Franklin Covey Co. (FC) Q4 2012 Earnings Report, Transcript and Summary

Hello. And welcome to the Q4 2012 Franklin Covey Company Earnings Conference Call. My name is Maisha, 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 this conference is being recorded. I will now turn the call over to Derek Hatch, Corporate Controller. You may begin.

Thank you. Good afternoon everyone. On behalf of the company, I would like to welcome you to our fourth quarter and full fiscal year webcast this afternoon to discuss our financial results. Before we get to the good stuff, however I want 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 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 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 revise -- update or revise these forward-looking statements to reflect events or circumstances after the date of today’s presentation, except as required by law. I’d like to invite to read the other remaining stuff on the slide regarding Regulation G of the Securities Exchange Commission and our definition of adjusted EBITDA. And with that, certainly, I would like to turn the time over this afternoon to Bob Whitman, our Chairman and Chief Executive Officer

Thanks, Derek. Hello to everyone. We appreciate you joining us today. We are pleased to report that we had a very strong fourth quarter and fiscal year, turned out to be the strongest quarter and year ever for our current business. And during our third quarter earnings call, we announced an increase in our adjusted EBITDA guidance range between $26 million and $27 million for the year. We were pleased that given the strength of our fourth quarter revenue and adjusted EBITDA results, our full-year adjusted EBITDA actually increased $27.1 million slightly exceeding the upper end of our increased guidance range for the year. Adjusted EBITDA of $21.7 million represents a $5.9 million or 28% increase, compared to the $21.2 million in adjusted EBITDA achieved in fiscal ‘11, which in turn was up substantially from $14.4 million in adjusted EBITDA we achieved in fiscal ‘10. We continue to feel very confident about our business and about our prospects for continued strong growth, each of our channels impacts seriously. We also feel very good about our momentum, the trajectory of our business in the coming quarters and our outlook for continued growth in fiscal 2013 and beyond. So today, I really I like just to touch on three topics briefly. First, review of our overall financial results for the quarter and the year. Second, review our results for each of our channels and practice areas. And finally, review our momentum business pipeline and outlook for fiscal 2013. So I’d like to start with an overview of the financial results for the quarter and the year. Starting with revenue, we achieved strong revenue growth for the fourth quarter and for the year. And the fourth quarter revenue increased $6 million to $51 million, a 13.3% increase compared to the $45 million in…

Thank you, Bob and good afternoon, everyone. I’m also very pleased with our financial results for this quarter and for the year. Bob has given a lot of the very important highlights. So, let me just say a little few words about our balance sheet and our cash flows and a little bit about next year. First the balance sheet, our balance sheet remains strong in my opinion and balances are still generally within the expected ranges. Our cash balance increased to $11 million and we have no borrowing against our revolving credit line. Our account receivable balance is up over last year, due primarily to significantly increase sales in the fourth quarter and particularly in the month of August. Additionally, on our balance sheet, we classified a portion of our FCOP receivable as long-term to reflect the timing of our expected collections. And accordingly, we discounted that amount to reflect the time value of money. We expect to collect at least $3.5 million in cash from FCOP in the next three month. You might note that, a number of common shares outstanding at August 31st was $18.1 million reflecting in that number. There is an exercise of $1 million warrants for about 341,000 shares. We also have noted probably that we have initiated buying under our Board authorized $10 million stock buyback plan and had purchased about $400,000 worth of stock by year end. As I always say, if you are new to the story, I strongly encourage you to call me to talk about our balance sheet. And particularly, our financing obligation that’s really like a capital lease. Our tax NOLs and foreign tax credit, our future share account and our real estate operations. I really enjoy these conversations and they generally turn out to be positive and…

(Operator Instructions) Our first question is from Omid Eftekhari with Roth Capital Partners. Please go ahead with your question.

Thank you. Good afternoon, guys.

Good afternoon. Omid, How are you?

Doing well. How are you?

Good. Thanks.

First question I have is on the international licensee business. Curious if you can give us some more color behind the 13% growth here by curriculum maybe or just by geography?

Sure. Hi, Omid.

