Operator: Good day ladies and gentlemen, and welcome to the First Quarter 2012 Franklin Covey Earnings Conference Call. My name is Larry, and I'll be your operator for today. At this time all participants are in listen-only mode. Later we will conduct the question-and-answer session.
I will now like to turn the conference over to your host for today, Mr. Derek Hatch, Corporate Controller. Please proceed.
Derek Hatch - Corporate Controller, Central Services, Finance: Good afternoon, everyone, and Happy New Year. On behalf of Franklin Covey I'd like to welcome you to our first quarter conference call for fiscal 2012.
Before we begin today's presentation, we'd like to simply remind you that our presentation today 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 our 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 Mr. Bob Whitman, our Chief Executive Officer and Chairman of the Board.
Robert A. Whitman - Chairman and CEO: Good afternoon, everyone. We are delighted to have you with us. We're delighted to report on a very strong first quarter. Hopefully you've seen the press release on that. It turned out to be the strongest first quarter ever for our current business and one that also somewhat exceed our expectations. We continue to feel very good about the business, about our backlog, pipeline, momentum, and our outlook for the second quarter of the year and the expected trajectory of our business over the next several years.
Today I'm going to keep my remarks relatively brief to allow time – plenty of time for questions. So, I'd like to touch on three topics. First, some key headlines regarding the financial performance of the business during the first quarter. Second, our outlook for the year and what we see as the very positive trajectory for the business and our growth and earnings potential over the next several years, and then finally the potential for further accelerating our growth with the specific focus on one particular growth opportunity.
So, first, on first quarter headlines; first of those is that our revenue was very strong during the quarter. Our revenue during the first quarter increased to $39.5 million with $4 million or 12% increase in revenue from other areas of the business more than offsetting the plans $3.9 million year-over-year decline in revenue related to the large government services contract which as you know last year at this time was in its initiation phase during the first quarter was.
We're pleased that our total revenues somewhat exceed our expectations and made the first quarter the best first quarter ever for our current business. Our results even slightly exceeded the very strong first quarter we posted last year which was driven by the substantial revenue where you've seen this part of the initial launch phase of that contract. Then for the trailing four quarters ended November 26th our revenue of $160.9 million represented $16.6 million increase 11.5% increase compared to the $144 million in trailing four quarters revenue we had a year ago. We are pleased that our growth also during the fourth quarter is very broad based with revenue growth of 9% in our four U.S. and Canadian geographic direct offices revenue growth of 24% in our National Account practices with sales performance practice scoring 37% in the quarter, the education practice scoring 23%, and the customer loyalty growing 11%. We had revenue growth of 22.8% for international licensee partner offices and we're excited that 18 of our 20 largest licensee partners posted revenue growth for the quarter, and we also had a small amount of revenue growth in our international direct offices.
So, that's kind of the first headline for the quarter. Second headline is that our higher increasing percentage of revenue flowed through the increases and adjusted EBITDA, operating income, net income and free cash flow. Just to maybe touch on each of those, our adjusted EBITDA grew 12.2% for the first quarter to $6.4 million, which is up from $5.7 million for the first quarter of fiscal 2011. This exceeded our expectations and also made first quarter our best first quarter ever for adjusted EBITDA. We really felt particularly good about this since we were up against a very tough comp from last year where our adjusted EBITDA had increased by 63% or 2.2 million compared to the first quarter 2010 driven by the initiation of the government contract.
Interesting for us is historically the only quarter in a year in which we really ever achieved adjusted EBITDA of 6 million has been in our seasonally strong fourth quarter, and just two years ago we had what we viewed as a very strong first quarter when we achieved 3.7 million in adjusted EBITDA. So, for us to exceed 6 million in adjusted EBITDA in our first quarter was very encouraging.
For the trailing four quarters ended November 26th adjusted EBITDA increased to 21.8 million, an increase of 5.2 million or 31% compared to the 16.6 million in trailing four quarters adjusted EBITDA at the same time a year ago.
Net income grew 109% for the first quarter to 1.7 million, which is up from 800,000 in first quarter of 2011 this resulted largely from a positive change which we've been hoping for in our improved effective tax rate, which is now here. For the trailing four quarters ended November 26th net income increased to 5.7 million which was a 5.6 million increase compared to the small net income that we had for the trailing four quarters at the same time a year ago.
Finally, on free cash flow, free cash flow grew 4.2% during the first quarter to $3.5 million, up from $3.4 million in Q1 of 2011.
For the trailing four quarters ended November 26 our free cash flow increased to $13.2 million against the $21 million of EBITDA, which is an increase of 24% or $2.5 million compared to the $10.6 million in trailing four quarters free cash flow at the same time a year ago.
So, in all the key metrics of adjusted EBITDA, operating income, net income and free cash flow, we feel very good both about the quarter and certainly the trailing four quarters in momentum.
The final headline is that our adjusted EBITDA margins also expanded meaningfully in the first quarter, with the significant flow through of revenue to adjusted EBITDA. Our adjusted EBITDA as a sales percentage increased to 16.1% for the first quarter from 14.4% in last year's first quarter. For the trailing four quarters it increased to 13.6% from 11.5% for the year trailing four quarters a year ago.
We expect that future revenue growth and continued to high flow through incremental revenue to adjusted EBITDA. We expect our adjusted EBITDA to sales margins to increase to approximately 18% over the next few years. So, we're very pleased and encouraged by these strong results as we hope you are.
The second topic then of the three that I'll like to discuss is to share our outlook for the year and what we see is the positive trajectory for the business and our growth and earnings potential over the next several years.
Our outlook for the balance of the year first, as you can see in Slide 3, during the first quarter our pipeline of book days and awarded revenue which were commitments made by customers, contracts and commitments grew $3.9 million or 15% compared to the same time last year. This reflects both growth in bookings from existing clients, and our winning of a number of important new engagements. Just share a couple of observation about this pipeline.
