Jan 8, 2010
Executives
Derek Hatch – Corporate Controller Robert A. Whitman – Chairman of the Board, President & Chief Executive Officer Stephen D.
Young – Chief Financial Officer, Executive Vice President Finance, Chief Accounting Officer & Secretary Stephen Mardyks – Co-Chief Operating Officer Global Operations & Senior Vice President Franklin Covey International Michael Sean Merrill Covey – Chief Product Officer
Analyst
Analyst for Alexander Paris – Barrington Research Kevin Henehan – KMH Capital Advisors Patrick Retzer – Retzer Capital Management
Operator
Welcome to the Franklin Covey Company quarter one earnings conference call. At this time all participants are in listen only mode.
We will conduct a question and answer session towards the end of the conference. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.
I would now like to hand the call over to your host for today Derek Hatch, Corporate Controller.
Derek Hatch
Before we get started however, we’d like to read the forward-looking statement page that you’ll find in your packet. It says, 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 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 10k and other periodic reports filed with the Securities & Exchange Commission. Many of these conditions are beyond our control or influence.
Any one of which might cause future results to differ materially from the company’s current expectations. 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 overview, I’d like to turn the time over this afternoon to our Chairman and CEO Bob Whitman.
Robert A. Whitman
Let me just from an overview perspective that we felt very good about Q1’s results. Revenue exceeded our expectations, our gross margin percentage improved, our SG&A costs were significantly lower than both last year and our budget expectations.
Our EBITDA of $3.82 million was $2.7 million higher than in last year’s Q1 and also significantly higher than we had budgeted. We reported our second consecutive quarter of bottom line profitability and so overall we felt very good about the results and about the momentum that led to it.
I’d like to briefly speak to each of these elements at a high level. Revenue continued strengthen during the first quarter.
Revenue was up $1.5 million compared to our budget expectation and excluding the planned reduction in public programs, which we talked about in previous quarters, which as you know are fundamentally self-funding marketing programs, we consciously cut those back in the middle of last year’s first quarter. But, excluding public programs the revenues from our training and consulting business were actually up 2.8% compared to last year so that’s been the first quarter in a number of quarters where we actually had an increase in revenue in our consulting and training businesses, so we felt great about that.
That continues a trend that has been improving quarter-by-quarter. This represented a strengthening as I mentioned of revenue trend compared to Q4, which itself is improvement from Q3, which in turn is improvement from Q2.
So we feel good about the trend. We expect that we will achieve positive year-over-year revenue growth in Q2 on an overall basis and even more in our consulting and training business and for the year as a whole.
As we will discuss in more detail in a moment, this strengthening year-over-year revenue trend was very broad-based, which we are excited about, with revenue strengthening in all of our key channels, including our direct offices, our licensees, and our international account practices. As a result of strong bookings, our contractual pipeline increased in Q1.
If you will go to Slide Four, the contractual pipeline is shown here is just over $15 million and the end of Q1. This compared to $10.7 million at the end of Q1 last year, and was also higher than the $13.6 million at the end of Q4 so that’s continued to strengthen.
The size and depth of our new business pipelines also grew during Q1 and our booking momentum was also strong throughout the quarter and continued to be strong in December. As shown in Slide Five, through December our year-to-date revenue from our licensed facilitators is up $800, 000, which is up 10.4% and our bookings for on-site delivery work, when consultants go on-site and deliver the training, it was up 5.5%.
So, overall, Revenue we feel good about both the result and the trend. Our Gross Margin percentage improved also during the quarter to 63.5% from 61.8% during Q1 2009, an improvement of 170 basis points.
Our selling, general and administrative expenses during Q1 were $2.9 million lower than last year’s first quarter, and they were also lower than budget. Our cost improvement, here again was very broad based with costs lower in every major area except for in our practices where we are making new investments.
Here the costs came in as planned and as I’ll note later even after these additional staffing adjustments, the EBITDA contributed by these practices increased significantly during Q1. In terms of profitability, as noted our Q1 EBITDA for first quarter was $3.82 million.
This is $2.7 million better than last year’s first quarter and significantly higher also than our Budget. Almost all of this improvement in EBITDA flowed through with the result that operating income was $2.6 million higher than in last year’s first quarter and pre-tax income was $2.7 million higher than in last year’s first quarter and moved from a loss to a profit.
We also had positive net income even with a very high nominal tax rate of 79%. Steven Young will cover this in more detail in a few minutes but utilizing a normalized tax rate of say 41% we would have earned approximately $0.04 a share in the first quarter.
