Franklin Covey Co.
Q2 2009 Earnings Call Transcript

Published: 10 Apr 2009

[Operator:]

Good day ladies and gentlemen, and welcome to the second quarter 2009 Franklin Covey Company earnings conference call. My name is Josh and I’ll be your coordinator for today. (Operator Instructions) I’d now like to turn the presentation over to our host for today’s call, the Corporate Controller, Derek Hatch. You may proceed.

[Derek Hatch:]

Good afternoon everyone and thank you for joining us on our call this afternoon. Before we begin, we’d just like to remind everyone that our presentation this afternoon 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 our current expectations and there can be no assurance that the company’s actual future performance will meet management’s expectations. These forward-looking statements are based on management’s current expectations and we undertake no obligation to update or revise these forward-looking statements to reflect events or circumstances after the date of today’s presentation. With that out of the way, we’d like to turn the time over today to our Chairman and Chief Executive Officer, Bob Whitman.

[Robert A. Whitman:]

Welcome everyone. I’m glad to have a chance to speak with you today, and thanks for making the time to join us. I’d like to start out and just make a few comments about Q2 and then I’ll provide a broader overview of our business overall during the quarter as we see it going forward, and then I’ll have Steve take you through a more detailed explanation of Q2, and then open it for questions. Our Q2, though soft in terms of absolute results, came in approximately as we expected it to. You see that the revenue for the quarter was down approximately $7.4 million, but approximately 60% of that amount had little to do with the fundamental strength of the business in the quarter related to other things I’ll speak about now, and an additional 20% of that was as expected and discussed in our previous calls. The first, you know, item of revenue I’d note that like I said had very little to do with the quarter was that, as a result of softer bookings in last year’s Q3 and Q4 as we noted in last quarter’s call we knew we were starting Q1 and Q2 with less revenue on the books to be delivered during each of the quarters than we had last year. So we started Q2 with approximately $750 thousand less in booked day revenue to be delivered during the quarter than we had last year. Because of strong bookings during Q1 and Q2, however, we started off our Q3 a month ago with in place bookings higher than last year, and I’ll discuss that in more detail. But that was the first item of the $750 thousand. Second, public programs represented about a $1.7 million decrease during Q2 and that was as planned. As you know, public programs are basically paid for marketing events where we put on a program at a hotel and it generates revenue, but it’s basically break-even on profit. As we also talked about in last quarter’s call we’ve significantly reduced the number of public programs we’re holding this year since they’re harder to fill in this environment in terms of people responding to direct mail or companies being willing to send their employees there. And that will impact our revenue. It impacted it in second quarter and will the rest of the year, but essentially no impact on our profitability. So that is one that doesn’t have particular impact on the business. The third item is that we had in last year’s second quarter we had a couple of transactions which were for the sale or licenses of intellectual property. One which totaled about $2 million as noted. One for $1.5 million was to a client in Japan, which was completed in last year’s second quarter. Per the terms of the agreement we knew it wouldn’t repeat in this year’s Q2; however, it will renew – it’s expected to renew in the third quarter in the amount of approximately $800 thousand with half of that to be recognized in Q3 and the balance in Q4. So we’ll see a significant portion of that benefit come into the quarter, which will serve to further strengthen, of course, our Q3 and Q4 results. The other license was sold during last year’s Q2 to a large U.S. company, and that license is still in effect and won’t produce additional revenue in this year although the contract is ongoing. So that was a $2 million piece. And finally our facilitator business continued to be softer in the second quarter as expected. We expected this decline to – it was actually a little more than probably $300 thousand more than we had expected the decline to be, and represented $1 million difference compared to last year. Interestingly, the vast majority of this decline was due to clients not sending new people to become [inaudible] rather than them not ordering manuals and materials to support their existing training personnel, which they’re still doing at about the rate as in prior years. To address this decline in new certifications we’ve just completed a series of 30, you know, face-to-face North American what we call “Facilitator Enhancement” days, which were attended by approximately 900 individual facilitators which represents about 9% of our active facilitator base. We expect that approximately 40% of these 900 participants will cross-certify in additional content categories as a consequence of these meetings, and we expect that to result in more than $700 thousand of new facilitator revenue during Q3 and Q4, in addition to whatever we would normally receive. This Monday we’re also beginning a series of virtual certification events to reach the other approximately 9,000 active facilitators who couldn’t attend a live event, and we expect significant participation in these events and additional significant revenue to flow from these in Q3 and Q4, therefore really softening the impact of just what’s otherwise been soft in Q1 and Q2. I’m pleased to note that in March our facilitator revenue, even without the benefit of any of these things, was up actually more than double digits versus last March. And we also know of several big facilitator orders, one of which will be recognized tomorrow and another one later in this month which total over $500 thousand. So we believe that in this quarter we’ll see a moderation, certainly, and maybe a substantial elimination of the decline in our facilitator revenue. The one unexpected decline in revenue for the quarter, really, was the $700 thousand decline in our international licensee royalties, where softness really began to appear in January and February. As you recall, they went up 12% during the first quarter and started off in December looking strong, but in January and February the impact of the economy hit their countries really around the world. It softened. We’re grateful that the forecast for this month and this quarter aren’t for substantial declines [inaudible] flat, but we did have a decline particularly related to January and February. So those are the, you know, the main differences on the revenue side, which of course had an impact on the bottom line that was significant, but most of it expected. Aside from this, actually our business momentum remained stronger in Q2 and we were very pleased with that. During our year-end conference call we outlined three objectives. I think we reiterated them in the Q1 call. One was to continue to generate strong bookings. If we could do that, then we felt confident that with our cost reductions and such we would have a strong back half of the year. The second was to continue to reduce costs, and the third was to generate cash flow and monetize the assets on our balance sheet. I’d say that in Q2 we feel very good about the progress that we made on all three of these fronts. Let me talk about first in terms of revenue momentum. Bookings during Q2 were up from more than 30% compared to Q1, and Q1 we felt very good about. Most of this new business is scheduled to be delivered in Q3 and