Franklin Covey Co. Q3 2009 (Qtr End 05/30/09) Earnings Call Transcript

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Franklin Covey Co. (FC)

Q3 2009 Earnings Call

July 9, 2009 5:00 pm ET

Executives

Robert Whitman – CEO

Stephen Young – CFO

Derek Hatch – Corporate Controller

Analysts

Hamed Khorsand - BWS Financial

John Lewis – Osmium Partners

Julian Allen – Spitfire Capital

John Gruber – Gruber and McBaine Capital

Presentation

Operator

Good day ladies and gentlemen, and welcome to the 2009 third quarter Franklin Covey earnings conference call. (Operator Instructions) I’d now like to turn this presentation over to our host for today’s call, to Mr. Derek Hatch, Corporate Controller; please proceed sir.

Derek Hatch

Good afternoon. Before we begin our presentation this afternoon, I’d like to start off with our forward-looking statement slide and the information on it and 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 but not limited to the ability of the company to stabilize and grow revenues; the ability of the company to hire productive sales professionals; general economic conditions; competition in the company’s targeted marketplace; market acceptance of new products or services and marketing strategies; changes in the company’s market share; changes in the size of the overall market for the company’s products; changes in the training and spending policies of the company’s clients; and other factors identified and discussed in the company’s most recent Annual Report on Form 10-K and other periodic reports filed with the Securities and Exchange Commission.

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

These forward-looking statements are based on management’s current expectations and we undertake no obligation to update or revise these forward-looking statements to reflect events or circumstances after the date of today’s presentation.

With that out of the way, we’d like to turn the remainder of the call or this portion of the call over to Robert Whitman, our Chairman and Chief Executive Officer.

Robert Whitman

Thanks Derek, appreciate everyone joining us this afternoon and we’ll looking to answering your questions after a short review of the results reported here just an hour ago.

In Q3 our operating performance was actually meaningfully better than that we achieved in Q2. As you will note we had a very unusual tax provision which Stephen will address that was several million dollars, but otherwise the quarter reflected good continued progress on each of our major objectives.

Despite hitting our cost targets however it fell somewhat short of our expectations as more revenue than expected shifted from Q3 to Q4 and we’ll talk to that. Our operating loss of $1.2 million reflected $2.2 million improvement compared to that achieved in Q3 but still reflected a loss.

We expect to generate an operating profit in the fourth quarter and hopefully every quarter thereafter. Operating EBITDA which is in previous calls we’ve identified as excluding severance or restructuring charges which were $900,000 during the quarter, so excluding those costs operating EBITDA was $1.7 million positive during the quarter which reflected a $3.2 million improvement compared to Q2 but fell approximately $2 million short of our expectations all because of this revenue shifting which we’ll speak to.

We were successful in meeting our cost reduction targets and the gap therefore was primarily due to revenue expected to be recognized in the quarter that shifted into Q4 and a little bit into Q1. Its still on our books thankfully, but due to clients who themselves are struggling to meet their quarters and might in a given month all of a sudden shut the door to all training even if it was planned and then reschedule it for the next month, the start of the next quarter.

Its those kinds of things that effected on the margin. This shift of revenue was definitely a disappointment but I don’t believe that it reflects any fundamental weakness in the business. In fact as we’ll talk about in a minute we showed progress during the quarter on each of the key initiatives outlined in the previous quarters and I’ll speak to those one by one.

As we mentioned this shift reflects the difficulty really of predicting precisely when we will deliver and recognize training revenue in the current economic environment because of the kinds of things that clients are doing and needing to do but most of the revenue that shifted is still in our revenue backlog and is expected to be realized primarily in Q4 with some shifting until after the summer into Q1.

Its important to emphasize as I did, most of this reflects a shift in timing with respect to our customers as our cancellation rates have really remained pretty much in line with our historical trend. While predicting the exact timing of certain revenue may continue to be difficult in this environment we are still moving at the mountain, using a metaphor from last time, so expect to achieve our stated summit so to speak, of getting back to a run rate of operating EBITDA without our consumer business unit which is equivalent to that we achieved when the consumer business unit results were included.

However with the slippage of certain of our revenues in this quarter its likely to be a few months later if that were to continue into the next quarters. As I’ll explain below we have and are taking additional business model improvement actions that will help to mitigate further shifts and so that whatever that impact of shifting would be, it would be muted to some extent by these other cost reductions that we have undertaken in the last month or so.

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