Jan 6, 2011
Operator
Good day, ladies and gentlemen, and welcome to the first quarter 2011 Franklin Covey earnings call. My name is Melanie and I'll be your coordinator today.
At this time all participants are in a listen-only mode. We will accept your questions at the end of this conference.
If you would like to ask a question, you may enter the queue by pressing star 1 on your touchtone phone. If at any time during the call you require operator assistance, please press star 0 on your phone and an operator will assist you.
As a reminder, today's call is being recorded. I would now like to turn the call over to Mr.
Derek Hatch, Corporate Controller. Please proceed.
Derek Hatch
Thank you, Melanie. On behalf of the company, I'd like to also welcome you to our first quarter fiscal 2011 earnings call today and hope you enjoy today's presentation.
Before we get started, we'd like to begin with our forward-looking statement presentation, and remind you that this presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based upon management’s current expectations and are subject to various risks and uncertainties including, but not limited to, the ability of the company to stabilize and grow revenues, the ability of the company to hire productive sales professionals, general economic conditions, competition in the company’s targeted marketplace, market acceptance of new products or services and marketing strategies, changes in the company’s market share, changes in the size of the overall market for the company’s products, changes in the training and spending policies of the company’s clients, and other factors identified and discussed in the company’s most recent annual report on Form 10-K and other periodic reports filed with the Securities and Exchange Commission.
Many of these conditions are beyond our control or influence, any one of which may cause future results to differ materially from the company’s current expectations. And there can be no assurance that the company’s actual future performance will meet management’s expectations.
These forward-looking statements are based on management’s current expectations and we undertake no obligation to update or revise these forward-looking statements to reflect events or circumstances after the date of today’s presentation. With that out of the way, I would like to turn the time over to our Chairman and Chief Executive Bob Whitman.
Thank you.
Bob Whitman
Thanks, Derek. I'm glad to have the chance to talk with all of you today and appreciate you joining us.
Hopefully each of you had the chance to read the press release that was issued about an hour ago. Now I'd like to address some detail behind that.
I'd like to organize my comments today around kind of four headlines or themes. First, that we're very pleased with the company's strong performance and results in the first quarter.
Second, we are encouraged by the strong booking trends momentum we're continuing to see in the business. Third, based on these trends, we expect to achieve significant continued improvement in both revenues and profitability during 2011 and beyond.
And fourth, we believe we have the opportunity to significantly accelerate our growth in the future perhaps beyond what we've talked about in the past, and I'll hit some headlines there. So I'd just like to now maybe provide some detail behind each of these themes, the first one, being pleased with the company's performance in the first quarter.
As you saw from a revenue perspective, revenue for the first quarter totaled $39.4 million, just an increase of $7.5 million or 23.5% from the $31.9 million we achieved during the first quarter of fiscal 2010. As expected, our strong bookings during the third and fourth quarters and our pipeline that we talked about at our last call translated into significant revenue growth during the first quarter.
As you see in Slide 4 which is the sales detail by region and type, we were pleased to have achieved growth in almost all of our major channels, and I'll just address this quickly. Revenue in our government services group grew by $5.7 million in the first quarter, reflecting the previously announced government service contract that was awarded at the beginning of last year fourth quarter and other contracts won by that group.
Significant in this contract was and is we also achieved significant growth during the quarter in other key channels. In fact six of our eight direct offices, both domestic and international, grew revenues during the first quarter as did every field support practice, our international licensee partners and two of three of the national account practices.
Revenues in our geographic direct offices in the U.S., there are four of them, excluding the government services region, grew $900,000 or 7% during the quarter, reflecting the delivery of the training related to the strong bookings achieved during the third and fourth quarters, and four of the five domestic offices grew revenues during the quarter. Revenues in our international direct offices also grew and actually grew 16% for the quarter, with the big news being that Japan has continued to gain momentum and generated actually 30% revenue growth during the first quarter.
We also achieved growth in Australia. Our revenues in our U.K.
office, however, declined 200,000 during the quarter; but based on bookings, we expect U.K. revenues to be back and be at least flat to LY, to the last year, during the second quarter.
