Franklin Covey Co. (FC) Q1 2013 Earnings Report, Transcript and Summary

Welcome to the Q1 2013 Franklin Covey earnings conference call. My name is Trish and I will 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 being recorded. I will now like to turn the call over to Derek Hatch, Corporate Controller. Please go ahead.

Thank you. On behalf of the company, I would like to wish everyone a happy new year and welcome you all to our first quarter conference call to discuss earnings. Before we get started with our annual shareholders' meeting coming up on January 25, we would like to encourage you if you are a shareholder of record to please vote your shares in as early as possible convenience so that your shares may be tabulated and counted in time for our annual shareholders' meeting. We value your votes and would encourage you to please vote your shares as soon as possible. With that out of the way, I would 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 sales professionals, general economic conditions, competition in the company’s targeted marketplace, market acceptance of new products or services and its 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 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 the company's Chief Executive Officer and Chairman of the Board, Mr. Bob Whitman.

Thanks, Derek. I would like to welcome everyone to our fiscal first-quarter 2013 conference call. Wish you a happy new year and we really appreciate you joining us. Hopefully you all have saved copies of the press release that went out about an hour ago. We are pleased to report we had a strong first quarter. The strongest first quarter ever for our current business with both revenue and profitability growing substantially over the prior year, and we continue to feel very positive about Franklin Covey's business, comfortable about our prospects for achieving continued strong growth in each of our channels and practice areas which we will discuss a little further as we go through. We are encouraged by our momentum, the expected trajectory of the business in the coming quarters and our outlook for continued growth through the balance of fiscal 2013 and beyond. So, today I would like to just briefly touch on three topics. First, provide an overall summary of our financial results for the first quarter and for the trailing 12 months. Second, provide a summary of our results in each of our channels and practice areas. Third, give an update on our momentum business pipeline and outlook for fiscal 2013. I would like to start with an overview of our financial results for the first quarter and for the trailing 12 months. First, on the revenue line we achieved strong revenue growth in both the first quarter and for the trailing 12 months. As you saw in the release, in the first quarter revenue increased $4.5 million to $44.1 million, an 11.4% increase compared to the $39.5 million revenue achieved in the first quarter of 2012. All of this growth was organic and we were pleased it was also very broad-based with growth in all…

Thank you, Bob. It's nice to be with you this afternoon and happy new year from me also. Now let me just take a second to mention a little bit about our balance sheet, our cash flows and some of our other expenses. First of all, our balance sheet remains strong and our balances are generally within expected ranges. As an example, when you look at our cash balance, we expect our cash balance to decrease in Q1, and we expect a significant increase in our cash balance in Q2. In fact, even though that cash balance decreased to $7.3 million in the quarter, as of today our cash balance is already over $13 million. So this is a pattern that we expect every year. That’s because, in Q1, remembering that we had a very solid Q4 and what I would term a good year, last year, it is in Q1 when we pay our fourth quarter commissions, our fourth quarter bonuses and our annual bonuses. So our decrease in cash is primarily a result of these payments and our increase in Q2 will be primarily a result of decreased accounts receivable and related party receivables as those balances convert to cash. Additionally, we continue buying under our board authorized $10 million stock buyback plan and purchased another $400,000 worth of stock under that plan. Now if you are new to our story, I still strongly encourage you to call me to talk about the balance sheet. Particularly, our financing obligation that is really a capital lease, our tax NOLs and credits, our future share count and our real estate operations. Conversations about these items continue to be very positive and shed light on often misunderstood accounts. I make this invitation every quarter because the conversations are still important and…

Okay, Steve, I guess it is time we turn back to the operator to set up our question-and-answer session.

(Operator Instructions) Our first question comes from Jeff Martin from Roth Capital. Please go ahead.

Bob, can you talk to the curriculum development plans for the year. Are there any specific practice areas you are working on at the time or is it fairly broad-based?

I will make a note of it and then maybe I will ask Shawn to give further detail. There is ongoing development in each of our practice areas every year but we also, every year or so, particularly we are making a concentrated investment as we did for the previous two years in the productivity practice. For us going forward, the leadership practice area is going to receive the biggest emphasis. We will be redoing the 7 habits content, Signature content in the coming year and making additional investments in leadership. Shawn, do you want to add any further comments to that?

