Q2 2022 Franklin Covey Co Earnings Call
Welcome to the Q2 2022 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'll conduct a question and answer session. During the question and answer session. If you have a question. Please press Star then one on your Touchtone phone and now I'll turn the call over to Derek Hatch Derek you may begin.
Thanks, Adrian Hello, everyone.
Half of Franklin Covey, I would like to welcome you to our earnings call to discuss our second quarter fiscal 2022 financial results before we begin I would just like to remind everyone 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.
<unk> and are subject to various risks and uncertainties, including but not limited to the ability of the company to stabilize and grow revenues the acceptance of and renewal rates of 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 the higher sales professionals.
General economic conditions competition in the Companys targeted marketplace market 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 and discussed in the company's most recent annual report.
On Form 10-K , and other periodic reports filed with the Securities and Exchange Commission many.
Many of these conditions are beyond our control or influence any one of which may cause future results to differ materially from the companys current expectations and there can be no assurance the company's actual future performance will meet management's expectations. These forward looking statements are based on management's current expectations and we current expectations and we undertake no obligation to update or revise these forward.
Looking statements to reflect events or circumstances. After the date of todays presentation, except as required by law I think that gets longer every time I read it was that out of the way I'd like to turn the time over to Mr. Paul Walker, Our Chief Executive Officer, Paul Thank you Derek and Hello, everyone.
We're happy to have the opportunity to talk with you today and we thank you for joining us.
I'm joined by Bob Steve and the team and we also have some <unk> Cmos Sean Covey on the line as well.
We're really pleased with our both our second quarter and year to date results as.
As you can see in slide four subscription in subscription services revenue grew 31% in the second quarter and 32% year to date.
This drove overall company revenue growth of 18% in the second quarter and 22% year to date.
Our balance of deferred revenue billed and Unbilled grew 24%.
Our gross margin percent reached 77 nine for the quarter and increased 41 basis points compared to last year's second quarter, and an increase of 140 basis points to 77, 8% year to date.
Operating SG&A as a percent of sales improved 316 basis points for the quarter going from 66, 9% to 63, 7% and improved 468 basis points year to date going from 67, 3% to 62, 6%.
This combination of strong revenue growth and increasing gross margin percentage and declining operating SG&A as a percent of sales drove a 35% flow through of incremental revenue to adjusted EBITDA in the second quarter, and a 43% flow through year to date.
As a result.
Adjusted EBITDA for the second quarter increased 57% to $8 million, an increase of 103% to $18 million year to date.
And net cash flow from operating activities year to date increased $23 2 million increased to $23 2 million.
I'd now like to step back and provide a few.
Context and insights on some of the key factors, which are driving these results.
Our focus and unique expertise in helping organizations achieve results that required the collective action of large numbers of leaders and individuals.
As indicated in column one of slide number five on the left side. There there are many in our industry, who provide libraries of information.
This can prove to be a useful resource to a companys employees. Similarly as indicated in the center column. Many off many others offer libraries of content to provide our clients employees the opportunity to develop life and job skills to help them advance in their careers.
At Franklin Covey. However, our focus is not just on providing our clients with useful information or providing content to help people learn skills that can help them advancing their careers. Although I think it's important to note that both are available on the all access pass rather Franklin Covey is organized and focused our entire organization on helping clients achieve results that require <unk>.
<unk> scale change in behavior.
We help our clients address challenges and success and successfully pursue opportunities, which as indicated in that third column on the right require unleashing the collective power of the entire organization.
These opportunities and challenges include things like moving our key metrics such as customer satisfaction. Our sales performance are measurably, increasing the engagement and commitment of employees.
We're developing leaders who can unleash the capabilities of their people to achieve extraordinary results.
Said differently, we're their partner of choice for organizations, when winning as a team sport.
We've always been viewed as best in class at helping organizations achieve these kinds of high impact results and when we made the decision to convert to a subscription business model just over six years ago. We already had a number of significant strengths going for US. These included things such as over the prior five years, we'd achieved significant growth in revenue and adjusted EBITDA.
We've created some of the world's most impactful and best selling content.
We had invested significantly in technology based delivery capabilities.
We had a large and growing sales force, we had a lot of loyal customers and we had a tremendous culture.
However, despite our successes we knew that our customers had a much broader range of important opportunities and challenges then are at the time one off solution by solution go to market approach was allowing us to help them address.
To become the true partner of choice for our clients and to help them address their most important opportunities and challenges we decided we would need to change our business model and the way in which we engage with our clients and in turn them with us.
To do this we created our powerful all access pass subscription offerings.
We've reviewed the value prop for that on previous calls so I wont do it here today, but for your information slides 23, and 24 in the appendix have a detailed overview of the all access pass value proposition.
By combining the all access pass is compelling value proposition and subscription business model with the power of our best in class solutions, we expected that we could become a unique kind of company.
Accompany that as shown in slide six.
Would achieve three things first that we would occupy the position as most trusted in the industry.
Second that we would earn extraordinary extraordinarily high levels of client loyalty and commitment translating into high and growing client lifetime value and third that we would generate extremely strong and accelerating top tier financial results.
