Franklin Covey Co FC
Q3 2010 Earnings Call Transcript
Transcript Call Date 07/01/2010

Operator: Good day ladies and gentlemen, and welcome to the Fiscal Third Quarter 2010 Franklin Covey Company Conference Call. My name is Sally, and I’ll be your operator for today.

At this time, all participants are in listen-only mode. Later we will be conduct a question and answer session. As a reminder, this conference is being recorded for replay purposes. I’d now like to turn the conference over to your host for today, Derek Hatch, Corporate Controller. Please proceed sir.

Derek Hatch - Corporate Controller: Good afternoon everyone. Welcome to our earnings call for the third quarter of fiscal 2010. Before we get started, I’d like to remind everybody this afternoon 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. I’d also like to add, expectations surrounding the recognition of revenue in future periods, 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 & 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 performance will meet management’s expectations.

These forward-looking statements are based upon 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.

With that said, I’d like to turn the time over this afternoon to Bob Whitman, our Chairman and Chief Executive Officer. Mr. Whitman?

Robert A. Whitman - Chairman and CEO: Thanks, Derek. We’re glad to have the chance to talk to everybody this afternoon. Let me start out and just make one statement that we know that the results for the quarter were somewhat lower than what the analyst estimates had been and we’re going to talk about some of the reasons why we think that may have been the case in just a minute. But to (indiscernible) maybe than we were actually very excited -- in light of that, we are very excited about the trends that we saw in the business this quarter and we actually view it as a fundamentally very strong quarter where each of the key bets for us were on track and where our revenue generating capability actually was really well in excess of what we would have anticipated in terms of what we were able to put on the books.

I would say, we’ll go through some of the differences in analysis but let me just say one of the key underpinning sort of value creation strategy of course is to continue to drive revenue growth. We think we have our cost flow under control. Our gross margins have been solid and continue to be, and so the key issue is going to be drive revenue through each of our key channels.

As you see in slide four, in a number of our channels we did. In the direct offices in U.S. and Canada, revenues were up 8%. What that really reflected was four offices that were up more than 8%, and one office in our western region of the United States whose economy has recovered a little slower in Southern California and Arizona and Nevada and others parts of the country where there was a year-over-year decline that offset that. But, still, overall the revenue growth was solid.

And I think what we feel good about is we see strengthening in that west region. And in May and June, we’ve seen significant strengthening, wherein previous quarters, even though we’ve shown some good revenue growth, we’ve seemed always had the offset from that west region. We think that won’t be the case going forward. It will be much less the case going forward.

Let me just skip forward and we’ll come back and talk about the international direct licensees, our international direct office. Our international licensee offices grew revenues by 16% during the quarter. They’ve had very solid revenue growth, particularly in the last two quarters. The national account practices had growth of 14%. And our self-funded marketing programs, which you recognized are these public programs that become self-funded, there was a small increase.

Because we have a sale lease-back on our campus where we have multi tenants, we had a lease too that rolled out that did not get replaced in the quarter, and that resulted in a decline of around $300,000, which has a high percentage associated with it in our lease revenue, but we’re confident we’ll be able to release that space and that will return over time.

The international direct side actually is made up of two components. Our Australia and U.K. offices had good growth. The Japan offices which have been a continuing challenge for us declined, but in this case, the decline was primarily a result of a non-repeat of a big intellectual property contract of around $800,000, which we sold last year. In last year’s third quarter, actually we sold several years ago and repeated for a number of years, where they no longer have an obligation to renew that each year, and I think that was one of the areas where we perhaps should have pointed that out even though we don’t give guidance. We should have pointed that out because it affected both revenue and probably the increased gross margin assumptions in some of the analyst presentations. But overall, growth continued in each of these areas and we were encouraged by that.

I should note that as it relates to Japan, we are happy to report – there is another big difference between the analyst report and ours, that during the quarter we were able to complete the sale of our Japanese consumer products business. This is something we have talked about in the past, about a desire to fully exit the consumer products business. And this is the one place that when the sale of the consumer business is towards is now FranklinCovey Products (occurred). The Japan business was not sold at that time.

This is a business that would have had during the quarter approximately $1,100,000 of revenue and where the EBITDA actually improved year-over-year, but it’s a business that last year did about $500,000 of EBITDA. We sold the business for a cash payment of $3.3 million to a large paper company and paper and products company in Japan, $3.3 million upfront and an ongoing royalty that’s perpetual that we think will be a couple of hundred thousand dollars a year and so that depending how you want one values that would be an add-on to the $3.3 million we receive. But aside from feeling good about the basic economics of the transactions, strategically that completes with the exception of our below the line income that still comes from our -- or not that comes from our interest in FranklinCovey Products. We were delighted to get out of that business, and so that affected the top and bottom line results compared to what the analyst reports would have shown.

Let’s say, maybe most of all, we were excited about the momentum in our bookings during the third quarter, which were extremely strong, and which maybe setup and they should set up, what we believe will be a very strong fourth quarter and first quarter. Let me just give you a few words about our sales momentum during the quarter.

