Franklin Covey Co (FC) 2017 Q3 法說會逐字稿

Welcome to the Q3 2017 Franklin Covey Earnings Conference Call.

My name is Adrienne, and I'll be your operator for today's call.

(Operator Instructions) Please note, this conference is being recorded.

I'll now turn the call over to Derek Hatch, Corporate Controller.

Derek Hatch, you may begin.

Thanks, Adrienne.

Good afternoon, ladies and gentlemen.

On behalf of Franklin Covey, I would like to welcome you to our third quarter fiscal 2017 earnings call and discussion this afternoon.

Before we begin, 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 risks and uncertainties, including but not long limited to, the ability of the company to stabilize and grow revenues, the acceptance of and renewal rates of the All Access Pass; the ability of the company to hire productive sales professionals and 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 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, I would like to turn the time over to Mr. Bob Whitman, our Chairman and Chief Executive Officer.

Bob?

Thanks, Derek, and hello to everyone.

We appreciate you joining us today.

We're happy to have the chance to talk with you.

For the third quarter, we're pleased that the sum of revenue plus the change in deferred revenue for the third quarter was $2.3 million higher than last year's third quarter, and that for adjusted EBITDA, the same is true that the sum of adjusted EBIT, plus our change in deferred revenue that we always talked about, was $1 million higher, so we thought it was a good, solid quarter.

We were particularly pleased by All Access Pass' continued momentum, by the momentum of the education division and the momentum in the rest of the business going into the fourth quarter.

We believe we are well positioned to accelerate growth in the fourth quarter.

We expect very strong fourth quarter and to also position for some transitions in fiscal 2018.

Inflection points we'll talk about in the future years.

Today, I'd like to briefly address 5 questions, which we've been asked in recent investor conferences and visits.

I'll actually address the first 3, and Paul and Sean Covey will address the fourth, and Steve, the fifth.

But the first is how our sales of All Access Pass going.

I'll give you an update on that.

Second, how is the lifetime value of our customer is playing out, the factors which drive that.

Third, how is the transition to the All Access Pass subscription business model progressing.

Fourth, how are we organizing.

People have asked, what -- tell me how you're going to organize and really take advantage of the big opportunities in both -- with All Access Pass and with Education.

And then, again, some update on how we've been utilizing our excess cash to hopefully increase -- further increase value.

So first, I'll address on how the All Access Pass is going.

We introduced the -- as you can see on Slide 4, we introduced All Access Pass in the first quarter of 2016.

As you can see, in that quarter, we invite -- invoiced just 375,000 of All Access Pass.

But from that start, All Access Pass and Pass-related sales accelerated rapidly, in fact, just passed themselves to $21.5 million by the end of last year.

As you also see on that slide, in addition to the $21.5 million invoiced for the sale of passes themselves, those pass sellers were also purchased $1.7 million of add-on training services and materials during fiscal '16.

So together, the amounts invoiced for All Access Pass and pass-related sales reached $23.2 million from fiscal '16, an amount equal to 24% of the total amounts invoiced for the full year for all of the offerings those offices that are selling All Access Pass were also selling.

As you can see on Slide 5, that momentum has continued to accelerate in fiscal 2017.

As you can see in Slide 5, we have a fair amount of data there, but you see the first band is fiscal '17, the second band is '16, and the third is the change.

As you can see there, in the first quarter of fiscal '17, All Access Pass and pass-related amounts invoiced were $7 million, which was a $6.7 million increase compared to the 3. -- 0.375 million or 375,000 invoiced in the first quarter of fiscal '16.

In the second quarter, as you know, All Access Pass and pass-related amounts invoiced increased to $11.25 million, which is an $8.2 million increase compared to the $3.1 million last year's second quarter.

Then the third quarter, where we're up against a larger quarter last year, still increased significantly with Pass and Pass-related amounts increasing to $13 million, which was a $7 million increase compared to the $6 million amount we invoiced in last year's third quarter.

As you can also see there, year-to-date through the third quarter, we've invoiced $31.3 million of All Access Pass and Pass-related amounts.

This is a $21.9 million increase compared to the $9.5 million of All Access Pass and Pass-related amounts we have done through the first 3 quarters of last year.

So it's a good increase, a strong increase, around $22 million.

As you can also see on Slide 5, the momentum continues to build.

Year-to-date through the third quarter, All Access Pass and the Pass-related amounts accounted for 53% of the total amounts invoiced for those offices that are selling All Access Pass, which includes all of our U.S. direct offices, including government, U.K., Australia and those -- all those units accounted for 53% of that.

Last year, at this time, it accounted for only 14% of those same offices revenue, so there's been a fundamental transformation in the whole go-to-market approach and in the share of mind and wallet just coming from that.

In this year's third quarter itself, it was even more significant for All Access Pass, it accounted for 60% of the total amounts invoiced for those same offices in the third quarter compared to only 28% last year's third quarter.

So then, finally, as you can see, from inception 18 months ago, a little more than 18 months ago, we've now reached $54.6 million of cumulative amounts invoiced since that time.

So we feel really good about the momentum of All Access Pass.

Feel like we're just getting our legs in terms of being able to sell it really, because it was a brand-new thing to all the salespeople just a year ago, and now, it's a whole new process still for many.

And -- but everybody is selling it now and it makes up the majority of our pipeline, more than the -- the vast majority of our pipeline is related because of the value proposition.

I'll go to the second question.

In terms of how the factors, which should drive -- which we believe should drive increased lifetime value of our customers are tracking.

Really, there's a lot of change directionally, which is good, from last quarter, which is all those same factors are still moving forward.

As you know, there are 3 factors, which we are increasingly confident are driving significantly increased lifetime value of our customers.

These are: one, a higher initial sale size; two, a higher revenue renewal rate; and three, meaningful amounts of add-on purchases of services and training materials.

First, in terms of All Access Pass increasing our average sale size, approximately 40% of the more than 1,500 All Access Passes purchased to date have been purchased by customers who previously were active Franklin Covey facilitator customers.

Another 10% or so came from previous on-site purchasers, and most of the balance have been new customers that were not previously customers.

For the vast majority of these customers, their initial Pass spend alone for the All Access Pass was substantially greater than their average total annual spend as a previous Franklin Covey facilitator customer or on-site customer, even before considering the additional add-on purchase of services or Pass expansions.

Now as these customers renew their passes, the majority have expanded the size of their All Access Pass.

Initial purchase size by new customers, as I mentioned, is also substantially larger than for similar new customers before the introduction of All Access Pass.

So in our minds, there's no question that All Access Pass is substantially increasing the average purchase amount for the vast majority of all of our customers.

Second, as to having a high revenue renewal rate, our target has been to achieve an annual revenue renewal rate of 85% or greater.