Very few companies become recognized as a leader in their chosen market or earned the top tier loyalty of their customers.
You are still achieve and maintain top tier financial results.
We believe that by combining all access pass is compelling value proposition and subscription model with our already significant.
Strategic strengths and our new investments in content technology and in our teams we could become a unique kind of company a company that has indicated could simultaneously and consistency consistently achieve all three of these objectives.
I'd like to provide a bit of commentary on each objective and how our original assumptions and expectations are playing out.
First as illustrated on slide seven as to our progress on objective number one that of cementing our position as the most trusted leadership company.
We're pleased that over the past several years, we have expanded our solutions to include new blockbuster offerings addressing some of the some of the organizations most impactful challenges and opportunities.
We've expanded our micro learning and reinforcement offerings through the acquisition of Jonna.
Established through our acquisition of strive state of the art learning delivery platform to generate measurable behavior change at scale.
We've published numerous new best selling books, which expanded market awareness of our solutions and have added to our more than 50 million books sold worldwide.
And we initiated a brand a brand refresh and a new brand launch in fact, many of you'll notice our new brand reflected in our presentation here today.
You'll recall that we indicated in the fourth quarter of last year that we were making significant investments into branding and positioning the company, even more clearly and powerfully in the market.
I am pleased to report that these efforts are being received exceptionally well and we are focused on getting the word out to new potential clients like never before.
Second as illustrated in slide number eight as to our progress on objective number two that of earning extraordinary levels of client loyalty and commitment. We're pleased that as expected our customer lifetime value is both high and increasing as shown in slide nine and our U S, Canada business, which makes up 71%.
A total enterprise division sales our average all access pass contract value has grown from 31000 in fiscal 2016 to 46000 at the end of this year second quarter.
Our annual revenue retention rate has exceeded 90% every quarter since the inception of all access pass.
All access pass subscription services revenue has increased as a percent of all access pass subscription sales from 15% in fiscal 2016% to 57% for the latest 12 months, while also achieving year over year subscription service retention revenue rates of greater than 90%.
This reflects the importance of the opportunities, we're helping our clients address and their commitment to achieving them and finally, our gross margin percent has increased steadily increasing to 77, 9% in this year's second quarter, reflecting our pricing power and SaaS enabled business model.
Third as illustrated in slide 10.
As to the progress on objective number three that are generating extremely strong and accelerating top tier financial results.
We expected that our combination of best in class solutions and extremely high customer loyalty and commitment would establish a powerful flywheel of factors that would drive strong and accelerating increases in financial performance.
A flywheel that as shown in slide 11.
We'll do the following would drive very strong growth in subscription and subscription services, which in turn would also increase sales growth across the company overall.
Second generate large amounts of durable recurring revenue, which would establish high levels of revenue predictability and visibility.
Third.
Despite this flywheel would establish a compelling business model a model that would generate significant revenue growth while at the same time driving both increases in gross margin percentage and reductions in SG&A as a percent of sales with the result that a significant percentage of incremental revenue would flow through to increases in adjusted EBITDA and cash flow and that this would <unk>.
Fourth.
Chief accelerated growth in adjusted EBITDA, and cash flow, which would in turn allow us to point number five make ongoing investments in the business, which will allow us to further accelerate the velocity of this virtuous cycle, while also returning capital to shareholders.
We're really pleased that each of these expected results is becoming a reality and that the power of our flywheel of performance and result is accelerating more and more quickly.
For a minute here I'd like to provide additional detail on each of these.
First.
We expected to achieve strong growth in all access pass subscriptions and subscription services and we're pleased that we have we expected that this would in turn drive substantial increases in overall company revenue growth and this is happening as shown in slide 12.
From inception of the all access pass in 2016 fiscal 2016 total all access pass subscription and subscription services revenue has grown from $13 7 million to $126 9 million for the latest 12 months ended this year second quarter.
This strong growth continued.
In this year's Q2 and year to date periods with all access pass subscription and subscription services revenue growing 29% to 32 million in the second quarter, and 28% to $65 $2 million year to date.
As expected the strong growth in all access pass subscription and subscription services revenue was also driven strong increases in total overall company revenue.
While we've said that we expect to achieve overall revenue growth in the low double digits.
Total company revenue grew 18% in the second quarter and 22% year to date.
This was driven by stronger than expected all access pass subscription and subscription services revenue growth.
And we also benefited from comparison to last year's second quarter and year to date periods that were still somewhat affected by COVID-19 .
Second we also expected that our strong subscriptions. We also expect that our strong subscription sales to generate large amounts of durable recurring revenue, creating significant predictability and visibility into the future and we're pleased that it is.
As shown in slide 13.
As noted our subscription revenue retention has remained above 90% and every year and every quarter since the introduction of all access pass.
Our subscription revenue retention rate remained above 90% again for the second quarter and latest 12 months periods and our multiyear contract value as a percent of total all access pass contract value has continued to increase growing from 37% in fiscal 2019% to 57% at the end of this year.
Quarter.
The significantly increasing visibility into and predictability of our future revenues further indicated in slide 14.
