Q1 2020 Earnings Call
Welcome to the Q1 2020 Franklin Covey.
<unk> earnings Conference call. My name is Cynthia and I'll be your operator for today's call. At this time all participants are any listen only mode. Later, we will conduct a question answer session. During the question answer session. If you have a question. Please press Star then one on your Touchtone phone.
Please note that this conference is being recorded I went out in the call versus your attach Eric you may begin.
Thank you Cynthia Hello, everyone and happy new year on behalf of Franklin Covey would like to welcome you to our first quarter fiscal 2020 conference call to discuss our earnings release earnings. This day for begin we'd like to remind everybody that this presentation contains forward looking statements within the meaning of the private Securities Litigation Reform Act 1995.
Forward looking statements are based upon managements current expectations are subject to various risks and uncertainties, including but not limited to the ability of the company to higher or too.
We are stabilizing grow revenues acceptance and renewal rates for the all access past the ability of the company the higher productive sales professionals general economic conditions competition in the company's targeted marketplace market acceptance of new products or services and marketing strategies changes and the company's marketshare changes in the size of the overall market for the companies.
Product [noise].
Changes in the training it spending policies of the company's clients. Other factors identified discussion the company's most recent annual report on Form 10-K . Another 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 on management's current expectations are we undertake no obligation to update or revise these forward looking statements.
Reflect events or circumstances. After the date of today's presentation, except as required by law.
The way would like to turn the time over toward Chief Executive Officer, Mr., Bob Women [noise]. Thanks Derek.
Hi, Good afternoon happy New year, we hope old you had a great holiday really appreciate you joining us today.
We're really pleased to report that our strategic and financial momentum continued to be very strong in the first quarter.
You know our goals and expectations for fiscal 2020 and for years to come or really twofold first.
First to continue to be the leader and what we've used the most strategically important lucrative segments of the performance improving industry.
Second to consistently generate extremely high rates of growth in adjusted EBITDA and cash flow.
Our first quarter latest 12 months results are very strong actually on both of these objectives strategically we had a significant number of large all access pass client wins and expansions in the first quarter.
As shown on slide three are all access pass and related sales grew 22%, we retain more than 90% of their oil exes past subscription <unk> revenue for the 16th straight quarter.
And a significant 32% of Rolexes passes are now multiyear passes up from 22% at the end of last year's first quarter.
Driven by this we had very strong financial results in the quarter revenue grew 8.9%.
Our gross margin percent increased by 337 basis points to 71.7%.
As a result, our adjusted EBITDA increased 56.5% or 1.8 million to 5 million for the quarter.
Andrew a similar percentage fruit, 55% or 8 million truly just 12 months.
And actually a little faster 8.8 million for what you just 12 months in constant currency.
These results we've gotten a softer was strong strong start toward our expectation and guidance of increasing adjusted EBITDA up from 20.6 million in 2019.
To between 20 732 million in fiscal 2020, which represents growth of between 31 at 55%.
We expect to build on this momentum over the balance for fiscal 2020 and beyond.
Specifically as we discussed in their year end conference call and as shown in slide four.
Over the next three years, we expect grew adjusted EBITDA in constant currency from the 20 point Sixmillion, we achieved in fiscal 2019 to between 27 and 32 million in fiscal 2020. So noted a growth of between 30, 155%.
And then to between 36 and 41 million in fiscal 2021, and do between 45 and 50 million in fiscal 2022.
We also expect to increase our net cash generated to between 20 530 million in fiscal 2020, and then to between 30 539 million in fiscal 2021 and to between 44 and 49 million in fiscal 2000 for it to.
Today, we'd like to briefly review our financial results and then address for key topics, which underlie our expectation is continuing to achieve this very rapid growth in adjusted EBITDA and cash flow in fiscal 2008, 2020, 122 and for the foreseeable future thereafter.
First I'd like to dig a little deeper into our financial results for the first quarter and for the latest 12 months.
First revenue.
Our revenue as you can see in slide five.
Grew 8.9% were $4.8 million in the first quarter.
And grew 14, and a half million or 6.7% for the latest 12 months.
Our total subscription related revenue grew 21% or 5.8 million for the quarter to 33.6 million.
Grew 23.3% or 24.2 million $248 million for the latest 12 months.
Our invoice revenues grew 8.4% or 3.8 million in Q1, and this was led by US in Canada were in voice revenue grew.
Over 10% for the second straight quarter.
Our balance of billed and Unbilled differs from subscription revenue grew $16.8 million or 26% in the first quarter to 82.7 million.
Compared to a balance of 65.9 million at the end of last year's first quarter and compared to 47.7 million balance into the first quarter fiscal 2018.
In addition, our total value of contracts signed in the quarter grew 17.5% were 7.9 million, our strongest contract coming quarter.
In the last several years very strong contraction quarter.
And that increased to 53.1 million.
As shown in slide six the high flow of the flow through of this revenue growth drove a 56.5% were 1.8 million increase in adjusted EBITDA in the first quarter.
With adjusted EBITDA, increasing to 5 million from 3.2 million in the first quarter fiscal my team.
For the latest 12 months, 55% of the 14.4 million of revenue growth regenerated flowed through to increase adjusted EBITDA. This resulted in adjusted EBITDA, increasing 8 million or 55%.
To 22.4 million for the latest 12 months.
From 14.4 million for the same 12 month period, a year ago.
Constant currency adjusted EBITDA grew an even greater 61%.
Point 8 million to 23.3 million for the latest 12 months.
This high flow through of increases to revenue.
In revenue to increase in adjusted EBITDA again demonstrates the come combined power.
Of our strong high single digit revenue growth are increasing gross margin percentage and the fact that this jay has been declining as a percentage of sales.
Both the enterprise and education divisions achieved strong revenue growth in the first quarter.
As you can see in slide seven in the Enterprise Division, which accounted for 78% of total company revenue in the quarter.
Revenue grew 8.7% invoice sales grew 7.8% the value of contracts signed grew 18.2%.
