Q1 2023 Franklin Covey Co Earnings Call
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Good day, and thank you for standing by and welcome to the first quarter 2020 three for currently earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.
Session.
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I'd like to hand, the conference over to your Speaker today, Derek Hatch corporate controller. Please go ahead.
Thank you.
Hello, everyone on behalf of Franklin Covey, I would like to wish everyone, a happy new year and welcome everyone to our first quarter earnings call for fiscal 2023 before we get to the good stuff I'd like to remind everybody that this presentation contains forward looking statements within the meaning of the private Securities Litigation Reform Act of 1095.
Forward looking statements are based upon management's current expectations and are subject to various risks and uncertainties, including but not limited to the ability of the company to stabilize and grow revenues the acceptance of and renewal rates for our subscription offerings, including the all access pass and leader in me memberships, the duration and recovery.
From the COVID-19 pandemic the ability of the company to hire productive sales professionals general economic conditions competition in the Companys targeted marketplace 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 pause.
These are 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. Many of these conditions are beyond our control or influence any one of which may cause future results to differ materially from the company's current expectations and there can be no assurance the company's actual.
Future performance will meet management's expectations. These forward looking statements are based on management's current expectations 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 with that out of the way, we'd like to turn the time over to Mr. Paul.
Walker, our Chief Executive Officer, Paul Thank you Derrick.
Hello, everyone. Thanks, so much for joining us today and as Derek said, we want to wish you all a very happy new year I'm joined by Steve Young our CFO by Genco Simo, the president of our Enterprise Division and Sean Covey, President of our Education Division and several other members of our executive team are also happy to have Bob Whitman, our executive chairman with us today as well.
We're really pleased that our results for the first quarter of fiscal 'twenty, three we're strong and even stronger than expected.
As you know the ongoing strength of Franklin Covey is performances driven by five key factors and I thought I would just briefly highlight these.
And then dive into our results.
First we help organizations address mission critical challenges and opportunities these challenges and opportunities require collective action of large numbers of people.
The second strength as we've organized our entire company around helping clients address these challenges and our solutions, which combine best in class content technology coaching.
And measurement work.
They really do work and as a result, our lifetime customer value is significant and increasing and the duration of our subscription contracts continues to extend increasing both the durability and predictability of our revenue.
The third strength is the strength of our subscription business, which is growing at more than 20% per year and is driving an overall increase in growth for the entire company.
Overall revenue growth has increased from the high single digits to the low double digits and now into the low teens and we expect this growth to continue into the mid teens and then high teens in the coming years.
Fourth the strength of our subscription business model with its high gross margins and declining SG&A as a percent of sales is resulting in a significant flow through of incremental growth in revenue to increases in adjusted EBITDA and finally, the fifth strength is that we have significant headroom for growth and we're investing to take advantage of it.
These investments include growing our sales force by more than net 30 last year, and which will grow by more than net 40. This year and in addition, we're making investments in content technology and in marketing.
So he is thinking about.
Those five strengths and how they are playing out let's talk for a minute here I'd like to share with you how they did play out in the first quarter I would like to start with headlines.
Beginning with those regarding our double digit revenue growth in the quarter.
As you can see as shown in slide five.
Revenue growth for the first quarter of fiscal 'twenty, three was strong increasing 13, 2% to $69 4 million.
In constant currency, our revenue has grown even more rapid 16, 6% even after absorbing the impact of ongoing COVID-19 related lockdowns in China in the quarter and a slow return to post COVID-19 covered normalcy in Japan.
Our revenue growth for the latest 12 months through this year's first quarter was also exceptionally strong with revenue growing 14, 3%.
And growing 16, 2% in constant currency.
As significant as was our overall growth for the quarter and for the latest 12 months our subscription in subscription services revenue growth was even stronger.
As also shown on slide five total subscription in subscription services revenue grew 21% in the first quarter and grew 26% and our latest 12 month period.
With the all access pass subscription in subscription services revenue growing 20% in the first quarter and 26% for the latest 12 months and the leader in me subscription in subscription services revenue growing 24% in the first quarter and 25% in the latest 12 month period.
The durability of our revenue also continues to increase.
And our visibility into future revenue growth continues to extend and expand.
As also shown on slide five our balance of deferred subscription revenue billed and unbilled increased 25% or $35 million in the first quarter compared to last year's first quarter to $151 6 million.
And finally as shown on slide five for the latest 12 months in our North American Enterprise operations. The percent of our total all access pass Invoiced revenue represented by multiyear contracts of at least two years increased to 62% at the end of the first quarter up from 55% at the end of fiscal 'twenty Two's first quarter.
Now to some headline profitability metrics as shown in slide six.
Our gross margin percent in the first quarter remained very strong at 76% an increase of 100 basis points compared to the 75% in the last year and last years.
First quarter and close to the 77, 7% gross margin achieved in the first quarter of fiscal 2022.
This reflects strong growth in education revenues and 25% growth in subscription services, both of which carry a somewhat lower gross margin percentage.
Our latest 12 months gross margins were also very strong at 76, 4%, reflecting the same strong growth in education and subscription services revenue.