We're very encouraged that through the third quarter, more than 90% of the amount of All Access Pass revenue that should have renewed through the third quarter has renewed.

And we expect that additional passes that were renewable in the third quarter will still renew but in the fourth quarter.

We also expect that more than 90% of the significantly increased amounts of All Access Pass revenue up for renewal in the fourth quarter will also renew.

We have teams, of course, working on this.

And we're able to continue to achieve this high revenue renewal rate.

The combination of a higher initial sales size and a high annual revenue renewal rate will continue to prove up the idea of the increased lifetime value for the vast majority of All Access Pass holders.

Finally, final component is to adding on sales and services.

As previously noted, and as you can see on Slide 5 again, inception to date, All Access Pass sellers have purchased $11.1 million of add-on sales and services and training materials to add onto their Pass.

So many of them have increased the size of their Pass.

And then, on top of that, they've also added services and training materials.

This amount now equals 25.6% of the total 43.45% of passes themselves sold since inception compared to only approximately 8% of Pass revenue a year ago.

So the sales process of going in, making a sale of a Pass, going in and having a discovery day where we identify additional populations, different challenges and additional challenges people are trying to accomplish, some of which they can do on their own, and others, which they choose us to help them with, is adding significant amounts of services as well.

At Gartner Group, add-on services equaled approximately 50% of intellectual property sales.

And we believe this is a stretch objective, which will help our clients to achieve their objectives, and one which we normally aspire to achieve.

It takes us a few years, it did them too, but it's moving rapidly that way.

So as to the idea of the things that are driving lifetime value to the customer, each of those components continues to feel very -- both feel and have the data to prove how strong, both high initial sale size and expansion, the high renewal rate and add-on sales.

Then go to the third question is to how All Access Pass' business model is progressing.

We believe here that we were at positive inflection point on each of 3 key business model dimensions.

First, we expect to see a very significant increase in reported revenue, adjusted EBITDA and profit in fiscal 2018, as the large amounts of high profit margin deferred revenue, which is expected to be on the balance sheet at the end of this year fourth quarter, flips over and becomes recognized as revenue rather than just building up as deferred revenue.

Second, we expect that this combination of a very high revenue renewal rate on increasing amounts of in-place All Access Passes and increasing amount of add-on sales and service and materials we just discussed will result in more than 85% of prior year revenue being in place each quarter before making any new All Access Pass sales.

So the 85% of the revenue from the prior year will be in place before having to make new sales.

This will establish an elevated revenue platform from which to achieve accelerated growth.

And then, third element of the business model, we expect the combination of increasing gross margin percentages associated with the Pass, lower marketing costs associated with renewal of the Pass than their traditional new sales and the new streamlined field cost structure will result in an increase in the amount and percentage of any increases in revenue, which will flow through the increases in adjusted EBITDA, cash flow and profits.

So we think our flow-through will increase a lot.

I'd like to just briefly address each of these 3 points just to give you a little more background.

First, we expect to see a very significant increase in reported revenue, adjusted EBITDA and profit in fiscal '18.

As we mentioned, there's large amounts of high profit margin deferred revenue expected to be on the balance sheet at the end of this year's fourth quarter become recognized as revenue.

This year, fiscal '17 is the year in which we're transitioning, as you know, from recognizing most of our revenue immediately in prior years when it's invoiced, to recognizing much of the revenue over 12 or more months.

As a result of that, reported revenue for the full year of fiscal '17 will be significantly lower than in fiscal 2016, while the net increase in our deferred revenue could increase by as much as $25 million, because a lot of our expenses are relatively fixed, and the period cost associated with generating this deferred revenue is expensed by the time we get it, the impact on our reported profit and adjusted EBITDA in fiscal 2017 is even greater.

The inflection point though is in fiscal 2018 will hit a point where just approximately $25 million of very profitable increase in deferred revenue will be recognized as revenue and without the associated period costs that we've already charged this year.

So we expect to achieve very strong reported revenue growth in fiscal 2018 and even more significant growth in our reported adjusted EBITDA and profit.

On the second idea that we're going to be able to build a higher and higher foundation of in place revenue, let me just give some context.

Historically, a significant portion of our revenue has come from our sales force identifying a specific client need, recommending a specific content solution area to address that need, and then, either having our consultants deliver the training, which we call on-site delivery, or having the client purchase training materials and certify their own facilitator or teachers in order to implement the training themselves, which we call facilitator delivery.

All Access Pass' strong value proposition has provided -- has really provided such compelling alternatives to our traditional approach, but of course, it's eating into it, as you can see on Slide 6, the fundamental value proposition points with All Access Pass are that our client can receive unlimited access to Franklin Covey's entire collection of best-in-class content.

They can assemble, integrate and deliver that content through any of almost limitless combination of delivery modalities, live, live online, online, webcast, podcast, integration of a piece of content into existing customer training offerings, et cetera.

With the Pass, they get an implementation specialist to help them identify the impact journey, so that they don't have to do all the work themselves.

They can arrange and understand what the job is that the client is trying to get done.

And that comes with the Pass, plus there's an array of affordable add-on services to ensure customers execute on their key jobs to be done.

And all of this at a cost per population trained, which is less than or equal to that, that's provided by a single content or single modality provider, including us.

And soon, it will be able to be accessed globally in 16 major languages throughout the world in our state-of-the-art secure, easy-to-use portal.

So the strength of this value proposition has made it very compelling for both existing and new clients to purchase their content through the All Access Pass, rather than through our traditional approach.

And then, they add on services later as they implement solutions.

So this has resulted in a decline in traditional sales in facilitator and on-site sales that has been offsetting some of the -- or most of the significant growth in All Access Pass over this initial year or so period.

We've now reached an inflection point, however, we expect that the combination of 2 factors will result in All Access Pass significantly overshadowing any ongoing disruption of traditional sale and being strongly accretive to growth.

These factors are as follows: first, and expect to continue higher All Access Pass revenue rate -- renewal rate will mean that, substantially, all of the increasingly large amounts of cumulative All Access Pass revenue is expected to be retained.

And despite the significant increase in the dollar amount of All Access Pass that's set to renew in the third quarter, we were pleased that, again, in the third quarter, our net revenue renewal rate was more than 90%.

Second, as previously shown in the Slide 5, add-on sales and services materials have been increasing in both in absolute basis and as a percentage of total All Access Pass sales.

As you can see on Slide 5, from inception of the All Access Pass through this year's third quarter, All Access Pass services materials totaled $11.1 million.

An amount equal to now 25.6% of cumulative All Access Pass sales today to 43.4.

Year-to-date through the third quarter, sales of All Access Pass-related services totaled $9.4 million, which is now equal to 42% of All Access Pass sales for the same period.

