Q1 2021 Franklin Covey Co Earnings Call
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[noise] welcome to the Q1 2021 Franklin Covey Earnings Conference call. My name is day train and not for your operator for today's call.
At this time.
And sorry to listen only mode later.
Got a question answer session.
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Okay, Alright, Derek Hatch corporate controller, Derek you may begin.
Thank you.
Good afternoon, ladies and gentlemen on behalf of Franklin Covey, I would like to welcome you to our first quarter financial results call. This afternoon and welcome everyone to 2021, we hope everybody has a safe and healthy beginning to the new year and hopefully you will enjoy today's presentation before we begin todays presentation, we want to remind everybody that this.
Presentation contains forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
Forward looking statements are based upon management's current expectations and are subject to various risks and uncertainties, including but not limited to the ability of the company to stabilize and grow revenues for the acceptance of in renewal rates for our subscription offerings, including the all access pass for leader in me memberships.
The duration of recovery from Nick the duration of and recovery from the COVID-19 pandemic the ability of the company at a higher productive sales professionals general economic conditions competition on the Companys targeted marketplace market acceptance of new offerings or services and marketing strategies changes in the company's market share changes in the size of the overall market for the company's price.
Tax changes in the training and spending policies of the company's clients and other factors identified discussed in the company's most recent annual report on form 10-K, and other periodic reports filed with the Securities and Exchange Commission.
Many of these conditions are beyond our control or influence any one of which may cause future results to differ materially from the company's current expectations and there can be no assurance the company's future actual future performance will meet management's expectations for these forward looking statements are based on management's current expectations and we undertake no obligation to update or revise these forward looking so.
Day must reflect events or circumstances. After the date of todays presentation, except as required by law without other way, we'd like to turn the time over this afternoon Mr., Bob Whitman, our chairman and Chief Executive Officer, Bob. Thanks, Thanks, Derek Good afternoon, everyone.
We're happy to have the opportunity to talk with you today.
We're pleased that in the first quarter fiscal 2021.
Our operations continue to demonstrate their strength agility and ability to progress even during the continuing pandemic.
Specifically as you can see on slide three.
In the first quarter revenue was strong driven particularly by the strength and growth of all access pass and related sales.
Gross margin increased by 359 basis points compared to those in last year's strong first quarter.
Operating EPS Junaid declined by 4.4 million.
Adjusted EBITDA was 3.7 million versus an expectation to between two and two other half million.
Our net cash provided by operating activities increased 60% or 4.1 million for $10.9 million.
Substantially exceeding even the 6.8 million of net cash provided by operating activities in last years first quarter.
And we ended the quarter with approximately $49 million of liquidity up from 42 million at the end of the fiscal year in August and up from $39 million at the start of the pandemic. So we're pleased with the continued progress in the first quarter.
And I'd like to discuss the results in more detail in just a moment for the first is that we provide a little context in our year end conference call little over two months ago.
We reported that in our enterprise Division in North America, which accounts for approximately 70% of total enterprise sales.
And we're all access pass and related sales account for 84% of total sales on the way the 90.
We reported first.
As you can see on slide for your chart one day on slide for in the production quarter. We expect all access pass subscription sales that we we had as expected reported all access pass subscription sales had remained strong throughout the pandemic day.
Growing 18% North America for the period March through August.
It was indicated.
We said that we expect you all as Pat all access pass subscription sales can continue to be strong.
For this year's fiscal first quarter net on an ongoing basis thereafter.
Second as shown in the chart one be on slide for we said that after the initial disruption of live on site coaching and training for during the first six weeks for the pandemic.
Our quick credit to deliberate delivering training and coaching services live online capability, we've had for more than a decade OLED our add on services to rebound quickly we reported that as a result by July.
Our new bookings of services had returned to essentially the same levels, we had achieved in the prior year.
We said that we expect to this booking trend to continue in Q1 and beyond.
Third and one chart when C.
In our international operations, we reported the despite having had only nation all access pass subscription businesses and most of our international operations and that's a relatively small base of all access pass subscription revenue nutrition them.
They had begun to recover.
As we said and we expect these operations to strengthen further your progress and the day accelerated focus on all access pass in these offices would over the next few years allow them to achieve a strong base of subscription and related.
But she revenue retention rates and go look for revenue similar to that currently being achieved in our North American operations and finally for indicated one when de risk.
We said that in our education Division.
Accounts for just under 20% of total sales.
We achieved very high leader in me subscription school retention last fiscal year.
For the remarkably in the middle dependent credit also added 300, plus new schools zone, almost all of which came on during the kind of debt.
We said that notwithstanding a continued difficult school environment, we expect their subscription retention to remain high and even increase in fiscal 2021, and then we expect the specs for dad, even more new leader in these schools in fiscal 2021 that interest grew 20.
Well the environment has continued to be challenging.
We're happy to report that as indicated in slide five day.
These positive trends have continued and even accelerated through the first quarter.
And are continuing to can continue to accelerate in the second quarter.
As shown when they all access pass subscription sales continued to be very strong in the first quarter.
And invoiced amounts for accelerated even faster.
Building the foundation for future.
Acceleration of actual subscription sales second while.
All access pass related sales rebounded quickly are now exceeding the levels achieved last year, even pre pandemic.
One see sales in China, Japan, and among our other international offices have continued their strong recovery.
And finally leader in me membership retention from existing leader in me schools has been very strong in the first quarter two will talk about in sales new schools or.
After a very encouraging start.
Diving, a little deeper I'd like to address each of these points that you have.
Some background and transparency on them.
First as shown in short one day in slide six total.
Total company all access pass subscription sales grew 16% in the first quarter to $17 million.
We grew 17% to 65 million for the latest 12 months.
