Derek Hatch - Corporate Controller, Central Services, Finance Bob Whitman - Chairman and CEO Steve Young - CFO Sean Covey - EVP Global Solutions and Partnerships, Education Practice Leader.

Tim McHugh - William Blair Marco Rodriguez - Stonegate Capital Partners Jeff Martin - ROTH Capital Partners Kevin Liu - B. Riley Peter Van Roden - Spitfire.

Welcome to the Franklin Covey’s Third Quarter 2015 Earnings Conference Call. My name is Shinette and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Derek Hatch. Mr.

Hatch, you may begin. .

Thank you. On behalf of the Company, I'd like to welcome everyone to our call this afternoon to discuss the third quarter fiscal 2015 financial results. Before we begin this afternoon, I'd like to remind everybody that this presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements are based upon management’s current expectations and are subject to various risks and uncertainties, including but not limited to the ability of the Company to stabilize and grow revenues, the ability of the Company to hire 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 our 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 except as required by law. With that out of the way, we’d like to turn the time over to our Chairman and CEO, Mr.

Bob Whitman..

Thanks Derek. Hello everyone, and happy July. Thanks so much for joining us and I'm happy to have the chance to report on our fiscal third quarter results. First, I thought it might be helpful to provide just some quick third quarter highlights; I'll just do that now.

Our third quarter revenue of $48.3 million was the highest ever for a third quarter, even after absorbing more than $1.3 million in foreign exchange impact. Our prospective business pipelines really grew significantly during the quarter, setting the stage for what we expect to be our highest ever revenue for both the fourth and first quarters.

Our operating results were solid, due to similar -- by the combination of $0.5 million negative foreign exchange impact and the increased staffing and training investments in our Education practice necessary to prepare for the delivery of the significant booked revenue in the fourth quarter.

We are making significant progress on each of our key growth initiatives and have made some meaningful refinements to our business model, which we expect to increase our profitability and flow through and scalability, both in the fourth quarter and particularly in fiscal 2016.

After utilizing $5.9 million during the quarter to repurchase stock, we still ended the quarter with $13.8 million in cash and our full $30 million credit facility undrawn, so our cash flow is strong. It's also a strong quarter in terms of meeting our own expectations.

The primary differences to our expectations were that one, we expected a significant amount of revenue from some large third quarter contract wins to be -- some of that revenue to be realized in the third quarter, and while we were thrilled that these contracts were awarded, a delay in the timing of these awards or in the start of their implementation shifted revenue, and this revenue now will be recognized in the fourth and some in the first and first, maybe even in the second quarters because some of them are large.

The other difference to our own expectation was our third quarter Speed of Trust marketing events generated a higher than expected pipeline of larger onsite delivery rollout [ph] opportunities versus normal certification of new facilitators which is good news.

Normally, the facilitator revenue is recognized in the quarter, for the quarter while these larger assignments get moved into the following quarters, and this resulted in approximately $1 million less revenue than expected being recognized in the third quarter in the four geographic offices in the U.S.

That $1 million, however, and almost $2 million of additional Speed of Trust opportunities were added to our fourth quarter pipeline. So, other than those two things, we really -- we felt like it was a great quarter and met our expectations in almost every front.

You may have seen in the release that we reset our adjusted EBITDA guidance range to $34 million to $36 million, down from $36 million to $39 million to reflect; one, the full $3 million expected adjusted EBITDA impact of the ongoing foreign exchange headwinds.

And two, that the -- as I noted, the extremely large number of training days already scheduled for delivery in the fourth quarter.

We’ll utilize nearly all of our fourth quarter delivery resources in some of our practice areas, and as a consequence, some of the revenue related to the contracts which we won or are winning and had hoped to would start to deliver in the third quarter or now, in which we expect it would offset some of that unrelated foreign exchange impact in our foreign operations may not be able to be fully delivered until the first quarter.

That will be good news for our first quarter. I will say this, that our teams are working and we are pulling on additional delivery resources to get as much of it as possible, and so we may get in more than we think, but we want to at least provide for them. Now I'd like to address some of these points in some additional detail.

First, our third quarter revenue and pipeline growth. As noted, our third quarter revenue was the highest ever for a third quarter, reaching $48.3 million. This level was achieved even after absorbing more than $1.3 million in foreign exchange impact. This represents growth of 2.5% compared with $47.1 million in last year's third quarter.

Excluding the impact of FX, revenue growth in the quarter would have been $2.5 million, representing growth of about 5.2% in the third quarter, which is often a staging quarter for us for the fourth quarter.

As you can see in slides three and four, excluding the impact of foreign exchange, nearly all of the company's major delivery channels and practices grew compared with the prior year, including 18% growth in our government services region, 18% growth in the education practice, and as I noted after adjusting for FX, 9% growth in our international direct offices, and 4% growth in our international licensee partners in this quarter.

Year-to-date, these licensee partners have grown 9%, excluding foreign exchange and have grown 12.5% for the trailing four quarters. Again, excluding the impact of foreign exchange, our year-over-year revenue was flat for our four geographic offices which serve the US and Canada.

They were up against, as expected, last year, a tough comp last year, it was a great comp last year where we had The 7 Habits launch, but we are really pleased that the revenue for these offices, despite comping against that launch were up $1.9 million or 10% compared to the second quarter, so we had good sequential growth as expected.

In our second quarter conference call, we noted that, one, our direct offices in the US were up against some tough year-over-year comps in the second, third and fourth quarters due to last year's successful launch of the recreated 7 Habits offering.

