Q3 2022 Franklin Covey Co Earnings Call
darirk hatch Derek, you may begin.
Thanks dard.
Good afternoon everyone. On behalf of Franklin coveby, it's my pleasure to welcome you to our earnings call for the third quarter of fiscal 2000 and ny-two. Before we get to the good stuff, I want to remind everybody that this presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1900 and nety-five.
Speaker 2: 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 stabilizing grow revenues. The acceptance of renewal rates of our subscription offerings, including the All Access, pass and leader and mean 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 company's targeted marketplace. Market acceptance of new offerings or services and marketing strategies. Changes in the company's market share. Changes in the size of the overall market for the company's products.
Speaker 2: Changes in the training and spending policies of the company's 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.
Speaker 2: Many of these conditions are beyond our control or influence, anyone of which may cause future results to differ materially from the company's current expectations.
Speaker 2: And there can be no assurance that the company's actual future performance will meet manageer's expectations.
Speaker 2: These forward looking statements are based upon management's current expectations and we are take no obligation to update or revise these forward looking statements to reflect reflective events or circumstances. After the date of today's presentation. Except as required by law with that out of the way we'd like to turn the time over to MR Paul Walker are Chief Executive Officer Thank good Eric Hi. Everyone. We're grateful that you're with us today and we hope your sumers are off to a very good start. I'm joined today by Steve Jan seon and.
Speaker 3: The rest of our executive team. We're also happy to boallb in the line with us today as well. We are happy to be able to talk to you today and report our strong Q3 results and are really pleased that again, the results were strong for not only the quarter but year-to-date and for the latest 12 months, even stronger than expected.
I'd like to start with a few revenue headlines, as you can see in Slide four.
Speaker 3: Revenue growth for the quarter was strong, increasing 13% and importantly, this 13% growth was after factoring in the impact of cot-related lockdowns in China and other covert-related impacts in Japan. Excluding China and Japan, reue grew 19% for in the third quarter and our year-to-date and latedest 12 month revenue growth has also been very strong where, again even after factoring in the recent impact in China and Japan, revenue grown 19% cent year-to-date and 24% for the Lest 12 months.
Our subscription and subscription services revenue growth was even stronger for the quarter year-to-date and also for the latest 12 months.
Total subscription and subscription services revenue grew 31% in the third quarter and has grown 31% year-to-date and 36% for the latest 12 months.
With all Access Pass, subscription and subscription services revenue growing 32% in the third quarter- 29% year-to-date than 32% for the Lat 12 months- to 136.2 million.
And leader in mee subscription and subscription services revenue growing 28% in the third quarter, 38% year-to-date and 49% for the latest 12 months to $54 million.
The durability and visibility into our future. Revenue growth also continues to expand.
Our balance of deferred revenue, both buildill and unbill, increased 21% over last year's third quarter to $116.5 million.
And as shown in Slide 5, in our North America enterprise operations.
Speaker 3: The percent of our all-access pass contracts which are multiyear was 42% and the percent of our total all-access Pass subscription revenue represented by these multiyear contracts increased to 58%.
Has also shown the average lifetime value of our All Access passed customers continued to increase in the third quarter year-to-date and for the latest 12 months our average revenue per client increased to 47 thousand dollarsrevenue retention continued to be well ababout 90%, and.
And our services attach rate increased to 66% for the latest 12 months.
I'd like to point out a few profitability metrics, and these are reflected in Slide six.
Our growth margin percentage for the quarter remained very strong at 77% and has increased 55 basis points to 78% year-to-date and 40 basis points to 78% for the latest 12 months.
Operating SGNA is a percent of sales for the quarter, improved 275 basis points from 64% to 61%, and.
Speaker 3: It's also improved 392 basis points year-to-date.
Speaker 3: Moving from 65.9 per to 62% and 229 basis points for the latest 12 months from 64% to 62%.
The flow through of incremental revenue to increases in adjusted EBITDA for the quarter was 31% and has been 40% year-to-date and 27% for the latest 12 months.
As a the result of strong revenue growth and high flow-through, adjusted EBITDA increased 2,7% or $2.3 million in the quarter to 10.9 million.
66%, or Eleven point onefour million dollars year to date to 28.9 million, and 50% or 13.1 million for the latest 12 months to 39.4 million.
Net cash provided by operating activities was 39.5 million, an increase of $8.7 million or 28% compared to the same nine month period last year.
During the third quarter, we returned a significant amount of capital to shareholders, investing $20.3 million to repurchase approximately five thousand shares.
Speaker 3: And even after investing $20.3 million in share repurchases, we ended the quarter with $67.1 million of liquidity, comprised of $52.1 million in cash and with our full $15 million revolving credit lines undrawn.
As we'll discuss in a few minutes. As a result of these continued strong results and the strength of the key factors driving and underlying this growth, we're confident in increasing our guidance and outlook.
As shown in Slide seven.
Speaker 3: First while, of course, some quarter's revenue growth will be higher than others, we're increasing our revenue outlook for fiscal 23 and beyond from the expectation of growing our rolling 12 -months revenue from low double digits to expecting that rolling 12 -months revenue growth now that it will be at least in the low teens- call it 12 or 13 ish percent- and moving toward the mid and then high teens in the quarters and years to come.
We expect this accelerating revenue to be driven by and reflect the ongoing growth in our high-margin, high recurring subscription and subscription services revenue.
Second we're increasing our adjusted EBITDA guidance again for fiscal' twenty-two.
Speaker 3: As you know, our initial guidance was that for fiscal' 22, adjusted EBITDA would increase to a midpoint of 35 million, an increased a seven million or 25% compared to adjusted EBITDA of 28 million in fiscal twenty-one.
Speaker 3: Our most recent guidance was for fiscal 2000 and twenty-two's adjusted EBITDA to increase to a mid point of 38.5 million.
Speaker 3: Representing year-over-year growth of 38%.
We now expect adjusted EBITDA for fiscal 2022 to increase to between 40.0000415 trillion.
Speaker 3: The middle. Of this range reflects more than 45% growth in adjusted EBITDA, compared with the 28 million achieved in fiscal 2021.