Our balance of deferred revenue billed and Unbilled has grown from only $17 8 million in fiscal 2016 to $119 3 million at the end of this year's second quarter.
In the second quarter, our balance of deferred revenue grew 74 grew to $70 4 million, an increase of 20% compared to the same period last year and our balance of Unbilled deferred revenue grew 31% to $49 million.
Our balance of billed and Unbilled deferred revenue as a percent of prior 12 month sales has also increased steadily and significantly increasing from 39% in fiscal 2019% to 49% for the latest 12 months ended in this year's second quarter.
The increasing percentage of revenue represented by our deferred revenue balance provides significantly increasing predictability of and visibility into future revenue growth.
Third.
And the third element of the flywheel, we expected the economics of our subscription model to create a compelling business model and we're pleased that this is occurring.
As shown on slide 15, we've achieved strong and increasing gross margins.
In the second quarter, our gross margin percent increased to 77, 9% an increase of 41 basis points compared to last year's second quarter and our gross margin increased 194 basis points to 77, 7% for the latest 12 month period.
At the same time that our gross margin percentage increased our operating SG&A sales percentages also improved.
With a 316 basis point improvement in Q2 to 63, 7% compared to last year's second quarter, and a 544 basis point improvement to $62 6 million for the latest 12 month period.
This is reflective of the fact that our lifetime customer value far exceeds our cost of acquiring a new customer.
And this has resulted in a high flow through of incremental revenue to incremental adjusted EBITDA in the second quarter the flow through of incremental revenue to incremental adjusted EBITDA was 35% and for the latest 12 months is flow through was 37%.
We expect the continued strong growth in subscription revenue together with the continued high flow through of that revenue to adjusted EBITDA will result in our adjusted EBITDA to sales margin increasing from 15% for the latest 12 month period to approximately 20% over the next couple of years or so.
The fourth element that flywheel is that we expect that we expected this to drive accelerated growth and adjusted EBITDA and cash flow and we're pleased with this achievement.
Slide 16 in this year's second quarter, adjusted EBITDA increased 57% to $8 million.
Compared to $5 1 million and adjusted EBITDA in last year's second quarter.
Year to date through the second quarter, adjusted EBITDA increased 103% to $18 million compared to adjusted EBITDA of $8 8 million for the same period last year and for the latest 12 months adjusted EBITDA increased $23 million or 163% to $37 1 million compared to $14 1 million for the same period.
Last year in.
And as shown on slide 17, our net cash flows provided by operating activities increased to $23 2 million at the end of this year's second quarter.
We ended the second quarter with $76 1 million in liquidity.
Comprised of $61 1 million in cash and with our $15 million revolving credit line fully undrawn and available we have no net debt.
Fifth and finally.
As it relates to the flywheel as illustrated in slide 18, we've consistently invested a portion of our cash flow and strong liquidity to make a series of tuck in acquisitions.
Acquisitions like strive and John that have established a strong technology based delivery platform and increased our micro learning capabilities. We've also utilize our excess liquidity to return capital to shareholders by repurchasing and retiring more than 6 million shares net over the years, we expect to continue to utilize our excess liquidity to create value in.
These same ways.
We're thrilled that our education division with its strong leader in me subscription offering and more than 3100 schools in the U S and Canada and more than 5000 schools. Now worldwide is also achieving greater than 90% leader in me subscription revenue retention, while at the same time benefiting benefiting from a flywheel of factors very similar to those we've just out.
Blind.
Which is driving strong increases in its financial performance.
In conclusion in.
In the year since our introduction of all access pass our position of leadership in the market is strengthened even further in our subscription flywheel has proven to be increasingly strong and powerful.
And as exciting as the past six years have been since we began all access pass we're even more excited about what lies ahead.
As we continue to invest in World class solutions technology, and the teams to help our clients win we expect virtually all of our sales to become subscription in subscription services within the next three years or so.
And as we previously noted we expect to be a unique company a company, which as a reminder, as shown in slide 19 will achieve three really important objectives.
First that will further strengthen and expand our position of leadership as the most trusted leadership company.
Second that will earn extraordinary levels of client loyalty and commitment and third that will generate extremely strong and accelerating financial results driven by the powerful flywheel of factors. We've just discussed.
And I think it's important to note is this nearly complete transition to subscription in subscription services occurs we expect revenue growth, which not that long ago were in the high single digits to move into the low double digits, especially as we move out of the pandemic around the world and then into the mid teens and eventually we think onwards towards 20%.
We look forward to having you with us as investors and partners in this exciting next phase of our growth and we're we're grateful that you're here today and with that I'd like to turn time over to Steve Young to provide an update on guidance and our outlook.
Thank you Paul and good afternoon, everyone I'm pleased to be with you today talked a little bit about our guidance.
Targets.
And our initial guidance for FY 'twenty two in November we said that we expected to generate adjusted EBITDA for the year of between 34 and $36 million.
With our strong year to date performance through the first half of this year. We're pleased that our adjusted EBITDA of $37 1 million for the last 12 month period is already above the high end of that original guidance range.
As a result, we are raising our full year guidance range, our new guidance, but you can see on slide 20.
