Franklin Covey Co (FC) 2017 Q4 法說會逐字稿

Welcome to the Q4 2017 Franklin Covey earnings conference call.

My name is Allie, 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.

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

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

Please go ahead.

Thanks, Allie.

Ladies and gentlemen, on half of Franklin Covey, it's my pleasure to welcome you to our fourth quarter fiscal 2017 earnings and investor call.

Before we get started, however, we'd like to remind everybody that this presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements are based upon management's current expectations and are subject to various risks and uncertainties, including, but not limited to, the ability of the company to stabilize and grow revenues, the acceptance of and renewal rates for the All Access Pass, the ability of the company to hire product sales professionals, general economic conditions, competition in the company's targeted marketplace, market acceptance of new products or services and marketing strategies, changes in the company's market share, changes in the size of the overall market for the company's products, changes in training and spending policies of the company's clients, and other factors identified and discussed in the company's most recent annual report on Form 10-K and other periodic reports filed with the Securities and Exchange Commission.

Many of these conditions are beyond our control or influence, any one of which may cause future results to differ materially from the company's current expectations, and there can be no assurance the company's actual future performance will meet management's expectations.

These forward-looking statements are based upon management's current expectations, and we undertake no obligation to update or revise these forward-looking statements to reflect events or circumstances after the date of today's presentation, except as required by law.

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

Bob?

Thanks, Derek.

I would like to thank everyone for joining us today.

We appreciate you being with us.

We're really delighted to have the chance to talk with you today.

As you know, Franklin Covey is a content company.

We have a collection of the world's best content and solutions for addressing problems that, as we say, require a large-scale change in human behavior.

Historically, as you know, we've sold this content to clients one course and often one team at a time.

2 years ago, we determined that converting our historical course-by-course sales and delivery model to a subscription model in which we would provide our customers, 1, unlimited access to our entire collection of best-in-class content; second, with the ability to assemble, integrate and deliver this content to an almost limitless combination of delivery modalities in 16 languages worldwide; and number 3, at a cost per population trained, which was less than or equal to that offered by other providers for just a single course; and then, of course, with an array of affordable add-on implementation services.

We postulated it out being an extremely valuable value proposition for our customers, one so strong it would have the potential to change the basis for competition in our industry and would be extremely compelling ultimately for our shareholders.

We also knew that during our business model transition, it would be disruptive, both to our financial reporting, since it would result in subscription accounting treatment, and also to our historical course-by-course business model.

I think one of the fundamental theses of Clayton Christensen's Innovator's Dilemma -- the dilemma is do you go ahead and disrupt yourself with the pain that that requires because you have to transition, or do you wait and hope that somebody else won't disrupt you?

So the bad news is that, as expected, it has been disrupted.

Over the last 2 years, the percentage of any given subscription sale that is recognized upfront has declined significantly, and the portion that is recognized over time as deferred revenue, billed and unbilled, has increased significantly.

As we'll discuss in a minute, we now believe we are at an inflection point where the recognition of this large bank of deferred revenue that we've been building up every quarter, rather than detract from our reported results, will actually help drive strong reported and, really at this point, economic revenue growth.

As also expected on the bad news side, the strength of our new subscription-as-a-service business model and our focus on it, almost maniacal focus on it, has disrupted our traditional facilitator and onsite sales.

Now, in Slide 3, just as a reference, for Adobe Systems, who went through a transition -- and we recognize we don't belong in the same paragraph.

We're not claiming we belong in the same paragraph, let alone the same sentence as Adobe, but Adobe announced in 2011 its decision to move from a unit-by-unit boxed software model to a subscription model, and it went through a similar transition.

As you can see on Slide 3, during its business model transition, its traditional boxed software business declined from more than 83% of total revenue when its transition started in 2011, to only 14% of its total revenue in 2016.

During this same time period, despite the fact their subscription revenue increased from 11% of sales to more than 78% of sales and overall revenues for the company grew 54%, Adobe, as you can see, had 3 years where the dramatic growth of its subscription business was basically fully offset by declines in its traditional boxed software business, and total revenue was really flat, as you see that data, pretty flat in that 2011, '12, '13 and '14 period.

But by the end of that period, the dramatic growth in the new business overwhelmed both the declining size of the historical business and then all of a sudden there was a huge pop in revenue -- there was growth in revenue in '15, but a huge pop, more than $1 billion, in revenue in '16.

Then, while we don't claim to belong in the same zip code as Adobe, we've had a similar experience during our transition.

The dramatic growth of our subscription business during the past 2 years of our business model transition has mostly been offset by the decline in our traditional facilitator and onsite business, thus flattening our total revenue and causing some on the phone or otherwise saying when is revenue going to get growing?

As we'll discuss in a moment, we believe we are ow at the inflection point where the magnitude and significant growth rate of our subscription business will increasingly more than offset the ongoing declines in our now much smaller historical onsite and facilitator channels.

As a result, as we will also discuss further, we expect both our reported and economic revenue growth to accelerate in fiscal 2018 and beyond, and even be double digit kind of growth, top-line growth.

The substantial portion of our business is already well on the way to becoming primarily subscription-based.

As we'll talk about, the subscription and subscription-related revenue already accounts for more than 70% of the revenue and binding contracts in our English-speaking direct offices in the U.S., Canada, the U.K. and Australia, and we expect to increase to approximately 80% to 85% of total revenues in the coming years.

Also, we'll be launching an All Access Pass in our offices in China and Japan later this year, and already more than 80% of our education business is related to a subscription where the schools have a binding subscription and they're adding services to that.

So in as much as, as I said, substantially all of our business is now -- or the majority of our business is already subscription, and it's moving more that way.

I'm going to focus my comments today primarily on our subscription business, acknowledging that our version of the boxed software business is going to continue to decline.

It won't fully -- it won't be completely out of our hair for a couple more years.

It'll continue to be somewhat of a drag, but we think, despite that drag -- just like with Adobe, they still had some drag in '14, '15 and '16, but it became so much less that the growth -- this explosive growth of the subscription business overwhelmed it.

One more note -- well, specifically, I'd just say that I'd like to respond to 4 questions which we're often asked.

I'm going to direct my comments to these 4 questions.

You can see those on Slide 4. First, what are some of the key indicators that the transition to the subscription business model is on track?

Is it on track, and if so, why do you think it is?

Second, what factors are responsible for the significant growth in the subscription business?

What are the strategic factors or operational factors that are allowing that growth to occur?

Third, what are the opportunities you see for accelerating both the growth of the business and the strength of your strategic position in the marketplace?

And fourth, when will you hit the inflection point where the new business model is more than offsetting the disruption of the old and you'll expect reported economic growth to accelerate?

I'd like to respond to each of those questions in just a moment, but one more note.

The same things that underpin the success of the subscription model also complicate the accounting for it somewhat.

Fortunately, companies like Salesforce, Adobe, Microsoft and others have been doing this for years, and since there are now well-established, standard defined metrics against which to measure the performance, strength and momentum of a subscription-as-a-service company, we are going to use those same metrics in today's discussion and in all of our communications in the future.

Over the last quarters, you would have been better served -- we probably would've been better served if we had used those same metrics in prior quarters instead of, in a sense, through customizing terms, but we're going to use the standard terms today and in the future.

As you know, these metrics typically include such things as reported revenue, deferred revenue billed, deferred revenue unbilled, which includes the as-yet-unbilled portion of any binding, non-cancelable extended-term contracts, and then the total deferred revenue, which is billed and unbilled.

And so the sum of those 2 measures, which, when added to the amount of revenue reported, provides a report on the total economics, so you have revenue plus the sum of all deferred revenue billed and unbilled, and it kind of gives you a measure of the economic engine.

Other of those metrics measure more a specific time period, the next 12 months, whatever.

Other measures include annually recurring revenue, number of subscribers, et cetera, and the definition of each of these we've included in the appendix so that you'll know what we're using and what the basis for that definition is.

Specifically, these definitions came directly from Salesforce's public filings, and we thought we'd use them out of aspiration, not because of the comparability of our business model, but we belong at least to the same peer group -- or the same grouping in terms of subscription.

