Nov 16, 2009
Executives
Boyd Roberts – Corporate Direct of Finance Robert Whitman – Chief Executive Officer Jennifer Colosimo – Chief Learning Officer David Covey – Co-Chief Operating Officer, Global Operations Stephan Mardyks – Co-Chief Operating Officer, Global Operations Shawn Moon – General Manager, Government Services and Education Stephen Young – Chief Financial Officer
Analysts
John [Roffel – Arkin Capital] Analyst for Alex Parish – Barrington Research John Lewis – Osmium Partners
Operator
Welcome to the fourth quarter 2009 Franklin Covey earnings conference call. (Operator Instructions) I would now like to turn the conference over to your host for today, Mr.
Boyd Roberts, Corporate Director of Finance. Please proceed.
Derek Hatch
Thank you and good afternoon. 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 said, I will now turn the time over to Bob Whitman, Chairman and Chief Executive Officer.
Robert Whitman
Thanks Boyd. Thanks to everyone for joining us today.
We are glad to have a chance to talk to you today about our fourth quarter results and about our outlook for Q1 and also about the key factors we believe will drive top and bottom line growth this year and will make us a real growth company in the years ahead. I am happy to be able to report that after several quarters where revenue slipped from expectations due to customers postponing training and consulting engagements, revenues did firm up during the last half of Q4.
As a result, Q4 revenue came in pretty much as expected with revenues of $34.5 million and adjusted EBITDA adjusted for the write-off of our note with Franklin Covey Products and restructuring and other special costs of $3.3 million which is both a big increase relative to third quarter and other quarters last year as well as to last year. Steve will discuss this in more detail in a few minutes.
To give you a sense for the revenue trends, we refer you to slide four. You can see it looks back to Q3 and shows that at beginning in Q3 we started to have some sequentially quarterly improvements in revenue.
After things dropped off in Q2, revenues in Q3 increased a small amount compared to Q2 and in Q4 they grew substantially. They improved substantially compared to Q3 and grew 12.5% or $3.9 million compared to Q3.
After adjusting for public programs, which are on the right hand side of the chart, as you know public programs are really just paid for marketing programs that have very little impact on the bottom line. We consciously began cutting those back in Q1 of last year.
Adjusted for that, Q3 revenues increased about $1 million compared to Q2 and Q4 revenues increased by almost $4 million or 13% compared to Q3. Slide four you can also see the year-over-year revenue gap narrowed in Q3 compared to Q2 and is expected to improve quite a lot further in Q4.
In fact in August our year-over-year revenues were actually up 5% compared to last year and that is reflective both of the traction we got during the second half of the quarter as well as the fact we historically have at the end of August a particular push on our facilitator manuals at the end of our fiscal year. We do that every year.
This year it was a little larger than it had been in previous years. That contributed to overall revenues actually being up year-over-year in August.
During our planning and budgeting sessions this past summer where we expected that once you adjusted for public programs which we expect to be down another $1.5 million this year because we did more public programs in Q1 of last year than we will in this year’s Q1 and we will even thereafter. We expect the year-over-year revenue gap to narrow even further in Q1 and disappear altogether in Q2.
We knew it wouldn’t completely disappear in Q1, or we thought it wouldn’t since the first half of last year’s Q1 was relatively strong particularly in our international operations and among our licensees. Through the first two months of Q1, however, we are happy to report that revenues have been even stronger than expected.
For the first two months revenues are up $2.3 million compared to what we expected for those months and even up slightly for the first two months to last year exclusive of public programs. So even when compared to a very strong Q1 internationally last year we are tracking well on revenues and what is perhaps most encouraging is we are seeing strength in each of our major channels.
It is not all in one or one making up for the other. It is really across all our major channels we are seeing things solidify.
As shown on slide five, because of strong bookings in Q3 and particularly in Q4 we started off our fiscal year in September with revenue on the books which was about $3.9 million higher than when we began last year’s Q1. Our revenue during the first two months has also continued to be strong.
For example, licensed facilitator purchases and these are facilitators who were certified and work inside client companies, which last year we reported were down for the first quarter and through October were down almost 24% last year are up 32% during our Q1 to date this year which is well over $1 million to date. So, on the revenue front we are feeling while we are not saying the world is now all a rosy place, that we feel we are gaining traction.
The pipeline of businesses we are proposing working on are deeper. The willingness to make a decision about these kinds of things has gotten a little better.
So we are feeling better about our ability to meet our revenue targets and that is, as I said, being reflected in our first two months of this year’s performance as well as in August. On a cost side as you know from our previous quarterly calls, we reduced costs significantly in fiscal 2009 compared to 2008.
In our central cost centers, for example, our central general administrative expenses declined by $12 million in 2009 compared to 2008. The annualized impact of these reductions will also benefit this year.
These benefits have been substantial in the first two months of this fiscal year as well. These have consistently met our cost targets over the years.
With the combination of significant cost reductions in completed during the first half of fiscal 2009 and the completion of additional business model adjustments during Q4 we started the fiscal year with almost all of the cost reductions necessary to meet this year’s targets already in place. As a result, we are very confident we will meet our cost targets for this fiscal year, 2010.
