Q3 2023 Franklin Covey Co Earnings Call
Okay.
Good day and thank you for standing by welcome to the third quarter 2023, Franklin Covey 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 to ask a question. During the session you will need to press star one.
One on your telephone you will then hear an automated message advise your hand is race to withdraw your question. Please press star. One again, please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, Derek Hatch corporate controller. Please go ahead.
Thank you Victor.
Good afternoon, everyone on behalf of Franklin Covey, I would like to welcome you to our third quarter fiscal 2023 earnings call before we begin this afternoon I would like to remind everyone that this presentation contains forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995 forward looking statements are based upon management's current.
Expectations that are subject to various risks and uncertainties, including but not limited to the ability of the company to grow revenues the acceptance of and renewal rates for our subscription offerings include.
The all access pass and leader in me memberships the ability of the company to hire productive sales and other client facing 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 company overall market for the company's.
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Changes in the training and spending policies of the Companys clients and other factors identified and discussed in the company's most recent annual report on Form 10-K, and other periodic reports filed with the Securities and Exchange Commission.
Many of these conditions are beyond our control or influence any one of which may cause results to differ materially from the companys current expectations.
There can be no assurance the company's actual future performance will meet management's expectations. These forward looking statements are based upon 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.
That out of the way, we'd like to turn the time over to Mr. Paul Walker, Our Chief Executive Officer, Paul. Thank you, Eric Hello, everyone. Thanks for joining us we're glad to have the chance to talk to you today.
Joining me on the call are Steve Young our CFO , Jennifer call a female president of our Enterprise Division, Sean Covey, President of our Education Division and other members of our executive team. We're also happy to have Bob Whitman, Our executive Chair and chairman of the board with Us today.
I'd like to start out by expressing how pleased we are with the continued strength durability and growth of the business and of our business model.
The strength and durability are evident in our third quarter year to date and latest 12 months results and we're pleased to reaffirm our fiscal 'twenty three guidance that we expect to achieve adjusted EBITDA of between 47 and $49 million in constant currency.
I'd like to begin today by briefly sharing a few headlines from the quarter.
First our revenue growth continued to be strong.
As you can see as shown in slide four since the conversion of our subscription business model in fiscal 2017, our subscription and subscription services sales have grown by more than $150 million to $222 2 million.
We're pleased that driven by the continued strength of our subscription business, both our overall revenue growth and our subscription and subscription services revenue growth continued to be strong in the third quarter and for the year to date and latest 12 months periods.
For overall company revenue as you can see on slide five in the third quarter total company revenue grew 8% or 9% in constant currency or $5 $3 million on top of the strong 13% growth achieved in last year's third quarter.
A quarter, which benefited from comping against the pandemic impacted third quarter in the prior year.
For the year to date and latest 12 months periods revenue grew a strong 10% and 11% respectively.
Or 12% year to date and 13% for the latest 12 months in constant currency.
The growth of our subscription in subscription services revenue was even stronger, particularly considering the pandemic comp enhanced growth last year.
As shown on slide five in the third quarter, our total subscription and subscription services revenue grew 9% or $4 $9 million on top of the strong 31% growth achieved in last year's third quarter.
For the year to date and latest 12 month period subscription in subscription services revenue grew a strong 15% and 17% respectively.
I'd like to briefly provide additional context on our year over year revenue growth and its comparison to grow over the past several years.
For total company revenue.
As shown on slide six for the latest 12 month period through fiscal 2022 third quarter.
Total latest 12 month revenue growth was a very significant $48 $8 million.
Again as noted the magnitude of this growth partially reflected benefiting from comping against the pandemic impacted periods in fiscal years 2020 in 2021.
In comparison with that significant growth our percentage revenue growth for the latest 12 month period through this year's third quarter was lower.
However, as you can see on an absolute dollar basis, the $28 $4 million of revenue growth. We achieved in the latest 12 months period through this year's third quarter was very strong.
In fact, as you can see the $28 $4 million of growth in the latest 12 months period through this year's third quarter represents the second highest dollar amount of growth for any comparable period in any of the past six years.
It was exceeded only by 2020 two's growth, which as noted benefited from a comparison against the pandemic period.
And to normalized for last year's pandemic benefited comparison is also shown on slide six our more than $77 2 million dollar growth on a rolling two year basis over the last two years exceeded that of any other two year period since our biggest model conversion both in terms of absolute dollars of growth.
Percent of growth.
Importantly, if we were to achieve the same strong $28 $4 million of revenue growth in the next 12 months that we did in the last 12 months.
That level of growth would itself represent approximately 10% revenue growth in the coming year.
From a year over year comparison standpoint by the end of the first quarter. This fall, we expect to lap the COVID-19 influenced more difficult growth percentage comps and beginning in the second quarter of fiscal 'twenty four comparisons will return to a more apples to apples basis.
This same pattern has played out in our subscription and subscription services revenue.
You can see as shown on slide seven for the latest 12 month period through fiscal 2020, twos third quarter, our subscription in subscription services revenue grew by an extremely strong $57 million again benefiting from comping against the pandemic impacted periods in fiscal 2020 one.
Again in comparison with that very large growth our percentage revenue growth for the latest 12 months period was lower.
However, on an absolute dollar basis are $32 million of subscription in subscription services revenue growth for the latest 12 months through this year's third quarter was very strong representing the second highest 12 months dollar growth amount over the past six years exceeded only by 2020 two's growth, which as we've noted Ben.
