Derek Hatch - Corporate Controller, Central Services, Finance Bob Whitman - Chairman and CEO Shawn Moon - EVP, Global Sales and Delivery, Government Services and Education Paul Walker - General Manager, Central Region, General Manager, FranklinCovey United Kingdom Sean Covey - EVP of Global Solutions and Partnerships Steve Young - EVP of Finance.

Jeff Martin - ROTH Capital Partners Marco Rodriguez - Stonegate Capital Kevin Liu - B. Riley & Company.

Welcome to the Franklin Covey Fourth Quarter and Fiscal Year Earnings Conference Call. My name is Vivian and I’ll 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 Mr.

Derek Hatch, you may begin..

Thank you, Vivian. On behalf of the Company, I'd like to welcome everyone this afternoon to our conference call. Before we begin, 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 the Company's clients and other factors identified and discussed in the Company’s most recent annual report on Form 10-K and other periodic reports filed with the Securities and Exchange Commission.

Many of these conditions are beyond our control or influence, any one of which may cause future results to differ materially from the Company’s current expectations. And there can be no assurance the Company’s actual future performance will meet management’s expectations.

These forward-looking statements are based up 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, I’d like to turn the time over to our Mr.

Bob Whitman, our Chairman and CEO..

Thanks Derek, thanks everyone for joining today. I’m happy to have the chance to talk to you. From today's discussion, I'd really like to have you leave with the clear understanding and feeling of confidence about three points or three things.

First, that I'm deeply sorry that we missed our guidance in the fourth quarter and thus for the year, and that I take full responsibility for it. Come back and talk about that.

Second, so just notwithstanding we've achieved significant and consistent growth over the years and that the key growth engine that have driven this growth are strong and proven. Those units whose growth slowed in fiscal 2015 are education practice in our US direct offices or growing again.

And we believe our poised for very strong growth in fiscal 2016 and beyond. And third, we plan to use our substantial cash flow and liquidity to compound impact of our expected operating growth on shareholder value creation. We go back to the first point. I want to acknowledge and address the fact that we missed our annual guidance.

This is something that has not happened in many, many years and I apologize and take full responsibility for it. I apologize to each of you, our analysts and each of you our investors. It's something I and our senior management team; all of us take very seriously and personally. And we’re determined not to miss our guidance again.

I’d like to briefly just five some context what was behind the miss from your information, not to mitigate it, but will provide some additional details about the education practice in a few minutes. In our education practice, our results for the balance of the company did meet our expectations for the fourth quarter.

However, in the education practice in the fourth quarter, more than $4 million of revenue we had expected to receive in the quarter was not realized in the quarter. This was due to two factors.

First, although we contracted $18.5 million of new sales during the fourth quarter in education, which represented 8.8% increase compared with $17 million of revenue we contracted in the fourth quarter of fiscal 14.

We had a much higher mix of coaching and web-based subscription service revenue in this year’s fourth quarter than we did in the prior year. In fact it was 26.5% of our fourth quarter revenue, education revenue in fiscal 2015 versus only 12.9% in fiscal ‘14.

Since this revenue is not fully recognized at the time of sale, but spread evenly over the next 12 months, approximately 3.4 million of this revenue was not able to be recognized in fiscal 2015. This revenue will be recognized evenly throughout fiscal 2016, one-twelfth for each month.

But we had expected some increases in mix of this description revenue compared to fiscal ’14, we didn't currently forecast the extent of this change in mix. The other factor was that we didn't close some significant education contracts in the quarter, which we felt were almost certain to close.

The combination of these factors left us more than $4 million short of the education revenue we had expected to recognize in the quarter. I should not have provided guidance based on winning pending state and central government funded contracts.

Regardless of how we’re doing so caused us to miss our own expectation of the third quarter and our guidance in the fourth. Our future guidance won't include the assumption of winning such contracts and again, I apologize to you for it.

The second point moving forward, this is notwithstanding, we have achieved consistent and significant growth over the years, and the key growth engine that have driven this growth are strong and proven.

Those units whose growth slowed in 2015, our education practice, which was just again explained in our US direct offices are growing and we believe are poised to resume strong growth in fiscal 2016, and beyond.

Actually in our meetings, we’re more confident and excited about the business about the expected growth and performance of each of our operating divisions in fiscal ‘16. We expect fiscal 2016 to be strongest year ever for both sales and adjusted EBITDA.

It’s of course easy and natural to express optimism that future results will be better than those of the few prior year and actually there are questions about the foundation for that confidence. But I say that we believe our confidence is very well founded for the following reasons.

Our significant and consistent growth over the number of years has been fueled by drivers that are now part of the fabric of the company, which have very strong forward momentum.

Second, the growth engines that I mentioned our proven – actually all proven and strong, those units as we mentioned here whose growth slowed some are growing and we believe both poised for strong growth in fiscal ‘16 and beyond. Just going to address each of these points.

First, the significant and consistent growth over the years has been built on these proven drivers and strong forward momentum.

As I mentioned we’ve grown consistently and significantly for years, the proven factors have driven this growth over the years included for example, the hiring and ramp up of new client partners and the related infrastructure that helps drive that. These have as much greater momentum than we’ve ever had.

They’ve also built the foundation for what we believe will be continued strong growth in the future. Another diver has been customer retention which is a bit in the range of 90% year over year doing things that really make an impact on our customers is another key driver, and that continues to be strong.