For those who would like to have more information about the economics of deferred revenue, this billed and unbilled, we've included some examples in the appendix, which we'd be happy to talk about individually or in the question-and-answer part.

Finally, once I've addressed the 4 questions, just know that I'll turn the time to Steve Young, who will provide some information, which we hope you'll find helpful, in reconciling the reported and deferred revenue billed and unbilled numbers to the guidance we provided to you all before we started reporting our results utilizing these same common definitions and translate that.

It'll at least give you some basis for understanding what that means.

Now, I'd like to address the 4 questions outlined above.

So, first, question 1, in terms of the key indicators that show the transition to our subscription business model is on track, which kind of Slide 15 raises the question -- or Slide 5, I mean, raises the question.

As you can see on Slide 6, All Access Pass and Pass-related revenue plus the change in deferred, both billed and unbilled, in our enterprise division has been extremely strong.

It grew $40.7 million, more than 200%, almost 300%, in fiscal 2017, from $23.2 million in fiscal 2016 to $63.8 million in fiscal '17.

So that's one metric, is how is it going in the enterprise business with All Access Pass, and we'll spend some more time talking about that.

As shown in Slide 7, in our education business, Leader-in-Me subscription and subscription-related service revenue plus the change again in deferred revenue, billed and unbilled, grew $5.5 million, or 15.4%, in fiscal 2017, from $35.6 million in fiscal '16, so it's up to $41.1 million total.

And the education business has been a subscription model for several years.

They started several years before, and so they're now to the point where this 15% growth a year has become relatively predictable and, again, a lot of it under contract.

As shown in Slide 8, our total subscription and subscription-related revenue plus changes in deferred revenue, so this is combining enterprise All Access Pass with Leader-in-Me.

You see that crossed over the $100 million mark in fiscal 2017, ending at $107 million, which was growth of $44 million.

The blend of the 2, of the enterprise and education, was $43.8 million of growth, 69% growth, compared to the $63.3 million we generated in total subscription revenue in 2016.

So you can see that on this idea that we're moving to being a subscription company, obviously, it's getting closer and closer to that.

In Slide 9, you can see the total number of paying subscribers.

You can see the definition of that.

These are all current contracts with people who are current on their payments, but in our case, they pay upfront anyway.

So you can see in Slide 9, our total number of paying subscribers to our subscription offerings in both units was 468,000 at year-end 2017, which is an increase of 168,000, or 56%, from the approximately 300,000 subscribers we had at the end of fiscal 2016.

So for us, I mean, well, again, we're focused on -- we're looking at a lot of different metrics.

For us, this is an important one because we're trying -- part of what we're trying to do is build deep, pervasive, ongoing relationships with our clients.

We want them to engage with us and expand their populations.

And so this growth in subscriber populations is a function certainly of increased number of passes, but it also reflects that within the passes we've sold in the past, there has been a significant expansion in the populations covered by them as we go in and find other problems that they have or challenges they have in the companies for which they're hiring other vendors or no vendors today.

That's allowing us to move forward, and so this is an important metric for us strategically, as we want to keep the total subscribers growing actually ahead of the number of passes.

As you can see in Slide 6 -- or, sorry, move to Slide 10.

Sorry.

It's just to break the subscribers out between our enterprise and education subscribers.

As you see in Slide 10, 320,000 of total 468,000 on the previous slide are in our enterprise division, almost all of which are All Access Pass subscribers.

This 320,000-person subscriber base is up 146,000, so a very high percent from the 174,000 subscribers we had at the end of fiscal 2016.

It's 84%.

As also shown in that same slide, 10, in terms -- 148,000 of the 168,000 are in our education division, almost all of which are subscribed in our Leader-in-Me membership offering, and this 148,000 base is up 21,000, or 17%, from the 127,000 subscribers we had at the end of fiscal '16.

So for us, on this key thing of are we reaching and keeping these populations, it's reflective of the fact that we're selling a lot of new passes, we're retaining more than 90% of the revenue, we're expanding these passes and getting the chance to serve more customers inside them.

As we'll talk about in a minute, when we look at the revenue -- or the revenue you already saw, but we'll discuss it more in a minute -- is that these people are -- or these passholders and the buyers are also buying additional add-on services that have helped to drive that.

In fact, let me just refer you back, if you would, to -- if I can, to Slide 6, which shows the growth in our enterprise division for All Access Pass, and you'll see that in the top bar, fiscal 2017, what we sold, approximately $50 million, $49.7 million, of binding contracts, both billed and to be billed.

We sold and recorded $13.2 million of add-on services as people have found out that we have services that can help them drive their results.

Slide 11, one last metric in terms of what we're following to say are we on track for the business.

In the future, we will report the official annually recurring revenue number, but we're still making sure that our version of that number is exactly consistent with how other people do it.

And so in this case, this is the surrogate slide for today, which tells you what the total amount of contracted revenue is that's going to come in over the next 12 months.

It excludes other contracts we have, like our licensee partners have contracts with us for -- have minimum royalty payments.

They're contractual.

As you may know, here at our campus, we have a -- we used to have a campus.

Now we're just operating from one building, but we get leased revenue from the part that we used to occupy.

And so those things, which add up to another $13 million or $14 million, are not included in this contractual revenue, although they're there, and it doesn't include, of course, the stuff that -- services and other things that are going to be offered under these binding contracts.

This is really intellectual property licenses and not necessarily all the other business that's attached to it, but this is kind of the recurring idea of revenue you can count on, that's going to flow through.

A lot of it's already in deferred or whatever, and that's what that is.

And so, for us, the combination of those factors with the tremendous growth in the All Access Pass and all the things we've just talked about with respect to the expanding populations and services, the continued growth in the education division and licensed revenue, where now substantially every new school that's added first buys a license that includes intellectual property and coaching, and then other implementation services are added on.

So the combination of the really pretty dramatic growth of All Access Pass, the continuing strong growth in Leader-in-Me, which is more mature, the growth in our total subscription revenue costing over $100 million in terms of revenue plus the binding contracts, so it's getting so that with one more turn of the flywheel, that number could easily be in the $130 million or $140 million range and the next year more than that.

So certainly the balance is tilting in favor of completely subscription, and as we add Japan and China this year, our licensees also have -- are not yet selling it.

It won't affect our income statement because we don't have the deferred revenue from them, but it'll allow them to achieve the same kinds of revenue accelerations.

We believe that we really are -- we're excited about the really quite dramatic growth in the subscription business already and feel like when we get all the engines in place with China and Japan and then just other groups that we've now integrated, like sales performance and others that in the past didn't have access to this, that we have some really strong engines that can even accelerate this growth going forward.

The second question, which I'll be shorter on, is kind of one of the strategic factors behind the significant growth in the subscription business.

You’d see on Slide 13, over the years, we have focused -- we've always said how do we really differentiate ourselves in the marketplace, because we're in a marketplace in training, and the training portion of our business, we're in a marketplace that consists of a lot of small operators, professors in universities who developed a course or whatever.

It might be great content, but they don't put the weight behind it to have film-driven courses, millions of dollars that we put behind a course, having all the delivery modalities, et cetera, the apps and other things that go with them.

So that's our industry, and so we said, look, we want to differentiate ourselves, but we don't want, also, to just be part of that industry, the training industry, because really the performance improvement industry is a much bigger map, that people hire a lot of other people to help them get business results that require a change in human behavior.

And so we, starting back as early as 2004 -- 2003, decided we did not want to be a training company, per se, building just capabilities when what the CEOs and everybody else want is outcomes.

They want capabilities that lead to outcomes.

And so with that commitment, at a time when others weren't really doing it and at a time when we weren’t very profitable either, we invested tens and tens of millions of dollars in new content, and since then, really since 2003, we've invested more than $150 million in content directly and in practices to help drive the application of that content to really be impactful.

We developed the entire execution practice, the sales performance practice, the customer loyalty practice.

In education, before the Leader-in-Me, which we decided would be an integrated offering trying to deliver a specific outcome, we just sold materials and things to schools.