Our international licensee partner revenues also grew and grew by 10% in the quarter, with their royalty portion growing 15% and wholesale growing -- or actually declining a little bit, but most of our international licensee partners growing over the prior year including nine of our ten largest licensees. In our national account practices, our education practice grew revenues by 16%, the customer loyalty practice grew by 10%.
The sales performance practice which achieved 37% revenue growth in 2010, as expected, saw a decline in revenue during the first quarter of $700,000, and that was expected. During last year's first quarter, the sales performance group was awarded a large new multiyear sales training contract with a major technology firm.
Last year, the revenue associated with the launch of this new contract was $1.3 million during the first quarter alone. And while this contract continues to be very significant and actually generated approximately $450,000 during the first quarter, this was $900,000 lower than during last year's launch year.
So other than that, we grew, and despite this decline, we still expect the sales performance practice to achieve revenue growth of approximately 20% for fiscal 2011 as a whole. So it's in good shape.
Profitability, adjusted EBITDA for the first quarter was $5.3 million which is an increase of 58%, $2 million, compared to last year first quarter. And this was after covering approximately $800,000 in extra expense related to our once-every-three-years Worldwide Sales and Delivery Conference which we held this September.
So we felt very good about the growth and profitability; I'll touch more on that. Our gross margin dollars increased by $4.5 million or 22% for the quarter.
Our gross margin percentage, however, decreased to 63% compared to 64.6% in the first quarter of fiscal 2010. We maintained gross margin percentages in all of our major offering categories, so this overall reduction in gross margin percentage primarily reflected the shift in our mix of delivery method with more of our delivery during this quarter being on-site, or a higher percentage being on-site, and a lesser percentage being these facilitated orders than in last year's first quarter.
SG&A declined to 50.2% of sales during the first quarter compared to 54.1% of sales in the first quarter of 2010. In absolute dollar terms, SG&A expenses increased approximately $2.5 million during the quarter compared to the first quarter of 2010, primarily due to $1 million increase in commission costs resulting associated with the increased revenue and this $800,000 previously noted conference cost for our annual [ph] Sales and Delivery Conference which I noted is held every three years.
So otherwise, even with that $800,000 there, SG&A as a percentage of sales declined. As noted above, adjusted EBITDA for the quarter was $5.3 million, as I said, reflected a 58% growth over the $3.3 million achieved in last year's first quarter.
Income from operations increased $2 million during the first quarter to $3.4 million, more than doubling the prior-year performance. Pretax income improved to $2.7 million in the first quarter, which is up $2 million, compared to the $700,000 achieved in the first quarter of last year.
So overall we felt very good about the company's first quarter financial performance, we're strong in almost every quarter. And we're also pleased that as of today our cash balances of $5.8 million exceed our outstanding balance on our credit line as expected, and that we are therefore in a position to pay off our credit facility.
We will expect to continue to have credit facility of approximately $10 million available in the future which would be just kind of the rainy day line, occasionally you'll dip into it. But we've said several times that we expected by yearend to be essentially out of the line, and that happened instead on the 5th of January, but pretty close.
So again, the first point, we're pleased with the performance in the first quarter on really all fronts. Second, we continue to be excited and encouraged by the trends we're seeing in the business.
We're very encouraged by the continuing strong momentum in our bookings during the first quarter. A key metric we refer to as booked days, which are commitments for the future delivery of training engagements on-site at our clients' locations, as shown in Slide 5.
In last year's first quarter we booked approximately 1,350 days for future delivery. In this year's first quarter we booked approximately 2,300 days for future delivery, an increase of 70%.
But even without the benefit of the bookings raised with the large government contracts, booked days grew by 21% during the first quarter. As you can see on Slide 6, this strong booking momentum and the addition of new contracts during the quarter resulted in now having $11 million more in our pipeline of booked day and awarded contracts revenue at the end of the first quarter which would be delivered in the coming months and quarters than we had that time a year ago.
We also grew our total pipeline by about $1 million relative to where we were at yearend. We expect as usual that the bulk of these bookings will be delivered over the next two to three quarters.