Operating SG&A as a percent of sales improved another 199 basis points to 59, 5% in the first quarter compared to 61, 5% in the first quarter of fiscal 'twenty, two and improved 296 basis points for the latest 12 month period to 63% compared to 63.
2% in the same latest 12 month period last year.
The incremental flow through of our growth in revenue to growth in adjusted EBITDA in the first quarter was 19%.
Just as a point it would have been 20, it was 22% in constant currency.
Reflecting the combined impact of strong gross margins and declining declining operating SG&A as a percent of sales.
And the flow through of growth in revenue to growth in adjusted EBITDA was 28% for the latest 12 month period and would have been 30% in constant currency.
As a result of this strong revenue growth adjusted EBITDA grew 16% or $1 $5 million in the quarter to 11, 5 million and grew 28% or $9 6 million to $43 7 million in the latest 12 month period and.
In constant currency adjusted EBITDA grew $2 3 million or 23% to $12 2 million in the first quarter, and 34% or $11 6 million to $45 7 million for the latest 12 months.
Our net cash provided by operating activities was $3 million in the first quarter compared to $10 2 million in the first quarter of fiscal 'twenty, two reflecting changes in networking capital.
We expect our cash flows from operating activities to be strong in fiscal 'twenty three.
We ended the first quarter with $73 $2 million of liquidity comprised of $58 2 million in cash and with our full $15 million revolving credit line Undrawn.
Our strong and increasing liquidity.
Yeah.
This.
Add to Franklin Covey to our operational.
Adoption alley to us as we continue to invest in our business evaluate potential acquisition opportunities and continue to look for ways to further enhance shareholder value.
We're pleased by our accelerating revenue growth and our growth in adjusted EBITDA and by the businesses continued momentum there.
Pleased with our first quarter revenue growth of 13, 2% or 16, 6% in constant currency and our latest 12 month revenue growth of 14, 3% or 16, 2% in constant currency. It gets us off to a very strong start for the year and now with that I'd like to turn some time over to Steve to dig a little bit deeper into these results.
Okay. Thank you Paul and it's a pleasure to be with everyone happy happy new year.
As Paul expressed we are really pleased with the combined ongoing strength the growth of our revenue adjusted EBITDA and cash flow.
And as Paul also noted we are pleased to have achieved these strong results even after absorbing ongoing COVID-19 related impacts on our results in China and Japan.
And after absorbing a $2 million revenue decrease related to unfavorable foreign currency fluctuations.
I'd now like to provide a little more detail on the factors underlying this strong performance focusing on the results in three key areas of our company.
Specifically in our enterprise business in North America, and our enterprise business internationally in both our direct offices and in our international licensee partner operations.
And in our education business.
All of which is in North America.
First as shown on slide seven results in our enterprise business in North America were very strong in the first first quarter and in the last 12 months.
Revenue in North America, which.
<unk>, 473% of total Enterprise Division revenue.
Grew 16% in the quarter and 17% in the latest 12 month period.
Subscription and subscription services revenue grew even more rapidly increasing 19% in the first quarter and 24% in the latest 12 months.
Our balance of deferred revenue billed and Unbilled.
Grew 25% compared to last year's first quarter balance.
And the percentage of North America's all access pass Invoiced revenue represented by multi year contracts.
Increased to 62% for the last 12 months ended this year's first quarter up from 55% for the same.
Latest 12 month period last year.
Second as shown on slide eight.
Revenue growth was very strong in our offices in U K, Ireland, Germany, Austria, Switzerland, and Australia cut.
Countries, which together make up approximately 48% of total international sales and who are all access pass makes up a substantial portion of those sales.
Revenue in these offices grew 12% in the first quarter and grew 20% in the last 12 months.
Months.
All access pass subscription and subscription services sales, which make up approximately 83% of total sales in these countries grew even more rapidly increasing 13% in the quarter and 35% in the last 12 months.
And our offices in China, and Japan, which account for approximately 52% of our total international sales.
Widespread COVID-19 related Lockdowns in China over the past 15 months, which continue to persist throughout our first quarter.
Together with a very cautious and slow return to normalcy.
<unk> covered in Japan.
And the negative impact of FX.
Impacted results in these two countries as revenue.
Declined by 8% and 20% in the last 12 month period.
Our strong overall company results were after absorbing these impacts.
Also shown on slide eight our international licensee partner revenue increased 9% in the first quarter and 15% in the latest 12 months.
Our licensee partners operations continue to strengthen.
Despite the impact of FX and world economic conditions.
Finally, as shown on slide nine as a result of our education business, which accounts for approximately 24% of total company revenue were also very strong.
With education revenue growing 23% in the first quarter and 24, 21% in the last 12 months.
Education subscription and subscription services revenue.
Growing 24% in the first quarter and 25% in the latest 12 months.
Education balance of deferred subscription revenue growing 20% in the first quarter.
Our year over year retention and later in May schools remaining very high at approximately 90% for the last 12 month period.
So Paul back to you.
Thank you Steve Thanks for reviewing those results.
Driving these strong results as the ongoing strength of our subscription business.
As shown in slide 10, our subscription in subscription services revenue grew 26% in the latest 12 month period and now accounts for 77% of total overall company sales.