And so for us now, even before the transition to All Access Pass, around $90 million of our revenue that we reported each year was related to some kind of -- helping drive an outcome.

So for us, one, we wanted to differentiate ourselves in the whole industry and say that we're a credible partner with any organization on any major topic.

If they're trying to drive an outcome like improved performance, whether that's somebody like a Marriott driving guest satisfaction and trying to distance themselves from their competitors, or big shopping supermarket chains or technology firms or sales organizations that are trying to differentiate the way they sell complex, high-value things, we now are engaged all the time on those kinds of things.

So for us, best-in-class content, this serum metaphor, goes back to George Merck, who, back more than 100 years ago, defined some big intractable health problems that they wanted to address and put all the resources after them.

We've done the same with some big intractable problems whose solution requires a fundamental and lasting change in human behavior.

So we said that's going to be our hallmark.

We want to have the best-in-class content.

We want -- and honestly, I've been on literally hundreds of sales calls, maybe just short of 400, I think, and it's not a question.

Our customers view both the content as best-in-class.

It's, "Oh, yeah, sure.

If I'm going to do anything in that category, it's your content.” We have to have branded content driven by best-selling books, et cetera.

But the content is there.

The other thing they say is, "Oh, my gosh, your people are amazing," and we built this deep capability to help deliver based on some of the more intractable problems.

They want somebody else to help facilitate it.

And so we do not want to just be a content company that tosses content out that anybody can do just by putting it on a portal and saying you've got access to it, even if it's the best content.

We want to have the capabilities to also deliver outcomes for them.

Second, we wanted to have the most flexible delivery modalities.

Now, we used to get asked the question -- and this is identified just what the learned modalities are.

So people used to ask if you're going to be an online training company, what percentage of your revenue comes from online training?

And we would say, "Well, look, we'll answer the question, but we think it's the wrong question, though," because for us -- and it's turned out to be the case, but we've just always experienced that people who buy our stuff aren't buying modalities.

They're buying outcomes.

They use the modality to get the water to the end of the row.

And so, for us, our determination and commitment to building all these modalities wasn't so that we could get a merit badge for the number of modalities in which we deliver our content.

It was so that a place like Marriott, we could certify all of their managers throughout the U.S. where they have concentrations live.

At the same time, across the hall, we could be certifying all of their managers in the Caribbean and South America live online.

At the same time, in a pre-shift Marriott with the Marriott Marquis Hotel in New York, we could be training 125 housekeepers with a 5-minute video vignette because we have these massive film libraries that we've built do support our content.

And so, for us, flexible delivery modalities is a way -- was and is a way of saying we want you to be able to utilize the content in a very flexible format.

And finally, we wanted the broadest and deepest sales and distribution capabilities.

And so as you see here, in terms of best-in-class serum on Slide 15, we've built this best-in-class content, as we mentioned, and developed these practices.

I've already mentioned that.

And our delivery modalities, as you can see in Slide 17, if you look at -- this is from a training magazine that shows all the different training modalities.

We haven't chosen much -- we haven't done much in gamification, although we're testing that right now with a few clients.

And so you see some X's down at the bottom.

We haven't used a lot of academic institutions to partner with to date.

But, otherwise, our content can be flexible delivered through all the rest of them, and that's part of the investment that we have made.

And then, finally, in terms of distribution, 10 years ago, there were a lot -- obviously, there were a lot of global companies, but most of them did not deal with their people issues globally.

They had everybody pick kind of their own thing they were going to train on.

Now, that's increasingly, for us, a big advantage to have a global footprint where somebody can contract with us here in the U.S. or they can contract with us in China or Germany and know that across the world, they're going to get that same solution.

So anyway, so for us, this -- the things that have driven this growth in the past, these pillars -- 2 years ago, we decided we're going to -- because we've made the investment in all those things -- it's not just like wouldn't that be great if we were a subscription service company or wouldn't it be cool if you did it in a format.

It's because we have the world's best collection of the best-in-class content, we already had the flexible delivery modalities, and we also had the distribution that we could do it.

And so Slide 21, we introduced the All Access Pass.

And as you can see on Slide 22, the value proposition is this -- instead of 1 course at a time, you can -- your passholder population is signed up for, so 100 people in your company or 100 leaders or whatever it is, or 1,000 or 10,000.

It provides that whole population with unlimited access to Franklin Covey's entire collection of best-in-class content.

So instead of having to say, "Gosh, you have a bunch of great content.

I've got to decide which one do I want to do," we say, "Look, frankly, you've got a lot of needs in your company, and you don't have to make one decision of how you're going to do business with Franklin Covey because you're going to get the whole library.

Let's get started with a given problem today, but we'll move forward."

The second thing, value proposition, on Slide 23, is that with all that content, you have the ability to assemble, integrate and deliver our content solutions through an almost limitless combination of delivery modalities -- live, live online, online, webcast, podcast, integration of pieces of content.

If you want to break up and just use some of our concepts or film vignettes or whatever in other training you do, versus having to buy a whole course, they can do it in existing training offerings.

And recently -- we'll talk about this in a minute.

Through the acquisition of Jhana, we now have this micro-learning, push learning where you can take the content in bite-size pieces without even knowing you're ever taking a course.

And so, for us, that was the second value proposition, so all the content with almost infinite delivery flexibility.

Part of that delivery flexibility was you also get the services and the implementation specialist at no additional cost.

It's an investment we've made to say there is going to be somebody with organizational design capability who's going to work with you and your organization, because these people -- if you've ever been a general contractor on your own home, trying to get a project done, that's not a lot of fun.

Most of the people in learning and development are trying to have an impact in that same world, where they really -- it's a great idea, but, gee, by the time you have to schedule the classes and decide which content and assemble it, et cetera, and customize it, it's just too much.

And so we said, "Look, we've got somebody who's going to be your partner, who's going to help you identify what to do, figure out all the ways in which you might want to do it, help you assemble the LEGO blocks in a way that's going to work exactly for you." We also have some add-on services they can buy from us if they want us to actually this stuff ourselves, and so that's a key part of it.

On Slide 24, another, to be able to access that globally in 16 major languages.

We made the huge investment this past year to localize all the core content in the All Access Pass.

We have it available in 16 major languages.

That part is done.

It'll be delivered through the new portal.

We have a new portal, a huge investment in a new portal that's been ongoing.

We've been swallowing that investment this past year, and we'll be swallowing some more here in the coming quarters, but it's a new, state-of-the-art portal in terms of it meets all the international data privacy standards, et cetera, it needs to do, and a very strong and robust platform.

And so with that idea, you get all the content, interest, delivery flexibility you get to help to do it.

You've got -- you can do it anywhere, on Slide 25, and all that at a cost per population trained, which is less than or equal -- on a per-person basis, it's less than or equal to that available from other providers for just a single course in a single delivery modality.

So it's not surprising that it is compelling offering, but we had to think differently and say, look, if we look at the price per person trained, you won't do this, but if you look at the revenue and lifetime value per customer, which is our real unit of measure, which is how much business is a customer doing with us -- we believed that it would do 4 things.

1, we'd get a higher initial pass site.

With that kind of value proposition, they just instinctively know they could serve a bigger population.

So it starts out on Slide 26 with a large population size to start with, but as we get in there really and we start to analyze things, there actually will be opportunities to expand populations, another part of this virtuous cycles.

For some of those engagements, it would be -- they'd be important enough issues that they would add on implementation services and get -- and that's the add-on services you saw, and that they would also renew at high rates.

So that's the basis why we think it's being successful.

It's very compelling, and we're in a unique position, we believe, in our industry to offer it just because of the investments we've made over 10 to 15 years.

Slide 27 raises the third question, what are the opportunities we see for accelerating both the growth of the business and the strength of our strategic position in the marketplace.

I'll just hit bullet point for Slide 28.

It just shows for one salesperson who sells 10 new passes a year, adds 20% of add-on services, which is less than we're getting generally, has a 90% revenue renewal rate, that that salesperson just selling 10 new passes a year can add up $2.3 million of revenue by the tenth year.

