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Franklin Covey Co. (NYSE:FC)

F3Q11 Earnings Call

June 29, 2011, 17:00 p.m. ET

Executives

Derek Hatch - Corporate Controller

Bob Whitman - Chairman, President and CEO

Steve Young - CFO, EVP of Finance, Chief Accounting Officer, Corporate Secretary

Shawn Moon - EVP, Global Sales and Delivery, Government Services and Education

Analysts

Bill Gibson - Anderson & Strudwick

Joe Janssen - Barrington Research

Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter 2011 Franklin Covey Earnings Conference Call.

My name is Amnesia and I'll be your coordinator today. At this time all participants are in a listen-only mode. We will conduct a question-and-answer session toward the end of the conference. (Operator Instructions)

I would now like to turn the call over to Mr. Derek Hatch, Corporate Controller. Please proceed.

Derek Hatch

Good afternoon ladies and gentlemen, welcome to our earnings call this afternoon. Before we get started I’d like to just remind you that today’s presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based upon management's current expectations and are subject to various risks and uncertainties including, but not limited to, the ability of the company to stabilize and grow revenues, the ability of the company to hire productive sales professionals, general economic conditions, competition in the company’s targeted marketplace, market acceptance of new products or services and marketing strategies, changes in the company’s market share, changes in the size of the overall market for the company’s products, changes in the training and spending policies of the company’s clients, and other factors identified and discussed in the company’s most recent Annual Report on Form 10-K and other periodic reports filed with the Securities and Exchange Commission.

Many of these conditions are beyond our control or influence, any one of which may cause future results to differ materially from the company’s current expectations. And there can be no assurance that the company’s actual future performance will meet management’s expectations. These forward-looking statements are based on management’s current expectations and we undertake no obligation to update or revise these forward-looking statements to reflect events or circumstances after the date of today’s presentation.

We also like to remind you that there are some non-GAAP presentations in here in lieu with adjusted EBITDA and there are reconciliations available in today's presentation and on our website.

With that out of the way, we like to turn the time over to our Chairman and Chief Executive Officer, Mr. Bob Whitman.

Bob Whitman

Thanks Derek. Thanks everyone for joining us today. I’m delighted to have the chance to talk with all of you and appreciate very much for joining us. I’d like to organize my comments today around the following three headlines theme; first, that we are very pleased with the company’s strong performance and results for the third quarter, I will talk about that in detail of course. Second, that we are very encouraged by the strong momentum we are continuing to see in the business. And third, based on our performance during the quarter and year-to-date, we always expected our full-year results to be very strong. We now expect them to be toward the higher end of our previously provided adjusted EBITDA guidance and we expect to continue to achieve strong growth in both revenue and profitability in the future. As a result we also expect our adjusted EBITDA to grow significantly again in 2012.

So those are the headlines, I'd like to maybe just provide you some detail behind each of these things. First, in terms of the performance for the quarter. Revenue for the third quarter totaled 40.9 million which is an increase of 10.4 million or 34% compared to the 30.5 million in revenues achieved during the third quarter of fiscal 2010. As expected our strong bookings during the first and second quarters that are within our pipeline that we referred on before translated into significant revenue growth during the third quarter.

As you can see in Slide 3, we were pleased to have achieved growth in all of our major channels during the quarter. Revenues in our government services grew 3.6 million in the third quarter reflecting in part the continued bookings in revenue related to the significant government services contract awarded to us at the end of last year’s third quarter. However, we also achieved significant growth in all of our other key channels. In fact seven of our eight direct offices both in U.S. and internationally grew revenues during the third quarter as did all four of the field support practices, our international licensee partner group and two of our three national account practices.

Maybe I’ll just summarize briefly our performance in each of these channels. In terms of our geographic offices in North America, they grew revenues during the quarter by $3.7 million or 29%. This reflects the delivery of the training engagements booked during the first and second quarters and was as expected.

Revenue in our international direct offices grew 14% in the quarter including Japan where revenue grew 23% and this is really quite remarkable. We mentioned it in the last call, of course which was just right after the tsunami and earthquake and expressed that we felt that notwithstanding that the resiliency of the people there and really of our own team, that they had good bookings and between bookings and publishing sales, our revenue did grow 23% during the quarter.

We also achieved growth in our Australian office. As expected revenue in our U.K. office is essentially flat for the quarter. However, based on bookings we expect that their revenue will be up somewhat during the fourth quarter. Our international licensee partner’s revenues grew 13% in the quarter with all but five of the 38 international licensee partners growing over the prior year including 9 of our 10 largest licensee partners.