So from an outlook perspective what does all this mean for the future? In a statement, we expect to be a real growth company moving forward.
Over the past year we have taken many actions which have allowed us to exit non-core businesses and activities, significantly reduce our capital intensity and increase our profitability. These actions, however, have also resulted in a reduction of our reported revenues because we closed more than 100 retail stores, distributed products on a royalty or wholesale basis rather than through our own channels, converted the Mexican and Brazilian offices to licensees and sold entire business units such as Premier and Consumer Business Unit.
These actions combined with the fact the accounting treatment was often not on a discontinued operations basis [and add to that] our core training and consulting business has actually been a significant growth business even during those years. As show on slide six, in the years 2005 to 2008 revenues from our eight direct offices, five in North America as you know and three international, grew from $79 million in revenue to $112 million, an increase of $33.2 million which is 42% on a compounded annual growth rate of a little over 90%.
Their EBITDA contribution grew from $17.8 million to $34.1 million, an increase of 92% or $16.3 million. As you will see later during these same years the royalties which we received from our international licensee partners moved from $4.3 million to $9.2 million on an apples-to-apples basis which is 114% and including the conversion of Brazil and Mexico grew to $10.2 million which is 135%.
So this kind of growth, the things we think will drive that growth and the things we think will drive growth in the future, but I wanted to give you an idea of the direction where we think the business can grow over the next few years. I will do that through a series of slides 10 and build off the different assumptions so you can sort of understand our confidence going forward.
On slide seven you can see that because of our business model improvement and cost reduction efforts in fiscal 2009 if we were able to just hold direct office and licensee revenues at slightly more than even with what we did last year. I say slightly more than even because if you just take into account the same volume of business we did last year but with the 2% price increase that we implemented at the end of August, and then the fact we had a couple of offices that actually grew last year and if you assume they grow at the same amount they did last year and then of course we had good growth in our practice which I will speak to later with $5.5 million in revenue growth during 2009 in our practices.
If they just achieve that same amount, which their margins are not as high but we would have over $16 million of EBITDA without really much of an increase in the level of sales activity from what we had in 2009. I thought that might be a useful reference point.
Just assume you stayed the same as they were in 2009 and you have the same basic business activity you had last year, because of the cost reductions, operations would improve equal to around $16 million. The next slide, eight, shows the pro forma impact of other business model improvement actions which we have already taken or which are in process which would add another $5 million of EBITDA when they are fully annualized.
These costs include, for example, transitioning our IT system to a new, less complex platform which we expect to implement mid-year this year and it will save us $1 million in this year but then it will save $2 million next year and actions similar to those. So with no additional revenue but just the pro forma impact of other business model actions that have already been set in motion that would add another $5 million or approximately $21 million.
The next slide shows whenever field revenues, this means our direct office and licensee revenues, return to the level they were at in 2008, and we are not saying that would happen in this year and we are not forecasting it would but whenever it returns to that level that given our current cost structure that would add another $9 million to EBITDA meaning that on revenues we have done before with the exception of the practices, would be almost $30 million of EBITDA. Finally if after achieving this level we were in ensuing years able to achieve the same kind of growth that we did just in our direct offices and licensees from 2005 to 2008, had no more growth in our practices and assume we actually have some additional costs associated with this growth that would take EBITDA to more than $40 million.
So the idea, although this isn’t time bounded or giving specific forecast by year or by quarter the idea is without doing very much more than what we have done in the past in these business units because of the cost and business unit changes, we think the growth in EBITDA over the coming years can be really substantial. We also have some new growth initiatives which we will talk about now that we hope can accelerate this in both the timing of achieving this and maybe allowing us to move beyond that, so I refer you to the next slide, 11, which shows the six key drivers of growth.
These are really the six factors that underpin our confidence that we can grow and grow rapidly in the future. First, our significantly reduced and flexible cost structure.
I will ask Steve Young to respond to that. Second, our large and loyal client customer base.
I will give you some idea about the recurring revenue that comes from those customers and we will discuss that. Third, the growth in the size and capabilities of our direct sales forces, one of the major drivers of our growth in 2005 to 2008 with the continuation of what we expect in the future.
Fourth, the growth in the size and number of our international licensee partners. Fifth, the growth in our new practices; things like customer loyalty, education, etc.
Finally, growth for our new technology delivery platforms which were introduced just at the very end of last fiscal year and all of that revenue is still ahead of us. I would like to turn some time to Steve so he may speak a little to the cost structure.
Steve will give you a little more detail on our financials here in a minute. Maybe if you could speak, Steve, to the cost structure issues.
Stephen Young
Thank you Bob. To begin with let me just repeat some of Bob’s words because they were such beautiful words today.
We have demonstrated in our history willingness and ability to control spending to whatever that control is needed. And during this past year our spending did decrease more than $12 million compared to the year before.
Lastly, yes as we go forward and to continue to implement our business model and to benefit from the business model changes already implemented, we will gain an additional $5 million of earnings from primarily the cost side as those efforts are completed. Additionally, in this past year we saw some impairment expenses and restructuring expenses and other special expenses totaling more than $7 million.