Q4. A little bit rolls over into Q1. We won approximately 1,200 new assignments during Q2 compared to approximately 800 new assignments in Q1, which again we also had felt good about. And as shown in Slide 4, which is called Sustained Momentum, our latest 12 month revenue momentum is up approximately $4.2 million over last year as of the end of Q2, you know, which means that over the next months we expect just on the basis of what we’ve already got booked, that we’d have $4 million more revenue to be delivered in the coming months than we had at this same time last year per last year’s revenue. And so we feel that things are, you know, are solid in that regard. We’ve, you know, what is driving that momentum is a lot of assignments around execution, customer loyalty, sales performance, the new trust practice that we acquired is having strong bookings. And in general there are a lot of very strategic pieces of business being done that are both large and expects to be recurring. So revenue momentum for the quarter I said we felt good about and really was good or better than we had anticipated and hoped for. On the cost side, you can see that in Slide 5 called Central Overhead Costs, our cost reduction efforts have really been very substantial. And, you know, while these are projections essentially all of these have been implemented. You know, there’s some – there’s probably less than $1 million of it that hasn’t already been implemented and that’s in, you know, 27 different projects that people are working on, you know, that we’re partially there but it’s just uncertain as to exactly what the number will be. But we’re confident that overall the costs will come out as expected. During Q3 we expect our central overhead costs to be approximately $2.2 million, lower than last year. You see in Q4 that that increases to about $4.5 million during Q4, and that reflects both the ongoing cost reductions as well as the fact that in last year’s fourth quarter we had some overhead costs, though not specifically deal related that nevertheless were non-recurring. They were somewhat deal related in terms of settling up of our long term incentive programs and other things that occurred in the fourth quarter. Nevertheless, on a year-over-year basis we’ll receive the benefit of those in the fourth quarter. The majority of all of these costs will also move forward and continue into 2010. As you see in the exhibit, we every Friday forecast out four quarters and we expect, you know, that each of the first two quarters will also have a couple million less cost than we had even in this last year. And so as a result of these cost reductions, we expect central overhead levels for the next three quarters to be approximately $9.5 million lower than during the same quarters last year. The reason I focus on central cost reductions is those are real cost reductions unrelated to volume increases or decreases. We also, you know, we’ve made some overhead investments in our new Practices and customer loyalty and execution and trust and some of these other areas, but the business model of these covers all those costs, you know, and so the additions of costs are with also an addition in net contribution. Next is the cash flow and balance sheet. Despite the decline in our revenue and profits during the quarter we still generated approximately $4.5 million in cash flow from operations during Q2. This reflects primarily our efforts to reduce our outstanding and receivable balances and Steve will talk about that a little more later. We currently have the sale of our Canadian office warehouse building under contract, and it is expected to schedule to close very early in fourth quarter in early June. In addition to our efforts to monetize assets on our balance sheet, you know, the expected performance for the balance of the year, which I’ll discuss in a minute, should also generate very significant amounts of cash flow which we’ll use to add to our liquidity and pay down our credit facility. So in terms of the outlook and guidance, you know, recognize that given the first half performance, it may be difficult to understand how we would achieve a significant increase in profitability in the second half. I can assure you that every Friday and again in preparation for today’s call we model a wide range of scenarios of booking paces and facilitator revenues and have, you know, the big grid that shows, you know, what if bookings were down this far and facilitators fell off further or whatever. But under all the scenarios that we view as reasonable today, and it’s quite a range that’s, you know, substantially below the levels we’re currently looking at we really stand, you know, and feel confident about our original guidance that as we said last year within approximately 15 months after the sale of our Consumer Business Unit we would achieve a run rate of operating EBITDA that when annualized would equate to the $23 million of operating EBITDA we achieved last year when we still had the Consumer Business Unit. You know, in January I said that we felt at that point that there was a chance we could achieve that run rate even a little earlier than the 15 months, maybe by the end of this fiscal year. I would say that given the impact of the economy on our international licensees businesses and, you know, just the general environment, you know, it’s pushed us back a month or two so that it’s really back on our original guidance. But it appears, you know, really more likely that we will achieve that original 15 month guidance during next year’s Q1. Obviously I can’t predict exactly how the economy will unfold, but our modeling takes into account the scenarios that I mentioned that have bookings and facilitator revenues well below our current pace. And under any of the scenarios that we model, we remain confident that we are on track to meet our original guidance. So I hope this discussions helps somewhat in the understanding of how we see the strength of the business playing out over the next six months. As I noted we expect to have more than $9 million less costs over the next three quarters, with most of that all but a couple million of that happening in the next two quarters. We have a little more than $4 million more on the books to be delivered than we had at this time last year, and expect to continue solid to strong bookings. Some of the largest contracts that we signed up in the first and second quarters while it took a quarter to get them organized to deliver, because obviously when it’s a large company and they’re planning to bring a whole sales force, you know, to train their whole sales force it takes a few months to get things scheduled. But we have begun delivering on a number of those big contracts. In fact, almost $1 million of revenue came in during the month of March, related to some of these contracts that have produced not that much revenue in the past. And really our February and March as back end loaded as this forecast is, our February and March results suggest that we’re on track. Our revenues came in as expected in February and we think so in March. Obviously we just finished last Saturday, so we don’t have everything closed but it looks like it’ll be pretty much as expected. We expect our costs to be in line with our expectations. In fact, each month we’ve been a little better on our costs than projected. We achieved positive EBITDA in February and fully expect that it’ll be significant and positive in March as well. We expect Q3 we’ll have very substantial positive operating EBITDA, with Q4 being even higher, due obviously partially to the extra $2.5 million of expense reduction versus last year but also to the fact that our booking patterns historically and also in this year have a lot of the, you know, have somewhat of an uplift during Q4. So with that overview and recognize you will have time for questions in a few minutes, I’ll turn the time now over to Steve.

