Derek Hatch – Corporate Controller
Robert A. Whitman – Chairman of the Board, President & Chief Executive Officer
Stephen D. Young – CFO, Executive Vice President Finance, Chief Accounting Officer & Secretary
David Covey – Co-Chief Operating Officer Global Operations
Stephan Mardyks – Co-Chief Operating Officer Global Operations & Senior Vice President Franklin Covey International
Analyst for Alexander Paris – Barrington Research
James Maher – Think Equity LLC
John Lewis – Osmium Partners
Franklin Covey, Co. (FC) F2Q10 Earnings Call April 6, 2010 5:00 PM ET
Welcome to the Franklin Covey Company second quarter and fiscal year 2010 financial results conference call. (Operator Instructions) I would now like to turn the call over to Mr. Derek Hatch, Corporate Controller. Please proceed.
Good afternoon everyone and thank you for joining us on the call today. Before we begin the call we would like to read the usual forward-looking statement release here.
I remind you 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 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 & Exchange Commission.
Many of these conditions are beyond our control or influence, any one of which might cause future results to differ materially from the company’s current expectations. There can be no assurance that the company’s actual future performance will meet management’s expectations. These forward-looking statements are based on management’s current expectations and we undertake no obligation to update or revise these forward-looking statements to reflect events or circumstances after the date of today’s presentation.
With that said, I would like to turn the time over this afternoon to Robert Whitman, our Chairman of the Board of Directors and Chief Executive Officer. Mr. Whitman?
Thanks Derek. I am delighted to have everyone join us today and hope everyone received the press release about an hour ago and have had a chance to look through it. I am delighted to report that our second quarter met or exceeded our expectations on essentially every measure.
Let me just give you some headlines and then go into the details and we will have other members of the executive team share some perspective. Our revenue grew during the quarter. We achieved revenue growth of $1.9 million which is 6.2% versus second quarter of last year. This somewhat exceeded our expectations for the quarter. Excluding self-funded marketing events including public programs and speeches the year-over-year revenue grew $2.7 million which was 9.8% which we felt very good about. Our gross margin improved at 63.6% compared to 62.5% during last year’s second quarter, also slightly exceeding our expectations.
Our selling, general and administrative expenses declined. Total SG&A for the quarter was 18.9 versus 20.2 during the second quarter of last year. Excluding approximately $954,000 of nonrecurring charges during the quarter which we talked about in our last quarterly call and we didn’t have any nonrecurring expenses in the first quarter. We don’t anticipate any in subsequent quarters but we knew we would have some this quarter. That would put SG&A expense for the quarter at about $18 million which would have been a reduction of more than $2.3 million compared to last year. That is even after incurring additional commission expense resulting from increased revenue during the quarter and reflecting additional expenses in support of building our practices.
Our adjusted EBITDA which is adjusted only for the nonrecurring charges which we will detail in a moment, our adjusted EBITDA for the quarter was $2.2 million which was a $3.8 million improvement compared to last year’s adjusted EBITDA loss of $1.57 million. In Q1 we saw adjusted EBITDA increase by $2.7 million and this was obviously $3.8 million, even better than that. So even though as we mentioned in our last call the second quarter revenues were slightly lower than the first quarter due to the seasonality of the holidays, we expected our improvement in adjusted EBITDA would exceed that achieved even in the first quarter which we felt very good about and substantially exceeded that.
Even without eliminating the nonrecurring charges EBITDA was up $2.8 million so it also exceeded the improvement in the first quarter even at that level. Most all of that improvement flowed through so that operating income for the quarter improved $2.7 million even including the nonrecurring charges. Net cash provided by operating activities was positive $2.2 million. Our balance sheet also improved during the quarter. We paid down our credit facility to $10.5 million at the end of the quarter.
Those are kind of the headlines. I will now just give some additional details on these and then turn some time over to the Executive team members.
Revenue as we noted continued to strengthen during Q2. I have already given the basic numbers but revenue increased $1.9 million or 6.2% and without the self-funded marketing programs, public programs and speeches revenues increased 9.8%. So this is a significant milestone for us and reflects an ongoing pattern where we had positive revenue growth overall in Q2. In Q1 we had positive revenue growth in the training and consulting side but not overall. Here we did so the revenue trend continues to strengthen. Q2 was better than Q1. Q1 was stronger than Q4. Q4 was stronger than Q3 which was stronger than last year’s Q2. So we feel good about the trend.
