Franklin Covey Co (FC) 2018 Q2 法說會逐字稿

Welcome to the Q2 2018 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.

Derek Hatch, you may begin.

Thanks, Adrienne.

On behalf of FranklinCovey, we'd like to welcome everyone to our earnings release call to discuss the second quarter of fiscal 2018 and its financial results.

Before we begin today's festivities, we'd like to remind everyone that this presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

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

Many of these conditions are beyond our control or influence.

Any one of which may cause future results to differ materially from the company's current expectations, and there can be no assurance that the company's actual future performance will meet management's expectations.

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

In addition, we'll be referencing certain non-GAAP financial measures during this presentation.

Please refer to the appropriate reconciliations of these measures as found in the appendix to this presentation.

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

Thanks, Derek.

Hello to everyone.

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

Let me just start out by saying that 2 years ago, as you know, we determined that we could better serve our clients needs, substantially expand the breadth and depth of their impact in their organizations if we were to give them access to our full collection of world-class content offerings through a subscription-based model.

Since then, as you know, All Access Pass has transformed the way in which our clients engage with us, the pervasiveness of their reach and impact in their own organizations and the flexibility and agility with which they can develop leaders and teams in order to improve their organization's performance and results.

So it's really fundamentally changed both our interactions with our customers and the way in which -- their opportunity for impacting their organizations.

It's also increased the lifetime value of our customers because these clients' -- our clients' initial purchase of an All Access Pass covers significantly larger population than it used to.

Second, the annually recurring revenue retention among passholders is greater than 90%, so that revenue sticks with us.

Many of the passholders end up increasing both the size of the population covered by their pass and extending -- and end up extending their pass' duration, which gives us that income for a longer period of time with a bigger population.

And fourth, the passholders are also purchasing a significant amount of add-on services to help them accelerate results within their organization.

And we feel like we're uniquely able to provide that combination of best-in-class content together with services that help people really engage on issues where they really want to have the need to have the impact.

So we're really encouraged and excited by our momentum.

There are 4 key takeaways which I hope you'll glean from our remarks today.

As you can see in Slide 3, the takeaways are: First, our stronger-than-expected second quarter and year-to-date results, we believe, establishes solid foundation for the significant increases in revenue, adjusted EBITDA and cash flow we expect for the full year of fiscal '18 and beyond; Second, the magnitude and significant growth of our balances of deferred revenue are providing increasing visibility into and a strengthened foundation for accelerated future growth as that balance gets bigger and bigger; Third, the momentum of our subscription business is accelerating, really driven by the significant value our customers are receiving and the retention of their revenue and add-on services and past expansion; And finally, the inflection point that you're seeing in our results is really the -- is being driven by the interplay of 4 key factors, which I'd like to just describe a little bit to you today.

So first, I'll just go through the highlights of the first -- the second quarter.

Slide 4 provides some quick highlights on key results for the second quarter and year-to-date.

As shown, revenue grew 10.3% in the second quarter and 15.2% year-to-date through the second quarter.

Importantly, all of the company's major operating units achieved revenue growth in the second quarter.

Second, total subscription and subscription-related revenue grew 55% year-over-year in the second quarter and 57% year-to-date.

Subscription and related revenue in the Enterprise Division grew even more rapidly at 81% in the second quarter and 104% year-to-date, All Access Pass.

Deferred revenue billed on the balance sheet at the end of the second quarter was $32.1 million, a year-over-year increase of $16 million or 99%, effectively a doubling of the deferred revenue that's been billed.

We also had a significant increase in deferred revenue unbilled, and so the combination of those 2 at the end of the second quarter was $47.2 million, a year-over-year increase of $29 million, or percentage-wise, it's a big percent, 165% compared to the $17.8 million of total deferred revenue balances, billed and unbilled, we had at the end of last year's second quarter.

Really encouraging is the fact that our gross margin percentage increased significantly in the quarter to 70.3%.

It's a 392 basis point year-over-year increase, reflecting the high profitability of the subscription revenue and of the All Access Pass and the membership in education -- a leader in the membership offering in education.

Adjusted EBITDA turned out to be 700 -- approximately $700,000 better than guidance even after making even more significant growth investments.

We'll talk about that.

And net cash provided by operating activities increased $2.6 million year-to-date, even after making these significant growth investments.

In addition to these factors on this -- shown on Slide 4, our number of paid subscribers -- subscription subscribers grew 36% year-over-year in the second quarter and 46% in the Enterprise Division.

I'll now like to provide a paragraph or 2 on each of these key metrics.

If you look at Slide 5, you can see revenue grew 10.3%, as we said, in the second quarter to $46.5 million, growth of $4.3 million compared to the $42 million of revenue we reported in the second quarter of fiscal '17.

Year-to-date, revenue grew 15.2% to $94.5 million, growth of $12.5 million compared to the $82 million we generated year-to-date for the second quarter of fiscal '17.

As you can see in the middle, our subscription -- our total subscription and subscription-related revenue across both the Enterprise and Education Divisions grew an even more significant 55% in the second quarter and 57% year-to-date.

And the subscription and related revenue of our Enterprise Division grew 81% in the second quarter and 104% year-to-date, driven by All Access Pass and pass-related sales.

This significant growth in our subscription and related revenue is partially offset by the declines in our now-much-smaller legacy facilitator and on-site delivery channels, and so the decline is now becoming substantially less.

The drag from that, from the decline, is now much less.

In the Enterprise Division, revenue grew $3.2 million or 10% in the second quarter to $36.3 million.

Year-to-date through the second quarter, enterprise revenue grew $10.9 million or 17.4% to $73.8 million.

As I mentioned, importantly, all of the Enterprise Division's major operating units achieved revenue growth in the second quarter, including our offices in China, Japan, the U.K. and Australia, along with the -- all of the direct offices in the U.S. With the launch of our new All Access Pass global portal, which just was launched last month, in now 16 languages, our international licensee network has just begun to sell the All Access Pass, and their excitement level about All Access Pass is extraordinarily high.

They've started to make sales of it, and we expect substantial new Pass sales between now and the end of the year from them.

In the Education Division, revenue grew $1.2 million in the quarter or 15% to $9 million.

Year-to-date through the second quarter, revenue grew $1.6 million or 10% to $18.2 million.

The Education Division added several new licensee partners to their network during the second quarter, including 3 new partners in China.

This brings the total number of licensee partners in the Education Division alone to 51.

We believe the Education Division will be able to build a licensee network comparable in size to that -- to at least what we currently have in our Enterprise Division's licensee network, which generates approximately $75 million gross revenues today, resulting in royalties for FranklinCovey of approximately $10 million.

We're getting going, and really great start in the education licensee business, and ultimately, we believe it could have that same potential.