We don’t expect a repeat of impairments and restructuring costs like that in the coming year. The number next year should be very, very low for those types of costs as we see it now.
Lastly, this business model that is percentage-based that we have implemented and are refining is a very powerful tool to help us even more in the future to easily direct and control our spending. As our revenues go up or as our revenues change our model will drive our spending and it will be very clear and understood.
So I am very comfortable as in the past in the cost side of the business and our ability to control costs.
Robert Whitman
Thanks Steve. The next topic, or goes that saying that even during the summer because of the additional business model actions were taken during the summer, that assuming the level of revenue in the first quarter would generate more to the bottom line even as it did in the fourth quarter as a consequence.
I would like to ask Jen Colosimo, who is our Chief Learning Officer, who develops and is in charge of all of our customer initiatives as it relates to our consultants and delivery of our different offerings around the world to talk about the second point of the large and loyal client and customer base. Jen?
Jennifer Colosimo
Thanks Bob. As you can see on slide 14 we measure loyalty in terms of those customers returning to us to buy our solutions year-over-year.
Even in the midst of the difficult year we had last year in the economy, both the percentage of revenue from our returning customers and the average revenue per returning customer grew, a clear indicator for us of loyalty driving growth and also increases our referrals because our happy, loyal customers refer us to others. In addition, as Bob mentioned previously a component of our business is certifying facilitators to lead our processes and teach our content in their own organizations.
We have more than 9,500 active facilitators. While at the beginning of last fiscal year we saw a bit of a decrease in what they were buying, we had a huge fiscal year 2008 August and they really stocked up on materials so we saw a decrease.
By the time we got to the end of the year we had increased the number of manuals purchased during the year which means they are teaching our content. They continue to buy and they are finding value in our solutions.
So from a customer standpoint we are seeing growth in our two major indicators; percent of repeat customers, average revenue per repeat customer as well as the facilitator channel.
Robert Whitman
Thanks Jen. So for those of whom we have spoken about this before, the difficulty last year thankfully ended up in not keeping our existing customers and keeping them happy, although that is always an issue, but it really became more difficult to attract new customers and on our facilitator side while they bought more manuals, new companies sent fewer new people to be certified in the early part of the year.
That picked up again in the back half. We are grateful for the chance to work with these customers and for the fact they have found what we are doing to be useful to them even in the difficult times.
There were a number of hotel chains and others who had very difficult years who eliminated all other training except for ours and just felt it was mission critical to what they were doing. We had of course some things eliminated as well that may have been less strategic.
Most of our strategic areas we were able to retain the business and attract loyalty as you saw on this slide. The third driver and this has been a big one in the past is the growth in the size and capabilities of our direct sales forces.
I would like to ask David Covey, who is co-chief Operating Officer for our Global Operations with Stephan Mardyks, to talk about that.
David Covey
Thanks Bob. If you look on page 16 you can see what our model is for direct sales force.
We have a five-year model on how we want to ramp our sales people. You can see it goes from 200,000 in the first year up to 1.2 million in year five.
You can also see in year one even though it is only 200,000 we only lost 48,000 so it is just a slight loss but in year two we make $159,000 of EBITDA on $500,000 of revenue. So, we think that is still a very good investment to make.
We have made 70-80 of these investments over the last five years. Last year we did not make hardly any hires.
We had a few hires and some replacements but we did not stay on the same ramp plan we had in fiscal 2005 to fiscal 2008. I am happy to report we are back on that ramp plan for fiscal 2010.
So that is kind of the model on page 16. Page 17 shows where we are at as it relates to that model.
So you can see on the left hand side a new planned partner revenue in terms of where we were at through fiscal 2008 and to the right of that is the new partner ramp. That is the earlier slide that we showed.
If you go to slide 18, this shows you kind of where we are getting that growth from. As Bob mentioned on an earlier slide our revenues had grown to 42% from fiscal 2005 to fiscal 2008 in revenue and grew 92% in EBITDA.
So from the revenue point of view you can see we are getting that from the top 20% of our sales people. They increased 65%.
That was a significant improvement for us. The middle 60 improved 47%.
The bottom 20 contributed 87%. We are getting it from all three groups and we have a number of people from our earlier investments that are in year two, or year three that we are going to start to really see that ramping up this fiscal year so we are excited about that.
Robert Whitman
David you might just also speak to how you are seeing the new sales force right now and you and Stephan just came back from a long trip.
David Covey
I think we are seeing a rebound in terms of our bookings. Just last week we had our highest bookings so far this fiscal year.
We are seeing customers in the past we are having appointments and talking to customers and we are thinking we are progressing the business along and they were saying no you can have another appointment. Which was fun.
It was nice to have another appointment which was fun. Nice to have another appointment but we wanted to close some more business.
We are seeing now business start to progress a little bit quicker than what we had seen last fiscal year which is exciting. We are seeing customers, as Jen said we have a lot of loyal customers, but we are adding a lot of new customers and we are winning a lot of contracts.
That is happening in the last three or four months. So that is exciting.
Stefan and I just came back from China and Japan. Japan is one of our direct offices.