Sure. So the big pockets for probably the next 12 months is going to be on the 7 Habits of Highly Effective People workshops and that’s a flagship for us. It’s a very important part, a big part of our business. Internationally, it's half of our business. It's not broken. It's doing really well but we feel like there is a lot we can do to enhance, make it more relevant, to create longer-term revenue streams from the products. So that’s undergoing a thorough review right now. We do a lot of research upfront from clients and from our own salespeople and we get that data together and we put it together. So that will be coming out in probably about a year. We also have, as Bob mentioned, ongoing development in all the practices. In particular this year, there is a lot of development going on the sales performance group, updating and codifying the product there so that we can create a stronger centerline so we can sell it more broad-based internationally. As well in the education practice, the Leader in Me is getting an upgrade as well in terms of creating long-term revenue streams, a powerful new web community will be part of that. So we have a commitment of the company, we always spend 4% of revenue on R&D each year and this has been a really good thing for us. We have been doing this for 10 years and it's paying dividends in big ways today.

Great, that’s excellent. I appreciate it. Then could you also touch on your sales support team? How much that spilt out? If there is more to go? Just trying to get a sense for modeling out SG&A.

We have added a lot. In fact, I don’t know if Shawn Moon is travelling today. Shawn, are you on the call?

I am here, Bob.

Let me just make a note and then why don’t you give us detail on it. The key areas of investment that we want to build infrastructure in this year, where our central marketing team which was in place by mid-year last year and so we continue to make investment. There is some increase in investment in that team but we basically got that in place. We have implemented marketing and list purchasing management capability which was primarily done again during the back half of last year and that was one area of investment. The second was in sales managers for each the regions. The third was in terms of continued addition of new salespeople and also event marketing people who help to fill these events so that more of our sales people's time can be spent face-to-face with clients. We have made good progress in each of those and Shawn maybe why don’t you just give the details of that.

We had made really good progress and we are excited about the direction they are going. I would just say, in the question relative to, do we have a whole lot more infrastructure to add? The answer is no. We have that essentially in place which is one of the reasons why we are encouraged in the first quarter despite the investment we are able to achieve these growth targets. It takes some time for the investments to pay off as we will be marketing event there is a sales cycle that a client goes through. I will just give one example of where we are seeing this traction start to occur. Bob gave example of the sales manager in the West region. We have three of those now in place. They are all now in place and in the case of the West region where this individual was given all new client partners, every single one of them exceeded their revenue goal and looks like they will hit at least for the second quarter and possibly more in the second quarter. But in our event registration team, we are seeing some exciting things happen there. We anticipated that we would get about one registration for every two hours with this team and we have just about hit that by twice our expectation. In the case of our U.K. office, which as Bob noted, the revenues flat over the year but we believe they are building infrastructure to grow in the out quarters. They have a team of four people that is filling event that were not doing this last year and they have already exceeded by about five times in the first quarter the number of total participants they had in events all of last year. So that’s indicating to us that the play that we are calling is actually the right play and it is leveraging the time of the client partner so they can spend more of their time actually in face-to-face sales discussions. So the infrastructure we believe is in place. There may be two or three of these event registration partners that we still need to add but beyond that the structure is set.

Great, that's helpful. Thank you. Then do you have a number or do you have a metric for tracking the number of events and how much that is up year over year and what the outlook is for growth and events for the rest of the year?

We do. We haven’t historically recorded but let me just give you an example. Last year, for fiscal 2012, in fact, Scott Miller is here, head of our marketing. Scott, do you want to just respond to this?

Yes, last fiscal year, we had about 650 live marketing events in the U.S. and Canada and this year we are expected to more than double that and we have a pretty tight algorithm on exactly all of the inputs and outputs and we know exactly how many invitations need to be sent, how many people need to show up, how many people need to actually progress to a sale, what that average purchase will be. So we have that all pretty tightly knitted. The expectation is that it will come in probably roughly more than double the number of events this year from last year. In fact, right now, we are looking to have about more than 1,400 events. That excludes all of our licensee operations.