One of our key metrics is what we refer to is booked days, which are contracts for the delivery of training days on-site at our clients’ locations. As you see in Slide five, in last year’s third quarter, we booked approximately 1,100 days for future delivery. Each one of these days has a value of around $5,300. In this year’s third quarter, we booked approximately 1,700 days for future delivery, which was an increase of 54%.

This strong booking pattern has continued through June. For our two business days remaining, we booked over 900 days compared to approximately 550 days in June of last year. So, these additional bookings in the third quarter and in June should alone translate into incremental year-over-year revenues of more than $4.5 million during Q4 and the first quarter of next year. So, that incremental to what we did in those quarters last year.

Perhaps more dramatic is that during the third quarter, we also won some very significant execution practice contracts with major clients, and we’re awarded a very large contract within our Government Services Group with the governmental entity that resulted in our training more than 53,000 of these clients, leaders and front-line supervisors.

The combination of these contracts is expected to generate more than $15 million in new additional contractual revenue over the next year, contract and booked days with more than half of these revenues that took the invoice over the next two quarters, including between $3.5 million and $4.5 million in the fourth quarter alone. While we feel very confident about our invoicing pattern, given the complexity of some of these multiple element contract, revenue recognition rules, we’re still analyzing the trees in which this revenue will be recognized. So, this $3.5 million to $4.5, all of it could come in the – all of the invoices could come in the fourth quarter or none of it could come in the fourth quarter blend, and we’ll be getting final accounting judgment on that. But for us the momentum will drive us in – keep driving us forward over the next 12 months in a very significant way.

And so, as you see in slide 6, as a consequence of these strong bookings and contracts, our pipelines of booked days and awarded contracts increased to $29.7 million at quarter end, which is a $15.7 million increase over this point last year and even a $12 million increase from where we ended the second quarter just a few months ago. This should significantly improve the already positive revenue trends in our domestic direct office operations and in our practices in the current and coming quarters.

So, for us, this was a quarter where despite continuing sputtering economy, we were able to present strong value propositions to our clients. They saw the value of that. We saw business come back in our historical training and leadership businesses. We saw execution revenues, customer loyalty revenues, sales performance revenues grow. And so, for us, with the exception of weakness in the Western region, which improved toward the end of the quarter, weakness in Japan, the bulk of which was simply the non-repeat of prior year contract, about $600,000 of FX impact with the strengthening dollar. For us, operationally, it was one of the most important quarters we’ve ever had as a Company. In fact, more revenue is put on the books for future delivery than at any other time, certainly in memory, but I would say in the history of the Company.

Now, I’d like to provide an overview of the results for the quarter. We achieved a solid but not great performance for the quarter on a reported basis. We think the results were very strong when the impact of the FX charges in our Japan operations are excluded.

The difference between our performance and the analyst expectations resided probably primarily in three areas. One was, obviously, there was no knowledge, which we didn’t have for sure of the discontinued operations with the sale of the consumer business in Japan, but we were pursuing it. At the end of last quarter, it wasn’t something we were certain enough about the forecast. That affected the year-over-year improvement in EBITDA by around $300,000 and about $1.1 million in revenue.

The $600,000 of FX impact was something where the analysts were neutral, and the fact that we had this large contract in last year’s third quarter and that we didn’t – we should have – even though we don’t give guidance, I think I should have just said we don’t expect a repeat of that contract. That was never on my part, probably led them to believe that would be higher.

On the other hand, with the momentum that we have, we believe that, as I’ll talk about in a minute, the fourth quarter is likely to be at least as strong, if not stronger, than what has been forecasted there. So our reported revenues for the quarter were up $1 million or 3.5%, revenues were up $1.1 million or 8% in our domestic direct offices, our international licensee revenues, essentially all of which flows through to the bottom line, were up $400,000 or 16%, the national account practices revenue was up 14%, reflecting increases in sales performance, education and customer royalty practices.

As noted earlier, our international direct offices were down $700,000, which is 12%, with revenue growth in Australia and the U.K. being more than offset by revenue declines in our Japan office, primarily resulting from that $780,000 intellectual property sales, which occurred in last year’s third quarter in Japan, which did not repeat this year and was essentially all profit. Excluding the impact of this contract non-repeat, revenues from our international direct offices would have been up 2%.

As noted earlier, during the third quarter we completed the sale of our consumer products oriented business in Japan and I’ve talked about that. And as previously discussed, the sale of this business was accounted on a discontinued operations basis. As noted, excluding the impact of the FX charges in the Japan operations, we think we felt really good about the quarter with revenues up $1.8 million (indiscernible), the adjusted EBITDA of 1.8 was up $2 million from last year.

Our gross margins were solid. We had a slight decline in gross margins relative to prior year, but again, last year was – because that intellectual property contract was almost all profit, it skewed it a bit. So, without that, we actually would have exceeded last year’s gross margin by 70 basis points.