China is our largest licensee, and we are starting to see an uptick in our business there as well. I don’t think we are out of the woods yet.
We would like to say we are fully rebounded and headed back to the same levels of growth but I think we can see a path on how to get there.
Robert Whitman
The next driver just hit growth in the size and number of our international licensee partners. I would like to turn the time Stephan Mardyks who is co-chief Operating Officer with David in our global operations.
Delivery operations.
Stephan Mardyks
Thank you Bob. On Page 19 and 20 as you can see our international licensee partners we have 34 master licensees and investor licensees who are covering 143 countries so we moved some countries under U.S.
embargo and some countries in central Africa. In all major countries in the world.
This is a [inaudible] local languages which is a great competitive advantage of course. I will echo what Bob said on the financial side.
We in 2004 from $4.3 million to 2008 $9.2 million comparing apples-to-apples but with the conversion of Brazil and Mexico we went from $4.2 million to $10.2 million. In gross revenue we went from $26 million to $66 million which is $40 million gross of course comparing apples-to-apples.
That would be [inaudible] gross with Brazil and Mexico conversion. So our partners are doing well.
What is very interesting is even in last year, in 2009, we were doing better than our competitors. [inaudible] are of course as you know the big countries, Brazil, India and China, and I am very pleased to report we are on track on our market penetration and as we just said awhile back from China which for sure is becoming a key market in our industry.
We have the perfect partners and relevant solutions for years to come to be a key player in China. The same for India.
Of course you know our European partners are also enjoying years of growth. Our content is extremely relevant specifically on the contribution that we are going to talk very soon about.
Robert Whitman
Thanks Stephan. The fifth area is the growth in practices.
We introduced a new concept about a year or so ago talking that in addition to our field sales forces we have these practices leaders who are content matter experts who are focused on specific solutions. They really have two jobs; one is to help the field to be good at selling these solutions.
That revenue is reflected in our field revenues and was a help in the last year with the increase of productivity in our sales force. The other is they have certain national accounts where they have revenue responsibilities themselves.
They split that revenue with the field. So this is reflecting, we show here just the revenue that actually flows to the practices themselves from their national account activities.
But even there while the impact is perhaps multiplied in the field sales, nevertheless they had some good growth in sales. Slide 23 shows from 2008 to 2009 they saw a $5.6 million increase in revenue during the year which was 54%.
Obviously they are coming off of a relatively small base. We think this is also an important thing because we see specific problems, things like customer loyalty, sales effectiveness, education, speed of trust, execution, that are specific topics where we in addition to taking a general approach with our geographic sales forces we can take a specific or vertical market approach in some of these areas.
We think we can achieve really significant growth. Each of these areas we believe in the coming years each of these practices can be between a $10-30 million practice in the coming years.
We have good leaders who are the content matter experts in each of these areas. I will mention that in customer loyalty we grew, adding eight new clients in the last three months.
These clients are in their early stages. They go through a phase where they do a calibration phase and revenue takes several months and sometimes quarters to go up.
So those are off to a very good start. In our four disciplines of execution practice, David you might just speak about what is going on there.
David Covey
Last year we had significant growth in our execution practice even though as a whole we were down as a company, we grew significantly there. We have now expanded that practice all across the U.S.
and we are looking to expand that to China and India and our key international direct offices. So we are expecting this year to have anywhere between 50-80% growth.
If the first two months are an indicator we are at 80%, the high end of that and so we are going to have significant growth in execution practices. It is really a consulting practice for us and we are helping clients get tremendous results and making it happen at one tenth the cost a traditional consulting company would charge.
We are doing it within four to six months. So we are looking to really expand that practice and grow that and have significant growth this year.
Robert Whitman
I think this is an important area. On the conference board’s list of the top 3,000 CEOs every year what are the biggest topics on their minds.
Of 96 topics the first two are execution. Execution is the first one.
Execution on strategy was the second one. I’m not sure exactly what the difference is between those two but they are both execution related.
There are a lot of companies out there that are actually are creating some tools that help people get aligned on goals and other things that are getting tremendous multiples and interest in the market. Even though many of them aren’t yet making money, there is a prospect that the companies will on a wholesale basis do anything, buy anything that has a chance of helping them out a little on execution.
Our approach has been a much deeper one where we are expecting not 7-9% increases in a factor you are trying to drive but really very big changes. 30-40% breakthrough kind of results.
We also have a new electronic tool set to go along with that. We believe on the real issue of helping organizations execute with excellence when you have some of the major consulting firms partnering with us and bringing us in as their partner to help implement the strategies which they have designed for clients, when you have major clients referring us to others that are in related industries, they are saying the impact is so significant and what we saw this year in tough industries like retail and lodging where when they cut out every other kind of training and consulting, we were able to keep these engagements.
So we really feel like we are having an impact in this. In our education area we have also had a good year.
Shawn Moon is the co-practice lead for Education along with Sean Covey, who is travelling today. He is going to give us a quick report on that and our sales effectiveness of practices.
Shawn Moon
Thank you Bob. I am very excited to report on education.