Jeff, the revenue from one of these events tends to, when you track it back, it tends to play out over about 20 months, a pattern of revenue that recurs from one of these events. Some of it happens immediately in certain kinds of things. Then on average this will build for 20 months. So we are trying to do and give you reference. If we obviously chose not invest the $17 million or $18 million in growth or if we chosen one quarter to hold back on the hiring, we can you pop the results for one quarter by $0.5 million or $1 million dollars as we could have in this first quarter but you can feel confidence in the results that come from these investments and we are really increasingly confident, not perfectly so by any means but we are certainly directionally confident about these and getting precision on them. It feels like the right things is to make these investments now to front and low them so that we can have an impact in our third and fourth quarters and moving into next year.

So by that nature, would you expect the high-teens growth rate that you saw in Q1 for U.S. and Canada direct to continue or maybe even accelerate?

I think on a long term basis, we have said that we think the overall company have been growing low double-digit and to maybe as we continue to increase that then maybe it will increase a couple of points because we have some areas like our self-funded marketing that tends not to grow very much and we have some other areas like rental income and our real estate that tend not to grow much, it obviously implies that we would be able to grow more rapidly otherwise. So I think the idea that 18% percent was a very, very strong growth (inaudible). In some cases you will have large accounts that make it non-comfortable year-over-year but on a general base if we can feed that to the salespeople and continue to market investments we think for those offices achieving mid double-digit growth ultimately is good target for us.

Our next question comes from Joe Janssen from Barrington Research Associates. Please go ahead.

Bob, just for clarity, acknowledging flow-through in the quarter was down due to the investments you guys were talking about just a second ago, but it sounds like this could be below the 35% to 45% range for the next few quarters. Is that a fair statement?

I don’t know. Let's take a look at the flow-through in the first quarter. If you take last year's performance, which was about $6.4 million of adjusted EBITDA in the first quarter, approximately $1 million of that came from this book and audio deals. So if you really look at $5.3 million, the $5.3 million grew to the $7.1 million and so on the revenue growth of $4.5 -million actually our flow through was mid-30s kind of flow-through on the revenue we generated other than this non-repeat of the contract last year. So I think our investments we have been making on a consistent ongoing basis, I think our first there is absent the comp on the book and audio deal last year, which uncharacteristically most of our self-funded marketing is not very high margin. It is what it says. It covers its expenses. In this one case, the book and audio deal was very profitable. It was an intellectual property sale. Aside from that, our flow through was in the mid-30s and we would expect that, our investment are kept in the range that on ongoing basis, we would expect flow-through in that range and so we figure if we for the year we are suggesting that adjusted EBITDA increases in the range of the $3 million to $5 million because of this thing you might have a couple of things like this first quarter when that would make it non-comfortable but we would expect that would represent something like 32% to 37% flow-through on the normal increases in revenue otherwise.

Okay, that helps, I appreciate that. Shifting gears a bit, focusing in on licensing operations. That 10% growth in the quarter, can you give me a sense of where the growth was coming from? For example, you mentioned new practices, organic reactivating or inactive territories, getting them to grow again, or was that fairly balanced across the board?

I will let Shawn cover it.

Okay, it's fairly down. Let me give you a sense for breakdown by region. Maybe it will help a little bit. So Asia-Pacific was generally about flat for the quarter, Europe was down about 1%, Middle East, Africa about 20% and the Americas was way up because of the large deal we had with Abril Education that Bob mentioned. So the Americas was way up. Although that 10%, we get a lot of ups and downs by quarter by different countries. Generally, as Bob mentioned before about 70% of our revenue is coming from leadership practice. We are very young in the other practices. So that represents a big opportunity. That’s always increasing. So by the end of this year, it will probably be more like 66%, 67% coming from leadership and the rest coming from new practices so that the object here is to keep growing the leadership practice at a reasonable rate, while we rapidly increase the growth of other practices. Education is the fastest growing practice internationally. Execution has got a lot of opportunity as does productivity and trust. Then we always have some outstanding performances each year by certain countries. Last year, we had Middle East grow by (inaudible) and then last year in Thailand, for example, we had floods. Okay, and that wipes us out for much of the year and Thailand has had tremendous. They are a big operation for us. They grew 62% this first quarter. Egypt also last year had a coup that didn’t help too much. They were growing rapidly. They have been getting back together somewhat. So I hope that gives you a little bit of flavor for what's happening there. Our largest partner, China seems to be pretty steady all the time. It is around 10% or 15% and then one of the things to keep in mind is that we have some protection and we have contractual growth in place, meaning we have got with all of our partners, they got ahead of certain level or they pay regardless. So that helps, gives us a safety net, so to speak, to keep the growth steady all across the board, it’s a really nice thing to have. It helps smooth out some of the natural ups and downs you will get when you have got 140 countries operating.