Speaker 3: We'll discuss this guidance in a bit more detail in a few minutes.
Third.
Speaker 3: We're increasing our outlook for adjusted EBITDA growth for fiscal' 23, fiscal' 24 and fiscal' twenty-five.
We now expect that adjusted EBITDA will grow from between 40 to 41.5 million and fiscal' twenty-two and.
And between 47 to 48.5 million in fiscal twenty-three.
This compares to our previous adjusted EBITDA outlook of approximately 45 million for fiscal' twenty-three.
We then expect that adjusted EBITDA will increase to approximately 57 million in fiscal' 24, versus what we said previously: fifty-five million.
And then to increase to approximately 67 million in fiscal twenty-four.
A level at which we would expect adjusted EBITDA as a percentage of sales to be approaching 20%.
With this impressive and strong expected growth in revenue and adjusted EBITDA, we also should generate significant amounts of cash flow.
Speaker 3: Which as we'll discuss in more detail in a few minutes, we plan to reinvest in the business at high rates of return and also return substantial amounts to shareholders through ongoing share repurchases.
Speaker 3: I'd now like to turn some time to Steve to dig a little deeper into our results.
Speaker 4: Thank you very much Paul good afternoon. Everyone is nice to be with you today to talk about or we believe we are good results. So as paully expressed.
We are really pleased with the ongoing combined strength and growth of our revenue, our adjusted EBITDA and our cash flow.
And as Paul mentioned, as strong as our overall results were, our results were even stronger excluding enterprises, international operations where, as noted, COVID-related impacts in China and Japan impacted our results.
Specifically excluding enterprises' international operations. Revenue growth, which was already strong 13% - was 19%.
Speaker 4: To provide you with the deeper understanding of the factors driving this performance, you'd like to quickly report on three key areas of the company.
Our enterprise business in North America.
Our education business, which is almost all in North America, and our enterprise business internationally.
As shown in Slide 8, results in our enterprise business in North America, which accounts for approximately 53% of total revenue.
Slide eight results in our enterprise business in North America, which accounts for approximately 53% of total revenue, were strong.
Revenue grew 20% in the third quarter and has grown 19% year-to-date and 22% for the latest 12 months.
Subscription and subscription services revenue.
Grew an even higher 27% in the third quarter, 25% year-to-date and 27% in the latest 12 months.
Our balance of deferred revenue, buildil and unbilled grew 16% for the quarter over the prior year.
And the percentage of oexcess passast contract revenue represented by multiyear contracts increased to 58% during the quarter.
Up from 52% in the third quarter of last year.
Shown in Slide nine.
Speaker 4: The results in our education business, which count for approximately 22% total revenue, were also very strong.
Education revenue grew 21% for the third quarter and has grown 33% year-to-date and 42% for the latest 12 months.
And education. Subscription and subscription services revenue.
Grew 28% in the third quarter.
And 28% in the third quarter, 38% year-to-date and 49% for the latest 12 months.
Our balance of deferred revenue again. Build and unbuild in education grew 49% in the third quarter.
And as a result of covervid-related impacts on our operations in China and Japan over the past quarter and half.
Results in our international enterprise operations in the quarter were a mix of geographic areas with very strong growth and those whose operations were significantly impacted by covidt-related challenges.
In our offices in the UK Ireland Germany Austria, Switzerland and Australia.
Which compriseed approximately 36% of total international sales.
And where all Access Pass makes up a substantial portion of sales.
Revenue grew one point three million, or 41% for the quarter.
And grew 48% year-to-date and 60% in the latest 12 months.
All ex passed subscription and subscription services sales, which make up approximately 86% of total sales in these countries, grew even more rapidly.
Increasing seventy-sevent percent for the quarter: 81% year-to-date and 100% in the latest 12 months.
International licensee partner revenue increased 9% in the third quarter compared to last year.
These operations continue to strengthen coming out of COVID-19, despite the interruptions in Eastern Europe .
In our offices in China and Japan, which account approximately 64% of international sales.
Widespread COVID-related lockdowns in China and a very cautious and slow return to normal cias guided by the Japanese government impacted business in these two countries.
Revenue declined two point six million or 46% to three point one million for the quarter.
But declined only 15% year-to-date and to 6% in the latest 12 months.
Reflecting that the latest COVID-19 lockdowns and restrictions.
Primarily impacted the second and third quarters.
However with the recent easing of COVID-related restrictions in China and Japan, sales in these countries have started to rebound.
And we expect that both countries will contribute to international and company growth in FY twenty-three and.
Now I'd like to provide a little more detail on these key highlights.
As shown, a slide ten.
Revenue in the third quarter. In the third quarter, revenue grew 13%.
To 66.2 million, an increase of seven point four million compared to the 58.7 million of revenue generated in last year's third quarter.
And as strong as our revenue growth was, the growth of our and profitability and cash flow related to this revenue growth was even more significant.
Our gross margin percentage remained very strong at 77% and.
Our operating SDNA is a percentage of sales declined: 274 basis points to 61% for the third quarter.
Adjusted EBITDA increased 27% or two point three million to 10.7 million in the third quarter, compared to eight point six million in the third quarter of FY twenty-one.
Our cash flow and liquidity positions were also very strong.
As shown in Slide 11, cash provided by operating activities through the third quarter increased 28% to 39.5 million.
This strong cash flow reflects an additional benefit of our subscription model, specifically that we invoice upfront and collect cash from these invoice amounts even faster than we recognize all the subscription revenue.
With this strong cash flow, we ended the third quarter with 67.1 million in liquidity.
Even after investing the 20.3 million in the third quarter related thir reppurchase of approximately five thousand shares.
Our sixty-seven point well, million of the liquidity at the end of the third quarter was comprised of 52.1 million in cash, which means no debt, no net debt, and with our 15 million revolving credit facility remaining fully undrawn. So Paul, back to you. Thank you, Steve. Thanks for that great review.
I'd now like to touch briefly on five key drivers behind these strong results.
These are illustrated in Slide number 12. the first driver is that the markets we've chosen to serve are very large and they're growing significantly, and they're highly fragmented.