Going to deferred revenue growth in Slide 6. Our deferred revenue balances increased to $47.2 million in the second quarter, that's billed and unbilled, growth of $29 million or up 165% year-over-year from only $17.8 million in last year's second quarter.

As you can see, the deferred revenue billed on the balance sheet increased to $32 million, which is basically a doubling from last year's second quarter.

And the unbilled deferred revenue, which represents business that's contracted but unbilled and off the balance sheet, ended the quarter at $15.1 million, which is up sevenfold compared to our $1.7 million that we had at the end of last year's second quarter.

Just reporting briefly on adjusted EBITDA and gross margin.

As we noted, it was higher than -- our adjusted EBITDA was higher than our guidance in the second quarter.

As you can see on Slide 7, we were pleased that adjusted EBITDA is approximately $700,000 higher than our guidance.

We'd expect in the given guidance that our second quarter reported EBITDA would be as much as $1 million lower than that reported in last year's second quarter, reflecting a combination of significant investments we were making and the fact that we would have -- a lot of what we're selling would be deferred.

We're pleased that our actual adjusted EBITDA was only $300,000 lower than last year's second quarter despite those investments, reflecting kind of 2 key benefits of our new business model.

One, the highly recurring and more predictable revenue, the nature of it, resulting from these high levels of client satisfaction with our offerings.

And this is indicated by our very high revenue retention rate.

The other point is our higher and increasing gross margins.

Our reported revenue was $4 million higher year-over-year or 10.3% increase to $46.5 million.

As shown on Slide 7, our gross margin percent increase, as we noted before, 392 basis points in the second quarter to 70.4%.

So this combined strong revenue growth with the higher gross margin generated -- resulted in gross margin dollars increasing $4.7 million or 17% to $32.7 million compared to $28 million in last year's second quarter.

And this -- interestingly, this $4.7 million increase in gross margin dollars almost entirely covered our nearly $5 million in planned increased growth investments, which we'll itemize here in a minute; but despite really significant increases in investment for content, implementation specialists, et cetera.

This increase in gross margin dollars covered it -- almost covered it.

Year-to-date, for the second quarter, our gross margin percent increased 430 basis points to 69.4% from 65.1% year-to-date last year.

And our gross margin dollars increased by $12.3 million year-to-date, which is up 23%, to $65.6 million, and our adjusted EBITDA increased $3.1 million year-over-year through the second quarter.

For us, this is an important concept because as you'll hear in a few minutes, we expect the expense side of our business to have -- to grow at a much lower rate going forward than it did this last year, when we had all these big investments to make.

And so this increasing gross margin against a relatively flat cost structure, we think, will allow us to flow through a lot of what we -- a lot of increased revenue in the coming years.

If you just -- going down through in enterprise -- just talking about -- in Slide 24, you can go through in the appendix, and then you can just see it broken out by division.

In the Enterprise Division, second quarter revenue was $36.3 million, growth of $3.2 million or 10% compared to revenue of $33 million in last year's second quarter.

The Enterprise Division's gross margin increased a significant 510 basis points to 75% from 69.9% in last year's second quarter.

And this combination of higher revenue and higher gross margin percentage increased the Enterprise Division's gross margin dollars by $4.1 million or 17.8%.

This growth in gross margin dollars slightly more than offset the $4 million of additional growth investments made, specifically in the Enterprise Division, resulting in a small growth of $100,000 in actual EBITDA after these investments for the quarter.

Just to give you an idea of what these investments are, the All Access Pass investments included, among other things, investments for new All Access Pass content including 3 significant new courses, which we added to the All Access Pass, including Clayton Christensen's new innovation course entitled Find Out Why; a new frontline unit level leader course entitled, The 6 Critical Practices for Leading a Team; and a new mid-level manager course entitled 4 Essential Roles of Leadership.

We also -- in this year, we've, of course, brought on -- we now have -- with the Jhana team that came on, we have the investment there that's reflected as an increased investment each quarter, and this is a very talented team, which generates additional microlearning content on an ongoing basis.

We also made significant investments in the new global All Access Pass portal, which is now done, as I mentioned, and launched and now just be amortizing it at the same level.

And we also have the cost of localizing our All Access Pass content in 16 languages worldwide, and with this new portal, we now can offer it for sale, which is great.

Year-to-date through the second quarter, the Enterprise Division's revenue, as you can see there, grew $10.9 million or 17.4% to $73.8 million compared to $62.9 million last year.

The gross margin increased year-to-date 570 basis points to 73.6% from 67.9% last year.

And this combination really drove an almost tripling of the Enterprise Division's EBITDA year-to-date to $7.4 million through the second quarter compared to $2.6 million last year.

Importantly, this $4.8 million increase year-to-date in divisional EBITDA for Enterprise was after covering more than $6.8 million of planned increased growth investments year-over-year.

The Education Division revenue of $9 million in the second quarter reflected year-over-year growth of 14.8% or $1.2 million.

The Education Division's adjusted EBITDA in the second quarter was a negative $0.9 million, just about $1 million negative, slightly less than last year's second quarter EBITDA of negative $0.6 million in the quarter.

As you know, this reflects both the fact that the staffing and marketing investments we make in the Education Division during the first and second quarters, in order to be in the position to generate contracts with hundreds of new schools, whose revenue isn't recognized until about the fourth quarter in which -- a quarter in which Education Division generates nearly 1/2 of its annual revenue and substantially all of its annual EBITDA -- is one major factor.

And the second, as we mentioned last quarter, there's a change in the structure of our leader in the subscription offering, where we are now including several on-site delivery days as part of the membership offering instead of charging for these training days outside of the membership.

This adds real value, we think, to the schools.

It also results -- the revenue from those on-site days, they get recognized -- the revenue gets recognized over 12 months, and it used to get recognized in the first 2 quarters.

And of course, that will flip over, and in the last 2 quarters that will benefit us a little bit, in the third and fourth quarters.

Net cash provided by operating activities, as shown on Slide 8, you can see, was $9.4 million year-to-date, an increase of $2.6 million compared to last year.

So that kind of covers that, hopefully, just at least the high level, the results for the quarter.

I wanted to also go, as you can see in Slide 9, the second outline point we want to talk about is the significant growth in our deferred revenue balances provides us with meaningfully increased visibility.

As you can see in Slide 9, our total balance of deferred revenue, billed and unbilled, as we've noted before, increased to $47.2 million in the second quarter.

That's really substantial growth of $29.4 million or 65% compared to the $17.8 million in total deferred revenue balances, billed and unbilled, we had at the end of the last year, and you can see that breaks out between billed and unbilled revenue.