<unk> from its comparison to a pandemic impacted period.
And again the normalized for last year's pandemic benefited comparison on a rolling two year basis.
Our $82 $7 million of subscription and subscription services revenue growth for the last two year period.
Far exceeded that of any other two year periods since our business model conversion both in terms of absolute dollars of growth and percent of growth.
The second thing I'd like to note is that the durability of our sales also continues to increase and the extent of our visibility into future sales growth continues to expand.
Since our conversion to our subscription business model in fiscal 2016.
Our balance of deferred subscription sales, both billed and Unbilled has grown consistently and rapidly.
As shown in slide eight our balances of deferred subscription sales billed and unbilled have grown from $17 8 million in fiscal 2016 to $140 9 million for the latest 12 months through this year's third quarter.
And this strong growth in deferred subscription sales continued to grow strongly in the third quarter, increasing $24 $4 million or 21% to $140 9 million up from $116 5 million in last year's third quarter.
Achieving this strong growth in our balance of deferred subscription sales in the third quarter provide an extremely strong foundation for our continued ability to achieve significant future sales growth.
All of this deferred sales balances recognized in the coming quarters and years.
Adding another dimension to the increasing durability of our revenue is that at the same time, our deferred subscription sales balances are increasing the average duration of our subscription contracts is also increasing.
As a result.
Of the significantly increasing percentage of our all access pass contract value that is represented by multi year contracts are at least two years.
As also shown on slide eight for the latest 12 months through this year's third quarter in our North American Enterprise operations. The percent of our total all access pass contracts represented by multi year contracts are at least two years increased to 52% up from 42% at the end of the third quarter last year.
And the percentage of contract amounts we have invoiced represented by those multi year contracted at least two years increased to 57%.
From 51% at the end of the third quarter fiscal 2022.
The third point I would like to make is that our gross margin and operating SG&A as a percent of sales remain extremely attractive.
As shown in slide nine our gross margin percent has increased steadily over the years improving from 67, 6% in fiscal 2016 to 75, 8% for the latest 12 months through this year's third quarter.
As also shown on slide nine our gross margin percent in the third quarter was a strong 75, 9% and was 76, 1% year to date and 75, 8% for the latest 12 months.
We're also pleased that operating SG&A as a percent of sales in the third quarter improved a further 157 basis points to 59, 3%.
Compared to 68% in last year's third quarter.
And that for the year to date and latest 12 month periods operating SG&A as a percent of sales improved 140 basis points to 65% and 211 basis points to 59, 8% respectively.
Fourth adjusted EBITDA growth continued to be strong the combination of strong revenue growth significant gross margins and declining operating SG&A as a percent of sales.
Has increased.
Has resulted in significant increases in adjusted EBITDA.
As shown in slide 10, since the beginning of the pandemic impact in 2020, adjusted EBITDA has increased more than $30 million from $14 3 million in fiscal 2020.
To $44 9 million for the latest 12 month period, reflecting a 37% flow through of $83 million increase in sales during that same period.
We're pleased that this robust growth in adjusted EBITDA continued in the third quarter, increasing to a higher than expected $11 $9 million compared to the $10 9 million in last year's third quarter.
In constant currency adjusted EBITDA in the third quarter was $12 3 million.
Year to date through the third quarter, adjusted EBITDA increased $2 7 million or 9% to $31 6 million or $32 9 million in constant currency.
And for the latest 12 month period, adjusted EBITDA increased 14% to $44 9 million.
Representing flow through of 19%.
Building on this strength and as I mentioned previously we're pleased to reaffirm our fiscal 'twenty three guidance that we expect to achieve adjusted EBITDA between $47 million and $49 million in constant currency.
We then expect adjusted EBITDA in constant currency to increase to approximately $57 million in fiscal 'twenty four into approximately 67 million in fiscal 'twenty five and then to continue to increase aggressively each year thereafter.
Finally.
As it relates to the purchase of stock during the third quarter. After can you continuing to make growth investments in the business, we invested $25 million to purchase 664000 shares.
Over the past five quarters, we've invested $50 million to purchase a total of $1 two 6 million shares or a significant eight 8% of the company's total shares that were outstanding at the beginning of the five quarter period.
We're pleased to have been able to.
We have been able to perk to purchase such a significant amount of stock at what we view as a compelling value.
The ongoing strength of these outcomes reflect the power of our continued focus on three fundamental priorities.
First being our client partner of choice for addressing the challenges that really matter to them.
Second accomplishing that first priority with a strong and profitable business model.
Third reinvesting these profits and cash flow at high rates of return to create even more value for shareholders.
As shown in slide 11, our first priority being our client's partner of choice for addressing the challenges that really matter to them translates into high client and revenue retention strong growth in revenue and.
An increasingly large and growing lifetime customer value.
Yes.
Our second priority accomplishing the first priority priority with a strong and profitable business model results in a significant portion of our revenue growth flowing through to increases in adjusted EBITDA and cash flow.
Importantly, this means that shareholders can earn significant cash on cash returns on their investment at the same time, they see the value of their investment continue to grow.
And our third priority reinvesting these profits and cash flow at high rates of return to create even more value translates into the creation of substantial additional account compounding shareholder value.
Shareholders benefit from both the expected continued increase in the value of the company and the prospect of owning an increasing share of it.
