Franklin Covey Co FC
Q2 2011 Earnings Call Transcript
Transcript Call Date 03/31/2011

Operator: Good day ladies and gentlemen, and welcome to the Second Quarter 2011 Franklin Covey Company Earnings Conference Call. My name is Derek, and I'll be your operator for today.

At this time, all participants are in listen-only mode. We will facilitate a question-and-answer session at the end of the conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I will now like to turn the conference over to Mr. Derek Hatch, Corporate Controller with Franklin Covey. You may proceed.

Derek Hatch - Corporate Controller, Central Services: Thank you. Before we begin today, this afternoon's presentation, I want to thank you for joining us and we will begin with our forward-looking statements. 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 & 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.

With that out of the way, we'd like to turn the time over to our Chief Executive Officer and Chairman of the Board, Mr. Bob Whitman.

Robert A. Whitman - Chairman and CEO: Thanks, Derek. We're delighted to have the chance to talk to all of you and appreciate you joining us. Hopefully, each of you have seen the press release that went out about an hour ago and we're also delighted to report that revenues were up 19% for the quarter and 21% year-to-date, and that our adjusted EBITDA for the quarter was up 78% and that's 68% year-to-date. So, this hopefully will be a more fun call and continue to progress over the last many quarters.

I'd like to organize my comments there on the following four headlines we're seeing. First, we are very pleased with the Company's strong performance and results in the second quarter; second, we continue to be encouraged by the strong booking trends and momentum we're continuing to see in the business; third, based on these trends we expect to achieve significant growth in both revenues and profitability during 2011; and fourth, we believe we have the opportunity to continue the strong growth in the future. So, I'll just maybe give some background on each of those.

In terms of the quarter, from a revenue perspective, revenue for the second quarter totaled $35.5 million, which was an increase of $5.7 million or 19.2% compared to the $29.8 million in revenues that we achieved in the second quarter of fiscal 2010. This is pretty much as expected because our strong bookings during the fourth and first quarter we expect to translate into significant revenue growth and they did.

As shown in slide four, we're pleased to have achieved growth in all of our major channels. Revenues in our government services grew by $2.6 million in quarter, reflecting the previously discussed government services contract that we were awarded at the end of last year's third quarter. We also achieved growth in all of our other key channels. In fact, seven of the eight direct offices, both domestic and international, grew revenues during the second quarter as did three of our four field support practices, our International Licensee Partners as a group and all of – all three of our national account practices and you remember from last quarter, the sales performance practice has been down a little bit last quarter reflecting the lower revenue repeat of the kick-off of a big contract last year, we expected to comeback this quarter and they did.

Revenues in our core geographic direct office in U.S. excluding the government services region grew $2.4 million or 20% in quarter, again reflecting the delivery of the training engagements booked during the fourth and first quarter's and all four of our geographic domestic offices grew revenues during the quarter.

Revenues also grew in our international direct offices by 13%, including Japan, where revenue grew 23%. We also achieved growth in our Australian office. Revenue in the U.K. office was essentially flat through the quarter, a slight decline of $77,000, but based on bookings we expect U.K's revenues to be slightly up, flat slightly up or probably slightly up to last year during the third quarter.

Our International Licensee Partners royalty revenues grew 12% in the quarter, with most of our International Licensee Partners growing over the prior year, including nine of our ten largest partners. Then in our national account practices, our education practice grew, the sales performance practice grew, as did the customer loyalty practice. So, very broad based, good bookings in all of our areas, which is encouraging for the future.

From a profitability standpoint our gross margin dollars increased by $3.8 million or 20% for the quarter and our gross margin percentage increased a little bit to 65.1% versus 64.9% in the second quarter of fiscal 2010. We were really pleased to be able to maintain or improve our gross margin percentage in all of our major offering categories.

Our SG&A expenses declined to 56.1% of sales during the second quarter compared to 62.1% of sales in the second quarter of 2010. In absolute dollar term, SG&A expenses increased approximately $1.4 million during the quarter compared to last year, and this of course, was primarily due to an increase in associate costs or commissions, resulting from increased commission on the improved sales compared to prior year.

Towards our profitability as we've said the strong revenue growth and improvements in gross margin and SG&A percentages, resulted in adjusted EBITDA for the quarter being $3.6 million, and this is up by $1.6 million or 77% compared to last year's second quarter.

Year-to-date, as I noted earlier we're up 68% year-to-date. We had a good strong entire six months. Income from operations increased $2.6 million during the quarter to $1.5 million. Pretax income of $850,000 was up $2.7 million compared to a loss of $1.85 million during last year's second quarter.

So, on this first point, we felt really good about the Company's second quarter performance on essentially every major metric. Second point is that we continue to be excited and encouraged by the trends we are seeing in the business. We were very encouraged by the continued strong momentum in our bookings during the second quarter you can see on slide five.