Finally, revenue for our national account practices grew 24% in the quarter, with sales performance practice growing $1 million to 75%. The customer loyalty practice growing at 10%. And the education practice posting a slight decline of $100,000 which really primarily represents timing difference and the delivery of training programs during the quarter.

As noted above and as shown as you can on Slide 4, revenues in 6 of our 7 practice categories grew during the quarter, it's only [gaining] slight decline in education where in term of our content areas we didn’t grow during the quarter and we expect of course to grow substantially for education for year as a whole.

In terms of profitability, as you’d expect these increased revenues translated into significant flow through to profitability. Gross margin dollars grew 6.6 million or 34% for the quarter with our overall gross margin percentage of 63 remaining equal to that achieved in last year's third quarter. So, we are happy that we were able to maintain our gross margin percentages in all of our major offering categories and that the mix stayed really about where we thought it would.

Our SG&A expenses as a percentage of sales declined to 51.4% during the third quarter, this compares to 57.5% of sales in the third quarter of 2010. In actual dollar terms, SG&A expense to increase approximately 3.5 million during the quarter compared to the third quarter of 2010, primarily due to increases in associate costs resulting from increased commission on the improved sales revenues compared to prior year.

Finally, as a result the actual flow through, as a result of the strong revenue growth and our improvement in the SG&A as a percentage of sales as you can see on Slide 5. Adjusted EBITDA for the quarter was 5.2 million, this is an increase of 3.2 million compared to the 2 million in adjusted EBITDA achieved in last year's third quarter. So, it was a very significant increase in profitability on the growth in revenue.

Income from operations increased 3 million during the quarter to 2.9 million. Our pretax income also increased 3.1 million during the quarter to 2.2 million. So, all in all we feel very good about the company’s third quarter performance on essentially every major metric. We want to thank our tremendous team, our executive team members here and all of our team throughout the world for the tremendous results and efforts they made during the third quarter and of course in the quarters leading up to it.

The second point I’d like to highlight is that, that we are very encouraged by the strong momentum we are seeing in the business. I’d like to spend a minute on this. One of our key lead metrics is what we refer to as our pipeline of booked days and awarded revenue which we present and we report in these calls. While this metric only captures booking data for our U.S. operations and therefore, excludes the approximately 50% of our revenue which is recognized in our international direct offices and our international licensee offices and from sales of material to our license facilitators domestically. It typically thus provide pretty good insight as the likely spend of revenue for at least the next couple of quarters.

So, I like to share just a few observations about this pipeline. At the end of the second quarter our pipeline of booked days and awarded revenue was 29.9 million. This amount was approximately 12 million higher than at the end of last year's second quarter. A significant portion of this 12 million incremental pipeline was converted into revenue in the third quarter with the result as noted above that our revenues for the third quarter increased by more than 10 million from 30.5 million in last year’s third quarter to 40.9 million in this year’s third quarter.

Second point about the pipeline is that you can see in Slide 6, due to the strong bookings we had during the third quarter and continued bookings of contracts and so forth, we were able both to replenish the 10 million of our second quarter pipeline which had flowed through the revenue in the third quarter. And still increased our total pipeline of booked days and awarded revenue by 1.2 million. So, it's really for us we felt very good that while we were able to bring that revenue through into the quarter. We were also able to replace it and more during the quarter in our pipeline. So, that we ended up the third quarter with a pipeline of 31.1 million at the end of the third quarter. This pipeline balance is the largest we ever had in any quarter and so it's really significant this momentum is continuing to build. Since most of the pipeline at least historically has been converted to revenue and most of it at least the following two quarters, we expect the third quarter pipeline should translate into strong revenue during both the fourth and first quarters.

The third and final point is that if you look at Slide 7, you can see that starting in the fourth quarter of last year, the amount of corporate or non-government bookings in our total pipeline has increased both in dollar terms and as a percent of our total pipeline. You can see that corporate pipeline was 62% in the fourth quarter pipeline of last year that increased to 65% to 78% and then has remained to 78% during Q3 of this year. And that’s important because besides the government contract is important and greater that isn’t and we believe we'll get ongoing revenue from it that the strength of our bookings has spread well beyond the impact of that contract and the contracts have not left much impact.

So I'd just say that during the fourth and first quarter as the result of these strong bookings, during the fourth and first quarters and beyond, we think we expect very strong growth in our geographic offices in North America in our national account practices. I should note that although their bookings are not included in our pipeline we also expect strong growth in international direct offices and among our international licensee partners in the fourth and first quarters and beyond.

