Q4 2019 Earnings Call
We had very high expectations for growth in adjusted EBITDA and cash flow in fiscal 19.
Specifically as you can see inside three excuse me.
We expected that in fiscal 2019 in constant currency.
Our reported adjusted EBITDA would increase from 11.9 million in fiscal 18 to between 18 and 22 million in 19.
We also expect that our adjusted EBITDA plus the change in our deferred revenue balance would increase to between 30 and $34 million in constant currency.
And that our net cash generated would increase to between 18 and 22 million.
We're pleased with the strength our results in fiscal 19 allowed us to meet or exceed each of these expectations.
Again as you can see in slide three in constant currency, which was the base for guidance. Our adjusted EBITDA increased from 11.9 million in fiscal 18 to 21.6 million in fiscal 19 growth of $9.7 million or 82%.
Before adjusting for changes in foreign exchange and as reported adjusted EBITDA increased from 11.9 million to 20.6 million.
The growth of 8.7 million or 73%.
We also see the combination of adjusted EBITDA plus the change in deferred revenue in constant currency increased to 31.3 million.
And importantly, our net cash generated increased to 22.2 million.
In addition, our cash flow from operating activities increased 81% or 13.6 million.
From 16.9 million fiscal 18 to 30.5 million in fiscal 19.
19, so we're pleased with the performance it was strong and all the fronts that we expected to be strong on and.
And feel that really well position to continue this kind of growth moving forward as will discuss in more detail a moment.
This was also we're really pleased this great performance was broad based across both the enterprise and education divisions.
So you can see in slide for the high growth in adjusted EBITDA and cash flows being driven.
By the combined impact of three factors that we've talked about for the last several many quarters.
In fact, one is that a high percentage of every.
Dollar sales this flowing through to increases in adjusted EBITDA and cash flow will talk about the reasons for that.
Factor too is that our high gross margin subscription revenue is growing rapidly.
Sticky, we're retaining substantially all of it and is trading like I lifetime customer value.
Also establishing strategic and structural door durability.
Which we'll talk about an increasing the trajectory predictability and visibility of our future revenue.
Third factor is that we're aggressively taking advantage of a compelling salesforce expansion opportunity, which is expected to further accelerate our growth will detail how that can work.
The combination of these factors driving high rates of growth.
As we said, an adjusted EBITDA and cash flow.
It is put us on a great trajectory, we think for an accelerated March up the mountain to achieving significant continued growth in adjusted EBITDA and cash flow in fiscal 2020 122 and beyond.
As indicated on slide five.
And as we will discuss in more detail in the guidance section in fiscal 2020.
In getting constant currency, we expect growth adjusted EBITDA from 20.6 million in fiscal 19, which was.
What we achieved before adjustment for FX to between 27 and 32 million.
In fiscal 2000, Twentys, we've raised that a bit from what we said last year that represents growth of between 31 and 55%.
We also as shown expect to increase our net cash generated between 25 and 30 million.
Has also shown our target and expectation thereafter is to grow adjusted EBITDA to between 36 and 41 million in fiscal 2001 again, an increase over what we said last year and to between 45 and 50 million in fiscal 2000, 2022 also a bit of an increase from what we thought last year.
Also to grow net cash generated to between 35 and 39 million fiscal 21.
And then to between 44 and 49 million fiscal 22.
These are these expected and targeted results represent very strong growth as we would note in adjusted EBITDA and cash flow.
And as a team we're all committed to and both committed to have aligned.
To achieve.
I'd now like to provide you more detailed look at how these factors.
These three factors I, just talked about combined to generate high growth in adjusted EBITDA and cash flow in 19.
And finally, we expect them to continue to do so.
In the future.
So just the bullet point on slide.
Six just shows that.
The thing that's driving this high flow through.
The incremental revenues incremental EBITDA is combination of high single digit revenue growth.
Hi, gross margins.
DNA that a declining as a percentage of sales, reflecting the stickiness of our revenue.
And accelerate with driving this accelerated growth in adjusted EBITDA.
More detail that you can see on slide seven.
Our revenue before adjustment for changes in foreign exchange grew 15.6 million or 7.4% from 209 million 209.8 million in fiscal 2018 to 225.4 million fiscal 19.
In constant currency, our revenue grew 17.6 million or 8.4% 227.3.
Switching to really just slightly exceeded the 8% in constant currency that we expected.
This growth was broad based across both divisions.
The enterprise divisions revenue growing 7.2% or 8.4% in constant currency and the educations divisions revenue growing 8% also 8.4% in constant currency.
As you see here our subscription related revenue grew.
23.1% or 22.4 million for the year from 96.9 million the previous year to 119.2.
In 19.
Our invoice sales grew 50 sales grew.
From that.
Grew to 12.5 million sorry to 233.7.
Million.
In the fourth quarter and voice revenue grew 5.9% or 6.3 in constant currency.
Began because it's in the subscription revenue made up substantially all of that increase and hardly any of that was recognized in the quarter. Because this is subscription sales almost all of that was added to the balance sheet. So the actual reported growth was small because it was all subscription.
But if we added a lot to the balance sheet, our balance of billed and unbilled deferred all related to subscription sales grew 21%.
Or 15.1 million to 88.1 million at the end of fiscal 19 up from 73 million last year.
And just breaking this out the deferred revenue broken out between two groups the billed deferred revenue and Unbilled.
Our balance was billed deferred revenue increased 20% to 58.2 million an increased $11.6 million.
And our balance of Unbilled deferred revenue increased 22% to $29.9 million, an increase of 5.4 million.
Importantly, substantially all of this very high margin deferred revenue will be recognized evenly.
Throughout fiscal 2020, that'll help smooth that out increases in revenue and profit throughout the year.
In addition to this large and increasing balance of deferred revenue the contractual annual minimum royalty payments from our significant licensee business.
Now totals the minimum royalty payments totaled 11.6 million the actual royalty payments are more in the range of $15 million to $16 million, but 11.6, so that is contractual adding further to our large and growing balance to the annually recurring revenue.
Our total contracted revenue grew 4.6% during fiscal 19.
We had a high flow through of revenue to adjusted EBITDA as you can see in slide eight.
