Welcome to the Q2 2015 Franklin Covey Earnings Conference Call. My name is Adrian 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 this conference is being recorded. I will now turn the call over to Derek Hatch. Derek Hatch, you may begin.

Thank you. On behalf of the Franklin Covey Company, welcome to our call this afternoon to discuss our financial results for the quarter ended February 28, 2015. Before we begin, we’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 events or circumstances after the date of today’s presentation, except as required by law. With that out of the way, we would like to turn the time over to Mr. Bob Whitman, our Chairman and CEO.

Thanks Derek. I’d like to welcome everyone to the call and appreciate you’re joining. The second quarter was characterized by the four things: Strong overall revenue levels against the big comp quarter last year; second, foreign exchange movement which impacted both revenue and adjusted EBITDA during the quarter; third, large net investments in new client partners in supporting marketing activities which have already helped to drive a 12% increase in the size of our prospective business pipelines for Q3 and Q4; and fourth and finally, nearly $40 million increase in our liquidity with an increase in our authority to use it and our intend to use it to help to create shareholder value. Second quarter also established the foundation for what we expect will be significant growth in both revenue and profitability during the balance of the year and beyond. So I’d just like to now provide a brief overview and description of the results for the year. First, talk about revenue. Our $46.3 million in revenue represented actually a strong revenue quarter for us; in fact, we achieved our second best revenue ever for a second quarter for our current business. Excluding the approximately $1.2 million reduction in revenue related to foreign exchange, our revenue would have been $47.5 million and that would have been our strongest second quarter ever. While the revenue was strong, it was flat to last year due both to foreign exchange charges and to the fact that we were up against very tough comp from last year’s second quarter where total company revenue grew 15% driven by the very successful launch of our re-created 7 Habits offering in that quarter. We felt good about the revenue performance for the quarter broad-based. We generated our highest ever second quarter revenue in our education practice which…

Thank you, Bob. Good afternoon everyone. I am pleased to be with you. So as you know, over the past years in addition to the increased earnings, capital transactions have played an important role in the company’s progress. Slide 13 actually shows some of the things that we have done including the sale of Premier, sale-leaseback of campus and so forth. So I think we’ve shown a willingness to complete these types of transactions. To give us the flexibility that we need currently to hopefully benefit shareholders from the strength of our balance sheet and our liquidity, we’re happy to announce that we’ve increased the size of our revolving credit line from $10 million to $30 million and also obtained bank approval to additionally borrow up to $20 million more under a two-year term loan. Our Board of Directors also increased the amount of our share repurchase authorization from 10 million to 40 million. And note that we also ended the quarter with approximately $18.6 million of cash and we had more than $12 million of cash flow from operations during the quarter. So, we have $18 million of cash significant availability in our revolving line in this potential term loan that we currently have no balance outstanding on either of those. So a combination of the increased cash, the increased borrowing capacity and the increased authorization to buy shares gives us the ability we believe to use our balance sheet strength to benefit shareholders including through the repurchase of outstanding shares and outstanding shares including the potential to repurchase Knowledge Capital shares, all or part of those shares that could become available. In Q2, we did purchase some shares under the repurchase authorization that we had in place. So, we’re quite excited about that. We spent about 1.6 million of our -- about 89,000 shares. So we’re excited about the authorization and the borrow capacity and the ability that it gives us to benefit shareholders by being proactive in using the strength of our balance sheet and our liquidity position. So, thanks Bob.

