Q2 2021 Franklin Covey Co Earnings Call
Welcome to the Q2 2021 Franklin Covey earnings Conference call. My name is Adrian and I'll be your operator for today's call.
At this time all participants are in a listen only mode. Later, we will be conducting a question answer session. During the question and answer session.
If you have a question. Please press Star then one on your Touchtone phone. Please note. This conference call is being recorded and I will turn the call over to Derek Hatch corporate controller, Derek you may begin.
Thank you Adrianne Hello, everyone on behalf of Franklin Covey, I would like to welcome you to our conference call to discuss our financial results for the second quarter of fiscal 2021.
Before we begin I'd like 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 revenue. So the acceptance of and renewal rates for our subscription offerings, including the all access pass and leader in me memberships, the duration and recovery from the COVID-19 pandemic.
The ability of the company to hire productive sales professionals general economic conditions competition in the Companys targeted marketplace.
Acceptance of new offerings or services and marketing strategies changes in the Companys market share changes in the size of the overall market for the Companys products changes in the training and spending policies of the companys 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 actual future performance.
We'll meet management's expectations. These forward looking statements are based upon management's current expectations and we undertake no obligation to.
To update or revise these forward looking statements to reflect events or circumstances. After the date of todays presentation, except as required by law.
With that out of the way, we'd like to turn the time over to Mr. Bob Whitman, our chairman and chief.
Net of officer Bob.
Thanks Derek.
Hello to everyone. We appreciate you joining us today.
Really happy to have the opportunity to talk with you.
We're really pleased that our second quarter results were strong and even stronger than expected.
I believe just again emphasize the strength quality and durability.
<unk> value proposition and very strong subscription business model.
Specifically in the second quarter as you can see in slide three.
Revenue was strong.
Driven, particularly by the strength and growth of all access pass and related sales.
Gross margins increased 569 basis points compared to <unk>.
Last year's already strong second quarter.
Our operating SG&A declined by $2 4 million.
Adjusted EBITDA increased to $5 1 million, which is the level of 1 million, one or 26% higher than the $4 million of adjusted EBITDA achieved in last year's strong pre pandemic second quarter.
And it's at a level significantly higher than our expectation of achieving between one five from $2 million.
Adjusted EBITDA for the quarter.
Our cash flow was also strong net cash provided by operating activities year to date increased 26% with $4 5 million to $21 9 million.
Ahead of the $17 4 million.
<unk> achieved in last year's second year to date and second quarter and finally, we ended the quarter with approximately $55 million on liquidity, which is up from the $39 million liquidity, we had at the start of the pandemic when year ago.
So we're pleased to be this position.
Like to discuss these results in more detail in just a moment, but.
First some context.
This strong and stronger than expected performance reflects the continuation and acceleration of four key trends we've discussed in the past three quarters, and which continued in this quarter.
Specifically as indicated in slide four.
These trends are first.
The growth of all access pass sales has been very strong.
Second the all access pass related services have continued to be strong now even higher than the very strong levels, we had pre pandemic.
Third our international operations have continued to rebound in <unk>.
Of course despite continued.
Continued uncertainty during the first half of the year.
Trends in our education business are really encouraging.
Like to provide a little more detail on each of these trends.
First as expected the growth of all access pass and related sales, which accounts for 83% of our enterprise sales in North America continued to be very strong.
As shown in chart a in slide five.
You can see the total company all access pass.
Pure subscription sales grew 13% in the second quarter to $17 5 million have grown 14% year to date for the first six months and 15%.
For the total.
Total 12 months.
<unk>, which the entirety of the pandemic to day to $67 million.
In addition, as shown in chart D.
Total company all access pass amounts invoiced had been growing even faster growth.
16% in the second quarter to $22 5 million and 30.
8% year to date to $38 4 million.
Accordingly, much of this 30% year to date growth in all access pass Invoiced amount has been added to the balance sheet.
We will establish the foundation for accelerated sales growth in future quarters.
Importantly to US all access pass performance has been strong.
Across all of the key elements, which we pay attention to.
The number of all access pass sales to new logos increased meaningfully both from the second quarter entered voice and in the latest 12 months.
As shown in chart <unk>, our annual revenue retention has continued to exceed.
90%.
And also the sale of multiyear contracts has continued to be strong with our balance of unbilled deferred revenue related to multiyear contracts increasing to 37 4 million.
As shown in chart D.
Second the sale of all access pass related services, which delivered primarily live online.
It was also very strong in the second quarter.
Charlie and slide six shows the strong booking trend for all access pass add on services.
Most all of which are now being delivered live online.
As you can see in chart to see with the beginning of the pandemic in March of last year bookings of services delivered live onsite.
Site at client locations were necessarily cancelled and year over year dollar volume of services declined which delivered engagements down $6 $9 million in North America in the third quarter.
However, in the fourth quarter of fiscal 2020, new bookings increased levels nearly equal to those achieved in the fourth quarter of the prior year and 19.
These strong bookings 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 up only $1 1 million.
The same positive trend continued in the first quarter and accelerated in the second quarter with the resulted in this.
Second quarter sales were actually higher in year to date actually services revenue in North America has exceeded the levels achieved in last year's second quarter and first six months period pre pandemic.
As shown in sharp be 92% of our services are now being delivered to clients live online.
This is.
Important because with 92% of services now being delivered live on line up momentum can continue regardless of wind and weather organizations returned to their offices.
Third as shown in slide seven performance in our international operations. So there's also strength in the second quarter.
Sales.
