Q2 2025 Franklin Covey Co Earnings Call

Okay.

Unknown Executive: Good day, and thank you for standing by.

Speaker Change: Good day and thank you for standing by welcome to the Franklin Covey second quarter earnings Conference call. At this time, all participants are in a listen only mode.

Unknown Executive: Welcome to the Franklin Covey Second Quarter 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'll need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To start your question, please press star 1-1 again.

Speaker Change: The speaker's presentation there'll be a question and answer session to ask a question during the session you'll need to press star one wanted your telephone.

Speaker Change: Didn't hear an automated message advising your hand is raised to withdraw your question. Please press star. One again, please be advised that today's conference is being recorded I would now like to turn the conference over to Derek Hatch Corporate controller. Please go ahead.

Unknown Executive: Please be advised that today's conference is being recorded.

Derek Hatch: I would now like to turn the conference over to Derek Hatch, Corporate Controller. Please go ahead. Thank you.

Derek Hatch: Hello, everyone, and thanks so much for joining us today. We appreciate having the opportunity to connect with you.

Derek Hatch: Thank you Hello, everyone and thanks, so much for joining us today, we appreciate having the opportunity to connect with you as we get started please remember that this presentation contains forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995 forward looking statements are based upon management's current expectations and are subject to various risks.

Derek Hatch: As we get started, please remember that this presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based upon management's current expectations and are subject to various risks and uncertainties, including but not limited to the ability of the company to grow revenue, the acceptance of and renewal rates for our subscription offerings, including 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 company's targeted marketplace, market acceptance of new offerings or services and marketing strategies, changes in the company's market share, changes in the size of the overall market for the company's products, changes in the training and spending policies of the company's clients, and other factors such as governmental contracting actions that are 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.

Derek Hatch: And uncertainties, including but not limited to the ability of the company to grow revenue.

Derek Hatch: Acceptance of and renewal rates for our subscription offerings, including the all access pass the leader in me memberships.

Derek Hatch: 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.

Derek Hatch: And the compass.

Derek Hatch: Company's market share changes in the size of the overall market for the company's products changes in the training and spending policies of the Companys clients and other factors such as governmental contracting actions that are 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 <unk>.

Derek Hatch: 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.

Derek Hatch: Actions are beyond our control or influence any one of which may cause future results to differ materially from the companys current expectations and there can be no assurance the company's actual future performance will meet management's expectations. These forward looking statements are based on management's current expectations and we undertake no obligation to update or revise these forward looking statements.

Derek Hatch: 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 today's presentation, except as required by law.

Derek Hatch: To reflect events or circumstances after the date of todays presentation, except as required by law.

Paul Walker: With that out of the way, we'd like to turn the time over to Mr. Paul Walker, our Chief Executive Officer and President. Thank you, Derek. Good afternoon, everyone. We're happy to have the opportunity to speak with you today and to share an update on the continued progress of the business. The current external economic environment is turbulent and uncertain. We're not we're not entirely immune to what's going on in the broader economic and political environment. However, we are pleased, first, that the importance of the opportunities and challenges we help organizations achieve our mission critical to them, and our business and business model are strong.

Derek Hatch: With that out of the way, we'd like to turn the time over to Mr. Paul Walker, Our chairman, our Chief Executive Officer.

Derek Hatch: Thank you Derek good afternoon, everyone. We're happy to have the opportunity to speak with you today and to share an update on the continued progress of the business.

Derek Hatch: The current external economic environment is turbulent and uncertain.

Derek Hatch: We're not entirely immune to what's going on in the broader economic and political environment. However, we are pleased first that the importance of the opportunities and challenges we help organizations achieve our mission critical to them and our business and business model are strong.

Paul Walker: Second, we're pleased at the traction we're already achieving in the implementation of our go-to-market transformation in our enterprise North America business is significant. And third, we're pleased that our education business continues to be strong. As a result, we continue to be confident in the actions we've undertaken to accelerate future revenue growth. And with this growth in revenue, we also expect to achieve significant growth in adjusted EBITDA on cash flow. Over the next few minutes, I'd like to briefly address the following questions you can see shown on slide four. The first question is, what are the areas in which we have been seeing some impact from the external environment?

Derek Hatch: Second we're pleased with the traction we're already achieving in the implementation of our go to market transformation in our enterprise North America business is significant.

Derek Hatch: And third we're pleased that our education business continues to be strong.

Derek Hatch: As a result, we continue to be confident in the actions we've undertaken do accelerate future revenue growth.

Derek Hatch: And with this growth in revenue, we also expect to achieve significant growth in adjusted EBITDA and cash flow.

Derek Hatch: Over the next few minutes I'd like to briefly address the following questions you can see as shown on slide four.

Derek Hatch: The first question is what are the areas in which we have been seeing some impact from the external environment I don't want to lay those out.

Paul Walker: And I want to lay those out. Second, what are the key metrics that reflect both the continued underlying strength and durability of our business model and the significant traction we're already achieving in the implementation of our new go-to-market acceleration actions in our North America enterprise business? And then the third question I want to answer, lay out an answer, is what are the key factors that are driving the continued strength and growth in our education?

Derek Hatch: Second what are the key metrics that reflect both the continued underlying strength and durability of our business model and the significant traction we're already achieving in the implementation of our new go to market acceleration actions in our North America Enterprise business.

Derek Hatch: And then the third question I want to answer it lay out an answer is what are the key factors that are driving the continued strength and growth in our education business.

Paul Walker: So let's get into each of these first. What are the areas in which we've been seeing some impact from the external environment? While we feel good about progress across the vast majority of our business. We are experiencing direct and indirect impact from the actions being taken by the federal government and by the results in economic uncertainty. And while this impact is on the margin for our overall business, nevertheless, it is impacting our revenue growth in the year and is the primary reason why our results will be down this year compared to expectations. We're seeing the effect primarily in the areas you can see shown on slide five.

Derek Hatch: So let's get into each of these first.

Derek Hatch: What are the areas in which we've been seeing some impact from the external environment.

Derek Hatch: While we feel good about progress across the vast majority of our business, we are experiencing direct and indirect impact from the actions being taken by the federal government and by the results and economic uncertainty.

Derek Hatch: And while this impact is on the margin for our overall business. Nevertheless, it is impacting our revenue growth in the year and is the primary reason why our results will be down this year compared to expectations.

Derek Hatch: We're seeing the effect primarily in the areas you can see as shown on slide five.

Paul Walker: The first is in our government. Roughly 6% or 17 million of our total business is in some way tied to governmental entities such as the Department of Defense. veterans affairs and state and local Approximately $5 million in government revenue has already been cancelled or postponed as the federal government looks to cut spending in nearly every category. We expect government revenues to be down by at least $5 million this year compared to the low end of our original guidance. The second area in which we're seeing some impact from the same government actions and trade tensions is in our international direct and licensee operations.

The first is in our government business.

Derek Hatch: Roughly 6% or $17 million of our total business is in some way tied to governmental entities such as the department of defense.

Derek Hatch: Trends affairs and state and local entities.

Derek Hatch: Approximately $5 million in government revenue has already been canceled or postponed as the federal government looks to cut spending in nearly every category.

Derek Hatch: We expect government revenues to be down by at least $5 million this year compared to the low end of our original guidance.

Derek Hatch: The second area in which we're seeing some impact from these same government actions and trade tensions is then our international direct and licensee operations.

Paul Walker: A significant portion of this impact is being felt in China, where the threat of escalating tariffs and other potential factors and political factors is causing a sensitivity by national and even local companies in China to being viewed as doing business with U.S. firms. In a small number of cases, we've also had clients in Europe and Canada postpone or cancel engagements either as a defensive or nationalistic response to the threat or the reality of tariff actions or as a response to the uncertainty of the economic conditions in their own country. While these pressures have not been widespread, they are having an impact on the margin, and we expect that they could result in our international revenues being down by as much as $4 million compared to the low end of our guidance this year.

Derek Hatch: A significant portion of this impact is being felt in China, where the threat of escalating tariffs and other potential factors and political factors.

Derek Hatch: It's causing a sensitivity by national and even local companies in China to being viewed as doing business with U S firms.

Derek Hatch: In a small number of cases, we've also had clients in Europe, and Canada, postpone or cancel engagements either as a defensive or nationalistic response to the threat.

Derek Hatch: Or are the reality of tariff actions.

Derek Hatch: Or as a response to the uncertainty of the economic conditions in their own country.

Derek Hatch: While these pressures have not been widespread they are having an impact on the margin and we expect that they could result in our international revenues being down by as much as $4 million compared to the low end of our guidance this year.

Paul Walker: Third, we see the potential for some impact in our education business. Today, we've seen little measurable impact from concerns about the potential disruption of the Department of Education. And I think it's important to note that almost all of our education revenue comes from state-level funding. We sell to schools and districts and not to the Department of Education. However, because the Department of Ed has historically provided approximately 14% of state-level education funding, we're mindful that uncertainty about potential federal-level changes within the Department of Ed could cause some uncertainty at the state level, which could slow down schools' speed of decision-making this spring.

Derek Hatch: Third we see the potential for some impact in our education business.

Derek Hatch: To date, we've seen little measurable impact from concerns about the potential disruption of the department of education.

Derek Hatch: And I think it's important to note that almost all of our education revenue comes from state level funding, we sell to schools and districts and not to the department of education.

Derek Hatch: However, because the department of Ed has historically provided approximately 14% of state level education funding.

Derek Hatch: We're mindful that uncertainty about potential federal level changes within the department of Ed could cause some uncertainty at the state level, which could slow down school speed of decision, making this spring.

Paul Walker: We think this could have as much as a $3 million impact to education revenue. While we haven't yet experienced any real negative impact here, we are monitoring the situation closely. Looking out a little bit into the future, ultimately, it appears that any funding changes at the federal level are likely to be reallocated to the state level, and from there to the local schools and districts to which we sell, but short-term disruption is a possibility. Finally, these same government-related actions also have the potential to create some headwinds for some of our clients in the United States, and we think that this could create an approximately $3 million of additional impact here.

Derek Hatch: We think this could have as much as a $3 million impact to education revenue.

Derek Hatch: While we haven't yet experienced any real negative impact here, we are monitoring the situation closely.

Derek Hatch: Looking out a little bit of the future ultimately it appears that any funding changes at the federal level are likely to be reallocated to the state level and from there to the locals in school districts and local schools and districts to which we sell but short term disruption is a possibility.

Derek Hatch: Finally, the same government related actions also have the potential to create some headwinds for some of our clients and we are in the United States and we think that this could occur.

Derek Hatch: Created approximately $3 million of additional impact here.

Paul Walker: So let me now speak to how this translates into our revised guidance for the year. First, I would just say that the objectives of our go-to-market transformation that we've talked about in the last few calls remain unchanged. Despite the on-the-margin interruptions in revenue in our government and international operations that I just described, the engines in our enterprise division in North America and in our education business remain strong and durable. Our go to market transformation is tracking a bit ahead of expectation. And I want to talk about that here in a minute. And our go-to-market transformation is expected to drive significant acceleration of our overall company revenue growth, moving us from single-digit to double-digit revenue growth in the coming years, and with a significant flow-through of this incremental revenue to increases in adjusted EBITDA and cash For more information visit www.FEMA.gov With that said, due to the impacts of the government actions just outlined, we are adjusting our guidance for this fiscal year.