In addition, as also shown in chart one be in slide six total company all access pass amounts invoiced, which read for the balance sheet in which form the basis for accelerated future growth in sales.
Hoops, we got some paper shuffling of the back here sorry somewhere.
Increased.
You're saying are invoiced amounts.
Increase in extremely strong 55% in the first quarter.
And even excluding a large government all access pass contract growth with its still very growth for nimbly sales was still a very strong 32%.
This establishes a strong foundation for accelerating future growth.
Importantly, all access pass performance was strong across all of the key elements that we look at for all access pass, including sales to new logos, which increase substantially both in the first quarter and for the latest 12 months nine of those 12 month course took place during the pandemic and still had new logos increase every quarter.
Annual revenue retention, which continued to exceed 90% both for the quarter employee just 12 months you can.
Season, one C.
And the sale of multiyear contracts, which is shown in when the.
Our unbilled deferred revenue related to multi year contracts grew 19% over Q1 cash income.
In Q1 compared to Q1 20 to 40.5 million. So we're really pleased that all of the key underlying metrics and drivers.
Were strong.
As shown in chart when a gain on slide seven in addition in North America. As previously noted our almost immediate credit to booking and delivering coaching and training engagement slave online allowed us to continue to meet the needs for our customers remotely and interest through the flexibility, which live online delivery provides.
As in many cases also result in class expanding the extended their use of add on services because they see it so simple to get people together and do it.
As shown the strong booking trend for add on services sold almost all of which are now being delivered online.
Rich by July had resulted in our booking booking pace equaling that achieve the same time in the prior year and are exceeding it by the end of August as continued strong through December.
The increase in bookings, which is a lead measure predictive measure because it's booked but not yet recognized drove an increase in the lag measure which is the actual invoice sales services, having been delivered in both bookings and sales of services have continued to strengthen as.
As you can see.
In the chart one of slide seven with the beginning of the pandemic in March.
The kings of live on site services were necessarily cancelled.
Stay at home restrictions and the year over year volume observes followed down with the deliberate engagements down $6.9 million in North America in the third quarter.
However, in the fourth quarter of fiscal 2020, new bookings increase to the level nearly equal to that we've achieved in the fourth quarter of fiscal 19 and this in turn drove an increase in the dollar volume of services actually delivered.
As a result, instead of being up $6.9 million in the third quarter. The dollar volume of services delivered in the fourth quarter was off only $1.1 million.
The same positive trend continued the first quarter.
Total bookings were up year over year, and invoice sales fall, which followed be were only off 200000 compared.
Compared even to last year's very strong first quarter.
And when you add in Decembers results for the first four months for fiscal 2021 September through December actual sales of services delivered exceeded those achieved for the same for month period last year, which is a very strong period for us.
Last year pre pandemic.
As shown in chart one be in slide seven it's important that 87% of our clients have now shifted to live online delivery of services. This is important with 87% of our clients now having shifted to live online.
Our susceptibility to future cancellations have been reduced substantially.
So we're very pleased with the trends continuing here.
Maybe just turning to our international operations second as you can see on slide eight.
Sales in China, Japan, Germany, and among our other direct costs as licensee partners in the first quarter improved substantially compared to both the third and fourth quarters.
The started pandemic, we had recent Scott reschedule substantially all live on site training engagements in these countries.
Since these countries were just starting to sell all access pass and therefore did not have a strong base of durable subscription revenue for Christian them sales in these countries declined only 4.1 million in the third quarter compared to 12.7 million in the third quarter of fiscal might change.
However, in the fourth last year fourth quarter, while still operating well below the levels achieved in last year's fourth quarter sales.
Sequential sales in these countries increased 70% to 7 million from the $4.1 million in sales in this year's third quarter in last years third quarter.
And we had said we'd expected that our international operations, we continue to strengthen in the first quarter and we were pleased that they did.
As shown in the first quarter International sales were 9.9 million ahead of our expectation of 9 million.
And while still below the level achieved last year. This represented an increase of $2.9 million or 41% compared to the 7 million achieved in the fourth quarter and was 2.4 times.
The the amount to the 4.1 million amounted shipped in the third quarter.
Importantly in addition to the significant recovery reported sales our international operations were also seeing strong increases in all access pass amounts invoiced.
For starting to build the balance of deferred revenue on the balance sheet that will drive sales in these countries in the future. So we feel good about the direction in these countries and strategically also the acceleration of their shift co exist past for.
Finally as shown in slide nine.
In Education Division, despite an environment that continues to be very challenging as we all know.
We've seen some strengthening in trends in the first quarter.
Including one that the number of leader for me schools, which have renewed or ready to renew their leader in me membership contracts.
Has increased to 615 cash.
Imperative for 50 450 schools at the same time last year.
Second thing is that the number of new leader in me schools contracting we're in the process of contracting after being down in the fourth quarter net.
Equal to that achieved in last year's first quarter, which was of course pre pandemic and so considering the current education environment, we feel very good and encouraged about these trends medication.
Let me now dive a little deeper into our first quarter performance looking at slide 10.
So you can see our first quarter approach was stronger than expected and showed.
Thankfully, we're grateful showed positive momentum on almost every front.
Our adjusted EBITDA for the first quarter was 3.7 million.
Exceeding your expectation of achieving adjusted EBITDA of between two and two and a half.
These results for even more notable in light of the fact that last year's first quarter was itself very strong.
Next our as shown on slide 11, our cash flow and liquidity position were also very strong as shown in slide 11.
Our net cash generated for the quarter of 532000, and our own for most quarters was 4.9 million higher than last years first quarter.
This reflects almost entirely that our significant growth the new all access pass contracts invoice Reed.
Resulting in our net deferred revenue position.
Not not going down as much pulling stuff off the balance sheet versus what you added on actually improved.