Finally, our net cash provided by operating activities was $1.6 million during the quarter. We expect this to accelerate further in coming quarters.
So in an overall level we felt very good about our Q1 results. We’re also feeling good about the prospects for the second quarter’s performance.
Five weeks in to our second quarter our momentum is good and we expect that the performance for the second quarter will also be strong. As noted above, our revenue momentum was strong in December.
Revenue trends continue to strengthen and while clients are still cautious in the economy, we expect to achieve year-over-year revenue growth in the second quarter and also in our third and fourth quarters from what we can tell now. Gross margins are expected to continue to be strong.
Our selling, general and administrative costs are expected to come in well below last year and as a consequence EBITDA is expected to be substantially better than in last year’s second quarter and in line with our expectations. You will recall in last year’s second quarter we actually had negative EBITDA and we expect positive EBITDA of course during this year’s second quarter.
Some investors have asked us to provide some insight on the expected seasonality of our revenues so I thought I would do that. On Slide Six it gives you the percentage of the revenues that have occurred in each of our four quarters on average over the last three years.
This is the mean of the last three years. It shows that our business is not that seasonally, not highly seasonal but there are some quarter variances that I would like to highlight.
As you can see, because companies tend to not do much training during the holidays, during the last two weeks in December and the first week in January, our revenues during Q2 are typically a little lower than in other quarters. On the other hand, our revenues tend to be a little higher in the fourth quarter reflecting the fact that substantial revenues from our education practice are recognized in the fourth quarter which as you know is the summer when teachers are not teaching and therefore can be trained more easily.
The second reason why the fourth quarter is typically a little higher is that we have our one big facilitator promotion during August of each year and that’s a time when they can buy facilitator training materials if they buy 10 they get one additional manual free. That’s a promotion that people look forward to.
But, overall it’s not that seasonal. We would expect because of the holidays this year of course during the second quarter that the revenue for Q2 will follow this historical pattern pretty closely.
We also believe that given our strong bookings and pipeline, the revenues in Q3 and Q4 are likely to be somewhat stronger than the strict application of this historical trend might imply. Hopefully, that’s helpful for those that are trying to get a sense of the seasonality.
In terms of looking to the future, in our last quarterly call we presented a model that showed directionally where we believed the business could go over the next few years. This model reflected our belief that we can achieve substantial top and bottom line growth over an extended period of time.
Following last quarter’s call several of you called and asked that I walk you through the model so I thought it might be helpful to take everyone through that model just briefly once again so I will refer you to Slides Seven through 10 and it is just a build up that goes slide to slide. First, as shown on Slide Seven, because of the business model improvements and cost reduction efforts in fiscal 2009 if we were able to achieve just very modest revenue growth versus last year in our direct offices and among our licensees reflecting the impact of the 2% price increase that we implemented in the end of August and a little growth in the offices that grew last year and if we were able to just achieve just the same $5.5 million revenue growth in our national account practice business that we achieved last year because of the business model improvements EBITDA would increase to more than $16 million during that period.
Next as show on Slide Eight, is just a buildup. On that same revenue base with the pro forma impact to further business model improvement actions which we’ve either already implemented or which are in process which would result in further improvement in our cost but whose full effect won’t be felt this year as those cost reductions are fully implemented the EBITDA would increase to $21.4 million on just those same revenues.
These kinds of costs include for example, transitioning our IT to a new less complex platform which we’ll be doing here in just a couple of months and we expect it will save us $1 million this year but will save us $2 million next year. So, there are things like that in this.
The next Slide Nine, just shows whenever our revenues in our eight direct offices and our licensees return to the level they achieved in 2008 again, with this new business model EBITDA would increase to $30 million in this model and that’s without additional growth in our national account practice revenues. Then finally, in Slide 10 if after we got to that level we were in the ensuing four years able to achieve similar growth in revenues and EBITDA that we did in 2005 to 2008 in our direct offices and licensees again, with no further growth in our practices it could take it to over $40 million in EBITDA.
So, this isn’t a time bounded forecast and [inaudible] this is our projection for any particular period, this is trying to get an idea that because of the business model improvements, we expect a very substantial increase in profitability during the course of this year. We will get back to the 2008 revenues and if we can continue our cost and business models that would get us in the $30 million range and we think that the same things that allowed us to grow in 2005 through 2008 which we’ll talk about in a minute are bets that while we can’t be sure of it that we feel pretty darn good about because we were able to do it before and we feel we’re getting traction there.