[Stephen C. Young:]

Thank you Bob. Good afternoon everyone. I’ll now talk a little more about the operating results of our second quarter. I suggest, of course, that you read our filed earnings release and quarterly report for additional information. Our quarterly result is difficult to compare to last year due to the sale of CSBU in the fourth quarter last year. This is especially true in Q2 because our results last year include the CSBU Christmas season, so it’s their biggest quarter. Please remember also that we retained a 19.5% voting interest in the products company. The results of that operation are and will be reflected in equity and earnings of investee. My comments now relate to the comparison of current year results to the prior year excluding CSBU. First to our income statements. Bob mentioned the sales decrease and also explained the change, so I won’t talk anymore about revenue. Revenue, of course, the make up of the revenue is the primary reason for a 380 basis point decrease in our gross margin percentage. The intellectual property deals that Bob talked about are essentially all margin. The licensee revenue that Bob talked about is essentially all margin. So decreases in those two items alone make up the majority of the decrease in our gross margin percentage. Additionally, we also have the remainder due to other mix, that of facilitator sales being down as Bob mentioned, and amortization costs which are fixed is therefore a higher percentage of sales. So the summary of all that is gross margin percentage down due to mix, with each component of the revenue pretty much holding its gross margin percentage. On the positive side, SG&A was down $900 thousand compared to last year. Some of that decrease was due to decreased sales but more importantly, as Bob mentioned, our restructuring efforts and our cost control efforts resulted in a $2.2 million decrease in central overhead. We expect this trend to continue for the remainder of the year. Still on the positive side, we added $1 million of cost to create the Practices business model and as mentioned the Practices are doing very well. We always get questions about our tax rate being near 80% year-to-date. This tax rate as you remember is high due to unrecorded interest on the management loan program and our current inability to benefit from foreign tax credits. Please remember also as it relates to taxes that we have an NOL carry forward at the end of Q2 in excess of $25 million which will help reduce our actual cash out for taxes in the near future. We also get questions about the number of shares used to calculate earnings per share. Please remember that when calculating earnings per share in a loss position we must deduct the management loan shares of 23.5 million that are held in escrow. Therefore, 13.4 million shares is used in the calculation even though 16.9 million shares approximately are outstanding. So I hope that adds a little more understanding to our income statement. Now a little bit on the balance sheet. Receivables are down more than $5 million this quarter due a little bit to sales, but primarily due to our collection effort in this quarter. You’ll see a tax receivable of $4.5 million recorded at the end of the quarter. This amount will be used to offset future taxes due. Bob mentioned the assets held for sale that is clearly identified on the balance sheet and broken out. You’ll also see that we have our receivable from Franklin Covey Products is $4.9 million. The note portion of this balance totaling $3.6 million was due in January. However, to accommodate our partner we extended that due date and expect payment in January of 2010. Payables and accrued liabilities decreased quite significantly due to the payment of accrued restructuring costs and transaction costs at the end of the year, and also lower accrued bonuses and commissions, and the timing of our EDS payments. We also paid as we disclosed about $1 million for the Trust Practice, primarily resulting in an increase to intangible assets. As a result, our outstanding balance under the revolving credit agreement was $17.7 million. We still expect this amount to decrease significantly by year end, of course depending on operations coming through as expected. Now a little bit on our cash flow statement. Cash flows from operations in this quarter as mentioned was a positive $4.5 million, resulting primarily from collections of receivables and operations offset by decrease in payments of payables and decrease in accrued liabilities. But we are pleased with the $4.5 million cash flow provided by operations. We expect to also generate positive cash flows from operations in the future. We may hold some actual cash balances while still having balances borrowed under the revolving credit line. We do not anticipate at this time any significant capital additions other than IT projects that we have talked about and our normal capitalized development costs. So we expect to have future earn out payments related to acquisitions as we’ve described in the Q. Overall, we expect to generate cash. So I hope that adds a little bit of understanding to our financials as you review them. Again I would suggest that you look at our earnings release and our quarterly report for additional information. Thank you.