One of our key metrics is what we refer to as book days, which are commitments for the future delivery training engagements onsite at client locations. This metric is tracked primarily for our North American direct offices and so these numbers are reflected only of that group and our domestic practices.

As shown on slide five, in last year's second quarter we booked approximately 2100 days for future delivery in North America, which of course is up a lot versus the prior year. In this year's second quarter we booked approximately 2750 days for future delivery, which is an increase of just over 30% during the quarter.

As shown on Slide 6, the strong booking momentum and the addition of new contracts during the quarter resulted in our closing the quarter with approximately $12 million more in our pipeline of booked days and awarded contracts revenue to be delivered in future months and quarters and primarily our North American operations where we collect this data, than we had at the end of the second quarter a year ago.

We expect as normal that the bulk of these bookings will be delivered over the next two to three quarters. As it has over the past – as always a portion of this pipeline relates to government contracts, starting at the end of the last year third quarter if you recall this pipeline jumped a lot because we had this one very large contracts that continues to be a portion of this, but not a majority by far approximately 20% of this pipeline, but because of this government contract, the exact timing of it any day we're always hopeful that the government will keep the budget going each day, today they have, to-date they have and we're hopeful that the government will continue to fund its operations so this revenue will continue.

As you may also recall and I just noted the large new government contract was first reflected in our pipeline reported end of last year's third quarter and this added significantly to both the overall size of our pipeline and to the incremental growth in our pipeline then and since.

Although we expect to continue to receive significant revenues from this contract in the future, beginning at the end of the third quarter, the year-over-year growth in the size of our total pipeline related at least the discount will be much less than it was at the end of the third quarter of last year when the first big bump happened. On the other hand, the vast majority of our total pipelines relates to non-government operations and a significant portion of any year-over-year growth that we've had in the size of our pipelines also relates to our non-government operations, and we expect this portion of the pipeline to continue to have strong growth. Again as noted, we still have $12 million more in revenue already on books to be delivered in coming quarters than we had at this same time last year. So, we expect our future growth to be strong.

Third point is based on these trends we expect to achieve continued improvement in both revenues and profitability during the back half of 2011. As a result of this booking momentum and the things – the other lead measures we really expect to achieve this growth despite the potential impact of the earthquake and tsunami on the operations at our Japanese office. I'll just make few comments about our Japanese office, thankfully all of our associates and their families are safe and well, and most experienced very little damage to their homes and property which is good. Our office (share), we lost a couple computer monitors that fell to the floor, but otherwise we experienced very little damage and all the employees are back at work full time.

We were very fortunate that we feel ourselves among our associates, but obviously feel like you all do very deeply for the human loss and devastation and the physical and emotional toll these events have taken on the Japanese people beyond belief. A testament to their resiliency that really took all the Japanese people is by most imports, company's employees are now back at work, things are moving ahead as normal as they can be.

As it relates to our business, obviously in the first ten days following the earthquake with electricity and transportation disrupted and the nation focused on the tragedy and many people asked to stay home, some of our training engagements were cancelled or rescheduled, but just not withstanding we expect that our March revenue and profit will still be higher than planned than last year, with the tsunami happening kind of mid-month, and currently more than half of the training days that were canceled came from one large insurance client who has currently all of their available people focused obviously on existing and processing insurance claims and therefore they had to cancel or delay training, but, overall, to date cancellations have not been widespread.

In terms of our new bookings, our pace has been consistent with the average booking pace for the year which was ahead of last year, but in this month, it will be below the accelerated pace of the previous two months which is understandable. As a consequence of these new bookings, there is ongoing booking activities, we had more revenue come on the books than have been cancelled to date.

So despite any impact in Japan based on the strong pipeline of booked days and awarded revenue and on the momentum we have, we continue to expect that we'll achieve our adjusted EBITDA range of between $18 million and $21 million in 2011, and we believe that the opportunity to continue to achieve strong performance in the coming quarters of the year remains substantial as each of our operations is gaining strength.

Just maybe note that this growth in terms of what underpins this potential for growth over the past several years have been driven by two key initiatives. One is the growth in the size and productivity of our sales forces both in our direct offices and in our licensee offices. The second has been the growth in our practices both those we call field support practices and our national account practices.

As you can see on slide seven, from 2004 to 2010, driven primarily by the increases in the size and productivity of our sales and delivery forces, revenue in our direct offices grew 28% and EBITDA grew 67%.

In slide eight, during the same year you see that royalty revenue for international licensee partners more than doubled from $4.3 million to $9.2 million, reflecting revenue growth in their operations between $25 million to something like $65 million. During the same year, our national account practices almost doubled revenues from $9.8 to $19.5. So, we believe there are certain practice areas, execution, education, Speed of Trust, sales performance, customer loyalty and our two newest areas that we designated as practices leadership and productivity, each has the potential in the coming years to achieve at least $50 million in revenue, even at relatively low levels of penetration in their defined markets. Towards this goal we believe that over the next three to four years revenue in these practices should grow by approximately $40 million with something like 30% flow through just in those practices alone.