And we expect the magnitude in our deferred revenue balances, billed and unbilled, to continue to increase in each of the coming quarters, providing us and you with greater and greater visibility into, and predictability of, our future revenue.

The third general point we've just touched on is that our subscription momentum is accelerating, and that's being driven by the value our customers are receiving as we've talked about.

Our very high annual recurring revenue retention and our customers' significant add-on purchase of impact-driving services are indicative, we believe, of the value they are seeing that we are adding to their businesses.

For example, just to give you a couple of examples, client examples.

One client initially purchased an All Access Pass for approximately 150 leaders in order to pilot the use of the All Access Pass generally, and specifically, to implement our Speed of Trust content with a group of leaders within their organization.

That pilot went very well, and upon renewal, the company expanded -- decided to expand the All Access Pass to cover not only the 150 leaders they already had, but to go to 1,000 leaders.

And to help ensure strong implementation impact after having experienced it, they also purchased more than 50 days of on-site delivery services to go with this.

So this is a client who had really tested it, tried it, decided it was for them and went long.

Another client initially, and one that we were looking at the other day, initially purchased an All Access Pass covering approximately 200 leaders.

Again, with the success of their initial initiative, at the end of their first year as a passholder, they expanded their pass from 200 leaders to 1,500 leaders and purchased almost 200 days of add-on services.

Recently -- this is what we're talking about the other day -- when we talked about it, they renewed their pass for these same 1,500 leaders, but another division inside the company who knew of the results they were getting purchased its own pass for an additional 1,500 leaders.

And so this is the kind of thing -- our objective is to develop deep, which means at all levels throughout the organization, pervasive through all divisions, ongoing, high-retention relationships with our clients.

Sometimes, this pervasiveness starts at the top with the divisional leader or higher, and that's a great place to start.

But often, like in these 2 examples, an initiative starts out in the field and because of its impact, moves up through the organization and gets bigger and bigger as it goes.

We have literally hundreds and hundreds of customers for whom, like these clients, All Access Pass is now viewed as an indispensable part of how they develop leaders and how they drive business outcomes.

I can tell you, for our team, nothing is as exciting for us -- nothing is more exciting, at least, than to have deep, pervasive client successes.

I mean that gets talked about throughout the organization.

You just know what -- that's what we're about as an organization, and it's very exciting.

It's this kind of impact that's driving the significant and accelerated momentum because when we retain all or substantially -- a substantial portion of all the revenue in the past and then add on services that take it to more than 100% of what the initial pass was, we're already in growth land even without the sale of new passes except for the declines in legacy business, which of course, is getting less and less.

So as a consequence, the subscription business is really driving the overall growth of the company.

A couple of points.

First, our subscription and subscription-related growth continued to be very strong in the second quarter year-to-date and for the latest 12 months.

As you can see in Slide 10, through the latest 12 months, our subscription and related revenue plus our change in deferred revenue, billed and unbilled, increased to $112 million, growth of $37 million or 50% compared to the $75 million in total subscription revenue and change in deferred we had for the same period last year.

So moving from $75 million to $112 million.

And that's really, at this point, without anybody -- any of our offices in China or in Japan having been able to sell this or any of our licensee partners.

So we feel like we're now in a position where they can sell it, where this can accelerate further.

Second, we also achieved strong year-over-year growth in our number of paying subscribers.

As you can see in Slide 11, our total number of paying subscribers across both our Enterprise and Education Divisions increased over 0.5 million in the second quarter.

That's an increase of 140,000 or 39% from the approximately 370,000 paying subscribers we had at the end of last year's second quarter.

You can see how that breaks out between the Enterprise and Education Divisions.

Slide 11, you can see -- sorry, Slide 12, you can see the break out in Enterprise, that 360,000 of those paying members are in the Enterprise Division, and they grew -- that balance grew by 50% from 240,000 last year.

And in the Education Division, as you can see in Slide 13, we had approximately 150,000 paying subscribers at the end of this year's second quarter that represents growth of approximately 20,000 subscribers or 15% compared to the 130,000 subscribers that we had in the second -- end of the second quarter of fiscal '17.

As you can see in Slide 14, we also, as I've noted before, achieved continued significant growth in add-on services.

This has moved from only about 5% of pass revenue in the first year in 2016 to about 26% of revenue, average revenue, in '17 to now a number that's close to 40% of average outstanding recurring revenue -- subscription revenue balances.

And so this is -- what happened is we've mentioned those 2 examples, as clients get in, they try it out, they then find problems to which they can attach it.

Some of those problems are meaningful enough and important enough that they want us to help them implement them, and we add those services on.

Finally, in this section, we're also pleased that our subscription business' key indicators continue to place among what are considered best-in-class subscription companies.

An independent study of subscription companies to which I referred last quarter included data on all 56 of the publicly traded SaaS companies.

And it identified those companies the study considered best-in-class.

As you can see on Slide 15, this was at least -- this wasn't all of them.

This is just a sampling of those they considered best-in-class.

This designation was based on these companies' achievement of all 3 of the factors you can see in Slide 16, which is certain growth in subscription revenue, which is at least 20%; having gross margin that was substantial on the pass side of at least 70%, independent of services; having growth efficiency, which is the sum of their subscription and related revenue growth plus their free cash flow margin of at least 30%.

And so if you had to get the growth efficiency, if you have 25% growth and 5% cash flow margin, you'd get there.

According to the study, these best-in-class public subscription-based companies are valued at a total enterprise value to revenue multiple of between 4.2 and 10x revenue.

And we're encouraged that, as indicated in Slide 16, our subscription business continues to also achieve all 3 of these best-in-class SaaS standards.

And the combination of our passholders making relatively high initial purchases, expanding their passholder populations and extending the terms of their passes, having more than 90% annual revenue retention and then having them purchase add-on services is definitely increasing the lifetime value of their own customers driving the momentum of the business.

Finally, our inflection point is being driven by the interplay of 4 key factors, which I just like to note.

As you can see in Slide 17, with our transition to subscription accounting, as we know the portion of a given contract's value that's recognized upfront has declined while the amount of this deferred has increased.

And we've also had an impact in our legacy business.

But it's really also giving us, as we talked about, this great visibility with deferred revenue now being at $47.2 million.

Slide 18 identifies 4 factors that are underpinning the inflection point that you're starting to see in our reported results and which has already happened in cash flow and otherwise.

These 4 factors shown in Slide 18 are as follows.

Just take Figure A, B, C and D is just -- what each is saying or at least indicating.

As shown on Figure A in Slide 18, during the initial transition to All Access Pass since 2017, this shows you -- the green bar is our legacy -- revenue from our legacy on-site and facilitator businesses versus new subscription revenue.

