Welcome to the Q1 2013 Franklin Covey earnings conference call. My name is Trish and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.
I will now like to turn the call over to Derek Hatch, Corporate Controller. Please go ahead.
Thank you. On behalf of the company, I would like to wish everyone a happy new year and welcome you all to our first quarter conference call to discuss earnings. Before we get started with our annual shareholders' meeting coming up on January 25, we would like to encourage you if you are a shareholder of record to please vote your shares in as early as possible convenience so that your shares may be tabulated and counted in time for our annual shareholders' meeting. We value your votes and would encourage you to please vote your shares as soon as possible. With that out of the way, I would like to remind everybody that this presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements are based upon management’s current expectations and are subject to various risks and uncertainties including, but not limited to, the ability of the company to stabilize and grow revenues, the ability of the company to hire sales professionals, general economic conditions, competition in the company’s targeted marketplace, market acceptance of new products or services and its 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 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, except as required by law.
With that out of the way, we would like to turn the time over to the company's Chief Executive Officer and Chairman of the Board, Mr. Bob Whitman.
Thanks, Derek. I would like to welcome everyone to our fiscal first-quarter 2013 conference call. Wish you a happy new year and we really appreciate you joining us. Hopefully you all have saved copies of the press release that went out about an hour ago. We are pleased to report we had a strong first quarter. The strongest first quarter ever for our current business with both revenue and profitability growing substantially over the prior year, and we continue to feel very positive about Franklin Covey's business, comfortable about our prospects for achieving continued strong growth in each of our channels and practice areas which we will discuss a little further as we go through.
We are encouraged by our momentum, the expected trajectory of the business in the coming quarters and our outlook for continued growth through the balance of fiscal 2013 and beyond. So, today I would like to just briefly touch on three topics.
First, provide an overall summary of our financial results for the first quarter and for the trailing 12 months. Second, provide a summary of our results in each of our channels and practice areas. Third, give an update on our momentum business pipeline and outlook for fiscal 2013.
I would like to start with an overview of our financial results for the first quarter and for the trailing 12 months. First, on the revenue line we achieved strong revenue growth in both the first quarter and for the trailing 12 months. As you saw in the release, in the first quarter revenue increased $4.5 million to $44.1 million, an 11.4% increase compared to the $39.5 million revenue achieved in the first quarter of 2012. All of this growth was organic and we were pleased it was also very broad-based with growth in all of our major channels. We also achieved strong revenue growth for the trailing 12 months with revenue increasing $14 million or 8.7%, again all of which represented organic growth. We feel as well as I will talk about it later that the pipeline is growing, our revenue engine is strong and we feel that we have got good momentum building.
Second, a high percentage of our revenue continued to flow through to increases in adjusted EBITDA, income from operations and net income. As a result, as you can see in slide three, the adjusted for the first quarter increased $700,000 or 11.5% to $7.1 million compared to $6.4 million in the first quarter of fiscal 2012.
We are pleased with this growth, and particularly so in light of the facts that, one, it was achieved at the same time the company made significant investments in the quarter in R&D, hiring new client partners and sales support personnel, marketing investments, training infrastructure and secondly, last year's first quarter results included an almost $1 million contribution to adjusted EBITDA from what we refer to as self-funded marketing related to a one time long-term book and audio licensing agreement which did not repeat in this year's first quarter.
For the trailing 12 months adjusted EBITDA increased $5.9 million to $27.8 million, a 27.2% increase compared to the $21.8 million in adjusted EBITDA achieved from the same 12 month period last year. The adjusted EBITDA for both the first quarter and for trailing months are the best ever for those periods for our current business.
Income from operations, as you can see on slide four, increased $1.6 million for the first quarter to $5.3 million 42.9% increase compared to $3.7 million in income from operations achieved in the first quarter of fiscal '12. For the trailing 12 month period, income from operations increased $7.8 million to $19.2 million, an increase of 68.6% over the $11.4 million in income from operations achieved for the same 12 month period last year.
Net income, as you can see on slide five, for the quarter net income increased $1.2 million to $2.9 million or $0.15 a share, a 74.3% increase compared to the $1.7 million or $0.09 a share of net income achieved in the first quarter of fiscal 2012. For the trailing 12 month period net income increased $3.4 million to $9.1 million, a 59.9% increase compared to the $5.7 million in net income achieved for the same period last year.
As I noted a moment ago, we were particularly pleased with these strong operating results being achieved while continuing to make significant ongoing growth investments in the business, including investments for research and development, practice, leadership, marketing, substantial ramp up in the hiring of new client partners, trading consultants and event marketing people and in building the mentoring and training infrastructure for our direct offices to continue their growth as well as helping to accelerate the growth of our international licensee partner network.
For the trailing 12 month period, these growth investments totaled more than $17 million, almost all of which were expensed. We see significant opportunities for continued growth and believe that we will be able to continue to make high return investments in each of these areas in the future so we can expect to continue to make significant ongoing growth investments in an increasing amount this year.
Third, our cash flow continued to be strong for the first quarter and for the trailing 12 months. Our net cash generated, as you can see in the slide six, for the quarter increased just $100,000 to $4.8 million up 2% from the $4.7 million of net cash generated in the first quarter of 2012. This was made up of several factors. The adjusted EBITDA increased to $700,000, as we noted. There was also a decrease in curriculum development of $600,000. These two benefits to net cash generated were offset by an increase of about $800,000 in cash paid for taxes and also by a $400,000 increase in the purchase of property and equipment during the quarter.
For the trailing 12 months, our net cash generated increased to $22.2 million, an increase of $6.7 million or 42.8% compared with the $15.6 million achieved during the same period last year. I think, as you know, our net cash generated tends to follow our adjusted EBITDA pretty closely in terms of pattern and tends to be the highest in our fiscal fourth quarter.