Hi. This is (inaudible). I’ll let Shawn to give the answer overseas that business.

Okay. Hi. This is Shawn. Yeah, so a little bit of insight on that. We’ve had good solid growth over the past many years. If you look back a last eight years has been pretty solid at about 12%, 13%. This last year, we grow 14%. The growth is pretty evenly spread out. I think we were seeing higher growth in Asia generally then in Europe. Our highest growth areas right now are the bigger countries, because we’re putting more behind them. So China, very strong growth in China last year about 10%, India grew at about 30%. Good growth in Thailand, very strong country and most of our operators in Asia are doing pretty well. Latin America, Colombia is growing well. Brazil is growing well. Our revenue distribution, if you just look at where our revenue is coming from, it’s about 50% from Asia, about 30% from the Europe and about 20% from Latin America. Now, most of these countries are pretty under penetrated. And so, that’s where we think the biggest opportunity is. If you would compare the penetration level, market penetration level of our country across the board, we’ve got 39 partners operating in our 144 countries. Our penetration level is about one fourth that of the U.S. And so, we’re doing about $10 million for example in revenue in China. And if we are doing the same with the U.S., it would be more like $40 million. So, we think the opportunity for further penetration is very strong across the board. And the growth -- we also have many countries that are hardly even touched on yet. For example, Germany is a huge economy. It’s got a very small operation there. There’s a lot of opportunity there. France is another one big, France and Italy are both big opportunities, big economies but we have very little penetration. So, just looking at the future, it’s very clear, we’ve got a lot of strong growth opportunities in penetrating deeper in some of these key countries and activating countries that are currently doing almost nothing. And then in terms of product mix, that’s another big growth opportunity, because about 70% of our mix is coming right now from one category, which is leadership and compared to about -- that’s about 25% in the United States. So, we are doing most of our business through one practice. So, as we build other practices such as education and execution and productivity, which we’ve been very little with yet internationally there is a lot of growth opportunity there. So as looking forward for the next year, we think we can anticipate good solid growth with our partners. So that, does that answer your question or do you have any other?

Yeah. No. No. That was very helpful. Thank you. And second question, I was curious what the average revenue per salesperson was at the end of the quarter end and for the full-year?

For the full-year, this is Steve. This would be to be approximately right, about $1.580 million for the salesperson who has ramped up. So for person who has gone through the ramp has been here all the time necessary to get through ramp is just over $1,580,000, that’s up from about 800,000 in 2005. And then for overall including our new salespeople, we agree of the need for all salespeople about $1.1 million and that includes lot of people who are just starting out ramp and we expect most people to ramp to at least $3 million and then continue to increase the productivity thereafter. So, that’s where it was for this last year.

Okay. Great. And then, if I recall correctly was about $1.2 million last year, correct?

I think it’s about $3 million. I think when we saw the $380 million was the actual for the -- I think sometimes we mix the two numbers and even so I think for those people who ramped up last year were about just about $1 million or maybe was close to $1 million, $2 million or $3 million. So I think it’s a $3 million actual number and then less for the people in ramp and so this is good increase in productivity for the average salesperson in addition to the continued ramp up for the salespeople.

Right. Okay. And then final question is on the SG&A leverage. I mean we saw pretty big decline year-over-year and you touched on it little bit, but curious what’s your expectations are for next year if we can expect further improvements or any kind of color would be helpful here?

Steve?

Well, in our SG&A category, we have as you would expect cost that are variable and that will increase like our commissions paid to salespeople. We will continue to have increased cost related to hiring of new salespeople and the direct support of salespeople. So, those are items -- those are areas where cost will increase in this coming year and we’ll continue to increase as we grow. And then there are other costs that are related to our corporate overhead and those central type costs that are more fixed, but in the future should be a decreasing percentage our overall revenues. So, the combination of those should provide a little bit of improvement in the percentage of SG&A compared to revenue. And then all of that would be impacted by anything we might choose to do on top of that like a marketing promotion or something might just impact for a short-term. But overall we would see a decrease in percentage that is a good part of the reason, why we would expect our adjusted EBITDA to increase to 18% in a couple of years.