As shown in slide 3, without any adjustment for changes in foreign exchange from 2009 through 2015 our revenue in – our overall revenue grew from $123.1 million to $209.9 million. So from $123 million to $210 million. The compounded average growth rate of 9.3%.

Our revenue would have grown even more rapidly when adjusted for the impacted of changes in foreign exchange over those years. And as shown in slide 4, adjusted for foreign exchange just in the fourth quarter, Q4 revenue was our highest ever for the fourth quarter, our current business or for any quarter for that matter it’s our best quarter ever.

Our revenue growth over the years has also been very broad based. We have a number of growth engines, channel engines and practice engines. As shown in slide 5, before and after adjusting for the impact of FX, each of our major channels has achieved significant growth over the years.

So we've had that’s purity of timing shown since 2010 in common currency, the kind of growth we’ve had across each of our channels. As shown in slide 6, we’ve also achieved significant growth in each of our major practice areas over the years. This is not adjusted for FX, but where the growth would be even more significant.

As it relates to adjusted EBITDA, as you can see in slide 7, the adjusted EBITDA growth has been solid and consistent also growing every year 2009 through 2014 even after the impact of foreign exchange headwinds and adjusted for foreign exchange for fiscal ’15, it would have also grown -- would also have grown in that year.

Adjusted EBITDA would have grown to $35.1 million in ‘15 adjusted for foreign exchange, up from $34.3 million in fiscal ‘14.

Finally, as shown in slide 8, our fourth quarter adjusted EBITDA of $17.3 million was in and of itself our highest ever for the fourth quarter or any quarter even after observing approximately $1.1 million in negative foreign exchange impact during the fourth quarter.

Adjusted for the foreign exchange impact, adjusted EBITDA would have been $18.4 million for the fourth quarter, representing growth of 9.5% compared to $16.8 million of adjusted EBITDA for the fourth quarter of fiscal 2014.

And then the final operating numbers, you can see in slide 9 are growth in net cash generated which is a definition we have with cash that is going to be like net operating income has been significant.

In addition, as result of our outstanding shares having declined from a high point of 19.6 million shares in 2008 to 16.2 million shares at present, our cash flow per share has also grown even more rapidly.

As a result of our significant cash flow, return on assets and equity have also been very strong, depending how your measure pretty much anyway you measure it. Moving onto another point in terms of the base of our confidence.

Secondly is the key growth engines that have driven our growth and strong improvement, and again, education in US direct offices are growing and will be poised to resume strong growth in fiscal ‘16 and beyond. We have four strong divisions which include a dozen or more strong subunits.

Each of his has grown significantly over the years, and is positioned for strong future growth. The growth of two of these units education and direct offices slowed for fiscal 2015 but we believe as we will talk about now really are poised for growth and are growing. Just going to give a brief review of each of these engines.

First of all growth engine number one, which is our international licensee partner operations. As you can see in slide 10, over the past six years and really for years before that, our licensing partner’s gross revenue has grown consistently.

Even after observing the impact of foreign exchange, which is reflected here this is pre-foreign exchange -- this is after the foreign exchange impact, but doesn't adjust for foreign exchange. Adjusted for the impact of foreign exchange, our licensee partner’s growth has been even stronger.

As shown in slide -- this is kind of their gross revenues, which were paid as a percentage of about 15%, which is shown in slide 11. So again, even before the adjustment for foreign exchange our licensing partner’s growth is translated into strong growth in our licensee royalty and related revenue.

This has been driven primarily by the organic growth of our historical licensee partners and also by the expansion of licensee partner network. Adjusted for the impact of foreign exchange, we expect licensee partner revenue to again achieve strong growth in fiscal ‘16 and beyond.

And as much as the largest depreciation of the dollar related to other currencies began after the first quarter of fiscal ’15, we expect growth rate of our reported licensee royalty and other revenue in US dollars to be somewhat slower during the first four months of fiscal ‘16 and then will equalize.

So that's growth engine number one, our international licensee partners. Growth engine number two are education practice. As you can see in slide 12, our education practice has extremely tremendous growth over many years under Sean Covey's great leadership.

As shown in slide 12, education practice revenue grew from $6.3 million in fiscal 2009 to $32 million in fiscal 2015, its impact has grown from having just six Leader in Me schools in 2008 to more than 2,500 Leader in Me schools today.

And over the past three years, we've added approximately 500 new Leader in Me schools each year, which we also did again in fiscal 2010. In recent years, the number of large district contracts has increased as they hear good things that are happening in individual schools. Just contracts provide a great opportunity for impact.

The closing or failure to close such contracts has happened in the fourth quarter, can also make the growth of education practice more lumpy in any given quarter.

Aside from these large contracts, as you can see in slide 13, over the past several years, we've continued to grow our core or non-big contracts, education business at a steady pace from 9.8 million from ‘11 to $23.2 million in ‘15.

However, as noted, the combination of some big planned contract expirations and some of the big contracts being awarded, but not being contracted during the fourth quarter impacted the education division’s growth for the quarter and the year, despite the fact that the core education revenue is going well.

As a consequence, as you know, we didn't grow in the fourth quarter in education, so well below our own expectations.

