Welcome to the Q3 2016 Franklin Covey Earnings Conference Call. My name is Eric. I will be your operator for today’s call. [Operator Instructions] Please note this conference is being recorded. I will now turn the call over to Derek Hatch, Corporate Controller. Please go ahead.

Thanks, Eric. Good afternoon, ladies and gentlemen. Welcome to our call to discuss the third quarter fiscal 2016 financial results. Before we begin the call and the webcast this afternoon, we just 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 companies 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 except as required by law. With that out of the way, we would like to turn the time over to Mr. Bob Whitman, our Chairman and CEO. Bob?

Thanks, Derek. Good afternoon, everyone. We are happy to have the chance to talk to you today and really appreciate you all joining the call. Maybe to start out. Last quarter, we introduced you to the All Access Pass and noted that it represents a major strategic shift in the way in which we engage with our clients. We also said we believe it would significantly increase the average lifetime value of our customers. And in the process, it really changed our whole business. Well, as you probably have got from some of the information you have already read, that change is really accelerating. As shown in Slide 3, All Access Pass reported income has increased from just $0.25 million in Q1, all of which happened kind of toward the end of November to $1.9 million in Q2 or second quarter and $3.4 million in the third quarter. If continued into June, we expect All Access Pass revenue in June – recognized revenue in June alone to be nearly $2 million with approximately an additional $4 million All Access Pass revenue likely to be recognized during the balance of the fourth quarter. In addition to the revenue that we are recognizing, we are also generating substantial amounts of deferred All Access Pass revenue. As you know, when we sell an All Access Pass, we enter into a contract with a client that has two primary components. One is an IP license for up to 26 of our content areas, which represents approximately 60% of the contract value and the revenue for that portion is recognized immediately. And the second component is the digital library, representing 40% of the contract value, which is put on the balance sheet and recognized over the following 12 months. As you can see on Slide…

Thank you, Bob. It’s nice to be with you today to spend a few minutes to overview the results for the third quarter. First of all, let me point out that net income for the third quarter was a loss of $1.1 million compared to net income of $1.2 million in the third quarter last year. If you look back at Slide #15, you will see the reconciliation of net income to adjusted EBITDA that we are going to talk about for a minute, the adjusted EBITDA. You will see that adjusted EBITDA for the third quarter was $1.8 million compared to $4.9 million last year. In a summarized view, this decrease reflected the combined impact of three things. First of all, a $1.7 million combined negative impact of a couple of unusual type items; the expected non-repeat of a large government agency contract, which generated $900,000 of adjusted EBITDA last year and an unexpected $800,000 accounts receivable write-off. So first, we have those two unusual items. Next, if you take all the rest of the business, excluding the U.S. direct offices, the adjusted EBITDA of that remainder of the business increased a little bit in the third quarter compared to last year, a few hundred thousand. And then third is looking at the U.S. direct offices where we are primarily selling the All Access Pass. So, the decrease relates primarily in those offices so that the change in the business model related to selling the All Access Pass. So, let me go over that just a little bit. So, the shift in this business model means that we generated $1.6 million of very high growth margin deferred revenue during the quarter. To provide some further context on how this impacted the quarter, in last year’s third quarter and all…

Well, thanks Steve. Thanks. I just want to spend a minute maybe talking about three ways – in addition to the deferred revenue coming in at future periods and the value of that accelerating growth in the future, three things we identified about All Access that we felt would really change the business. The first is the change in the increase in lifetime value of a customer to us of even our existing loyal customers. This is driven by the expectation at least was driven by two things: the assumption that you can achieve a higher average spend from these All Access Pass holders and that you would also get a higher percentage of these folks and customers repeating in revenue. And as the increase in average spend while it’s still early to-date, the All Access Pass holders who are prior customers have in fact been spending more with us this year than they did last year. For example, 139 pass holders who are active facilitator clients in fiscal 2015 buying training materials from us are now All Access Pass holders as of the end of May. In the full fiscal year 2015, these particular 139 clients spent $3.7 million for the whole year, a median of $17,700 per client based primarily on facilitator materials. These same clients, who are now All Access Pass holders have already spent $5.2 million this year – year-to-date through the third quarter, a median spend of $25,250 and most of them just became pass holders recently relatively recently. Now, approximately $1.5 million of this spend is being treated as deferred revenue we just keep talking about. So, a lot of the difference – we haven’t seen much of that difference come through yet, but it will, but the actual spend is higher and so…