Speaker 3: This provides us with enormous headroom for growth and the opportunity to own a significant share of each of the markets in which we serve. The second drivers that we're focused on the most important, lucrative and durable spaces in each of these markets.
Speaker 3: The opportunities and challenges we help our clients address are very durable, providing us the opportunity to partner with them both in good and more challenging times.
Driver number three is the strength of our subscription model.
Speaker 3: It's a powerful engine that's driving strong growth.
Significant and increasing predictability and durability of revenue.
Speaker 3: And the high flow through of revenue to profitability and cash flow.
The fourth driver is that we have compelling opportunities for growth.
The combination of our large and growing markets that we serve, the importance of the challenges we help our clients address and the strength of our business model create a number of exciting opportunities for growth. And the fifth drivers that our strong cash flow has and can be invested to create significant additional value for shareholders.
Speaker 3: I'll briefly touch on each of these in a little bit more detail. First, the first driver: the attractiveness of the markets we've chosen to serve. Each is large and growing and fragmented. As you can see on Slide 14, our focus is on three large, growing and growing markets.
Our enterprise learning market, where the total addressable market is approximately $99 billion in growing by about three billion per year.
The education market, where the TAM is six billion, in growing approximately a billion a year.
Speaker 3: And third, the market for business leaders investing from their own operating budgets to improve their organization's performance, where the total addressjustable market is not defined but is likely in the trillions of dollars and growing.
Each of these markets is highly fragmented, with the largest players accounting for only approximately 1% to 2% of sales.
Speaker 3: We believe this provides us with tremendous opportunities for growth and to establish significant market share.
Driver number two.
Is that we're focused on the most important lucrative and durable spaces in each of these markets.
As shown on Slide Sixteen.
Speaker 3: Many things can add value to an organization, including providing people with useful information and helping them learn new skills.
Speaker 3: However as important as sharing information and helping people learn new skills can be, the single most impactful opportunity most organization have is to find a way to mobilize the collective actions and best efforts of large numbers of people toward the organization's highest priorities.
As illustrated in Slide 17, for every major strategic, operational or cultural initiative and organization has whether, for example, that objective is to systematically improve its customer loyalty scores, increase sales effectiveness, help its leaders, increase trust and engagement throughout the organization or any other key initiative.
Almost every organization will already have pockets of great performance.
That's represented by the number one on that chart.
Every organization will also have variability in its performance across its people and units. That's represented by the number two on the chart.
This variability in outcomes typically as a result of inconsistency in human behavior and in execution. What differentiates the best-performing organizations from their lesser-performing counterparts isn't that one has pockets of great performance, while the other doesn't.
They both in fact do. Nor is it that one has variability in its performance while the other doesn't. Again, both do.
Rather what differentiates top-perform organizations from lesser performers is the extent of that variability.
Speaker 3: As indicated by the number three next to the red Dash line. What really differentiates top performing organizations is that the performance distribution curve of the top performers is simply righter and tighter than that of lesser performers.
Top performers are better at institutionalizing or getting widespread adoption of the behaviors, actions and paradigms that are already present in their existing pockets of great performance.
This does not happen by accident.
Helping clients achieve true performance breakthroughs by driving the kind of collective behavioral change that allows them to systematically and predictably move their performance and behavior curve writer. And tighter is exactly the kind of thing Franklin Covey helps his clients achieve.
In fact, our entire organization is focused specifically on helping companies, schools and teams of all sizes and across just about every industry achieve these kinds of results.
Speaker 3: It's the reason why is- we'll discuss in a minute- we've made acquisitions like jonna and stries, and while we continue to invest in content and technology, and why we're focused on accelerating the growth of our sales force.
Every organization has these ridghter and tighter challenges and opportunities, and they exist during both times of great opportunity and times of great challenge.
Speaker 3: The challenge organizations have and moving their operations and initiatives. Rider and tighter is a very durable one.
We witnessed this during this durability, during the constantly changing pandemic environment, when thousands of organizations in schools purchased, expanded and renewed their leader in me and all acscesshas- ped subscriptions, and also purchased support services from Franklin covy to help them achieve their most important goals.
Speaker 3: It is franklyin Covey's ability to help clients address these kinds of challenges and opportunities that, as shown on Slide 18, is keeping the lifetime value of our customers, both large and growing.
Speaker 3: The third driver I would highlight is the strength of our subscription model.
It's a powerful engine that's driving strong growth, significant and increasing predictability and durability of our revenue and a high flow through of revenue to profitability and cash flow.
Speaker 3: At substantially all of our business become subscription and subscription services. Over the next few years, we expect our overall growth in revenue and profitability to accelerate. I'd like to briefly highlight these points first.
Our subscription and subscription. Our subscription and subscription services model is driving strong growth, as shown on Slide twenty.
Speaker 3: Our subscription and subscription services revenue grew 31% in the third quarter and has grown 31% year-to date and 36% for the Lest welve months.
Speaker 3: This growth has been driven by our all-acxcess passast subscription offering in our enterprise business and our leader in mee subscription offering in our education business.
All axcess passes, driving strong growth in the enterprise business, as we predicted it would. As shown in Slide 21, from the inception of all access passed through in fiscal 2016 through this year's third quarter, all aacxcess passed subscription and subscription services revenues grown tenfold.
From 13.7 million in fiscal 2016 to 136.2 million for the latest 12 month period ended this third quarter. This robust growth is continued this year, with all excess passed subscription and subscription services revenue growing 32% in the third quarter, 29% year-to-date and 32% for the latest 12 months.
Similarly, the leader in me subscription is also driving strong growth in the education division, as we expected it would. The leader in me subscription offerings growth has been so substantial that, for the latest 12 month period, leader in me accounted for more than $54 million, or 93% of education's total revenue.
Speaker 3: And leader in me. Subscription revenues are continuing to grow rapidly, as shown Slide. 22 leader in me subscription and subscription services revenue grew 28% in the third quarter, has grown 38% year-to-date and 49 percentfor Lat 12 months.
Second.
Speaker 3: Our subscription model also continues to drive an increase in the durability and predictability of our current and future revenues.