As shown in – despite this message, shown in slide 14, it’s a deeper story here as I mentioned earlier, education actually contracted more revenue during the fourth quarter of fiscal 2015, $18.5 million of contracted revenue than it did during the fourth quarter of prior year, where it contracted $17 million.

However, as we noted before a significantly higher percentage of fiscal 2015’s fourth quarter revenue was for coaching and web services, the subscription services than in the previous year that was 26.5% of the $18.5 million versus 12.9% in fiscal ‘14.

As noted and as mentioned these services represent annual subscription services, whose revenue is recognized one-twelfth each month. Net of it was that $2.8 million of this year’s fourth quarter revenue was deferred into fiscal ‘16 and was deferred into the fourth quarter -- deferred in the fourth quarter of last year.

Sort of these subscription services are important thing for us. And so despite its impact, our lack of good forecast in terms of what the mix would be, they represent the long-term commitment of both the education practice and Leader in Me schools to ensuring quality results into making sure there is ongoing impacts.

Although we recognize somewhat less revenue from such sales in the quarter for the quarter we received both the revenue benefit in the following year and the years beyond and with a higher impact on schools.

Just note the education is off to a very strong start thus far this year, benefiting from last year deferred revenue stream and by increases in contracts of revenue we've achieved thus far this year. Going into growth engine number three are direct offices. The growth of our US direct office has been strong and consistent over the years.

As shown in slide 15, in the five years 2010-2015, revenue in our US direct offices grew from $51.8 million to $85.7 million to compounded average growth rate of 10.6%.

The key drivers of this growth were the retention and increased productivity of our alumni or our legacy client partners, together with our successful hiring and ramping up of new client partners. As you can see on slide 16, our number of clients -- just since 2012, our number of client partners has grown from a 120 to 191 present.

As we mentioned in our previous third quarter call, we moved our November sales academy to January, so we expect to increase our number of client partners to 203 by the end of December in time for the sales academy. During these years, the revenue generated by these new client partners has somewhat exceeded their original targeted revenue ramp rates.

I mentioned, for these direct offices, despite the historical growth in fiscal ’15, the growth of these offices slowed significantly. This is due we think primarily – I mean, almost entirely to two factors, both of which were associated with the extremely successful multi-quarter launch of our recreated 7 Habits offering in fiscal ‘14.

The first factor was that these offices were up against very tough revenue comparison quarter during the second, third and fourth quarters of fiscal ’15 because of the success of The 7 Habits launched during those same quarters in the previous year.

The second factor was that facilitator sales, which are sales of trainee materials to client employed facilitators or teachers have a shorter sales cycle in offering such as execution. They also have a much lower average revenue per sale.

The shorter sales cycle pushed more pipeline through the system during time period than the normal business mix would have, and the average amount of pipeline through opportunity that’s in there was reduced. As a consequence, we entered 2015 with pipelines that were not as large as we would like.

To increase the size of our direct office pipelines, we did three things, we – one, increased the total number of marketing events held during the second, third quarters of fiscal 2015 and had a greater focus on our execution and first practices in those events, which typically drive a larger amount of pipeline per event and with larger average opportunity size.

Second, we created a new service events called culture events. We did two of them last year, we are going to be doing 12 of them this year, we did a big one only yesterday. And these are specifically focused on generating high level qualified leads for our legacy enterprise client partners who are most capable of selling to high level clients.

Yesterday in Atlanta, we had a group of clients that really is probably the strongest and highest level group of clients. More than a 180 of these clients came and these are real decision makers for us or other venture of people who decision influence decision of decision makers, that’s the second thing.

The third, simply continue our focus, but we increased the number of sales [indiscernible] to existing and perspective clients. We have reported on this for several quarters.

I think it’s such an important engine that we just want to say that we have been very pleased with result of this refocusing has been growth for our pipelines, which began to accelerate during the second, third and fourth quarters of last year.

As a result, we started fiscal 2016 with pipelines for our first and second quarters, it will be converted in our first and second quarters for these offices, which were significantly larger and at the same in fiscal 2015. And the pace of pipeline additions has continued to accelerate.

Just like yet to ask Paul Walker, who is the new Head of our Direct Office Division, just to share just a couple of thoughts, a couple of perspectives on our direct offices in the US and internationally for fiscal ’16.

Just want to note the great job, which Shawn Moon has done over the years running our direct offices and the confidence he has had of everybody. We now have – we also have that same confidence in Paul to build on that great foundation, which Shawn built.

Paul has been the General Manager of our Central region for many years, which has been our largest region. Two years ago, we also asked him to take over, current responsibility for the UK office.

As you can see in slide 17, it’s like an ad for Paul Walker that both the Central region and the UK offices did extremely well under Paul’s leadership and we are confident that under his leadership and with historical focus on strategic sales, his Central region had more sales of the execution practice, of the sales performance practice, big deals in custom sales than any other offices in the company and that with the current positive direction of the pipeline, growth will continue for the entire direct office division.

Paul just want to say a couple of words about what’s that you’re seeing. .

Thanks, Bob, and hello everybody. Just a couple of things in support of what you’re saying there. As you mentioned, in Q2 and Q3 and Q4 last year, we started to see the pipeline increasing in the direct offices and that has continued into Q1 at an even accelerated pace.