This growth has been driven by both the growth in our all access pass subscription business and our enterprise Division and by Alere leader in me subscription business and our Education Division maybe.
Maybe just a couple of bullet points on each of these <unk>.
First as shown in slide 11 in the enterprise business all access pass subscription in subscription services revenue grew from $13 7 million in 2016 to $144 5 million at the end of fiscal 'twenty, two and grew further to $151 1 million for the latest 12 month period.
Through the first quarter of fiscal 'twenty three.
Second Similarly, the leader in me subscription offering is driving strong growth in the education Division. We're leader in me subscription offerings growth had been so substantial that for the latest 12 months period accounted for $62 million or 93% of education total revenue.
And leader in me subscription revenues continued to grow rapidly increasing 24% in the first quarter and 25% for the latest 12 month period.
Our subscription model is also driving significant increases in both the durability and predictability of current and future revenue.
As shown on slide 12, our balance of deferred subscription revenue billed and Unbilled continues to grow significantly increasing 25% or $30 2 million to $151 6 million at the end of the first quarter.
And additional durability and predictability of our revenue is being created by the increasing percent of our all access all access pass contracts, which are multi year.
At the end of the first quarter fully 62% of our total all access pass subscription invoiced amount with for multiple year periods up from 55% for the same period last year.
Importantly, our subscription business model has also resulted in a significant percentage of our growth in revenue flowing through to growth and profitability.
With our subscription offerings strong gross margins and declining operating SG&A as a percent of sales a significant percentage of our accelerating growth in subscription revenue is flowing through to increases in adjusted EBITDA as noted a few minutes ago. As a result, adjusted EBITDA grew 28% or $9 6 million in the latest 12 month period.
Given the strength of our subscription business as just described.
Its importance and now accounts for more than 77% of total company sales of more than 100% of our growth in sales.
And given that we expect subscription in subscription services to account for substantially all of our sales within the next few years, we thought it might be important and useful to first articulate what we view as three important and differentiated elements of our subscription business model and second discuss the key factors that are driving them I'd like to just briefly.
<unk> discussed these two points as indicated in slide 13.
Our business model includes includes three key and differentiated elements.
These are as follows.
First when we enter into an all access pass subscription with a client that contract becomes an asset worth hundreds of thousands of dollars.
Second that the duration and certainty of these contracts is increasing each year further increasing their value.
And third that.
Our cost of acquiring a new client contract is not only significantly less than the net present value of that contract lifetime customer value, but it's even less than the contracts first year value.
I'd like to briefly touch on each of these factors and what's driving them.
So first when we enter into an all access pass subscription with a client that contract ultimately becomes an asset worth hundreds of thousands of dollars.
The average new all access pass contract has an initial year subscription sales price of approximately $27000, which by the way that amount has increased substantially from the approximately $18000 average sales price when we first offered all access pass.
In addition to the value of their all access pass contract in the first year of pass holder as a pass holder clients purchased approximately $13000 in additional subscription services for an approximate total first year client spend of about $40000. As you can see as shown in the top node of slide 14.
As shown in note two of that slide the combination of this relatively large first year spend.
Our high logo retention rate.
The fact that upon renewal the average client significantly expands its all access pass holder population.
And our clients significant and ongoing purchase of value, adding services to help them achieve their objectives together means that the average annual all access pass client becomes a client spend becomes approximately $77000.
This significant average annual all access pass client spend not only more than offsets any revenue loss from contracts that don't renew but it's almost double the first year spend of $40000.
Finally as shown in note three with a blended gross margin of approximately 85% on the $77000 in annual revenue generated by the average all access pass contract. The average all access pass contract produces an annual contribution of more than $65000.
And with the annual revenue of the average all access pass contract continued to increase each year. The expected lifetime value of an average all access pass contract as hundreds of thousands of dollars and many times the value of the initial subscription contract.
The second point underpinning our business, our subscription business model that the increasing duration of our subscription contracts increases visibility into future revenues from those contracts and thus their value.
As valuable as each all access pass subscription contract already is the duration of these contracts and the increasing visibility into future revenue is expected to come from them continues to increase their value.
As shown in slide 15, the percent of total Invoiced amounts of all access pass contracts, which are for multiyear periods continues to increase.
As shown in 2017 this percent with approximately five it increased to 37% in fiscal 19% to 53% in fiscal 'twenty, one and a 61% through the end of fiscal 'twenty two.
As a result, the extent of visibility into future revenues, which will come from these contracts continues to increase.
As this occurs we begin each new year with more billed and Unbilled deferred revenue in place as a percent of the prior year's total revenue.
The extent of this increase can be seen on slide 16.
As shown in fiscal 2017, the sum of billed and Unbilled deferred revenue from all access pass contracts as a percent of the enterprise division's prior year revenue was 30%.
This increased to 40% in fiscal 19 to.
<unk> to 59% in fiscal 'twenty one.
And to 62% in fiscal 'twenty two.
And as a higher and higher percentage of total contracted revenue becomes multi year and as those contracts represent a higher and higher percent of prior year's revenue.
The certainty of our future revenue increases.
This reduces the theoretical discount rate that should be applied to that future revenue further increasing the total value of these contracts.