Is that we expect adjusted EBITDA for FY 'twenty two.
To be between 38 and $39 million.
The midpoint of this new range will reflect an approximately 38% increase in adjusted EBITDA in FY 'twenty, two compared to the 28 million of adjusted EBITDA achieved last year.
For factors that underpin our guidance first.
The expected recognition during the balance of FY 'twenty two.
Of a meaningful portion of the $74 million of deferred revenue currently on the balance sheet.
And the billing of a significant portion of the $39 million of Unbilled deferred revenue, which is primarily related to multiyear contracts.
This deferred revenue provides significant visibility into our revenue for the balance of this year and beyond.
Second in addition to the recognition of our deferred revenue.
The factor, which is expected to have the greatest impact on our FY 'twenty two results.
Also the one in which we have high confidence.
That is the continued strength of the all access pass subscription and subscription services sales.
Third over the past year, we achieved growth in the contracted all access pass subscription and subscription services sales in both China and Japan.
The all access pass sales, which we achieve in these countries will result in a portion of the sales not being recognized immediately but rather being added to the balance sheet as deferred revenue.
Additionally, despite these offices progress over the past years, we expect that China's continued lockdown of certain cities and parts of the country related to the pandemic.
And Japan's slower than expected rebound will result in lower than originally expected sales in China and Japan during the back half of this year.
For context in FY <unk>.
21, China accounted for approximately 5% of total sales in.
And Japan accounted for approximately 4% of total sales.
So then for factor in education, we expect to continue to achieve strong retention of both schools and revenue among existing leader in me schools and we also expect to grow our number of new leader in me schools to a level even higher than we achieved in <unk>.
A strong FY 'twenty one.
Now a little bit about Q3.
In the third quarter.
We expect that adjusted EBITDA will.
Will be between eight six and $9 6 million.
Compared to the very strong $8 6 million in the third quarter last year.
Which as you might recall was up more than $5 million compared to the $3 1 million in the pre pandemic third quarter of FY 19.
This third quarter strength reflects strong growth in North America in our English speaking direct offices in UK and Australia and in education.
Partially offset by the expected impact of a combination of a few things.
Number one as the pandemic related challenges in China, and Japan that we just talked about.
And also we just talked about the fact that some of the contracted revenue in these countries will result from sales of the all access pass a large portion of which will go on to the balance sheet as deferred revenue this year, which will benefit future periods more of that than it does the current year.
Third war related factors and our licensee offices in eastern Europe , which is small, but it's still in a smaller but it's still an impact.
And for some increases in growth investments in the third quarter.
While the fourth quarter could also.
Be impacted by these same factors, we expect that the tremendous ongoing strength of the all access pass in U S. Canada and the expected strength of Education Division will result in strong results in the fourth quarter and beyond.
So your guidance quarterly guidance now targets for FY 'twenty three in FY 'twenty four as shown in slide 21.
You'll recall at the end of the first quarter.
We increased our original targets of achieving $40 million and adjusted EBITDA in 'twenty three.
And $50 million.
Adjusted EBITDA in 'twenty, four we increased those targets.
$5 million to our new targets, which were discussed as achieving $45 million of adjusted EBITDA in 'twenty three and.
And $55 million in FY 'twenty four.
Given our strong year to date performance, we still feel good about these increased target as.
As always we will update our targets when we give our first quarter and full year guidance in November .
So while dramatic changes in the world environment and other factors could impact our expectations as we've seen in the last couple of years, we wanted to share that these our current targets and expectations.
So want to remind everyone again as you look at our proxy Youll see.
The executive team's L tip awards depend on achieving these strong multiyear goals. So Paul Thank you.
Steve.
Again, we are grateful to you here today, we feel great about our momentum and we look forward to accelerating growth and that with that Adrian we would like to turn to you and to open up the line for questions.
Thank you we will now begin the question and answer session.
You have a question. Please press Star then one on your Touchtone phone.
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Once again, if you have a question. Please press Star then one on your Touchtone phone and our first question comes from Alex Paris Barrington Research. Your line is open.
Okay.
Hi, everybody. Thanks for taking my questions and congratulations on the beat and raise.
Thanks, Alex.
Good good good thanks.
I'll start first with guidance nice increase to the guidance no surprise, given where you stood at the end of the first quarter.
But but great to see anyway.
And just to kind of go over the moving parts. The comps are tougher in the third and fourth quarters obviously.
As COVID-19 begin to wane in those quarters, a year ago were less impacted.
But you have planned investments also in the second half, including hiring new CP. So that's where I wanted to start where do we stand with CP hiring year to date.
And what are your plans for the third and fourth quarters in that regard.
Yeah, Great Great question, and you're right in terms of increased growth investments for us they are around client partner hiring some things we can do to get to.
Marketing going even greater to help drive even more new logos and then in content, but specifically as it relates to.
Client partners.
You know this is a.
A very important metric for us and a key driver of growth.
So where we do the bulk of our hiring in the second quarter.
We're geared up and ramped up to do that.
For a bit of context in the year prior to the pandemic. We added 31, new client partners that year that was a new kind of a high watermark for us.