And what’s exciting about that is not only the growth pipeline up, but the number of unique opportunities that were surfacing and driving the pipeline that’s also increased and the average size of each individual opportunity going in is also larger.

On the thing I would say just in – as we pre-organized into divisions, there has also been some changes we made within the direct office division.

One of those that’s I think applicable here is that we reallocated some of our internal resources to give our enterprise client partners, particularly, the resources they need to go and close larger deals within what we traditionally referred to as our HR or training suites of offerings and so that’s helping drive larger opportunities and we expect to drive larger deals as well.

So thanks a lot. .

one, the size of the pipelines; and two, some refinements we’ve made in the operations that shifts some of the seasonality. So we expect more of this increase, a lot of that will happen in the second, third quarters.

A final note, during last year’s first quarter, our $5.9 million in adjusted EBITDA included approximately $2 million of adjusted EBITDA contribution from a specific large government contract we have had for years and which repeated – which renewed in last year’s first quarter and the key component of that was the $2 million worth of intellectual property license, all of which came into the quarter having an almost $2 million impact on EBITDA.

We are also likely to see some FX impacts in the first quarter since last year’s most significant appreciation of the dollar relative to the currencies turned after the first quarter. So well, we otherwise expect to achieve growth in the first quarter in all of the operations.

I am guessing it won’t fully offset the impact of the non-repetitive government contracts and then the FX impact. So consequently we don’t provide quarterly guidance.

I would expect just so that you, again with the spirit of making sure that our expectations and yours are similar, I’d expect that we don’t fully offset say $2.5 million that would come from the government contract in FX, we do recovered some of it, and that our adjusted EBITDA in the first quarter would be in the range of $4 million or so with most of the year-over-year change in EBITDA for the first quarter being made up in second and third quarters in addition to the growth we would otherwise expect.

So with that, let me now turn the time over for questions. .

[Operator Instructions] Our first question comes from Jeff Martin from ROTH Capital Partners. Please go ahead. .

Thanks, good afternoon, Bob. .

Hi, Jeff..

Bob, could you touch on the marketing events at the start of fiscal ’15, you had plans for roughly a 50% increase in the number of events versus fiscal ’14? Can you give us a review of the effectiveness of those events and what your plans are for fiscal ’16?.

Yes, thanks [indiscernible] We did just what you suggested, in the second quarter of last year, we amped up the number of marketing events really substantially. And the result of it was we did in fact increase our pipeline a lot.

What we also recognized was that we didn’t need – when you analyzed every city in which we held one and the nature of which events generate the most revenue by the third quarter, we said we still see my view, we ought to be increasing our marketing events, but with two refinements.

One, which practices in which cities with which client partners and concentrated a smaller number of events with a lot more client partners feeding into it, so we had the effect of having looking at more events. But it didn’t – the actual number was less, because you had bigger events in bigger cities. That was wise.

Second, we focused more of the execution and speed of trust related, which tend to generate larger opportunities when they generate them.

And so I think now based on last year it had the effect that we wanted in terms of getting stuff up, we probably spent an extra $0.5 million or so more in marketing than in the second quarter than in retrospect we would and we won’t this year.

The total number of events, Paul, for this year – last year was -- total number of events we held was 540 and the new number is --.

About 308, 320.

And so some of these events, Jeff, where we could run 100 events for $500,000, these culture events, we run 12 for $500,000, so they are much bigger decision-maker events, but in terms of number of attendees and level of attendees, we think for the same investment we made last year were less, we can generate more pipeline and more business, but it really did have the – I mean those events that we held last second and third quarter and the adjustments to those in the third and fourth and now first have had the effect.

About a third of our total pipeline is driven by events. The other two-thirds is just driven by the fact that I am going out and making face to face calls by the sales person and our people.

We’ve also provided additional resources to those folks as Paul said with realigning some of our regional client partners to work directly on the biggest opportunities rather than helping out lot in the smaller stuff..

Okay, could you give us an update on the international license partners? I would have thought that with 7 Habits being translated and going out roughly a year after the domestic launch that you would have seen more of an uptick in license?.

I will let Sean address, but I think the short answer is we actually have had is just I think FX impact has been a pretty big headwind, but Sean do you want to speak to it?.

Yeah, so the international partners I feel had really good year last year actually. FX disguises that, because it was the worst year we’ve had since I can remember. But if you look at the last five or six years, if you adjust out FX, we are growing at 11% per year.

This last year, if you adjust for FX, we grew at 9.5%, so it’s a little lower than where we have been, but still pretty darn good year.

And we did have a couple of hits in the Middle East, for example, that oil prices dropping so much really hurt our Middle East operations and our operations in Egypt, but all things considered, I thought it was a pretty strong year adjusted for FX and then looking forward, the story we've been talking about for quite some time I still think is there, nothing has changed.

These partners are for pretty young, they're pretty small, they are relatively underpenetrated in their markets. We’re primarily selling one solution which is leadership. We still have a lot of growth in the other practices. We've got some big economies that we haven't really got off the ground yet.

Just this last year we signed up France with the new partner there, so this economy will be helping us a lot in the future years. So all things considered I felt like it was little lower than where we’ve been. The 7 Habits localization has been helping.

And we just have fallen off a little bit in some other areas, some other things that didn’t come through as much as we thought and a couple of countries hurt us. But all things considered, we feel pretty strong and the story is still a really good one. I think we can continue to grow at the same rates we have been for very long time to come..