As shown in Slide 11 the key drivers of growth which I have just summarized in to four which should drive this model at least directionally are one, just cost structure and improved business model which we now have in place. Second, the growth in the size, reach and strength of our sales and delivery forces in our eight direct offices.
Third, growth in the size and strength of our 38 licensee partner operations. Fourth, the growth in our practices and our technology platforms.
I’m going to ask members of our executive team to address each of these briefly. So Stephen Young, as you know our CFO will now take on this first issue of the significantly reduced cost structure and improved business model.
Stephen D. Young
The sale of our [CSVU was extremely important. It represented the final step in our multiyear effort to exit all businesses or activities not central to our training and consulting business.
It also allowed us to reduce central operating costs and improve our overall business model by one, collapsing our holding company structure and moving to a streamlined central organization; and two, completing the consolidation of direct offices in North America, both of which we completed during fiscal 2009. During the year we also indentified and implemented other cost reduction and business model improvement actions to ensure that in the future, even at reduced revenue levels of fiscal 2009 we would earn attractive levels of profitability.
These actions reduced our central costs by $12.8 million in fiscal 2009 compared to fiscal 2008 as you can see in Slide 12. The annualization of these actions also will provide additional year-over-year cost benefits for fiscal 2010 and beyond.
These benefits were substantial during Q1 and we are very confident that we will meet our cost targets for the fiscal year of 2010.
Robert A. Whitman
The key strategic advantage and growth driver for us is the size, reach, strength and growth of our various sales and delivery channels and as we’ll discuss the sales and delivery capability which includes our direct offices, licensees and national practice accounts provides us with the unique ability to serve truly global clients. It also allows us to attract content from key thought leaders who are interested in accessing our distribution capabilities.
I’d like to ask Stephan Mardyks, our Co-Chief Operating Officer of our Global Operations to report on our direct office and licensee operations and then I’ll ask Sean Covey to report on our licensee and technology platforms.
Stephen Mardyks
I will begin by presenting the growth in the size and strength of our sales and delivery forces in our eight direct offices. We have five direct offices in North America and we have three direct offices internationally, one in Japan, on in the UK and one in Australia.
Between fiscal year 2005 and fiscal year 2008 revenues in our eight direct offices grew significantly in percentage and in dollar terms. Our direct offices contribution to operating income grew even more substantially.
The key drivers of these goals were number one, the significant increase in the size, capability and productivity of our sales and delivery forces in these offices and number two, our business model cost structure which is high valuable with our client partners who are paid mostly on commission and our delivery consultants who are paid mostly per consulting day for delivering [inaudible]. During these years we invested heavily in the equipment and training of these client partners.
Our investments in training and the additional or new offerings also helped to increase the productivity of our alumni sales force by more than 29% during these years. What we mean by alumni is client partners who were already in place at the beginning of fiscal year 2005.
The weakness in the economy has resulted in a decline in productivity of the average client partners during fiscal 2009 but we expect the growth in the size and productivity of our sales and delivery forces to continue to be a key driver of our overall global growth in the future. In our five domestic direct offices during Q1, revenue continued to remain solid.
Revenues were down 4% compared to Q1 of last year but if you exclude the public programming part, revenues were down less than 2% compared to Q1 of last year. This was indeed ahead of expectations.
Booking and [inaudible] orders were strong during Q1 and as Bob noted earlier this trend continued in December. Our revenue per [inaudible] in Q1 also greatly increased versus the previous year.
Most of our client partner teams outperformed relative to either their budget, or to last year, or to both. Almost all of those who didn’t outperform in Q1 did end the quarter with account pipelines that suggested significant growth for them during Q2.
Our domestic offices are currently expecting to grow revenue and EBITDA compared to last year in Q2. In our three international direct offices during Q1, Australia’s results were up versus budget and up versus last year.
Australia’s operations are also expected to be up versus budget and up versus last year in Q2. UK’s revenue were up versus budget but down 6.6% compared to last year.
However, because of cost controls the UK EBITDA increased versus the prior year. In Q2 we are expecting double digit growth on the top and bottom line.
Japan appears to be the most impacted by our global economic environment. Japan was down versus last year by 21%, partially as a result of a strong Q1 of last year which included $900,000 of revenue that fold over from Q4 of fiscal year 2008.
We currently believe that Japan’s revenue will be down compared to prior year in Q2 but that the variance will be less than it was for Q1 and due to cost reductions EBITDA will be flat or a little bit higher than prior year. Overall, we are very optimistic about our Q2.
We believe revenues in our international direct offices will be slightly down compared to prior year but that our EBITDA will be a little bit higher than prior year. I will cover now our growth in the size and strength of our 38 international licensee partner operations.