We expect to achieve positive year-over-year revenue growth in both Q3 and Q4 and for the year as a whole. As you will note in the press release in the attachments our revenue improvement was very broad based. As show on slide four for those who are following, revenues in our direct offices in the U.S. and Canada grew by $1.5 million which was positive 12% growth. The revenues in our direct international offices declined by $500,000 overall which was 6%. That reflects the revenue increases in the U.K. and Australia which were slightly more than offset by declines in our Japanese office where the economy continues to struggle.
Internationally was the primary place where we continue to struggle and the economy continues to be soft. We think we are making progress but nevertheless it continues to be the one area that hasn’t seen the improvement we had hoped. International licensee royalty revenues grew 17% to $300,000. Revenues in our national account practices grew by $1.5 million which was 61% and as noted the self-funded marketing programs and other expenses declined as discussed above.
As a result of the strong bookings our contractual pipeline increased in Q2 compared to both Q2 of last year and to the first quarter. We expect to achieve revenue growth in Q3 and Q4 as I mentioned and that contractual pipeline puts us in a good position to do so. As shown on slide five at the end of the second quarter our contractual pipeline was just over $17.6 million compared to $15.7 million ended the second quarter of last year and $15 million at the end of this year’s first quarter. Bookings have been particularly strong in our field offices which is where most of the declines occurred last year.
In March alone in our field offices domestically we booked 735 new training days. That means days we ultimately will deliver in the coming months. So 735 in March of this year compared to 397 days in March of last year so this 330 day improvement translates into approximately another $1.8 million of booked revenue in March alone that will be delivered in future periods.
As shown in slide six both our facilitator business and our bookings in our field offices are up year-to-date. On the revenue side we see strength in almost every area and in Japan while the declines have moderated some that is the only challenge we continue to have. We think we will have further moderation in Q3 there. Overall even our international direct offices will show growth in the third quarter even net of the decline in Japan.
Gross margins as I mentioned improved to 63.6% from 62.5% for the second quarter, an improvement of 110 basis points. I mentioned before SG&A expenses during the second quarter were $1.3 million lower than last year’s second quarter and adjusted for the nonrecurring charges they declined $18 million which was an improvement of $2.3 million compared to the second quarter of last year even after accounting for increased commission costs resulting from our increased revenues and our investments in our practices.
Our cost improvement was very broad based with lower costs in every major area except in our practices where we are making new investments and where as you know commissions are growing as a result of increased revenues. As will be noted in a few minutes even after the additional staffing investments the EBITDA contributed by these national account practices increased significantly during the second quarter.
On the profitability metrics excluding the $954,000 in nonrecurring charges adjusted EBITDA was $2.2 million representing a $3.8 million improvement compared to the second quarter of last year. I have already reviewed most of this but EBITDA was up $1.26 million even including nonrecurring charges which represented $2.8 million improvement and operating income was $2.7 million better than last year’s second quarter. Pre-tax was also $2.5 million higher than in the second quarter even including these non-repeating expenses.
Finally, our net cash provided by operating activities was $2.2 million during the quarter and we expect this to increase in the coming quarters. So overall really almost every line item and every operation we felt very good about second quarter’s results. We are also feeling good about Q3’s expected performance. Five weeks into Q3 our momentum is good. Our backlog is good and we expect that Q3’s performance will also be strong.
As I noted previously our revenue momentum was very strong all through March. Our first month of the third quarter with field bookings of 735 new training days booked versus 397 last year. Revenue trends will continue to strengthen. While clients are still cautious we expect to achieve year-over-year growth in revenues as I mentioned in both the third and fourth quarters. Our pipelines are deeper. Conversion rates are better and cancellation rates are substantially less than they were once things are put on the books.
We expect gross margins to continue to be strong. Our central SG&A expense will continue to be low and our field SG&A expenses will increase somewhat to reflect increased commissions relating to the growth in revenues. We will also have some increases in the expenses related to our practices but we expect all of these increases in costs in the practices and the field to be more than covered by growth in revenues. So overall any increases in costs we expect will have very good flow through from increased revenues.
EBITDA in the third quarter is expected to be substantially better than last year’s third quarter. We don’t expect any nonrecurring charges during the third and fourth quarters. As shown on slide seven as we discussed last quarter our business is really not very seasonal. There are some quarter-to-quarter variances that are worth highlighting. Slide seven shows the average seasonality of our current business by quarter over the past three years. That is noted because companies tend to not do much training during the last two weeks in December and the first week in January. Our revenues during the second quarter are typically a little lower than in other quarters.