The business model, we have now resulting in approximately 56% of every dollar of increased revenue.
The flow through to increases in adjusted EBITDA.
This resulted in 8.7 million or 73% growth in adjusted EBITDA as reported and 9.7 million or 82% growth in adjusted EBITDA in constant currency, which was the base for guidance.
Through a couple of things that drove that first our gross margin percentage remained at the high level that we achieved last year of 70.7%.
And this despite the fact that we continued to grow our all access pass add on services.
Would show have little lower.
Margin and but the blend still allowed us to maintain the 70.7.
Gross margin dollars increased 11 million or 7.4% for the year.
And in constant currency was was even higher.
In the fourth quarter again, because the substantially all the growth in voice revenue was in subscription sales.
Almost none of that was recognized in the fourth quarter, but that is on the balance sheet and will be recognized.
The second thing driving it besides gross margin high gross margin was that are relatively fixed operating SGN expenses again helped drive the decline.
And operating SGN as percentage of sales in fiscal 19.
For the year operating SGN as percentage of sales was 61.6%.
That's a 304 thats a level 348 basis points lower than last year, 65% of sales than in the fourth quarter that figure improved 384 basis points coming in at 52.3% compared to 56.2% in last year's fourth quarter. So the combination of strong revenue growth.
Hi, gross margins reduced operating expenses resulted in as you can see.
Very strong growth growth in adjusted EBITDA.
As noted previously the adjusted EBITDA before adjustments for foreign exchange increased 8.7 million or 73%.
To 20.6 million.
With 56% of the increase in revenue flowing through to EBITDA, an incoming currency was even higher adjusted EBITDA grew 9.7 million or 82%, 21.6% 21.6 million.
Close to the tough range in the fourth quarter, adjusted EBITDA increased 18% to 13.4 million.
Finally, our growth in cash flow was also very significant.
Our metric net cash generated increased 7.2 million or 48% to 22.2 million as you can see in slide 31 in the appendix are going to see the detail.
We exceeded the handover expected range and net cash flow provided by operating activities, which you can see in slide 36 in the appendix increased 13.6 million or 81% to 30.5 million compared with 16.9 billion last year. So we're very pleased with the strength that country's performance.
Overall.
And for the fourth quarter.
And especially pleased that performance is broad based with strong results in both enterprise and education divisions, which had that seems strong.
Resulted in strong revenue growth high gross margins high flow through declining.
Sales SGN, a as percentage of sales.
We expect to be able to continue to achieve strong revenue growth in the future expected again, a high percentage. This revenue for the same reasons will flow through to increases in adjusted EBITDA and cash flow, resulting in very high rates of growth.
In adjusted EBITDA and cash flow in fiscal 2020 and beyond.
Here I could just say and probably mercifully to you would be good. If I said just said the same strong results occurred in the in enterprise and education than just move on but in as much as we have taken you through the detail in each of the prior three quarters. This year.
Because sort of you let us know that you appreciated this detail.
We'd like to just take a few minutes to walk through the detailed results from enterprise and education highlights and nuances in couple of those things and then perhaps in the future I think we can just go ahead and put these results in the back in future quarters, and and youll be able to attracting yourselves so pure.
Okay that we go through the detail in the Enterprise Division.
Which accounted for 76% of the companies.
Total revenue in fiscal 19.
Adjusted EBITDA grew 39% or 7.2 million to 25.5 million.
Again represents the combination of the same factors high single digit revenue growth very high flow through of this incremental revenue to adjusted EBITDA driven by high gross margins and lowering SGN as a percentage revenue.
You can see on slide nine.
Enterprise revenue for the year as reported grew 7.2% or 11.5 million 270.6 million compared to 159 million last year, but in constant currency. The enterprise Division revenue grew 13.3 million or 8.4% 272.4.
Meeting or just little exceeding our expectation.
All access pass and related sales grew 29.4%.
For the year and 20% in the fourth quarter.
Invoice sales.
Pre adjusted for FX increased 6.5% for the year and again as already noted the increases in invoice sales in the fourth quarter almost all.
Went onto the balance sheet as reflected in the because they were subscription sales and they'll be recognized throughout the year. So that meant the reported revenue grew only at 1% in the fourth quarter, but thats because it all went onto the balance sheet.
Our balances billed and Unbilled deferred revenue.
Grew 23%.
Or 12.7 million to 68, and a half million at year end from 55.7 at the end of 18.
That was broken down between billed deferred increasing 19.1%.
To 39.3, and the Unbilled deferred increasing 28%.
To 29.1 million. So the combination of these provides a really strong foundation for future growth and contract revenue again grew 5.8%.
But declined a little in the fourth quarter, reflecting that whereas in the last few years multiyear sales have occurred primarily in the fourth quarter. We now have a process for multiyear sales are spread pretty much evenly throughout the year.
As to the flow through to adjusted EBITDA as you can see in slide 10, approximately 62% of this increase in revenue in the enterprise division flowed through to adjusted EBITDA, resulting in adjusted EBITDA growth of 7.2 million or 39% for the year.
And 8 million or $8 million in 44% in constant currency.
The same two factors were behind the site flow through strong gross margins. These.
Enterprise Division.
Say that the high level of 74.4% that achieved last year despite growing its.
Service revenues.
And as a result.
Gross margin dollars increased $8.8 million or 7.5%.
Pre.
Pre FX.
Just a little over 8%.
Adjusted for that.
Yeah.
Second operating SGN as percentage of sales also continued to improve you can see that operating SGT as percentage of sales was 59 than half percent.
This year that was 329 basis points lower than last year 62.7.
And improved actually significantly in the fourth quarter again.
So as noted adjusted EBITDA in the.
As you can see was for the enterprise increased 39.2% or 7.2 million to 25, and a half million before adjusting for changes in foreign exchange was 62% of increased sales flowing through to increase in EBITDA in constant currency the growth was.
44% or 8 million to 26.3 million.
In the fourth quarter, adjusted EBITDA increased 31% or two and a half million to 10.7 from 8.2 in last year's fourth quarter. So momentum in the enterprise Division continues to be very strong.
It's a cry across all the parts of the operation.
International direct offices international operations generally as well as domestic.
Sure let patients will just go through quickly also so you get more detail of the education Division.