And you can see they were roughly equal, that the growth in the subscription business, even though these weren't all the same customers, we had some of these people converted over, but a lot of our subscription revenue came from new customers, that nevertheless interrupted our talking about it, having all the salespeople talk about it, just interrupted clients.

They didn't know exactly -- if they hadn't yet bought an All Access Pass, they might -- they were waiting to do anything until they could do it.

And so really the growth in one was offset by the other.

This year in 2018, you can see there's a positive gap between the growth of our subscription and related business and the decline in our increasingly smaller legacy business.

And so for us, this green bar, even if the percentage decline continued unabated for the next few years, and we had the same percentage decline in the legacy business year-over-year, because it's on such a smaller base, it will become less and less -- fewer and fewer dollars will be represented by that.

And the gap between the growth in our subscription business, which has been obviously growing at high rates as we've talked about here versus that is that the first -- is the first factor is that positive gap between the growth of our subscription business and the decline of legacy.

So that's an important thing that is really happening, we expect to continue to happen.

The second factor, shown on Figure B of that same, is the positive relationship between the growth in revenue and the increase in central and support costs.

As I noted earlier, in fiscal 2019 and beyond, our incremental investments in new content and portals will continue but with relatively small increments compared to fiscal '18's elevated levels.

In addition, our central, and central support, costs are expected to remain essentially flat.

As a result, as indicated in that Figure B, in fiscal '19 and beyond, the significantly higher portion of increases in revenue and gross margin dollars are expected to flow through to increases in adjusted EBITDA and cash flow.

And so that's the second thing driving this inflection.

The third factor shown on Figure C, is the relationship between the growth in revenue and the growth in adjusted EBITDA.

The powerful combination of accelerated revenue growth, high and increasing gross margins, highly variable commission-based selling costs and a relatively flat central and content cost structure means that, as shown on Figure C, a high percentage of the significant increases in revenue we expect to achieve in fiscal '18, '19, '20 and beyond are expected to flow through to accelerated increases in adjusted EBITDA.

Then finally, as it relates to cash flow, is the relationship between the growth in adjusted EBITDA and the growth in pretax cash flow, as you can see in Figure D in Slide 18, in fiscal '19 and beyond, cash flow is expected to grow even more rapidly than reported revenue.

In fact, significantly more rapidly.

This is due to the fact that the accounting for subscription sales, because it spreads the recognition of the amount of subscription revenue over the term of the subscription contract even though almost all of our subscription revenue is billed upfront at the time it's contracted, it means that the accounting recognition of the deferred revenue, therefore, significantly lags the collection of cash, and as a result, cash flow growth is expected to grow even more rapidly than reported revenue or even adjusted EBITDA.

So the interplay of these 4 factors are expected to drive significantly increased growth in enterprise value.

And we believe that as these factors become increasingly visible in the coming quarters and it's -- and are better understood, that the gap between the net present value of our expected cash flows and our market value will continue to narrow.

So conclusions.

Going back or just to Slide 19, just hitting on the points we've made.

First, our stronger-than-expected second quarter and year-to-date results, we believe, establish the foundation for significant increases in revenue, adjusted EBITDA and cash flow growth that we expect in '18 and beyond.

Second, the significant growth in our deferred revenue balances provides a meaningful increased visibility into, and strengthened foundation for, our accelerated future growth.

That the momentum is being driven by our subscription business, which in turn is being driven by the lifetime value of our customers and the value they're getting from our offerings.

And fourth, this inflection point we've hit in our operating results is actually expected to accelerate because of the interplay among those 4 key metrics, which -- each of which is also hitting the inflection point.

So at this point, I'd like to turn the time over to Steve Young to discuss our guidance.

As I do, however, I'd just like to say that we truly are excited about the progress we're making with the company and the marketplace and with our customers.

We continue to believe that we have a significant opportunity for growth as organizations, enterprises of all types and all sizes around the globe seek to develop their leaders, improve the productivity of their frontline employees, advance their cultures and improve their results.

And we believe that we are uniquely poised perhaps to address those evolving needs.

So thanks very much.

Steve?

Okay.

Thank you, Bob.

I'm excited to talk a little bit about our guidance.

As you can all remember, our guidance for this year is that we expect net sales to increase from $185 million to approximately $212 million, a 14% increase.

We expect deferred revenue on our balance sheet to increase by more than $15 million, at least a 36% increase.

And we expect adjusted EBITDA for the year to increase from $7.7 million to a range of $10 million to $15 million.

Our year-to-date result supports that annual guidance, and we reaffirm guidance.

Because our year-to-date adjusted EBITDA is $3.1 million higher than last year, that means, obviously, that if our 3 -- Q3 and Q4 results are just equal to last year, we would still be slightly within our annual adjusted EBITDA guidance.

So we're reaffirming that guidance.

Bob has already talked about how we're pleased that our Q2 result was better than our guidance.

We're happy about that, so I'll just jump to Q3.

We expect that our Q3 result will be somewhat higher than last year, up to approximately $500,000 higher.

That is at the adjusted EBITDA level.

We expect sales and gross margin to be higher than last year, offset by the increased cost related to growth investments that we've talked about previously and that Bob just talked about also.

So the information that Bob discussed is obviously critical to understanding our guidance.

Particularly, we still believe that we are at an inflection point, and that future results will benefit from increased sales, continued strong gross margin and high flow-through of increased earnings to increased cash.

So I know I don't need to say it, but I will anyway.

You need to remember that we are still in a significant accounting and business transition and could report results that are different than what we just talked about.

Particularly just want to impress again of the many factors that could cause a difference, that would include a mix shift in sales between subscription and nonsubscription sales, which could result in lower reported net sales.

Another way of saying that is if our subscription business accelerates more than we think, we could have lower-than-expected net sales and yet still be happy.

So thank you, Bob.

That's our guidance.

Thanks, Steve.

At this point, why don't we open it to questions?

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

Can I just ask -- I noticed there's a new slide towards the back of the investor deck, I think 28, and it breaks out kind of the direct revenue in the Enterprise Division from All Access Pass.

I guess one -- it's, I guess, essentially flat sequentially, and I guess, they are technically down by a small amount.

But given the growth in the subscription business, I want to think there's seasonality, and I would've thought that, that would be a building number.

So why -- I guess, why wasn't it?

Yes.

So Tim, let me just say it back.

You're saying the other direct offices that grew -- their total growth was 8 -- is this where you're looking?

The 8.7 of revenue from those offices versus 7.3 last year?

What I'm looking at, it says in the slide that in Q1, there's $8.6 million of revenue from All Access Pass, and in Q2, there's $8.4 million.

Okay.

I'm sorry.

I thought you were doing the other direct offices, I apologize.