Like to briefly report on our strong progress in each of these three priorities in our third quarter year to date and for the latest 12 months.
To accomplish our first priority that are being our client's partner of choice in addressing the challenges that really matter to them.
We've organized the entire company around being the partner of choice for our clients and helping them address their mission critical opportunities and challenges.
We want to be so effective at doing this that they've become clients for life.
This loyalty in turn translates into high durability of our revenue and significant growth in our lifetime value of our customers.
This is reflected in the following outcomes as you can see as shown in slide 12.
Consistently winning new logos or clients.
Having subscription and subscription services sales continue to increase as a percent of total company sales.
Retaining substantially all of our subscription revenue.
Increasing our average subscription contract size.
Increasing the percent of logos in multiyear contracts.
Continuing to have clients purchase a considerable amount of services to help them achieve their performance breakthroughs.
And achieving a high and growing lifetime customer value.
We're pleased as you can see on slide 13 that each of these key outcomes remained strong in the third quarter and has for the year to date and for the latest 12 months.
Slide 14 as you can see provides additional information on some of these outcomes as shown subscription and subscription services sales for the latest 12 months now account for 79% of total company sales.
Average subscription in subscription revenue subscription services revenue has increased from approximately $20000. When we launched AAP to $77000 to the end of fiscal 'twenty two.
As noted a moment ago the percentage of clients, who are now on a multi year contract continues to increase in the percent of the dollar amount of contracts. We invoice represented by those multi year contracts continues to increase.
And finally, our clients continue to purchase considerable amounts of services.
Services, which are an important part of our solution and a unique point of strategic differentiation.
Just a brief report on our second priority, which is to accomplish priority one with a strong and profitable business model.
And doing so such that.
A significant percent of our sales growth flows through to increases in adjusted EBITDA and cash flow.
As shown in slide 15, the strength of our business model is reflected in the following outcomes.
First continuing to achieve strong gross margins.
Second having a cost of acquiring a customer that is less than the sales generated even in the first year of a subscription contract.
Third having operating SG&A decrease as a percent of sales even as we grow and finally continuing to grow our adjusted EBITDA, which has significant increases free cash flow.
As you can see on slide 16, we are pleased that these outcomes also we made strong progress in each of these areas in the third quarter.
Shown in slide 17. These specific outcomes are as follows gross margin remains very strong even after absorbing education Division symposium expenses and increased travel related to onsite delivery.
Operating SG&A as a percent of revenue continues to decline.
And we're achieving strong flow through of incremental revenue growth and adjusted EBITDA due to our relatively fixed cost structure and high gross margin and contribution levels.
And finally, a brief report on our third priority to reinvest these profits and cash flow at high rates of return to create even more value.
As shown in slide 18 successfully achieving this priority as reflected in the following outcomes.
Best in capital in the business at high rates of return.
And returning substantial amounts of excess cash to shareholders in the form of stock buybacks.
As shown on slide 19, we are pleased that our investments have met each of these key outcomes over time.
As shown on slide 20 during the third quarter as I mentioned, we returned more than $25 million to shareholders by purchasing 664000 shares and over the last five quarters, we've invested $50 million to repurchase approximately one 6 million shares or eight 8% of the company's total shares.
Steadily advancing each of these priorities is placing us in a special category of companies.
A company that consistently and simultaneous simultaneously seeks to strengthen and expand our strategic moat and the most important and lucrative space in our chosen markets.
Generate high rates of growth in adjusted EBITDA and cash flow.
And third a company that generates outsized cash on cash and long term returns for shareholders by investing that cash to create additional value.
Consistent with this as I said, we're pleased to reaffirm our guidance that we expect to achieve adjusted EBITDA between 47% and $49 million in constant currency for fiscal 2023.
We're pleased that for the latest 12 months through the third quarter. Our adjusted EBITDA is already close to the low end of that range and as we'll discuss in a minute. We expect to we expect further growth in adjusted EBITDA in the fourth quarter.
We then expect adjusted EBITDA in constant currency to increase to approximately $57 million in fiscal 'twenty, four and to approximately 67 million in fiscal 'twenty five and then to continue to increase meaningfully each year thereafter.
I would now like to turn some time to Steve to discuss our results in quarter for the quarter and year to date in little more detail Steve.
Thank you Paul and good afternoon, everyone.
Pleasure to be with you today.
I'd like to briefly provide more detail on the factors underlying this strong performance.
Focusing on <unk>.
Our results in three key areas of our company.
Specifically, our enterprise business in North America.
In the enterprise business internationally in both our direct offices.
International licensee partner operations, and our education business, which is primarily in North America.
As shown on slide 21 results and our enterprise business in North America continued to be strong in the third quarter year to date and latest 12 months.
Reported sales in North America, which account for 73% of total Enterprise Division sales grew 3% in the third quarter on top of 20% growth in last year's record third quarter, 9% year to date and 11% in the latest 12 months.
We are pleased with the 23% growth we've achieved in enterprise business in North America over the past two years, the first year of which as Paul noted benefited from comp to the prior year covet impacted results.
As noted we expect the beginning in Q2.
FY 'twenty four or year over year comparisons will return to be.
An apples to apples basis.
Subscription and subscription services sales in North America grew 3% for the quarter on top of 29% growth in last year's third quarter.