We also expect to nearly double the size of our sales and delivery forces over the next four years and expect this acceleration to produce significant revenue and profit growth in our business.

So in summary, we were very encouraged by our results. The momentum we're seeing in the business is good, continue to be strong. We believe we'll have the potential to achieve strong growth in future quarters in the years and we will look forward to reporting on our continued progress as we go through the year.

When Steve Young and I talked to you and to our other prospective shareholders, there are several questions which seemed to come up frequently and today rather than ask each of our executive team members to give a report on their areas of responsibility, we thought it might be helpful to address three of the most frequently asked questions that we – Steve and I get and we'd like to maybe do that as the three frequently asked questions. Then our executive team will be on the line should you have any specific questions. The three questions that Steve and I would like to address are these; one, many of you've asked for a review of how our revenue breaks down by practice area. Steve is going to provide that and discuss that.

Second, we get asked a lot of times how we think about the valuation of the Company, knowing everything we know, how do we look at the valuation of the Company. I thought maybe it would be helpful just to share three different lenses through which we look at that question and third which we're covered in some other webcast, we'll just do briefly. What should investors understand about some unusual balance sheet item? So following this we'll open it to answer your general questions and so I am not going to turn to Steve Young to address question one which is how our revenue breaks down by practice. Steve?

Stephen D. Young - CFO: Thank you, Bob and good afternoon, everyone. It's nice to be with you. So as Bob said for the first time in our conference call we are presenting this sales result summarized by practice. So if you look on Page 11 you'll see each practice is listed separately and the results were compared to the prior year.

We hope that this information is meaningful to you. You'll notice on page 11 that six of the seven practices show significant growth. Only practice is down due primarily to be in compared to a very strong result last year. We expect all of these practices to grow quite significantly in the future.

For several quarters now, we've said that we're investing in practices. This means that we've been investing in the leadership offerings, marketing et cetera related to these seven practices. We believe that our investments are paying off and that the practice leadership has been and will continue to be a crucial part of our growth strategy.

Behind each one of these rows or each of our practices is developed and developing leadership team. These practice leaders are the ones who are experts in their subject matter. They are thought leaders they are business developers and closers. They are the ones who are the business leaders who can create and maintain leverage business models and the ones who can keep these practices laser-focused so you can see the numbers there. There is significant growth in the practices. We're excited about the leadership team, the practice leads over each of these practices. We're excited and based upon the foundation that has been laid and upon our results so far, you can see, we do expect these practices to grow so Bob that's your summary of Page 11.

Robert A. Whitman - Chairman and CEO: I think that should be helpful as Steve said, we see the expansion of our EBITDA margins as we covered those fixed cost and we planned these different practices so to speak and have it come up to the ground and get profit but each of them now contributes meaningfully on the margin nearly more than 30% incremental margins to the bottom-line of revenue growth.

Thanks Steve, so the second question that we were going to address today, is how we think about evaluation of the company because you've asked us that we felt we just show the same information with everybody so I'd like to maybe share three perspectives on evaluation and hope you'll find useful. We know of course, that you will do it your own way. You already do it your own way but nevertheless, it might be helpful to see it as we see it.

First, as a summary, maybe I'd suggest three different way to lenders who would do evaluation, at least that we do. One is that, under one way of accessing value, the current market cap reflects only the value of our international licensee business alone. I know that's a bold statement but that's actually how we see it.

In my prior investment experience, if you tell me establish a value for a company, we would try to value each of the company's assets and operations and see how far through the assets or operations you had to go starting from the top before you effectively got the rest of the companies for free service. At Franklin Covey that analysis – you might conclude that you only have to go through one operation which is the value of international licensee business before you might feel that you're effectively getting the rest of the company for free.

Our licensee business includes licensees – our 42 international licensee partners, each of whom pays us royalties equal to approximately 15% of the gross revenues. Last year, this business generated EBITDA of more than $8 million and this business is growing significantly during the first two quarters.

Our international licensee partners are tremendously capable people who will have more than doubled their business over the next five to six years, with their collective revenues growing from approximately $25 million to more than $70 million and our royalties growing from approximately $4 million to $10 million.

Our overhead for running this operation couple of million is pretty fix as we already have our regional people in place. We believe the growth of these licensees are poised to double their operations again in the next four to five years, as many are really accelerating their progress. Business is non-capital intensive, it generates straight royalties. Our agreements with most licensee partners require annual increases in their (minimum) royalty payment to us.