6 million versus the prior year.
As you can see in slide 12 also our cash flow from operating activities for the first quarter.
First quarter was $10.9 million.
Which was $4.1 million or 60% higher than last year's $6.8 million.
This strong cash flow reflects an additional benefit of our subscription business model.
We invoice upfront and collect all of the cash faster than we recognize all other income.
And so it actually generates cash faster than it generates income.
As a result, we ended our fiscal year in August with more than $40 million in total liquidity comprised $26 million of cash and our $15 million revolving credit facility Undrawn.
The amount that was even higher than than we had at the start of the pandemic and we're pleased that we added for there to this liquidity during the first quarter and in the first quarter with 49 million of total liquidity comprised of 34 million of cash which means no net debt.
With our $50 million revolving credit facilities still undrawn.
And available.
So we're pleased with the financial position of this strong performance was driven by as you can see on slide 13.
Strong strong growth.
Revenue growth for revenue was $48.3 million.
Strong and a little bit stronger than we would have thought driven.
Driven by particularly by our North American operations, which in turn was driven by the performance while exes past.
You can see in slide when they have slide 14.
Company wide all access pass subscription sales grew 16% in the first quarter.
In addition to the all its past subscription revenue actually recognized in the quarter.
As we've talked about and as shown in chart one be of slide 14.
We also achieved an extremely strong 55% growth in all access pass amounts invoiced and as I mentioned, even excluding a large government contract.
Growth in all access pass mounts Invoiced was still a very strong 32%.
As you know most of the significant gross knowledge. This past amounts invoiced was not recognized in the quarter was added to the balance sheet as deferred revenue will be recognized in Q2 quarters accelerating our results in those quarters.
As noted previously also these new invoice smells included strong sales new logos, a continued quarterly and latest 12 months revenue retention rate of greater than 90% as you can see in one C.
Average number of all access pass expansions.
And and shown in one deal a large volume of multi your all access passes which increased our unbilled deferred revenue, which of course will flow into sales in future quarters.
All access pass add on sales were also very strong in the first quarter as we mentioned previously our add on services booking momentum, which is a lead indicator to actual add on sales returned to levels equal to the prior year as early as July and our booking pace accelerate beyond that in August and through the first quarter.
And third and through December this resulting in strong booking pace. This result also than in strong actual delivered revenue for worldwide. These services increased to $9 million, which was a bit above actually than that achieved.
Pre pandemic in last years very strong first quarter.
Where we actually saw very significant growth of add on sales compared to the prior year.
Second as you can see in slide 15, all access pass drove also growth strong gross margin growth beginning in the first quarter gross.
Our gross margin percent was 75.3%.
359 basis points from the 71.7% achieved in the first quarter of fiscal 2020, and up 275 basis for the latest 12 months.
As a result for our gross margin percentage for the enterprise Division in the first quarter increased to 80.6% compared to 75.3% in last year's first quarter, an increase of 530 basis points you.
These can Crs unit was lower than last year this debt.
Came in at 32.7 million, which was 4.4 million lower than last years first quarter.
And finally, the combination of these factors resulted in adjusted EBITDA as we mentioned before coming in at $3.7 million.
In the first quarter compared for an expectation of between two and two and a half million and just 1.3 million lower than last year's very strong quarter. Despite the slower recovery in our international operations.
We mentioned again that are strong we had strong invoiced in multiyear sales in the first quarter.
And because most of these sales were not recognized build that per balanced to for revenue, which as you can see on slide 16, our total balance of billed and Unbilled deferred revenue increased to 97.4 million.
Reflecting growth of 14.7 million or 18%.
Compared to our balance for the 2.7 million at the end of last years first quarter.
As noted last quarter, just note again approaching 100 million of deferred revenue billed and Unbilled deferred revenue is a big landmark for subscription businesses. This provides significant stability off and visibility into our future performance.
And this kind of strong combination of factors, both reported sales new bookings balance sheet improvement.
And the balance and increasing the balance of deferred revenue continues to drive growth expectation that we will generate very high rates of growth and adjusted EBITDA and cash flow in 2021.
And on an ongoing basis.
As you can see in slide 17, we've seen this before we expect to generate adjusted EBITDA of between 20 and $22 million in fiscal 2021.
And we're pleased to be off to a strong start toward this objective.
Keeping 20 to 22 million in adjusted EBITDA will represent approximately 50% increase in adjusted EBITDA compared to the $14.4 million, we achieved in 2020.
Our target is to see adjusted EBITDA, then increase by approximately 10 million per year each year thereafter.
Approximately $30 million in 2022 to approximately 40 million 2023.
These targets reflect our expectation that we will achieve at least high single digit revenue growth each year growth, that's approximately $20 million for your revenue growth and then on average approximately 50% of that amount of growth in revenue will flow through to increases in adjusted EBITDA and cash flow, reflecting our high gross margin strong.
Gross margins and and.
Variable selling costs.
We fully expect to achieve an adjusted EBITDA to sales margin of 20% in the coming years and really to become a $1 billion market cap company in the coming years, even at an adjusted EBITDA multiple that's conservative relative to our adjusted EBITDA growth rate and without relying on.
Multiples of revenue, which we should increase and we'll be able to garner.
Looking forward I'd now like to address three factors that we expect to drive us toward the achievement of the strong objectives.
End of our being a consistently we hope and expect higher adjusted EBITDA growth high cash flow growth company.
On the navigation Slide 18, those three points are the three drivers gross.
Gross driver number one is the strength of the all access pass economic engine, which we've talked about.
Growth driver number two is that we are making significant ongoing investments in areas that are.
Our customers value, most and in which we already have significant competitive advantages.
And third is actually the strength or organization and leadership and our teams throughout the world.
