Franklin Covey Co (FC) 2016 Q2 法說會逐字稿

Welcome to the Franklin Covey's Q2 2016 Franklin Covey earnings call. My name is [Sherry] and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that the conference is being recorded.

I would now like to call Derek Hatch, corporate controller. Derek, you may begin.

Thank you, Sherry. On behalf of Franklin Covey, I would like to welcome everyone to our conference call to discuss the second quarter of fiscal '16 financial results. I hope you will enjoy today's presentation.

Before we get started, I'd like to remind everybody 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 stabilize and grow revenues, the ability of the company to hire productive sales professionals, general economic conditions, competition in the company's targeted marketplace, market acceptance of new products 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 identified and discussed in the company's most recent annual report on Form 10-K and other periodic reports filed with the Securities and Exchange Commission.

Many of these conditions are beyond our control and influence. Any one of which may cause future results to differ materially from the current -- company's current expectations. And there can be no assurance the company's actual future performance will meet management's expectations. These forward-looking statements are based upon management's current expectations, and we undertake no obligation to update or revise these forward-looking statements to reflect events or circumstances after the date of today's presentation, except as required by law.

With that out of the way, we'd like to turn the time over to Mr. Bob Whitman, our Chairman and Chief Executive Officer.

Thanks so much, Derek. Good afternoon, everyone. We appreciate you joining today's call. We were happy to have the opportunity to report the results for the second quarter. We also want to introduce you to our new All Access Pass intellectual property license, which we believe has the potential to add a real accelerator to our growth. And we also want to provide you an update and outlook for the rest of the year.

So we have three key takeaways for the second quarter, which I'd like to briefly address are the following, first that we were able to generate $4.98 million of adjusted EBITDA in the quarter before the impact of foreign exchange. This represents pre-FX growth in adjusted EBITDA of 29.3% compared with last year. And this despite the fact that, as expected and as we reported last quarter, a major government contract which provided $1.7 million in revenue and $800,000 EBITDA in last year's second quarter hasn't been out for bid this year and therefore did not repeat in this year's second quarter.

In addition to the $4.98 million adjusted EBITDA pre-FX, we were also really delighted to generate an additional $900,000 in adjusted EBITDA contribution during the quarter from that portion of All Access Pass revenue which was contracted during the quarter but which was deferred into future quarters. That means the actual EBITDA generated from sales completed in the quarter was $900,000 higher than the reported amount, and we look forward to recognizing half of that $900,000 amount benefit in the next two quarters and the balance in next year's first and second quarters.

Second takeaway for the quarter is that the introduction of our new All Access Pass offering got off to a very strong start. The All Access Pass's new offering, which we'll discuss in a moment, which provides a new way in which our clients and customers can access a wide range of our world-class content. Given the magnitude of our All Access pipeline for the third quarter, we're confident we'll continue to drive the significant new revenue in the quarter, for the quarter, in the third and fourth quarters while also creating a bank account of millions of dollars in deferred contract revenue which will benefit future periods. We'll talk more about that.

And third, we're -- over the years, we've been trying to increase the amount of recurring revenue and contractual revenue. We want to just note, and I'll give some more detail in this, that we had more than 20% year-over-year increase in what we referred to as our contract value during the second quarter, and we'll be generating more and more contracts that -- where we have contractual revenue, [IP] and otherwise. And we also had a 35% increase in our deferred contract revenue balance related to these offerings that -- whose revenue is recognized over time. These two things we believe have established a foundation for what we expect to be accelerated growth during the balance of the year and beyond. So now I'd just like to briefly address each of these areas.

First, the $4.98 million of adjusted EBITDA pre-foreign exchange in the second quarter. Adjusted EBITDA, as reported for the quarter, was $4.4 million, reflecting growth of $600,000 or 14.5% compared to last year's second quarter even after absorbing a foreign exchange impact of $571,000. Excluding the impact of the $571,000 and changes in foreign exchange, adjusted EBITDA was $4.98 million, which represents an increase of $1.12 million or 29.4% compared to last year's second quarter despite the fact that it's expected, and as noted, a major government contract which provided $1.7 million in revenue and $800,000 in EBITDA in last year's second quarter did not repeat in this year's second quarter.

In addition to the adjusted EBITDA of $4.98 million pre-FX that I mentioned, we generated an additional $900,000 in adjusted EBITDA contribution from All Access Pass revenue, which is contracts during the quarter -- that portion of the contract with the revenue which contracted for during the quarter which will be deferred into future quarters and will be excited that approximately $450,000 of this deferred EBITDA contribution will be recognized in each of the third and fourth quarters with the balance being recognized in next year's first and second quarters.

Finally, as shown on Slide 6, a large -- the large government agency contract puts through $1.7 million in revenue and $800,000 of EBITDA in last year's second quarter didn't repeat, and this year's second quarter hasn't yet gone out for bid, don't know if it will this year. Excluding the impact of this contract, adjusted EBITDA in last year's second quarter would have been $3.05 million, so the $3.8 million minus the $808,000 you see on the screen. And so compared to that number, this year's adjusted EBITDA of $4.98 million with the same in the constant FX would reflect growth of $1.9 million. The impact of the non-repeat of this contract was lower, obviously a lot lower in the second quarter than in the first quarter. As you can see $800,000 versus the $2 million in the first quarter, and it will be much lower in the third quarter and will have no year-over-year impact on the fourth quarter because the contract ended at the end of last year's third quarter.

