Welcome to the Franklin Covey’s Q2 2016 Franklin Covey Earnings Call. My name is Sherry and I’ll be your operator for today’s call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is begin recorded. I would now turn the call over to Derek Hatch, Corporate Controller. Derek, you may begin.

Thank you, Sherry. On behalf of Franklin Covey, I’d like to welcome everyone to our conference call to discuss the second quarter of fiscal 2016 financial results. And I hope you’ll enjoy today’s presentation. Before we get started, 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 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 policy with 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 the company’s actual future performance will meet management’s expectations. These forward-looking statements are based upon 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, I’d like to turn and sign over to Mr. Bob Whitman, our Chairman and Chief Executive Officer.

Thanks so much Derek. Good afternoon everyone, we appreciate you joining today’s call. We’re happy to have the opportunity to report our results for the second quarter. We also want to introduce you to our new All Access Pass intellectual property license which we believe has the potential to add the really accelerated for our growth. And we also want to provide you an updated outlook for the rest of the year. So three takeaways for the second quarter, which I’ll like to briefly address are the following: first, that we were able to generate $4.98 million of adjusted EBITDA in the quarter before the impact of foreign exchange. This represents pre-FX growth in adjusted EBITDA of 29.3% compared with last year. And this despite the fact that as expected and as we report last quarter a major government contract which provided $1.7 million in revenue and $800,000 EBITDA in last year’s second quarter hasn’t been out for bid this year and therefore did not repeat in this year’s second. In addition to the $4.98 million adjusted EBITDA pre-FX we were also really delighted to generate an additional $900,000 in adjusted EBITDA contribution during the quarter from that portion of All Access Pass revenue, which was contracted during the quarter, but which was deferred into future quarters. That means they – actually but they are generated from sales completing the quarter was $900,000 higher than the reported now and we look forward to recognizing half of that $900,000 amount to benefit in the next two quarters and the balance in next year’s first and second quarters. Second takeaway for the quarter is the introduction of our new All Access Pass offering got after a very strong start. The All Access Pass is new offering, which we’ll discuss in a moment,…

Great. Thanks Bob, hello everyone, you are doing well today. So during the last two weeks of November we invited a small group of 20 client partners to sell the All Access Pass on a limited test basis, to a limited number of clients and during that final two week period of November, 13 of the 20 client partners who were invited to participate closed a total of 19 All Access Pass sale. And that represented $381,000 in gross revenue. We’re pleased with those results early on, so we decided to continue with that small group into the month of December. And while every one was still very new at this we are still trying to figure out exactly how to position it, we sold an additional 23 passes. And those sales represented $509,000 in gross revenue. One of the things that we expected to see and we were happy to see was that the average transaction size when somebody bought the pass was two to three if not more times larger than what a typical transaction would be for us. Our thought at the time was to continue to keep the group of test client partners and test target clients relatively small, but because of the feedback we were receiving from the client partners and from the clients we purchased, we decided to open it up more broadly to our client partners and to our clients. And so we ask client partners to go out and start talking to clients more generally about it. And so from the period of the late – the last week of January through the end of February, we sold an additional 91 passes. And [indiscernible] numbers that we sold 114 passes in the second quarter and 133 dated back to that last couple…

Thanks, Paul. And anybody who wants to ask Paul questions, we will have Q&A here with the whole team. I just like to note three ways we expect All Access Pass to accelerate our business. First, it will leverage our significant investments in content development. For the past 10 years or so we’ve invested more than $150 million in content development, in content applications, including millions of dollars for content area developing courses, customized dorm, libraries and tools, creating portals tools and process to support to same lasting changes and performance improvement. As a result, we believe that we are better positioned anywhere in our space providing offering such as the All Access Pass. Recently some clients have purchased All Access Pass tools, but whereas in the past they had many different content suppliers. Now first the All Access Pass with its extraordinary quality, flexibility and reach, they’re dropping the rest of their content suppliers and using the All Access Pass for the foundation for their people development performance improvement ways and that will happen obviously in every case, but it has a powerful impact. Second, All Access Pass also leverages our significant investment in practices, and in building integrated solutions with premium services. Well, so many will find – many customers will find that all significant portions are needs to be met with All Access Pass content alone, others will find that purchasing additional services coaching [indiscernible] will help them to achieve their objectives in certain areas. Perhaps a little bit like Gartner Group on top of the platform of intellectual property sales where they add another third of their revenue comes from premium services. We have built a strong capability around these services for our execution, sales performance, customer royalty, et cetera. And we believe that this All…

Thank you. We’ll now begin the question-and-answer session. [Operator Instructions] Our first question comes from Marco Rodriguez with Stonegate Capital.

Hi, Marco.

Hi, guys. Thanks for taking my questions here.