Alex has passed and related sales grew 22%.
And deferred revenue billed and Unbilled alluded to the all exes past invoice sales grew 31%. So were very strong revenue momentum in the enterprise Division.
And as you can see in slide eight in that in addition to achieving strong revenue growth.
The enterprise division's gross margin dollars increased and even more significant 15 15, 24% in the first quarter.
This reflected the combined impact of strong revenue growth and a 433 basis point, increasing gross margin percentage.
In addition, operating yesterday as percentage of sales declined slightly for the quarter, even after covering the cost of adding 23, new client partners in the enterprise Division in fiscal my team.
And also the costs associated with the conversion of the German office to redirect office.
This year.
So for the latest 12 months as Junaid as a percentage of sales declined a significant 241 basis points.
So the combination of these factors.
Proving revenue improving gross margins, improving yes, junaid as percentage of revenue drove a 47% or two and a half million dollar increase in adjusted EBITDA in enterprise division for the quarter.
With adjusted EBITDA, increasing to 7.7 million.
From 5.3 million in last year's first quarter.
The latest 12 months adjusted EBITDA increased 41.4%.
In the enterprise division or 8.2 million to 28 million.
As shown in slide nine strong quarterly in late latest 12 months performance reflects continuation of the strong growth in revenue adjusted EBITDA and enterprise division over many quarters.
As you can see.
In slide nine.
Last 10 quarters enterprise divisions, we just 12 months revenue has grown from 135.9 million 274 point threemillion growth of 38.5 million.
And during the same period latest 12 months adjusted EBITDA increased from 10.7 million to 28 million growth of 17.3 million to this represents a 45% flow through of increases in revenue over that period to increases in adjusted EBITDA. So this model is continuing to drive strong revenue growth hydro.
Gross margins.
Declining revenue and accelerated growth in adjusted EBITDA.
The shown on slide 11, and Education Division, the majority of whose revenue and profitability occurs in the fourth quarter. As you know when schools are out in teachers and administrators are available to go through training.
Revenue grew 7.1% in the first quarter.
Education's gross margin percentage declined 172 basis, and this year first quarter due primarily to an increase in the mix of services they sold relative to two.
Which will property licenses.
This is expected to reverse in the second half of the year when price increases kick in in the fourth quarter and when we have very high absorption.
Our coaches in the fourth third and fourth quarters.
The SJ also increased in the quarters, you know education invest early on.
To make sure we're ready to serve a solid revenue later on reflected increased commissions on increased revenues.
Read this geneight increase it is also reflected investments in new client partners. The addition of symposium marketing events initiatives first quarter.
In an increase in the amortization of deferred commissions.
Educations pipeline of opportunities is strong.
We expect significant growth in its revenue and EBITDA in fiscal 2020 as a whole.
Again, we're really pleased with the strength to our first quarter.
And for the latest 12 months.
This momentum has gotten off this off to a strong start toward our growth objectives for the year and we expect this momentum to further accelerate in the coming years will discuss later.
Now I'd like to address for key topics, which underlines our expectation.
Of achieving this very rapid growth in adjusted EBITDA and cash flow in 2020, 122 and for the foreseeable future thereafter.
As shown in slide 12.
These topics include.
No one.
Just.
Touching on the greatest points of leverage in our business model those points of levers that are driving the high flow through of increases in revenue to increases in adjusted EBITDA.
Topic to is really addressing why this strategic space in which we play is so attractive and why we are winning in that space.
Topic through which are less Paul Walker to to cover is where we see opportunities to accelerate revenue growth in the future.
The topic for which will as Steve young to address how we plan to utilize the significant amount of excess cash we expect to generate over the next three years.
Turning to topic, one the points of lever a greatest leverage in our business model.
There are three.
I'd like to address the first point of leverage is that because all access pass is generating high gross margins.
Gross margin dollars are growing even faster than our revenue.
As you can see in slide.
14.
Over the last two years the enterprise division's gross margin percentage has increased 156 basis points from 73.9% for the latest 12 months ending Q1 fiscal 19% to 75.5% for the latest 12 months.
Quarter just ended.
As a result as noted the enterprise division's gross margin dollars of growing even faster than its revenues.
The second point of Leverages that with this increase in gross margin of higher and higher percentage, where revenues are also all exes past revenues that have this high gross margin as you can see in slide 15.
There's a credit information on this.
Table, but in the upper portion of the table, you'll see that all access pass and related sales.
In enterprise vision of grown from 41.2 million.
End of the latest 12 months for Q1 fiscal $18 million to $85.8 million for the latest 12 month period.
Has also shown with this strong growth all access pass and related sales have increased from 29% of our total enterprise Division sales.
Two years ago to 49% of total enterprise Division sales here for the latest 12 month period through this year's first quarter.
Expect Alex's pass through sales to complete it could continue to grow as a percentage of sales.
Precinct more than 75% of total enterprise Division sales.
Over the next few years with the balance being made up of licensee royalties, which will also be related XIAFLEX as past and then some of our legacy onsite and facilitator revenue in miscellaneous revenue would make up the difference.
With this strong growth in all access patent related sales has also come a significant increase in the amount of our deferred revenue balances.
As you can see in slide 16.
Balance of deferred revenue billed and Unbilled has increased from 18.1 million at the end of fiscal 17 first quarter to more than $82.7 million at the end of this year first quarter.
With this has come significantly increased visibility into what we expect to be our future growth. We already know it's on our balance sheet and so a significant amount of what were.
Expecting in forecasting in the future is already on our balance sheet.
Third and final point of leverage.
Is that is it all access passes high revenue retention rate.
It's creating high lifetime customer value and this is allowing SGN a to decline as a percentage of sales.
It was illustrated on slide 17.
Combination of all access passes attractive gross margins and high revenue retention.
Well as well as high add on services attachment and the fact that sticky and we're retaining this is creating very high lifetime customer value.
This high retention is allowing operating asked you need to decline as a percentage of sales in the enterprise Division.
