Welcome to the Third Quarter 2014 Franklin Covey Earnings Conference Call. My name is Lakiv, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Derek Hatch, Corporate Controller. Derek, you may begin.

Thank you. Good afternoon, ladies and gentlemen. On behalf of the company, I'd like to welcome you to our third quarter investor call this afternoon. Before we begin, I'd 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 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 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 the events or circumstances after the date of today’s presentation, except as required by law. With that out of the way, we'd like to turn the time over to Mr. Bob Whitman, our Chairman and Chief Executive Officer. Bob?

Thanks, Derek. I'm happy to have a chance to talk with all of you today. I've enjoyed talking to a number of you over the last few days. And inasmuch as you all have had the press release and we've talked, today, I'd just like to maybe hit some headlines. I know we're competing with the World Cup game, and we'll understand if we hear cheering in the background. But we appreciate you joining us. I'd just like to briefly address 4 topics. Let me just hit on the results for the third quarter, give a little more detail on the shift of the -- the economic shift of the $2.4 million of revenue from Q3 to Q4, then give an update on our progress on the overall business plan and thesis of growing double digit and flowing through 30%, and then give our -- just review our outlook for Q4 and beyond. So I'll start with our third quarter results, which you've seen the detail of. I'll just hit some headlines. Third quarter for us was generally a very solid quarter in terms of revenue growth. As you can see on Slide 3, we achieved growth in all of our major channels, except for government services. Our direct geographic offices in the U.S. and Canada posted 7% growth for the quarter on top of 19% growth in the second quarter and had 12% growth for the trailing 4 quarters. But for the shift of revenue to the third quarter, most of which occurred in these offices, their growth would have been, of course, stronger. And we expect to be very strong in the fourth quarter, independent of the shift and in adding that shift to it to be even stronger. Second, our international direct offices achieved growth of 12%…

Thanks, Bob. Believe me, right now, nobody misses Steve more than I do at this moment. So let me take you through this stuff, some other information really quickly to round out the income statement. As you can see, most of the metrics on this page didn't change significantly from the prior quarter. Depreciation is expected to be $3.5 million for the year, up a little bit compared with the prior year. That's due to primarily some computer hardware we added in the first quarter. So we still feel pretty good about -- and some expected computer software in the fourth quarter. Amortization is expected to be $4 million for the year versus $3.2 million. That's primarily -- the decrease there is primarily due to the acquisition last year of NinetyFive 5. Now that, that was done in the third quarter of fiscal 2013, we're really on apples-to-apples basis there with our amortization expense. If you don't see it, it was essentially flat compared to the prior year. Our net interest expense and discount, no change there from our prior expectations, down a little bit from the prior year, primarily due to change in accreted interest on FCOP receivables. Effective tax rate. Our tax rate for the quarter, as you might have noticed, was 20%. That's a bit under what we would normally expect. That was primarily due to some -- what we call uncertain tax positions. Those are tax assets that we're not allowed to take on our returns because they're not rock solid or not achieving as a high enough probability that they can be maintained if they were questioned. The statute of limitations ran out on those -- or being able to take those assets. We were able to take those assets during the quarter, which reduced…

Let's just open it for your questions now, and operator, if you can set that, that would be great.

[Operator Instructions] And our first question is going to come from Joe Janssen from Barrington Research.

First, let me just focus on the government contract that was pushed from Q3 to Q4. I mean, what gives you confidence that's going to be renewed in the current quarter?

Yes, we don't have absolute confidence, which is why we expanded the range to allow for that. We've been informed that their intention is to have it rebid during the quarter. They would like to begin training by the end of the quarter, but I think it is uncertain, just as all things in the government seem to be in the last few years. So we've been told to get ready for the bid. We have our request for -- our RFP response prepared. Assuming they follow through on their plans, their stated plans, we would expect to submit it immediately and hopefully have it be awarded, but we're not absolutely certain.

Okay. And then with guidance, it sounds since you lowered it by $1 million on the lower end, a function of this government contract, my question is, assuming the government contract got pushed into Q1, but given the current trends and what you're seeing in the current quarter, the original guidance of $35 million to $37 million, I mean, is that still within reach?

Yes, I mean, the government contract itself could have an impact of, say, $1.8 million on EBITDA in the quarter. And so the fact that we reduced the guidance range by $1 million says that to be conservative otherwise just because not everything happens as you think, we have a plan internally to try to make sure we get into the range with or without a government contract. Everybody's working against that plan. And if everything came in as planned, we would still end up in the original range to allow for the government and any slip, anything that might happen just on the margin, that's the reason for the range.