On the other hand our revenues tend to be higher in the fourth quarter reflecting the fact that substantial revenues from our educational practice are recognized in the fourth quarter which is obviously when the teacher’s aren’t teaching and therefore could be trained more easily. Second, historically we have our one-day facilitator promotion during August of each year which adds a lot of revenue late in the year. Revenue for the second quarter was, as I mentioned, somewhat better than this historical pattern and we also believe if you look at slide seven that our revenues in the third and fourth quarter are likely to be somewhat stronger than the strict application of any historical trends might imply with substantial profit flow through from each incremental dollar of revenue.
So as we noted last quarter the key factors underpinning our expected future growth are as follows on slide eight. Really it is four things; the significantly reduced cost structure and improved business model which we have in place now. Second, the continued growth in the size, reach and strength of our sales and delivery forces in our eight direct offices. Third, the growth and size and strength of our 38 licensee partners’ operations. Fourth, growth in our practices and technology platforms.
So I am going to ask Steve maybe to take on the first one which is our cost structure and improved business model.
Good afternoon everyone. As we previously talked about the sale of the CSBU was extremely important to us. It represented the final step in our multi-year effort to exit all businesses and activities not central to our training and consulting business. It also allowed us to reduce central operating costs and improve our overall business model by doing a couple of things; One is collapsing our holding company structure and moving to a streamlined, central organization. Two, completing the consolidation of direct offices in North America, both of which we completed during 2009.
During that year we also identified and implemented other cost reduction and business model improvement actions to ensure that in the future even at the reduced revenue levels of 2009 we would have attractive levels of profitability. These actions reduced our central costs by $12.8 million in fiscal 2009 compared to fiscal 2008. The annualization of these actions and other actions has provided and will provide additional year-over-year cost benefit in fiscal 2010 and beyond.
At the same time that our central costs are declining we have made investments, as Bob mentioned, in the support of our practices and with the increased revenue and profit our commissions and other variable pay also increased. While we expect all of these investments will be more than covered by increased practice revenues, our net SG&A is and will be increased by these investments. Bob?
Thanks Steve. Moving onto these other key ones really driving the growth side, obviously a key strategic advantage and growth driver for us is the size, reach, strength and growth of our various sales and delivery channels, the scope of our distribution including our direct licensee offices and national practice accounts provides us with a unique ability to serve truly global clients and really allows us to attract content from key thought leaders who are interested in accessing our distribution capabilities.
I would like to ask David Covey, our Co-Chief Operating Officer for our global operations to report on our direct offices and then ask Stephan to talk about our licensee operations.
Thanks Bob. As Bob said we had a really good second quarter for U.S. and Canada direct offices. Revenues continued to strengthen. They were up as mentioned by 12% this entire year which was a little bit ahead of expectations which is always a good thing.
Both bookings and facilitator orders were strong. Bookings were up 5%. We had pretty strong bookings last year so that was a sign of good growth for us. Facilitator orders were up 25% during the second quarter so we were very happy to see that. That was probably a little bit exceeding expectations in that area. Most of our client partner teams are outperforming relative to either their budgets or their last year results which is great to get back on track and see about 2/3 of our folks back on target against their goals.
Our domestic offices are currently expected to growth both revenue and EBITDA compared to last year in Q3 and Q4. So we don’t think this is going to be a flash in the pan. For a quarter we think we have turned the corner and we are expecting to see further revenue increases over prior year both in the next few quarters.
For the three international direct offices, as Bob mentioned, two of the offices in Australia and the U.K., Australia was up significantly versus prior year and the U.K. was as well higher than budget and last year. So we are excited to see continued growth from both of those offices in Q3 we expect. As Bob mentioned Japan continues to be impacted the most in terms of all of our direct offices. We saw a decline by about 18% in the second quarter which was a slight improvement over Q1 which was down 21% but we expect that Japan’s revenues in Q3 will strengthen a little bit we don’t expect to see growth over prior year.
Overall, however, we feel good about the operations in Q2 and our outlook in Q3 in all the offices except for Japan which is going to continue on the same trajectory. Despite Japan’s relative softness, revenues are expected to be up slightly and EBITDA we also expect to be up slightly over Q3.
Thank you David and Bob. Growth in the size and strength of our 38 international licensing partner operations, as Bob said earlier, during Q2 our license revenues of $2.1 million were up 17% compared to Q2 last year. We have just returned from a great trip to India with Robert Whitman and our partners there have grown significantly from where they began seven years ago. We feel really good about their operations and future prospects.