Because we're retaining substantially all the revenue from selling.
The combination of these three points of leverage.
Again strong enjoying gross margins.
We have.
The.
Increasing share of our revenue that's being generated that is subscription related and the high retention of that revenue is really creating.
Very strong operating leverage in the income statement.
Topic too.
His newly address quickly why the strategic space in which we play is so attractive and why we are winning we often get questions on.
Trying to get a little better understanding of the strategic space in which we play and why it is that we are winning and retaining the.
Revenue that we are in these and our passes are being renewed so Andrew address that.
Just to say that first the market for organizational performance in which we play is huge and expanding.
Almost every when you think about it almost every organizations largest investment is in its people its collected investment is people.
And therefore, its biggest opportunity for organizational performance improvement most often lies in increasing the collective performance of its people.
Pursuit of this improvement.
Estimated that organizations globally spend more than 90 billion on outsourced learning and development solutions and services.
There's been an additional approximately $220 billion for their learning and development staff and for internal content development.
And then in addition, as learning and development, but just their account was additional billion spin on consulting and other performance initiatives outside learning and development spend so there's a lot of money effort and time spent on this topic second.
We are playing in what we believe is the most is the largest and most strategic and most lucrative space in this market.
And we are winning.
The in slide 19.
Just the organizational performance market.
Generally be captured as shown in that slide at the bottom of the pyramid is the job developing skills and capabilities in individual learners.
The lift 10 side of the bottom rove is developing personal and interpersonal skills and on the right hand side you have technical skills.
Currently the vast majority of training at the bottom of the pyramid. So to speak is focused on the bottom right hand side on developing technical skills.
Recently enterprises are turning to online and do it yourself video content to provide this kind of training and they should this next analytically smartway delivers new technology, while engaging individual learners online, especially with increasingly disbursed workforce.
As you move to the left hand side of the bottom of the pyramid beyond technical skills into the train of pursuant interpersonal skills.
And even more importantly, as you grew up the pyramid to developing leaders can achieve results and engage their people and even higher to the top.
To help organizations achieved major strategic initiatives that require large scale change in human behavior.
Find the very challenges that line leaders and C level executives value most.
And have the budgets to address.
These organizations must win challenges challenges such as closing an operational gap improving sales performance.
Measurably, increasing trust throughout an organization or improving organizations key customer loyalty metrics.
Leaders not only invest a significant portion of their outsource learning and development budgets to address these challenges.
But also a disproportionate share of their internal learning and development budgets as well as portions of their operating budgets.
Are focused on addressing these problems.
We are winning and retaining expand air business organizational customers seeking to address just these kinds of challenges.
In doing so we're gaining access not only to the large outsource learning and development, but just the $90 billion piece, but also to the internal learning and development spend the $220 billion fees.
As well as to portions of organizations operating budgets.
Just three quick note on to that as to winning a bigger portions of clients outsourced learning and development budgets.
There's a large financial service from which has now been an opex is pass holder for nearly three years.
Who during this period expanded their pass from 100 users to more than 8000 users.
Additionally, their contract came from many dozens of trading days will refer to as an add on services each year.
This client has expanded its pass holder population rapidly in three short years because of the depth and breadth of content in the all access past.
Each time, they encounter new need in the organization.
Consult with their Franklin Covey implementation specialist instrument, how that need might best be met through the content and tools in the all exes past and most often it can be the.
So this process has played out again and again there to that until axis passes increase significantly significantly. It's important to note. This client start investing more money in addressing their needs and they did previously in fact, this spending a little bit less than they did traditionally but they've shifted almost all of their spend away from the other historical providers.
And toward Franklin Covey, and then all exes past similar things are happening with internal learning and development spend we're winning over people to sit recognize and they can take the content. It all access passed and we that content and the tools and all access past throughout their leadership development frameworks.
And in that in so doing again, they are displacing a number of their former former internal and external offerings. We are one example of multinational Fortune 100 company, who purchased all access past three years ago as a pilot.
With a relatively small population of 200 leaders.
Who recently increased surpassed Kabral 30000 leaders in the organization inside the three year contract again.
This is not only the outsourced spend but also their internal and finally, we're also winning as I noted in portion of clients operating budgets. For example, the CEO of a large retail organization you'd know made the decision to implement our four disciplines of execution solution systematically throughout their hundreds of stores using all exes past.
As a result, their revenue and profits historic highs they give credit to this whole process to four disciplines and the organization has gained an increasing capability in toolset to execute strategy Seth So we're winning in all three budgets.
And the reason we're winning finally.
It is because our first because our well known best in class branded solutions are focused on.
And known for their track record in delivering measurable outcomes on exactly these critical challenges that we talked about.
Due to the importance of the challenges just outlined organization seek out best in class solutions that have a track record and credibility for delivering outcomes.
And this is absolutely were Franklin Covey shines.
Franklin Covey is known and trusted for being the partner of choice for organizations facing challenges the solution to which require behavioral change.
At scale.
For his most content and learning and development spaces, unbranded and relatively undifferentiated Franklincovey solutions and insights are well known best selling branded and trusted.
They receive ninth and 10th NPS scores from participants and buyers and have a great track record reputation for delivering desired outcomes.
And so with the this branded content on important problems. That's the first reason we're winning in the second is because all access past structure.
Has an extremely extremely compelling value proposition.
With all access pass the clients receive unlimited access to all of our well known and trusted solutions many of which are shown on slide 20.
And they get that for their entire pass holder population and finally as shown in slide 21 with all access pass. These solutions are available in an almost limitless combination of delivery modalities, they're available in 21 languages worldwide. So people can implement these solutions worldwide.
They get the services and have an implementation specialists, who can help to cure rate and design impact journeys to meet specific needs. The client need client has as noted in this one plant is going to.
Pretty much every leader in their organization.
The solutions can be purchased with add on coaching and delivery services to help a client to achieve this desired outcomes.
And all this is available to price per population trained this less than or equivalent to that typically charge for single course in a single modality.