Okay. And then a margin question here. Given the flow-through characteristics that you've talked about, investment spend easing a bit as we go forward. Maybe a few years ago, we were all looking for that 18%. I think that's within striking distance, obviously. If you're looking 3 to 5 years, given the flow-through characteristics, maybe help me think my -- or reset my expectations. Low 20s, kind of mid-20s, it looks like the business, given the characteristics, could very easily do 100 basis points improvement on an annual basis. I mean, am I far off there?

Well, I mean, I think the math is right, Joe, in terms of the -- if we're able to flow-through 30% of incremental revenue to incremental EBITDA, obviously, it would tend to keep moving up. What we've said in the past is that we would try to -- our goal would be to accelerate growth. If we could accelerate -- if we could maintain really good EBITDA margins and accelerate growth, we'd choose that. But right now, we don't feel like we're holding back on investment anyway. As you've seen, we've hired -- we've been investing in everything we can invest in, that we can feel we can manage. And so I think it's likely we'd continue to creep up some until we -- but I think we didn't say, "Hey, we figured out we can hire 40 Client Partners a year instead of 30," then that would again flatten out for a few years. And then I think if we could figure how to keep upping that every year, it would probably keep it flatter. But otherwise, I think if you stated 30 a year, obviously, over time you'd absorb that and start to -- it would keep moving toward 30.

Okay. And then, just -- I heard Derek's comments regarding the tax benefit in Q4. Just for my modeling purpose, should we just assume a 41% tax rate?

For Q4? Yes, right now, go ahead and model that in. We really do think it will be a little lower than that. But until we get that information in the quarter and our tax department guys can run the information through to determine whether or not to take those deferred taxes international foreign [ph] tax credits, we won't know that until really the end of the fourth quarter. So I think for modeling purposes, 40%, 41% would be a good rate.

And then our next question is going to come from Tim McHugh from William Blair.

I guess just 2 questions. One, I guess -- you've talked about the Leadership program's producing, I guess, at a higher level than you thought. But how do you think about the impact, I guess, on the other programs in terms of client, your sales people focusing on that? Because, I guess, separate from even the issue for this quarter, I guess, my impression is overall sales aren't drastically different than you would expect. So is there just a greater, I guess, distraction or shift in focus amongst the sales force or is it kind of consistent with what you would have expected?

Let me just to get one point of context to it, if that's okay. There are certain sales team -- we have different sales forces. There's one sales force that sells primarily Leadership, Trust and Productivity. And so there, if you have a big launch of one thing, where they're trying to fill the next extraordinary number of events in 1 quarter, it does tend in that quarter to offset somewhat. But what you're doing is, as you build the base of clients from doing that and you launch a product and deep into a number of organizations and they repeat revenue at 90%, they can then drop back in subsequent quarters and have a more steady fluence. So really, almost all the growth in the last year has occurred in that -- for that sales force has include -- has occurred in Productivity and Trust and those products have moved from -- moved up significantly, grown their revenue very significantly over the years. And they're now established brands and products that can expand domestically and internationally. 7 Habits was already established, but had not been relaunched. So we just felt it was worth -- it is basically driven -- the metrics are driven by the number of events you have and the number of attendees. And we just decided during the second and third quarters not to hold a lot of those other events just to -- we've done a lot in the past and just make sure that there's sufficient focus on 7 Habits. But going forward, you'll have a blend of events that will allow each product line to grow by 10% or 12% a year. We'd expect all of the practice to grow in line with our overall growth and there wouldn't be a particular dislocation, if that's responsive.

Yes, a little bit. I guess, I mean, I guess, I understand this -- that, that group's selling the same products, and Productivity and Speed of Trust grew a lot last year. But I guess what I'm trying to understand is that the better-than-expected results in Leadership, is that really, I guess, an above average outcome or is that a shift in focus amongst the sales force from one product to the other that's having a negative impact on the other ones? And I guess the net impact of if you look at the sales force, maybe just focused on that collection, while Leadership is above average, is the overall sales productivity of that group above average or is it just a shift in focus, I guess?

Yes, fine. So versus expectation, it's better than expected because we expected to not have those -- you schedule those events way out and we knew that the other 2 practices would decline. So relative expectation is better. And so -- on the question is the whole company a lot better off than it would have been had you not launched? In the short run, I think, yes, a little bit better. It's not dramatically better than it would have been if we just continued to push the other products. But we think establishing thousands of new licensed facilitators in 7 Habits who will be teaching, who will be able -- who will go out and spread this in their organizations, will be a very good thing for us long term. And so, I don't know if that...