No.

Okay, All Access Pass.

Yes.

And so this is reconciling to the actual reported revenue, right?

Yes.

Yes, it is.

And so this isn't tracking, Tim, the contracted revenue, which was substantially higher in the second quarter.

We've, in fact -- let's give you that -- I think, well, maybe see if we can break that out.

We can answer this specifically.

So we had higher -- we had substantially higher All Access Pass contracted sales in the second quarter than the first, in the order of -- Paul's remote here, but in the order of $13.2 million versus like $7.8 million in the U.S. direct offices.

So it's just what you'd think, that the amount of contracted revenue would go up sequentially, and we expect to continue to do so.

It's just that because of the -- because almost all of that revenue is just contracted as deferred, very little of it showed up in the quarter.

We can give you the exact breakout, but -- Steve?

Yes.

So like I was saying, we were talking about reported revenue.

I'm just repeating what Bob said, the other one, since we're talking about reported revenue, and we have a lot of our deferred sales that occur in the fourth quarter of the prior year, what that means is that a large chunk of deferred revenue that goes on to the balance sheet is going to come off evenly in the first and second quarter.

So a big piece of the amount of revenue recording is the reversal of that deferred of the prior year, plus a little bit that comes in from the sales of that quarter.

But that's the kind of thing that tends to smooth out the first and second quarter.

The relationship -- the balance sheet deferred to the P&L, if that's making sense, Tim.

Yes.

I mean, I'll just -- I get what you're saying.

Maybe I'll look more closely at it.

But your main point is right.

The -- like I say, the total contracts of All Access Pass sales was up a lot from something like $7.8 million to $13.2 million or so in those offices.

And that then, of course, puts more on the deferred, that's why our deferred balance went up, and it'll start to benefit these future quarters.

We're happy to walk that through and give you a summary sheet if you'd -- afterwards if you'd like.

No, that's fair.

Let me ask, as long as you're talking kind of contracts signed, the education business, I think it's the second quarter where the contracts signed number is down year-over-year.

Can you talk through what's happening there?

Yes.

Shawn, would you like to address it specifically?

Yes, sure.

Yes.

Well, most of the year, we spend -- for the first half of the year, we spend working on trying to get new schools to sign up.

We don't watch the numbers so carefully in the first couple of quarters, I think what -- we're building for the third and fourth quarters.

And so we came in about where we expected for the second quarter.

We typically have to hire a lot of marketing resources and sales resources early the first half of the year, and deliver in the third and fourth quarters.

And so the reason our EBITDA is slightly down for the second quarter is because of the amount of investment we have to make, so we can deliver on the third and fourth quarters.

And then, Tim, in terms of just the contracted amount, so as you were talking about, the actual contracts signed because so many of the schools do it in the third and fourth quarter, right, before they're getting it for delivery is about even with last year.

What happened though is I made a note that wasn't probably very clear is that in the past, we would be receiving revenue recognized in the quarter and contract in and recognized related to these on-site delivery dates, we would have that, and that'd be part of our kind of gross contracted amount.

So what happened is we decided that it added more value to the customer to include some of those on-site days.

And so in the first quarter and the second quarter, there's more than $1 million of that revenue, which historically would have been recognized in the quarter and would have shown up as, therefore, at least been even with last year in the second quarter.

But because it's now included in a subscription, it's being amortized equally throughout the course of the year.

As a consequence, the first and second quarters were each down by about $1 million each because of that.

And then the third and fourth quarters, that will reverse and that'll be $1 million higher than really what we're contracting.

So really, we think the answer is education was flat.

Normally, it's flat this time of the year.

And in terms of contracts, just because of the nature of the contracting cycle, the pipeline is really strong, but actual signed contracts is, in our review this week, was just flat, at least basically flat year-to-date.

Okay.

Just to follow up.

Bob, that comment you made, though, was true of revenue, right?

I mean, you're -- the contracts signed metric you disclosed obviously adjusts for deferred revenue movements.

Yes.

I'm saying the contracted amount, but for the change in accounting on the on-site days would be basically flat with last year.

Yes, so I believe that's the answer.

Okay.

All right.

And then lastly, you made a comment about, basically, the cash flow being -- growing faster than EBIT in the future and that being depressed.

I guess, I understand that the shift accounting-wise makes the numbers noisy.

But can you revisit that?

I mean, how was free cash flow, I guess, depressed by the change at the moment that's going on with the business model?

Yes.

If I said that, I misspoke.

I was saying the cash flow will grow faster than the reported because that gets billed before the revenue is recognized.

So if I said depressed on the wrong -- I was -- I modified the wrong part of the sentence.

Because cash flow should grow faster than reported revenue now, now that we're across the transition because we are billing that contracted revenue upfront, and it will come in well ahead of when the revenue comes in.

And our next question comes from of Alex Paris from Barrington Research.

This is Chris Howe sitting in for Alex.

I have a question as it relates to the multiyear agreements.

Were there any multiyear agreements this quarter from new customers as opposed to existing?

And if you can, just give an update or further insight on the progress of these multiyear engagements?

How has it been going?

And what have been the pushbacks from new customers in the adoption?

Sure.

Paul, would you like to address it?

You bet, yes.

Chris, thanks for your question.

So as we mentioned, I think, last quarter in our call, we really began focusing on multiyear contracts in last year's fourth quarter and really just in August of last year's fourth quarter.

And we saw some nice growth in those, obviously from virtually none to a fair number.

That's continued.

In our second quarter, we didn't have as many in Q1.

We had a number of them in the second quarter.

And specific to your question, we're seeing them both from clients upon their renewal.

And we're also seeing some of those that are signing multiyears as new customers as well.

I would say right now, we're probably still 3 to 1 in terms of those renewing, who are signing multiyear versus those who are new, but that number continues to grow.

This is new behavior for our salespeople.

And I would say, it's actually less a function of clients not wanting to do it and more a function of just us learning how to do it and making sure that we present our contracts as multiyears every time that we can.

We've been reworking our proposals and our whole contracting system so that becomes a default for us into the future.

So we're actually pleased with the growth in the multiyear contracts.

Like I say there, we're starting to see those happen even on the first year that a client signs up with us.

But the majority are still coming upon renewal, which I think will always be the case, that you'll have a client who's -- as Bob mentioned earlier in the 2 examples, where a client chooses to get started, they're not quite sure yet how far that initiative will go, how many people it will cover.

And I think a natural point to do it would be upon renewal, but we of course want to get multiyear any time we can.

That color is very helpful.

And I have one last question for Steve.

You had reaffirmed the deferred revenue increase of $15 million for fiscal '18.

Any guidance or insight into unbilled revenue, unbilled?