As you can see on Slide 15, in between fiscal year 2005 and fiscal year 2008 our international licensee partners royalties received increase from $4.3 million to $9.2 million which is a 112% increase. This is without considering the conversion of our direct offices in Brazil and in Mexico to licensees in fiscal 2008.
When you take in to consideration the conversion of those offices the increase is from $4.3 million to $10.2 million. Using our average licensee royalty percentage this suggests that our international licensee partner’s gross revenue grew from approximately $30 million to approximately $60 million during those years.
Our international licensee partner operations have grown largely because of those same factors that have driven the growth of our direct offices. Specifically those factors include the growth in the size, the capabilities and the productivity of their sales and delivery forces.
In the past years we have made significant investments to provide resources and support to our licensee partners with training and development of their people. We have also made significant investments in the development of offerings that can be customized to their local needs much more easily.
Fiscal year 2009 was a difficult year of course for many of our licensee partners but moving forward we are really confident that our licensee partners organization will continue to drive our global growth for years to come. We are especially confident regarding the quality and professionalism of our licensee partners, their ability to increase the size and productivity of their sales force and also the significant untapped potential in their markets.
During Q1 our licensee revenues were $2.4 million which is $400,000 or 15% lower than in Q1 of last year. Having said that, these results exceeded our budget expectations.
By the way Q1 of last year was a weaker quarter for us. As you may remember, this was before the recession outside of the US which only started to impact our international operations towards the end of November of last year.
In Q1 in this fiscal year we are encouraged that royalties that we see from some of our largest licensees in greater China and Korea and in Scandinavia actually grew over the prior year. We continue to see positive indicators among our licensee operations and believe that they will achieve double digit growth compared to last year during Q2.
Robert A. Whitman
Sean would you now just give an update on the practices and our technology platform?
Michael Sean Merrill Covey
I’ll talk a little bit about our practices and technology platforms. Over the past couple of years to ensure market leadership in the content areas and the markets we are choosing to compete in, we’ve created a new structure of what we call these practices.
You can think of the practices as a product line or a vertical market or it’s a job to be done content area. We currently have five practices which include: education; sales performance; the speed of trust; execution; and customer loyalty.
We are also in the process of developing some other practices that will be coming on shortly like online learning that are in process right now. Now, practices are in charge of growing their respective businesses so think of each practice having responsibility for everything including things like thought leadership, building the relevant products and solutions, developing the go to market approach and strategy and then building the capabilities of our sales and consulting teams to sell and deliver the solutions.
Practices also have the responsibility to sell directly and to develop business with their own client base which includes selected national accounts. So, they are not just fully dependent upon our existing sales force, they have the option to go direct as well.
Now, our new practice categories have grown significantly since their inception and much of the revenue which they generate is recognized in the revenues of our direct offices or licensees. The practices own share of revenue can come from their national account efforts and this also has become very substantial.
If you take a look at Slide 16, even in fiscal year 2009 you can see the growth from 2008 to 2009. Our practice national account revenue grew by $5.5 million or 54%.
So, during Q1 of this year our practice national account revenue increased by 72% or $2.2 million so we have a very good first quarter from the practice perspective. Their gross margin percent was also up slightly over budget and the EBITDA contribution was $815,000 which compared to last year was significant of $145,000 last year so $145,000 to $815,000 in Q1 alone and also up significantly over budget.
I’d like just to say a few things about a couple of our practices. There are many things we could say but let me say a couple of things about education.
Education is a vertical market practice focused on two markets, the K12, kindergarten through 12th grade market which is elementary, middle and high schools and then the higher education market. Currently in this practice we’re focusing on a solution, a new one we’ve built called the leader in me and this is for elementary schools.
The leader in me is a three year process designed to help transform elementary schools including improving everything from academic achievement of the students, improving the school culture, increasing parent satisfaction and so forth. The offering costs about $30,000 to implement this process in the first year and about $10,000 each year thereafter.
This solution consists of about seven to 10 days of training, some materials for the staff and students and a web community. Now, in virtually every school that has engaged thus far, we’re seeing off the chart significant results.
We now have the leader in me in over 200 schools and we have a great pipeline building. As a result our first quarter revenue improved by $600,000 or 60% year-over-year and our EBITDA for the quarter grew nearly $500,000 year-over-year because much of that went to the bottom line and we also achieved some cost savings.
Now, given that there are over 100,000 elementary schools in the US alone, we believe this will be a significant and meaningful growth area to us in the coming years. Another practice we have that is under development is online learning.