I'd note that a portion of this pipeline relates to the large government contract and that the delays in the approval of federal government budget could impact a portion of this revenue or at least shift the timing thereof, if the government isn't somehow to get a budget approved sometime soon. Third, observationally, based on these trends, we expect to achieve significant continued improvement in both revenues and profitability during fiscal 2011.
As a result of this booking momentum and the strength of our other lead measures such as a number of face-to-face meetings with clients, a number of we call them solution recommendations, these are proposals that we issue, these kinds of lead measures, we believe we are positioned to achieve continued growth in revenue and profitability during the second quarter and beyond. As you know, while historically we've not provided guidance, we decided at the end of -- well, when we did our annual update, we decided to provide adjusted EBITDA guidance this year to give some additional clarity on how we see the trajectory of our business unfolding in fiscal 2011.
As we said during our last webcast, based on the strong pipeline of booked days and awarded contracts and on our operating assumptions, we expect that the company will grow adjusted EBITDA from $13.4 million in fiscal 2010 to between $18 million and $21 million in 2011 which would represent growth of between 35% and 57%. This first quarter we made good progress toward that.
Given the solid first quarter and historically our strongest quarter is the fourth quarter, that we would expect, and you should expect, more, on an absolute basis, more modest results during the second and third quarter, although still improving, with the third quarter likely to be stronger than the second quarter which is our normal seasonal pattern, and also we know some specific revenue that would tend to make that the case this year. Finally, I'd just say that we believe we have the opportunity to significantly accelerate our growth in the coming quarters and particularly in the coming years.
Our growth, as you know, over the past several years has been driven by two key initiatives -- first, growth in the size and productivity of our sales forces in both our direct offices and in our licensee offices, and second, the growth in our practices, both those we call field support where the revenue is reflected in the field's numbers and the national account practices whose revenues are identified separately. As you can see on Slide 7, the combination of these initiatives has resulted in significant growth over the last five to six years, as you see, from 2004 to 2010.
Driven by increases in the size and productivity of our sales and delivery forces, revenue on our direct offices grew by 28%, and that's even after the effects of the recession. EBITDA also grew 67%.
And as you can see on Slide 8, during the same years, royalty revenue from our international licensee partners more than doubled from $4.3 million to $9.2 million. And during the same years, our national account practice revenue almost doubled from $9.8 million to $19.5 million.
So we continue to be excited about these initiatives and believe in them and we're excited to share with you that we now believe that we're in a position in the coming years to significantly accelerate the growth of these two initiatives. Let me just hit headlines on that.
With respect to increasing the size and productivity of our own direct and delivery forces, we used to think in terms of having the potential increase to size of our direct office sales force from approximately 100 to approximately 220 client partners, adding approximately 10 client partners net per year and having new sales people cover their costs in year two after their hire and ramping up to more $1 million in revenues in four to five years. Based on our experience and analysis, we now believe that we have the potential to ultimately have more than 500 client partners in our direct offices versus approximately 100 at present.
We believe we have the potential to ultimately have more than 1,000 client partners in our licensee offices versus approximately 200 at present. We believe with all that we've done we can now accelerate our hiring of new client partners from 10 per year to 20 next year then approximately 30 then 40 and maybe getting as much as 50 a year over the next several years.
We believe that a new sales person can fully cover his/her costs in the first year rather than over two years and the ramp-up to the million-plus level can occur in three to four years rather than four to five years. Obviously achieving this potential will require a great execution on our part, but we thought it was important to announce a shift in our goals with respect to growing the size and capabilities of our sales force.
With respect to growing our practices, we now believe that our six largest practice areas -- execution, education, speed of trust, sales performance, and then our two newest practices, leadership and productivity which already have a substantial base but did not have a practice leader in the past, each have the potential in the coming years to grow significantly and ultimately to become $50 million plus practices even at relatively low levels of penetration of the defined market. As an example, there are 124,000 K-through-6 schools in the U.S.
and Canada. The average school in our Leader in Me program spends approximately $60,000 with us over a period of three to four years.
And so for every 1% penetration that we can get of the elementary school market in North America, that's worth $70 million of revenue. Now that's -- we've crossed over the 400-school mark now, we've got a long way to go to penetrate the market, but we have confidence in our ability to do that.