[Robert A. Whitman:]

I think we’d like to now open it to questions if we can get some help on doing that.

[Operator:]

Thank you very much sir. (Operator Instructions) Your first question comes from Hamed Khorsand.

[Hamed Khorsand:]

Hi. Just a couple questions here. One is that where are you seeing the strength coming from your bookings that you’re seeing the month over month increases?

[Robert A. Whitman:]

The bookings are kind of – I mean, obviously given that we have 1,200 new ones, you know, they’re coming from a lot of different places, but if you take I’d say there are four areas in terms of content areas or practice areas where we’re having, you know, very significant growth. One is in what we call the execution practice where organizations in these times are recognizing they’ve taken a bunch of steps, you know, they’ve got great plans for reducing expenses and doing other things and yet, you know, how do you get everybody in their organization moving toward the same, you know, on the same page toward that. And so this 4 Disciplines of Execution manager certification process takes, you know, medium and large size companies. Our clients tend to be a little larger typically, and where they might have, you know, 1,000 units. You know, 1,000 stores or hotels or whatever else. It helps to get everybody in the whole organization aligned around the one or two things they’re going to do to execute on the plan. So that’s been an area of significant growth this year. Our customer loyalty practice interestingly although retailers of course have been perhaps, you know, some of the most hardest hit, they also recognize that, you know, one of our observations and analysis over the years is the biggest difference between great performers in customer loyalty and other areas and average performers isn’t that they both have variability. Of course they do. But the best performers, their distribution curve of performance is righter and tighter. On average they’re better and there’s less variability among their operations. And so while most managers and leaders just accept the variability they have as a given, just because they know there’s going to be variability, they assume they have to accept the particular shape of their curve. We can show them how to move the needle significantly on the customer loyalty and other scores and that’s been something where they recognize that it used to be the ones who were righter and tighter used to just be more profitable. Now the ones who are loose and left, you know, might not be in business. And so that’s been something where despite the environment on behalf of large private equity firms and others we’re getting assignments to work on their portfolio companies. Sales performance again maybe not surprisingly but we have a particular sales performance methodology that is particularly attractive for technology or professional services firms, and while we don’t name our clients, if you listed the largest technology firms probably seven of the ten largest – well, say four of the seven largest are clients of ours where they are engaged and we’ve received assignments to train their entire sales forces. Also other professional services firms in consulting and accounting and so forth find this methodology particularly useful for them. So Hamed, I don’t know if that’s useful but those are the areas where you have the biggest growth. There is softness, you know, in the traditional business of going to HR professionals who – you know, that segment of HR professionals who were simply buying a course to fill out a competency in their map, you know, a lot of those people are doing less than they were. And so that part of the business where it’s non-strategic and you’re coming in, you know, simply to sell, you know, based on features or whatever that’s kind of a losing proposition. But if you can lay out, you know, I mean the big issues facing companies today, not to extend this too long, but one is strategy execution or executing on priorities. The Conference Board did a study where of 93 topics, execution rates number one and number two. Not surprising that were there. Second is everybody’s trying to do more with less and so the productivity offerings that we have, you know, even just around time management, things like that, actually have enough edge to them to say, “Well, gosh, if I’ve got to do more with less it’d be nice if I had each of my people what one or two most important things are to do and getting aligned around it.” There’s enormous anxiety out in the market right now. Companies have gone through these big layoffs. They’ve done all this stuff. But 30 to 40% of their employees time at work is either unproductive or less productive because they’re really so worried about their own situation and so we’ve found clients hiring us even to do some of the 7 Habits Principles to help people, you know, bring their own [leather] with them; focus on the things they can affect. And they’re seeing an impact in culture. We’ve got some very large, very large Fortune 500 companies who have mandated this Speed of Trust thing throughout the entire organization, recognizing that boy, in times like this when trust is low and people are uncertain that getting people, you know, not just teaching them about trust but showing the two or three things that they can do as a manager; being more transparent, etc. Those are the things that are winning. So I hope that’s helpful and responsive.