Okay, that helps. One last question. It's regarding the stock loan program. Given that that March 30 deadline is approaching, I am just curious, maybe you can shed some light, what the board is thinking here? Let's call it like $15 is the breakeven price. If it is not reached, is it fair to assume that the likely outcome is you are going to extend the agreement?

This is something that the board can make a final decision on exactly what the options are but, as you know, one of the options is just take that shares in cancellation of the loans and that’s the right that we have. We feel good about the progress the company is making, the impact on the individuals involved in the program. It could be significant if we didn’t extend it. So it’s a topic for board discussion but a reasonable thing to think about it would be it appears that we are going to continue to be on the track or even at the same multiple. We will get there within a reasonable period of time. It might be a wise thing to consider extend for a period of time just to get it completed given you are going to get 3.35 million shares back one way or the other. If it’s a few months later, it might not make a lot of difference but I think that’s a decision that hasn’t been formally resolved by the board and we have a meeting later this month and it will be a topic on that.

Would you announce that through in a K or something at that time?

Probably not. Probably as we get really close, we will probably wait until we will be reporting the second quarter within a day or two of the expiration of the due date here. I think it will be most likely it will be around that date.

Our next question comes from Marco Rodriguez from Stonegate Securities. Please go ahead.

Wondered if you could talk a little bit more about the sales strategy? I believe on the last conference call, you guys had mentioned that you had extended the last offer to an area director. Was that offer accepted?

It was, and I think Shawn did mention, we have each of those in place now.

Yes, they are in place.

Okay, perfect. Then in terms of that overall strategy there, you provided some nice color in terms of the Western region and how that is progressing positively. I am wondering if you might be able to shed any other color on different regions.

Yes, I used the example of the west region because this particular area director or sales manager had an entire team of brand new client partners. The same pattern is happening elsewhere. That was just the extreme case. We are seeing increased focus and attention with these guys there engaging in a process that we call plan and review session. Marco, I think I might have talked with you about that. So it’s a weekly accountability and strategic planning session where they go through all of the key lead and lag indicators with their business. It's achieving a higher level of focused attention and really what I am most concerned about is the idea of mentoring that we haven’t had as well established as in the past and it has a much higher level of focus and attention. Give another example in the central region. We have a great new sales manager there and this individual, like the others, but he is spending his time on Mondays in the plan and review sessions and the rest of the week in face-to-face meeting with the client partner coaching them, some times doing the meetings himself, sometimes having them do the meeting but doing the curbside coaching after. So this is happening across all of the regions. We are encouraged by the higher level of touch and attention that we are achieving.

Marco, I just wanted to comment on that. The whole purpose of this infrastructure is to make sure that our sales force ramps up well. As we have reported in the past, thankfully, over the last seven years actually collectively our sales force, the sales hires have ramped up a little bit faster than we projected and we have done well. We have also been able to accelerate our hiring but the key constraint, we think, and we have talked about it for years, is mentoring. For a few years we had people who were player coaches do the mentoring and that worked well but at some point your best player coaches who also are good mentors have been utilized and you want to grow faster than them. So the addition of the sales management's function, the addition of these events schedulers, once again these are not massive investments, but the event schedulers we hired a little over 20 of them and that will be an annual cost of around $800,000 but the effect of those is to significantly increase both the number of people we book into these events and also to free up time for the sales force to work. So we think it is pretty easy investment to swallow but having invested in that infrastructure in the first quarter, we have hired more than 20 support people in the first quarter. In the second quarter that will be probably be an addition of five or six and it will tail of in the out quarters. So we think these are investments that will help us predictably to be able to hire ramp up these 30 net sales people this year.

Marco, I would add one more thing to the sales manager question and that is implement of cost that a cross pollination is probably the wrong word but we are doing some cross training and cross best practice sharing between this group which is really an activity that at this level has not happened before. We have regular coordination of planning session meetings with our general manager but now we are having a cross-section of sales manager and area director role that are coming together. So, the good things that are happening in the West can be replicated in the Central and the Northeast and in London and in other places. So there is a process now for sharing what is working and what is not working across all regions.