As you may recall, at one point we owned premier school agendas where we built 120-sales-person sales force just in education. We sold that business in 2001, but we have an idea of what's possible in terms of building sales forces.
So in summary, we're very encouraged by the results for the quarter, the momentum we're seeing in the business, and the potential to accelerate our growth in future quarters and years. I look forward to reporting on our continuing progress as we go through the year.
So I'd now like to turn the time over to Steve Young, as you know, our CFO, to discuss our financial results in more detail. Steve?
Steve Young
Thank you, Bob. I hope that you all enjoyed Bob's report as much as I did.
It's nice to have good numbers to talk about. I'm also pleased with the first quarter operating results.
When you review our balance sheet, you'll notice a few things. You'll see that the accounts receivable balance was $5.3 million higher than at yearend and incidentally $11.4 million higher than last November.
This increase is due to increased sales and unusually high balances from just a few large customers which have now been reasonably collected. You'll also see that accrued liabilities decreased significantly in the quarter nearly $4 million.
As a result, or an impact on cash of increased receivables and decreased accrued liabilities, our line of credit was still $11.3 million at quarter-end with $1.7 million in cash. So we are very pleased that today Bob could announce that our cash balance exceeds our credit balance.
So as you can see, we have collected a significant amount of cash in the past six weeks. November and December seem always to be our highest collections month by quite a bit.
If you look at the slide titled Selected Cash Information, you'll see a summary of cash generated by these operations. You'll see that net cash generated in Q1 was $3.4 million even after we paid $300,000 for capital additions and $1 million for curriculum development.
I should say $1 million for very exciting and important curriculum development. At the end of Q1 we still have $31 million of domestic net operating loss carry-forward and additional unused foreign tax credits.
The amount we pay for domestic income taxes will therefore be significantly less than statutory rates for sometime. Our tax provision is, however, an unusually high rate at 71%.
This high tax provision makes it look like we have a bad tax situation in the company and it does hurt our calculation of earnings per share. But we really have a favorable tax situation with such a large net operating loss carry-forward and unused foreign tax credits.
For sometime we will continue to have a high effective tax rate on our income statement, but happily we will also continue to pay a relatively small amount of cash that actually goes out for taxes. If you're new to Franklin Covey and have interest, then please call me and I would love to talk more about this tax provision and also our financing obligation, which is really capitalized rent, and 3.4 million outstanding shares that are held in escrow related to our management loan program.
So in summary, we are pleased with our first quarter result. We are pleased with our current momentum.
We expect to invest in growth and to grow in the future. As we grow, we expect to generate increased cash from operations, we expect our balance sheet to remain strong, we expect our liquidity position to be strong, and again we're just pleased with a good quarter, and if you have any balance sheet or other questions, please call.
Thanks, Bob.
Bob Whitman
Thanks, Steve. Before we go to questions and answers, I'd just like to invite Shawn Moon, who as you know runs overseas all of our direct offices and all of our field support practices as well as some of our national account practices, to just share a couple of views on what's going on out in the field, and also ask Jen Colosimo, who is our Chief Operations Officer, also leads our leadership practice, to just give quick updates, and then we'll go to questions and answers.
Shawn Moon
Thank you, Bob. Good to be with you all, good afternoon.
As Bob mentioned in his discussion earlier, our direct offices achieved significant revenue growth in the first quarter. Revenues from our eight direct offices were $28.1 million which was $8 million or 40% higher than the prior year, with our domestic offices growing 51% and our international offices growing 16%.
As Bob noted, a large part of this growth was a result of the government services contract. However, it's not limited to that.
Our growth was broad-based as six of our eight locations grew over the prior year with over 50% growth in our southeast and government regions. Furthermore, our product growth was broad-based, it wasn't just in one area.
Each of the major product lines which include our individual effectiveness lines, productivity, leadership, execution and trust all grew over the prior year. Our domestic growth was primarily a result of 23% increase in the number of days delivered, not including the days in connection with the government services contract.
So these are in addition too. These days were largely a result of the strong bookings we had in the third and fourth quarters of the prior fiscal year.