Subscription and subscription services sales increased 9% year to date and 12% for the latest 12 months.
We are pleased with the growth rates, we've achieved in the enterprise business in North America, particularly in light of the fact as growth is comping over pandemic impacted.
Impacted quarters.
Our balance of deferred sales billed and Unbilled in North America grew 19%.
Prior to last year's third quarter balance.
Establishing a strong base our next year's growth.
And the percent of North America as all access pass Invoiced sales represented by multiyear contracts as mentioned increased from 57% for the latest 12 months ended this year up from 51% for the latest 12 months last year and the percentage of contracts.
For multiyear periods increased to 52% from 42% and latest 12 months last year.
As shown in slide 22 revenue in our in our international operations, which account for approximately 17% of our total enterprise Division revenue increased $1 7 million or 23% in the quarter primarily driven.
Brian improved results in China.
As also shown on slide 22, our international licensee partner sales increased 9% in the third quarter, 10% year to date and 16% in the latest 12 months.
We're pleased with these results, particularly considering the adverse impact of FX and a challenging geopolitical environment.
Finally, the results in our Education Division, which account for approximately 24% of total company sales continued to be strong in the third quarter year to date and latest 12 months.
As shown in slide 23.
Education sales grew 18%.
$2 6 million in the third quarter.
23% year to date, and 21% and our latest 12 months.
Education subscription and subscription services sales growth was strong increasing 19% in the third quarter, 24% year to date and 22% in the latest 12 months.
Education's balance of deferred subscription sales building unveil increase.
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And year over year retention of leader in me schools remains extremely high at approximately 90% for the latest 12 months.
Now cash flows from operating activities at.
As shown on slide 24, our cash flows from operating activities was $25 9 million at the end of the third quarter.
This is consistent with our expectation that cash flows would strengthen in the back half of this fiscal year.
Finally, even after investing more than $50 million of excess liquidity for stock purchases in the last five quarters as mentioned, including the 25 million stock purchase we did in this quarter. We ended the quarter with more than 100 million in liquidity, including $39 $3 million in cash.
Cash and with a full $62 $5 million revolving credit agreement Undrawn.
So now going on to guidance.
As Paul noted.
Previously you said and as shown in slide 25.
We are pleased to reaffirm again.
Our guidance is we expect to achieve adjusted EBITDA of between 47 and $49 million in constant currency for FY2023.
As noted for the latest 12 month period through the third quarter.
<unk> EBITDA is already very close to the low end of that range right.
We expect further growth in adjusted EBITDA of course in the fourth quarter.
As we do each year, we expect to provide formal FY 'twenty for guidance when we report year end results.
However, our projected outlook is that we expected adjusted EBITDA in constant currency.
To increase to approximately $57 million in FY, 'twenty, four and approximately $67 million in FY 'twenty five and then continued to increase each year thereafter.
Because a significant percentage of the company's growth and revenue flows through to adjusted EBITDA.
Achieving these future adjusted EBITDA targets.
Only requires revenue growth in the high single digit to low double digit.
Ranges.
However, our multiyear revenue outlook is to move from high single digit growth to low double digits to low teens in coming years.
As noted earlier the company's latest 12 month revenue growth of 11% was on top of 17% growth in FY 'twenty, two but of course benefited from company against 20 ones pandemic impacted numbers.
Consistent with this guidance noted in our third quarter year to date adjusted EBITDA.
After the constant currency adjustment of $1 3 million is $32 9 million.
We expect adjusted EBITDA in the fourth quarter to be between $14, one and $16 $1 million in constant currency.
We feel good about achieving this result.
As to revenue consistent with last quarter's update we expect revenue for the year to be approximately $284 million.
Reflecting approximately $81 4 million of revenue for the fourth quarter.
We have confidence in these targets despite the possibility of dramatic changes in the world geopolitical and Ryan that the economy and other factors.
Could impact our expectations. So Paul back to you. Thank you Steve I appreciate that.
We're now ready to begin.
The transition to the Q&A portion of the call and as we do I.
I'd like to begin by addressing three questions. Some of you have previously indicated you have an interest in.
First some have asked how potential uncertainty in the current economic environment is impacting or how it may impact the durability of our subscription business.
I thought I'd provide you a little bit of color about what we're seeing right now across our enterprise all access pass business and I'll make up just for maybe four quick points here.
First as you know we've chosen to organize the entire company around the most important must win challenges and opportunities our clients face.
Therefore, one aspect of durability solution durability.
Our solutions to these must win challenges and opportunities are viewed as best in class at driving collective action or behavior change and these challenges and opportunities continue regardless of the external environment.
Second as we reported we continue to be pleased with our growth in a number of new logos growth, which shows clients continued desire and need to invest to address.
To address our top challenges and opportunities year over year revenue from new logos has grown in each of the first three quarters this fiscal year.
Third in increasing and sizeable portion of our clients recognize that they benefit from a long term partnership with Franklin Covey.
After considerable focus and effort over the past few years, we've grown the percentage of clients in the U S and Canada, who are on one of these multi year contracts from zero.
As we've said, 52% at the end of the third quarter.
And of course, the associated revenue is 57% of our subscription revenue and this growing base of multiyear clients creates tremendous durability and future visibility and predictability of revenue.
Interesting point not only is the annual revenue retention from these multi year contracts at least a 100% during the term of their contract.
At the conclusion of their multi year contract term at the beginning of a next contract period or.