And our plan has been to continue at that when the pandemic hit we hired nine that in the first couple of months that next year and then we were the pandemic was upon us and we parse that and then we came out last year and said we would hire 20, you actually we actually hired 19 in the year. One came in right. After we hired to 'twenty there and we've said we're back on.
Our plan now to hire 30.
Year to date, we're down.
I think we're down a bit.
Just a few eight which isn't uncommon for us in the first part of the year.
And recognizing the environment, we're in we've more than doubled the size of our recruiting team in the last couple of months, we've added a whole new so in addition to more than twice the number of recruiters. We've also added our sourcing team to help us source great candidates out there and the teams now full tilt to bring in as many as we can.
To get to that target of hiring 30, new client partners. This year.
Would you think it would be <unk> and <unk> or would it be.
Fewer number in Q3 and a greater number in Q4.
I mean, roughly that but it probably the way it ends up working out its probably like 10% and 20, it probably skews a little bit to Q4.
Not quite evenly split.
Okay. Good and then you also mentioned other growth investments, including sales support personnel, how should we think about sales support personnel.
What's the ratio of.
Incremental sales support personnel to Cps.
And if I said that I misspoke.
There are two areas of investment would be in marketing to get our message out further to go in land more new logos with even more new clients that will be one area and then the third area would be investments continued investments in content and technology as we bring strive to market.
So if you think about our investments it's really those three areas its client partner growth and hiring and growth.
Getting the word out even more than we have in the past because we see such a compelling opportunity for.
For growth, we're still very underpenetrated in this massive market and then to make sure. The solution is as amazing as possible for our clients.
Got you. Thank you and then.
Steve with regard to.
The outlook in the out years fiscal 'twenty, three and fiscal 'twenty four I. Appreciate that you raised those targets earlier this year to <unk>, 45, and $55 million, respectively, but I wonder if those.
Those targets are still conservative given your expectation.
And your increased expectations for fiscal 'twenty two.
Well.
I think.
<unk> $45 million, and then $55 million I think that would be a really good result.
Alex.
Going up $10 million between 23, and 24 I think those would be good results.
We're still we're still very bullish on those on those years, we just want it we just want to see how the as you know our fourth quarter is always a big quarter on a see how the rest of this year comes out and every year update our targets at the beginning of the year based upon the best information we have at that time.
So.
So.
As we said, where we're still excited about being able to hit those numbers, but I wouldn't want to increase them or change them until we see how this year turns out see how are new logos are coming in are investments in all of those things that we'll know in November after we have our fourth quarter results.
So once we have the fourth quarter result.
Expect formal adjusted EBITDA guidance for fiscal 'twenty, three and then.
A revision of the outlook for fiscal 'twenty for maybe fiscal 'twenty five at that point.
Terms of targeted way to as a good way to say that real guidance for FY 'twenty three our revised outlook for 'twenty four and maybe some talk about 25.
Okay fair enough.
And then Steve what did you say that the country. The incremental contribution margin was revenue to adjusted EBITDA in the second quarter and year to date.
You said there was 37, 37% 35 35.
Yeah. So so you have about 35%, Alex and and of course the flow through is impacted by the gross margin, which we think will hold in there at a good gross margin and then the SG&A.
Having the increases that Paul talked about salespeople.
Content development marketing all to have what we still think is decent.
Decent flow through especially.
In the short term the remainder of this year.
And even into next year.
Of say, 30% to 40% about it in the middle of that right now.
Got you okay perfect. Thank you so much and again congratulations on the quarter.
Thanks, Mike. Our next question comes from Jeff Martin from Roth Capital Partners.
Hi, James Good afternoon, everyone.
How you doing Paul.
Great.
I was wondering if you could give us an update on the plan.
Rollout of strive I know, that's an exciting proposition for you should.
Increase lifetime value to the customer base with the automated.
Capabilities of it but yes.
Where are we at in terms of getting them ready to launch here.
Yeah, Great Great question. Thanks for asking that we are very excited just as a reminder, we think we expect that strive will help us expand in three ways.
One because it will allow learners to more easily access our content and for us to be able to help guide them through impact journeys that will more measurably change behavior, we think that it'll lead to all access pass expansion, we've talked in calls in the past about while we do it.
This job landing and expanding Theres still a lot a lot of headroom to expand just within our existing clients and strive should help on that that side of things. The second thing strive. We'll do is it'll make it easier for our clients to deploy our content, where they are using a franklin covey delivery consultant to deliver training and or to provide coaching that will all happen via.
This tech platform and so that should lead to a continued expansion in services, where today. It's 57% of every dollar of subscription we think that has room to continue to grow as well on the services side and then third is just it's a really cool.
Platform and technology, and so showing that to new customers. We think will help us on the new logo win rate as well.
So to the question you asked where are we we're in a great spot. We had intended we have intended.
To launch.
Towards the end of this year, we actually did pass.
<unk> launch.
Starting back in December that went very well, we got some great feedback. We've now put we've put all of our content now onto it. So its all been converted for strive to be powered by strive and we are doing now we call. It limited launch going out too.