As for operating income. Income from operations for the quarter actually showed a loss of $300,000. That was after absorbing several things. First, the $1.2 million charge to reflect the fact that the Sales Performance practice's continued revenue and EBITDA growth has increased the likelihood of our needing to make a second earn-out payment related to the acquisition of NinetyFive 5 several years ago. That for us -- we'll talk about that as good news for us. It shows that performance of that practice is improving and growing well now.

We also had $600,000 negative foreign exchange impact and $400,000 in charges relating to the eliminating of small sales offices in various cities around Australia. As I mentioned, we're very happy about the charge to provide for making another earn-out payment related to our acquisition of NinetyFive 5 and our Sales Performance practice several years ago as it reflects the Sales Performance practice is now in a very good trajectory.

You may recall that years ago, we actually had a benefit that came into the operating income for the quarter because we had anticipated an earn-out payment being made. But given the performance of that time, it was unlikely that would be made. Now it's back on track and that's moving in the right direction. Also, eliminating the small offices in various cities around Australia, and instead having client partners work there [mobily] as do the vast majority of our client partners in the U.S. and elsewhere. We had hundreds of thousands of dollars of incremental EBITDA in our direct office in Australia each year without any expected negative impact on revenues. Excluding these items, income from operations during the quarter would have been $1.35 million, representing $200,000 and 15% year-over-year increase.

Two other items on the financial results revenue. First, revenue. After absorbing $0.5 million in negative foreign exchange impact and the $1.7 million reduction due to the non-repeat of the government contract, revenue for this year's second quarter was -- reported was $45.3 million compared to $46.3 million in last year's second quarter. In addition to these factors, as we mentioned, $1 million of the $2.8 million of All Access Pass revenue contracted during the second quarter is deferred into future quarters, half of which will be recognized equally in the third and fourth quarters. So excluding the impact of all those factors, revenue growth for the quarter would have been just over 5% of what we contracted, net of foreign exchange.

Finally, cash flow and liquidity position. Our cash flow, liquidity and balance sheet position all remained stronger in the second quarter. Cash provided by operating activities for the first two quarters was $16.8 million, representing a 38% increase compared with the $12.2 million in cash from operating activities generated in the first six months of last year. After investing $35.3 million to complete the Dutch auction tender offer in which we purchased 1.97 million shares, we still ended the quarter with $5.2 million in cash and with $10.1 million in borrowings under our credit facility. We were pleased that as a result of our strong ongoing cash flow, we were able to complete the tender offer, utilizing less of our credit facility in cash than we'd anticipated. So that's just a quick review of the overall financial results.

Second, I wanted to introduce you to the new All Access Pass. I mentioned in the introduction this new All Access Pass offering got off to a very strong start in the second quarter. We introduced this just in the last five weeks of the quarter. And let me just give you some background on its purpose and what it is.

Just this context, the biggest share of corporate university and corporate training budget is focused on leadership development and performance improvement. That's the big area. That's the big target and our big opportunity. We've been working in this space for more than 25 years. And a lot of our current revenue, of course, comes from these areas and continues to represent a big area of opportunity for us. We were pleased that last month, we were again named as one of the top 20 leadership development companies. They don't rank them per se, but we're obviously one of the largest. And that's among thousands of small- and medium-sized companies in this space.

Over the years, we've met directly with hundreds and even thousands of those with direct responsibly for leadership development and performance improvement in their organizations. We've learned that their needs are a bit like blocks of Swiss cheese that are made in different factories. Each organization has a lot of common holes or needs. However, a lot of other holes are quite specific to their own organization circumstances. So related to the holes are needs that are common, we have really focused on that a lot over the years. And those include developing leaders of high character with the willpower and guts to make the right decision, developing leaders who engage their employees to consistently achieve superior results, developing first time and high potential leaders and developing leaders who can earn the trust of key stakeholders.

Over the last years, in many years, we've focused a substantial portion of our research and product development budgets on addressing these common leadership development holes, the ones that everybody has; and our efforts to deal with important and powerful new content, including the 4 Disciplines of Execution, Leading at the Speed of Trust, The 4 Imperatives of Great Leaders, 7 Habits for Managers and the recreated 7 Habits of Highly Effective People, all of which were targeted to meet specific needs that we know most of these buyers have. These investments have helped us to achieve strong growth in our organizational development suite and execution of this over the past five years.

On the other hand, the holes that aren't the same in every organization because every organization is unique. Every organization also has unique holes that those tasks with performance improvement and leadership development find difficult to address. These include helping teams to get aligned around their critical goals, helping the distributed workforce to develop more impactful collaboration and communication skills, be able to access the right content with which to create their own in-house training, if they have their own learning and development departments; and providing individuals throughout their organization with the ability to pick and choose their own development paths as the Millennial generation wants to be able to do that.