And China, Japan, Germany, and among our other international direct offices and licensee partners continued to improve.
<unk> the trends established in both the fourth and first quarters.
At the start of the pandemic, we had to re schedule substantially all LIBOR onsite training engagements in these countries.
Since these countries, we're just starting to sell all access.
Past and therefore did not have a strong basis durable subscription revenue accretion them.
Sales in these countries declined significantly compared to the third quarter of fiscal 19.
These declines started a little earlier in China in the middle of last year's second quarter with the onset of the coronavirus virus there.
As shown in last year's fourth.
Fourth quarter, while still operating well below the levels achieved in the prior year's fourth quarter sequential sales and sales as a percentage of the prior year and these countries begin to improve significantly.
Year over year sales improved further in the first quarter.
We expected sales in these operations to continue to strength in the second quarter.
And we're pleased that they did.
As shown in the second quarter International sales were ahead of your expectations and just 14% lower than in last year's second quarter with most of this decline year over year decline represented in Japan in U K, which have had a series of rolling shutdowns from their economy, which we expect.
To strengthen.
Importantly, another reason drags a little bit of a decline is that we are having a good conversion of sales to all access pass.
And that is putting instead of putting the revenue into the quarter is putting on our balance sheet and this is driving an increase in our balance of deferred revenue internationally.
They will help to drive strong sales force growth from the future.
Finally, as shown on slide eight.
In the Education Division despite.
Despite an educational environment, which has continued to be very challenging we've seen a strengthening in the trends of our education business, both from the second quarter and year to date.
To this.
Strengthening includes that number one the number of leader in these schools, which have renewed already to renew their leader in me membership increased to 1059 during the second quarter compared to 725 schools at this same time last year.
And second the number of new leader in me schools, who have contracted by the end of the first quarter.
We're in the process of contracting is almost equal to that achieved in last year's second quarter pre pandemic.
Just note that there are also some positive trends in the education market overall.
Despite the challenges, which we all know about.
These will help our education business during the remainder of this fiscal year.
Into.
Next fiscal year. These.
These trends include one increasing confidence among those and educational community that most schools will be opened in the fall of this year.
Certain but more comp from the second.
As shown on slide nine and as shown on slide nine the three COVID-19 stimulus bills passed by <unk>.
Congress in March last year December in this March dedicated nearly $200 billion towards stabilizing budgets from K 12 schools.
With a disproportionate amount of that help coming to title one schools were leader in me is often the strongest.
And three the third trend is that so.
Social emotional learning.
For students called SCO, which plays to the strength of leader in me.
<unk> gained momentum its importance is being talked about every day in the press it is becoming increasingly required by districts.
Just one more note to take advantage of the stimulus funding in the ACO movement in your.
Social emotional learning education team has added to its positioning efforts.
<unk> schools take on the issues of learning recovery and the student and teacher mental wellness.
<unk> has become the pressing topics education community is trying to address and the leader in me is really designed to deliver on.
Early indicators.
Suggested this expanded positioning is working well and so we believe these business and market trends will work in our favor.
Its still be a difficult environment. This year, but we're confident in the future of our education subscription business, we've been conservative better expectations. This year.
Feel good about our ability to meet those.
With this context I'd like to ask.
The time to Steve Young and ask him to dive deeper into our performance for the second quarter Steve.
Thank you, Bob and everyone I am pleased to be on the line with you today to talk us a little bit more about our second quarter results.
So as shown in slide 10, our performance for the second quarter was stronger than expected and showed positive momentum in almost every front.
Our adjusted EBITDA for the second quarter was $5 1 million an increase as Bob said.
Net of $1 1 million or 26% compared to last year's second quarter.
And an amount substantially exceeding our expectation of achieving second quarter adjusted EBITDA.
Twin one five and $2 million.
These results are even more notable given that.
Net last year second quarter was itself very strong.
Our cash flow and liquidity position has also increased significantly.
As shown in slide 11, our net cash generated for the quarter.
$5 2 million was $4 two.
$2 million higher than the $1 million of net cash generated in last year's second quarter.
This reflects strong growth in adjusted EBITDA and significant growth in all access pass contract Invoiced, resulting in our balance of billed and Unbilled deferred revenue.
Increasing by almost $13 2 million or 16%.
To $95 9 million in the second quarter.
As shown in slide 12.
Cash flow from operating activities for the second quarter.
Increase.
Creased for $5 million or 26% to <unk>.
$21 9 million compared to the $17 4 million in last year's second quarter.
The strong cash flow reflects an additional.
<unk> benefit of our subscription model.
We invoice upfront and collect the cash from Invoiced amounts faster then we recognize all of all of the income.
As a result, we ended our fiscal year in August with more than $40 million of total liquidity comprised of $27 million of cash.
Is the $15 million on an undrawn undrawn revolving line.
It was an amount higher than we than at the start of the pandemic.
We are pleased that we added further to this liquidity during this year's first half.
We ended the second quarter with $55 million of.
Total liquidity.
Apprised of $40 million in cash, which means we had no net debt.
And with our $15 million revolving credit facility.
Undrawn and available.
So this good performance was driven by first.
Strong revenue as shown on slide 13.
Second quarter revenue of $48.2 million.
Was driven by very strong performance in our North America operations and the continued outstanding performance of all access pass.
Question.
As shown in chart.
On slide 14.
Company wide all access pass subscription sales grew 13% in the second quarter, 14% year to date and 16% for the last 12 month pandemic period.
And in addition to the all access pass subscription revenue recognized in the quarter chart <unk> shows that we also.