Education is seeing some pretty exciting growth. We went from $4.8 million in 2008 to $6.2 million last year.
We are on a path to hit $7.5 million this year. Year-to-date the first two months were up 78% so we are excited about the trajectory of our growth.
It is really being fueled by the leader in the process. We have learned over the years we can be very effective at taking the leadership content and helping implement them with executives and military leaders and government leaders, etc.
The question is can we bring this down to the elementary school level. We can and we have.
We started last year at this point of the year with about 20 schools implementing The Leader in Me process which again is taking these concepts and driving them down into the elementary school level. So about 20 schools last year at this point in time.
We are currently at 195 and think we will exceed 300 schools this year. We are very excited about that, what it is fueling.
It is the fuel to our growth in education and it is having clearly a tremendous impact. Also excited to talk about our sales performance team.
The sales performance team over the last couple of years have had some tough years. Last year they slipped but we are excited that year-to-date they are at 62% growth over last year.
So that is an encouraging trajectory there. The focus of sales performance really is around very large technology companies.
We are working with some of the largest technology companies in the world as well as other professional services firms. The target there is organizations that have a large sales force, that train their entire sales force and are involved in very complex sales with multiple stakeholders.
We believe we have the premier product and tools available to them and are excited about our growth trajectory there. A good start to the year.
Robert Whitman
Shawn you might also speak to this last year in terms of the new technology platform. Shawn heads up our special sales areas for the company and selling in the technology platforms is a specialized selling effort which I will let Shawn report on.
Shawn Moon
This is an area we are just launching this year. I am very excited about it.
The technology platform is headed by a product we call Insight, which is a subscription based service that allows leaders within organizations access to all of the full range of our intellectual property in bite sized chunks. So during the course of the day without requiring people to leave the office for multiple days or purchase expensive materials, they are able to train their sales force, their people across the entire organization in 15, 20 or 30 minute chunks.
Now the cumulative impact over the course of the year is a very robust leadership development process. It is a very innovative approach now that allows us to access new buyers.
It allows us to scale in different ways and maybe even more importantly for this discussion brings a recurring revenue model that we haven’t had in the past that will penetrate these new markets and we will be able to have revenue on the books for years to come based on these relationships. So, this is something we are launching now and we anticipate it being a $20 million business for us in the coming years.
[Unidentified Speaker]
The key selling proposition on Insight is also directed to Generation X and Generation Y. We think the Gen X and Gen Y are not going to be training in the same way that the baby boomers have.
We have shown that. We still have a lot of baby boomer clients and they are doing a lot of great work but to get the new generation we have got to be able to reach them in different ways.
This is a product that is really specifically designed to do that as well. We are excited about reaching the younger people with this new product.
Robert Whitman
I know I have spent more time on the growth initiatives today than I have historically have but I think it is important now that the dust has cleared for you all to understand the major underpinnings and the strategies we have. We will intend to report on each of these each quarter.
Probably spend a little less time on them but we will have some slides that report on our progress in each of these areas. We feel good about them.
We have spent a lot of time and effort over the years building the foundation for these. Many of them have already been successful and others are on the cusp and we are confident we can move these forward.
I just will say in conclusion that we have had the opportunity over the last 6-7 weeks to be out visiting and doing kick off meetings with all of the associates in our direct offices in North America and it has been great. In these meetings we have had a chance to celebrate those who did have winning performances last year and to personally hand our Presidents Club award and to acknowledge not only the fact that really despite the severity of the storm last year most of our associates kept pressing towards the sum of the entire year.
As a consequence, while some of them didn’t have great years. Many didn’t have great years, many of them are starting out this year with a platform and a pipeline that is much deeper.
As a consequence, like I said most of the pipelines are deeper than any other time in the past year. There is a feeling of commitment, enthusiasm and positive energy by our people that is palpable.
We are off to a good start. Our teams are optimistic about the business for 2010 and beyond and so are we.
So I would just say again it is good to be in a position where we feel like we have more visibility to what is going on and gaining more traction. Certainly I think this is going to be a challenging environment in the coming year but we are starting to get our footing.
In the last 90-120 days we have become more sure footed on predicting and being able to hit our revenue targets. We feel good about where we are in costs.
Strategically we feel we are well positioned to resume the growth that we actually saw in 2005 to 2008 in our core business. We will answer any questions in a minute.
I would like to turn the time to Steve Young to go over the fourth quarter results and add any other comments you would like to, Steve.
Stephen Young
Thank you Bob. Why don’t I just draw your attention to slide number 26, which is entitled Pro Forma Financial Information and is the reconciliation of non-GAAP earnings.
What this slide reflects is what operations would have been adjusted for certain special and non-repeating costs, and is presented using a 41% tax rate. Our pro forma results for the quarter as presented on this slide is after those adjustments $3.3 million of EBITDA on $345 million of sales and generating a pre-tax income of about $600,000.
Using the 41% tax rate, that generates a net income of $356,000. We show this presentation to give a better understanding of what we feel is really going on in the business and what the fundamental baseline economics of the business are.
