Franklin Covey Co. (FC) Q4 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the FQ4 2011 Franklin Covey Co. Earnings Conference Call. My name is Justhania and I’ll be your conference operator for today. (Operator instructions.) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Mr. Derek Hatch, Corporate Controller. Please proceed, Sir.

Thank you. I’d like to welcome everyone out to our earnings call this afternoon for Q4 and the fiscal year ended August 31, 2011. Before we get started I’d like remind everyone that this presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based upon management’s current expectations and are subject to various risks and uncertainties including but not limited to the ability of the company to stabilize and grow revenues, the ability of the company to hire productive sales professionals, general economic conditions, competition in the company’s targeted marketplace, market acceptance of new products or services and marketing strategies, changes in the company’s market share, changes in the size of the overall market for the company’s products, changes in the training and spending policies of the company’s clients and other factors identified and discussed in our most recent annual report on Form 10(k) and other periodic reports which are filed with the Securities and Exchange Commission. As 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. And with that I’d like to turn the time over at this point to Mr. Bob Whitman, the company’s Chairman and Chief Executive Officer.

Thanks, Derek. We’re delighted to have a chance to talk with all of you today and I’m clad that you could join us. I’d like to start just with a few headlines and maybe just hit three. First, as you probably say in the press release we achieved significant revenue growth for the year. We finished revenue at $160.8 million with a $23.9 million or a 17% increase over the $137 million achieved in F2010, which in turn was $13.8 million higher than the $123 million in revenue we achieved during F2009, so we’ve been able to keep this momentum going and we’re pleased with that. Our growth during the year was very broad-based, which is exciting for us, with the company achieving revenue growth in every major channel and in every practice. It’s important to note that this broad-based revenue growth for the year is a continuation really of the seven-year growth trend in our core business that has seen revenues grow from approximately $96.5 million in F2004 to $160.8 million in F2011. We were not able to pull those numbers out before we sold the previous business, but this is for us, in this business, a continuation although it’s accelerated recently. We’re also really pleased to have achieved revenue of $45 million in FQ4. You may recall that in our webcast in June we said that due to the very high revenue level achieved in FQ4 2010 which was driven by the significant initial revenues associated with the launch of that new government services contract we had just been awarded, we said that we believed then that despite strong (inaudible) it was unlikely that our FQ4 revenue in the other areas of the company, the growth in the other areas of the company would be sufficient to offset…

Thank you, Bob. I’m very pleased to be with you this afternoon, even more pleased to talk about our financial results. As Bob mentioned, I also am pleased with the amount of growth we had in the year, the broad-based nature of that growth; pleased with the increase in adjusted EBIDTA and pleased that we’re generating some cash at the end of the day. As Bob noted in the headlines, our revenues for the year did grow to $160.8 million, a significant $23.9 million or 17.5% increase compared to $136.9 million last year. A key driver of our revenue growth is the growth in the size and productivity of our sales force, which in turn is driven by growth in our number of clients and our average revenue per client. During F2011 we benefited from increased productivity of existing sales people as well as from the addition of 15 new sales people in our direct offices, bringing the size of our direct office sales force to just over 100. As pointed out in previous conference calls, as our salespeople become more seasoned their productivity increases at a fairly defined rate. The company’s revenue benefits from new salespeople in year one, and this benefit increases to an average of $1.4 million of revenue per salesperson for salespeople that have been in the company at least five years, with top sales people generating as high as $3 million or $4 million in sales. The productivity and ramp up rate for salespeople has accelerated in recent years as a result of our focus and support of our various practices. During F2011, revenue per salesperson with us at least one year increased by 16%. New sales force additions typically benefit the company at the EBIDTA line in a salesperson’s second year, and with approximately…

Thanks, Steve. We really do feel good about the company’s performance, both F2011 and FQ4, on really essentially every major metric. I’d like to maybe just focus now on our pipeline and our momentum. As I noted upfront we continue to be very encouraged by the strength that we’re seeing in the business. Our visibility into future revenue really has four key elements. The first and one that we’ve talked about before is our pipeline of booked days and ordered revenue. A second, though, is our revenue from international licensee partners. A third is revenue from our more than 10,000 active client facilitators and fourth is self-funded marketing revenue. I’d like to briefly touch on each of these to let you know at least how we see the visibility of our business. The first of these metrics is what we refer to as our pipeline of booked days and ordered revenue. While this metric only captures booking data for our US operations and therefore excludes the approximately 50% of our revenue which is recognized in our international direct offices and our international licensee offices, and from sales of materials to our license facilitators both in the US and Canada and international offices. It typically has provided a good insight into the likely strength of our booked revenue for at least the next couple of quarters. Just a few observations about this pipeline: despite ongoing economic uncertainty the vast majority of our clients are focused on growing their businesses and are still focused on making essential investments. We have thousands of clients around the world; they continue to take sales calls, they continue to request recommended proposals. They’re putting out RFPs and we’re bidding on them. Our face-to-face meetings with clients are very high and we’re talking about a lot of…