Same idea. The these same factors replay in education division, which accounted for approximately 22% of our total revenue in fiscal 19.
Education division's adjusted EBITDA grew 31, and a half for 31.1%.
Or 800000 3.6 million.
And in constant currency grew even faster, 37% or 1 million.
Again, reflecting those same factors as you can see in slide 11.
Education divisions revenue grew 8%.
To 48.9 million.
In constant currency grew 8.4.
As a percent as with Enterprise reported education Division revenues in the fourth quarter were flat to last year as strong growth in subscription sales put more deferred revenue on the balance sheet.
And the transition to six of six accounting, which benefited the education divisions top and bottom lines in the first quarter reduce top and bottom lines by approximately the same amount from the fourth quarter.
And last year's accounting standard revenue in Education Division would have grown 7% in the fourth quarter.
And just to note education divisions deferred revenue balance increased 22% at the year at year end to 19.7 million.
And grew 11.3 million or a 149% over the balance of the ended the third quarter, reflecting the.
A large amount of sales and differ in subscription sales, which the education division makes in the last quarter.
There was a high flow through with high gross margin of 62%.
Again really good improvement in the operating SGN as percentage of sales, which came in 244 basis points better.
Than last year.
And in the fourth quarter came in 465.8 basis points better. This again resulted in 31% growth in adjusted EBITDA.
And there.
And 37% growth from the fourth quarter.
So again, we're very to really excited about the broke the breadth the strength of both operations and the and the.
Building that was broad based with each this division so.
So now having gone through the financials, let me just touch on the other two points quick.
Factors.
If you can see and.
In slide 13.
Indicates that our high margin subscription related sales are driving.
The strength of our results this revenues growing rapidly very sticky.
Paying substantially all of it and it's creating significant endurable lifetime customer value in both the enterprise and education divisions.
As you can see in slide is in slide 14, the company's total subscription related revenue.
23%.
For the year, all access patent related sales grew 29.4%.
And our number of paying all access past subscribers grew more than 20% compared to last year.
As we reported in the past Alex has passed is not only growing rapidly, but its achieving key subscription metrics that are putting.
Since the company if some of the top subscription subscription companies.
As shown on slide 15. These metrics include an annual revenue retention rate, which again exceeded 90%.
Net on services rate increased to 45% in this is highly correlated with high customer retention because they're hiring has to do things that really there there must win games for them and they're willing to higher services.
To help make sure they get done.
Building, new leaders and driving a higher level of guest satisfaction or sales performance building trust throughout the organization.
We also have a relatively large initial purchase price.
Which reflects the relatively large size the population, which all access pass is typically purchased it also established the foundation for strong unit level economics.
And we have a customer acquisition cost.
Which is less than one to one.
We are also all exes past you can see on.
Next slide 16.
Creating high lifetime customer value. This combination has a strong purchase price.
Hi, gross margins add on services and sticky annual revenue retention on all of the revenue both subscription and services.
Giving it really creating a high lifetime customer value.
Solutions at addressing our customers most intractable performance challenges challenges, which require significant and lasting change in human behavior at scale, where they wanted across their entire organization.
Helping organizations successfully address these important challenges creates strategic durability.
And the means they're with us they are on their own problems that are we're solving that's why they are entering increasingly entering into multi year contracts.
And adding services.
As indicated in slide 17, just 111 example.
A large financial services company partners with us to provide leadership development to their leaders all over the world.
In 2019, the expanded their all access past 2000 leader multi year pass.
And also purchased more than $100000, an additional add on services.
Recently, we launched our new unconscious bias offering and while that was something that was saying they want it not only for their leaders, but they wanted to add to their pretty much the whole population and so in addition, there all access pass thousand leader pass they added especial single content pass.
Called the to unconscious bias offering, which they can add onto an all access pass to go to Tim over 10000 employees.
They also extended the term of both are all access pass tendering contrite unconscious biased past.
For another three years.
Maybe I just make a note that because there are a number of all access pass holders, who are who are considering significant single content additions there passes to reach their front line employees. This happens, let's say where their training all the leaders and sales performance, but they want to take the solution to every sales person or their training all their leaders with all excess power.
Yes to drive customer loyalty, but they decide they want to take our leading customer loyalty pass to every frontline employer unconscious bias, our our clients are increasingly adding on populations in specific content areas.
Because of this.
It will tend overtime to skew the year over year comparability of our number of paid subscribers because you'll have some of these.
You know people, who are buying large populations for specific content area at a relatively lower price and so for that reason in the future. We will continue to report our total all excess pass and related revenues.
But will not be giving the exact number they add on.
Subscribers, just because it's going to skew it make it look.
Like we're doing better than we think we think we're doing great on all access pass, but it will it will skew that number we want to keep it clean on what we're really selling which the all access to us.
In addition to generating highlights and customer value.
All access pass has two elements to create structural durability.
First Alexis Pascal purchasers contract and pay for their subscription at least a full year in advance.
And secondly, as you can see on slide 18.
An increasing percentage of pass holders oriented entering into multi year contracts.
For fiscal 2019, 32% of passwords organizations entered into multi year contracts up from 21% a year ago. There is an even larger number has some extended term contract that might be 18 months or whatever we're just reporting here on actual multiyear contracts.
Just one last thing, though the education Division Division enjoys a similar virtuous cycle.
Lifetime customer value as it is achieving similar quality metrics with our leader in me subscription model, which is our primary primary K through 12 hour offering our education Division.
In fiscal 19, our number of paid leader me schools around the globe increased 20% from 3500 last year to 4200 this year.
And we enjoy a very high retention rate of our leader in these schools.
For fiscal 2019, we finished the year with retention rate of 88% on a global basis up from 86% last year.
Our licensee partners also enjoy high retention rated their leader in the schools and finished the fiscal year with retention rate of 91%.
Similar to how the all access past able to continue expand within enterprise leader in me is able to expand within the school district.
Even with the strong growth we've had an education leader in me is only in the 850 of the approximately 15000 school districts in North America.
And given that on average where we aren't a district, we only had two liter and me schools for district. It provides a real a really great beachhead, but a tremendous upside and headroom for growth.