Okay.

And then, Bob, on the client partner side, where did you start the year, you ended at 191, what was the numbers at?.

At this time last year, I believe we had 176 – 169.

So 169 and you may recall, Jeff, last quarter we said that we – last year we did our sales academy right in the middle of kick-off and we think it actually slowed down getting out of the blocks quickly on the New Year, because we had general managers and others who were trying to focus on both getting the existing client partners growing and so we decided to move that sales academy back.

And so we have gone from 169 to 203 by the time we had sales academy even though the sales academy is a couple of months later, so it’s not exactly year-over-year. It’s kind of sales academy over sales academy which is the driving factor we will have grown by that number..

And how has the performance of client partners hired over the past two to three years track versus your model that you’ve shown several times?.

Yeah, for us the good news is that actually not just last year or even in the prior year, but for a period of like six years every year the ramp rate in the aggregate and of course there are people who don’t do as well, but not very many, but in aggregate we are couple of million dollars ahead this last year again of where you would have expected the ramp in client partners to be.

So for us the issue really wasn’t how much can you hire and ramp them, the sales management position which we announced a couple of years ago has turned to be a huge thing. We now call these people managing directors who recognize their power not only in directing sales people but also in managing 10 to 12 sales people.

Some of these managing directors or sales managers not as much as 10 million of revenue under their responsibility. So these are the key next level of leaders who have elevated the titled, we are treating as management. So they are doing great.

The issue for us is the same thing that slowed, so it wasn’t the new client, but it was the slowing -- the slowdown happened with our more seasoned client partners who were sort of working on bigger deals because they all have a big pipeline also in facilitators.

They, during the launches of 7 Habits and 5 Choices reoriented a lot of their activity in most of our events oriented, as we noted to, sales that although quicker were smaller and they are the ones whose pipelines are most currently we are focused most on and that’s where these culture events, execution events and other things, this is the domain of these client partners, their networking on things that are big and one thing interesting thing that Paul you referred to bit, the average size, not only is the overall size of the pipeline growing substantially, one of the interesting thing is that’s a big statement substantially, but and we are growing our pipeline that’s $7 million to $8 million a week in the US direct offices alone.

That compares with 4 to 4.5 to maybe as high as 5 last year. That’s an important number. What maybe to us even more important is the average size of the opportunity that’s going into Salesforce.com and if you track the Salesforce.com and that, Paul, has gone up by 40% or so, even higher. .

It’s actually gone up. The average opportunity going into the pipeline in the first couple of, well, even going back into August last year is about 70% larger than it was which reflects I think that we are on the backend now of these product launches.

So as Bob alluded, what we are asking our enterprise clients partners to go back and relaunch these products to their facilitators which is the smaller price point sale and now that that’s behind us and they are focused on more of the types of deals that we would like to focus on going forward, the average size deal going into the pipeline is about 70% larger than it was..

I am not sure honestly going back we do anything differently, because these big client partners started out as small client partners. So half of their revenue comes from these facilitator sales where they build up these foundations.

And so really we feel like getting those product launches done and done well establish as a foundation for these client partners for years to come.

The thing I would do differently, Jeff, is that we because we renovated a bunch of our historical products right on top of each other, because they hadn’t been redone for years over a period of two years, we relaunched the 5 Choices, our productivity project management and 7 Habits.

And I think the combination of those things really did hurt our pipeline where if we launched those – so I can promise you as we go forward when those get renovated three or four or five years from now, we will make sure we have spacing on these things to go a bit.

In the end, these client partners have benefitted from the launch even though it hurt them in the short term. .

Okay. And on government side, just to be clear, you are not including any contribution from government contract renewal in the guidance..

That’s true. .

That doesn’t necessarily imply you don’t expect to renew, is that correct?.

Yeah, it doesn’t. I will say this, I think I would say I think right now unlike in some prior years where there has been a process going on that was likely to lead to a rebid, right now that process is not going on.

And it doesn’t mean it won’t sometime during the year with management changes and those things in that agency, we are both not including in the guidance and also thinking that’s pretty smart not to include in the guidance, because I think right now we are working on a bunch of things, but we’re just not sure that it is going to translate.

I don’t know if Shawn Moon if you want to add –.

No, that’s correct. Although there is lots of activity to do everything we can there, but I will say this Jeff that we are pleased aside from that there is nice double digit growth in the team, aside from that particular contract. .

Exactly. They had growth aside from the contract grew at 14% last year that team and so -- but yeah, we are not including it, we think it’s wise not to, but we are working on it. .

Okay.

And what is the contact specifically? It was – you said it was over 2 million, it was 5.7 million of revenue?.

Yeah, for the year we did 5.7 million, for the year it generated a little over 3 million of EBITDA contribution of which 2 million of it came in the first quarter, the way the contract works is they bought an intellectual property license upfront which was very high margin and then that gave them the right to buy materials and things rather at much lower margins.

And so the 2 million generated, I mean the 2.2 million intellectual property contract generated about 2 million of EBITDA contribution whereas the 3.5 million of other services generated about 1 million.

And so for the year if it didn’t renew and we didn’t do anything with that agency otherwise, we would lose 3 million where we expect in the first quarter we will move that.