And we're also pleased to report that our strong booking pace has continued through the first quarter of our current fiscal year. Revenues have also increased as we've realized more revenue per day delivered than in the prior year, and a favorable delivered day trends [ph] were particularly offset -- or partially offset by a decrease in product sales to lead client facilitators.
The company's client base continued to be strong. This is an indicator we watch closely.
The company had double-digit increase in its client base, and we define a client by as an entity that purchases more than $30,000 worth of products or services in the proceeding 12 months. And that increase maintained over 60% of our business being generated from repeat customers, which indicates a loyal customer base.
We're also seeing an increase in the average revenue generated from each client. Furthermore, as we discussed in previous webcasts, we sold our Japanese consumer products business during the fourth quarter of FY2009, hustling [ph] for our full attention, ongoing [ph] Japan's training business which had been unfavorably impacted by their difficult economic conditions, and we're pleased to report that we've had 30% growth in Japan, our Japanese operations during the quarter, and expect to see double-digit growth in the second quarter.
Just a final note, Bob mentioned that we had in September our once-every-three-year Sales and Delivery Conference. This is an opportunity where we're bringing all of our client sales partners, consultants, operational personnel and licensees.
This is an opportunity for us to present to them our growth strategies and make sure that everyone is on the same page. And it was a terrific event and we feel like everyone left that marching in the same beat.
And the results that we're seeing now are evidence that that in fact happened. So that's the report from the direct office and the practices.
Bob Whitman
Thanks so much, Shawn. Jen?
Jennifer Colosimo
Yes. Of course you say Jen the minute the pilot speaks, right?
It's been silent until then. Hello, everyone.
As many of you know, I wear a variety of hats. I have two practices reporting into me, the national winning customer loyalty practice and the field-based leadership practice.
I also have our operations from order to cash and quality and our internal onboarding and learning function. And I just have three things to share.
Number one, as Bob mentioned, our winning customer loyalty practice grew 10%. We're excited about that; that's the result of expanding our customer base and retaining our biggest customers.
So we're thrilled about that growth. The leadership practice has been integral into our field both international and domestic growing.
And an exciting thing happening with the leadership practice, we have a keynote session coming at the Training 2011 Conference on effectiveness, engagement and execution. We're really being recognized as a leader in leadership recently within Training Magazine's e-newsletter.
So we're seeing growth on both the winning customer loyalty and the leadership fronts. And from an operational internal standpoint, we have for years collected quality data from our participants of all of our training and consulting, and that continues to be high.
We continue to get excellent participant experience, and we have started to delve into getting very scientific buyer experience. Of course we had qualitative, we had their experiences they share with us.
And now we're going with the same organization we work with with our customer loyalty practice to go out and find from our buyers the results, so, beyond experience, getting more results focused more scientifically and quantitatively over time. We're excited about that happening, and that we'll be able to even better meet the needs of our clients, ramp up those client partners that Bob mentioned, and be better at hitting their exact circumstances.
So, Bob, there's mine.
Bob Whitman
Thanks, Jen. Have a safe flight.
Thank you.
Jennifer Colosimo
Thank you.
Bob Whitman
We're now prepared to go questions and answers. Just before we do, one of the questions of course that's been on the table, been on your minds and our minds, has been, when we get to the point where we have excess cash and liquidity, what are we going to do with that liquidity?
And that's been a topic of discussion over the months at our most recent board meeting, it'll be something that discussions will continue on. As you probably know, there are a couple of things that we're trying to take into account in deciding what that answer is.
One is just the fact that the seasonality of our cash flow, even though the business isn't that seasonal, it seems like our cash flow is somewhat seasonal because of our big third and fourth quarters and our big first quarter, we end up using a lot of working capital to fund the increases in sales during those quarters that you don't really collect until later. So if you look at something that might be in the order of $14 million of free cash flow this year, we really have used $12 million of that to pay down our credit facility recently.