As shown in slide 19 growth driver number one is the strength of the all access pass economic engine.
In slide 20.
You see the all access pass and related sales.
Have driven the vast majority of our growth in revenue and adjusted EBITDA over the past five years.
You can see since 2015 annual expense all access pass related sales have grown from really nothing to more than 90 million for fiscal year 2020, reflecting a huge compounded average growth rate and an average absolute all access pass related revenue growth of between.
I mean, 10 and $20 million each year.
This growth in all access pass and related sales has generated the vast majority of total revenue growth for the company overall during this year and it almost every individual year more than offsetting the early runoff of our legacy facilitator non site businesses, which are now largely.
Behind us with the 84% of revenue.
Now.
Enterprise Division in North America coming from.
All excess cost and related.
Second as you can see in slide 21.
In the first quarter company weighted all access pass subscription sales grew $2.3 million or 16% compared to the same period and for the latest 12 months, including nine months the pandemic from March to November.
Paul Exes past subscription sales still grew 17% compared to the same nine month period, a year ago interest and or for latest 12 months year ago.
Again as shown in chart when they have slide 22, we noted this.
That all access pass sales grew the add on services grew and that importantly, our amounts invoiced to new sales that are put on the books grew 55%.
Including a large government all access pass contract, but even excluding that was still still grew 32% or 3.4 million.
The other element thing about all access pass that's really driving it as shown in slide slide 23, that's compelling business model economics.
As you can see it's driving strong gross margins.
It's a high revenue retention is allowing us to reduce for operating EPS gene is percentage of revenue switch reducing operating costs.
Right Thats, giving us a high flow through with the.
Combination strong gross margin some declining operating costs.
But as a percentage of sales is a spectral out approximately 50% of incremental revenue.
Gross to flow through to increases in adjusted EBITDA and cash flow and then in terms of the visibility and predictability the large and growing balances billed and unbilled deferred revenue, which is approaching 100 million as we talked about and.
And then also the predictability of the all access passes key operating metrics, including annual revenue retention for the 90%. The fact that more than a third of all access passes for entering into holders are entering into multi year contracts.
And that our add on services, which now proven to be extremely durable average 45%. All of this we believe gives us significant durability visibility and predictability.
Growth driver number two is the ongoing investments, we're making in areas. We're already strong we're making significant.
Investments behind the things that are actually distinct competitive advantages and these are the things our customers value most.
I, just say that all access pass.
Is is not just another typical as we say all you can eat subscription service, providing unlimited access to large amounts of undifferentiated skills content.
Other all access passes subscription service I'd say with the punch was illustrated in 25 really for powerful strategic punches.
Franklin Covey is purposely and systematically build its strategic back to establish best in class competitive modes in each of the following for areas that are important for our customers.
As you can see in slide 26 moat number one.
Is having the best in class solutions to our clients highest impact must win opportunities and challenges.
At any given time, most organizations have several high impact opportunities, which have achieved or challenges, which overcome would have a significantly disproportionate positive impact disproportionately positive impact on the organization result.
These opportunities and chose include things like successfully and systematically implementing a new or refined strategy number two getting an entire organization to nimbly adjusted necessary changes. We've all had this past year third achieving a major non linear operational break through such as increasing sales performance for improved.
In customer experience.
For establishing the foundation for winning and engaging culture five developing leaders at all levels and.
Leaders, who do as Eisenhower suggested get people to want to do the things that must be done and.
So while the rewards for achieving organizational breakthroughs in these areas can be truly significant even great organizations, often struggle to consistently address and achieved.
Other challenges, which can't be solved disability people through content library and pick topics interesting to them rather achieving breakthroughs in these areas requires collective organization behavioral change at scale.
Net back from this you recognize that there are certain things like strategic consulting that can have a big impact there just not very scalable it doesn't get any behavioral change you've got other things that are really scalable where you can have lots of people take courses that doesn't have much impact for we're playing is at the intersection of those two is high impact with.
Hi, scalability and.
And these are you the exactly kind exactly the kinds of high impact challenges.
On which Franklin Covey as focus it solution development efforts and budgets for more than a decade.
And as a result.
We now have the acknowledged best in class blockbuster solutions for addressing exactly these kinds of blockbuster challenges.
Can see in slide 23, you can see in slide 25, some of those solutions.
As you can see.
In slide 27.
Slide 27, our best in class solutions include bunch of great solutions, including for disciplines of execution. The speed of trust for essential rules of leaders moving players.
And a wide variety of other.
Offerings, including our two most recent best selling solutions six critical practice for leading a team and overcoming unconscious bias unleashed potential and.
And of course. These are in addition to our historical strong things solutions like leader in be in education.
And seven habits of highly effective people both of which continue to set all time usage records, even though they are now a minority of our offerings.
But even with this very strong collection of best in class solutions, we're making ongoing investments in new condensate tend to end solutions, including a new change management solution new leadership offerings.
Let me just for two in slide.
20.
I've got some it looks as good a numbering from one of these slides, but we're also the Flexibilities you can see in slide 27 is also.
A big competitive mode for us because having best in class solutions for our clients biggest opportunities and toughest problems is critical however, they've also got to be able to debt to deliver that and access it flexibly.
So we've made significant ongoing investments in technology portals digital learning assessments Micrel learning coaching and the latest in structural instructional design.
Instructional design.
Investments sorry.
We've now got flexibility across a wide variety of modalities, including digital Mike for learning live online live on site coaching or any combination thereof.
Most any segment of time this unit.
On slide 27.
On any device.
In more than 20 languages worldwide.
With digital live online or life coaching and other services available to support them.
And as a result again as shown on slide 30.
Slide 30.
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All access pass related sales and.