As we evaluated business that might be similar, I'm not saying that we're correct, but as we looked at it, businesses like this have been reasonable (move) for this kind of businesses, maybe 16 times EBITDA for that particular kind of business. If you'd evaluate this, there's some that trade above and some below, but this is a unique business. The value of the licensee business alone is arguably higher than the current market cap of the Company.

For those who might want to use a lower EBITDA multiple, it might mean they have to add the education practice to the licensees before you get the rest of the Company essentially for free, but however one values the licensees business, we believe it's worth a substantial amount and have no intention of selling it, but this provides a significant – this underpinning of value provides significant downside protection of value for investor to purchase the same from Covey stock and we hope with that foundation unpinning it, you can then focus on growth. So that's one lens.

The second lens – I mean evaluation is one. It depends on the peer group to which we are compared. We believe that investors often struggle with which peer group to compare it. Within the corporate training business or related kind of things on one end of the spectrum there are companies that are sometimes referred to as body shops where most of the training and consulting is customized and conducted or delivered by humans and by consultants and therefore viewed as less scalable.

These companies now in our analysis tend to trade at around 10 times EBITDA. At the other end of the spectrum, our subscription services, consulting light or product type consulting companies who primarily sell products and services with a third or less of their revenues coming from consultant billing, these companies often trade between 15 and 20 times EBITDA.

We're currently valued at a lower multiples then at even lower end of the body shops. In fact, our mix of business – in fact, though, mix of our business is much closer to the subscription services, consulting light or product types consulting companies.

You might be interest to know that more than 60% of our revenues come from training product, subscriptions, training materials, online contracts, et cetera, and our onsite trainers are often just the first step in the training process that only ultimately result in companies buying manuals, buying intellectual properties, et cetera. So it's more an entry point than it is an endpoint.

If you know we have 9,500 active trainers certified inside companies, they order material and deliver training percent intellectual property contracts in light.

If you look at slide nine, perhaps a good measure for looking at the relative scalability of our business on the scale of body shop on one end to subscription service on the other. We've showed on slide nine, a great company like GP Strategies, who provides more consulting services. According to the information from their public filings, generates revenue per employee of approximately $137,000 per employee and they are a great company, just a different model.

At the other end of this spectrum, a great company Corporate Executive Board who is offering as more subscription services-oriented generates revenue per employee of $234,000. Where someone like Gartner Group who is also more on the subscription services scale - at the end of the scale achieved revenue per employee of $289,000.

As you see on this slide, our revenue per employee is actually less closed to that being achieved by Corporate Executive Board and Gartner then it is for the more consulting-oriented companies. But unless you see us in that peer group, which we probably haven't done a good job of doing it you might think we are more of a body shop than a product type consultant.

So, finally then the third view is rather than value in Franklin Covey on an EPS basis, we believe that bearing it on a total enterprise value, the EBITDA or perhaps even better on a total enterprise value to free cash flow is much more reflected of the true multiple.

As you know, or some of you know because of the required accounting for the sale leaseback of our corporate campus several years ago, our campus real estate still appears on our balance sheet in the asset and it's being depreciated even though we haven't owned it for at least five years. On our balance sheet is also the related capitalized lease obligation which is also just a lease obligation.

As a result of this and other factors, we report large non-cash depreciation and amortization charges and in fact, our depreciation and amortization is approximately $8 million a year, whereas our ongoing CapEx spending is only a little more than $1 million a year. So, that gap in the real economics suggests us that the total enterprise value to EBITDA is a much better method for valuing this in EPS multiple.

Even better measure perhaps is to look at total enterprise value after tax free cash flow, because of the significant profitability of the business and a large approximately $28 million net operating loss tax carry forward in the U.S. and approximately $10 million in foreign tax credit, if we were to say achieved $20 million in adjusted EBITDA, we would generate approximately $14 million of after tax free cash flow.

So, at current trading value today's closing price we're trading at only approximately 10.4 times free cash flow, whereas certain of our consulting (writers of ships) and services peers are trading at 20 to 25 times free cash flow. So, I think we're not saying where we ought to trade, but it assumes like we think there's downside protection in value provided by the underpinning of value that's in the licensee business represents.

There is perhaps for many a miscategorization or misunderstanding that our business today is really productized training in consulting business is not a human-based consulting business; most of our revenues come from that. Third, therefore on a relative basis output is relative to EBITDA or free cash flow we're trading - there seems to be some real room for multiple expansion in the valuation.

So, hopefully that's helpful. We do believe also that we have significant opportunities for continued growth as I mentioned earlier that today being factored very much. So, we believe in that Company is currently being valued very considerably. So, Steve, I'll turn it back to you to address the third question.

Stephen D. Young - CFO: Thank you, Rob. So, the third question, we are asked often about our balance sheet uniqueness. So, I've entitled this section Hidden Treasures. We do still have a $28 million net operating loss carry forward and $10 million of foreign tax credit that will be very valuable to us in the future.