Steve will speak to our SG&A and restructuring costs, the combination of those two declined of course during the quarter, and our EBITDA for the quarter of $1.7 million was $650,000 improvement close to – obviously, percentage-wise it’s huge, 70% or so improvement compared to last year’s EBITDA, the $1 million. Excluding our Japanese operations in these non-repeating charges, that would, of course, have been higher.

Our operating income for the quarter improved $795,000. Operating income would have increased $2.2 million, but when you exclude the non-repeating contracts and FX charges, net cash provided by operating activities was $1.7 million, which was an increase of $1.7 million compared to last year’s third quarter.

And our balance sheet also improved during the quarter. We paid down our credit facility of $9.3 million as of the end of the quarter, and of the proceeds from the sale of our Japan consumer products business’s strong fourth quarter operations, we continue to pay down our credit facility. We will continue to pay it down during the fourth quarter and expect that that we’ll essentially have no outstandings on that by the end of our first quarter.

As a consequence, as everything I just mentioned, we’re feeling very good about fourth quarter’s expected performance. Five weeks into the fourth quarter, our revenue booking momentum, as I noted, continues to be very strong. We expect that the fourth quarter’s overall booking performance will continue strong.

Another difference, in the third quarter last year we did a special promotion with our facilitators in the third quarter, which was historically only done in the fourth quarter. That drove significant additional revenues in last year’s third quarter, which, again, we could have mentioned, maybe should have given that much guidance, but we’re putting all of our effort behind the fourth quarter promotion which we determine was the best thing to do so we wouldn’t confuse them. And so, we’ll expect some upside in that area as well.

We have strong bookings in our education business, et cetera. So, as shown in Slide 7, while our business is not that seasonal, we typically generate substantially more revenue in our fourth quarter than in other quarters. And this is the result of the fact that much of our educations practice revenue is recognized during the fourth quarter when teachers and principals are not teaching school.

Second, that our one day promotion now for our more than 9,500 licensed facilitators occurs in August where if they buy 10 training manuals they get one free and they get some other things that encourages people to purchase at that time, and that’s historically very big pop and we expect not having done that in the third quarter. We will have some upside versus last year in the fourth quarter.

And so, because of the strength of the education practice, the very strong bookings that we’ve talked about in the third quarter and through June, most of which will be delivered during the fourth quarter and in next year’s first quarter, it increased number of newly certified facilitators who are expected to purchase training manuals in the fourth quarter. And these new significant execution and government services contract, we expect this year’s fourth quarter to have revenues that represent an even higher proportion of our annual revenues than in prior years. That should give us an upside and perhaps an ability to catch up at least some of the shortfall from the third quarter analyst estimates, if not all. And so, we’re actually feeling very good as a business, but concerned that I wasn’t as good a communicator about this quarter as I could have been.

So, at this point, I’m just going to turn to an overview, kind of the key bets for going forward and turn the time over to team members to address these briefly. And so, Steve might just refer to the next Slide 8 in your deck. I’m going to turn over to Steve Young, our CFO.

Stephen D. Young - CFO and Corporate Secretary: Good afternoon, everyone. Nice to be with you today to talk about cost reductions and our cost controls in business models.

We have frequently repeated three concepts related to SG&A. First of all, we claim to have an ability to control cost and we are still completing cost reduction efforts at this time. Second, as we see the opportunity, we will invest all or part of those savings in growth initiatives. And third, as our profits increase, compensation tied to profit will increase.

In this quarter, SG&A is $700,000 over last year. As Bob has talked about, nearly $600,000 of that increase is related to the FX impact this quarter compared to last year. So, it is easy to think that SG&A, excluding the impact of FX, is essentially flat to last year.

While this is true, it doesn’t give the real picture. Please understand that in this quarter, we do have a fairly significant amount of savings achieved in the quarter. Those would include savings in our IT systems and our phone systems and other types of central costs and general savings throughout many areas of the entire Company. And then, we have quite significantly invested in this quarter in growth initiatives. Those include practice leadership, marketing platforms, bonuses, et cetera.

So when we look at SG&A, it really, while a very similar amount, is not the same type of SG&A that we had last year. It’s an SG&A spend that is much more directly targeted toward growth than what it was last year, again, because of the savings we achieved and because we applied those savings toward growth initiatives.


Robert A. Whitman - Chairman and CEO: Thanks, Steve. I’m going to now turn the time over to David Covey, Co-Chief Operating Officer, and then to Stephen to talk about our field operations.

David Covey - Co-COO, Global Operations: Okay. Thanks, Bob. Good afternoon, everyone. As was mentioned earlier, we had four out of our five U.S. offices show revenue increases during the third quarter, and collectively, they grew at 7.6% over prior year. As also mentioned by Bob, our onsite bookings were up 54% in the third quarter. So they are up significantly. We were up 5% only in the second quarter and we were actually down in the first quarter.

So we saw significant improvement in our bookings. We’re up 17% for the year and we expect that those bookings will continue to remain strong. We were down negative 5 last year. So we think that if that remains strong we could actually maybe even be up 20% for the year, 25% turnaround in our bookings. Our revenue per booking has also increased over the prior year. In the past, we’ve been around $5,000 a day and now we’re about $5,300 a day, as Bob mentioned.