<unk> had a very strong 16% growth.
All access pass amounts invoiced to $22 5 million in the second quarter.
And grew 30% year to date to $38 4 million.
Most of the significant growth in all access pass amounts Invoiced was not recognized in the quarter, but was added to the balance sheet as deferred revenue.
This will of course be recognized and help accelerate our results.
In future quarters.
These new Invoiced amounts included strong sales of new logos.
Our continued quarterly and last 12 month revenue retention rate of greater than 90%.
As shown in chart see a large number of all access.
Pass expansions.
And as shown in chart day, a significant volume of multi year, all access passes which increased our unbilled deferred revenue significantly over last year's amount.
Sales of services were also very strong in the second quarter.
Services revenue in North America grew seven 7 million in the second quarter compared to seven 1 million in the prior year.
Second as shown on slide 15, the strong all access pass sales drove significant growth in our.
Our gross margin percentage again in the second quarter.
As shown our gross margin percentage in the second quarter increased 559 basis points to 77, 5% from 71, 9% in the second quarter of last year.
As shown also our gross margin percentage has increased 459 basis points year to date.
And 392 basis basis points from the last 12 months.
In the Enterprise Division.
Driven by the significant growth of the all access pass and related.
Net sales.
Gross margin percentage increased to 81, 7% compared to 76, 1% in last year's second quarter.
Increase of 562 basis points.
Third our operating SG&A in the second quarter.
It was $2 4 million lower than last year's second quarter, and $6 8 million lower than the first half of last year.
And finally, the combination of these factors resulted in adjusted EBITDA growing to $5 1 million.
An increase of $1 1 million or 26% compared to just over 4 million of adjusted EBITDA achieved in last year's strong second quarter.
Significantly higher than our expected amount.
The strong second quarter also.
Also resulted in adjusted EBITDA for the first six months of this year, reaching eight 8 million a level only 200000 less than the first half of fiscal 2020, which of course was pre pandemic.
Importantly, as.
As noted we also have strong invoiced and multiyear sales in the second quarter.
Most of these new invoice sales where subscription sales.
These amounts were not recognized in the quarter, but went onto the balance sheet and added to our balance of billed.
And Unbilled deferred revenue.
Which will add to and be recognized in future quarters.
As a result as shown on slide 16.
Our total balance of billed and Unbilled deferred revenue increased to <unk>.
$95 9 million, reflecting growth of $13 two.
$2 million or 16% to a balance of $82 seven.
$7 million at the end of last year's second quarter.
As noted last year approaching $100 million have billed and Unbilled deferred revenue is a big landmark for our subscription business and helps to provide.
Significant stability and visibility into our future performance.
This strong combination of factors continues to drive.
Expectations that we will generate very high growth in adjusted EBITDA and cash flow in fiscal 2021 and on a non.
Ongoing basis.
So we're pleased with our second quarter result, and Bob turn the time back over to you.
Thanks, so much Steve.
Just continuing as shown on slide 17.
As we reviewed last quarter, we expect to generate adjusted EBITDA between 20 and $22 million in fiscal 2021, and we're pleased to be.
After a very strong start towards this objective.
Achieving that range adjusted EBITDA would represented approximately 50% increase in adjusted EBITDA compared to the $14 4 million from adjusted EBITDA, We achieved in fiscal 2020.
And also as we've noted previously our target is to see adjusted EBIT increased by.
Approximately $10 million per year every year thereafter.
To at least to approximately $30 million in fiscal 2022% to 40% in 2023 and so on.
These targets reflect our expectation that we will be able to achieve at least high single digit revenue growth each year, which is growth of approximately $20 million per year.
On average of.
Approximately 50% of that amount of growth in revenue will flow through to increases in adjusted EBITDA and cash flow.
As we also said previously we fully expect to achieve an adjusted EBITDA to sales margin of approximately 20% over the next few years.
<unk> EBITDA approaching $60 million and to become a $1 billion market cap company.
And even at the adjusted EBITDA multiple.
Really around 15 that is conservative relative to our adjusted EBITDA growth rate, which is more like 35.
And this of course doesn't reflect the mobile flow.
Ever get a multiple of revenue, which is often achieved by companies with similarly successful subscription.
Base business models.
So looking forward.
We've discussed substantially all of our growth has been is being driven by growth in all access pass and related sales.
This strong growth in all access pass related sales has continued strong through the pandemic you've heard and we expect it to continue to drive significant growth.
Growth in the future.
I'd like to just briefly highlight three factors that we expect will continue to drive significant growth in our subscription business, which will drive very significant growth in sales and profitability in the coming quarters and years.
As shown in slide 18. These are first driven by growth in all access pass.
We expect substantially all of the company's sales to be subscription and subscription related within the next three years to four years.
Second we expect that the already significant lifetime customer value of an all access pass holder will actually continue to increase.
And third as we continue to aggressively grow our sales force and.
Our licensee network the volume of new highlights high lifetime value all access pass logos will accelerate.
Just like to touch on each of these three quickly first.
As indicated in slide 19.
Driven by growth from all access pass related sales, we expect net substantially all.
All of the Companys sales will be subscription and subscription related within three to four years.
Is this almost complete conversion to subscription and related revenue occurred we expect virtually the entire country to be able to generate the same kinds of growth in revenue gross margins revenue retention and customer impact we've seen.
And our subscription business over the past five years.
We expect this almost total transition to be driven by the following three things one first by the continued strong growth of all access pass and related sales in the enterprise Division in North America.