Okay. Great. That’s helpful. Thanks, guys.

Thanks. Maybe just one addition to that on we just that in our direct offices in the field we -- and for every operation in the company we really had to model. So they are targeting toward and so we expect that even with the grow -- as we grow salespeople, sales support people et cetera there, the field office level in the U.S. and Canada will be able to maintain EBITDA contribution margins about 35%, net of those additions. In our international direct offices they come -- they don’t have the same central support that U.S. offices do. It’s more in the range of 22% to 25%, the target is 25. And so, I know we spend about 4% on R&D and so it is just what we have saying was, Steve said, that our central staff really hasn’t increased on a net basis. There are number of people in the central office here has remained about the same for the last two or three years, outside of the U.S. We don’t expect that to increase. And so, we have kind of we call the pod model, which is wanted to take the support the salespeople and ramp them up between the salesperson and marketing investment et cetera. And we think that those are -- be able to contribute mid-30s contribution against relatively fixed cost and that’s just another way of cutting the same issues, which is that in a given quarter you might have more expenses for user product launch or something. But in general, we are trying to have everybody run against the specific model that we will continue to drive our EBITDA margins.

Okay. Great. Thank you.

Thanks so much. Great questions.

Thank you. Next question is from Joe Janssen with Barrington Research. Please go ahead with your question.

Great quarter.

Thank you so much, Joe.

Hey, just kind of building of that previous question. Historically, I thought about this and you’ve talked about this. The follow through on incremental revenue in that range of kind of 35 to 45 and I think we’re kind of trying to hit this point in a previous question. Are we anyway, if I look at your run rate what you don’t lately it’s been trending greater than 50% if I done my math right. I mean should I -- we think this or is that incremental revenue flow through about 35 to 45 still accurate, because you’ve been trending higher?

Well, we have been trending higher for the last several years. And I think it’s possible that it will be a little big higher. But as we accelerate the number of people that we’re hiring, as I mentioned would accelerate the number of new client, partners that we hired in those coming year, as we build out the practice et cetera. I think just or it maybe a bit higher than 35 to 40. But I think if we can keep our central cost in good shape, it’s in that -- I think it will be some of that we really can make more investments to grow a little more rapidly and sort of probably come down a little bit relative to the recent years.

Okay. And then any effect from the hurricane over the northeast expected in Q1, anything we should be looking for?

Yeah. Shawn Moon. You’re on again.

Yeah.

Good to talk with you, hello. It has had an impact on our business there. And they are hurt all by this nasty Nor’easter and that has resulted in several programs that have postponed. We don’t anticipate the long-term cancellation of those things. It’s just simply a matter of shifting when those programs are delivered. And with our first quarter ending on the end of the month, this month. We are not able to get all of those reschedule, but in fact many of them of are looking like -- if not most are looking like they are going into second quarter. So there is an impact.

Can you quantify them, because I’m assuming those who are sitting in the pipeline?

I’m sorry. Say it again.

Can you quantify that on the pipeline, like you exclude that and compare like an apples-to-apples basis like, because you’ve had accelerated pipe in Q4. When you guys reported, I’m assuming there’s some lumpiness in the pipeline?

Yeah. For the quarter, we anticipated it could be as much $300,000 to $400,000 of revenue.

Okay.

Yeah. So it’s not a huge number but it will probably, could affect revenues 1% or so.

Okay. And one last question just on the education practice. I think you’ve talked to about 800 schools in the U.S. and Canada but another 100 outside. What are your expectations if you look into 2013, where do you think those numbers will fall out at?

Sure, well the growth continues to be pretty strong. We think we will add probably another 300 to 400 schools I think next year and that will keep accelerating. I think we could be -- our target is to be at the 10,000 schools in U.S. and Canada, 300 to 400 next year will be a good estimation. And a probably another 100 outside of the U.S. we have, The Leader in Me, which is the solution we are selling in education, which is a school transformation process is now in about 22 countries. Some of these are pretty substantive. So that’s the plan.