For example, the share how a district can handle this in slide 19, even seen in Lehigh Valley, Pennsylvania in an effort to reinvent the former steel based economy, the business community and the United way partner together with the school district to bring leader in May to all of its schools for workforce development, India, even to improve literally.
Yeah.
Began with a single leader and me school with 450 students.
Eight years ago.
Over the past eight years has expanded to 33 schools with 24600 students.
With a stated plan to bring leader to me to all 50 of the schools was 74000 schools.
When they get that done they didn't plan to expand it to other neighboring districts. The communities filled with results as are the parents and teachers and.
And they are achieving what they're achieving as evidenced by their desire to bring leader me to all the schools and expand to other districts.
Slide 20, just so less through the idea that bring a combination of top tier growth in subscription related sales with top tier subscription economics and customer metrics.
And at the same time generating high rates of growth in it in adjusted EBITDA and cash flow is really rare to get all three.
For us achieving the intersection of these three factors accelerates our opportunity to create significant increases in value for our shareholders.
Finally factor number three is that we're aggressively.
Taking advantage of the compelling salesforce expansion opportunity.
Which has created by the enormous size of our total addressable market and by the strong unit expansion economics that are created by our business model.
So you can see in slide 21, as we've discussed in prior quarters, we have a lot of headroom for growth within approximately one year payback period on our investment in a new client partner, our Salesforce growth economics are very compelling.
As you can see slide 22, we have been and are aggressively taking advantage of this opportunity.
Last year. This time, we said that we expect that at least 20, new client partners in fiscal 19, and a total of 75 net new client partners by the end of fiscal 2021.
That would bring our total base and client partners from 214 that they started fiscal 19 to 234 by the into fiscal 19 and to 289 by the into fiscal 2001, we made a lot of progress toward these objectives in fiscal 19, who we added 31 net new client partners ended the year a bit ahead.
Before we thought with 245.
Importantly, our various cohorts of sales hires are also benefiting from the high lifetime customer value being generous generated by our subscription offerings.
We are achieving a ramp rate above that shown in slide 22 also on the right hand side.
So in conclusion slide 23.
Three factor driving accelerated growth again.
I'd have very high flow through.
Rapidly growing subscription revenue that sticky.
And and strategically.
And structurally durable and third that we're taking advantage of the ability to grow our salesforce very rapidly going forward. So we believe the combination of these factors.
Has put us on a great trajectory for achieving significant continued high growth in adjusted EBITDA and cash flow in fiscal 2020 122 and beyond.
And that these three key facts and we'll continue to drive significant shareholder value.
Before I turn that time or its Steve talk about our.
Our guidance I, just want to mention that both enterprise and division and education divisions have have achieved and expects to continue chiefs different growth and it becoming more and more like each other both had subscription business models with add on services.
Both have similar key performance indicators, including generating new subscription sales, adding new local schools, achieving high annual recurring subscription revenue and successfully hiring and ramping up new client partners. Both divisions also have direct office and licensee operations, both are making significant technology investments and portals.
And otherwise both drawn our strong central services operations I T human resources and other capabilities and again, both are doing really well.
Well as well as they're doing we believe that there are some exciting opportunities to further accelerate the growth of both divisions by establishing more uniform best practices across divisions and by better leveraging our central innovations in support functions.
We believe this kind of coordination can both accelerate growth and further increased profitability for both divisions from for the company overall.
To facilitate this progress in addition to Paul walkers responsibilities as president of the Enterprise Division.
We've asked into service President and Chief operating officer for the company overall to help US take advantage of these opportunities for leveraging capabilities and resources across divisions.
You know the enterprise Division account for approximately 80% of Franklin Covey is overall revenues and also utilizes the vast majority of the company's innovation and central services.
Paul will continue to serve as president of the Enterprise Division.
And Sean Covey, just had a phenomenal job to deliver education Division. We continue to serve as president of Education Division and as a key member of our innovations and book strategy committees, where he has made huge contributions over many years.
Both Colin Sean will continue to service key members of our executive team.
Once recognize the tremendous job, both Sean Paul done and arguing and running their respected divisions and congratulate Paul on his appointment as President Chief operating officer for the company overall.
So we appreciate your support and the efforts of our approximately 1000 associates and 80 client licensee partners throughout the world and I'm really excited about or opportunities in the trajectory. We're on we had our kickoff meeting not long ago and everybody agreed that this is a great time to be at Franklin Covey in when we really feel with Steve alternative for guidance.
Very much okay. Thank you Bob.
Good afternoon, everyone.
So guidance.
As Bob discussed we expect next net sales to grow at a rate of high single digits in fiscal two that 2020 and expect that a significant portion of this increase in revenue will flow through to increases in adjusted EBITDA.
Our fiscal 2020 guidance therefore in common currency is that adjusted EBITDA.
Well increased from 20.6 million.
And Thats why 19 to a range of between 27 and 32 million in fiscal 2020.
Anywhere in that range, we think represents really strong growth in adjusted EBITDA.
Excuse me with growth rates from between 30 and 55%.
So we're we're we're pleased that we'll continue to have high fell through fall through on growing rapidly.
Now to our first quarter, despite the SEC significant investments in our 31, new client partners and other investments, we still expect adjusted EBITDA to grow in Q1 by up to $1 million compared to last year to approximately four point.
2 million.
In the quarter.
So thats our apps our guidance.
Let me also touch on a couple other matters before I turn it back back to Bob a little bit about liquidity.
We also have significant liquidity.
Intend to use it to create additional shareholder value.
So four points related to liquidity.
First we generated significant cash flow and fiscal 2019.
As already discussed our net cash generated as we define increased to 22.2 million and ask why 19.
And our cash flows from operating activities increased 81%.
Or 13.6 now I am.
610.9 million last year to 35 to 30.5 million this year, even after making substantial growth investments in new content increase portal funds holiday and adding a sick significant number of new client partners.
So second point, we expect to generate significant additional cash flows in the future in the coming year as discussed our target is for net cash generated.
After ongoing investments in new content portals et cetera is still to increase by more than 25 million our next year.
Third point, we have substantial liquidity I.
Probably noticed that we ended the year with almost 28 million or cash on the balance sheet and have significant availability under our credit facility.