So this expected continued strong sales of add-on services to high revenue being retained is expected to more than offset declines in the traditional on-site delivery and facilitator sales in the coming quarters.

And so the compounded impact to achieving high revenue renewal rate on increasing large amounts of All Access Pass contracts, expanding many of those Passes, and then adding on increasingly large amounts of Pass-related sales and service materials is expected to have a powerful positive impact on the percentage of prior year sales expected to be in place each quarter, even prior to make any -- making any new All Access Pass sales, which will establish an elevated platform from which to achieve growth -- even stronger growth.

As you can see on Slide 7, in this year's first quarter, just to illustrate this, after you deduct the amount of year-over-year revenue decline in our traditional facilitator and on-site delivery channels and adding the small amount of additional revenue from the more than 90% renewal of the very small amount of Pass revenue of 375,000 in that year, there was about 63% of the prior year's first quarter revenue that was in place, prior to selling new Passes.

This left a gap equal to approximately 37% of last year's first quarter revenue that needed to be covered from new All Access Pass revenue in the first quarter.

As you can see, in the second quarter, where there was significantly increased amount of Pass revenue to renew, again, more than 90% renewed, but as -- and as a result, because there was a higher amount that didn't decline very much, the base of prior year revenue retained even after the decline in the traditional delivery channels increased to 74% from prior year revenue.

Last quarter, when we reported, we said that we hope that by this -- in the third quarter, we'd get into the 82% range.

And we were pleased that, again, the base of revenue retained prior to new sales was that -- just a little better than that 83%, which was slightly above our expectation.

And in the fourth quarter, we expect, again, that will be 83% or greater, as the same effect is there.

And so the idea that the combination of high revenue renewal, plus add-on sales, is overcoming the declines in traditional sales as the time passes and new -- and more and more of these add-on services are being purchased is a big thing for us.

We're now at the point, for example, in on-site sales a year ago, when we really started selling All Access Pass, we had a more than $2 million decline in last year's third quarter in on-site revenue delivered by our consultants.

And we weren't yet at a point in the past process where we've gone in and identified jobs to be done and solutions they were trying to solve for a week that didn't help them deliver them.

This year, that's dropped by more than half.

And in fact, now, we actually are on the upswing in terms of the number of on-site days being delivered.

It's now, for the last 2 quarters, ahead of where it was prior to the implementation of All Access Pass.

Because Pass holders get a little bit of a discount on the price per day, our total revenue is still slightly below, but it's not a major drag today.

And within the next 2 quarters, we expect to tip that over, so there'll be no decline from that channel.

In the similar way, the facilitator impact is becoming less and less, both because the base of facilitators is much smaller and because the materials are ordinary.

So really, we believe that -- final thing -- so the 2 inflection points we talked about.

One is the accounting transition.

The second is the business model transition driven by in place revenue.

The third one, we just -- we briefly noted the -- and in addition to those other 2, we believe that the combination of increasing gross margin percentages associated with All Access Pass sales, which again, sometimes, on the face of the income statement, you may not see because there's a huge amount of deferred revenue to date that has essentially 100% gross margin but is not being factored in yet, plus lower marketing costs associated with renewals, there's a tremendous effort, but it isn't a marketing effort, it's a person-to-person effort.

And a new streamlined field cost structure, which we'll discuss in a moment, we believe that will result in increasing the amount and percentage of any increases in revenue, which will flow through the increases in adjusted EBITDA, cash flow and profit.

So as the fourth question, how are we organizing to take advantage for the peers to be (inaudible) growth opportunity for All Access Pass and Education.

A number of people have asked us to address that.

In Slide 8, this is just an idea of how big the opportunity for, we think, All Access Pass is, just in terms of number of companies.

On this slide, you can see there are 90 -- just for example, in the United States alone, there are 94,000 companies or company units with at least 200 employees.

And of that number, you see going to the left, it branches about, 11,000 of those accounts are assigned to the U.S. and Canadian sales forces, which is roughly 85 accounts per salesperson or so.

Of those 11,000, 4,000 are active accounts with us, and 7,000 are assigned to somebody who's going out to sell to them and prospect, but they're not yet accounts -- they're not yet clients.

And so our opportunity with All Access Pass, as we've talked about, is to grow the 4,000 active clients, increasing the lifetime value of the customer through increased sales size, renewal, add-on sales and increased Pass size.

To penetrate in a better way, the 7,000 assigned but not yet -- people who are not yet customers, as I mentioned, little over -- approximately 50% of All Access Pass sales to date have come from that group, so some of the 4,000 active used to be in a bigger group of assigned but not yet customers, people who might not have wanted to do business with us under the old business model, which are now open to it.

And then, we've got, of course, we got a -- so we've to grow the active ones, convert the ones not -- that are assigned but not yet customers, and then, reach the 83,000 unassigned accounts, which are really greenfield for us.

We have a similar opportunity on the next page in the Education business, the same way on the same chart.

In the U.S., there are 144,000 in U.S. and Canada; 144,000 K-12 schools in the U.S. and Canada, 45,000 were signed out in these big pods, 2,500 schools are active in existing middle schools or other active schools.

The idea is continue to grow those, again, with more than 90% renewal rate.

But there are 42,000 that are assigned that are not yet active schools and another 99,000 unassigned schools.

And so for us, we've been, of course, organizing around this for years, but if you look on Slide 10, we're really say that we ought to -- we've now streamlined our organization with everything that goes on in the organization being involved with 1 or 2 go-to-market approaches.

One, which I referred to here, is All Access Pass Co and it fits relative size relative to Education Co, and the other is Ed Co.

And so the idea is to streamline everything we do, so there's a similar, a common go-to-market approach, similar post-sale approach, renewing, updating, upgrading, adding services, regardless of whether it's a direct office or a licensee office in All Access Pass Co.

And similarly, in Education, to build a similar structure there where they have their own version of -- they have their own pod structure to go after, on a direct basis schools, or on a licensed basis schools.

And so we're trying to have just a couple of simple models, which is -- what's happened is with our compelling value proposition of All Access Pass, not only has it disrupted sort of our traditional facilitator and on-site business but it's also disrupted some of these practice areas where he had specific offerings, single offerings, like in sales performance or customer loyalty, where we're trying to sell, like in the old ways, sell a single solution to a single customer with a single delivery modality, and so because a lot of these content, we made the decision to put all the content basically into the All Access Pass, it's obviously disrupted the sales of those units as well.

And so as part of this realignment, this -- in the third quarter, we pulled all of those units into one -- a single structure, they're now nonindividual, outside sales force, so you're either part of the corporate sales force and -- or you're part of the Education sales force.

And we believe this is going to be a lot better.

Of course, there's a transition involved with that, which there was in the third quarter.