Excluded to get to this pro forma FY09 Q4 is primarily the Franklin Covey Products note impairment and certain restructuring, severance and other transition costs. During the latter part of FY09 Franklin Covey Products experienced a deterioration in their financial results.
After year-end that deterioration accelerated. Based upon these facts and the expected cash flow we evaluated the collectability of the note and determined the note should be impaired as of August 31, year end.
We have reflected that as a $3.5-3.6 million impairment. Collection of all or part of that note is still possible as it was not written off, it was impaired, but we feel like that impairment is necessary.
They other primary costs included are restructuring, severance and other costs like that we do not anticipate to repeat and accelerated depreciation on assets in the company some that were in development and not implemented. But the $600,000 of income before taxes I believe is a fair representation of what the quarter would have been without those types of costs.
As you look at our financial information our tax provision is quite difficult to understand why the percentage is so high and isn’t the normal 41% we might expect. If you have questions on that I would ask you to please give me a call and I will take a little while to explain that.
It might be important. Also the number of shares we use in calculating earnings per share might be of interest to some.
I would invite you to call and we can go over that. Lastly, let me just mention our balance sheet is something I view as quite straight forward.
We have seen improvement this year in our accounts receivable day sales outstanding and in our inventory turns. We expect to see a little more improvement there.
We expect to deploy our operating cash in additional improvements we get through the elements of working capital to our revolving line so the only thing that will be a little bit different on our balance sheet from in the past is we will have an earn out payment based on the acquisition of the Speed of Trust business. That earn out payment is anticipated to be made in February or March and could be a significant amount of cash out based upon how well that operation is doing.
So it could be between $2-3 million of cash out for that business which is doing very well. So I guess you could say we are excited about the future and we would be happy to answer any questions about our financial position.
Robert Whitman
Thanks Steve. With that why don’t we open it to questions now.
We have taken quite a bit of time in the presentation today but we felt it would be helpful. We will now take questions.
Operator
(Operator Instructions) The first question comes from the line of John [Roffel – Arkin Capital].
John [Roffel – Arkin Capital]
Just an aside, when I try and click through to the link to the presentation on your website it is only pulling up a single page PDF which is just the title page for the presentation. So you may want to repost that at some point.
Robert Whitman
Were you not able to get any of the information we spoke to today?
John [Roffel – Arkin Capital]
I wasn’t able to look at the slides as you were going through them. No.
Robert Whitman
Thank you very much.
John [Roffel – Arkin Capital]
On the pro forma adjustments, could you just give me a little more granularity? The $1.4 million add back on the SG&A line, what is that?
I am assuming that the cost of sales adjustment was the accelerated depreciation but what was the $1.4 million on the SG&A line?
Stephen Young
First of all, the adjustments in that $1.4 million there are some bonuses that were paid with respect to this entire restructure that was going on during this period of time our normal LPIP long-term incentive pay was discontinued. We didn’t make a payment for a year.
Based upon all of the restructuring activity that was going on we paid a restructuring bonus of about $600,000 that would not repeat. Additionally we looked at the reimbursement of some costs that are again sparked by everything going on and everything that has been going on we looked at some costs that should be reimbursed that we did reimburse of about $500,000 for the quarter.
Then there are just some other miscellaneous costs that are restructuring-types of costs in different offices but not reflected as restructuring severance. So again, all of the costs included in there, and we didn’t include all of the ones we thought we could that might not be recurring.
Included in there are those costs we incurred in the fourth quarter that we would not expect to repeat next year or would not repeat if we completed the fourth quarter again.
John [Roffel – Arkin Capital]
In terms of, I missed the final question you made on the tax rate but I know you are using a 41% tax rate on those pro forma financials. Is that the rate that you expect to be booking on a consolidated GAAP basis going forward?
Stephen Young
We expect that at a future point in time when our net operating loss carry forwards are consumed and we are able to utilize our foreign investment tax credits. At that point we do expect to be between 41-42% on our tax rate.
In the meantime we have a very high tax provision, expense as a percentage of our pre-tax number but please know even though our tax expense number is very high the amount we pay out in actual cash paid out for taxes is very low because our net operating loss carry forward. So this net operating loss carry forward kind of goes both ways.
It causes us to be unable at this time to utilize in our provision our foreign investment tax credit. So we have a high expense but it is non-cash expense in that even if…our net operating loss carry forward is more than $30 million right now.
So we have a fairly significant amount of domestic earnings we can generate with very little tax paid on those earnings. So if I was to look at our tax provision in the short-term going forward I would look at about 41% plus a couple of million dollars of expense no matter what our pre-tax level is.
Was that helpful?
Operator
The next question comes from the line of Analyst for Alex Parish – Barrington Research.
Analyst for Alex Parish – Barrington Research
I apologize, you may have answered this during your presentation, but with the current economic environment are you seeing stabilization within the existing clients in your businesses?
Robert Whitman
Maybe as some of you were not able to pull up the slides, but one of the slides we presented was a slide that showed among our existing clients there were two things that happened this last year. One, they actually increased their average spend a little bit.
Second, a higher percentage of them repeated the business with us, or at least a higher percentage of our revenues were accounted for by repeating business from these clients than there were in prior years. So that was one thing that was happening.