Just a note on this government contract, as you know large government contract awarded towards the end of last year third quarter added significantly to both the overall size of our pipeline at the end of last year's third and fourth quarters, and to our revenue growth in the fourth and first quarters. It continue to provide revenue and we expect little in the future, but it had big impact in those quarters.

So, on a year-over-year basis, the pipeline at the end of the third quarter, the gap would be smaller because last year we added, we are comparing against this big initial launch of the contract. We expect significant revenues from this contract in this year's fourth and first quarter and beyond. As we discussed in prior quarters while we expect our fourth quarter revenue to be higher, we think our overall revenues will be higher than in any other year except in last year's fourth quarter when the government contract is launched, because of the magnitude of the startup revenues from that contract recognized in last year's fourth and first quarters, we don’t expect and haven’t expected as we said in prior quarters that fourth quarter revenue would quite match the revenue of last year's fourth quarter. It might come reasonably close, that it won’t fully match it.

Because of the expense associated with the startup of the contract in last year's fourth quarter, however, we expect that our adjusted EBITDA for the quarter will be very close to that achieved in last year's fourth quarter. We also expect strong revenue growth in fiscal ‘12 driven by the continued strength across all of their channels, but expected that growth will offset somewhat during the first quarter by a reduction in the magnitude of revenue received from the government services contract which was still in it's major launch phase last year. After the first quarter we expect that the full impact of our strong corporate bookings and strength in all of their channels will be fully felt in each of the quarters and (inaudible) see in a significant growth in those quarters.

So, in summary we feel very good about the momentum we are seeing in the business, we expect that momentum to continue to grow in both revenue and profitability in 2012 and beyond. We are also happy that the government contract itself is continue to be an in-place contract that we think we are getting it. We won additional business in that contract recently and we expect that it will continue to provide good revenues for us going forward.

Final observation of our result is, my sermon is based on our performance during the quarter and year-to-date, we expect our full-year results to be very strong and towards the higher end of our previously provided adjusted EBITDA guidance, and we expect to continue to achieve strong growth in both revenue and profitability in the future. As a result we expect our adjusted EBITDA to grow significantly again in 2012.

Just refer you to Slide 8. As you can see on Slide 8, for the trailing 12 months ended May 31st, our revenues were 160.5 million which is an increase of 34.9 million or 28% compared to the same 12 month period ended last May. Our adjusted EBITDA for the trailing 12 months is 21.4 million which is an increase of 11.3 million compared to the same period last year. So, we feel very, very good about where we are standing right now. As a result of this strong year-to-date performance and the strength of our pipeline of booked days and awarded revenue, we expect to finish the year with our adjusted EBITDA towards the higher end of our previously provided guidance that adjusted EBITDA guidance of 18 to 21 million. We also expect significant growth in fiscal ‘12 and beyond and with fiscal ‘12 budget essentially complete now. We currently expects to grow our adjusted EBITDA by approximately 20 to 25% again in fiscal ‘12 and we will give more refinement on that of course at the year moves forward.

So in summary, we are very encouraged by our result, by the momentum we are seeing in the business and third, by the potentially achieved strong growth in future quarters and years. And we look forward to reporting Q on our continued progress.

I’d now like to turn some time to Steve Young to discuss other elements of our third quarter performance.

Steve Young

Thank you, Bob. Hello everyone, nice to be with you. I’m also very pleased with our results of this past quarter and our year-to-date result and our past 12 month result. I’m pleased with the amount of the growth and also with the broad based nature of the growth. So, different topics, let me tell you little bit about the balance sheet.

We don’t take much time in these webcast to discuss our balance sheet or our tax provision. The reason for that is that our improving operating result and the understanding of our focus and strategy to drive future growth is more meaningful part of our story and rightfully consumes our time on these calls.

Our balance sheet to use my word is clean but does take some time to explain and understand. So, what’s new to our story and on the call, please note that we have a very high effective tax rate, our financing obligation are nearly 30 million and an escrow program including more than 3 million shares. Then please give me a call because I love to talk about these items.

We actually have an attractive tax position, a remaining $24 million of net operating loss carry forward and nearly $10 million of unused foreign tax credits, our financing obligation is really like a capital lease and our escrow program is a way to potentially reduce our number of outstanding shares. So, please give me a call and I’ll be more than happy to talk about the balance sheet and all of these items.

Bob talked and referred to our adjusted EBITDA slide and talked about the quarters results. Please note also that there was a $7 million improvement in adjusted EBITDA over last year for the three quarters. Like Bob mentioned with the quarter, those improvements to adjusted EBITDA also flow down to operating income and to pretax income. In fact, operating income year-to-date increased 7.9 million compared to last year and pretax income year-to-date increased 7.8 million compared to last year. So, I think this is a very good result.