We had sales, for example, in our Sales Performance practice and Customer Loyalty, both by the value proposition of All Access Pass and the transition in the third quarter, but we made it across the bridge and we think, well, by the end of March or early April, got back on track, so the running pace was good through the balance of the third quarter and feel very good about this.

So I'm just going to invite Paul Walker to talk about All Access Pass Co and reorganization and refinement, what benefits we expect to get from that.

And the same from Sean Covey.

I might just note that although this wasn't the purpose of the alignment, in the elimination of functions, which also added complexity and extra marketing, et cetera, the reduction in cost on an annualized basis from this effort have been about $5 million, which is a side benefit that wasn't exactly -- it wasn't the point of it, which we believe it'll help us to have the same go-to-market approach.

Paul, I'll turn it to you?

Thanks, Bob.

Hello, everybody.

Good afternoon.

As Bob mentioned, in March, we reorganized a significant portion of the organization to match and better drive our All Access Pass go-to-market strategy.

And if you look at Slide 11, this is just a simple diagram to explain what the structure looks like.

Within our field organization now, nearly all of our employees fall on a team, a market team.

And today, we have about 14 -- we have 14 of those around the world, in those countries that -- where we've historically had our direct offices, so this supplies to the U.S., Canada, the U.K., Japan, Australia and China.

Each of these teams are similar in size, both in terms of revenue and the number of employees or staff on each of these teams.

They're also similarly resourced, and that's important because these teams now become really the primary operating unit of the company.

And it's through these teams that we sell, we support, we deliver and ultimately renew our Pass holder relationship.

So you see there, terms you might be familiar with, our client partners, each team there in the center is led by a managing director.

We've got our insight sales teams, our client service coordinators, those implementation specialists that we've talked on -- talked about on prior calls that are so important in helping us maintain and renew these Pass holder relationships.

We've got our regional practice leaders that help us preserve our ability to have to go deep with client on specific topical areas in some of our solutions.

And so each team is similarly structured.

And as Bob mentioned, we've integrated into each of these teams what we historically are, sales and marketing delivery efforts from our Sales Performance practice, Customer Loyalty practice and our Global 50 sales force.

And while we're still very focused on those verticals and the specific solutions they've sold, we want the outcomes, just as Bob mentioned, to be the same from those teams and in those areas as they are with all the rest of our solutions, larger initial sale size, expansion and add-on with those clients and, of course, very high renewal rates.

So regardless of the solution that we're selling, we want to go-to-market the exact same way, both in terms of how we market and sell and attract clients to us, and then, how we service, expand and renew, and we do that around the world now in exactly the same way.

In the gray, surrounding that, the blue hexagon there, are some of our corporate resources, like client partner hiring and onboarding and our learning and development function and our Pass holder services organization.

They're there to serve centrally each of these 14 teams around the world.

If you go to Slide 12, each of these teams now falls into 1 of 3 geographic areas.

We've got a Pacific area, which is essentially everything west of the Mississippi in the United States and Canada, plus Australia; an Atlantic area, which is everything east of Mississippi effectively in the U.S. and Canada, plus our U.K. operation and our federal government team in the U.S. and our state and local government team; and then, we've got an Asia area, which is China and Japan.

We implemented these, as Bob just mentioned a minute ago, at the start of the third quarter.

And these things tend to be a little bit disruptive, and I'm sure it was for us, and probably cost us a little bit in the quarter, but we're very glad we did it.

We feel like it was exactly the right thing to do.

And there's never a perfect time to do it, but it sure feels good now that we did it then.

And just the team has done a great job of executing and reorganizing and we're off and running.

That's all I have to say there, Bob.

Thanks, Paul.

And Sean?

Would you like to speak to Education?

Yes hi, do you hear me, okay?

Yes.

Great.

Yes, so hi, everyone.

So similar to how Paul has organized the corporate side, we've done the same kind of thing with Education.

As Bob said, big opportunity in Education, 144,000 K-12 schools in U.S. and Canada alone, and about 3 million across the world.

So we have organized ourselves into market teams as well.

We did this many years ago and we just keep refining it.

But each market team of about usually 4 or 5, 6 members will take on about 1,500 schools in the area and work with those schools to try to get them onboard and then to keep them strong.

And we call these market teams pods.

We have 30 of them total.

And the pods consist of a client partner that leads the sales efforts, customer service person.

One or more coaches, some of these pods are pretty big, might have 200 schools, and they'll have 4 coaches.

Each coach serves about 40 to 50 schools and their job is to help these schools achieve outcome that the school desires.

And then, we've got a person in each pod that is focused just on getting the school to renew, keeping them happy and serving them so that we have a high renewal rate.

So at 30 pods, as Bob mentioned, that gives us about 45,000 schools that we're kind of looking after, even though we haven't penetrated.

We've only penetrated 2,500 of the 4,500.

But -- so on average, each pod is working with about 100 schools and has approached about another 100, so there's still a lot of room to grow here.

The pod structure looks really well because it's a team-based approach.

There's a lot of synergy among team members.

The coach talks with the salesperson who talks to the renewal person who talks to the customer service person.

They rally around the school and their needs.

And this has resulted in a really high renewal rate.

Last year, we had 94% of the schools that were part of The Leader In Me to their school transformation process renew.

And this year, we'll know by the end of year, but it's running at about 93%, so about the same as last year, which we're pleased with.

So on a global scale, that's how we're organized with our direct offices.

And again, much like the corporate side, on the global scale, we have both direct offices as well as license partners.

And right now, we have across the world, so we're direct in the U.S. and Canada and in Japan and Australia, and then, we're licensed everywhere else so far.

And right now, we have 45 partners, licensee partners.

They're covering 71 countries and about 1,000 Leader in Me schools.

And we think we'll sign a number of new partners just in the next few months.

So the opportunity for growth outside the U.S., we think, is probably even greater than it is in the U.S. and Canada.

We're having great success there and refining most in every country, we're able to get there.

So the number of new schools that we'll bring on this year, new Leader In Me schools, will be about 800.

And so that will bring us, by the end of the fiscal year, we should have about 3,800 Leader In Me schools.

We think we're working on ways to accelerate this growth, while keeping the quality as high as possible.

We're organized well to help each school individually grow as well as to try to scale across the globe.

So there you go, Bob.

Thanks, Sean, very much.

For us, this is an important thing.

Getting the structure right allows each of these pods to then take on all the responsibilities and go-to-market, servicing the customers afterwards, renewals, et cetera, so that you at least have a structure where you're not just building a big central team.

This really builds around the people who have to deliver on this.

Final question then, #5, how do we expect to utilize our excess cash and credit line capacity.

Steve, if you'll just address that, that'd be great.

Okay.

So my opportunity is to take on what we've done and expect to do with cash.