The third point under underpinning a subscription business model as is shown as shown on slide 17, our cost of selling or acquiring a new all access pass subscription contract the cost of customer acquisition or the CAC is not only well less than the net present value of an all access passes.
All access pass contracts lifetime value, it's even less than a client first year all access pass spend.
Our direct sales force of approximately 300 client partners is large and growing significantly.
So our teams have implementation strategists and client success professionals.
We also invest in thought leadership marketing PR et cetera to help acquire new clients. However, we're grateful that as a result of the effectiveness of our marketing sales and customer success efforts.
A relatively large initial contract size.
And our strong gross margin percent, our total customer acquisition costs or CAC is still less.
Then the initial first year contribution generated by the average all access pass contract. This is important.
Many organizations customer acquisition costs significantly exceeds the first year contribution generated by the average subscription contract as a result of more rapidly they grow the greater is the aggregate negative contribution generated from this new revenue.
Their business models are based on the expectation that if they can achieve good revenue retention over time their accumulative contribution will eventually turn positive and they'll recover their first year deficit.
While the number of companies that are able to cover their cost of customer acquisition within two or three years, we're fortunate to be in a position of generating a positive contribution and a new all access pass contracts first year, and then having that contribution grow each year. Thereafter. This is really important it provides us with the ability to simultaneously achieve growth.
In both revenue and profitability.
Importantly, this profitability is not only relative.
It's not only relative to the all access pass contracts lifetime customer spend.
Two its first year value.
The combination of these three factors that are subscription contracts have a high and increasing lifetime customer value that our average subscription contract also has an increasing duration and that our cost of acquiring one of these extremely valuable contract is a fraction of the contracts total lifetime value.
And even less in the contracts first year value provides us with a unique opportunity the opportunity to generate accelerating revenue and while at the same time, achieving accelerated growth and adjusted EBITDA.
Three key factors.
Underlying that are driving enabling and enabling our strong but the strong business model as shown in slide 18. They are first the mission critical nature of the kinds of challenges our clients engage with us to address second the effectiveness of those solutions and helping clients address the challenge these challenges and third the strength and reach of.
Of our client facing organization in acquiring serving retaining and expanding client relationships I'd like to just share a thought or two about each of these first as shown in slide 19.
Is the importance of the mission critical challenges, we help our clients address as we've reviewed in some detail in prior quarters, and therefore I won't go into the same level of detail here today, the opportunities and challenges we help our clients address challenges that by definition require the collective action of large numbers of people our must win for organizations and our long lasting.
These must win challenges include things like executing on a major strategic objective the accomplishment of which requires the collective focused efforts of large numbers of people or building leaders at all levels leaders, who can both achieve their big business objectives, and do so while leading in a way that engages their people and build the organizational muscle necessary.
To achieve even bigger objectives in the future.
Or establishing a culture that builds trust with all key stakeholders.
Because these kinds of challenges are always important helping clients to successfully address them provides us with the opportunity to establish long term partnerships with our clients and schools partnerships that enduring both good times and in more challenging times.
The second point I would highlight is as shown in slide 20, the effectiveness of our solutions and helping our clients successfully address these challenges.
As we've noted in the past and as shown on slide 21, most organizations already have pockets or units in which their business results are exceptional.
Just as high and their leaders, leading away, which unleashes the potential of their people.
Every organization also has variability often significant variability in the performance across its units and its variability provides our clients with both a tough challenge and a big opportunity.
As shown in slide 22, our solutions combined best in class of blockbuster content.
Technology, including our new impact platform, which allows us to deliver this content with impact and at scale the.
The guidance of extraordinarily talented and experienced people, including our world class coaches and facilitators and metrics that provide clients with the ability to measure the impact of our solutions and moving desired behaviors and results righter and tighter.
And third as shown in slide 23.
Is the strength and reach of our client facing organization in acquiring serving and retaining and expanding these client relationships.
We've organized our entire company around helping clients address exactly these kinds of challenges.
And the combined efforts and capabilities of our thought leadership in marketing, our client partner or our salespeople and implementation strategists and our coaches and consultants provides us with a unique capability to acquire serve retain and significantly expand client relationships.
And our reach includes direct operations in nearly all of the world's largest economies.
And an extraordinary licensee network, which is able to serve client needs in more than 150 countries and in almost every language. This creates a network effect, it's really hard to replicate.
The combination of these factors is providing us with a unique set of capabilities with which to serve customers in a set of capabilities that translates into both strength in acquiring new clients and an extraordinary capability to serve retain and expand those client relationships and were working.
And investing continuously to further strengthen our already significant strategic strengths as soon as shown in slide 24 by continuing to make significant annual investments in existing and new content areas technology, which allows the delivery of that content with both high client impact and at significant scale and the size and capabilities of our.
Sales force and the reach and impact of our thought leadership.
We're pleased that because of our strong business model, we are able to make these ongoing investments to accelerate our growth in revenue while at the same time accelerating our growth in adjusted EBITDA and cash flow I want to express my huge appreciate appreciation to our amazing teams that are making this possible every day I'd now like to turn some time over to Steve Young to review our guidance in our multi year outlook.
Thank you again Paul.
Guidance and outlook.