Got it, that's helpful. Then in terms of the overall strategy that you have implemented here from the sales side, are there any, I guess for lack of a better phrase, wrinkles that have come up that might need to be ironed out over the next few quarters?

Well, yes, I have mentioned in the final review process. That’s a new process they are going to do. So there uneven implementation of that at this very moment. So that’s one of the major topics that we are addressing with all team all together. Here is the template that you use. Here is how you access it and track it in sales force so that any given moment in time, anyone of us can get a view as to what any client partner is doing and its happening region-by-region-by-region in the exact same way. So if the same kind of thing would happen in the implementation of any new strategy. If the codification and center lining of all of the key behaviors that needs to happen in the same way with the different people across the different regions.

Marco, just not to glow over this but I think our strategy has been kind of bullets before cannonballs and so most of these strategies have been being tried for years and in pockets. So we have proven it up in one or two regions and once we feel like it is codified then there is the implementation rollout. With that, I think there none of the parts of this strategy are we wondering about today as to whether or not they are going to be stable of going to work. We have proven them in the past where they were being implemented as Shawn mentioned it. There is always uneven implementation in the early months but ultimately, thankfully we have been able to get there on all the other components.

Got it, and then the last quick question I have. In terms of marketing, if my memory serves me correctly, I believe you hired a new marketing team or at least head of marketing last year, and you were either in the process or kind of finishing off a rebranding or an image change for Franklin Covey and I was wondering where you stand in that process, if that’s been finished and rolled out nationwide or companywide yet?

I will ask Scott Miller to answer.

So we are still in the process. It is an ongoing effort. Minimal things like just updating our fonts and adding a tagline and those types of things are in place worldwide now. I think at this point we are focusing on helping the marketplace understand how organized is the 7 Practices. So its both the education of our internal sales force and our client base that Franklin Covey has a different value proposition for each of our 7 Practices and that these 7 Practices are really are key face to the client. So that an ongoing project but in terms of the logistic aspect of the rebranding, business cards, letterheads, things like that, that’s going very well. Now it’s a re-education campaign internally and externally so that all of our partners can speak to the 7 Practices. They have the capacity and clients think of us with that point of view as well to. So far we are doing well on that.

Not surprisingly, part of the rebranding is also the launch of best-selling books that put a new face of Franklin Covey out there. The 4 Disciplines of Execution, in fact, has become a best-seller. It has been a good thing, I think, for the brand. We did some advertising and such behind that during the launch. It is now gaining good traction and each of those additions of intellectual property and so forth also helps to rebrand the company as people start to recognize us for a broader portfolio of offerings. It's amazing how we are having big marketing events around featuring the authors of the book, holding these marketing events and when we normally might have 30 or 50 people that we target to have at the size of these events is a multiple of that, always over 100 and sometimes upward of 200. So I think, each of these things is going to be a fabric that’s woven each practice driving at home the fact where more than 1,000 schools now and Leader in Me is now gaining in that market a positioning. So our view is to, we are just overarching branding strategy around Franklin Covey but we also have the purpose branding strategy around these practice to drive home the efficacy of what we are doing in each areas.

Our next question comes from Aram Fuchs from Fertilemind. Please go ahead.

Yes, it is Aram Fuchs. I was just wondering if you could focus on this education practice. The growth was quite impressive. Are you committing roughly that the amount of that growth in salespeople and other human capital as you are to what we are seeing on the sales line, or is that starting to scale ahead of the costs already?

Well, I think we have a target set for the operating margin for each unit into Joe's question earlier, even with our growth investments, we expect our direct offices in the U.S. and Canada to maintain the 35% EBITDA margin and they do. So they swallow these investments in bites that allows them to do that. The same in our practices. They have the targeted EBITDA contribution margin. They make investments that allow them to stay within that. We will also taking advantage of the opportunities we might for a couple years as we did in educations. So we are going to break that model for 2011 and 2012 doubled down the investment to get accelerated growth but with that, they are actually back on model again this year. Shawn, I don’t know if you want to add to that.