(Operator instructions.) The first question comes from the line of John Lewis. Please proceed. John Lewis – Waitrose : Well first of all I guess I would be in very sharp contrast to your Board and advisors on the advisement of building up a significant cash position, and over the years you guys have seemed to indicate to investors that you thought it was a very attractive opportunity to repurchase shares. You’ve been saying on numerous calls that you believe the end of calendar year 2011 was an appropriate time to get into this discussion. And given your extreme optimism on the business it seems like a very odd departure. Can you give us some clarity on in a near zero rate interest environment why it’s a good idea to build up cash?

Sure, John. I think it’s a tradeoff. I’ll say it very simply because obviously I’m not very articulate otherwise – it’s this: if 80% of the future value of the company and its shares depends on achieving significant growth, and if another 15% of that future depends on increasing our multiple, it would really be foolish for us to do anything… If we have opportunities to invest in the business it would be really foolish and unwise for our shareholders for us to instead dividend it out or to repurchase shares rather than invest in the business. So if I misspoke and it was unclear, we have had a very big record of returning cash to shareholders, and the only reason we haven’t done it in the recent years is because three years ago we took $30 million of our cash and instead of paying off debt we did repurchase shares. So I think our record on this- John Lewis – Waitrose : Look, I hear you there, Bob, that’s helpful but-

What I’m saying, John, and I think two things we’re saying is one, we should only do it out of excess cash. Other people who are doing buybacks and dividends are doing it out of excess cash and so all we were saying is to do that you have to establish what is required cash versus excess, and we’ve established that in this $15 million to $20 million range. We continue to agree on your point otherwise, which is above that minimum threshold it’s a great idea and we’ve show a predilection to do that. So I think the only thing that’s changed is that given the acceleration of growth, the fact that we have more large contracts which tend to require more working capital; the opportunity to invest in the business in ways we think can give us a multiple return on a few of these add-on acquisitions and investments – that in trying to assess that whole thing I hope that it makes sense that we try to figure out as a company what we think we need to take advantage of all the stuff that we think can actually increase the value. And that’s all we’re saying, that rather than saying “We’ll take the cash to zero and borrow money to buy stock,” we just have said “Once we have sufficient cash and that we are comfortable that we can fund the growth opportunities, well then the idea of returning cash makes sense after that point.” John Lewis – Waitrose : Got it, okay. I’ll just leave it and we’ll move on to some other questions but basically one, the business as you guys have said is way more predictable. It’s gone from 40% to 65% recurring revenue. EBIDTA margins have expanded; there’s attractive growth opportunities as far as the eye can see. The debt’s been paid down in like I said, a zero interest rate environment. You can pay dividends, buy stock, and for a very predictable business like this I’m sure there’s no problem in getting any kind of line if you had very attractive investment opportunities. But this is a sharp departure over your history of repurchasing stock when the business was in a much more precarious position over time, and so to see the business in a much better position and to see you guys saying you need a $15 million to $20 million cushion strikes be as ridiculous. And your Board and your advisors don’t represent what I think is necessary for this business.

I appreciate that, John, and I think the only difference is what you think the minimum cash is. John Lewis – Waitrose : I mean you said it on the last call. You thought that the international licensee business in your opinion was worth 750 to 10 on a standalone basis, so I just find it shocking that you have all these other great growth opportunities, you have a stock price under your watch over ten years that really hasn’t done anything. I saw you guys picked the low price but the reality of the situation is the stock price hasn’t done anything, we haven’t been able to get analyst coverage, we haven’t been able to get really any buy side attention and it’s frankly frustrating and disappointing to see you guys change what you have stated you’d do in the past. You can move on to the next question.

Okay, thanks John.

The next question comes from the line of Joe Janssen from Barrington Research. Please proceed. Joe Janssen – Barrington Research: Hey guys. Just kind of building on what was previously said, you mentioned a large addressable market within your existing practices. You talked about the sales force; you’re going to add an additional 20 in 2011. Are there any internal conversations of really starting to accelerate the hiring of these salespeople especially if they can ramp up so quick and become so profitable so fast?