Okay. Great. Appreciate it. I’ll jump back in queue. Good quarter.

Thanks, Joe.

Thank you. Next question is from Marco Rodriguez with Stonegate Securities. Please go ahead with your question.

Good afternoon, guys. Thanks for taking my questions.

Hey, Marco.

Hi. I just want to get a clarification. Did you say that you had 120 sales people at the end of the year?

Yeah

Okay. And, could you please provide a sort of break up if you, or distribution of those 120 people who are the alumni versus the ramp people?

Yeah. Of the 120, I think in the chart that we included I think shows it, as of the year end we had about 62 that were new client partners who would be in the ramp. And so the difference would be people who are ramped up. Alumni client partner or people who’ve gone passed the ramp and got in there. So that would be -- so it’s roughly 50-50 breakdown. And so what really is embedded in our growth, I mean if we can continue to, we’ve had been fortunate and we think had a good record now being able to ramp up new sales people. And so, even if we were to stop hiring new sales people we’ve got 60, approximately 60 people they are still in the ramp in some form. And so we’d expect just the people in the normal course of ramping up would add significant revenues in 2013, ‘14 and ‘15 just from the continued ramp up independent of the new hires.

And of those 62 new CPs, I mean can you differentiate who is like how many or at one and who is at four?

We can’t. I’m not sure we have that. Maybe there’s something we got to provide for everybody in the next quarter. But we’re happy to try to break that down for everybody who wants to talk to us can give us a call. But if you look at -- I can just give you a way to estimate it. If you look at our -- the chart on, I think it was slide seven. We provide what the cumulative number is by year. And just looking at that chart actually at slide, hold it, slide 10, you can kind of estimate what the additions were by each year and figure out where in the ramp they are likely to be, but we’d be happy to do that math for you.

Okay. Great. And then I was wondering if you could also talk a little bit more about the expansion in this sales force here? Looking like you’re being ready to ramp that up next year. Can you talk a bit about your ability to find qualified candidates?

Sure. Let me ask Todd Davis who is our Chief People Officer and who is here to respond to that. It’s easier to find top sales people.

Yeah. Hi. This is Todd Davis. Thanks for allowing me to join. We have a recruitment division in our people service, at our human resources group headed by Aaron Thompson, who is actually a former client partner with us for many years before we put him in his role of Director of Recruitment. And then Aaron has working for him several recruiters mainly contract recruiter, so we can kind of have inflow with the needs of the company. Most of them were specifically focused on the client partner, the sales role that been the biggest levers as we’ve discussed. So we have and had for a long time an ongoing process through lead-generation process through many of the online sites as well as LinkedIn. And we work with several outsource firms and more and more we have -- and it’s true in my many years of recruiting you find the best people from our own people. And so we have a very large internal referral fee. When we have our client partners and consultants already with us, always what the recruiter had on looking for great talent out there with some of the other folks, competitors that we went into. There are certainly pockets in various regions where we will have a challenge, signing in particular any plus talent. And so we’ll move more of our resources including finder speeds and some of these contract recruiters over that area. And so far as Bob mentioned, even just two months into the quarter for these 25 net new hires that we are hiring in that direct offices here in U.S., we’ve got seven of those and they are quite outstanding hires already started. So, overall, we feel good and it’s always our number one area of focus is finding the right people and then focusing on their very quick ramp.

Todd, you might have just missed. Also, we talk about your perspectives on how the support structure we provide for yourselves that helps us to recruit people who might not be doing the same support elsewhere?

So as Bob mentioned in his pod, once a client partner comes on board then she or he has quite a network that is invested in helping them with lead generation for their client pipeline with a new world that we’ve added to this part call Inside Business Partner. And the whole purpose of this person is to do all of the administrative work, including setting up appointments and putting all of the information from those appointments in our sales force tracking system. So that the client partner is focused on, and has the time for many hours out of their week, just face to face with clients. So they have an impact business partner. There is another roll called an event registration partner. These are folks hired by the region that are coming, and they are just cold calling and dialing, and finding the right kind of folks that we need to get into all of our events which is a huge source of our lead generation. And then somebody knows to be appropriate client partner what they tend to be advance. So there is quite an infrastructure build there for the client partner. There is a whole sales academy and the client partner when she or he joins the company that they go through where they have intense training involvement, engagement and understanding and learning all of our solutions and have we position those solutions, and how we then meet face to face with the clients, and get into more, and more deeper levels and higher levels within each organization.