And as a result, they have increased from zero to more than 90 million latest 12 months, which revenue revenue tensions been high at more than 90% more than 35 cents per passenger and clients are signing multiyear contracts. Our average pass size has grown from 29000 $840000 for late.
In the latest 12 months and again, our balances build non billed deferred revs.
Revenue is really significant.
Maybe im looking at slide Slide 31, which is the third puzzle piece.
You can see on slide 32, Franklin Covey has built a direct sales force.
I have 247 client partners or sales associates in the USA and Canada in China, Japan, Australia, and the UK, Ireland, Germany, Austria and Switzerland.
In addition, we expect had 20 net new client partners.
This fiscal year two the for 247 client partners, we had at the end of Q1.
And.
Paul Let me turn the time to you to maybe talked about also the licensee network that we've built and the other strategic moves that we have.
Sure. Thanks, Thanks, Bob and good afternoon, everyone for you as you look there on slide that they've got a slide 33 in.
In addition to.
A growing number of client partners, who are continued to ramp at or above our expectations, which day and other of themselves represent a great ROI.
Revenue driver for us for the company, but on Slide 33, we have also built a network of approximately 80 international licensee partner offices, which cover most of the countries in the world.
These partner offices generate gross revenues of approximately $50 million and they pay Franklin covey or royalty that's equal to about 15% of these revenue.
These lightened licensee partner offices or are strategically very important to us not only do they work to penetrate their local market.
But they also provide services to global clients.
With local offices and so this.
This allows for example, a global client in Germany, who buys an all access pass to rollout that solution in many countries around the world to have access to all access support resources in just about any country that they might be operating in.
And then as shown in slide 30 for the fourth strategic mode.
Is the power reach and influence of Franklin Covey is industry, leading thought leadership.
Our years of investment in research and development and our thought leadership partnerships not only result in solutions that provide enormous value for value for clients.
But they create a large treasure trove of research and case studies that we use to broaden our thought leadership.
As shown in slide 35.
Franklin Covey and its key thought leaders published what often become best sellers, which present, the principals and solutions to help our clients.
Our key thought leaders in each Solutionary also write white papers and articles they contribute to publication that deliver podcasts and webinars and they speak the some of the world's most influential event.
Franklin Covey is industry, leading thought leadership includes bestselling books as well.
And to date, we've sold more than 50 million copies.
Of books worldwide and more than 50 and over 50 languages.
And to put that 50 million number in perspective, the number of books that we sold as part of our thought leadership strategy is greater than the amount sold by a large number of our top competitors combined.
To achieve best seller status about typically need to sell a little over 250000 copies and sort of reached 50 million copies sold and still counting is unprecedented in the industry.
These books typically achieve best seller status not only in the U.S. and Canada, but also in other countries throughout the world.
And in addition, our practice and thought leaders regularly publish articles and podcast in a variety of publications and outlets and speak a client events and on the world business for him stage.
Strong thought leadership helped to establish our position as the partner of choice for organizations that are truly seeking best in class solutions around the world and at scale.
So Bob ballpark, maybe talk about growth driver number three.
Okay. Paul why don't you just go ahead and talk about the strength of our organization.
Most of these people flow.
Good day through use so.
Okay, Great have you see the navigation slide there 36, so speaking about the strength of our organization. This has really kind of our third growth driver.
And ours is a culture, where our leaders are experienced and trusted.
Our processes are disciplined in strong and our team members are are really highly engaged most.
Most organizations correctly attribute their success to the strength of their people and and their credit and doing so however, with the opportunity of having a front row seat deep inside the operations of thousands of organizations with whom we work we know that Franklin Covey organization, our leaders and processes in our culture, our extremely strong.
Factor among the strongest that we see.
As to our leaders being highly trusted.
Our recent annual employee engagement and culture survey all the Franklin Covey associates for App to rate on a zero to 10 scale with 10 being the highest how likely they would be to recommend their leader or manager for someone to work for and you can see on slide 37.
94% rated their leader, a seven or above and 83% rather leader at nine or a 10 on that question.
And this even in the middle of the pandemic when leader for being stretched for required to deal with a number of additional challenges.
As for our process is being strong we do a lot of work with organizations as I mentioned earlier, helping them institutionalize their ability to execute on our key priorities.
We know that every organization has pockets of great performance and we know that every organization has variability in that performance.
What differentiates the great performers from lesser performers. It's the extent of that variability you can see a little diagram of this in slide 38.
Top performers performance distribution curve is simply writer and tighter than that of their lesser performing counterparts. In other words on average their performance is better and there is less variability among their units.
Institutionalization of great results requires strong and consistent processes.
We've implemented these same strong execution processes throughout our own operations, we use the for disciplines of execution as an example, and we're pleased that as a result of our strong leaders and strong processes. Our leader's performance distribution curve is very right and tight.
Illustrative of their strong execution is that as Scott showing you'll see on slide 39.
In the first quarter 12 of our 15 managing director so each country.
It has a managing director in the United States, We have 10 and United in Canada, We have 10 and they lead our our great sales teams, but each 12 of our 15, managing directors met or exceeded their quarterly revenue objection objective for Q1.
And the other three leaders who missed our goal missed by an aggregate of only.
1.3% of the total direct office.
Sales goal.
And collectively they group all 15 exceeded their revenue goal.
In addition, as you can see there on the right of this slide 14 of the 15 managing directors met their EBITDA goal with the one who messed missing by only $50000 and collectively of course this group exceeded actually exceeded EBITDA by about $1 million collectively.
And finally to that to the the engagement of our associates around the world as shown in slide 40 again on the same recent culture survey that we conducted.
We at Franklin Covey Associates RASK rate on a zero to 10 with 10 being the highest again, how likely they would be to recommend Franklin Covey is a great place to work somebody that they would want to invite their their friends and people that they know to come in and joined and were pleased that 92% of employees gave a rating a seven or higher and 69%.