Two, that as a result of the success of the 7 Habits relaunch and its relatively shorter sales conversion cycle when compared with other offerings, our pipeline had been reduced somewhat. In other words, a lot of what we booked last year was delivered in the quarter, fourth quarter and didn't build up the same amount of pipeline.

And so in the second quarter we said that as a consequence we had significantly increased our number of marketing events and face to face calls in the second quarter as we also did in the third quarter and that as a result of our increased volume of these calls in the March events, we were pleased that our prospective business pipeline for those four offices had increased $8.1 million during the second quarter compared to the same time in the prior year, noting that approximately, of that $8 million, approximately 30% to 35% would be expected to convert to revenue in the following couple of quarters.

As a consequence, we felt that these offices would be in the position to achieve strong sequential revenue growth in the third quarter and strong sequential and year-over-year revenue growth in the fourth quarter.

As expected, a portion of this conversion, the pipeline conversion did occur resulting in revenue growth of 10% or $1.9 million for these offices during the third quarter to $21.1 million, compared to $19.2 million in the second quarter.

For us, the really good news is that as expected, the growth of our pipeline for these four offices has continued to grow with all the marketing investments and sales calls and at an accelerating rate during the fourth quarter.

Our prospective business pipeline at present for the fourth and first quarters is now $17 million higher for these four offices than it was at the same time last year, as you can see in slide five.

With approximately 30% to 35% of this increased pipeline amount typically converting to revenue, we expect strong growth in these offices for both the fourth and first quarters and really beyond. As you can see in slide six, these four offices have achieved significant and consistent revenue growth over a number of years.

The full year compounded average growth rate has been 12.6%, and since 2012 through '14 it was 13.7%. So with these investments in building our pipeline back, after these big launches, we are really confident in these offices having or regaining their growth position and will do so in the fourth quarter and beyond.

Working on -- in those offset, working on greater number of large important potential client engagements than ever and feel very good about these offset expected performances as I said for the fourth quarter and beyond.

As you can see in slide seven, for the trailing four quarters, our revenue growth was 6% after absorbing more than $3.6 million in negative foreign exchange impact. Excluding the impact of FX, revenue growth for the trailing four quarters was 7.8%, up against the 7 Habits launched last year.

Our continued growth this quarter, even after the impact of FX, will allow us to continue our multi-year trailing four quarter growth trend. Second one, I’ll briefly also address our operating results.

Our adjusted EBITDA for the quarter was $4.9 million after absorbing $500,000 in negative foreign exchange impact on EBITDA and after also absorbing significant investments and the increased staffing and staffing related costs in our education practice necessary to prepare for the delivery was expected to be very significant revenue in the fourth quarter.

Excluding the impact of the $500,000 FX charge, adjusted EBITDA was $5.35 million compared to $5.1 million in last year’s third quarter.

For the trailing four quarters, adjusted EBITDA was $31.2 million, representing 3.2% growth compared to the same four quarter period last year after absorbing approximately $2.3 million in negative foreign exchange impact.

Excluding FX, again, adjusted EBITDA for the trailing four quarters grew 10.8%, continuing the pattern of growth established over the years.

And we expect a significant increase in both sequential and year-over-year operating results during the fourth quarter, resulting from a combination of number one, significant increases in revenue across all channels, including in our education practice, where approximately 60% of the revenue for the year is expected to be recognized in the fourth quarter.

Second, increased gross margin percentage resulting from our historically high -- the historical increase in high margin sales of training materials to our thousands of certified client employed facilitators in the fourth quarter.

Third, flat central costs and fourth, the fact that any cost increases will primarily be compensation, including commissions tied to increase performances. So, this is a quarter in which we had -- last year, we had more than 50% of incremental revenue flowed through the increases in adjusted EBITDA and we expect that are better this year.

In addition, business model refinements we have implemented over the last two quarters, which I’ll discuss little more detail in a moment, should result in a significantly increased flow through of any increased revenue to adjusted EBITDA in the fourth quarter and for fiscal ’16 as a whole.

So, at this point, we’re feeling very good about the strength of the quarter minus just other than those two things in terms of timing differences on revenue, feel like we’re very well positioned with our pipeline through strong fourth quarter.

Being a month end to it, the pipelines are building further and we’re feeling very good about our bookings and the business that’s firmed up for the fourth quarter and so, we’ll expect to report a good -- really good fourth quarter and year when we talk again in the fall.

Now, I like to just shift briefly to address four things really excited and confident about in the business generally. The first is there are key strategic initiatives working.

As you know our key strategic initiatives that we talk about are to have best-in-class solutions in each of our practice areas and two to significantly increase the size and productivity of channels through which we sell and deliver them. We feel that we’re making really great progress on both fronts.

As our best-in-class solutions are providing us with pricing power, our gross margin remained high at 65.8% for the trailing four quarters. Repeat revenue, as you can see in slide eight. Over the past year, as the percent of revenue from customers in one year, which repeats in the next has increased from 69% to 90% just in the five year period.

Also growth at average revenue per customer engagement has increased more than 20% over the last five years. So, we feel very good about this idea that our best-in-class solutions are providing impact for our customers that allows us both pricing power, retention of the customers and expansion within those customers.

Also, the size and productivity of our sales and delivery channels continues to grow. The size of our sales force has grown to 181 client partners. The ramp up of new client partners continues to be at or ahead of model.

