Jul 1, 2010
Executives
Derek Hatch – Corporate Controller, Central Services, Finance Bob Whitman – Chairman and CEO Steve Young – CFO David Covey – Co-COO, Global Operations Stephan Mardyks – Co-COO, Global Operations Sean Covey – Chief Product Officer, Education Practice Leader, Head of Alternate Distribution Channels
Analysts
Joe Jansen [ph] – Barrington Research James Maher – ThinkEquity LLC Kevin Henehan – KMH Capital Advisors
Operator
Good day, ladies and gentlemen, and welcome to the fiscal third quarter 2010 Franklin Covey Company conference call. My name is Sally and I will be your operator for today.
At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session.
(Operator instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Derek Hatch, Corporate Controller.
Please proceed, sir.
Derek Hatch
Good afternoon, everyone. Welcome to our earnings call for the third quarter of fiscal 2010.
Before we get started, I’d like to remind everybody this afternoon that this presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based upon management’s current expectations and are subject to various risks and uncertainties including, but not limited to, the ability of the company to stabilize and grow revenues, and also like to add, expectations surrounding the recognition of revenue in future periods, the ability of the company to hire productive sales professionals, general economic conditions, competition in the company’s targeted marketplace, market acceptance of new products or services and marketing strategies, changes in the company’s market share, changes in the size of the overall market for the company’s products, changes in the training and spending policies of the company’s clients and other factors identified and discussed in the company’s most recent annual report on Form 10-K and in the 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 performance will meet management’s expectations.
These forward-looking statements are based upon management’s current expectations and we undertake no obligation to update or revise these forward-looking statements to reflect events or circumstances after the date of today’s presentation. With that said, I would like to turn the time over this afternoon to Bob Whitman, our Chairman and Chief Executive Officer.
Mr. Whitman?
Bob Whitman
Thanks, Derek. We are delighted to have the chance to talk to everybody this afternoon.
Let me start it out and just make one statement. We know that the results for the quarter were somewhat lower than what the analyst estimates had been.
And we are going to talk about some of the reasons why we think that may have been the case in just a minute. But surprisingly, we are actually very excited.
In light of that, we are very excited about the trends that we saw in the business this quarter, and we actually view it as a fundamentally very strong quarter that were each of the key bets for us. We are on track and where our revenue generating capability actually was really well in excess of what we would have anticipated in terms of what we were able to put on the books.
And as I said, we’ll go through some of the differences in analysis. But let me say that one of the key underpinnings to our value creating strategy of course is to continue to drive revenue growth.
We think we have our costs well under control; our gross margins have been solid and continue to be. And so the key issue is going to be drive revenue through each of our key channels.
As you see in slide four, in a number of our channels, we did. In the direct offices in the US and Canada, revenues were up 8%, that really reflected was four offices that were up more than 8% and one office in our Western region of the United States whose economy has recovered a little slower than Southern California and Arizona, Nevada and other parts of the country where there was a year-over-year decline that offset that.
But still, overall, the revenue growth was solid. And the good – what we feel good about is we see strengthening in that West region.
And in May and June, we have seen significant strengthening and we, in previous closing, have shown some good revenue growth. We’ve seen – always had an offset from that West region.
We think that won’t be the case going forward. It would be much less the case going forward.
Let me skip over a little and come back to our international direct licensees – our international direct offices. International licensee office grew revenues by 16% during the quarter.
They have had very solid revenue growth, particularly in the last two quarters. The national account practices had growth of 14%.
Their self-funded marketing programs, which you recognized, are these public programs that became self-funded. There was a small increase.
Because we have a sale-leaseback in our campus where we have multi-tenants, we had a lease to that rolled out that did not get replaced in the quarter. And that resulted in a decline of around $300,000, which has a high percentage associated with it in our lease revenue, but we are confident that we will be able to release that space and that will return over time.
The international direct side actually is made up of two components. We had – our Australia and UK offices had good growth.
The Japan offices, which has been a continuing challenge for us, declined, but in this case, the decline was primarily a result of a non-repeat of a big intellectual property contract of around $800,000, which we sold last year, in the last year’s third quarter. Actually we sold several years ago and repeated for a number of years.
But for that, they no longer have an obligation to renew that each year. And I think that was one of the areas where we perhaps should have pointed that out.
Even though we don’t give guidance, we should have pointed that out because it affected both revenue and probably the increased gross margin assumptions in some of the analyst presentations. But overall, growth continued in each of these areas and we were encouraged by that.
I should note that as it relates to Japan, we are happy to report – there is another big difference between the analyst report and ours is that during the quarter we were able to complete the sale of our Japanese consumer products business. This is something we’ve talked about in the past about a desire to fully exit the consumer products business.
And this is the one place that when the sale of the consumer business of Franklin Covey to what is now FranklinCovey Products occurred, the Japan business was not sold at that time. This is a business that had – would have had during the quarter of approximately $1,100,000 of revenue and where the EBITDA actually improved year-over-year.
But it’s a business last year did about $500,000 of EBITDA. We sold the business for a cash payment of $3.3 million to a large paper company and paper products company in Japan.