Derek Hatch: So let me now speak to how this translates into our revised guidance for the year.

Derek Hatch: First I would just say that the objectives of our go to market transformation that we've talked about the last few calls remain unchanged.

Derek Hatch: Despite the on the margin interruptions in revenue in our government and international operations that I. Just described the engines in our Enterprise Division in North America and in our education business remained strong and durable.

Derek Hatch: Our go to market transformation is tracking a bit ahead of expectations and I want to talk about that here in a minute.

Derek Hatch: And our go to market transformation is expected to drive significant acceleration of our overall company revenue growth moving us from single digit to double digit revenue growth in the coming years and with significant a significant flow through of this incremental revenue to increases in adjusted EBITDA and cash flow.

Derek Hatch: With that said due to the impacts of the government actions just outlined we are adjusting our guidance for this fiscal year.

Paul Walker: as shown on slide six. Last year we achieved revenue of $287.2 million, generating adjusted EBITDA of $55.3 million. Our original guidance for fiscal 25 provided that at the low end, we would grow revenue by approximately $8 million and generate adjusted EBITDA of $40 million, with the reduction from the prior year reflecting the $16 million of incremental growth investments being made this year. Due to the impact of government actions we just discussed, we now expect revenue will come in between $275 and $285 million, or $7 million or 2.5% lower than last year. and 15 million or 5% lower than the low end of our original guidance in constant current.

Derek Hatch: As shown on slide six.

Derek Hatch: Last year, we achieved revenue of $287 $2 million generating adjusted EBITDA of $55 3 million.

Our original guidance for fiscal 'twenty five provided that at the low end, we would grow revenue by approximately $8 million and generate adjusted EBITDA of $40 million with the reduction from the prior year, reflecting the $16 million of incremental growth investments being made this year.

Derek Hatch: Due to the impact of government actions. We just discussed we now expect revenue will come in between 275 and $285 million.

Derek Hatch: Or $7 million or two 5% lower than last year.

Derek Hatch: $15 million or 5% lower than the low end of our original guidance in constant currency.

Paul Walker: With this, we expect adjusted EBITDA to be between $30 and $33 million. Primarily reflecting the growth profit we expect to be lost related to the decline in revenue again related to the government actions previously discussed. While the $16 million of incremental growth investments were always going to have a direct impact on this year's adjusted EBITDA, we expected they would establish a solid foundation for accelerated future growth, and we still do. As noted, we're pleased with the traction we're getting and both fully committed to these investments and confident they will do exactly what they were expected to do, which is to accelerate our growth.

Derek Hatch: With this we expect adjusted EBITDA to be between 30 and $33 million.

Derek Hatch: Primarily reflecting the gross profit we expect to be loss related to the decline in revenue again related to the government actions previously discussed.

Derek Hatch: While the $16 million of incremental growth investments, we're always going to have a direct impact on this year's adjusted EBITDA. We expected they would establish a solid foundation for accelerated future growth and we still do.

Derek Hatch: As noted we're pleased with the traction we're getting in both fully committed to these investments and confident they will do exactly what they were expected to do which is to accelerate our growth.

Paul Walker: We, of course, did not anticipate the impact of the government actions, but are taking quick action to reduce our cost structure in government. in our international operations and other areas of our business. We expect these actions will partially offset some of the government related impact. and resulted in an even higher percentage of incremental revenue flowing through to Adjusted EBITDA next year. Therefore we expect this will be an approximate one year step back and that next year Adjusted EBITDA will be back to approaching where we thought it would be this year.

Derek Hatch: We of course did not anticipate the impact of the government actions, but are taking quick action to reduce our cost structure in government.

Derek Hatch: Our international operations and other areas of our business. We expect these actions will partially offset some of the government related impact.

Derek Hatch: And resulted in an even higher percentage of incremental revenue flowing through to adjusted EBITDA next year.

Derek Hatch: Therefore, we expect this will be an approximate one year step back in that next year adjusted EBITDA will be back to approaching where we thought it would be this year.

Paul Walker: will provide specific fiscal 26 revenue and adjusted EBITDA guidance in November, which has been our pattern.

Derek Hatch: We will provide specific fiscal 'twenty six revenue and adjusted EBITDA guidance in November which has been our.

Derek Hatch: Pattern.

Paul Walker: So, having talked about the external environment and our updated guidance for the year, I'd now like to turn to a different topic, which is to address the strength we're seeing across the majority of our business right now. Despite the potential near term impact in the areas just discussed, the strategic strength of our overall business and our business model continues to be evident. We're also pleased with the significant early traction, as I mentioned, that we're achieving in our new go to market in our enterprise North America. I'd like to first address the strength of our strategic position in business.

Derek Hatch: So having talked about the external environment and in our updated guidance for the year I'd now like to turn to a different topic, which is to address the strength, we're seeing across the majority of our business right now.

Derek Hatch: Despite the potential near term impact in the areas just discussed this strategic strength of our overall business and our business model continues to be evident.

We're also pleased with the significant early traction as I mentioned that we're achieving in our new go to market and our enterprise North America.

Derek Hatch: I'd like to first address the strength of our strategic position and business model are.

Paul Walker: Our strategic strength derives from the importance of the opportunities and challenges we help organizations address. opportunities and challenges which are very durable for clients in good times and in more challenging This strategic strength and the strength of our business model continue to be reflected in the following metrics in our North America enterprise business as you can see shown on slide seven. First Our revenue continues to renew at high rates. Apart from the government action related headwinds we've addressed, a majority of our clients continue to expand and renew even amid a more uncertain environment. This strong retention is driven in part by our clients' continued interest in expanding the duration of their contracts with us to ensure the ongoing achievement of their critical objectives.

Derek Hatch: Our strategic strength derives from the importance of the opportunities and challenges we help organizations address.

Derek Hatch: Opportunities and challenges, which are very durable for clients in good times and in more challenging times.

Derek Hatch: This strategic strength and the strength of our business model continue to be reflected in the following metrics in our North America Enterprise business as you can see as shown on slide seven.

Derek Hatch: First <unk>.

Derek Hatch: Our revenue continues to renew at higher rates.

Derek Hatch: Apart from the government action related headwinds, we've addressed a majority of our clients continue to expand and renew even amid a more uncertain environment.

Derek Hatch: This strong retention is driven in part by our clients' continued interest in expanding the duration of their contracts with us to ensure the ongoing achievement of their critical objective.

Paul Walker: At the end of the second quarter, 61% of our subscription revenue is under a multi-year contract, equaling the high percentage we'd achieved at this same point last year. Second, our clients continue to expand with Over time, the average revenue per All Access Pass client has expanded significantly from $39,000 to more than $85,000, reflecting both the growth of the populations being served within our clients and the expansion of incremental offerings that they For more information visit www.allaccesspass.com The third area of strength is that our clients are continuing to purchase significant amounts of services to help them achieve their mission critical objectives.

Derek Hatch: At the end of the second quarter, 61% of our subscription revenue was under a multi year contract equaling the high percentage, we'd achieved at the same point last year.

Derek Hatch: Second.

Derek Hatch: Our clients continue to expand with us.

Derek Hatch: Over time, the average revenue per all access pass client has expanded significantly from $39000 to more than $85000, reflecting both the growth of the population is being served within our clients and the expansion of incremental offerings that they purchase.

Derek Hatch: The third area of strength is that our clients are continuing to purchase significant amounts of services to help them achieve their mission critical objectives.

Paul Walker: Despite the uncertainty, it is significant that excluding our government. In our business in the United States and Canada, our advance bookings for new services have increased 5% year to date over the same period last This is this reflects our clients commitments to achieving a performance out Importantly, this momentum in bookings will translate into increases in services revenue in the coming quarters. We're pleased with the indicators of significant traction we're already achieving in the implementation of our new go-to-market acceleration in our enterprise business in North America. And I'd like to talk about this here just for a couple minutes.

Derek Hatch: Despite the uncertainty it is significant that excluding our government business.

Derek Hatch: And our business in the United States and Canada, our advanced bookings for new services have increased 5% year to date over the same period last year.

Derek Hatch: This is this reflects our clients' commitments to achieving our performance outcome importantly, this momentum in bookings will translate into increases in services revenue in the coming quarters.

Derek Hatch: Fourth.

Derek Hatch: We're pleased with the indicators of the significant traction we're already achieving and the implementation of our new go to market acceleration in our enterprise business in North America, and I'd like to talk about this year just for a couple of minutes.

Paul Walker: This is an initiative into which, as previously discussed, we've invested an incremental $16 million this year. It's been just 90 days since we launched our transition, and the traction and early results we're seeing are very encouraging. The focus of our go to market transition is on achieving significant increases in two key outcomes, which will drive our accelerated growth. The first objective is to significantly increase our new logo sales, and this is off to a very good start. We won more new logos in the second quarter, both in terms of dollars generated and number of clients than in any of the last five quarters, and we expect another strong quarter ahead in Q3.

Derek Hatch: This is an initiative into which as previously discussed we have invested an incremental $16 million this year.

Derek Hatch: And then just 90 days since we launched our transition and the traction and early results were seeing are very encouraging.

Derek Hatch: The focus of our go to market transition is on achieving significant increases in two key outcomes, which will drive our accelerated growth.

Derek Hatch: The first objective is to significantly increase our new logo sales and this is off to a very good start.

Derek Hatch: We won more new logos in the second quarter, both in terms of dollars generated and number of clients than any of the last five quarters and we expect another strong quarter ahead in Q3.

Paul Walker: We exceeded our new logo plan by more than 50% in the second quarter. And while we did not start the transition until the second quarter, we're pacing to achieve approximately 40% growth in new logo sales for the year. Importantly, we've also had a higher purchase of services by new all access pass clients this past quarter than we've seen in previous I'm going to come back and touch on that in just a second. Our second objective is to increase our expansion within existing client organizations. This is also off to a strong start. The second quarter was a strong quarter in terms of client expansions and we beat our planned expansion target by 8%.

Derek Hatch: We exceeded our new logo plan by more than 50% in the second quarter.

Derek Hatch: And while we did not start the transition until the second quarter, we're pacing to achieve approximately 40% growth in new logo sales for the year.

Derek Hatch: Importantly, we've also had a higher purchase of services by new all access pass clients this past quarter than we've seen in previous quarters.

Derek Hatch: I'm going to come back and touch on that in just a second.

Derek Hatch: Our second objective is to increase our expansion within existing client organizations. This is also off to a strong start.

Derek Hatch: The second quarter was a strong quarter in terms of client expansions and we beat our planned expansion target by 8%.

Paul Walker: Underpinning the strength of this early traction are two important factors. First, that our new go-to-market organizational structure is fully aligned, fully staffed, and working. Every role is filled, and we've added top tier talent and critical roles to go along with the already tremendous talent we had in place. All 44 of our new logo salespeople are in place today. 42 of the 44 were in place by December 1st and the other two, so all 44 were in place by February 1st, which is a full month ahead of what our planned staffing plan indicated. 21 of the 24 brand new, new logo hunting salespeople closed business in the second quarter.