We continue to see positive indicators in our licensee operations worldwide and believe that it will also achieve significant growth compared to last year during Q3. Bob?
Thanks Stephan. I guess when operations are up 17% you get to be very short. Finally just a note on our practices. As you know over the past couple of years to ensure market leadership in each of our content areas and markets we have created practices. We think of them as product lines or vertical markets or as we say jobs to be done, content jobs to be done that our clients have, we current have five practices; education, sales performance, speed of trust, execution and customer loyalty. We are also in the process of developing other practice areas including a practice in online learning.
Practices are in charge of growing their prospective businesses. Each practice is responsible for such things as creating thought leadership, building relevant products and solutions, developing the go to market strategies and building the capabilities of our sales and consulting teams that sell and deliver these options.
Practices have also been [inaudible] to sell directly in developed business with their own client base which includes selected national accounts. As you know our new practice categories have grown significantly since their inception. Internally we categorize our practices as follows; One, field support practices. Those are all the practices where almost all of the revenues are recognized in the revenues of our direct office or licensee offices. These include the execution, speed of trust and online learning and technology platforms areas. Their practice leaders are really leveraging the worldwide network we have and almost all the revenues are recognized there.
We have others where they are more focused on specific target markets. We call them national account practices and this is where almost all of the revenues are recognized in the practice. So these practices include customer loyalty, sales performance and education. The revenue from these national account practices that actually have revenues recognized have become quite substantial and even in 2009’s difficult environment our national account practice revenues grew by $4.4 million or 2%. During the second quarter revenue in our national account practices grew by $1.5 million which was 60.9% off a relatively small base. The gross margin percentage was up compared to budget and EBITDA contributions up even further.
As you see in slide nine year-to-date in 2010 the national account practice revenues have increased $3.2 million which is up 58% year-to-date. Gross margins are up and EBITDA contributions are up even further. So as previously discussed we believe this new practice structure will offer us new growth opportunities that we really never had before. It will give us the focus we need to become market leaders in every practice area in which we choose to focus and each one of our practices from trust to execution to sales performance and online learning are experiencing significant growth and creating really tremendous client results. In this last quarter we had a number of very large clients go into full rollout with some of our offerings and while those aren’t necessarily in contractual totals now the commitments will ultimately show up in those contractual totals and we think they could be very significant to future earnings.
So in conclusion, all in all we feel very good about Q2’s results. We believe in the combination of our lower cost structure and improved business model together with the strength and factors we discussed above we [look to get] some very good results in the third and fourth quarter and for the year as a whole.
I am going to now turn the time over to Steve Young to discuss our financial results in a little more detail. Just before I do, on a personal note I would like to mention that some of you in the coming weeks and months may see some Form IV filings reflecting the sale of a small number of shares by me. These are pursuant to 10B51 plan which has been in place for some time and provides for the sale of a relatively small number of shares, 12,000 to 16,000 shares, in each of the next six months.
I mention it one to just be aware. Two, to emphasize it no way reflects any kind of lack of commitment. Obviously I have outright stock ownership, warrants and options I have more than 3.5 million shares so I am one of the largest if not the largest individual shareholders and the sale of these shares really won’t affect my net ownership to any real degree because as each year a significant portion of my compensation comes from the form of new stock grants which are typically more than these shares. This simply provides some additional liquidity for some philanthropic and other activities in which our family is involved.
Steve with that I will turn the time to you.
Thanks Bob. As Bob discussed in his own review we are very pleased operating profit was $2.7 million higher than last year even after absorbing the $950,000 in nonrecurring charges we mentioned in Q1 would be occurring in Q2.
So we are very pleased with that result particularly as Bob mentioned that revenue increased $1.9 million over the prior year. I also agree with what Bob said and echo the same information that our balance sheet is straight forward and I believe it is under control and we are generating cash. From a whole overview to me the most important point this quarter is that revenue grew over the prior year. That is just a very important, important factor.
I just want to mention a few key points. Included in the webcast slide is a reconciliation of net loss to adjusted EBITDA as you can see in slide 10. This slide when we present it will typically reflect EBITDA without certain non-repeating and unusual costs. As you can see from this slide adjusted EBITDA increased $3.8 million in the quarter and $5.6 million for the first half of the year. We are very pleased with this increase.