Our all access pass already accounts for 83% of sales.
As shown in slide 20.
All access pass and related sales represented only 13% or $13 7 million of total sales in North America in 2016, when we first introduced all access pass.
The dramatic sustained compounded growth. Since then has resulted in all access pass and related increasing to.
$94 3 million from the latest 12 months through this year's second quarter.
And with annual all access pass related sales growth expected to continue to grow at more than a double digit pace.
With our historical legacy sales now at very low levels and expected to remain flat or decline a little bit further we expect all access.
This patent related sales to increase to more than 90% of total North America enterprise sales over the next few years.
The second major driver to becoming almost totally subscription and related is the conversion of the majority of our international operations to all access pass and related in the coming years.
In addition to the 83% of north.
North America enterprise sales, which were already.
First pass the growth and penetration of all access pass has also progressed rapidly in our English speaking international direct offices as.
As you can see in slide 21 from having almost no subscription sales in these offices just five years ago.
All access pass and related sales.
Latest 12 months now account for 74 percentage of total sales in the U K and 69% in Australia for the last 12 months.
Both these offices are willing their way towards the same 90% penetration, we expect to achieve in North America.
As you know our largest international direct offices are in China and Japan.
Both of which are in the early stages of conversion to all access pass but accelerating.
Having made the conversion to all access pass in the U S and Canada, the UK and Australia. We know what the play is we are confident that China and Japan will also convert the vast majority of their revenue to all access pass and related in the coming years.
And then.
The final driver of increased subscription penetration is the other area of the company as our education Division, which accounts for 22 percentage of sales.
Slide 22 shows that in our K 12 business, 70% of our sales.
But were subscription.
We're a pure subscription for the latest 12 month period through this year's second.
<unk> quarter.
Slide 22 also shows the significant increase in subscription sales in our K 12 business over the past years.
And we expect both our K 12, and higher Ed businesses to continue to advance towards seeing 90% subscription that we are close to in North America, which were on the way to the U.
K in Australia in which we'll achieve also.
In China and Japan.
This combination of the 82% and then everything else is moving we expect virtually the entire business to reflect the higher growth higher margin higher retention properties very subscription operations.
In the coming years as you've seen in the impact will be what we've already seen in North America.
The total business.
I'd now like to ask Paul Walker to address the other two elements behind our expected accelerated growth in our subscription business Paul.
Yeah.
Thank you Bob and good afternoon to everyone on the phone.
For the second factor that we expect will continue to drive significant growth and profitability is shown there on slide 23 point number two.
That's the already significant lifetime customer value of our all access pass holders has increased and will continue to increase in the future.
As shown in slide 12.
For <unk>.
All access pass has first and they are at the top of relatively large and increasing pass size of $38000 up from $31000 just a year ago.
The path has an annual revenue.
Our revenue retention rate of greater than 90%, which was the case even throughout the pandemic.
Third our services attachment rate of 44% and I think important to note that that's up from just 17% a few years ago.
A combination of all access pass the pass itself and the related attached services now total approximately $55000 per pass holding customer and that number's continued to increase and then fourth is.
Shown here the blended gross margin on the path and the related services combined.
Have a gross margin of greater than 85%.
Strong economics are driving a very significant lifetime customer value and in fact, this customer value is quite a bit higher than we had under our previously legacy pre subscription model.
For example, as shown in slide 25, our prior clients. An example client spending $10000 in a given year under our legacy model typically spend about twice that or 20000 over three years and at the gross margin of about 70%.
In contrast, a typical all access pass customer today spends.
Approximately $55000 on a combination of our pass and the related services in their first year $49500 in their second year and $44500 in their third year for a three year total of $149000 between the path and the related services.
Stated a minute.
Net ago, whereas the old model was about a 70% gross margin in this new blended margin on all access pass and related <unk>.
That 85%.
So that's the second reason the third reason is.
Indicated here as indicated here in slide 26, and third factor for driving our expectation of significant revenue and profitability growth.
Is that as we continue to aggressively grow our sales force and our licensee network the volume of new all access pass logos will accelerate.
The combination of one our high and growing lifetime customer value.
Second our less than one to one cost of acquiring a new customer and.
And third our approximately.
The one year payback on the investment in hiring a new client partner makes the economics of growing our sales force extremely compelling.
As shown in slide 27.
Over the past five years, we've added 74 net new client partners in our direct offices.
Half of these client partners are only midway through their five year ramp up to one three.
Millions in annual sales volume.
We expect these ramping client partners to generate significant revenue growth over the next few years as they complete their ramp and we also have a lot of headroom to add additional client partners.
As shown in slide 28. This is just the U S and Canada example alone where we currently have 179 client partners across.
Both enterprise and education, we have.
Have room to add at least an additional 435 client partners in the coming years.
We expect the combination of ramping the existing client partners and hiring at least 30 net new client partners. Each year will allow us to add a significantly significantly increasing number of new logos.
Which in turn will generate very significant and increasing lifetime customer value.
We believe that the combination of these three factors will continue to drive significant growth in sales and profitability in the quarters and years to come.
Rob I'll turn it back to you.
Great and alternative to Steve young to address our guidance now.
Thank you very much Paul.
Steve.
And I'll keep the ball.
Uh huh.
So.
Our guidance for FY 'twenty one.
As discussed in past quarters.
We expect to generate adjusted EBITDA between 2000 22 million.
And we affirm that guidance.
This result would be an approximately 50% increase compared to the $14 3 million of adjusted EBITDA achieved last year.