Then after that, I'll mention a few fun financial facts.

And then, talk about guidance.

So first of all, what we expect to do with cash.

As we discussed last quarter, while our transition to subscription accounting suppresses reported revenue, EBITDA and earnings, it does not suppress cash.

So our cash flow is expected to remain strong and predictable.

As you know, historically, after making the investments we need to, to grow the business, we have used a significant amount of our excess cash to repurchase shares.

Over the past 7 quarters, we've repurchased $45 million of shares.

And over the past 10 quarters, $59 million of shares.

So fairly significant amounts, we think, for a company our size.

And as we said, last quarter, it's easy for us to decide to continue to repurchase shares for several reasons: first, at approximately our current market cap, the after-tax cash yield is around 7%; a second reason, since we have grown in the past and we expect to grow in the future, the internal rate of return that we think we can get by repurchasing shares is good and exceeds our cost of capital; and third, we believe that very little value is still being attributed to our potentially largest growth engine, that being the direct offices.

So the value of the company, we think, is only -- is not a -- enough more than the value that we think of the Education practice and the licensee practice.

So we expect in the future to continue to use our excess cash to repurchase shares.

Now in the third quarter, however, we didn't repurchase shares.

And the reason for that is our knowledge of 3 pending acquisitions and transactions, which though small, are strategically important and could be considered material nonpublic information.

And therefore, we're not buying shares even though we have the cash and the willingness.

Now these 3 transactions are very interesting to us and fall in the category of the use of cash and strategic direction for the company.

First, the acquisition of Robert Gregory Partners was completed in May, and provides us with a platform for adding implementation coaching and executive coaching as add-on services to reinforce the implementation of content and training solutions included in the All Access Pass.

In the 6 weeks since the acquisition, we already have literally dozens of new opportunities under discussion, including some large accounts for adding coaching services.

Robert Gregory Partners has a great management team, and we look forward very much to working with them.

Second, the license of content based upon Clayton Christensen's book Competing Against Luck gives us a new course and content centered on the important concept of how deep customer understanding drives innovation, and how that is critically important to a high retention rate of customers.

The third acquisition, which we can't talk about, is also small but one which we believe will give us new capability to deliver learning, which is embedded in content.

That can be pushed to, or easily accessed by managers.

This acquisition, which we expect to sign a definitive agreement very soon and which we expect to then close within a couple of weeks, is of a small, fast-growing company that provides insightful articles, practical tools and online support for frontline managers.

This approach helps managers who may not want to take the time to go to live training, but who want to learn on-the-job as the need arises.

This kind of flexible micro-learning is becoming increasingly important, and we expect to be able to infuse elements of our large body of content into their process to further strengthen their already impressive offering.

So on Slide 13, which is a visual of the All Access Pass, the Robert Gregory Partners acquisition gives us significant increased coaching capability, while the Clayton Christensen-based content and the others soon-to-be-announced acquisition gives us a very valuable added content and functionality in the center of the -- in the heart of the All Access Pass.

So we're very excited about these acquisitions and the content that we have acquired and the people that we will have an opportunity to work with.

So as we've said in the past, we expect with our cash to drive the business, opportunistically do acquisitions and transactions and repurchase shares.

A few little fun facts, our new -- so this is new subject, financial fun facts and then guidance.

Our new China direct office is doing very well.

Sales were $2.6 million in the quarter compared to last year when royalty revenues were $600,000.

Another fun fact is that we're not being clobbered by FX this year, minimal impact year-to-date, and expected cumulative minimal impact for the year.

Next, our CP count at the end of the -- that's salespersons count at the end of the quarter was 211 CPs.

And the fourth is that we expect to beginning selling more multiyear agreements, and these sales will have a very positive impact on our company.

So now guidance.

We expect adjusted EBITDA for the year to be equal to or slightly below the previously released guidance range of $10 million to $14 million.

This is based upon the fact that we anticipate an exceptionally good financial result in the fourth quarter.

Our original guidance for the fourth quarter was that adjusted EBITDA will be approximately $14 million; and that deferred revenue on the balance sheet, less 15% for deferred costs, would increase by more than $13.5 million in the quarter.

That guidance represents what I believe would be a phenomenal fourth quarter result.

We do still expect the change in deferred revenue, less 15% for cost, to increase by $13.5 million or more, and we expect adjusted EBITDA to be close to the guidance of $14 million, contingent upon the mix of sales in Q4 between those sales that are deferred and those that are recorded upfront.

Said another way, we expect our Q4 result of adjusted EBITDA plus the net change in deferred revenue, less certain costs, to be within our previous guidance range of $27.5 million to $29.5 million, an increase of $3 million to $5 million over that same measure last year.

So we're very optimistic and excited about the fourth quarter.

Year-to-date through Q3, adjusted EBITDA is one within $300,000 of guidance.

The change in deferred revenue on the balance sheet less the 15% of cost, while significant year-to-date, is $3.7 million less than guidance.

While we expect this -- what I would say is an exceptional result in Q4, it is possible but unlikely we will make up that an entire year-to-date difference.

So again, we're very excited about Q4.

We're excited about FY '18 and future.

And so, Bob, thank you.

Thanks Steve.

I guess we should open up for questions.

Thanks.

(Operator Instructions) And the first question comes from Tim McHugh from William Blair.

First, maybe Steve, the last comment you made about deferred revenue growth, I guess, for the year essentially is a little less than you thought at the start of the year.

Is that because of the All Access sales have been less than you would have said at the start of the year?

Or is there a bigger drag from the traditional business, essentially more cannibalization than you would've assumed at the start of the year?

What's the difference?

Well, first of all, the amount of increase in deferred revenue that we talked at the beginning of the year was really quite significant.

As Bob talked about, it could be as much as $25 million at the end of the year.

So -- or for the year.

So the shortfall impacting deferred revenue is primarily the subscription-type sales, while still, as Bob talked about, significant increases over last year and growing very, very rapidly, are a bit less than we anticipated.

Yes.

And what the -- probably the key driver of that -- I mean, there may be a little disruption for a few weeks in the organization, but that wasn't it.

The main driver is, in last year's third and fourth quarters, we signed up new All Access Passes in order to -- some people would say, "Oh, gosh, I'm not sure I can use it right now." And so we gave many -- a lot of different people, we gave them a Pass that was not just a 12-month Pass, we gave them a 14-month Pass.

And so when we look at the anniversary, originally, when we the kind forecasted the number, there was kind of an assumption that people would just assumed that since they bought the Pass in the third and fourth quarter, they would renew then even though their Pass term went into the following quarter.

So if they bought in the third quarter, it might not be renewable until July.

And if they bought in the fourth quarter for some people, it's not renewable until September or October.