The facilitator revenue was off in the third quarter, and we really do like two promotions a year. Last year we did it in the third quarter and the fourth quarter. This year we did it in the second quarter and the fourth quarter. So we saw 25% growth in our facilitator business in the second quarter, but we obviously saw declines in our third quarter because of a promotion that we did the prior year. So we expect a big finish in the fourth quarter and we’re gearing up for that now.

In our field support practices, their primary role is to help or direct offices and our licensee offices to sell our solutions, includes execution. Our Execution business the Speed of Trust, and technology platform, which is really our Online Learning, we’ve achieved significant growth this year. In fact, for the year, we’re expecting that our Execution Practice is going to increase from $4.5 million to about $8.2 million, which is about a 78% increase. Our Speed of Trust practice is going to increase its revenues from $7.25 million to, we’re expecting about $12.5 million, also a significant increase. And then our Online Learning platform is going to go from about $900,000 to $2.5 million. So you see significant growth in each of those areas.

Robert A. Whitman - Chairman and CEO: And Dave, you might just mention what the original goal was in each of those three and…

David Covey - Co-COO, Global Operations: Yes. So the original goal with Execution was $8 million, and again it was 78%. So we’re looking about 8.2, so it’s about couple hundred thousand higher. The goal in our Speed of Trust practice was from $7.25 to $9.25 and we’re going to beat that by $3.25, maybe $3.5 million. So we’ll significantly go over that and then our Online Learning, our Technology platforms was from $900 to $2 million and we’re looking to beat that by about $0.5 million. So all three of them will exceed expectations, and in Execution we already had a 70% plus expectation. So we’re just going to beat that at 75%. So we’ll take that.

In our three international direct offices, which is Australia, U.K., and Japan, Australian results have been terrific, very strong. We’ve grown significantly over prior year in each of the quarters, all three quarters, and we expect that to happen also in the fourth quarter. The third quarter growth was 20% in local currency, even higher in USD.

In the U.K. office, our revenues were higher than the prior year by 7.4%. And due to some reductions in our SG&A, EBITDA was more than double, it was actually 127% over prior year. And we’re also expecting double-digit by growth, revenue growth and EBIDTA growth during the fourth quarter. So we’ll see that trend to continue.

And then, the bad news of the three is our Japan office continues to be down, we were down 20% plus in the third quarter. A lot of this was due to an IP contract that we received last year that didn’t repeat as Bob mentioned earlier. But even with that taken out, we still would have been down by about 15%. And we don’t expect our Japan business in the fourth quarter to meet our prior year numbers, but we don’t think the decrease will be as significant, as it was in the third quarter, which is good news. You want to take some good news from that.

So overall, we feel great about our operations in Q3, and we’re very excited about the outlook for Q4 in our international direct offices.

Stephan Mardyks - Co-COO, Global Operations: On our Associate International Licensee Partners Operation, after a strong Q2 in which licensee revenues increased 17% compared to Q2 of the prior year, our Q3 license revenues of $2.5 million remain strong as expected, and we’re up 16% as Bob said compared to Q3 of last year.

Our growth of our licensee has remained constant, with mostly year-over-year growth coming from all our regions of the world including India and China. We feel very good about our licensee partners’ operations and futures prospects. We continue to see positive indicators among our licensees operations and believe that we’ll also achieve growth compared to last year during Q4.

Robert A. Whitman - Chairman and CEO: I’d like to turn the time to Sean Covey to talk about our national account prices.

M. Sean Covey - Chief Product Officer: We have three national accounts practices; sales performance, customer loyalty and education. And these are practices that are different than the field support practices that are primarily the revenue goes through the field. These are practices where the revenue goes directly to the practice itself.

Overall, in Q3 we did very well. Revenue in national account practices grew about 500,000 or 14%, and the EBITDA contribution was up even further, about $775,000 versus $640,000 last year in the third quarter, which is about a 20% increase. And year-to-date for fiscal year 2010, our national account practices revenues has increased $3.7 million or 40% and the EBITDA contribution is even up further at almost $3 million versus $925,000 last year, which is a 220% increase in quarter-over-quarter EBITDA contribution.

So, one of our practices is the education practice, and it continues to grow really strong, and the third quarter growth was at 30% compared to last year this quarter, and for the year, we’re up about 50% year-over-year, and this is in a very tough education environment right now with a lot of cuts going on. So we’re happy with that.

And this practice is focused on helping elementary schools transform themselves using a process that we call ‘The Leaders in Me.’ And this is a leadership development process for all the staff and the students that impact the systems, the traditions and the processes of the school. In short, it works on transforming the culture of the school and unleashing the talent of every child.

And we’ve been amazed to see the outcomes that have been produced by this process. Consistently we are finding increased test scores of students, improved teacher morale, improved parent satisfaction and kids who are better equipped with what we call 21st Century life skills, such as goal setting, conflict resolution and self-management. And we’ve been pleased to see that the leader in these schools are a frequent winners of all kinds of awards, including best in innovation, academic achievement awards and parent involvement awards.