Thanks Steve. Let me just finish up here in terms of our outlook. So we’re very encouraged by the momentum we’re continuing to see in the business, by the continued growth in the size and productivity by our direct sales forces, the growth in our international licensee partner operations, in our practices and by the overall momentum and trajectory of the business. Our key momentum indicators continue to be very positive and this momentum is both strong and broad-based. Our prospective business pipeline as I mentioned, continues to be strong and growing. As noted about a minute ago, the size of our prospective pipelines for our four direct offices for the third and fourth quarters have already increased 12% just on the foundation of events we’ve had already and those tend to continue to build the as the client partners follow up on these events. We’re experiencing similar growth in the pipelines at most of our other operations. So, we feel very good about the momentum of the business. When we established our adjusted EBITDA guidance range for the year of $37 million to $40 million, it was with the expectation that we as a team would be targeting the high end of that range; it continues to be our objective and parenthetically that’s what drives the compensation for our executive team and others. And that number isn’t changing because of FX or anything else; that continues to be our objective. We believe that absent the effects of foreign exchange, our operations would track toward the high end of that range for the year. With the ongoing impact of foreign exchange however, we expect to absorb approximately $2.8 million of negative impact to adjusted EBITDA which we had not anticipated. So despite this nearly $3 million foreign exchange hit because of our confidence in the strength of the business otherwise for the second half in fiscal ‘15 and some more transactions on which we’ve been working and are very hopeful about, we’re only reducing our fiscal 2015 adjusted EBITDA guidance range by $1 million to between $36 million and $39 million, not by the $3 million the FX effect and certainly hopeful that expresses our confidence in the foundation of the business. So with that Steve, do you have other things you’re going to talk about today? With that we will turn it over to you all for questions and looking forward to answer.

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. And we have Joe Janssen from Barrington Research on line with the question. Please go ahead.

FX aside, if I hear you correct, it sounds like a momentum; things are continuing to move in a positive direction. Let me focus on the marketing side of this. Given the big push in terms of the actual number of events you had in Q2 relative toward the pipeline that today Bob, are you talking about the early results, are you pleased maybe compared to what maybe your original expectations were going into the quarter? I think you had on your last quarterly call; you gave a slide where you were doing almost 100% increase of what you did last year. So I am just kind of looking at the peak and how that’s going?

For the last four years, we’ve been running a lot of these events and have kept pretty darn good records on them to find out what each event produces and how quickly. So, I think we feel confident about what comes out of these events. So the events we held this quarter, it wasn’t with trepidation that we increased the number of events; it was actually with real commitment and a determination that we would find the way to hold that number of events because we know what should come out of them. So, I think the pipelines that are coming out, our early expectations are on track or maybe a little ahead of what we would have thought. The event mix make some that has some impact on that Joe. When we have events that are more 7 Habits or productivity oriented, the conversion cycle, this average sales tends to be a little lower because people are just as license with more often than not a license facilitator who is buying enough mails for class. So the average order size tends to be a little smaller. But the curve of the pipeline is faster. When we do more execution, sales performance and trust events, there tend to be a higher percentage of those events to become larger strategic -- it’s strategic, all strategic, tend to be engagements where we might be delivering some of the content ourselves. And so, the mix has something to do with it. Let’s say overall our understanding of the numbers we think is good and the results have been good. So, we’re continuing on with very strong event schedule every quarter thereafter. And so the jump quarter-to-quarter won’t be the same, so we have this big starting the engine and priming the pumps which…

It does. So nothing has changed; back half of the year, you expect to follow to obviously go higher given your guidance, again asset of side. The execution risk gets a little higher in the back half of the year just given the early first half results of adjusted EBITDA. Higher in expectations in the back half, you kind of stated goals about net 30 CPs; you’ve now got 20, just so I don’t get too far ahead of myself, another 10, is that kind of what we’re looking at? You’re not going to go too much above and beyond that target number, are you?

We expect to hire another 23 by August 31 but we won’t be hiring them a lot ahead of that either. We are going to start a sales academy, Shawn…

Second week of September.

Second of week September. And Shawn, you will be hiring not till fall?

June or July.

June or July, okay. So, the 23 net new hires between now and at the end of the year will get us in to 200s by the beginning of the year. Imagine there will also be some additional hires that we don’t know about right now. But right now there are some programs hire. We have 23 they’re programmed by region by date by type of client partner that we’re going to hire. We’ll continue to focus on that. I think the idea of net 30 a year continues to be the goal and it will be -- if we were little over 200, we would be a little below net 30 for the 12 months ended August 31, my guess is by November though but will be in the zip code of that. And we’re hiring for specific cities and the mentoring coverage et cetera effects a little bit the hiring. We did we report in January that we’d hire net 31 for the 12 months, prior months. So, we remain committed to the initiative and at the same scale.