And so for us, while the issue is an important one, it'll likely be later in this year, maybe even at the end of this year to early next year, when we have substantial excess liquidity. The second is that with the expectation that now being able to accelerate our growth, while we don't think we'll have to fund losses to do that, as we said we think we'll be able to get sales people ramped up in the year, nevertheless the working capital needs associated with that, with the success of the speed of trust practice, we have buyout obligations, earnout obligations there, we're going to continue to address this at this meeting and finalize an answer, a strategy that fits with our revised growth plan, in our spring strategy retreat which will occur in May.
But I'm sure there'll be some additional questions on that, but I wanted to at least make you aware that this is a topic on our minds as well as on yours. We think it's obviously a critically important one.
Historically we've had a predilection to return all excess cash that we could to the shareholders either in the form of buyouts, pay off the senior debt, or buying back stock. We're considering the prospect of a dividend as well in the future.
But we want to make sure, I think the exciting perhaps change in the perspective over the last while has been that we actually have more opportunities for investment in the business than we might have thought and we want to make sure that our plan appropriately addresses those various needs as well as the seasonality of the cash flow. At this point I'll now turn the time over to you all for questions and let our moderator tell us how we do that.
Operator
Ladies and gentlemen, if you would like to ask a question, please press star 1 on your touchtone phone. If your question has been answered or you would like to withdraw your question, you may press star 2.
Please press star 1 now to begin. And stand by as we compile the list.
Bob Whitman
I assume that our phone system is working. We either -- who has the first question?
Operator
Sir, we do have a question coming in. The first one comes from the line of Joe Jansen with Barrington Research.
Go ahead.
Joe Jansen
Guys, congratulations on a great quarter.
Bob Whitman
Thanks so much. You bet.
Joe Jansen
I just need a bit of clarification here. In the press release you mentioned direct offices was up 45% and you mentioned largely owing to several large contracts, and then Shawn had mentioned something of 50%, excluding certain things here.
I'm trying to get what, excluding those several large contracts, what, on the year-over-year basis, what direct office has been.
Bob Whitman
My comments, and sorry if we're confusing. Let's take the government services group out separately and say that it grew revenues $5.7 million during the quarter, and that's like 280% growth.
If you'll exclude that, and not all of that was due to the contract because it has other, it has a number of broad-based contracts, if you take those out, the regional offices grew revenues 7% -- the geographic offices grew revenue 7% in the quarter, and that's reflecting that three of the four regional U.S. offices grew by 13% on average and one declined during the quarter.
It's one of our largest and most profitable offices and it'll grow through the year, it just had a year-over-year contract that was smaller in this first quarter.
Joe Jansen
Okay.
Bob Whitman
Does that -- keep going with your question if I've not answered it.
Joe Jansen
Yes. No, no, it does.
That growth rate this quarter and Q4 has really started to accelerate. As this government contract works its way through, are we looking to slow down here, a deceleration?
Bob Whitman
Well, first of all, we've had government contracts for many, many years in this company, and they may be different branches of the government, but we do a lot of work in the Department of the Defense and the agencies and so forth. So this is a business for us that we expect will be ongoing.
We hope we'll win contracts that will replace this. Well, this, we expect this contract will have a reasonably long tail on it and other work will come from it.
We have a very precise strategy about going after other large contracts like this. So we hope this will be part of the business.
But even if it were to tail down, I think the news has been that over the last quarters, independent of the government -- these particular contracts, we've had other substantial contracts we've signed in the execution business and in our schools and other things, all of our practices, and booked days unrelated to this contract worth 21% during the first quarter. So I think the bookings are consistent, even independent of the government contract, are pretty consistent with the revenue growth that we think we can, at least those other ops, that we can keep bookings up 21% ultimately we'll have good at least we think double-digit growth in the direct offices.
Joe Jansen
That kind of leads me to my next question, with the report in Q1 and seeing December's bookings, are you more confident that your EBITDA guidance could be at the high end of the range?
Bob Whitman
I think we're just confirming the range. As you know, while the world is thawing [ph], we're doing strategic business, the timing of which could change.
You've got this government funding issue there. And so we're just reaffirming the 18 to 21 range.
I think the first quarter is in line with what we would have hoped it would be. We thought it would be good.