Right now, we have over 250 schools in the U.S. and Canada that have signed up to this process and we are gaining about three to four schools every week. And given the track record of success we’ve been having, we believe potentially we could reach thousands of schools in the U.S. and outside, abroad. So stay tuned.

Robert A. Whitman - Chairman and CEO: Thanks, Sean. I have Steve Young maybe to just cover a few things regarding the financial results for the quarter.

Stephen D. Young - CFO and Corporate Secretary: We’ve had a good discussion about the numbers. I, like everyone else, am very pleased with the bookings and the awarded contracts of this quarter. So, just a couple other things specifically related to some of the numbers.

When you look at our tax provision this quarter, maybe the best thing is just give me a call. Our tax provision, as you know, is a little bit complicated, and we normally have a very high effective tax rate of sometimes 70% to 80%. And when the same factors that causes to have a 70% or 80% effective tax rate are applied to our operating results that is near zero, then we should just talk about the tax provision, because it’s quite complicated, but I’d be happy to talk with you about it.

Second, as it relates to Japan, we’ve talked about the sale of our Japan operations, and that it was included in discontinued operations. Please also note that it was a subsequent event to the quarter. And therefore the $1 million gain on the sale of the business in Japan will appear in our fourth quarter, but are still –still it was appropriate to show as discontinued operations in the third quarter. And that’s also why you will see on the balance sheet, assets held for sale. Those assets are the Japan assets, primarily inventory hold for sale.

So, for the quarter, our balance sheet is stable. Our booking trends are great. We are able to invest in growth initiatives. The sale in Japan will allow the focus that we’ve talked about. Our margins are good. We have revenue growth. We have income from operations, and at the end of the day, we generated some cash, a good amount of cash. So, Bob, this is the summary of the quarter.

Robert A. Whitman - Chairman and CEO: Before we have questions and answer, I’ll just conclude and say, this week has been actually a very exciting week for us. We have our quarterly (Redwood Council), we call it, the top 25 leaders in the Company together for the last three days. It’s kind of our preplanning and discussion for the next three to five years.

And I think we recognized that for the first time in long time, the bets on the table for the next three to five years are the same ones that really lead us well over the last few years. And 2005 through 2008, our domestic direct offices or our direct offices in total grew revenues by 42% and EBITDA by 92%. Basically they increased revenue about $33 million during those four years and EBITDA by around $17 million. Our International Licensee operations more than doubled, increasing EBITDA – revenue and EBITDA contribution by more than $6 million.

We introduced our National Account Practices during that time and they have been growing by about $4 million to $4.5 million of revenue a year on a very profitable basis. And so, going forward – and then our field support practices, which were introduced in Execution, Trust, and in our technology platforms so forth, were introduced in the last couple of years, and David’s already reported on their growth.

And so, there is a lot of excitement among our teams. We feel very good about all of our leaders. Those leaders have been in place for a number of years. They are committed to being in place in the future. Their compensation has always been based on profit, but we’re introducing an enhanced profit participation opportunity for meeting the kind of growth. And so you recognize that if we can accomplish over the next three to four years, what we did in the three to four years, 2005 to 2008, we have the opportunity to add not small amounts of EBITDA, but in the order of $25 million or so if we just do what we did. And we believe that we understand those bets better than we did then, that we’ve got a team that’s more seasoned than they were then. Many of the activities which we’re – we found weren’t that useful as you try to do new things are now – have now been refined.

So, there is a real commitment on our part, our balance sheet is strong and will get stronger as we pay-off our credit facilities. So, all-in-all, I think we came out of our meetings earlier today feeling that locking arms and being committed to as a team, really moving this business forward. Given the nature of our business, we’ve have some large contracts. There will be quarters where a contract that you hoped would deliver revenue in the particular quarter slides a little bit into the next quarter just because the clients management needs, a little of that happened in this quarter as well. But I’d say with the exception of the things we’ve mentioned that were negative really so for us of the 25 operations that our leaders represented, only two had negative results during this quarter on a year-over-year basis, and even those two are showing improvement.

So, we feel good about it. We think we are well positioned for the fourth quarter. As you know, we don’t give guidance, but directionally the analysts have made the estimates they’ve made for the fourth quarter, and for us, it seems like those are numbers that we ought to be able to achieve and perhaps succeed depending on the revenue recognition with some of these contracts. So, any way we look at it, this is going to be an enormous increase in profitability and revenue for the year, and so we’re feeling like we’re on the right track.

At this point, I’ll now turn it over for questions and comments and be happy to take those.

Transcript Call Date 07/01/2010

Operator: Joe Janssen, Barrington Research.

Joseph Janssen - Barrington Research: I just wanted to get some more color on the pipes since I think that’s like the big story here. You mentioned the large contracts, $15 million, are you seeing more contracts of that size in the RFP process that you are currently bidding on?