As shown on slide 25, two months ago in our year end report, we provided full year FY 'twenty three adjusted EBITDA guidance in constant currency.
Between 47 and $49 million.
Which reflected an upward revision from the 47 to 48 5 million, we guided to in July .
We are really pleased with the first quarter being ahead of our guidance and even in the context of the challenges in the broader world any economy.
We are pleased to be able to reaffirm our full year guidance.
<unk>, 47% and $49 million.
And our outlook targets of $57 million in FY, 'twenty, four and $67 million in FY 'twenty five.
Underpinning this guidance are the following expectations.
First the significant amount of deferred revenue.
Currently on our balance sheet will be recognized this deferred subscription revenue is secure it's already been billed and the majority of has already been collected.
In addition, a significant portion of our $74 9 million of Unbilled deferred revenue will be build in this year and a portion of that will also be recognized during FY 'twenty three.
This significant balance of deferred subscription revenue.
Provides tremendous visibility into our revenue for FY 'twenty three and beyond.
Second then in addition to the recognition of our deferred revenue.
All access pass and leader in me subscription and subscription services sale will continue to achieve strong growth.
Driven by high revenue retention.
<unk>, new logos and expanding lifetime customer value. These are assumptions of which we have a high degree of confidence.
Third and as to the strength of our subscription business model.
Ongoing investments, we are making this year and salesforce grow.
And in content and technology.
Gives us confidence in our ability to accelerate our growth in years to come.
We view this as an important time to make these investments.
Does it gives us an opportunity to increase our share of market in this environment.
We're expecting sales in China, and Japan to be relatively flat in the year.
Reflecting post COVID-19 impacts.
Consistent with our overall guidance of adjusted EBITDA, increasing from $42 2 million in FY 'twenty two to the 47% and 49 that we've talked about in FY 'twenty three.
We expect adjusted EBITDA in the second quarter to be between $89 million.
The $8 million and adjusted EBITDA, We achieved last year was a good result up 57% from the year before.
We will feel very good about achieving this result, particularly given this second quarter is one of our smallest revenue is our smallest revenue quarter and that many of our growth investments such as client partner hiring and investments in content and technology.
Relatively evenly spaced throughout the year.
We expect reported revenue growth in the second quarter to be approximately 11%.
Even after absorbing approximately 200 basis point impact on growth.
Kern current foreign exchange rates.
And the expectation of flat sales in China and Japan.
Excluding the impact of FX.
And of China, and Japan, the rest of the business is expected to grow approximately 15% in the second quarter.
While some quarters revenue will be higher than others, we expect revenue growth in the year to be approximately 12% to 13% in constant currency.
While dramatic changes in the world geopolitical environment, the economy and other factors could impact our expectations as our current targets.
Paul Thank.
Thank you Steve.
We feel great about our continued momentum and are looking forward to.
Continued accelerating growth and with that maybe let's let's ask Victor to open the lineup for questions and be happy to take those.
Sorry, I missed the question you into press Star one one on your telephone please standby, while we compile the Q&A roster.
Okay.
One moment for our first question.
Our first question comes from the line Alex Paris from Barrington Research. Your line is open.
Hey, guys. Thanks for taking my thanks for taking my questions. Congrats on the Q1 and the strong start to fiscal 'twenty three.
Just kind of starting at the top down.
My first question's going to be regarding economy inflation, the employment outlook in 2023, the risk of recession.
And the reason I ask and we've talked about this before is the company is very different than it was.
Then it was during the last recession that we experienced.
I guess two parts what are you seeing any impact from the economy.
A slowing economy and new logos for example, which I would assume.
And then.
No comments with regard to inflation in your pricing strategy for fiscal 'twenty three.
Yes, Thanks, Alex Great Great question Saul.
See if I can hit all three of those inflation.
Employment recession et cetera. So.
First of all just just stepping back for a second.
Our our clients are.
Unfortunately, because you are a client of Franklin Covey Youre not any.
Any more immune to what's going on in the world right now and so our clients are dealing with the same things, they're talking about where they're going to allocate their budgets.
Right size of their workforce should be.
Going forward right now and all the things you would imagine that everybody is talking about dealing with so we certainly.
Feel that we're in the middle of that we hear that we are many times, where we're partnering with them as they try to figure some military questions out.
And so yes to the extent are we are we feeling some of those headwinds we are.
And don't know what that necessarily looks like out into the future, but today, we're selling into that environment and we're doing we're doing quite well in that environment and so just its just a couple of points of evidence there to maybe give a little bit of color to you.
We just we just talked about the fact that we have 62% of our all access pass contract value is made up of multi year contracts I think that underscores the the idea that we're on these multi year journeys with our clients and Theres a high level of commitment that they have to what they're trying to do and therefore also to us as their partner.
We we didn't we were in the environment in the first quarter and didn't see a lot of those headwinds impact our first quarter results as we just reported there.
We're on topics as you know that are important to our clients I think that gives us.
A leg up there and helps us as well.
We.
We just ran some numbers yesterday actually and look through the first four months of the year how has.
Attendance at marketing events, which is a leading indicator for us gone and it's up about 20%. This year in the first four months over what it was in the first four months of last year.
Alright.