Our already high revenue retention percentage is even higher with these multi year contract clients in fact, its 50% higher than that of their single year term peers on an already high base.
Finally last quarter, we reported that while the vast majority of our large and growing subscription business. It was unaffected by the macro environment. Those few clients, who were combined with the high comp over the prior year's elevated growth percentage, partially due to the COVID-19 impact the previous year.
That did have some impact in the quarter on revenue retention and overall all access pass growth rates were.
We're pleased to report that our revenue retention percentage strengthened meaningfully in the third quarter compared with the second and we're expecting the fourth quarter to be even stronger returning to roughly the same strong quarterly retention levels, we achieved throughout last fiscal year and in the first quarter of fiscal 'twenty three.
We continue to feel incredibly good and have a high level of confidence about the durability of our all access pass subscription business.
If I could maybe a second question that's come up from time to time is related to how we're thinking about the growth of our sales force.
Specifically the key client facing revenue generating roles of client partner implementation strategist and leader in me coach.
As we reported last quarter from the end of fiscal 2012 through the end of fiscal 'twenty. Two we've grown our number of client partners by 250% from 120 to 300 <unk>.
Additionally, since the launch of our subscription business in fiscal 2016, we've created and grown two additional key client facing account roles implementations strategists that our enterprise Division and leader in me coaches in our education Division from zero to approximately 150 people.
Today the professionals in these three roles represent a far and away the largest client facing organization in our company's history and a team that is among the largest in our industry.
Each of these roles is critical to driving new client subscriptions retention expansion and the sale of subscription services.
As we prioritize the successful development and ramp up each of these associates, we expect to end fiscal 'twenty three with approximately 450 client facing professionals and then anticipate that we will hire roughly 40 net new professionals across these three client facing roles in fiscal 'twenty four.
Additionally, and importantly.
The ultimate revenue potential and expectation for a new client partners growth beyond his or her initial ramp up is increasing significantly.
Prior to the launch of our subscription business, we did not have a contractual and consistent recurring revenue model.
As a result, once the client partner reached their top and ramp up goal of achieving $1 $3 million in annual sales. It was more difficult for them to consistently achieve revenue growth above that $1 3 million dollar fully ramped level.
And because they had to replace a lot of revenue each year when they did grow above the $1 $3 million level in the aggregate. These fully ramped client partners tended to grow their revenue by only two or 3% each year.
Today, nearly eight years into our conversion to subscription our data and experienced demonstrate that the average client partner once ramped to $1 $3 million, we will continue to grow their revenue by approximately 10%.
At least the next five years.
This significantly increased growth rate for fully ramped client partners is made possible by a combination of important factors, including our.
Our high levels of client and revenue retention.
The fact that more than 50% of our clients are in a multi year contract.
The significant headroom, we have for expansion within nearly every one of our clients.
The addition of implementation strategist and leader in me coach roles.
And our increasing sales enablement and sales management capabilities.
The combination of these factors gives us tremendous confidence to continue expanding each of these key client facing account roles and it gives us confidence in our ability to generate significant future revenue growth.
And third.
Third question before we open to.
To your questions today.
That's what led us to decide to invest $50 million to purchase more than 8% of the company's outstanding shares over the past five quarters, while continuing to make significant growth investments in the business.
Sometimes we're asked to share how we approach the decision to purchase shares.
I'd like to briefly share our framework.
First we work to ensure that we're making all of the high return internal investments in content technology sales force expansion and client facing team expansion necessary to meet our growth objectives and expand our strategic moat.
Second we want to ensure that we always have the liquidity available to quickly complete small tuck in acquisitions, which can further strengthen our strategic moat such as we did with John Robert Gregory and stripe.
Third we want to always maintain additional significant liquidity to provide plenty of cushion to be able to accelerate expansion when opportunities arise and to provide a margin of safety.
As Steve mentioned earlier, even after continued continuing to make significant ongoing investments in technology content and sales force and client facing team expansion and utilizing $50 million of excess liquidity to purchase shares over the past five quarters. We're pleased to currently still have more than $100 million of liquidity.
Fourth the determination to utilized $50 million of excess cash to purchase shares have been an easy one over the past five quarters and it was really pretty straightforward.
It's because we have an extremely strong conviction that at current values. Our stock has and continues to trade at very significant a very significant discount to its true value.
We believe that returning capital to shareholders in the form of stock purchases offers a great way to increase shareholder value.
Because the highest of the high expected return rate of return on the investment and because of the increased share of the company.
Alone.
Specifically as it relates to the ability to create shareholder value by repurchasing shares our analysis is that the.
Is that the price at which we've been purchasing shares reflects an extremely deep discount to what we believe is the true value.
First and foremost we believe that we've been purchasing shares at an extremely deep discount to the net present value of our expected future cash flows.
Parcel map of which we've shared with you by letting you know that we expect to achieve adjusted EBITDA of between 47% to $49 million, and then $57 million and $67 million in constant currency in the coming two years.
Second we believe the multiple of adjusted EBITDA reflected by the total enterprise value at which we are currently trading also represents a very significant discount to the multiple appropriate to the rate of growth in adjusted EBITDA and cash flow, we have achieved and expect to achieve in the future.
Third given the significant levels of adjusted EBITDA and cash flow being achieved at current values. We can in a remarkably high cash on cash return on our investment our cash on cash return approaching 10% and still retain all of the upside.