Derek Hatch: Underpinning the strength of this early traction are two important factors.

Derek Hatch: <unk>.

Derek Hatch: That our new go to market organizational structure is fully aligned fully staffed and working.

Derek Hatch: Every role is filled and we've added top tier talent in critical roles to go along with the already tremendous talent we had in place.

Derek Hatch: All 44 of our new logo salespeople are in place today 42 of the 44 were in place by December one.

Derek Hatch: And the other two so all 44 were in place by February one, which is a full month ahead of what our planned <unk>.

Derek Hatch: Tapping plan indicated.

Derek Hatch: 21 of the 24 brand new new logo hunting salespeople closed business in the second quarter 'twenty. One of 24 closed business in the second quarter, which is their first quarter, that's an unprecedented ramp speed for us.

Paul Walker: 21 of 24 closed business in the second quarter, which is their first quarter. That's an unprecedented ramp speed for us. And our new logo pipeline exceeded plan by 30%. And our conversion rates were 300 basis points above our targeted conversion rates in the second quarter. The second factor underpinning our traction and momentum is that the important investments we've been making into content, technology and delivery capabilities over the past years are enabling us to serve even more clients more broadly and more effectively than ever before. As I mentioned a minute ago, we're also seeing a strong attachment rate of services to new logo wins.

Derek Hatch: And our new logo pipeline exceeded plan by 30%.

Derek Hatch: And our conversion rates were a 300 basis points above our targeted conversion rates in the second quarter.

The second factor underpinning our traction and momentum is that the important investments, we've been making into content technology and delivery capabilities over the past years are enabling us to serve even more clients more broadly and more effectively than ever before.

Derek Hatch: As I mentioned a minute ago. We're also seeing a strong attachment rate of services to new logo wins and this is a bit of a shift for us. We're intentionally driving this with these new logo sellers and this is not only increasing deal size, but we anticipate it will also boost client retention as our clients, who buy services renew at higher rates.

Paul Walker: And this is a bit of a shift for us. We're intentionally driving this with these new logo sellers. And this is not only increasing deal size, but we anticipate it will also boost client retention as our clients who buy services renew at higher rates.

Paul Walker: I'd like to share a quick win story from the second quarter that highlights the win of a new logo that also had more of these services attached. We closed a large hospital system in the Midwest for $253,000 in annual contract value. So that's a very nice new logo win for us. And this contract had it was $144,000 all access pass subscription with $109,000 in services attached to that to that subscription. The deal, this is interesting, the deal began with interest from the hospital system CEO and he'd asked for a single keynote on the speed of trust.

Derek Hatch: I'd like to share a quick win story from the second quarter that highlights.

Derek Hatch: The win of a new logo that also had more of these services attached we closed a large hospital system in the Midwest for $253000 in annual contract value. So that's a very nice new logo win for us.

Derek Hatch: And this contract had it was $144000 all access pass subscription with $109000 in services attached to that to that subscription.

The deal. This is interesting the deal began with interest from the hospital systems CEO and he'd asked for a single keynote on the speed of trust and we quickly expanded that initial interest into a rollout that covered a few hundred of their leaders to instill trust across teams and within patients in each of their hospitals. This.

Paul Walker: And we quickly expanded that initial interest into a rollout that covered a few hundred of their leaders to instill trust across teams and within patients in each of their hospitals. This deal was closed in just 44 days by one of our new logo sellers who was new in role. It was her third month in.

Derek Hatch: This deal was closed in just 44 days by one of our new logo sellers, who is new enroll with her third months in seat.

Paul Walker: Finally, I'd like to, as I touched briefly on a minute ago, just discuss for a second the ongoing strength we're seeing in our education business. As shown on slide 8, education revenue grew 3% in the second quarter and is up 7% year-to-date. Importantly, year-to-date invoiced amounts in education are up 13%, positioning us well for the seasonally stronger second half. We're seeing strong demand for Leader in Me driven by success in delivering the outcomes that educators, parents, and communities care about, such as leadership development, student engagement, and character building. This strong demand is fueling our transition from selling initially to individual schools to selling to entire districts, and we now, in a handful of cases, are serving statewide contracts.

Derek Hatch: Finally, I would like to test as I touched briefly on a minute ago just discuss for.

Derek Hatch: <unk> for a second the ongoing strength, we're seeing in our education business.

Derek Hatch: As shown on slide eight education revenue grew 3% in the second quarter and is up 7% year to date.

Derek Hatch: Importantly year to date Invoiced amounts in education are up 13% positioning us well for the seasonally stronger second half.

Derek Hatch: We're seeing strong demand for leader in me driven by success in delivering the outcomes of educators parents and communities care about such as leadership development student engagement and character building.

This strong demand is fueling our transition from selling initially to individual schools to selling to entire districts and we know in a handful of cases are serving statewide contracts.

Paul Walker: We're pleased there are now 7,800 leader in these schools around the world, and we're just getting started in growing that number to even larger heights. So we feel we feel quite good about the progress that's being made with the transformation of our North America operation. We feel good about the continued momentum in education.

Derek Hatch: We're pleased there are now 7800 leader in these schools around the world and we're just getting started in growing that number to even larger heights.

Derek Hatch: So we feel we feel quite good about the progress that's being made with the transformation of our North America operation, We feel good about the continued momentum in education and.

Steve: And with that, I'd like to turn the time over to Steve and ask Steve to share a little bit more detail on our financial results. Also share a little bit of specific Q3 guidance. Thank you, Paul. Good afternoon, everyone. It's a pleasure to be with you today.

Derek Hatch: With that I'd like to turn the time over to Steve and ask Steve to share a little bit more detail on our financial results also share a little bit of a specific Q3 guidance.

Steve: Thank you Paul good afternoon, everyone, it's a pleasure to be with you today.

Steve: You'll find on slides 9 through 12 and in the appendix, the second quarter financial details I've typically shared verbally on these calls. But today, I'll take the time to highlight a few encouraging trends we're seeing in the business that continue to support our confidence moving forward. First, a few high-level financial results. The second quarter revenue was 59.6 million or 60.1 million in constant currency. Slightly below the $61.3 million we achieved in Q2 last year, with more than all of the difference reflecting the impact of the government-related cancellations in the last 60 days. adjusted EBITDA for the quarter was 2.1 million, or 2.6 million in constant currency, landing at the top end of our expectations despite the government disruption.

Steve: Youll find on slides nine through 12 and in the appendix the second quarter financial details typically shared verbally on these costs.

Steve: But today I will take the time to highlight a few encouraging trends we're seeing in the business that continue to support our confidence moving forward.

Steve: First a few high level financial results.

Steve: Quarter revenue was $59 6 million or $61 million in constant currency <unk>.

Steve: Slightly below the 61 3 million, we achieved in Q2 last year.

Steve: With more than more than all of the different reflecting the impact of the government related cancellations in the last 60 days.

Steve: Adjusted EBITDA for the quarter was $2 1 million or $2 6 million in constant currency.

Landing at the top end of our expectations. Despite the government disruptions.

Steve: gross margin and SG&A were in line with projections, including the second quarter share of our 16 million in incremental growth investments in North America. We feel good about the results given the canceled government revenue and the related shortfall in international sales. and it being the first quarter of our go to market transformation Paul just described. Second, I'd like to highlight that we're seeing continued strength in the number and value of multi year contracts being signed. In fact, additional additions to unbilled deferred revenue, which reflects multi-year contracts secured but not yet invoiced. was up 10% in the second quarter and is also up 10% for the first half of this year compared to the first half last This momentum is also evident in our all access past contracts in North America.

Steve: Gross margin and SG&A were in line with projections, including the second quarter share of our $16 million and incremental growth investments in North America.

Steve: We feel good about the results given the castle and government revenue and the related shortfall in international sales.

Steve: And it being the first quarter of our go to market transformation, Paul just described.

Steve: Second I'd like to highlight.

Steve: There, we're seeing continued strength in the number and value of multiyear contracts being signed.

Steve: In fact additional additions to unbilled deferred revenue, which reflects multiyear contracts secured but not yet invoiced or.

Steve: As up 10% in the second quarter and is also up 10% for the first half of this year compared to the first half last year.

Steve: This momentum is also evident in our all access pass contracts in North America.

Steve: As of the end of Q2, the percentage of all access pass contracts that are multi-year was a strong 55%. And as Paul mentioned, the percentage of our subscription revenue associated with this multi-year agreements was also a strong 61%. These results reflect our clients long term commitment and belief in the value and strategic impact of our solution. In the midst of a more challenging macroeconomic environment, we're also pleased that the vast majority of our clients are renewing their contracts, expanding their usage, and expressing confidence in the work we're doing together. This gives us continued confidence in both the future trajectory of the business and the early returns we're seeing from a go to market transformation.

As of the end of Q2, the percentage of all access pass contracts that are multiyear was a strong 55% and as Paul mentioned the percentage of our subscription revenue associated with this multiyear agreements was also a strong 61%.

Steve: These results reflect our clients' long term commitment and belief in the value and strategic impact of our solutions.

Steve: And the message of a more challenging macroeconomic environment. We're also pleased that the vast majority of our clients are renewing their contracts expanding their usage and expressing confidence in the work we're doing together.

Steve: This gives us continued confidence in both the future trajectory of the business and the early returns we're seeing from a go to market transformation.

Steve: Third, as Paul mentioned, where our services booking rate in the United States and Canada excluding government is up 5% year over year. This is a strong indicator that we're not only landing new clients. But we are a trusted partner in delivering solutions that drive real outcomes and lasting value. Fourth, we're seeing good momentum in our education business, particularly in the number of large state and district level opportunities we're actively pursuing. this pipeline strength, together with the base of 7800 school gives us confidence in the demand for the kind of outcomes our leader in MESA solution delivers.

Steve: Third as Paul mentioned, where our services booking rate in the United States and Canada, Excluding government is up 5% year over year.

Steve: This is a strong indicator that we're not only landing new clients.

Steve: But we are a trusted partner in delivering solutions that drive real outcomes and lasting value.

Steve: Fourth we are seeing good momentum.

Steve: In our education business, particularly in the number of large state and district level opportunities you're actively pursuing.

Steve: This pipeline strength together with the base of 700 800 schools give.

Steve: It gives us confidence in the demand for the kind of outcomes our leader in me so solution delivers.

Steve: And provides confidence in continued growth as we move through the second half of the year, which is historically education's strongest period. Finally, our business continues to produce strong, reliable cash flow. And today we still have more than 100 million in liquidity. We've continued to use this strength to return value to shareholders. From 2022 to today, we have invested approximately $105 million or 83% of free cash flow to purchase 2.6 million shares. In the first half of this year, we've invested $14.7 million to purchase 397,000 shares. We expect to continue allocating excess cash toward accelerating growth, M&A activities and share purchases.

And provides confidence in continued growth as we move through the second half of the year, which is historically education strongest period.