And as far as fiscal year '19, would you be able to provide any bird's eye view of where you're trending towards, whether it's scenario 1 or 2, which was provided on the last call?

Well, first of all, look at the unbilled.

No, we haven't -- as Paul said, each quarter of -- first and second quarter of this year, we had more unbilled than we had before.

But as you remember, we had a significant amount of unbilled revenue that we entered into Q4 of last year.

So I think, it would be reasonable to say that we're going to have unbilled deferred, that Paul talked about, in the third quarter and an increased amount in the fourth quarter but not prepared to say that the fourth quarter amount will be as much as it was last year.

It might be, but really, it could be less than since that is the quarter that we really introduced the focus with more of our salespeople and really looked at the unbilled deferred.

So absent that fourth quarter of last year being so significant, we expect our unbilled to continue to grow, as we've talked about, and be an important part of the business.

And I hope that makes sense.

And as far as '19 -- did that answer the unbilled?

Yes, it does.

Okay.

And as far as '19, we really haven't given any guidance into '19.

I think it's obvious that we expect our revenue to grow, and we would expect our mix of revenue to continue to shift toward deferred, which means that our deferred on the balance sheet we'd expect to continue to grow, but haven't attached numbers to that as guidance yet.

And the next question comes from Jeff Martin from ROTH Capital Partners.

Bob, I want to get a better understanding of your -- what components go into your revenue retention rate?

Is it just All Access Pass?

Or does that include other items such as any of the add-on services?

Yes.

The retention rate is only with regard to contracts, which really just the All Access Pass contracts themselves.

And so when we say more than 90% of the revenue from those contracts is retained, then add-on services is on top of that, and that's not contractual, so we don't -- so we're not measuring that.

Okay.

And that remains above 90%, I think you said?

Yes.

So the annual revenue retention is above 90%.

And then the add-on sales are in the ZIP Code of 40% add-on to that.

So if somebody had a $100,000 purchase, they would -- of the pass, we'd retain over 90% or over $90,000.

And then add to that $90,000 about 40% in services on -- to get an idea of what -- but it's -- yes, the annual revenue retention is just on contracted revenue.

And then can you give us the sense of how many of your clients, say, over the last 5 or 10 years have transitioned to All Access Pass?

And what do you think full saturation is on a percentage basis of the client base?

Percentage that's moved to All Access Pass or just in...

So answering 2 different ways.

One, in the initial 1.5 years, Jeff, about 40% of the purchasers of All Access Pass were active customers in a different channel.

But because they bought so much more when they -- because they increased their investment so much of their -- when they bought the pass, the -- not as high a percent of the -- about 20% of the initial All Access Pass revenue was replacement revenue, if that makes sense, because they were spending half of the amount that they spent when they stepped up to the pass.

And so that's answering it one way.

In terms of the percentage of the customers, so that was the percentage of the passholders that were previous customers.

If you're asking -- I think you're asking what percentage of our customers have come over.

Of the 4,300 or so active accounts, which include small accounts, too, we've had around 400 of those come across.

And so we still have -- we have -- the others are still either doing this legacy business or in the pipeline for a potential conversion to All Access Pass.

And about 70% of those are in our pipeline, but that doesn't mean they're moving through it as fast as we'd like.

But that's kind of where it is.

We've got a lot of customers who still buy episodically outside of the pass.

And they're an opportunity for us to convert over time.

Is that helpful?

It is.

It is.

And then are you still seeing a pretty high percentage of the clients that are purchasing All Access Pass are new clients?

No, so it isn't as much.

So nowadays the initial ones for whom it made sense got plenty of chances to come across.

And so nowadays, it's in the range of about 20% of our new pass sales in terms of units would come from existing active clients.

But that would only represent about 10% of All Access Pass contracted revenue because that's replacing old revenue because they're buying twice as much now.

[So does that make sense?]

Okay.

Okay.

And was there -- do you have a number for the revenue contribution from acquired businesses in Q2?

Yes.

Steve?

I don't have that in front of me.

In the quarter, it's about $1 million for Robert Gregory, give or take.

I think there's like $1 million, between $1 million and $1.2 million.

Okay.

And then last question, maybe for Bob and Steve as well, in terms of the leverage in the model next year, I think that's one of the focal points for people to focus on here.

What do you think -- what's your view on what kind of leverage you can deliver to the EBITDA line next year on each dollar of revenue, incremental dollar of revenue?

We really haven't given any guidance for next year, so I don't know that I could throw out a number.

I mean, in the past, we've talked about 30% flow-through of incremental sales to incremental adjusted EBITDA.

And with some other things we're doing, it could even be higher than that for a period of time.

So it's -- in that range is what we normally talked about, and we just haven't given guidance for FY '19.

In last quarter's report, we included a sensitivity chart, Jeff, that you might find helpful just in getting the relationships.

It showed under different revenue growth rates the incremental flow-through of revenue.

That wasn't a forecast, but it just gives you -- at least shows how the models work and it's -- and you'll see that it's well north of 30% or 35% just because we've been investing so heavily on things that at least for the next year or 2, you'll have a higher-than-normal flow-through given the nature of the deferred revenue coming on -- coming in and so forth.

That should have an -- the increase in revenues should be at a high and a good margin.

Cost grow at a rate that's much slower than the rate of growth of revenue.

And then also, the other things that impact cash flow, of course, are development costs.

And we've had a fairly significant amount with the portal and our ERP system, et cetera, that would also impact our cash but would not be repeated in FY '19.

And the next question comes from Marco Rodriguez with Stonegate Capital.

Just a follow-up on the prior question here on the leverage in the model.

Obviously, you guys have communicated in the past that you've got a model where there's 30% or 40% flow-through of revenue to EBITDA.

If we're starting to think on to '19, I mean, where -- do you think you'd be at the lower -- do you think you'd be more on the lower end or the higher end of that sort of a range based on having a lot of those investments that you've made on a -- over the last 12 months kind of subsiding, if you will?

So I think that what we've talked about is all accurate as far as the growth in revenue at a high margin, our cost growing at a rate less, slower, and that we'd have less going out in our CapEx type of cost but really aren't prepared to say what percentage we think that's going to be in '19 yet.

I don't have the numbers.

And before, we really went through and looked at that with the intent of disclosing it to the world.

I'd hate to just throw out a hunch as to what that percentage is going to be.

Well, it's going to be what I'd call good.

Right.

Got you.

Okay.

And then in terms of the ERP costs that you've been incurring here for the last few quarters, how much longer is that going to remain?

We're essentially done with the system implementation.

There are some costs that we're going to incur.

This will probably surprise you that every once in a while, there's a new -- some bugs in a new ERP implementation that take a while for us to fix, and we'll incur some costs in that.