Finally, in terms of overview, our adjusted EBITDA margin also remained very strong for the quarter and expanded significantly for the trailing 12 months. As you can see in slide seven, we are pleased that despite significant year-over-year these ongoing staffing investments in new client partners, et cetera, and the non-repeat of this very high margin audio and book deal we had in last year's first quarter, our adjusted EBITDA to sales percentage remained a very strong 16.1% for the first quarter. For the trailing 12 months, the significant flow-through of increased revenue to adjusted EBITDA resulted in an increase in adjusted EBITDA as a percent of sales to 15.9%, up from 13.6% for the same period one year ago and up from 11.5% for the period of 12 months prior to that.
With our expected strong continued growth in revenue and continued high flow-through of this incremental revenue to adjusted EBITDA we expect our adjusted EBITDA, as a percentage of sales to continue to increase and believe it should reach approximately 18% on a full-year basis within the next 18 to 24 months.
I would now like to briefly review the revenue performance for each of our channels and practices. Hopefully you will find that helpful.
As shown in the slide eight, in our direct offices in the U.S. and Canada, revenue grew 18% in the first quarter. We are really pleased with this as it showed the ongoing investment we made in hiring new client partners, the new investments we are making in marketing, many of which won't fully flow-through to income or revenue until coming quarters, but we had each of our geographic offices achieve substantial growth and we were also pleased that we achieved revenue growth of 9.5% in our government services region where we had expected a small decline due to the maturation of a large government agency contract. We also achieved strong revenue growth in our direct offices in the U.S. and Canada for the trailing 12 months with revenue also including government for the trailing 12 months with revenue from these offices collectively growing at 9%.
In our national account practices, first quarter revenue grew $700,000 to $6.2 million reflecting a growth of 13% compared to the $5.5 million revenue achieved in the first quarter of 2012. For the trailing 12 months, revenue in our national account practices grew $4.2 million to $28.1 million, a growth of 18%. I will give you a little detail on that in a moment.
Our international licensee partner royalty revenue grew 10% in the first quarter and also grew 10% for the trailing 12 months. This growth reflects our continued penetration in China, Singapore, India and other emerging markets, as well as general growth worldwide. Our first quarter represents the largest revenue quarter ever for our licensee partners.
We continue to see significant opportunities for growth in our licensee operations and those areas of growth include, first, organic growth as existing licensee countries continue to increase the size and productivity of their own sales forces.
Second, adding more of our new practice area content to their existing mix of offerings. We have mentioned in prior calls that historically a very, very significant portion of all the revenue in our international licensee partner network has come primarily from leadership practice and over the last year, we have started to expand our new practices into these offices.
For example, during the first quarter our productivity practice revenues in our licensee partner network grew 70% over what was achieved in the prior year's first quarter. It was off a small base but thanks to our new 5 Choices solution, which is now available globally, this practice is growing. There was particular success, for example, in our Nordic region which had 250% growth and with our largest partners in China which had 53% growth. The productivity practice now accounts for 8% of our revenue among our international licensee partners. So that 8%, say around $80 million of gross up revenue. So it is starting to take hold and become a significant product line in many of our licensee partners' offices.
Our trust practice grew 23% in the first quarter over prior year with our international partners. India achieved of 200% growth, again off a small base, Thailand, a 110% and Indonesia, 92%. Trust now represents 5% of our international partners' revenue, up from 1% just a couple of years ago.
Over the past year, our execution practice, which is relatively new among our international partners grew by 21% now represents 7% of our total revenue among the partners. In our Mexico and Central America operations execution now accounts for 40% of their revenues. So this gives you some idea of the potential we think we have in many countries.
Finally, our fastest-growing practice, education, grew 164% fiscal 2012 internationally, driven in part by a large new education partnership in Brazil with Abril Education, one of the preeminent education providers in Brazil. Abril is committed to taking our signature education transformation solution, which we call the Leader in Me to thousands of schools in Brazil. It maybe interesting to you all to know that because of the relative use of Brazil's population they have essentially the same number of K-12 schools in Brazil as we have in the U.S. and Canada combined. So this is a big opportunity for us. The education practice now accounts for approximately 8% of our international partners revenue compared to just 3% two years ago.
So you can see that the collection of these different practices now represents, has gone from essentially nothing to more than 30% of our total international licensee partner revenue and it's concentrated in relatively small number of countries. So we see big opportunities for continued growth from just expanding these practices.
A third opportunity for growth in our licensee network lies in activating countries currently covered by license agreements but where revenues are currently extremely small. For example, in Chile, Norway and Finland, all three of these countries represent inactive countries with relatively large economies that are currently covered by our license agreement but where there is essentially no revenue coming from them. To activate Chile, we worked with our licensee partner to hire new general manager, who had lived in Chile and now who does live in Chile. Incented to this new general manager with a profit sharing plan, hired several new associates and sales people, established a physical office and new growth targets. As a result Chile grew 105% last year. They have had some revenue before but they moved from small amount of revenue $300,000 to more than double that.
In Norway and Finland, we are in the process of finding new general managers and implementing the same procedure done in Chile. We foresee that these countries will also have significant growth in revenues growing from maybe $400,000 or so in revenue in last year to $3 million within the next five years. We see dozens of other countries in which we can implement similar plans.
In other cases, Shawn and his team have worked to break up multi-country licenses and award them just single country licensees in order to increase focus. This had been the case in Africa where have new single country partners in South Africa, Uganda, Tanzania, Botswana, Zambia, Rwanda and Burundi. So we have had good growth among our international licensee partner network for years. It's averaged more than almost 13% compounded average growth rate for the last seven years. We see opportunities for accelerating this.
Finally from the channel standpoint, our international direct offices also grew. They grew revenue 11% in the first quarter, primarily as a result of strong revenue growth in our Australia operations, which had in last year been lagging some. They grew 21% in the quarter and our Japanese operations, which have been strong over the past six quarters which grew 12%.
We are encouraged by the growth of our Japan and Australia offices. These offices have been implementing the same sales go to market approach that we are taking in our other direct offices in the U.S. and Canada, specifically the client partners in these offices have been engaged in much higher number of clients, face-to-face meetings with clients. They are running the marketing events which provide increased client exposure to our content and as result of these activities their pipelines are growing. They have resulted in lots of increased sales discussions, growing pipelines, increased revenue. Revenue in our U.K. office was flat for the quarter where we are just being to implement the same programs. For the trailing 12 months, our international direct offices grew a total of 8%.