Okay. Got it. And last quick question here and I’ll jump back in the queue. Could you provide an update on the hiring of your Area Directors, and where you kind of are in completing that part of the strategy?

Bob, do you want me to talk about this.

Shawn, you probably talk about it.

Marco, hello. We extended an offer this week to the final piece of the puzzle, so that is complete for the year. Each of the region as we talked about before, they have a targeted spend of control now with our sales people. This is a big part of the answer to your previous question. How do we ensure that our client partners come on board? They have appropriate focus, they have the appropriate resource, tools and all of the things they need to hit their number. And the Sales Manager and Area Director function is a key part of that and that covered is now complete and moving forward. We are having great success with it by the way. I think we have a process whereby every week the client partner sits down their irrespective sales manager to review their plans, to review their pipelines, to review their actions, clear the path items that are necessary. But they are planning forward for the coming weeks. So there is much higher level of touch than there has historical been, and we’re finding that is helping our client partners hit the ground learning better.

Got it. Thanks a lot, guys.

Thanks Marco.

Thank you. Our next question is from John Lewis with O. Partners. Please go ahead with your question.

Good morning. Good afternoon guys.

Hi, John.

Just a quick question, looking at your balance sheet, I think you guys said that you expect to collect the $3.5 million receivable from Franklin Covey planner in the next three months here?

Yeah.

And if you just look at the seasonality and how you generate cash, Q1 is typically more muted and Q2 is strong. I mean, just looking at the kind of seasonality and the related party, would you expect to see your cash double between now and March 1st?

I wouldn’t expect it double, but I would expect it to significantly increase, John, for all the reasons that I think you talked about and to increase significantly. I don’t have an exact number to say, but we would expect it to increase significantly. Just now you said that our sales at the end of the year are good. We collect those amounts. We collect money from FCLT and then remembering that in. So all of that money is coming in that’s positive in Q1 and Q2, and then we also have a significant payout of our year-end variable pays and bonuses and things that are tied to year-end numbers that happens in Q1.

All right. Okay. That makes sense. And if you could just replicate the first half of last year and you collect the receivable, it would be something like $11.5 million. I guess one other and you guys said that your game plan is still to use cash obviously about $10 million for share repurchases?

Yeah.

Yeah. We still have that program in place and that’s what we intend to do.

Great. Well, thanks a lot. Great numbers and congratulations. Thanks so much.

Thanks, Shawn.

We have no further question at this time. I would like to hand it back to Bob Whitman for closing remarks.

Great. We would like to thank everyone for being on the call today. I appreciate your continued support and interest. Let me just say as we close that this is a very exciting time for us and the business. We spend years putting in place the practices, the regional infrastructure, the process is to hire ramp-up people and the marketing machinery over the last several years. We feel like we’re now in a position where we move to a different plateau. We were able to do this at a fundamentally different scale. That wasn’t many years ago and the EBITDA that we had in this last quarter was what we had in the year, not quite even. And so we feel like it is a time where we try to teach the companies about execution, but I think as thing focused on, helping our client, partner to be successful, working with our major clients we had about 89 little over, maybe just slightly over 90% of the revenue from 2011 repeated in 2012 in our clients. So there is high resilience and commitments for our customers, our average size of engagement is growing with our customers. One of our goals is to increase our deep pervasive ongoing relationships with our customers and there are number of large, I think large for us. The larger accounts is going to add significantly, and just at every price tier there are just more people doing more business with us. They stay longer and having more impact. The people that we have, I mean, we’ve had just strong people in our sales forces, in our delivery forces and this is an example, I mean recently, we hired a couple of regional practice twitters in our execution practice. One of them was Bill Bennett and…

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