And the fourth point, yes, we recently expanded our stock repurchase authorization to 40 million.
Our first first priority has always been to make investments in new content sales fourth goal and enhancements to our customer portals, which can accelerate that growth and increased our strategic mounts.
And we have made significant investments in the business each year.
And waiver earned a very strongly turn on these investments in that business and we'll continue to make those investments in in the business even with these investments we still expect.
To generate substantial excess liquidity and still plan to utilize a meaningful portion of this excess liquidity to repurchase stock.
So we have liquidity.
Well I don't want additional point.
For for your interest.
10 years ago.
Bob women and I received a onetime down or stock options.
Only options, which the company has an outstanding almost all of these options remain on exercised.
While we were both love to continue to hold these options most of them expire in January .
As a consequence, Bob and I will need to exercise this option in the next three week open period, neither of US plans to sell any of these shares we just want to let you know that while neither in either up is planning to sell and Lee shares as you know when we exercise these options it will show as both the purchase.
And a sale the sale, reflecting the not exercised by the company to pay.
Taxes.
Also please be aware that a member of our board of directors for the past 27 years, we'll reach mandatory retirement age next year and retire from the board as part of that retirement planning. This director intends to put in place a tenbfive one stock sale program.
Put that in place and will be selling some shares I didnt want to be surprised by that.
After holdings options for 10 years et cetera, et cetera, we just need to do something with them.
Thank you Steve with that we'll open it to question. Thank you very much everyone.
Thank you, we'll now begin the question answer session.
If you have a question. Please press Star then one and you touched on sound.
If you wish to be remiss MCU.
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Once again given audio question. Please press Star then one on your Touchtone phone.
And our first question comes from Jeff Martin from Roth Capital. Your line is open.
Thanks. Good afternoon, guys. How are you, yes, how are you.
John well thanks Hello.
I wanted to just touch on.
Your content development on your investment and content.
You bought some items in the past year. So in some of those have been come pretty sticky.
Give us an update on the uptake on on some of those and if those are helping drive new sales and then what's your plan as for additional.
In their content investment of content creation.
20, plus.
You bet the effect historically, we've invested about 4% in new content development every year with the introduction of all access path and and leader in May we increased that budget for a couple of years to seven or 8% and think it'll kind of settle in at around five or six.
Since the year. So were we have ongoing investments that are really substantial.
These include.
Something some things as mundane is as customer functionality and user user access and and the way that really are the portals work et cetera, but very necessary to on the other end the acquisition or licensing or development of new content.
And last a year and a half we've had three really important additions to our content to your point.
One is a new is new content was associated with acquisition of John a called everyone deserves a great manager or.
Fixed critical practices for leading a team we have a new bestselling book that supports that solution, but it's focused on one of our key jobs to be done which is helping develop.
Unit level leaders and so thats been a really good hit the second is this unconscious bias offering which is noted has just been out about six months.
The number of we have landed some that are really quite large populations inside an all access pass holders I mentioned, where they don't go into all 10000 of their employees. In addition to having a pass for the thousand so thats been a great thing. The John acquisition itself has been made the content very sticky could they get.
John a weekly.
We've added in Education Division, we've added leader in May we went leader in the 4.0 and they had a whole new versioning of this that comes out every year, but this has been a massive effort and significant investment as well as our new disparate model, which allows us to make it more scalable as we see this dig up.
Unity districts loved what's happening in the one or two schools wanted to take it to their district had to re architect that and then we acquired rights to all of lives weitzman's content on mobile players and so those are some of the important pieces of content at the last one is you know in development now lives and will be coming out later this.
This year, but I think thats, if thats hopefully that responsibility, we're making investments across a wide range of things. We also have refreshing of existing content, but that is that helpful. Jeff Yes, yes, definitely appreciate that and I got on the call a little bit late but I was wondering if you could I'm, referring to slide 28.
Contracts signed spine.
I was wondering if you could just kind of put into perspective.
The change in deferred revenue change current revenue.
Fourth quarter.
Thanks.
That you.
Thanks.
Quite a bit in the fourth quarter. Thank last year's fourth quarter, you had a pretty significant periods for all access past, maybe give some perspective on that yeah, I think on the contract signed page.
One of the thing is it that it gets reflected in this too is unbilled deferred revenue.
And so in prior years, the fourth quarter, we did all of our multi year essentially all of our multiyear sales in the fourth quarter and so that it that was really helpful. On the unbilled deferred additions we had good Unbilled. Deferred addition, this year, but we now this is just a way of selling I don't know Paul if you want to add to that this is what we do.
Good day in day out in these sales are now more easily evenly spread throughout the years and so rather than making a big effort to get everybody to sign up for multi year in the fourth quarter. We just have said lets settle into a process and so it will hit this first fourth quarter, a little bit because that historically, we had a bit had a bunch of that big press at the end, we just had.
Not to have any big presses and anymore and just run similarly throughout the whole year. So I think thats. The primary that's the primary factor Jeff otherwise.
It's pretty steady with what we normally would do.
Okay, and then I was wondering how your your recent class that's a new salespeople last year has progressed are you seeing them hit there Mark sorry.
They are then.
Yes, what you kind of hypothesize with your model I know its LNG hasn't hall, and Sean to respond to that experience.
Hey, Jeff So I'll respond for enterprise this is Paul.
We're really pleased with not only this last year, but the last couple of years one of the things that we hoped what happened when we.
Bob mentioned earlier, a number of things we hope what happened as we move to the subscription model with all access pass.
One of those would be that we would see a faster ramp of client partners because they would start each year with all of that subscription revenue from the prior year in place or substantially all of it in place and that is proving to be the case for all of our client partners.
As a particular impact on those that are new what they're trying to hit these ramp rates that we we talk about and so we saw that again in fiscal 19 is a great year for the new client partners. Just another point of that wasn't one other things we've done and I think we talked about this.
Call or two ago.
We've really worked our onboarding process for our client partners as well and so where we used to but quite a bit into them now it's we're spending.
Five actually amount of time with them to make sure that they have everything they need to really at the ground running and to be successful not that's paying off for US also so we're we're pleased with how we saw in fiscal asking for the new client partners for sure.
Yes, I'll just add this is Sean.