That's helpful, yes.

In the quarter, it tends to one -- last year's third quarter, we had a big push on Speed of Trust. And we did that for a couple of years before, but it was a $2.5 million product that's now almost a $20 million product and has been growing well. But every few years, you do a new big tour that allows you to attract new customers. Same with 5 Choices when it replaced that focus. So I think -- we do think -- I think your point, your insight on that is correct, that if we were to add 20 new offerings to the sales force, at some point, you'll just be trading one off versus the other. But these products don't all address the same problem or job to be done. I mean, Trust, it can be -- I mean, Trust is a great thing and so is Leadership and so is Productivity. And so to that extent, they could be interchangeable. But really the way in which we sell them, the targeted audience for Productivity is different in the -- even though it's all HR related training people. I mean, Productivity is focused on organizations with lots of high-value decisions where you have big sales forces and things like that, where making good choice of how to spend your time has a particularly big impact. Speed of Trust is particularly effective and targeted on organizations who have gone through a major realignment or a merger acquisition where there's lot -- it may not be a foundation for Trust. 7 Habits is focused on building a foundation for winning culture. So it's not the same problem you're trying to solve, but it's the same sales force selling it. And if we can establish ourselves in all 3 problem areas, they're all big and, in fact, with problems each of which can grow. And that sales force then can increase their productivity, and it can be a net positive for doing it.

Okay, that's helpful. And then, the government business, I guess, if we assume -- just assume that if you didn't get the contract renewal, I guess how big is it at this point, such that, as we think towards next year if it's even a meaningful issue anymore?

No. It is still meaningful, but not so much on a year-over-year basis if we -- so on a total basis in this fiscal year, assuming we didn't get it, it would have produced around $6 million of revenue during the quarter. It didn't produce anything during the first quarter to speak of until the very last day. We then had about $5 million in second and third quarter, in the early part of the third quarter, and it'd be nothing in fourth. And so $7 million of revenue, it'd probably have -- if we didn't get anything, if we didn't renew at all, it might have something like net, net $2.5 million impact on EBITDA in 2014. But it's actually, on a year-over-year basis, had more of an effect than that -- I mean, in 2015. It's had more of an effect on that in 2014 because of the decline. So I'd say it's something that it would be great if we got it. If we don't, we intend to build and expect to grow the noncontract government business and all the rest of them, and our expectations would remain unchanged so it would actually probably take some lumpiness out, but we're hopeful of getting it renewed at some point.

And then our next question is going to come from Marco Rodriguez out of Stonegate Securities.

Yes, I was wondering if you could do -- provide a little update here on NinetyFive 5, the acquisition there. It seems like you might be kind of underperforming there. Any kind of update you can provide?

Sure. I'll say maybe 3 different data points. Number one, the primary reason for the acquisition of NinetyFive 5, and the economics of the foundational acquisition was that we were about to spend $1.5 million on developing a tool set which they already had developed. It was complementary to our content. And that we -- they also had a book of business. And so the initial price that we paid at $4 million, in our minds paid for the product development we would have done -- do on our own, plus the existing pipeline of business. So that's one metric in terms of we priced it, so there wasn't any way we could end up upside down on the actual investment. And with it, we got some tremendous new clients, a great team and then maybe a critical mass in the business. But as it relates to -- so then second, there was the expectation of what would be required to get the earn-out to have earn-out more than $4 million? And that was set in a very aggressive growth level, which isn't a normal growth level, but we basically agreed with the team that if they could achieve certain really, really stretch objectives, they could achieve that and they're not now achieving it. The third metric is what do we really expect, and it's a little less -- and we're -- our performance has been a little less than we expected in terms of growth. I think it's driven, not by the quality of the content we got or the quality of the customers, but by the fact that neither our own sales force in Sales Performance practice, nor NinetyFive 5's -- or I should say both of them are very, very good at big deal, they're whale hunting…

Got it. Understood. And then, in terms of the 7 Habits launch, it seems like it's done fairly well here, above expectations here in the U.S. Any sort of update you can provide on pushing that out to the international licensees?

Yes. Sean Covey would you like to just address the rollout? And then, Scott Miller talk about what's on the docket for these coming months?