This is basically delivering our solutions through technology platforms. Over the past couple of years we have made significant investments to develop these solutions through which we can train and consult with organizations.
We believe these new platforms can significant increase our reach and introduce us to a whole new set of people and populations and organizations that may be reluctant to use traditional training and to take people offline for one, two, three or five days. A couple of these new offerings include our InSights offering and InSights is a web based product that draws from a larger library of our film which teach our principals on different competencies.
Specifically, InSights is a web based product with 63 bite size modules that can be used in a lot of different ways. For example, a manager could use these bite size modules at the start of a meeting or the end of a meeting, or they could use one of these modules as a standalone unit, or these modules could be used individually and then discussed with other team members.
The concept is basically a small nugget of learning instead of a day long program, it’s a 20 to 30 minute program that can be used within the seams of work. Another technology that we are very excited about is called Live Clicks.
Live Clicks is a webinar platform and these workshops are one to two hour courses, we have about 25 different topics at this point and they are delivered over the Internet right to a client’s desk with a live instructor on the other end. They can be taught by Franklin Covey consultants or they can be taught by a licensed certified client consultant.
This platform we’ve created with Live Clicks we believe to be a market leading innovation. These webinars aren’t just a power point and discussion, instead they are very interactive.
They utilize video, interaction, polling so you can do surveys on the spot and see how people feel about different things and other really innovative tools to make them very engaging and very interactive. Thus far with these two platforms in the first quarter our revenue increased over 100% year-over-year and we have a very solid pipeline building for the future.
So overall, we believe that this practice structure has offered us new growth opportunities we would not have had had we not built this structure. It is also allowing us the opportunity to become real market leaders and to really focus on becoming experts in these areas that we choose to focus on, these jobs to be done, content areas we are focusing on.
So, each of our practices from trusts, to execution, to sales performance, to online learning is experiencing high growth and creating very good client results.
Robert A. Whitman
Just in conclusion from an overview, just say all-in-all we feel very good about Q1 results. We recognize the economic environment remains challenging.
We feel that the combination of our lower cost structure and improved business model together with the strength of the factors discussed above will lead us to a very good resulting Q2 and for the year as a whole. I’d just say out of caution that because we mentioned several times that we beat our budget in Q1, somebody might want to extrapolate that we’re going to blow away all our numbers but we already expect substantial improvement year-over-year and so I would think that we will be able to meet our expectations but wouldn’t expect that we would have as much variances, at least in these next couple of quarters as we did in the first.
We have reasonable transparency on certain things. A lot of the educational revenues will come in to our fourth quarter.
We had good revenues in our first quarter but because of it being in the middle of the school year a lot of those revenues won’t hit to the fourth quarter. Some of our big sales training revenues that hit in the first quarter are in and done and won’t be as big until later in the year.
So, we feel good about being able to meet our expectations and those expectations are quite substantial as they are without everyone assuming that we are going to continue to beat those. I will now turn the time over to Steve Young to discuss our financial results in more detail and then we’ll open it up to your questions.
Stephen D. Young
As Bob, Stephen and Sean discussed in the overview, we are pleased that our operating profit was $2.6 million higher than last year. We’re also pleased that we have positive earnings for the quarter.
We are pleased that our cost control and business model measures are working well and we’re pleased with the good revenue start for the year. They’ve also talked about a lot of numbers and given a lot of good overview of the P&L information so maybe I’ll just go with a few reminders and call it good.
I usually have more time to talk when the numbers are bad. First of all, as you review our financial information now and in the future, please always note these three points that will be with us for some time, the first one is that our income tax provision is typically higher than income taxes calculated at statutory rates.
The tax rate is high due primarily to the interest on the management loan program and our current inability to benefit from foreign tax credits. In this quarter, as an example, our provision is 69% of pre-tax.
Our tax provision will typically be something like tax calculated at statutory rates plus about $2 million of expense per year. Additionally, please remember that even though our tax provision is a very high percentage of pre-tax income, our amounts paid for taxes is primarily only the amount paid in international jurisdictions, primarily Japan.
That’s the amount of our overall payments so typically in good profit times that will be less than our tax at statutory rates and this benefit in the amount we actually pay is due to our NOL carry forward still totaling more than $30 million. Additionally, we also get many questions about the number of shares we use in the calculation of earnings per share.
When calculating earnings per share when we’re in a loss position, we must deduct the management loan shares of 3.5 million from the share count. Therefore, you see 13.4 million used in the prior year even though our outstanding shares is about 16.9 million.