The productivity of our ramped up client partners continues to be strong and our international licensee partner revenue has also increased significantly over the years as you can see in slide nine and as we just reported for the trailing four quarters, more than 12% in local currency.

The second thing we’re excited about is that our business model is increasingly compelling at least from our standpoint. Our repeat revenue as I mentioned, has increased from 69% to a little more than 90% as noted above. Let me repeat this.

Increasing our repeat revenue from 69% to 90% over the last five years is really significant for us and for our business model and indicates the kind of impact we’re having in clients with our number one focus being quality results for our clients.

Second, in terms of the business model, as a result of the strength of our content, more than $90 million of our revenue now comes from content only sales.

Now, why is that important? This is -- let me just say, first of all, what it is and content only sales means there are purchases of training materials, content, licensing agreements, subscription services, coaching revenue and digital content delivery.

These content sales increased both the impact and sustainability of our offerings inside our customers, because they’re taught how to implement this themselves and they’re simply buying content from us with trained champions who can implement it. It also increases the scalability and profitability of our own business.

And that’s important and with more than 90% of this $90 million of revenue repeating, it’s really a major factor in the business model now and in the future.

Our adjusted EBITDA margins have also increased consistently as you can see in slide 10 and this has been despite significant investments in content and infrastructure and some potholes in the last couple of years like government sequestration and shutdown and the foreign exchange issues of last year and this year.

Say also, we expect additional increases in our adjusted EBITDA margins as a consequence of recent refinements in our field and central cost structure, which we’ve refined and analyzed over the years and now implemented a refinement in the number and type of marketing events for holding so that we have higher yield on each of those.

We’ve consolidated offices from four to three, we’ll do in September in the US and we’ve increased the span of control for our regional practice leaders, all of which have refined our business model some.

The third important thing that we’re excited about is that we really believe that our growth opportunities are even bigger than we’ve previously contemplated and – out of two different ways.

While our past growth and progress have been significant, we really believe that our most important growth and opportunities lie ahead of us, but we’ve achieved a great – we’re now at the base camp of another mountain.

The capabilities, solutions and processes that have been put in place to get us to where we are have also established a foundation for what we believe will be accelerated growth progress and impact in the years and quarters ahead and it’s kind of like when you climb up a mountain, all of a sudden, you have new perspectives.

While having climbed to where we are, we have a new perspective and these are opportunities that we see now as being bigger than we had previously thought. I will just note in bullet point form, four of them. First, the opportunity increase -- significantly increased the number of organizations with whom we do business.

We’ve noted this before, you can see it in slide 11 that we have more than 2,500 organizational clients in the US alone. There are more than 90,000 additional companies in the US alone that we haven’t yet reached, only approximately 8,000 of whom are even assigned to one of our sales people.

So we have the same opportunity in every major country around the world just because there is huge headroom for growth and is the key reason why we’re determined to hire these net new, at least 30 new sales people a year, and to increase that further as we can.

The second opportunity that has become more apparent in recent years is not only the number of organizations, but within these organizations, we may never get to the Head of Training or something a decision maker in these companies where they really want to buy something, but nevertheless, they have lots of decision makers, lots of managers who can make decisions.

In the US workforce alone, there are more than 14 million managers. We believe that at least a third of these managers have the spending authority to make a decision to purchase a $5,000 training class or something for their own team, whether or not their company ever decides making overall organizational training decision.

This provides us with another big opportunity. This year, we hired -- in follow up to last year, we’ve hired 15 new, what we call, area client partners to focus on this group. Their entire responsibility is to populate a marketing event every six to eight weeks with just such decision makers people were just rank and file managers in their companies.

We have learnt that a very significant portion of these people can make a decision and do so right on the spot, become certified to teach our content or hire us to come and deliver it.

The ramp up of these new area client partners are on track and we plan to hire another group of these area client partners of similar size before Christmas this year, so that’s the second opportunity. Third, we have an opportunity to achieve much broader radiation of our solution to within our existing client organizations.

We have a number of clients where our solutions have been implemented pervasively throughout their organizations with huge impact. With other clients, our solution had only been implemented with the team or regional levels.

For several years, we focused the efforts of a certain number of our client partners on increasing our radiation within a smaller number of clients, I assigned them a smaller number of clients and just tried to go deeper and this has been met with very encouraging results.

As a result of this multi-year test and the success of it in which our total average revenue per client has increased 20% overall in the US direct offices just as a result of the impact of these small number of client partners who have been doing it, we have now as a consequence reduced a number of accounts with whom some of our top client partners work, we call these client partners, enterprise client partners.

With this focus, we have full confidence that these enterprise client partners will be able to have an increased impact on broadening our solutions, reach within their existing clients and that gives us without a lot of new prospect or anything else that delves in to go deep and have an impact there.

And finally, we believe there is a big opportunity to quote on the solutions as specific different organizational challenges like sales performance, customer loyalty, whole-school transformation, merger integration, et cetera, each of which presents a huge opportunity on its own growth very specific to a circumstance in which an organization finds itself and where we can build a targeted sales effort toward as we have done in sales performance, in customer loyalty and in education.

We have made some recent realignments to our organization to ensure that we are able to execute on these opportunities, including dividing our business and government-oriented direct sales forces into two groups, one we are calling the direct office group and the other a new strategic markets group.