Finally, as shown on slide nine, in the first quarter, four of our seven practice areas achieved very strong growth with revenue growth of 63% year-over-year in our education practice, 38% in our productivity practice where we continue to gain significant traction from the introduction of our new 5 Choices to extraordinary productivity offering, 29% growth in our trust practice and 16% in our execution practice. The leadership practice revenue grew 3%. We had declines in the first quarter in our customer loyalty and sales performance practices which we believe primarily reflects a transition of some key accounts in both practices where revenue from certain large maturing accounts declined year-over-year in the quarter and where even though they have got many new contracts, they were still in their early ramp up stages.
For example, in our sales performance practice, several of our long term clients in the professional services and high-tech pushed sales training of the first quarter for different business reasons to other quarters. At the same time the new clients have been added in the manufacturing and services industries and show a lot of potential for the practice including three new major accounts which we expect will generate roughly $100,000 in revenue in the coming quarters and 24 other new accounts which will generate more than $1 million in revenue in the coming quarters.
Similarly in the customer loyalty practice, while revenue from one large account has declined significantly we have added four significant new accounts, one with the potential to be over $1 million annually, and these are in the ramp-up phase. So we expect that each of our practice areas will grow for the year and despite a couple of them being off in the first quarter.
For the trailing 12 months, among our practices, four of our seven practices again experienced growth with revenue growth of 48% in education, 32% productivity, 16% in execution and 15% in trust. We had the same impact in our sales performance and customer loyalty practices affected by those declining large accounts that are maturing, not being fully offset in the period with the increase of new clients, although we are winning a number of new accounts.
Finally in the channel self-funded marketing, as noted above, during last year's first quarter we completed a multiyear agreement for the distribution of audio books and other materials which added approximately $1 million, a very high margin revenue during last year's first quarter. You can see the decline year-over-year. This is a one-time multiyear deal whose revenue did not repeat this year. It also produced nearly $1 million dollars in EBITDA contribution. So again, we were pleased that in the first quarter we were able to overcome that and still grow of meaningfully despite the non-repeat of that. So overall we are very pleased and encouraged by the strong results achieved in the first quarter and for the trailing 12 months.
I would just like to make a few comments about our momentum and outlook for the year. The momentum in our business continues to be strong and broad-based. As you can see in slide 10, our pipeline of booked days and awarded revenue, which is business already booked or awarded in our five direct offices in the U.S. and Canada and among our national account practices grew to $33.9 million at the end of the first quarter, reflecting a $3.9 million or 13% year-over-year increase compared with the $30 million size pipeline of booked days and awarded revenue we had at the end of the first quarter in '12. The pipeline of booked days and order revenue was our largest ever for the end of the first quarter and reflects continued strength going into our second quarter.
Second, our prospective business pipeline, which is, we track this to measure the amount of potential new revenue currently being discussed with and proposed to existing and potential clients and is one stage earlier in our business alone process than our pipeline of booked days and awarded revenue. Historically this has been a very strong predictor of the strength of bookings and revenue in the coming months and quarters in these offices. Here again we are very encouraged that our prospective business pipeline at the end of the first quarter was significantly larger than at the same time last year indicating strong and accelerating momentum.
Our total pipeline in our U.S. and Canada geographic regions of this prospective business pipe is approximately 20% higher than at the same time last year. This increase is attributable to increase the number of CP, the increase the productivity of our CPs and the positive impact of their marketing efforts in the number product showcase events has had in our lead generation. We expect that a significant portion of this large pipeline of prospective business to convert to increased bookings and contractual commitments in the coming months and quarters. In fact, the conversion of a portion of this has already happened in the first month of our second quarter.
In terms of our sales force growth and ramp up, as you know one of the most important factors underpinning our continued growth trajectory is our ability to continue to increase the productivity of our seasoned client partners in to higher ramp-up new client partners or sales people. In our fourth quarter and full year conference call in November, we reported that during fiscal '12 we increased our cumulative net new hires by 21 client partners with 15 additions in U.S. and Canada in six additions in our international direct offices, bringing our total CP count to 120 as of August 31. We also reported that that collectively our various classes of new client partners has achieved a revenue ramp up. It was at of our targeted model generating $29.9 million revenue in fiscal '11 compared to fiscal '12, actually compared to our ramp up revenue of $25.2 million for the year.
We also said in that call, we expect to hire 30 net new client partners during fiscal '13. Towards this goal, we had seven new client partner additions during the first quarter. With these hires, our total number client partners at the end of the first quarter was 127. We have a very good pipeline of people with whom we are speaking at the current time and we expect will we will meet or exceed our goal of having 30 net new hires for the year.
Over the past years we have worked hard on building organizational capability to mentor and help to ramp-up these new client partners. A key part of this infrastructure is the role of sales manager, a new role we have added who has full time responsibility of the ramp-up client partners and I wanted to just mention that we are very encouraged by the early results we see from this increased attention with these sales manager providing to new client partners.
Just as an example, in our Western region, we recently hired an experienced sales manager to work directly with that region's new client partners and sales manager provides each of the client partners under her stewardship increased coaching accountability, forecasting attention, account planning and really helps on a day-to-day basis with the client partner development. As a result each of the new client partners in this region exceeded their ramp-up goals for the first quarter and each has a pipeline that suggests the second quarter will also be achieved as well.
Our outlook, given the strength of our first quarter results, the momentum we are continuing see in the business and the continued growth in the size and productivity of our sales forces, both in our direct offices and among our international licensees partners, we are excited about the positive momentum and trajectory of our business and what we believe it indicates for the coming quarters and for fiscal 2013 as a whole and beyond. As a consequence, with it being our only our first quarter in our new fiscal year, at this point we are reaffirming our fiscal 2013 full year of adjusted EBITDA guidance of between $30 million and $32 million and hope that we will be able to perhaps tighten that range toward the upper end as we move through the year.