Sure. Sure, this is Sean. Yes, so internationally, we're just starting because we had to localize. So we've got it in the top 9 key languages now, and so the -- we've just begun the launch in the last month. And we have about 125 different events going on. The initial response has been extraordinarily positive across the board because one of the key things we did to the new 7 Habits 4.0 is we made it international, a lot more diversity. We filmed a lot of the new films in different locations around the world. So it's being received very, very well across the board by clients. So we're excited by that. And some of our first events like we held one in Singapore, we had 250 people in attendance. We got 80 certifications out of it, went very well. So we're just at the very beginning. We have a plan to try to get 1,000 people certified by the end of August in the new 7 Habits 4.0, and this -- we'll hit it hard for the next couple of months. And so we'll get some impact from the fourth quarter, but most of it will come next year, in the first and second quarter. Internationally, we think it will be very impactful just because it's about 50% of our sales is in the single product. And so the leverage of that is tremendous. So from a product standpoint, it's being very well received. From a marketing standpoint, we're just beginning on the front end of the launch. And but -- it's very positive thus far. Scott, what would you add about...

That's great, Sean. And Scott Miller, just maybe talk for a minute about what's planned in the coming months.

I would just expand on what Sean said. So we have -- we're about 1/3 of the way through the international tour. We will end the first launch of this tour with over 300 events worldwide, like Sean said, in Singapore. This week, we have events going on in Hong Kong, Beijing, Shanghai. They're all averaging 240, 260 people coming to preview. The North American average was between 70 and 100 previews. So our international events are, in many cases, they're working what are otherwise very robust events in North America. So we have some large events in big cities. But internationally, the events are proving to be phenomenal. I think another exciting progress is that this facility or channel has not typically [ph] been very robust international. Most of our certified facilitators come from our English-speaking direct offices. And our virtual certification process, which is now done all online, is now being translated into other languages. So we're going live with our Spanish version of our virtual certification, which will allow 15, 20 countries to begin to very efficiently and effectively certify facilitators, so I think we're going to see this tour gain enormous traction. Sean mentioned, our goal is 1,000 certifications from 7 Habits. And out of about 8 cities, we already have 160 certifications, so the momentum is very encouraging.

Got it. And last quick question, just a follow up on the tax question earlier for modeling purposes. I understand if you guys do take those benefits on the taxes. Can you give us a sense as far as how low that tax rate can go in Q4?

Yes, that's a tough question just simply because if you look at how much we did last year, it's really dependent on a bunch of variables. It could be as low -- we could end up similar with last year's rates or even as, I think, from talking to our Vice President of tax, even 1% lower. So I would guess that the best scenario would be what it was last year in the fourth quarter. I'm sorry, I don't know have that percentage right here with me, but they would probably end us up being -- end up being around a 26% to 27%, maybe even 25%, effective rate for the entire year.

And then our next question is going to come from Jeff Martin out of Roth Capital Partners.

Could you -- thanks for all the detail on the seminars for the recreated 7 Habits. Was curious as to your conversion rates, we're all looking at the conversion rates for the existing clients, what kind of conversion are you seeing for the new clients and how does that compare to some of your other content practices?

Yes, the conversion rate, obviously, the simple number is that in the quarter, for the quarter, about 7% of those who attend as a new client convert in the quarter for the quarter, and it ends there. And then, there's a similar amount that converts in the following quarter. And then, of course, then you got a pipeline that's still out there for many months that people continue to work. It may not be in the time in their organization. So overall, what we've learned from the other products is that out of every event that we have, that doesn't include existing clients, may end up generating about $70,000 or $80,000 of business over time in the next 12 to 14 months. And so that translates into an effective conversion rate somewhere around 30%, Jeff, I mean, effectively over time. And so, some of it happens right upfront; other amounts are spread over time.

Okay, that's helpful. And then, how should we look at the growth in Leadership over the next 2 to 3 years? I mean, you're going to have a lot of events really running through probably, what, end of the year, first half of next year? How should we look at the growth rate in Leadership, and what kind of level do you think that, that can get up to on a run rate basis?

Well, at a minimum, we'd expect Leadership to be growing along with the pace of the company, generally about 10% or 12%. But I think it will be somewhat elevated probably for the next 12 months. Even in the U.S., it will be elevated just because you'll still have this big pipeline that's going to be generated quarter after quarter. And so, it will get a disproportionate share. If we're doing, say, 800 events next year, Scott, how many of them will be -- in the 800 in the U.S., how many of them will be 7 Habits events next year?