And for clients were already purchasing access to video libraries that help individuals develop technical skills or personal skills.
Alex This past is extremely additive because it allows organizations to transcend these basic skills and also address or more pressing 80 20 challenges so delivering on this compelling value proposition as a key reason where sales of all access past are growing rapidly.
We are retaining substantially all of the all exes past related revenue, we sell what pass will organization not only be renewing their passes we are doing so for multiple years.
We have a similar value proposition education were educational institutions again or buying a subscription to the leader in me funding enormous value in it and expanding within their course the school retains we retain these schools and theyre expanding within districts.
With that I mean, as Paul walked through our President Chief operating officer to address topic, three which is where we see opportunities for even more accelerated revenue growth in the future. Thanks Bob.
While our high flow through of incremental revenue to incremental adjusted EBITDA and cash flow means that we can hit our targets for growing EBITDA, 30% to 40% compounded.
Even at just high single digit revenue growth, we have a number of opportunities we're working on for accelerating that growth into the future and I'd like to share three of those here today.
The first is to further penetrate.
The existing Alexis pass holding clients that we have Bob shared a minute ago. Three examples of clients, where they started out with an initial population of two to 300 users and then in one case of expanded not 8000. Another case expanded to 30000 users and important to note even those companies, we still see expansion opportunity up and above.
Those numbers and that same opportunity that exists in those organizations exist across our entire all access pass client base today.
To try to quantify that.
Yeah.
Obviously those are those are big numbers, but but if we did that just even a modest amount across our current all access pass holding base, there's fivex or more than the all access pass the potential.
Inside our client base and we know that.
Those examples that thats, a lot bigger growth and buybacks going from two or 308000, or even 30000, so lots of headroom there the way that we do that.
Is the moment a client becomes an all access passholder their assigned and implementation specialists and I Didnt implementation specialist along with our client partner are in their immediately and engage with the client formally at least quarterly.
And so it's very much a land and expand model for US we make sure that we're doing a good job with the first job they hired us to do and our processes set up to uncover additional jobs. We can help that client with an additional populations, which we conserve and each of those addition additional populations represents.
Expansion within that logo and so lots of opportunity there were on that and we feel good about the momentum in the trajectory there the second.
Way in which we see Ics revenue growth accelerating the future is to land more new logos to two to two bringing on more new all access pass clients.
We're really pleased with the tremendous growth that we've achieved with the all access pass to date as you will note. We all access pass and related sales have grown from a significant 15.7 million in their first year to 85.8 million in the last 12 months.
And even with a success, we're just scratching the surface.
As we've talked about previous quarters, even excluding the small business market, which we in the future C of the potential market for US there are more than 50000 accounts in the us alone in our addressable market, which are not yet all access pass holders.
To take advantage of this opportunity, we're adding significant.
A significant number of new client partners every year.
And we're seeing these client partners ramp up on or ahead of expectation.
Over the past two years, we refined our recruiting process and profile. We now have four five full time recruiters, we've created a new more immersive sale school and Weve exists invested significantly in sales leadership and with these investments we expect to continue to add at least 25 net new client partners a year and have a lot of headroom there in the years to come to add those.
Hi partners.
In the third point I would touch on where we see the opportunity for accelerated revenue growth would be in our international operations. We now have direct offices in five of the seven largest economies in the world The U.S., China, Japan, Germany in the UK and these are in addition to our operations in Canada and Australia.
And it's important note that in each of these countries. We have the same or maybe even greater potential for growth as we do in the U.S.
And it's same strategy, where we will achieve that growth through the expansion with from existing all access path holding clients and through winning new logos through our salesforce expansion efforts, which are the same there they are in the U.S.
And just using our same land and expand and are higher and ramp processes that we've identified in executing for the last few years. So we feel really good about the momentum we have today and we see opportunity to only accelerate that in the future.
Thanks, much Paul let test Steve young to address topic for how we plan to use the excess cash we expect to generate over the next three years also review our guidance okay.
Thanks, Bob Good afternoon, everyone happy new year from May also.
As Bob mentioned over the next three years, we do expect to generate a very significant amount of excess cash we expect to utilize this cash to create additional shareholder value and at least two primary ways.
First by continuing to make value, creating investments in the company.
The large amount of excess cash flow, we expect to generate in the coming three years.
Is already after allocating large amounts for innovations and new content.
And continuing to make ongoing investments in technology and portal capabilities. So as we've always said, we intend to run run the business.
In a way that it can grow in addition to our investments in new content and what we've talked about.
From time to time, there maybe opportunities to invest in tuck in acquisitions.
Such as acquisition of Gianna.
That can add new capabilities that will add value to our pass holder customers.
We would of course expect to earn a high rates of return on on these types of investments.
So the second thing we plan to do is by continuing to return capital to our shareholders.
As you know Franklin County has a history of returning capital to our shareholders.
As you can see on slide 24 over the years, we've invested more than 150 million in stock repurchases and retired more than 11 million checks.
Last month, we repurchased an additional 13.8 million of stock, bringing our total investment over these years in stock repurchases to greater to more than 167 million.
At a weighted average purchase price of $13.86 per share. So the return on these stock repurchases has been very attractive to our shareholders.
We expect to trajectory of our growth in net cash generated in coming years coming years that we've talked about makes it attractive we believe under almost any discounted cash flow analysis to continue.
To opportunistically repurchase shares.
So we believe weekend, we can still increased the value of the company in the value to shareholders. So our guidance.
We expect net sales to grow as we've talked about at a rate of high single digits in fiscal 2020.
And the expected a significant portion of these sales increases will flow through to increases in adjusted EBITDA. Our fiscal 2020 guidance remains therefore that in constant currency adjusted EBITDA will increase from 20.6 million last year.
To a range of 27 to 32 million this year.
Anywhere in that range of course represents really strong growth in adjusted EBITDA.
Growth that we've talked about between 30, 155%.
So now Q2, despite the investments.
But we're still making in sales associates, new content cetera.