For rating of a nine or 10.
We have just a phenomenal group of associates around the world we.
We are so grateful for their efforts they are tireless workers and not only do they bring a tremendous amount of energy and passion.
This is a group that execute very very well and.
And I think you see that in the results we've talked about today and for Bob I'll turn to you for any comments and I think you want to move on to guidance from Yelp. Thanks, Paul Yes for stepping back from it we feel very.
We all wish we're in the pandemic, but we are grateful 10, demicks proven that the sub.
Solutions that we have are really valued by our clients the business model and the subscription version of this has been extremely strong and positive our teams who could have just hunker down in the 10 to assist avalanches coming down on that Didnt. They got out of the Tencent started climbing back up.
And to regain traction very quickly and so we're really pleased and grateful to be where we are with strong people strong teams strong offerings.
The financial resources to continue to make good investments and day and significant liquidity cushion us and without a like debt, Steve Young to review our outlook and guidance Steve.
Thank you, Bob and Paul I enjoyed hearing about the business and I'm also very excited about where we are in the direction that we're going I'm pleased to talk a little bit about guidance and target.
So our guidance our guidance for F Y 21 as discussed last quarter.
Is is that we expect to generate adjusted EBITDA of between 20 and 22 million.
This result would be an approximately 50% increase.
In adjusted EBITDA compared to the $14.3 million.
Adjusted EBITDA achieved last year.
This expected growth reflects everything above that Paul talked about including the continued strong performance of our North America operations are all access pass and other things.
Underpinning this guidance for the year other following expectations that we talked about last quarter.
And are consistent with our first quarter results.
First the recognition to sales during that point 21 of more than 60 point Sixmillion up deferred revenue already on the balance sheet at the end of last year.
And the recognition of a portion of the $39.6 million of Unbilled for third revenue, which we had contracted.
These balances provided and provide significant visibility into our revenue and gross margin for EPS by 21.
Second in addition to the recognition of deferred revenue.
The factor, which is expected to have the greatest impact on our EPS. Why 21 result is also a factor in which we have high confidence.
That is the strength of all access pass and related sales.
We expect that all access pass will continue to achieve.
Strong growth in both sales and Invoiced amounts.
Well achieve high revenue retention rates strong sales of new logos.
And continued growth in pass expansion and multiyear contracts.
We also expect that all access pass add on sales will continue to be strong.
Driven by this and that's why 21, we expect our operations in the us and Canada, including government to achieve an adjusted EBITDA contribution level higher than an F.Y. 19.
And even somewhat higher than we had originally expected to achieve an F y 20.
So the third underpinning of our guidance, we expect that our revenue in Japan, China and among our licensees will continue to strengthen.
The increase in all access pass, which we expect to achieve in these countries.
Well of course result in a portion of the new sales being added to the balance sheet as to for deferred revenue.
And the fourth underpinning of Guidances and education.
We expect to continue to achieve strong retention of both schools and revenue among existing later in May schools.
In addition, this.
Despite the fact that we could continue to be in a challenging.
And budget constrained environment for education, and the remainder of half why 21, we still expect to achieve growth in the number of new leader in school New leader in me schools that we add this year compared to the number we added last year.
So.
For affirming our annual guide.
Guidance.
And.
I feel comfortable with that for for our second quarter of this year.
We expect that adjusted EBITDA will be between one and one and a half million.
Paired to 4.1 million in adjusted EBITDA and last year's very strong second quarter.
And still reflecting the expected strong performance of all access pass in the US, Canada and government and the same general expectations, just outlined for dinner international operations and education.
Please remember that the last quarter, we did say we expected Q2 this year to be less than the very strong Q2 last year.
Please also remember that our second quarter is typically been the lowest adjusted EBITDA EBITDA quarter of the year due primarily to the holiday season.
And please also remember that even 1 million of adjusted EBITDA in Q2 would be more than the second quarter result in F Y 18, or the second quarter result in F y 19.
Our second quarter result, last year for just a very strong second quarter, representing the momentum that we had and talked about at the time and are beginning to see again.
So thats guidance now just a couple of thoughts related to general targets for for the coming years and repeating in a lot of what Bob said Bill.
Building on our 20 to 22 million of adjusted EBITDA, We expect to achieve this year and driven substantially by the expected continued growth in all access pass.
Our target is to have.
Adjusted EBITDA increased by around 10 million per year.
To around 30 million in F Y 22, and around 40 million in F Y 23 these targets reflect.
Our expectation of being able to achieve as Bob talked about high single digit revenue growth of around 20 million 50 per cent for that revenue to adjusted EBITDA.
So those are our targets.
While changes in the world business outcome and many other factors could impact our expectation we want to share. These as our current internal targets, NSF, and our and our assumptions and expectations.
We also wanted to share again like we did last quarter.
In order for the executive team to really see it for a long term incentive pay.
Hey to achieve those targets.
So thats, our guidance and a few thoughts about coming years.
So thank you Bob for.
Thanks, Stephen with that we're just say keach view and open this two questions.
Thank you well now begin the question and answer session.
Other question. Please press Star then one on your Touchtone phone.
If you wish to be able to for Q. Please press the pound sign what are they asking.
For years, the speaker phone you may need to pick up the handset first the for Preston the numbers.
So again, if you have a question. Please press Star then one on your Touchtone sound and our first question comes to answer you Nicholas and William Blair. Your line is operating.
Hi, good afternoon.
Just wanted to work hard for it.
With.
The sequential strength in international sales this quarter.
Talk a little bit about it in your prepared remarks, but I'm just curious if you could maybe flesh out the key drivers of the improvement versus last quarter, a little bit further and then maybe more specifically.
