Franklin Covey Company ( FC)

FQ4 2011 Earnings Call

November 8, 2011 05:00 pm ET

Executives

Bob Whitman – Chairman, President & Chief Executive Officer

Steve Young –Chief Financial Officer

Derek Hatch – Corporate Controller

Analysts

John Lewis – Waitrose

Joe Janssen – Barrington Research

[Don Hickman] – [Latinburg]

Bill Gibson – Legend Merchant

Jaime DeYoung – Credit Suisse

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the FQ4 2011 Franklin Covey Co. Earnings Conference Call. My name is Justhania and I’ll be your conference operator for today. (Operator instructions.) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Mr. Derek Hatch, Corporate Controller. Please proceed, Sir.

Derek Hatch

Thank you. I’d like to welcome everyone out to our earnings call this afternoon for Q4 and the fiscal year ended August 31, 2011. Before we get started I’d like remind everyone 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 our most recent annual report on Form 10(k) and other periodic reports which are filed with the Securities and Exchange Commission.

As 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.

And with that I’d like to turn the time over at this point to Mr. Bob Whitman, the company’s Chairman and Chief Executive Officer.

Bob Whitman

Thanks, Derek. We’re delighted to have a chance to talk with all of you today and I’m clad that you could join us. I’d like to start just with a few headlines and maybe just hit three. First, as you probably say in the press release we achieved significant revenue growth for the year. We finished revenue at $160.8 million with a $23.9 million or a 17% increase over the $137 million achieved in F2010, which in turn was $13.8 million higher than the $123 million in revenue we achieved during F2009, so we’ve been able to keep this momentum going and we’re pleased with that.

Our growth during the year was very broad-based, which is exciting for us, with the company achieving revenue growth in every major channel and in every practice. It’s important to note that this broad-based revenue growth for the year is a continuation really of the seven-year growth trend in our core business that has seen revenues grow from approximately $96.5 million in F2004 to $160.8 million in F2011. We were not able to pull those numbers out before we sold the previous business, but this is for us, in this business, a continuation although it’s accelerated recently.

We’re also really pleased to have achieved revenue of $45 million in FQ4. You may recall that in our webcast in June we said that due to the very high revenue level achieved in FQ4 2010 which was driven by the significant initial revenues associated with the launch of that new government services contract we had just been awarded, we said that we believed then that despite strong (inaudible) it was unlikely that our FQ4 revenue in the other areas of the company, the growth in the other areas of the company would be sufficient to offset the year-over-year declines in revenue related to that contract.

So we are very pleased that the $3.7 million in revenue growth achieved across the rest of the company in FQ4 more than offset the expected and anticipated $3.4 million year-over-year decline in revenue from the government contract during the quarter, thus resulting in strong revenue for the quarter. And in fact it was the strongest FQ4 we’ve ever had for our business. So point one is good, strong revenue growth.

The second point I’d make, a highlight would be a significant portion of our increased revenue for the year flowed through to increases in adjusted EBIDTA and free cash flow. On our last conference call we said that we expected our full-year results to be very strong and toward the higher end of our previously provided adjusted EBIDTA guidance of between $18 million and $21 million. As a result of the strength and momentum of our business during FQ4, adjusted EBIDTA for the year closed at $21.2 million, just exceeding the high end of our previously provided guidance.

This $21.2 million in adjusted EBIDTA represented a $6.7 million or 47% increase in adjusted EBIDTA compared with the $14.4 million achieved in F2010, which in turn was an $11.2 million increase compared with the $3.2 million achieved in F2009. Because of our high gross margins, which as you know are mid-60%’s and the variable nature of our selling cost, somewhere around 430% to 38% of incremental revenue flows through to EBDITA even after making investments for hiring new client partners, staffing regional practice leaders, etc.

In F2011, $6.7 million of the $23.9 million increase in revenue, which is 28%, flowed through to adjusted EBIDTA, and over the past two years $18 million or 47% of our $38 million in increased revenue flowed through to adjusted EBIDTA. Because our ongoing maintenance capital expenditures are modest, typically less than $2 million a year, and because NOL carry forwards reduce and will for at least the next several years reduce our net cash tax expense, for the next several years approximately 70% of the increase in adjusted EBIDTA is expected to flow through to free cash flow or usable cash.

The final point I’d make is just our adjusted EBIDTA margins also expanded significantly during F2011. Adjusted EBIDTA to sales increased to 13.2% in F2011 from 10.5% in F2010, and with expected future revenue growth and the expectation of continued high flow through of the incremental revenue to adjusted EBIDTA we expect that margin, the adjusted EBIDTA to sales margin, to increase to approximately 17% to 18% over the next couple of years.

Well, all in all we’re pleased and encouraged by these strong results. We expect to continue to be able to achieve strong revenue growth in the future which we expect will drive increases in adjusted EBIDTA and cash flow and continue to expand our operating margins.

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