[Hamed Khorsand:]

And just a follow up. Are you seeing a deviation in the revenue per customer? And then you said bookings.

[Robert A. Whitman:]

We’re not seeing – we haven’t changed our pricing and we haven’t been under pressure particularly to do that. You do see some difference in certain assignments. It actually hasn’t – if you look at the revenue per engagement it’s actually up this year, but that’s primarily because it includes other elements so, you know, some of these portals and other things. But, you know, certainly you have in some pockets where people who are training or training fewer people, you know, fewer people are coming to the class than they used to. But on average it’s kind of been offset by these bigger, more strategic engagements.

[Hamed Khorsand:]

Also in the last quarter when you reported Q1 results you said that bookings were strong, and this time around you’re saying bookings are strong but it didn’t get reflected in your revenues. What constitutes we’re going to have a great Q3 in operating income versus an operating loss in Q2?

[Robert A. Whitman:]

Yes, well, I mean obviously I can’t guarantee that but I hope that if anybody wants to go back to the transcripts of the previous calls I hope what we said was because we had strong bookings in Q1 and Q2, we felt that the back half of the year, you know, when those were scheduled to be delivered would be strong. I think there was a specific question where we recognized that very little of the business we booked in the first quarter actually would come into the second quarter, but some did. But mostly these bigger contracts and a lot of the booking pattern, you know, schedule stuff out into third and fourth quarters and what we’re booking now is heavily, I mean, is somewhat third quarter but heavily fourth quarter and some in first quarter. So I think that’s the natural pattern for us. But so, I mean, barring lots of cancellations we feel pretty good about our, you know, where we stand right now relative to our expectations.

[Hamed Khorsand:]

Lastly on your cost savings, could you just repeat the cost savings? I mean what kind of decline in SG&A could we expect in Q3?

[Robert A. Whitman:]

Yes, I think in my comments, Hamed, I mentioned that we think we’ll be and again when you say costs let’s take a look at our Central Costs, because it’s cheating a little bit on our part to claim the costs if sales are down and commissions are down. And so we’re not including that. But just in the fixed cost structure, the central office and central support function, it’ll be down a little more than $2 million in the third quarter and a little more than $4.5 million. And so it’s really $2.5 and $4.5, so about $7 million over the next few quarters with an additional about $2.5 million in the first quarter. So $9.5 million over three quarters, $7 million over two quarters.

[Operator:]

Your next question comes from [Jaime DeYoung – DeYoung Capital Management].

[Jaime DeYoung:]

Really nice job on the cost side this quarter.

[Robert A. Whitman:]

Yes. Major effort.

[Jaime DeYoung:]

I wanted to ask you if you could elaborate a little bit on the customer satisfaction portal and the progress you’re making there on bookings. I’m down in south Florida right now and I’ve had the opportunity to go into about eight different Advance Auto Parts stores, and the managers I’ve spoken with have said that that portal has really been incredibly valuable in helping them with going back to that existing customer base and you know driving additional revenue from customers, and they’ve just been very complimentary about your services.

[Robert A. Whitman:]

I’m grateful, both to them and to you for making the effort to go visit some of our customer locations and so I appreciate that. I think just generally that, I mean the reason why it’s going well just forget what we’re selling. The fundamental result we’re selling is one that basically everybody needs, you know, which is one most people don’t even actually know where their pockets of great performance are. You know that sounds weird. You say, “Well if the big idea is there’s all this value in moving the middle 60% toward where their top performers are,” actually it’s harder than most people think to actually understand where your pockets of great performance are. I mean, just quickly, not to give a long answer, but in this Coke study that we did on behalf of Coca-Cola and the Supermarket [Council] they give us a list of all their best stores, nine different chains. And they looked like they were the best performers just on an absolute financial basis, that’s how they ranked them. Once we put an econometric model over it to figure how they performed relative to the strategic hand they had been dealt relative to the quality of the real estate, competition, etc., over half of those they thought were great managers weren’t. They were just basically the real estate was so good they were just doing what anybody could have done. When you overlaid then the customer loyalty score, you know, only 25 of that 23% of those original great managers were still great. And when you put over the other screen, the other lens of did they also win the engagement and commitment of their employees, there were only about 17 remaining. So what this process does is somebody’s trying to move their operations righter and tighter, it’s number one really important to understand where your pockets are. And so with our big clients this is a huge thing, eye opener for them. They rank their stores. And so I’d say that piece of it which we call calibration is coming in and just helping people understand where they are so they can start to improve. You know, gives every store manager through the portal; they get their data every month. There are interviews going on all the time. All the stores are ranked. And so it puts real attention behind it, something that’s recorded all the way up through boards of directors, etc. The next question of course once you’ve got the score, have the score is how do you improve it? Using the 4 Disciplines of Execution we then take on what we call a wildly important goal, those stores that are under performing on the customer loyalty metric or some other metric, take that on as a goal. So with that, that is kind of what we do and then we add through – we’ve got a new offering called Insights that you can also go in the portal where it gives bite sized segments of training, so that these same store managers who don’t have a lot of time for meeting and they’re running the stores can in 5 and 7 minute segments get the best of our film library with questions they can discuss with their team. So that’s what we’re offering and I’d say the reception has been very good. These engagements tend to be large and our target is retailers. I mean, we’re focusing on retailers and lodging as primary segments because they both have lots of units, they have lots of front line employees, they both have relatively high turnover among front line employees so it’s important to keep training, etc. And our target is people who have at least 100 stores but, you know, target may be more like 1,000. So these are big engagements. They take a while to ramp up. We’ve won two new ones in the last month-and-a-half that are significant. And we’ve got several more in the pipeline. And so I think while it’s a relatively new practice we expect to do, you know, quite a lot of revenue this year and it’s a very high growth area.