This is kind of the larger training clients, the ones who spend at least $30,000 a year with us. The smaller ones, among our facilitators, even though it was a tough year, the 9,500 facilitators actually ordered a few thousand more manuals this year than they did last year.
It is just that new customers did not send as many new people to be there. I think among our existing clients there is a lot of repeat business and growth in the amount that they spend which is reflected in the fact that many more of our clients are now involved in these practice areas where it is really mission critical to what they are doing.
Analyst for Alex Parish – Barrington Research
I know you talked about your EBITDA. I know your goal is to hit a $23 million adjusted run rate EBITDA.
Are you still thinking that could hit by fiscal second quarter 2010?
Robert Whitman
If you look at that buildup, I didn’t give time dimensions on it, the factors that would be necessary to get back to that level, as you saw, if revenues were able to keep more or less flat with the same business activity we had last year, with the business model implementation we have already done plus the annualization of other actions we have taken, as I showed, that would be above $21 million so obviously it would depend on what the revenues are and the timing of the implementation which we didn’t give specific guidance on. I think we feel good that we had a business model discussion on our last quarterly call.
We are a little ahead of our expectations thus far. That doesn’t mean we will stay ahead all year.
We feel good about that and the pipelines we have. So for us, our targeted business model is to be north of 15% EBITDA to sales and that would get us above the $20 million.
We would hope to be at a run rate by mid this year if it will get us to that level and we are hopeful we will be able to do that.
Analyst for Alex Parish – Barrington Research
Would you be able to provide CapEx, depreciation and amortization for fiscal 2010 at all?
Stephen Young
Depreciation and amortization will be quite straight forward and the CapEx isn’t. We anticipate having just over $4 million of CapEx and capitalized curriculum spending during the year.
The CapEx spending is primarily related to our IT systems Bob talked about that we are just in the middle of a system transition. So depreciation will begin primarily on that project midyear.
Then we most always have a couple of million dollars more or less range of capitalized curriculum costs that we have put on the balance sheet. So I think we will have about $4 million of spending between those two items.
Analyst for Alex Parish – Barrington Research
Then for D&A, is that the same run rate as last year?
Stephen Young
Pardon?
Analyst for Alex Parish – Barrington Research
Depreciation and amortization will they be similar to the year that just ended?
Stephen Young
It would be similar to this past year with just added depreciation on those items given a three-year rate. But I don’t have the exact depreciation and amortization numbers sitting in front of me but it will be $7-8 million between the two reported next year.
Operator
The next question comes from the line of John Lewis – Osmium Partners.
John Lewis – Osmium Partners
Just to understand if you were to frame all the practices and the growth opportunities, I guess you gave the year-over-year growth you were seeing. I think you gave execution is up 58%, education is up 75% or so.
But if you were to aggregate up all the practices are we talking in terms of high growth opportunities are we talking about 10 million? 5 million?
20 million? What do you see for 2010?
Robert Whitman
Last year we had $5.5 million of growth in the practices. That was on the one side which you may not be able to see.
I think that kind of growth, again as a base case, having that kind of growth again this year we would see every indication is you have to be able to do at least that well. I think as you heard we are probably a little ahead of that in this first couple of months.
Whether or not we stay above that all year is hard to say. I think the idea it could grow north of $5.5 million to maybe north of $6.5 million this year and maybe a couple of million more than that would be a reasonable range.
If things really take off. Obviously we are coming off a small base so the percentage growth could be even more significant.
These come in large chunks when they come in some of the practices. I think we feel good about the momentum and where we are.
I don’t know if we are predicting exactly everything we will win but we feel good about at least being sustainable to what we did last year and probably a little better.
John Lewis – Osmium Partners
Let’s say we are just looking at education you said you have 195 in terms of Leader in Me customers. I think the average price is $25,000?
Shawn Moon
Yes. It is between $25,000 to $30,000 depending on the size of the school.
John Lewis – Osmium Partners
That almost gets you to $5 million right there, right?
Shawn Moon
Yes.
John Lewis – Osmium Partners
So just to understand for 2009 fiscal year do growth practices kind of defined as execution, education, customer loyalty, trust, in aggregate that is something around $5 million and you are looking…I’m sorry I just want to make sure I fully understand that.
Robert Whitman
The thing about the practices is this isn’t a measure of the whole product line because the product lines we expect will grow substantially more than that. In the aggregate across the world.
What we put into our practice revenue is only the national account activity that they own themselves. So if the Speed of Trust practice goes out and helps the sales force sell big deals, which they do all the time, with other clients, that revenue typically flows, almost all of it flows, through the field operations, not the practice.
So on the other hand when the practice goes out and finds an account on its own, lands it, it ensures the revenue the portion that it doesn’t share is showing up here. So while the practices themselves because they are national account activity or vertical market activity in the case of education, keep that much revenue, we are hoping these practices grow more than that in the aggregate.
That is why it is a little hard to say exactly what the growth per practice is because you can’t know the mix that will flow through to the field versus what will show for the practices. We are holding the practice leaders accountable for their own revenue numbers so we are pretty certain they will do at least the kind of growth we did last year and probably a little more.