But what’s happening is there is actually a couple of sales people focused directly on that agency who are now buying materials at much higher price and so we are going to earn I mean independent of the renewal we are going to earn back some portion of that in the course of the year and there is a big effort to do so..

Okay, great. And then one last question if I might. On the last page of your fourth quarter presentation slides, you mentioned that share based comp, impaired assets and other 4.5 million in fiscal ’15 expected to be 7.2 and 16, what’s the delta there and is that factored in and out of EBITDA guidance..

There are two primary changes. One is our share based comp has gone up just because of the nature of share based company and the other one is that as you know with acquisition, earnouts these days you have to value the earnout given current information.

And if an area that’s attached to an earnout is expected to grow at a rate a little more than you expected to grow before and it trips an earnout payment that’s in all or nothing payment then you have to adjust for that.

And so that’s a couple of million of the delta is a valuation of potential earnout valuations in the future and these items are not included in our adjusted EBITDA..

Yeah, Jeff this isn’t of course the one earnout we have is the Ninety-five 5 acquisition. Starting out of the blocks it wasn’t doing as well as we had maybe thought we would come out of the blocks a little faster when we actually impaired –.

Valued it.

Valued it down somewhat. Now that we are back and especially now under Shawn Moon’s [indiscernible] obviously growing it 14%, 15% a quarter, this is now looking like that we are going to need to –.

That’s what the delta..

The good news is they are going to get their earnout payment probably and we will get the EBITDA from that. .

Got it. Okay, thanks very much..

Thanks, Jeff..

Thank you. And our next question comes from Marco Rodriguez from Stonegate Capital. Please go ahead..

Good evening, guys, thank you for taking my questions..

Thank you..

I was wondering if we could back up here on your guidance.

I had a little bit of hard time writing down some of the information you had and following, you had given out some quarterly guidance and kind of flow I think you said in Q1 of your fiscal ’16 the adjusted EBITDA is going to be able 4 million, did I hear that correctly?.

Yeah, last year it was 5.9 million.

That included about 2 million from this government contracts that which you were just been speaking that intellectual property portion of 2 million of EBITDA contribution and we are guessing also that foreign exchange since the main changes in foreign exchange hit after our fiscal first quarter, it will have some hit there as well.

And so that would take it down 2.5 million or something. We are expecting that we will grow and grow some of that back.

We are just saying while we are not per se giving official guidance, I am just trying to nudge and say that from what we see right now, we won’t fully replace that government contract, [indiscernible] how well we grow, because even if everything else grew EBITDA by 20% or 25% that would just get us into the 4 and so while we are expecting good growth elsewhere it just won’t make up for that 2 million and may not make up for the FX.

So that’s what we were trying to say..

Got it.

And so, but you are expecting to make up elsewhere that 2 million to 2.5 million shortfall in Q1 in Q2 and Q3, did I hear that correctly?.

Yeah..

And then you mentioned something about making some changes operationally that was going to change the seasonality, so Q4 wasn’t as much of a hockey stick.

Can you talk a little bit what that is exactly?.

Yeah, there is three things. I think you’ve got exactly – first of all, you said is just what we meant to meant to say, so thanks for waiting through the interpretation. There are three things operationally that we think will change the flow of EBITDA throughout the course of the year.

The first is one that we have talked about in the past, but it’s the more consistent holding of events throughout the whole year, so their pipelines are bigger will mean that we don’t have to depend on the hockey stick at the end to have most of our sales coming in the third and fourth quarters.

And so that’s just a function operationally of having decided after last year not having done that in the first quarter and having to double down on events in the second, but we’ve held the standard events all year long, all through the summer and this year’s kick off we were holding events starting in September where last year we didn’t even start till mid-October.

That’s the first which is just more pipeline.

The second is the marketing engine the things about we just asked, have been such that in total, we put all of our marketing dollars throughout the company behind the things that we know are really good, we are going to be spending as much on some of these events, but we are not spending as much elsewhere.

There is probably close to $1 million of marketing spend which is being spent by our practices and doing things that really has been funneled into – after the analysis and everything it has been funneled into things, we will pick up neither.

Third is that we are not selling at least the start of new intellectual property sales et cetera that we will – we think we will be of a positive effect on our gross margin operationally for it, we consolidated our Northeast region offices and so in a time -- in quarter three we have a little less revenue, you don't have quite the same impact on EBITDA.

So those are the factors that on the same revenue would drive more EBITDA, but also we think with the increased pipeline and a fixed cost structure, will just flow -- there will be more flow-through of incremental revenue to EBITDA. There will be more revenue.

Therefore, more flow-through, less increased expense and we think we’re also lasting -- Marco, I should mention is that over the years, we've been building up this infrastructure to hiring salespeople. We’re really there now.

I mean, this year, in the whole of the US direct offices, which in some years hired as many as 60 to 70 people in sales and sales support roles, is really like four positions this year other than new salespeople.

So I think with those things, we just think a higher flow-through to incremental revenue and higher revenue in the second and third quarters..

Got it, understood.

And then shifting here to the education practices, I appreciate some of the color surrounding the issues that cause some revenues to perhaps be a little bit lower than you were expecting, but maybe is that the sort of trend that we should probably be expecting going forward, maybe a little bit higher of licensing effect for that practice?.

So, Marco, can you explain your question again a little bit to make sure I understand..