As shown in Slide 23, our balance of deferred revenue, both build and unbuilds, continues to increase significantly, growing 21% to 116.5 million at the end of the third quarter.
Speaker 3: Additionally, durability and predictability of revenues being created, as we've mentioned, by the increasing percent of our Access Pass contracts that are multi-year.
Speaker 3: Again at the end of the third quarter. The percent of contracts that are multiyear is 42% and the revenue represented by those contracts is 58%.
Speaker 3: Third our subscription business model also reflects high flow through of revenue growth to growth and profitability and cash flow.
With its strong gross margins and relatively low customer acquisition costs. A high percentage of incremental growth in subscription revenue flows through to increases in adjusted EBITDA and cash flow.
Fourth, as substantially all of our business becomes subscription and subscription services, over the next few years we expect Franklin Covey's overall growth in revenue and profitability to accelerate.
When we began our conversion to subscription just over six years ago, we shared the trajectory of Adobe's conversion.
Their own conversion to subscription.
As you can see on Slide 24, in the initial years of its conversion to subscription, thatadobe's strong growth in subscription sales was substantially offset by declines in their legacy box software business.
Speaker 3: However as their subscription business continued to grow rapidly and the decline in their legacy business flattened out, as shown by the green line, Adobe's overall revenue growth and market cap accelerated. We said that we expect that our conversion to subscription to follow a similar pattern, and that has been the case.
Speaker 3: We began our conversion to subscription in our enterprise North America business.
Speaker 3: As shown in Slide 25. we're pleased that our conversion to all AC has passed in North America has followed a similar trajectory to that experience by Adobe.
As our conversion has progressed. Subscription sales growth has continued to be very strong, while declines in legac legacy sales have flattened out.
As a result, North America enterpris's overall revenue has grown a significant 22% for the latest 12 months, as indicated by the green line on the right-hand chart.
As this acceleration in growth in North America has occurred, it's driven an increase in the company's overall growth rate from high single digits to low double digits and is projected to move to the low teens.
Speaker 3: As substantially all of the company's business becomees subscription and subscription services. In the next few years, as we've mentioned, we expect overall company revenue to increase to the mid-teens and then the high-teens in the quarters and years to come.
As this occurs, we also expect our adjusted EBITDA cash flow to accelerate.
The fourth of five drivers is that we have compelling opportunities for growth.
Of five drivers is that we have compelling opportunities for growth because we recognize.
Speaker 3: First the very large opportunities ahead of us in the markets in which we serve and our focused. Second and necessity for our clients to move rrighter and tighter to drive collective behavior change in addressing their most important challenges and opportunities. And third, because of the power of our subscription business model to generate significant growth. We're excited about the opportunity ahead of us and we're determined to take advantage of it.
Speaker 3: To that end, we continue to make investments in content technology, thought leadership and in growing our sales force. I'd like to briefly highlight efforts in two of these areas. First, on the technology front.
What we're now calling our new impact platform.
The resullt of our acquisition of strive. We've launched this platform to a significant portion of our customers, and the excitement and feedback have been tremendous.
We're right on track for our full rollout. We'll be bring the new platform to all English-speaking clients this fall and to many other additional languages by winter.
This new impact platform seamlessly combines our best-in-class content and solutions- instructor-led coaching support supported by cohort, our instructor-led coaching supported cohort impact journeys and powerful micro push content onto a single platform. We're creating an industry-leading user experience and a powerful way for client to deploy our solutions at scale across our organization to drive measurable behavior change and collective action.
Speaker 3: The second area I'd highlight is our continued investment and focus on growing our sales force.
We expected to add net 30 client partners this year and are on track to do so.
Speaker 3: As shown on Slide 27, we ended the third quarter with 265 client partners, which was even with where we were at this end of the second quarter and down a little from last year.
Speaker 3: As we mentioned before, our net new hiring generally occurs in the back half of our fiscal year and through today we're at 282 client partners.
With a robust recruiting pipeline and on track to hit 303 by year-end.
Speaker 3: Additionally, this year we've established a foundation for being able to accelerate our sales force growth in recruiting and sales management and sales enablement to support the addition of at least 40 net new client partners in fiscal' twenty-three and.
The fifth and final drive, rval. Highlight is that our strong cash flow has and we believe can be invested to create significant additional value for shareholders.
We've said that our objective is to be a relatively unique company.
A company that can simultaneously generate revenue growth in the low teens and which will accelerate to the mid and then high teens.
Speaker 3: Generate adjusted EBITDA on the range of 20% per year and reinvest excess free cash flow in the business at high rates of return, while also returning substantial amounts of capital to shareholders in the form of share repurchases.
Speaker 3: We believe that we're becoming exactly this kind of company.
As noted, we've increased our actual and expected revenue growth into the low teens and believe that our growth rate will increase to the mid- and high teens in the coming years.
Speaker 3: We've shared our expectation of generating adjusted EBITDA growth with a compound annual growth rate in the range of 20% per year, and we've been investing our excess cash at high rates of return to accreate additional shareholder value.
As it relates to investing free cash flow over the past years. First, we've reinvested capital in the business at high rates of return. For example, the ratio of our adjusted EBITDA, less capitalized development and other capitalized expenses, to net tangible assesetts has been in the range of 20%, and we expect to have many opportunities for organic and EA investments that can continue to meet these high hurdles.
Speaker 3: Second we've also returned a significant amount of excess cash to shareholders in the form of share repurchases at prices we believe have and will generate very high rates of shareholder return.
Speaker 3: During the third quarter we've mentioned, we invested 20.3 million to repurchase approximately five thousand shares at an average price of $40- 68 cents per shareover the years, we've invested approximately $195 million to repurchase 12.8 million shares, reducing our total share count to only approximately 13.9 million shares.
Speaker 3: We believe that these share repurchases represent an attractive use of cash. I'd like to outline the three points we considered as we decided to invest more than two million during the third quarter to repurchase stock.
First we believe that the price at which we have repurchased shares represents a significant discount relative to the net present value of our expected cash flows.
We believe that both our recent purchases and our purchases over the years have reached the standard.