Thanks Bob. Hello, everybody. The direct offices historically had very strong growth. In fact, if you look at Slide 14, from 2010 to 2015, compounded annual growth was 10.6%. And you can also see in that chart that growth started to slow in 2015. And we have spoken about this on previous calls, but the slowdown was driven primarily by reduced average sales size related to success of new product launches. While this didn’t immediately show up because of the type of sale related to the launch of a new product meaning that it has a shorter sales cycle, as we move back toward a larger average order size and associated slightly longer sales cycle, it’s made it harder to grow the past few quarters. We think the All Access Pass is really going to change this and is going to drive strong growth for us going forward. As has been previously mentioned, with the All Access Pass we know the average sale size is larger. We also know that the average lifetime value of the client is greater. And while right now we are not getting much of the benefit of past deferred revenue, the deferral that Bob spoke about on Slide 5 will begin to work on our favor and we expect past deferred revenue to contribute an amount equal to about 5% growth in 2017 and what could be as much as 9% growth by the time we get to fiscal 2018. As was mentioned, we didn’t have much deferred revenue working in our favor this year in Q3. In last year’s third quarter, substantially all of the $20.5 million in contracts entered into the U.S. direct offices was recognized as revenue in that quarter. However, in this year’s third quarter, only $18.7 million of the revenue…

Thanks, Paul. Well, maybe just to take a second and say, while this obviously is a developing story in the direct offices there are other parts of the business that are moving really well. And Shawn, you might just know what’s happening in the education business and licensees. The growth is continuing well there and maybe you could just give a brief update there and then we will conclude there with our cash flow and guidance.

Okay. Sure. Hi, everyone. This is Shawn. Yes, so education division continues to have steady growth. And when we talk about Education division, remember we mean higher education as well as the K-12 education both in the U.S. and internationally. So, it’s all about together. And on the K-12 side of the house, our primary offering as we have talked about before is The Leader in Me and this is this whole school operating system that basically teaches students 20% through life skills, such as public speaking, goal setting, creativity and communication skills. During the third quarter, the education division grew by 22% and so far for the year for the first three quarters, the division has grown by 28%. This year we will bring on 550 new Leader in Me schools, which will put us over 3,000 across the world, including about 800 that are outside of the United States. And we believe that the growth potential of The Leader in Me in both the U.S. and internationally remains very strong. We recently just signed new agreements with Macau, the UK and Cambodia and we have several more right now pending agreements in other countries. Our focus has always been on helping schools achieve quality outcomes in the areas of student behavior, teacher and parent engagement and student achievement. And we feel very good about the progress we are making here as we continue to focus on quality results for our clients. And this is evidenced by when we did the Leader in Me, there is an installation piece and then there is the sustainment piece, which is kind of an annual package the schools participate in. And this year, we expect approximately 93% of the schools will renew that sustainment piece. And so we are not only starting…

Thanks, Shawn. As we said, there are a lot of exciting things happening out in the strategic markets. We will do maybe a spotlight on that next time, but the new offering in Customer Loyalty, the government business outside of the contract, the non-repeating contract is growing well. And the sales performance is going to have really a big year, target for the year. So Steve, why don’t you finish up for us here?

Okay. Just a little bit on cash and guidance. First of all, cash. Our year-to-date cash flows from operating activities of $21.9 million reflects a $6.5 million or about 42% increase compared to $15.4 million in cash flows from operating activities last year. So we continue to generate cash. Our liquidity remains strong with $8.9 million in cash at quarter end and $40 million of availability under our revolving credit agreement. This is all after utilizing more than $35 million – $37 million this year to purchase more than 2 million shares and some of that is on our $15 million term loan that you will see. So, finally, guidance. A couple of thoughts. First, we do expect to achieve strong revenue and adjusted EBITDA growth in the fourth quarter on a reported basis, while also generating a fairly significant amount of All Access Pass related deferred revenue and Education-related deferred revenue. In November, when we gave our full year guidance initially of $34 million to $36 million of adjusted EBITDA in common currency, we had barely begun to test the concept which we are now talking about as the All Access Pass. In fact, we had only sold a few passes at that time as a test. Also, when we reported Q2 results, we are also early in the All Access Pass sales process. The point is – of this as it relates to guidance is now – we now expect to have more sales and therefore deferred revenue, more sales in the All Access Pass and therefore more deferred revenue on the balance sheet than what we have previously thought. So with that said, given this accelerating growth in the All Access Pass and potentially, further acceleration in the fourth quarter and the significant amount of deferred revenue, which could be generated, we are expanding our guidance range pre-FX to between $31 million and $36 million. It might be interesting for you to note that the entire executive and management team is still intently focused on achieving the original guidance range notwithstanding the headwind of accelerating deferred revenue from the All Access Pass and might just be interesting for you to note that we are still paid on the same numbers that we were targeting at the beginning of the year. So, Bob?

Thanks, Steve. With that, we will just open it for questions that you may have.

Thank you. [Operator Instructions] And our first question comes from Marco Rodriguez. Please go ahead.

The next question comes from Alex Paris. Please go ahead.

And our next question comes from Kevin Liu. Please go ahead.

And the next question comes from Samir Patel. Please go ahead.

And our last question comes from Jeff Martin. Please go ahead.

Okay, thanks. Alright, well thanks everyone. I know, it’s been – we have overstayed. If there are any other questions, please feel free to give us a call. We look forward to talking to you. Thanks very much. Have a good quarter.

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