Okay. Thank you.

Thank you.

The next question comes from Tim McHugh from William Blair. Please go ahead.

This is Sam [ph] actually filling in for Tim. Just a question on incremental margins, maybe to just get a sense of what your expectations are for the full year?

Yes, the EBITDA margin, if we take this range of 36 to 39 expanded range and we set the revenue -- we thought revenue growth was going to be 10% but it would be down. So, 10% growth would have referenced about $20 million of revenue. We said that we’ll do about 5 million less than that because of FX there will be 15 million of revenue growth, the middle of the range from 34.4 to say just 37.5 or something. We have roughly 25% EBITDA flow-through from the incremental revenue, does that make sense?

Yes.

That’s approximately. And obviously FX hitting is reducing that a little bit below what it would have been but fundamentally, it’s kind of still in that range.

Okay, sure. And then just kind of a little -- and then just another follow-up question. So when you establish the 30 new client partners per year, I guess what was the maybe just like a reminder as far why 30 and maybe not why tie that to like a different metric like prospective business pipeline or events or anything else like that?

So that’s a great question. We start up; we kind of know what the economics of the new client partner are. And so, that’s kind of our unit of measure. So, for us, it’s kind of like opening stores, how many new stores are we going to be opening. And so, we went from 6 to 10 to 13 to 18 to 22 and then we felt we could maybe even jump to 30. But the idea behind that is if we hire 30 net new client partners a year, we can grow our field operations within a couple of years of doing that. If we can do that for another couple of years, all of our direct offices that have these client partners will be at a revenue rate where they can grow at 12% or 13% a year year-after-year with that kind of revenue growth with that kind client partner growth. And so for us, we were looking at what the potential was; what we could handle. And 30 isn’t -- when we think we could have more than a 1,000 client partners, the question we’re often asked is why isn’t that more than 30? But I think at 30, we feel like for the next couple or three years that’s a good level where we can mentor them, we can make sure they’re successful, we won’t have any degradation in quality. And so that’s kind of where we set it. But behind that are the lead metrics that exactly what you’re talking about. So, we have the lead metrics that drive that client partner revenue of the number of events that they have the number of leads per event. We expect for example these new client partners that are focused just on these events that I mentioned to Joe where they don’t have the signed accounts, they just take the new clients that come in. We expect them to generate four new certification equivalents, we call them. That’s around $600,000 sales. Their first 90 days then eight, their second and 12 every quarter thereafter and while retaining 90% of the revenue from their previous ones. And so there is a set of metrics and the events for them are two thirds of the gain. For our other client partners and the more strategic big account client partners, they use events selectively. And so we kind of have the ankle bones connected, the weight bones connected, the hit bone strategy which is okay if we want those people to ramp up according to the schedule that we’ve established what kind of lead flow do they have to have, how much new pipeline do they need to add every single week, where does the pipeline come from. So we have a lot of math behind it but the unit of measure is kind of like same store sales and increasing number of stores opened so to speak and having the number of client partners.

And the next question comes from Jeff Martin from ROTH Capital Partners. Please go ahead.

Bob, you meant -- I know you’ve for a while have been tacking phase time with clients and that is not a new initiative but it’s an emphasized initiative. I was just curious if -- it sounds to me like in the quarter there was a particular emphasis on that. I was just curious if there was something that led up to that or that is a normal course of business?

I’ll let Shaw Moon respond.

There is a couple of responses. We really do emphasize the face to face hours that a client partner achieves. This is something that I check on with my team every single week; it’s one of a lead indicators. And at the individual client partner, we have what we call plan and review sessions where they have an hour every week with their respective sales managers to go over a few key indicators in their pipeline of big deals and stuff like that. And this is the first thing that they review and abstract it. There is lot of coaching and mentoring and while long that happens, all that. So that’s a long way of saying we really do focus on the face to face hours. And as we were going into the quarter knowing that we had the last year’s 7 Habits launch as part of -- we pulled that forward into February from March; we had a specific emphasis on pipeline building that would come from these face to face hours. We developed a very powerful we believe face to face kit to give very specific agenda for these face to face meetings. And so, the first answer is no, its part of our standard force and the second answer is yes, we had a special emphasis on it and we’ll continue to do that as we move forward into the fourth quarter and the first quarter. And it yielded a very impressive pipeline from these face to face hours. This is a very important metric to us. And we actually overachieved our expectation in the second quarter and established; it was good for the pipeline.