We do have our financing obligation on our balance sheet, that's really the capitalization of our rent. We do have 50 million plus of notes receivable but are reserved against and don't show on our balance sheet. To me, these are all hidden treasures even though our uniqueness is when they're understood or most of the time they're viewed positively.

You might be interested to know that in the second quarter we paid our revolving line of credit down by $9.8 million in the quarter. Additionally, just to complete the slide, if you look at page 10, the adjusted EBITDA, this is the reconciliation of net income to adjusted EBITDA and please note on this schedule that we've included share-based compensation as a non-cash item, obviously that's listed on this sheet.

We've talked about page 11. Page 12 is selected cash flow information that we include each time. Page 12 shows that our operations generated $5.9 million of cash in the quarter. Lastly, page 13 is our page that is new to our webcast and conference call. Page 13 shows that for the trailing 12 months, our sales have grown 20% and adjusted EBITDA has grown 80% and you can see the individual growth numbers that Bob talked about. So, we believe this was a very good quarter, so thank you.

Robert A. Whitman - Chairman and CEO: Thank you Steve. This time, we would like to open the call to questions from you all and so we'll turn it over to our moderator to do so.

Transcript Call Date 03/31/2011

Operator: Joe Janssen, Barrington Research.

Joseph Janssen - Barrington Research: I appreciate all the color on the valuation perspective of your Company. I think it's extremely helpful and I agree with you, I think investors have definitely been asking that question. If I could take just like one step further, if possible can I get approximate EBITDA margins by business units to help get to that value?

Robert A. Whitman - Chairman and CEO: Yeah. That's a good question. We don't have it prepared today. We'd have no issue providing that in the future webcast. If you want to me give you – I could probably give you kind of a general idea today or we can just wait for the next webcast. What would you like to do Joe?

Joseph Janssen - Barrington Research: Any guidance would be helpful. I mean I know you've mentioned international direct that – and I assume your license practices were somewhere around 85%, 90% flow-through but the other ones would be helpful?

Robert A. Whitman - Chairman and CEO: Look at marginal flow-through by business. Here is basically how you just look it, our domestic direct offices because we cover, we have certain potential overhead that would cover – we operate a lot of their functions collections and so forth centrally. Gross margins are in the high 60s, say 68%. Our direct selling costs are about 20%. When we hire new sales people, we have a cost of starting them up that compresses yields by about 5% or so, but you can think of, even when you're growing and spending new money, in some cases we are adding new consultants, et cetera, we would end up in a position, where between 40% and 45% of incremental revenue would flow through from our domestic direct offices. Those offices make up, say, $75 million of our business. Our international direct offices, because they cover all their own overhead, do all their own accounting billing, collections, have IT, et cetera, their over head is heavier. The marginal contribution toward that over head though is very similar. Margins are actually slightly higher. In some cases, like Japan, where we have third-party sales agents in some areas, our selling cost may be higher, but on the margin, you'd expect in our international direct offices 30% to 35% flow through on incremental revenues. In certain of the offices like Australia and even the U.K., you'd have something closer to 40% flow through on those direct offices. You mentioned international licensee – business because we've built the infrastructure already and are covering that overhead, incrementally not 100%, but certainly very close to 100% flows through on incremental royalty. We expect at this point, since we have teams in charge of Europe, Middle East and Africa regions, the Americas and Asia that we will add very little additional costs as those businesses grow as we've already staffed up for that. In our practice areas, as Steve mentioned, each of them has a team and we've added to those teams over the years, so the flow through in some of these has been smaller than it will be going forward. Now, that we generally have teams in place, our education business and these other direct practices, I'd say, education, sales performance should flow through in the mid-30s on incremental revenue. In customer royalty, it's lower because the portion of our revenue is from data collection, which has lower margins, but even with that, the flow through on incremental revenue is in the 20s at this point. I don't know, I hope that's helpful. Joe, is that responsive to your question?

Joseph Janssen - Barrington Research: Yeah. It is, I appreciate it. Another modeling question, it looks like in Q2, your tax rate was around 64%, I think, bringing your year-to-date tax rate if my math is correct, somewhat around 69% and I think Steve did a good job highlighting these hidden treasures. Since it's kind of difficult to model, can you – if any kind of guidance you can give for Q3, Q4?

Stephen D. Young - CFO: The percentage that we're using is an approximate percentage of what we expect for the year. So obviously due to the maintenance that we have, that rate will go up and down depending on what the actual result is, but we're using 71% for the year.

Joseph Janssen - Barrington Research: On an annual basis?

Robert A. Whitman - Chairman and CEO: As you know that's not the cash tax.

Joseph Janssen - Barrington Research: Right. It's non-cash based, right.

