is one way of delivery. Booked days is only one way of delivery, we had more growth in contracts and other things that we did just in that. So, we might thought of explain to that, now we are trying to do how to explain. I’m giving you a slide that only explains 26% of the revenue most and so like maybe it's not as helpful one, but those are the numbers basically.

I lied, one last question. For Q3 last year, if you strip out the government contract, what did the pipe look like then?

Well we added about to the pipeline, if you subtract about 7 million I believe [void] 8 million, so last year's pipeline without the government contract was 8 million less than it is than it showed within around 21 million.

(Operator Instructions).

I’m not sure either is someone is asking questions, we are hearing it understand, then I’m assuming press that we taking any questions there are a couple minutes more if you'd like to ask the questions. Not? Operator if there are questions you are receiving them, correct.

Yes, sir.

Great. All right, why don’t we wrap up here and we will of course happy to talk to anyone who would like to speak either a day or in coming days, but again I’ve been stepping back from the business. For us this isn’t a quarter-by-quarter issue. We have been on March when 2004 with the exception of two quarters bent in 2009 with the recession. We have been on a growth curve with the business it's remaining since 2004, we have been holding our ability to plan up sales people, we now feel like we have accelerated that. We started practice categories, those are included in our success accounting from many, many of our large deals, now we are expanding those into leadership and productivity. We have fundamentally changed the economics of the business in terms of the profitability flow through etcetera, and converted from what was a one time credit capital intensive business to one that isn’t very capital intensive. So, we’d anticipate leaving one question that wasn’t asked here is, I think many of you have is, what we are going to do with the excess cash that business generates? And we expect that we will have that excess cash, you see we have been investing in lot of working capital to support the increased sales at this point. But that tips over starting in about September-October and begins to bring in more cash than we go out and reverse it itself. And so we would expect to have a substantial cash inflows in the late part of the first quarter, and we would anticipate that we announce plan to be coming with excess cash though. Thanks very much for joining us, we appreciate the chance to talk and appreciate your continued support. Thank you very much.

Thank you for your participation in today’s conference. This concludes the presentation, you may now disconnect.