And then Bob, your EBITDA guidance, your updated guidance, if you adjust for the FX, it actually implies that your increasing it by a couple of million, I am just curious if I am thinking about that correctly?

I think you’ve got the math right. Yes, I mean what we’re seeing is that we laid out initial guidance for giving FX, we did not budget or plan for large individual transactions because it's just hard to predict, now it's hard to predict. But because we have a pipeline of those of big transactions on which we’re involved across a number of practices we feel right now that there is a likelihood that given -- it's not hundreds or anything, but a dozen or so good sized, really good sized deals that we feel that we’ll get our share of those and we likely to get our share of those and hence give you some more optimism about what the normal run rate would be. Obviously if we didn’t get any of those we’ll be back towards the lower end of that. But that’s the thinking behind it is FX we know kind of where it will hit us at least at current exchange rate. We’re feeling a little stronger about the likely revenue in the coming quarters. And Joe mentioned of course the more backend loaded in one sense it looks like there is a lot more execution risk and there probably is. But in another sense I mean you take what Sean Covey is building in the education practice we by this time their schedule is filling up very rapidly for the late third and fourth quarter. And so the execution risk in education and you can speak more of this Sean if you'd like has moved from sales execution risk more to delivery execution risk in the fourth quarter. Same thing for us in the rest of the organization, there is more execution risk on filling the pipeline in the first-half of the year. There is more execution risk on delivering on that pipeline in the back half both have their unique challenges. But given the two I’d rather be on the delivery and delivery side of that debt than the other. And so, we feel like of course there is risk and I hate to be back and loaded that at least the back and loading is of a different kind of a debt than it is on the filling pipeline. Sean you want to add there?

Yes sure, so just on education and so our fourth quarter back loaded I’m going to share with you what’s happening with our because it's like the key predictive majors that we have second half of the year, I can just share those with you like our main one is contracted revenue, so it's driven around contract right now for the third and fourth quarters about 21% most of that in the fourth quarter up 48% in the fourth quarter, another key major is our pipeline of proposal stand. This is a dollar value of proposals that are we’re waiting to hear back from those are up 61% over last year. The number of large deals in our pipeline is stronger than it's ever been, so that’s way up over last year and then the fourth one is our course of sustainment revenue. So when our sustainment revenue as opposed to new school revenue, new school revenue is when a school implements the leader and makes solution there is a couple of years of implementation. And then after that there is the sustainment revenue is coaching and keeping the solution alive and well inside the school, lot of materials and so forth, that’s the key major for us as well and that’s out 148%. So, we feel good about the second half of the year in education.

And then wanted to ask you about the chain advisors up 950 over the last 12 months, how does that compare to the past couple of years and is there anything specific driving that? I would think it doesn’t have it, but just curious if there is thinking out?

Yes exactly, I think we have these kind of two sides, we look at our solutions in kind of two camps. We call some modular solutions where people buy a course or content or whatever, it's not -- they don’t have to buy a whole solution, they don’t have to buy a whole rollout. These solutions are typically sold to the HR suite decision makers who are test with building the capabilities of their organization. We have these other integrated solutions that are really focused on specific outcomes where a line leader or line leader too there was a great performance oriented HR partner is trying to get results that’s like an execution sales performance, leader in the customer loyalty. And so, we have -- during a period of years when we were launching leader in the execution and sales performance, a disproportionate amount of our new sales because I just put our events in lead generation was coming on the side towards these integrated solutions and we now have about $70 million of our revenues as a company that comes from these integrated solutions that didn't exist at all five or six years ago. But in the cycle of product development what's happened is, it's been four or five years since we had redone all of core courses that were on the modular side in the more HR oriented things like productivity Trust and 7 Habits and like a hotel has to renovate every -- soft goods ever three to four years, hard goods to five to seven and lobbies and public areas seven to eight we just in the normal cycle gotten back because we did those things first in 2003 through 2005 it was time for those to recycle and so I think what's driven is Jeff is that when one, we just gotten better at it and second because in the last three to four years we re-launched productivity, Trust and 7 Habits, in 7 Habits now managers coming up and so forth, there has just been a higher volume of products that are bought by people where these frontline facilitations by their own certified facilitators has been the primary mode of delivery. So at this point we think the two will balance out and probably the growth won't be quite as rapid on that side it will be a little more rapid on the integrated solution side and there will be a balanced portfolio. So we still think it will add 800 to 1,000 new certified facilitators a year just because of the pace that's behind it, that’s what's been driving the unusually high number of new facilitators over the last couple of years.