Then if you are looking at our income statement, you will notice reported improvement to net income is significantly muted by our tax provision. So, that is a point you give me a call, and we talk about the amount of taxes that we actually pay which is low and the consistency in the amount of taxes we pay year-to-year, and about the tax benefits that we actually have available to us.

Additionally, on Slide number 9, that we are generating cash from our operating activities and in this quarter we are quite in these three quarters we have invested quite heavily in curriculum and course development and we also moved our offices in Japan and incurred some leasehold improvements and some IT improvement.

So, Bob, in summary of this short part conclude that we are very pleased with our performance in this quarter. We are pleased with our strategic direction, we continue to invest in growth, we have a clean balance sheet and we look forward to the future.

Bob Whitman

In a minute we open this up to your questions and answers from us, but before doing that we just address three questions all right and we’d like to share with you. One, when C&I thought you and other prospective shareholders, we've been told by certain of you that it would be really helpful for us to provide you with the simple summary of our investment thesis on Franklin Covey just in terms of both point to think about. And I thought it might be hopeful to briefly share a version of that today and I’d like to just briefly touch on these points. I’d be happy as Steve would be to get your advise on how we might change this and make it simple to understand our story.

But looking into three bullet points, in terms of what that the investment thesis might be; one, strong business fundamentals. Second, a large and expanding strategic moats around various parts of the business, and that’s people. And so, let me just take you through there. Just three slides and I think maybe you will find it helpful and if not it will be short.

On the first slide, in terms of strong business fundamentals, I’d like to just summarize, what seems like my viewpoint about the business itself. As you have seen our multi-year growth efforts are accelerated with the trailing four quarters revenue up significantly and profitability up significantly.

We are able to achieve and sustain high gross margins, 63% for the business overall. We have high and growing recurring revenues, we have moved our recurring as the percentage of revenues in any given year that repeat in the following year from 42 to 62% on the weight of what we hope will become (inaudible) around 70 to 75%.

We gained significant revenue and profitability for our international licensee partners with total revenues in gross terms are around $75 million to $80 million, they pay us royalties, but their businesses are significant and growing. We had 8 of them here this prior week along with the other senior leaders of the company. And these are very significant capable partners who are investing in their own growth.

Next 40% plus or minus of incremental EBITDA, revenue growth flows through the EBITDA and this continued flow through should drive EBITDA to sales of a target number of EBITDA to sales about 17% over the next couple of year's which is our goal.

We have low ongoing capital expenditures and so 70% is all EBITDA and because of our tax benefits 70% of EBITDA flows through to after-tax free cash flow at this point. With 80% of incremental EBITDA flowing through the free cash flow, so as we grow there is a very significant flow through to cash of incremental EBITDA that’s generated.

If we were to grow revenues $15 million with that formula we would expect to flow through roughly say 40% or 6 million of that in EBITDA. We would invest only about $2 million of them, but we only expect to have approximately 2 million of that 2-3 million incremental working capital and so, really the incremental we have pretty much fixed budget increase a little bit with revenue on our R&D, but essentially on incremental capital we have a very high pay back. And we also have a business model that allows us to add to the size of the sales force which is essentially a one year pay back and so. So, those points that are helpful, but maybe as a summary how we see the business fundamentals.

Second, as a business we believe we really do have some large and expanding strategic moats. Not least of which is our focus on delivering what we call transformational results for clients. We are very happy when clients results to our training life of the training, but for us the standard is are they going to give us 9 or 10 on the impact that they have on their organization, we take it very seriously. That is ultimately the biggest strategic barrier at any premium company to build these effect that it works, that it changes the result.

Second, our approach, our offerings which are productized training offerings but have the best in class branded solutions. So, our courses in their segment are usually the detrimental course in that area, it's synonymous with the solution to that problem, branding is driven by best selling books, by it's feature of story article that help us build branded solutions today our niches make it very much harder.

Third is our worldwide sales and delivery capabilities. More and more clients becoming or either already global or a moving global and more and more they are also trying to ask similar or the same thing solutions for their populations around the world. Our ability to sell and deliver solution in more than 100 countries is a huge advantage for global sales, and we have the major initiatives, focus on these global accounts.