This expected growth reflects everything that Bob and Paul talked about including the continued strong performance of our.
North America operations.
Underpinning this guidance for the year or the following expectations that we talked about last quarter.
Are still consistent with our year to date results.
First that a significant portion of the deferred revenue on the balance sheet and a portion of the contracted unveil.
Unveiled the FERC revenue.
Clearly flow through to recorded sales as expected.
Second that the all access pass will continue to achieve one strong growth in both sales and invoice sales high revenue retention rates strong sales of new logos and continue.
<unk> growth in pass expansion.
Spansion and multi year contracts.
We also expect that all access pass add on sales will continue to be strong.
Third that net sales in Japan, China, and among our licensees will continue to.
To strengthen.
The increase in the all access pass sales, which we expect to achieve in these countries will of course result in a portion of the new sales will be added to the balance sheet as deferred revenue.
And for that in education, we expect to continue to achieve.
<unk> strongly tension of both schools and revenue among existing later in May schools.
And despite the fact that the environment could be challenging and budget constrained for education and the remainder of FY 'twenty, one we still expect to achieve growth in the number of.
No later than May schools beyond the 320 schools achieved in FY 'twenty.
So that's our overall guidance.
Affirm that guidance for the third quarter of fiscal 2021, we expect that adjusted EBITDA will be between 4% and.
$4 5 million co.
Impaired to the adjusted EBITDA loss of $3 6 million in last year's pandemic impacted third quarter.
Please note that among the amount of adjusted EBITDA expected in Q3 is not only more.
Then seven 5 million higher than last year. It is also higher than the adjusted EBITDA result of $3 1 million achieved in the third quarter of FY 19.
So that's our guidance.
Now our general targets per.
For years beyond.
2021.
As we said before building on the 20 $22 million of adjusted EBITDA that we expect to achieve this year and driven substantially by the expected continued growth of all access pass.
Target is to have adjusted EBITDA increase.
<unk> by around $10 million per year.
So around $30 million in FY, 'twenty, two and to around $40 million.
FY 'twenty three.
These targets reflect our expectations of being able to grow at least high single digit revenue growth and approximately 50% of that growth in <unk>.
Revenue will flow through to increases in adjusted EBITDA.
While changes in the world's business outlook and many other factors could impact our expectations.
We wanted to share this as our current internal targets and assumptions.
We also want to mention again.
That not only are these are targets, but then when you read our last proxy.
You noted that these are the targets that are tired.
That are tied to us achieving our L tip awards.
So.
That's our guidance, Bob and turn the time back.
Mark over to you.
Great. Thanks, so much and really want to express appreciation to the whole Franklin Covey team and to all of you for your support and the guidance.
Throughout this past year, we're delighted to be where we are and grateful.
Really excited about what's ahead of us at this point, we will open open it to questions.
<unk>.
Thank you we will now begin the question and answer session.
Have a question. Please press star one on your Touchtone phone.
If you wish Stephen loose from the queue. Please press the pound sign or they ask.
If you're using a speakerphone you may need to pick up the handset first before pressing the numbers.
Once again, if you have a question. Please press Star then one on your Touchtone phone and our first question comes from Andrew Nicholas from William Blair. Your line is open.
Hi, good afternoon.
Hi, how are you.
Good.
First I was hoping you could outline.
Specifically, where you saw better than expected performance in the second quarter.
At least relative to your internal expectations and then.
Relatedly trying to get a better feel for the rationale for maintaining the full year guide.
It looks like what's.
What's implied for fourth quarter adjusted EBITDA as is a decent step down from.
Your historical averages in the fourth quarter and even the fourth quarter of last year. So.
Is that a function of some conservatism or is there a pretty meaningful increase in.
Expense spend in the back half of this year, just kind of help me pick that apart a little bit if you wouldn't mind.
Great.
Taking the last question first I think your observations are observation too which is primarily.
Really we think conservatism just recognizing that a lot of our education sales occur in the first quarter.
If that environment continues to be uncertain, although we.
<unk> said, we feel there's some good things there it just felt like well the trend.
Being up versus expectation in the first and second quarters and feeling good about the third.
It's possible that it to this time next quarter, we'd be adjusting our guidance.
It just felt like.
It is probably wise just to get a better handle on where educations looking going into the fourth quarter, which will have a really good handle on we think by.
By May and June so, it's really primarily that there's no expectation of anything.
Any of the existing trends not continuing with that.
We will have some additional.
Spend that'll be in the function of new hiring hiring of new sales people, which we have new sales classes coming on those arent message.
Incremental investments, but those are some.
There are some there also.
Although it doesn't affect adjusted EBIT does much there will be some expense.
Last year.
Bonuses and other things of course, we're well some of it will hit adjusted EBITDA and reduce it but it's not enough to change the general trend. So it's more just trying to feel like we haven't really good handled by the time.
We would if we were to change your guidance do we do that knowing where we.
<unk> is.
Does that response from the second half of that question.
Got it.
That's helpful.
And so and then.
I'm sorry.
Yes as to the quarters.
We over performed a bit Paul and Jane and Sean would you like to address that.
A couple of areas.
Of over performance.
Yes sure.
This is Paul I'll just take a.
Quick comment on first of all as noted in the prepared remarks, all access pass continues.
To.
Chug, along and do very very well.
And so that was we saw great growth there and the number of new logos revenue retention stayed high again and services have come back quite nicely.
And even a bit ahead of where we maybe thought that would've been in the second quarter and then also international direct while we.
No it would improve.