[Jaime DeYoung:]

That’s great, Bob. The two that you mentioned that you’ve got as new bookings, are they also multi-million dollar deals like the Advance Auto Parts deal?

[Robert A. Whitman:]

They’re very – I’ll say this, most of these start out with a pilot that’s less than multi-million but they’re each hundreds of thousands of dollars in the initial phase with the expectation that if we get through the calibration phase and the pilot phase, it’ll go bigger. And thankfully thus far, you know, thus far most are moving forward, have moved forward. But it usually takes, you know, you come in; the deal takes two or three months to win the first phase; they test it out and then it rolls out. So we have obviously high hopes and expectations. These are all CEO level sales and they’re not messing around. They’re doing it to test it and make sure it’s working right, and then we hope that they will roll out.

[Jaime DeYoung:]

And they’re all – gross margins are well above the corporate average, right?

[Robert A. Whitman:]

Well, the gross margin is interesting. On our customer loyalty business it’s two-pronged. On the portal itself, obviously those are extremely high margins for the things they get. There is a data collection element that is low margin, actually, in which, you know, getting them their customer loyalty scores, etc. because to do it accurately as much as we’d like to get away from email – I mean as much as we’d like to get away from phone calls, etc., we find that we can’t get a reliable metric that allows them to rank their stores appropriately without it. And so just as our practice head was the head of customer loyalty, [Sandy Rogers] at Enterprise Rent-a-Car, they still use the telephone as well. So that is relatively low margin but it’s what makes this whole thing sticky is getting the scores every single month. On the portal itself obviously it’s impossible.

[Jaime DeYoung:]

The other thing I wanted just to touch on was you did a great job given the cost side, the operating cash flow was quite good in the quarter and now that you’ve got strong bookings that should show up in the second half of the year and you’ve got further cost improvements coming, and then you’ve got that Canadian business that’s under contract, you know, the operating cash flow barring some unforeseen disaster should accelerate in the second half of the year, so what are the plans then for this excess cash that you’re going to be throwing off as we move into the second half of the year?

[Robert A. Whitman:]

Yes, I would think, Jaime, and obviously we’ve in the past I hope that when we, even though we haven’t always done it when everybody wanted us to do it, you know, that ultimately we’ve bought back hundreds of millions of Senior Securities. Now, you know, you’ve got to balance that and so at the point where we feel confident that we’ve got our credit line paid down and things are on track with where we’re headed, you know, we would expect that in the future rather than just utilizing to repurchase shares that we’d probably have some mix of a dividend and repurchases at some point in the future. And so, assuming that we come in as we expect to, I would imagine that in our fourth quarter we’d be having to have a board discussion about what the right use of cash is.

[Jaime DeYoung:]

My final question and I’ll jump in queue here is given you’ve reiterated your 15 month guidance and the strong bookings, is your confidence such that you’ve got plans to, you know, get out on the road and meet with institutional, you know, [buy sigh] firms and attend some conferences and hopefully get some more coverage here as we move in the second half?

[Robert A. Whitman:]

We do and I appreciate your question. Actually beginning the first week in May, because we’ll be in an open window then, for the month of May we actually have quite a lot of events and investor meetings and some presentations at conferences that we’re doing during the course of May. So hopefully we’ll get a chance to get out there. And of course even though this is back end loaded we’re actually through the first months now of our third quarter, so I think by the time we’re out there even though we won’t be able to divulge new information about where we stand in the middle of the quarter, nevertheless I think the fact that we’re actually in the quarter that we believe will be the turn to positive EBITDA and significantly. So, you know, hopefully it will play out. We also have had, you know, some additional analysts. We appreciate Hamed’s efforts on it and to cover the company. There have been some other analysts, one of whom whose conferences we’re speaking at in May who have suggested to take on coverage. And I don’t know of course, we don’t control that, but it seems they’re making the efforts where some time in the coming month or months that we should have some additional coverage out there which will be useful.