You bet. Thank you.

I was wondering if maybe you can talk a little more about the All Access Pass here. I’m just trying to get some clarification on the product itself. It sounded like instead of just selling one module or one practice for example, you have access to multiple practices. And so I’m just trying to figure out here if the – but at the same time you did say also that the size of the transaction was two to three times. So I’m just trying to understand how the revenue aspect is flowing because it would seem to me that perhaps revenue might be somewhat cannibalized.

Yes that’s a big question. First of all, just say this, when we engage with the client we’ll often send one of our consultants, one of client, senior clients partners and they’ll offer to spend a day during stakeholder interviews with the population various people who have various people development leaders in the organization. 80% or 90% of the time what happens is you get through those stakeholder interviews you try to identify common needs that those people have leaving out all the individual needs that are common. And you try to get that group to agree on a course of action maybe a focus on execution to get certain goals done and or a speed of trust or whatever to address a problem. And so we’ll continue to be doing that. So typically they’ll buy one of the content areas and take a long journey. What we’ve normally done is in that same process though the other 20 things we heard about we just said, well look, we can’t get them doing, we got them to make a decision and do something with one population and we kind of leave those other problems unsolved. Now when we go through – and that will still be the case where there are many organizations that have a very specific need, they attend an event and will continue doing exactly what they do now. But this is a way of also doing that in an organization saying in addition to that one thing by the way, you can also buy the rest of the content because this is intellectual property rights, we don’t have really additional cost on our side related to them buying an intellectual property, we’ve already – we already have that cost on our balance sheet. And so by…

No, no, that’s understandable. I appreciate the additional color there. Are there any sort of sales centers or any sort of structure that you’re putting in place for the All Access Pass to incentive CP’s pass pushed us a little bit further than they were normally.

No, in fact, almost the opposite. We’re basically saying we don’t want, we want this to be an add-on sale. We wanted to be in the value-added category if you didn’t understand your client’s needs. And so well oftentimes at the end of the quarter whatever will provide special incentives. Really as it in part time early recognition and putting people’s names on the scoreboard for getting things done. This is just one other array of offerings I mean there are big recognition comes to me in their sales growth for their quarter for which they get paid extra commission, they get a bonus commission on all revenue for the quarter and they meet their goals, that’s a primary incentive. We don’t want to make this just a product push. We want this to be just another alternative when they reach into an organization and see the need. But in the past, we’ve just left the rest of those needs untouched, but there will maybe someday we’ll be able to go bigger in this client. Now, we can say hey by the way, we’ve heard these 20 things and now hey, if you want to step up the All Access Pass, you can solve a much broader array of needs. Somehow, okay, that’s really that sounds awesome. But I just have this one thing I need to get done. But today what we’ve found is the average revenue has been of this pass that purchased is significantly large they’re not huge in terms of total dollars, larger in this $23,000 instead of $7,500. And so that when they sell one, it’s a good thing for them. They have a bigger sale for the sales person. It’s a great value to the customer even though this isn’t a subscription, it might – it might be similar to Apple music versus buying songs for $0.99, hey, it’s not that $0.99 is a good deal. And many of us still are buying $0.99 songs every day, so that just meets our needs. That in that same way, clients will continue to buy manuals and buy training one off. But when you have a need of this broader or aspirations that are broader, the idea of spending $10 a month to Apple music even though the price per song might go down, then you have this similar situation we have. They have library of content they’ve already paid for or licensed. And so it’s kind of similar to us. So we think the average revenue per client increases, the lifetime value of a client probably increases at least at these lower levels. Our big clients tend to stay with us anyway, but some of these smaller clients they tend to churn a little bit more because they had one specific need. And so we think it benefits us in both ways.

Got you. And last question, I’ll jump back in the queue. Can you provide us with an update on where the strategic markets group is right now in terms of expectations?

Yes. I’d be happy to. Shawn Moon is traveling today. So I think he probably wouldn’t trust me to tell you how excellent. The government business absents the one contract that didn’t repeat doing well. It grew about 10% this last quarter. We had a good quarter other than the big $1.7 million it didn’t repeat. And they move into the third and fourth quarters, third quarter still was up against that contract with a smaller amount in the fourth quarter will grow. So that part of the story, the global 50 team, we’d actually not expect to have any revenue during the second quarter and they had some. And that’s good and they have a big pipeline. There are selling a lot of specific solutions, but this All Access Pass is also been helpful to them. The sales performance practice also grew during the quarter which is one of range fiber now, meaning to recruit for positive earn out payment. And in customer loyalty we’re actually down year-over-year, related to one contract and the rest of the business is doing well. It’s a small business as you know. But we have a large retail contract that expired in September. And the fact, they haven’t been able to replace that into the contract came, they delivered the value. But it was a contract that they’re trying to replace. They have a new offering coming out this – their offerings always been lower margin data collection – customer data collection services. And they have anew offering called leading customers loyalty which was actually part of this All Access Pass and we’re accessible, but they’re sold by their own sales forces. So hopefully that’s helps a little. Journal is going well. Shawn Moon is doing a fantastic job leading it. This is a lot of big deals. He’s the big deal – one of the best people at big deals and strategic things, and he’s got his teams focused on that actually. So we feel great about it and it’s on a good trajectory.