Given the strong growth in our education practice, much of whose revenues is recognized in the late spring and summer when schools are out and teachers and administrators have more time to go through training and with the growth of our base of certified client employee facilitators which is now more than 12,000 and these people tend to purchase a disproportion amount of their materials during our fiscal fourth quarter. We would expect that somewhat disproportionate amount of our growth in revenue and EBITDA for the year to occur late in our third quarter and in our fourth quarter.
So we are pleased with the results and momentum of the business, and as just mentioned, expect to be able to continue achieve both strong top and bottom line growth during the fiscal '13 and beyond. I want to thank each of you for your continued support and guidance and I would now like to turn the time over to Steve Young for some brief remarks. As you know, Steve is our CFO. Steve?
Thank you, Bob. It's nice to be with you this afternoon and happy new year from me also. Now let me just take a second to mention a little bit about our balance sheet, our cash flows and some of our other expenses.
First of all, our balance sheet remains strong and our balances are generally within expected ranges. As an example, when you look at our cash balance, we expect our cash balance to decrease in Q1, and we expect a significant increase in our cash balance in Q2. In fact, even though that cash balance decreased to $7.3 million in the quarter, as of today our cash balance is already over $13 million. So this is a pattern that we expect every year. That’s because, in Q1, remembering that we had a very solid Q4 and what I would term a good year, last year, it is in Q1 when we pay our fourth quarter commissions, our fourth quarter bonuses and our annual bonuses. So our decrease in cash is primarily a result of these payments and our increase in Q2 will be primarily a result of decreased accounts receivable and related party receivables as those balances convert to cash.
Additionally, we continue buying under our board authorized $10 million stock buyback plan and purchased another $400,000 worth of stock under that plan. Now if you are new to our story, I still strongly encourage you to call me to talk about the balance sheet. Particularly, our financing obligation that is really a capital lease, our tax NOLs and credits, our future share count and our real estate operations. Conversations about these items continue to be very positive and shed light on often misunderstood accounts.
I make this invitation every quarter because the conversations are still important and even though many of you who been through this in great detail, it is still good to, if you have any questions about our balance sheet to give me a call.
Just a couple of additional points. In our first quarter, our share-based compensation was $473,000, down from $1,000,191 in the first quarter of last year. We still expect our share based compensation for the year to be about $2.5 million. The amount of amortization in cost of sales was a similar number about $471,000. We expect that overall amortization to be at about $2.3 million for the year. Depreciation and amortization last year was $5.5 million, we expect it to be about the same this year. Our net interest and discounting cost totaled about $600,000 for the quarter, we expect that to be less than $2.7 million for the year. I mentioned before we expect our effective tax rate to be between 42% and 44%, which is down from prior years, even though we do expect to pay more cash out in taxes.
So I mentioned all of those things again just so you can see that the pattern of Q1 versus what we expect for the year in these measures that we don’t talk about very much. So I am also pleased with the quarter, pleased with our strategic direction. As Bob said, we continued to invest in growth and we expect to continue to generate cash.
So thank you.
Okay, Steve, I guess it is time we turn back to the operator to set up our question-and-answer session.
(Operator Instructions) Our first question comes from Jeff Martin from Roth Capital. Please go ahead.
Jeff Martin - ROTH Capital Partners
Bob, can you talk to the curriculum development plans for the year. Are there any specific practice areas you are working on at the time or is it fairly broad-based?
I will make a note of it and then maybe I will ask Shawn to give further detail. There is ongoing development in each of our practice areas every year but we also, every year or so, particularly we are making a concentrated investment as we did for the previous two years in the productivity practice. For us going forward, the leadership practice area is going to receive the biggest emphasis. We will be redoing the 7 habits content, Signature content in the coming year and making additional investments in leadership. Shawn, do you want to add any further comments to that?
Sure. So the big pockets for probably the next 12 months is going to be on the 7 Habits of Highly Effective People workshops and that’s a flagship for us. It’s a very important part, a big part of our business. Internationally, it's half of our business. It's not broken. It's doing really well but we feel like there is a lot we can do to enhance, make it more relevant, to create longer-term revenue streams from the products. So that’s undergoing a thorough review right now. We do a lot of research upfront from clients and from our own salespeople and we get that data together and we put it together. So that will be coming out in probably about a year.
We also have, as Bob mentioned, ongoing development in all the practices. In particular this year, there is a lot of development going on the sales performance group, updating and codifying the product there so that we can create a stronger centerline so we can sell it more broad-based internationally. As well in the education practice, the Leader in Me is getting an upgrade as well in terms of creating long-term revenue streams, a powerful new web community will be part of that. So we have a commitment of the company, we always spend 4% of revenue on R&D each year and this has been a really good thing for us. We have been doing this for 10 years and it's paying dividends in big ways today.
Jeff Martin - ROTH Capital Partners
Great, that’s excellent. I appreciate it. Then could you also touch on your sales support team? How much that spilt out? If there is more to go? Just trying to get a sense for modeling out SG&A.
We have added a lot. In fact, I don’t know if Shawn Moon is travelling today. Shawn, are you on the call?
I am here, Bob.
Let me just make a note and then why don’t you give us detail on it. The key areas of investment that we want to build infrastructure in this year, where our central marketing team which was in place by mid-year last year and so we continue to make investment. There is some increase in investment in that team but we basically got that in place. We have implemented marketing and list purchasing management capability which was primarily done again during the back half of last year and that was one area of investment. The second was in sales managers for each the regions. The third was in terms of continued addition of new salespeople and also event marketing people who help to fill these events so that more of our sales people's time can be spent face-to-face with clients.
We have made good progress in each of those and Shawn maybe why don’t you just give the details of that.
We had made really good progress and we are excited about the direction they are going. I would just say, in the question relative to, do we have a whole lot more infrastructure to add? The answer is no. We have that essentially in place which is one of the reasons why we are encouraged in the first quarter despite the investment we are able to achieve these growth targets. It takes some time for the investments to pay off as we will be marketing event there is a sales cycle that a client goes through.
