Franklin Covey Co (FC) 2016 Q3 法說會逐字稿

Welcome to the Q3 2016 Franklin Covey earnings conference call. My name is Eric. I'll be your operator for today's call.

(Operator Instructions)

Please note: This conference is being recorded.

I will now turn the call over to Derek Hatch, Corporate Controller. Please go ahead.

Thanks, Eric.

Good afternoon, ladies and gentlemen. Welcome to our call to discuss the third-quarter FY16 financial results.

Before we begin the call and the webcast this afternoon, we'd just like to remind everyone that this presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based upon management's current expectations, 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 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 that the Company's actual future performance will meet management's expectations. These forward-looking statements are based on management's current expectations, and we undertake no obligation to update or revise these forward-looking statements to reflect events or circumstances after the date of 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 CEO.

Thanks, Derek.

Good afternoon, everyone. We're happy to have the chance to talk to you today, and really appreciate you all joining the call.

Maybe just to start out, last quarter we introduced you to the All Access Pass, and noted that it represents a major strategic shift in the way in which we engage with our clients. We also said we believed that it would significantly increase the average lifetime value of our customers, and in the process really change our whole Business. As you probably got from some of the information you've already read, that change is really accelerating.

As shown in slide 3, All Access Pass reported income has increased from just $0.25 million in Q1, all of which happened toward the end of November, to $1.9 million in Q2 or second quarter, and $3.4 million in the third quarter. It's continued into June, and we expect All Access Pass revenue in June -- the recognized revenue in June alone to be nearly $2 million, with approximately an additional $4 million of All Access Pass revenue likely to be recognized during the balance of the fourth quarter.

In addition to the revenue that we are recognizing, we're also generating substantial amounts of deferred All Access Pass revenue. As you know, when we sell an All Access Pass, we enter into a contract with a client that has two primary components. One's an IP license for up to 26 of our content areas, which represents approximately 60% of the contract value, and the revenue for that portion is recognized immediately. The second component is the digital library, representing 40% of the contract value, which is put on the balance sheet and recognized over the following 12 months.

As you can see on slide 3, at the end of the third quarter we had $2.7 million of deferred All Access Pass revenue on our balance sheet, which is already an amount approaching that which we said we expected to have at year end when we last reported. Approximately $800,000 of this amount will flow into and contribute to the fourth-quarter results, with the balance being recognized next year.

We also expect to generate an additional $3 million to $4 million of deferred revenue during the fourth quarter related to All Access Pass, suggesting that we may have in the range of $5 million of very high margin deferred All Access Pass revenue on our balance sheet at year end. Gross margin associated with that deferred revenue is very high, almost -- it's intellectual property, so it's close, 95%. And that will then serve as a -- so, we'll have a bank of deferred revenue, embedded in which is nearly $5 million of also gross margin, most of which is EBITDA contribution to move into next year.

As noted, this amount is a couple of million dollars higher than we expected to have at year end when we last reported. And we're excited about that, but it's also having an impact on the amount of revenue recognized in the quarter versus the amount deferred.

The implications of the early success momentum are very exciting for us and for the Business. And the deferred revenue generated in connection with these sales will help to accelerate revenue and profitability growth in the future, and help to somewhat smooth out revenue throughout the year.

Slide 4 gives you an idea -- and maybe just spend a few minutes on this -- of how the combination of new All Access Pass sales, the recognition of deferred revenue over time, and the renewal of existing All Access Passes when they come up for renewal, which is actually an automatic renewal, can combine to accelerate revenue growth, smooth out revenue, and mitigate the impact of the deferring 40% of the revenue associated with the new All Access Pass sales. As you can see on slide 4, there's some key assumptions, which aren't a projection, per se; they're just modeled.

But assuming the recognition of $4 million of new All Access Pass revenue each quarter in -- for FY17 through FY18 -- the annual renewal of 80% of these All Access Passes -- it's early and so we don't really know what that number will be. We're targeting at least 90%, but let's say -- for this model's purposes, we're saying 80%. Using those two assumptions, you see that total recognized All Access Pass revenue would increase from $11.8 million in FY16 to nearly $35 million in FY17, to then $55 million in 2018.

As you can also see on the row entitled, reversal of deferred sales versus new deferred sales, the relationship between the amount of past deferred revenue, which was reversed and recognized as revenue in a given quarter, and the amount of new deferred revenue generated in the quarter related to new All Access Pass sales, improved from 9% in this year's second quarter. Where the amount of deferred revenue from prior periods, which was recognized in the quarter, was only 9% of the amount of new deferred revenue generated in the quarter, which of course, resulted in a lot of net new deferred revenue.

You can see it moving to more than 80% in FY18, where the amount of deferred revenue from prior periods recognized in the quarter is more than 80% of the amount of the new deferred revenue generated in the quarter, of which results in the creation of relatively small incremental amounts of new and net deferred revenue. This whole idea is that, with a pretty steady growth in All Access Pass sales, something that's maybe a little more conservative than our current -- at least current pace -- this can really be a very significant impact on the Business, just in terms of recognized revenue.

Importantly also, on slide 5, is the impact of deferred revenue, and the bank of deferred revenue and growth, that's embedded in it for the next year. As you can see -- and slide 5 shows the balance of All Access Pass deferred revenue relative to the previous year's sales from all sources for those same offices. So it really creates this embedded growth.

For example, the assumed deferred All Access Pass sales balance at the end of FY16, shown on this sheet here, is $4.78 million. That's the amount of net deferred revenue.

That's equal to 5% of the FY16's estimated $100 million of total sales from those offices that are selling -- currently selling All Access Pass. And that means that when these offices start FY17, they will already have embedded growth of -- or at least already have embedded revenue include the 5% of the prior year, and potentially 5% more growth from this deferred All Access Pass revenue, which will be recognized in FY17.

As you can see, the amount of year-over-year revenue growth embedded in the deferred revenue at the start of fiscal year increases to 9% by the end of FY17 under this model, and to 12% by the end of FY18. And the main point is that, as we build up this deferred revenue, it really helps us to establish the foundation for re-igniting growth, particularly in our direct offices, going forward.

All Access Pass's extremely compelling value proposition for customers and differentiating strategic position in the market, together with the potential to provide [for the] accelerated more predictable revenue growth, has given us compelling reasons for our ongoing focus and investment on ensuring the success of All Access Pass. When we first introduced All Access Pass, our thought was -- let's add this to the mix, and then let the client partners and salespeople go out and at least have it in the tool kit of things they could talk with customers about.

But the reaction from customers, [together with] what we knew it could do for the Business, caused us really, starting in the second quarter but then accelerating in the third quarter, so we really need to put our full weight behind this initiative. It's a game changer for us.

And one of the things, of course, that really affected us was the fact that, at one point in the third quarter, all of a sudden, most of our clients -- existing clients had heard something about it and wanted to talk about it. And literally there are thousands of those clients who -- the timing may not be now, but who are now interested in that. And so it felt like, and feels like, that what we need to do is really double down, take advantage of this real opportunity to transform the Business. So that's what we've been doing.

With that introduction, and obviously we have plenty of time for questions and answers, I'd like to now just have us briefly address the overall results for the quarter and year to date, including the impact of the shift in our business model toward All Access Pass, and ask Steve if you'll do that; provide some additional detail on three ways in which the All Access Pass is changing our Business and business model; discuss what the All Access Pass means for growth in our US direct office, and ask Paul Walker, who heads those offices, to do that. And then have Steve conclude remarks with a discussion of our cash and cash position, liquidity and cash flow, and the updated guidance.