Steve: Finally, our business continues to produce strong reliable cash flow and today, we still have more than $100 million and liquidity.

Steve: We've continued to use this strength to return value to shareholders.

Steve: From 2022 today, we have invested approximately $105 million or 83% of free cash flow.

To purchased two 6 million shares.

Steve: In the first half of this year, we've invested $14 7 million to purchase 397000 shares.

Steve: We expect to continue allocating excess cash toward accelerating growth M&A activities and share purchases.

Steve: We remain committed to being disciplined steward of capital while staying focused on driving long term value creation.

Steve: We remain committed to being disciplined stewards of capital, while staying focused on driving long term value creation.

Steve: Now just a little bit more on guidance. As Paul shared earlier, our revenue guidance for the year is to be between $275 and $285 million with adjusted EBITDA between $30 and $33 million in constant, both in constant currency. Our guidance for the third quarter is that revenue will be between $67 and $71 million and adjusted EBITDA will be between $4 million and $6.5 million. reflecting both the expected continued revenue disruption from government related activities impacting our direct government, international education, and other revenues, as well as the third quarters portion of our growth investment. So, Paul, back to you.

Steve: Now just a little bit more on guidance.

Steve: As Paul shared earlier, our revenue guidance for the year to be between 275 and $285 million with adjusted EBITDA between 30 and $33 million in constant both in constant currency.

Steve: Our guidance for the third quarter is that revenue will be between 67 and $71 million and adjusted EBITDA will be between 4 million and $6 5 million.

Steve: Reflecting both the expected continued revenue disruption from government related activities impacting.

Steve: Our direct government International education, and other revenues as well as the third quarter's portion of our growth investments.

So Paul back to you.

Paul Walker: Thanks, Steve. Thanks for taking us through that, and we'll now invite the operator to open the line for questions. As we do, just want to again thank everybody for being here today, and look forward to answering your questions. Thank you. As a reminder, if you would like to ask a question, please press star one one on your telephone. We also ask that you wait for your name and company to be announced before you proceed with your question. One moment for the first question.

Paul Walker: Thanks, Steve Thanks for taking us through that and.

Steve: Yes.

We'll now invite the operator to open the line for questions as we do just want to again, thank everybody for being here today and look forward to answering your questions.

Speaker Change: Thank you as a reminder, if you would like to ask a question. Please press star one on your telephone. We also ask that you wait for your name and company to be announced before you proceed with your question one moment for the first question.

Alex Paris: And our first question will come from the line of Alex Paris of Barrington Research. Your line is open. Hi guys, thanks for taking my questions. Good to talk to you today. Yep, same here.

Operator: And our first question will come from the line of Alex Paris of Barrington Research. Your line is open.

Alex Paris: Hey, guys. Thanks for taking my questions.

Operator: Good to talk to you today, yes.

Alex Paris: I guess we'll start with the the external impacts. Doge and tariff related and so on. I think I understand that there's, there's direct federal government agencies in lawless business, there's impact on your international business because of the response to the increased tariff talk from this end. And there is an expected impact on on your education business as well.

Operator: Yeah same here.

Operator: I guess, we'll start with the external impacts.

Operator: Does <unk> tariff related and so on.

Operator: I think I understand it.

Operator: There is direct federal government agencies and loss business. There is impact on your international business because of the response to the increased tariff talk from this end.

Operator: And there is unexpected impact on.

Operator: On your.

Operator: Education business as well so.

Paul Walker: So focusing first on the federal government. I think you said in your prepared comments that that it's 6% or $17 million is government revenue on a full year basis, DOD, VA, and then state and local. Is that correct? Yeah, but the majority of it being federal. Yeah. Okay, that's what I was going to ask. The majority is federal. And you called out DOD and VA.

Operator: Focusing first on the federal government.

Operator: Yeah.

Operator: I think you said in your prepared comments that.

Operator: Sure.

Operator: Got it.

Operator: 6% or $17 million as is.

Operator: Government revenue on a full year basis.

Speaker Change: VA and then state and local is that correct.

Operator: But the majority of it being federal.

Speaker Change: Okay, that's what I was going to ask.

Speaker Change: The majority is et cetera, and you called out Dod and VA are there any other agencies that we should be aware of.

Paul Walker: Are there any other agencies that we should be aware of? Yeah, so we do work with, USAID has been an agency we've had a long, long relationship, had a long relationship with in the past. We've done stuff with Health and Human Services. We've had a nice government business for a long time, doing work across a number. We do work with the Treasury and work with Congress in the past. So it's been fairly, fairly broad over the years out.

Speaker Change: So we do work with.

Speaker Change: USAID has been an agency we've had a long long related had a long relationship with in the past.

Speaker Change: We've done stuff with a healthy human services, we've had a nice government business for a long time doing work across a number we do work with the treasury.

Speaker Change: And work with <unk>.

Alex Paris: Congress in the past so it's been it's been fairly fairly broad over the years Alex.

Unknown Executive: Gotcha.

Paul Walker: And then you said, I think Steve said that that the entire year over year decline in revenue was due to canceled government contracts and then the related impact on your other business. Yes, yes, that's right. Yeah, particularly in the impact was reflected in Q2 of the cancellations just in the last 60 days. Okay, gotcha.

Speaker Change: Got you and then.

Speaker Change: You said I think Steve said that the entire year over year decline in revenue was due to canceled.

Speaker Change: Government contracts and then the related impact on your other businesses.

Speaker Change: Yes, yes, yes, that's right.

Speaker Change: The impact was reflected in Q2 of the cancellations just in the last 60 days that's right. Okay got you.

Paul Walker: All right, and then. On the education, and I, you know, obviously, there's nothing you can do about that. Are there hopes to win the business back in the future? Certainly your guidance assumes that you don't win it back this year. Yeah, yeah. So staying on government for a second, our guidance and our and our view right now is that we don't win that back this year. I don't see a scenario where that happens.

Speaker Change: Alright, and then.

Speaker Change: On the education.

Speaker Change: Obviously, there's nothing you can do about that.

Speaker Change: Are their hopes to win the business back in the future.

Speaker Change: Certainly your guidance assumes that you don't want it back this year, yes, yes first staying on government for a second our guidance in our in our view right. Now is that we don't win that back this year.

Speaker Change: I don't see a scenario where that happens.

Speaker Change: Hi.

Paul Walker: And so what we're doing, one of the things we're doing is we're just taking a look at that government business and saying, okay, over the next I kind of scattered in quickly here. I'm going to address some complanies that we covered last time. become more efficient, get more out of their people, you know, do more with less, like we have, we have a whole set of offerings, as you know, around execution, there could be an opportunity to get back in and help on some of those things. Right now, the environment is such that there's not a lot of appetite to buy anything new in the government.

Speaker Change: And so what we're doing one of the things. We're doing is we're just taking a look at that government business is saying, okay over the next bit of time here, assuming the assuming the trajectory of what's happening in within the government doesn't change how do we structure that business. So that we can be as profitable as possible on less revenue. If that's an action we're taking immediately longer term if things settled.

Speaker Change: I mean, a big part of what we do as a company as we help organizations.

Speaker Change: Become more efficient and get more out of their people do more with less like we have a whole set of offerings as you know around execution, there could be an opportunity to get back in and help on some of those things right now.

Speaker Change: The environment is such that there's not a lot of appetite to buy anything new in the government, but I think that we will see as we go into next year, whether that looks different but at the moment that is how we see it.

Paul Walker: But I think, you know, that we'll see as we go into next year, whether that looks different. But at the moment, that's how we see it.

Paul Walker: For more information visit www.FEMA.gov Gotcha, thank you. And then on the education side, 86% of funding comes from state and local governments. Only a small, small component, 14% comes from the federal government. Overall, I'm not saying your revenue. And that would be things like Title One, and individuals with disability.

Speaker Change: Got you. Thank you and then on the education side.

Speaker Change: 86% of funding comes from state and local governments.

Speaker Change: Only a small a small component 14% comes from the federal government overall, I'm not saying your revenue.

Speaker Change: And.

Speaker Change: That would be things like title one.

Speaker Change: Individuals with disability.

Speaker Change: Yeah.

Paul Walker: What percentage of your education division revenue comes from the Department of Education? So we don't the Department of Education for us is not actually a client. And so they dole out 14% of a state's budget, which comes through them. And like you said, it is directed towards Title I, towards some of those programs that you mentioned. And so we're not selling to them. We don't have a relationship with the Department of Education, never had. The fact that that agency is being cut, cut in half, however far it gets cut back, that itself doesn't have any impact on us.

Speaker Change: What percentage of your Education Division revenue comes from the Department of Education.

Speaker Change: So we don't the department of Education for US is not actually a client.

Speaker Change: And so they doled out 14% of the state's budget comes as it comes through them and like you said. It is it is directed towards title one towards some of those programs that you mentioned and so we're not we're not selling to them. We don't have a relationship with the department of education never had the fact that that agency has been cut in half whatever however, if argus.

Speaker Change: Cut back that that itself doesn't have any impact on us and we don't actually think Alex over time Theres nothing from everything that we can see right now the dollars that have been flowing from the department of education to the states. We expect those dollars are still going to flow they might come from a different agency then the department of Ed It might be.

Paul Walker: And we don't actually think, Alex, over time, from everything that we can see right now, the dollars that have been flowing from the Department of Education to the states, we expect those dollars are still going to flow. They might come from a different agency than the Department of Ed. It might be as the administration is trying to actually shut down the Department of Ed. And so long term, we don't actually. see that creating a funding challenge for us.

Speaker Change: As the administration is trying to actually shut down the department of Ed.

Speaker Change: And so long term, we don't actually see.

Speaker Change: See that creating a funding challenge for us what we're trying to highlight here in this call that just so happens that it might throw just a bit of sand in the gears and our third and fourth quarter, which is the time of the year when schools are making decisions to start leader in me alright. The second half has always been our biggest half of the year and so it's just it.

Paul Walker: What we're trying to highlight here in this call is it just so happens that it might throw just a bit of sand in the gears in our third and fourth quarter, which is the time of the year when schools are making decisions to start Leader in Me, right? The second half has always been our biggest half of the year. And so it's just the thought that there might be just enough uncertainty during our third and fourth quarter as the dollars are being shifted from the federal government to states that it might cause some slippage in the timing of decisions.

Speaker Change: The thought that there might be just enough uncertainty during our third and fourth quarter as the dollars are being shifted from the federal government to states that it might cause some slippage in the timing of decisions decisions in that business are usually made in school board meetings and so if you Miss The school Board meeting you are up for the next one and there could just be enough of that right now we're not.

Paul Walker: Decisions in that business are usually made in school board meetings. And so if you miss a school board meeting, you're up for the next one. And there could just be enough of that right now. We're not seeing it really widespread at all at the moment. We're just trying to highlight that there's a possibility there could be a few million dollars of impact there. Generally speaking, it's really on the margin. That business is doing quite well and we expect that it will continue to be.

Speaker Change: Seeing it really widespread at all at the moment, we're just trying to highlight that.

Speaker Change: There is a possibility there could be a few million dollars of impact there generally speaking its really on the margin that business is doing quite well and.