We got $3.3 million upfront and an ongoing royalty that’s perpetual that we think will be a couple of hundred thousand dollars a year, so that depending how you want to value that, one values that, that would be an add-on to the $3.3 million we received. But aside from it, we are feeling good about the basic economics of the transaction.
Strategically, that completes with the exception of our below-the-line income that still comes from our – or not, that comes from our interest in FranklinCovey Products. We were delighted to get out of that business.
And so that affected the top and bottom line results compared to what the analyst reports would have shown. Let’s say, maybe most of all, we were excited about the momentum in our bookings during the quarter, which were extremely strong.
And we should maybe set up – and they should set up what we believe would be a very strong fourth quarter and first quarter. Let’s just give you a few words about our sales momentum during the quarter.
One of our key metrics is what we refer to as booked days, which are contracts for the delivery of training days on site at our clients’ locations. As you see in slide five, in last year’s third quarter, we booked approximately 1,100 days for future delivery.
Each one of these days has a value of around $5,300. In this year’s third quarter, we booked approximately 1,700 days for future delivery, which was an increase of 54%.
This strong booking pattern has continued through June, where with two business days remaining, we have booked over 900 days compared to approximately 550 days in June of last year. So these additional bookings in the third quarter and in June should alone translate into incremental year-over-year revenues of more than $4.5 million during Q4 and the first quarter of next year.
So that’s incremental to what we did in those quarters last year. Perhaps more dramatic is that during the third quarter, we also won some very significant Execution Practice contracts with major clients.
And we were awarded a very large contract within our government services group with a governmental entity that will result in our training more than 53,000 of this client’s leaders and frontline supervisors. The combination of these contracts is expected to generate more than $15 million in new additional contractual revenue over the next year, contracts and booked day, with more than half of these revenues would take the invoice over the next two quarters, including between $3.5 million and $4.5 million in the fourth quarter alone.
But we feel very confident about our invoicing pattern, given the complexity of some of these multiple element contract revenue recognition rules. We are still analyzing the periods in which this revenue will be recognized.
So this $3.5 million to $4.5 million, all the invoices could come in the fourth quarter, none of it could come in the fourth quarter blend, and we will be getting final accounting judgment on that. But for us, the momentum will drive us and keep driving us forward over the next 12 months in a very significant way.
And so, as you see in slide six, as a consequence of these strong bookings and contracts, our pipeline of booked days and awarded contracts increased to $29.7 million at quarter-end, which is a $15.7 million increase over this point last year and even a $12.0 million increase from where we ended the second quarter just a few months ago. This should significantly improve the already positive revenue trends in our domestic direct office operations and in our practices in the current and coming quarters.
So for us, this was a quarter where despite a continued sputtering economy we were able to present strong value propositions to our clients. They saw the value of that.
We saw business come back in our historical training and leadership businesses. We saw Execution revenues, Customer Loyalty revenues, Sales Performance revenues grow.
And so for us, with the exception of weakness in the Western region, which improved toward the end of the quarter; weakness in Japan, the bulk of which was simply the non-repeat of prior year contract; about $600,000 of FX impact with the strengthening dollar; for us operationally, it was one of the most important quarters we have ever had as a company. In fact, more revenue is put on the books for future delivery than at any other time certainly in memory, but I would say in the history of the company.
Now I’d like to provide an overview of the results for the quarter. We achieved a solid, but not great performance for the quarter on a reported basis.
We think the results were very strong when the impact of the FX charges in our Japan operations is excluded. Say, the differences between our performance and the analyst expectations resided probably – primarily in three areas.
One was obviously there was no knowledge, which we didn’t have for sure of the discontinued operations or the sale of the consumer business in Japan. While we were pursuing it at the end of last quarter, it wasn’t – we were certain enough about the forecast.
That affected the year-over-year improvement in EBITDA by around $300,000 and about $1.1 million in revenue. The $600,000 of FX impact was something where the analysts were neutral.
And the fact that we had this large contract in last year’s third quarter and that we didn’t – we should have – even though we don’t give guidance, I think I should have just said we don’t expect a repeat of that contract. That was an error on my part, probably led them to believe that would be higher.
On the other hand, with the momentum that we have, we believe that, as I’ll talk about in a minute, the fourth quarter would likely be at least as strong if not stronger than what is being forecasted there. So our reported revenues for the quarter were up $1 million or 3.5%.
Revenues were up $1.1 million or 8% in our domestic direct offices; our international licensee revenues, essentially all of which flows through to the bottom line, were up $400,000 or 16%. The national account practices revenue was up 14%, reflecting increases in Sales Performance, Education, and Customer Loyalty practices.
As noted earlier, our international direct offices were down $700,000, which is 12%, with revenue growth in Australia and the UK being more than offset by revenue declines in our Japan office, primarily resulting from that $780,000 intellectual property sale which occurred in last year’s third quarter in Japan which did not repeat this year and was essentially all profit. Excluding the impact of this contract non-repeat, revenues from our international direct offices would have been up 2%.
As noted earlier, during the third quarter, we completed the sale of our consumer products oriented business in Japan, and I’ve talked about that. And as previously discussed, the sale of this business is accounted on a discontinued operations basis.