It's it was only off 14% in the second quarter and that so that continues to strength for us and then of course, our gross margin.
As we convert to all access pass from the mix of business shifts.
<unk> to benefit our gross margins greatly which of course drops to the bottom line. So I would say those would be three.
On the enterprise side.
Yes.
Got it no that's all helpful color.
And then maybe as my follow up Bob You mentioned it in response to the second part of my question earlier touched on it a bit but just kind of sticking with education I was.
Was wondering if you can speak a little bit more to kind of how youre seeing that recovery unfolds, what the cadence might look like there and maybe at what point are you anticipating.
<unk> returning to pre pandemic.
Our revenue levels is that something we can reasonably expect in fiscal 'twenty two.
Or is it another year or two out from there great. Thanks, Sean would you like to address the first part and I'll just do it very young.
Yes sure.
Thank you.
So I think that we're here's what we're seeing right now is we're starting to get.
A lot more phone calls.
Accepted visits accepted or.
In the first quarter our day.
Leverage coaching days were down 55% this quarter they are down about 24%.
We expect them to be up in the third quarter.
By probably about 25%, so it's going the right direction.
<unk>, so we are having more opportunities to.
Get into schools. That's a really good thing schools are opening up it's different by state by by County and district.
But that's a positive trend.
And and our retention has been strong as you can see.
That's that's been.
Ben we've been up about.
About 300 schools compared to last year.
In terms of the number of schools that we're maintaining.
The thing that's still a little bit uncertain as just decision, making by some of the districts and.
People are still kind of holding out longer than usual.
So we do believe.
That will get more schools and in the fourth quarter than we did last year. We brought in 320 last year, we think we'll beat that this year.
And it's hard to say, but I think that.
It might be mid year next year before we fully recover next fiscal year, but the trends are going in the right direction and we.
We expect.
We expect things to improve in the third quarter and the force.
Bob what would you add.
No that was great.
I would just really hardly anything thats. The only thing I'd add is just to give perspective our numbers.
Fiscal 19, we added 520 New school.
Schools.
Last year was $3 20, which was amazing and a way given the environment as Sean said, we think we'll do somewhat better than that maybe close to 400. This year, but expect to be kind of back on that track to five 500, plus next year. So.
Got it.
And then sorry, just if I could squeeze.
One more in I'm hedging clues on how much of your targets for 'twenty, two and 'twenty three.
Are dependent on kind of a reacceleration in that business and I'm, just kind of thinking about.
If if there is some disruption.
To the fall calendar.
Or into next year's school year, if that is a meaningful deterrent or if you think that kind of momentum in the enterprise.
To overcome that.
Yes, that's a great question, that's really a great question.
Short answer is that R. R.
Guidance or outlook of being able to generate $10 million or so EBITDA growth a year is really not very dependent on either the growth of the education or even our international operations, because all access pass and related sales have been growing by close to $20 million a year on.
The rone in North America, and the UK and Australia, and so just if if those keep on pace.
That's.
80% of what we're talking about does not include much does not include the <unk>.
Big recovery or none of it required.
Require.
Here's a big recovery.
And when we gave you those numbers we knew it was a little uncertain. So we felt like we should just assume that.
Education and international.
Recovered more slowly they're doing better than we thought at the time we.
Gave that outlook. So most of the outlook is driven by north.
All access pass.
Sales great great.
Thank you have evergreen items.
Thanks for the great questions you owe two things.
And your next question comes from Marco Rodriguez from Stonegate Capital. Your line is open.
Hi, Mark Good afternoon, everyone, Hey, guys. Thanks for taking my questions.
Thank you.
I was wondering if you could maybe spend a little bit more time line on the sales force and the client partners just kind of wondering what sort of.
Activity, he might have expect or youre expecting rather in the second half of 'twenty, one or are there maybe any sort of new different incentive structure, he might be playing around with or thoughts as far.
Or is accelerating pace of hiring or changes in hiring strategies any sort of marketing events.
Yeah, Paul in June do you want to address that.
Jan do you want to take that one.
Thanks, Michael can call a simo.
In terms of what we're seeing.
And what's driving the acceleration is really the ecosystem of the hiring happening and a strong sales enablement process around onboarding, we're seeing them get much quicker start.
<unk> has been wonderful to see throughout the pandemic that link up with what we're seeing in thought leadership.
Ship, we have increasing exposure and thought leadership in terms of the article placement, what we're getting in terms of podcast and more social it's the ecosystem of marketing the sales enablement and a really strong management team executing on strategy and building an inclusive environment. So all of those together.
Gather have accelerated what we are.
Seeing happening in terms of our Onboarding and our ability to continue hiring at the pace that we have Paul what would you add.
I would just add I think it was great I would just add that we've recently added one more recruiter to our staff.
Internal recruiters.
Recognizing that we're going to accelerate the number of new client partners being added. So now we have a team of six that do that full time for us.
In addition to what John said, and then as far as down the road.
I think we'll we'll look at.
As we grow towards having many hundreds of client partners.
For example, just in North America, I imagine the structural look a little bit different there and we might be up to this point, we haven't really from divided our sales force out among different sized organizations I think we're having discussed well I don't think we are having discussions about that I think in the years to come we will do something about that we think will even accelerate.
Our ability to add more client partners in earlier, and we might get to a point, where we're actually north of net 30 a year.
Yeah.
Got it very helpful.
And then kind of sticking around with the client partner activities, just obviously, given the pandemic and you had a slide in your presentation.
<unk>.
A lot of the interaction or the vast majority of the interactions have shifted kind of an online delivery model.