Speaker Change: And we expect that it will continue to be but highlighting there is that there is that there is that risk that potential.

Paul Walker: But highlighting there is that there is that there is that risk, that potential.

Alex Paris: Just a couple more. So If I understand it correctly, some of these internal impacts are kind of masking the success and the traction and the trajectory, you know, resulting from your North American Enterprise Salesforce restructuring. Just to be clear, I think in Q1, of that $16 million incremental investment, I think you spent a little bit less than $3 million in the first quarter, and I think you were expecting to spend a little bit more than $4 million in the second quarter. And then $4.5 million in each Q3 and Q4 to get us to $16 million.

Speaker Change: Just a couple more.

Speaker Change: So.

Speaker Change: If I understand it correctly some of these internal impacts are kind of masking the success.

Speaker Change: The traction and the trajectory.

Speaker Change: <unk> from your North American Enterprise sales force.

Speaker Change: Restructuring.

Speaker Change: Just to be clear I think in Q1.

Speaker Change: $16 million incremental investment I think you spent a little bit less than $3 million in the first quarter and I think you were expecting to spend a little bit more than $4 million in the second quarter.

Speaker Change: And then $4 5 million in each Q3, and Q4 to get us to $16 million or are we still pretty much on that schedule in terms of incremental spending.

Paul Walker: Are we still pretty much on that schedule in terms of incremental spending? We are like really right on that schedule. I'm looking at Steve here, he's nodding. Yeah, so that set of bets, those investments are right on track. We've made those investments. So the people are, it's primarily people, the people are here, they're in role. And so that penciling out you just did of around three going to four and then four going to four and a half and four and a half, those are with us now. And that's a conscious decision we're making here. We're saying we like the early momentum that we're seeing, the traction that we're beginning to see.

Speaker Change: We are.

Speaker Change: Really right on that schedule I'm looking at Steve here. He is nodding, yes, so that that set of bets those investments are right on track.

Speaker Change: We've we've made those investments so that people are it's primarily people that people are here, they're enroll and fill that penciling out you just did have around three going to four and then for going to $4 five and $4. Five those are with US now and that's a conscious decision we're making here, we're saying we like we like the early momentum that we're seeing.

Paul Walker: We're only 90 days in, but we like what we're seeing. And that's not an area where we want to cut back. That's the area we believe, that's the engine that pulls the company's overall growth rate higher and higher that we've talked about and that we're excited about. And so we see doing some trimming in some other places, but we don't want to trim there.

Speaker Change: The traction that we're beginning to see we're only 90 days in but we like what we're seeing and that's those that's not an area, where we want to cut back. That's the area. We believe that's the engine that pulls the company's overall growth rate higher and higher that we've talked about and we're excited about and so.

Speaker Change: We see making some some doing some trimming in some other places, but we don't want to trim. There. We are quite pleased with what we're seeing in the early days here.

Alex Paris: We're quite pleased with what we're seeing in the early days. Great.

Alex Paris: And then The last couple would be regarding guidance. So you kind of spelled out the guidance there and the delta from previous guidance and year over year. You gave third quarter guidance. So we have implied guidance for the fourth quarter. In the text of the press release, you said that the company expects this to be a one year step back and the company suggested EBITDA will approach 2025, original 2025 expectations in 2026. So that suggests there's been a reduction in expectations in 2026, given these external factors.

Speaker Change: Great and then.

Speaker Change: The.

Speaker Change: Last couple would be.

Speaker Change: Regarding guidance.

Speaker Change: So you kind of spelled out the guidance there.

Speaker Change: The delta from previous guidance and year over year, you gave third quarter guidance. So we've implied guidance for the fourth quarter.

Speaker Change: In the text of the press release, you said that the company expects this to be a one year step back and the company's adjusted EBITDA will approach 2025 original 2025 expectations. In 2026, so that suggests theres been a reduction in expectations in 2026, given these external.

Paul Walker: And then what does that do to 27 and 28? Because you had given long term guidance through 2028 previously.

Speaker Change: Factors and then what does that do to 27% and 28, because you had given long term guidance through 2028 previously yes, yes, it's a great. It's a great question I would say.

Paul Walker: Yeah, it's a great question. I would say we will, as has been our pattern, we're going to go ahead and update that in November, as we kind of see how the next couple of quarters play out. I will say that, just two more comments on your question there. One, we As we take takes as we expect to accelerate some of our invoicing growth and whatnot in the back half of this year, and we take some of the cost We take a look at some of the costs that aren't related to our growth. We do see ourselves next year, even on modest revenue growth, getting pretty good flow-through on that, having had a big investment year this year and not needing to make anywhere near the same level of incremental investments next year, plus the flow-through on some of the things we would do on the cost side in the back half of this year, setting ourselves up for a good flow-through year next year, flow-through like we used to have, like you've been accustomed to us having.

Speaker Change: We will as.

Speaker Change: As has been our pattern, we're going to go ahead and update that in November as we kind of see how the next couple of quarters play out I will say that just two more.

Speaker Change: Comments on your question there one we.

As we take takes as we expect to accelerate some of our invoicing growth and whatnot in the back half of this year and we take some of the cost.

Speaker Change: We look we take a look at some of the costs that are related to our growth. We do we do see ourselves next year, even on modest revenue growth getting pretty good flow through on that having had a big investment year this year and not needing to make anywhere near the same level of incremental investments next year plus the flow through on some of the things we would do on the cost side in the back half of this year setting ourselves up.

Speaker Change: For a good flow through a good flow through your next next year.

Speaker Change: Flow through like we used to like we used to have like what you've been accustomed to us having and that's the comment about setting up next year to getting back to approaching getting back to where we would have been this year on the on the adjusted EBITDA side.

Paul Walker: And that's the comment about setting up next year to getting back to approaching getting back to where we would have been this year on the adjusted EBITDA.

Paul Walker: As far as the longer-term outlook on revenue-adjusted EBITDA, we'll give a good update on what we think in November. I will say that fundamentally, as we think about just the underlying thesis here, we still do very much believe that this is a business that there's great demand for what we're selling. Our clients need what we have. We have good strength in this business, and that the transformation we're making in our North America enterprise operation, coupled with the good momentum we've had for a long time in education, that over time, the revenue growth accelerates. And with that, we drop through revenue to increases in adjusted EBITDA and cash flow.

Speaker Change: As far as the longer term outlook on revenue adjusted EBITDA will give a good update what we think in November I will say that fundamentally as we think about just the underlying thesis here. We still do very much believe that this is a business that there is great demand for what we're what we're selling our clients need but we have we have good strength in this business.

Speaker Change: And the transformation, we are making in our North America enterprise operation coupled with the good momentum we've had for a long time in education that over time.

Speaker Change: The revenue growth accelerates in with that.

Speaker Change: We drop through revenue to increases in adjusted EBITDA and cash flow on that underlying thesis remains intact and we will as we get a little more visibility, we'll get we'll share more about what that when and when and by how much but that's the trajectory where we still think we're at.

Paul Walker: And that underlying thesis remains intact. And as we get a little more visibility, we'll share more about when and by how much. But that's the trajectory where we still think we're on.

Alex Paris: Okay, gotcha. And then lastly, I guess, again, the positive effects are somewhat masked by the external impacts.

Speaker Change: Okay got you and then lastly, I guess.

Speaker Change: Again the.

Speaker Change: The positive effects are somewhat masked by the external impacts I think you said on the last conference call. The things we should look for in terms of milestones would be size of pipeline that that's where it would show up first.

Paul Walker: I think you said on the last conference call, the things we should look for in terms of milestones would be size of pipeline, that's where it would show up first. Growth in invoice sales, that's where we'd see it second. I think it was down still in Q2, I realize we're 90 days in. And then ultimately reported revenues.

Speaker Change: Growth in invoice sales Thats, where we'd see it second I think it was down still in Q2, I realize really 90 days in and then and then ultimately reported revenues.

Paul Walker: One of you could just give comment on those three milestones, or a little additional color. So, yes, growth in pipelines. And just a couple of comments there. As we mentioned, in our North American business, our pipe, we exceeded our pipeline target by about 30% in the second quarter. We had a better close rate than we thought. So I think if you think about the new logo side for a minute, the factors that drive new logo are, can our marketing organization generate more leads, more pipeline, more opportunity? Can our sales organization qualify that advance and close it?

Speaker Change: If you could just give comment on those three milestones are a little additional color.

Speaker Change: You bet.

Speaker Change: So yes growth in pipelines and.

Speaker Change: Just a couple of couple of comments there we as we mentioned in.

Speaker Change: In our in our North American business, our pipe, we exceeded our pipeline target by about 30% in second quarter, we had a better close rate than we thought so I think if you think about think about the new logo side for a minute the factors that drive new logo or can we can cut our marketing organization generate more leads more pipeline more opportunity can our sales organization.

Speaker Change: <unk> qualify that advance it and close it we saw that in the second quarter at rates that were above what our plan. What are plans suggested we would have been great success. So we were ahead on those.

Paul Walker: We saw that in the second quarter rates that were above what our plan suggested we would have been great success. So we were ahead on those.

Paul Walker: And then on the other side, it's can we take the client on the on the expand side? Can we take those clients who've now landed at greater rates? And can we expand them and retain them? And, and we had good we beat our expansion plan by 8% in the quarter as well. That's that those happened with even with the noise we saw with some of our contracts and some of the you know, government is part of North America. So despite some of the headwinds we saw in the quarter began to see in the second quarter, our second quarter happened to be, you know, January, February, December, January, February, the leading indicators were positive.

Speaker Change: And then on the other side it can we take the client on the expand side can we take those clients who have now landed a greater rates.

Speaker Change: And can we expand them and retain them and we had good we beat our expansion plan by 8% in the quarter as well.

Speaker Change: Got that.

Speaker Change: That those happened with even with the noise, we saw with some of our contracts and some of them.

Speaker Change: Government is part of North America. So despite some of the headwinds we saw in the quarter began to see in the second quarter. Our second quarter happened to be January February December January February the.

Speaker Change: Leading indicators were positive and as you mentioned, where we're only 90 days in.

Paul Walker: And as you mentioned, we're only 90 days in.

Paul Walker: And we look forward to reporting on that again, as we get to Q3, Q4, we'll just keep reporting on those as we go along.

Speaker Change: And we look forward to reporting on that again as we get to Q3 Q4, we'll just keep reporting on those as we go along here.

Paul Walker: And has there been any impact on the commercial side of the business within enterprise, like extended sales cycles due to uncertainty, tariffs, recession worries, things like that? think that's what so so certainly as we taught as we alluded to we're seeing that we've seen that internationally in fact in three of the three of the countries in which we operate in our international direct offices they've had snap elections in the last 90 days so there's some uncertainty there and we're so we see some of the prolonged decision-making happening in international and that's why we've tried to reflect that in our updated guidance and and then we've provided a little bit of in the in the US you know expecting a little bit of headwind there as well which is where the we've also accounted for about three million dollars that potential headwind there in the US as well so haven't seen a lot of it yet but expecting that we might see a little bit of that and that's in guidance.