As noted, excluding the impact of the FX charges in the Japan operations, we think we felt really good about the quarter, with revenues up $1.8 million without – with (inaudible) of that. The adjusted EBITDA of $1.8 million was up $2 million from last year.
Our gross margins were solid. We had a slight decline in gross margins relative to prior year, but again with – last year was – because that intellectual property contract was almost all profit, it skewed it a bit.
So without that, we actually would have exceeded last year’s gross margin by 70 basis points. Steve will speak to our SG&A and restructuring costs, but the combination of those two declined of course during the quarter.
And our EBITDA for the quarter of $1.7 million was a $650,000 improvement, but of course the – obviously percentage-wise it’s huge, 70% or so improvement compared to last year’s EBITDA of $1 million. Excluding our Japanese operations and these non-repeating charges, that would have of course been higher.
Our operating income for the quarter improved $795,000. Operating income would have increased $2.2 million, but when you exclude the non-repeating contract and FX charges, net cash provided by operating activities was $1.7 million – which was an increase of $1.7 million compared to last year’s third quarter.
And our balance sheet also improved during the quarter. We paid down our credit facility to $9.3 million as of the end of the quarter.
And with the proceeds from the sale of our Japan consumer products business and strong fourth quarter operations, we continue to pay down our credit facility. We will continue to pay it down during the fourth quarter and expect that we will essentially have no outstandings on that by the end of our first quarter.
As a consequence of everything I just mentioned, we are feeling very good about Q4’s – fourth quarter’s expected performance. Five weeks into the fourth quarter, our revenue booking momentum, as I noted, continues to be very strong.
We expect that the fourth quarter’s overall booking performance will continue to be strong. Another difference, in the third quarter last year, we did a special promotion with our facilitators in the third quarter, which we’ve historically only done in the fourth quarter.
That drove significant additional revenues in last year’s third quarter, which again we could have mentioned – maybe should have given that much guidance. But we are putting all of our effort behind the fourth quarter facilitator promotion, which we determined as the best thing to do.
So we wouldn’t confuse them. And so we will expect some upside in that area as well.
We have strong bookings in our education business. As shown in slide seven, while our business is not that seasonal, we typically generate substantially more revenue in our fourth quarter than in other quarters.
And this is the result of the fact that much of our educations practice revenue is recognized during the fourth quarter when teachers and principals are not teaching school. Second, there is a one big promotion now for our more than 9,500 license facilitators occurs in August where if they buy 10 training manuals, they get one free and they get some other things that encourages people to purchase at that time.
And that’s historically a very big pop and we expect not having done it in the third quarter, we will have some upside versus last year in the fourth quarter. And so because of the strength of the education practice, the very strong bookings that we’ve talked about in the third quarter and through June, most of which we deliver during the fourth quarter and in next year’s first quarter, the increase in the number of newly certified facilitators who are expected to purchase training manuals in the fourth quarter and these new significant execution in government services contract, we expect this year’s fourth quarter to have revenues that represent an even higher proportion of our annual revenues than in prior years.
That should give us some upside and perhaps an ability to catch up some of – at least some of the shortfall from the third quarter analyst estimates, if not all. And so we are actually feeling very good business, but concerned that I wasn’t as good a communicator about this quarter as I could have been.
So at this point, I’m just going to turn to an overview, kind of the key bets going forward and turn the time over to team members to address these briefly, and so Steve, you might just refer to the next – slide eight in your deck. And I’m going to turn the time over to Steve Young, our CFO.
Steve Young
Okay. Good afternoon, everyone.
Nice to be with you today to talk about cost reductions and – or cost controls and business model. We have frequently repeated three concepts related to SG&A.
First of all, we claim to have an ability to control costs and we are still completing cost reduction efforts at this time. Second, as we see the opportunity, we will invest all or part of those savings in growth initiatives.
And third, as our profits increase, compensation tied to profit will increase. In this quarter, SG&A is $700,000 over last year.
As Bob has talked about, nearly $600,000 of that increase is related to the FX impact this quarter compared to last year. So it is easy to think that SG&A, excluding the impact of FX, is essentially flat to last year.
While this is true, it doesn’t give the real picture. Please understand that in this quarter, we do have a fairly significant amount of savings achieved in the quarter.
Those include savings in our IT systems, our phone systems, and other types of central cost and general savings throughout many areas of the entire company. And then we have quite significantly invested in this quarter in growth initiatives.
Those include practice leadership, marketing platforms, bonuses, etc. So when we look at SG&A, it really, while a very similar amount, is not the same type of SG&A that we had last year.
It’s an SG&A spend that is much more directly targeted toward growth than what it was last year, again because of the savings we achieved and because we applied those savings toward growth initiatives. Bob?
Bob Whitman
Thanks, Steve. And I’ll turn the time over to David Covey, Co Chief Operating Officer, and then – to step on to talk about our field operations.
David Covey
Okay. Thanks, Bob.
Good afternoon, everyone. As was mentioned earlier, we had four out of our five US offices show revenue increases during the third quarter.
And collectively, they grew at 7.6% growth over prior year. As also mentioned by Bob, our onsite bookings were up 54% in the third quarter.