So with that, Steve, I'll turn the time to you.

Thank you, Bob.

It's nice to be with you today to spend a few minutes to overview the results for the third quarter. First of all, let me point out that net income for the third quarter was a loss of $1.1 million, compared to net income of $1.2 million in the third quarter last year.

If you look back at slide 15, you'll see the reconciliation of net income to adjusted EBITDA that we're going to talk about for a minute, the adjusted EBITDA. You'll see that adjusted EBITDA for the third quarter was $1.8 million, compared to $4.9 million last year.

In a summarized view, this decrease reflected the combined impact of three things: first of all, a $1.7 million combined negative impact of a couple of unusual type items -- the expected non-repeat of a large government agency contract, which generated $900,000 of adjusted EBITDA last year, and an unexpected $800,000 accounts receivable write-off. So, first, we had those two unusual items.

Next, if you take all the rest of the Business, excluding the US direct offices, the adjusted EBITDA of that remainder of the Business increased a little bit in the third quarter compared to last year, a few hundred thousand. And then third is looking at the US direct offices, where we are primarily selling the All Access Pass. So, the decrease relates primarily, in those offices, to the change in the business model related to selling the All Access Pass.

So, let me go over that just a little bit. So, the shift in this business model means that we generated $1.6 million of very high gross margin deferred revenue during the quarter.

To provide some further context on how this impacted the quarter, in last year's third quarter and all other quarters, substantially all of the $20.5 million in contracts entered into in the US direct offices was recognized as revenue in the quarter. In this year's third quarter, however, only $18.7 million of the value of contracts entered into in the quarter was recognized as revenue in the quarter, with the additional $1.6 million of net deferred revenue associated with the same All Access Pass sales added to our balance sheet. And as Bob said, this very high margin deferred revenue will flow through a 95% margin when it comes through next year.

A portion of this deferred revenue from Q3 will be recognized in the fourth quarter, with the balance recognized in future quarters, generally all recognized in four quarters over a year. So, this deferral in revenue and the related EBITDA, together with about $500,000 that we spent in marketing and travel costs incurred in the quarter to ensure a successful launch of the All Access Pass, all of which was charged to the quarter, and the cost of the new client partners added this year, accounted for substantially all the rest of the difference in adjusted EBITDA for the quarter.

Might just be interested to know that this business model dynamic that's taking place of the recorded portion and the deferred portion was more acute in March and April than in May. And in May, the acceleration of the revenue was getting closer to the amount recognized being equal to prior periods. And then the amount deferred was just an additional value being put on the balance sheet. But the recorded revenues were coming closer together in May, and we're experiencing that in June. So I hope that helps to give a little color on the change in adjusted EBITDA in the third quarter, from last year to this year.

Now, on a year-to-date basis, if you look at slide 6, revenue year to date through the third quarter was $135.2 million, compared to $142.5 million for the same period last year, a difference of $7.3 million. Excluding the $1.5 million year-to-date impact of changes in foreign exchange rates, this difference would be $5.7 million.

As shown on this slide, more than 100% of that decline relates to the non-repeat of the government agency contract that we've talked about several times, which generated more than $6.5 million in revenue during the first three quarters of the year. Excluding these changes related to FX and the government contract, the remainder of the Business was up $775,000, and would be up that much going into the fourth quarter.

Additionally -- we keep going back to this, but I think it's important -- at the end of May, we had -- the end of our third quarter -- we had built up a balance of $2.7 million in this very high margin deferred revenue. Approximately $800,000 of that deferred amount will flow through in our fourth-quarter results, and the remainder will come through in FY17 and next year.

And adjusted EBITDA, year to date through the third quarter, was $10.7 million, as you can see, compared to $14.6 million for the same period last year, a difference of $3.9 million. Excluding the $1.2 million year-to-date impact of the change in foreign exchange, then the difference is $2.7 million. As shown, like the revenue discussion, more than 100% of this decline is related to the non-repeat of the large government contract agency, which generated $3.8 million in EBITDA contribution during the first three quarters of FY14.

Excluding this -- changes in FX and government contract -- adjusted EBITDA would be up a bit, $1.1 million for the remainder of the Business. And, as previously noted, this $2.7 million of very high margin deferred revenue will flow through to adjusted EBITDA in the same way that it will flow through to revenue in the coming year, at a very high flow-through rate. And that, again, is $2.7 million at the end of the third quarter.

So just a note, to stand back, due to this increase in deferred All Access Pass revenue, in addition to the significant amount of value we think is being created on the income statement, there's also a lot of value that's being created that's put on the balance sheet. And while it wouldn't be appropriate, and we're not trying to add those two things together and change our result, nevertheless, we do feel that there's a good value that's being created in the third quarter, some that's on the income statement and some that's on the balance sheet.

Bob?

Thanks, Steve.

Thanks. I just want to spend a minute maybe talking about three ways, in addition to the deferred revenue coming in future periods and the value of that to accelerating growth in the future -- three things we identified about All Access that we felt would really change the Business. The first is the change in -- or the increase in lifetime value of a customer to us, of even our existing loyal customers.

This is driven by -- the expectation, at least, was driven by two things. The assumption that you could achieve a higher average spend from these All Access Pass holders and by -- that you'd also get a higher percentage of these folks and customers repeating the revenue.

And as to increasing average spend, while it's still early, to date, the All Access Pass holders who were prior customers have, in fact, been spending more with us this year than they did last year. For example, 139 Pass holders who were active facilitator clients in FY15, buying training materials from us, are now All Access Pass holders as of the end of May. In the full FY15, these particular 139 clients spent $3.7 million for the whole year, a median of $17,700 per client, based primarily on facilitator materials.

These same clients who are now All Access Pass holders have already spent $5.2 million this year, year to date, through the third quarter, a median spend of $25,250. And most of them just became Pass holders recently -- relatively recently.

Now, approximately $1.5 million of this spend is being treated as deferred revenue -- we just keep talking about. So, a lot of the different -- we haven't seen much of that difference come through yet, but it will. But the actual spend is higher, and so that's an important thing.

We also, in addition to these larger clients who are some of the early targets for All Access Pass, we have thousands of smaller clients. And for each one of those who makes the trade-up -- for a typical client who might be spending -- a facilitator who might be spending $8,000 in a year for facilitator materials, and just because of the way they're -- even though they're active every year, one year they train in November and the next year they train in some other period. Of that $8,000, about $6,000 of that comes into the next year, and another $4,000 the following year, so that over a three-year period, you have somewhere, $18,000 to $20,000 of total revenue that comes in over a three-year period.

With All Access Pass, any one of those who steps up and buys, say, a $20,000 Pass in their first year, they've already spent, in their initial year, as much as they would spend in three years. If we're right about the idea that at least -- our target is 90%, but if we're right that at least 80% will renew, they'd spend then $16,000 the next year and so on. And so, all of a sudden, you have somewhere close to $50,000 over three years from the same clients.

So that's a major focus for us, and there are literally hundreds and hundreds of opportunities, which Paul will talk about, that are currently being worked. So this first idea is that increase in the lifetime value of the customer, just in terms of the Pass itself and the related renewals, et cetera.