I think, at least in our guidance, my guidance, we assumed that -- just that we'd get 90% or more of the amount of what actually contracted in the quarter.

And that makes up substantially all of it, really.

It's just that it pushed some from the third quarter over, and the fourth quarter will push some into the first.

And so we’re making some efforts to giving people some offers to get it back in to the year, and that's where, as Steve said, if there are some efforts, it's possible we actually will go -- we'll recover it.

The other -- and so that's it for deferred revenue.

The only other real impact was the Sales Performance practice.

Again, with the inclusion of its content in the All Access Pass, we assumed incorrectly that they could just continue to sell the way they had to existing customers.

But we've really disrupted them in the third and fourth quarter, but that's more on the other side of the income statement.

So that's on the...

Yes, that's as reported.

That's as reported.

But that's -- the deferrals almost all just is [sliding].

We haven't been doing that same thing going forward, by the way.

I mean, nowadays we're not doing that.

We're selling 12-month passes, it's rare when we use something else.

Okay.

And you touched on the sales effectiveness program.

I guess, that Strategic Markets business.

Now that it's increasingly rolled into the All Access Pass, I guess what's the risk that, that revenue continues to erode on a standalone basis?

Yes.

We think -- here's what -- what we've done is we've rolled those sales people into these pods that you see.

So these -- each of these salespeople still has the accounts that they had before.

And now they have the entire resources.

Before they didn't have the marketing resources, because they were too small.

They didn't have the Pass holder services resources or the sales [mix].

So I think the early returns, and it is early because it's 2 months later, is that people are thrilled about this idea that now their part of a real team.

They have more accounts to handle.

Some of these are most -- some of the most capable salespeople in the company but they've had a limited number of accounts to manage.

And they now have a full territory.

They've got all the marketing support.

So I think the product line itself, we don't think will -- I mean, we've had some declines this year, in the year, because we've cannibalized it.

But we think it actually started from this, that the content -- we've had 7 or 8 people selling that content.

Now we have 300 potential, including our licensees, that can do it, all of our existing salespeople plus those.

So I think the category will grow.

It'll probably grow at an accelerated rate relative to other things.

Now, that individual salespeople will continue to do well.

They're some of our best.

And they'll get a lot of more support in doing it, but not have the cost of trying to build separate pods around it, so I think it streamlined some cost.

But we think, for both Customer Loyalty and Sales Performance, which have not grown really in the last couple of years, this is now going to unleash a lot of new sales there.

But just to understand, right, the roughly, call it, $20 million or so rollover of annual revenue in the Strategic Markets, that's going to shift towards in All Access Pass sale going forward.

I mean, you have to do the tradeoff.

Or do those salespeople have to sell All Access Passes now, and increasingly less likely they're selling those on a standalone basis?

Is that right way to think about this?

Yes, probably.

That's true.

They'll sell -- they won't sell on a standalone basis, but what'll happen, as is happening now, is it's -- somebody when they buy the Pass, they're buying it oftentimes for a specific purpose.

So they'll still be talking to sales forces who are saying, "Gosh, I've got all these development needs." And -- but rather than buying that content separately just for the Sales Performance, we'll say to them, "Hey, listen.

You can get all the content that you need for your Sales Performance solution plus you get everything else in the Pass to help out elsewhere in the company," and it just provides a more comprehensive solution.

But people can still buy -- I mean, many people are still buying a solution to a specific problem, we want them to do that, it's just they're delivering it through the All Access Pass.

I don't know, Paul, if you would add [to that].

No.

And Steve, do you have the free cash flow or operating cash flow in that one?

I don't know, I'll get Derek to get the exact number of -- from our Q that's going to come out, it's like $11.7 million year-to-date.

$11.7 million.

Is that operating cash or free cash?

That's the net cash provided by operations.

Yes.

So $11.7 million.

And do you have CapEx?

Yes.

CapEx for the quarter...

For 3 quarters.

For 3 quarters is $5 million.

Curriculum development, $4 million.

And then as we said in the press release, we did about $3.5 million for the Robert Gregory acquisition.

And our next question comes from Marco Rodriguez of -- I apologize.

No, go ahead.

Thank you.

I just interrupted you.

Our next question comes from Marco Rodriguez from Stonegate Capital.

I wanted to follow-up a little bit on the sales team organization now.

I'm still just trying to parse through the changes that you guys have implemented now and how you used to approach markets.

And if I'm not mistaken, in prior calls here when we've been transitioning -- you've been transitioning to All Access Pass, you've talked about there still being, I guess, clients or any customers are going to want individual type practice sales.

And so I'm trying to understand this whole move.

Are we getting away from doing any individual sales?

And how is that going to kind of work?

Marco, this is Paul.

I probably didn't explain that very clearly.

I apologize.

So we're actually very much not trying to move away from the individual solution-based sale.

We want to deliver those individual solutions via the All Access Pass.

But we still are very interested in doing large sales transformation engagements, large execution engagements, large Speed of Trust engagements.

The benefit to us and we think.

To our customers as we do that is, in the past, some of those practice areas got a little bit lumpy, where you'd sell into an organization with a really big initiative but there was nothing there on the back side of it, we had to go find to next client.

We think the benefit in still engaging with the client initially, let's say, for example, around the sales transformation solution is that they can get all of the content and tools they need from within the Pass.

And because they're Pass holder, we can then work with them to find additional journeys, additional areas or the organization.

Or we can have an impact, start to line those up, and now that client becomes much less lumpy with us.

And there are clients that would renew and stay with us year after year after year.

And so we're trying to get the best of both worlds, which is still to leverage our great expertise in 7 or 8 key areas, but to deliver those clients in a way that allows us to go broad once we're in that organization, to increase the lifetime value of that organization.

Okay.

And did you cut heads in the sales force to switch to this...

No.

No, really -- and really what we'd say is for the sales person, individual salesperson, other than that some of them report to a different managing director today, it didn't affect them.

With the exception of the sales people coming over from the Sales Performance practice who now have more accounts and can sell the full range of our solutions, it really didn't affect the individual salesperson or his or her job.

But what did is provide them with the support structure within their pod wherein -- if they happen to call for central resources to try to help them close a sale or to have a Pass holder services discussion or sales assistant or whatever it is.

Just provided the resources under our MDs.

So it's really just -- all of the change happened just at the supervisory level and support level.

The job of the client partners stayed the same as it was before.

The go-to-market approach is the same as it was before with the exception of Sales Performance practice that is now part of -- those 8 salespeople are now part of these geographic MD regions.

Got you.

Okay.

And I apologize if this is in the press release, I didn't get a chance to go through the entire thing.

But the restructuring charge you had for the sales force realignment.

So what is that for then if you didn't cut heads?

Yes, we didn't cut salespeople.