So they are up significantly, we are up 5% only in the second quarter and we were actually down in the first quarter. So we saw significant improvement in our bookings.
We are up 17% for the year, and we expect that those bookings will continue to remain strong. We were down negative 5% last year.
We think if that remains strong, we could actually maybe even be up 20% for the year, 25% turnaround in that in our bookings. Our revenue per booking has also increased over the prior year.
In the past, we’ve been around $5,000 a day and now we are about $53,000 a day, as Bob mentioned. The facilitator revenue was off in the third quarter.
And it was really – we really do like two promotions a year. Last year we did it in the second quarter, third quarter and the fourth quarter.
This year we did it in the second quarter and the fourth quarter. So we saw a 25% growth in our facilitator business in the second quarter, but we obviously saw declines in our third quarter because of a promotion that we did in the prior year.
So we expect a big finish in the fourth quarter and we are gearing up for that now. In our field support practices, those who – the primary role is to help our direct offices and licensee offices to sell our solutions include Execution, our Execution business, the Speed of Trust, and technology platform, which is really our online learning.
We’ve achieved significant growth this year. In fact, for the year, we are expecting that our Execution Practice is going to increase from $4.5 million to about $8.2 million, which is about 78% increase.
Our Speed of Trust practice is going to increase its revenues from $7.25 million to we are expecting about $12.5 million, also a significant increase. And then our online learning platforms is going to go from about $900,000 to $2.5 million.
You’ll see significant growth in each of those areas.
Bob Whitman
Dave, you might just mention what the original goal was in each of those three and –
David Covey
Yes. So the original goal with Execution was $8 million, and again it was 78%.
So we are looking at about $8.2 million. So it’s about a couple of hundred thousand higher.
The goal in our Speed of Trust practice was from $7.25 million to $9.25 million, and we are going to beat that by $3.25 million, maybe $3.5 million, so significantly over that. And then our online learning or technology platforms was from $900,000 to $2 million, and we are looking to beat that by about $0.5 million.
So, all three of them will exceed expectations. And in Execution, we already had a plus-70% expectation.
So we are just going to beat that by 75%. So we will take that.
In our three international direct offices, which is Australia, UK, and Japan, Australian results have been terrific, very strong. We have grown significantly over the prior year in each of the quarters, all three quarters.
And we expect that to happen also in the fourth quarter. The third quarter growth was 20% in local currency even higher in USD.
In the UK office, our revenues were higher than the prior year by 7.4% and due to some reductions in our SG&A EBITDA was more than double. It was actually 127% over prior year.
And we are also expecting double-digit revenue growth and EBITDA growth during the fourth quarter. So we will see that trend continue.
And then the bad news of the three is our Japan office continues to be down. We were down plus-20% in the third quarter.
A lot of this was due to an IP contract that we received last year that didn’t repeat, as Bob mentioned earlier. But even with that taken out, we still would have been down by about 15%.
And we don’t expect our Japan business in the fourth quarter to meet our prior year numbers, but we don’t think the decrease will be as significant as it was in the third quarter, which is good news, if you want to take some good news from that. So overall, we feel great about our operations in Q3, and we are very excited about the outlook for Q4 in our international direct offices.
Bob Whitman
Thanks. Stephan?
Stephan Mardyks
All right. On our (inaudible) national licensee partners operation, after a strong Q2 in which licensee revenues increased 17% compared to Q2 of the prior year, our Q3 license revenues of $2.5 million remained strong as expected and were up 16%, as Bob said, compared to Q3 of last year.
While growth of our licensees has remained constant with mostly year-over-year growth coming from all of our regions of the world, including India and China, we feel very good about our licensee partners operations and future prospects. We continue to see positive indicators among our licensees operations and believe that we will also achieve growth compared to last year during Q4.
Bob Whitman
I’d like to turn the time to Sean Covey to talk about our national account practices.
Sean Covey
Okay. Yes.
We have three national account practices; Sales Performance, Customer Loyalty, and Education. And these are practices that are different than the field support practices that are primarily – the revenue goes through the field.
These are practices where the revenue goes directly to the practice itself. Overall, in Q3, we did very well.
Revenue in national account practices grew about $500,000 or 14%. And the EBITDA contribution was up even further, about $775,000 versus $640,000 last year in the third quarter, which is about a 20% increase.
And year-to-date for fiscal year 2010, our national account practices revenues has increased $3.7 million or 40%, and the EBITDA contribution is even up further at almost $3 million versus $925,000 last year, which is a 220% increase in quarter-over-quarter EBITDA contribution. So one of our practices is the Education practice, and it continued to grow really strong.
And the third quarter growth was 30% compared to last year this quarter. And for the year, we are up about 50% year-over-year, and this is in a very tough education environment right now with a lot of cuts going on.
So we are happy with that. And this practice is focused on helping elementary school transform themselves using a process that we call the Leader in Me, and this is a leadership development process for all the staff and the students that impact the systems, the traditions and the processes of the school.