So to address this need for flexible resources with which to address the myriad performance improvement and leadership development challenges organization faced over the years, we have, over the last years, created new course content, build our extensive digital learning library and develop integrated outcomes-oriented offerings and execution, Sales Performance and Customer Loyalty. Each of these offerings, in fact, has been and will continue to be successful on its own. But we also knew that normally when each of the pieces was sufficiently strong, we would want to try to find a way to combine these solutions and elements to create a unique broad-based, flexible, resource-oriented offering that these buyers and these organizations could -- where they could buy the -- all of the content and meet a much wider percentage of their total needs. This offering is now a reality, and we call it the FranklinCovey All Access Pass.

The breadth of content and tools included in the All Access Pass (technical difficulty) provide the organization is a simple, scalable way of addressing both those holes that all organizations have in common. So it includes all the contents from our historically strong courses as well as those that are unique to each organization.

I'd like to briefly address, first of all, what the All Access Pass is and some of the results we've achieved and feedback we've received to date.

So let me just suggest that you turn to Slide 3. So you can see in Slide 3, the All Access Pass is an annual renewable pass which packages under one banner; three offerings, which we have here before sold only separately.

First, as you can see, an intellectual property license to our content. We have sold single-content IP licenses, intellectual property licenses for several years. An organization with a particular development need will sometimes purchase an IP license to achieve a specific development objective for a designated portion of their employee population. But with the All Access Pass, rather than an organization purchasing an IP license for just one or twp of these content areas, better organization for roughly a similar investment can now purchase a pass which gives their entire population or any portion thereof access to, as you see on Slide 3, up to 26 of our world-class courses and content areas for the entire population for whom their pass is purchased. This content -- categories include 7 Habits of Highly Effective People, Speed of Trust, 4 Disciplines of Execution, 5 Choices, 4 Imperatives of Great Leaders and an additional 21 of our most widely used content areas.

It also includes the 35 online webinars that are pre-recorded webinars, which we call LiveClicks; digital participant materials for each content area which allow them to train people in an iPad or laptop as well as live; unlimited facilitator certifications, which means you'll -- they can get as many teachers certified to teach our content in the organization as they want, so they can expand the number of instructors teaching across the organization to impact more people. They get these work-session PowerPoints and other tools. And then in addition, pass-holding organizations can weave this content into their existing training program that they already have that are specific to their business. They can create derivative works or they can focus on very specific jobs to be done or they take our content and apply it in a circumstance. This helps in better content in their normal work processes, training and vocabulary.

Because the purchasing organization has unlimited access to this content for the entire population from when the pass is purchased, the organization has the flexibility to take each learners through multiple training programs in a year and -- or they can take a bunch of people through different programs. In addition, an organization can create job-specific training using the content from this pass. The pass can be purchased for approximations as small as 100 people or as large as thousands or even tens of thousands of people. So that's what it is.

Second. The second thing and the second -- in the column, the middle column on the Slide 3 is all -- access -- all of the All Access Pass where we'll also see access to our entire digital content library, which includes 130 Franklin Covey single-point lessons we call InSights, which can be facilitated at the start of a staff or pre-shift meeting, can be used to provide on-demand training and development for the entire population. So it gives people the ability to teach people who want just-in-time training 5 or 10 minutes at a time.

We also have 25 accelerators. A product that gives one hour on-demand learning sessions around specific topics, and it's a new way to access the content. It includes also the more than 100 award-winning videos, each of which teaches a principle, [frame of change] in paradigm where outlines the process for increased effectiveness.

Now in the third column, every member also -- each pass will also get a special pricing if they want to buy prepackaged participant manuals and materials, prepackaged facilitator manuals and materials. They want to hire one of our consultants to help deliver -- do custom design or help get element -- learning management system-integration services. With this flexibility, an organization can address a broad range of unique development needs. And so this is, at least, what the path is, and it's been getting a really good reception in our short six weeks. Really we've been at it. I'm just going to ask Paul Walker, who as you know heads our direct office division to where was this first launched or first introduced to just share a couple of thoughts about it, progress to date, some of the reactions from clients and client partners.

Great. Thanks, Bob. Hello, everyone. Hope you're doing well today. So during the last two weeks of November, we invited a small group of 20 client partners to sell the All Access Pass on a limited test basis to a limited number of clients. And during that final two-week period of November, 13 of the 20 client partners who were invited to participate closed a total of 19 All Access Pass sales. And that represented $381,000 in gross revenue.

We were pleased with those results early on, and so we decided to continue with that small group into the month of December. And while everyone was still very new at this, we're still trying to figure out exactly how to position it, we sold an additional 23 passes. And those sales represented $509,000 in growth revenue.

One of the things that we expected to see and we were happy to see was that the average transaction size when somebody bought the pass was two to three, if not more times larger than what a typical transaction would be for us. I thought at the time was to continue to keep the group of test client partners and test target clients relatively small. But because of the feedback we were receiving from the client partners and from the clients we had purchased, we decided to open it up more broadly to our client partners and to our clients. And so we asked client partners to go out and start talking to clients more generally about it. And so from the period of the -- of late -- in the last week of January through the end of February, we sold an additional 91 passes.

And in summary, if you've been keeping track of the numbers there, we sold 114 passes in the second quarter and 133 dated back to that last couple of weeks of November through the end of our second quarter. So 133 sales represent $3.2 million in revenue.