We expect adjusted EBITDA in Q2 to grow by apart approximately 1.5 million.
Compared to last year to approximately 2.5 now.
Bob.
Thanks, Steve and Paul So just in conclusion.
We are pleased there strong results in the trajectory of our expected results.
Please their strong business model, which we expect to continue to generate very high rates of growth in adjusted EBITDA and cash flow.
We feel good about the strong and growing position what we believe is the most attractive and lucrative part of the performance improvement market.
And we believe that we have several great opportunities to further accelerate or our revenue growth in the coming years, while retaining high flow through of this revenue and we expect to utilize excess cash said shareholder value. So we appreciate your support and look forward to take advantage of this tremendous growth ahead of US now I'll turn the time over fuel for questions.
Thanks.
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And our first question comes from Andrew Nick.
You may begin.
Hi on good afternoon.
Hi, Andrew how are you.
Great great.
First question, then just kind of light touch on gross margins, a little bit obviously really strong quarter.
I think 340 basis points compared to last year.
You talked a bit about it I was hoping you could get flush out the primary driver is there a bit more.
Speak to whether or not there any any unique items in the quarter to call out and then how we should think about gross margin progressing throughout the remainder of the year.
Great. Thanks, I think there weren't any specific.
No special onetime items I think the primary thing.
I think at work here is the increasing mix of all access pass and related sales and they just have very high gross margins.
What we've said is that over time, we believe that to.
From types and we'll have big jumps like this in a quarter, but in longer term, we expect gross margin percentage will increase some each year.
Ed just because the company the on one hand that positive thing it will be Greg pulling it upward is increasing mix of all access past con and.
Leader in me subscription sales.
But we also believe the strength of those offerings is really.
Made more strategic by the addition of services and so as services continue to get added to the subscription revenue there a little bit lower margin. The combined margins will really be good and will come balance together.
Also there could be some shift depending how we.
Where we if we develop public content ourselves at tall capitalized in the in the.
The development in capitalized development costs, sometimes we license revenues license content also in as little different accounting treatment and may shift the mix between gross margin Nextgen, a but I think long term, we would think as we've said in the past we think that.
Gross margins will add job.
Not by hundreds of basis points, a year or anything like that but adding.
Somewhere around maybe 100 basis points, a year of gross margin in the for the foreseeable future and to some quarters will be bigger than others. That's the general trend.
Great. Thank you and then another one on tuck in M&A.
Obviously, one area of focus would would be content, adding content, but just wondering if you could speak maybe a little bit more to the type of content that you'd be focused on I know on slide 19, you touched a little bit on the technical skills part of the pair made where you havent.
Typically concentrated what does that make sense to to be more aggressive there or is that outside of.
Jay direction of what you're trying to serve clients right.
For full say that in terms of acquisitions, most content acquisitions, because the thought leaders mate typically don't have a company that they are they are thought leaders they might be professors they might be authors oftentimes acquiring the continent occurs more in the it by is less capital intensive because really its entering into a long term.
License to acquire rights and then developing the courseware and content and technology delivery and so we don't see significant opportunities for acquiring companies have lots of content just because in our industry has been very highly fragmented business with lots of small.
Operators that tend not to the they just don't they're not really acquisition targets for content generally more like with Liz weitzman's content licensing or with Clayton Christensen in recent years, you have the ability to license the contents of the tuck in acquisitions, we're talking about fit.
For example, Johnny gave us new capabilities. It gave an ability to deliver micro learning in a whole different delivery method with John a weekly in accessing this this library of best in class articles and content that can be navigated by an individual user in so I think it's probably khan.
Those kinds of areas.
To your point strategically what we have some technical capabilities in error in our content libraries.
There are plenty of people focused on that it tends to be relatively and differentiated and we think Joe the world's going to be well served with new probably another dozen people who come up with their own libraries the of technical content et cetera. So we think that part of the market will be well served and we'll give the organizations plenty of options for rotating.
Contained among among providers for us.
We want to make sure that the eight or 10 key jobs to be done on which were focus. These critical must win gains that organizations have that we can get that content to them and unique and interesting ways that they can access so it's that kind of thing.
Assessment engines different things that it'll probably be on direct or M&A targets to fill in capabilities more than content. If that's responsive.
Hey, Thanks, a lot.
Thanks very much.
And our next question comes from Jeff Martin You May begin.
Thanks, Good afternoon guys.
Jeff above.
Great area.
Yeah, we covered but Kevin gross margin, but I was curious if we could go into the same on Fright Fest Shannay in terms of.
As a percentage of sales what kind of trend per year.
Last year I believe it was close to 400 basis points improvement when should we expect a couple hundred basis points leverage on on SGN a for the next several years.
Yes, I'll, let Steve address what Steve.
Oh.
Hi, Jeff. So we do expect we do expect leverage in Nash DNA, obviously is a combination of reducing costs in some areas, having fixed costs that were able to control and remain fixed our semi fixed and then also.
That would leave areas, where SDMA will increase primarily for additional salespeople and commissions.
Paid to salespeople implementation specialists content development and those types of things.
But but in general.
Not product quality, but we talk about SGN, a increasing at a rate maybe half the rate that that sales increases and away that test to fall. This is working out is the targets that we that we that we talked about at the beginning in the presentation and that we've.
Discussed if you have revenue that growing lets say, 8% for discussion and and the adjusted EBITDA is growing at the rates that are indicated on those targets and most of that.
In our minds, you know Bob talked about gross margins, increasing a little bit overtime. Most of that leverage is coming from the reduced percentage of SGN a.
So sales.
Does that responsive enough.
Yeah.
That's helpful.
And then I wanted to say congratulations on the large client wins and expansions thats really.
For the good to hear was just curious if theres anything different in the sales process or the delivery process.
Thats, helping that effort.
Paul.
Sure Hi, Jeff.
I would say nothing substantially different we're now I think what's happening is we're now more than four years into this and I will give our salespeople on our sales leaders great props for how they've helped US transition this business and just every month that goes by the salespeople become more.