The direct office group includes our geographically organized direct offices and sales and delivery teams in the US, Canada, the UK, Japan and Australia, and this team is tasked with realizing the huge potential we just talked about and increasing our number of clients, reaching an increased number of decision makers and then the penetration of existing accounts.

This same mission is also handled through our licensee network. This direct office group will now be headed by Paul Walker. Some of you know Paul. Paul has been leading our Central Region for many years, and during his time the Central Region’s revenue has grown from 10.5 million to 30 million.

Two years ago, we asked Paul to also take on in addition to the Central Region, the leadership of the UK office, and with a remarkable efforts of our great team there, and under Paul’s leadership, the UK’s revenues increased 62% over the past two years with its EBITDA growing a 100%.

So Paul is a terrific leader, who has proven himself time and gain in every role he has been asked to take on, we had a lot of confidence in him to be able to take the play that we are running in our direct offices and make sure it’s run systematically throughout the world.

The strategic markets division as we tell, we are focusing on specific problems for specific customers, who will include the government region. As our sales performance practice, the customer loyalty practice, a new special sales team focused on named global accounts who are not – the accounts that are not currently assigned to other sales people.

And very likely some new acquisitions. This group will be tasked with taking very specific solutions to very specific customers and trying to own those solutions. It will be headed by Shawn Moon.

We talked about creating this new growth division with government, sales performance, customer loyalty, global accounts and the opportunity to grow through addition acquisitions, it had Shawn’s name all over it.

The government sales performance have been reporting to him and he has overseen the three acquisitions we have made over the past five years, specifically the trust practice, NinetyFive 5 and sales performance in Red Tree.

And Shawn has been responsible for some of the largest, most strategic deals we have conducted as a company and we recognized if we didn’t just separate this group of activities and focus on it, we never really take advantage of the opportunity and Shawn raised his hand, we raised our hand and we are excited about what he is doing there.

Our Education international licensee groups will continue to be led extremely capably by Sean Covey, who has led the growth in both groups over the past many years in addition to our innovations group.

So there won't be any changes there but we have great teams in both of those areas, Sean has done a fantastic job of growing those because we think by segmenting the markets a little bit more, we'll be able to get increased top focus, increased marketing and other focus from Scott Miller and his team here to help us penetrate those markets.

Just to mention the last thing at which we're excited is that we think our strong cash flow and liquidity will give us some new opportunities for value creation in the future, because I noted earlier, we're in a strong position with $14 million in cash, no borrowing under our $30 million credit facility and expectation of generating additional $30 million in after-tax cash flow in the next 12 months.

This provides us with the opportunity to repurchase stock and make some thoughtful disciple bolt-on acquisitions as they become available and as we focus on them. Finally, again just some notes on the outlook.

In last year's fourth quarter, we generated revenue of $68.1 million, with an overall gross margin of 68.9%, with prospective quarter pipeline which is $17 million higher than at the same time last year when we did that, we have real confidence that even after the impact of FX, our Q4 revenue will be our highest ever, consequently because the very high flow through in the fourth quarter, we also expect to have and are confident that our Q4 adjusted EBITDA will also be our highest ever.

As discussed, we've reset out adjusted EBITDA guidance range, try to account for a combination of the full impact of the approximately $3 million of the EBITDA impact associated with FX plus the possibility that with the magnitude of trained days which we are already scheduled to de-deliver in the fourth quarter, which may concern nearly all of our fourth quarter delivery resources because the magnitude is so big.

And that we're scrambling and we got contract consultants and others to help, it maybe that some of that shifts and so we just wanted to provide a cushion for that. Nevertheless, we feel great about the fourth quarter and anything that doesn't get into the fourth quarter is good as we expected to be will help us get a good start on the first quarter.

So I want to thank each of you for your support.

Honestly, our opportunities for growth has never been better, we've never been better prepared to take advantage of them, we feel like as a team, and as an organization we've got tremendous people in every position, excited to move forward and we look forward to being singularly focused on meeting the strategic goals, where our multi-year plan is finishing up strong for this year and get off to a fast start next year.

So with that, just wanted to call your attention, if anybody have any questions about any specific accounting issues, you can see on slide 14. As we do each quarter, Steve is here of course, and can answer any questions about those items. And at this point, I think we'll just open this for questions and be delighted to talk to you..

Thank you, we will now begin the question-and-answer session. [Operator Instructions]. And our first question comes from Tim McHugh with William Blair, please go ahead..

Yes, thank you..

Hi Tim..

Hi, how are you doing?.

Great, how are you?.

Good.

Just I guess one numbers question, the impairment charge, maybe I missed it if it was detailed, but what's the impairment this quarter?.

Steve?.

There are two components to the impairment.

We had a set of discussions related to related party receivable and the long-term cash flow related to the collection for the long-term portion of that receivable, and while this set of discussions benefits us somewhat currently, the long-term view caused us to impair that receivable from a related party by between 500,000 and 600,000.

In addition to that, we had some changes in content that caused us to impair a portion of amounts that we had capitalized in a couple of content areas, and the sum of those two things is the million that's reflected in the financials..

Okay.

I guess as you think about the deals, I guess, slipping relative to your expectations, maybe just elaborate on what's happened, because you actually -- you tell a story about more and more of the revenue coming from repeat customers and from intellectual property, but there seems to have been a number of kind of things slipping in the last year.

Trying to triangulate the visibility with these items slipping, and associated with that, when you talk about I think the strong Q4 and then Q1, I think you meant or you made the comment that it would be a record year, but if you are growing every quarter it is a record year.