Speaker Change: And has there been any impact on the commercial side of the business within enterprise.

Speaker Change: Like extended sales cycles due to uncertainty tariffs recession worries things like that.

Speaker Change: I think thats what.

Speaker Change: So certainly as we talked as we alluded to we're seeing that we've seen that internationally in fact in three of the three of the countries in which we operate and our international direct offices, they've had snapple actions in the last 90 days. So there is some uncertainty there and so we see some of the prolonged decision making.

Speaker Change: Happening in international and Thats why we have.

Tried to reflect that in our updated guidance.

Speaker Change: And.

Speaker Change: And then we've provided a little bit of.

Speaker Change: In the U S expecting a little bit of headwind, there as well, which is where the.

Speaker Change: We have also accounted for about $3 million of potential headwind there in the U S. As well so haven't seen a lot of it yet, but expecting that we might see a little bit of that.

Speaker Change: And that's in guidance.

Alex Paris: Okay, great. Well, thank you. I'll get back into the queue. Appreciate your answering my questions. Thanks, Alex. Thank you.

Speaker Change: The guidance, yes, okay, great well, thank you I'll get back into the queue I appreciate your.

Speaker Change: Answering my questions.

Thanks, Alex.

Unknown Executive: One moment for the next question, please.

Speaker Change: Thank you one moment to the next question. Please.

Jeff Martin: And our next question will be coming from the line of Jeff Martin of Rothkappa Markets. Your line is open. Hi, Jeff. Thanks. Good afternoon, Thomas. Hope you're well. Thank you. Good to talk to you.

Speaker Change: And our next question will be coming from the line of Jeff Martin of Roth Capital markets. Your line is open.

Jeff Martin: Hi, Jeff Thanks, Good afternoon, Tom Steve Hope you're well.

Speaker Change: You too thank you get to talk to you.

Jeff Martin: So Paul, I was just curious if you could clarify the $17 million in government-related revenue, 6% of revenue. Does that include non-government organizations that are influenced by government agencies, or is that, I can remember that, and are you seeing any impact there? Yeah, the 17 million is governmental. agency direct. The 17 million is direct. The broader, as far as government representing a good share of the GDP and how that spills over to companies who do a lot of work with the government, etc., etc., that's what we're trying to point to in the 3 million or so of impact we might see in the U.S.

Speaker Change: So Paul I was.

Paul Walker: Just curious if you could clarify the $17 million in government related Rob.

Speaker Change: Revenue 6% of revenue.

Speaker Change: Does that include nongovernment organizations are influenced by government agencies.

Speaker Change: Is that incremental to that and are you seeing any impact there.

Speaker Change: Yes, the $17 million as governmental agencies.

Speaker Change: Agency direct.

Speaker Change: The $70 million direct.

Speaker Change: The broader as far as government, representing a good share of the GDP and how that spills over to companies, who do a lot of work with the government et cetera et cetera.

Speaker Change: That's what we're trying to point to.

Speaker Change: The $3 million or so of impact we might see in the U S and Canada, so not yet seeing a lot I think were.

Paul Walker: and Canada. So not yet seeing a lot. I think we're not seeing a lot of that yet. We're obviously directing our sales forces, our sales force towards those organizations that, you know, trying to assign them to the highest and best use to the types of accounts that we think will do well in these times, but haven't seen a lot of that yet. Yeah, okay.

Speaker Change: We're not seeing a lot of that yet we're obviously directing our sales forces our sales force towards those organizations that.

Speaker Change: Trying to trying to trying to assign them to highest and best use to the types of accounts that we think will do well in these in these times with haven't seen a lot of that yet Jeff.

Paul Walker: And then I was curious if you could characterize the project starts among your clients who are Subscription purchasers. Are those largely starting on time? Are they starting to infuse some delays related to uncertainties, you know, need to focus on other areas of the business, the impact of tariffs, etc. You know, we, as we, we mentioned In the second quarter, we actually had a better new logo quarter. And so for us, when we bring on a new client, we sell a new logo, we're starting right away with them. Their subscription starts, the clock is running on that first year subscription.

Speaker Change: Okay.

Speaker Change: I was just curious if you could characterize the.

Speaker Change: Project starts among your clients or.

Speaker Change: Subscription.

Speaker Change: Purchasers are those largely starting on time are they starting to <unk>.

Speaker Change: And she has some delays related to uncertainties.

Speaker Change: We need to focus on other areas of the Delaware.

Speaker Change: The impact of tariffs et cetera.

Speaker Change: We as we mentioned.

Speaker Change: The second in the second quarter, we actually had a better new logo quarter and so for us when we sell when we sell we bring on a new client we saw new logo, we're starting right away with them. Their subscription starts the clock is running on that first year subscription and so we're seeing we haven't seen any slowdown in terms of project starts Jeff.

Jeff Martin: And so we're seeing, we haven't seen any slowdown in terms of project starts, Jeff, at this point. Okay, that's encouraging.

Speaker Change: At this point.

Jeff Martin: Okay, that's encouraging.

Paul Walker: And then if the economy does roll into a recession here, I know in the past you've spoken about the durability of the subscription model. Obviously, moving to multi-year contracts helps, but how do you see that in terms of potential impact on new logos? I know you just had a really strong first 90 days under the new go-to-market strategy, but just was curious if you have the same level of conviction if the economy does do roll into a recession. Yeah, so you highlighted two important things. First, I would say, you know, the subscription business helps us in a situation like that where we need to roll into a recession in that we've got all the clients that you've got that portion of clients that are on a multi-year contract.

And then.

Jeff Martin: The economy does roll into a recession here.

Jeff Martin: I know in the past you've spoken about the durability.

Jeff Martin: The subscription model, obviously move into multiyear contracts helps.

But how do you see that in terms of potential impact on new logos I know you just had a really strong.

Jeff Martin: First 90 days ended.

Jeff Martin: Go to market strategy, but just was curious if you have the same level of conviction.

Jeff Martin: If the economy does do well into a recession here.

Jeff Martin: So you highlighted two important things first I would say the subscription business helps us in a situation like that where we're going to roll into a recession in that we've got all of the clients that <unk> got that portion of clients that are on a multi year contract. So about 55% of our contracts are multi year, meaning meaning two years or longer 61 <unk>.

Paul Walker: So about 55% of our contracts are multi-year, meaning two years or longer. 61% of the subscription revenue is under a multi-year contract, again, two years or longer. So you get a nice, there's a bridging effect there. A lot of the base is bridged and in place in that experience. In the past when we've seen a downturn like that, usually there's a couple of quarters where there's a lot of uncertainty. And so we've got some good built-in durability there just in those multi-year contracts. We also, for all those clients that are on a multi-year, they're on a one-year contract.

Jeff Martin: <unk> subscription revenue.

Jeff Martin: Is under a multi year contract again, two years or longer. So you get a nice there's a bridging effect there are a lot of the base is bridged and in place.

Jeff Martin: <unk> experienced in the past when we've seen a downturn like that usually there is a couple of quarters, where there's a lot of uncertainty and so we've got some good built in durability. There just in those multiyear contracts. We also for all of those clients that are in our multi year. They are on a one year contract and so you've got a good number a good percentage of clients that are.

Paul Walker: And so you've got a good number, a good percentage of clients that are, you know, in their first quarter, second quarter, they're only, you know, a portion of the way into even the single year. So there's some increased strength and durability built into just the way that all access paths and Leader and me are contracted in the form of, you know, minimum one year contracts.

Jeff Martin: In their first quarter second quarter, there are only a portion of the way into even the single year. So theres some increased.

Jeff Martin: The strength and durability built into just the way that all access pass and leader in me or contracted in the form of.

Minimum one year contracts to your second question around new logo.

Paul Walker: To your second question around new logo. So I think so again, we were I was pleased in the second quarter, it wasn't like the second quarter didn't have some some external noise in it. And we had a good quarter, we right now our pipelines in the early early indicators for q3, even in this environment suggests that q3 is going to be another good, strong new logo quarter for us. And we feel good about that right now. We are, of course, as we've done in the past, we direct our salesforce a little even a little bit more to the solutions like the four disciplines of execution, our sales performance solutions, those topics that we fortunately cover that really become even more critical and important to clients and organizations when they're, they're, you know, they're trying to grow their own businesses.

Jeff Martin: I think so again, we were I was pleased in the second quarter. It wasn't like the second quarter Didnt have some some external noise in it and we had a good quarter, we right now our pipelines in the early early indicators for Q3, even in this environment suggests that Q3 is going to be another good strong new logo quarter for us.

Jeff Martin: And we feel good about that right now we are.

Jeff Martin: Of course, as we've done in the past, we direct our sales force a little even a little bit more to the solutions like the four disciplines of execution, our sales performance solutions those topics that we fortunately cover that really become even more critical and important to clients into organizations when they're there they're trying to grow there.

Paul Walker: And so we'll direct our salesforces there and, and remains to be seen. But right now we're encouraged by what we saw in Q2 and the early indicators for Q3 on new logo.

Jeff Martin: Businesses and so we'll direct our sales forces there in and.

Jeff Martin: Remains to be seen but right now we're encouraged by what we saw in Q2 and the early indicators for Q3 on new logo.

Jeff Martin: Okay, and then last for me is Your guidance implies roughly this is roughly speaking 14 to 16 million is just even down to four. And just curious your level of conviction, what could what could happen to exceed that number? Or what could you foresee that might pressure that? if you want to make any comments on that. Hi, Jeff. You know, Since since any subscription sale only a portion of that is recorded to actual revenue. The fourth quarter especially is impacted a lot by the amount of services that we deliver. and the amount of coaching days that we deliver, especially in education.

Jeff Martin: Okay, and then last for me.

Speaker Change: Your guidance implies roughly.

Speaker Change: Speaking of $14 million to $16 million adjusted EBITDA in Q4.

Speaker Change: So I'm just curious your level of conviction what could look at.

Speaker Change: Happened to exceed that number or what could you foresee that might pressure that number.

Steve: Steve do you want to make any.

Speaker Change: Comments on.

Speaker Change: Hi, Jeff.

Speaker Change: Yes.

Speaker Change: Since that since any subscription sale only a portion of that is recorded to actual.

Speaker Change: Our revenue.

Speaker Change: The fourth quarter.

Speaker Change: Especially it is impacted a lot by the amount of services that we deliver.

Speaker Change: And the amount of coaching days that we deliver especially in education. So.

Steve: So one of the one of the important areas that Paul talked about related to the fourth quarter is that is that there isn't some some thing that we cannot imagine that would significantly impact the education days. We don't see that we don't anticipate it, but that's the kind of thing that could could be a could be a disruption. And then the improvement could be simply that again, in education and in everywhere else, some of the disruption that we're anticipating might happen just doesn't. And that the need, there is a need for those delivered days and the services and the content and the companies just go ahead with what they need would be an improvement to what we're projecting.

Speaker Change: One of the one of the important areas that Paul talked about related to the fourth quarter is that there.

Speaker Change: There isn't some sums thing that we cannot imagine that would significantly impact the education.

Speaker Change: Yes.

Speaker Change: We don't see that and we don't anticipate it but that's the kind of thing.