We reported at the end of the fourth quarter that we had $11.5 million more revenue to be delivered in future quarters than we'd had at the time that time last year. And so the fact that a little over half of that came through -- a little more than half of that difference came through in the first quarter, is pretty well what we would have expected.
So we're sticking with our range until I guess I reaffirm that range. But we didn't slip off our pace in the first quarter, which was good.
Joe Jansen
Great, guys. Thanks, Bob; thanks, Steve.
Bob Whitman
Thanks very much.
Steve Young
Thank you.
Operator
Our next question comes from the line of Julian Allen with Spitfire Capital. Go ahead.
Bob Whitman
Hi, Julian.
Julian Allen
Good morning and thanks for taking my question.
Bob Whitman
Thank you, Julian.
Julian Allen
You mentioned an increase and an acceleration in some of your longer-term growth targets, specifically client partners, perhaps the long-term target being 500 instead of 200 with faster ramp. Can you give us context to that increase in target?
Is it cyclical, is it product-based, is it client-based? But any context to that increase would be appreciated.
And thanks for taking my question.
Bob Whitman
Sure. Thanks, Julian.
The foundation for this, we've been talking about in webcast for several quarters, which has been that we've tried to go from what I'd call a net approach where we have client partners who are representing all of our solutions to all customers to one where they're focused on a narrower set of solutions, focused on a narrower and more targeted group of clients. That's happened in all of our practice areas in the past years and even through the recession we've seen the growth of those practices being significant, not only double-digit but high double-digit growth, where we've actually picked a specific problem or job to be done and targeted a specific sales force against it.
So the constraints, at the 200 level, there were four constraints that we're removing. One is the idea that a client partner owns a geography forever and that -- I mean, take an example, just a state like Ohio.
There are -- we have a wonderful client partner there who's one of our top client partners and will always be one of our top client partners -- there are 3,780 companies or company units with more than 500 employees and another 5,000 have more than 100 employees. We have some very good strategic business there.
But our business there is done with 70 of those clients. And so I think as we have analyzed this and understand the prospects that the client partner like that one can do in terms of penetrating existing clients, recognize the number of new clients he will likely attract every year even as good as he is, you just see the opportunity, and as we have seen with a separate educational effort, or that client partner might have other client partners working with him that can penetrate these markets.
So one element of it is just a recognition now, understanding who our target markets are, and recognizing that there is a significant potential as you target specific clients that are kind of non-geography-based that you can do. That's one.
And second is that we have seen, as we've narrowed the scope of the offerings that our client partners represent and narrow the range of clients to whom they're presenting, so they have more repetitions and more experience going after a specific target client with a specific solution, we've learned that their conversion rates are much higher, their ramp grade is higher. And one of the constraints to growing faster has been, you're trained to grow earnings every year and growing cash flow and even though we had a fast payback of investments in new client partners, it was still having $1 million investment or so hiring new client partners has been some kind of a constraint which if we could remove that and have them ramp in a year would accelerate.
The third and perhaps the most important constraint has been mentorship. You have to get client partners ramped up and to hire new client partners.
One of our constraints which we've talked about when this question has been raised in the past is the constraint of having enough mentors and that we are trying to develop mentors and mentorship models. Again these practices are affording us a very significant boost to our mentorship capability as we now have in certain practices regional practice leaders who are there while you have a general manager and area directors and so forth which we'll continue to have.
If I'm a new client partner in the Central Region out of Chicago assigned to work primarily on the execution practice with multiunit operators, I now have -- in the past I had to care on getting some mind share of my senior client partner, now I've got a practice leader who's riding with a shotgun with me. And as we've done that for the last few years, we've seen the conversion rates increase, success at penetration.
So it's really a combination of those factors that we've already been doing, it's just the natural result of that is that with -- there are 115,000 companies or organizational units in the country that have at least 500 employees, there are another 130,000 that have more than 100, all of those contained [ph] in our target, about 4,000 of those are currently clients. And given the substantial amount of business we do with existing clients each year and the penetration of that, we're just not going to get to those others very fast without amping this up.
And we now think we understand how to do that. It's not to say there won't be execution issues related to it, obviously anytime you make a big jump like that, no matter how much you prepared, it will take us -- we're not going to go from 10 to 50 a year in one jump.