As Bob mentioned, we now have hundreds of opportunities in the pipeline we're seeing good progression of those opportunities.

Just, if I may, just two quick pieces of feedback. One of our client partners said he called me one day and said, "Paul, when I tell clients about the All Access Pass, I can't tell who's more jazzed, me telling them or them after I tell them. This is really a joy." That was a fun comment to receive.

I've been out with a lot of clients recently, about 20 of the last two or three months. And one large prospective client we've been trying to get into for a long time said, "We would not have traditionally thought of doing business with Franklin Covey. We love your content, but we don't need to purchase courses. What we need is access to great content. We've always known you have that, and now it sounds like you have a way for us to access the kind of content that we need that truly matches the way we need to deploy it." And so it's been fun. It's been exciting for our sales force and for our clients, and so thanks, Bob.

Thanks, Paul. And if anybody who wants to ask Paul Walker questions, we'll have Q&A here as a whole team.

Just like to note three ways we expect All Access Pass to accelerate our business. First, it will leverage our significant investments in content development. Over the past 10 years or so, we've invested more than $150 million in content development and content applications, including millions of dollars for content area, developing courses, customize strong libraries and tools, creating portals, tools and process to support the same lasting changes and performance improvement. As a result, we believe that we're better positioned than anyone in our space, providing offering such as the All Access Pass.

Recently, some clients have purchased All Access Pass tools, whereas in the past, they had many different content suppliers. Now that they have purchased the All Access Pass, with its extraordinary quality, flexibility and reach, they are dropping the rest of their content suppliers and using the All Access Pass as the foundation for all their people development and performance improvement needs. That won't happen obviously in every case, so it has a powerful impact.

Second, All Access Pass also leverages our significant investment and practices and in building integrated solutions with premium services. While many will find -- many customers will find that all or a significant portion of their needs to be met with All Access Pass content alone, others will find that purchasing additional services, coaching or events, toolsets will help them to achieve their objectives in certain areas.

Perhaps a little bit like Gartner Group on top of the platform of intellectual property sales, where they have add -- another third of their revenue comes from premium services, we have built a strong capability around these services for execution, Sales Performance, Customer Loyalty, etc, and we believe that this All Access Pass at the center of the circle, we can add pieces around the circle where it will be a natural way to go bigger and broader inside companies.

Third, we expect that All Access Pass will allow us to better leverage our broad reach and strong go-to-market approaches. It creates one compelling offering, which can be sold by all of our sales forces worldwide, in addition to the individual offerings that they sell. It gives one consistent offering that can be sold that we think it has the potential to help our sales force to ramp up even more quickly, create larger and more pervasive client engagements and sell additional services.

We have operations in more than 100 countries. They do directly as -- primarily through our licensee network. And having one offering that we can sell across the world in multiple languages creates a big competitive advantage for winning global deals and really establishes given the costs and difficulty of getting the content and getting it all translated establishes a large barrier to entry for others. These global deals are becoming an increasing portion of our revenues.

So while this will be just one of the offering, just an -- this is just added to our array of existing offerings, it provides a particularly strong value proposition for those in the circumstance of having lots of different jobs to be done and not having the resources to really do it or having to work with 30 different suppliers to meet those.

Finally, in terms of ways it will impact. As we expect, it will create increased recurring revenue. We expect the smaller clients, All Access Pass will increase our revenues from transaction even after deferring approximately what was in this last quarter, 37% of the revenue, from each All Access Pass sale due to the value associated with the access to our digital content library. I figured it will also increase our renewal rate for these smaller customers. It also increases our deferred contract values. I mentioned that to give you an idea of that in a minute. But with this deferred revenue of $1 million in this quarter, we expect that could be many millions by the end of this year.

If you have interest in learning anything more about the All Access Pass, we thought -- we might invite you to an analyst- and investor-only webcast next Wednesday afternoon. We've scheduled a team at 2:00 at Mountain Time on April 6. So if you're interested in learning more about this particular offering and the way of which -- way of growing the market, please send an e-mail to Stephanie King, the world's best assistant, at stephanie.king@franklincovey.com. That's stephanie.king@franklincovey.com. That would be Wednesday afternoon, April 6 at 2 p.m. Mountain. We're obviously also happy to answer any questions you may have directly.

And finally, the final thing I'll just like note is that, as you can see in Slide 4, with a more than -- we had more than 30% year-over-year increase in our contract value during the second quarter. I'll define that in a minute. A 31% increase in our deferred contract revenue during the quarter and a pipeline that is significantly larger at the same time last year. Because of those factors and the momentum we're feeling, we believe the foundation for accelerated growth has been laid for the balance of the year and behind -- and beyond, I should say.

Let me just quickly say, over the past five years, we have significantly increased a portion of our revenue in one year that repeats to the next from 69% in fiscal 2009 to just over 86% in fiscal 2015. Over the last few years, we've also increased the amount of our contract value of revenue, which we define as the 12-month value of revenue under contracts of at least 12 months in duration.

So let me say that again, 12 months value of revenue under contract -- of revenue under contracts at least 12 months in duration. And more recently, the amount of our deferred contract revenue has also been increasing, representing a revenue and EBITDA, which will fall into future periods.