Additionally in slide 11 is a newer presentation for us. This slide shows the amount of cash generated by those activities that are directly related to the statements of operations. You can see this slide begins at the top with our reported income or loss and then we add back the amount of non-cash expenses included in net income and then deduct the cash paid for capitalized development and capitalized expenditures.
Some call this a free cash flow or cousins to free cash flow. This result shows that we generated $1.6 million of cash in this quarter and have generated $4.8 million of cash in these two quarters by the P&L related activities. Please note that still the amounts we paid in the quarter for capital expenditures and capitalized development are unusually low and in coming quarters will increase as we spend more on capitalized development [inaudible] primarily.
I think this is a very important slide intended to just show our operations generate cash. We also get many questions about the number of shares used in the calculation of earnings per share. When calculating earnings per share in a loss position we must deduct the management loan shares of 3.4 million held in escrow from the share count. Therefore you see 13.4 million shares used in the calculation even though our number of outstanding shares is about 17 million.
Additionally, as we show on slide 12 which is modified just a little bit from the past, as you consider outstanding shares please remember the potential impact of the management stock loan program shares that are currently being held in escrow and would come back to us when our share price equals the sum of principle plus interest and the impact of our outstanding warrants and options. In all of these things if you need any additional information please feel very comfortable to call.
You are all very good obviously at reading through the P&L so I won’t just go down the P&L. Just to repeat we are pleased with revenue. We are pleased our margins are good. We think our margins will hold up and will modify or vary just with mix but still be good. Our SG&A we mentioned the cost control efforts of this year and past year are very broad-based meaning all administration support and field functions in there have participated.
As we think of SG&A please remember we have cost control efforts going on. We have the benefit in 2009 of these efforts in this year of efforts that we undertook in 2009. We are still conducting cost reduction efforts and then please remember we will invest in our practices and we hope our commissions and our bonuses continue to grow because that means we have revenue growth and we have profit.
Depreciation will remain pretty much the same. There has been a little increase as we capitalize some systems and that sort of thing. Our interest will be down a little bit as our revolving line goes down but our interest is primarily related to our financing obligation so that will remain about the same, just down a little bit. Please always remember our tax provision is typically higher than our income tax is calculated at statutory rates. When we have a benefit the benefit is higher also.
For example, in this quarter the tax benefit is 73% of the pre-tax loss. So we expect our tax provision to be a similarly high percentage of pre-tax income in the future but due to the impact of our NOL carry-forwards we expect our taxes paid to be only the taxes paid primarily in our international locations.
During this quarter we did obtain a modification and a one-year extension of our line of credit facility. Under the terms of that modification the line of credit remains at $13.5 million until December 31st and then reduces to $10 million for the remainder of the term which is mid-March. The interest rate has primarily changed to LIBOR plus 3.5%. Subsequent to quarter end we paid $3.2 million to the former owners of Covey Link for their first of five potential earn out payments for the speed of trust practice which is doing very well.
Bob I think that is enough to go over at this time. I will just summarize again by doing the way that revenue increased and we are very pleased with the year-over-year change in our profitability.
Thank you very much, Steve. We will now open it for your questions. I want to note on Tuesday in New York for those of you who may not have heard we are having an investor day. We would like to invite you to that. Hopefully each of you on the phone has been notified of this but if you need any of the details we will get them to you. It is from 9-1 p.m. next Tuesday at the Waldorf Astoria. It will be a full presentation by management similar to the one we had out here for the field trip we had out here.
So at this point I will turn it back to the operator to set it up for questions.
Question and Answer Session
(Operator Instructions) The first question comes from the line of Analyst for Alexander Paris – Barrington Research.
Analyst for Alexander Paris – Barrington Research
In your prepared remarks you mentioned March was a strong month and bookings were up about 85%. What do you attribute this to?
We had a pretty weak third quarter last year so I wish I could say it is a sign of things to come for 85% but I asked my team this, we just had our team meeting on Monday, and everybody is saying we feel like things are starting to open up. We are seeing a lot more bidding that we are doing. So clients who in the past maybe might have called us up and ordered now are doing a request for proposal where we are bidding for business.
We actually saw some of the proposals we had one, particularly in the Northeast where our business has suffered a little bit more in that area, that part of the country for us, and we actually won a bid and we got a number of days we got from that. That was part of what was won in March. Then the other part of it was we had a pretty weak March of last year we were comparing to. But it was our second highest month so I don’t want to discount it as not being a successful month. It was our second highest booking month for the year and that typically doesn’t happen in March.