The second way in which All Access Pass is changing our Business is the way in which we're engaging clients. That way of engaging clients is providing a clearer path for expanding our reach and influence within these organizations.

Often when we sold just a course, that was the end of it. There was a certified facilitator. They bought a certain number of manuals. They would then buy those manuals every year, and that was a great thing. But again, it didn't repeat at the same level every year.

But this -- with All Access Pass, when they buy this intellectual property license, they're now being engaged in a way where we're identifying the jobs to be done that they have, and really trying to find out how to accelerate and impact their organization. Let me just say that, if you look at slide 8 -- no, go back to slide 7 -- once a pass is sold, we have a whole team that we call Pass Holder Services now that added some to the costs in last quarter, but that team's now in place. But it's a group that is focused on ensuring that the customer is delighted, and that they're getting full value out of what they bought.

In fact, maybe while I'm on that, and just go back to slide 7 and just say that this team is tasked with the outcomes shown on this slide 7. We meet every Tuesday morning in the early afternoon to review the progress on this.

The first thing we want to make sure, put the top of that in the yellow bubble, is that they are -- the customers are delighted with what they bought. And we are doing Net Promoter Score surveys after they've been a Pass holder for two months, and then again at the six-month mark. Our goal is to have a world class Net Promoter Score, where their likelihood, as you all know about Net Promoter Score, on a 0 to 10 scale, how likely is it you would recommend this to somebody else? And we want that to be a 9.5, because we know the behavior.

If it's a 9 or 10, the behaviors will be that they will renew, they'll expand their relationship with us, they'll refer us to others, and they'll be willing to spend time with us to help us get better. We want to build our timeline having very strategic relationships, not just a vendor/purchaser relationship, but to have a relationship that is strategic. We want to be so embedded in the major initiatives they're doing that the switching cost would be high to pull us out, that we're involved in so many of the important initiatives.

We want to also find ways of expanding the populations that are utilizing the Pass; also, in some cases, upgrade those Passes to a higher -- we have different levels of these Passes that we all refer to as All Access. But we have a Personal Effectiveness Pass and an All Access Plus, et cetera. And we also want to add on additional services.

And so turning to slide 8, maybe you can see how that plays out. Let's say in the middle is -- this black ball here is the Pass itself. It's the intellectual property license that somebody buys.

Immediately when a purchaser comes on, one of our implementation specialists actually sets up a call within the first week to connect, to orient them to the content, what they bought, to start a dialogue about the jobs to be done, they're trying to get done, the impact journey they want to take. And usually, in that first conversation of an hour or so, they've identified some things for which they were buying the Pass to start with. They already knew they had some things to get done, and they're plotting out those jobs to be done.

But following that, within the first month or so, there will also be an on-site visit by one of our consultants and our salesperson, which we would call a discovery day, where they're going in, and they may have sold the Pass to -- the person who purchased it may have been the head of people development or whatever it was inside the company. But they'll go in and do a day of interviews. Now, because it's a different relationship now that their person's already bought, to come in and make sure that they're getting full value from the Pass.

And with that, they might talk to six or eight other stakeholders in the process, identifying what they're trying to get done, at a minimum just reinforcing the value of what they bought, but oftentimes expanding the population. And that's happening -- probably about 20% of the conversations to date -- it's leading to an expanded Pass.

As you go through these slides from 8 through 11, after the one we just -- the black dot -- if you go to the next slide, it's un-numbered here. The other thing they'll find is that for certain of the things that organization is trying to do, there may be some advanced tools or services that customer needs.

Paul will share an example in a minute, but in -- we have hundreds of thousands of dollars, just in June alone, from Pass holders who bought in May, who, after this first discussion, even though they might, in many cases, be certifying their own facilitators, recognize that in other areas they'd like to have a Franklin Covey person come and help them deliver that content, an execution or trust or something else. So that's the second idea.

The next one -- they can also buy additional single content Passes, which on the next slide you can see that, as you go in an interview, somebody may have bought an All Access Pass for 100 of their leaders. But as that discovery day occurs and they're talking with certain of those leaders, they'll find that one of the leaders in charge of sales has a lot of salespeople, or somebody else has the front line customer service organization reporting to them, or they've got an execution job. And so they'll identify expanded populations that might have a very specific need who won't necessarily buy the overall Pass, but who would buy an intellectual property license to one of those content areas.

And then finally, on the next slide, there are services available under each of those. For example, an execution initiative where they bought the content rights in All Access Pass for, say,100 people, they might have 1,000 people who they're trying to get a goal done that requires better execution. That whole group, they might buy an All Access Pass specific for disciplines pass, a content pass for that group, and then add on services to help implement it. So that way of engaging with the customer is a natural way of building strong ongoing relationships, adding on services, and building lifetime value.

Finally, as shown on 13, the third way in which we envisioned, we hoped would have an impact, is the All Access Pass offering is not only helping us to increase lifetime value of existing customers, but also to win back former customers and to win more new customers. As you can see on slide 13, we have thousands of active facilitator customers who can upgrade to All Access Pass, and I mentioned the economics of that. We can increase their lifetime value.

But as shown on slide -- and as you see on slide 13, 52% of the customers who bought the passes to date have been those customers -- exactly those customers. So it represents today maybe -- we've already converted over maybe 7% or 8% of the active population of that group. And so we're just getting started. It's an exciting prospect.

But at the same time, among our existing Pass holders, half -- almost half have come from new categories that we wouldn't normally -- we'd hoped for, but wouldn't normally know that we'd get. We have certain facilitator organizations that really had bought things from us, but didn't see a strategic path anymore. And 13% of our buyers said, wow, with this, I'd like to re-engage.

We have 18% coming from new clients, even though our marketing has not primarily been focused there, just people who are -- organizations who have been assigned to client partners, but perhaps they've never even met with, now are raising their hands saying, wow, if we can engage that way, that would be a great thing to do. And then even on-site clients, we call them people, who hire us only to deliver a class or two each year, because they're not fully committed to a rollout, with the All Access Pass providing a way where they can access the content, they're now saying, wait, I'll keep doing more on-site days in the areas where I'm doing those, but I'd really like to add this on.

So those are three ways in which we think -- we originally anticipated it would occur. It's exciting to see that it is occurring, and just wanted to share that with you.

Maybe just turn some time to Paul Walker to talk about how All Access is -- how we expect it's going to affect the US direct offices.

Thanks, Bob.

Hello, everybody. The direct offices -- we've historically had very strong growth. In fact, if you look at slide 14, from 2010 to 2015, compounded annual growth was 10.6%.

And you can also see in that chart that growth started to slow in 2015. And we've spoken about this on previous calls, but the slowdown was driven primarily by a reduced average sale size related to successive new product launches.

While this didn't immediately show up because of the type of sale related to the launch of a new product, meaning that it has a shorter sale cycle, as we move back toward a larger average order size and associated slightly longer sales cycle, it's made it harder to grow the past few quarters. We think the All Access Pass is really going to change this, and it's going to drive strong growth for us going forward.

As has been previously mentioned, with the All Access Pass, we know the average sale size is larger. We also know that the average lifetime value of the client is greater. And while right now we're not getting much of the benefit of Pass deferred revenue, the deferral that Bob spoke about in slide 5 will begin to work in our favor. And we expect Pass deferred revenue to contribute an amount equal to about 5% growth in 2017, and what could be as much as 9% growth by the time we get to FY18.