In short, it works on transforming the culture of the school and unleashing the talents of every child. And we’ve been amazed to see the outcomes that have been produced by this process, consistently refining increased test scores of students, improve teacher morale, improve parent satisfaction, and kids who are better equipped with what we call 21st century life skills such as goal setting, conflict resolution and self management.
And we have been pleased to see the Leader in Me schools are frequent winners of all kinds of awards, including best in innovation, academic achievement awards, and parent involvement awards. Right now, we have over 250 schools in the US and Canada that have signed up to this process, and we are gaining about three to four schools every week.
And given the track record of success we have been having, we believe potentially we could reach thousands of schools in the US and outside – abroad. So, stay tuned.
Bob Whitman
Thanks, Sean. Steve Young maybe just cover summary – few things regarding our financial results for the quarter.
Steve Young
We had a good discussion about the numbers. I, like everyone else, am very pleased with the bookings and the awarded contracts of this quarter.
So just a couple other things specifically related to some of the numbers. When you look at our tax provision this quarter, maybe the best thing is you just can give me a call.
Our tax provision, as you know, is a little bit complicated, and we normally have a very high effective tax rate of sometimes 70% to 80%. That’s – and when the same factors that cause us to have a 70% or 80% effective tax rate are applied to operating result that is near zero, then we should just talk about the tax provision because it’s quite complicated, but we would be happy to talk with you about it.
Second, as it relates to Japan, we have talked about the sale of our Japan operations and that it was included in discontinued operations. Please also note that it was a subsequent event to the quarter.
And therefore, the $1 million gain on the sale of the business in Japan will appear in our fourth quarter. There are still – it still is appropriate to show it as discontinued operations in the third quarter, and that’s also why you will see on the balance sheet assets held for sale.
Those assets are the Japan assets, primarily inventory hold for sale. So for the quarter, our balance sheet is stable.
Our booking trends are great. We are able to invest our growth in growth initiatives.
The sale in Japan will allow the focus that we have talked about. Our margins are good.
We have revenue growth. We have income from operations.
And at the end of the day, we generated some cash – a good amount of cash. So Bob, this is a summary of the quarter.
Bob Whitman
Yes. Just before we request questions and answers, I’ll just conclude and say, this week has been an actually very exciting week for us.
We had our quarterly Redwood council, we call it, the top 25 leaders in the company together for the last three days. It was kind of our pre-planning and discussion for the next three to five years.
I think we have recognized that for the first time in a long time, the bets on the table for the next three to five years are the same ones that really led us well over the last few years. In 2005 to 2008, our domestic direct offices – or our direct offices in total grew revenues by 42% and EBITDA by 92%.
Basically they increased revenue about $33 million during those four years and EBITDA by around $17 million. Our international licensee operations more than doubled, increasing revenue and EBITDA contribution by more than $6 million.
We introduced our national account practices during that time, and they have been growing by about $4.0 million to $4.5 million of revenue a year on a very profitable basis. And so going forward – and in our field support practices, which we introduced in execution, trust, and in our technology platforms and so forth that we introduced in the last couple of years, and David has already reported on their growth, and so there was a lot of excitement among our team.
We feel very good about all of our leaders. Those leaders have been in place for a number of years that are committed to being placed in the future.
Their compensation has always been based on profit, but we are introducing an enhanced profit participation opportunity for meeting the kind of growth. And so you recognize that if we can accomplish over the next three to four years what we did in the three to four years, 2005 to 2008, we have the opportunity to add not small amounts of EBITDA, but over $25 million or so if we just do what we did.
And we believe that we understand those bets better than we did then. We’ve got a team that’s more seasoned than they were then.
Many of the activities, which we found weren’t that useful as you try to do many things, have now been refined. And so there is a real commitment on our part.
Our balance sheet is strong and will get stronger as we pay off our credit facilities. So all in all, I think we came out of our meetings earlier today feeling that walking arms and being committed to as a team really moving this business forward.
Given the nature of our business, we have some large contracts. There will be quarters where a contract that you hope to deliver revenue in the particular quarter slides a little bit into the next quarter just because of the clients’ management needs.
A little of that happened in this quarter as well. But I’d say except for the things we’ve mentioned that were negative, really so for us, the 25 operations our leaders represented, only two had negative results during this quarter on a year-over-year basis.
And even those two are showing improvement. So we feel good about it.
We think we are well positioned for the fourth quarter. As you know, we don’t give guidance, but directionally the analysts have made the estimates they have made for the fourth quarter.
And for us, it seems like those are the numbers we ought to be able to achieve and perhaps exceed depending on the revenue recognitions with some of these contracts. So anyway, as we look at it, this is going to be an enormous increase in profitability and revenue for the year.
And so we are feeling that we are on the right track. At this point, I’ll now turn it over for questions and comments and be happy to take those.
Operator
Thank you. (Operator instructions) And your first question comes from the line of Joe Jansen [ph] with Barrington Research.
Please proceed.
Bob Whitman
Hi, Joe.
Joe Jansen – Barrington Research
Do you guys hear me now?
Bob Whitman
Now, we can.
Joe Jansen – Barrington Research
Sorry about that. Technical difficulties on my end.
Just want to get some more color on the types since I think that’s like kind of the big story here. You mentioned the large contract, $15 million.