For example, the average price at which we've repurchased the 12.8 million shares over the years has been $15- 16 cents per share.
Speaker 3: Which we've repurchased the 12.8 million shares over the years has been $15 16 cents per share second.
Speaker 3: We believe that a significant percentage of our market cap is attributable to our current cash and the net present value of our projected cash flows alone, without any reliance on residual or exit value.
Third we believe that the price at which we repurchase shares reflect a significant discount relative to other companies with similar revenue and growth expectations.
As we've shared, we expect to generate an adjusted EBITDA comp- no growth rate- in the range of 18% to 20% per year over at least the next three years.
Our analysis of expected revenue and EBITDA growth for small and mid-cap companies suggest that this level of growth in ebitda- and with at least low teens's revenue growth, which we also expect- would place us in approximately the top 15% of the two -year expected growth rates for these comparison companies.
Speaker 3: However while our expected growth rates would place us near the top of small and mid-cap companies, we're currently trading at a significant discount to the average of small and mid-cap companies with similar financial profiles, even after many of these companies have undergone significant declines in their market caps over the past couple of months.
Speaker 3: The combination of these factors gives us confidence that investing excess cash flow in the business and in share repurchases can generate, and can create, significant additional value for shareholders in the coming years.
So with those, having gone to those five points, I'd now like to turn some time to Steve to talk about our outlook and guidance.
Hey Thank you again, Paul. So we've reviewed it a little bit of this guidance before, but we'll go again and expand a bit.
As you know, as shown in Slide 29, our initial guidance provided last fall.
Was that in FY 22, adjusted EBITDA would increase to a midpoint of thirty-five million.
Speaker 4: Which was an increase of seven million or 25%, compared to the adjusted EBITDA 28 million in FY twenty-one.
Our most recent guidance was for FY 22 adjusted EBITDA to increase to a midpoint of 38.5 million.
Representing year-over-year growth of 38%.
We are now increasing our adjusted EBITDA guidance again for FY' twenty-two and.
two between 40.0000415 trillion.
The middle of this range represents more than 45% growth in adjusted EBITDA compared with the 28 million achieved last year. Underpinning this guidance are the following expectations.
First that we will recognize that the deferred revenue currently on the balance sheet.
This deferred revenue is secure and provides significant visibility into our revenue for the fourth quarter next year and beyond.
Second that, in addition to the recognition of our deferred revenue, our all excess pass and leader in mesubscription and subscription services sale will continue to achieve strong growth and assumption, which in which we have high confidence.
Third that while we are expecting recovery next year from the recent pandemic lockdowns in China which normally accounts for approximately 5% of sales.
And restrictions in Japan, which normally account for approximately 4% of sales.
Our guidance assumes very little improvement in their operations in the fourth quarter compared to this year's third quarter.
Speaker 4: Little improvement in their operations in the fourth quarter compared to this year's third quarter fourth.
Is that our inter education business will continue to achieve strong, retentionable schools and revenue among existing leader in me schools and also grow our number of new leader in me schools to 11 level, even higher than we achieved in our strong fiscal 2021.
For the the year. Education will also significantly increase the number of coaching days it delivers in its leader in M schools.
This year because our team's continued effort to have a revenue be recognized more uniformly throughout the year and because of the lifting of code restrictions, these coaching days have been able to be spread throughout the year, whereas last year a majority fell and will recognized in the fourth quarter.
Consistent with this overall guidance, we expect adjusted EBITDA in the fourth quarter to be between 11.1 and 12.6 million.
Compared to a strong 10.6 million in the fourth quarter of FY twenty-one.
This expectation reflects strong growth in North America and our English-speaking direct offices in U K and Australia, and in education.
Partially offset by year-over-year declines in the operations of China and Japan and by the timing of education coaching days recognized in last year's fourth quarter, many of which have been recognized in earlier quarters this year.
We expect revenue growth of approximately 7% in the fourth quarter, reflecting the declines in China and Japan. Japan and the previously discussed timing of shifts in education coaching days out of the quarter into earlier quarters this year.
Total revenue growth for the year, including the fourth quarter, is expected to be 15%.
So talk again about our targets for FY 23 through FY twenty-five.
As shown in Slide 30. you'll recall that the end of the first quarter we increased our original targets of achieving four million of adjusted EBITDA in FY' 23 and five million in FY' twenty-four.
To the target of achieving 45 million in adjusted EBITDA 23 and 55 million in FY twenty-four.
As we discussed a few minutes ago, our targets are to achieve between 47.0000485 trillion in fiscal 2020. -three.
We then expect that adjusted EBITDA will increase to approximately 57 million in FY 24, versus our previous expectation of approximately fifty-five million.
And then to approximately 67 million in FY 25, a level at which we would expect adjusted EBITDA to sales percentage to be approaching 20%.
Of course, while dramatic changes in the world- environment, the economy and other factors- could impact these expectations, we wanted to show with you that these are our current targets. So back Paul, Thank Steve. We feel great about our momentum and look forward to continued accelerating growth. And with that dararyll, we'd like to open the lines of questions, if you would.
And if anyone has a question you can press zero one on your touchst phone once again to ask a question. It's zero one on your touchstone phone.
And our first question comes from Marco Rodriguez. Go ahead, Marco.
Good morning, good afternoon guys. Thank you for taing our questionguys. I was wondering if you could talk a little bit more about the cliiment partner hirings. I heard you correctly your're targeting 40 new net CP hires in fiscal' 23, but I missed some of the commentary surrounding that. So, if you can, if we talk about the main drivers that that are moving you from a net 30 to a net 40, and should we basically they sort of assume that this?
40 level per year is a new run rate level going forward.
Is a new run rate level going forward: ped to improved.
Yes great question. So you'll recall you've been with us for a long time. We, when you, first stepped down and say he, we recognize growing the sales force is key to growing the overall company and growing revenue, and we stepped down and start hiring that 10 year and then we move that up to net 20 and right now we're that 40, we're going to net 40 so- and I know I think 40 is next year- we have ambitions to go beyond that in the two years. You know you might see us's come and talk about a 15 net 60 number in the next couple of years here, and so the commentary I think you're looking for is the. What we need to have in place to beable to support those is: 1- the recruiting, the size of therecruiting team.