I don't understand how much of that rebound is a function of continuation of or rebound in traditional product sales versus maybe some success expanding the reach of the all access pass product in those regions.
Thanks, Paul would you like to address that.
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Paul perhaps you can hear me ROE growth start out.
Sorry, I was talking into my mute button.
Thanks, Andrew Thanks, Andrew for the question.
To that to the first part about just maybe adding a bit more color to the sequential growth from Q4 to Q1.
The drivers of that for.
Frankly, the main driver of that is just the increased stability in China and Japan They were hit for.
Particularly hard earliest at the beginning of the pandemic and so things things on the ground. There have improved in those countries people have gotten back to work and our teams have done a nice job of filling the pipeline back up again and so they were working on that in earnest back in our late Q2 Q3 Q4 hundred.
Just kind of seeing the momentum build back into the business there.
We expect to continue to see that business Derek build we will in Q2, Q2, thus our smallest quarter and that part of the world because of the holidays and because of the Chinese new year and so.
Revenues may not be exactly the levels there'll be a little less than what they were this quarter, but but on a percentage basis I think you'll still continue to see the same sequential improvements.
Yes, and certainly year over year.
We move into Q2 here and into Q3 as far as how much of that is coming from traditional business versus all access pass. They are all access pass is coming online and the Japan had a nice quarter with all access pass.
China is just getting started.
We are deep into that with them right now that actually isn't driving yes that performance you're seeing because those sales of course are going on the balance sheet and will recognize we'll begin recognizing those over the next nine to 12 months and so.
There are a lot of that is traditional products for you're seeing reflected in the Q1 numbers, but I think it is important to note that we are feeling quite good about the momentum around all access pass in those countries and then of course, we had mentioned much on this call, but in the UK and in Australia, we've been selling all access pass for years and their results.
Look much more like what we talked about in the us and Canada in terms of subscription growth add on services growth et cetera.
Hi, Andrew if thats it thats helpful or for you have another question has there that's helpful. Thank you.
And then for my follow up I, just wanted to to ask about education and weakness in revenue.
This quarter any.
Any more color you can provide there on the drivers the decline what if anything.
It's timing related there and then maybe any color on how the sales conversations have evolved over the past couple of months I know, it's a very fluid environment Tony anymore.
Color on on that business would be helpful. Thank you for sure Sean Sean Thanks for that so much Sean would you like to address education.
Yes, Thanks, Hi, Andrew.
Sure the.
Sales in the quarter were down.
Quite a debt.
Primarily for one reason is because.
A lot of our dilemma.
Delivery dates co.
Coaching and delivery that we typically do a lot of in the first quarter. We just we just didnt do it was down about over 50% delivery days.
Cooking and consulting because what happened is in September October November you've got schools coming on the pandemic we've.
We've got a lot of schools and you still have time right now please call us back in two or three months.
We're trying to figure out bussing schedules and lunches and going online and then they kept changing and so we found it very difficult to get to school.
With our training and consulting.
And so that that's the that was the biggest hit for the first quarter. So we could recognize any revenue for those consulting and coaching days encouraging thing is that as is rebounding.
And now we are down over 50% in the first quarter right. Now we are tracking at about 17% down for the second and it looks like it just keeps improving all the time. So we're pleased with that.
And and then I think in general regarding regarding sales and how thats going and what we're pleased with that retention is really good.
We're way ahead of last year, we had over 615 15 school that have committed to come on to renew their memberships compared to 450 last year.
And even though we had a really good first quarter last year.
And getting new schools up and going this year.
Where were little over last year. After the first quarter terms of for the number of new schools that have committed.
The combined.
So we're encouraged with the retention numbers the net schools.
It's been the deliberate days coaching and consulting day that as hers that.
For the first quarter.
A lot of these days are already contracted and so they will be recognized before the end of the year.
They have to be because it's a part of their contract and will recognize the revenue for them. So some of that a lot of it is timing.
And well go.
Anyway, Bob anything else you'd add.
No no I think that last point is worth emphasizing that with the revenue.
The decline in revenue being primarily related to the delivery of services. The vast majority of those services are under contract already in the <unk>, you mentioned that Sean but they are for it it's not less revenue for the year. It will in fact come in it just is that isn't recognized until either it's delivered or until the contract here.
Ends and so we will get that revenue.
Is that helpful. No that makes sense, yeah that that's part of why at let's index yet.
Yes, thank you for for all the help.
Right.
Thanks for the great questions you too.
And our next question comes for Jeff Martin from Roth Capital Partners. Your line is open.
Thanks, Good afternoon, Jeff.
Doing well.
I hope you heard.
First question as with all access pass remaining.
And if young Clinton.
And bill.
Long term deferred income going in the upper teens.
In terms of the growth rate.
With the legacy business.
I assume thats relatively stable at this point with it.
New level.
Now.
A portion of the business.
Just wondering to get your view on whether.
High single digit growth rate for the overall business yes.
Asset that continues to grow at high teens rate shouldn't we see the overall business grow a little faster than the upper single digits.
Yes, no. Thanks.
Thanks, Jeff we should and I think what you've seen in North America. If you look at the booking pace for invoice sales over the last six quarters.
Free pandemic it was was higher than 10% and it has been in recent.
Recent quarters as well so I think ultimately that drives that drives that topline growth in the all access pass unrelated being high will ultimately share.
Should ultimately course could pull the overall average up for some years as you noted we've had offsetting that growth was some decline in the historic legacy business. That's now as you pointed out on the flatter part of that curve and so as all access pass and related continues.
Well I think our point is that as we can if we think we can achieve 10 for that.
$10 million a year of EBITDA growth, if we only grew in the high single digits, because the 50% flow through but to the extent, we got higher revenue growth and your your point to when that we obviously believe.