But as far as capitalizing our cost, I think we're essentially finished with capitalizing that project.

Okay.

And last quick question here.

On the gross margin line, some very nice upside at least compared to our model of 70%.

Were there any IP sales or higher-than-normal IP sales that maybe kind of got that number to get a little bit higher than normal more than expected?

No, I can't think of anything in there that would be like a onetime type of thing you're talking about, can't really think of, no.

I think it's a reasonable gross margin percentage.

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

First question, just as you look at the international direct offices, now that they have the ability to sell the All Access Pass as well, can you talk about what sort of the accounting impact headwind you expect kind of going in on the second half of the year?

And then related to that, just what sort of uplift you might get in terms of either the deferred revenue or just kind of invoiced amounts that you'd expect out of those international operations?

Sure.

I don't know, Paul, if you want to address it first or you want me to.

Bob, I would just say -- Kevin, that -- so we are -- we actually won't be -- so we've been selling the All Access Pass in the U.K. and in Australia really since day 1, so since the end of or early 2017.

So those are already in the numbers.

And those are being -- the accounting in those offices looks very much like it does here in the U.S. In Japan, we have the portals now just available.

And so there will be some sales.

We expect to make some sales and are already talking to a number of clients and closing deals there.

So there will be some impact there in the form of deferred revenue.

China won't actually come online until the fall.

We have to set up a separate instance of our portal in China behind their firewall and so won't be any impact in this fiscal year from China.

Thanks, Paul.

The other thing I would mention is our licensee network that's now selling the All Access Pass more, we will continue to receive our royalty as they bill.

So there won't be any impact in our licensee network.

Got it.

And actually, along the licensee front.

As you look at the growth there, I mean, it's been flattish for the first half but kind of on an improving growth trajectory versus Q1.

So just kind of curious where you expect the growth rate on the licensee piece to be once you exit the year.

This is Shawn.

I'll give that a shot.

Sure.

I think there's been a lot of pent-up sales because the licensee network has been waiting for the new portal with 16 languages.

And so I believe it's depressed the first half of the year somewhat, and we're flat year-to-date.

I believe we're going to see some good, solid growth going forward, third and fourth quarters, because now we are starting to sell it.

Just in the last few weeks, we've sold many.

And there's a lot of pent-up excitement around it.

So I believe, not going to quote anything, but I believe we're going to have good, solid growth for the third and fourth quarters.

And I think it will continue as the licensees, in a similar fashion to the U.S. and the direct offices, I think they'll transition to the All Access Pass pretty rapidly.

So I think next year, it might be 30% to 40% of the sales, the following year, over 50%, and then maybe 75% the third year as we transition to the All Access Pass.

There's nothing, I feel -- just one more comment.

I feel the network is strong.

We've got several new partners in place in areas like Vietnam, that's coming on strong, and France.

And so we think it's pretty healthy at this point.

That's great.

And just one last question from me.

I certainly appreciate all the new disclosures around specific revenue breakouts on the enterprise side.

As we look at those numbers, is there kind of a significant headwind you'd anticipate on the facilitator side over time?

For instance, do you expect that to continuously decline down towards 0?

Or do you think it stabilizes at some level?

And then conversely, as you look at your All Access Pass numbers, given what you're seeing on the contracting side, is there a point in time that you can share with us when you expect that to maybe account for, say, half the business or more?

Yes, Kevin, on Slide 18, it's at least illustrative without specific numbers, but I can give you an idea.

If you look on Figure 18 -- I mean, Slide 18, Figure A, do you see that?

Yes.

Yes.

And so the green bar is the expected decline in the legacy business over the next few years compared to the growth in the blue line of the subscription side.

And so we think, in rough terms, that you'll have -- the legacy business will decline maybe $7 million or $8 million of drag, maybe higher than that this year, but then will be down to $7 million or $8 million in -- it'll be higher than that in '18, but it'll be down to $7 million or $8 million of decline next year going down to $3 million or $4 million.

And so it will continue.

There'll be some base of it that continues.

But its drag on results is less this year.

It will be even less next year.

And so the growth rate in subscription will start to become more and more the growth rate in the business.

Your question about when it will become, in the Enterprise Division, licensees aside, as Steve said, the accounting won't change that.

But over time, really, we think that All Access Pass and pass-related services will end up being around 80-plus percent of the total business.

So if you take $175 million today of Enterprise Division total revenue, subtract out the portion that's licensees of around $10 million or $12 million in terms of royalties, the rest of it, probably about 85% of that -- 80% of it in the next 2 years will be All Access Pass or pass-related.

And the next question comes from Samir Patel from Askeladden Capital.

Guys, you've almost left me questionless, so good job.

I do have one though.

So Steve, you kind of talked about the Q3 and Q4 comparisons.

And looking at Slide I think it's 6 here, yes, Slide 6 in your slide deck.

Your billed deferred revenue balance is already up about $16 million year-on-year.

And looking at the balance sheet, I know the balance sheet deferred revenue item kind of includes some stuff that isn't really related to the subscription business, but the balance sheet shows deferred revenue being down about $5 million.

So given that Q3 and Q4 are your big sales quarters and typically seasonally, would expect to build a lot of deferred revenue during that period and then kind of burn some of that maybe in the first half of the year.

But given that during the first half of the year, you've more or less been invoicing what you've been burning, when you talk about that more than $15 million number, I mean, it seems like $15 million would actually be a fairly low estimate.

When you say more than $15 million, could it be meaningfully more than that?

Or is it likely to be kind of close to that, $15 million maybe $20 million range?

Because it just seems like you should book a lot more deferred revenue in Q3 and Q4 and widen that gap year-on-year that you're showing on Slide 6. Meaning you should book more -- you should invoice more revenue than you actually bill in Q3 and Q4.

So yes.

Q3 and Q4 are the quarters that we put most of the deferred revenue on the balance sheet.

And let's just say that if sales go according to what our targets would be inside, then it would be more than $15 million.

So again, not prepared to really say, but we were a little bit intentional in saying that we're reaffirming our guidance.

So I wouldn't really like to change our guidance in that, but we do expect to have a good fourth quarter and add a significant amount to our balance sheet.

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

I only have one question.

Historically, you've been very active and aggressive buying back stock, and I understand you've been making investments in the business for the last quarter or 2. But I'm wondering how you're thinking about stock buybacks over the second half of the fiscal year here.

I hope that we've demonstrated over time our willingness to use excess cash to buy back stock.

That's still the intention that we have.

As you mentioned, we've had the ERP project, the portal development, the international -- converting the international -- the All Access Pass into the 16 languages, all of -- and some earnouts, all of which use excess cash.