These efforts are bearing fruit. And as you can see on Slide 4, our contract value of revenue increased $7.6 million or 30% in the second quarter this year compared to -- reaching $33 million compared to $25.4 million at the end of last year's second quarter. The amount of deferred contract revenue, so this is revenue received over time, increased $3.1 million or 31% during the second quarter to $12.8 million from $9.7 million at the end of last year's second quarter with second quarter All Access Pass sales contributing $1.1 million of this increase in deferred revenue, and the balances increased coming from education.

Finally, the size of our prospective business pipeline for the third and fourth quarters is significantly higher than at the same time last year, including what is now hundreds of All Access Pass opportunities, showing the continued interest among a portion of our customer base. So we believe the foundation for accelerated growth has been laid for the balance of the year and beyond. As we mentioned, the effect of the government contract will be much less than the third quarter and nonexistent in the fourth quarter than it's been in the first two quarters.

Also, as you can see on one of the slides, Slide 5, at constant currency, the impact of FX on our operations is expected to be a lot less -- it was less than this quarter than in the first quarter. The revenue line was actually about the same on the EBITDA line because we had -- we held cash in [Canada] when the exchange rate changed so it got revalued.

We also -- the effect of our -- as shown on Slide 3 of -- in the future quarters, slide -- sorry, Slide 6, the effect of the non-repeated government contract was much less in the second quarter than in the first and will be less in the third quarter still and nonexistent in the fourth.

So with this big base of contractual revenue, our momentum on the pipeline, the reduced impacts of these other factors at constant currency and the government, we believe we have the foundation set for accelerated growth for the balance of the year and beyond. So even with a significant portion of All Access Pass revenue and the related contribution to EBITDA being deferred into future periods, 37%, as I mentioned, was deferred in Q2, we expect that, that portion of revenue, which will be recognized the next two quarters, will allow us to meet our original adjusted EBITDA guidance range while at the same time building a deferred EBITDA bank related to All Access Pass deferred revenue of more than $3 million at least, which will flow into and benefit fiscal 2017.

So if we can continue to -- if we can hit our expectations, recognizing two third of that revenue plus all the rest of the revenue from the company and also build up the bank for next year, that starts to -- that continues to do what we've been trying to do to increase the predictability of our revenue. So we reaffirm our original adjusted EBITDA guidance range of $34 million to $36 million at constant year-end fiscal '15 foreign exchange rate levels.

And at this point, I'd just like to open it up and respond to any questions.

Thank you, we will now begin the question-and-answer session. (Operator Instructions)

Our first question comes from Marco Rodriguez with Stonegate Capital.

Hi, Marco.

Hey, guys. Thanks for taking my questions here.

You bet. Thank you.

I was wondering if maybe you can talk a little bit more about the All Access Pass here. I'm just trying to get some clarification on the product itself. It sounded like instead of just selling one module or one practice, for example, you have access to multiple practices. And so I'm trying to figure out here if the -- but at the same time, you did say also that the size of the transaction was two to three times. And so I'm just trying to understand how the revenue aspect is slowing because it would seem to me that perhaps revenue might be somewhat cannibalized.

Yes, that's a good question. First of all, when we engage with a client, we will often send one of our consultants or one of our senior client partners in and they will offer to spend the day doing stakeholder interviews with the population, various people who had various people development needs within the organization. 80% or 90% of the time, what happens is you get through those stakeholder interviews, you try to identify common needs that those people have, leaving out all the individual needs that aren't common. And you try to get that group to agree on a course of action, maybe focus on execution to get certain goals done and/or Speed of Trust or whatever to address a problem. And so we'll continue to be doing that. And so typically, they'll buy one of the content areas and take a long journey.

What we've normally done is in that same process though, of the other 20 things we've heard about, we just said, "Look, we can't get them doing -- we've got to make a decision and do something with one population and we kind of leave those other problems unsolved."

Now when we go through -- and that will still be the case where there are many organizations who have a very specific need. They attend an event and we'll continue to do exactly what they do now. But this is a way of also doing that in the organization and saying in addition to that one thing, by the way, you can also buy the rest of the content. Because this is intellectual property rights, we don't have really additional costs on our side related to them buying the intellectual property. We've already -- we already have that cost on our balance sheet.

And so by simply -- by going into these folks and saying, "Listen, you may have been buying Speed of Trust transformational process for 50 managers. Here's what that will cost to do that. But we also identified in talking with your stakeholders that there's a need for another couple of hundred people to be developed. You've got all these new managers. You've got people with Customer Loyalty needs, etc. For a relatively modest increased investment, you can have access to all the content and actually solve a lot more of these problems."

And so the increase in revenue comes that they would say, "Well, fine. I'm still going to do the Speed of Trust implementation, but hey, since I'll get so much more value, first, I'll step up the average order size." And so for many of our client facilitators who were buying this simple course who have already been doing anything that big like a big Trust Transformation, they're buying 30 manuals or 50 manuals with which to train a specific group in a specific content area.

All of a sudden, they're saying, "Gosh, they're not that much more in terms of total dollars." I mean, today, their average sale, for some of those folks, may be $7,000. For $18,000, which is still a manageable amount of investment for their budget, they can get access to a lot bigger. Instead of 30 people taking a course, they can get 50 to 100 people for a step-up of $10,000 or $15,000 and be able to access a lot of them.