Fourth, whereas the discounted net present value valuations of many companies have continued to depend heavily on the expectation of an expansion in market multiples.
And or a high terminal value, we believe that at our current share price more than half of our total enterprise value is reflected in just the combination of the current cash we already have on the balance sheet and the more than $150 million of additional cash flow, we expect to generate over the next few years.
We find buying stock at a discount to be attractive.
I hope beginning the Q&A session with posing these three questions and answering them. Its been helpful. We'd now like to ask Victor If you would open the lines for any additional questions that you have today.
Sure as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.
<unk>, we compile the Q&A roster.
One moment for our first question.
Our first question comes from the line of Jeff Martin from Ross Your line is open.
Great. Thanks, good afternoon, everyone.
Hi, Jeff.
Hi.
Paul could you expand a little bit more on the revenue retention.
Pack that you saw in Q2.
What maybe.
It's more client specific than market related.
And then what.
At least your conviction for significant improvement in Q4.
Yes, great.
Great question, So as we reported in the <unk>.
At the end of the second quarter.
There were.
A handful of clients, who we use definitely use the metaphor if you recall deeper snow, but there were a handful of clients who were themselves not unaffected by some of the uncertainty in the environment and while.
<unk>.
The percentage of clients, we retain in any given quarter remained roughly the same this handful of clients some of whom are some of our a few larger clients, who either didn't renew or down down downgrade the size of their pass drug on our provided a drag on our revenue retention, we talked a bit about that last quarter.
That.
To the degree to which that occurred in the second quarter.
While there was some of that in the third quarter far less we had it was a much better revenue retention quarter in the third quarter and just what we're seeing in our pipelines. The conversations we're having with our customers as you know we have a quarterly business review with every one of our subscribing clients, where we sit down with them and we actually begin the renewal discussions far in advance of that final quarterly <unk>.
And so in those discussions the pipelines we are seeing.
Seeing that what I think was a bit of a bottoming out there in Q2 and a return to normal much more normalized retention rates in Q4, and as we move into next year.
Great that's helpful.
Wanted to kind of bridge the gap between let's let's take North American Enterprise Division for example, the gap between the subscription and subscription services revenue.
Growing at 3% in the quarter, 9% year to date realm.
Relative to high teens to low 20% growth in deferred revenue.
Our clients just pushing out.
Some of the projects are they taking a pause.
Is there anything under flying that dynamic.
So it's a good question part part of that the comparison on a percentage basis as we've noted.
A few times here in today's remarks fit.
The 3% this year is comping over a very very significant growth percentage last year.
And so what were frankly, what we're seeing is if we if we.
<unk> for that and just looked over a couple of years, we're quite pleased with where the.
The level and the size of that subscription and related services business at this point.
You have to go back a couple of years and pick where we thought that would be what would be an exciting number we're about in that same spot. It just came in with a really big first year of growth because of the comping over the pandemic.
And then this year.
As a lower growth percentage to your specific question.
We're not we're not seeing a lot in in.
Clients pushing things out we're actually quite pleased with the number of clients, who even in the environment or signing multiyear contracts with a meaningful jump this year year over year and in the percentage of revenue that's now multi year and in the percent of clients didn't know if we'd ever get above 50% back in the day thought we might get to about a third of our contracts being multi year now.
More than half I think it speaks to clients recognizing that the types of challenges.
They need and want to address.
Aren't solved in a quarter or even a year.
View this as a long term partnership with us and I think we're seeing that show up and being reflected in the numbers.
Okay and last one from me is update on the impact platform, what's the what's the uptake rate what kind of responses are you getting do you see that being.
A longer term driver of revenue growth acceleration.
Yes, Jennifer call CMO, President Enterprise divisions on Jan do you want to take that one of course, thanks for the question Jeff.
We are seeing a tremendous impact from the impact platform.
The vast majority of our English speaking clients are on that platform. We now have our primary languages launched in early fall and winter will have our secondary languages, giving us roughly 224 languages that will be launched in what we're finding from client.
<unk> is as we talk about collective behavior change at scale. The platform makes it so much easier to deploy and scale and get real behavior change, So where I think our better technology story is also driving new logos some of the multi years great use cases.
Continuing to see the impact of that as it rolls out around the world.
Thank you John .
Thanks, Jeff.
Thanks, Jeff.
Thank you one moment for our next question.
Our next question comes from the line of Noah Chaouchi from Northland Capital. Your line is open.
Yes, Thank you and congrats on a great quarter.
Thanks Neil.
So.
I think you guys would you agree that invoice value and at year over year growth.
Excellent quarter metric and that definitely improved on a year over year basis.
Looking forward.
What kind of invoice growth would you need in order to May.
Maintain confidence that initial fiscal year, 'twenty, but that perspective.
Yes.
So that's a great question first we mentioned took to.
To achieve that.
And we're quite confident in maintaining our outlook targets of fiscal 'twenty $4 $57 million of adjusted EBITDA in fiscal 2560 $7 million is that.
The total.
Company revenue growth level of reported revenue growth level, we need.
At a high single digit low double digits call. It 10% is what is what we would need to achieve the targets. We feel very good about that in fact as I mentioned a minute ago, the 28, or so million $28 $7 million of growth. We've achieved in the last 12 months.
If we did that same thing again in the next 12 months that would be roughly 10% growth year youre.