Yes. Yeah, in fact we think we have the opportunity in certain practice areas to hire as many salespeople within a given practice, like in education, as we historically hired in the whole company. So we have a steady stream of recruits. It’s an accelerated effort and it’s ongoing so we see opportunities there. We think there’ll be some opportunities to hopefully invest in the expansion of our licensee network so that it can grow even faster than it would otherwise grow because we have, as great as our licensee partner business is, sometimes these people don’t have the capital necessary to grow their business and it’s being constrained. We have some opportunities there. We have some opportunities to reacquire some countries and so forth that we then could get new partners in who could penetrate it further. We’ve got these big investments that we’re making in these marketing programs which have a predictable return, so I think there are four or five key levers for driving the growth of the business and we expect to do so. Joe Janssen – Barrington Research: I appreciate that. And just a modeling question – I always ask this: taxes, as you mentioned, were going to be similar to the tax rate you had on a full-year basis. Should I be expecting lumpiness in that or is that somewhat normalized where I’d expect that 43% to go over quarter-over-quarter for the next four quarters? I know you give a formula historically but I wasn’t really expecting the gain, which is a benefit in terms of EPS, but just some clarity around that.

I don’t have an exact number but it would be more like the 43% we would expect next year. Joe Janssen – Barrington Research: On a year-over-year basis and on a quarterly basis? Should I expect some lumpiness or would that be more normalized?

That’s about the same percentage each quarter the way we do our tax provision. Joe Janssen – Barrington Research: Okay, I’m going to jump back in queue.

The next question comes from the line of [Don Hickman] from [Latinburg]. Please proceed. [Don Hickman] – [Latinburg] : Hello. I’m new to this story and I’m interested if you can just, I mean without too much elaboration but can you talk about how you’re selling your education services product into the schools these days when school districts by and large have no money?

Yeah, the growth in our education business has really occurred during the last three to four years when the schools have had no money. So the growth in that has come really from two roles. One, there are certain Title IX schools and so forth, and Title I programs that allow the expansion and they’re actually allowed different ways to fund. But beyond that, the majority of the growth has actually occurred by the results that schools have have been profound enough and encouraging enough to the whole community that in many cases chambers of commerce have stepped in to fund them, some of our investors have sponsored schools in their own communities which we admire and appreciate. We have some larger companies who have decided to fund a number of schools based on what they’ve seen happen in those schools, and so through a combination of community funding, endowments, large businesses and government funding we’ve been able to find those schools and they’ve been able to in many cases go find the money themselves. It may be a wealthy parent who decides, commits to do it. So obviously having free-flowing money would be an easier thing but all of the growth that we’ve had to date has been in that kind of circumstance. So it’s based on really the results a school gets and that’s been the focus. [Don Hickman] – [Latinburg] : So do you sell that on a per-school basis, per-classroom?

It’s a per-school basis, so it’s a whole school implementation program and that’s the focus. [Don Hickman] – [Latinburg] : So what’s the per-school cost?

A school would typically invest over its first three years about up to $45,000, so on average $15,000 a year. It’s more on the front, close to $25,000 to $30,000 in the first year or so as you take everybody through the initial phases of training and then there’s an ongoing fee that continues and hopefully continues forever in the schools. [Don Hickman] – [Latinburg] : And then can you go over the stats just one more time? What’s the opportunity nationwide, the number of schools?

There are just over 140,000 K-6 schools and so if you look at 1% penetration it would be 1400 schools, and so 1400 schools, for every 1% penetration if there’s $45,000 or $50,000 of revenue you can kind of do the math. It suggests that every 1% can generate $55 million to $60 million of revenue in that business. We’ve grown to 0.5% penetration over the past three years and I think we can continue the momentum, but that’s kind of the math and that’s just in US and Canada. It doesn’t include the foreign opportunity which we are starting in India. [Don Hickman] – [Latinburg] : And that’s just one module – the $15,000 is just one?

That’s one school, yes. So it’s a whole school integration. [Don Hickman] – [Latinburg] : But I guess you could add other products to that over time.

It’s an integrated product, it’s an integrated offering. We’d be happy to take you through on the website and maybe have our education practice people take you through it in detail. I think you could get a good feel for it if you’d like. [Don Hickman] – [Latinburg] : Okay, thank you.