Are you seeing more contracts of that size in the RFP process that you are currently bidding on?
Bob Whitman
I am glad you raised the question. Let me just articulate, this $15 million increase in the pipeline of booked days and contractual revenues is made up of three basic components.
About $4.5 million of that $15 million relates to the increased bookings, onsite bookings, to which David referred, that occurred in the third quarter and that have occurred thus far in June. This is as of the end of the third quarter.
So about $4.5 million relates to that. About $8 million of it relates to a large governmental contract.
We think there is upside on the size of that contract actually, and we think that actually against that contract in the fourth quarter alone, we will invoice between $3.5 million and $4.0 million. It’s a one year contract.
And so we think the potential for these are substantially bigger. That’s $8 million.
And the rest is made up of several large for us contracts but much smaller than this governmental entity primarily in our Execution business than in others. So I’ll now go ahead and answer the point to your question.
I’m going to make sure that you are clear that it’s not a $15 million contract per se, but it’s a series of contracts and booked days that add up to the increase in $15 million of what we have on the books to be delivered in future quarters. Does that help at all?
Joe Jansen – Barrington Research
Yes, that does. Are you seeing – I mean, regardless of size or overall are businesses already starting to increase the training spend, are you seeing more RFP?
Bob Whitman
Let me ask David and Stephan respond to that and I’ll add any further commentary if there is anything else.
David Covey
Yes. I would say that the leading indicator we look at is booked days, they book for the future.
So typically these days will be booked, most of them we have delivered in three months. Some of those are out for six months.
But as I said, we were up 70% for the year, we were up 54% for the third quarter, and we were down 5% last year. So that’s really the leading indicator.
We started off the quarter at negative flow in the first quarter. The second quarter, we were positive five, and then positive 54.
So we really have seen in the last three months our bookings increase dramatically. Clients seem to be spending more, opening up their profit books a little bit more.
We are hesitant to say that we are out of the woods apparently, but we definitely have seen an increase in training dollars being spent.
Joe Jansen – Barrington Research
What about conversion rates?
David Covey
I would say, higher in conversion rates, yes. I think I mentioned six to 12 months ago, a lot of the business meetings that we had were meetings where we would talk about our products and services and give proposals and so forth.
And they would say, hey, this is great, why don’t you come back and talk again? And we didn’t get anywhere, we couldn’t get any business, but – and we weren’t.
They were just kind of straining us out a little bit in terms of timing. And now we are seeing the timing back to where it was in fiscal ’08 where clients are booking things for one, two months, three months out.
And the cycle – the timeframes are not as long as we’ve seen in, say, last year – last fiscal year.
Bob Whitman
Stephan, do you have anything to add?
Stephan Mardyks
Yes. I mean, compared to last year, especially in Europe, universal (inaudible) Brazil, India, China territories are really booming (inaudible).
But even compared to last year, really growing this year. The UK, Europe, still getting better, but slower lower than what we would expect.
So that would be very different, as you already know, region by region.
David Covey
Yes. Just to add this, Joe, that I think probably economy continues to be who knows what, I mean, up and down.
The business we are getting now is not being, is not based so much on prosperity by these companies. They have cut a lot of people.
And from an economy’s perspective, it’s not the best thing. Obviously from a human perspective, it’s terrible.
But the economy is not the best. It is not adding people.
But they are training the people they have and recognize them. If they are going to move forward, they need to make these investments.
And so even all the way through the depths of the recession in the Execution business, in the Speed of Trust business, Customer Loyalty, Sales Performance, we grew all the way through. And so those things are just accelerating now.
And what we are seeing come back is the willingness to invest in the basic HR – you know, more HR led things of training leaders and training frontline employees because they have fewer of them, but they need to win with the people they have. And so they need to really make sure that everybody there is on the same page.
A large client that we have is in the lodging business, and you think there is – this industry, as you all know, has been through several recessions, but this recession, the impact on revenue per available room has been greater than the last three combined. So it’s a terrible time for them to be making investments, and yet they are saying this is the time we need to invest if we are going to win in the marketplace because we have a chance to differentiate ourselves where we can get our large numbers of frontline employees on it.
So we will be very happy if the economy gets really robust because I think that will bring back some of the less strategic investments that we historically have had some benefits from. We are not seeing that business now, these are very serious minded business people who are saying I need to do this or I need to do that with a specific business purpose in mind.
Joe Jansen – Barrington Research
Great. That helps.
Thanks a lot, guys.
Bob Whitman
Thanks.
Operator
(Operator instructions) Your next question comes from the line of James Maher with ThinkEquity LLC. Please proceed.
James Maher – ThinkEquity LLC
Good afternoon, everyone.
Bob Whitman
Hi, James, how are you?
James Maher – ThinkEquity LLC
I’m doing fine. How are you?
Bob Whitman
Doing well. Thanks.
James Maher – ThinkEquity LLC
A couple of questions for you. In terms of again the pipeline that is the key thing here, you mentioned in the Education practice that you are seeing good booking.
Are you seeing any difficulty in school districts and school systems committing to projects? I know we’ve been hearing that a lot from other vendors who – or other companies who have a lot of education clients.