Great. Thanks a lot, Bob. I appreciate it.

Thanks.

Our next question comes from Jeff Martin of ROTH Capital Partners.

Hi, Jeff.

Good afternoon. Hi, Bob.

How are you?

Good. How are you?

Good. Thanks.

Could you touch on the practices by practice leadership education, I don’t think you covered yet.

Yes. Let me just also apologies. I didn’t include the practice chart just because with All Access Pass, it’s a little hard to know exactly your kids got all different content. It will start over time. It’ll be harder to track the revenue. But let me just give a quick update. We talk about the sales performance practice in customer loyalty and their response to Marco has been going into more detail on that. If that’s helpful those two practice – execution practice last quarter, it’s now building a good pipeline. Its revenue is up a little bit, but not strongly yet last quarter. But it’s on the right track and it was a good pipeline. We’re selling in a little bit like All Access Pass. One of the things we’re doing in all our practices which is I think will be a good thing for building recurring revenue. And also recurring revenue and also the margins is in the execution and sales performance historically when we’ve done a big installation called installation, somebody hires to do a big transformational sales engagement. We will tend to sell – we will just price the whole engagement, which is kind of denominated more in services some of the consulting contracts where they also get IT and things. And we’re now splitting that so that each of the practices will sell intellectual property contract to the core content some cases to the operating system whether it’s a portal of something. And then on top of that adding these services what makes clear that there’s an ongoing intellectual property relationship with that. So we’ve got – that’s in our growing an execution practice. We think it will really build the recurring revenue stream there. In terms of the organizational development suite which includes the normal productivity leadership and trust, I think the – because the focus on All Access, it’s little hard to divide out the exact revenue. And so I actually – I mean, we can happily find that of the exhibits – because we haven’t allocated out the $3 million of All Access Pass revenue probably won’t in the future. We’re now seeing that much more as one thing kind of the organizational development or learning development suite. And in the past we can’t go – we referral a little and trusted that because we launch that down to the other place. This is all in the same suite sold to the same buyer. And so overall our revenue as I mentioned besides from these ways of these ups and downs of FX and government, would have been about 5%, including the revenue from All Access, it was differed. And so anyhow practice revenue in the OD suite will pretty much follow that.

Okay. Thus so we anticipate you won’t break it out by curriculum from this point on?

Yes. I think it’s probably right, it just won’t mean very much. I mean, I would say, I was just going to just assume the time to shine. Have you talked about the education practice specifically? I just taken the OD suite. And so, Shawn, you may speak to the education status.

Sure. Yes. So, hi, Jeff. So education, we had a good quarter. We grew – so, first quarter was the 35% growth. A lot of that came from deferred revenue from year before which was nice to have. This quarter we grew at 30%, so it’s healthy. And I don’t think we’ll grow that same rate going forward. Last year we had a lot of our events in the third quarter, this year came at the second quarter. So I think our third quarter won’t be as nearly as high as the education, year-to-date is growing at 32%. And we expect – looking to the future, expect to bring on about 500 new schools this summer. So that’s really nice. We also have a lot of new partners globally that we’re signing up to run our education business, license business in different countries. There a lot of – we focusing in on just the same one. So, once the school starts, we want to keep them as long as we can. And then we’re also – just sort of we’re just trying to get more schools in. We’re looking at innovative ways to lower our costs, and keep the quality as high as possible, but all things considered, I think things are going really well.

Okay. And then. I know you’re looking at taking that to higher education. Where does your strategic initiative on that?

Sure. Well, with higher education we’ve got – this got good solid growth. There’s a small group right now is we’re expecting them to come in at just about $3 million for the year, growing for about $1.5 million. So we feel good about the progress we’re making. The strategy we’re using right now, we’re selling a lot of – called success. These are of course students take help and succeed in college and in life. And we’re – that’s one of our new offerings, it’s doing really well. We have a lot of new contracts, and some big ones that are in the pipeline. We’re also doing All Access Pass in higher education. We think this is going to be a great opportunity with staff development inside universities and colleges to also sale [indiscernible] staff, the few of them already. [indiscernible] is the exact level with our client partners is very good, and leading us great opportunity as well.