Okay, great. And then last question does your expanding credit facility prohibit you from using that capital to repurchase of shares or can you use it?

No, it's specifically last -- go ahead Steve.

Yes, it does allow.

We can use the whole 30 million of credit facility plus the $20 million term loan facility for the repurchase of shares on top of our 80 million. So it was put in place to give us all the options, provide all the options to us there are no restrictions on that.

It allows us to do other things.

Yes, we can do other things --

Okay.

Specifically allows all of that.

And the next question comes from Marco Rodriguez from Stonegate Capital Partners.

Hey I wanted to follow up on the last question on the credit facility, just want to get a little bit of sense as far what was kind of driving, you're guys are thinking and planning there I understand obviously you up the share repurchase but just kind of give us a sense as far as what else you might be thinking about?

Well, I would say that primarily we're thinking of just having the capacity to react to current circumstances related to share price or other thing or the overhang of knowledge capital shares and just the scenario that we find ourselves in, specifically to give us the ability to repurchase shares. So it gives us the other abilities also but I think that was the driving factor.

Understood. And then next question, in regard to the international licensees can you maybe provide us a little bit of an update as far as where they are and their ramp on the new released 7 Habits and then also maybe if you can give us some more color in terms of where they might be in their stage if you will in terms of rolling out that same CP rent the marketing strategy that you guys have been using for last three years.

Yes, sure. Okay, so in terms of just to recap from where they stand right now for the year and then I'll talk about 7 Habits and their ramps thing, but we're in a healthy spot, we're factor out the negative FX exchange we're growing at 14% this year. We are very encouraged by the new practices and the growth of the new practices internationally because again 66% of our revenue is coming from leadership only so there is so much open field here. Education international is up 68%, trust is up 43% and sales performance is up 15%. So on the 7 Habits itself I would say we are halfway through that. We still have a lot of work to do for example just last month we were launching it in India for the first time hard. And so I think there is still a lot I think some of the growth we’re starting to experience right now this 14% growth at the gross dollar level is part of that. And so I still think we’re going to see a benefit for the second half of the year and probably some for next year as well. Just because it takes time to get these products localized and to just get the machine going. So I think that’s an encouraging thing. I think secondly on the hire and ramp plan for CPs it’s almost like everything is delayed by a year and half to two years on everything we’re doing. All our best practices with face to face hours hiring and ramping CPs marketing events it just takes more time and more energy and again you’ve got the language factors. So I think we’re a little behind the U.S. and again I think this is a really good thing to look forward to as these best practices begin to get rolled out. So we are now tracking face to face hours across the board, tracking weekly with all of our partners all 54 of them. We are tracking pipeline. We’re tracking, hiring and ramping CPs. So I am excited by this and I think it’s one of the key reasons why we’ve got a lot of future pent up growth. Between practices and new practices coming on board I think there is a lot of opportunity there, getting these systems like the hire and ramp process in place there is a lot of opportunity there. And I think just the fact that we’re still pretty small most of these partners are 1 million to 5 million to 6 million in size. And so, I think there is a lot of low hanging fruits still left in these countries it’s harder to grow once you’re much bigger but at this stage I think you can grow faster. So I feel like the prospects are positive.