Fourth, is our ability to deliver training through a wide range of modalities, modality in terms of ways in which we can deliver it. Some position themselves as e-learning companies and that’s been a good thing and particularly good for technical training things like that. But we have an ability to deliver on-site at a customers location to train their trainers and deliver material to do it through blended solution at certain elements that are electronic, like delivery to through their own consultants of trainers of our own. We can do full technology delivery, we can do remote web delivery. We can sell them intellectual property contracts where we can than customize the materials for them themselves. They can customize themselves. And so we can find a way to deliver our training in almost any circumstance from an aircraft carrier in the U.S. navy who might use their intranet and their own navy knowledge online system to deliver training to five minute film segment for frontline retailers to of course executives in an offsite meeting where they are discussing strategy for several days.

And finally, this is a bold statement because it starts with the word unprecedented, but we have it’s not unprecedented, a very, very strong list of industry leading clients in each of our practices. Our goal is to win in each of our segments, the industry leading clients. And so in our sales performance area, if you look at the largest technology and professional services firms, you would find many of them on our client list. Because we don’t share client names, some of our clients allow us to and others prefer not, but you’d see a list that includes many of the most important names, Shawn you can tell me whether or not you can share any of those names.

Shawn Moon

No.

Bob Whitman

Okay.

Shawn Moon

Just to say that it is the most prestigious professional services firms that are there that we have the presence with.

Bob Whitman

A very strong presence with. And we have the same in our execution business where two of the country’s largest multi-unit operators were our anchor clients and we’re adding many others as a consequence. So that become a strategic advantage for us because once you’ve tied down and they see value in what you’re doing, it helps us sell through that.

And then finally, the claim of best people, (inaudible) unless you spend time with our people. But we have a goal inside the company which we think actually is an essential actually in our kind of business is a real strategic advantage. We have a goal to be the workplace of choice for achievers with heart.

So we want the best performers, we want people who care deeply for the clients and about each others. Instruments that we use to help clients measure their own cultures, our own instrument, the XQ, and the employee Net Promoter Score developed by Bain as they have the transportational issue we have the, in our culture today the highest XQ scores of any organization that we have surveyed.

We have about 68% of our employees who give us a 9 or 10, and the next biggest group is 8. And we’re constantly trying to do things that will move all the 8s to 9s. But in many organizations, they say we got your 98% of our employees are satisfied, well, we have 97% that are today. The real point is no they’re satisfied. The question is are they loyal and are they all in. And most organizations might have 15% to 20% of their employees give a 9 or 10 for the company and we’re fortunate that we’ve got a lot higher than that.

And finally, this Redwood Structure, we call it the Redwood. We have quarterly meetings, we call the Redwood Council which is our top 35 leaders around the world including those of our largest licensee partners.

So the idea is that we want the strength to be in the field, where they have Redwood metaphor is that they each of our leaders has a genetic predisposition to grow large, to be enduring, to build an enduring enterprise and to gain strength from the interlocking root structure.

So this metaphor is good, but what it sets for us is, this isn’t about me, it’s not about the central office, it’s about them. It’s about the client facing partners, we have each of whom shares a profit has share of the profit. In our licensees’ case, they share all the profits. They don’t pay to us in royalties. But all of our Redwood have profit sharing component in their operations.

So that’s one topic I wanted to discuss. And hopefully, that at least provides a summary of things that you all have heard before.

Second is that last quarter Steve and I gave a summary in response to questions on how we look at valuation of the company. I won’t spend as much time as I stated last time on that. But I’ve been asked by several of you if we would remind reviewing that in this quarter. So just maybe to hit the headlines of it that we think that as I’ve said, we feel great about the business, we feel great about the business’s fundamentals, about its business model, etcetera.

And one way of assessing value, our current market capitalization, reflects not much more than the value of at least what we’ve been told our international licensee business alone might be worth. This is a tremendous network of strong partners, who’ve more than doubled their own revenues or almost tripled their own revenues in the last five years, six years, who expect to double their revenues again in the next four years, who are gaining momentum, gaining strengths, the business model works. They pay us royalties equal to approximately 15% of their gross revenues. They have very strong people in their own markets. I was surprised and amazed really at a recent tour that I did in Scandinavia. And really the very top CEOs of the very top companies in Sweden and Denmark were there at the meetings that we held the speeches. They stayed after, it was clear that they had the credibility that our partners had there and it’s the same everywhere you go.

So with the strong people with growing strength of their organizations, expanding product lines, their capabilities to sell wherever our solutions are going, they expect to double their business, low capital intensity, high royalty.

One way to think about it is that that business itself is very, very valuable, However, whatever [multiple] you put on it, it says that an investor at least we view an investor in Franklin Covey stock has significant downside protection and gets an option on everything that’s been growing so much that we’ve talked about today.