Additionally, as you can see in Slide 17 which we have presented in the past but we think it is important to keep in front of everyone, when you consider our outstanding shares, please remember the potential impact of our management stock loan program shares and our outstanding warrants. If you want to talk further about how those works and how they behave, please give me a call and I’d be happy to talk about that.
The third item that we think is important to always remember is that we have a financing obligation of more than $31 million when you consider the long term and short term portion on our books. This financing arrangement is the capitalization of our rent obligation, we rent our corporate operations here in Salt Lake City.
We pay just over $3 million per year in rent for these facilities. Since the transaction is reflected as a financing obligation even though it’s like rent and the financing obligation is on the balance sheet, the rent doesn’t appear in SG&A, the payment that we make is reflected as interest expense and a reduction in long term debt.
Please remember that and determine how you want to handle that in valuing the company. Slide 18 is a new presentation for us.
This slide shows the amount of cash generated by those activities that are directly related to our statement of operations. You can see in this slide that we start with reported net income of $248,000 then we add back the amount of non-cash expenses which are depreciation and amortization, amortization of capitalized curriculum, deferred income taxes and share based compensation and then deduct cash paid for capitalized development and capitalized expenditures.
The results shows that nearly $3.2 million of cash is generated this quarter by P&L related activities. We just felt it would be interesting to show the difference between $248,000 of net income and the cash that is actually being provided in a quarter by those activities.
Please do note that in this particular quarter the amount that was spent on the purchase of property and equipment and curriculum development costs is quite low. That amount will be higher in coming quarters, particularly in our third and fourth quarter so our ongoing benefit wouldn’t be quite the gap that we show here but still significant in most every quarter.
Also, in the slides we include in the webcast slide typically a pro forma financial information as you can see on Slide 19. This slide when presented will typically show the operating results without certain onetime non-repeating and unusual costs.
We put this in just to show that we didn’t have any of those in this particular quarter. When we make this presentation we will typically present income taxes at a 41% rate just for this pro forma presentation as opposed to the 79% or whatever would show on the face of our statement of operations and that’s the only amount that we have to talk about during this quarter.
We did not expect significant pro forma adjustments in this year like we have had some restructuring costs and others in the past. We just don’t anticipate restructuring and other costs like that in this year.
We do expect in Q2 to have almost $1 million of non-repeating or non-operating and non-repeating costs related to reimbursement of airfare and compensation and I will talk about those more in Q2. But, I think good results shown in the pro forma information that goes down to a $690,000 pro forma net income for the quarter.
As we talk about our P&L I think we’ve gone over that enough. We’ve talked a lot about revenue, we’re pleased with the good start for the year, our margins are good, we think they’re going to be good.
They are dependent upon our mix and we’re comfortable with that. Our SG&A, we’re very pleased with the broad based changes in SG&A meaning that all areas of administration and support participated and reflects a good focus on our business model and very important I believe is that our reductions we do not believe in any way reduce our ability to grow the business so we haven’t cut in to the flesh engines of growing the business.
I think that’s very important and we expect that these kinds of trends will continue somewhat in to the future. At some point in time obviously the dollar reductions will turn as hopefully revenue grows but we’re very comfortable with our P&L this month.
On the balance sheet, I’d just mention a little bit about the balance sheet because our balance sheet is also pretty straight forward. Collections these days are a little more strung out, perhaps due to the economy but still we have receivables in inventory that are in good shape and we have some room for improvement, meaning reduction of those balances.
We’re always going to buy some fixed assets and some computer equipment but we’re not capital intensive and we don’t see how we would be and we’re going to in the future capitalize our curriculum development costs. We also anticipate looking at the balance sheet that our line of credit which expires in March of this year we expect will be renewed with a new credit line before that date and we expect our borrowings under that line of credit to decrease significantly throughout the year even to zero sometimes next year, maybe even early in next year.
We do expect to have an increase in goodwill over the coming years depending on the performance of the acquired speed of trust business and the resulting earn out payments that we will make and as I said we expect the borrowings under our revolving line to decrease. As a result of that we expect those results to convert in to cash flows which obviously will be most impacted by operations.
But, as you think of cash flows, our interest expense will be similar to what it’s been in the past, reduced a little bit as our revolving line of credit reduces. We expect our taxes paid will be the $2 to $3 million depending on our profit in international jurisdictions similar to what it’s been in the past.
We expect to spend our $4 million more or less in our cap ex and capitalized development. We expect to make the earn out payment that we talked about.