Robert A. Whitman - Chairman and CEO: I’m glad you raised the question. Let me just articulate, this $15 million increase in the pipeline of booked days and contractual revenues is made up of three basic components. About $4.5 million of that $15 million relates to the increased bookings, on-site bookings to which David referred that occurred in the third quarter and that have occurred thus far in June – well, this is as of the end of the third quarter, so about $4.5 million relates to that. About $8 million of it relates to a large governmental contract. We think there is upside on the size of that contract actually, and we think that actually against that contract in the fourth quarter alone, we will invoice between $3.5 million and $4 million. It’s a one-year contract. And so, we think the potential is for to be substantially bigger – that’s $8 million. And the rest is made up of several large for us contracts, but much smaller than this governmental entity, primarily in our execution business and in others. So I’ll now go ahead and answer your – pose your question, I just wanted to make sure that you were clear that it’s not a $15 million contract per se, but it’s a series of contracts and booked days that add up to the increase in $15 million of what we have on the books to be delivered in future quarters. Was that helpful at all?

Joseph Janssen - Barrington Research: Yes, that does. Are you seeing – regardless of size overall, are businesses starting to increase their training spend, are you seeing more RFP processes?

Robert A. Whitman - Chairman and CEO: Let me ask David and Stephan to respond to that, and then I’ll add any color to come through if there’s anything else to say.

David Covey - Co-COO, Global Operations: I would say that the leading indicator we look at is booked days. They book for the future. So typically these days will be booked and most of them will be delivered in three months, some of those are out for six months. But as I said, we’re up 70% for the year, we were up 54% for the third quarter and we were down 5% last year. So that’s really the leading indicator. We started off the quarter at negative 12, I mean the first quarter, the second quarter we’re positive five and then a positive 54. So we really have seen in the last three months, our bookings increased dramatically. Clients were seen to be spending more, opening up their pocket books a little bit more. We’re hesitant to say that we’ve out of the woods entirely, but we definitely have seen an increase in training dollars being spent.

Joseph Janssen - Barrington Research: What about conversion rates?

David Covey - Co-COO, Global Operations: I would say higher on conversion rates too. Yes, I think I mentioned six, 12 months ago, a lot of business meetings that we had were meetings where we would talk about our product and service and give proposals and so forth and they would say, hey, this is great that why don’t you come back and talk again. And we kept saying, well, are we going to get any business, and we weren’t. They were just kind of stringing us out a little bit in terms of the timing. And now, we’re seeing the timing back to where it was in fiscal ‘08 where clients are booking things for one, two months, three months out and the cycle, the timeframe is not as long as we’ve seen in, say last year, last fiscal year.

Robert A. Whitman - Chairman and CEO: Stephen, do you want to add anything to it?

Stephan Mardyks - Co-COO, Global Operations: Yes. I mean, compared to last year, especially – otherwise, Brazil, India, China territories are really booming. They were doing okay last year, but you even compared to last year Joe, really growing this year. U.K. Europe, you know are still getting better but slower than what we would expect, so that will be very different, you know as you all know regions by regions.

Robert A. Whitman - Chairman and CEO: Yes, I’ll just add to this that Joe, that I think, probably economy continues to be, who knows what, I mean, up and down. The business we’re getting now is not being, is not based so much on prosperity by these companies. They have cut a lot of people, and for our economies perspective, it’s not the best thing to, obviously from the human perspective, it is terrible, but, and economy is not the best, they’re not adding people. But they are training the people they have and recognizing that they are going to move forward, they need to make these investments. And so, even all the way through the depths of the recession in the execution business, and the Speed of Trust business, customer loyalty, sales performance, we grew all the way through. So those things are just accelerating now and what we are seeing come back is a willingness to invest in the basic HR, more HR led things, training leaders and training front-line employees, because they have fewer of them, but they need to win with the people they have. And so, they need to really make sure that everybody there is on the same page. A large client that we have is in the Lodging business and you think, there is an -- this industry as you all know has been through several recessions, but this recession the impact on revenue per available room has been greater than the last three combined. So it’s a terrible time for them to be making investments, and yet they are saying, this is the time we need to invest, if we are going to win in the marketplace, because we have a chance to differentiate ourselves, so we can get our large numbers of front-line employees on it. So, we’ll be very happy if the economy gets really robust, because I think that will bring back some of the left strategic investments that we historically had some benefit from. We are not saying that business now, that these are very serious minded business people who are saying I need to do this or I need to do that with a specific business purpose in mind.

Operator: James Maher, ThinkEquity LLC.

James Maher - ThinkEquity LLC: A couple of questions for you. In terms of, again, the pipeline that is the key thing here. You mentioned in the education practice that you are seeing good booking. Are you seeing any difficulty in the school districts and school systems committing to projects? I know we’ve been hearing that a lot from other vendors or other companies who have a lot of education clients. Are you experiencing that? And I’m trying to get a grip in this particular practice and more broadly in what’s really driving the big acceleration right now in the pipeline?