[Jaime DeYoung:]

Thank you Bob. Congratulations on the great progress.

[Robert A. Whitman:]

Thanks very much. You know, it’s, you know, standing here and talking about our guidance, obviously I had a background in mountain climbing and I sometimes feel a little bit like that. You know, some of these climbs you’re just very glad to get to the summit but you’re not able to predict that you’ll get there exactly on, you know, you might be two hours late getting there. And people are mad who are waiting around for you. But, you know, you have avalanches and other things in the way and that’s a little bit how we feel here is that we really are very determined to try to hit this guidance and feel like under a range of alternatives we really can’t. At the same time, you know, on a given day you have somebody call you from the UK office and the deal just got moved off and instead of happening in March it’s going to now come in April 23 and you’re still happy you’re moving toward the summit, but on any given day, you know, it can move around a week or two as to when you think you can actually hit the number. But like I say we think we’ll hit it and get to the run rate level some time during the first quarter.

[Operator:]

Your next question comes from John Lewis - Osmium Partners.

[John Lewis:]

Just a couple quick questions. You mentioned that you have the Canadian real estate, I think you said you have a contract and it should close in I guess June early Q4? I was just curious what was the amount that you could sell it for?

[Robert A. Whitman:]

Steve, you can talk about what the book value is.

[Stephen C. Young:]

Well, we expect to sell this building at basically a breakeven with all of our costs and commissions and everything else at our book value.

[John Lewis:]

And I think in the Q is that about $1.7 million?

[Stephen C. Young:]

$1.7 million of book value.

[John Lewis:]

I guess as long term shareholders we see the stock price where it is as a significant opportunity for the company to repurchase shares, and we understand like what Bob was just saying about the need to preserve liquidity and we’re excited that the board can hopefully consider that in early June. And just a lot of things have been moved around and Bob, like you were saying, the mountain climbing analogy, but I think we were originally looking for something like $20 to $25 million in cash from operations and maybe $16 million in free cash flow and given, I guess, that the [Peterson] note, I guess that’s pushed out if I understand correctly to January, 2010. So I guess what I’m trying to figure out, I guess, one of the big bets that we have internally on the company is when you’re going to collect this cash and then how are you – I guess the opportunity to buy back stock, so I guess in round numbers given all the numbers we’ve discussed or you guys have discussed so far, I mean, do you think ballpark $20 to you know a little over $20 million in cash flow or cash from operations is realistic for 2009?

[Robert A. Whitman:]

I’m not sure exactly how much you’re forecasting will come in from additional reductions in receivables on this, so I don’t know exactly how to respond, but let’s just go back and make sure we’re clear about what we mean in terms of the guidance. What we’ve said in the past is so if we get back to a run rate of operating EBITDA within this 15 month window equivalent to what we had before, that would say that we’re on a run rate to hit $23 million a year when annualized. That when annualized we’d be at $23 million of EBITDA. You know, we think that number we’ve said in the past means something like somewhere in the $18 million range of actual EBITDA, actual operating EBITDA. It’s probably a little bit ahead of the run rate actually. Probably a number a little lower than that, so $16.5 or $17 would get you to the run rate. But you know we’ve kind of talked in the terms of $18. So when we say where we think we’ll be, you know, the guidance in our minds, at least in my mind that’s what we’re talking about is $18 million in operating EBITDA by the end of the first quarter. And so with that, if you didn’t have any improvement in the balance sheet, if you just had the same days sales outstanding that would then be, for the year, you know, say for the months through the end of the first quarter that would be the $18 million. You’d have some CapEx spending. We don’t have much in the way of taxes, but we have some CapEx spending. We have some foreign taxes that we pay. And then interest and so forth. So to get to a number like $20, that would require something other than just operations in the EBITDA sense. So the question is how much – we started off the year with a lot of extra receivables as talked about. We had $7.5 million almost, $7.2 million relating to the sale of Franklin Covey Products. About half of that has been collected. We had receivables that were – we had lots of days outstanding and that’s been reduced substantially, but we still have a significant opportunity to reduce it more. We have the sale of this Canadian building, but we also used $1 million to buy the Trust Practice. And so I would think there is, you know, that operating cash flow from operations could certainly be more significant than the net of operating EBITDA minus CapEx. But whether it gets to that level depends on how well we monetize the assets on the balance sheet. You know, as Steve mentioned. The tax receivable, some of that will be monetized as it offsets income, assuming we get our numbers we’ll have taxes to pay. It’ll offset that. And so I think you have to add back from the operating EBITDA minus CapEx, minus some of these other things, and then add back the change in the balance sheet to get your estimate. And so I don’t know exactly which ones you’re using but I think it would require $8 million of which we had $4.5 million this quarter, but it might require something like $8 million improvement in monetization of the balance sheet to get into the range that you’re talking about. Which doesn’t seem unreasonable; it’s just I didn’t know what assumptions you’re thinking about.