I attribute it to us turning the corner and starting to see a lot more activity and getting back to pre-recession bookings.
We started to see many parts of the world also large accounts looking to talk to us about various engagements. Almost the same way we were in 2007 and 2008 before the recession outside of the U.S. Frankly we are not out of the woods but we are starting to talk to clients about very large deals.
Alexander Paris – Barrington Research
Is that why you continue to say customers continue to be kind of cautious? You are just being conservative?
Yes that is right. We are seeing some different behaviors. We are actually thinking about hiring somebody to help us fulfill the requests for proposals we are seeing now because our business was not like that two years ago. We think the clients need help. They still need training and they believe Franklin Covey’s training can help them but they are more cautious and put it out to bid. They try to get a low price. They send their procurement people to beat us down on price which happened a few times. So it is a little different behavior but we are seeing interesting activity. Not exactly the same way but it is definitely there.
The other dimension I think that is starting to kick in is partially in March and you will see this I think in the coming months as well, when we go into a new engagement and execution or something where they start out with five stores or five hotels or whatever they can go to, 20 and maybe get 60 or 80 then hopefully it rolls out. We are seeing a number of these now move into that space of full rollout and part of the booking momentum will be as those start to schedule new days going forward.
Also our pipelines are just deeper. If you look at the amount of business that we are talking about with people and proposing independent of these RFPs it is up. Our conversion rates are a little better and the other thing is our retention rate of stuff we get put on the books is also higher. So I think it is just a general increase in traction. You probably got more answer than you needed. Was that helpful?
Alexander Paris – Barrington Research
You brought up conversion rates. What kind of increase are we talking about?
I think part of it is driven by our prospects so it is kind of hard to say. In execution somebody who goes to one of our marketing presentations who invites us to come in and give a presentation to a team, we call it a buyer’s presentation, the conversion rate is almost 50% there. Otherwise in terms of we call solution recommendations where we have talked with somebody enough about the business that they ask us to put something in writing and send them a proposal, even though it is not real formal and it could be email that has the amounts and so forth, we close about 1/3 of those. So about 1/3 of those are converting now and that is higher. We were maybe in the mid 20’s last year and so it has moved into the low 30’s now.
It is measurably different. The average revenue per win is also up some. So the combination of the things is helpful.
Alexander Paris – Barrington Research
International direct you mentioned it was good except for Japan I think down about 6%. I am reading the national account practices was up 61%. How do I interpret this?
The percentages I think skews it a lot because if you look at the absolute dollars our national account practices in total prior to last year we had about $10 million of revenue in those national account practices. That grew to almost $15 million last year and so even though the percentage growth is high the dollar amount is substantial but not huge. Whereas, in the international or direct offices you have almost $120 million of revenue [address] all the direct offices around the world but not quite, 110-112 so a small percentage gain. I don’t know if that is helpful. In our national accounts practices they tend to be very large national accounts where the revenue per win is high but they tend to be recurring contracts. There is no repeat year after year. There is a lot of focus there starting off a small base. I don’t think we are thinking that we can grow 61% a year compounded in the practices and grow 9-10% in the direct offices, domestic direct. Nevertheless, I think we are winning on both fronts.
The next question comes from the line of James Maher – Think Equity LLC.
James Maher – Think Equity LLC
Maybe you could drill down a little bit within the education practice. Obviously you are getting some momentum across the board. You talked about that in more detail, on that practice last time. Could you give us some details on the revenue for the quarter?
We haven’t typically broken it out exactly by practice. In fact, I don’t have that sitting in front of me if I wanted to give it to you. We can give you an idea of the bookings but overall the first quarter was up like 60% for the “Leader In Me” year-over-year. The second quarter is also up significantly but not at the same pace just because a lot of the revenue can’t be recognized during the second and third quarters because the teachers are still in school. Our bookings have continued very, very strong for “Leader In Me”. Our biggest issue there which is kind of a nice problem but it is a problem, and it is a capacity question and being able to deliver everything within the period of time you want it.
I think we reported last quarter we had around 200 schools signed up. We have added another 60-70 schools domestically during the quarter. So it has been very substantial. The momentum is building. There has been good funding. I would say if you are really trying to look at the actual revenue for the quarter we are probably at close to 40% for the second quarter year-over-year on “Leader In Me” and the education practice. We expect the fourth quarter will be a very big quarter for us as a lot of the revenue will be recognized then.
James Maher – Think Equity LLC
Could you tell me the cash balance at the end of the quarter?