We talked about last time that you know we believe investors often struggle with which peer group to compare us. As you see on Slide 13, within the corporate training business, we’re just in the broader business services business industry. On one end of the spectrum there are companies that are sometimes referred to as body shops where most of the training consulting is customized and conducted or delivered by consultants and therefore viewed as less scalable over these refining firms.

And these companies have tended to trade around 10 times EBITDA. At the other end of the spectrum are subscription services, consulting light or productized consulting and training companies who primarily sell products or services with a third or less of their revenues coming from consultant billings. These companies often trade between 15 and 22 times EBITDA.

It’s interesting we believe that we’re currently valued at a lower multiple than at the lower end of the body shops when in fact our mix of business is much closer to that of the subscription services or consulting light or productized consulting companies. More than 60% of our revenues come from training product subscriptions, training materials, online contract, et cetera.

And our onsite trainers are often just the first step in the training process that ultimately results in the company certifying its own Franklin Covey trainers of which there are more than 9,500 active presently. These onsite trainers, who are employees of their companies order materials, deliver training pursuant to intellectual property contracts and the like.

So as you see in 13, perhaps you could measure at least something to reference in looking at the relative scalability of our business on this scale of body shops to subscription services to look at revenue per employee.

As you can see in Slide 13, some great companies which provide consulting services on the left hand side generate revenue of 137,000 whereas Corporate Executive Board, or Gartner might be in the high 200s. We actually fall in pretty much in that group. Our revenue per employee is much closer to that being achieved by Corporate Executive Board and Gartner than it is just as to the more consulting oriented companies although our multiple that are below kind of the more body shop oriented people.

And finally, most of you who’ve known the company probably think this way already, but value in Franklin Covey on an EPS basis has the negative that we have lot of depreciation and amortization charged every year, which is $7 million to $8 million and yet our CapEx spending is only $1 million, the disconnect from legacy assets that we own in the way in which they’re accounted now.

But looking at free cash flow or EBITDA, we think there is a better is more reflected at value. And so for us we believe on that basis that particularly looking down to free cash flow given our tax benefits that Steve spoke about that our multiple of free cash flow is we believe is quite conservative. So for those who requested that, I hope that summary was helpful.

Final thing I wanted to mention is that in the coming days we’ll be filing an 8-K that talks about a stock incentive plan for our Redwood Council members, these top 35 leaders. It’s structured in an interesting way so that the only way in which value will come to them is if the stock price actually increases substantially over a finite period of time.

So this are not options that will be outstanding for long time, regardless what happens to share price, they’re not full value shares that will vest without the performance of the stock. And so most of their pay is based on the performance of the business, this particular example will be based on the performance of the stock.

It’s such that it will not vest the basic grant will fully vest if within the next three years the stock price achieves $17 a share. If it does not within three years it will be cut in half and will expire in total if the stock price for some reason were not at $17 within five years. We want to basically be able to translate our operating results to shareholder value in a recognized way of value per share.

And so I hope I did an okay job of explaining it. But the basics are again not fully, these are shares granted whose vesting is contingent on the stock price getting to $17, at least this initial grant. If we anticipate there might be other grants that would then be again keeping the stock price moving forward.

But we think it [aligns] all of our leaders. I’m the only leader who will not participate directly in that program because I already have substantial other option, warrants and the shares. And we wanted to make sure we can put as much of this as possible in the hands of our great team. But we think it’s a very positive thing and hopefully you’ll view it that way also at least there are 35 people who are waking up everyday focused on how do you get to $17 a shares by three years from now or as sooner. And who have signed up on a three year plan that even at today’s, what we think are maybe low multiple would take us there in valuation within that period of time.

I mentioned I won’t be participating myself in that program because of the other shareholdings I have and so forth. But I’d just like to make one note in that regard, for the last 10 years, for three of them I took no compensation or stock awards or anything. For eight of those I took no stock awards and during that time I also bought substantial number of shares myself.

Nevertheless, about a year ago I explained that I was going to begin a 10B51 program to sell a certain number of shares. I didn’t anticipate reducing my actual shareholdings because new grants and other things I have would keep it about constant. And so I had very good intention to say I’m not going to reduce my shares outstanding. I’m also going to try to sell a little bit each month. So that way it wouldn’t move the stock price or anything else, but I’d tell you that’s probably been I think I’ve made a big mistake by doing it that way because, of course, every few days, you all are getting a notice that I sold some shares and whatever.