I will just give one example of where we are seeing this traction start to occur. Bob gave example of the sales manager in the West region. We have three of those now in place. They are all now in place and in the case of the West region where this individual was given all new client partners, every single one of them exceeded their revenue goal and looks like they will hit at least for the second quarter and possibly more in the second quarter. But in our event registration team, we are seeing some exciting things happen there. We anticipated that we would get about one registration for every two hours with this team and we have just about hit that by twice our expectation. In the case of our U.K. office, which as Bob noted, the revenues flat over the year but we believe they are building infrastructure to grow in the out quarters. They have a team of four people that is filling event that were not doing this last year and they have already exceeded by about five times in the first quarter the number of total participants they had in events all of last year.
So that’s indicating to us that the play that we are calling is actually the right play and it is leveraging the time of the client partner so they can spend more of their time actually in face-to-face sales discussions. So the infrastructure we believe is in place. There may be two or three of these event registration partners that we still need to add but beyond that the structure is set.
Jeff Martin - ROTH Capital Partners
Great, that's helpful. Thank you. Then do you have a number or do you have a metric for tracking the number of events and how much that is up year over year and what the outlook is for growth and events for the rest of the year?
We do. We haven’t historically recorded but let me just give you an example. Last year, for fiscal 2012, in fact, Scott Miller is here, head of our marketing. Scott, do you want to just respond to this?
Yes, last fiscal year, we had about 650 live marketing events in the U.S. and Canada and this year we are expected to more than double that and we have a pretty tight algorithm on exactly all of the inputs and outputs and we know exactly how many invitations need to be sent, how many people need to show up, how many people need to actually progress to a sale, what that average purchase will be. So we have that all pretty tightly knitted. The expectation is that it will come in probably roughly more than double the number of events this year from last year. In fact, right now, we are looking to have about more than 1,400 events. That excludes all of our licensee operations.
Jeff, the revenue from one of these events tends to, when you track it back, it tends to play out over about 20 months, a pattern of revenue that recurs from one of these events. Some of it happens immediately in certain kinds of things. Then on average this will build for 20 months. So we are trying to do and give you reference. If we obviously chose not invest the $17 million or $18 million in growth or if we chosen one quarter to hold back on the hiring, we can you pop the results for one quarter by $0.5 million or $1 million dollars as we could have in this first quarter but you can feel confidence in the results that come from these investments and we are really increasingly confident, not perfectly so by any means but we are certainly directionally confident about these and getting precision on them. It feels like the right things is to make these investments now to front and low them so that we can have an impact in our third and fourth quarters and moving into next year.
Jeff Martin - ROTH Capital Partners
So by that nature, would you expect the high-teens growth rate that you saw in Q1 for U.S. and Canada direct to continue or maybe even accelerate?
I think on a long term basis, we have said that we think the overall company have been growing low double-digit and to maybe as we continue to increase that then maybe it will increase a couple of points because we have some areas like our self-funded marketing that tends not to grow very much and we have some other areas like rental income and our real estate that tend not to grow much, it obviously implies that we would be able to grow more rapidly otherwise. So I think the idea that 18% percent was a very, very strong growth (inaudible). In some cases you will have large accounts that make it non-comfortable year-over-year but on a general base if we can feed that to the salespeople and continue to market investments we think for those offices achieving mid double-digit growth ultimately is good target for us.
Our next question comes from Joe Janssen from Barrington Research Associates. Please go ahead.
Joe Janssen - Barrington Research Associates
Bob, just for clarity, acknowledging flow-through in the quarter was down due to the investments you guys were talking about just a second ago, but it sounds like this could be below the 35% to 45% range for the next few quarters. Is that a fair statement?
I don’t know. Let's take a look at the flow-through in the first quarter. If you take last year's performance, which was about $6.4 million of adjusted EBITDA in the first quarter, approximately $1 million of that came from this book and audio deals. So if you really look at $5.3 million, the $5.3 million grew to the $7.1 million and so on the revenue growth of $4.5 -million actually our flow through was mid-30s kind of flow-through on the revenue we generated other than this non-repeat of the contract last year.
So I think our investments we have been making on a consistent ongoing basis, I think our first there is absent the comp on the book and audio deal last year, which uncharacteristically most of our self-funded marketing is not very high margin. It is what it says. It covers its expenses. In this one case, the book and audio deal was very profitable. It was an intellectual property sale.
Aside from that, our flow through was in the mid-30s and we would expect that, our investment are kept in the range that on ongoing basis, we would expect flow-through in that range and so we figure if we for the year we are suggesting that adjusted EBITDA increases in the range of the $3 million to $5 million because of this thing you might have a couple of things like this first quarter when that would make it non-comfortable but we would expect that would represent something like 32% to 37% flow-through on the normal increases in revenue otherwise.
Joe Janssen - Barrington Research Associates
Okay, that helps, I appreciate that. Shifting gears a bit, focusing in on licensing operations. That 10% growth in the quarter, can you give me a sense of where the growth was coming from? For example, you mentioned new practices, organic reactivating or inactive territories, getting them to grow again, or was that fairly balanced across the board?
I will let Shawn cover it.
Okay, it's fairly down. Let me give you a sense for breakdown by region. Maybe it will help a little bit. So Asia-Pacific was generally about flat for the quarter, Europe was down about 1%, Middle East, Africa about 20% and the Americas was way up because of the large deal we had with Abril Education that Bob mentioned. So the Americas was way up. Although that 10%, we get a lot of ups and downs by quarter by different countries.
Generally, as Bob mentioned before about 70% of our revenue is coming from leadership practice. We are very young in the other practices. So that represents a big opportunity. That’s always increasing. So by the end of this year, it will probably be more like 66%, 67% coming from leadership and the rest coming from new practices so that the object here is to keep growing the leadership practice at a reasonable rate, while we rapidly increase the growth of other practices.
Education is the fastest growing practice internationally. Execution has got a lot of opportunity as does productivity and trust. Then we always have some outstanding performances each year by certain countries. Last year, we had Middle East grow by (inaudible) and then last year in Thailand, for example, we had floods. Okay, and that wipes us out for much of the year and Thailand has had tremendous. They are a big operation for us. They grew 62% this first quarter. Egypt also last year had a coup that didn’t help too much. They were growing rapidly. They have been getting back together somewhat.