About 200.

Yes. So it will get 1/4 of the attention where historically it's had no event. So it will grow disproportionately. And so if we have, say, 10% or 12% growth as a company, you'd probably have 15% to 16% growth from 7 Habits in the U.S. It will be faster than that, I expect, in our direct offices. Particularly Japan is a big office for us and a significant portion of its sales come historically from 7 Habits. So we should have, again, accelerated growth in Japan and, as Sean said, in the -- among the international licensee partners. So I think, overall, it will be mid-teens or better growth overall, probably in the next year. And -- but the others ought to all do pretty well, too.

Okay. And then, we didn't cover much on Education. That's continuing to grow at a very healthy pace. Do you expect that to remain at an elevated growth rate for quite a while still?

Sean, do you want to address that?

Sure, sure. Yes, Education's growth has been strong and steady. And we -- fourth quarter, we expect it to be in the 30%, 40% range; for the year about the same, and I see this carrying on for the foreseeable future. We've yet to -- I mean if you look at where the Leader in these schools are, we'll add about 500 this year to the network, giving us about 2,000. And a lot of it -- I mean it's disproportionate in the Southeast where it began, where the first schools began. And then, we've kind of gone, migrated toward the Northeast. We're pretty lightly populated in the West, all the intermountain states, California, Oregon, along the coast, Washington, very few schools, so we've done very little -- done very little there, and the opportunity is right there. So our focus is on -- continues to be quality results for the schools, reducing behavior problems, helping with teacher engagement, parental support and engagement, as well as improving academics in some cases. And we just find we're getting better, our quality's getting better every year. We still feel like we have a long way to go, but it's getting better and that drives growth more than anything else. For example, in New York City, we have a few schools up and going in the Big District there with 500 schools. And because they've done so well, we're now looking at an opportunity to go to hundreds of schools in New York City. So we're going to just continue to focus on quality. We find that it is the key marketing tool for us. The Leader in e-book is also a key marketing tool, and that will be -- the second edition of that book will be coming out in August. We think that will drive some growth as well. So kind of a long answer to your short question, but yes, I think we can expect Education to continue to grow at the same rate as it has the last 3 or 4 years.

And then our next question is going to come from Kevin Liu out of B. Riley & Co.

Just regarding the facilitator visibility that you might have for Q4. I know you mentioned it's generally a big quarter there. But given that you guys had a lot of strength there with kind of the early buys in Q2, and that did seem to pull in some revenues from the third quarter here, I mean how confident are you that you can continue to see the usual step-up that you would typically see in the fourth quarter?

So -- well, first of all, we feel very confident that we will. Over the years, we've trained our existing client base that we have 1 big promotion each year which is that you buy 10 manuals, you get 1 free. And so a lot of our customers just know that they're going to be ordering in the fourth quarter. And so the facilitator sales in the second quarter were almost all driven by 7 Habits. And so in 7 Habits alone, as I mentioned, we think about half of those who will convert haven't converted this year. So we expect -- so the sum of second and third quarter could easily happen in the fourth or sliding fourth into the first. But all the other [indiscernible] really had no focus in the last couple of quarters. But we feel good and, of course, it's not just a general feeling. We have these reviews every day and we look at the size of the pipelines and opportunities. We spent the morning, this morning, going through several offices and looking. Their pipelines are a bit -- it looks to us right now that the pipelines in each offering area are elevated significantly; that they're good reasons for people to buy; that the current partners are out there talking to them early. And so in a normal year, we'd have about 1/3 of our facilitator revenue occur in the fourth quarter. And so, if any given year, you're going to do close to -- let's just say, you're going to do $48 million or something of facilitator revenue in North America, you'd have had -- you'd have $16 million in the last quarter versus $32 million across 3 quarters. And so we expect it to have a similar pattern in this fourth quarter. You don't have total visibility on the actual sale because it's not contracted, as I mentioned, but you still know what percentage of your pipeline of opportunity is likely to convert. And we have such a good relationship with so many of our clients with this 90% renewal that really, it's usually a question of how much, what their training needs are for the next year. It's not so much a question will they -- do they need to repurchase. They're committed to the offering, they're training new people. They're just trying to get a handle on the number of people they're going to need to train next year and they're making sure they understand the motivation of doing it in the last quarter. Is that helpful?

Yes, that's definitely helpful. And then just with respect to the International business, I mean, you guys were already growing double digits this past quarter. It sounds like the ramp up and launch of 7 Habits internationally is going well. Is it fair to assume that you guys expect to continue growing the International business double digits, both for the licensees and the direct office from here on out?