And just clarification there, when you mentioned that they’re about a year or so behind, that’s just the normal cycle that you have between when you guys implement something versus them not necessarily you’re behind the schedule that you guys have planned out in terms of trying to implement that. Is that correct?

Yes, it just takes longer and you’ve got distance to travel and you’ve got language.

And we also started later because we’re asking the investments necessary to get this started for them to hire new client partners to hire marketing resources, start holding events, have sales trainers, hire practice leaders, et cetera. Those investments we don’t with integrity want to ask them to do something that we haven't proven ourselves. And so until we felt we were really confident that we could share which we share all the metrics of these events we show them exactly what kind of list or mail et cetera. But the first two years we were still learning that and we couldn’t with integrity ask them to step up and make a bet that weren’t yet sure about ourselves, the same on hiring and ramp up. And so you’ve got it we didn’t even start asking to do it for two years after, we’ve been out for five or six years, we didn’t even asked them to get going and even them as Sean said we picked eight or nine key counties in which to get started in certain practices. And so yes it’s just a natural flow of this but we feel really excited about it and our last [Redwood] meeting which includes the top 10 licensee partners along with our owned direct offices we went around and spent about a whole afternoon identifying the number of new client partners that everybody is going to hire in the countries as well as in our own offices. And the aspirations were very similar. I mean we have a lot more countries than we have offices but if you take across the range of the licensees they had nearly as many new client partners in their schedules in their sights to hire as we did ours, there might be a little less absolute drill on making sure it gets done but not much of us.

And we just hired a new dedicated marketing director to help us run the play with the marketing events across the board which I think is going to help a lot. I just got back from the Middle East and our partners there and it’s really encouraging to hear about we have four client partners and now we have seven and we had two in this country and now we have three and we’ve four here now we have six. So, the hiring [bog] gets catching.

And the next question comes from Kevin Liu from B. Riley & Company. Please go ahead.

Just a couple of quick follows ups to the guidance questions from earlier. I guess you’re now incorporating some of the large deals and I know you alluded to some of those last quarter as well. But in terms of the decision to factor them in the guidance now, maybe talk about where they are in terms of at this stage of the sales cycle and why you have increased confidence so close? And then also just whether these deals are spread pretty broadly across your different practice areas or concentrated in any particular areas?

Yes, so the confidence in income -- you’ve asked exactly the right question what stage of the sales process are they in, for just the prospects you think would be a great something that doesn’t make [indiscernible] but we have a group of accounts where there has been a proposal made, where there has been a solution discussed and are being worked on for long periods of time and we always have a pipeline of these, these are just the ones that we think are going to have the chance of maturing now. But almost all of these that we’re thinking about have the specific solution has been discussed, a specific proposal that is in the hands of the client, in most cases there is ongoing discussion about the implementation, in many cases there are pilots being run to test this, to test how they are scoring. And so again we’re not in our numbers, it's not we’ve got millions and millions of dollars and these big deals in our thinking. But I think maybe a 1 million or so of EBITDA related to deals in aggregate may add up to 6 million or 7 million in cost back. So it's just as far enough down the road that it starts to feel like some of those who will make it into the year and that’s why we’re feeling that we don’t need to reserve for the whole FX.

Understood. And then just going back to the second quarter, obviously revenues were fairly flattish and you talked about a number of factors there and the gross margin was a bit of -- I know there were some issues with things like underutilization and the like in the prior quarter, I am just wondering what sort of factors kept the gross margin from holding steady if not increasing in this current Q2?