So I’m going to change that approach. First of all, I’m going to not do it monthly. I’ll just do a couple of sales, one in July and then one in January. And then I would expect to terminate any future sales for the foreseeable future. I have not wanted to be a seller but felt like I share in order to meet these other obligations. I'm hoping that that, that may answer your questions, if not, then I apologize. But the net of it is I’ll sell just in two sales six months apart at the end which I would then terminate the program and anticipate no further sales in the foreseeable future. So I hope that’s helpful in that regard.

We’ll now with those issues addressed, we’ll now open it to questions from you all. And again, thank you very much for being on the call today.

Question-and-Answer Session

Operator

(Operator Instructions) And the first question comes from the line of Bill Gibson with Anderson & Strudwick. Please proceed.

Bill Gibson - Anderson & Strudwick

Yeah. I think I understand why direct sales were up so much more than everything else. And I’m assuming that’s the government contract driving that. Is there more behind that than that factor?

Bob Whitman

I’m going ask Shawn Moon, who runs our direct offices to respond to it.

Shawn Moon

Yeah, thanks, Bill. It’s a good question. And actually, I’m very pleased to say that it is not simply the government contract that is driving up the direct offices. Every one of our direct offices is up except for our UK operation, which is flat, but has a good runway for growth in the first quarter. So it’s pretty well-rounded growth. If you look at the business outside of the government contract, the direct offices were up 20%. So it’s more than that.

Bob Whitman

And so, Bill, domestic direct offices other than government were up 29% for the quarter. The international direct offices were up 14%. So that’s really where the momentum is building. And I hope that one slide showing the pipeline growing, but how the corporate pipeline is really what’s been growing. It now makes up 78% of our total pipeline and will continue to grow hopefully is that helpful at all on that question?

Bill Gibson - Anderson & Strudwick

Actually that helps a lot. One thing, one follow-up and this relates I believe India is just starting out on the education front where they're going to your licensee over there will institute that practice. All of a sudden, I just had visions of that potentially getting really big. Has there been any progress on that front?

Bob Whitman

There has been. Approximately, a year ago, several of us were in India and has chance to meet with Minister of Education of India, Mr. Singh. And we told him about what was going on in the United States. He was very interested in that. That very day they have instituted for the very first time in the history of India mandatory pre-education for every child from six to 14.

So it’s a whole new world for them in terms of everybody has to go to school, but what do we do and how do we make sure these schools are preparing the kids in India to be able to actually contribute to a society that needs their contribution. When he heard what we were doing in the U.S. he called another ministers and asked whether we’d be willing to take a large number of schools immediately and try to do them.

I told him I appreciated it but honestly, we didn’t have the capacity and we wanted to do a good job. But they have begun and I believe the number is 25 schools that we’ve begun in Delhi. There’s a lot of attention on this. And you can imagine the opportunity given the age of not only the size of the population, but the age of the population in India, They have almost 700,000s grade schools compared to our 100,000s. So the opportunity there is great.

But I think you may Bill, another point you might think of is that our licensees today generally up until three years ago, they were licensees primarily in what we’d call our leadership content. And that’s really all that they sold. And so in addition to their growth in their historical leadership areas, every one of our licensees has the potential to add execution as now a new product line which has had such growth United States has education to add customer loyalty, to add sales performance.

And so as they certify and are willing to make the investments necessary to build, they have those opportunities to build the business not only by expanding the number of sales people, but by the expanding the product lines as we’ve done here. And so we think there’s a good opportunity in India certainly but in all around the world to expand practice as well as expand sales force.

Bill Gibson - Anderson & Strudwick

Thanks, Bob.

Bob Whitman

Thanks very much, Bill.

Operator

And our next question comes from the line of Joe Janssen with Barrington Research. Please proceed.

Joe Janssen - Barrington Research

Hey, guys. Great quarter.

Bob Whitman

How are you?

Joe Janssen - Barrington Research

I’m doing good. I just want to clarify something. In your press release, you mentioned plans like that include introduction of new offerings. Is that outside the practices or a new practice? Just some comment around that?

Bob Whitman

It’s part of the existing practice but we have a big launch this fall that maybe Shawn you want to speak about. It’s in our productivity has always been an important practice category for us, but or at least a course category for us. Only recently we made it a practice as to practice leadership, etcetera, and an investment behind it a lot this year. But we have a major new offering that we’ve always been the leader in time management. So this takes it well beyond that. Shawn I don’t know if you want to talk about what the launch will be this (inaudible). He’s not on the phone today. He’s on a family trip in Ireland and is not able to join us now.