Yes, we stated in the licensees that we expect -- we've grown about 11.5% -- 11.8% compounded for the last 7 years and we have this stretch goal to say we want to get to $200 million of gross revenues for about $85 million -- have their gross revenues get to $200 million by 2020. We -- everything that the team is doing there led by Sean Covey in that area is pointed toward that. And in international direct offices, Shawn Moon, do you want to just speak to that?

Yes. Our expectation for the international direct offices is to say we have the same kind of growth expectations in those offices that we have in our domestic offices. We are encouraged by the fact that, for instance, in Japan, the office sells more 7 Habits than any other single office and has yet to launch the 7 Habits because of translation, but it's actually doing that now. We've had our first couple of events in Japan and they have been filled to bursting in the venues and have been received very, very well. So we're excited about that. In the U.K., where we have launched the 7 Habits, we're back-to-back on 2 of our very largest quarters ever. And the fourth quarter is looking strong in the U.K. and Australia is the same. In fact, one of the large deals that we expect in third quarter and closed just to the first couple of days of the fourth quarter, as Bob mentioned, the shift of the revenue was in our Australia office, the single large deal they've had there. So we're encouraged by the growth momentum there and expect that to continue. Our expectations again are the same for those offices that we have in the U.S. and Canadian offices.

And you might talk to the hiring that you're doing?

Yes, the hiring -- yes, thank you, Bob. The hiring expectations there are the same elsewhere. And so we have identified our target hiring thresholds and they are clipping along at that pace. And so they are -- we are -- the phrase we use is "they're running the play." And we are running the play, which includes all of the marketing events and all of the other launches that have said that we have including the hiring and ramping of Client Partners. So we are on pace there.

Great, and just one last question for me. Any color you can add on kind of the SG&A line here for Q4? I know typically there seems to be a seasonal spike. Can we just look back at the magnitude on either an absolute or a percentage basis last year to assume the Q4 number for this year?

Sure, here's Derek Hatch.

Yes. We would expect -- to be there's -- to be an increase primarily due to the increase to the [indiscernible] sales at [indiscernible] because increased sales, we would expect some increased commissions on those increased sales. And actually it was the driver -- at least the last few years, that's been the primary driver of our SG&A increases in the fourth quarter. We would expect that to occur again. So I would say even on an absolute dollar basis, it's hard to project. But based on sales, I would say, it would probably be up maybe another $1 million or $2 million versus last year.

We expect that [ph] -- even with that, Kevin, as you know, the strategic -- the detailed model, but we'd expect very significant flow-through of incremental revenue to incremental EBITDA in the fourth quarter.

And our next question is going to come from Matthew Berry from Lane Five Capital.

You mentioned in the last 10-Q, the longer-than-expected collections time for government education and licensee accounts and expected some improvement in the third quarter, I think, which didn't seem to materialize. So there's still -- it looks like maybe $8 million to $10 million of cash locked up, which is like a 3% buyback or more than a whole year's worth of practice development costs or 40 to 50 new hire costs. So could you just touch on what is actually causing those delays, the underlying causes of those accounts?

Well, primarily, we did see a little bit of improvement in the fourth -- in the third quarter, but like you said, not a lot. A lot of that stuff is simply due to the timing, the payment cycle on some of these clients. The government typically tends not to pay quite as fast. They will pay. Their stuff doesn't move quite as quickly. And we have had some relatively large deals that have gone through and sometimes those guys have gone to a little bit longer payment terms. And so we do believe that there is some capital locked up in our receivables. We hope to get to that, get the DSO down and days sales outstanding down and get the cash in the door. But you're right on your analysis as far as there's probably $7 million or $8 million of receivables locked up in a little bit longer terms than we would like. We definitely have all hands on deck to try to collect those.

And it's not an indication of anything we need to be concerned about at this point? I mean, you haven't made any provisions against them or anything like that?

No. Yes, our write-offs are virtually 0 for the entire year, so we're not providing for a lot of write-offs or anything like this. We believe they're all still collectible.

And we have no additional questions at this time.

All right. Great. I would just like to thank everyone for your participation today, for staying on a little bit longer. Appreciate that. We're looking forward to talking at the end of the fourth quarter. And obviously we're in the middle of a lot going on here in the fourth quarter. So thanks again for your support, look forward to talking to you soon. Thanks.

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