So we've been pleased also with the client partners and their grouse.
To wrap rates in education, and what we've done.
Historically, we haven't had that much cells management, we've been putting that in place last couple of years and.
So we have several regional managers district managers now that are helping to oversee and ramp client partners, which has been a very positive thing. So we've got a sense in the last two miles that had eight new client partners.
Education over last year that now.
And where we're continuing to higher because we're getting good returns and we.
We felt like our Onboarding process is getting better all the time and so were very gung Ho about them.
The future and Jeff overall between thanks.
And Sean overall, if you look at the ramp the expected ramp, which you know the 200 500.
It's on slide of.
22 to 200, 500, 800 million 1 million three the cohorts we've hired since 2015 to 16 on when all exes past has been in place and leader in May.
We were about 20% ahead for each cohort and it's kind of seems to be about the same for each cohort. What's happening is of course, there retains substantially all the revenue they generate the first year, rather than losing a bunch of it and that puts them on a higher trajectory. We're keeping the goals the same but were about 20% had those numbers.
That's great to hear thank you guys.
Thanks Chip.
And your next question comes from Marco Rodriguez Stonegate capital markets. Your line is open.
Good afternoon, guys, Hey, thanks, Thanks for taking my questions. Thank you.
Oh, I'm, sorry, if I Miss on the call, but I was wondering if you could talk a little bit more about.
The gross margin in the quarter. They you guys saw I'm kind of flattish revenue growth year over year and.
Gross margins went down.
A few a few basis points here year over year as well.
Presuming that obviously you have higher revenue higher margin revenue in the mix versus last year, I'm, just kind of trying to figure out.
The drivers there.
Yeah through interest that is that because substations for the year as a whole we maintained the gross margin percentage of it really right on 70.7, both years and what we mentioned earlier was that this was despite the fact that we increased our services revenue some of the add on services.
Through quite a bit during the year, even though they're a little lower margin you kept the overall margins. The same so that's reflected that no more subscription sales at higher margins.
Increased by.
Impacted.
For the company overall by some services, but they retained retain that in the fourth quarter, we had a little a little less in terms of percentage overall as a company, but it's primarily related almost all of those related to the education Division, where we made some additional investments in the portal as well as launched a new.
New service that.
It's.
A derivative of of Gianna, but its call you know it's caused a leader in me. It's leader in me weekly that goes out to faculty and administrators every week and so those two investments we won't be increasing that those were kind of not one time, but they won't increase like this again.
And that affected the margin a little bit in the us in the Education Division and then most of this high margin subscription revenue. We cited the fourth quarter, none of it none of it showed up in this quarter. It's all on the balance sheet. So thats really all that happened is a combination of some more services. It kept at flattish the declined in the education.
We will we don't expect see a decline again to swallow these.
Investments that increased quite a bit this year.
And the fact that this high margin revenue that we signed in the fourth quarter all of its on the balance sheet.
Not didnt close through the income statement, yes.
Okay very helpful. Then in terms of the Education Division.
You can spend some time in the past talking about the under penetration and the market opportunity that you guys have available to you.
With that that line or that service can you, maybe just talk a little bit more about.
What sort of initiatives or drivers you might be looking at what's in the next couple of years that might.
Trying to increase that overall market penetration core gets question Division.
Sean sharp.
Yeah.
Well.
The biggest opportunity, we sell and low hanging fruit has and the district penetration.
And this is kind of taken at some time to see the opportunity because we had to kind of get penetrated first of all insanities districts.
And our increasingly what's happening as we start with a score to inside of it thats correct. They like it and they want to take it further and expanded across the district.
And as I shared there are about 15000 districts in North America Nielsen Canada.
And we're in about 850 of them and so this year and the next year that Nx foreseeable future, we've adjusted our offering offering to make it more district friendly.
As easier to expand we give districts many opportunities or ways of implementing that they.
Decidedly army inside of a district, we say okay. You can we continue with you. We can certify you to do it you can self implement.
Made a very easy and affordable and flexible for them. So that's that's been the big focus just in the last few months and we're right now selling leader me four point out with this new district focus.
That's probably the first opportunity is penetration and districts.
On average borrowing about two schools per district, and most districts have between between 10 and 20 there. They vary by size. Some are five and some are 250 right.
And so that's that's the number one focus is to get back into the districts.
Yes. This year this past year with we started the centric focus we grew our new schools well from 447 to 522, new schools that.
20% growth year over year.
And we're happy with that and sale like is only going to accelerate in the upcoming years with additional.
Focus on districts.
Internationally.
We brought on about 700, new schools and so we're really happy with with what's happening internationally as well starting at the combination of.
Penetration is going to be district focus.
And also the new 4.0 model is one part of it is the desperate focus on one part of it is a more flexible.
Upfront leader and make because our biggest complaint has been here too expensive. The first year. So we've made.
New offering that's less expensive the first share still about the same amount over time, it spread that out over time dealing again.
Yes in the last two months, let this new offering we've heard several customers come to us and districts come to us to say, Hey, I think youve solved the cost issue, there's a lot more affordable and flexible I'm really happy with what we're seeing and.
So we're seeing big opportunities and district, so that's that that's the plan.
Thank you.
Okay.
And then lastly, I'm just wondering if maybe you could talk little bit more about the decline partner ramp. If you could just perhaps talk about the cadence or expected cadence of of hires that you kind of progress through the year and then maybe you can address.
Your ability to find.
Additional client partners.
I am it ticked up so.
Mark This is Paul so client partners as we mentioned we added 31 net new client partners last year, which we feel great about ramping well very excited about them I will add at least 20 additional client partners. This year again, we tend to try to hire them and cohorts are in classes quarterly.
Last two weeks that every bit of every quarter for us is new client partner they kick off of their five week orientation, we call sailed academy and so actually starting here soon we have another batch client partners coming in so we try to space them throughout the year.
As equally as we can.
And.
We feel we do we as we mentioned a minute ago I feel great about bad and their ramp and their development.
As far as sourcing client partners, we ever recruiting team here at at our headquarters in Salt Lake. We have five people who are full time recruiters and their job is to find client partners and we're increasingly we think between both divisions shining incentive to zeroing in on who we think the right profile as a REIT candidate and.