So the increase in revenue per client or per client goes up, the revenue per person training might go down a little bit. But again for us, it's just the intellectual property. And so the cannibalization, these people were already buying content, probably. They were just buying in a form that was denominated in a manual. Now they're buying content in the form of pass and an expanded pass. And so I don't know if that's responsive market, but really for us, it does a couple of things.

One, I mean, again, we're still sell -- we're still selling everything the normal way. And there are a lot of people, that's just how they purchase and that meets their needs. But for those who have multiple needs and say, "Oh, gosh, we can -- we really have a lot of needs we'd like to get done." This gives them a chance to step up the average price per customer for us. It increases the renewal rate because they'll end up with needs that we'll plan how to solve. And we'll take them beyond the boundaries of the one-year contract, and they're automatically renewable unless they don't go forward. So it creates a bigger initial sale, we think a higher repeat rate, maybe more importantly, allows them to be inside that client, helping them to solve a broader array of problems, which, one, increases our importance to them and also likely increases the amount of services and other things we'll sell to them ultimately. Keep going in your question if I didn't respond well.

No, no, that's understandable. I appreciate the additional color there. Are there any sort of sales incentives or any sort of structure that you're putting in place for the All Access Pass to incent the CPs to push this a little bit further than they would normally?

No, in fact, almost the opposite. We're basically saying, look, we don't want -- we want this to be an add-on sale. We want it to be in the value-added category if you're understanding your clients' needs. And so well oftentimes, at the end of the quarter or whatever, we'll provide special incentives, really hasn't been primarily recognition, and putting people's names on scoreboards for getting things done. This is just one of the array of offerings. I mean, their big recognition comes from meeting their sales goals for the quarter, for which they get paid extra commission. They get a bonus commission on all revenue for the quarter when they meet their goals. That's the primary incentive.

We don't want to make this just a product push. We want this to be just another alternative when they reach into an organization and see the need that in the past we just let the rest of those needs untouched and say maybe someday we'll be able to go bigger in this client. Now we can say, "Hey, by the way, we heard these 20 things and now, hey, if you want to step up with the All Access Pass, you can solve a much broader array of needs." Some won't. They'll say, "Well, hey, that's great. That's sounds awesome. But I just have this one thing I need to get done." But today, what we found is the average revenue has been -- of the pass they purchased is significantly large. They're not huge in terms of total dollars, larger than the $23,000 instead of $7,500.

And so that when they sell one, it's a good thing for them. They have a bigger sale for the sales person. It's a great value to the customer. Even though this isn't a subscription, you might -- it might be similar to Apple Music versus buying songs for $0.99. It's, hey, it's not that -- $0.99 is a good deal, and many of us still are buying $0.99 songs every day because that just meets our needs. And that -- in that same way, clients will continue to buy manuals and buy training one-off.

But when you have a need that's broader or aspirations that are broader, the idea of spending $10 a month for Apple Music even though the price per song might go down. They have the similar situation we have. They have a wide array of content they have already paid for or licensed, and so it's kind of similar to us. And we think the revenue per client increases. The lifetime value per client probably increases at least in these lower levels. Our big clients tend to stay with us anyway, but some of these smaller clients, they tend to churn a little bit more because they have one specific need. And so we think it benefits us in both ways.

Got you. And last quick question. I'll jump back in the queue. Can you maybe provide us with an update on where the Strategic Markets group is right now in terms of expectations?

Yes, I'd be happy to. Shawn Moon is traveling today. So he -- I think he probably [wouldn't entrust] me to tell you how that's going. The government business absent the one contract that didn't repeat is doing well. It grew about 10% this last quarter. We had a good quarter, I'd say, other than the big $1.7 million that didn't repeat. And they moved into third and fourth quarters. Third quarter still was up against that contract but a smaller amount and the fourth quarter, [they'll grow]. That's part of the story.

The Global 50 team, we'd actually not expected to have any revenue during the second quarter, and they had some. And that's good and they have a big pipeline. They're selling a lot of specific solutions, but this All Access Pass has also been helpful to them.

The Sales Performance practice also grew during the quarter, which is one of the reasons why we're now needing to accrue for a possible earnout payment.

And in Customer Loyalty, we're actually down year-over-year. That related to one contract. I mean, the rest of the business is doing well. I mean, it's a small business, as you know. We had a large retailer contract that expired in September. And as a fact, they haven't been able to replace that. The end of the contract came. They delivered the value, but it was a contract they're trying to replace.

They have a new offering coming out. They're offering has always been relatively lower-margin data collection -- customer data collection services. And they have a new offering called leading Customer Loyalty, which will actually be part of this All Access Pass. It will be accessible here, but it's sold by their own sales forces. So hopefully, that helps a little.

But generally, it's [growing] well. Shawn Moon is doing a fantastic job leading it. This is a lot of big deals. These are big deals of -- one the best people with big deals and strategic things, and he's got his teams focused on that day after day. So we feel great about it, and it's on good trajectory.

Great. Thanks a lot, Bob. I appreciate it.

Thanks, Marco.

Our next question comes from Jeff Martin of ROTH Capital Partners.

Hi, Jeff.