Are you experiencing that? And I’m trying to get a grip in this particular practice and more broadly in what’s really driving the key big acceleration right now in the pipeline.
Sean Covey
Yes, sure. This is Sean.
Well, we are not – we are seeing – on one hand, we are hearing districts and school principals talk about all the cuts they are going through right now. On the other hand, we have I think such a powerful option, powerful solution that schools are flocking to this.
And so we haven’t – schools that want to do the Leader in Me process were finding that they find money, they can get title one money, or they find grants or they do fund raisers. Some of our schools, probably about 25% are sponsored by corporations.
We just got a big corporate sponsor to donate $1 million to 40 new schools over like three years. And so I think it’s because we have a very compelling offering that we are getting a lot of people coming in.
James Maher – ThinkEquity LLC
Do you anticipate any benefit from the raise to top funds or do you think are these applicable to some of the offerings that you have? Because I know there are some very specific but not easily understood rules on that.
Sean Covey
What we find generally in education is that there is a lot of money out there. You know, budgets being slashed.
If you want to do something, there is raise to the top funds, there is title-one funds, there is all kinds of grants you can write. So we are tapping into those funds.
We are also tapping into partnerships. We’ve just set up a partnership with the Center for the Advancement of Jewish Education, and there are 800 Jewish day schools in the United States.
And their goal is to take it to half the day schools. And so we are starting a pilot program in Florida – South Florida with 13 schools.
They are finding all of this through donations and foundation grants and so forth. And so we are surprised to find that there is all kinds of money out there if you know how to tap into it.
And we are helping our schools do that. We are also doing a lot with Chambers of Commerce.
We’ve got about a $1 million commitment from the US Chamber of Commerce to help out with schools. And we probably had about another $1 million already given to schools by chambers.
And so a lot of our marketing events are getting schools and chambers and local communities together, having big overviews of what we are doing and the schools to step up and say I’d like to do this, and the chamber will step up and say I’d like to pay for it.
Bob Whitman
I think the key thing, as Sean has said, James, is the motivation to get the money because our business in just selling basic training to schools is being affected by that. They are saying, we don’t have budget, we are cutting back teachers, we are not able to invest in classroom, how are we going to invest in training?
But when they attend one of the days or the demonstration days at these schools and they see the impact on these schools through the metrics, then people are going out and say, I got to find a way. And so we are trying to hold ourselves in this business and others.
Where we have a transformative impact, we are able to raise the money. Where we are able to go into this lodging company that’s cutting every other expense and we are the only outside vendor that they are hiring service from, the result they are getting are transformative.
So I think it’s kind of linked to the level of work. The less strategic it is, the more we will be getting hit.
The more strategic, the less we are getting hit, if that makes sense.
Sean Covey
As to the Leader in Me solution, which is just, as Bob said, a total process, is very intense. It’s gone from being zero percent of our business two years ago to being over 60% this year.
We’re very encouraged by the future.
Bob Whitman
Is that helpful, James?
James Maher – ThinkEquity LLC
Yes, yes. And maybe you could further elaborate on which segments of the economy or which kinds of clients are doing better relative to one another.
You’ve talked a little bit about lodging and how you’re doing well there. What about retailers?
I know we’ve talked in the past about large retail operations that have typically at least would have high employee turnover and the efforts you made there. What kind of turns you’re seeing among those kinds of clients?
Bob Whitman
I’ll speak to some of the vertical markets and maybe David and Stephan will talk to some of the other ones. But in the – we had some specific targets that some of these practices have.
As you noted, James, the Customer Loyalty practice itself has been targeted on multi-unit retailers, then particularly those small formats with 25 employees or fewer where there is an enormous impact that the individual employee can make on the overall customer experience. That’s an industry that’s been decimated by the economy.
Lots of units have been closed. But therefore I think the CEOs of these companies have said, look, my big opportunity to differentiate myself and to grow is to retain every customer I have and get them to bring other people in.
They really buy into that. And so there we’ve had good success.
The Customer Loyalty practice has added a number of new clients at least that are in the pilot stage. Some of those roll out, some don’t.
And we won’t know that for three to four months. They have got a number of great assignments in retail.
In supermarkets, we’ve picked up some really significant clients, one of which is in a very large rollout of more than 600 stores. Lodging generally wouldn’t be a targeted industry, an industry anybody would target because of the impact we are having with this significant lodging company and the results we are getting.
There is awareness of that among others and a chance to do additional business. In healthcare, in full service hospitals, patient satisfaction scores drive reimbursement rates under this Press Ganey measurement system.
We’ve gotten a lot of work there. That’s an example of some.
David and Stephan, do you want to add some –?
David Covey
Yes. So the other positive professional services.
We’re doing a lot healthcare pharma, as Bob said, manufacturing has been good for us. What’s been down is construction, we used to have a lot of business in home construction.
So that mainly hit the last fiscal year, but that’s not really making a full recovery. Auto, our business was down in Michigan.
Financial services, some of our businesses in New York in financial services sector have been down.
Bob Whitman
Stephan?
Stephan Mardyks
Yes. I would have exactly the same things outside of the US what David is saying.