Robert A. Whitman - Chairman and CEO: It's really not – a lot of this is not reflective of the base businesses, and includes interest from this more than $50 million taxable income on the interest from these $50 million of receivables that doesn't appear on our balance sheet from the employee stock loan program. It includes also if you – foreign cash gets transferred in and includes at least implied tax on them.

Joseph Janssen - Barrington Research: Then, Bob, I'm looking one or two year out. Our margins are high. Talk about a lot of leverage in the business and it looks like incremental contributions in Q2 are high 20, like 28% and overall around 10.2% of the quarter. How high can that margin get and like kind of what level of revenue would I need to get to?

Robert A. Whitman - Chairman and CEO: Well, we think, our targeted EBITDA to sales margin is 17%. We believe that another $13 million of sales or so would get you very close to that margin. So we've been moving it up quarter-by-quarter on a trailing 12 month basis and so I think it will take – to get 17%, probably, it will take about another $30 million of annual revenue to get there. You could argue that above that, you can just ignore them since you are adding flowing through 40% and 80% et cetera but I think we would choose if we got 17% or so to accelerate our growth to try to keep the EBITDA margins in that range. I think you'd be trading up growth for incremental profit if you try to go much higher.

Operator: (Patrick Retler, Retler Capital).

Patrick Retler - Retler Capital: You know we have sort of done this the last couple of quarters but now we're looking at very little debt, a company that generates a huge amount of cash and I agree with all of your valuation methodologies that the Company, the stock is weighing their value. So, when can we start buying back some stock here?

Robert A. Whitman - Chairman and CEO: Maybe I can try to answer almost mathematically. Let's say, up around $20 million of EBITDA that you generated on $14 million of free cash flow. For us the timing – even though the business is not that seasonal because of our big fourth quarter, a lot of that cash company's collected a lot of excess cash didn't come in towards end of the calendar year. In fact, we used about $12 million of that excess cash in December and early January to pay down our credit facility. At this point in the year because sales building for fourth quarter, we're working capital intensive. We also have buyout – this earn-out for the Speed of Trust Practice. It did very well last year. So, we used a little over $5 million for the earn-out payments in March. So, for us the next big slug of cash given that we have pending working capital and we're generating profit – obviously profitable operations and free cash flow, we're investing it through that free cash flow in working capital for to fund this extra $12 million of sales that's in the pipeline. So, I would expect the answer to your question, Pat, that in November, December and next year, we would have – that's when we started to see that $14 million of free cash flow and aside from the $5 million that we invested in this year that we'd have $8 million or $9 million, $10 million that we started to use at that point to return to shareholders in some point.

Patrick Retler - Retler Capital: Okay. But based on where we're going here and the fact that the stock doesn't trade a lot of volume wouldn't that make sense to start nibbling away on a gradual basis tomorrow, even if we have to access the line of credit to do that?

Stephen D. Young - CFO: It probably would never be a topic that we've had on the board. We just didn't know exactly the size of the payouts. We also are growing a little faster than we had budgeted for the year which is more working capital intensive, but we also had some large clients, including government clients who because of the budget stepping – where the payable gets stretched or the receivable gets stretched a little bit. So I think, philosophically, you know we're not opposed, we've used more than $50 million of excess cash in the last years to buy back stock and so I think we feel, of course, the same way. We see the numbers. We just want to make sure we have plenty of liquidity to be able to grow sales if we got another big few contracts and so our first investment will be that, is making sure we have plenty of working capital to grow and fund working capital beyond that, that's a pretty knowable amount. It's about 18% to 20% of incremental sales and so, I think with that in mind, I suspect you'll see it in coming quarters begin to put in some kind of a purchase authorization and begin to nibble away this.

Patrick Retler - Retler Capital: Well, from where I stand the sooner the better, rather than that keep up the great work.

Operator: (James DeYoung, Credit Suisse).

James DeYoung - Credit Suisse: Just had a – just one question I wanted to ask you. So given the free cash flow this year or say $15 million, your next year another $20 million, so that gets your enterprise value down to conservatively $120 million for the Company. We're already more than two quarters of the way through this fiscal year, that pretty certainly I think you're going to get more analyst coverage, but people are going to start looking at valuing this company off a next year's number, so anyway you look at it, we're at 5.5 to 6 times enterprise value to the cash flow for the business and growing top line, 20% bottom line conservatively 35%, 40%. So, is it fair building out some of the questions that were asked previously given that the cash flow comes in towards the back half of the year? I'm less concerned about when we buyback the stock, but given what you talked about with the comps and the Company currently trading at less than half of the other comps and more like 25% when we start going off in next year's numbers. It's safe to say that you'd be more than comfortable buying back stock at prices 50%, 60%, 70% higher than where the stock currently trades. If you can't get coverage and other managers don't want to buy – take positions in the company because it's illiquid, you'd just be more than happy to continue to take out the weekends as you continue to grow the business. Am I not correct?