And so that's a great thing for a salesperson to come in, who in the past had to go say, "Well, I've got to find some new customer or some new problem to solve every day.

If I can just get the pass in there and keep it in, I'm going to build a recurring revenue base."

Multiple this by the 217 salespeople we had at year-end, half of whom are still in ramp and doing their normal ramp, and so there's embedded growth there, plus then the new people we're adding, and that's what we're playing for.

We believe there's enormous opportunity to have an impact in our clients and also to grow.

We see opportunities, you can see it in Slide 29, in all of our -- in all 3 of the puzzle pieces, all 3, and content is shown on Slide 30.

We've added new content to the pass this year.

We added Clayton Christensen's Find Out Why, which is based on his best-selling book Competing Against Luck, this whole idea that the start of innovation is really understanding the why, what job to be done the customer has.

We've added the Jhana acquisition, which included both the new platform for micro-learning, but also this enormous library of very high-quality research, corporate executive board type research, around what helps managers be effective, but can be disseminated easily.

We also acquired in May Robert Gregory Partners to add coaching capabilities so that when our clients do want more help, we can give it to them.

So we see ongoing opportunities.

We have many, many conversations going on right now with people that we think -- around the specific problems we're trying to solve.

Again, we're not trying to solve all the problems in the world, but we've picked 8 key big and intractable problems that organizations have.

We want to have best-in-class content and solutions around those.

We're having conversations with a number of people there, so that's an opportunity for continued growth.

It's also been an area of continued investment.

We're making ongoing investments in content.

We've historically had a budget of around 4% a year, and we've increased that.

This year and next year, at least, we're going to be going at 6% a year spend, and, honestly, if we have the opportunity to do more and we think it’s going to solidify our hold on this part of the business, we'll do more.

In Slide 31, another opportunity for growth, as I mentioned, is the ramp-up of client partners we already have, the 218, but then the addition of new client partners.

As you can see in Slide 32, in the U.S., there are 94,000 companies or company units with at least 200 employees.

Today, we only have 11,000 of those assigned to salespeople in the U.S., of which 4,000 are active accounts and 7,000 are not yet assigned to anybody, so they're not being called upon.

They might get invited inadvertently to an event, but we try to focus all of our marketing dollars behind them, historically.

There's a big opportunity for us to expand that pie, both by hiring new salespeople, but also through marketing to get the word out to a lot more people.

We also have the 83,000 unsigned accounts.

And then on Slide 33, again, this is just -- what we think an opportunity for us is if we can make this transition, this just shows, again, something that we don't -- just like the NFL compared with my touch football team, but the transition, because of a transparent business model that has very high recurring revenue, predictable margins, et cetera, the multiple of revenue, the -- you look at where the transition period was.

Just the idea of what Adobe was going to do increased the multiple, and when they actually did it, they increased it more.

We'd like to be credible enough that in terms of the traction we're getting, that, over time, our shareholders can benefit from at least directionally what that is.

Finally, on Slide 34, when will we hit the inflection point where the new business model is more than offsetting the disruption of the old model?

Slide 35, again, this is the slide you saw first, Slide 3, which just shows that Adobe had that transition to get through, and we have 2, but on Slide 36, it's instructive that in the subscription business, as all of you all know as well or greater than we do, is that the inflection point in reported results is preceded by an inflection point in deferred revenue, both billed and unbilled, because it goes on the balance sheet first, or on the books first, and then comes through.

And so what you see on Slide 36 is that while the green line, which is total revenue, is flat, there in -- for several years, in 2013, '14, they hit the inflection point on their billings, on the deferred revenue that they were billing and contracting but not billing, and that they hit an inflection point there, and then the inflection point in reported followed it.

We believe the fourth quarter was -- I mean, obviously the fourth quarter was a huge inflection point in terms of number of -- amount of deferred revenue that was booked, but we expect that the first quarter will continue to be strong, not strong in a crazy sense, but a bit strong, very strong.

And as you saw in our guidance, we expect that the -- we really have hit the point where after flat years where -- for us, the subscription business hasn't been flat.

It's been growing 30%, 40%, 50% a year, but off a small base, and now we're getting a bigger base.

It's been being offset, but we're now at the point where we'll be able to cross over.

And so on Slide 37, as we add, we hope, a lot of new subscribers, a lot more contractual revenue, and yet our historical business that we've disrupted is so much smaller, we're already -- we've already completely overcome the loss in onsite revenue with that on sales, that we'll hit that inflection point.

So thanks very much for letting me go through that.

I'm just saying that we are excited about all 3 of those things.

We feel like this enormous, huge -- the enormous effort that's been -- the entire organization has been mobilized around this.

We are glad that the traction is there in terms of the revenue we're booking.

We're going to continue to make investments, so we're going to accelerate our revenue growth.

Thankfully, we're accelerating our revenue growth, and we'll accelerate our EBITDA growth too, but our EBITDA and cash flow will grow a little less in '18 than it would otherwise because we're making heavy investments.

We think that's a wise thing to do if it can get us into double-digit growth land on a predictable way, and so we're going to continue to do that.

And with that, Steve, I'm going to turn the time to you just to maybe talk about how to connect the dots with all this deferred revenue and our original guidance and give us the new guidance.

Okay.

So, Bob, since you've been talking about the future, maybe I'll jump into future guidance first and then go back and connect the dots on our guidance.

So good afternoon, everyone.

So the information that Bob discussed is obviously critical to understanding our guidance and our numbers for FY ‘18, particularly that the expected dramatic increases in our subscription business is partially reported as an increase to net sales on our income statement and partially reported as an increase in deferred sales on our balance sheet, while decreases in other areas of our traditional business, like facilitator sales, directly impact reported net sales.

Everything considered, we expect reported net sales next year to increase from $185 million this year to approximately $212 million next year, a 14% increase.

Essentially, all of the increase in net sales is attributed to our emphasis on the subscription business.

For the subscription business, this is an increase of almost 25% next year.

We also expect deferred sales on our balance sheet to increase by more than $15 million, or a 36% increase next year, and we expect to continue our focus on selling multi-year agreements.

On the cost side, as Bob talked about, while we have a high flow-through of incremental sales to incremental adjusted EBITDA, and while we have identified certain cost savings, given the size of our current opportunity, we've also decided to invest in other, primarily growth-related costs, as Bob talked about.

These costs include implementation specialists, which are very critical and important, I think content development, content amortization, and then, of course, commissions, bonuses and support staff related to being in a position that we can seize this opportunity that's in front of us.

Given these cost changes and based upon the $212 million of recorded net sales, we expect adjusted EBITDA, calculated the same way we've always calculated adjusted EBITDA, to increase from $7.7 million to a range of $10 million to $15 million.

This increase, of course, excludes the anticipated $15 million increase in deferred sales on the balance sheet and excludes the amount of multi-year contracts entered into during the year, which last year was $16.5 million of unbilled multi-year future contracts.

To summarize next year, we expect to increase net sales and increase deferred revenue on our balance sheet and expect to focus on selling multi-year agreements, so we want to improve all 3 measures that Bob talked about.

Now, just a little bit on Q1.

The seasonality of the education division sales causes most of their adjusted EBITDA to be generated in our fourth quarter, just like in prior years and causes their adjusted EBITDA to be less than last year in Q1.

The current concentration of adjusted EBITDA in our enterprise business is also toward the fourth quarter.

That said, we do still expect adjusted EBITDA in our first quarter to increase over last year by an amount around $1 million of adjusted EBITDA, and remembering that the majority of our year-over-year expected increase is in our fourth quarter.

Please also realize that our guidance is based upon our internal analysis and our internal expectations, and we take it very seriously.

We are still in the middle of a significant transition of our business, and we could report results that are different than our current expectations.

Many things could cause a difference, including a simple change in the mix of sales between subscription and non-subscription business.

It would have a significant impact on the reported amount, even if the value of the economics being generated are essentially the same.

So, Bob, that's how we're looking at FY '18 numbers.

Thanks, Steve.

And we've taken that into account, obviously, in the guidance we've given, but there's -- and that's why there's a wider range, is that if we have an investment opportunity or if we have a chance to disrupt our existing business even more, we will.