Speaker 5: And that's support stafp is that it's not fully in place now to hit that 40 and fiscal 23, Yeah it, Yeah. So what the support staff are? It's the managing Directors who leave the sales force. It's the sales namement people scaling up the sales nameablement tools. So you can, you can model 40, you going forward, and we might come back and pick it up higher, you know, a year from now as we talk about fiscal 24 and 25. got it very helpful then in terms of the international licenseing outside of China and Japan, it obviously sounds like results are are pretty strong and it sounds like it's partly being driven by all access path and adoption.
45% of their business. That's a P and a app services, which will, as we expect, lead to significant returns, and that same sort of why will? We talked about all the time and they'll same economics apply in Japan and and again they were restricted by the government requirement. In Japan, we're seeing a real turn and China's percentages are significantly growing. We probably would be seeing a higher percentage if we just hadn't seen such a downturn in their business and their ability to conduct business with the COVID-19 restrictions in their environment. We'll be able to talk more about that as we end out the fiscal year.
Very helpful. And then shifting here to balance sheet, on the last call we talked about your cash balance and might succeed the large stock buyback you guys did in the quarter, but the conversation also sort of evolved around potential.
Uses of that cash via acquisition, small tuck-ins, like kind of your historical bread and butter. Can you maybe update us on that acquisition landscape and perhaps your level activity, your level of activity in that area?
Absolutely.
So.
Marco we think of when we think of potential acquisitions.
We think of we could acquire capability we don't have those. Examples of that were the acquisition a few years ago, Robert Gregory partners which brought coaching capability and executive coaching to us. joona, the micro push content capability. Strive, of course, the platform to power what we're doing for clients.
So capability acquisitions we think of, we look at content potential. Content fits where we don't have to acquire content. We can off IM license it. But if there was an organization out there to add good content and brought with it, then one of these other 2, which could be a number of customers.
Speaker 3: Where the value proposition. They're happy with their current provider. But boy, if they had access to the content they currently have, plus everything that's in the all axcess path, we can convert them over at a high conversion rate and grow our customer counts even more rapidly. Or they might bring more client partners, sales people, with them. So we kind of think of the four Seas of potential acquisition targets- and Boyd robertsers is in the room here, leads that head set up for us and we're havingting conversations all the time across those four and looking at different things that we might do in the future. Right now we've been very focused on getting strive completely integrated and getting that out the door. But there are, we see.
The potential to be more active there as one of the uses of cash in our balance sheet.
Got it very helpful. Thank you guys for your time and really appreciate it.
Speaker 5: It very, very helpful. Thank you guys for your time and really appreciate it. Thanks, Marco.
And our next question comes from Alex parish. Go ahead, Alex. Thank you very much and thanks for taking my questions.
Land.
So congrats on the beat raise, Congrats on the raised guidance and outlook and with regard to guidance and the outlook, I was wondering if we can talk.
Macro for a bit. Maybe a little additional color. Typical questions that we're asking: how these conference calls is and the impact of inflation and how you're dealing with it, as well as the specter of recessha and how the industry behaves in that sort of environment. So a little more color there on those macro issues Please.
that'sa great question we were. We were expecting that that question might come up on this, callyes. Of course we CAn't predict.
Speaker 3: Will there WOn't to be a be recession, how severe, how deep, et cetera. But what we can do is look at where we sit relative to that potential and assess: how prepared are we, how confident are we, and we feel quite good about the level of preparation and our confidence should there be a downturn, and I would maybe point to five reasons for confidence.
First and we talked about this a little bit in a few minutes ago, but for us it starts with the nature of the problems that we're helping our clients solve.
And you could argue, actually the things we're helping them with might be even more important to them in the difficult times than in the quote easier times.
Executing strategy the need for that becomes even more paramount when things are difficult sales capability production. Our sales practice the culture of the organization and making sure that every leader in individual has the skills necessary to come together and deliver on the strategy. The company has tough times the company coun they just CAn't afford to submmiss or to be sloppy. And so we're on we're on the problems that are very enduring and durable particularly in a challenging time. I'd say itwould be 0.1. We not we're not caught up the think of thin things so to speak second.
We're laser focused on making sure the solutions that we create and we bring to market, we bring to our clients, actually do measurably move the needle in those areas.
Speaker 3: That when you engage with us, performance does improve and it improves at scale across the organization. So the combination of those two things first kind of puts us in in an unique and important arena. The third.
Speaker 3: And this will be a new enforce- and I think this is where I'm quite bullish- is that our subscription business model. We've, of course, gone through downturns in the past as a company, but we haven't gone through it with this new, powerful model where substantially all of the contracts are for at least one year.
Speaker 3: Build up front and none of those contracts come due on the same day and a year. There're spread throughout the year and so that provides just just the single year. Nature of the contracts provides some visibility and a real foundation. But as we mentioned earlier, nearly 50% of the contracts, in more than 50% of the revenue, is in a multiyear contract, which by definition is two years or longer. So there's an incredible amount of revenue that is and will and is scheduled to come in the year to come. So the model is quite different. We got a little bit of of a chance to see that during the pandemic where that subscription revenue held up really, really well if that continue to grow through the pandics. That's the third point. I think the fourth point is a bit of a.
Speaker 3: Well the fourth point would just be: we have cash and we generate cash, and in times of economic uncertainty, cash is King and we're fortunate to be in a position where we have and we generate lots of cash. And I think the fifth is maybe a little bit of a different point and it's something we're focused on with our sales forces. We're not, we don't want to capitalize that somebody else's expense.
And we've seen consistently from the inception of all access passed that as we add more and more to it it becomes and even more robust and powerful solution for our clients that they don't need to work with as many vendor partners as they do and so they can rationalize and consolidate others and actually double down with us. They might spend a little bit less in the aggregate and we actually grow our share with them and we Ve we reported on that during the pandemic. That was certainly the case with some of the large airlines, some of the large hotels, some of the large industrial manufacturing companies. We have continued to see that all along last six years. There's an opportunity here.