So I hope that gives you a little bit of flavor for what's happening there. Our largest partner, China seems to be pretty steady all the time. It is around 10% or 15% and then one of the things to keep in mind is that we have some protection and we have contractual growth in place, meaning we have got with all of our partners, they got ahead of certain level or they pay regardless. So that helps, gives us a safety net, so to speak, to keep the growth steady all across the board, it’s a really nice thing to have. It helps smooth out some of the natural ups and downs you will get when you have got 140 countries operating.
Joe Janssen - Barrington Research Associates
Okay, that helps. One last question. It's regarding the stock loan program. Given that that March 30 deadline is approaching, I am just curious, maybe you can shed some light, what the board is thinking here? Let's call it like $15 is the breakeven price. If it is not reached, is it fair to assume that the likely outcome is you are going to extend the agreement?
This is something that the board can make a final decision on exactly what the options are but, as you know, one of the options is just take that shares in cancellation of the loans and that’s the right that we have. We feel good about the progress the company is making, the impact on the individuals involved in the program. It could be significant if we didn’t extend it. So it’s a topic for board discussion but a reasonable thing to think about it would be it appears that we are going to continue to be on the track or even at the same multiple. We will get there within a reasonable period of time. It might be a wise thing to consider extend for a period of time just to get it completed given you are going to get 3.35 million shares back one way or the other. If it’s a few months later, it might not make a lot of difference but I think that’s a decision that hasn’t been formally resolved by the board and we have a meeting later this month and it will be a topic on that.
Joe Janssen - Barrington Research Associates
Would you announce that through in a K or something at that time?
Probably not. Probably as we get really close, we will probably wait until we will be reporting the second quarter within a day or two of the expiration of the due date here. I think it will be most likely it will be around that date.
Our next question comes from Marco Rodriguez from Stonegate Securities. Please go ahead.
Marco Rodriguez - Stonegate Securities
Wondered if you could talk a little bit more about the sales strategy? I believe on the last conference call, you guys had mentioned that you had extended the last offer to an area director. Was that offer accepted?
It was, and I think Shawn did mention, we have each of those in place now.
Yes, they are in place.
Marco Rodriguez - Stonegate Securities
Okay, perfect. Then in terms of that overall strategy there, you provided some nice color in terms of the Western region and how that is progressing positively. I am wondering if you might be able to shed any other color on different regions.
Yes, I used the example of the west region because this particular area director or sales manager had an entire team of brand new client partners. The same pattern is happening elsewhere. That was just the extreme case. We are seeing increased focus and attention with these guys there engaging in a process that we call plan and review session. Marco, I think I might have talked with you about that. So it’s a weekly accountability and strategic planning session where they go through all of the key lead and lag indicators with their business.
It's achieving a higher level of focused attention and really what I am most concerned about is the idea of mentoring that we haven’t had as well established as in the past and it has a much higher level of focus and attention. Give another example in the central region.
We have a great new sales manager there and this individual, like the others, but he is spending his time on Mondays in the plan and review sessions and the rest of the week in face-to-face meeting with the client partner coaching them, some times doing the meetings himself, sometimes having them do the meeting but doing the curbside coaching after. So this is happening across all of the regions. We are encouraged by the higher level of touch and attention that we are achieving.
Marco, I just wanted to comment on that. The whole purpose of this infrastructure is to make sure that our sales force ramps up well. As we have reported in the past, thankfully, over the last seven years actually collectively our sales force, the sales hires have ramped up a little bit faster than we projected and we have done well. We have also been able to accelerate our hiring but the key constraint, we think, and we have talked about it for years, is mentoring.
For a few years we had people who were player coaches do the mentoring and that worked well but at some point your best player coaches who also are good mentors have been utilized and you want to grow faster than them. So the addition of the sales management's function, the addition of these events schedulers, once again these are not massive investments, but the event schedulers we hired a little over 20 of them and that will be an annual cost of around $800,000 but the effect of those is to significantly increase both the number of people we book into these events and also to free up time for the sales force to work.
So we think it is pretty easy investment to swallow but having invested in that infrastructure in the first quarter, we have hired more than 20 support people in the first quarter. In the second quarter that will be probably be an addition of five or six and it will tail of in the out quarters. So we think these are investments that will help us predictably to be able to hire ramp up these 30 net sales people this year.
Marco, I would add one more thing to the sales manager question and that is implement of cost that a cross pollination is probably the wrong word but we are doing some cross training and cross best practice sharing between this group which is really an activity that at this level has not happened before. We have regular coordination of planning session meetings with our general manager but now we are having a cross-section of sales manager and area director role that are coming together. So, the good things that are happening in the West can be replicated in the Central and the Northeast and in London and in other places. So there is a process now for sharing what is working and what is not working across all regions.
Marco Rodriguez - Stonegate Securities
Got it, that's helpful. Then in terms of the overall strategy that you have implemented here from the sales side, are there any, I guess for lack of a better phrase, wrinkles that have come up that might need to be ironed out over the next few quarters?
Well, yes, I have mentioned in the final review process. That’s a new process they are going to do. So there uneven implementation of that at this very moment. So that’s one of the major topics that we are addressing with all team all together. Here is the template that you use. Here is how you access it and track it in sales force so that any given moment in time, anyone of us can get a view as to what any client partner is doing and its happening region-by-region-by-region in the exact same way. So if the same kind of thing would happen in the implementation of any new strategy. If the codification and center lining of all of the key behaviors that needs to happen in the same way with the different people across the different regions.
Marco, just not to glow over this but I think our strategy has been kind of bullets before cannonballs and so most of these strategies have been being tried for years and in pockets. So we have proven it up in one or two regions and once we feel like it is codified then there is the implementation rollout. With that, I think there none of the parts of this strategy are we wondering about today as to whether or not they are going to be stable of going to work. We have proven them in the past where they were being implemented as Shawn mentioned it. There is always uneven implementation in the early months but ultimately, thankfully we have been able to get there on all the other components.