We expect our days sales outstanding and our inventory turns to improve somewhat and we do expect our payables balance to decrease from what it is at the end of this quarter. Over time we will apply some money to our working capitals as our business grows and our receivables correspondingly increase but that will be a happy day.
And, we do expect to provide cash from operations. So, we’re quite pleased with this quarter.
Robert A. Whitman
I will now turn the time over to you all for questions. I just want to express my appreciation to each of you for your patience and continued faith in what we’re doing and also to our executive team and to all of the Franklin Covey associates who have stayed the course and do such brilliant work every day.
Let’s turn it over for questions.
Operator
(Operator Instructions) Your first question comes from Analyst for Alexander Paris – Barrington Research.
Analyst for Alexander Paris – Barrington Research
My question, when you look at your core business and having been able to stabilize your business during this economic time that we’ve gone through, what are overall top line expectations investors should be looking for this year and kind of going forward? Now, I kind of say that excluding the Slide Seven through 10 because those are more kind of hypothetical scenarios but from a modeling perspective can you kind of give me some guidance on that?
Robert A. Whitman
I’ll just say in general, although we don’t give specific guidance, the idea that as we mentioned our consulting and training revenues excluding public programs actually grew approximately 3% during the quarter. We would expect in the second quarter that revenues would grow even including public programs and just overall, revenues would grow and grow in the other quarters as well.
But, I think the existing environment continues to be difficult, we’re not expecting that we’ll return to 2008 levels in this year. We had a 2% price increase that we applied across the board early in the year, we had about $ 2 million in additional growth last year in some of our direct offices which we think they can do again this year and we would expect a little bit of growth, maybe we’ll get a little bit more but we would expect a little bit of growth in our direct offices and our licensees above that.
Our practices grew by $5.5 million last year and we would expect to be able to repeat that. So, if you take $130 million of revenue from last year and expect a couple of percent from price increases and some growth in the practices you would expect to be north of that number this year.
That’s probably as far as we would go at this point. It’s probably not as helpful as you want me to be but I think those are the factors that I would consider.
We’ll get our price increase, we’ll get a little bit of growth beyond that and we’ll get some growth in our practices.
Analyst for Alexander Paris – Barrington Research
On the last call you mentioned possibly another $5 million in additional cost take out going forward, when do you think we’ll see some of that come through? For SG&A, the $17 million is that you think a steady run rate here?
Robert A. Whitman
The other $5 million – the time we first talked about that was in our July conference call and felt that we could get – it’s a combination when we say costs of business model improvements that included some additional cost reductions, it also included some gross margin improvement activities and so forth. So those you do see in the first quarter, they are included in the first quarter results and we expect those will continue.
Our gross margins were higher, our costs were lower than originally had been budgeted reflecting the fact that these costs were there. As I mentioned in that one build up slide that is kind of the visions slide so to speak, there are some of those costs that will benefit us in this year like the IT, $1 million in the back half of the year that we’ll get this year, it will be $2 million next year that will be on top of that.
But, the $5 million we felt that we had identified and implemented by yearend. If you think on that vision slide, if EBITDA increased to something in the order of $16 million or so this year, that would certainly be included in that.
Stephen D. Young
The $5 million we talked about is business model improvement which included cost reduction and what we refer to as covering of costs and we expect to achieve that. I think as Bob mentioned, I just want to emphasize that as revenues go up, we hope that we’re paying a lot more in SG&A on commissions and bonuses that are tied to profitability and maybe investing in other areas of growth.
So, it seems like we always have kind of two different concepts going on as we’re thinking of SG&A as reported. That’s all the cost reductions and the good things that we’re doing to pursue the business model and then other things that we choose to do to grow the business going the other way and having some commissions increasing as a result of that.
Robert A. Whitman
That’s why we reflected in the slide we showed, we showed the [inaudible] which aren’t typically affected much by commissions, went down by $12.8 million, that we think will sustain and go down forward. As noted, we are investing in our practices but with the investment in SG&A, the EBITDA is going up from them because they’re covering that and the flow through on additional revenue if you take gross margins in the high 60s, overall on field revenues, close to 70% and direct selling costs including commission around 15 even though those will grow, the flow through is still quite substantial.
Operator
Your next question comes from Kevin Henehan – KMH Capital Advisors.
Kevin Henehan – KMH Capital Advisors
I wonder if you can give us any color, it looks like you will have a little bit of free cash flow, that’s what Steve was talking about. He didn’t exactly say that but he kind of talked around it, if there was some free cash flow this year and maybe more next year, what would be some of the uses of your cash flow that you would pursue?