Speaker 3: A strong, tend to get stronger in these times and I think we're coming into this with great strength. So that would be my thoughts about we. We're not hoping for a recession, but I think we're quite well positioned. And as far as to the inflation point, we don't have A. we don't have a massive supply chain, we don't have a lot of cost there. Of course, travel cost PE a little bit. We pass those on to our customers. Labor costs a little bit, but T we're not as suscetible maybe to high increases in inflation as other businesses might be.
Great I appreciate that thorough answer and I agree with those points. So you could argue that, particularly with the percentage of subscription and subscription related services that the company should grow right through a downturn, obviously depending on the length in severity of the downturn, that the problems that your customers have will only increase in tough economic times. And you got the increase in component curring revenues. That's great. Yes, Thank you. And then the Q4 challenges. I think Steve did a good job outlining those.
To levels.
Prepandemic.
So we saw it go down, we saw it come back up. Unfortunately it went back down again with what's happen in chin the last quarter and a half or so, but we expect the same conditions that caused it to go back up to prepandemic levels will be there againwe just Don, we just don't foresee that happening in the next, in this fourth quarter, but we do expect it will happen as we get into the next fiscal year. And then Japan has been, it'll be, it's just kind of it's already on to a's return to growth. It's a little bit of a different environment there, but we do expect that both those, those countries will contribute to our growth next year. Excellent, Thank you so much, congrread on the quarter and the into the queue thanks.
And their next question comes from some mere Patel go headme gu ifme. Congrats on a great quarter and thanks for finally repurchasing shares. I got three questions. The first one extends on- I think it was Alex a few minutes ago. Could you maybe you know, as a retrospective, talk a little more in depth about your experience during COVID-19 with those customers who were affected? Right and like you mentioned the hotels and airlline, to mean you know I'm looking care your press release from December 2020, when you were selected by best Western to provide services. More than 2000 properties inand nor.
Grow during the pandemic. But apart from the very early two quarters of the pandemic where we needed to go through the conversion of the subscription services portion of our revenue, which was all booked as live in person sessions, that client locations that out of course got cancellled and our clients weren't yet ready to move to live online, it took a couple of quarters for us to work within the convinceced and that that experience could be just as powerful as live in person. But once we got them over that bridge our subscription services revenue took back off again and it's now levels that's never been before. In fact, as you note here in this call we reported that as a percentage of all acxcess passed.
Speaker 3: subssubscription revenue. Services make up 66 Ve percent now. It wasn't that many quarters ago that that was down in the long, when it started at 12%. It just been slowly growing up to 66%. So I think that the point you're highlighting here is a good 1, which is both the subscription revenue and the services revenue.
Did grow quite rapidly through the pandemic once we got through those first two quarters on the services side, and it is because as, as as we both pointed out here, the nature of the problems we're solving- So we had- we had a client in the early days- is the pandemic that it was one of the largest airlines in the world. There was no airline traffic travel happening. And they came to us and said: we want to double down with you right now because this is a chance we have to reboot our culture and the skills and capabilities of leaders across our organization. They have the time and we have the need and let's go do something special here. And so that was an example there.
Speaker 3: We won the best Western deal. You referenced that and a another very large well, I think probably the lar- largest, if not one of the largest, if not the largest, hotel chain in the world- has been a client for a long time. They double down with us during the pandemic and signed a five -year contract.
Extended the one they had and signed for another five years. And we're still in the middle of that with them, and so we see this's happening. we- I referenced a large kind of industrial company. We began with them about five years agowith one hundred all-access pass users.
It went well they quickly expanded to 1000 and then 3000 users and then during the pandemic.
They went enterprise wide with us and we're now in the middle of a three -year multiyear contract with them where we're doing work all over the organization there and they they were at one point working with more than 30 different partners and are now down to about four or five and were one of and the others are just. They do things. We don't do which is why they're still working with them. And so I think.
To the point here and to Alex's previous question: again, not snot sitting here hoping that there's a downturn, but I do think there's an opportunity. We do feel quite bullish that should there be because of the power of the offerings and the nature of the problems. Our clients are going to need us and clients that are not ours today will also need to. We have to offer and strength looks for strength and I think we can be that strong place that people look to and want to partner with.
That's very very helpful color. Second question is for Steve and Steve I know we but heads on this seems like every quarter. But I mean I think I think with your guidance right. So if I look at this slide 30 it is herepaul in the past two quarters you've raised your revenue outlook from high single digits to low teenss growth. This year's EBITDA guidance midpoint has gone up by about six million and Steve somehow your out. Your targets have gone up by two million so and that's with hopefully next year kind of China recovering from levels that are actually depressed during this fiscal year. As you your has nothing to do with your core business. It just no one's allowed to do business there. Right now right So.
So maybe again is it just conservatism, and or is there something structural I'm missing as to why you've increased your EBITDA this year by six million versus prior target and the next year you're looking for order. That here's for like two million.
Yes So samar one of the things that you'll notice is that.
We're still looking in those outyears at about a 10 a 10 million dollar increase from one year to the next.
And so we think that that's fairly, that's a good amount of flow through year to year is about one million. Now we had really an increased amount of increase in adjusted EBITDA this year from the pandemic impact to 28 million to where we're going to end up, but we think that $1 million a year is a good target and the what we, what we should be able to achieve, and in our guidance for FY 23 is reflected some of the things that that we've talked about meaning hiring, hiring more sales people.
From high single-digit growth the low teens in the near future and then onwards to 15 17, 19% - I mean those out. Your targets, if you start achieving that, are going to be looking higher than that right would. Would you agree with that statement?
Yes Oh yes okay okay cool thanks, that that's. That's all for me.
Okay okay cool thanks, that's that's all for me. Thanks, smeor.
And our next question comes from Jeff Martin. Go ahead, Jeff.
Hi joinn thanks. Good after good afternoon, guys. Hi, how are you?
Great.
Well I was just wondering if you could put into context you had for North America enterprise. You had revenue growth of 27% and.
While growth in build-on build deferred revenue was 16% relative to the expectation of growth acceleration over the coming years and potentially reaching the mid and upper teens. Help help put some context around the deferred revenue growth below the the realized revenue growth for enterprise. It be helpful to have some insight from me there.