M. Sean Covey - Chief Product Officer: We are not. On one hand we are hearing districts and school principals talking about all the cuts they are going through right now. On the other hand we have, I think, such a powerful option, a powerful solution that schools are flocking to this. And so, schools that want to do the Leader in Me process, they find money, they can get Title I money or they find grants or they do fund raisers. Some of our schools, probably about 25%, are sponsored by corporations. We just got a big corporate sponsor to donate $1 million to 40 new schools over the next three years. And so, I think it’s because we have a very compelling offering that we are getting a lot of people coming in.

James Maher - ThinkEquity LLC: Do you anticipate any benefit from the Race to the Top funds or do you think are these applicable to some of the offerings that you have because I know there was some very specific but not easily understood rules around that?

M. Sean Covey - Chief Product Officer: What we find generally in education is, there is a lot of money out there even though budgets are being slashed. If you want to do something, there is Race to the Top funds, there’s Title I funds. There’s all kinds of grants you can write. So we’re tapping into those funds. We’re also tapping into partnerships. We just set up a partnership with the center for the advancement of Jewish education. And there are 800 Jewish day schools in United States, and their goal is to take it to half the day schools. And so, we’re starting a pilot program in South Florida with 13 schools. They are funding all of this through donations and foundation grants and so forth. And so, we’re surprised to find that there’s all kinds of money out there if you know how to tap into it, and we’re helping our schools do that. We’re also doing a lot with Chambers of Commerce. We’ve got about $1 million commitment from the U.S. Chamber of Commerce to help out with schools and we probably had about another $1 million already given to schools by Chambers. And so, a lot of our marketing events are getting schools and Chambers and local communities together, having big overviews of what we’re doing and the schools TO step up and say, ‘I’D like to do this,’ and the Chamber will step up and say, ‘I’d like to pay for it.’

Robert A. Whitman - Chairman and CEO: I think the key thing is, as Sean has said, James, is the motivation to get the money because our business and just selling basic training to schools is being affected by that. They’re saying, ‘We don’t have budget, we’re cutting back teachers, we’re not able to invest in classrooms, how are we going to invest in training?’ But when they attend one of the days or the demonstration days at these schools and they see the impact on these schools and they see the metrics, then people are going out and saying, ‘Well, I got to find a way.’ And so, we’re trying to hold ourselves in this business and to others. Where we have a transformative impact, we’re able to raise the money. Where we’re able to go into this lodging company that’s cutting every other expense, and we’re the only outside vendor that they are hiring service from, but the results they are getting are transformative. So I think it’s linked to the level of work. The less strategic it is, the more we’ll be getting hit; the more strategic, less we’re getting hit, if that make sense?

David Covey - Co-COO, Global Operations: So, The Leader in Me solution which is, just as Bob said, a total process is very intense, it’s gone from being zero percent of our business two years ago to being over 60% this year. So we’re very encouraged by the future.

Robert A. Whitman - Chairman and CEO: Was that helpful, James?

James Maher - ThinkEquity LLC: Maybe you could further elaborate on which segments of the economy or which kinds of clients are doing better relative to one another? You’ve talked a little bit about lodging and how you’re doing well there. What about retailers? I know we talked in the past about large retail operations that typically at least would have high employee turnover and the efforts you’ve made there. What trends are you seeing among those clients?

Robert A. Whitman - Chairman and CEO: I’ll speak to some of the vertical markets, and maybe Dave and Stephan will talk to some other ones. We had some specific targets that some of these practices have. As you noted, James, the customer loyalty practice itself has been targeted on multi unit retailers, particularly those small format with 25 employees or fewer where there’s an enormous impact that the individual employee can make on the overall customer experience. Of course, that’s an industry that’s been decimated by the economy, lots of units have been closed. Therefore, I think the CEOs of these companies have said, look, my big opportunity to differentiate myself and to grow is to retain every customer I have and get him to bring other people in, they really buy into that. And so, there we’ve had good success. The customer loyalty practice has added a number of new clients, at least they are in their pilot stage. Some of those roll out, some don’t, and we won’t know that for the three to four months, but they’ve got a number of great assignments in retailing. In supermarkets, we’ve picked up some really significant clients, one of which is in a very rollout to more than 600 stores. Lodging generally wouldn’t be a target in industry, but it would target because of the impact we’re having with this significant lodging company and the results we’re getting, there is awareness of that among others and a chance to do additional business in healthcare, in full service hospitals, patient satisfaction scores, drive reimbursement rates into this (pressure gaining) measurement system, and we’ve gotten a lot of work there. So that’s an example of some. David and Stephen, do you want to add some?

David Covey - Co-COO, Global Operations: Yes, so that are positive and professional services. We’re doing a lot at healthcare pharmas as Bob said, manufacturing is being depressed. Now, what’s been down is construction, used to have a lot of business in home construction. So, that mainly hit that last fiscal year, but that’s not really making a full recovery. Auto, our business is down in Michigan. Financial services, some of our business in New York and financial services sector have been down.