We are comfortable we've become better positioning this week, we are getting better entering higher in organizations, where you naturally can address these larger populations that I think so I think it's just the continued turns of the flywheel there on how we go to market.
And then the market's receptivity to what we're doing.
Nothing nothing unusual or extraordinary, which which is good I think.
Okay, Great and then last question on on the international direct.
It was just curious if you could give an update on some of the recent.
Offices, you've taken from a license model to a direct model how those are performing and.
I see.
There are potential.
The additional.
Taking a licensee.
And making those direct as well.
Sure to the to last point, we're now as I mentioned, we're now direct in in most of the low and the largest economies.
The U.S., China, Japan, Germany.
In the UK and then of course, we're directing Canada and Australia. So I think we're not we're not necessarily on a quest to convert licenses back to direct operations. That's.
There's been some opportunities that have come up and we did that most recently in Germany as you know, but thats I think where we feel good about the direct operations that we have it into places where we have them.
To the first question you ask.
The transition of Germany is gone well so of course and that it was really Germany, Switzerland, and Austria is what we picked up when we when we converted when we say we converted Germany, Germany of course being the biggest economy there were.
Significantly growing the number of client partners in Germany, we run that now out of our UK operation, which has been growing nicely.
For the past few years, and so we see and that in Germany were running the same play all access past related everything Bob talked about in the call here and so we just expect to for US. It's the same strategy everywhere in the world, It's higher client partners. Its ramp them successfully we sell all access pass everywhere we land.
We expanded and we're pleased with the momentum in international Drx as well, we're just getting to China now.
In Japan really this is kind of the year, where we start now that we're we're fully localized that have our portal up and running in China.
So we expect to see continued momentum there as well.
Great. Thanks for that Paul.
Thanks, Jeff Yes, okay great.
Sorry, and our next question comes from Marco Rodriguez.
You may begin.
Marco Hey, Bob how are you guys.
Great. Thanks, so fewer two oh, great, yes, I am. Thank you. Thanks, obviously for taking my questions.
I wanted to maybe start on the claim partner side.
Can you, maybe just graiver or discuss what the sort of hiring landscape looks like for you guys has things sort of changes are more competition for for talent out there.
Sure.
Hey, Mark all ill take that this is Paul so yes, we've talked I talk a minute ago about our hiring process. So we feel great about it we added a significant number of new client partners last year, we're adding we continue to add this year and.
As we've refined our profile client partner.
We were really pleased with the client partners that were able to attract and the enterprise division and chalk and speak to education as well.
It is a good tight labor market out there.
The economy doing nicely and unemployment is low and I would say.
We were really pleased with that people are able to attract I think I think one of the biggest contributing factors to.
Why we're able to attract tour attracting today is we are growing and thriving as an organization.
And Thats, a compelling thing for somebody, especially somebody who's been in our industry.
We've made investments that others have not made and and that is paying off and people are attracted to us we and so were.
We feel great about the candidates were getting we feel really good about what our team doing to ramp those folks and we feel great about the fact of these new classes of client partners last couple of years are all at or above the expectations. We had for them in enterprise shocking comment on when you are too high Marco.
She had an education, Brad we fill similar it's really attractive time to get people right now I think a lot of it is.
The education industry is being disrupted quite a bit and a lot of these big companies are just been shaken right now and so we're picking up a lot of really good client partners from.
Pharma companies like Pearson education, and so forth.
So it is that fair to look at the last eight client partners. We hired this year versus what we hired a year or two ago I, just think where we're getting better quality people.
Our experience, we always try to hire people that have education experience.
But they don't necessarily have to how they just need to have good solve its brands, but I felt really good about our processes and.
Bill over the last many years, we've improved every year or hiring capabilities.
Got it.
And then in terms of the implementation specialist they seem to have been.
Doing a really good job here for you guys in terms of increasing the the wallet share you have with your existing clients. I was wondering maybe if you can talk a little bit about them in terms of do you have the right numbers the not done right heads and if you can talk a little bit of up maybe their targets are they kind of hitting them are there any things that they need to kind of work on to kind of accelerate.
The increase in wallet share.
This this is Paul I'll respond to that as well. So we we do feel great about them and thanks for acknowledging them, they're doing a wonderful job and what we do we have the right. We have a formula we add them formulaically and they are added as a percentage of all exes past sales. So we kind of have a model for how many CLI.
And how much revenue and implementation specialist can work with and do a really good job with and then as.
Sales grow we add more and so it's it's a variable model that way.
And yes, they are they're hitting their targets. They are their compensation, they're paid a base salary and then they have a variable compensation that is tied to logo retention and revenue growth inside that account and so there to retain the logo. We they've got they've got to ensure that we do a really good job serving the client around but thing. They initially purchased CLL.
This past to accomplish and then the revenue growth of course comes as they develop more relationships and I would say the client partner stays very involved as well and so the two of them together.
Develop additional relationships look for additional population and that drives the other portion of their compensation is the expansion of revenue in the addition of add on services and so we are great team. The team we didn't even have four years ago and they're doing wonderful work.
Excellent and last quick question, maybe if you can talk a little bit about the international licensees, just kind of where they are in terms of.
Their implementation of the all access pass and their sales cycle.
Sure.
So they we are so all access pass is now available in 21 languages.
Right out of 21 languages continues to grow there and so it's all of our licensee partners that have been trained on it they're selling it.
We're quite pleased with how that that business is building for them of course.
They continue to pay us 15% of sales of their gross sales.
But their businesses are also converting from what was our traditional legacy business to the all access pass which helps them grow more rapidly and they see the growth the kinds of growth that we're seeing here, we had one of our licensee partners.
Lastly, in Q1 near the end of the quarter.
Close the very very large all access pass back one of the biggest once we had the company. It was just it was it was really kind of a thrilling thanks for that to come from one of our licensee partners and and so we're it's they're doing great great and we're it's like the important thing to note. There is across the enterprise Division we run the same strategy the same play.