Increasingly getting more and more confident we will evolve our client partners and those we've hired recently last couple of years are coming in there very very strong with great backgrounds and hitting the ground.
Running very quickly.
And you know this mark just adding if you had 20 net new sales people a year for five years.
By the fifth year in 50 or the first classes is is doing 26 million additional revenue, you're adding almost a 100 million of additional revenue and only the first two classes or close to ramp. So this is an important thing and getting it right. We've invested heavily as Paul said in the sales schools.
In the whole process now used to be a few days now it month and this is we've we've invested heavily behind this for a decade now feel like we're in a position where we can really.
At this 20 to 24 at least 20 to 25 to 30 like treated this last year and that really makes big difference to the growth rates a couple of years, though.
Thanks, Mike has appreciate your time.
Thank you so much more.
And our next question comes a Samir Patel from Askeladden capital. Your line is open.
Hey, Matt.
Yeah.
Thanks.
So Paul actually I want to ask your question, which is a couple of years ago, Bob talked about this campfire matter.
How their sees wonderful campfires, the top performance and client organization really Franklin Covey can help those client or patients.
Writer and tighter right. So that more people are sitting around those campfires.
With regards to your de role could you maybe talk about some of those best practices are campfire stat.
C and how you plan to replicate those across the organization. Thanks.
Oh good question inside our company. Nick question. So you can imagine Oh working for Bob All these years that that is not just a metaphor that we talk about it relates to our clients. It's a it's a metaphor that is alive and well aside Franklin covey as well, but it really is I think.
It's the story for us as a company, we we made a big transition a number of years ago, Sean started that before enterprise with has moved to later in may and not being a subscription business. The enterprise did this.
Four years ago, and we now have we think the right strategy. We think we have the right pieces in place we have the right you know content acquisition development strategy. The right funding behind that all those pieces kind of those strokes of the Pan If you will the things that you can decide to do we have those all in place and now it really is an execution.
Play for us and the better we can execute the writer tighter so so to speak that we can get.
Moving our.
Our little campfires to become bonfires in our bonfires to become something bigger than bonfires. It really what we talk about everyday around here and we're starting to see examples of that.
The UK for example, the great Great Great. Great example of this where I had been a nice business for a long time, but now it's really growing and thriving and doing well culturally with the all access pass hitting all of these key metrics that we talk about in so I would say for US specifically to answer your question what are some of those for us it would be.
Tighter and tighter staying on a higher and ramp of client partners. That's one big that's a major piece of our strategy that if we get that right and we continue to do that I'd almost takes care of everything else for us.
The growth will be there and we'll continue to accelerate.
A second one for US is then as we Harlows client partners and we sell to new clients. It's continuing what we're doing today, which is maintaining and retaining those relationships with our clients that we have up we have a process for what we do with clients once they become an all access passholder and and the better we get that we have pockets of excellence.
And we have other places, where we need to move more towards excellence, but that's a that's an example of that and we know when we do that process right. We don't with not only do we retain that customer.
That customer growth they add more seats, they add services all the things that we want.
So hiring and ramp.
It would be.
It would be retaining.
Those clients.
The great thing, we do around the content side and so obviously those probably be the three pretty big ones.
Oh no idea right.
Good God finish as they say, they're all things we know how to do that's the whole plant right. We know how to get the fire started and we just need to get it going.
More places more frequently.
So is it would you say, it's kind of like the sales school in that it's just kind of institutionalizing best practices that you already know how to deal with nothing revolutionary.
Finding finding okay. How are we were cohort of clients cohort clients or how is this core client partner selling better than this quarter, just standardizing the medical organization.
It's exactly what it is in fact, if you're kind of giving Bob you're giving you [laughter], you're giving box feature but.
That's the thing for most organizations. They they have most organizations they have pockets of excellent there they institutionally somewhere in the organization they know where they know how to do this to have pockets of excellence, where it's happening it just doesn't become uniform and widespread and that's really what Sean in our folks on everyday is how do we how do we make those great things more unit.
Form and widespread there's a scoreboard smear on each of the 20 managing directors. They have these four outcomes and every month tourism metric to see how right in tight they are in each of the key for metrics and so we're nudging it a little over the time and.
Trying to nudge it faster yes.
Perfect. Thanks.
Thanks.
Yes.
And our next question comes is that coming from B. Riley. Your line is open.
Hi, good afternoon, everyone. Thanks for taking my questions.
Hi.
Bob I was just going to ask you just split the flat revenue growth here in Q4, a lot of that type of can do and subscription revenue going straight on the balance sheet.
Should we expect this revenue growth smoothed out over time from quarter to quarter or is it going to be kind of this fluctuation from quarter to quarter, what youre seeing is exactly.
This year, we were glad that in the first three quarters.
No I mean, 90% of the growth in EBIT, Doug or for the year occurred pretty much in the first three quarters and that didn't used to be the case and so I think that trend will continue the bigger our growth I mean, it more subscription revenue we put on the books in the fourth quarter the less.
It was less will recognizing that quarter that helps every other quarter. So yeah. We are forecast would show that we will keep nudging.
The of the percentage of the total EBITDA per year that occurs in each quarter, we'll get it will get increasing their be increasing amounts every year in the first second third quarter and a decrease came out as a percentage.
In the four so these exactly what will happen and just happening.
Got it and then in terms of the ash in a line, especially with all the client partners that you brought on surprised to see Evans down on a sequential and year over year basis can you try.
Talking about the drivers.
Adam leave any lower asset in a here that we saw in Q4.
Hi, Zack.
So the simple answer is that we are a good portion of our SGN a is either fixed our semi fixed so as we're going through the transition to the all access pass and transitioning the business, we we added costs.
Implementation specialist.
Apartment as an example, we added those costs and a good portion of those ads then become a fixed amount that we can essentially grow revenue for our year, maybe two years, maybe three years in some areas without having a proportional increase in the cost so what's going.
And on as a couple of things, we arent that well three things we are investing in new client partners, we're adding money there were adding money in innovations, we're adding money and implementation specialist a good portion of our costs are fixed like I talked about and then in other areas where.