A decent percentage of our sales force and our clients and working to move them over on to strive that efforts happening in May and June .
And then we're ready right as we kick off our new fiscal year to launch and turn it on for all of our clients. So we're right where we wanted to be we feel great about it we're getting great feedback from those clients who have I think we are.
Actually the strive team that we brought over as still actually selling the original strive product out there to customers and they are winning deals like crazy that we then convert over to all access pass. So it's all systems go we feel really good about it.
Great look forward to seeing that platform launch here.
Could you go into a little bit more with respect to the investments in marketing and content development.
What particular initiatives are in place center.
Two steps up from investment.
Yes.
Great. Thanks, So so we.
Throughout the back half of last year and heavily during our fourth quarter and into the first quarter of this year. We first worked on rebranding the company and that was both look and feel if you go to our website is different now and so part of it is the activation of that refreshed brand Thats got a flow through all of our properties all of our materials.
All of our websites around the world et cetera, and as exciting as that will be to get the look and feel more modern more fresh a little maybe more tech focused.
The real action will be and how we get our clarified messaging around who we are and our real value prop. How we help clients. We're just scratching the surface in terms of making sure that everybody, who really ought to know that message doesn't know that message here. We were on the call again, the other day with a potential client and they got done and they said Oh My Gosh I had no idea. This is what Franklin Covey was doing.
Like you've got a you've got to help people understand that and we said so.
<unk>.
That's an example, more and more effort to do that and we think again, we're just scratching the surface really we saw a nice logo new logo growth in the second quarter, but we think theres a lot of room to expand that.
And so marketing is really getting the word out better PR we.
We don't do Big advertising, we don't go out buy media and things like that that we don't need to do that but it's making sure that people who are the movers and shakers in our particular industry Chief Learning officer head of learning and development that they are very clear about who we are and what our value prop is.
On the.
New content side.
It's.
This flywheel is moving and we brought a number of new things to market. This year, we launched a change management offering that's been received exceptionally well we launched that back in the fall.
We are bringing new solutions to market to built to continue on with our unconscious bias suite of offerings. That's done really really well for us we have three new modules coming there we're refreshing our four disciplines of execution content, our project management content.
We are moving as we come through the end of this year and moving into next year with time to go back and read and refresh things like the seven habits and the speed of trust. So we have a.
A very aggressive content road map.
And re imagining that some of those historic blockbuster solutions for the use case clients have in 2022 and beyond and getting them formatted for strive. So a lot going on on the content front, we feel great about.
Sure.
Our content is well received by our clients, we get very high NPS scores and.
So we're excited we're also considering a couple of new categories.
Maybe going to hear about new couple of new categories or offerings that would add substantially to the all access pass in the coming years and help us.
Expand client relationships.
Okay, great one more if I could.
On the service attach rate to all access pass was curious.
Yes, it was running in the high Fifty's narrow I think thats higher than what most people thought it would ever be what's the sustainability of that and whats really been driving that to the level that it is.
Yeah, Great question, we have.
We have some of our locations around the world, where they were heavy services their business model is heavy on services in the past they actually have a one to one services attach rate. So for every dollar of subscription they do a dollar of services. We have we have one of our licensee partners.
More than one to one so we think there's still room for services to grow.
What drives that is a couple of things one the nature of the problems, we're helping clients solve.
Oftentimes they want us to help them solve those so if we're coming in and engaging a group of more senior leaders.
That LNG person, who might be comfortable and happy to rollout to first level leaders in the organization. They want a trusted Franklin covey consultant to come in and work at the higher levels in the company or if we're taking on topics around sensitive culture issues that are important to be addressed at the executive level. They are looking for our folks to come in who are who've been there done that many many times.
That you can challenge and push appropriately.
The thing Thats driving that is actually I think we're benefiting from.
Frankly from the pandemic in this area, where services sales dropped off significantly in the first quarter or two of the pandemic because they were all booked as live in person in our clients, even though we had the capability to do live online our clients weren't ready and so they just kind of froze and canceled.
As we've converted our clients to live online.
We've seen services increase and I think that's a function of the fact that you used to have to go away and clear your scheduled for a day or two to go to training and now you can fit 90 minute live online modules into the themes of your workday in your work week and.
And organizations, who are working remote or hybrid.
They need ways to convene groups of people together to keep that team interaction high and to keep the culture of their team intact.
And so at live online I think is here to stay I think that has been a real boon to our services business and of course clients also are asking us to start coming back in in person and we have that as well to our whole business needs to be built on that so we get the benefit from both sides of that.
As a kind of a happy not that anything about the pandemic with happy you don't want to say that but kind of as a.
As a as an outcome of what happened with the pandemic.
Thanks, Paul.
Okay. Thanks, Jeff.
And your next question comes from Marco Rodriguez from Stonegate capital markets.
Good afternoon, everybody. Thanks for taking my questions.
I'm wondering if maybe you could talk a little bit.
The cash build up on the balance sheet.
I know, you've obviously discussed some additional investments youre, making here in the back half of this year.
Can you, maybe just talk a little bit more about what youre thinking about what that cash that are pretty substantial.