Marco Rodriguez - Stonegate Securities
Got it, and then the last quick question I have. In terms of marketing, if my memory serves me correctly, I believe you hired a new marketing team or at least head of marketing last year, and you were either in the process or kind of finishing off a rebranding or an image change for Franklin Covey and I was wondering where you stand in that process, if that’s been finished and rolled out nationwide or companywide yet?
I will ask Scott Miller to answer.
So we are still in the process. It is an ongoing effort. Minimal things like just updating our fonts and adding a tagline and those types of things are in place worldwide now. I think at this point we are focusing on helping the marketplace understand how organized is the 7 Practices. So its both the education of our internal sales force and our client base that Franklin Covey has a different value proposition for each of our 7 Practices and that these 7 Practices are really are key face to the client. So that an ongoing project but in terms of the logistic aspect of the rebranding, business cards, letterheads, things like that, that’s going very well. Now it’s a re-education campaign internally and externally so that all of our partners can speak to the 7 Practices. They have the capacity and clients think of us with that point of view as well to. So far we are doing well on that.
Not surprisingly, part of the rebranding is also the launch of best-selling books that put a new face of Franklin Covey out there. The 4 Disciplines of Execution, in fact, has become a best-seller. It has been a good thing, I think, for the brand. We did some advertising and such behind that during the launch. It is now gaining good traction and each of those additions of intellectual property and so forth also helps to rebrand the company as people start to recognize us for a broader portfolio of offerings.
It's amazing how we are having big marketing events around featuring the authors of the book, holding these marketing events and when we normally might have 30 or 50 people that we target to have at the size of these events is a multiple of that, always over 100 and sometimes upward of 200.
So I think, each of these things is going to be a fabric that’s woven each practice driving at home the fact where more than 1,000 schools now and Leader in Me is now gaining in that market a positioning. So our view is to, we are just overarching branding strategy around Franklin Covey but we also have the purpose branding strategy around these practice to drive home the efficacy of what we are doing in each areas.
Our next question comes from Aram Fuchs from Fertilemind. Please go ahead.
Aram Fuchs - Fertilemind Capital
Yes, it is Aram Fuchs. I was just wondering if you could focus on this education practice. The growth was quite impressive. Are you committing roughly that the amount of that growth in salespeople and other human capital as you are to what we are seeing on the sales line, or is that starting to scale ahead of the costs already?
Well, I think we have a target set for the operating margin for each unit into Joe's question earlier, even with our growth investments, we expect our direct offices in the U.S. and Canada to maintain the 35% EBITDA margin and they do. So they swallow these investments in bites that allows them to do that. The same in our practices. They have the targeted EBITDA contribution margin. They make investments that allow them to stay within that.
We will also taking advantage of the opportunities we might for a couple years as we did in educations. So we are going to break that model for 2011 and 2012 doubled down the investment to get accelerated growth but with that, they are actually back on model again this year.
Shawn, I don’t know if you want to add to that.
Yes, sure. So education is going fast and rapidly and I think a part of it is because years ago we had committed to hiring every year. So we have been doing that where the same sales strategy has been used in education where hiring, ramping, client partner successfully. We have the entire U.S. Canada divided in two pods about $2 million apiece or about 2,000 schools each. We have got 16 pods filled out right now. We have got another 80 or so that we could fill out over the next years. So we have got it all broken down in terms of how we can grow this.
Part of the reason we are growing well is because we are getting a lot of external funding as well. Funding support from large corporations, from foundations, from communities, chambers of commerce. They are pitching in. Everybody wants to change schools. So what we are learning is budgets are down across the board and federal and state budgets. There is a ton of money looking for something that works. Our focus has always been on quality results and because of that they talk in education. So we do well in school they talk to the superintendent. It spreads to other schools and so forth.
So the sales strategy and the investments commitment is there. It just happens to be extra hot right now. So I think we also feel like there is an opportunity right now to get to move fast to get a first mover advantage in terms of school transformation. So, anyhow, hope that helps.
Aram Fuchs - Fertilemind Capital
Yes, specifically around the financing, maybe we can take there because I have been sort of skeptical, as everyone knows that it's tough to get money there. So are you getting this from the straight operating budget? Or when you mentioned third party, is there a specific third party that is really keen on this idea? Maybe you can dig deeper there.
Maybe we can break it out in three categories. Shawn, can you just talk through it further? There are funding partners within the government that for tougher schools and turnaround schools, et cetera. That money has continued to be available even though budgets are tight. There is some that is directly funded from the operating budget there.
Second group comes from the communities who see what was happening in some of these key schools and decide to help support. So it will be some money from the operating budget of the school, but they will support also with chambers of commerce.
Then we also have, at this point, about eight or 10 larger funding sources within the companies who have decided within their community or within their state to do something or a few on a more broader basis who have funded large foundations, et cetera. So we are starting to see this.
So we think actually the funding the funding question is a lot more certainty than it was even despite the economic uncertainty. It is a lot more clear to us today of how you navigate it than what it was started and feel like this is not a temporary thing.
I think we feel more secure than we did a year ago and way more secure than a couple years ago in terms of the potential here that it is not going to dry up. So for example, if a school wants to do this, they want to do Leader in Me, two out of three times they can find the money themselves. If they can't and they really want to do it, we will say, okay, here are some options. Here are some funding sources. Here are some fund raising activities. Here is a foundation you can apply to. It has been supporting the Leader in Me. So that’s happening a lot.
Then a lot of cases will have large corporations say, I love what you are doing, I am going to fund 25 schools in this region and if it goes well, I will do more. So we always have the school pitching some money so they are still in the game but the object here is to never have a school be denied because they can't find funding. But again two out of three of the times they are finding it on their own in their own budgets. We also just recently won a large federal grant that will help a lot for next three years that schools will have access to.
Aram Fuchs - Fertilemind Capital
That you could dip into when needed, during those one-third of the time when they can't find the money?