A nice leading indicator are our pipelines remain.
Strong in full so I think.
My answer to your question would be certainly we're seeing it we're hearing it to some degree of feeling it there are some sectors of the economy. Some of it our technology clients arent expanding what they're doing with us at the moment and then there are other sectors of the economy, where we're in large expansion discussions with clients and so it's a bit of a mixed bag there depending on.
The client and where they are but we're navigating that I think.
Pretty pretty darn well right now and.
No.
On what we see right now we've tried to take all that into account as we've given the guidance that we've shared here today and reaffirming our guidance for the year.
That would be my answer as far as the inflation question, we're not susceptible really from a much from a cost standpoint to inflationary pressures, we don't have a big supply chain.
For us it would be and wage pressure and we did see some of that last year. During the great resignation as many did but that seems to have abated.
Quite a bit this year.
So Steve I don't know if you'd add anything to that no I agree. Okay. Thanks, and then related to that I think on the last conference call you said that.
You do annual price increases after the end of the fiscal year. So in September 1st you implemented a price increase and those typically range from 3% to 10% with inflation running.
Pretty hot right now, even though hopefully its might have peaked.
What can you say about your price increase for fiscal 'twenty three.
So we did implement a price increase September one at the beginning of our new so we actually do it Alex is that for the fiscal year not calendar year. So we implemented the price increase September one.
And over the years, we've taken it up between 3% and 10% in this year I would say our wait it out.
We did take prices up.
At 10%, but then we we created an opportunity for our clients to experience less of a price increase than that if they were in exchange for a multi year commitment and we've done that every year as well. So we did do a price increase.
And I would say weighted average with the number of contracts. We have that are multi year now weighted average, we probably pick up three.
3% ish yourself on price increases.
And then there are some that will pay 10% more especially new clients. This year, we did take the prices up.
Got you and.
Yes.
Maybe a little update on the impact platform I know you tested it throughout last year and you launched it in North America in October .
How what are the early indications from clients on that on that transition.
Great Great question Jen call Simo do you want to you are in the middle of that one every day do you want to talk about how how our clients are feeling about the impact platform.
Of course, thanks, Alex.
Just as we saw during the limited launch and during our pilot phases. What clients are most impressed with is their ability to scale.
The administration being taken all into the impact platform. They are able to really rollout, which is a big challenge for limited departments learning and development departments that have maybe less staff for the way we can actually scale. So much of this in a differential way, which has been a challenge they've been facing.
For decades, and so we are having tremendous conversations of clients converting taking cohorts through it doing the one on one coaching where we're seeing great success with the technology, we've rolled out.
Great and what are the next steps then I think you also said on the last conference call over the coming months, we'll roll it out to the other countries in other languages and things like that where are we in that process.
Our global rollout has begun with our English speaking direct offices, meaning the U K and Ireland and Australia have.
<unk> started the global rollout and as we take the platform into a variety of other languages, we're anticipating an April rollout globally.
Great and then the last question.
I'll give other people a chance.
Capital allocation.
Our full.
Cash flow statement has not provided in the press release wondering if you repurchased any shares in the first quarter how many.
Sure.
What is remaining on the outstanding current authorization and what are your plans for capital allocation in general share repurchases dividend consideration, both regular dividend and perhaps a special dividend I think people have talked about.
Alex we had about 800000 buyback in the quarter and that was related to the net exercise of long term incentive plan shares.
Our our philosophy related to capital allocation is similar to what it's been we're always.
We're always looking at Opportunistically buying back shares we periodically talk about.
Dividend, even though we're not in.
And our position right now.
<unk> that Avenue, we also look at.
Things related to acquisitions.
We have talked about so basically so basically.
We're looking at all of those all the time again.
Acquisitions, Opportunistically buying back shares maybe someday doing a dividend and then.
Don't mind, having a little bit of cash on the balance sheet.
From time to time so.
We have about $20 million.
<unk>.
On our on our authorization and.
And.
We talk about considering all of those capital allocation uses without making commitments because we're looking at those all the time and Opportunistically.
Buying back shares but.
But I think I can say.
We will periodically be in the market buying back shares.
Great Thanks, Dave and thanks, everyone.
Oh, that's the last of my questions for now thank you. Thank.
Thank you Alex.
Thank you one moment for our next question.
Our next question comes from the line of Chuck Ski from Northland Capital markets. Your line is open.
Alright, thank you.
Congrats on a strong quarter here.
Steve how much of an incremental headwind or tailwind was FX to a top line during the quarter relative to what you had expected a quarter ago.
Well it was it was a 2 million dollar impact.
Compared to prior year. So it's two 2 million topline 800000, adjusted EBITDA impact and we could see some of that come in but that's what the impact was.
What about relative to a quarter ago.
Our core goal, let's say just one second.
Our.
Our revenue impact.
Although I'm just second we'll give you audit quality number.
Okay.
Two clicks away.
Sure.
Yeah.
I don't remember exactly what it was.
Okay.
114 million.
Topline and.
And the same 800000 adjusted EBITDA impact.
Okay, great. Thank you.
And Paul.
So you mentioned that.
No.
Tech related customers and we see it in the headlines a lot of layoffs.
It sounded like.