We have the Speed of Trust offering as well, and many companies are asking us. So we’ve been into the banking financial industry.
We are having more and more requests to discuss how we can rebuild trust in this environment. What was very interesting as well in the last six months is the increase of global sales.
So companies again are asking us to go on a global business. That’s exciting.
David Covey
Yes. And Jim, maybe just one more answer, this is more than you want to know, apologize for that.
But we are also – market also differently than maybe just industries. But looking about the circumstance in which customers find themselves in trying to identify similar circumstances.
For example, when there is a new leader at a senior level in an organization, whether it’s a divisional president or CEO of an overall company, we are finding that one of the real opportunities is first to sell a solution using as a foundation the Speed of Trust where they are going to establish a foundation of trust for their new leadership with all of their key stakeholders and recognize that that’s really a skill to doing that. We’ve won probably as much as 25% of our business in the Speed of Trust, which has been growing so rapidly, has actually been targeted to some extent more recently at this particular target.
And so we think the circumstances in which people find themselves actually is almost a more important way to segment the market than just the industry.
James Maher – ThinkEquity LLC
Okay. That’s very helpful.
Thank you.
Bob Whitman
Thanks, James, very much.
Operator
Your final question comes from the line of Kevin Henehan with KMH Capital Advisors. Please proceed.
Kevin Henehan – KMH Capital Advisors
Hi, Bob, congratulations on a good bookings quarter. I had a question – couple questions about the balance sheet.
Could we assume that you took proceeds from the Japanese divestment and put that to pay down your credit line as well? Would that be fair?
Bob Whitman
I’ll let Steve speak. We didn’t receive it during the quarter and so I’ll let Steve talk.
Kevin Henehan – KMH Capital Advisors
Right. I know.
Steve Young
Yes, we did. So at the end of the quarter, we ended up with just over $2 million of cash and just over $9 million in our revolving line, so a net of $7 million.
Just to remind everyone, our revolving line is $13.5 million and it needs – our availability is $13.5 million. And that availability reduces to $10 million December 31st of this year.
If everything goes according to our estimates and projections, our borrowings under the revolving line near the end of the year will start bouncing up and down around zero, up or down that line.
Kevin Henehan – KMH Capital Advisors
Steve, were you referring to near the end of the fiscal year or the calendar year?
Steve Young
Calendar year, December 31st.
Kevin Henehan – KMH Capital Advisors
Calendar year, okay. Would it be fair, Steve, to say that it would be close to net debt free cash, say, by Labor Day near the end of your fiscal year?
Steve Young
Well, we have a lot of bookings in our fourth quarter, as we’ve talked about, and toward the end of our quarter. And it normally takes us a little while to collect that revenue.
And so I would say that we wouldn’t be bouncing around zero near Labor Day, but when our fourth quarter revenues are collected –
Kevin Henehan – KMH Capital Advisors
Then you would.
Steve Young
Then we would.
Kevin Henehan – KMH Capital Advisors
I got you. So that leads to a follow-up question, which you probably answered before, Bob, about return of capital to shareholders, which you’ve done a terrific job at, say, in the past few years.
Can you tell us what you would be thinking as you get net debt free cash flow positive – free cash flow? What would you be thinking in terms of buyback or dividends?
Bob Whitman
I think our philosophy won’t be very different. As we look at our efforts over the next year, actually we will probably spend a little less on development of new products than we have in the past just because we’ve had such a lot of investment.
And so we really will not – and even with that, we haven’t had very much per year. And so there is not a lot of – I mean, there is not a lot of places that we anticipate investing outside the business nor do we see a lot of acquisition opportunities.
And so we are going to continue to invest behind the offerings we have now. But beyond that, we expect that we will generate some excess cash flow.
As Steve normally mentions, we have a large net operating loss carry-forward in the US. When that’s utilized – I mean, as large as like $30 million and when that’s utilized, we have a relatively large foreign tax credit situation as well.
So we expect to generate excess cash. Our philosophy in the past has been if we can’t invest it in the business, we would return it to shareholders through – historically it’s been through repurchases.
But I think as we move forward, certainly there have been a number of shareholders who have asked us about. We are considering among other things the prospect of doing some dividending going forward.
But I think our first issue has been just to make sure that we get our credit facility paid off and we will have sort of a credit facility available, which will provide liquidity need. And then in excess of that, we can begin to think about how to use that.
But I think our philosophy hasn’t changed and we believe that we will be able to grow the business significantly in the coming years. Therefore, if we could buy back stock on an attractive basis, I think we would all view that as a good use of cash.
Kevin Henehan – KMH Capital Advisors
Okay. Thanks so much, Bob.
Bob Whitman
Thanks so much. Appreciate your questions.
I think even though our time is up, we are happy to take additional questions; we got started a little late, if there are any others.
Operator
There are no additional questions at this time.
Bob Whitman
All right. We’d like to thank everyone again and we look forward to our fourth quarter report.
Steve and I will be out talking with some of you all in the coming weeks and months, and we look forward to that as well. Thanks so much.
Operator
Ladies and gentlemen, that concludes today’s conference. Thank you for your participation.
You may now disconnect and have a great day.