Your question at a company level your question around.
Invoiced subscription sales.
Yeah.
Need to be a little bit ahead of that right as those invoice sales.
Eventually.
Convert into reported sales and so growing a little bit ahead of that is what we would need to see and we're we're feeling.
Good and confident enough in that to put out those and reaffirm those EBITDA target for the next two years.
Okay.
Just to be clear.
Sure.
Sort of.
First three quarters are invoiced value on an overall basis I think is up mid single digits now for.
For the first three quarters so.
It sounds like you do need to be.
In the high single digits.
Low double digits in order for you guys to achieve your fiscal 'twenty Cisco objectives and so.
And you've talked about expectations of a strong fiscal fourth quarter. So that sounds like you are expecting your invoice levels on a year over year basis accelerating as well.
Yes, that's correct.
Yep, Okay, alright, directing them to accelerate in the fourth quarter and then through the first.
Meaning to the FERC meaningfully through the first part of next year.
Slowly.
And what is giving you that confidence that we will indeed accelerate because it doesn't look like you are coming into us materially easy comp until the fourth.
Fourth quarter here.
Yes.
Not a meaningfully materially meaningfully easier comp in the fourth quarter as that flipped as we said at the beginning of Q2 next year. So towards the end of the fall here, but what's giving us confidence in the growth is one we are we do see the.
Revenue retention rates.
Coming back nicely after the dip in Q2, and a little bit and a little bit in Q3 here. So thats a big driver. That's the biggest number we have to influence riders that revenue retention number and we're seeing that strengthen.
Second as we've reported we've been we've sold more new logos. This year in the first three quarters of the year than we did a year ago and we expect that's going to continue in both the sales of new logos is higher and the average revenue per new logo continues to tick up as well so that increases the base that we have to renew and the base of subscribers.
<unk> to which we have to attach services I think the third is we've hired we've hired a lot of client partners.
While this year.
We'll end the year about where we are in the client partner front about where we ended last year at 300.
<unk> got to remember that we added over the prior three years or so a significant number of client partners, who are ramping and becoming more mature and more effective at the same time, we're seeing client partners who are already ramped.
Their ability to go far beyond what we thought was possible is increasing and so I think the combination of those factors.
It's giving us confidence that.
While there has been a bit of a.
I have a slowing in the year over year subscription growth again, partially related to the amount of growth, we had last year and comping over that.
That will put the subscription business will grow enough to throw off the amount of revenue growth for news at the total company level for us to be able to hit the EBIT targets, we put out there.
Okay, Great and then Paul you mentioned a much.
I'm not sure I quite understand but I think you said that.
Sure.
Customers that are entering into a multiyear contract.
At renewal, we're seeing 50% higher valued renewal.
Can you just repeat where it is that you said there is.
Yes.
So it's interesting getting in and out. So the question is is how much how much better are multiyear contracts and single year contracts and of course, we're happy to have all contract single or multi year, but we're really happy to have multiyear and one of the things. We've watched is what happens to our clients at the end of their initial multiyear term, whether it's two years three years four years.
What do they do do they do they feel like they're done and they don't renew at all do they do they renew and renew for just the same value as they had in place do they renew and expand and the analysis. It shows it's showing that those clients.
At the conclusion of that multi year contract or whether it's two years three years four years or more when they do renew the value of that next contract is 50% larger than the value of the contract that they were coming out of work.
Just to be clear.
Total contract value or annual contract value.
Annual annual.
Wow so effectively.
If it's an average three year contract and Youre seeing.
50% uplift three years later that's effectively.
Mike.
I'm sorry.
Your retention rate.
Now, it's not 50% greater than their contract they ran at 50% greater than their single year contracts peers.
So the analysis is single year contract clients versus multi year contract clients, how much more valuable than what happened to them relative to the point. The point is not on that specific client.
The value of multi year versus single year, why we're pushing so hard to get multi year because they are not only is that revenue guaranteed during the term of the multi year contract. They they are 50% more likely upon renewal to expand they're not expanding by 50%.
One day, we hope that will happen.
Okay.
We loved it we are doing everything we can to make sure that our customer engagement model. The customer success teams are treating them those clients in a way that could be possible for some they do but that's not what's happening it's not it's not 50% growth in the contract value, it's compared to their peers single your peers.
Okay. Okay. Yeah. Thank you for clarifying that great great clarification.
Yes.
And then just just to be clear.
That 50% improvement relative to single year contracts cares.
There is generally two components right renewal rate and then upsell, which one is the bigger factor here.
It's.
Right.
Bill rate is the slightly larger factor because multi year clients are more they've been with us longer and they are more likely then to <unk>.
Line up for the next journey with us but.
So it's a slightly more because of renewal rate, but we do see greater expansion of those clients as well again, because we've had a longer time with those clients to establish a relationship to to look for and sell to expanded populations tee up additional journeys that we can go with that client.
The larger driver is there.
Sure.
The likelihood that they are renewing versus a first year client for example that.
May not renew.
Okay, great. Thank you.
Thanks, Nick Good question good to talk to you.
Okay.
For next question.
Our next.
Question comes from the line of Dave storms from Stonegate capital.
Line is open.
Good afternoon.
Dave.
How's it going I just wanted to kind of start I saw the education EBIT margin adjusted margin had a nice jump sequentially is there a story there.