Yes, sure. So education is going fast and rapidly and I think a part of it is because years ago we had committed to hiring every year. So we have been doing that where the same sales strategy has been used in education where hiring, ramping, client partner successfully. We have the entire U.S. Canada divided in two pods about $2 million apiece or about 2,000 schools each. We have got 16 pods filled out right now. We have got another 80 or so that we could fill out over the next years. So we have got it all broken down in terms of how we can grow this. Part of the reason we are growing well is because we are getting a lot of external funding as well. Funding support from large corporations, from foundations, from communities, chambers of commerce. They are pitching in. Everybody wants to change schools. So what we are learning is budgets are down across the board and federal and state budgets. There is a ton of money looking for something that works. Our focus has always been on quality results and because of that they talk in education. So we do well in school they talk to the superintendent. It spreads to other schools and so forth. So the sales strategy and the investments commitment is there. It just happens to be extra hot right now. So I think we also feel like there is an opportunity right now to get to move fast to get a first mover advantage in terms of school transformation. So, anyhow, hope that helps.

Yes, specifically around the financing, maybe we can take there because I have been sort of skeptical, as everyone knows that it's tough to get money there. So are you getting this from the straight operating budget? Or when you mentioned third party, is there a specific third party that is really keen on this idea? Maybe you can dig deeper there.

Maybe we can break it out in three categories. Shawn, can you just talk through it further? There are funding partners within the government that for tougher schools and turnaround schools, et cetera. That money has continued to be available even though budgets are tight. There is some that is directly funded from the operating budget there. Second group comes from the communities who see what was happening in some of these key schools and decide to help support. So it will be some money from the operating budget of the school, but they will support also with chambers of commerce. Then we also have, at this point, about eight or 10 larger funding sources within the companies who have decided within their community or within their state to do something or a few on a more broader basis who have funded large foundations, et cetera. So we are starting to see this. So we think actually the funding the funding question is a lot more certainty than it was even despite the economic uncertainty. It is a lot more clear to us today of how you navigate it than what it was started and feel like this is not a temporary thing.

I think we feel more secure than we did a year ago and way more secure than a couple years ago in terms of the potential here that it is not going to dry up. So for example, if a school wants to do this, they want to do Leader in Me, two out of three times they can find the money themselves. If they can't and they really want to do it, we will say, okay, here are some options. Here are some funding sources. Here are some fund raising activities. Here is a foundation you can apply to. It has been supporting the Leader in Me. So that’s happening a lot. Then a lot of cases will have large corporations say, I love what you are doing, I am going to fund 25 schools in this region and if it goes well, I will do more. So we always have the school pitching some money so they are still in the game but the object here is to never have a school be denied because they can't find funding. But again two out of three of the times they are finding it on their own in their own budgets. We also just recently won a large federal grant that will help a lot for next three years that schools will have access to.

That you could dip into when needed, during those one-third of the time when they can't find the money?

This will support a massive district that has applied for the grant and want it. So it will be about like 100 schools in the district. That make sense? I think the big picture is, we start looking at this (inaudible) is there opportunity here to keep growing. We have got 1,100 schools. Our target is to get to 10,000. We think we can really help change education in a significant way if we can get there and we are finding that there is a lot of people who would want to join this cause and there is a lot of money looking for something that works for the right opportunity and for a cause.

Our next question comes from Kevin Leary from Spitfire Capital. Please go ahead.

Most of my questions have been answered, but I just have a couple of follow-ups from Steve's comments. So Steve you mentioned that there were about $400,000 worth of repurchases in the quarter. Do you have the average pricing of these?

I don’t have it right with me. Our average price for those purchases were just over $11.

Okay, thanks. Then second question is on the balance sheet. So looking at the related party receivable, it was up about $0.5 million sequentially from August to December. But then Steve, you mentioned that part of the increase in cash since December has been payment from a related party receivable. Can you maybe talk about how much of that has been from the related party and then maybe expand that into how we should think about this receivable over the year or so?

Okay, in Q2 we expect to receive about $3 million applied against our related party receivable. That is on the cash we will receive. Remember that the receivable balance itself continues to have activity each month because that related party owes us an example for rent and other things that we provide for them. So it will continue to go up as rent is due and as warehousing costs are due, et cetera but a $3 million payment in Q2, we believed could be significant. Then in Q3 and Q4, the balance for that right related party will increase like it did last year and then again a little bit in Q1 and primarily Q2 of next year it will decrease again. So the balance at the end of Q2 next year will be a little. Every year the balance from that related party will be a little less at the end of each quarter. Then we will just follow that sine curve, if you will, that is generally going down. Does that answer it okay?