But we'll expect to move to say 15 this year, 20 next year, 30 the following year. Hopefully at that point we'll see our way clear to be able to go higher.
But that's the kind of ramp that we think we can get to. And the same thing works in our international licensee partners.
They have a couple of hundred client partners today and their major growth initiative will be the same and be driven by the same practices. Our practices will have that reach internationally as well.
So hopefully that -- is that helpful at all, Julian?
Julian Allen
Yes. And my only follow-up is, it sounds as if the growth bias is towards practices versus call it the traditional type training business.
Is that a fair assumption?
Bob Whitman
I'd just maybe make one distinction, is that what we're really saying is there's a lot of business we do that'll be in the traditional training business. For example, we have formed a new leadership practice and we've formed -- we are forming, as we're kind of in the middle of forming, a new productivity practice which is our original, our historical core offering.
So we actually, we have good starts in both of those areas. What we're really doing though is narrowing the circumstances and problems that we're trying to address with those so that we can get specific things.
For example, in one of our practices, one of the major circumstances that we've gotten hired to address is when there's been a major organizational change, either because there's been a change in the top leader at the divisional level or up or there's been a merger or business combination or restructuring. And these leaders are in the circumstance of needing to establish a new foundation for what they're doing.
We now can identify a thousand leadership changes a month in our direct offices and target those clients. And that -- so I think what's happening is these practices are the way in which we go to market.
Our historical content is often part of the solutions that are offered, but it's just a different way of going to market.
Julian Allen
Great. Thanks very much.
Bob Whitman
Thank you, Julian.
Operator
Our next question comes from the line of Kevin Hanrahan with KMH Capital Advisors. Go ahead.
Bob Whitman
Good evening, Kevin.
Kevin Hanrahan
Good evening, Bob. Congratulations on a fine quarter.
I just had a question which I'd probably asked in the past. And I heard you said the word dividend near the end of your comments before the questions started.
So I wonder if you can just juxtapose for us share buybacks, what you’ve done in the past on either the share buybacks and the big Dutch Auction just before Lehman Brothers went down. Juxtapose the share buyback versus the dividend or possibly both with your excess free cash flow that you expect to have going forward.
Bob Whitman
Yes, I mean, I suppose there's a strong argument that the buyback creates more long-term value for shareholders who stay in for the long term. There's a lot of research that might suggest that.
At the same time, in a world where liquidity is important, where certain funds can't participate unless there is a dividend, there's at least, in broadening the shareholder base, there's some push on that side. And so I don’t know what will come out on the balance.
I mean my background would orient me more toward buybacks than dividend, but at the same time I think you're recognizing where the world is. And so as we think about it, things that are discussed or the prospect of having some meaningful but minimal level of dividend that wouldn't preclude buyback, at such time as we have liquidity level that we think is appropriate for our growth plans.
And so I don’t know if that was helpful at all because I kind of stated the obvious, but --
Kevin Hanrahan
No, that's helpful. I've asked that question to other companies recently, especially because the dividend tax cuts got extended, but then usually the answer, well, the buyback is more efficient in terms of taxation because there's no tax, whereas the dividend is going to get taxed at 15%.
But that is helpful, I really appreciate it.
Operator
And ladies and gentlemen, I show no further questions at this time. I'd like to turn the call back over to Mr.
Whitman for any closing remarks. Please proceed.
Bob Whitman
Thanks, Melanie. Well, again, we just thank each of you for being -- for making the time to be on the call today.
Thank you for your continued interest and support of the company. I think I've said enough about the business, but we do feel optimistic about what's going on and feel like we've built the foundation.
Most of these things that we've been investing in are now -- the trees that we've been planting are now out of the ground and growing. And we think we can -- we'll probably spend most of our time trying to help the trees we've already planted grow and grow rapidly and lesser amount on investing in new (inaudible) new people and new client partners.
So, we look forward to talking with you again in a few months and individually in between now and then. Thanks very much.
Operator
Ladies and gentlemen, thank you for your participation in today's conference. That does conclude the presentation; you may disconnect.
Have a wonderful day.