Finding that as we've gone through the transition now that we're on the other side, we can actually find efficiencies and effectiveness to reduce some costs. So we have costs increasing costs that are fixed and costs that are decreasing and so overall, we expect a good portion.
One of our accelerated flow through to EBITDA to come from a repeat of this same.
Scenario that we have revenue growth, our gross margin stays good and our SGN, a becomes a smaller and smaller percentage of revenue.
I understand that's helpful and then.
Just one final question around potential uses of cash and it sounds like with all the cash that's being generated an expected to be generated here in the coming years that.
Potentially using that buyback some of your own stock if.
Have you still explored a potential M&A at this point or what's really the approach there.
Uh huh.
Pretty much the same as we've talked about as we said here, we will always first run the business because adding salespeople investing in the businesses will provide the best return to shareholders and then if we could.
Theres in my view, if we could find acquisitions that fit into what we're doing and are incremental to the business and add an acceleration to the growth or fill in a holes in the content or anything like that that we could see beneficial and I believe we would use cash.
To do acquisitions, and and I think that that would be very valuable to the company and then to the extent that we have access well as an example, gianna and Robert Gregory were both right a small acquisitions done over the past couple of years. So we'll continue to do that and then.
When we still expect to have any.
Incremental cash.
And we've shown a willingness to return.
Cash to shareholders through buying back stock.
There there are lot of work.
You won't see us, making we like to transformative acquisition during the that big Big bets, but we think that in our space right. Now there are lots and lots, there's lots going on and things like John and Robert Gregor in such or they are really can add tremendous capabilities. We are on People's radar, we avoid roberts.
Who is on our executive team.
As a charge all of our business development Anda between content acquisitions license deals for content small acquisitions otherwise.
And we book also boosted our investment in content as we mentioned from 4% to 6% 30 kind of the uses we've been able to generate kind of a net tangible assets very high rates of return on what we invest.
In the business the cash flow relative to the net tangible assets. So the good thing if we can do it we have like should we ever feelers out overtime, but even with that we suspect that we'll have quite a lot of excess cash being generated beyond what we can conceive and.
And we're likely to do and that will be applied to continue into as you know weve reduced total shareholder base by more than 10 million shares.
Over the long long period of time has continued and.
And we like the idea of having existing shareholders on more and more of a business that we think is on a really great trajectory of high EBITDA and cash flow goes.
Okay, great. Thanks for taking my questions and I pass on that because he had the f. by 20.
Thanks, Matt Thank you.
Your next question comes from Samir Patel.
Askeladden capital your line is open.
Hey, Matt.
Actually you can you talk about a one year payback period on new client partner and obviously, the 90% revenue retention in the high incremental Mark.
Got together into an LTV to CAC type of metric it seems like it'd be best in class, but you have actually disclosed.
We have we've said, it's less than one to one but I think.
Point exactly but I think it's a really the unit economics are really so compelling that's why we built this whole infrastructure is taking years to build with the sales schools have easier part you go that's not easy, but I mean building infrastructure of all these managing directors, who can mentor and ramp up these people.
But yeah, it's exactly it and so the the.
That ratio of lifetime customer value to the because the customer acquisition costs for us a combination of the fact that as you say first our initial sale prices a pretty substantial amount because inside of the population and there and our cost of acquisition are well less than one of the ones. So so we think thats a compelling.
Metric.
Okay. Thanks.
Thanks.
Our next question comes from Andrew Nicolas William Blair. Your line is open.
Hi, good afternoon.
How are you.
Good how are you.
Great. Thanks.
So a lot of my questions have been asked but I appreciate you squeeze man.
Just just one I was hoping you could maybe talk a little bit about performance in a quarter across the different geographies.
Are there any regions that are going, particularly well right now where do you think you have the most opportunity going forward and then maybe any color on client engagement in the UK and Europe , given some of the uncertainty in those regions.
Thanks, Paul you might go to yes. Thanks.
Andrew So we're pleased and Bob mentioned earlier.
All year and even in the fourth quarter quite broad based result success and results from all of our different operations and so that was about one point very broad based everybody had a had a really strong year good growth.
Areas, where we expect to see a great growth in the future one would be China.
We think theres a lot of headroom there for us.
The reason that we converted that from a license to a direct operation a few years ago. We did the same thing at earlier this fiscal year.
Really in December .
With our Germany, Switzerland, and Austria operation. So that was formerly a license operation of ours is now direct being managed and run out of the UK for us.
So we see that a potential good potential growth opportunity also so we now kind of how the major economies in the world that our direct and then this great licensee network that that helps us cover everywhere else in the world.
Specifically to the UK and in Europe , we actually we had a great year in the UK, Despite Brexit and all that the the questions there and what's going to happen that business has grown really well one of the things I think that benefits us is and it plays like the UK and this is probably true of anywhere we operate.
While while we are growing nicely, we're still very underpenetrated in most markets in which we serve and so the offered the headroom for us to grow.
Is there.
Even if theres choppiness going on as well. We're just we're just not that big and so that allows us to continue to tug along and to grow we saw that this year in the UK and we think that will happen in Germany, Switzerland, Austria as well now that it's being run the way we run all of our direct operations.
Great. Thank you Thats all I had.
Okay. Thank you so much.
And this concludes the question answer session I will turn call back over to Bob Watson for final remarks, great well, we just want to thank each of you for for being on the call will stay more importantly, we thank you for your support and guidance and coaching and so forth over the years, we feel like we have a tremendous team.
Of course.
People throughout the company.
We have you know kind of we we have as scoreboard, we said we have.
Right person on the right sit on the bus and all the key the critical positions.
End of the answer today.
Is that we are agreeing on every major position. The company that is of that is one of those critical positions occasionally we'll have one or two yellow rose and worked with them, but that's a that's a big thing second.
We're at a time we're are.
The $40 billion, this spend and outsourced content and services and so forth for performance improvement was primarily a fragmented business and we with our value proposition all access password and increasing position to win more and more of that greater and greater share of that we've got many key.
Plants, who have decided to.
Take their 30 suppliers and narrow it down to us alone the rest and one other suppliers. So we think it's a great opportunity. So we are grateful to have the chance to have you as our partners in this.
And feel great about where we are about the prospects for 2020 and beyond and so thanks very much for joining state.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.
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