Now that the vaccines are sort of rolling out.
How are you guys kind of thinking about that impact as it relates to climb.
Client partner travel and maybe if you can speak to.
What you might be expecting.
Or how youre thinking about your overall employee base and the whole work from home experience.
Paul I can speak to that.
Excellent.
Of course, if a sparkle if a client wants to see us face to face in fact I was on with several client partners today that have.
Face to face meeting scheduled lunches breakfast events at their office space. If that client is returning whether to a hybrid model or two in all in office model, we of course want to meet with them.
So it really is very client dependent as you see in the marketplace what that client.
<unk> is expecting to do and how they'll hoped to interact with us.
I do not expect us to return anytime soon to the same sort of travel that we had previously simply because the clients aren't looking to that kind of travel. So from a travel standpoint, we are looking at what makes sense based on.
Our client bias, which as you might expect is differential dependent on province, or state in Canada and the U S.
Yeah.
Got it very helpful. Thank you guys for your time I appreciate it.
Thanks Margaret.
Sure.
And your next question.
Comes from Jeff Martin from Roth capital.
Your line is open.
Hey, Jonathan Good afternoon, how are you.
That's pretty good.
Good thanks, Good day.
Was curious if you could expand on the opportunity within education, yes.
Specific to.
Howdy.
The stimulus programs benefit you in and how they're going to need to.
No basically.
Reinvigorate the teachers and students back to kind of normal and.
Are you doing anything for social and emotional learning different than.
And you otherwise would have when you go work with existing and new schools.
But Sean George Yes, Yes, yes, hi, Jeff.
Oh sure sure Yeah, Here's what we're seeing where we're we're thrilled about the three big.
Covid.
Bills.
To bring a lot of money in.
The amount $200 million to $200 million over the last year compares to about 5200.
200 billion excuse me compared to about $50 billion.
Typically the federal government spends in K 12 education, so it's like a three fold increase.
This will.
Will help.
Supplements for some of the budget cuts.
And.
So that's a good thing it will also help with title one schools, primarily which is where we're strongest.
Over 60% of our business is with title one schools.
These are schools that have high poverty. So we're doing a lot to try to take advantage.
Of this we have in the last just few weeks we've bid on.
Bigger request for proposals rfps than we ever have before and a lot of these are around them.
What we call learning recovery learning loss is a big factor. The schools are very concerned that students have lost a whole year.
Of learning and it's going to impact them long term and so we've.
<unk> added to our positioning in this whole learning recovery nose cone on top of our marketing and positioning where we're coming out to day.
Schools and districts and saying Hey leader in me is actually really good at helping you recover learning we've got a solution to help you do that.
So we're taking.
Advantage of this by.
Going after stimulus money, we're targeting it you recently hired a person that's a specialist in this area.
There's a lot of money to be had in this won't just be for a few months. This will last for a couple of years all this money.
So it's a it's kind of a long term play over the next two to three years.
Student and teacher wellness is another big factor, there's just been a lot of trauma.
For students and for teachers just says.
You know the changes and others that were in school without the hybrids the amount of stress. That's created that's been a huge factor in fact.
The top two hot topics right now.
What do we do with all this learning loss.
What can we do with helping meant you know help helping with wellness with teachers and students and so we've.
We're also going after that we've actually created just in the last two months from new products.
That are part of leader in me, but they're kind of again adjacencies.
He has to it to go after teacher and student wellness.
So we feel like this is a big opportunity for US we think S. L. Social emotional learning is is right down our alley.
So we're going to this is why we're pretty bullish about the future as we feel like we can really take advantage of the stimulus money.
Do a little bit of repositioning.
Fissioning of the of the leader in me to take it to leverage these hot topics that were pursuing right now.
So Jeff is that responsive to your question. That's very helpful. I mean, I think it's intuitive that that leader in me plays an important role here and it strengthens the value proposition is there's kind of the way I see it.
Yes, it does.
It does.
Okay I have a couple more real quick here was curious Bob if you could elaborate on where you are with respect to the rollout of the all access pass subscription model internationally I know that's hard to do because you got to decipher because across regions, but.
Now from a high level you know.
How much of the international markets are you now actively selling all access pass now which ones are kind of pending some additional work that needs to be done and with respect to licensed partners kind of same question, how much how many of them and what percentage of them are actively.
Selling all access pass today.
Yeah.
Yes, we mentioned in the script.
Co remarks, you know that in the English speaking in UK and Australia, they're already at about 70% of all access pass and so that's been growing concurrently, but Paul do you want to talk about the efforts to convert the.
Our licensees and their internet.
Offices in Japan, and China and Germany.
Yeah, you bet Hi, Jeff.
So.
In Japan, we've now we're now well underway in fact, Japan is approaching a quarter of their client base.
Now converted to all access pass.
<unk>.
And we kind of see we see that playing out as maybe a third a third a third over the next three years such that three years from now there'll be their business will look very much like the U S and Canada business today.
And as Bob mentioned that that's driving our ability to say we think that.
In three to four Years' time, we'll have 90%.
Or so of the whole company will be subscription related.
Japan, there are core to the way in probably get to a third by the end of this fiscal year and then and then we'll move on from there. China is is right on their heels, where now we have the portal up and China, It's up and running we're doing a significant amount of sales training getting.
All the things we did in the U S.
In the U K and Australia to get to where we are we're doing in Japan and now we're starting to do in China.
There'll probably be.
On a similar path of Japan, probably trail six or eight months, just because theyre not theyre not quite there yet, but we're starting in China, we have but we've actually sold a couple of all access passes.