So what's the growth rate that you think about as you go into 20 -- if you say this pipeline sets you up for the following year? What's the target at this point?.

Yeah.

First we will take that last question first and then go back to kind of the shifting economics, would that be helpful, Tim?.

Yeah, that's great..

Good. Yeah, as it relates to our growth rate, we've said our long-term expected growth rate and kind of year after year has been -- our goal is to grow revenue at least 10% a year and try to have a flow through of incremental revenue of that incremental revenue of approximately 25% to 30% closer to adjusted EBITDA.

As you know, over the last couple of years, it's been a little noisy because of the government shutdown and sequestration, and last year's plus [indiscernible] of FX hit us by $4 million of EBITDA, but we increased adjusted EBITDA by $3 million.

In the year, we really -- that flow through would have been more like what we thought had we -- but for that. But again, those things happened.

This year, it's more FX related, but in general we are – and to try to actually adjust that, we've done some dimensions and refinements in the business model to provide ourselves some additional cushion, so that whatever that pothole is next year, that might be a few million dollar pothole, but we are still able to meet at least a 10% revenue growth number and with the flow through of 25% to 30% EBITDA.

So is that responsive on the first question?.

Yeah..

Yeah. And then as it relates to shifting economics, let me just tell you, we got kind of two bases of revenue.

We've got a normal base of revenue, this 90% repeat revenue that flows relatively consistently, but not every client renews exactly the same time every year and there is -- it's not always that there is a – it might not be a gap between one division finishing some training and somebody new starting, but that's kind of the normal flow of the business we deal with.

Increasingly, in the last couple of years, we've had opportunities for some large contracts and these are, I think, with the economy coming back partly, people are now recognizing they have some money to invest in leadership development and training, so they are putting out large proposals where their large clients with whom we worked, who historically are now doing something big.

They want to do something big. They don't have a specific timeline for doing it, and so they set up a process and say they have certain time they want to do.

We win the contract, but then things like this happened, and they might start the contract two or three months later, that's still a good news for us, but sometimes when we think -- we think we have a specific start date and it moves off a month or so, that’s I think the nature of what happens there.

But beyond that I think the only other thing in the last year that's been a little bit – that’s pushed us a little bit more than normal from quarter to quarter is that with the launch of 7 Habits last year, the 7 Habits product, because it was primarily purchased by people, these decision-makers who became certified facilitators, they made that purchase decision quickly and when that sale decision -- purchase decision was made we shipped them materials, and so that's a good thing in that quarter, but it also drained our pipeline some because the normal flow, there is a faster conversion cycle in last year's second quarter than normal.

That caused us, I think, maybe not to belabor this, but during the second quarter, our pipeline, we felt like at the end of the first quarter, it was a little wider than we wanted to be to build for the third and fourth quarter, and we made those investments.

But I'd say that, it's primarily those two things, and I think we are now back to what we think is more business as usual.

We’ll still have these -- we’ll still have some of these big contracts that come up and they get awarded, but then something happens with the client, but that’s just kind of the normal ebb and flow, but thankfully over the last year, we have been able to maintain kind of this adjusted for currency -- pretty solid growth rate and expect to be able to do so going forward.

Is that responsive push? – if I am missing it..

No, that’s fine.

And then I guess I missed was, did you give the client partner number for the end of the quarter?.

It was 181. So, as we mentioned last year, we are now hiring in classes and so, we use to kind of hire throughout US. We still do a little bit of that. But generally, we’re trying to hiring classes at a specific time. We find it especially a good thing for people who are part of the class.

There is the collegiality, the competition, et cetera that comes with that. And so, in the corporate side, we’re hiring now one big time a year and then filling in with any replacements during the course of the year.

And so, that big hiring was in the fall last year and we’ll expect to be in the late fall this year, probably right before Christmas when we hire the next big class there. Education has the same idea but they do theirs in the summer. They’ve just hired a group of client partners for next year there.

But that’s -- so, the 181, we expect by about the time we report year end in November that we will have higher -- another -- the number that will get us into the 200, 205 to 208 range, which was the target but it’s a couple of months later than the original target.

Now, we’re recognizing that instead of hiring those people right at the -- that class right at the same time we’re kicking off all of the new year and all of the effort that’s done with managing existing – meeting with all the existing people who are better off to give those people kind of their own time in the sun and clouded by everyone else and that’s we’re going to be hiring those folks in kind of late November, early December, so that they get trained and ready to go in January..

Okay, thank you..

Thanks, Tim..

And our next question comes from Marco Rodriguez of Stonegate Capital Partners..

Hi, guys. Thanks for taking my questions.

I was wondering if you could help quantify the revenue or the impact of revenue in adjusted EBITDA from the large contracts that got pushed in Q4 -- into Q4 that is?.

Yeah, I think we can. There is good -- we had good flow through for additional contracts and so, we thought there would be about a million dollars of revenue delivered in third quarter, which would have contributed after gross margin and commissions about half that amount. So, probably half a million got pushed there to EBITDA.

And then as I mentioned, the conversation cycle from our marketing events in trust this quarter, the good news, we positioned this as more -- trust as more a strategic thing and then just training facilitators. That was a good thing but it also meant that we build up a little bit more pipeline.

There was about a million less revenue there, probably another half a million. So, but for the -- those two factors, and again, they’re just part of business. We’re not trying to say they are extraordinary events.