So with that, we'll open it to questions, I think.

So we thank each of you for -- I'd just like to say this.

Thank you to each of you for the effort you've made over these years to really try to understand what's behind it.

I think we've felt tremendous support from you all as our shareholders.

I mean, obviously, like everybody, we're happy to be here today saying that we're making that transition and setting the tractions there, but we appreciate your support during the years when it's been the Adobe years, and we hope that you'll get the other part of the Adobe years going forward.

Oh, yes, Steve, you -- Steve is going to also provide some reconciliations.

I apologize.

So just a little bit about reconciling our results to our guidance for last year.

We just hope to provide some information that will help you in looking at our reported and our deferred revenue, both billed and unbilled numbers, compared to the guidance that we've given, and reconcile between the guidance we gave and the buckets that we now look at of reported deferred and unbilled deferred.

As you know, when we gave our guidance last year, it was the sum of 2 numbers -- reported adjusted EBITDA and the change in deferred revenue less certain costs, would be between $35 million and $38 million.

At that time, and even at the end of Q3, we didn't anticipate that we would choose to have a large portion of our deferred revenue be unbilled, even though other SaaS companies generate lots of unbilled deferred revenue.

Our result for the year in those 3 buckets was $7.7 million of adjusted EBITDA.

Add the $2.1 million of commissions related to unbilled deferred revenue, for a starting point of the $9.8 million, very close to our guidance of $10 million to $14 million that Bob talked about, plus $29.6 million of deferred revenue less certain costs at 15%.

Of that $29.6 million, $17.7 million was from billed deferred revenue, and $11.9 million was from unbilled deferred revenue.

The sum of those 3 numbers is NAV $39.4 million.

If you choose to exclude the unbilled deferred revenue, the NAV is $27.5 million.

In a slide in the back, in the appendix, we lay out all of these numbers and provide the ways to look at the result depending on how a person chooses to treat unbilled deferred revenue.

We would be happy to discuss this, of course.

For us, we intend to focus on improving all 3 measures in the coming years, deferred sales, both billed and unbilled, and reported revenue, as a way that we can see to, in the coming year and in future years, maximize value and cash.

Thanks, Steve.

Also in the back, there's an equation of where this unbilled revenue came from, was a decision we made as we had a bunch of clients -- I mean, hundreds -- who are mid-term, wanting to expand the term of their contract to better match -- now that we've been in there talking about impact journeys, as we call them, that their team is going to be on, it didn't make sense for them to have a contract -- a plane flight for less than the journey they were going to be taking.

And so we knew they were willing to do it, and historically, we would have just credited -- we'd have taken the $10.9 million of contract amounts that they originally signed up for, credited them with the other $4 million that was still remaining.

We'd have picked up the other $6 million in deferred revenue so we could bill it.

Instead, many of these clients, if they didn't have to get billed today, even though they've already paid this in the past -- they were just saying, gee, it would be helpful just on their normal billing cycle or whatever to do it when the natural renewal date comes in.

They were willing to sign bigger contracts with expanded populations.

For us, the income we're going to get in the year is the equivalent of -- the revenue we're going to get in the next year is exactly the equivalent or a little better than the equivalent if we had brought it forward, and yet we created another $6.5 million of contract value that we know is going to come in, plus locked in our relationships with customers.

So we've got data there that you can sort through, and we'd be happy to answer that.

So with that, now we'll open it for questions.

Thank you.

We will now open the line for questions.

(Operator Instructions).

And our first question comes from Jeff Martin from Roth Capital Partners.

I was hoping you could help explain the unbilled deferred revenue from the perspective of the duration of the license or the agreement in the past.

I assume that's a multi-year agreement causing that portion of it to be --

Well, some are, and some are just extended terms.

Here's basically what it is.

These are contracts that, on average, had terms of about 13 months.

On these expansions, they now have an average of 19 months, so it's not multi multi-year, but they're extended terms.

Their original contract term was $10.9 million.

It's now $16.7 million.

So the $16.7 million increase -- so the $6 million increase, ish, is a combination of extended -- first, extended passholder size, because they also expanded their populations by an average of 15%, and then they extended the term on these as well.

And Bob, there are a lot of multi-year.

Yes, there are a bunch of multi-year ones, but I'm just saying they're also -- well, all of them have extended terms, but they extended duration, and, yes, a number of them are multiple years, actually, in that as well.

Does that give some color?

Just keep going if it's not.

We'll try to answer any questions you have.

No, that's helpful.

That's helpful.

But on that, I can say this -- of that amount, of the $16 million amount, $16.7 million amount, about half of it -- just a little less than half of it will actually be recognized as revenue in the next 12 months.

And so for us, there's $7 million or something like that, approximately.

That amount will come through in the next 12 months anyway, so it has a similar effect as though we had billed it in terms of the impact on income.

And so one of the ways that you'll see it back is it hits our column 3 or also view C, is that if you look at the total revenue that's going to come in in the next 12 months, we've picked up a little bit more than we would've had we chosen to just go ahead and credit these contracts, and yet still have this extra $6 million of contract value that's going to come in in future periods.

Right.

That makes sense.

If I could ask to clarify something on your Slide 11, your contracted revenue, which is close to $50 million expected for next year -- I assume that's to be recognized over the next 12 months, that's the portion to be recognized as revenue over the next 12 months.

Is that right?

Steve, yes, it is?

It is.

Yes.

Yes, that's what it is.

We've got other contractual revenue, but this is really the -- this is the subscription kind of revenue.

And it is to come in over the next 12 months and intended to just show the significant increase in that number, given there's more visibility into the future because that number is growing so rapidly.

Yes, and so there's another $7 million.

As I just said, about half -- or there's another $9 million of what we contracted that's not in that number because it's not coming in the next 12 months.

It's that part of the $16.7 million that's not going to come in in the next 12 months, that'll come in in the following 12 months, the bulk of it, but also some past that.

Right.

Right.

Is it fair to say your gross margins should be up in fiscal '18 because of the start of the revenue recognition here if you're taking 15% of costs allocated out of it when you're talking about the billed and deferred?

Yes.

Yes, it will.

I mean, I don't want to start getting line-by-line guidance requests here, but I was just curious if you could kind of help us ballpark the magnitude of the gross margin, what range it should be in for next year.

I mean, are we talking 5 percentage points?

Are we talking 1 percentage point?

A couple hundred basis points, I think.

Yes, something like that.

Yes, something more like that.

Part of this also and the reason for that is, obviously, that you've got extremely high-margin deferred revenue coming in, and also the new pass sales are also extremely high margin.

We're also adding on, though, more and more services, and those services have lower margins, so on balance, as the mix between services -- we've always loved, of course, the corporate executive board model and everything, but what I've really loved is the Gartner model, where 2/3 of the revenue comes from subscription, roughly, and another third comes from services.

We've chosen to solve problems where people will hire us at -- they will hire us to help them, and eventually these problems we'll add services.

So I think it could shift -- based on mix shift, it could change, but in terms of the basic balance, we think it'll be in the range of 150 to 200 basis points change in gross margin.

Okay.

That's helpful.

And then last question, and then I'll hop off so others can ask, but in terms of your investment in an implementation specialist, content development and some of the other areas, can you give us an order of magnitude of what that investment is going to be?

Sure.

So each one of those is a few million dollars, so you add them all up, and it's probably -- if you put in the commissions that are related and everything else, you're at least at $7 million to $10 million, depending on how you look at it, so something like $8.5 million, $9 million, so it's a significant amount of investment.

Again, when you add the content development, the amortization of the content development that we capitalized last year, the implementation specialist, and the bonuses and commissions related to that, you're pushing like $9 million.

Okay.

That's very helpful.

So for us, our guidance of EBITDA is after swallowing that.

Yes.

After swallowing that, we still expect good expansion, but it's -- and it won't be that -- just one last thing, Jeff, because you and others are so careful thinking multi-years.

In '19, we don't expect we'll have that same thing.