$3.2 million. $3,162,000.
James Maher – Think Equity LLC
I think you said the line of credit balance but I missed that.
That is $10.5 million which is down from quarter-end and down from last year-end.
Year end it was…
August 31 it was $12.9 million and our cash balance was $1.7 million. So our cash balance has gone up well over $1 million and our revolving line has gone down well over $2 million.
James Maher – Think Equity LLC
Can you remind us again of your CapEx plan for the fiscal year?
CapEx spending is about $2.2-2.4 million which shows up in CapEx line. We have some capitalized development costs. Those are amortized and reflected in our cost of goods sold. So our total capital spending would be just slightly over $4 million but really the CapEx budget I think we were talking about will be just over $2 million because it is going to be IT and ongoing spend and that has been very stable.
James Maher – Think Equity LLC
I think you mentioned it was a little light in this particular quarter but [audio fade]. I think you have talked about how some of the client focus has been on large retailers and also large hospitality clients. Are they starting to…if you could describe the general tone. Are they starting to get a little more of a positive or a little more comfortable and confident? I am looking to see if you are beginning to see in those particular clients more of a focus on growing than just surviving.
I think you said it very well. Last year we were very pleased we were engaged by them during their worst days because it really showed the depth of their commitment to what we were doing or at least the depth of their hope that what we were doing would really be helpful to them. Now that they have gotten through and I think psychologically, even if operations for example in the lodging industry continues revenue per available room has continued to decline for them and they are not expecting the industry in general isn’t expecting to have much of a bump up in RevPar until the late fourth quarter.
So the reality hasn’t changed, but we actually can see that bookings are increasing and they are going to be coming out of this. So what was used maybe more as a defensive weapon last year saying we have to do something to retain our customers and deliver more out of what we have got now they are seeing this as an opportunity to, they are seeing what a difference it has made in their operations in the difficult times and now have a renewed commitment to say this is going to become the operating system for our whole company to help us win in better times.
I think we are seeing that. A couple of our large lodging clients, one particularly, we are into a full scale rollout across North America in a major supermarket chain a similar thing. It is not in full rollout yet but it has moved to more than 600 stores in North America. A key part of our value proposition in the execution space is everybody has pockets of great performance. Everybody also has variability. The real difference between great performance and lesser performance is the extent of that variability. The best performer’s operations are simply righter and tighter on average. They are better and there is less variability among them.
That idea is one that drives all of these clients. They know they know how to do well in pockets. They just don’t know how to institutionalize it and our execution methodology is really targeted to getting large numbers of front line people who need to do something differently or better to do it. I think particularly the value proposition is very easy to prove or disprove in that kind of a retail setting. We continue to feel that even though that industry is still having difficulties almost all of these multi-unit [operator revenue] has difficulties at some level except for healthcare and they have different kinds of problems but there is a real hopefulness amongst the clients that things have bottomed out and an expectation that what we are doing will help them win.
The next question comes from the line of John Lewis – Osmium Partners.
John Lewis – Osmium Partners
On international can you talk about what geographies are showing the greatest strength?
Asia is much stronger specifically in China which is still growing a lot. Continental Europe is a little bit soft. We started to see in England in the U.K. especially in Q2 and now in Q3 we have much stronger pipelines so it sounds like with the election coming up on May 6th people are starting to be more optimistic about the business and are starting to give us larger engagements, as I said, all year. Japan is soft. No question about it. I was just in Japan last week again. The economy there is very soft and as you might know, their fiscal year starts on April 1 in Japan so we will know soon more about budget and everything for their new fiscal year and we will have better data very soon. No question it is soft.
Brazil is doing well. So the big increase was Brazil. India and China are doing well. Continental Europe is soft. Asia is strong and Australia very strong.
John Lewis – Osmium Partners
I saw recently you just unveiled your execution practice in India. Do you plan to move that to any other geographies? I think that was the first practice, one of the relatively newer practices that has been rolled out internationally. Can you talk about that?
Absolutely. India is number one. Australia and China are going to follow, and the U.K. will follow in the weeks and months to come. Then we will expand geography by geography.
John Lewis – Osmium Partners
On the customer loyalty practice can you talk about the number of clients that are at least in the pipeline or secondarily how many are buying?
We have 17 that are live now and in various stages. A lot of them are as we have talked about before and in fact some on the phone might find this interesting, the initial phase of a customer loyalty signing tends to be something we call a calibration study where most people already have some sort of customer metric in place. What we are showing them is the metric they have doesn’t actually rate their stores. It doesn’t actually tell them what percentage of their customers are delighted and it just turns out it is true. That is a physical process that starts out with a $30,000 to $70,000 initial engagement.