Speaker Change: Could be.

Speaker Change: It could be a disruption and then.

Speaker Change: The improvement could be simply that again in education and in everywhere else. Some of the disruption that were anticipated might happen just doesn't.

Speaker Change: The need there is a need for those deliver days and the services and the content and the companies. Just go ahead with what they need would be an improvement to what we're projecting and just just on that I think that's a great point. So far have all of the factors that we that I walked through that kind of.

Paul Walker: And just just on that, I think that's a great point. So far of all of the factors that we that I walked through that kind of give the basis for the new guidance. The government piece there is. lost business, we've already incurred there. The others are just as we look at the future and try to try to think about what we think might happen. But we're working every day to figure out how to do better than and what that might be. So international where we think we might be down as much as $4 million compared to plan this year.

Speaker Change: The basis for the new guidance the government piece there is <unk>.

Speaker Change: <unk> business, we've already incurred there the others are just as we look at the future and try to try to think about what we think might happen.

Speaker Change: We're working every day to figure out how to do better than what that might be so international where we think we might be down as much as $4 million compared to plan. This year.

Jeff Martin: And no one's going to be happy that we hit the number we just gave out today. We're trying to do everything we can to do better than that, and hopefully we'll be able to beat what we shared here today, and that's certainly our expectation. That's helpful.

Speaker Change: No one no one is going to be no one's going to be happy that we hit the number. We just gave out today, we're trying to do everything we can to do better than that in and hopefully hopefully we'll be able to beat what we what we shared here today and that's certainly our expectation.

Speaker Change: Because it.

Jeff Martin: Thank you for taking. Thank you for the time. Thanks, Jeff. Thank you.

Speaker Change: That's helpful. Thanks. Thank you for taking thank you for your time.

Jeff Martin: Thanks, Jeff.

Unknown Executive: One moment for the next question.

Thank you one moment for the next question.

Dave Storms: And our next question will be coming from the line of Dave Storms of Stonegate. Your line is open. Hi, Dave. Afternoon, appreciate you taking my questions.

Speaker Change: And our next question will be coming from the line of Dave storms that Stonegate. Your line is open.

Dave: Hi, Dave.

Dave: Afternoon, I appreciate you taking my questions.

Paul Walker: Um, just want to start, you know, while we're looking at the external environment, is there any ability or appetite to maybe bend down the hatch a little bit and shift focus on enhancing AI capabilities, any internal project. So we're we're we are we have a we have a great product development roadmap On that product development roadmap includes how we're going to incorporate AI into our products, and we're already doing that. We've talked about that in the past. Internally, there's also an opportunity to just continue to make our own internal operations more efficient, more streamlined. I think there's obviously the ability for AI to help with that.

Speaker Change: Just wanted to start what we're looking at the external environment is there any ability or at appetite, maybe batten down the hatches, a little bit and shift focus a little more internally towards.

Dave: More focus on product development.

Speaker Change: Focus on enhancing our capabilities.

Speaker Change: Internal projects like that.

Speaker Change: So were we.

Speaker Change: We are we have a we have a great product development roadmap.

Speaker Change: On that product.

Speaker Change: And our roadmap includes how we're going to incorporate AI into our products and we're already doing that we've talked about that in the past.

Speaker Change: Internally. There is also an opportunity to just continue to make our own internal operations more efficient more streamlined I think theres obviously.

Speaker Change: The ability for AI to help with that one of the things I mentioned in my remarks was just that we recognize that that we're taking our EBITDA guidance down as well primarily as a function of the revenue going down and then not wanting to cut the $60 million of growth investments. We will look for other places that arent tied to.

Paul Walker: One of the things I mentioned in my remarks was just that we recognize that we're taking our EBITDA guidance down as well, primarily as a function of the revenue going down and then not wanting to cut the $16 million of growth investments. We will look for other places. that aren't tied to the things that are going to grow the business in the future and try to look for ways to become as efficient as we can. And we've done that for years. And we'll continue to certainly do that and look inward on those things, Dave.

Speaker Change: The things that are going to grow the business in the future and try to look for ways to become as efficient as we can and we've done that for years.

Speaker Change: And we will continue to certainly do that and look inward on those things Dave.

Speaker Change: Understood very helpful. Thank you.

Paul Walker: Um, and then just looking at some of your go to market strategy, kind of outpacing goals, it does logos is up, you know, 150% over goals, where, you know, the expanders call at 108%. book and pass the market insurance. be a point where you will need to hire more expanders faster than landers? And I guess kind of how are you thinking about the balance between those two roles?

Speaker Change: And then just looking at some of your go to market strategy kind of outpacing goals. It does look like.

Speaker Change: As you mentioned.

Speaker Change: The new logos is up 100% over goals, where the expanders.

Paul Walker: Paul like 108%.

Paul Walker: Looking past the market uncertainty do you see a point, where you will need to hire more expanders faster than landers, I guess kind of how are you thinking about the balance between those two roles.

Paul Walker: What a great it's a great question. So first of all, stepping back for a second long long term as we as we as we zoom, zoom out for a second and think about what happens over the long period of time. We've done a nice job of expanding once we land a new client expanding that client, and we take them on a journey. The journey to date has been to move from an average of $39,000 over time to an average a little over $85,000. And we expect that to continue. even if that didn't grow by a lot more and they just went from 39 to 85,000, the fact that we could be landing a lot more new clients in the future, that's going to generate a lot of growth and so we do expect in the coming years, next year and going into years after that, to grow the landing side of the organization and continue to grow that.

Paul Walker: Yes.

Paul Walker: It's a great question. So first of all stepping back for a second long long term as we as we as we zoom zoom out for a second and think about what happens over the long period of time, we've done a nice job of.

Paul Walker: <unk> of expanding once we land a new client expanding that client and we take them on a journey of the journey to date has been to move from an average of $39000 over time to an average of a little over $85000 and we expect that to continue.

Paul Walker: Even if that didn't grow by a lot more than they just went from 39 to 85000 and the fact that we could be landing a lot more new clients in the future.

Paul Walker: Is going to generate a lot of growth and so we do expect in the coming years next year and going into the years after that to grow the landing side of the organization to continue to grow that that there are about $16 million potential clients, we could sell to.

Paul Walker: There are about 16 million potential clients we could sell to, that includes SMB, but there's a huge market of clients out there to which we should be selling to who could be users of our content and our solutions and so we see a lot of headroom to keep growing on the land side, so those account executives who are out hunting for new business and we expect to do that. We also will, as we're successful, need to grow the expand side, but not the same rate. Those expanders, the way we've got capacity there, in fact, we don't think we need to actually expand, add any, very many, if any, expanders this next year because of the capacity that's there to receive the accounts we're throwing over to them.

Paul Walker: That includes SMB, but theres, a huge market of clients out there to which we should be selling to who could be users of our content and our solutions and so we see a lot of headroom to keep growing on the delay on the land side. So those account executives we're out hunting for new business and we expect to do that.

Paul Walker: We also will as we're successful need to grow the expand side, but not at the same rate.

Paul Walker: Those expanders we.

Paul Walker: We've got capacity there in fact, we don't think we need to actually expand add any very many if any expanders. This next year because of the capacity. That's there to receive the accounts were throwing over to them and so yes over time, we'll need to but I think the expand side, we will be able to grow at a slower rate than the land side. We also have on the <unk>.

Paul Walker: And so, yes, over time we'll need to, but I think the expand side will be able to grow at a slower rate than the land side. We also have on the expand side, the customer success organization, the implementation strategist we've talked about in the past that help provide some of those account management duties so that those expanders can focus on looking for new opportunities to expand the average, the usage of our solutions inside our existing accounts. So both will grow, but I think we'll be growing the land side even ahead of the expand side. And therefore, we got to get even better flow through on those existing clients, because our cost structure doesn't have to change, won't have to change as much on that side.

Paul Walker: <unk> side, the customer success organization the implementation strategies, we've talked about in the past that help provide some of those account management duties. So those expanders can focus on looking for new opportunities to expand the average.

Paul Walker: Our solutions the usage of our solutions inside of our existing accounts. So both will grow but I think we will be growing the land side, even ahead of the expand side.

Paul Walker: And therefore, we ought to get even better flow through on those existing clients because of our cost structure doesn't have to change won't have to change as much on that side, you'll remember that those those one more point here sorry that those those expanders.

Paul Walker: You remember that those those one more point here, sorry, that those those expanders used to have the responsibility to also land new business. Now, now their full job is to take care of the existing clients and try to expand them. And so we can we can we can increase the number of accounts per expander without disrupting that expansion play. very helpful. Thank you. Thanks, Dave. Thank you. One moment for the next question.

Paul Walker: Used to have the responsibility to also land new business.

Now now their full job is to take care of the existing clients and try to expand them and so we can we can we can increase the number of accounts per expander without disrupting that expansion play.

Paul Walker: That's all very helpful. Thank you.

Dave: Thanks, Dave.

Paul Walker: Thank you wouldn't want me to the next question.

Nehal Chokshi: And our next question will be coming from the line of Nehal Chokshi of Northland Capital Markets. Your line is Hello, Nehal. Yeah. Hello. Hey, thank you for the questions. Congrats on the strong lend and expand metrics within the quarter. Clearly, the big topic, though, is the fiscal year revenue reduction. On slide five, you did have a line item here of three million additional impact in the year. I didn't hear any color on what that additional impact is.

Speaker Change: And our next question will be coming from the line of Niihau Chaouchi.

Speaker Change: Northland Capital markets. Your line is open.

Speaker Change: Yes, Hello, Hey, Thank you for the questions.

Speaker Change: Congrats on the strong land and expand metrics within the quarter clearly the big topic, though is the.

Speaker Change: Fiscal year revenue reduction.

Speaker Change: On slide five you do have a line item here of $3 million additional impact in the year I Didnt hear any color on what that.

Paul Walker: Could you repeat it if you already did talk about it? Oh, sorry. Yeah, it's just the the. the spillover, the spillover of the government actions. Tariff-related news, things like that, that will create, we expect, some headwinds for our clients here in the U.S. And just the presumption and expectation that there'll be some of that this year that we'll be up against the back of.

Speaker Change: Additional impact is could you repeat it if you already did talk about it.

Speaker Change: Alright, yes, it's just the.

Speaker Change: The.

Speaker Change: The spillover the spillover of the government actions.

Speaker Change: Tariff related do things like that that will that will create we expect some headwinds for our clients here in the U S and just the presumption in expectation that there'll be there'll be some of that this year that will be up against the back half of the year.

Paul Walker: Okay, so the way I kind of understand this guidance, Todd, is that 9 million has been realized already, and 6 million is being anticipated. yeah the yeah the five million's been realized the four isn't fully realized yet. It's the expectation of what we think happens across the year at International. and then and then add in and the additional headwinds. So it's It's, yeah, it's laying out the 15 million. But the five is lost business already in the federal government. The others are just kind of our view into what we think could happen here in the future.

Speaker Change: Okay.

Speaker Change: I kind of understand.

Todd: This guidance Todd is that $9 million has been realized already and $6 million as being anticipated.