[John Lewis:]

So if I were to be a little bit more conservative, you know, something like $20 million in cash from operations and you’ve got, I think, $2.8 million for the first half, so call it $17 so it could be something like $8.5 in cash from ops.

[Robert A. Whitman:]

Yes. And I’m talking, you know, I’m still focusing on this 15 month window, John, just so that – I mean the numbers I used.

[John Lewis:]

Right. I understand that.

[Robert A. Whitman:]

Say by the end of the first quarter, something like that probably is a realistic view if we’re able to hit what we think. And we say within quite a range. It’s interesting, given the advancing of the bookings, how far out they get booked, it has less effect than you might think. You know, if bookings are 15% lower, it has a lot more effect on first and second quarters than it does on third and fourth actually. And so, you know, but we’re not seeing that and we hope we won’t.

[John Lewis:]

I know this is looking out and I mean we’re, I guess, it’s almost half way through the year so for you guys, I mean looking out to 2010, I mean, do you think something like in terms of cash from ops given all the dynamics of your business, do you think $8 million a quarter is sustainable? I guess that could be a little aggressive, but you know somewhere in that range per quarter?

[Robert A. Whitman:]

Let’s just – we can think of what might be underpinning it and you can do the math better than any of us can. You’re very sharp on that. But if we were able – we said in the first couple of quarters we think we’ll have $2 million less – at least $2.5 to $2 million less in Central Overhead in each of the first few quarters than we had this year. Obviously then by the time you get to third and fourth quarters next year you won’t have as much benefit from additional cost reductions because you’ll be annualized on those. If our bookings continue where they are now we’d have then increases in EBITDA in both the first and second quarters so that only if we’re on a run rate of $23 million of EBITDA by the end of the first quarter, then obviously it would imply that during the year you’d get, you know, you could get there. And so at $23 million of EBITDA we’d still have some CapEx and we’d have the other things that we mentioned. We’d also have some continued tax loss carry forwards. And so the question again is how much more you’re expecting to get from improving the balance sheet, because if it was $23 or $24 million you wouldn’t be getting $8 million a quarter of free cash flow unless you’re also improving the balance sheet load.

[Stephen C. Young:]

And at some point, the balance sheet – you’ve got everything out of receivables that you consider additional and your receivables will actually then increase as your sales increase.

[John Lewis:]

I guess you did that one acquisition with the Speed of Trust. Do you see other attractive niche practices out there that are interesting in terms of, you know, potential M&A or do you think you’re pretty well situated?

[Robert A. Whitman:]

I think we’re pretty well situated generally but I think there are a couple. You know, we’re not so anxious that we go out and spend a lot of money or go into debt to buy one. We did – the way we structured this purchase of the Covey Link operation was an upfront payment of $1 million and their chance to earn it out over five years. And that kind of structure where going in you’re maybe paying two times their latest 12 months EBITDA up front as a down payment and where they can earn three times, you know, they can get three times multiple on future EBITDA so that under any scenario it’s accretive. You know, if it can add to a practice area we have one that we’ve been looking at that’s like that. But again it’s small amounts of capital required so it’s not going to be a major theme I don’t think, John. But you know there is one additional one that we’ve been talking with that could end up happening here in the third quarter. And we might add a few million of revenue and half a million of EBITDA or something in the next ensuing 12 months. So they’re not big things but they fill out certain content categories that we think help our offerings, and so where they have significant strong sponsorship behind them, there’s some attractive things to do.

[John Lewis:]

Great. Thank you very much. I’ll jump back into queue.

[Robert A. Whitman:]

Thank you much. I know our hour is about up. Are there any other questions?

[Operator:]

And at this time we are showing no further questions available. Mr. Whitman, you may proceed.

[Robert A. Whitman:]

Thanks very much. I just want to again express appreciation to each of you one for joining the call today, for your great questions. I hope that, you know, we’re making an attempt to be as transparent as we can for people who have historically given no guidance. We felt this year particularly that we needed to, since there’d been such a fundamental change in the business. Number one, because of the sale of Consumer Business last summer. And two because of the nature of the downturn and the assumption, you know, that in this environment we wouldn’t be booking 1,200 new assignments. And so I hope that this is helpful. We recognize the risk that we have in going out and reaffirming, but you know we feel good. We actually feel confident, you know, for everything we can see today but this will need to play out. We’re glad that it’s less back end loaded than it was when we said it a year ago, a lot less than when we said it then and less than the end of the year or first quarter. And at least we have, you know, there are some signs of flowers springing in the winter landscape. So hopefully we’ll be on track here as we move forward. And hopefully you also understand the basic story, and if we get to the summit an hour early or an hour late, but still get there. We hope you’ll still include us in the summit photo. Thanks very much everyone and have a good rest of the week. Thanks.

[Operator:]

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a great day.