Okay. Thank you. Thanks, Shawn. Bob, can you touch on the – an update on the client partner initiative.

Yes, on the hiring and ramping plan progress?

Yes.

Yes. So we’re sitting at 198 client partners that to the – end of the second quarter. The big additions will come in the U.S. direct offices in the November time period, as notable. We will add client partners this summer in education. We’ll be adding several in the direct offices still. In June and adding some also for our customer loyalty. And government for the state municipal government category, you’ve got a couple of other slated also in government. So we expect that as we said last time that we’ll end up by the time we reported in November. We’ll end up with about 208, 210 client partners by the time. So I think we’re – we feel like we’re on track there, everybody is now fully committed or fully staffed on our managing director or sales manager positions. And so we’ve grown some from August, we had a 180. We had 194 at the end of the first quarter, I think and 198 now. And with [indiscernible] sales performance, I think we’ll add another 10 to 12 net between now and the fall and then we’ll have a big group in added on schedule four – the four persons.

Got it. Thanks for taking my question.

Thank you, so much.

We have our next question from Kevin Liu of B Riley and Company.

Hi, good afternoon.

Hi, Kevin.

First question, just wanted to clarify something on your adjusted EBITDA guidance, it sounds like it’s based on the fiscal 2015 exchange rates. If I look at the slide, it looks like about a $2 million impact year-over-year. Does that mean for [indiscernible] as reported basis that we should be looking more or like 32 to 34 in terms of what we model in?

Yes. We are going to given in constant currency – that we at least we’re dealing with the common currency way to think about it. To date, the EBITDA impact year-to-date has been a $1.2 million for the first two quarters. At current exchange rates, we’d only be another couple of hundred thousand in this year. And so if you – nothing went our way. The end is going to little bit our ways of recently, we would probably expect about $1.4 million, I mean the midpoint of our guidance would be a $1.4 million higher than post FX.

Got it, right. And then just a couple more follow-on where the All Access Pass, if you look at your existing base – customer base today as well as what you have in the pipeline. What percentage of those customers do you think that the profile for one that you would sell in All Access Pass to might be receptive to that offering?

Most of the – I mean probably what to say, in two-thirds of the organizations to probably qualified because they’ve got somebody who’s task with people development in their organization. Some small organizations actually – you wouldn’t think would be customers or potential because they don’t have that position actually have been – have raised your hands. I’ve never thought I could access Franklin Covey’s content from my calculation, I don’t have ahead of learning development, but now I can buy this pass. And I can assign my assistant with everyone else to coordinate the same because you get all the content. But I think the big idea for us is that in market raise the prices of cannibalized, I think for the group – the group is buying 30 manual bigger than continue to buy 30 manuals. But mostly the organizations do in fact have much bigger needs and bigger opportunities than we’ve historically been able to service. So we think they will probably – I mean if our existing customers, we have 1,500 customers who are small customers who are buying just less than 10,000 year of materials and so forth. Most of the organizations and they work to be potential, I mean we won’t penetrate in all that. If we got 15% or 20% of those people in the first 12 months and that probably continue for the next three years or four years, we’re just people learn about it and as their needs change, there is our client partners stay close to them. They’ll find opportunities to expand. In addition though I think we have about 12,000 accounts assigned to our client partners just in the U.S. of which only about 3,500 are actually clients they – as I mentioned, 1,500 of those are small clients.…

Got it. And just lastly, in terms of the current debt balance, which anticipates allocating [indiscernible] cash go to pay that down as quickly as possible. Are you comfortable carrying that on the balance sheet for this ending?

So it dependent on what the future brings as far as we’ve seen as opportunities used cash we’re not on comfortable was having a little bit or debt. But we do expect to generate cash as we’ve talked about for an either use that cash to pay off the $10 million of debt or maybe opportunistically still like some shares or do something else. So we’re not totally opposed to $10 million, outstanding on our revolving line. But if not other opportunities come out will generate that cash paid off.

[indiscernible] at our intent, we have an open authorizations of purchase tend to would be the continue to take advantage of that through the combination or cash in. And if the opportunity came, we probably even still have $20 million undrawn almost on their credit facility we could use that as well by most stocks. So we feel like we’ve got good flexibility and the ability for wanted to increase our credit facility.

Okay. Thanks for taking the questions.

Thank you, Jeff.

And at this time I’ll turn the call back to Bob for closing remarks.

Thanks everyone for joining today. We delighted to invite you again next Wednesday, if anything would like to know more about All Access, Wednesday, 6, 2:00 PM Mountain Time just to e-mail stephanie.king@franklincovey.com. And for those of you would like to join, we’re look forward to talking to you. Then thank you so much for your great questions today and for your attendance and we’ll look forward to seeing each of you soon. And thanks very much.

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