Robert A. Whitman - Chairman and CEO: You are correct. Any lack of purchasing has nothing to do with the price of the stock. If we believe in the future we've laid out, the prices which we buy is a small issue, for instance just making sure that we have plenty of liquidity. For example, if we used all of our cash two years ago to buy that stock, we would not have had the money to do the Speed of Trust Practice, which has added $10 million - $12 million of annual revenue to what we are doing. If we had invested all of our rest of cash in OEM and buybacks and then won this large government contract, which required us to fund significant working capital for six months, we would have been at a point where we had to shutdown sales in order to fund it. So, for us, well we understand and I think have demonstrated in understanding the buying back stock at a discount is a smart thing to do. We are managerial a slightly more complex equation and that enters into the question, but it's only through excess cash flow that could not possibly hurt the growth of the business then I'm willing to invest. So, I appreciate, but philosophically yours and past comments are exactly on point. We couldn't be more philosophically aligned. We just have other factors to manage besides what the share price is and how much we got to make sure that we can grow the business.

James DeYoung - Credit Suisse: If there are accretive acquisitions to be made and that's a better use for the cash. I'm all forward. I'm just sitting here looking at a business that's straightened at 3.7 times enterprise value to EBITDA on next year's numbers and 5.5 times free cash flow to enterprise value. So, it just makes no sense, when you look at comps some are growing faster than the comps. So anyways, thanks a lot. Good work.

Operator: (William Gibson) Andrew Strudwick.

William Gibson - Andrew Strudwick: Thank you for the comments on what's going on in Japan, but could you give us a little more flavor of some of some of the International Licensees, specifically Europe which is having their own troubles, and Asia, particularly India and China.

Robert A. Whitman - Chairman and CEO: Sure. Thanks for your interest. Europe for us is a picture of about nine different licensee partners, and in each of the markets we have very – I mean, even though they've grown, many of them have grown like 5x since their start, for example, in the Central European countries. We received I think in the first we had like $300,000 of revenue, so we had $30,000 in licensee fees. Today, they are, I won't disclose that numbers, but they are multi-million business growing rapidly. So, our growth in Europe is really driven more by the strength of the team, because we have such opportunity, we have such low penetration. The size and quality of the team is more determined in the economy in Europe today. To give you an example, in Scandinavia we're one of the strongest partners, we have some of our strongest partners, the whole population of Scandinavia is less than California. But they have become this year our second largest Licensee Partners. We've got a very strong team, they're focused, they're not in high growth markets, and yet, because the low penetration they've grown for seven or eight years now, very strong partners. I hope that's a useful example maybe Europe, but what we think the potential is elsewhere and we've got other partners who were doing that same thing some who aren't. We see Europe actually as a very good growth area for us and more partner specific issues than it is if they're not growing as rapidly I believe than it is economy or opportunity. In India, we just had our partners here last week with just in our Redwood Council Meeting, (calling our) senior management leading that. We view ourselves not, hey we have direct offices and licensee offices, we (re-gear) ourselves having 50 offices, eight of which are owned by the Company a 100%; 42% which are licensees , but we treat them all as our partners. The growth rate in India is extraordinary. They have moved from having four employees six years ago to I think they reported 187 and expect to add another 100 over the next two years. So, there business is exploding. We have a whole team going there next and we have a new education opportunity going there that (teaches) 25 schools in our sixth Leader in Me practice going on there. China is one of our fastest growing areas as well. So, we have strong partners in almost all of the economies you would want to have – in which we should have strong partners. We have good partners in some areas that who just don't have the capital whatever to grow in some smaller markets, but in general these partners have made investments. We've made investments in them in terms of time and money and training and products and so forth. So, we feel like this network is poised to accelerate growth.

M. Sean Merrill Covey - EVP: Bob, this is Sean. Do you want me to add a couple of things here?

Robert A. Whitman - Chairman and CEO: I knew you were in at – (later) today so – thank you.

M. Sean Merrill Covey - EVP: Sure. So, this is Sean Covey and I lead our International Licensee Partners and just to echo what Bob has said, I think the growth opportunities we've announced in almost everyone of these markets, if you just look at where they are compared to most our U.S. direct offices, they are many years behind and they are doing very well. The penetration levels are very low. So, we feel like there is just years and years of growth ahead. China is our largest operation as you might expect and the potential there is just – I think all of these could be very, very significant businesses. We have operations in Thailand. They're doing extraordinarily well, in Malaysia, in Indonesia, all which have great growth prospects. Looking to Latin America, we find that our operations in Panama and Mexico, Central America are doing very well. Brazil; again is just scratching the surface. But most of these big emerging economies like India and China and Brazil and Mexico are all growing at 25% plus with really unlimited potential for the next 10 to 20 years. It was actually quite an exciting business and as Bob mentioned, we have very, very good teams in place and the quality of the partners is usually the key, but many of these operations have 150 employees, 50 employees, 200 employees and they basically own the franchise for the whole country. So, we've got a bright future, and I think the growth prospects are – it's hard to even put a cap on it.