It's impacting but they're not canceling contracts or are they still going through the motions of doing renewals, especially those that are laying off employees.
It's just simply youre not getting the level of expansion I, usually get can you just double click there yes.
Yes, I'm glad you came back to that good good question.
So a couple of things one and thats not to say that there arent tech companies still doing business with us in fact.
The end of the first quarter, we closed up.
<unk> deal with a very very large tech company, who would very prominently in the news for laying off a lot of people.
And.
And I think that highlights that even though you might let go 16000 people you saw of 80000 people last two need to be more effective the culture needs to continue to make progress et cetera et cetera. So.
My point there was yes. So clients are still we're still experiencing very nice renewal and retention rates like we have even in this environment we.
We had a nice new logo quarter in the first quarter people are still coming to our marketing events. As I said I was just more trying to highlight that it's a bit spotty out there and we do see some of those headwinds and they show up a little bit more in some places in the economy than others and.
There are other industries, where we're talking about very large expansions right now there's even a couple of tech companies are talking about large expansions because again.
They're recognizing that business doesn't end because we're facing headwinds we still have to figure out how to get these important things done even in this environment.
Something Alex said earlier to that just to.
Doubleclick back on that.
This is different for us.
We have the subscription business model now and we're much more entrenched with our clients generally speaking than we were pre subscription.
We continue to see that be the case today.
Okay great.
And then.
Service rates continue to attach.
Attach rates to auction pass continue to go up in this quarter as it has been before.
Since the beginning of the pandemic can you just since we're basically three years into that trend go over the reasons why this continues to increase.
Yes, we had a really big subscription quarter in Q1.
You mentioned I think a couple of factors that are driving this one.
We talk about the nature of the problems, we're helping our clients solve and by definition. These are.
The complex thorny your word you used the word intractable problems, they've had them forever and they're not easy to solve and therefore, the idea that they're going to be able to solve them without help.
They recognize that they can get further faster with experts and we represent those experts at least in the topics that we focus on and so it's very attractive to bring our people in particular, when we're working with more senior leaders in an organization handling topics like strategy execution sales performance working on the <unk>.
Evel trusted exists among senior leaders and organizations, it's natural to have somebody come in from the outside and help facilitate through those topics. So one <unk>.
One driver of those all access pass subscription services and our leader in me services is that just the nature of the problems were on lend themselves to let's get somebody here to help us versus let's have everybody sit at their computer and just kind of work on stuff on their own right you need to bring people together and it's nice to have an expert come in the room.
The second thing that is driving services growth over the years I think in this is that.
In some ways, we're the beneficiaries of a little bit of what happened during the pandemic pre pandemic.
We had the ability to deliver all of almost all of our content live online like we do today that pass back then we pioneered the use of adobe's product.
Adobe connect we skin, we put a new skin on it and we adapted all of our content for that this is going back we've had this capability for <unk>.
10 years.
And nobody wanted it.
I would say nobody wanted it but you know two years or 3% of our delivery was that way in the other 97%, 98% was still people wanting to get together in a room with a with a facilitator.
The pandemic hit and that was not possible any longer to get together in a room and so we had we had that capability to convene people on zoom or Microsoft teams or webex or whatever technology you want.
There.
There wasn't an immediate pickup in fact, if you track our results are a couple of quarters, there where our revenues declined largely because it was during that transition period, where clients were trying to get comfortable with that live online.
Viable delivery modality.
They did and we were there ready with that capability and so today, we're a dual threat, we're happy to come in and work.
With an intact team in person around the conference room table or in a conference room, and we're equally happy to get on zoom and do this in 90 minute chunks as it turns out the 90 minute chunk spread out over time, three or four of those cobbled together over a few weeks provides a really nice segmented spaced approach for learning to happen.
And it actually is better for behavior change and so.
What's driven the services growth last three years I think is the nature of the problems and the fact that live online is a great way for the stuff that we do to be delivered the.
The impact is still very high the net promoter scores are very high and it's because it's de noted a 90 minute chunks, it's easier for clients to slot them into the themes of the work week or the workday you don't have to think about gearing up for let's go have an offsite everybody's going to leave that we have for two days have to come back and get caught up on work instead, hey, you need to be on for one to $2 30.
Every Wednesday for a few weeks and we're going to work on this together and so I think we're benefiting from some of the larger macro trends and changes people, becoming more comfortable with technology and the fact that we have we have had this great capability for a long time and now we get to use it.
Okay great.
And then given the robust results for the November quarter, especially the 23% year over year increase.
And value of contract signed for the November quarter.
It seems to validate the thesis that Franklin Covey revenue will be resilient to a recession and then.
The points about renewals despite layoffs.
All seems to line up really well.
So why no guidance rates basically.
Why not.
The address guidance range, yes.
We've had.
We've had a policy for a long time that coming out of the first quarter. We just we just don't do that our fourth quarter tends to be well it doesn't tend to be it is a very it's very large it's went a lot happens in education a lot of things come in there are a lot of our adjusted EBITDA for the year happens late in the year and so our pattern has been to address guidance at the end of Q2, when we get.
A little bit closer to the back half of the year and we intend to look at guidance again and address it in our Q2 call.