Yes, I think three things Kevin. One, the under absorption you talked about, so the margins improved somewhat from the first quarter, that was good. It improved 170 basis points or so from the first quarter I believe in terms of the year-over-year difference in the second quarter versus the difference in the first. We still have in education in Japan and in Japan the under absorption of consultants and delivery capacity that will come into play and reverse itself in the third and fourth quarters as those quarters get bigger. Second is the amortization related to the development of the 7 Habits offering last year is fixed at about 500,000 a year. But it affects gross margin more in the first two quarters, we actually had the project completed at the end of the second quarter last year. So now in future quarters, it was already affecting last year’s margin and this year there is 0.5 million charge in each of those quarters. And the third is a slightly different mix of sale in this quarter, we have in education a higher percentage of revenue from these coaching contracts that are in fact lower margin and because of the launch of 7 Habits last year which had about 83% gross margin associated with it. In fact you had a couple of million more revenue in the four direct offices just meant you had a couple of million more at that higher margin. So as the three factors that have play out in third and fourth quarters, the reversal of the absorption in education and Japan will just reverse. I mean we’ve got those costs they just will charge through a very, very high margins in those quarters. On the 7 Habits amortization, we’re already now anniversaryed on that and so the incremental impacts with both the smaller in Q3 and Q4 and that’s percentage of sales which will be bigger it will be a smaller impact. And then on the mix typically our fourth quarter has a very high mix of facilitator. So as we mentioned that’s why there is -- on the corporate side there is a bulge in the fourth quarter and so we think those margins are come back into line generally. We have just on pure percentages as you develop new products even though we also get new pricing power, on a contribution, gross margin dollars of contribution per sale we have increases, but in terms of absolute percentages if you increase the cost of sales by $8 and you don’t increase the price by double, you do have a slight erosion in the margin. But we think that’s minimal and the other factors are the driving factors on margin.

And the next question comes from Jamie DeYoung from Goudy Park Capital. Please go ahead.

Congratulations on good results in a tough FX environment. I just had a couple of questions. I want to turn to page nine on the slide deck so international licensees business has tripled over the last 10 years you grew double digits again this past quarter. Can you tell us what the EBITDA margin was on that 15.8 million of royalty revenue that you’ve had over the last 12 months?

In general we have a model set for every operation in the company that knows exactly what it's supposed to be, for them their cost is delivering this is about 15% of revenue. And so again at low margin -- but they’re fixed cost. But today it’s about 85% of incremental revenue flows through for licensees but it wasn’t that way when it was smaller and that doesn’t include all of our investments in product development so forth which aren’t actually charged DSO[]. So we have practice leaders that aren’t charged against that et cetera. So it’s not a true profitability contribution but looking at the way we do incremental revenue relative to incremental cost it flows through that 85%.

So one way to look at the business is that your base consulting practice business is really being valued at four or five times EBITDA when you put a much higher double digit multiple on licensee business so when you look at other businesses that you are comped against GPX et cetera that trade at 11 times EBITDA with no royalty revenue the business seems to be grossly undervalued. So that’s just one observation. Another point if we just look out on the business you’ve done a good job keeping the share count down, now with the extended line of credit and the strong free cash flow is it fair to say over the next two years existing next year and growing operating free cash flow another 20 million next year that you’d be in a position to try to take 2 million out of the share count?

I mean I think we have the capacity to do that for sure. I mean you’ve said just right and you always had a very good handle on this let’s just say that we end the year without buying, we end the year with little north of 20 million of cash and then we generate another 20 million of cash each of the next two years just say after tax cash flow. You have 60 million of cash and 40 million of credit facility and that’s net of our investment -- that cash flow is net of our normal investments in growing sales people content et cetera. So I think we certainly have the capacity to do that and we’re trying to put ourselves in to position to do that.

So whether or not capital comes out this quarter or in five-six quarters from now it really doesn’t matter. So if you model this thing out, if you are successful in taking the shares out and growing EBITDA in that 13%-15%, you’d be in a position then to do potentially $3 in adjusted EBITDA if you can get the share count down next year and then if you can continue to grow the free cash flow and take another 1 million up in next year in fiscal year ’17 you could be in a position to do 350 plus in adjusted EBITDA you can decide what multiple you want to put on it. But is that the right way to kind of look at where it going I mean there is no real change to ultimately getting to 50 million in adjusted EBITDA for fiscal year ’17, that still remains kind of the longer term goal, is that right?