William Gibson - Andrew Strudwick: I came in liking the business, you got me excited here with nearly 100% incremental margins internationally.

M. Sean Merrill Covey - EVP: It's a good model.

Operator: Joe Janssen, Barrington Research.

Joseph Janssen - Barrington Research: Sean, you mentioned low penetrations. Any color on that as to why?

M. Sean Merrill Covey - EVP: It's just that they're just new businesses. A lot of them have only been around, most of Europe; most of our partners have been around only four or five, six years. So, they're just starting, it's just a lot of entrepreneurial start-ups, some real quality people that's got excited about our content five, six years ago. They get going and just takes time to build the business. So, for example, in Germany, we have an ex-Arthur Andersen partner that runs Germany and she started about five years ago and they've got a few million dollar business that will I think could grow to four, five, ten times as big over the next many years. It just takes time to establish a brand to get some marquee clients going, to build the team around, Joe, and just traditional start-up. Some of our more advanced…

Joseph Janssen - Barrington Research: I appreciate that. One last question, I think we're running out a little bit over here, maybe this is for Bob. You've talked about in the past, I just want to drill down on your sale force a bit. You've kind of laid out the timeframe and when they become profitable. I was just curious, are you seeing any improvements in that on productivity of new hires?

Robert A. Whitman - Chairman and CEO: We are. In the last webcast we talked about our belief that we now – historically we accepted and we thought it is a good model that we invest approximately $50,000 or $60,000 – kind of, a net investment, $50,000 or $60,000 in the first year that a sale person came on. They generated $200,000 of revenue, with 68% gross margins we'd cover their cost and lose $50,000 or $60,000, but in their second year we get all that back plus $100,000. By year five, they will be generating $0.5 million in revenue or in EBITDA or so, a little over that (through) each sales person. We believe that was on a ramp that assumed you went through $200,000 of revenue in the first year, $500,000 in the second, $800,000 in the third and $1 million in the fourth and then $1.2 million in the fifth. We've observed over the last three years in our national account practices and in other areas, where we have narrowed the focus of the sales force, given them fewer offerings and more practice support that they have been able to ramp up much faster than that. So we are hopeful that our new hires will fully cover their costs, plus $1 in their first year and be able to ramp maybe a couple of hundred thousand dollars faster in each of those checkpoints. So we have evidence of it over the last three years. We're now accelerating the hires and expect that that will be the new model we look forward to.

Joseph Janssen - Barrington Research: Are you still on pays? I think you mentioned 2011, 15 and 2012, 20 and then 30 new hires in 2013, is that correct?

Robert A. Whitman - Chairman and CEO: Is Shawn Moon on? He is not. Okay, he is in Europe with our operations there, but we affirmed that last week during our Redwood meeting, so those are more or less our target and those aren't – that's kind of directionally right, to amp this up. What we're doing is hiring these classes around a more specialized way. We'll be hiring a certain number of sales people for our new productivity offering and others in education and others for execution. So they'll come in with a specialty or major, so to speak, and focus on that one area until they get up to a point where they ramp. We think with the supportive practices, getting more repetitions on a narrower set of offerings and a narrow set of target customers that we can accelerate ramp.

Joseph Janssen - Barrington Research: Great, I appreciate and then I guess lastly I'll just say, you guys have done a great job in turning this business into a growing and profitable business, and keep up the good work.

Robert A. Whitman - Chairman and CEO: Thanks so much, Joe. We sure appreciate your support. We are about out of time. Is there one last question?

Operator: At this time, I'm showing no further questions. I'd like to hand it back to Mr. Bob Whitman for any closing remarks.

Robert A. Whitman - Chairman and CEO: Great. Well, we'd just like to express our appreciation to each of you for joining the call today also for your support and guidance throughout the years and look forward to our report for next quarter. So, thanks very much. We look forward to seeing many of you. Just note that on June 1st, in New York, we'll be having an Investor Day. Investor and Analyst Day and we'll get more details out on that. It will be any connection with Barrington. Clayton Christensen, who is one of our Board members and who is on the cover, you may have seen him in Forbes magazine last week, a professor of the Harvard Business School. We'll also be there. We'll have an Investor Day. He is going to be giving a luncheon speech on kind of their latest research at the Harvard Business School on the money management industry and paper that (Ian Smothers) about to write for the Harvard Business review. We thought that would be interesting for you. So please, plan on June 1, we'd love to see all of you there. Thank you so much.

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