Shawn Moon

The productivity practices is relatively new as Bob said though we have been in the world of time management for many, many years, our first operating that is the foundation to that will be launched in the coming weeks actually on September 7th. We have identified 180 cities worldwide launch plan that is being executed right now in terms of registrations. We are very, very encouraged frankly by the amount of interest that we are gathering on that initially as an example. We just had the SHRM, the big HR conference that concluded this morning and we had over 3000 people registered that event to come to this preview which is a buying presentation around the launch. So, we are excited about what this productivity offering is, and we are very encouraged by the enthusiastic response we have gotten.

Bob Whitman

Maybe at the heart of your question. In terms of we think within the practices we have now that each of these practices with relatively low levels of penetration in their targeted market could be 50 to $100 million just in North America within 5 to 7 year offering that has also done extremely well in manufacturing all the time. We have the deep capability actually in manufacturing where implementing, people who are already doing six sigma use our process to drive home specific goals and so we see more staying within the seven practice categories, adding content and so forth on the margin we are making investments that we find our offering, make implementation easier at our clients. So, I don’t think you will see a lot of the new categories of offerings and they are coming in future. Although, honestly there are another 10 to have that same potential belief and we remind where we are today.

Shawn Moon

It's not our intention to add, seven new practices next year, we believe our focus, we are going to grow within the established practices and if we fail to reach certain thresholds, then we will think of adding.

Joe Janssen - Barrington Research

A modeling question; I know for your tax rates for 2012, should I be looking at 2011 for guidance or is like 2012 going to be a different tax rate here for modeling purposes?

Steve Young

I don’t have the exact number in front of me, Joe, but our effective rate next year should be lower than this year, don’t know by how much, but the general idea is that you can take our pretax income apply to 40 to 42% to that and then adjust that by about $2.5 million, and that will come close. And we can refine that as we go into next year.

Joe Janssen - Barrington Research

Okay. One more question and I will jump back in queue. Did you guys give any, I didn't see in your little slide deck here booked days. You gave total revenues but you usually kind of give like booked days.

Bob Whitman

Yes, to give you the booked days, at certain time we explained that you recognize that booked days represents such a small part of the total business that until we have it for our international offices, we have been giving it every quarter and it increased this last quarter. And we had about a 9% increase in what we call booked days in our geographic direct offices in and international contracts in North America. But as you get down to it represents only about 26% of the total revenue. And so it's not as good a guide as we usually thought it would be. The pipeline is double that, it did have strong, we had very strong bookings last year, third quarter, we exceed those this year and had about 9% growth in those booked days per se which is one way of delivery. Booked days is only one way of delivery, we had more growth in contracts and other things that we did just in that. So, we might thought of explain to that, now we are trying to do how to explain. I’m giving you a slide that only explains 26% of the revenue most and so like maybe it's not as helpful one, but those are the numbers basically.

Joe Janssen - Barrington Research

I lied, one last question. For Q3 last year, if you strip out the government contract, what did the pipe look like then?

Bob Whitman

Well we added about to the pipeline, if you subtract about 7 million I believe [void] 8 million, so last year's pipeline without the government contract was 8 million less than it is than it showed within around 21 million.

Operator

(Operator Instructions).

Bob Whitman

I’m not sure either is someone is asking questions, we are hearing it understand, then I’m assuming press that we taking any questions there are a couple minutes more if you'd like to ask the questions. Not? Operator if there are questions you are receiving them, correct.

Operator

Yes, sir.

Bob Whitman

Great. All right, why don’t we wrap up here and we will of course happy to talk to anyone who would like to speak either a day or in coming days, but again I’ve been stepping back from the business. For us this isn’t a quarter-by-quarter issue. We have been on March when 2004 with the exception of two quarters bent in 2009 with the recession. We have been on a growth curve with the business it's remaining since 2004, we have been holding our ability to plan up sales people, we now feel like we have accelerated that. We started practice categories, those are included in our success accounting from many, many of our large deals, now we are expanding those into leadership and productivity. We have fundamentally changed the economics of the business in terms of the profitability flow through etcetera, and converted from what was a one time credit capital intensive business to one that isn’t very capital intensive. So, we’d anticipate leaving one question that wasn’t asked here is, I think many of you have is, what we are going to do with the excess cash that business generates? And we expect that we will have that excess cash, you see we have been investing in lot of working capital to support the increased sales at this point. But that tips over starting in about September-October and begins to bring in more cash than we go out and reverse it itself. And so we would expect to have a substantial cash inflows in the late part of the first quarter, and we would anticipate that we announce plan to be coming with excess cash though.

Thanks very much for joining us, we appreciate the chance to talk and appreciate your continued support. Thank you very much.

Operator

Thank you for your participation in today’s conference. This concludes the presentation, you may now disconnect.

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