Todd: Hi.

Todd: Yes.

Todd: Yes, the $5 million has been realized before.

Todd: Isn't fully realized yet its the expectation of what we think happens across the year in international.

Todd: And then and then add in the additional headwinds so its.

Todd: It's yes, it's laying out the $15 million.

Todd: But the five is lost business already in the federal government. The others are just kind of our view into what we think could happen here in the future and again, we'll try to we'll try to do better than that certainly.

Paul Walker: And again, we'll try to we'll try to do better than that certainly. Right.

Nehal Chokshi: Okay. All right.

Todd: Right, Okay, Alright, and then moving on to the guidance.

Steve: And then moving on to the EBITDA guidance. The EBITDA guidance is cut 70 percent. It's cut 70% of the low end of the revenue cut, while the high end of the cut is only cut 50% of the revenue cut. Right? So the amount of flow through is less. as we go to the more extreme portion of the new guidance range. Why is that? Um So Nehal, yeah, so the sorry, it's the other way around. The amount of guidance cuts is less as we go through, go to the lower end of the new revenue unit that they're raising.

Todd: The button.

Todd: Guidance is 70%.

Todd: Okay.

Todd: It's got 70% of the low end of the revenue cut.

Todd: The high end of the.

Todd: A bit.

Todd: Our top 50% of the revenue cut right. So the amount of flow through is.

Todd: Less.

Todd: As we go to the more extreme portion.

Todd: The.

Todd: The new guidance range why is that.

Todd: Yes.

Todd: So yes, so sorry, it's the other way around.

Todd: The amount of the guidance cut is less as we go through go to the lower end of the new revenue and EBITDA ratios, that's around let's say sorry.

Steve: That's what I'm gonna say. Sorry. Yeah, Nehal, we see the same as you do. And that is what we clearly identified that the numbers that the difference that we're talking about is related to the low end of the guidance versus the full, full guidance. And if we did, if we did the calculation based upon the high end of the high end of the guidance, it would be a different level of threshold. So we're agreeing with exactly with what you said. And we did the we did the comparison to the low end of the ranges, just because knowing clearly identifying it.

Todd: Yes.

Todd: The same as you're doing that is we clearly identified.

Todd: The numbers.

Todd: The difference that we're talking about.

Todd: Related to the low end of the guidance versus before full guidance and if we did if we did the calculation based upon the high end or the high end of the guidance it would be a different level of there also so we're agreeing with exactly with what you just said and we did.

Todd: We did.

Todd: The comparison to the low end of the ranges just because.

Steve: So anybody wanted to do the calculation based upon the high end, all the numbers are available to easily do that. But we see it the same way you see it now. Okay, and what I was trying to say was that the low end of the new guidance range relative to the high end of the new guidance range for the EBITDA cut is not as severe as a percentage of the revenue cut as it is for the high end. And so you're expecting not as much of a profitability impact as you get to a more extreme revenue cut scenario here.

Todd: Knowing clearly identify and Thats why anybody wanted to do the calculation based upon the high and all the numbers are available to easily do that but we see it the same way you say it anyhow.

Todd: Okay.

Todd: What I was trying to say was that the.

Todd: The low end of the new guidance range.

Todd: It's at a high end of the new guidance range for the a bit.

Todd: Okay, a bit to cut is not as severe as a percentage of the revenue cut as it is for the high end and so you are expecting.

Todd: Not as much of a profitability impact.

Todd: As you get to a more extreme revenue cut scenario here.

Steve: So that was the question, not which baseline to utilize. Yeah, Nehal, if I understand correctly, I think the. The thing included there is we're including an anticipation of having some reasonable controls of our SGNA. So those SG&A adjustments to adjusted EBITDA are the same, or they're talking about the low end or the high end of the range. It's the same number rather than a proportional adjustment based upon the change in revenue. And I think that's what's changing the different percentages. Does that make sense? That makes a lot of sense. Yep, that makes 100% sense. Okay.

Todd: That was the question.

Todd: Yes.

Todd: Baseline to utilize yes.

Todd: Understanding correctly I think.

Todd: The thing included there is were including.

Todd: In anticipation of having some reasonable controls of our SG&A.

Todd: So those SG&A.

Todd: Adjustments to adjusted EBITDA are the same whether they are talking about the low end or the high end of the range.

Todd: The same number rather than a proportional adjustment based upon the change in revenue and I think thats whats changing a different percentage.

Todd: Does that makes sense that makes a lot of sense, yeah that makes 100% sense. Okay and then it looks like this quarter you did have negative free cash flow, what's the driver of that.

Steve: And then it looks like in the quarter you did have negative free cash flow. What's the driver of that? Well, there's a couple things going on with free cash flow. And obviously, Nehal, as you look, you'll see that the free cash flow is meaningfully below last year. A couple of significant things going on there. One is that we paid over $6 million in taxes this year that we normally haven't paid. We've signaled that we've signaled that for quite some time that those tax payments were were coming because because we're out of net operating less carry forwards and foreign tax credits.

Todd: Yes.

Todd: Oh.

Todd: There's a couple of things going on with free cash flow.

Todd: And obviously <unk> look youll see that.

Todd: Free cash flow is meaningfully.

Todd: Below last year, a couple of significant things going on there one is that we pay we paid over $6 million in taxes. This year that we normally haven't paid.

Todd: We've signaled that we've signaled that for quite some time that those tax payments were.

Todd: We're coming because of the because we were out of net operating loss.

Todd: Carryforwards foreign tax credits, so we had an increase in <unk>.

Steve: So we had an increase in in cash paid for taxes. And we also last year had a meaningful amount of customer deposits added to our cash flows. And those are really lumpy. And that's because we don't often have customers prepay for their services. But sometimes in education, and especially at the state and district level, if they have cash available, then they can make a pretty significant prepayment to us. And that affects our cash flow meaningfully. So there was, there's like a $7 million difference in the deposits that we received. And then net income is the other part.

Todd: Cash paid for taxes, and then also last year had a meaningful amount of customer deposits.

Todd: Added.

Todd: <unk>.

Todd: To our cash flows and and those are really lumpy.

Todd: And that's because we don't often have customers prepay for their services.

Todd: But sometimes in education, and especially at the state and district level. If they have cash available then they can make a pretty significant prepayment to us and that affects our cash flow meaningfully. So there was there is like.

Todd: $7 million difference in the deposits that we received and then net income is the other part. So those are the things that are primarily.

Steve: So those are the things that are primarily, you know, the level of profitability, and then that the sales level impacts our accounts receivable and our deferred revenue. But the things that are really different is the profitability of the company, the customer deposits, and the taxes.

Todd: The level of profitability and then that the sales level impacts our accounts receivable and our deferred revenue, but the things that are really different is the profitability of the company the customer deposits and the taxes.

Nehal Chokshi: Okay, that's really helpful.

Speaker Change: Okay, that's really helpful.

Steve: And then, you know, clearly, you guys are signaling high confidence in the business fundamentals by deploying about $8 million in buybacks during the quarter. Can you give us a sense as to whether or not you will continue to do so, given where the stock is indicating here? Nehal, as you know, we never really say exactly what we're going to do. But we do we do look at the share price and we have shown a willingness to buy back shares. So So, I think that's an indication that our strategy going forward will be similar to the past, and that is, we hope to, we hope in any scenario to be actually generating positive cash flow, even at these reduced levels.

Todd: And then.

Speaker Change: Clearly you guys are signaling high confidence in the business fundamentals by deploying about $8 million in buybacks during the quarter.

Speaker Change: Can you give us a sense as to whether or not you will continue to do so given where the stock is indicating here.

Speaker Change: Thanks Holly.

Speaker Change: As you know, we never really say exactly what we're going to do but.

Speaker Change: We do we do look at the share price and we have shown a willingness to buy back shares so.

Speaker Change: <unk>.

Speaker Change: So I think that's an indication that our strategy going forward will be similar to the past and that is we hope to we hope in any scenario to be actually generating positive cash flow even at these reduced levels.

Steve: And if we can have a meaningful acquisition activity that will really increase the value of the company over a longer term, then we'll look seriously at that. And then we'll all, amid all of that, we'll obviously look at the share price and other factors that we can see, and the cash that we have available, and look at buying back shares.

Speaker Change: And if we can have a meaningful act.

Speaker Change: Acquisition activity that will really increase the value of the company over a longer term then we will look seriously at that and then we'll all.

Speaker Change: Amid all of that will obviously look at the share price and other factors that we can see in the cash that we have available and look at buying back shares.

Steve: Okay, what's your degree of confidence that the remaining that they expect to generate for this year will generate positive free cash flow? I think it'll be for positive pre cash flow. We don't get as you know, we don't give an estimate on that. We think even with these reduced forecasts, we'll have positive free cash flow for the year. for the full fiscal year, or are you talking about for fiscal 2H25? For the for the full year and and and some additions in additions to the first half in the second half Maybe not maybe not that much but but still some You know free cash flow for the year and and and and most likely a little bit in the second half Great.

Speaker Change: Okay.

Speaker Change: Your degree of confidence that the remaining debt that we expect to generate for this year will generate positive free cash flow.

Speaker Change: How do you think it'll be for positive free cash flow.

Speaker Change: As you know we don't give an estimate on that we think even with these reduced forecast we will have positive free cash flow for the year.

Speaker Change: For the full fiscal year are you talking about for fiscal two H 'twenty fights.

Speaker Change: For the for the full year and and some additions in additions to the first half in the second half maybe not maybe not that much but still some.

Speaker Change: Free cash flow for the year.

Speaker Change: And most likely a little bit in the second half.

Nehal Chokshi: Thank you very much. Even given these numbers. Great.

Speaker Change: Great. Thank you very much even given these numbers.

Nehal Chokshi: Okay. Thank you. Thanks, Nehal. Thank you.

Speaker Change: Great. Okay. Thank you.

Speaker Change: Thanks Neil.

Unknown Executive: And that does conclude today's Q&A session.

Speaker Change: Thank you and that does conclude today's Q&A session I would like to go ahead and turn the call back over to Paul for closing remarks. Please go ahead Paul.

Paul Walker: I would like to go ahead and turn the call back over to Paul for closing remarks.

Paul Walker: Please go ahead, Paul. Thank you. Thanks again, everyone for joining today. It's great to be with you and, and to share an update on where the business is. We're, we're pleased with what's happening in our go to market transformation and also what's happening in our education business and look forward to talking to you again in a quarter.

Paul Walker: Thank you. Thanks again, everyone for joining today, it's great to be with you and to share an update on where the businesses were.

Paul Walker: Pleased with what's happening in our go to market transformation and also what's happening in our education business and look forward to talking to you again in a quarter.

Unknown Executive: Have a great afternoon. Thank you all for joining today's conference call.

Paul Walker: Have a great afternoon.

Paul Walker: Thank you all for joining today's conference call you may now disconnect.

Unknown Executive: You may now disconnect.

Paul Walker: Okay.

Paul Walker: [music].

Paul Walker: Okay.

Paul Walker: Yes.

Paul Walker: [music].

Paul Walker: Yes.

Paul Walker: [music].