Our goal has been and continues to be for getting FX for a second, we said in the next two or three years to get to in the 50 million range and so whether it’s two years or three years with FX and other things getting in that range is it continues to be the goal it’s what drives the long term incentives for most everybody in the company is getting to those kind of numbers and putting ourselves in ability to position to also reduce the share count certainly directionally could have the same, have the effect that you’re talking about. At the same time we continue to flow through if we can flow through the incremental revenue to EBITDA our operating margins would also continue to increase and so we’ve kind objectives around each of those things.

And the last question will be from Tim Mchugh from William Blair. Please go ahead.

I joined a little let but I just have a few quick questions I want to follow up on. On currency just to be clear the kind of $3 million impact cited in the press release, is that since you last gave guidance or is that the full year impact? In other words I assume your guidance for last quarter when you were talking 37 to 40 included a couple of million of impact already and so…

For the full year we think we’ll have 5.3 million of revenue impact and 2.8 million of EBITDA impact. At the time we gave the guidance we thought there would be about 1 million of FX in that near just under about 900,000 or so of FX effect on adjusted EBITDA and now it’s a couple of million more than that.

Okay, so the difference so it’s versus 2.8 versus 900,000 previously?

Yes.

It’s really I guess it’s a $2 million head from where we thought previously but you only brought it down by 1 million so it’s a $1 million delta, I guess in terms of adding into big and that’s in the big projects.

That’s true metric.

And when we think about these bigger projects it’s the same sales force that’s selling it so I mean is this just a replacement for other I guess smaller projects that these guys usually would have been working on or I guess is that part of why that explains some of the backend loaded nature of these are longer sales cycle projects? Or is it really a separate bucket of focus for the sales force?

It’s largely a separate bucket of focus. We have around 20 client partners that we view as large account client partners, in face we’re having a meeting here in two weeks with those 20. And so it’s a different group where we’ve got these three groups Tim, we’ve got a group of these, we’ve got area client partners that just do events day in day out and they just get those. We have another group that had between 70 and 100 accounts assigned to them is moving down so they can focus on a narrow group. But we also have this group of 20 who does a disproportionate amount of their business with a relatively small number of accounts. And so it’s really not -- these folks aren’t holding a lot of event they might occasionally put one of these large accounts into events which they do and they’re helpful but it’s a separate group that’s working on these larger accounts. And again they don’t meet -- the fact they work on larger accounts doesn’t mean they fit in to this category of a truly large account but from this base of things that they’re doing bigger deals there occasionally comes in a big worldwide or nationwide kind of opportunities and that’s what we’re talking about. I think Kevin asked and I forgot to respond Kevin I apologize, these were spread across higher education, government, sales performance, execution and trust and government so there is a pretty good diversity of things also among the licensees there’re a couple of larger ones where there could be some large transactions within existing licensees and also the possibility of a couple of new countries where we could have a sale where to become a license so it’s relatively broad based, it’s not taking time away from the things that other people will be doing in the fourth quarter typically it’s a different group of folks.

And are these license sales or I mean it’s an ongoing relationship or a bigger relationship you’re creating where the impact will be even bigger as we go into the following fiscal year?

Shawn Moon is going to respond.

It includes both, there are typically, large deals typically includes a license sale but in almost every case where we have a license sale that represents a long tail to it, it has an ongoing relationship.

In fact just to add to it, so that make sense how that works. So these aren’t typically sales where we just license the content to somebody and then just take a while, what they’re doing is because they’re committed to a big roll out of the solution, we price it to say look if you’re going to do -- if you’re going to roll this out across 10,000 managers what you ought to do is buy a license right because you can get the price down per manager and then just buy content on top of it so it tends to be a statement that they’ve now made the decision to go big and go pervasive inside the organization and a license is just a part of an overall structure that we do is part of the bigger sale. Occasionally you will have somebody who just buys a license, right to all the content within their entire organization, that tends actually be a smaller sale, but when they are large it tends to include both sides, that make sense?

I’ll now turn the call over to Bob Whitman for final remarks.

Thanks very much. I’ll introduce my brother Bill Harry and then close. We appreciate very much and being part of the call today. We appreciate the time and effort each of you invest to understand what is we’re doing and ask such great questions. We’re excited about where we are and where we expect to go in the coming quarters and years and appreciate your support. Thanks so much.