Our next question comes from Carter Dunlap from Dunlap Equity Management. Please go ahead.

While I was on the call, I got a call from one of your event bookers. So that’s a pretty good turn.

Are you going?

Yes, it is the Hansen thing in Palo Alto. Just a couple of quick clarifications. When you were talking about pipeline, you then switched to the prospective business pipeline, and I heard a number of 20%. Is that apples-to-apples? Is that U.S. Canada direct? Or is that a broader footprint?

No, it is the same footprint and its just a percentage of the prospective business pipeline ultimately converge to the pipeline of booked days and awarded revenues. So we are encouraged. The fact that the prospective pipeline is up 20% doesn’t necessarily mean that revenue is going to be up 20% because we have an increased focus on the predictability. So we are trying to get the numbers a bit better. So we are getting a higher percentage of the pipeline going in this year than last but nevertheless, on an apples-to-apples basis, it is a good increase quarter-over-quarter.

Okay, and pardon my ignorance, but can you clarify the self-funded marketing? What triggers the lumpiness in that?

Historically, we haven’t had that much lumpiness. The things that’s made up historically, it is made up of speeches that we do where we get paid for speeches not with you but there are people out of the world that work for us that get paid for speaking. It is public programs for holding events at a Marriott Hotel and inviting people to come and get an exposure to the content, book royalties, et cetera. So historically it has been pretty steady, honestly, not fast-growing but from time to time we will have a new book launch where we might get a special royalty agreement on a new book or in the case of last year's first quarter we had this one time sale of a lot of the intellectual property that was packaged for distribution as audio and electronic books, et cetera that just made that particular quarter lumpy. But historically it is pretty low margin, pretty steady revenue, not much fluctuations historically.

Much of it is just on book launches, advances on books and they tend to be every year when we have a new book or every two years or every 18 months, whatever That is upfront and causes these spikes.

Okay, and lastly, and I was off the call for a moment, at your analyst meeting, you spoke about the Brazilian prospect in education that had such strong plans. Is there any update on where that business lies?

Sure, so this is Shawn. So Abril Education, a big education provider in Brazil they have, this is just brand new and so about three months ago, we had them all up here. We trained and certified their whole team. Had them travel around the country and visit our best schools to really understand deeply what the Leader in Me is all about. So they are starting this year just with a handful of schools. The idea is to go slow. See if you can go fast later in the range of 25 schools. Going to 100, going to hopefully hundreds and hundreds and then thousands beyond that. They are taking this very seriously. They believe they can get to, right now, they are into about half the schools in the country. They have roughly the same number of K-12 schools we have in the U.S., so about hundred thousand. Their objective is to really do this well, get the credibility behind it and over the next four to five years get to thousands of schools. They have set a target to personal goals, as a company is to try to beat the U.S. We said great, power to you. So it is just starting, 25 schools. Do it well, do it right and then expand from there. The big payments we got that are showing up in our international numbers are for advances on this partnership that we have.

We have no further questions in queue.

Well, thanks to everyone. Maybe just conclude and again express appreciation for the support and guidance each of you gives us. Maybe just make one last statement that there has been a couple questions about the effect of accelerated growth of our business model. I think maybe it is worth repeating that we have, we hope, a pretty disciplined approach to this where we measure everything and we expect each of our 30 plus leaders has a model that they are operating to. So I think the main thing is while we have been enable to flow-through in the high-40s over the last several years, we have always said that we think our stable flow-through is in the 35% to 40% range. We expect that with these investments we will be able to do that on a normalized basis. Again, aside from this lumpy item like this book and audio contract a year ago that we expected. Otherwise we did achieve it and expect we will continue to achieve it. So I don’t think you should expect that we will decide when you are to spend away all of our profit with the hope that it will come in. We think we can grow at the levels we are talking about with the 30 plus additions to the new client partners accounts and continue to make marketing investment while also maintaining our flow-through. That is driven by our basic model of high good gross margins, pretty predictable direct marketing costs, controlled central cost, so that when we make these additional investments in R&D or marketing in a given year, it might lift the operating margins 500 basis point if not dramatic. So thanks to each of you and we will look forward to answering any other questions you all might have a one-on-one and have a good day. Thanks very much.

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