Good afternoon. Hi, Bob.

How are you?

Good. How are you?

Good. Thanks.

Could you touch on the practices by practice leadership education, I don't think you covered yet.

Yes. Let me just also apologize. I didn't include the practice chart just because with All Access Pass, it's a little hard to know exactly because it's got different content. We'll start over time. It will be harder to track the revenue, but let me just give you a quick update.

We talked about the Sales Performance practice and Customer Loyalty in the response to Marco. Happy to go into more detail on that, if that's helpful, with those two practices.

Execution practice, the last quarter, it's now building a good pipeline. Its revenue was up a little bit but not strongly yet last quarter. But it's on the right track, and it was a good pipeline. We're selling in -- a little bit like All Access Pass. One of the things we're doing in all of our practice areas, which we think will be a good thing for building recurring revenue and also really recurring revenue and also the margins, is that in Execution and Sales Performance historically, when we've done a big installation, I call it installation, somebody hires us to do a big transformational sales engagement. We will tend to sell -- we'll just price the whole engagement, which is kind of denominated more in services, some of the consulting contract, where they also get IT and things. And we're now splitting that so that each of the practices will sell an intellectual property contract with the core content, in some cases, to the operating system whether there is a portal or something.

And then on top of that, adding new services. So it makes clear that there's an ongoing intellectual property relationship with that. So we've got the -- that's now growing in the Execution practice. We think it will really build the recurring revenue stream there.

In terms of the organizational development suite, which includes the normal Productivity, Leadership and Trust, I'd say because of the focus on All Access, it's a little hard to divide out the exact revenue. And so I actually -- I mean, we can happily find that. I just don't have the [exhibit] ahead of me because we haven't allocated out the $3 million of All Access Pass revenue. We probably won't in the future. We're now seeing that much more as one thing kind of the organizational development or learning development suite. And in the past, you would tend to hear us say, hey, we were up a little in Trust because that's -- because we launched that and down [little] in the other place. This is all on the same suite and sold on the same buyer.

And so overall, our revenue, as I mentioned, aside from these -- the way -- these ups and downs of FX and government would have been up about 5%, including the revenue from All Access that was deferred. And so I think our Practice revenue in the ODs, we can pretty much follow that.

Okay. So should we anticipate you won't break it out by curriculum from this point on?

Yes. I think that's probably right. It just won't mean very much. I mean, we're still -- (inaudible) I was just going to just then turn the time to Sean Covey to talk about the Education practice specifically. I've just taken the OD suite. And so Sean, do you want to speak to the Education practice?

Sure, yes. So hi, Jeff. So education, we had a good quarter. We grew -- so first quarter was 35% growth. A lot of that came from deferred revenue from the year before, which was nice to have. This quarter, we grew at 30%. That was healthy, and I don't think we'll grow at that same rate going forward. Last year, we had a lot of our events get in the third quarter, but this year, it came in at the second quarter. So I think our third quarter won't be as nearly as high as this, but Education year-to-date is growing at 32%. And we expect -- just looking to the future, we expect to bring on about 500 new schools this summer. So that's really nice. We also have a lot of new partners globally that we're signing up to run our Education business, license those in different countries. There's a lot of refocusing in on just sustainment. So once the schools start, we want to keep them for as long as we can.

And then we're also -- the spirit of just trying to get more schools in. We're looking to innovative ways to lower our costs and keep the quality as high as possible. But all things considered, I think things are going really well.

Okay. And then I know you're looking at taking that to higher education. Where does your strategic initiative on that stand?

Sure. Yes. Well, with higher education, we've got good solid growth. There's a small group. Right now, we're expecting them to come in. This is about $3 million for the year, growing from about $1.5 million. So we feel good about the progress we're making. The strategy we're using right now is we're selling a lot of college success. These are courses that student take to help them succeed in college and in life.

And we're -- that's one of our new offerings. That's doing really well. We have a lot of new contracts and some big ones that are in the pipeline. We're also doing All Access Pass in higher education. We think this is going to be a great opportunity with staff development inside of universities and colleges to also sell All Access Pass. We sold a few of them already.

The word on the street is the excitement level with our client partners is very good. So we think that's a great opportunity as well.

Okay. Thank you. Thanks, Shawn. And Bob, can you touch on the -- and update on the client partner initiative?

Yes, on the hiring and ramping client progress?

Yes.

Yes. So we're sitting at 198 client partners as of the end of the second quarter. The big additions will come in the U.S. direct offices in the November time period. This is normal, but we'll add client partners this summer in Education. We'll be adding several in the direct offices in June and adding some also for Customer Loyalty and government for the state and municipal government category. And we've got a couple other slated also in government. So we expect that, as we said last time, that we'll end up -- by the time we report in November, we'll end up with about 208, 210 client partners by that time.

So I think we feel we're on track there. Everybody is now fully committed. We're fully staffed on our managing director or sales manager positions. And so we've grown some from August. We had 180. We had 194 at the end of the first quarter, I think, and 198 now. And with -- I also didn't mentioned Sales Performance. So I think we'll add another 10 to 12 net between now and fall, and then we'll have a big group added on schedule for -- before Christmas.

Got it. Thanks for taking my question.

Thanks so much, Jeff.