Stephen D. Young - CFO and Corporate Secretary: I would have exactly to some of these outside of the U.S. and David is saying, we have to Speed of Trust offering as well and many companies asking us to welcome. So even in the banking and financial industries, we’re having more and more request to discuss how we can reveal trust in many environment. What was very interesting as well in the last six months is increase of global sales. So companies again are asking us to grow on the global basis. That’s exciting according to me.

Stephan Mardyks - Co-COO, Global Operations: And Jim, maybe just one answer, maybe this is more than you wanted to know, I apologize for this. That, we’re also thinking market also differently than may be just industries, but looking about the circumstance in which customers find themselves and trying to identify similar circumstances. For example, when there is a new leader at a senior level in an organization whether it’s a Divisional President or a CEO of an overall company, we’re finding that one of the real opportunity is for us, to sell the solution using as a foundation the Speed Of Trust, where they are going to establish a foundation of trust for their new leadership with all of their key stakeholders and recognize, it’s actually a skill to doing that. We’ve won, probably as much as 25% of our business in the Speed Of Trust, which has been growing so rapidly has actually been targeted, to some extent more recently at this particular target, and so we think, the circumstances in which people find themselves, actually is almost a more important way to segment the market than just the industry.

Operator: (Kevin Henehan), KMH Capital Advisors.

Kevin Henehan - KMH Capital Advisors: I had a question, there are a couple of questions, is about the balance sheet so could we assume that you took the proceeds from the Japanese divestment and put that to pay down your credit line as well, would it be fair?

Robert A. Whitman - Chairman and CEO: I’ll let Steve speak. We didn’t receive it during the quarter. So, I’ll let Steve talk.

Stephen D. Young - CFO and Corporate Secretary: Yes, we did. So at the end of the quarter, we ended up with just over $2 million of cash and just over $9 million in our revolving line, so a net of $7 million. Just to remind everyone, our revolving line is $13.5 million and it needs -- our availability is $13.5 million and that availability reduces to $10 million, December 31st of this year. If everything goes according to our estimates and projections, our borrowings under the revolving line near the end of the year will start bouncing up and down around zero, borrow down that line.

Kevin Henehan - KMH Capital Advisors: Steve, were you referring to near the end of the fiscal year or the calendar year?

Stephen D. Young - CFO and Corporate Secretary: Calendar year, December 31.

Kevin Henehan - KMH Capital Advisors: Calendar year, Okay. Would it be fair Steve to say that you’d be close to net debt free counting the cash, say by Labor Day, near the end of your fiscal year?

Stephen D. Young - CFO and Corporate Secretary: Well, we have a lot of bookings in our fourth quarter as we’ve talked about and towards the end of our quarter, and it normally takes us a little while to collect that revenue. So, I would say that we wouldn’t be bouncing around zero near Labor Day. But when our fourth quarter revenues are collected then we would.

Kevin Henehan - KMH Capital Advisors: So that leads to follow-up question, which I probably asked you before Bob, about return of capital to shareholders, which you have done a terrific job, at say in the past few years. Can you tell us what you would be thinking as you get net debt free, cash flow positive, free cash flow? What would you be thinking in terms of buyback or dividends?

Robert A. Whitman - Chairman and CEO: Yeah, I think our philosophy won’t be very different. As we look at our efforts over the next years, actually we will probably spend a little less on development of new products than we have in the past just because we’ve had such a lot of investment. And so, we really will not and even with it, we won’t be -- even with that we haven’t had very much per year. And so, there is not a lot of places that we anticipate investing outside the business, nor do we see a lot of acquisition opportunities. And so, we’re going to continue to invest behind the offerings we have now, but beyond that we expect that we will generate significant excess cash flow. Steve has normally mentioned, we have a large net operating loss carry forward in the U.S. and when that’s utilized with, I mean large like $30 million or so. And when that’s utilized, we have a relatively large foreign tax credit situation as well. So, we expect to generally have excess cash. Our philosophy in the past has been, if we can’t invest it in the business, we would return it to shareholders through – historically it’s been through repurchases. But, I think as we move forward, certainly there have been a number of shareholders who’ve asked us about it, and we are considering among other things the prospect of doing some dividending going forward. But, I think our first issue has been just to make sure that we get our credit facility paid off and we’ll have – we still have a credit facility available, which will provide any liquidity needs and then in excess of that we can begin to think about how to use that. But I think our philosophy hasn’t changed and we believe that we’ll be able to grow the business significantly in the coming years. Therefore, if you could buy back stock on an attractive basis, I think we would all view that as a good use of cash.

Robert A. Whitman - Chairman and CEO: Thanks so much. We appreciate your questions. I think even though our time’s up, we are happy to take additional questions. We got started a little late, if there are any others?

Operator: There are no additional questions at this time.

Robert A. Whitman - Chairman and CEO: All right. We’d like to thank everyone again and we look forward to our fourth quarter reports. Steve and I will be out talking with some of you all in the coming weeks and months and we look forward to that as well. Thanks so much.

Operator: Ladies and gentlemen, that concludes today’s conference. Thank you for your participation. You may now disconnect and have a great day.