'19 will have less growth in it, I should say, and so there will be more flow through on the incremental revenue dollars that come in '19 than on '18, just because we've had these big things like localizing all the content into 16 languages, $3.5 million portal -- millions of dollars, hiring the implementation -- the first time, implementation specialist the first time, $4 million.

And so after that, it'll be more incremental, and -- but, anyway, we feel like it's the right thing to do.

It'll keep the revenue growing, so we're on it.

Our next question comes from Marco Rodriguez from Stonegate Capital.

A couple of quick follow-ups here, just on guidance, making sure I'm kind of understanding some things.

The adjusted EBITDA guidance of $10 million to $15 million, so that's back to your normal definition of adjusted EBITDA, not the adjusted EBITDA plus deferred revenue that you guys were doing before in fiscal '17?

That's right.

Okay.

And can you maybe talk a little bit about the range there?

I mean, the dollar amount is not a huge difference, but percentage-wise, it's a fairly wide range.

Is that just -- what's going to drive the high end of that versus the low end?

Yes.

So I think the first thing would be the -- just mix.

The first thing is mix.

And we read a transcript from the CFO for Adobe and he was saying that he had somebody who got -- a shareholder who got mad at him because they missed their earnings.

But it was because he disrupted his software business faster than he thought.

Started generating more deferred revenue.

And he was going to destroy it anyway, but hey, you destroyed it faster than you thought.

So there's that kind of stuff, although it's -- that thing is getting smaller and smaller because our historic -- but that's the first one.

The other would just be us deciding that there is some opportunity to grow, that there's a marketing investment we'd want to make or whatever.

And so we're leaving the range wide, we're going to obviously all want to be as high in range as we can.

But actually tempered by -- if we think we can get the kind of revenue growth that we're talking about here, net of the loss of the historical business, hopefully our shareholders would want us to make those investments.

And so, we're just leaving it broad today hoping -- I mean, we assume that we'll -- and Steve gave some guidance on the first quarter, which is we hope good.

And so -- but that's the only reason.

It's not -- it's just more the historical facility -- we've already crossed over, Marco.

On the disruption we did of our traditional onsite business where somebody would just buy a Porsche from us and have us deliver it, we've already crossed over on that one.

Where we were losing in the initial years, '16 and the first part of '17, we had a deficit of about $2 million a quarter in revenue, which was the difference between the new add-on services we were adding to All Access Passholders, and the amount of old onsite revenue we were losing.

And so, that was a tough nut to crack.

We've covered that now.

We've more than covered it on volume variance.

We are selling more days.

We have been since the second quarter.

But because Passholders get a little better rate, a 10% better rate, we've been off on the price variance a little.

But we're crossing over on that now, because we're anniversarying.

And so, it's those kinds of things that make a difference on that.

Got you.

And then, in terms of the guidance, I don't know if I heard this correctly or not.

I thought I heard you say that it was -- is it going to exclude multi-year contracts?

And if so, can you help me understand why the guidance would exclude that?

Well, the multi-year contracts are amounts that would not be recorded in our reported number or on our balance sheet as deferred revenue.

So these are multi -- the future years of multi-year agreements are not recorded anywhere in our financials.

Now, even though this year we had $16.5 million of that unbilled deferred, again, unbilled deferred meaning it's not represented anywhere in our financials.

It's not recorded and it's not deferred on the balance sheet.

Even though it's binding.

It's a creditworthy --.

Even though it's a binding contract, just like the other contracts, it hasn't come to the effective date yet.

So since that is so new to us, just primarily in the fourth quarter, I'm not really comfortable saying exactly what we think it will be next year.

And we're going to (inaudible).

We're reporting it every quarter.

So every quarter we'll give you actual revenue growth, growth in deferred billed, and growth in deferred unbilled like others do.

But we just didn't feel like we knew -- less than $1 billion, more than $10 million.

And so, we just haven't given guidance on that.

But you're right Marco.

That will be -- that's on top of the reported and the change in deferred.

Okay.

So help me understand something here just to make sure I'm kind of following how the contract maybe is structured.

So let's just say hypothetically you've got a client that's got a three-year contract.

He's going to pay $100 a year.

You're only going to bill the first year $100.

That goes to deferred revenue and you'll recognize it over 12 months.

Come January 1 the following year, the same process happens.

And so, it's additional 200.

But is this unbilled revenue that there's nowhere on the balance sheet or obviously on the income statement.

Is that correct?

Yes.

Got you.

You've got it.

And so we -- if it was a three-year deal in our example, we would bill 100 a year and record that to deferred and amortize it over the term just like you said.

And just to note, these contracts we're signing are non-cancellable.

These are not monthly pay deals where you can cancel.

I mean, these are binding contracts, which we've always -- our customers have always honored and we have too.

And we've made sure they…

Got you.

And if I remember correctly, I know that you guys have talked about doing some multi-year type contracts I think starting in the last quarter or so.

Is there a significant push to have the Salesforce I guess really go after the multi-year contracts, or is that just kind of up to the client?

Well, it's driven by what the client needs are.

But sure, we, like other people in our -- in the subscription business pay an incentive.

They get extra commission if they can get a multi-year contract, and they did.

And so, we think this will be a part of what we're trying to do.

We're trying to drive two numbers.

We want to drive the total amount -- total deferred revenue, and we also want to drive each of the two pieces.

So we'd like to -- you look at somebody like Salesforce who grows their revenue by a certain percent and about the same percent growth in deferred billed and the same percent in deferred unbilled, that keeps that pipeline so you have two-year visibility on our model.

We want to do that.

And so, we've got the incentives in place.

As Steve said, we're a little new on it.

We haven't even introduced the possibility of it till the fourth quarter.

So we don't know -- and we have a lot of our business come in the fourth quarter, so we're not expecting a flood in the first couple of quarters.

But we'll have some of that.

We'll have some of it every quarter we report on it, but we'll be mounting -- building up momentum for later quarters of the year.

Got you.

And the bonus for CPR or the sales person that brings in a multi-year contract, they get an upfront bonus for signing that contract, and then thereafter it's just a trail of commission, if you will, on the subscription?

Or are there additional bonuses for retention.

Paul?

Yes.

This is Paul.

That's exactly right.

So at the time they close the deal, they get their normal commissions for the first year plus an upfront bonus.

And then, they'll still receive their normal commissions on year two, if it's a two-year deal, or years two, three, four, if it's a two, three, or four-year deal.

So they're incented to go and try to sign as many as they can.

We're finding that some clients are willing to do that in year one.

But there's a larger percentage that when they come to that first year renewal, at that point they've had a year's worth of experience with the Pass, and as they approach their second year they are willing to instead of sign up for a second year, sign up for a second and a third, or a second and a third and a fourth.

But we are pushing on that with our salesforce.

Got you.

Thanks a lot, guys.

I appreciate your help.

Thanks, Marco.

One thing I'd just mention also organizationally is we now have these two businesses - the enterprise business and the education business is now consolidated.

And Paul Walker has been leading our enterprise business, except for the licensees, and Sean Covey has been leading our education business plus licensees.

Those responsibilities will continue.

But we have made each of them -- we've named each of them Presidents of their respective divisions here today.

And just want to congratulate them and congratulate you, because you'll be -- it's great to have them assume additional responsibilities just for the totality of what they are responsible for.

John Lewis, Osmium Partners.

Nice work on the growth in All Access Pass subscribers.

That was quite a feat.

Just a couple quick ones.

I guess first off, you said you would increase your investment in content.

I guess just when you look at kind of customer feedback, the increasing spend on content, what -- do you have any gut feel of what incremental content will do in terms of the customer satisfaction for the subscription?

Yes, I think -- here's the way we think about it.

I think on one end of the spectrum not very much.

We're just adding one more course where we already have 30 in the category, not very much.

But category one, where we have some new -- some areas where we are not deep in content for a specific job to be done -- so say something for senior leaders where we've got some great content, but it's not really deep in it.

Making an addition of content that really allows us to penetrate a market like that, that we're not deep in today, would have a bigger impact than something else.

There are certain things -- other categories like toolsets that they'd like to have to go with something.