We’re just trying to give context on what our own -- versus our own expectations, so it would have been about another million of EBITDA contribution on those items, which we don’t think we’ve lost, we will get it. We will still get it.

And part of that will increase our fourth quarter and part of it may push into the -- because of our really significant pipeline that we have to deliver in the fourth quarter, some may -- because of either our schedules or client schedules, some of that may push into the first quarter..

Got it. And then I wonder if you can may be kind of elaborate and go back a little bit more in terms of these realignments that you made in the business here? One of the prior questions, it sounded like your answer was you wanted to kind of give yourselves a little bit more of a cushion to meet the topline of 10% and flow through of 25% to 30%.

But unless I misunderstood, you kind of sounded like some of the issues at least this year that have been impacting are kind of transitory in terms of FX in just some business moving from Q3 to Q4.

So, I’m just kind of trying to understand what’s kind of really driving this realignments that you discussed in the business?.

Thanks, Mark. Yeah, you got exactly right. What’s driving the realignment is nothing to its cost.

It’s just is a result of we’ve been -- we’ve also been working on the business model, but the realignment is really to make sure that we have intense focus on one or two direct objectives rather than multiple ones, and so, the idea of setting up the strategic markets group and asking Shawn moving to head it is the idea that it’s one of our fastest growth areas and biggest opportunities within things like sales performance and in customer loyalty and in some of these vertical market things that we’re doing, even in healthcare and other things, where we haven’t -- we don’t talk about it a whole lot here, but they are fast growing small initiatives.

We feel that without real leadership on those things, we won’t put the kind of organizational muscle behind it to make these things successful. These tend to be big deals, they tend to be things when people train their entire sales force worldwide, et cetera, this is something where you need a special set of skills.

Shawn Moon has run these groups over the years and so his main idea was if we could do that, organize that group, in addition, identify a number of select accounts that we’ve never really even been in on, it might be 100 really significant companies that have a big opportunity, but where they’re one of sixty accounts and other sales person is focusing on and we will now have a sales person who might be focusing on three or four of those accounts.

Also, we believe in some of these vertical markets, there are some opportunities for some small bolt-on acquisitions that could increase our potential and sales performance there and merger and integration or some of these things that we do and without the focus of a leader who could both – who could integrate these things and we have confidence we just wouldn’t do them, so the first reason for setting up strategic markets was to – and also in our government business to I guess particular focus independent of the large contracts that we’ve had, we have a terrific general manager there, Preston Luke who has done a fantastic job over the years, he’s reported to Shawn, but we think there is a big opportunity both in federal and in municipal and local governments which we’ve never focused on.

And so it’s really to organize ourselves, take advantage of segments, it’s for accelerated growth, not for cost reduction.

In that area -- our direct offices having all of them focused on one play, instead of having multiple plays because there are other pieces of this like government and sales performance in it, having one set of plays being run by all of the offices in the same way we think is the right idea.

Paul Walker has been, we have all great general managers and Paul has been one of those. Paul has been really out in front on many things and we’ve asked him to lead that, because the reasons are both just to accelerate progress on implementing plays we already know work, but which we feel like we need increased top level focus on.

Is that helpful?.

Yeah, that’s very helpful. And last quick question, I’ll jump back in queue.

I was wondering if you could talk a little bit more about the international licensees revenue in the quarter, it looks like it declined year-over-year, can you talk a little bit about the drivers there?.

Yeah. I’ll ask Sean Covey just to respond..

Sure. Yeah. So for the fourth quarter, with FX taken out, FX impact, which was negative, we grew up 4%. If you look in to it, growth has been pretty stable, this quarter dropped primarily because of three large partners that had a bad quarter, one of them in particular had a large deal last year, Puerto Rico, but didn’t repeat this year.

I don’t think it’s anything systemic and I expect that we’ll get back to the 10% to 12% range we’ve been in. If you look at the last there quarters so far this year, so year-to-date, we’re at 9% growth and the last year, it’s at 12.5%.

If you look at the 9% growth this year, if you look at just the gross revenue, so just the grossed up revenue of all the partners, in their local currency, it’s also at 12%. But we reported 9% just because there are some direct sales we had last year in Korea and some other markets that are reported in that number.

So I think generally we feel this 10% to 12% growth rate with the partners that we’ve had for the last many years is still a place that with an off quarter primarily because of three larger partners that had – just had an off quarter..

Sean, you might just speak to expectation for the fourth quarter and for the year for licensing?.

Yeah. So we think that the FX will be about the same as it has been, it’s been hitting us pretty hard. And it easily takes down your percentage growth by -- it’s been anywhere from 8% to 10% each quarter. We expect that to continue.

We expect our growth rate in local currency to continue at the same rate it’s been at, we think this third quarter again is an anomaly and will be in the 10% to 12% range.

Does that help?.

Absolutely. Thanks a lot guys, appreciate it. .

Thanks, Marco..

And our next question comes from Jeff Martin of ROTH Capital Partners. Please go ahead. .

Thanks. Hi, Bob. .

Hey, Jeff..

Bob, could you shed some light on the revenue recognition in terms of accounting of large contracts and if there is any risk of not – if you don’t complete those contracts, you won’t be able to recognize revenue for some of them in the fourth quarter?.

Let’s talk about the different nature of contracts, really kind of two – I mean, there are kind of three generic ways it can happen. One is, it’s just a contract where they sign it up and they ask us to do onsite delivery, that’s the least frequently occurring, but that way is just – we do that one class at a time and one course at a time.