Substantially high level in comparison to historically.
Steve you want to take that one yes. It is it's a good problem to have.
<unk>.
So our view of cash of using cash.
Alternative uses of cash is very similar to what it's been.
In the past.
And that and that is.
The alternatives that we have are similar to what we've talked about before.
One is.
Growing the having the cash to grow the business to make the investments we need to make and we clearly have enough cash and we generate enough cash to do the things pulse talking about.
Develop the content add client partners do all of those things that would allow us to grow and I think that's our first priority and we clearly have enough cash to do that and we generate enough cash to do that so then we're looking at alternative uses of cash and that would automatically.
<unk> include acquisitions and buying back shares.
So as you as you know and as Paul mentioned.
We've had a net.
The decrease in our shares outstanding of $6 million over the years, we've been here. So we've shown a willingness to buy back shares and an understanding of the value of buying back shares.
Also understand in this environment we.
Yeah.
Acquisitions like the like the slide that Paul showed those acquisitions have been very beneficial to us and we'll keep looking for acquisitions.
That would either bold in or give us.
<unk>.
A better platform or some way accelerate our revenue bring in some revenue. So we will continue to to look at acquisitions and might well have in the future.
Since we have that cash that we have now a combination of where we do we do some acquisition work and we do some.
Buyback.
Purchasing of shares.
And then we don't think it's all bad to have some cash.
On the balance sheet. So so mark I think we're looking at it very similar to what we've looked at it in the past.
And were very.
Conscientiously trying to look at what the best use of that cash would be.
Got it very very well understood.
Just out of curiosity you have any.
Like one time distributions ever come up as far as a use of that cash.
Well, we've done a couple of tender offers if that if thats what you are talking about repurchases.
We haven't had any dividend type of distributions.
But we've done as you know over the years, while we've been here a couple of a couple of tender offers and then you've done a lot of.
Sure.
Open market repurchases.
Got it and then I was wondering if you could then also circle back around on.
On the client partners.
I believe it was in the last call maybe it was the prior call.
We're talking about there is the potential or youre thinking about.
Different ways in which you can maybe.
Celebrate.
The amount of client partners that you can bring in per year.
Wondering if there.
There has been any updates in regard to that if there's been any other thought processes around that that we could maybe see.
A spike in the client partner hiring after this fiscal year and beyond.
Yes, that's a great question.
You can imagine that that topic is.
Important topics when we talk about a lot how do we how do we ramp the existing ones more quickly and how do we create a system, where we can bring people on more effectively and so I think.
Short answer is yes, I think over time, you could expect to see that what used to be hey, let's organized at 10, a year and we kind of got to where we were able to add <unk>.
We added 31 right before the pandemic hit we were fortunate to add 20 last year. We are working at 30. This year, that's that's kind of a new floor and then.
We build from there to answer your question about what does it take so for US it's finding the talent.
It's making sure we have the management and coaching infrastructure internally to support.
Increasing new hires and.
Sales enablement function.
So that's what we're working to build out we know we have we know what we have is that we have the right product and we have the right market and it's a really exciting market and so I think we're our plans are consistent with kind of what your your ask is there and we will.
We'll be prepared to talk more about that as we get into the to the to.
At the beginning of next year, when Steve updated targets.
Yes.
Understood.
Thank you guys I really appreciate your time.
Thank you.
And our next question comes from Samir Patel, the Atlas can capital your line is open.
Hi, <unk>.
Congrats on a great quarter. So the first thing I wanted to talk about what.
You mentioned, Paul almost off hand, I'm surprised it hasn't gotten any attention yet, but you mentioned that your long term revenue growth targets are increasing from that kind of high single digit level towards you said teams in the near term and then towards 15 or 20% of the longer term I mean, obviously you have that momentum in your business now I know, that's something we've talked about why or why not grow.
Faster, maybe you could spend a little time just open that question, maybe you could flush out.
Why you arent being more I guess aggressive sort of about making that a public target of 2000.
19% to 20% a year.
Yeah, great Great question, so so because you're already doing that right I mean I recognize that there are some I recognize there is some benefit right now because you are kind of rebounding from Covid and leader in young and all that but.
Yes.
Yes, I think.
Maybe two things I would respond to their first is kind of just.
You know this but just to say it again.
What's happening in the business is free.
Franklin Covey is this $250 million to $260 million company that prior too.
Prior to the invention of the all access pass was kind of a.
Mid to high single digit grower and what's been happening over the last six years is there's this powerful SaaS like business, that's exploding inside the company and Thats, both all access pass and our leader in me subscription business and those are growing very very rapidly and as they grow to become eventually substantially all of our revenue is that just naturally.
Should drag the growth rate of the company higher.
In the short run.
And so we believe that will happen, we see that happening you see that happening in the short run there are some things that are still.
Holding that growth down just a little bit one Steve talked about is just we have some parts of the world that haven't yet fully converted to subscription and as they do those sales go out on the balance sheet and so that kind of that mute the growth for a period of time until they're all the way over like we are in North America.