That could be a bit better so.
Okay. That's helpful. Thanks for the insight debt and then second question is on the.
The content development and the thought leadership is clearly understood. Thanks for the details on that but just.
Just curious relative to say the last couple of years have what what's your outlook for your level of optimism regarding your new content opportunities over the next couple of years.
We see there are some really big ones Weve, because we're focusing on the challenges are the organizations that are our clients are facing and because we're always always talking to them. We have more than 100000 hours other sales conversations last year with clients in more than 40000 a day.
Conversations for implementation specialists that really helps us.
Hone in on exactly what they're looking for so we're very excited about two new offerings that we have coming out this year that we believe will hit things that our clients have needed. They if they don't get it from us they need to get it from somebody else and given that they have an all access pass they would love to just increase their spend.
With us and have those issues solve so we think actually that if you look back it with all the things we've had historically two of the biggest.
Offerings in terms of usage or ones that have been introduced in the last couple of years, one six critical practices for leading a team is around frontline leaders and it really gives a set of very practical useful skills and tools and mindsets around lean leaders.
Being a frontline leader and we are increasing we're making another big invested in that country. This year, but it's been a big big and the other one is unconscious bias, which weve been developing for years. It turned out of course. This year. There is a particular emphasis on that thats been a good.
It's been a good thing for the offering has been I think a good thing for our clients and for us.
Really deepen the understanding of how you can can systematically identify biases have all kinds and how you can unleash people's potential better and so those are two examples of the ones that have come out in the recent years that are actually some of the strongest offerings that we have and we believe these two new ones will be.
For the same so we have a map a multiyear map of the things that we know our clients need than staying on those things were pretty confident that we're we're scratching a bigot. So to speak so that really is important and being responsive to their needs and their desire to do more with us within all access to us.
Great. Thanks, Bob appreciate your insights.
Thanks, so much.
And your next question comes from Marco Rodriguez Stonegate capital Your line is open.
Hi, good morning, Thanks for Hey, hurting for decking my questions.
Thank you.
Wondering if maybe you can talk on.
For a bit of a high level just.
Aside from any sort of.
Corona virus impacts that you might need to digest two in the next day.
Few months for 12 months can you maybe just talk about what are your strategic priorities that you are going to be focusing on here for the next 12 24 months.
You bet.
Now for us.
Maybe I'll start out net ask Paul to.
For Sean to add to it but.
Priority number one for us is making sure that they just exactly the question, Jeff just ask that our offerings are really both hitting the topics most important to our clients and that the flexibility and deliberate and ability to access those offerings across the world easily.
[noise] technologically in every other way.
Our really simple and so we are making big and ongoing investments in portal technologies in user experience in add on services in various formats thing.
Doing new formats that providing coaching through John.
Just on my weekly basis to poll things up we've got new micro learning of investments that we're making so I think thats number one is making sure that our map is really lined up with the needs of our clients number one number two.
He is building.
The sales force.
To support that because the needs are as large as our sales force has become.
For 250 up from a 120 not very many years ago.
We have a real opportunity to for more than double that at 30 30, new net new client partners per year, it would be adding.
150, new client partners to that existing count of 250, just over the next five years for there is a lot of focus on that and making sure that our we're building the infrastructure mentoring infrastructure et cetera.
To do that.
And then I think the third is that we are looking for to expand into some new content areas that aren't just the ones that are clients looking for now or capabilities. They may not have.
Picked out on their own, but we see being utilized in certain areas that we think will be good. So I think two of them for product development. One is is expansion.
Paul what would you add to that.
The only I think I think those are exactly right, Bob I would say, maybe less strategic but as kind of an operational big focus and we've talked about this a lot, but you can imagine a day when our international direct operations when when the percentage of their business. That's all access pass unrelated is like it is in North America.
But the growth rates could look like and so that continues to be a very big focus of ours, helping them.
And it will it will happen this year, but over the coming two or three years, having their all access pass business look like North America. There is a big big Big focus.
Got it understood and then lastly, just.
And given your guys' expectations sounds like things are starting to turn around.
Since last quarter your.
Your expectations for for positive cash flow as you guys have good size amount of cash on the balance sheet just kind of how are you. How are you guys thinking about that.
Cash there and.
And now allocated.
Gross think you had in two ways Marcos first is that in that third priority that I discussed. We think there are some opportunities person bolt on small acquisitions that will use some of that cash for that willing to enhance our abilities to serve clients and really extend our lead versus any.
No one else who's playing in our space in certain key areas and saying that will be a use of some of the cash and it won't be large amounts and then but we expect to continue to generate cash flow, that's really equivalent more or less to the EBITDA. So on top of what we have if we had 20 and 30 and 40.
We think that because most of what we're doing is developing in house to requiring license the capital intensive our business just isn't very high it isn't capital intensive to add sales people or to add new content. It's already relief in the technology investments are not that cash capital intensive and so.
As a result, we expect we will have.
As we have in the past for reviews to $170 million of cash in the past years to repurchase shares we believe for that to.
With this kind of growth rate and EBITDA, there will be opportunities too.
For us to see the value, perhaps before certain other investors do want to add a lot of additional value through the continued to repurchase shares.
Got it thanks, a lot guys I really appreciate the time well for us.
Thanks, Mark we're very much for your great questions.
And this concludes the question answer session I will now turn the call back over to five Whitman for final remarks.
With that again, we just thank each of you for making the time to join US sales. So for your the depth of your analysis and understanding and we hope. This is helpful. In terms of at responding to questions, but we really appreciate the the focus you have on the business and the support over the years.
We feel good about where we're headed and appreciate you being with us on that on this claims thanks very much.
Thank you ladies and gentlemen, this concludes today's conference. Thank you for participating.
You may now just.
Thank you.
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