Yeah.

It seems like one of the main reasons you guys were discussing why education practice didn’t meet its expectation was because a fair amount of revenue got deferred because it wasn’t more of a teacher based form and so I'm just trying to figure out whether or not that was just some sort of a quarterly anomaly or that’s something that we should be expecting a trend where more of that type of revenue goes into deferred versus more of a recognition upfront?.

Sure. Yeah. I think this last year was more of an anomaly because this was a new product. It was basically trying to keep the school strong. And we started earlier in the school. We hope to retain them for life. So, we created this coaching and web services package that's deferred over a year and last year was our catch-up year.

It was going to all the schools for the first time and saying, hey, we've got this great new resource. So, a lot of our selling time and effort went towards that, more so than we anticipated, especially last couple of months.

And so, as a percent of sales, I think it was last year was the biggest anomaly and we got the majority of our schools on the service now. So I don't think it will be as impactful as it was this year and the coming years.

But -- so all things considered, we still feel great about the opportunity we have ahead of us and these large deals, many of which we had six large opportunities that didn’t close, four of the six are still alive and hopefully, we’ll close these. So we just overestimated what was going to come in for the fourth quarter..

Sean, just maybe refining also, it's not the total amount of subscription revenue wouldn’t be similar to next year, but as a percentage -- year-over-year change..

Year-over-year change. Last year would be an anomaly, the percentage of change. It will continue to be an important part of our business going forward and as was said, the fourth quarter, we still contracted and sold 18.5 million versus 17 million the year before and the year before was 32% growth from the previous year.

So we were up against the really big year and even on that big increase, we were able to contract and sell more. So we feel that the basic engine is strong and alive..

Sean, you might address also some of the things you’re doing inside your own business model, since almost all of the -- half of the revenue and essentially all the EBITDA contributions occurred historically in the fourth quarter. Some of the things you are doing to move some of that revenue up during the year, besides the deferred revenue portion.

Some of the innovation you’ve done to try to, because it’s one more operating thing Marco to your earlier question..

Yes. No one likes hockey sticks right. So in education, we’re aware of it and we're trying to do what we can to help smooth it out. There are a few things we are doing for one is our higher education group is not hockey stick like, and so as that continues to grow, it's kind of a new area for us.

If that continues to grow, that will help us out, that will be more smooth.

We’re also so much of the delivery of the education solution, the leader in me happens in the summer time when we have professional development days available from schools and it's hard to find two or three days where teachers can take time off and so, so much development happens in the summer.

So what we are doing now is we’ve created modular training opportunities, so that these trainings, instead of taking place over two to three days, they can happen in small half day increments throughout the school year. It gives the school a lot more flexibility and helps us in the fourth quarter.

We’re also creating some new solutions that are different in the -- we can deliver throughout the year, such as the Principal's Academy, symposiums and just other odds and ends.

So altogether we think over time, the hockey stick will decrease, it’s still going to be an issue, I think, because so much happens in the summer, but I think over time, it's only going to get better than it is now in the coming years. But it will take a few years to really smooth it out more..

Got you. Yes, very helpful. And that kind of dovetails into my next question, you had mentioned the large contracts that didn't close, I think you said that there were six that were outstanding that didn't close I suppose, and four that are still alive, can you quantify how much we're talking about here in terms of revenue standpoint..

Well, just roughly, I mean we missed our fourth quarter by about 4 million. I think some of the shift, so it's probably couple of million worth of large opportunities that we're talking about here.

And it is primarily, you are dealing with state governments, you’re dealing with large districts and it’s just a lot of bureaucracy, you get a lot of signatures and I guess we underestimated how many signatures we needed..

Got you.

And have any of those additional four that are still alive or are they any closer to closing? Have any closed or?.

We have one of them that we are hoping will close in the next couple of weeks, and another one we are hoping will close in the second quarter, early in the second quarter and that's about where we are right now..

And we are not forecasting those either in our guidance..

Yeah. I think going forward, I think it's going to be, we want to forecast less of these large deals and focus more on just the core and if the large deals come, then great, if not, they are not in the forecast..

Got you.

And then last quick question, just kind of a clarification, on the CPs, where did you end the year with the headcount on the CPs?.

We will be at 203, exactly here in, 191, which we must have ended the year. The problem is for us, we are thinking of sales academy year and so but I think at year-end we were, 180, so we’ve added that number 11 in the last month and a half and we will add the rest here in the next month..

Okay.

And so is the goal for your Q1 fiscal ’16, the November quarter, is that still to get to 210 or is it 203 now?.

I think 203 looks like what we are going to do, with some of the organizational changes we've made, consolidation of regions and one of our regions, which will have new sales managers in place, really exciting new sales managers who are big engines that we put in there. We are going to let them.

Instead of adding a bunch of new client partners on top of them, they've got a bunch of -- they’ve got a group of existing client partners who are in the ramp in one of the regions we decided not to add the extra six or seven that we would have added and just it was better to let these new sales managers, managing director get their feet on the ground and get to know the existing folks and hold off on.

Of course, we can add them any time. Once we feel -- they don't have to be there for the one big sales academy, but so later in the year, if we feel by mid-year that the sales managers have the traction, we've talked about at that point we’ll probably think about adding a few more..

Got it. Thanks a lot guys. I appreciate it..