First is, the vast majority of our clients are focused on growing their businesses and they are continuing to make essential investments including investment in training connected to key strategic competitive they have. In fact getting more better results from the huge existing investment that companies have in their people is one of the biggest opportunities for improvements for almost any organization.
As a result our pipeline of booked days and awarded revenue increased during the first quarter and as of November 26, as you see on Slide 3, this key metrics increased to almost $30 million from $26.1 million at the same time last year. This is an increase of $3.9 million or 15%.
It's worth noting that this $3.9 million pipeline increase was after deducting more than $3 million in year-over-year pipeline value related to the government contract. In other words as you see, our corporate pipeline grew $7.2 million or 42% compared with the same quarter, offset by a decline of around $3 million in our government -- particularly this government contract.
While this metric only captures booking data for our U.S. operations and excludes the predictable revenue for more than 10,000 licensed facilities we have inside client companies. It provides a good insight into the likely strength of revenue for at least next two or three quarters and is very positive we believe. We also estimate that international direct offices have an additional pipeline of booked days and committed revenue of somewhere between $8 million and $10 million.
This pipeline of booked days and award revenue metric is as I mentioned of actual booking and client commitments. We also track what we call our prospective business pipeline, which is a measure of the magnitude of potential revenue which is currently being discussed with and proposed to clients. We track this every week and the size of that pipeline is also significantly larger than at this time last year indicating strong momentum which we expect will convert to bookings in contractual commitments in the coming months and quarters.
So, in summary, this brings to our first quarter performance, the momentum we're continuing to see in the business is reflected in both the increasing size of our pipeline of booked days and awarded revenue and the magnitude of our prospective business pipeline all increase our confidence in our previously provided adjusted EBITDA guidance range of $24 million to $26 million. We are clearly focused on hitting the high end of that range, and look forward to updating our guidance in future quarters.
On a longer-term perspective, we maybe discuss what we see as a positive trajectory for the business, and our growth in earnings potential over the next several years. We said before that we expect to be able to continue to achieve strong revenue growth in the future of at least double-digit levels, and we're pleased that our revenue growth over the past two years has been higher than this.
We've also said that we expected between 30% and 40% of our increased revenue should flow through to increases in adjusted EBITDA and we're again pleased that our revenue flow through over the past few years has also been higher than this.
Achieving these economics should drive aggressive growth in adjusted EBITDA earnings and free cash flow, while significantly expanding our adjusted EBITDA margins in coming years. The power of our operating model can be seen in this Slide 4, as shown assuming that we achieved say 10% compounded average growth rate in revenue over the next three years and the 35% of that increase in revenue flow through to adjusted EBITDA. Our adjusted EBITDA would increase to between 38 million and 40 million and this would translate into a compounded annual growth rate of adjusted EBITDA of approximately 22% each year.
The percentage growth rate in operating income and net income would obviously be even more significant and free cash flow generation would be very substantial. Under this scenario our adjusted EBITDA to sales margin percentage would increase to approximately 18% by the end of fiscal 2014. It is also indicated in Slide 4 so you can see the ranges, any acceleration in the rate of revenue growth beyond the 10% that I used or the flow through percentage or combination of the two would have a compounded impact on growth and adjusted EBITDA as well as on free cash flow operating income, net income etcetera and you can see what those different growth rates would be. But even at 10% you would be generating 22% or so compounded annual growth rate in adjusted EBITDA under this example.
Slipping back from the data for a minute, while the range of possible outcomes included in Slide 4 shouldn't be considered as formal guidance, we are offering this degree of insight into the future; one, to provide you with an idea of the growth in earnings potential that we see in the business over the next several years; and second, because we are actually committed to achieving results of this magnitude the data included in the Slide 4 actually brackets the general parameters of our current three year plan and this plan isn't just the typical Excel spreadsheet, this is a plan which has been backed up by a detail at the cost center level three year budget which has been signed off on and committed to by all of our top (20) leaders. Every one of this folks are achieving something very close to 40 million of adjusted EBITDA by approximately at the end of fiscal 2014.
Our short and long-term compensation plans are actually tied the achievement of the key metrics include within the performance parameters outlined on this slide and most of the compensation is tied to realize an increase in share price which level of growth should warrant.
We have confidence and with the strength offerings, practices channel and our leaders we can achieve it and this confidence is actually supported by the trajectory of our revenue and adjusted EBITDA results over the past few years which were themselves part of the prior multi-year plans which we are grateful to have been able to achieve and exceed. So I hope that's at least some helpful.
The final topic I'd like to discuss today then is to focus on the potential for further accelerating our growth and potentially moving it up on that grid some. I'd like to give a specific emphasis on one particular growth opportunity rather than giving too much information on too many.
But first, as significant is the growth prospects outlined in Slide 4 are -- we actually do believe we have the opportunity to accelerate this growth. In our letter to shareholders which hopefully most of you have received we identified four factors that differentiate us from others in the training and performance improvement industry.
These factors have driven our growth over the past years and really believe will be the key drivers of our growth in the future and we believe we have significant opportunities for growth and for accelerating growth in each of these areas.
These four factors are first, our world class intellectual property, the impact which is reflected in our strong gross margins which on average are in the high 60s through our offering. The durability and longevity offerings measured our offering and our content is – the longevity is measured not in months, or even in years but in decade.
Finally, the magnitude of the worldwide revenue which each of our practice area offerings can generate as I noted in our letter to shareholders, two of our core practice offerings have generated more than $1 billion each in revenue to-date and our new practice area offerings have already collectively generated more than $200 million in revenue over the past few years.
We expect each of our practice area offerings to only become $500 million to $1 billion offerings in terms of cumulative revenue and we're off to a very strong start with our new type choices to extraordinary productivity (world launch tour). We think this one has the real potential to be a real blockbuster offering for us.
The second thing that sets us apart is, our focus on helping clients achieve these transformational organizational results, while providing clients with a highly flexible continuum of delivery options. Note in the -- the strength of this factor is reflected in our increasing revenue from existing clients, which was up 12% last year and the increasing portion of our delivery which is either technology delivered or technology assisted.
Three years ago, approximately $7 million of our revenue fit into those categories. In the trailing 12 months approximately $40 million of our revenue is either technology delivered or technology assisted in one way or another. So, our investments and focus on our continuum delivery options is significantly increasing our scalability.
Third, our global footprint which is reflected in the increasing size and productivity of our sales forces worldwide and our increasing number of global clients. Then fourth, the depth and breadth of our influence reflected in the large and growing number of book titles reaching top 30 status, which we have three right now, three of the 30, the millions of individuals who are consumers of our content each year.
So, each of these unique differentiators provides us with opportunities that cause our margins and growth rates and the nature of our business to be different than the typical industry participants, and each has growth -- really plenty of growth opportunities and we got specific initiatives in each, but I'd like to just briefly focus on one particular area of opportunity, which is further accelerating the already strong growth the international licensee partner network.
As you can see on Slide 5, over the past seven years our 35 international licensee partners' gross revenues have increased from approximately $29 million in fiscal 2004 to approximately $75 million in fiscal 2011. This growth resulted in more than doubling of our licensee royalties and other licensing revenue from $5 million to $12 million with licensee royalties and sales growing from just under $4 million to approximately $10.5 million.
During fiscal '11, our international licensee royalty and related revenue grew 14% compared to the prior year and this increased 22% during the first quarter compared to the first quarter of fiscal '11.
To help drive – continue drive this, we now include eight of our top licensee partners – meet the leaders of our licensee partners in our business unit leader and general manager meetings, so they are really part of the team, they're learning everything at the same times so that we can more systematically roll this out, and we're working with them closely to accelerate their growth.
Even without a change in the current trajectory we expect our licensee partner revenues in our royalties to double over the next four to five years, and we're very encouraged and excited about that, but in addition to this organic growth we see opportunities further accelerating the growth of the international licensee partner channel including the following. I'm just going to touch on them, and in the Q&A we could go into more detail or offline. But first up, opportunities to increase our penetration within licensee what we call home countries. As noted we have 35 international licensee partners, who have rights to represent us in the 141 countries. As these licensees have built their businesses they generally focus primarily on their home country, say Germany, Belgium, Panama et cetera.
With this focus approximately two-thirds of all of our licensee revenue comes from just these 35 countries. But even in these countries the fact that they've grown well, that they started just recently they still have relatively low penetration even in our home countries and we always to our own direct offices in North America where we still have very low penetration as well as potential if we could just over time get these exiting licensees in the home countries to where they have the same penetration level we already have with our relatively low penetration in our direct offices that would increase our licensees gross revenues by almost 100 million and increase our royalties by 14 million. So, that's a big opportunity and we are on that every day, they are adding – sales people are doing it. I'll just touch on the others.
The second opportunity lies in activating non-home countries that are covered by existing licenses and this is only 25 million of the current licensing revenue comes from non-home countries these licensees – the penetration in these non-home countries is even less than in the home countries for the potential student.
Third, the sale of new geographic licenses; with our focus on helping our existing licensees to grow their businesses we have not added many new licensees over the past few years, but we've now identified 19 new countries in which we are actively pursuing new licensing partners, we expect to see some of those advantage here in the coming quarters.
Fourth, opportunity is to expand our various practice offerings into our licensees it's interesting that 74% of our existing international licensing partner revenue is coming from just one of our seven practiced categories (that of) leadership.
Significant portion of our growth in North America has been driven over the last year by the other six practiced categories and expanding these practiced categories it is a huge opportunity for accelerating their growth. An example of that – potential can already be seen in our five choices to extraordinary productivity launch where for the first time we had a simultaneous, uniform, coordinated go-to-market launch in almost all of the home countries in the world and in many of the non-home countries.
Finally, there are opportunities for helping certain key licenses to accelerate their growth by helping them to recapitalize their businesses. Several of our most rapidly growing licensee partners have extraordinary growth opportunity, they have already grown really rapidly, but they are constrained because they don't have the working capital to grow. So, helping them to find ways to release these constrains could also allow them to further accelerate their growth.
For example in India, our team started about six years ago with 7 employees, they have 185 today, but they are just still scratching the surface. So, we're very focused on taking advantage of these additional growth opportunities to accelerate the growth of our licensee network and again be happy to amplify any of these opportunities in the Q&A or offline.
So in conclusion to summarize again, our first quarter financial highlights where the revenue growth is very broad-based with sales increases in our direct offices in North America, our direct international offices, I mean they are now in our international licensee channel, international account practices and then books and royalties.
Adjusted EBITDA increased 12% to $6.4 million compared to $ 5.7 million in the prior year. On the trailing four quarters its up 31% compared to a year ago. Our margins increased, our EBITDA margins increased to 16.1% from 14% a year ago. We are very pleased with the results and the momentum to our business. We expect to be able to continue to achieve both strong top and bottom line growth in fiscal 2012 and beyond.
We also believe the differentiating factors discussed a minute ago will both help us to achieve this growth and continue to set us apart in the important strategic position and strength in the marketplace. So, thanks to each of you for your continuing support and guidance.
Let me now turn the time over to Steve Young for some brief remarks and then open to questions. Thanks very much.
Stephen D. Young - CFO: Thank you, Bob and hello, everyone and a Happy New Year, and to Derek, Happy New Year. I am also pleased with our first quarter results and look forward to exciting things in the future. Bob gave a wonderful summary of our earnings, so I will just mention really three quick points related to our balance sheet, our taxes and our share count.
First our balance sheet, our balance sheet remains strong. I don't think that when you review our balance sheet, you will see any unexpected amounts or unexpected changes in those balance sheet accounts. We know that in our first quarter of each year, our accrued liabilities will decrease significantly due to our payment of fourth quarter and annual revenue and earnings-based compensation. So that cash is always used in Q1. So, you'll see that and that's normal and I think you will see that everything related to our balance sheet is clean and our balance sheet remains strong.
Second our taxes, our income statement reflect a significant decrease in effective tax rate that, Bob spoke of. For several years, we were unable to report the benefit of foreign tax credit. In some quarters our tax expense actually exceeded our pretax income. Now, fortunately, we are able to reflect the benefit of current foreign tax credit. So, the current tax rate of about 46% is more typical of the effective tax rate that we will see for the remainder of this year and in the near future.
Please also as you think of taxes remember that we do still have net operating loss carry forwards and unused foreign tax credits that will give us about $12 million plus of tax relief in the future related to cash for taxes.
Third, our share count. Again, as you look at our income statement, you'll see the outstanding share count has increased by about 700,000 shares compared to last year. You'll remember that this increase is due primarily to the exercise of $1.9 million warrants last year.
So, as you think of our share count, please remember that in our future, hopefully, when our share price gets a little bit over $15, right now its $15.12, then our share count will decrease significantly as the management loan program is resolved and 3.4 million shares will come out of our outstanding share count.
In the meantime, please don't be surprised because you know that there are still 4.3 million warrants outstanding that could be exercised for the next 14 or 15 months. That exercise, if it happens and depending on the price would of course increase our outstanding shares. So, we don't want to be sort of surprised as the count goes up and then want you to be pleasantly surprised when and if there share count goes down significantly.
Sorting through all of that a lot of people ask us what we see related to the share count, and what we see is if we get to a point where the management stock loan program is resolved and if the warrants were exercised with an extra price – exercise price similar to the warrant exercise last year, and if we get to a share count that our share-based compensation that is tied to share count those shares are awarded, then we see a share count of about 16.5 million. Of course that could be higher or lower depending on a lot of variables, and we love to talk about that but that's kind of the way we see it. So, Bob, those are just the couple of extra points. As I said, I am also excited about the core and excited looking into the future. Thank you.
Robert A. Whitman - Chairman and CEO: Thanks, Steve. I think we'd now like to open it for questions and I guess turn it back to the operator to tell us how we do this.
Operator: Joe Janssen, Barrington Research.
Joseph Janssen - Barrington Research: So, my first question, maybe this is for Bob. I am trying to get a sense of the quality of your pipeline in terms of like the visibility. You've talked about this in the past you gave us some color on the conversations with clients within the pipe. In your prepared remarks, you mentioned that they are committed to help growing the business, but can you maybe take it a step further and dive a little deeper?
Robert A. Whitman - Chairman and CEO: In terms of – as our pipeline you are saying?
Joseph Janssen - Barrington Research: Quality of the pipe like you've put out like what you've seen in RFPs in terms of taking sales calls you had kind of given some metrics in the past and I just kind of want to get a feel of where that's trending?
Robert A. Whitman - Chairman and CEO: Great and in fact Shawn Moon who leads all of our direct sales force, maybe I'll just have Shawn make some comments and then I'll follow-up, Joe if it's okay?
Joseph Janssen - Barrington Research: Yeah, it's great.
Shawn Moon - EVP, Global Sales and Delivery, Government Services and Education: Joe, good to talking to you. We feel encouraged by the strength of our pipeline and the visibility in the pipeline. We feel like it's better than it has been in the past, and the utilization of tracking tools is better than it's been in the past. One of thing that is encouraging to us is the nature of large deals. They are bigger and more prevalent than they've been in the past. So, that allows us to be a little bit more predictive, as an example the large government contract that Bob referenced. That's three-year contract and very predictable -- well mostly predictable quarter-by-quarter. So that gives -- it gives much more visibility into -- in how we're able to track that predict.
Joseph Janssen - Barrington Research: What was the average revenue per client in the quarter? I think last quarter it was up -- I think last year it was up 12% you said where large content you quantified them as a 100,000 plus that was also growing, are we still seeing the same trends?
Robert A. Whitman - Chairman and CEO: We are. We are actually Joe we've been – if you were in our conference, you would have seen that we got a list of about 30 large accounts on the books that we're working on. Last year, excluding the government contract which would have skewed the data we had about 12 – just over 12% growth in revenue per client and that has continued in the first quarter, so we've had – again when you exclude as we said earlier we had little over 12% growth in revenue from our geographic offices during the first quarter. The only place that declined really was this government contract which we knew. So that – most of that – some of that course is new clients which we – but most of the new clients are being driven -- a lot of the new clients in the first quarter were driven by the new type choices launch so not a lot of those converted to a lot of revenue in the first quarter. So, primarily I would say that the exact number we had provided, it's roughly in the range of 11% to 12% revenue growth per client also during the first quarter. Just stepping back, because you're asking kind of the visibility question, let me just say there are four stages in that question. We have actual booking which is this pipeline of booked days and awarded revenue and we've given that. The pipeline of potential stuff is currently being disused with clients. We know how big that is and we have percentages applied to different categories of these in A, B, C, D percentage that gives a weighted average pipeline there. This is stuff that's currently being discussed and all the more we got into the pipeline we mentioned that that's also much larger than it was at this time last year. The third element is our marketing event pipeline, a lot of what we do, nothings sells for us like an experience with our content. We have these two hour marketing overviews where the right targeted buyers are invited. We've got more than double the number of those schedules this year, one because we've proven that they really work, but the number of those, that will drive new opportunities into the potential business which eventually will translate. Then we've also got – something that gives number of face-to-face calls on clients that we track. So, when you look at that whole thing, the visibility from the – from what's already been booked is two to three quarters out or one to three quarters. What's in the pipeline is two to four quarter. The marketing event drives stuff from two to four or five quarters and the face-to-face meetings get started and those will move to more than a year. So, increasingly as Sean said, we feel like we have some visibility where we can think of a three-year plan and say, we have good visibility for a quarter or two, and good visibility about the lead metrics out beyond that, so that we can really be thinking as we said we being. So, we actually – we think that, hey, this month might be looking a little soft or this one looks really great and what can we do about it a year out that's helping us in our predictability. Is that response of your question?
Joseph Janssen - Barrington Research: No, it does it's very helpful I appreciate that. I'll jump back in queue.
Operator: John Lewis, Osmium.
John Lewis - Osmium: I guess this is a question for Steve. What percent of EBITDA should equate to free cash flow in just in a steady state environment not obviously you guys had some growth, but I'm just trying to get a feel for that?
Stephen D. Young - CFO: So, in the slides there is a part that I didn't really refer to but it's Page number 9, which shows for the quarter and for the year our net cash generated which is our view of free cash flow. So, John, it's probably easier to talk about on a year basis. So, if you look at the four trailing quarters we're $13.1 million to $13.2 million of net cash generated on between $21 million and $22 million adjusted EBITDA. So, that's kind of the relationship that we would see going forward for the next.
John Lewis - Osmium: I understand that. I guess, my question is in a steady state environment because I guess my understanding is that business model it was going to become less capital intensive and you picked up the government contract so the capital intensity has gone up, so I am just to trying to connect the dots to what a steady state EBITDA to free cash flow ratio should look like. My understanding is ratios declined giving us government contract and the revenue growth is being taken up with the working capital?
Stephen D. Young - CFO: Well, the free cash flow as a percentage of adjusted EBITDA will change – the percentage will change consistently as they both increase. I think it's the gap between the two that will remain consistent. So, as an example, just say that right now where relationship is for example 21 million of adjusted EBITDA to 13 million. If the 21 goes up by 5 to 26 then we'd expect the free cash flow to go up 5 from 13 to 18. That percentage will be less, but it is like all of the increase in adjusted EBITDA is flowing through to free cash flow.
John Lewis - Osmium: We can talk more offline about that. I guess, my next question was in light of success factors in Element K transactions in the fourth quarter clearly there is a ton of demand out there from customers given their growth rates and the multiples that strategic buyers paid for these businesses. I am just curious what is your strategic focus, you guys talked a little bit about it but really to meaningfully drive this distribution channel with LiveClicks, InSights and other offerings and I am just curious on what's going on in that front?
Robert A. Whitman - Chairman and CEO: Maybe I'll just respond to that, John. Probably a little different than some of the companies – I'm not saying whether it's better or worse what it is different, is that there are some companies who have picked the modality to which they are going to deliver their content. They are going to be a technology-based delivery mechanism where they going to be a subscription service and then what they do is the best they can to deliver the results or whatever have chosen the modality. We have had a different view which is more a continuum of delivery that would say that we want to be sure that those people who -- those customers who have picked them up if they want to pick modality we want to make sure we can deliver in modalities. But more often than not for us we are looking at a continued delivery that meets who our company is engaging us to try to get some kind of transformational results and so for them the result is the question and they want to make sure that we can address that in a wide range of ways. So, what we've done is develop these continuum that has on one end -- your (self service) where they can buy the technology and self pay the person can take it and that is great for many of their frontline employees. There may be middle level employees who are because they are leaders -- middle line who will go through and want to have some on-site delivery with blended delivery to make as much impact that they can, with the scalar across the lot of leaders and then at the top they may want to have a very hands-on help -- which would be a fully premium service for us. So, I think what's happening John really for us is we're not per say I know – I recognized the multiple of those companies and it'll be great if they are able to maintain those multiples, if the reality turns out to be as high as their multiple. We will probably not be one of those companies that's trying to just be pick a modality. On the other hand if we can deliver for a major point across a range of modalities and really make a big impact. For us the revenue per client is bigger. The revenue goes on for a long time and so for us, as we said, we've moved the portion of that revenue, it is technology delivered or technology assisted as part of the engagement that has gone from roughly $7 million to roughly $40 million over the last three year really. so for us, that's only a very small portion of that's driven because we said we want to find out how much technology stuff we can deliver. There is about $6 million of it being driven by that, but the rest of the growth has come from same, what we want to do is have these strong value propositions of transforming the results and we've got a – and we're platform agnostic, we want to design it, so it can meet your need. It turns out that the way we had delivery options, we can meet any pricing competitive, so for us we don't lose – we're not losing deals to these people who are only modality-driven because we with intellectual property sales or technology et cetera, we can compete head-to-head with them. But we're playing a different game than they are, but very cognizant of the fact that this technology investment allows us to be very scalable. So I think we are continuing the investment every year in the technology side. We've got a big focus on integrating everything that we can. Anything that can be delivered technologically, we want to make sure it's available. But rather than telling, trying to sell the customer on modality we want to sell them on the result and tell that that we have it available through any modalities. So, I don't know if that's helpful at all.
John Lewis - Osmium: So basically what you are saying is clearly there is a lot of customer demand for the modality to be delivered some online component if it's a webinar clearly is at $7 million to $40 million, so there is the consumer demand there. I guess my next question is given the enormous growth rates and the interest out there just industry wide, do you have the right distribution to sell in with client partners or do you need more people in inside sales force or how do you continue to grow the modalities the customers are interested in given the economics presumably or significantly better than consulting.
Robert A. Whitman - Chairman and CEO: Yeah, in fact, John, just we really do no consulting. We actually do not – about five years ago, we did have an organizational consulting group that had about 20 people that we disbanded and sold off. So, we actually do no training…
Stephen D. Young - CFO: Training.
Robert A. Whitman - Chairman and CEO: Just to reference that. So, for us it's just a question on the continuum. Do you want a premium service, like I can get at Gartner? Gartner they are reporting every quarter and I'm very proud of the fact that in addition to this, there is no-hands on and the (self-served) model that they also have an increasing amount of businesses that's in the – that is a premium service that include some where they have a human being that's involved, that's how we see. So, I'd say this; again it depends on when you're looking through. We don't visit many customers who are saying, I have the demand for online learning what can you do for me? There are some. More, they have an execution problem and they want to know how you can make this available to them across the range of their whole things. So, for that question our practice led the way we scale this is through adding sales people, front end you mentioned some great points, which is increasingly we'll have front-end marketing people on the phones and e-mail programs and so forth that are driving to advance the driving into this pipeline. But for us, if we can get people committed to solving the problem and then have the modalities available so that whatever they want to do, we can deliver at a quality and cost that it just competitive with anybody who is primarily modality focus that's really our strategy and there is no lack of opportunity there, I mean, you think there are people like Element K who have gone to sell, who were a great company we love them and they are selling a modality into the education space, but I wouldn't, I don't think, I don't know that I'd trade their value proposition for ours in that space. I think it's a wonderful offering, but you're going into transformer school it allowed us to get to a more than we discussed over 700 schools, Sean.
Shawn Moon - EVP, Global Sales and Delivery, Government Services and Education: Yeah.
Robert A. Whitman - Chairman and CEO: So, I don't know if it's helpful really?
John Lewis - Osmium: It's helpful, I mean it's fair and I appreciate the color and I'll leave it that, we can talk more offline, but I'll leave it as.
Robert A. Whitman - Chairman and CEO: But the really question that John we would be glad…
John Lewis - Osmium: I appreciate. I guess just that the point and value differences Element K you know about 47 times EBITDA, two times sales just because they had the online learning component and I'm clearly there is a lot of interest in the marketplace given the economics that…
Robert A. Whitman - Chairman and CEO: So, I think we need to do better job John, explaining. This is the first day that we've ever said we have $40 million of revenue these are technology delivered or technology assisted, and Jim point I think if I understand one of your points is, hey fine you may have the strategy, but let me make sure people understand the extent to which you have this technology based delivery because it gets a lot higher valuation of people understand you've the scalability and if they think you're kind of a body shop that there is bunch of consulting and we really need do a better job of explaining that.
Operator: James DeYoung, Credit Suisse.
James DeYoung - Credit Suisse: Just had a couple of observations and questions. The international licensee royalty grew really nicely in quarter I think that was up 23% year-over-year?
Robert A. Whitman - Chairman and CEO: Yes.
James DeYoung - Credit Suisse: So, if you could expand upon that a little bit on what percentage of revenue is coming from time management versus older products?
Robert A. Whitman - Chairman and CEO: Great. I've Sean Covey let me ask him to as you know Sean heads up the international licensee efforts.
Sean Covey - EVP, Global Solutions and Partnerships, Education Practice Leader: So, our international partners the revenue primarily is right now coming from our leadership practice which is about 74% of it so very little comes from time management, about $5 million total of $75 million. So, with the launch of this new productivity solution that we've just spent last couple of years building we think this is a huge opportunity for us get this going internationally. So yeah, it's a small piece and that's one of the big opportunities we have. The licensee network is pretty young relatively speaking and so like Franklin Covey Direct many years ago, we kind of started with seven habits and other leadership offerings and then began to grow to other practices. They are kind of on the same trajectory starting with seven habits, other leadership solutions and so forth and so again we think the opportunity is huge for productivity, time management and then also for other offering execution and other practices. Does that help?
James DeYoung - Credit Suisse: Yes, that's helpful. It leads into my next question which is it seem a lot of this new practices and products that you've developed over the last couple years really are in their infancy in terms of being introduced internationally. So when I look at and I greatly appreciate the visibility that you shared on the call with, where you hope to get to, I think $40 million in EBITDA exiting 2014 gets you around $2.50 a share on EBITDA. But it's hard for me not to think that that's an incredibly conservative number because I think you grew EBITDA as a Company almost 59% last year and $24 million to $26 million this year suggests 14% to just under 24% EBITDA growth, and when you lay out the pipeline that you do and then you talk about --actually just scratching the surface it seems to me that $50 million is really the number for 2014, it's one thing to be conservative and not want to miss numbers, but it's another thing to be so conservative that it's hard to take you seriously. So, now I challenge you to really get out there and put some numbers out there that are believable? The last question I had was can you expand a little bit on the sales performance practice that had a very good quarter, extremely strong last four quarters and give a better sense of what you think the longer range opportunity is to expand that offering?
Robert A. Whitman - Chairman and CEO: Shawn Moon do you want?
Shawn Moon - EVP, Global Sales and Delivery, Government Services and Education: We're really excited about what's happening with the sales performance practice. Sean and I spent couple of hours this morning having this very discussion on how do we expand this practice and its capabilities more into our international licensee operations. One of the key things that we've done on the last little bit around our sales performance practice is really mainstreamed it into the main body of Franklin Covey and made the designation that we're going to not focus on lot of things that are not important and we are going to focus on a few key things that are important sales performance practice being one of those. We're pleased that we've had very, very significant growth. We think our path forward is going to be accelerated as we continue to grow within our domestic offices, and we've over the last couple of years, we've doubled the size of the sales force, and doubled the size of the delivery force and we're seeing that start to bear fruit and that's exciting. But in addition to that doing the same kind of mainstreaming efforts with our licensee partners that are eager to have this and here report have not had access to it. So, that includes a process of certification, it include the process of ensuring that we have strict center line and churn quality of delivery as we take this out it's a little bit more skill based and in some cases little bit more sophisticated and complex in some of our other offerings. So there is some work to do there to ensure that we maintain the high standards of quality that we have. But we're excited as we look forward with sales performance and our ability to scale that with our licensees.
Sean Covey - EVP, Global Solutions and Partnerships, Education Practice Leader: Right now, we only have – this is Sean Covey. Of our 35 partners only one of them is doing significant right now with our sales performance practice. So, we think opportunity there along is very, very big.
Robert A. Whitman - Chairman and CEO: So, Jamie, to your point. Obviously, there are harder and easier ways to grow, but one of the easiest ways to grow is to get these center line – these offering expanded around the world because each of them has a ton of potential. So, for us the last few years, we've been spending kind of getting everything clarified here is what the marketing event looks like, here is what the product looks like, here's what the product looks like, here is what the translation is into your country, here is the platform that allows you to easily scale this. We've gone through the phase of working on joint contracts together, but we're really – as I said, we stepped across the – we really stepped across the chasm on 5 Choices launch this fall and we'll continue just to say, look we're going to be worldwide from day one on the new productivity offering. We're going to expand executions. We've got eight new countries right now involved in a big execution effort to get them up to speed this coming year and then we'll sell divide into this and each year it will go from there. So, in addition to do organic growth our intention is to sell it, so we accept the challenge.
James DeYoung - Credit Suisse: One last question, if I may. So, when you talk about selling in internationally to places like Brazil, India and China. Is more of the opportunity today taking one of your existing large customers like Marriott or Frito Lay and converting that business internationally into additional sales or is it more greenfield opportunity at this point?
Robert A. Whitman - Chairman and CEO: The way you post the question, I'd say it's more greenfield than it is expansion, but there is big opportunity in both. We're looking in these countries. It's interesting, my last trip to India, every evening we had events with business people, and of course you would have – you'll have a handful of those that are U.S. company and customers who came because they already know our offerings already doing it. The remaining more who came because they knew the Company, the Franklin Covey, they were thought leadership, but were interested in the topic of execution or topics of (the ultimate). So, we have a global sales initiative that focus on these truly global accounts and it involves our team from our licensees, the team from our direct offices coordinated by Shawn Moon and Sean Covey and they work together on a number of large global deals and the number that we're winning is going up a lot and so there's a big opportunity for expansion around the globe, but we figure out how to get that seamlessly and so we know exactly how you handle that. But still relative to any individual country business, it probably represents less than 10% of their business. They're going out and getting the local companies and hitting those and so there's enormous numbers of account that are being addressed by the licensee networks outside the U.S.
Shawn Moon - EVP, Global Sales and Delivery, Government Services and Education: But it's also doubled in the last year and a half, our number of global sales, the global deals have doubled and again we think that's a big opportunity as we get the international partners coordinated with the direct offices here in the U.S.
Sean Covey - EVP, Global Solutions and Partnerships, Education Practice Leader: The nature of our office is more strategically on our solutions and more pervasive they're going to be across large organizations which by nature goes across boundaries.
Robert A. Whitman - Chairman and CEO: Just last point, last we call Redwood Council Meeting with their top 20 leaders we invited the person who made the buying decision for the large client in Europe where we had a – we are going to have a global deal to come over and kind of beat us up and tell us what we did well and what we didn't do so well. Thankfully it was mostly stuff – he was nice and did mostly said that we did well, but we weren't pushed to what do we need to do better because we have a unique footprint. That global footprint is unlike anybody else in our industry where we can actually win these things and so as Shawn said we doubled this, there's big opportunity for growth there. But I think the big of the two much more of our growth will be driven by penetrating local markets than it will be just expanding, but we're going to welcome both. Thanks, Jimmy, I know our time is about up, but if there are other questions, we're happy of course to continue to explain you all out.
Operator: Bill Gibson, Legend Merchant.
William Gibson - Legend Merchant: You went over most of what I want to understand, but I do have one question and it relates to Europe. Are you seeing any impact from your problems there?
Shawn Moon - EVP, Global Sales and Delivery, Government Services and Education: Europe, you know so far no. Europe is growing healthy. We've had problems in particular countries that have had issues, but generally so far we haven’t seen much impact. We had healthy growth in the first quarter. We had healthy growth last year. We've had problems in the Middle East, a little bit with Egypt obviously and Libya, but so far we haven’t felt it. We are watching carefully for what’s going to happen, but Europe is even younger than our presences in Asia and in Latin America and so we think there are big opportunities still in Europe and we've got still an impact.
Robert A. Whitman - Chairman and CEO: I think probably the reason for that Bill and we all know the economy is not great in Europe but we – as we tell our own people, as he asked if we were GE or somebody who already has a 40% or 50% market share, and yeah we probably ought to be affected by the GDP of these countries will affect us. But with the competitive advantages we have and the small penetration we have our job is to go out and take market share if the economies and it grows more slowly we just need to win greater market share and so I think the world is having an impact but our share that's increasing in some of these countries and we're not feeling it.
Operator: Joe Janssen, Barrington Research.
Joseph Janssen - Barrington Research: With these potential 19 new partnership agreements, where like geographically where are you seeing any of these opportunities?
Shawn Moon - EVP, Global Sales and Delivery, Government Services and Education: Yeah, well, most of the world is already licensed. Most of these are in Africa. Got a new licensee down in South Africa which is a good sized economy, but most of it is in Africa, Mongolia. We also see a lot of opportunity with some of the current partners that have maybe more territories than they can handle and stripping off some pieces and giving more focus to particular countries. But they're generally smaller economies. So, the bigger opportunity is just penetration with the partners we already have in their home countries and in their satellite countries.
Robert A. Whitman - Chairman and CEO: As Shawn said, I think the other is in the first 19 new licenses that are in smaller economies that we also have this opportunity. Since two-thirds of our licensee revenue comes from just 35 of the 141 countries under license. This opportunity is either see how they grow fast there or to find a way to work at a reasonable deal with our licensee partners where we do a win-win agreement, where we get some of those countries back and they helps them and helps us there is an opportunity for growing there too.
Joseph Janssen - Barrington Research: Certain contracts like in terms of timing like, I mean, to a degree to certain (unregulatory) for X number of years or is that all negotiated?
Robert A. Whitman - Chairman and CEO: So, this tends to be five year agreement and so we have a chance to relook at the stuff and they have – there is a motivation on their part if they're not moving to penetrate the country, they have to pay a minimum royalty payment in that country. So, it's a reasonable thing to say, like you've been there for four or five year. Can we agree on a plan so you penetrate country act, and if not, hey, you won't have to pay the minimum royalty payment for something you can't form, so to speak, and we can get it back and get a team in place there that can grow it and we're aggressively pursuing doing that.
Stephen D. Young - CFO: Just to give you a feel for this. Most of our partners are $1 million to $5 million businesses, we've got a few that are a lot bigger, most are in the $1 million to $5 million range and so they're thinking a lot of low hanging fruit in terms of growing and penetrating in a lot of these countries. I'm getting from $1 million to $5 million to $10 million to $50 million businesses is the opportunity and we can do that in many, many countries across the world over the next four or five, six years.
Robert A. Whitman - Chairman and CEO: That's what driven a lot of the growth has been small startups becoming – there eight or 10 of them have become pretty good size businesses, $5 million to $20 million businesses -- that $5 million to $15 million business, I guess and they're now really gaining strength. So we've got plenty of opportunities to either get back or help them to make the investments necessary to grow in some of these ancillary countries.
Joseph Janssen - Barrington Research: Just for clarity, Bob, last quarter you referenced, you know increased visibility or no visibility, but an acquisition strategy, is this, what you're referring to?
Robert A. Whitman - Chairman and CEO: I just mentioned there would be opportunities too, I did mentioned last call that there would be some opportunities to help grow the licensee network, one, in some case you might decide to reacquire a license in the country. In other cases, you might find ways to provide with some capital to help some of these licensees who are constrained by capital -- where their growth is constrained not by opportunity, but by capital to try to figure out some way, and that's what I was referring to last time. It's not huge amounts of capital we are not trying to become capital intensive. But small investments of $300,000 here and there could add up to a couple of million dollars that could really help to accelerate growth in some of these circumstances.
Operator: George Santana, Ascendiant.
George Santana - Ascendiant: I'll keep quick filling the time. Considering the sales of cycle and you've addressed this in a couple of different ways, but are you seeing a lengthening or shortening of that sale cycle at all? Follow-up question, any guidance for the current quarter?
Robert A. Whitman - Chairman and CEO: I'll let Shawn?
Shawn Moon - EVP, Global Sales and Delivery, Government Services and Education: Yes, I'll speak to the sales cycle. We actually are seeing an acceleration of the sales cycle as the byproduct of our go-to-market strategy Bob talked about the event, the strategy and one of the things that we know through our many years here is that when people have an opportunity to experience the content and not just to get an intellectual understanding, but to get an intellectual understanding and a visceral understanding of how this IT solves problems on the teams in the organizations and in their personal life it does accelerate how they buy. Bob mentioned the dramatic increase in the number of events as part of our go-to-market efforts this year over than last year and so we're starting to see more activity.
Robert A. Whitman - Chairman and CEO: On the second half of your question, well, we don't give our guidance because specifically by quarter. I think we expect top and bottom line growth in the quarter.
Operator: Julian Allen, Spitfire Capital.
Julian Allen - Spitfire Capital: Just switching gears for one quick question, could you talk a little bit about your residual exposures to the legacy products business? I noticed that on the balance sheet the third-party receivable is now to about $6.4 million, could you give just a quick comment on A, how that business is doing and what the residual exposures are, be they for the EDS, sublease or other contracts?
Robert A. Whitman - Chairman and CEO: I'll give you the headline thing. We have to be going to any detail -- but we will do in short. The short answer is the residual liability has gone down dramatically over the last few years. They're down to the residual liability came in one of three forms. Retail stores, they are now down to less than 12 stores left. A year from now they will have no – essentially no stores remaining and so that liability has gone from having 60 leases down to 12 to that will be close to zero. We had the second which was the EDS warehouse agreement. We worked out a new deal with them and half of that liability is now resolved and we expect the rest of it to be resolved through the leasing out of the existing warehouse. Then the final area is just office space here, which is a relatively small exposure and they are talking about small amount per year, and we've had some good success at finding new tenants. So, as a just a general idea is that the liability is shrunken down dramatically. The receivable that's outstanding, we have allowed they are payable to us to increase in certain times to allow them to get some of these things resolved, where they bought out of store leases and things like that. Today, I think we received a $3 million payment or so from them which will significant reduce that. So, we'd expect that liability to continue to decline. This is the time of the year when they have the most cash of course. The business generally is holding its own, Julian they've -- with the restructuring and so forth that's gone on, they are basically on a basis where they continue to generate around $3 million or so of positive cash flow and EBITDA. There are no real big -- for them that's just a steady state thing that eventually just continues to distribute out. We get a share of that cash flow starting in about six months that will further reduce that liability. So, I don't know Steve if you want to add anything to that.
Stephen D. Young - CFO: No, I agree with the balance. We expect to be significantly lower in the quarter -- second quarter.
Robert A. Whitman - Chairman and CEO: In the year from now, Julian we'd expect to have essentially no balance, no outstanding – just current, just 30 day balance between the companies for stuff we buy from them et cetera. So, that risk we never view it as a huge risk, but whatever it was before, it's much, much smaller now and we think it will be essentially down a year from now.
Julian Allen - Spitfire Capital: Thank you very much.
Robert A. Whitman - Chairman and CEO: Well, I think that's it probably for questions and analyst who were there. To the operator, are there anymore in waiting?
Operator: There are no other questions at this time.
Robert A. Whitman - Chairman and CEO: We just express appreciation to each of you for being on the call today and for your continued support and great questions. We are very happy and delighted to follow-up on any questions offline here and we appreciate everything you are doing to help us. Thanks very much.
Operator: Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect at this time. Have a great day.