We still are feeling some pandemic related impacts in China, and in Japan, China, China dealing with the pandemic right now Japan is kind of still dealing with the aftermath of the pandemic a little bit slow to come around and so we've got we've got a couple of those things that are just holding it down a bit which is where you're seeing bill.
Big year over year comps in the first half of the year and then not quite as much growth in the second half of the year, Although we feel great about the growth rates, we are putting out but I think generally speaking what youre alluding to is what we see will happen over time and as.
As we move through this year and think about how we want to position of what we want to say publicly about that next year will we.
We're talking about the very same thing you are asking.
Okay that makes sense I mean, it's just it's just I know you guys always saying that guidance, but it's starting to get a little sort of ridiculous at this point with the momentum you have in your business and so I'm going to talk about I'm not even talking about 'twenty, two because I understand the pandemic impacts I'm, just saying like $45 million of EBITDA for next year seems like a.
Pretty easy hurdle unless you guys are planning to invest substantially in ramping up growth and you're kind of not targeting either anyway. So that was question. One question two to go back to I think Marco asked you about the cash and will be a little more explicit I mean, you guys are going to be at negative three times net debt to EBITDA by the end of this year, which is not anywhere close to an optimized balance sheet.
For a business with.
Highly recurring revenue very predictable.
Why.
I'm all for it as a big shareholder I'm, all for having cash on the balance sheet, but it does seem like a lot I mean, I guess, Paul but why not commit to something more like a programmatic return of capital right like as opposed to just letting cash historically, you've kind of done a lot of tenders.
Why not be just more of like Hey, we're going to devote 2030% of annual free cash flow to share repurchases, we're going to have a dividend of 15% 20% of free cash flow and then the remaining 50% we're going to keep for funding potential M&A like why not and those are state numbers, but why not commit to that sort of programmatic approach that I think a lot of companies have.
I'll give you sort of incident safety once I think I think that's a.
That's a great recommendation.
And this is this is this and what to do with cash.
Because we know we are generating and we expect to generate a lot of cash in the future and.
How quickly do we think the growth rate will continue to tick up or two are two important topics in.
I think your recommendation there is a fine recommendations, it's good Steve what would you add on cash agreed samira.
Have a.
A more formalized and discussed plan that we could let the.
Right now what we're thinking on those specific targets when we get conclusions draw.
Ron is just exactly what you are saying how much of free cash flow are we going to spend on on this and on that I think is a really good recommendation.
That we're looking at and then we will do.
Okay that makes sense and then I guess the final question going a little bit deeper on the client partners.
Obviously, you're obviously, a very soft environment for talent right now.
Could you just talk a little bit more depth about.
Various various Egypt, you mentioned hiring a couple of additional recruiters.
Maybe you can just go on a little bit more depth about why you think Franklin Covey can attract talent I know, we've talked about the sales compensation model being very attractive.
But I guess I'm, a little so probably no. It is not atypical, but I guess I'm, a little surprised that youre kind of down to Hcp's at this point.
Yes.
To put that in context of the same point last year, we were down I think five and so it's not uncommon just the seasonality of it.
But to your to your larger question.
We actually more than doubled the size of the recruiting team so it's a pretty meaningful.
Full AD in terms of number of recruiters that are out there I think the reason we believe that we can win in that space as is one.
Okay.
What were doing something that we think is quite unique in the industry.
And we're built what we're building what we're assembling his is working.
Very attractive for our clients and if you're a salesperson that that's the kind of thing you want to go and sell something that you.
We have a sterling brand and reputation.
We enjoy very very high levels of client loyalty and retention.
The way we've set up our sales structure is that our salespeople.
They they win when they sell new logos than they win as they retain those logos and so from a compensation standpoint, that's attractive, but I think where we're putting a lot into making the overall offering.
As great as it can be and as indispensable as it can be for clients and so many of those that we're winning are.
Coming from actually in recent times here coming from.
Other SaaS, Ed Tech companies, who haven't been able to grow revenue and EBITDA at the same time and are having to cut back on things like customer acquisition costs expenses, and things like that and Theyre coming and saying, Hey, Wow Franklin Covey looks this is this is where I want to come work, our culture is fantastic as well and so.
We think we have a very compelling kind of total rewards plus culture value prop for new salespeople and.
And are really focused on that.
No I appreciate that okay, Yes, I mean my final my final comment is just like look operationally you guys are doing absolutely phenomenally right I don't think that anyone could criticize what youre doing.
But from a stock valuation perspective, obviously, when just on intrinsic DCF basis, it's worth.
70, 80, 90 Bucks, a share and forget about comps right, where Ed Tech comps trade. So.
Just just keep working on taking care of that part of it too and I think everything will be great. So thanks, Paul I appreciate it.
Thank you Samira that's great.
And this concludes our question and answer session I'll now turn the call back over to Paul Walker for final remarks.
Well thanks, everyone for joining today. Thanks for your great questions and thanks for your continued interest and support we really appreciate you and hope you have a <unk>.
Wonderful rest of your day and your week.
Thank you ladies and gentlemen, this concludes today's conference.
Thank you for participating.
Disconnect.
Yeah.
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Okay.
Okay.
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Yes.
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