Like for example, in sales performance, they've had some fantastic toolsets.

People who only have to do that.

And so, for us though, our main idea is the acquisition of companies, although we've done two this year.

For many of these, it's a perfect match to just license content because they'd love -- there's somebody who doesn't have their own distribution, they don't have a salesforce to go do this or implementation specialists.

And so, for us we think some may increase frequency of usage is one thing that will help make it sticky.

We think it's already sticky, but Jhana has been a great addition not just because it's bite-sized learning because it could be bite-sized and not great.

What's great about it is we've got this fantastic team that Jhana who does -- has done this great work and built this massive research library of content around what helps managers be successful, they continue to crank out new content.

Many of them are here every here helping work on it.

And so, that kind of thing where you're putting relevant content and a new platform.

For us, Jhana with all the content they have, that capability was another reason we acquired Jhana.

Because we now can take all of our content, we can molecularize it so to speak, blogify it or whatever, and we can bring it down to where whatever the problem, whether it's sales or it's education or it's senior leaders or whatever, we can have a version of Jhana that could give them the bite-sized access to content.

And of course, with all of our film libraries and everything where historically Jhana may have referred you to other articles only, they can now refer you also to where you click on it and you can get our film library.

You can get additional learning on it.

You can get a module.

You can sign up for a course.

And so, things that give us either a new segment that we're not in today, a greater frequency of usage, or a depth of the tools that help for implementation are the kinds of things we are thinking about in the discussions we're having.

Got it.

That's super helpful.

I guess another thing is we spend a lot of time looking at annual recurring revenue businesses that trade in public equity.

And we found I think 43 or 44.

And companies that are measured with contractually obligated revenue of one year or longer in public equity today trade at about 8.7x sales with a median growth rate of about 37%.

I think you guys have -- and I think it makes sense.

It's usually high margin type revenue.

I think you guys have built an unbelievable business going from $35 million SAS revenue, as you have on your Slide 37, and potentially hitting it looks like $150 million-plus for 2018.

Who knows if that's plus or minus a couple?

But your business is valued at about something like 2x ARR or a massive discount to the peer group.

So I guess my question is how do you think about -- I mean, I think you've talked a little bit about lifetime value of this sticky high growth business and I'm glad to see that you'll be buying back more stock.

But how do you think about the growth and building of this sticky business in relation to shareholder value given the short-term noise?

Yes, I think you framed it very well.

And we probably -- and we've learned a lot from you over the years in helping us think about it correctly.

I think given the different multiple on growing the business and getting something that's stickier and stickier is the reason we've increased our budget from 4% to 6%.

But that, as I've mentioned, I said that if they happen to go to 8% for a year or two to allow us to build the business, that will be our first priority is making investments.

I've said the -- so on one hand, philosophically we're going to put whatever money in we need to do it.

Luckily in a way for us, there are -- a lot of the best content out there is not somebody who has their own distribution where you want to acquire them.

It's just a small -- I mean, another small training company or something.

The bigger opportunity is something that actually isn't very capital intensive.

It's signing a license -- a 10-year license to have the rights to their content.

And signing a bunch of those kinds of agreements, you can do a lot for not as much money in a given year.

And so, we think we can be very aggressive at adding to the content in the areas that we're talking about.

We have 20-plus conversations going right now, which may lead to four or five really good things.

But we'll do all that we can because we have a map of -- to answer your question, we have a map of where we think the highest impact is.

And those 20 -- there are a few that aren't on the map -- they're off the map, they're just not worth talking to.

But most of them are focused on specific capability or a content area or customer where we think not only it would be great to be there, but where we think we can leverage the worldwide strength of Franklin Covey or our other content to leverage it, so that for us whatever we paid it's a multiple of that we get back.

So I don't know if that's -- with all that said, if we have extra cash, we'll buy back stock.

I appreciate that.

And I guess one final one.

What does 2018 look like for CP growth, and how are your client partners doing in terms of just any kind of color you have on the ability to sell All Access Pass and the ramp rates?

Are some really doing --?

We know the number, but I'd love to have Paul and Sean commit themselves publicly.

So this is Paul.

We intend -- this has been talked about for years.

And you saw on the slide there, there's been steady client partner growth now for many years.

We intend to hire pretty aggressively again this year and on our side be up net 20 or so.

And then another --.

Yes, this is Sean.

And on the education side, we'll probably hire in the range of 10.

So it would be about 30.

As you may recall, last year we said that we were going to -- we consolidated all of the offices and salesforces into these new market teams, and including just a part of the strategic markets group.

And so, we felt this year, the net 12 or 14 made sense just because these managers -- the people who had to mentor them were already picking up a bunch of new responsibilities.

But we've just -- I spoke this week at our new sales class and we're --.

24.

Yes, 24 new -- of those hires just started.

So we're in -- we have a good start towards that number.

We'll lose some of those starts -- we'll lose some.

But the net 30 commitment is what we've all talked about and we have plans for that.

Sorry.

Just one last quick one, if I could.

I saw China is at $11 million.

I know you just took that over.

I mean, I know that's a tough market to sell into.

But where do you see that going?

I mean, does that -- obviously, it's a huge market, but what is your chance of being able to meaningfully grow that into a large business?

This is Paul.

So I was just actually over there two weeks ago, spent a week with the team there.

We have a -- and Sean actually really kind of built this when they were part of the licensee network.

But we have a fantastic team in China.

A really great leader over there.

It was great to be with the team.

They'll grow meaningfully in fiscal '18.

And that's an area of the world where we think we can really do something pretty meaningful and special, which was one of the driving reasons to take it back over direct and to bring that over.

So we would like to focus there.

We intend to focus there and expect good things in the quarters and years to come.

And we expect growth.

I mean, we expect…

They'll grow like every…

Really good growth and they are committed.

We're excited there.

They haven't had the benefit, nor has Japan, of the All Access Pass.

So they're still playing the game we were playing as a company for the last -- many -- 30 years.

And so, later this year they'll start to enjoy the benefit of All Access Pass and what that's doing for the rest of our business as well.

And we're excited for that and they're excited for that too.

Kevin Liu, B. Riley FBR.

Just a quick question on the education practice.

I appreciate kind of all the details you guys have given in the subscriptions versus kind of the add-on sales there.

But if we look at kind of the growth rate over the course of '17, it seemed a little bit slower within the fourth quarter.

Obviously a bigger comp there.

But just kind of curious as to how that compared with kind of your internal expectations and whether the business is now at kind of a mature enough point where you would expect growth to be a little bit more muted than what we've become accustomed to in the past.

Yes, sure.

This is Sean.

Yes.

So education, I mean, if you go back, look at the last six years before this fiscal year '17, we were growing at around 25% to 30% compound annual growth rate.

Right?

This last year, it slowed down to about 15% on a gross basis.

I think given that you've got bigger numbers we -- it's probably more going to be in that range.

I think the growth won't continue at the same rate given just the size of the business.

But we expect solid good growth, double-digit growth, for the foreseeable future.

Internationally as well.

We have a lot of -- we have now 39 partners -- licensee partners.

That's growing really well and we expect a lot of growth there.

Our higher education group, which is part of the education division, which is really small right now, which is only about $2 million in sales, we expect it will grow a lot faster.

So we, looking at the next five years, we expect good solid growth.

And our penetration level right now, we have 2,500 Leader in Me schools out of 130,000 in North America.

130,000 total K-12 schools.

Their penetration level is really low.

So we feel like we could continue to increase our percent of penetration.

And there's a lot of continued growth.

I'd just say one more thing, too.

We're starting to penetrate districts at a much bigger level.

Right now on average we have like two schools per district.

Most districts have 15 to 40 schools.

And so, that's a big opportunity for me as well.

Yes.

And given, just maybe one other thing that came out of our detailed business review here a few weeks ago, is I think the main reason for slowing a little bit was just a mix shift where they had signed -- there was a shift toward more subscription revenue in the fourth quarter, which of course by that time, didn't affect fourth quarter very much, their biggest quarter, away from just the normal -- more just services business.

We -- more of these customers bought multi-year contracts -- or multi-month and multi-service contracts, coaching and such.