Maybe it was a sign of good things to come or is that just more seasonal factors or macro driven.
Yeah.
Okay sequential Q2 to Q3.
Yes, David Good question, what the driver of that first of all education business is really doing great.
Really really thrilled reflection on the team are doing there is a specific.
The answer to that question is that in Q2, we do need.
What we call client symposiums.
And there are events, where we bring together current and prospective clients as a way to.
Expose them to a leader in the process and we charge for attendance at those so it comes in as revenue and in the second quarter, we did more of them than we did in the third quarter and so but we don't we're not making money on those we're just charging a little bit to help defray some of the cost of that revenue coming in with no profit attached to it and we had more of that in the second quarter than we did.
In the third quarter and that caused a sequential bump there in gross margin.
Yes.
Understood very helpful. Thank you.
And then the other thing I know you mentioned in your comments that adjusted EBITDA for the quarter came in.
Turning level came in higher than expected.
Was there anything that really been bright that you could see going forward or is that just.
Some of the revenue retention stuff that you were talking about earlier.
Steve anything you want to.
One of the significant things in the in this quarter is that.
We're just in the process like everybody else, we're really reviewing a lot of our expenses and controlling our hiring and just everything that we can control without.
<unk> impacting revenue.
So we had so our expenses came in quite a bit lower than we anticipated.
In Q3, and our dura or rather than a holdup held up good our gross margin held up good and we had less expenses everything kind of added together.
The expenses were a big part of that.
Very helpful. Thank you for taking my questions and congrats on the quarter.
Thanks, Nick.
One moment for our next question.
Yeah.
Our next question comes from the line of Alex Paris from Barrington Research. Your line is open.
Hi, guys.
Thanks for taking my questions I wanted to also congratulate you on the strong performance in the <unk>.
Third quarter.
And what a difference three months makes right.
Yes Big difference. This conference call are in last conference call in.
The deep snow that we're awaiting through seems to have melted a bit here in the spring.
So yes.
Just kind of.
Trying to add incremental questions here.
The.
You said that.
In your prepared comments that the number of.
All access pass clients, who renewed or expanded in Q3 was up.
Or consistent with Q2 and.
You didn't lose or not renew.
Large clients like you did in Q2 can you maybe just dive into that a little bit more sequentially.
What's the macro impact on the North American enterprise business.
Yes, great question.
Hi.
Yes.
<unk> mentioned.
Q2, we had.
We had in Q2 was a few a handful of clients who were some of our a couple of our larger clients that that because of circumstances on their side weren't able to renew and that disproportionately weighed on that.
We had we saw.
Much less of that no big clients like that in Q3, certainly and so that improved while client again client retention.
The percentage of clients retain quarter to quarter was roughly the same.
But the revenue retained from those clients, who renewed was that percentage was better in the third quarter. Because again, we didn't have a couple of those outlier clients like we did in Q2 and then we're seeing that trend continuing continue into Q4 and that strength of that trend being the strengthening trend there getting revenue retention back.
Up to levels that were more consistent with what we're seeing.
In Q1 and throughout last year and we.
Further outlook is that that we expect that to continue into the first quarter and beyond.
Got you and then you still have hope or expectations that youll have the opportunity to win back some of those larger clients that didn't weren't able to renew in Q2.
100%, 100% in fact.
Yes.
The ones, we're talking about in Q2, the conversations where we are on their side. We are so disappointed theres some things going on and we're not going to talk about who those clients are but when you. If you knew them you would understand why they were in the position that we're in.
And they have every expectation so do we that they'll come back in fact, we continue to meet with them and have quarterly business reviews, where we're still kind of treating them as if they're.
Their clients, we're not they're not they don't have access to our products and services from a relationship standpoint, we hope and expect that we will win them back in and that's really the mentality, Alex we take with all of our clients, we talk about clients for life.
At both kind of our mantra, but it's also a way of behaving and.
So.
Every quarter, we have some nice win backs of client that for some reason, we weren't able to renew in fact, we talked in the second quarter.
About a client a large client that wasn't able to renew with an it consulting services firm very large global company that wasn't able to renew in the fourth quarter. They were unsure about what this year would look like for them.
They didn't renew but they did renew in the second quarter this year and significantly expanded the size of their subscription with us and so we hope and expect and are doing everything we can to make that the case for any client that we lose and particularly a couple of those big ones in Q2.
Good to hear good to hear thanks.
And then.
Still on the enterprise business.
In your prepared comments, Paul you mentioned that China performed better China, and Japan were obviously a drag in the first half of the fiscal year.
Together they represent represented 52% of international sales you didn't mentioned, Jimmy Japan, specifically, but maybe just a little overview on what's going on in China, and Japan quarter over quarter.
Thank you.
We're pleased.
Japan, and China behaved like we thought they would in the third quarter. So so you'll recall we.
We talked in the second quarter about the fact that they were they had been a drag.
And continued through the first two quarters of this year to be a drag than we anticipated and still do that they kind of net net overall are are providing a bit of a drag on overall reported growth this year.
And that we kind of gave guidance around that in Q2 that said in Q3, China strengthened significantly.
<unk> seen this now three times with that China has kind of had a three times in and out of Covid experience. Each time, they come back out the business has responded and grown rapidly that happened again in the third quarter and we expect that it will have meaningful growth in the fourth quarter they will not be.
To the level, we thought they would have been for this full year.