The same recruiting profile of the same hiring ramp processes really everywhere in the world than it does not make much of a difference if any difference at all whether it's a direct operation country or licensee country.
Look I just add to that in many of these countries. Our local license partners and we did we don't licenses that happens to be the legal way, we do business. We view them as really is full of partners. They really have tremendous stature in their countries. These are people who are well known in this learning and development space in May.
I have been senior leaders in organizations in just have a passion for this as a consequence in many of these countries. They are really look too is that person the company or their organization for the individual is one has asked to speak on issues relating to leadership, whose interviewed on television if theres a lot.
Leadership issue in the country or whatever and so we have a tremendous group of partners.
You know invested their own capital alongside us to build these operations and so we feel really really great about having this.
Having this network that now outside the outside approximately 10 countries in Central Africa, and those under us embargo.
We really have a licensee network that operates and you'll at least has a footprint in essentially every country in the world.
Got it thanks, guys appreciate your time.
Thank you Mark.
And our next question comes from Zach Cummins.
Yes.
Is there.
Hello, guys. Congrats strong started the year.
Just a question around the new client wins and this quarter.
So more of the question is really around is how are you getting in the door at new customers to begin with and is it typically the displacement of an existing vendor is how you get into the door or is it trying to focus on a maybe a.
Leadership area that haven't been addressed before at the company.
Yes.
Paul you can just first on it.
So hey back.
So we.
There are.
Won't be too long with his answer but there are.
Okay.
Two primary entry points for us inside a new customer and Bob mentioned these earlier the outlined kind of that strategic pyramid Hagen slide I remember, but.
We enter and sell to either senior learning and development leaders, So the chief learning officer or that the head of talent development et cetera.
And they're primarily purchasing capability development, either leadership development or development for individuals across the organization and maybe thinking about things like culture et cetera, or we sell to the second entry point of tilt to the line organization itself. The the Cxo level person Chief sales Officer, Chief Executive Officer, Chief operating Officer access.
And so our salespeople out every day they each have a 100 accounts assigned to them and some of those accounts or existing in summer perspective, and they're calling on those accounts and using our marketing collateral and what usually happens is that they identify and needed client house and whether we end up displacing another competitor or not.
I'm times, we do sometimes we don't.
Lot of our competitors actually also per a lot of our clients purchase at the bottom part of that pyramid. The technical skills. We're working alongside another organization, they're addressing the technical side and we're addressing more of the performance enabled.
[noise] outcome side and so we're just it's the salespeople out there with really good marketing behind them, we do a lot of marketing events, where we invite people to comment learned more about how we might help them and that's our that's our go to market process. It's been so in that market Zach when you've got people who are already purchasing things.
A lot of our big wins are coming from organizations deciding that rather than doing business with 20 different suppliers, having to be kept beat and serve as their own general contractor with format that don't exactly match the quality doesn't match, it's not unit, it's not implementable across the world. This what's happening is that more and more.
Some of these large organizations, who either already or customers or not yet customers are being compelled by the value proposition and say gosh, if I can get the world's best content on these topics I'm trying to get solved services to help me given done.
Languages across the world et cetera that will value proposition, we're winning a increasing share of the dollars that these clients have an impact even in some cases, where the client is in their own many recession, where they might be cutting back.
Laying off 10000 employees, there say coming to us and saying look.
We're not going to be spending as much but we got to make darn sure. The money. We are spending is having the greatest impact it can have and as having a single focused on a couple of jobs to be done. We've won significant increases in revenue to us at the same time that client is spending the same or less and so it's a combination of those things when we.
Talked with big wins this less to do we have big wins every thankfully every quarter, but we've had some really good expansions and some big new wins in those areas and those through an execution. So.
Got it that Thats extremely helpful and.
Just over on the education side of it.
Any sort of update on the rollout of the districts model that you were talking about on the Q4 earnings call. I mean have you seen any sort of uptick in interest, but interested buyers or more any sort of receptiveness to this new model.
Yes sure.
Yes, it's that we think it's going really well, we're calling a leader me four point now and it's got this district component to it.
Now what we're finding is we've got a lot more.
We're having a lot more discussions at higher levels.
The Salesforce is a very excited about where this is headed so we're having a lot of.
A lot of the district discussions are leading too.
Big community discussions with multi district, sometimes state level discussions.
So we.
Initially volume in doing this for a few months, we feel really good about it so far and we've got a pipeline of districts. We have right now compared to last year as we have many fold more does really encouraging. It's also a new type of cell. So we are having to learn how to sell the districts.
Maybe a third of our client partners are predicts brands of districts in the rest are and so there is some learning curve here for sure and I think it's going to take us a good year to really get.
Really good at it.
Definitely the right direction early results are good my guess is in the past, whereas like last year. We bought on 30, new districts, we could bring up to 100 new districts. This year.
And the pipeline looks really strong, but it's going to its going to take some time to really get it crossed all the client partners the capability.
Got it that that's helpful. Appreciate the color I think thats all the questions I had for now that congrats on a strong start here and best of luck with Q2.
Oh, thanks very much.
And our next question comes from Patrick Retzer, you may begin.
Good afternoon, gentlemen, congratulations on another good quarter.
Thanks, very much hope you're doing well.
Thank you.
I had a question about the knowledge ventures transaction, you bought $10 million worth a stack I wanted to thought your appetite would have been substantially larger than that I'm wondering now.
You're saving a lot of dry powder to.
Essentially put a floor under the stack care.
If you bought at 30 514, I would thank Karen 33 area you'd be quite aggressive one the restrictions come off.
Thanks, Pat first of all we think that no. Its capital transaction itself is going to be a great thing for allowing us to expand our shareholder base and we that's going to be a great thing over the years, we've had a number of important potential shareholders, who have hope that someday nodes capital.
It would distribute the shares to the underlying institutions. So that at least over some period of time, there might be a source of shares. So we think thats a good thing.
And that balancing the purchasing shares ourselves to allowing some other good shareholders to come in.