As was mentioned, we didn't have much deferred revenue working in our favor this year in Q3. In last year's third quarter, substantially all of the $20.5 million in contracts entered into in the US direct offices was recognized as revenue in that quarter. However, in this year's third quarter, only $18.7 million of the revenue -- or of the value of contracts entered into in the quarter was recognized as revenue in the quarter, with $1.6 million of net deferred revenue associated with All Access Pass sales added to our balance sheet.

Much of this was related to the fact that we're, frankly, in Q3, still getting all of our client partners into a position where they could successfully sell this, and happy to report that we're now there. But in Q3, the amount of All Access Pass revenue that was recognized in the quarter was somewhat lower than what we would expect going forward, and this is already starting to correct itself in June. We expect revenue actually recognized in the month of June to be somewhat higher than it was in June last year, while at the same time creating an additional $700,000 of deferred revenue that will benefit us in quarters to come.

We're very excited about the momentum. In fact, in the last eight business days, we've closed over $1.1 million worth of All Access Pass contracts. In addition, we have hundreds of opportunities in advanced stages in our pipeline.

I might just share one experience. Bob referenced this a minute ago. We've talked a lot on this call, and on previous calls, about the importance of not only selling the initial Pass, but that Pass creates a foundation for us to engage with these clients, to get the population size right, expand the population, and add on additional services.

We had an experience recently where a client purchased a Pass for 100 users. And in subsequent conversations, they decided that -- with our help -- that they needed to expand that by an additional 75 people. There was a sales population, drawing on Shawn Moon's group's here expertise, and our Sales Performance practice, they had an additional 75 people that needed some sales development work.

And so, not only did they step up the size of the Pass by adding another 75 people, they also came to us and contracted to have Franklin Covey deliver 17 consulting days. And so, it took what was already a very nice transaction, to a very, very nice transaction for us, and we're seeing this all over.

These kinds of conversations are happening all over the country right now, with current Pass holders and future prospective Pass holders. We're very pleased about the momentum and the high interest on the part of our client partners, and also on the part of our clients.

And so, thanks, Bob, and I'll turn it back over to you.

Thanks, Paul.

Maybe just take a second to -- this obviously is a developing story in the direct offices. There are other parts of the Business that are moving really well. And just, Shawn, you might just note what's happening in the education business and licensees -- the growth is continuing well there. And maybe you could just give a brief update there, and then we'll conclude here with our cash flow and guidance.

Okay. Sure. Hi, everyone. This is Shawn.

Yes, so, education division -- it continues to have steady growth. And when we talk about education division, remember we mean higher education as well as the K-12 education, both in the US and internationally. So it's all of that together.

And on the K-12 side of the house, our primary offering, as we've talked about before, is The Leader in Me. And this is this whole school operating system that basically teaches students 21st Century life skills, such as public speaking, goal setting, creativity and communication skills.

During the third quarter, the education division grew by 22%. And so far for the year, for the first three quarters, the division has grown by 28%.

This year, we'll bring on 550 new Leader in Me schools and -- which will put us over 3,000 across the world, including about 800 that are outside of the United States. And we believe that the growth potential of The Leader in Me in both the US and internationally remains very strong.

We recently just signed new agreements with Macau, the UK and Cambodia, and we have several more right now pending agreements in other countries. Our focus has always been on helping schools achieve quality outcomes in the areas of student behavior, teacher and parent engagement, and student achievement. And we feel very good about the progress we're making here as we continue to focus on quality results for our clients.

And this is evidenced by, when we do The Leader in Me, there's an installation piece and then there's the sustainment piece, which is an annual package that schools participate in. And this year, we expect approximately 93% of the schools will renew that sustainment piece. And so we're not only starting schools, but we're retaining them for long periods of time. So we're pleased with that, and think the growth prospects are good.

On the international partner front -- just a couple words about that. We now have -- we continue to sign a few remaining partners. We have most of the world covered, but we do have recent new partners in France, and also the Bahamas, which we need to get to soon and visit. And that now brings us to a total of 55 partners, serving about 140 countries.

For the third quarter, we grew revenues by 11%. And the negative exchange rate, if you discount -- or if you take that out, it would have been 13%, so a 2% difference. And it's noteworthy that this is the lowest impact we've had on foreign exchange in a long time, in about eight quarters, at only 2% for the quarter. So it's turning into our -- it's not in our favor quite yet on the international partner front, but it's -- we expect the fourth quarter to be relatively flat or neutral, in terms of foreign exchange.

And so far this year, we've had strong double-digit growth throughout Europe, and in parts of Latin America and Asia. In particular, we've got really strong growth and strong futures in Mexico, in the Nordic region, in central and eastern Europe, and Thailand and Malaysia are real stars this year. So, anyhow, because of the size of our network, and that they're relatively young and small in terms of penetration levels, we still believe that we've got great potential here to continue to grow.

The All Access Pass will be a key part. We'll start selling All Access Pass in earnest starting next fiscal year.

Right now, we're working on securing the intellectual property, safety, making sure that when we get to some of these developing countries, we've got that all protected. And also, we're working hard on localization so that we can have one All Access Pass that we sell across the globe to these multi-national companies, which is a huge opportunity for us and takes advantage of our global footprint. So that will be coming on next year, and we're excited about that as well.

Thanks, Shawn.

There's a lot of exciting things happening, also, in the strategic markets group. We'll do maybe a spotlight on that next time. But a new offering in Customer Loyalty, the government business, outside of the contract, the non-repeating contract, is growing well. And the sales performance is going to have really a big year, target for the year.

So, Steve, why don't you finish up for us here?

Okay -- just a little bit on cash and guidance. First of all, cash -- our year-to-date cash flows from operating activities of $21.9 million reflects a $6.5 million, or about 42% increase, compared to $15.4 million in cash flow from operating activities last year. So we continue to generate cash.

Our liquidity remains strong, with $8.9 million in cash at quarter end, and $40 million of availability under our revolving credit agreement. This is all after utilizing more than $37 million this year to purchase more than 2 million shares. And some of that is in our $15 million term loan that you will see.

So finally, guidance -- couple of thoughts. First, we do expect to achieve strong revenue and adjusted EBITDA growth in the fourth quarter on a reported basis, while also generating a fairly significant amount of All Access Pass-related deferred revenue and education-related deferred revenue.

In November, when we gave our full-year guidance initially of $34 million to $36 million of adjusted EBITDA in common currency, we had barely begun to test the concept, which we're now talking about as the All Access Pass. In fact, we had only sold a few Passes at that time as a test.

Also, when we reported Q2 results, we were also early in the All Access Pass sales process. The point is of this, as it relates to guidance, is now -- we now expect to have more sales and, therefore, deferred revenue, more sales in the All Access Pass and, therefore, more deferred revenue on the balance sheet than what we previously thought.

So, with that said, given this accelerating growth in All Access Pass and potentially further acceleration in the fourth quarter, and the significant amount of deferred revenue which could be generated, we're expanding our guidance range, pre-FX, to between $31 million and $36 million. It might be interesting for you to note that the entire executive and management team is still intently focused on achieving the original guidance range, notwithstanding the headwind of accelerating deferred revenue from the All Access Pass. And it might just be interesting for you to note that we're still paid on the same numbers that we were targeting at the beginning of the year.

So, Bob?

Thanks, Steve. With that, we'll just open it for questions that you have.

Thank you. We will now begin the question-and-answer session.