Having a really interesting one we're excited about right now that we're talking with decline over there.
It's important to note that in China, we do a lot of all of delivery to U S multinational and other multinational companies that have a presence in China. So we're delivering.
The all access pass to clients all over in China, right now, but we're talking.
Specifically here about sales made in China.
Companies in China, and that's where we're just getting going right now so.
So that's Japan and China.
In the licensee partners.
We were actually that business is growing all access pass is growing pretty well inside the licensee operations, we have one of our partners.
In the Benelux region their business looks now like the U S. There right near 90% of their business is now all access pass and related our middle East operation as is well north of 50% all access pass and related Singapore, Hong Kong, Taiwan, they're about a third of the way there. So we're pleased it's a little.
Bit of a different dive getting them as our licensee partners across on that but but.
Every month every quarter, they're businesses converting and I think we're on a similar timeline with them as we are in China, and Japan I think we're looking at three years from now maybe for at the outset of the outside marker there substantially everything.
And enterprise, whether it's direct or licensee sold will be at that kind of 90% ish all access pass and related.
Yes.
Jeff and the team of course as it relates to the whole business model and you as to why you asked the question but.
When you start having more than 90% retention.
<unk> of all the revenue around the world.
The old model, which was you know six years 65 from starting from that base every year and then with the new customer engagement model allows you to stay inside with clients and help those clients to grow and expand and increase their lifetime value is.
This is both strategically and.
Financially a very different thing as youre seeing in North America.
Sure sure.
That's great detail. Thanks for that and then final question is.
With respect to gross margins I mean, you you detailed the.
The all access pass model is generating for mature clients.
Generating 85% gross margins is that what youre seeing across the client base or was that a unique example.
And where do you see once you're fully rolled out with all access pass to the level of degree that you are in North America.
Internationally, where do you see the what do you see the gross margin profile of the business looking like at that.
That point.
No.
Okay.
And Stephen you would maybe want to add some things to this whole just maybe set the context you can see that the 85% gross margin is a pretty good balanced.
What it should be for an all access pass co.
Because that's a balance of subscription.
<unk> plus 45% services. So it gives you that blend in.
So as you know directionally as the.
That becomes the norm across the world.
Our margins will continue to creep up as they as they have.
That.
It might not happen every quarter because you know you may add more services you know the mix may not stay.
Every quarter be exactly the same mix, but we've seen the.
Services' repeat really at about the same 90 from a same store basis or same client basis at about the same level. So we think that's a model.
So the gross margins will tend to increase over time, some things work against that.
The muted a little bit.
Is that too.
As a services grow in some areas that don't yet have you know they are selling all access pass is not as much add on services.
<unk>.
They'll get to 85%, but it won't be the it could it could mute the overall companies a little bit.
Net is that happens, but I think overall you can think of a world where the margins will move toward that.
And we will always have 10% of the bear legacy because that's a good.
Wei.
Somebody has a corporate meeting and they wanted to invite one of our consultants to come and deliver training there and they don't yet that's a lead in to do an all access pass for somebody gives a speech.
We will always have you know 10% of it'll be the rest of it will tend to move toward the I don't know, Steve what you would.
Ed.
No Bob that's.
That's exactly what I would say our gross margin is primarily a function of mix.
The pandemic the one of the benefits of the pandemic, if you will or one of the impacts as the mix shifted toward subscription so just as Bob was saying.
If if.
If the mix well well the subscription business will continue to grow over time and that will cause the margin to go up if the other areas as they come back could have some some.
Reduction for awhile and particularly.
Travel.
Maybe 100 basis points of our improvement is related to travel.
When travel comes back Youre willing.
Impact our gross margin, but not our EBITDA, so Bob exactly what use.
You say, Jeff and Jeff.
The reason why that traveled Oh, sorry secret.
I had.
What are you explain just why that how travel plays into that it's not it's not our corporate travelers traveling consultants to client sites.
Yes, so the reason it doesn't impact them it doesn't impact our adjusted EBITDA because well we.
We billed to customers and get reimbursed.
But it's a meaningful amount that hits revenue and cost of sales with zero margin. So you can think of a sale of zero margin. So it impacts our gross margin percentage a bit.
Well not hurting our adjusted EBITDA. So so.
So that means there just be a little bit of a of a coming.
Coming out of the pandemic adjustment to gross margin and then a long term.
The increase of gross margin as the mix of the whole company shifts more percentage wise towards.
Got it thanks for the color and have a nice holiday weekend.
Right you too Jeff Thanks, so much.
And that concludes our question and answer session I will turn the call back over to Bob Whitman for final remarks.
Again again, thanks to each of you for your support.
And confidence through this period.
We're grateful to you grateful to our team just wanted to express maybe publicly.
<unk> heard from our amazing executive team because they really are incredible.
And just in every area you couldnt have better better leaders, who who have more engaged employees in the middle of this pandemic.
Our employee engagement scores actually went up they were already high you would expect we have a good culture.
But they actually went up to new levels, just showing that.
Trust does even in difficult times Trust and leadership does and so.
Admirer people into it.
Both of our executives.
<unk> team and all of our leaders and people just think it's an important point Sean.
A huge strategic advantage. So thanks to all of you and have a great <unk>.
Over the weekend and we look forward to talking to any of you who would like to follow up.
It was just as soon as you'd like thanks, so much.
Thank you ladies and gentlemen, this concludes today's conference.
Conference call. Thank you for participating you may now disconnect.
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