That is why maybe it is a little hard to say. We think overall these practice areas can grow more than that.
We just don’t know how much will be reflected in the field versus in the practice itself.
Analyst for Alex Parish – Barrington Research
So on the customer loyalty portal I think the last call you did you had around eight and were looking to add around 8-10 in 2010. You said you added eight last quarter.
So in terms of just customer loyalty portal customers I guess you are up to 16 or so now?
Robert Whitman
That would be true. Eight of them are in the first stage which we call the calibration phase so they are kind analyzing their existing data, getting the thing set, and so that generates some revenue during that portion but most of the revenue starts after they move into a rollout.
We hope those eight will but you don’t know exactly. Our hope is still to be by the end of the year we would have eight clients that were in full rollout.
That were committed to full rollout. But it may not be all of the eight that we have now.
Some of those might fall out and might defer complete rollout. It is encouraging we have added a lot in this last quarter and more than we added the previous two quarters.
So we feel we have some good segments in which we are focusing right now and the message is resonating.
Analyst for Alex Parish – Barrington Research
So basically when those go, if they go through the calibration phase and go live, that should be about $1 million of targeted minimum of 1,000 or so?
Robert Whitman
The potential for any one of the engagements would be somewhere the target would be $1 million. A $1 million engagement.
Then again as these come up out of the calibration and they may take on a division or so. So ultimately we would hope each customer has at least $1 million of opportunity.
That will tend to build during the course of a year to 18 months.
Analyst for Alex Parish – Barrington Research
In your September 2009 PowerPoint I think you show execution, sales performance, customer loyalty, all the kind of growth practices and 2012 you are shooting for kind of like somewhere between $70 million in incremental revenue and as much as $105 million by 2014. So I guess there should be some pretty considerable growth but when you look at that what assumptions do you make about the core business today in terms of holding flat or shrinking?
In terms of what are the overall top line expectations that investors should look for this year and going forward?
Robert Whitman
Maybe my analysis and little presentation wasn’t as helpful as it needed to be. We are trying to kind of give some ranges there so people can figure out but we don’t know exactly where we will be.
On the one hand we believe we ought to be able to hold the level of business activity about even or at least even. So that is one benchmark this year.
That would mean that we had expected in the first quarter it would be down some because of the strength in international last year. Thus far it hasn’t been, in 32 months.
But some idea it would be slightly better than flat I think would hope to be a very conservative thing for the year. That might end up being the realistic one with the growth in practice.
If that is the case then the first bar on that EBITDA chart would be kind of in the range. If we are able to do that.
If the progress to date were to continue and the booking pace and so forth were to continue and the practices were to continue then obviously some of those other bars you get closer to some of them. The idea is that over the next period, the next couple of years we ought to be able to get this thing back to the level of revenue we had in 2008.
I would certainly think in the next two years we would think that. Directionally that gets you into that $30 million range.
So somewhere in between those two is kind of the target for this year and next. I think as we get into the year we will continue to report on how we have done in the recent months and how we are doing in the quarter so we would hope that in January report we would obviously tell you exactly how we did the first quarter and tell you how things are looking for Q2.
We will probably be able to tell you whether we are closer to the one book end or the other. I expect in this year over the next couple of years that seems like a reasonable rate to be in which would represent very significant growth opportunities.
Analyst for Alex Parish – Barrington Research
I think you have right around $113 million on your line at the end of August. When do you think you will be I guess out of that line?
Is that how you are looking in kind of a Q2 or Q3 2010? What are your thoughts there?
Robert Whitman
Again, depending on the range of performance under the conservative end you would retire the line somewhere close to the end of the year. We tend to build up a lot of receivables at the end of the year.
So when we say year-end, the lowest point on our cash is either right before summer or right after an earnings call when we collect on those. So that would be the conservative view.
Obviously improvements above that lower baseline would accelerate that. Somewhere in the late third to early first quarter would be the range when normal operations would retire that.
We have some possibility of capital transactions or something small that would accelerate that but nothing big on the horizon.
Operator
That is all the time we have for questions. I would now like to turn the call back over to Mr.
Robert Whitman.
Robert Whitman
Thank you very much everyone for joining us today. I apologize if our presentation went so long you all didn’t get a chance to ask your questions.
We are also sensitive to the fact that for many of you it is late. So thanks again for joining us.
As a final note, we will be giving next quarter reporting a break ahead of our revenues in terms of domestic direct, international direct offices, licensees and practices so the things we have laid out for you here today we will be able to report on going forward so you will be able to track our progress. I want to express appreciation to each of you who have had the confidence to invest with us and to believe in the story when it was even less obvious than perhaps it is today.
I am glad that today perhaps some of that is directionally showing to be moving in a direction we have all talked about. We feel it is here.
We are optimistic about what we can do and really mostly optimistic because we have such great people. We have great partners.
I express my appreciation to all of them for sticking it out through a tough year and for the great things they are doing already this year. Thanks very much.
Operator
Ladies and gentlemen that concludes today’s conference. Thank you for your participation.
You may now disconnect. Have a great day.