So that’s recognized just as it’s delivered over a period, but they have – they sign a master contract where you’re doing that.

The second would be where they purchase an intellectual property license and that again is done when they purchase the license, they get the rights, that revenue is recognized, there is no ongoing obligation there unless they also buy services, you know coaching services or something in association with that which again are fulfilled on a piecemeal basis.

And then the third would be, if they decide to certify a champion inside the company and then by materials from, so I think the revenue recognition, the size of the contract doesn’t really change the nature of what we do. The revenue recognition is pretty straight forward for any of those three.

We do it lots of times at smaller contracts, so there is nothing unique in most of these larger contracts that changes revenue recognition or risks the recognition of that revenue..

And then you enter that acquisitions, could you shed some perspective there, are these mostly tuck-ins that you’re talking about and what specific practices are you looking to add?.

I mean, this idea, we have got – our practices have each grown to kind of the $20 million plus range, which means that in any one of the content categories, we are in the top, if we are not the top practice in the industry in that content category, we are one of the three or four.

But in some of these vertical practices, there are other people out there who are kind of equivalent in size and so as you know in the past, we have done some tuck-in acquisitions where those -- like 5 Online or NinetyFive 5, where we bought this tool set basically plus we got to grow some really good people, Red Tree, I guess some contents and great people, Speed of Trust was the largest acquisition, which is a new category for us.

But I think, as we enter in some of these vertical markets, instead of just trying to say, what’s the greatest amount of revenue we can get just using our own content.

The real question we want to focus on which we have done in these areas is to say, what it takes to solve the problem, and if there is a tool set we don’t have or a capability we don’t have, where there is somebody else had region to a client segment that we want, that kind of a thing in sales performance for example, or customer loyalty as an example, or in healthcare going to be good acquisitions where you are making a $10 million or $12 million, $15 million acquisition that fits in nicely with what we are doing gives us an additional capabilities.

We are not thinking about making kind of a transformational, kind of an acquisition and risking a lot of things on that.

But I think we just think there are some good things to do that could increase, for example, in sales performance, the acquisition of one or two of those people could put us into it that, being that would be equal or equivalent to any of the top two or three sales training companies. We are in the top eight or ten now.

We could move up into the top tier with an acquisition there in customer loyalty. It wouldn’t take much to move into that top tier. And so those are the things we are thinking about is taking our content, other people’s content and to our distribution and really trying to own some of these content categories. .

Okay.

And then could you talk about the ramp in client partners and that’s a big part of the thesis here is that the ramp and adding more each year or at least having to step it up last year and this year will create some higher visibility into some consistent growth that’s in that 8% to 10% range?.

Yeah, thanks, Jeff. Let me say, first of all, we have been doing as you know for years hiring and ramping sales people and reported that each year they are king of a key metrics for us with respect to new sales people, are they hitting the ramp and two, do we retain the right percentage of those new people. As it relates to hitting the ramp.

The people we have kept have hit the ramp and are being ahead of the ramp consistently and are again, this year we expect and we usually report on this in November kind of after the year is over, because these classes come in in the fall and then gets through their first year and others are on that schedule where their ramp metrics are set kind of on these annual basis.

But during the ramp up, with the addition of sales manager position a couple or three years ago, the regional practice leaders we help people present these events and close sales, other sales support that we provide centrally.

While we've increased our investment, certainly the ramp up has been good and we have no concerns about the ability to ramp up the sales people. In terms of retention, again the addition -- we originally thought that we had hired 15 to net 10. In our first six years of doing this we had to hire 17 to net 10.

That included a couple of tough years like 2009 when fewer people were successful probably. But generally now we think it's in the range of still we got to hire 16 to net 10, but that's been pretty good – been pretty consistent and the addition of sales managers has really helped us retain those people hiring in classes that we think is helpful.

So all those things work well. The number of hires, you mentioned, again this is net 30 a year. In the last couple of years we made two shifts that may have [indiscernible] is that we used to hire kind of evenly throughout the year, now we hire in a class.

And second, we've moved that class back this year to, as I mentioned, end of the fall rather than the start of the fall, but other than that we think that works well.

The other key element of this of course is the retention and productivity of people who already ramped historically over 10-year period, that's averaged about 5.6% a year of compounded annual productivity growth for those people and we've retained about 94% of that group as a whole.

In this last fall we had one death, the client partner tragically, we had a retirement and then we asked a couple of others to take management positions, different places in the world and so they are -- as a group, that affected their growth a little bit.

But in general, this is working and that's a key bet that we have and it doesn't change with the segmentation of the salesforce. We have the same ramp up for those folks as well..

Okay. So if we were going to characterize this in a summary fashion, you had a depleted pipeline going back about four, five months ago, you worked to fill that pipeline and now you feel good about where you are at in terms of getting back to a 10-ish percent growth rate.

Is that accurate?.

It is. I mean these four offices, it is primarily in four direct offices in the US which of course constitute around $85 million of revenue. These offices I think we showed on one of the slides, slide six, averaged over a four year period 12.6% growth and then over the two year period 13.7%.

So it's really I think just the launch of 5 Choices and then 7 Habits, because these were shorter term sales to -- you saw our revenue drop off a little bit in some of these longer term contracts.

We've been building that back up in almost every office, that's -- we expected, as you said, the sequential growth in the third quarter which we got minus the 1 million that we didn’t get and which is about 4% that we didn't get in the quarter, but the 96% we thought – of what we thought we would get we did get and now the fourth quarter pipeline is so much bigger that we feel like that on an overall basis we are right there.