So it affected 3 things.

One, of our more than 130 or 140 salespeople in the U.S., only about 15 are working out of the offices that we had, because we have offices in Atlanta, in Chicago and in Orange County, California.

But the salespeople really were out in their territories working.

And really the only thing that was in the central offices were some administrative functions.

So we consolidated those functions and eliminated offices.

And that was one thing.

We had duplicate marketing functions in both at the -- in offices as well as centrally.

That's now been reorganized.

We -- Paul, you can address some of the other things.

But those are the -- 2 of the biggest ones.

There were some individuals in staff positions which we tried to put into different positions in the company.

But there were some staffing reductions of around 14 people or something that, in the end, because they couldn't move or whatever, there wasn't a job for them, and they were given severance.

We organize in these 3 geographic areas instead of multiple regions around the world.

And organizing that way and with around an odd structure, we're able to streamline and get some efficiencies.

So from an overall supervisory level, there was a little bit of a reduction there as well.

Got you.

Okay.

And where are the -- what are the client partners total now at the end of the quarter?

211.

Got you.

Okay.

And last quick question, the acquisitions that you've announced here.

I'm assuming they're not significant enough to change your guidance or they're not really doing much to guidance one way or the other.

Yes, that's right.

As you know, during the implementation of an acquisition, you have some additional cost for the first quarter or so.

And also, the financial impact from the acquisitions would be, if our sales, for example, increased because of that content not because of the acquired EBITDA.

And the next question comes from Kevin Liu from B. Riley & Co.

First question, just in terms of the All Access Pass sales, I think I heard mentioned is some potential multiyear arrangements coming down the pipe.

So just curious if you are planning on extending bigger discounts or what other value adds you have to convince clients to enter into multiyear arrangements?

Yes.

Basically, the answer's yes.

But I mean, right now, we have had introductory pricing going since the inception of All Access Pass, and that will lend right about 10% to the price of the Pass anyway.

So the first thing they get by renewing and doing a multiyear is they get to lock in for the period of time the introductory Pass.

And then on top of that, there's another 10% cost -- price break if they'll add the extra years.

So...

Understood.

And then just also with respect to All Access Pass, can you talk a little bit about what sort of impact, if any, it's had on your licensee sales to date?

And at which point you would expect more of the licensee activity also shift towards All Access Pass predominantly?

Yes.

Sean, do want to speak?

Yes, sure.

Yes, so we haven't done that much yet.

We have done a lot of preparation to get it up and going.

But we are working on the portal that's got 15 new languages.

And as soon as that is completed, we will launch it hard across the whole globe.

We sold about 25 Passes primarily in the Nordic region and in the Netherlands area, a little bit in Germany, mainly to English-speaking multinational companies.

We think that -- I think this is going to be an extraordinarily good thing for our partners.

I think they are generally more sophisticated in their sales ability.

And I think this is a more complex sell.

And I think it will match up well with how they sell.

They're excited.

We're prepared.

We're just waiting for the portals to have the language, so we can get going.

Kevin, maybe a part -- a big part of your question...

We've sold -- sorry, Bob.

No, go ahead, Sean.

I'll just say we've sold about $0.5 million of All Access Pass so far this year.

The thing I was going to say, Kevin, is that -- you probably know this, but there's a -- we don't have the same accounting issues with the international licensee sales of All Access Pass because they pay us on invoiced amounts.

And so for them, the business model -- our business model, which is already just is a license fee we get from them, will continue as is.

But we think the All Access Pass will allow them, like us, to have bigger initial sales, higher renewals and bigger add-on sales, all of which will benefit their businesses, and therefore, benefit ours because they'll pay us a royalty as it's invoiced.

But we don't have the same deferred revenue thing coming up for our licensee partners.

Great.

That's helpful.

And then just a last question here.

The $5 million in annualized cost savings from all the reorganization, does all of that start to come through here in the fourth quarter?

Or is there anything else that kind of needs to be done that'll preclude you from showing all those savings?

We will get about one quarter's worth of that.

We'll get about 860,000 or something of benefit in the fourth quarter from those and -- because all of the -- they've all been implemented at this point.

And so, yes.

And then we expect to pick up, on the same operations, that cost saving next year.

Obviously, we'll make other investments in new people.

So the net cost savings for the year won't be $4 million -- and it will $4 million that we're running this year over and there'll be $4 million versus what it would've been.

But of course, we'll still have new salespeople and things out of it.

But these cost savings are real, they've been implemented and they're flowing through already in the fourth quarter.

And our next question comes from Samir Patel from Askeladden Capital Management.

So I want to drill down on a couple of things.

So I guess the first one is it sounds like, I mean, just apples-to-apples.

Before even any growth in revenue, you're going to have $4 million increase in adjusted EBITDA next year just from the calendarization of the cost savings, right?

Effectively, yes.

I mean, that's the idea.

If we bring in the same revenue again this year as we had last year, you would give the cost that you're on control.

Okay, cool.

So following up, the other thing you mentioned but I don't think you really highlighted enough, you said that because of the way you've streamlined the sales organization, that your flow-through on incremental revenue to incremental adjusted EBITDA is actually going to exceed your historical range.

Can you dimensionalize that any?

Can you put a number on that?

Because I think, historically, you've guided to 25% to 30% incremental EBITDA margins.

What would you expect now?

Yes.

I mean, I would say that we -- the combination of those 3 out in the 30% to 35%.

I mean, that would increase by -- if we say 25% to 30%, let's say we were thinking 28%, this thing would have 300 to 400 basis points change over time as we continue to increase margins, reduce the costs and have lower marketing cost on the renewal revenue.

Got you.

Okay.

So then putting that all together, I mean, you talked, I think, qualitatively about how excited you are about 2018.

But if you could just put a number on it, right?

You're starting with $38 million, your -- currently you're $34 million plus $4 million in cost savings.

Obviously, you're getting a big boost from the deferred revenue.

So I mean, is it reasonable to think that it's going to be somewhere in the low 40s at a minimum for adjusted EBITDA next year?

And of course, I'm referring to invoiced amount not the stupid GAAP accounting.

Thanks for the rhetoric comment on the GAAP accounting.

We agree.

The SEC probably doesn't like you to actually (inaudible).

We're -- so, yes.

So we're not prepared, obviously, to talk about guidance for next year, but don't have any argument with your thought process.

And our next question comes from Patrick Retzer from Retzer Capital.

So I wanted to talk about your guidance for adjusted EBITDA plus the change in deferred that you had laid out last quarter and the previous quarter.

Last quarter, you beat your guidance for the second quarter of the fiscal year.

And it sounds like you're confident you will meet your guidance for Q4.

Having said that, you fell short a bit here in Q3.