Great you- I ked about the walk from yesi have, how you do, on nice to be talking to me. So yes, kind of remind everybody on the phone, which I'm sure most, but to reminder how this works. So when we deliver days et cetera, ship materials or to deliver days, we record that revenue as the transaction takes placeand then, as you know, the next level up from that is that when we invoice for a contract, we normally invoice one year in advance. We put that one year on the balance sheet as deferred revenue.
And that revenue comes off evenly for the coming of 12 months.and then, if it's a multiyear contract that we enter into, we normally let's say it's a three -year contract. We bbuild for the first year and then we do and we put that on the balance sheet. But the second and third years are in the UN, the unbilled deferred. That is off balance sheet. So we always have those three levels.
The deferred revenue on the balance sheet comes off evenly.
The deferred revenue on the balance sheet comes off evenly every month.
But the unbilled deferred, the unbilled deferred, that's off-balance sheet.
Comes on in annual chunks because we bbuild a year in advance and so those contracts are coming off a full year at a time being added to the balance sheet and then coming off the balance sheet evenly. That's all just to say it's a little bit complicated and in this third quarter. In this third. In this third quarter.
We put 30, 28.8 million.
We added to deferred revenue, whereas last year was twenty-two point seven.
So that was more.
We added eight million to unbill deferred where it was nine the year before that's a million less but you noticed quickly that last quarter. We added four million more to unbill deferred and in the first quarter we added three million more so that's just kind of a reflection of how the multiyear contracts were sold in these three quarters. So the year to date number looks looks really good for the contracted amount and for the invoiced amount. It was just this quarter. There was a little bit impacted on the amount of multiyear sales. Even though the percentage.
ofmultiyear related to those particular sales went up. What was that? two many you know helpful I was. Just the reason for the question is that wanted to get some perspective that deferred revenue growth isn't its in on a decline all. Eventually that catches up to the reported revenue growth and it sounds like third quarter was somewhat of an anomaly with respect to the addition of multi-year contracts.
Yes multiyear it was- is a good quarter for what we invoiced, got it okay. And then Paul wanted to get a sense in terms of revenue growth acceleration key drivers. Obviously continuing to expand the mix of subscription and related services is probably the biggest, but maybe help give us kind of a pecking order of where you expect the other most meaningful contributions will be. Obviously client partner growth is going to be a big part of that and then rebound in Asia is going to help, but maybe just kind of help us prior to which are the most impactful beyond to be increasing concentration of subscription.
Yes I think you actually peacked through the pecking order there. By far the biggest one is: we now have that. We now have a model. We're.
six years into this, that is is built to grow it. It retains, we retain.
Substantially all the revenue we had services, though that the model is growing and as that, and that all Axis passed and related and the leader in mean related businesses are growing far and above the mid-teens- we talk about, the low teens we talk about- And so as that continuue to become a greater andgreater percentage of the business, of course the whole, the business growth rate increases, which you said there, and so I think the drivers of that are as you mentioned. It's it's frankly, more sales people, it's more time with the existing customers. We still have a tremendous amount of headroom to expand inside each of our all Axis passast subscribing clients we've mentioned on previous calls. Very few of them are we enterprise with.
Speaker 3: We're just we're in there with initial populations that are, while nice-sized, have was a lot of headroom to grow inside the existing, all excess past clients, in addition to adding new clients in the future, and so I think it's the sales people to do that. It's continuing to be smart about how we market in position the company. It's making sure that we have a growing, powerful subscription offering that our clients will find appealing.
Really the point to be made here is, I think the model is built to grow and and we're doing the things. That causees us to grow and it's the execution in the perfecting of the things we're doing and doing them. But even a higher level of velocity causes subscription to keep growing and a subscription keeps growing the whole company growth rate till higher and higher. And then wanted to get a sense with the impact platformyou know what. What are some of the opportunities to do things maybe a little different. Enhance the value proposition once that's fully rolled out versus you what you've been doing in the last 6, seven years with with the subscription model, Thank you, thanks for calling the impact platform.
Everybody kind of knows that and the industry knows that to sit your computer and watch something by yourself you might have your own individual aha, but it's kind of a lousy way to drive collective aha and behavior change in an organization really needs. So what you need is to you need a place to convene where people can come together in an easy way with other people in their organization and have these facilitated experiences where together you're wrestling through things, you're learning things, you're talking about how to apply them, and that there can be coaching for those organizations that want to support that experience with one on one or team based coaching. So it's this capital P platform: takes great content, marries it up with.
Our instructors are consultants and or client facilitators. The client wants to do that. And then all the in between, in the scenes of your workday, workweek self follow-up and reinforcement that you need to make behahave su to sustain behavior change.
And integrates that all onto one capital P platform that's that's elegant and easy for our buyers to deploy prior to the impact platform prior to strive.
Speaker 3: Clients want to do that, but it's very difficult for them to have to piece all that together. It's not a seamless experience and it requires a lot of back-end work. We take all that work away from them and make it fairly push button easy.
And then on the flip side for the user, if you were, I going through this. We're now that what we need to do is being served up to us. We don't have to go away for two days to training, make a bunch of notes to make commitments, get back to that day jobs, forget everything we learned and get on, and it's just kind of: we did that, we were there we, we did it and didn't really change behavior. Now this platform is powering you or me, or any of us that are on this call, through a multi oddal experience over the course of time and measuring our be behavior change over time, and so it's very elegant and easy for the user. It's also very elegant and simple for the administrator to help us do something that's not actually easy to do, which is to engage somebody and help change our behavior over time.
So the opportunities for that are: it's a's a very attractive thing and so when you got and talk to new clients, they re attracted by that, are attracted to that. So the win rate- new clients do low as et cea- ought to go up over time as we get this out there. Second, it's built to drive even more services right. It's So seamless to integrates the people component that the consultants, and so we expect to continue to see services grow as a result. And then because it is makes easier for the buyer to deploy it at scale to larger populations of people, we think it ought to help us drive increased expansion. As I mentioned a minute ago, we're still we have lots of head.
And thank you, Ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.