That will build our shareholder base and provide ongoing demand and in conviction is a good thing. So so well these shares have been distribute institutions, who we've known for 30 years I've known for 30 years of ensure owners for 20, and we believe you know based on their discussions within there will be very disciplined holders overtime. It will.
And they've been investors, they're excited about this the what's going on in the company overtime. It will probably provide some opportunities for new shareholders to buy as to our own purchasing.
We have as we've noted we have an authorization of around 40 million, we invested 13.7 million.
In the last month or so.
In share repurchases and we believe there will be opportunities to continue to purchase and.
And obviously, we get the point that if you.
The to if we thought it was good 35.
The.
It's also check through 35.
54.
So I think again I think the hopefully the chart in the discussion that Steve had.
We've shown a willingness and certainly.
Purchase the basically over 14 million shares.
In totals $267 million 12 million shovel insurers overtime and so yes, we see this as an opportunity, but I think Moreover, we will be there we want to be on an ongoing purchaser of shares and not just episodic we've got the capacity in the cash flow and the.
Tracker to end the intent and so we I think you're right that rather than saying, let's try to buy all that at one time.
We've got.
The people who receive those shares aren't necessarily sellers today and we also have some people who we think if there are buyers that we'd like to we might share the purchase with them so to get some new large shareholders into the into the company.
Okay, great. Thank you.
Thank you Ben.
And your last question comes from Alex Paris.
You may begin.
Oh this is Chris sitting in for Alex Hi, Chris how are you.
I'm doing well.
Congrats on the quarter.
To start today.
Year.
Yes.
My questions have been asked would just moving through my list there are some remaining.
As we move back to some of your comments that you made.
About retention of revenue and how thats, creating leverage for the business.
Diving deeper into that I imagine.
Material.
Driver of that.
Has than your Salesforce and the performance of this.
More specifically the retention of your top performing sales force members.
And in addition, the new hires as they move through.
Move through towards their incremental revenue goals.
The different cohorts that you're bringing on can you just.
Perhaps dig more into what you're seeing thats driving.
The success that you're seeing retention on a more granular level.
No.
Yeah, you make hopefully important points first of all with a fixed investment in a new client partner and net investment is pretty much flat for the for three or four years, let's say, you're you're paying them 100 or $120000 year for the first three years, even though they're on commission there there there's a guarantee that they're getting and so with.
The more rapid ramp up that we've referred to in previous quarters. We have this 200000 500000 800000 million 1 million three go our last our last four classes the ones that has been hired since all at CES path.
In the Enterprise Division since we Rooney.
Membership in the Education Division.
Overall ramp rate has been a little bit ahead of that and so to your point, there's leverage on a given fixed cost for those new people there's leverage on on.
On the cost there you're getting more revenue out of the same cost 0.1 0.2 is that also because you're retaining substantially all the revenue from these passes and people are expanding adding on services et cetera, you are not spending new marketing dollars to do that and you are using a fixed investment largely fixed investment.
In implementation specialists in the Salesforce and getting more out of that without having to spend new money and so the things behind that are these strategic things that as we're in there with the client we're identifying one task they're trading one problem. They are trying to solve or opportunity there trying to take advantage of and within that same client.
They've got 10, others, they're just they're not doing anything about him today, where theyve hired others to do them and that serves that Paul talked about as when you're in their enabled to find additional opportunities and you're not selling you really their servicing and people are saying gosh could you help me. So this one to had been the first thing has been so successful.
Hey would you give me help on this too is just an organic process that is driving this but in the past.
Sales person had to replace those good share of the revenue they sold in the first year before they started to grow and now they don't so.
That responses.
That was responsive yes, thank you for the color.
And.
That seems to be all I have for now I did have one overall.
One last question to ask you it's been touched on many times.
The growth that you're seeing in international markets space.
More of a bird's eye view.
No we're getting a little late in the call.
But can you talk about just where you are within some of the markets.
In regard to the.
Market potential that you see as far as whether you're in the early innings late innings and some different tailwinds that are benefiting you.
You bet.
First of all just one thought is that.
The markets are becoming increasingly global 20 years ago, we had our beginner or international partner network. There were lot of international companies of course, but they didnt approach. This concepts at building their whole workforces on a global basis. It was delegated to each country to figure out kind of how theyre going to do.
Leadership development or how they were going to do cultural improvement today, that's not really an option if you're a global company. Your culture is your competitive advantage and so this is creating this is creating a beachhead in many many countries because wherever that wherever the client might be whether they're in Germany, when they buy the path.
Yes, they have 10 other countries in which they operate within the U.S. They have 20, others whatever is creating a beachhead that is helping us.
Seed every country in which we have license late licenses licensees and also in their direct offices.
Now with the with direct offices in five of the second largest economies. Many of those many of the global clients were operating in all of those economies assess providing a good foundation in terms of penetration just generally though.
When you look at across across Japan, China, The UK, Australia, Germany et cetera, we have around $40 million revenue and you look at that and say the combined the those combined the if if our U.S. revenues or more like 130 million in the enterprise side.
You recognize it to be 40 million in all the other biggest economies there were much with all the headroom we have in the U.S. were much less penetrated outside the U.S. and so I think for US. We see this is an imperative and a huge opportunity it's needed by our clients.
They are seeing us gift, giving us business to get to grow that helped us grow in those areas. We've got great client partner hiring thing is going but we think as Paul said that this is a tremendous opportunity.
The the.
They are both so big you can't we're not going to get their anytime soon but certainly we're further away from the potential internationally than we are in the U.S. and we're just getting started we think in the U.S. So so we've got a lot to do.
That's very helpful. I appreciate the color. Thank you thanks, Chris.
Okay.
There are no more questions.
Operator, we have no further questions at this time I will now turn the call back over to Bob for final remarks.
Well, we just appreciate each of you. Thank you. So if you are great questions. Thanks for your support over all these years.
For a four of helping us think through things as you do is and we've view you is great partners. We appreciate you and and we look forward to a.
Strong second quarter in year. Thanks, so much.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.