We have our next question from Kevin Liu of B. Riley & Co.

Hi, good afternoon.

Hi, Kevin.

First question, I just wanted to clarify something on your adjusted EBITDA guidance. It sounds like it's based on the fiscal '15 exchange rate. So if I look at the slide, it looks like about a $2 million impact year-over-year. Does that mean for kind on an as-reported basis that we should be looking more like 32 to 34 in terms of what we model in?

Yes. Our guidance was given in constant currency just for that, at least we're dealing with the common currency and the way to think about it. To date, the EBITDA impact year-to-date has been $1.2 million for the first two quarters. At current exchange rates, it will only be another couple hundred thousand in this year. And so if nothing went our way, the [ends] has gone a little bit our way recently, we would probably expect about $1.4 million, I mean the midpoint of our guidance would be a $1.4 million higher than the post FX.

Got it, right. And then just a couple more follow-on for the All Access Pass. If you look at your existing base -- customer base today as well as what you have in the pipeline, what percentage of those customers do you think fit the profile for one that you would sell an All Access Pass that might be receptive to that offering?

I think most of the -- I mean, probably, what is it I'm saying, 2/3 of the organization is probably qualified because they've got somebody who's tasked with the people development in their organization. Some smaller organizations, actually, you wouldn't think would be customers or potential because they don't have that position and actually have been -- have raised their hands and said, "I've never thought I could access Franklin Covey's content for my population. I don't have a head of learning development, but now I can buy this pass and I can assign my assistant or whoever else to coordinate this thing because you've got all this content."

But I think a big idea for us is that -- and Marco raised the question of cannibalizing. I think for the group that's buying 30 manuals, they're going to continue to buy 30 manuals. But mostly, organizations do, in fact, have much bigger needs and bigger opportunities than we've historically been able to service.

So we think probably -- I mean, with our existing customers, we have 1,500 customers that are small customers who are buying just less than 10,000 a year of materials and so forth. Most of the organizations within their work could be potential, and we won't penetrate them all. But if we got 15% or 20% of those people in the first 12 months and that will probably continue for the next three to four years, where these people learn about it and as their needs change and as our client partners stay close to them, they'll find opportunities to expand.

In addition though, I think we have about 12,000 accounts assigned to our client partners, say, just in the U.S., of which only about 3,500 are actually clients today. And as I mentioned, 1,500 of those are small clients. And so the real opportunity and what we've been really excited about in this really -- again, we're six weeks into this thing, but we have lots of examples [thankfully] because we have a 100 now -- well, 130 at the end of the quarter, I think, 135 in sales.

What we're excited about is that many of those who have purchased are people who were assigned to a client partner but have never done business with us. And they always had this bigger need. And since we didn't exactly fit it and they're not getting the problem solved with others, they're just having to kind of cobble together solutions. When they heard about it, we've had really very good response from many clients when they first got the flyer about it or a kit telling about it, would immediately send an email to their client partners, setting up a meeting.

And so we think that's -- probably the biggest thing is we've got growth in terms of average revenue size from our existing small customers. From our bigger customers who have typically done business with us in one content area, this allows -- the likelihood is that they will be able to go much bigger with a lot of those. And third, we'll be able to now reach a whole group of people already assigned with client partners with whom they're not been doing business because of this.

In addition, we'll be doing some just -- we're doing some just general marketing because the other 85,000 companies in the U.S. that aren't even assigned to salespeople yet are also good prospects for this. And so when we have our events historically, we've primarily just invited customers and prospective customers. We're now making a clear outreach, recognizing that this is an interest that everybody has that needs to be scratched. And we're getting some good tangible reads for attendance in our events.

So I think it was a -- again, in addition to all the other things we're doing, this is a nice add-on that can have those benefits and I think will be an accelerator of growth on top of everything we're going to do.

Got it. And just lastly, in terms of the current debt balance, which anticipates allocating more of your cash flow to pay that down as quickly as possible. Are you comfortable carrying that on the balance sheet for the time being?

Depending on what the future brings as far as the opportunities to use cash, we're not uncomfortable with having a little bit of debt. But we do expect to generate cash, as we've talked about before, and either use that cash to pay off the $10 million of debt or maybe opportunistically still buy some shares or do something else. So we're not totally opposed to $10 million outstanding on our revolving line. But if none of those other opportunities come up, we'll generate that cash to pay it off.

(Inaudible) pointing that out, and our intent, we have an open authorizations to purchase, our intent would be to continue to take advantage of that through the combination or cash and -- if an opportunity came, we would probably even -- we still have $20 million undrawn almost on their credit facility, we could use that as well to buy more stocks. So we feel like we've got good flexibility and the ability if we wanted to to increase our credit facility.

Okay. Thanks for taking the questions.

Thank you, Jeff.

And at this time, I'll turn the call back to Bob for closing remarks.

Good. Thanks everyone for joining today. I'll be delighted to invite you again next Wednesday if anybody would like to know more about All Access, Wednesday, the 6th, 2:00 p.m. Mountain Time. Just e-mail stephanie.king@franklincovey.com. And for those of you who'd like to join, we look forward to talking to you then. Thanks so much for your great questions today and for your attendance, and we look forward to seeing each of you soon. And thanks very much.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.