(Operator Instructions)

Our first question comes from Marco Rodriguez. Please go ahead.

Good afternoon, guys. Thank you for taking my questions. I wanted to review some things here. You guys threw a lot of numbers out, and I was having a little bit of hard time getting them all down here. But on the revenue side, I know you guys have called out the non-renewal of the government contract, but that was expected, I believe. So I'm just trying to understand what else impacted your top line? Because it came up fairly short versus consensus.

Yes, I think as you say, Marco, we expected the government. We just -- we listed it. We had -- the main thing -- there were some ups and downs across the rest of the Company, and there are 10 or 12 different things, but they netted out net positive with the exception of the US direct offices. The main news in the direct offices was that in last year's third quarter, we had $20.5 million of revenue that was recognized.

This year, we had $18.7 million of revenue that was recognized, but also generated $1.5 million of deferred revenue in the quarter. So I think the reason we spent some time on that was obviously -- maybe not as well described as we should have, is that's really the primary thing. Other than the government contract and -- for the revenue for the quarter, there were some ups and downs, but generally the biggest difference was in this area.

Okay. And the education receivable that you wrote off, was there an impact there on the top line or was that all in SG&A?

All SG&A.

Okay. And that's $800,000, roughly?

Yes.

Okay. And then speaking of the SG&A side here, just trying to understand the increased costs that you seem to call out in the quarter, some marketing and additional promotional activities, and then obviously CP new hires. Can you quantify those particular buckets? And again, they came in at least a little bit higher than I was expecting.

The incremental things and as it relates to, first of all, the direct offices, so maybe just break it on this way. In addition to the write-off of the receivable, which had SG&A and some increased share based compensation that is below the adjusted EBITDA line. Basic things were an extra $0.5 million of marketing spend during the quarter. This is holding an increasing number of events we held, plus all of the materials and things that we send out to our thousands of existing accounts and prospective accounts to introduce All Access Pass to them and get them energized around it.

We had a luncheon program where people could -- we'd send them a clever marketing piece that says, let's do lunch, and they could -- if they would get their whole executive team together, we would do a Webcast for their executive team to take them through All Access Pass, et cetera. It's done a lot to build our pipeline, but that is the marketing side.

We also had some staffing cost. It isn't huge in the annualized basis. We have the pass holder services team of four people, and so that added about $150,000 during the quarter. That's pretty stable. Those people get added incrementally as time moves forward. And then relative to last year's third quarter in the US direct offices, we also have around 20 additional new client partners. Some of that cost was in the second quarter, as well. But in terms of year over year, we had an increase in the time when they're not generating much revenue because they're new, you have that cost there.

And so with that cost basis in there, all of the marketing costs are, of course, period expenses that are charged against that portion of the revenue that we did recognize, which is only about 60% of the revenue of All Access. So all of the expenses went against that revenue, but about 40% of the revenue was deferred. And so -- which will eventually come back. Is that helpful at all on that side?

Yes. And how many CPs did you end you up with at the end of the quarter?

192.

192, yes.

Okay. And last quick question, and I'll jump back into queue --

Excuse me, 194. I apologize.

194. Okay. On the guidance, I'm just trying to understand here how you guys are going to achieve some of the numbers here? What you guys have done year to date, and what you're expecting to do for the full fiscal on your adjusted EBITDA, implies some pretty hefty growth rates year over year. Can you just help me -- walk me through, just given all the deferral you're having, the negative numbers that we saw here in Q3, how are we really going to hit those types of numbers?

So I think just building this up, maybe you can go to slide 6. You can see where we are year to date. You know that, and that's why you're asking the question. But if you take the $10.7 million of adjusted EBITDA through the three quarters, and our guidance was pre-foreign exchange, that brings -- that was the [$1.184 million] of the impact -- foreign exchange impact. That gets you into the $12 million range, year to date, pre-FX.

And so that means that to be at the original range, we'd have to do somewhere around $22 million of adjusted EBITDA in the fourth quarter to be at the low end of the original pre-FX range. And depending on the deferrals to be -- you'd have to do $19 million, net of deferrals, to be in the low end of the new range. And so the major components of that, in education on a quarter -- during the first three quarters of the year, net education, it primarily just covers its costs. And given allocations, et cetera, it doesn't really contribute to the Company's adjusted EBITDA during the first three quarters. There's a significant increase there in education.

Also, in the US direct offices, historically, if the average quarter during the year is $18 million or $19 million of revenue, that last year was $27 million of revenue. We expect growth there, even after the deferral. And so there's another significant amount with very high gross margin and not much incremental cost there. Japan is typically -- its biggest quarter of the year is typically the fourth quarter. The sales performance practice has had really good performance for the year, but it had some lumpiness in the third quarter that took its EBITDA contribution down about $700,000. That was a slide of a couple of deals that are now staged for the fourth quarter.

We have our public programs area, which in the fourth quarter has a couple of big orders. We have some IP agreements that actually renew in July and August of every year that are more than $1 million. And so the buildup, we actually have a plan that gets us into our original range. And that's, as Steve mentioned, what everybody's compensation depends on. So there's a very detailed plan of getting there. We're -- so really almost all of the -- if not -- really all of the difference in the expansion relates to the fact that for every extra $1 million of All Access Pass contracts that we sign, we're adding $400,000 of additional deferred revenue.

And so the idea here is, this allows for us doing -- we had said at the end of the second quarter that we thought that at year end, we might have as much as around $3 million of deferred revenue going into next year. We've said here that it could be in the $5 million range. But -- and if it is, that will be good for the quarter, but it means that -- it will mean that we're not going to -- that wouldn't accelerate the past sales as we think we might. And so we're trying to allow for the fact that if you added an extra $4 million or so, that's a another couple of million of deferred revenue. But -- so we can go into more detail, if you'd like, but those are the major components of it.

Thanks a lot, guys. I appreciate your time.

Thanks, Marco.

The next question comes from Alex Paris. Please go ahead.

Hi, good afternoon. This is Chris Howe sitting in for Alex Paris.

Hi, Chris.

Hi. Just had a few questions here. I'm not sure if you mentioned it earlier, but how much adjusted EBITDA contribution from the All Access Pass was recognized in the quarter? And in reference to the $450,000 you had mentioned for the remainder of the year on the last conference call, is this still a good number to use when looking at the fourth quarter and trying to back into that?

Chris, when you talk about the deferred, we use -- center me on that $450,000 number. I'm just not picking up on that, sorry.

Okay.

From the prior quarter. I apologize that you have you to remind me on it, but I -- that didn't ring.

It's -- I have the transcript in front of me.

Yes, sure. Thanks.

It says, we look forward to recognizing half of that $900,000 amount of benefit in the next two quarters.

Oh, yes. Okay, yes. So that's saying the deferred revenue that we had, if you look at slide -- let's see -- slide 3, at the end of the second quarter, the deferred accrual balance turned out to be a $1.1 million. I think we were, at the time, thinking it was around $900,000. But we were just saying that half of that amount, roughly half of that amount, would be received because it was accrued at the end of the second quarter. Half of that would be recognized in Q3 and half in Q4, with the rest of it going into next year.

And so what's happened is that balance has now grown, net of whatever portion came in in the third quarter, the balance has grown, as you see, to $2.7 million as of the end of the third quarter. And we're suggesting that that number could grow further into the $5 million range, or even more, in this quarter. But I thinks that's -- so we -- usually, a $900,000 number, which I think related only to the US direct offices that we had some sales in our government -- All Access Pass sales in government and higher education, and the UK and Australia offices, that moved that from $900,000 to $1.1 million.

We were saying of the $900,000 that related to US offices, about half, or $450,000 or $420,000 or whatever the exact number was, would come in. So thanks for connecting me back to the number.

No worries. And I guess you had mentioned -- I like the words that you used, the foundation to engage, and the possible up-selling opportunities on top of this foundation. And generally speaking, how high could this expand the potential revenue per contract under the All Access Pass?

We hope that that's -- the answer to that is, a lot. But just the early example of it, in last year's -- when we started last year's fourth quarter, if you look at the number of opportunities in our US direct offices of $50,000 or more, the number was in the range of 20 to 25 opportunities that we had of that size or greater. The number that were over $100,000, we had some. We had seven or eight opportunities north of that. Today, those numbers are dramatically different. When we look at north of $50,000, there's literally hundreds of opportunities now are north of $50,000. And north of half a million, we have --

Yes. Or north of $0.5 million, yes.

Yes, so north of $0.5 million, we have 20 or so. And so I think what's happening is that we've been, for years, doing a good job at launching these new products. And these products, of course, establish the foundation for what we're doing in All Access Pass, because it's these branded content areas that are really the core of what people are wanting to buy. But at the same time, the way of going to market by launching those offerings, in a way, reduced -- we were selling a product instead of getting in there and having a solution.

We know -- we already -- All Access Pass was designed to go big, because we know that the people who are in charge of learning and development in these organizations, almost all of them have three responsibilities. One is to support some kind of a major strategic initiative inside their organization. If we're just selling facilitator manuals to a front line person, a trainer, we don't get a discussion on that one, even though a lot of our offering, sales performance, customer loyalty and execution, were already built for that. And independently we're out selling those, but it didn't give a natural way of going there. So that's at the top.

The second is leadership development. That one we've done a lot in. But what we recognized that leadership development, they have a lot of different needs. And this All Access Pass is targeted exactly on that job to be done. And then, of course, there's always just the normal development of the workforce, which we've always done a lot of, but All Access Pass provides an affordable, flexible way for them to do it.

So I think what we're finding is, the indication, Chris, for us is, again, we're into this half a year, and hardly that. Really, the big -- 80% of the past sales have occurred in the last probably nine weeks. But what we're finding is, those discussions that we're having with people about the All Access Pass, those discovery days, are identifying all sorts of new opportunities. We also have a number of large organizations that's have their own learning and development people, and their own instructional design staffs, who historically, they don't want to just buy off the shelf.

And so now with the All Access Pass, they can integrate our content into other things they're doing, because we have a number of those people who are saying wow, I never -- I loved your content, but I would never have bought from you before because I have my own people. I just wanted to integrate this into the things we already teach, and they're able to do that. We have some really large clients that Shawn Moon and his teams are working on that are exactly that, where they're integrating our content in. So anyway, I think the idea is big -- the largest opportunity we're talking about right now is probably 7,000, right? Yes, 7,000 users.

(multiple speakers) You've got one bigger than that. So we haven't won one of those yet, by the way, Chris. But I'm just saying the idea, but we're winning ones -- in this morning's report, we have lots of them in the multiple hundreds of users, put it that way. And some strategic wins that are in the thousands, and I think that's the path we think we're headed to.

Okay. Thank you. That's very helpful. And one last one from me. How many contracts were sold in the quarter?

We had -- we track this two ways. Actual contracts signed, but there are a bunch of different sizes, and so it can skew what it sounds like. So we convert these into Pass equivalents, which is $20,000 a sale is a Pass equivalent. In those terms, we actually contracted and closed 278 of those Pass equivalents during last quarter.

Already in June, we've got another 160. Expect in the next, actually, week to 10 days, we'd probably expect another 100 or so to come in. And so that's -- but that's the order of magnitude. In actual passes, when you don't convert to equivalents, I think our total now is like 420 total passes.

Okay. Thank you. I'll jump back in the queue.

Thanks very much, Chris.

And our next question comes from Kevin Liu. Please go ahead.

Hi. Good afternoon.

Hi, Kevin.

Your fiscal fourth quarter tends to be a strong period, due to promotions to your facilitators. How do you expect those promotions to go this time around, with the increased focus on All Access Pass? And will you be running similar levels of discounts for the All Access Pass?

That's a great -- Paul, why don't you talk to it?

Sure, yes. So we're doing two things. Right now, we've got our sales force heavily focused, as you might imagine, on the large All Access Pass pipeline. We don't typically start our promotions to what we call our client facilitators, the Buy 10 promotion is what we refer to it as, until August. And so right now, we're spending the entire month of June and July really focused on converting and closing as many of the All Access Pass sales as we can, for obvious reasons.

It's a larger transaction size. It's got all the benefits that go along with it, for us and for our clients. We will run, as we get to the midway point in the quarter, concurrently alongside that, the promotion we typically do run. And it will be -- it will have all the same fanfare and all the same things that go along with it to entice our clients to purchase. The idea being that we'd would like to create a way for every one of our clients to participate with us in the fourth quarter, either by purchasing the All Access Pass or purchasing through the traditional facilitator channel via our Buy 10 promotion.

Is that helpful, Kevin?

Yes, it was. And then just one other quick one. When you look at FX rates today, what sort of impact would it have on your year-over-year growth of both revenues and EBITDA, just for Q4 specifically?

Yes, the foreign exchange right now for us, because the yen is up, even though the pound is down, the yen, for us, is a more important currency than the pound, in terms of the relative size. Our UK revenues in the fourth quarter would be in the range of $3 million or so, versus $8 million or something for Japan. And so right now, the exchange rate -- I'm looking at Scott Sumsion, who calculates it daily -- is about neutral, I think, across most of our operations right now.

Last quarter, it was like $20,000 of total for the Company net. And of course, it's up and down by country. But that's -- we're not expecting right now -- at current exchange rates, we don't think FX will be much of a factor in the fourth quarter.

Yes, that's helpful.

Yes, in fact, Kevin, just as of today here, we've now got the -- it could be as much as $400,000 on the revenue line, which would mean [$130,000] on the bottom line. It would be the risk, right now, at exactly today's rates.

All right. Appreciate you taking the questions.

Thank you, Kevin. Let me just say one other thing. This question of yours, Kevin, about what happens to your existing facilitators, is an important one. Because on one hand -- and it's one that we're dealing with every day. Paul gave the answer to what we're actually doing, but that's an important, because we have hundreds of our existing facilitators who are in the pipeline for All Access Pass.

And one of the risks you have is that they are excited about All Access Pass, but they can't make the decision in the quarter where they could have made the decision to buy some manuals. That happened to us a little bit at the end of last quarter. And while it delayed things a few weeks, those sales are coming in in June. But that's a risk that we have, and that's the reason we're organizing around it. Last year, in the fourth quarter, we had about 625 organizations participate in the promotion.

And so we want to make sure -- about one-third of those people, right now, are actually in the All Access Pass pipeline at some advanced stage. And so it's not a huge disruption even if they were all to buy, that would be a good thing for us if they bought, because they're buying more. But we want to make sure those other 400 aren't frozen in the headlights, and so we're running a side-by-side play, that the moment that that person is saying, I can't make a decision on All Access this quarter. It might make sense for me later on.

We're immediately providing -- instead of waiting until August, which we normally do for the promotion, we've actually made that promotion available to our client partners right now so they can say, we get it. That's great, and we've got a special thing for you so you can keep training and doing what you're doing in the meantime. And that's an important thing for us on the transition. So I think it was really an insightful question.

And the next question comes from Samir Patel. Please go ahead.

Howdy, guys. Thank you for all the color. That was really helpful. I guess most of it's been covered pretty well. But going back to Marco's question earlier, I'm sitting here and I'm trying to add up the various impacts on your top line, from the government contract and currency and All Access deferral. And I'm still -- like I guess I'm still just not seeing very much growth in the business, even once you add those things back. It still looks flattish to me. It doesn't look like there's (multiple speakers) outside of the education practice.

(Multiple speakers) So sorry, quickly, to finish, I guess what I'm trying to ask is, this is now, I guess, a couple years now where you've been well off your targeted growth rates. Is there anything that concerns you? Can you just explain that a little bit better, I guess?

Sure. So let's talk about what it isn't. We've had -- aside from the -- there are two things that have affected us a lot, in terms of the reported growth rate. You know those. The government contract this year, $6.5 million, we started the year off knowing that wasn't going to renew, and the foreign exchange impact. But as you say, and as we show on slide 6, year to date, even absent those things, we've only grown $775,000 net across those things. And so it hasn't been robust growth and -- it's hardly any growth at all.

So let's talk about what it isn't. You heard from Sean Covey. It's not that the education, even though those education revenues have been small in these off -- they're relatively small, $6 million, $7 million a quarter, they've been growing at a good pace. We've had good growth in our government business, excluding the big contract. The licensee business, pre-FX, has been growing well, but it's been muted by that, and Japan's been growing well, but been muted by FX.

We're now entering a quarter where we don't have the government contract very much, a couple hundred thousand dollars, Steve?

$100,000.

$100,000 of revenue or EBITDA?

EBITDA.

EBITDA, and --

But it's about the same.

Yes, about the same, yes. So there's about only -- so the headwinds that we've had in the rest of the business, we don't think we'll have much FX or government. But -- so the concern has been that the main engine that we have, which is our -- we have lots of good engines. The licensing's a big engine. Fourth quarter education's a big engine. These strategic markets practices are now gaining traction and being engines. But the big engine that does $130 million of the revenue are our direct offices in the US and in Japan, Australia and the UK.

And it's not that some of those haven't been growing, but on a net basis, per Paul's discussion, that hasn't been growing. This shift a couple of years ago, when we launched three new products all sequentially, moved us into a bunch of really small sales, which are -- good establishing the products. But as Paul mentioned, their average sales size went down and the sales cycle shortened, because it was easier for people just to order those. That helped us for a few quarters, to hold even and up. And really, we still held even in the US offices, except for this deferred revenue, in pretty much for the year, but it hasn't been real growth.

And so I think that is the concern. We -- it's not that we -- All Access Pass, per se, is trying to address that concern, but we think it does address that concern. Education is on a good track. If you think of the divisions, education is on a good track. The licensees have grown 10% a year, pre-FX. They'll grow that again. And the strategic markets, absent these -- the government contract will, we think, be on track for that kind of growth here by the second quarter of next year. And so really, for us, it's the US direct office is why we -- and so I think that's where the concern is, and has been.

That's also where the opportunity is. It's also where almost all the sales of All Access Pass are today. And we believe that's going to -- this is now, like as Paul said in June, last quarter, we contracted a similar amount as we did last year, but recognized 18.7 versus 20.5. In June, we did $6.2 million last year. We'll likely be north of that by a few hundred thousand in recognized revenue, and add another $700,000 of deferred revenue in the US direct offices.

We think July and August are lining up to be similarly patterned. Where they'll grow some, we hope, in recognized revenue this quarter in the US direct offices, but then add a bunch of deferred revenue, which will then start next year out to grow. So I think it's something that took about eight quarters to get us into, in terms of selling in a different way, with all these product launches.

We're glad we did it, because they also established a foundation for growth around the world, because our licensee partners are doing this. But now All Access, as you can see on slides 4 and 5, slide 4, as you now accelerate the sales, start to get some of the deferrals and expand these passes within people, we believe this is the best way to grow and pull -- and go to market.

And so that's been one where we felt that way for a couple of quarters. In the third quarter, I would have thought, honestly, that we might have had a few more passes actually closed in the quarter, I mean on the margin. But at the end, you have to sign a contract. Our salespeople were getting trained and so forth, and I was probably a little optimistic. Although the number of passes was right, in my own mind, I was hoping that we'd sell maybe 30 or 40 more in the quarter. On the other hand, I wouldn't have expected we would sell anywhere near this in June. And the fact -- so I think it was just that it was a few weeks late, but I think you're on the target.

If we don't -- if we continue to be flat in the US direct offices, then the rest of the business, the whole business will be growing at 3% or 4% a year, generating a lot of cash. But if we can get the US direct offices back into the high single digits, then it moves the whole Company toward that 6%, 7% growth. And of course, we expect that maybe we can do a little better than that, once we start getting some of the benefit of this deferred revenue.

Okay. So wait, a couple follow-ups. The first is just, are there any other major contracts, like the government contract, that you see as being any risk of non-renewal over the next few years?

In the -- we don't have any in the government. The only place where we have any large contracts is in education, and that, for this year, is done. There's some charitable foundations who fund some number of schools each year, in total around $4 million. But otherwise, we don't have any large contracts. For us, a large contract, the largest would be like $1 million in a year is the normal -- is the largest contract outside this educational foundation.

Okay, but nothing that would materially impact your revenue growth like this one did? Or your EBITDA, for that matter?

No. In fact, it's affected us for 5 years. Because when we first won this contract, they wanted -- this agency had -- it was $16 million the first year. This was five years ago, and it's declined every single year, although it still provided a lot of revenue every single year for five years, except for the decline in the government contract.

And so while we hate to have lost that, we also -- we'll never have that one to anniversary again, and so that will help us some. FX has also taken out millions of EBITDA, $4 million last year, $3 million the prior year, and a lot of top line growth. And so those are the two, outside the US direct [office], that's been our challenge. But (multiple speakers).

Okay. And then the bigger, higher level question is, I guess my impression from a few quarters ago, or I guess last quarter when you first really started talking about All Access, is that you expected to be able to hit your targeted growth rate, that high-single-digit growth rate, independent -- like All Access would be incremental to that, like any up-sell from that. And I guess if I'm interpreting correctly, what I'm hearing now is that All Access is how you get back to that growth rate. Has there been a shift in that? Like is All Access now the thing that's going to get you to that growth rate, as opposed to something incremental to it?

Let's just break this apart. I think that's a good way --

And sorry, just to clarify. I'm talking about like fundamentally, like I'm not talking about the deferral, like I understand the deferral aspect of it. I mean just like, I guess a better way to put it would be like the actual dollar value of contracts you're signing in any given year (multiple speakers)?

Yes, so I'll say this, that All Access, if we -- like on slide 4, if we were to do the revenue, let's say -- sorry, [visit slide 3]. If we were to do $35 million of revenue next year in All Access, we'd still be doing $90 million of other revenue, I mean other things. So it's not -- the whole Company isn't -- or even the whole direct office divisions aren't just focused on All Access. So we think that these kinds of discussions that we're having with these strategic discussions, it's starting to increase our onsite revenues. We've had -- those have been down for four quarters. This is the first quarter in many quarters where we started off the quarter with more booked days to be delivered in our normal channels.

And so this isn't the only answer. We just think it will generate -- it's having the discussions -- the kind of discussions we're having will generate other things. But it's not the majority of the revenue, and won't be for perhaps two or three years. So even then, it will be [50%]. So this is a -- the real driver isn't so much what you're selling, although this helps us. It's really the ramp-up of hiring and ramp-up of new salespeople, because we know how much revenue they should do when they ramp up.

The new people are on track, and so the thing that's happened over the last two years is the new people we've hired have ramped up according to plan. But because of the change in average order size for some of our large big hitter client partners, they've flat-lined. And so for them, these All Access Pass discussions, along with the additional services and such that go with it, are in fact a way of rekindling their growth. But that -- the key unit of measurement is the revenue, the productivity of the sales force, which has stalled among some of our largest client partners.

Okay. So the initial concern around All Access was there might be cannibalization and you're still -- that's just not happening?

Yes, let me say this. We actually want cannibalization to happen, in the sense that because the lifetime value, the initial sale and the recurring revenue from an All Access Pass sale, we think is much better. And so the example I gave of an $8,000 -- a person who buys $8,000 worth of training materials, and then over 3 years buys $20,000 worth, if we can convert them to All Access, they will -- they'll spend $20,000 the first year and $50,000 over those [same 3 years].

So I think it is a vehicle for getting growth in that respect, because it will increase the average revenue per client that we do convert. So we hope we will cannibalize a lot of our existing customers and convert them to All Access, who then will not only buy All Access Pass but other services, as well. So the combination of All Access converting existing clients, adding new and ramping up new salespeople, is how we believe we'll get back to the high single digits in the US direct offices.

Okay. Got it. That's all from me. Thanks.

Thanks very much. We're happy to go through any numbers, If you want to call us individually, we're happy to go through, if that wasn't helpful.

And our last question comes from Jeff Martin. Please go ahead.

Thanks. Good afternoon, guys.

Hi, Jeff.

Bob, could you go into a little more detail, in terms of how the client partners will allocate their time between All Access Pass and the more traditional side of single content sales?

Sure. And if you talk about -- Paul, if you want to just address [that]?

Sure. Yes, so a client partner has always had two aspects to what they're focused on. One is their prospecting activities, and trying to sell new solutions to existing customers and selling new solutions to new customers, and then the maintenance of that, as well. Those are probably still the two primary buckets. The average client partner works off of a named list of accounts. Some portion of those are existing accounts that are spending money with us, and some portion are prospective.

And so I think what All Access Pass allows us to do is, if we're -- as we're successful and a greater percentage of that list becomes Pass holders, it allows us to shift to -- we now get to spend time with those customers on their side of the table now as, quote, owners of our content, talking about how they're going to use this additional populations they can address. And we get the chance, as we mentioned on the call here, to expand and grow beyond that.

And so I think there will be a little bit of shifting -- and part of this training Bob mentioned that we're doing right now is helping our client partners understand -- and he showed that slide a minute ago with all the circles. Client partners, we expect that they're in there with those existing Pass holders, having those kinds of conversations, to both expand and add on additional sales of services to those clients.

So I don't know that it changes materially. I think we get to go a little bit sharper with our clients, because now, as pass holders, it changes the nature of the conversation in, we think, a very good way for us and for our clients.

Jeff, just maybe going further on that. What we want to do is have a common -- one common way of going and talking to a client is to identify what their jobs to be done are, what problems they have, et cetera, and try to then connect to our solutions. That doesn't change. It's just that with this All Access Pass offering, we're able to meet a lot broader range of those. Because in the past, when a client partner went in, they had to say wait, now listening to that, do I go ahead and say 7 habits is the answer or trust is the answer or execution?

Today they can say, instead of -- so you know what, it sounds like you've got a broad range of needs. Rather than trying to choose among those needs, with All Access Pass, you actually can address each of them with different populations. And so the go-to-market, we're really trying to not have a product focused one. We don't want to have half of our client partners bringing on All Access Pass and half on selling on-sites and half of them selling execution. We want to have them -- 100% of their time, with their 500 hours of face-to-face meetings a year, spent in a certain process to identify the needs the client has, connects a solution to them.

All Access won't always be the answer. There will be people who have a specific execution need or sales performance or customer loyalty. That will continue. But we want to have a common way, and what we think we did a little bit is we pulled people off these product launches, we really had them going in there just to really talk about how great the upgraded product was, which was good. But this way of going to market is a single way that will be the same across the world.

Okay. That's helpful. And then the -- sorry, the strategic markets hasn't been discussed yet. What exactly is that? Is that your international, your three international markets? Or is that something else? It was -- I see it was down about 26%, year over year. I was curious what goes into that number?

Yes, so Jeff, the strategic markets -- this is Shawn Moon. Strategic markets includes the government services group, sales performance practice, the global 50 team and customer loyalty. We're actually very, very excited about the momentum there. The big government contract that you see will fall under that category, so you're going to see that impacting the year over year. But aside from that, the government team is up 12% for the year, and great momentum. The largest deal that we have with All Access Pass are in the strategic markets.

We're very excited about the momentum with the government. The sales performance practice is on target to hit its number for the year, and continues to land very large and significant relationships. It includes the global 50 team, which is just a hand picked group of accounts that, nine months ago, we've done no business with. This was a greenfield initiative for us to go out and really point the bat and go get them, and we're on target for the year on that. We have three heavy hitter client partners, and the pipeline there is very exciting.

Our single largest opportunity resides in this team right now, and Bob mentioned with the customer loyalty practice, we've historically done a lot of work gathering customer and employee data, which is -- it's actually nice revenue, but it's very low margin revenue for us. We're just launching a very, very exciting new offering around what's called leading customer loyalty. But it's a world class, very, very powerful training offering that addresses both managers and front line employees, and comes in at our traditional very high training margin.

So we're excited about the direction and the momentum that's happening within strategic markets. We feel like, aside from the government contract, we're at or above pace.

There's also, I think, in that -- Jeff, you look at the decline in revenue year over year there, you had growth in the -- there was a global 50 team that's up. A small amount of revenue because it's a brand-new team, but it's up. But government's down, as we mentioned, because of the large contract. In customer loyalty, we're down some. One of our large customers, one of our data clients, didn't have much EBITDA impact, filed bankruptcy, a sports retailer that did some business with us. So they were down, as well.

And even the sales performance practice, because of the shift to this fourth quarter, didn't do as well. So I think your conclusion that it wasn't a great quarter financially is correct. But as Shawn mentioned there, we think sales performance is going to be really strong in fourth quarter. Government won't have the contract to comp against. Customer Loyalty will still have a little bit of a headwind, honestly, against the -- a big customer last year who will also have this new offering, and global 50 is gaining.

So I think that's one that's going to really start to contribute meaningfully in the coming quarters, but is right now having a couple of transitions in government and customer loyalty.

Got it. Got it. Okay. I'll follow up with you with my other questions offline. The call's getting late. I want to free it up.

Thanks, everyone. I know it's been -- we've overstayed. If there are any other questions, please feel free to give us a call. We look forward to talking to you. Thanks very much. Have a good [quarter].

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