Great. Thank you very much.
Yes, thanks to help.
Thank you one moment for our next question.
Our next question comes from line of Dave storms from Stonegate. Your line is open.
Hi, Dave.
Does it go and thank you for taking my call and congrats on the strong quarter, just wondering if theres any catalysts for our turnaround that you all are keeping an eye out for in China and Japan.
Just looking to.
I wonder when that might turnaround.
We are too.
So.
Alright, not to be don't mean to be.
Joke about that but so I think there are two different situations going on.
In China and Japan.
First I'll start with Japan, Japan is.
Covid has like it has largely in other places in the world kind of run its course come and gone and what we're dealing with in Japan is a.
Just a slower than maybe even we would have expected.
Return to normalcy, there and and expect that it will get back to where it was but it's going to be a slower climb back there than it has been in other parts of the world. What is a positive thing that may not be it might not pick up immediately on in Japan, though is as that so we when we launched the all access pass.
Seven years ago in our English speaking operations, we did not land launch right away in China, or Japan part of that was for language reasons and there were some other reasons as well and so they were later to the game.
As Japan's business has gone through Covid is coming back out the other side. The team. There is now selling substantially all of their business is being converted to all access pass business.
So that does actually mute a little bit their return because the stuff theyre selling is being put out on the balance sheet right and so so their business their business is rapidly being.
All access pass over the next couple of years will we believe that their all access pass as a percentage of their overall revenues will mirror that of what we're seeing in the U S. In our English speaking operations around the world and so that actually puts a little bit of an increased drag on the business as they come out of Covid, but long term, it's a really good thing because they they we would expect that they would enjoy the same <unk>.
Of growth rates and retention rates and things like that that we have in other parts of the world. So that's the story on Japan. It will it'll it'll come back there it is coming back and it's being muted a bit because as it comes back it is being converted to subscription.
China is a different deal.
China went into Covid first.
Three years ago, we all know that.
They they got Covid because of their no COVID-19 policy. They got Covid back under control pretty quickly in our business, which was hit hard early on came roaring back.
Roughly back to pre pandemic levels, a couple of years ago.
China went back into Covid, 15, or 18 months ago, or so and we've been dealing with that bumping us and choppiness.
It's <unk>.
Doubly difficult there right now as you've probably seen in the headlines.
As they've gone away from the no Covid policy and are basically have chosen to just let COVID-19 kind of do its thing.
Significant numbers that people are contracting COVID-19.
At one point, our entire office in Beijing had COVID-19 at the same time.
And without recovering from that and so that is happening all over the country right now the death rate is quite high and so that I think you asked about.
I don't know how to predict what that will look like but I think it seems logical that that will run its course over the next.
Some number of months here, and then China ought to get back to some normalcy in what we have to point to there as when they had a handle on COVID-19. The first time around our business rebounded quite quickly and with back up to pre pandemic levels within just a couple of quarters.
So don't know that will be the pattern. This time, but China and Japan are two different places we do expect that they will continue to return I think China will be hard for a good part of this year.
And we've tried to account for that in our in our expectations, but I think China will be China will be slow this year.
Very helpful. Thank you if I could sneak one more in.
You mentioned on slide 14 kind of a transaction that is subscription client has gone from roughly 40000 a year.
He has had a 1000 a year.
You go into a little more detail what that transformation looks like specifically what gross margins look like for a client as they go from their first year to second or third year.
Correct.
Yes, so great question, so as we mentioned.
Typically our clients.
That 40000 of first year spend is comprised of what they spend for the all access pass subscription itself and then what they spend on the subscription services. The training the facilitation of the coaching that we do and so in rough terms it's at.
About.
$27000 of that first year spend is on the subscription itself for some defined population that they are buying a seat.
A number of all access pass seats in the average amount totals to about 27000, and then roughly another 13000 in that first year of those subscription services. We talk about and then what happens is as they are now a client of ours and they get access to not only do they maintain access to their original client partner that sold the past.
But they.
They now have access to a role that we call implementation strategists.
And.
That team together is now working to look for opportunities to expand that client relationship and what youre seeing between the 40000.
First year spend and the average spend of 77000 is just simply that that dose those clients stay with us the mature we're expanding to additional populations and then selling additional services as well and all along the way the blended gross margin on that business the subscription and services is roughly 85%.
So it's a it's a function of.
These.
Our land and expand model and the good thing about our model I think it's a good thing is that even in landing we're landing a fairly sizable chunk, where others land. It's a credit card swipe for a couple of people right for a technology purchase and then you are hoping to expand usage of something from a couple of people to something larger where lam.
<unk> much more significant initial population and then expanding from there.
That's perfect. Thank you.
Thanks, Dave.
Thank you and I'm not showing any further questions in the queue.
Back over to Paul for any closing remarks.
Thank you Victor.
Well again happy new year, everyone. Thanks for joining us today. We appreciate your continued interest in our company and for working to understand our story as well as you do and we are grateful to have been able to spend some time with you. Today. We are we're pleased with the results in Q1 and look forward to talking again towards the end of March.
Have a great rest of your day.
Today's conference call. Thank you for participating you may now disconnect everyone have a great day.
Yes.
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Yeah.
Okay.
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