Thanks, Marco very much..

Thank you. And our next question comes from Kevin Liu from B. Riley & Company. Please go ahead..

Good afternoon.

Just with respect to the strategic accounts piece of the business, you talked about some of the growth opportunities there, given the size and complexity of those deals, how are you factoring those into your guidance and then anything you can share in terms of year-over-year pipeline growth heading into ‘16?.

Yeah, let me have Sean answer that in just a second, but let me just say, there are kind of two types of business.

We already have, these are already existing units, our government units, our sales performance units, our customer loyalty, already have an engine in place and that doesn't affect that, but Sean, why don't you talk about global accounts and what you're thinking..

Yeah. Hi, Kevin. So, there is not an expectation in the first quarter on the global 50 team, that's the account where -- that’s the team that we’re focusing on these large account relationships, although we’re excited about the start that we've had. This really is an opportunity for us of great leverage with the organization.

We’ll bring a specific focus on a very small, but very talented group of people on a very hand selected set of opportunities and it really does open the door for a lot of exciting things, I mean, just for example.

We've historically -- take a look at just -- speaking now about strategic markets, take a look at the government team, the government has historically been focused on the federal government and now this team is going to be focused on all governments, Bob said earlier, which historically we’ve opportunistically gone after, but now we’re very strategically going after and it's just one data point.

We do about $2.99 for every federal government employee and we currently do about $0.24 for every state and local employee.

So if you apply the same metric over the next few years on achieving what we've done at the federal level with the state and local level, you can see that’s a $24 million, $25 million opportunity for us just right there, could potentially open 30, 34 new sales territories.

It’s that kind of focus and that kind of leverage that this team represents across government, sales performance now that we have unfettered access as Bob mentioned and of course the global 50 team, which brings tremendous talent at a tremendous level of focus..

Got it. And within the past two quarters, certainly there’s been more talk on your part just about creating more value for shareholders and you’ve expanded the share repurchase plan as well as, it appears that the pace of repurchases.

As you make your way into ‘16 and given some of the return metrics that you showed on the slides, do you anticipate being able to accelerate the pace of repurchases or do you have plans in place to do so? And then are you also considering more aggressive repurchases outside of just open market purchases, for instance, a tender off or other means to be able to buy back a bigger block at once?.

We do see a significant opportunity. We understand there are many different avenues we could go down or different directions we could go to acquire shares. So without talking about our announcing any decision related to any of those, specifically which we haven't made, we understand there are different things we can do.

We are going to look at all of those and we’re going to aggressively look at buying shares..

During the opening period, we were able to buy, Kevin, approximately $1 million a week on average during the open windows in the last six months and so that's not a bad thing, but also the number of open weeks during the course of the year also constraints that and so some of the other things, our cash flow was actually better than we thought and so whether we've -- possibilities of reloading, increasing our authorization again, considering there are alternatives, we feel like we should be very aggressive and we are going to look at every alternative for doing that..

Got it. I appreciate the color..

Thank you. And our last question comes from Tim McHugh from William Blair. Please go ahead..

Hi. This is actually Sam calling in for Tim.

Just a quick question, have you thought about how many new client partners you're expecting for next year?.

Yes.

Our goal really is to have 30 net new a year, and with the exception of the decision in this one regions, that's really -- in fact, I think to hold it to 30 will be challenging a little bit because, Shawn Moon in his area added three new already and he's got this idea of the whole government teams, but I think net 30 a year continues to be our objective and we can choose this to delay some occasionally, but that is our goal, and we've got the infrastructure we think to support it..

Sounds good. And then I guess if I strip out the first quarter of next year, it looks like there's a pretty significant increase in the last nine months of the year for EBITDA growth, I guess is part of that driven by maybe fewer client partner adds or –.

Not really. The eight fewer -- it’s a good question. The eight fewer client partners that we might add or eight or ten, whatever it is, during the course of the year, that would have cost us about, call it, $900,000 of compensation for a whole year, so they would have only been here for two-thirds.

So it would have been 700,000 and they would have contributed something against that. So it might have cost us $300,000 to $400,000 of EBITDA negative for the year. So that's not a factor really.

It’s these other things that I probably didn’t do a great job of explaining earlier that a combination of higher revenue growth, good flow through, less addition of sales support people, because we've gotten that put in place. Those are the kinds of things that are really driving it..

Okay. Thanks. I really appreciate that. That helps..

Yeah. I mean for us, just an example, in our direct offices, if we had $1 million of revenue in a quarter, the flow through on that at the marginal level is more than $0.50 of the incremental dollar, you’ve got 70% gross margins. You're all in commissions and benefits associated with it and marketing costs are the 20 or so range.

And so there is really huge flow-through if we can just get the revenue going. So that's why for us, it’s mostly driven by revenue, but the fact that it’s revenue without a lot of addition of staffing means that there really ought to be very good flow-through on any revenue we do have..

Thank you..

Thank you. And I'm not showing any further questions at this time. I’ll now turn the call back over to Bob for closing remarks..

All right. Thanks very much. We sort of got a little over. Thank you so much for all your great questions. We appreciate your support. Again, we feel great about where we’re headed right now, feel great about the team and apologize that we’ve missed your expectations and pledge that you will be able to trust us going forward as you have in the past.

Thanks very much..

And thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect..