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Operator
Welcome to the Franklin Covey fiscal year 2017 Q1 earnings call.
My name is Adrian 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 this conference is being recorded.
I will now turn the call over to Derek Hatch, Corporate Controller.
Derek Hatch, you may begin.
Derek Hatch - Corporate Controller
Thank you, Adrian.
Good afternoon ladies and gentlemen and happy New Year.
On behalf of the company welcome to our first-quarter investor call this afternoon.
Before we get started I would 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 risk 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; renewals of All Access Passes; 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 10K 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.
Without out of the way I would like to turn the time over to our Chief Executive Officer and Chairman of the Board, Mr. Bob Whitman.
Bob Whitman - Chairman, CEO
Thanks, Derek.
Good afternoon everyone.
We appreciate you joining us.
We are happy to have the chance to talk with you today.
We would like to just briefly provide you an update on first, our progress on All Access Pass including how it is changing our business, both strategically and economically.
Some of you have asked us to give a context for the strategic relevance of that and also how we expect a compounded impact of new All Access Pass sales plus the renewal of prior-year Passes to impact the next few quarters as though start kicking in.
Second, we will discuss our results for the first quarter on both a reported and on an apples to apples pre-deferral basis and how our investments and activities in the first quarter have built the foundation for what we expect will be a strong balance for the year and finally review again our detailed outlook and guidance for 2017.
So first, I would like to discuss our progress on the All Access Pass and then I will ask Steve Young to review our results for the quarter and our guidance for the year.
Maybe first, just a note about the economics of All Access Pass that we have had some questions about.
While the accounting for All Access Pass is on a subscription basis about it might be helpful to note a couple of differences in how the economics of All Access Pass work compared to those of some other subscription offerings.
Number one, while many subscription offerings bill and collect monthly, the All Access Pass is billed and collected upfront ahead of the time when we actually recognize most of the revenue.
So it doesn't affect our cash flow and in fact, it improves the cash flows as a percentage of reported revenue.
Second, some subscription offerings are cancelable on a relatively short notice.
That has given rise to whether or not ours are, they are not.
Each All Access Pass has a contract term of at least a year and is automatically renewable unless canceled at least 90 days prior to the start of the new Pass year.
Third, when we talk about announced invoice for All Access Pass I just want to clarify that we are talking about amounts actually invoiced that have either already been collected, amounts already been collected or which represent a valid collectible receivable and this differs of course from the concept of contract value which is often utilized by some who offer subscription services.
With that out of the way I just wanted to talk about a couple of things.
First, the strategic impact of All Access Pass in response to questions we have received.
I thought it would be helpful to put it in context.
All Access Pass we think leverages Franklin Covey's unique strategic strengths and we believe that it has the potential to change the basis for competition and be truly disruptive in our industry.
As context, one of the most important opportunities for performance improvement most organizations have lies in getting a greater portion of their operations to perform at the levels that are closer to those they are already doing in their best-performing units.
In other words, moving the average performance of their units righter and tighter and getting closer and closer to what they already know how to do in pockets.
On slide three there is an illustration of that, it is kind of where the intersection of where the campfire symbol appears.
The point is every organization has pockets of great performance.
That is represented by the campfire.
Operations where customers are delighted, employees are engaged and the financial results are exceptional.
These campfires of great performance art celebrated and studied by the organization in hopes of replicating their performance.
The metaphor is you're looking across your operations and you see these brightly glowing wonderful campfires of great performance and you want to go visit them and stand around and in figure out what is going on because you are trying to figure out how to replicate them.
So that is that first idea.
The second is every organization as shown by the blue line and the red line has variability in its performance.
So variability is a given however the extent of that variability is not.
Our research work over the years with thousands of organizations has really found that what truly differentiates top-performing organizations from their lesser performing counterparts typically is not that the relative performance of even their top-performing units is meaningfully different.
In fact, in our studies they've results achieved by a top performing companies, top 20% of units and the results achieved by a lesser performer's top 20% of units is often essentially the same.
Both top-performing lesser performing organizations have pockets or campfires a great performance, they both know how to operate at high levels of performance.
Rather, what differentiates the top performers from lesser performers is the top performers greater ability to institutionalize or implement across their organization, the things they already know how to do in their top performing units.
This is about getting large numbers of people to voluntarily do things differently or better.
The operations of the best performers as shown on the red line are simply righter and tighter than those of their competitors.
They are better at turning their campfires of great performance into wildfires and so that is the big opportunity for most organizations.
This kind of performance improvement is what Franklin Covey helps their organizational clients achieve.
As shown on slide four just to put in context what we do, Franklin Covey helps organizations improve in three areas that are central to achieving these kind of behavioral change that leads to great performance.
One, increasing the effectiveness of the individuals throughout the organization so the way they motivate themselves, interact with others is effective.
Second, helping to develop strong leaders who can engage those people properly and third, providing approaches, processes and tools which help focus the collective efforts of these effective people and leaders on executing on the organization's highest priority and that is the key point is you can have a lot of individuals that are effective and have been well-trained but somehow are not pulled together and so our execution methodologies and other things pull those effective people together towards results.
Over the past years, really eight years, we have invested more than $100 million in content, processes, integrated solutions and portals to build solutions that help our clients achieve superior business outcomes.
Building on these and other investments, Franklin Covey has established three areas in which we believe we have strategic leadership.
As shown on slide five these three areas are first, having best in class content in the related services that go with those.
Our best in class purpose branded solutions include offerings and solutions such as Four Disciplines of Execution, Speed of Trust, The Seven Habits of Highly Effective People, Five Choices to Extraordinary Productivity, Helping Clients Succeed, etc.
These best in class solutions and offerings, because they are viewed as best in class, provide us with pricing power, strong gross margins, solution longevity.
We have two of our purpose brand solutions each of which has generated cumulative revenues over its history of more than $1 billion each and there are several others that are well on their way.
Our investments in content development have also resulted in a number of best-selling books which reinforce these brands so the best in class content is the center of this and solutions.
Second, having the most flexible range of delivery modalities.
This flexibility allows us to get the water to the end of the road within an organization with different modalities to get different kinds of content or training or tools to the front-line people and it uses a combination of different modalities rather than being modality centric.
Finally, having the broadest sales and delivery reach.
We have a direct or licensee presence now in more than 125 countries allows us uniquely really to offer seamless solutions to global clients worldwide.
How does this connect with All Access Pass?
While each of the strategic advantages is compelling on its own, All Access Pass leverages and strengthens these strategic differentiators and advantages by offering our entire arsenal of best in class branded solutions with almost infinite delivery flexibility in terms of different mixes, deliverable almost anywhere in the world and at a very compelling offering price All Access Pass provides customers an extremely compelling value proposition.
We believe that All Access Pass has the potential to change the basis for competition in the performance improvement industry in a couple of ways.
One, instead of competing course against course around a single job to be done that a client might have, All Access Pass puts our entire arsenal of content at our clients' fingertips allowing them to address a broad range of jobs to be done areas where they want to make progress at a price equivalent to or lower than that offered by others who may only have a few content areas which are are even of lesser quality.
Second, instead of competing utilizing only a specific delivery modality as many of our competitors do, where you are competing against online learning or webinar series or whatever, All Access Pass offers literally hundreds of flexible delivery options across all modalities.
The ultimate flexibility allows clients to address any of the hundreds of jobs to be done they might have with different impact journeys.
We have mapped out literally hundreds of different ways in which people can apply mixes of the content to solve specific problems and that is just the start because it is almost infinite in its application.
Some early indications of All Access Pass's disruptive potential include that in just its first full year more than 1000 organizations who purchased All Access Passes almost all of these clients have organizational impact journeys that have been mapped out with our implementation specialist that are under way to extend well beyond their initial one-year license period.
Though it is still early on, the All Access Pass renewal rate has been very high and indications are that the renewal rate in second quarter is likely to remain so and beyond.
Next, so medium-size companies reported that because of the All Access Pass Franklin Covey is now their only content provider and some large organizations are telling us as a result of All Access Pass they're planning to significantly reduce the number of content providers with whom they do business.
Several of these reasons we believe that All Access Pass can be strategically important to Franklin Covey.
So hopefully that is helpful for those of you that had questions just on strategically where we see All Access Pass.
Economically we have reviewed this before, but thought we could give an update.
All Access Pass is we believe, increasing the lifetime value of our customers.
At the outset we had expected the All Access Pass to have a higher initial sales size with a higher renewal rate and the prospect of expanding Pass holder population and then adding on the sale of services which Franklin Covey has a broad capability to deliver.
We expected the combination of these factors would result in significant increase in the lifetime value of our customers.
The results today are supportive of these assumptions although it is still relatively early.
As to increasing the average spend just an update on what we gave last quarter.
For 299 previous active Franklin Covey facilitator clients who are now All Access Pass holders their total spend increased from $10.9 million for the four quarters ending November 28, 2015 to $15.9 million for the four quarters ending November 26, 2016, an increase of 45.8% so it seems to be playing out well.
The average purchase size is higher to start with.
As to renewal rate, in the first quarter the Pass holder renewal population was small having sold only 19 passes in the first quarter of the prior year.
As a point of interest at that time none of the Passes had an automatic renewal feature provision which they now all have where obviously we are working with clients but it automatically renews and they are expecting that to happen if they don't otherwise make a decision 90 days prior to the expiration.
We still work with it to make sure, affirm that they go in with that expectation.
Nevertheless without that provision 15 of these 19 Pass holders did renew their Pass either before or during the first quarter with an additional first-quarter Pass holder now expected to renew this month, they just had a change in management that required some new signatures and that will happen this month.
Now this renewable rate also doesn't consider the add-on sales of service and training manuals and offerings to All Access Pass holders which is becoming quite substantial.
During the 13 months since exception of All Access Pass the amount of add-on sales of services and products invoiced totals just over $4 million which is an amount equal to just over 14% of total value of Passes invoiced and we believe we are just getting started there.
We mentioned last quarter we are having these Discovery Days with new Pass holders and we have had now these Discovery Days with about half of the Pass holders and we are continuing to move through now that that new process but as we do so we are finding new opportunities to add onto the Pass holder populations, add new services, etc.
The combination of having a higher initial sale price, a higher Pass holder renewal rate plus add-on sales of service and materials is expected as we have said to significantly increase the lifetime value of our customers.
The next point, the progress of All Access Pass continues to be strong and is expected to be even stronger as the compounded impact of having new All Access Pass sales plus significant renewal sales from the prior quarters begins to kick in in the coming quarters.
As shown on slide six $32.2 million now of All Access Pass and Pass holder amounts have been invoiced since the inception of the All Access Pass offering last year.
This amount equals 27% of the total amounts invoiced for the offices selling All Access Pass for that same 13 month period.
This increase, the penetration of All Access increased 38% as you can see in this year's first quarter and really has increased a lot really through December.
It has now accumulated for the year at 42% for the year to date.
Total All Access Pass and Pass related amounts invoice were as you see, $6.3 million in this year's first-quarter compared to $383,000 in the first quarter fiscal 2016 and $9 million year to date through January 4, versus actually the same $383,000 last year through January 4, because really we didn't make any additional sales of All Access during December of last year.
So All Access Pass has the potential to strengthen our overall economics by increasing lifetime value, further increasing our already strong gross margins because of the high margins of these IP contracts that really is what All Access Pass is, is reducing the marketing cost per sale because All Access Pass -- because All Access Pass is higher average sales size and because of the expect high revenue renewal rate doesn't require a lot of new marketing and it is positively impacting the ramp up rate for new client partners who have a bigger initial sales size and a higher renewal rate in the second year.
Now with all of the All Access Pass benefits it is also requiring a transition, both operationally and from an accounting standpoint, as we talked about a couple of those things which you are aware of I think.
One, All Access Pass's sales cycle is longer than for a facilitator sale.
From the time a sales opportunity enters the pipeline until it is closed to date the average All Access Pass is taking 86 days compared to only 34 days for the facilitator sales that it is often replacing.
That this reflects both one come All Access Pass is often a more strategic sale which is a good thing for us long-term, is one of the things that allows us to get a bigger initial sales size, it often requires a higher level of executive sponsorship than does a traditional facilitator order of materials.
So just takes longer from that standpoint.
Also the customer is purchasing an intellectual property license and because we want to protect our intellectual property it requires a contract to be signed versus just a purchase order for materials which a facilitator can place.
It is a little harder to predict exactly the date those things are going to get signed.
During the first-quarter for example $1.4 million of All Access Pass contracts which were agreed to and expected to close the last week of the quarter which just happened to be Thanksgiving week, rolled over and normally would have come because the facilitator would place an order, rolled over to the week after Thanksgiving just after quarter end because signatures were not available over Thanksgiving and just signed on Monday and Tuesday when they got back.
Because All Access Pass sales however began to increase significantly in last year's second, third and fourth quarters the year-over-year impact of this longer sales cycle will have less impact in future quarters because it is up against a higher percentage of the same issue last year.
Another challenge or at least transition point is with although with All Access Pass our total sales of IP have increased, intellectual property, have increased substantially however these increases of intellectual property sales have been offset by declines in on-site sales as really some of these on-site delivery customers purchased a pass and are now considering through which modality they will deliver the All Access Pass content where in the past they might have either decided to just hire us to do it, they have now got the Pass and are deciding what to do.
We are encouraged that after several quarters of declines in book days that have resulted from this transition that year to date through December for the first time in more than a year, the number of on-site days we booked held even to the prior year.
So at least the volume of on-site days and most of this is coming from having these Discovery Days and selling add-on services to All Access Pass holders.
These days are at a lower rate because All Access Pass holders get a price break on delivery and so that is still affecting us some on the revenue side but we had both of those factors in previous quarters and we don't now at least year to date this year.
Just the revenue per day, not the number of days.
This relative improvement in the pace of new days was as I mentioned was driven insignificant by the sale of add-on services to All Access Pass holders.
We expect that the amounts invoiced in connection with the renewal of the significantly increasing amount of All Access Passes invoiced in last year's second, third and fourth quarters where All Access Pass amounts invoiced increased from $400,000 in the first quarter to over $3 million in the second quarter to more than $6 million in the third and more than $12 million in the fourth.
So that at high renewal rates all of a sudden the renewal which didn't make much difference in the first quarter with 80% of $400,000 if we had that same renewal rate in the second quarter that would be $2.4 million and in the third quarter $4.8 million and in the fourth quarter $9.6 million all of the sudden the compounding effect of renewals in the prior years plus new sales even if we weren't able to turn, improve the on-site sales that has been affecting even without that we would overcome that in the second, third and fourth quarters particularly in the third and fourth.
So we feel that these transitions we will get through them this year though they have been a little lumpy.
All Access Pass sales have also affected revenue recognition as you know moving significantly increased portion of invoiced amounts into subtraction service revenue.
This is significantly impacting our recognized revenue versus deferred revenue in fiscal 2017, that is the reason we have tried to provide guidance by quarter but the effect of this should be substantially reversed in fiscal 2018 as this deferred revenue is recognized as revenue which will also smooth out, help to smooth out our year so less of it is in the back end of the year.
Despite these transitional issues we expect All Access Pass's benefits to accelerate our growth, improve our business model and increase the predictability of our results.
We believe that we are poised to begin seeing the impact of these positive benefits in the second quarter.
These will accelerate in this year's third and fourth quarters and beyond as the combined impact of strong new All Access Pass sales together with high renewal rates more than offsets any impact in on-site revenue and facilitator sales.
One other point finally is that we expect that this compounding effect of new sales plus renewals will become even more pronounced as we offer All Access Pass in more countries around the world in the coming quarters ultimately by shortly after the first of the year All Access Pass will be available in operations that represent approximately $165 million of our total invoiced amounts in the year will be selling All Access Pass and so today that has been more like $85 million or $90 million.
As that expands then this same compounding can kick in in future years.
So with that I'm now going to turn the time over to you, Steve, to review Q1 results and guidance.
Steve Young - CFO
Thank you, Bob.
Good afternoon everyone.
First, I hope that you will find our Q1 financial report, our earnings release and the news bulletin issued on December 22, to be helpful.
These reports contain information and detailed explanation of the quarter's results compared to last year.
As outlined in these reports, the first-quarter results reflect a decrease in reported sales and in adjusted EBITDA compared to last year.
These changes reflect the combined impact of increases in deferred revenue, non-repeat business, the somewhat longer sales cycle for our All Access Pass that Bob talked about, increased growth related cost and less on-site revenue offsetting the significant growth in All Access Pass sales.
Before I talk about numbers let me set some context.
First, our first quarter has been an investment and staging quarter that establishes the foundation for the rest of the year.
Our enterprise and government sales cycles include making significant first and second quarter net investments in growing our sales and delivery forces and in marketing.
These investments, in turn, drive increasing sales pipelines which are harvested in the third and fourth quarter and whose high gross margins generate high flow through and adjusted EBITDA in those quarters.
This pattern in our corporate business, as you can see on slide seven, has been accentuated by the strong growth of the education practice where more than half of its revenue and substantially all of its EBITDA comes in the fourth quarter.
Except for commissions and other incentive compensation cost which track consistent with revenue, our other cost are relatively similar or flat in a quarter.
As a result, our SG&A to sales percentage is higher and the gross margin percentage and EBITDA to sales percentage lower in the first two quarters with these ratios reversing in the third and mostly fourth quarters where the SG&A to sales percentage is lower and the gross margin percentage and EBITDA to sales percentage is higher in those quarters.
Second point, this pattern continued in this year's first-quarter.
After a strong fourth quarter last year in which reported adjusted EBITDA plus the change in deferred revenue less certain cost was $23.6 million which was up $6.3 million or 36% compared to some of those same factors in the fourth quarter of fiscal 2015.
We made significant new investments in the first quarter.
These investments included hiring new client partners, new education coaches, All Access Pass and education practice marketing, investments in the translation and localization of all of our core content included in the All Access Pass into 15 major languages in addition to English and the development of the new All Access Pass portal.
As a result of this, SG&A in the first quarter increased $900,000.
That is excluding the $1.6 million increase in SG&A associated with going direct in China whose operations covered this investment and contributed adjusted EBITDA.
These investments are expected to be significantly more to cover their costs by increased revenue and gross margin over the next few quarters.
So we made some investments we expect to cover those cost.
With higher SG&A to sales percentage in the first two quarters any shift in the high-margin revenue plus or minus results in a high leverage impact on recognized adjusted EBITDA.
This is expected to change substantially in 2015 where we expect the recognition, 2018, sorry, we expect the recognition of the significantly increased amounts of deferred revenue to increase reported revenue in the first two quarters, significantly increasing year-over-year reported first and second quarter results and reducing the concentration of adjusted EBITDA in the third and fourth orders.
I hope that makes sense that the impact next year, this transition to a subscription type revenue will have a smoothing impact on our revenue and adjusted EBITDA in coming years but not in this year.
Two primary revenue shifts impacted our results in this year's first-quarter.
First, we had a $1.7 million reduction in revenues in the sales performance practice.
In the first quarter of last year we benefited from a big first-quarter in our sales performance practice where revenues for the practice increased $2.2 million which is 52% compared to the first quarter of fiscal 2015 reflecting the contracting of several large sales performance intellectual property contracts.
In this year's first-quarter the combination of a shift in the contracting period for one major contract until July which also impacted revenue in our UK office during the first quarter since it shared revenue for this contract.
And the pending merger of two of our major sales performance clients who we expect to continue to utilize our content and services post merger but who will not contract until the merger is completed and there is no revenue presumed for this in this year resulted in $1.7 million of high-margin intellectual property revenue received in last year's fourth quarter not to repeat in the first quarter this year.
Second, about $1.4 million of All Access Pass sales as Bob talked about that we expected to be contracted during this quarter, shifted into the week following Thanksgiving because the signatures could not be obtained during the Thanksgiving week.
So fundamentally we achieved what we were supposed to the quarter as far as preparing us for quarters Q2, Q3 and Q4 and we were able to maintain our guidance even with these shifts and decreases.
Before we do guidance kind of summarizing all of this and look at like five key points that are takeaways from Q1.
The first one is of course that All Access Pass sales are expected to increase each quarter this year and we expect high renewal rates.
That is number one.
Second, we believe that the operations which did well or okay financially in Q1 will do well in the rest of the year including China which had a great launch in the first quarter.
Our education practice, Japan, government, global 50 and others, we expect those that did well to continue to do well.
Additionally, after diligent review which you can imagine, we believe that the operations that did not go so well financially in Q1 will improve in Q2 and do well in Q3 and Q4.
This includes the region offices UK sales performance and some others.
So we look at this and we see what happened in Q1, we think it is going to do better in Q2 and they are actually going to do well in Q3 and Q4 and that is what our guidance is based upon.
The third point that we have made over again but it is still a major point is obviously the impact of deferred sales on reported earnings and sales is significant in this year.
In our three region offices along adjusted EBITDA was impacted $1.5 million by deferred revenue and there is also an impact in gross margin as you defer the deferred sale at extremely high-margin, you are impacting the gross margin percentage in this year.
The fourth key point again which we talked about but worth repeating is the cash generated is not impacted by deferred sales.
The cash is the same.
We bill, we collect, we have a valid receivable so cash is unimpacted even though the calculation of days sales outstanding looking at reported numbers and our reported margins are impacted.
Our fundamental underlying receivables and cash are not affected by deferring these sales.
The fifth thing is we realize that our projections for adjusted EBITDA are very back end loaded in the fourth quarter but that is the way we see it.
As we lay out each month and each quarter that is what we see.
So I think those are five key points or takeaways from this quarter.
So, guidance.
All of our guidance is excluding the impact of foreign exchange, good or bad.
So during our November conference call we issued financial guidance for fiscal 2017.
The guidance was that for this year the sum of reported adjusted EBITDA plus the change in deferred revenue less certain cost which are incidentally 15% will range between $35 million and $38 million.
We want to take this opportunity to affirm this guidance.
In addition, because we are transitioning our business model to one where a significant portion of revenue to be recognized a subscription revenue, we've recently provided expanded and more detailed guidance as you can see in slide eight contains that guidance which is by quarter for both as reported and for the combination of as reported plus the change in deferred revenue less 15% of cost and that is as we released it in the news bulletin on December 22.
So this guidance that you can read on slide eight and nine can be summarized as follows.
Once again for the third time that adjusted EBITDA plus the change in deferred revenue less these cost will range between $35 million and $38 million.
Second, that adjusted EBITDA as reported will range between $10 million and $14 million.
Third, that a significant portion of adjusted EBITDA will be generated in the third and fourth quarters, consistent with what we normally see.
Fourth, that net cash generated will range between $21 million and $24 million.
So we look forward to the coming year and happy to answer any questions at any time if you would like to call for a more detailed discussion of the numbers.
Bob Whitman - Chairman, CEO
Thanks, Steve.
I think at this point let's open it up for questions and look forward to getting your questions.
Operator
(Operator Instructions) Marco Rodriguez, Stonegate Capital
Marco Rodriguez - Analyst
Good afternoon, guys.
I have a few questions, I just want to get some clarification on some things.
Specifically, taking a look at page 6 of your slide presentation on All Access Pass for Q1 2017 you have total invoiced Pass amounts of $4.9 million and then you have a revenue recognized at $3.7 million.
So is that saying that $1.2 million of the $4.9 million was deferred or how should I be looking at that?
Steve Young - CFO
No, the $3.7 million or $3.8 million recognized is the net amount of the deferral of the sales in that current quarter and then just a small amount of that being recognized, offset by the revenue that is recognized from prior year sales.
So every quarter we will have some revenue that is recognize that was deferred in prior quarters and then we will defer a significant amount of revenue of that current quarter, especially as we are talking All Access Pass sales.
So again, Marco, it is a net number of the deferral this quarter, the small amount that is recognized and the amount that we recognized from the prior year.
Marco Rodriguez - Analyst
So the $2.5 million or the $2.6 million that you have below that change in deferred All Access Pass revenue balance, where is that coming from and how is that being generated then?
Steve Young - CFO
That is the change in the balance, change in the balance sheet.
Marco Rodriguez - Analyst
Maybe I am looking at the numbers wrong but the balance sheet deferred revenue balance went down sequentially.
Steve Young - CFO
Well, the $2.5 million is the change in the balance sheet in this year.
If you take the $2.7 million or the $7.254 million balance deferred at the end of the year and then the change in the deferral is the $2.5 million that gets to the current deferred balance on the balance sheet related to these sales of $9.8 million.
So every quarter we will be talking about the change in deferred sales and also what the total deferred amount is because that is the number that is impacting sales so much.
Marco Rodriguez - Analyst
Okay.
Let me shift gears here then.
I'm not sure I caught this or not but the increased sales that you had in the quarter brought up SG&A fairly significantly on a year-over-year comparison basis.
Can you walk me through what were the extra cost if you will, that you saw in the quarter that are likely not to repeat?
Steve Young - CFO
Yes.
The biggest single cost is the increase in SG&A is China.
So China going from a licensee operation in which we don't have any of the operations in our financials, we were just recording the royalty from that operation to an owned office or a direct office.
So all of these SG&A of $1.6 million is an increase compared to last year, so that is the biggest single item.
Then additionally we mentioned things like in education we add coaches, we added salespeople through the year that is an add.
We had implementation specialist.
Growth related adds are annualized in this quarter.
Marco Rodriguez - Analyst
Got you.
Steve Young - CFO
That is the increase again with the largest one being China which is totally offset by the sales in China so that our adjusted EBITDA actually goes up related to China even though there is such a significant increase in SG&A, that is more than offset by the increase in gross margin related to the increased sales.
Marco Rodriguez - Analyst
Got you.
And the investments made in All Access Pass in the quarter, were they fairly significant or not?
Steve Young - CFO
Well, a good portion of the localization example, a good portion of that will be capitalized.
But we did a lot of work on the portal and in IT and in innovations preparing, getting ready for the All Access Pass and positioning the content properly on the portal.
So yes, there was a lot of work in many different areas of the company related to getting the All Access Pass portal and product functioning.
Bob Whitman - Chairman, CEO
Marco, I think you are aware of this but we are getting ready obviously two things.
One, we want to make sure that the offering and the portal, etc.
are very compelling for all of the renewables that are coming up.
Second, at the end of February we are going to now launch All Access Pass globally so that offices like China, Japan, all of our licensee network that currently do not sell All Access Pass they will have that available.
So they are also marketing for us and training costs and other things that went into it.
These aren't huge dollar volumes.
We said we increased aside from China, another $900,000 of cost that are expensed in the quarter plus some significant investments in capitalized cost for curriculum and portal and other things.
Marco Rodriguez - Analyst
Got you.
Last quick question, I will jump back into queue.
I was wondering if maybe you could expand a little bit more on the sales cycle elongation here.
Just want to get a little bit better of a sense as far as your comments saying that the All Acess Pass requires a higher level of companies sponsorship, is that just higher up the executive chain or are there additional company heads at different segments of the business, any additional color there to kind of help me understand a little bit better the sales cycle would be helpful.
Bob Whitman - Chairman, CEO
Yes, let me ask Paul Walker just to address it first of all and then I will give some commentary
Paul Walker - General Manager, Central Region
Hi, everybody.
A couple of comments on that.
The sales cycle is longer and I think you just alluded to one part of it, typically we end up going up at least one level in the organization for the decision.
That is driven by two different things.
One, there is now an IP contract that needs to be signed and the person who oftentimes has the authority to sign such a contract is a level up in the organization.
So where we might have worked with a head of training and development in the past we might now need to interface with the head of human resources or a division leader.
So there is a little bit of just time related to getting on their calendar and then pushing through a final decision on their end elongates it a bit.
Also and this is probably good news I think for us is that the nature of the relationship now and what we are going to be doing with them and the job they are trying to get done have expanded.
So we are in there not just talking about a single training initiative but we are talking about additional ways that we can affect the organization through the Pass.
So there are more people I think that want to get involved not necessarily the decision but in the decision about how they're going to use it and so that adds a few weeks as well as you try to have a final meeting to really want to make sure we have it scoped right and the Pass is as large as we can get.
Bob Whitman - Chairman, CEO
Is that responsive, Marco?
Marco Rodriguez - Analyst
No, that is perfect.
That is very helpful.
Bob Whitman - Chairman, CEO
For us we like this because on one hand you could get a quick answer at the end of a quarter from a facilitator who is just ordering more materials and you could give them an incentive to do that.
Now you are actually in a sales cycle that those discussions are being had day after day with decision-makers who are really trying to get stuff done and so it is a change in the whole thing.
Like I said ultimately we will have $175 million of the business that is really focused in this exact same sales process.
It is affecting us in those quarters where we didn't have the All Access Pass sales last year obviously because we just had facilitator in the first quarter other than the 300 in the second quarter, we had $3 million of All Access but that jumped to $6 million and then $12 million in the third and fourth.
So the effect of this was less in future quarters because you are comping against quarters in which you had some of this but it was just part of the transition over and we have made the decision not to try to do promotions and things like that with clients.
We want to have these deep conversations and so there is some timing bumps as you go through this for a couple of quarters but it doesn't affect our view.
The really interesting thing, Paul could also give some color commentary on this, the number of contracts, there is a very, very high percentage of those who are actually getting the advanced pipeline that ultimately close.
Where in the past you might have said if it didn't close by the end of the quarter because you had lots of incentives and other things then sometimes it just didn't close because if you can't marry me when I'm proposing to you in front of the stadium, you don't do it at all.
Here it tends to not be that way.
We actually at this point in fact every single large deal that we had at the end of the first quarter that we thought we would close as of yesterday -- now I mean most of them closed in the first two weeks after, a lot closed in the first couple of days after -- but now every single one of those is closed.
So these are serious people talking about serious business issues.
This is a compelling value proposition and it is just there is an adjustment because the salespeople were used to being able to pull the facilitator switch and get a few million dollars at the end of a quarter.
We are just saying if we get across this bridge which we are doing quarter by quarter, we don't want to go back.
Marco Rodriguez - Analyst
Got you.
Appreciate it.
I will jump back in queue.
Operator
Jeff Martin, ROTH Capital Partners
Jeff Martin - Analyst
I apologize for background noise.
I am in the car.
Did I hear you correctly that the addressable revenue pool for All Access Pass over time is roughly $175 million?
Bob Whitman - Chairman, CEO
Yes, I'm saying out of our business when you think, that is the combination of our US direct offices, our international direct offices, the licensee network, higher education and even a portion of the sales performance and customer loyalty practices which really interface with our All Access Pass Plus that really the same sales system will apply to about, of the existing revenue $175 million what that leaves that isn't affected is of course the education business other than in Higher Ed is a completely different thing but the Leader in Me, the licensee network for education isn't there.
Then we have some other revenue from our sale leaseback of office space here, books and audios and some data collection revenue and customer.
Otherwise the whole business ultimately will expand into this essentially everything except those will be All Access Pass driven and really more than two thirds of the pipeline in those offices that are selling All Access Pass are now opportunities that what they are discussing is All Access Pass so we expect this to accelerate.
Jeff Martin - Analyst
So would you say by this time next year you are three quarters or even higher transitioned to All Access Pass?
What kind of timeline should we expect for the bulk of that $175 million to be converted over?
Bob Whitman - Chairman, CEO
Yes, I think it is in two pockets.
In the US direct offices I think it will account for two thirds of the revenue, probably in the US direct offices will be either directly with Pass or Pass related in the sense that selling services or products that go with it.
I don't know that internationally we may never internationally get to the exactly same level as we are now just because their businesses have been different always.
But I think the idea that it will grow in those offices I think is true but it is just it will take a longer time to transition.
So I think if you take half of the business, half of that $175 million, a little more being the US direct offices, the government business is that same way.
It is transitioned.
The UK and Australia, there is roughly say $110 million of the business that should be in that 60% plus range.
Then I think as the new offices come on it will take a while and they may only average 30% or 35% just because they are very heavy services oriented offices historically more than content.
It may take us a while longer, we may never get to those levels but I think it will take a year or two to get them up to the 30% or 40% probably.
Jeff Martin - Analyst
That is helpful, thanks.
And then could you touch on Discovery Days, I think I heard you say about 50% converted with the All Access Pass holders, how has that been going versus your expectations?
Maybe some other antidotal information you could provide would be couple.
Bob Whitman - Chairman, CEO
Great.
Let me tell you the idea of it and then Paul, you can respond about how it is going for the US and in the direct offices generally.
The idea again is the sale itself is more consultative.
You are involving more people as Paul described.
What we want to do though is make sure that this for us is it is great to make the sale, we want people to use it and renew every year and if we do you win the game eventually.
The compounded effect of this win if you can get renewals and if you don't then you are kind of caught in no man's land.
For us we just want to make sure that people are really utilizing the product and liking it and getting huge value out of it.
So literally the day that somebody starts, before they sign the contract we have already scheduled an implementation specialist phone call with these people where they are discussing and almost always, more than 90% of the time, they come out of that initial call already with what we call an impact journey or series of impact journeys planned out.
They have this part of the organization they are trying to get this done and that is already scheduled up front.
The challenge though is we have made a sales to maybe one person, ultimately even though it is a level up.
what we want to do is going to that organization with the flexibility of All Access Pass, meet a bunch of other stakeholders, business owners and so this Discovery Day is we say look, we will be willing if you will be willing to invest as a client the time to get a bunch of your senior leaders together, we will be willing to invest a day of our time and bring one of our senior consultants in too and we will spend, it is not a whole day, mercifully.
It is three or four hours where you are in their discussing what people are trying to get done and all of the sudden you broaden the base of people who see how valuable the All Access Pass can be and how they can get value out of it as well.
So the idea was of the Discovery Day was a new idea kind of towards the end of the summer, we had process size that it began to be implemented in September, October.
It is accelerating now, it is expected to try to get it done within 30 days but since it is a relatively new process and we are continuing to sell new ones we are only at about half of the dates.
I don't know, Paul, if you want to add color commentary to that?
Paul Walker - General Manager, Central Region
I would just say to date we have completed 561, we have 40 additional scheduled.
So we will be here another few weeks about 600, a little over halfway there and as Bob mentioned there it is providing the foundation frankly for the $4 million you see there on slide six of additional services and products.
That is where those are really driven, another 14% in addition to the Passes that we have sold and another 14% of revenue is coming out of these Discovery Days.
Bob Whitman - Chairman, CEO
Jeff, in essence really what we are really trying to say is that aside from the education we are really saying honestly we have one thing we do, we sell intellectual authority passes, primarily All Access and we add-on services and populations, etc.
and that is really the whole business we expect will be.
Jeff Martin - Analyst
Great.
Thanks for taking my questions, guys.
Appreciate it.
Operator
Kevin Liu, B. Riley & Co.
Kevin Liu - Analyst
Good afternoon.
Just on the international licensee business I understand kind of the impact of China going direct but there was also a reference that the other licensees declined a bit.
Could you just address that and then talk a little bit about what is going on there?
Then more generally for both international and direct and licensee as you start to localize and translate your All Access Pass what sort of impact do you expect that to have on both sales cycles as well as actual recognized revenues over the course of this year?
Bob Whitman - Chairman, CEO
Let's provide those.
Maybe ask Sean Covey to respond to the licensee business.
Sean Covey - EVP, Global Solutions and Partnerships, Education Practice Leader
Yes, the licensee business, the chart you look at has got China in it so it is hard to compare.
Just looking at the gross business itself the first quarter was down a little bit, about 5% on a gross revenue basis, not the recorded licensee revenue that we show, but on a gross revenue basis, down about 5% which is unusual because almost every quarter has been up for many years and it is primarily a couple of things.
I'm not really worried about it because I feel I second quarter is coming in much better and the year looks good but it is primarily ? I think part of it was the China operation also impacted Hong Kong, Singapore and Taiwan which are three of our bigger partners.
I think the focus on launching the new, big office centrally in China, the direct office, really took the eye off the ball on those other properties.
We had like three other partners that just had a bad first-quarter.
So overall I feel good about the growth, continued growth of the partners.
We did have a down first quarter.
The All Access Pass, as Bob mentioned, we have 15 languages coming on.
All of the European languages, Spanish, Portuguese, all of the major Asian languages will all be ready at the end of this month.
We have a certification process.
Our goal is to sell a few hundred of these by the end of the fiscal year.
It is going to take some time to get going.
The partners are generally very excited about this.
It is kind of like it is about time, this is what our clients have been asking for.
Many of their best sales and biggest sales are to multinational corporations that want multiple languages so that is going to be very helpful.
So I believe that this will, we have had really strong growth for the past many years with the licensees.
I think the All Access Pass will secure it for many more years to come.
That continued double-digit growth that we have experienced for so long.
But I think it is going to take, I think this year we will have six months of selling it.
I think it will really start hitting more strongly next year.
So anyway I don't know if that is responsive to your question.
Kevin Liu - Analyst
Yes.
Just a quick follow-on to that.
Are there any licensee partners or perhaps international direct customers that you feel are just going to wait for All Access Pass or would sales cycles ongoing now just continue even though they know this is coming down the pipe?
Sean Covey - EVP, Global Solutions and Partnerships, Education Practice Leader
Well, will clients be waiting?
I think that most of our clients internationally don't know much about it at this point.
I think some of the large multinational US companies do but the international ones that are based in international countries do not.
I think for us because we recognize royalties, we won't have to do for revenue with licensee partners.
When they sell we will recognize it right up front even though they might be deferring revenue we wouldn't need to.
Bob Whitman - Chairman, CEO
I think also the sales cycle question in these offices will be less just because these offices, they have not been facilitator-based operations, they have always sold strategic, kind of on-site things.
So for them the sales cycle I suspect will not be very different and they will be using All Access Pass as the vehicle through which they deliver content for continued on-site assignments.
That is why I mentioned earlier, Jeff's comment, because services represented a much higher percentage of our international direct office business than has IP, the replacement of the IP with All Access has all of the advantages it has but we have a bigger services base as a percentage that should continue I expect would continue to go well and they will use All Access as the way in which they deliver the content.
That is one reason why All Access as a percentage of total revenues won't be as high because service as a percent will be higher, also expect that it won't have the same impact on the sales cycle since the on-site days already have a long sales cycle.
Paul, I don't know if you want to add to that or not?
Was that helpful, Kevin?
Kevin Liu - Analyst
Yes, definitely helpful.
Thank you for taking the questions.
Operator
Tim McHugh, William Blair
Trevor Romeo - Analyst
Hi, guys.
This is actually Trevor Romeo in for Tim today.
First one, it sounds like the metrics and the renewal rates that you guys quoted for All Access Pass have been pretty strong so far.
Just wanted to ask a little bit more qualitatively as you kind of expanded it, what has the reception from clients been like, what kind of feedback have you heard from them?
Bob Whitman - Chairman, CEO
In terms of on renewable specifically?
Trevor Romeo - Analyst
Just in terms of like, I guess how they are using the program and how they like it so far.
Bob Whitman - Chairman, CEO
Yes, great.
I think right now I mean I can tell you every Tuesday from nine until 1 o'clock there is only one topic which is making sure they are delighted, finding anybody who we think is at risk, setting up an on-site visit to go out and try to recover if there is any problem or whatever.
Thankfully right now the number of recovery calls is very small so I think the answer is that early on because we said from day one we want people to get value and be utilizing this very quickly that more than 90% of the people who have purchased have impact journeys that extend beyond the term of their Pass.
So they have already committed to doing things in their organization, they are not assuming they are not renewing, they know it is kind of automatic renewal but the point is they can stop it but they are not intending to.
They have committed to impact journeys were they are trying to get stuff done in their organization that is going to take a while.
So they are delighted they now have the Access.
I would say there seems to be very, very high levels of satisfaction with what it is, a lot of plans to expand.
Of the initial Passes actually 10 of the 15 that did renew expanded their not only renewed but they expanded their Pass size or upgraded.
So they either added population to it or they added content to it moving from All Access Pass to All Access Pass Plus or from a personal effectiveness pass to All Access.
I think the indications are that people are using it and they are liking it.
But for us what we are learning also in these Discovery Days is that there are a lot of opportunities that we might not that we don't even know about where they have a specific problem and what they need is some content around a specific thing for a specific group.
So we are adding to All Access Pass a whole group of webcast series on topics that have come up in these Discovery Days where they don't need a whole course, they just want to take managers through a specific thing.
I don't know, Scott Miller, if you want to mention anything more about that, the launch of that business.
But again it is just part of what we are finding is there a lot of usage, there are a lot more opportunities for usage and these Discovery Days identified 20 other ways in which some of you have an issue here or an issue there that we can add new content or we can get some groups going.
We are kind of on the early side of it.
I can say this, looking at the heat map of ones expected to renew the vast majority are from all of the conversations we are having are expecting to renew right now.
A very, very small minority are expecting not to and we have some yellows that we are not sure but it is still the vast majority are already expecting to do it.
Many are renewing early, we already for the second quarter have a number of them that have signed up even though their Pass doesn't expire until the end of the quarter because a lot of them were sold toward the end of the quarter.
A Number of those are signed up already, we just won't be invoicing them, they are not counted in our numbers here because we haven't invoiced them yet but does that give color to it?
It seems to be going well but it is a thing we think most about.
Trevor Romeo - Analyst
Okay, great.
No, that is helpful.
Just one more kind of switching gears a bit.
The education practice did grow in the quarter, it looks like the growth rate has been kind of decelerating the last several quarters.
Is there any particular reason for that?
If you could give any more color on how to think about growth for that practice in the future that would be great.
Sean Covey - EVP, Global Solutions and Partnerships, Education Practice Leader
Last year the practice grew at 20% which was solid and not as high as some of the earlier years which were more around 30%.
Smaller, it is harder obviously to grow at the same rate at the bigger numbers.
But we look at this year and we are expecting high-growth again.
Oftentimes it is hard to see exactly what is happening in the first three quarters because we work for the first three quarters to close deals in the fourth quarter and most of the growth comes then.
All of our leading indicators look really good, the contracted new schools that we have starting for the year.
So this first quarter we grew at 7%, we have typically been around 15% or 20%.
I still think we are going to close the year in the 15% to 20% range.
We have good leading indicators in place.
A good way to think about our businesses is new schools that we bring on this year our goal is to bring on 800 new schools, 600 in the US and 200 outside the US.
So that would be on top of 3000.
Currently we have 3000 schools, 2100 in the US, 900 outside.
Our goal is 800 new ones, 600 US, 200 outside and we installed The Leader in Me, it takes about three years to install it and then we also have a membership package which is a renewal subscription service.
Basically it works just like All Access Pass, it is kind of the All Access Pass equivalent for education and that is about $8000 a year per school and so our goal there is last year we had 94% renewal on that and so we just think about it in terms of bring on 800 new schools get 95% of them to renew their subscription to Leader in Me and it is a really good business model.
So yes, I think the growth is decelerating a little bit from where it was years ago and I think we see the potential as not changing much at all, that we can still continue to grow it double digits for a long time to come.
So any other follow-up questions on that?
Trevor Romeo - Analyst
No, that was helpful.
Thank you.
Thanks for taking my question, guys.
Operator
Alex Paris, Barrington Research
Chris Howe - Analyst
Good afternoon.
This is Chris Howe sitting in for Alex Paris.
Just had one last one for you guys.
You had mentioned earlier in the call about some clients are only using All Access Pass after having used All Access Pass in addition to other services.
Was this client specific driven by your sales force or was this the result of the expansion of your content?
Bob Whitman - Chairman, CEO
Yes, I didn't explain it well.
What I was really saying was that one of the reasons why on-site sales have declined some is where historically a person who chose to do on-site may have been somebody who wasn't that committed to doing too much and so they weren't sure what they were going to do, so they just hired us to deliver the content early on.
Now those people have been engaged at a higher level and they are saying gosh, we have a lot of strategic things that we can do.
They buy the Pass whereas in the past they might have just hired us to train for a day, they now have bought the Pass.
We are in there doing the Discovery Day and we will ultimately sell them, we are selling them on-site days but it is just that the sales cycle we may have frozen somebody in the headlights who would have said sure, just come in and train on one class for a day when they understand the value of All Access they are saying for not that much more for my population I could have all of your content and do a lot of things.
So it was just a statement that that is part of the reason why on-site days declined for three quarters and come back now year to date for the first four months even has been that that you have on-site clients who are now saying gosh, maybe I should be thinking of doing more but while they are thinking of doing more they first buy a Pass, then they go through a Discovery Day and it has just extended the time but now it is starting to generate new days.
Paul Walker - General Manager, Central Region
I can give you one example of that.
We had one of our early purchasers of the Pass last year in November purchased a Pass for 100 users and the client partner and our implementation specialist getting in there and working with them to determine how they were going to use it, they started using the 100 person Pass, things were going well.
In the first quarter of this year they upgraded the audience size when they renewed from 100 people to 3000 people and they booked 96 consulting days with us and that is an extreme example.
We have a number that are smaller examples than that though where you get in, you do the Discovery Day right, the client starts to get a feel for the volume of things they can be doing with us and with the Pass and then that naturally leads to some of those things they will do on their own and some of those things they will want to contract with us to do.
That is where we are starting to see our on-site days pick back up is because we are not kind of on the backside of many of those conversations.
Bob Whitman - Chairman, CEO
Was that helpful?
Chris Howe - Analyst
That was very helpful.
Thank you for the example.
Bob Whitman - Chairman, CEO
Thanks for raising that question because--.
Operator
That concludes our question-and-answer session.
I will now turn the call back over to Bob for final remarks.
Bob Whitman - Chairman, CEO
Thanks very much.
Thanks everyone for joining today.
Appreciate your great questions, look forward to answering more detailed questions from many or all of you as you if you would like and Steve and myself and the whole team are available as you would like.
Thanks very much.
We feel good about it.
We had a strong December.
The pipelines that were built during the first quarter as a consequence of these investments were really significant.
We have what we call the A pipeline in salesforce.com for All Access Pass and just generally is quite strong through December.
In these first days you saw in that one chart that the revenue, the percentage of revenue through year to date through January is 42%, All Access versus 38% for the first quarter.
That is saying that in one month even with the holidays you have been able to increase it enough to move it.
So we feel good about where we are, think this will be another bit of a transition quarter as we have given guidance on how we expect things are kicking in in the third and fourth quarter we will start to see the effectiveness.
Thanks very much.
Look forward to talking to you.
Thank you.
Operator
Thank you ladies and gentlemen.
This concludes today's conference.
Thank you for participating and you may now disconnect.