(Operator instructions.) The next question comes from the line of Bill Gibson of Legend Merchant. Please proceed. Bill Gibson – Legend Merchant: Hi, Bob. I love how the business is operating but I’m more in John’s camp, and you know where I stand so this is more for any directors that are listening. You had all those nice tables but I can play with spreadsheets and show you can play considerably above today’s price and be accretive to earnings. And to not have an opportunistic program in place, and what I mean is that doesn’t mean you charge in and drive the stock up, but we’re in one of these volatile markets where bouts of weakness come about where all the buyers go on strike. And to not take advantage of that is just absolutely crazy in my opinion because you have relatively low compulsory capital investments. So that was my two cents’ worth on stock buybacks. I think you ought to have a program in place. My question, and this is just kind of really minor because you went over everything in pretty good detail – the third alternative, which practice does that fall in?

That falls in the leadership practice. Bill Gibson – Legend Merchant: That’ll be in the leadership, okay. Thank you.

Your next question comes from the line of Jaime DeYoung from Credit Suisse. Please proceed. Jaime DeYoung – Credit Suisse: Yes, thank you. Bob, Steve, congratulations on a very nice quarter and a great end to the year. I think other people have echoed this. I think that seven quarters in a row now, I may be a quarter off, of at least meeting if not beating expectations. You did a good job of talking about how you’ve got increased visibility into your business and are really pleased with the opportunities that you have in front of you for this next year. You talked a little bit about what you think the opportunity is for long-term adjusted EBIDTA margin. Did you also talk about kind of the long-term EBIDTA goal? We finished this year at a little over $21 million and you’ve continued to grow EBIDTA in this 20%, 25% range that you’ve been growing which you seem to have been able to execute on extremely consistently. That would get you to $40 million in EBIDTA three years from now, and what’s that, about $2.50 in EBIDTA; and given what valuations are, comps, really an opportunity to have an opportunity to make 2.5x, 3x your money on the stock. That’s what I’m in the stock for. Is that really how you want to present this thing? When you’re going out on the road, how do you want people to view this story, because you’ve got some sell side analysts who position this for “Hey, over the next three months we think the company’s going to earn this and we’ve got an $11 target on it.” And then you do this and they move their target up to $13, but that’s not a way to really position a company to new investors. So as a leader to this company how is it that you want to position it? For people who have the ability to be in the stock for the next three years the challenge is that this is a volatile stock, but I’m willing to live with volatility given the predictability of your results and the visibility you have on your business, and the growth that you think you have in front of you. So can you just speak to that because if your projection for the next three years is what I think it is I’m going to be here for a long time. So that’s be helpful if you can speak to that.

Thanks, Jaime. We see it the way you said and that’s I think what’s behind this desire to make sure we have plenty of ability to invest. The opportunities are getting bigger. For us, we’ve said time and time again that we think maintaining kind of organic growth in that 10% top line a year is something that we can do, and we can flow through a lot of it; and so the number that you talked about as a base plan would lead you to the kind of numbers you talked about. I mean if you grew $6 million of EBIDTA a year, $5 million to $6 million of EBIDTA a year you’d be in that $40 million range. We think the potential is at some point along that. It’s not that that doesn’t require a lot of hard execution and that’s a fast growth rate at the bottom line, and organically there aren’t that many companies who are growing organically at that rate. At the same time we think that there are, as others have noted, there is an opportunity to accelerate that. So that’s really what’s behind the desire to have sufficient liquidity to take advantage of it, is that we believe there are inflection points in various of these practices and various of these countries that could really change the equation for us. And so we’re playing, as great as it would be and we hope we can do something like you’re talking about – continue to every year put up good numbers and grow the EBIDTA by a predictable amount – we think there also may be a couple of opportunities along that road to make a pretty significant leap in one area or another. So that’s really what’s behind the thinking of our Board…

Your next question comes from the line of Joe Janssen from Barrington Research. Please proceed. Joe Janssen – Barrington Research: Yeah, my question was already asked.

I would now like to turn the conference over to Mr. Bob Whitman for closing remarks.

Well, I’m sorry that we’ve gone over. We appreciate your questions and we’re happy to have a chance to talk to you and of course we’d be delighted to talk to any of you individually who would like to talk further. And for those who would like to learn more about any part of the business we can arrange to have either practice leaders or others to spend some time with you, and we welcome you of course to visit here or we’d be delighted to visit with you as we will be doing in the coming weeks. So thanks very much and have a good rest of the day. Thanks.

Ladies and gentlemen, that concludes today’s conference. Thank you for your participation. You may now disconnect and have a great day.