And so, almost the entire different in growth really can be attributed to the shift in mix that didn't help the year but will help this year.

I appreciate the color.

And then, just a quick question on the All Access Pass economics.

I guess when you guys first started down this path, you had been pretty hopeful that you could kind of get an 80% dollar retention rate.

It seems like you've been able to exceed that and you're not talking more in the range of 90%.

What do you feel has kind of driven retention that high?

Do you think it's sustainable over a long period of time?

And then, related to that, how does that cause you to rethink how aggressive you should be on kind of the customer acquisition front?

Thanks.

I'd say, first of all from a philosophical perspective -- I know that's not what you asked, but philosophically losing one customer is really viewed as a crime around here.

I mean, because we know they need it and we know the value proposition is there and we know they're spending some money.

So our basic thought, first of all, is that we should not lose a customer.

And when we do, we know the reasons for every one of them.

And about 80% of those that we lose, we have lost -- and it thankfully hasn't been very many.

But when we lose, it's because the person in the position who bought it has moved on, either in the company or outside the company, and we didn't do a good job of building a network of users inside that.

So for us, I think the reason why we've had more than 90% revenue retention to date has been a combination of three things.

One, an intense focus on it.

We have this whole implementation specialist team Colleen Dom overseas.

We shifted Colleen's responsibility from head of operations because -- to head of all Passholder Services mid-year here.

And so, that together with a great team of people that she has are focused -- and the whole company is honestly.

This is -- there's a meeting every week for three or four hours where we review every single -- we have a heat index (indiscernible) come in and try to understand the reasons.

So that's one reason there's attention to it.

Second, I think just the value proposition of the Pass itself is good.

But I think the key for us is these implementation specialists, which is why we made the investment in them.

If you've got somebody who is an organizational design specialist who can sit down with you, even in large companies, most of these people there's an oh thank heavens.

I do not want to be my own general contractor.

And having somebody who they don't have to pay extra for, who is there to help them, all of a sudden they say, well, hey, what else are you trying to do?

And that person finds out they're spending money with 15 other vendors.

So we have a number of small companies who have dropped all other vendors and just said with the All Access Pass that's it.

All their people development stuff, they involve -- content is us.

Middle-sized companies have dramatically reduced -- many of them dramatically reduced it.

And the larger companies who have the big staffs, et cetera, still have said oh, my gosh, this is a fantastic resource to be able to integrate that in.

So I think the usability of the product, the focus from this team, and the implementation specialist support where you really have somebody who is a partner but not just a sales person as a partner who -- our sales people are fantastic.

But somebody who really can speak the language of the people that are trying to implement the content.

I don't know, Colleen, if you would add anything to that.

Yes, I think that's it, Bob.

I think that investment in the implementation specialists and them supporting the passes the way they are.

Samir Patel, Askeladden Asset Management.

So the first one is a softball for Steve.

I know that you don't want to give specific guidance for the change in unbilled deferred revenue for 2018.

But considering that you kind of just started signing these multi-year contracts, can we at least assume that it would be equal to or greater than the $16.5 million from this year?

Well, I hesitate to say that for sure.

Even though we're -- I think we're really excited about these multi-year agreements and think that's going to grow.

So the only hesitation is sometimes we have what would be like an early adoption phenomena like in the first quarter where we get a bubble that might not be representative of the coming year.

So that's my only hesitation.

I don't have any hesitancy in saying that I think that our unbilled deferred revenue over time is going to grow at a rate similar to our deferred revenue and our reported revenue, just like other SAS businesses.

So there isn't any hesitancy to say it's going to grow.

It's just not knowing for sure how this -- the huge amount that we had or really meaningful amount in the fourth quarter is going to play out compared to this year.

We just did a lot in the fourth quarter.

Sure.

Okay.

That makes sense.

Can you talk about -- a little bit -- just starting from the top line perspective of the multi-year arrangements?

As you're going into clients right now for new sales, renewals, I know you touched on this a little bit earlier, but what level of them are seeking multi-year arrangements at kind of those different life stages, right, like the initial sale and then the one-year renewal?

And when they do kind of renew for multiple years, I mean, what's the average churn?

Is it two years?

Is it three years?

Is it four years?

Yes, I'd say -- this is Paul.

I'll take that one.

I would say that those that are -- as I've said before, typically we're finding that more of them are interested in multi-year when they come upon the renewal period and they've had experience with the Pass.

We're just kind of kind of in the early days of talking to clients that are buying the Pass for their very first time about whether they would want to do multi-year.

And certainly, some do when they -- what we've sketched out with them is a multi-year set of impact journeys we call them.

But I would we're approaching somewhere in the 20% range of those who are renewing, who are interested in doing so for more than one year.

Right now, typically they're at -- they're doing two years.

We're seeing some that are going longer than that, but usually it's renewing for two years instead of one.

Okay.

Cool.

And as far as the economics of this, Steve, what I'm trying to tease out here is obviously day one you signed this contract.

And as far as I understand it, the sales person gets an additional incentive for signing that contract beyond what they normally would have gotten for signing a one-year contract.

Correct?

But then, when kind of the next year comes up, obviously it's much less work to get that revenue back in the door if it's already contracted.

So there's some economic savings where it's more profitable from a cash flow standpoint to have that revenue from last year just stroll through the door again with basically no incremental effort.

So is there any way you can quantify or dimensionalize the relative size of the initial incentive versus kind of the additional economics on the back end?

Do you understand what I'm asking?

I think the magnitude of the upfront bonus.

Yes.

So we pay an extra bonus of 3%.

So I mean, for us, the economic trade is an easy one because we pay 3% and if we're retaining 90% of the contracts instead of 100, and we can now guarantee that contract that we're getting 100% on, and we don't have marketing costs, we can spend the time with that client trying to add on services and sales rather than trying to convince them that they -- to go on the next journey.

So for us, we think the economic trade is easy, and we'd make a bigger trade if we needed to, to make sure it happens.

But we don't think -- we've now surveyed the industry pretty well of other people, and again, we're different.

But something in the 20% to 30% of renewals growing from multi-year seems to be a good starting point for us.

Over time, it will grow just because it's a phenomenon more on the renewal than it is on the initial sale.

And so, as your base gets bigger, that should grow as you're suggesting.

The multi-year ought to grow just because your base of owners continues to grow and they're more -- the propensity to expand is there.

But the incentive I think economically is an easy one.

And it was an easy decision for us in the fourth quarter to decide that, hey, if we could get an extra $6 million or $7 million of contract value versus just crediting it and having a shorter contract, forget what it does to short-term deferred revenue because it's been billed, it's going to come in much -- more of it's going to come in.

So it was an easy decision for us and it will continue to be easy that we're going to try to drive maximum contract value.

But I think we need to play -- we're going to play with the incentives and other things.

If there's a way to trigger more of it, we have plenty of room I think to do it.

Sure.

And Steve, on Slide 21, you kind of talk about All Access Passes as targeted EBITDA margin 30% to 40%.

Obviously, for the next year or two years or so going through the transition period where the financials look messy -- but I'm curious with that, that number -- a, is that including corporate overhead or not including corporate overhead; and then, b, kind of do you have a timeline in terms of how long you think it's going to take to get through the transition and when you think they're going to -- like Adobe -- when you're going to get to the other side of the curve and start reporting profits that people can recognize?

Yes.

I mean, that's just -- sorry, Steve is looking at me just because that is my slide.

I was wondering if I made a mistake on it.

No.

But that was --.

But no more questions should go to Steve.

So I can't --.

Thank you.

Yes.

That's the contribution margin really is what it's meant to be.

It's not the whole business.

It's just the contribution when you subtract out the marketing and sales costs, implementation specialists, et cetera, they're directly associated with the revenue.

Yes.

And as we have no further questions, I would like to turn it back over to Bob for closing remarks.

Just thanks to everyone very much for your questions and for sticking on the phone.

And we look forward to talking to--anybody who has individual questions we'll be delighted to talk to in the coming days.

So thanks very much.

We look forward to talking to you soon.