This will support a massive district that has applied for the grant and want it. So it will be about like 100 schools in the district. That make sense? I think the big picture is, we start looking at this (inaudible) is there opportunity here to keep growing. We have got 1,100 schools. Our target is to get to 10,000. We think we can really help change education in a significant way if we can get there and we are finding that there is a lot of people who would want to join this cause and there is a lot of money looking for something that works for the right opportunity and for a cause.
Our next question comes from Kevin Leary from Spitfire Capital. Please go ahead.
Kevin Leary - Spitfire Capital
Most of my questions have been answered, but I just have a couple of follow-ups from Steve's comments. So Steve you mentioned that there were about $400,000 worth of repurchases in the quarter. Do you have the average pricing of these?
I don’t have it right with me. Our average price for those purchases were just over $11.
Kevin Leary - Spitfire Capital
Okay, thanks. Then second question is on the balance sheet. So looking at the related party receivable, it was up about $0.5 million sequentially from August to December. But then Steve, you mentioned that part of the increase in cash since December has been payment from a related party receivable. Can you maybe talk about how much of that has been from the related party and then maybe expand that into how we should think about this receivable over the year or so?
Okay, in Q2 we expect to receive about $3 million applied against our related party receivable. That is on the cash we will receive. Remember that the receivable balance itself continues to have activity each month because that related party owes us an example for rent and other things that we provide for them. So it will continue to go up as rent is due and as warehousing costs are due, et cetera but a $3 million payment in Q2, we believed could be significant.
Then in Q3 and Q4, the balance for that right related party will increase like it did last year and then again a little bit in Q1 and primarily Q2 of next year it will decrease again. So the balance at the end of Q2 next year will be a little. Every year the balance from that related party will be a little less at the end of each quarter. Then we will just follow that sine curve, if you will, that is generally going down. Does that answer it okay?
Our next question comes from Carter Dunlap from Dunlap Equity Management. Please go ahead.
Carter Dunlap - Dunlap Equity Management
While I was on the call, I got a call from one of your event bookers. So that’s a pretty good turn.
Are you going?
Carter Dunlap - Dunlap Equity Management
Yes, it is the Hansen thing in Palo Alto. Just a couple of quick clarifications. When you were talking about pipeline, you then switched to the prospective business pipeline, and I heard a number of 20%. Is that apples-to-apples? Is that U.S. Canada direct? Or is that a broader footprint?
No, it is the same footprint and its just a percentage of the prospective business pipeline ultimately converge to the pipeline of booked days and awarded revenues. So we are encouraged. The fact that the prospective pipeline is up 20% doesn’t necessarily mean that revenue is going to be up 20% because we have an increased focus on the predictability. So we are trying to get the numbers a bit better. So we are getting a higher percentage of the pipeline going in this year than last but nevertheless, on an apples-to-apples basis, it is a good increase quarter-over-quarter.
Carter Dunlap - Dunlap Equity Management
Okay, and pardon my ignorance, but can you clarify the self-funded marketing? What triggers the lumpiness in that?
Historically, we haven’t had that much lumpiness. The things that’s made up historically, it is made up of speeches that we do where we get paid for speeches not with you but there are people out of the world that work for us that get paid for speaking. It is public programs for holding events at a Marriott Hotel and inviting people to come and get an exposure to the content, book royalties, et cetera.
So historically it has been pretty steady, honestly, not fast-growing but from time to time we will have a new book launch where we might get a special royalty agreement on a new book or in the case of last year's first quarter we had this one time sale of a lot of the intellectual property that was packaged for distribution as audio and electronic books, et cetera that just made that particular quarter lumpy. But historically it is pretty low margin, pretty steady revenue, not much fluctuations historically.
Much of it is just on book launches, advances on books and they tend to be every year when we have a new book or every two years or every 18 months, whatever That is upfront and causes these spikes.
Carter Dunlap - Dunlap Equity Management
Okay, and lastly, and I was off the call for a moment, at your analyst meeting, you spoke about the Brazilian prospect in education that had such strong plans. Is there any update on where that business lies?
Sure, so this is Shawn. So Abril Education, a big education provider in Brazil they have, this is just brand new and so about three months ago, we had them all up here. We trained and certified their whole team. Had them travel around the country and visit our best schools to really understand deeply what the Leader in Me is all about.
So they are starting this year just with a handful of schools. The idea is to go slow. See if you can go fast later in the range of 25 schools. Going to 100, going to hopefully hundreds and hundreds and then thousands beyond that. They are taking this very seriously. They believe they can get to, right now, they are into about half the schools in the country. They have roughly the same number of K-12 schools we have in the U.S., so about hundred thousand. Their objective is to really do this well, get the credibility behind it and over the next four to five years get to thousands of schools.
They have set a target to personal goals, as a company is to try to beat the U.S. We said great, power to you. So it is just starting, 25 schools. Do it well, do it right and then expand from there. The big payments we got that are showing up in our international numbers are for advances on this partnership that we have.
We have no further questions in queue.
Well, thanks to everyone. Maybe just conclude and again express appreciation for the support and guidance each of you gives us. Maybe just make one last statement that there has been a couple questions about the effect of accelerated growth of our business model. I think maybe it is worth repeating that we have, we hope, a pretty disciplined approach to this where we measure everything and we expect each of our 30 plus leaders has a model that they are operating to.
So I think the main thing is while we have been enable to flow-through in the high-40s over the last several years, we have always said that we think our stable flow-through is in the 35% to 40% range. We expect that with these investments we will be able to do that on a normalized basis. Again, aside from this lumpy item like this book and audio contract a year ago that we expected.
Otherwise we did achieve it and expect we will continue to achieve it. So I don’t think you should expect that we will decide when you are to spend away all of our profit with the hope that it will come in. We think we can grow at the levels we are talking about with the 30 plus additions to the new client partners accounts and continue to make marketing investment while also maintaining our flow-through.
That is driven by our basic model of high good gross margins, pretty predictable direct marketing costs, controlled central cost, so that when we make these additional investments in R&D or marketing in a given year, it might lift the operating margins 500 basis point if not dramatic.
So thanks to each of you and we will look forward to answering any other questions you all might have a one-on-one and have a good day. Thanks very much.
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.
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