Robert A. Whitman
I think Steve, you might want to speak to this. One of the things that Steve has talked about is we currently have a balance on our credit facility around $11 million and we would expect, as Steve said, to pay that off during this year.
So, one of the uses of our free cash flow is to pay off the debt. Following that, I think we’ve had a history of using excess cash flow of two things: one, making sure we had plenty of liquidity and then anything above that using it to either pay down debt, which we did, redeem preferred stock or buyback common.
I think you’ve missed perhaps a couple of the last calls but I think our plans going forward, although there’s no specific plan around it would be we don’t believe we’re capital intensive. We do believe that if we can meet our plan we will certainly result in the generation of significant amounts of free cash flow and we would expect to return that to shareholders in some way either through additional share repurchases or a dividend or a combination of both.
Operator
Your next question comes from Patrick Retzer – Retzer Capital Management.
Patrick Retzer – Retzer Capital Management
I heard the explanation on the high tax rate, the question I have is does that onerous tax rate for GAAP purposes go away at some point and if so, when does it more or less normalize?
Stephen D. Young
We hope that the extremely high rate does go away but it would be contingent upon two things happening. One, our resolution of the management stock loan program, because under that program there is interest expense accruing and it is that interest expense to the participants, interest income to us that we’re not reflecting in our financial statements that causes the additional tax expense.
So when the management loan program is resolved that will go away. At about the same time or based upon the same results, we will eventually consume our net operating loss carry forward and be able to utilize our foreign investment tax credits.
Then, at that point in time the other part will go away and we’ll be left with pretty much a reasonable rate at 40% to 42%.
Patrick Retzer – Retzer Capital Management
As far as the employee loan amount that contributes to that, that’s a fixed amount so as the income continues to grow the rate and percentage terms should drop, right?
Stephen D. Young
Yes, it would. As I mentioned, the result of those two things might be viewed as simply $2 million a year of additional tax expense.
Yes, it would be a smaller percentage of a larger number.
Robert A. Whitman
Again, just maybe a footnote on that, Steve talked about three things that were a little complex including the share count. There is more than a $50 million receivable, or approximately $50 million receivable from the participants in the management stock loan program that we wrote off years ago and that will never come back on.
So, there’s a $50 million asset – I mean, for those that try to value using looking at the multiple and then subtract other assets and liabilities, there’s either a bigger asset there I would argue or there are fewer shares. We get in our presentation the worst of both, no asset and yet all the shares associated with it.
Those shares are sitting in escrow and at such a point as the share price gets around $14 then those will automatically come back to the company and those shares will go out of the denominator. In the meantime, the interest on those, as Steve said, comes in as interest income for tax purposes of about $500,000 a quarter is the tax expense although it is offset against our NOL and so that is what fouls it up.
But, for those who have been patient enough to go through, most of you recognize that on a normalized basis that won’t be there, the shares won’t be there.
Patrick Retzer – Retzer Capital Management
You’re saying there is a hidden asset equivalent to about $3 a share?
Robert A. Whitman
Well, I’d really say the other way, the asset will just be cancelled when the shares come back to us but I would suggest the shares are over stated. You ought to show the asset, which we can’t do, and the shares or eliminate both which is probably what I would think is the right way.
Patrick Retzer – Retzer Capital Management
Can you comment on the growth that you saw in the customer loyalty program?
Robert A. Whitman
I can. We didn’t share specific numbers and I probably won’t but we had good growth in the customer loyalty practice in the first quarter in the order of 12% or 13%.
It came primarily from the expansion of existing customers and there was some new customers acquired during the first quarter, eight new customers that are in pilot phase that during the pilot phase it doesn’t add an enormous amount to revenue but some. But, the expectation would be that several of those would go in to full roll out.
But, each of the practice areas that Sean talked about I don’t think we had any practice area that didn’t grow and grow quite substantially during the quarter in terms of their national account business and overall.
Operator
There are no further questions at this time. I would now like to turn the call back over to Mr.
Bob Whitman for closing remarks.
Robert A. Whitman
My closing remarks would just be this, to thank you again for making the time to be on the call today, for your interest in what we’re doing. We feel good about our prospects, our team and the fundamental strategies.
It’s kind of simple, it’s really we feel moving forward the execution is at least around things that we feel like we know, growing the size and capability of our sales force, continue to build the strength and size of our licensee operations and taking these targeted practices and continuing to move them forward. That, on a good cost basis we think should allow us to have good top and bottom line growth for the foreseeable future.
Thanks very much.
Operator
Thank you for your participation in today’s conference. This concludes the presentation.
You may now disconnect. Good day.