Once that is done, at least to date, people have recognized the existing metric they have doesn’t really give them a reliable basis for trying to get righter and tighter because it doesn’t measure accurately the stores or the like. So at that point you are hoping you get a big assignment. In some cases despite the fact people know that they are so wed to the old methodology they have and have been reporting to others about how great they are on customer loyalty they don’t really want to go back and change a system out where it is going to take them some time other than moving to rollout.
At this point we have had good success particularly in the last two quarters targeting CEO’s directly. There are many of them who don’t care maybe. Don’t care that much about getting a reliable metric or don’t know to care. Those who respond tend to care and have given us good assignments. We have a number of new assignments. Most of those will be not ready to roll out for 3-6 months and we hope we will win maybe 1-2 of those to rollout. They are large when they do. We have retained all of our clients from the prior year which is great. Several of those have expanded with us.
This is a business where once you adopt the new methodology it is hard to get it out. This is now with the board of directors and shareholders and employees the new way of measuring it. The next phase is of course to implement our execution practice in those same customers and companies to really improve the score once they get a reliable score. So we are up significantly in the number of clients we have that are active. We have a good pipeline of proposals out there right now. I would say eight proposals that are out.
For us the proposals are reasonably technical in coming up with the architecture, etc. We feel good about it. We are hoping to convert some of these pilots or calibration studies to full rollout before the end of the year.
John Lewis – Osmium Partners
On customer loyalty are the clients that have rolled this out and gone live how would you gauge their user satisfaction on having this metric? How is it impacting and helping their business?
First of all we have a very high net promoter score from our customers in the customer loyalty practice. I tell you, with the exception of two early on where they are using the metric but it wasn’t ever adopted as the strategic imperative. There were a couple where it was early on and I think the way we positioned it early on we were so happy to get the assignment we didn’t force it to be as strategic as it needed to be. I would say otherwise, one is expanding in every one of the other clients. Two, several of those clients have been recently interviewed by others.
I am not exactly sure how people found out. There have been spokespeople from the fundamental differences making in their business. If I am trying to move my operation right and tight on customer loyalty and you find out you don’t even know which stores actually have the best loyalty or not it is hard to figure out which behaviors you are trying to replicate. For them, by having an accurate metric and having a clear idea of which stores are generating the highest level of satisfaction it gives them the basis for then identifying those behaviors which are driving that result and trying to replicate it throughout the company and that is what our practice does.
I would say it is very high satisfaction and the nice thing is high satisfaction at the board and CEO level, not just at the staff level.
Ladies and gentlemen this concludes the question and answer session for today’s call. I would now like to turn the call over to Mr. Robert Whitman for any closing remarks.
First of all were there any other questions in the queue? We would be happy to answer if there were other questions. Did we cut people off?
No sir, I have no further questions at this time.
We of course would be happy to talk to any of you personally who would like to follow-up. We appreciate very much your interest in being on the call today. Moreover the support and interest you have had in the company over the last quarters. We are really delighted internally, obviously we feel this enormous responsibility to keep everything moving but feel a real confidence that the [bet] you have on the table are ones on which we can execute. The last quarters have shown we are executing. We have a really great, great team. Honestly, our executive team is a superb group of people who really are driving the business day to day.
We also have what we call the Redwoods, our top 25 leaders around the world, who are really remarkable. We had this India trip last week where we were in Delhi, Mumbai and Bangalore. Each evening they had between 170 and 230 really senior business leaders there our team was able to put together. So you can see their stature. The fact they were able to invite heads of really major companies both domestic Indian companies as well as the Indian operations of multi-nationals, we really had CEO level people there. It was really quite impressive and meeting the teams and being with them.
We feel like right now we don’t have a lot of new debt to put on the table. The things we have going we have great opportunity where we are. We think things like the education practice and execution practice can really explode over the coming year. We have been spending a lot of time laying the foundation for that and have had good growth during the foundation. The speed of trust is going well. Our field offices are improving. We don’t have very many things in our weekly meetings where we feel like we have a lot of fixer-uppers with the exception of the economy in Japan. I think we are feeling good about things overall.
We appreciate your support and look forward to talking to you soon. We hope we will see many of you at the Investor and Analyst Day next week. Thanks very much.
Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect.
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