We've got one office whose pipeline isn't so as quite where we’d like it to be, but they are also adding at the most rapid rate. So we feel like in the fourth quarter and certainly by the first quarter, we will be in a very good position to just have a more consistent growth in these offices..

Got it. Thanks for your time, Bob..

Thank you, Jeff..

And our next question comes from Kevin Liu of B. Riley. Please go ahead..

Hi, good afternoon..

Kevin, how are you?.

Good. First question. Just in terms of the near-term visibility, from what I gathered on this call, it sounds like a lot of your training day is already booked up for the current quarter, so even if you were to close the March deals, you wouldn't necessarily deliver them in Q4.

So is the implied Q4 guidance based on your full year numbers basically pretty much in hand just given all the number of book days or is there still some dependence on some large deals within the pipeline closing this quarter?.

Yeah, the reason so much depend and let me just say again, there are two kinds of large deals, there are some that are intellectual property deals and we have a couple of those still to close and those are recognized in the quarter. Other large deals would be for delivery late in the fourth quarter and in the first quarter.

So our guidance really reflects business is already on the books, a couple of intellectual property contracts that we have been told we're getting and expect to. But more than anything, the very ability for us then is, just really on our large client facilitator business in the fourth quarter, which is usually August, you can see that.

If you look back at our numbers on the previous fourth quarters, let's say last year the four direct offices in U.S.

did $21 million approximately in the third quarter and then did $26 million in the fourth quarter because of this uplift, and so we're expecting that kind of an uplift again in those direct offices, and we've been doing that for a lot of years and I have confidence in that but as you say, most of our booked days are booked and to be delivered.

We still for the next three or four weeks can affect that and influence new bookings that we can still deliver but our guidance range anticipates mostly what's on the books or things that we are in the stage of the pipeline where there is an 85% plus chance they'll get on the books or just facilitate yourself that occur in the fourth quarter or in the August..

Understood and I think earlier you guys talked a little bit about underutilization impacting the gross margin and the business, with kind of the numbers of days sold for Q4 already, I mean, how meaningful of a pick-up should we see in the gross margin line as you absorb that capacity to deliver..

Let me give you an example in that, we mentioned in first and second quarters that for example in the education business we hire coaches who continue – whose focus is on trying to make sure that every school you know we deliver quality results in every school.

Those coaches are not – we’re not doing out at high rates because they’re schools, we want to make sure that it's a service to those schools. And so, our margins including materials and service everything else, we’re only 45% for those coaches during the two quarters and really into the third quarter as well.

Those same coaches on the other hand are now delivering training in new schools in the fourth quarter and as we mentioned in previous quarters, the gross margin and flow through on that is very high, so their gross margins are in the high 60s in the fourth quarter, where they were in the 40s during the earlier.

So I think there is a pick-up there, there is a pick-up in gross margin typically because of the significant amount of material sales to license facilitators that occur in the fourth quarter and also a number of our large intellectual property contracts that organizations buy and renew each year also happen to happen usually tend to happen in our fourth quarter, where they get some kind of a pricing advantage for doing so.

Our gross margin in last year's fourth quarter was around 69% for the Company as a whole in the fourth quarter compared with annual average more than mid-60s. So there is quite an uplift in gross margins, so there is a lot of flow through from incremental revenue in the fourth quarter..

Got it, that's all I have thanks a lot..

Thanks very much Kevin..

And our next question comes from Peter Van Roden of Spitfire, please go ahead..

Hey guys..

Hey Peter, how are you?.

Good, I'm just a little bit confused on the sales or the client partner side, just want to make sure that I understand it and so, let me walk you through what I understand.

So you guys ended the fourth quarter at 169 people, and you're at 181 today, and then you still want to end the fourth quarter, so September 30th at about 200?.

What we've said kind of generally is that by the time we report our fourth quarter in the last couple of years, when we've had all the hires done, so for the next year, so we basically, what the number we get is 205 to 210, was kind of our target by the end of this year, that includes the hiring of the next class to the following year and so that will happen I say kind of in the November period the hiring, they'll be trained in December, and begin in January, so we’ll expect to hire 20 to 25 new people between now and say the end of November, mid-November..

Got it. Okay.

So what’s going -- what’s really happening and as you kind of get to that net 30 for the year and then also add some additional people to start the build for 2016?.

Yeah. And it’s really -- and I apologize for the confusion. This is really what’s happened in the last couple of years as well is that we were at 145 or so sales people I believe at the actual, literally at August 31st last year or something like that. But, so we added a large number in the first quarter last year.

I mean we added them, they were added as part of our target for the growth, but they’re just added in the class that came in the fall. So this isn’t particularly a new thing. The only new thing I think is that we’re hiring now as a class and we’re moving that class back a couple of months..

Okay. Got it..

We can give you a summary. If you want to call, and we just walk you through year-by-year, so you can see how that’s played out..

Okay. Great. Thanks guys..

Thanks so much..

And we have no further questions at this time. I will now turn the call back over to Bob for closing remarks..

Great. Thanks. Well, really appreciate you joining us today. We appreciate your support and great questions. Of course, delighted to answer any questions you have. Hope everyone has a great holiday weekend and we look forward to talking to you soon. Thanks so much..

Thank you. Ladies and gentlemen, this concludes today’s conference. Thank you for participating. You may now disconnect..