And I wanted to clarify, it sounds like that's because, to a slight degree, from the disruption due to the reorganization.

And then, more largely, because last year, in Q3 and 4, you were granting 14-month passes for All Access Pass to get people on board.

So this year, some of those are getting pushed out the quarter.

I believe all of that is accurate.

That's accurate.

And the other one would be the Sales Performance practice.

As we mentioned maybe the disruption at ours, and also the change with $1 million of EBITDA less than we thought in the -- would've thought in the third quarter and will also be in the fourth quarter.

So we're saying, in the fourth quarter, we will meet our original guidance even though Sales Performance practice will be less.

And even though there are some of the revenues that will get renewed -- some of the Passes will get renewed in Q1, but were for Q4 sales.

But the question is, as Steve said, we think fourth quarter will shape up very strong.

Will it be strong enough?

We got some big deals out there that we're working to -- if we were to hit them, could actually make up some of that ground from the third quarter and we expect it would make up some of this ground from the third quarter.

But it would take really a couple of the bigger ones to actually make out for the third quarter.

And that's the reason why, on a reported basis, we expect to be on guidance.

Or if missed, then it'd be missing by hopefully a couple hundred thousand or something like that on the gross basis around the reported, plus deferred that number.

We're just trying to see how much of the third quarter we can make up in the fourth.

Okay.

And then Steve had talked about the 3 acquisitions.

The third one, he couldn't name, but it sounds like it's imminent.

Should we be expecting that to be done and announced in July or early August?

We would expect it to be early July.

Okay.

And that whenever...

Yes, we're very close to signing a definitive agreement.

In fact, we keep looking around the room to see if we've signed yet.

And then we expect that after we signed the definitive agreement to close within 2 weeks.

Okay.

And then at what point are you able to start buying stocks?

Well, this will be announced or announceable.

And so as soon as -- our quiet period lasts for 72 hours after we report our numbers.

So here in just a little while, we'll be free to buy stocks.

Yes.

We're announcing it today for that reason, frankly, so we can be back in the market in 72 hours.

And our next question comes from Samir Patel from Askeladden Capital Markets.

I just wanted to follow-up on 2 things.

The first was you talked about the introductory pricing in All Access Pass.

Can you just explain to me how that's going to flow through over the next few years in terms of when those clients come up for renewal, are they going to pay for 10% price increase?

Or is it just going to be kind of on people who signed after that offer expires?

Or just how does that work?

Yes.

This is Paul, I'll take that.

So what -- we're going to announce the introductory -- the phase out of the introductory pricing increase, so any new clients who signed after that period will pay the new pricing, which will be roughly 10% higher.

For those clients that got on early with us and have been some of our great active clients, we'll go to them this upcoming fiscal year and invite them to renew on time.

And if they do, they won't be subject to the price increase as a way of keeping them with us.

And we hope to sign them for multiple years at that point.

And those that don't renew on time for whatever reason would be subject to, then, the price increase.

And so that's how we'll balance taking care of those that came on early and then the rest of the market, which will start selling at 10% higher price.

Okay, great.

And then the follow-up to that is on your -- it sounds like, again, you've got 90%-plus net revenue renewal.

Is that counting upsells and price increases?

Or is that just literally the percentage of prior year revenue that's being retained?

It includes Pass expansions, so -- oftentimes.

So expanded populations it does include, but doesn't include any of the add-on services or price increase.

It's -- that's just the expansion -- it's either the renewal of the existing or the renewal plus expansion, which about 2/3 of those who have renewed, who renew, do so -- it might be a small additional population, but some additional population on 2/3 of it.

Sure.

And I don't know if this is just a metrics difference in the way that you present it or if it's an actual underlying difference in the business.

But you guys talked about copying the Gartner model a lot, right?

And Garner, I think, typically tends to achieve over 100% dollar retention, although they may measure that differently.

Do you think that's a -- is that the stretch goal for the out-years here?

Or do you think it's going to settle out somewhere in the low to mid-90s in terms of net revenue retention?

I mean, we think it'll probably settle out in the low 90s.

Actually for -- we've been saying it's above 90%, and it is about 90%.

And so -- but I would say, if we look out along, it might be a bit -- quite a bit above 90% right now.

So we think 90% would be a great thing long term.

Our sales process is different.

A corporate executive order, Gartner who have one now, they just have to convince Steve to buy the research report every year.

And as long as they keep in touch with Steve, then it's fine.

We have both a bigger opportunity because we have Pass expansions and we've got lots of Steves we can sell to inside an organization, that's the upside.

On the downside, if somebody leaves us who is head of the learning and development and you have to start over, you have some of that.

So I think over a long term, if we said that the Pass renewal revenue would be in the low 90s, but there were service add-ons and so forth, the actual retained revenue per client would be 100% or more.

That'll be the way to think about it, even though we're getting -- we're doing more like Gartner revenue retention right now.

Great.

Okay.

And then since you won't give me 2018 guidance, I'm going to be ambitious and ask for a 2028 guidance.

By which I mean, can you put all these numbers together into a long-term growth algorithm, right?

Like, obviously, there's a lot of flux in the financials right now, but kind of when you look out over the next 4, 5, 6, 7, 10 years, what kind of top line growth rate do you believe is achievable?

For us -- I mean, what we ought to be able to say is it ought to be double-digit.

But I think what we're saying is we're pretty sure it can be 6%, 7% every year.

And if we can do that on a base of $225 million and flow through something like 1/3 of that -- that, that would be a good target given the investments and so forth that we're going to need to make to do this.

But at least with your -- we think we're now organized, so that we can scale the next level.

So -- but that we might -- Steve?

Sure.

So double-digit is the target and 6% to 7% is what you're willing to commit to?

Yes, I think that's -- we should expect that with a couple of points coming from price increase on average and the rest coming from -- this is kind of organic.

More -- yes, mostly organic.

It's a good word, mostly organic.

Yes.

I mean, if you pick up $1.50 from somebody -- from a small acquisition, you'll pick up small amounts.

But the most important thing is you'll pick up capabilities and great people and an expanded offering.

And I'm sorry, did you guys say how significant the imminent acquisition is?

Like is it kind of comparable in size to Robert Gregory Partners or the Clayton Christensen center?

Or is it something bigger?

Yes, I would think about like the Robert Gregory.

This concludes our question-and-answer session.

I'll now turn the call back over to Bob Whitman for final remarks.

Thanks.

I just want to thank everyone for being on today.

Thanks for your great questions.

And if you have follow-up questions, obviously, we're delighted to talk to you.

We appreciate your support.

And excited to be in this fourth quarter, which is very active.

So thanks very much.

We're excited about it.

Thanks very much.

Thank you.

Ladies and gentlemen, this concludes today's conference.

Thank you for participating and you may now disconnect.