But we still have the same idea that we've had all along as when we have excess cash, returning that to shareholders.

You might just note that if we go back a long period of time, like it was like 15 years or something, we've actually retired almost 10 million shares, including the management loan program and the tender offers, I think it's about 10 million shares.

Of course, we've offered some as share-based comp and other things.

But we still have the same idea of aggressively buying back stock with excess cash.

And our next question comes from John Lewis of Osmium Partners.

Just a couple of quick ones for you.

I guess you guys have spent around, I think, ballpark $14 million or $15 million on the ERP system.

Have you -- is there any -- how much did it cost to put the portal in 15 languages?

I'm just curious, how much of a weight those 2 activities have been?

Well, the ERP, we probably combined a couple of numbers there, maybe our content development, acquisitions and everything.

We've spent about $7 million on the ERP project, give or take, and we spent $3 million, $3.5 million, $4 million -- $3.5 million on the localization of the content, and then a couple of million on the portal and ongoing development of the portal that we'll have for some time.

Got it.

Okay, that's helpful.

How about -- just looking through your M&A pipeline, do you see anything in the marketplace that you're -- do you still have a lot of conversations going?

Or where are you on bringing new content into the platform that you think could be meaningful?

Yes.

And as you said, John, probably most of it won't end up being M&A per se, but it's just the licensing and so forth.

We -- I think we have a good map of what things we think we're missing.

We're very intent and aggressively having discussions on the few pieces that we think we really need.

There's, of course, lots and lots of content available, but we have a good map, I think, of where we need it, and we're having those conversations.

And we expect in the next, probably in the third quarter or early in the fourth quarter, to announce some new content partnerships that we've been working on.

Great.

And I think, are you -- Bob, are you going to present at the [GBC] conference down in mid-April in San Diego?

Yes.

Yes, in San Diego.

Yes.

Okay.

Will you be having -- will you update -- will you just be giving the presentation or giving -- or do you have something more -- I don't know if there'll be a presentation for that.

Yes, there is.

Just they've asked to give us a little more strategic context for what we're doing.

So there'll be some more strategic stuff in terms of numbers.

We won't be updating anything there.

It's just 2 weeks, right?

And our last question comes from Shawn Boyd from Next Mark Capital.

Okay.

I'll keep it quick here.

If I'm looking at the numbers right, when -- if we look at Slide 5, the subscription and subscription-related growth in enterprise, we've got $13.7 million in the quarter.

And that's up about $1 million from the last quarter, so sequentially, from November to February quarters.

Given what you're seeing in your deferred and the contracts signed, et cetera, should we be thinking about that kind of $1 million increase per quarter going forward?

Or does that start to accelerate at an even higher rate if we keep kind of moving with this mix shift?

So this kind of goes back to Tim's question at the beginning.

And while we've been here, I kind of looked up something to help answer that a little bit.

So when we talk about reported numbers in Q1 and Q2, they're flattened quite a bit by what we've talked about, the interaction between the balance sheet, deferred and the reported number.

In this, we're talking about reported numbers.

So just for interest, our actual invoiced amount of All Access Pass in the second quarter was more than $6 million more than in the first quarter.

So we had significant sequential increase between Q1 and Q2 of the contracts that we entered into and billed.

And then that significant increase is muted by the fact that all -- a good portion of those sales in our second quarter would be in the last 6 weeks of the quarter, say, so we have a very small amount of that sequential increase actually reflected in the reported number.

But it was a significant increase.

So yes, our eventual growth rate of the -- related to the All Access Pass and subscription business lags more behind our invoiced number, and our reported number should increase significantly more than $1 million a quarter for our All Access Pass.

Got it.

Got it.

Okay.

And then kind of maybe going part and parcel with this question is also on the contracts signed.

So -- and I'll be honest, I forgot which slide I got that off of.

But on the contracts signed growth just within the enterprise, year-over-year, that was up about 6%.

Right.

So it's Slide 23.

Slide 23, okay.

Yes.

And so that also struck me, given everything else that we're talking about, in terms of the growth in deferreds, that, that number is likely to accelerate in the back half of the year.

Am I thinking about it right?

Yes, that is correct.

And you can see in that slide also, it's reduced further by the fact that with the change in unbilled contracts, we build up this big balance of unbilled deferred, we include that here.

But if you took it out, if you just took the reported net sales plus the change in deferred billed sales, you've had the $40 million in Q2 versus -- this year in the enterprise versus, I'm just adding here, $37.14 million.

And so you'd have gone -- it'd been 8% growth in actual contracted and billed kind of the reported plus change in deferred number is more like 8%, offset a little bit by the decline in the deferred, which is just amortizing off each quarter until we get to the fourth quarter.

So we agree with you that it should be -- it should accelerate both because of the sales in contracts of new All Access Pass and because the legacy business offset, which is part of this, as it continues to decline.

Its drag will be less and less on this.

So our subscription growth was well ahead of this number.

Got it.

Got it.

Okay.

Last one from me.

As the mix -- as the progress continues here, and the mix becomes more and more subscription-related, at what point do you think you all could guide not just to revenues and adjusted EBITDA for the full year but also subscription and subscription-related revenues for the year?

Do you think maybe we could get that for FY '19?

Or where do you need the model that you could start to provide that?

I think we could, yes.

So I think it's a good request.

We haven't done that to date, but it's not because we can't.

So I think we could easily do that.

I mean, choosing that for '19, and if that helps, everybody understand what's going on a little better.

Like you said, we predict it all the time, I mean, even though we don't disclose it.

Yes, we predict it every day of the week.

We're predicting it.

We're just -- every week.

There's a significant amount of effort on that.

But we just want to make sure before we go out to the world that the pattern becomes stable and representative of the future.

So we're only into this 2.5 years, and we started at 0. And you got early adopters and everything else.

So you're not 100% certain that your experience to date is representative of what you're going to experience in the future.

But obviously, as the numbers get larger and the growth rates and things become more consistent, then we would feel comfortable releasing that information.

But as you would expect, we spent a lot of time predicting and analyzing what All Access Pass has done and what it might do.

Yes.

Yes.

No, I understand that, and I appreciate it.

And it just seems that with the progress you guys have made so far, which has been quite a bit, it's probably getting to that point where you could make it a little more transparent.

So for those of -- from the outside, being able to see it, I think it would be really helpful.

Thank you very much.

Okay.

And this concludes your question-and-answer session.

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

Yes.

We just want -- thank you.

We just like to thank -- thanks to each of you for attending today and for your great questions.

And we're delighted to talk off-line with anyone who'd like to pursue any further questions or has any other data request.

But thanks so much for your great support.

I'd just say as we conclude that we really are generally enthused about what's going on.

We expect that our direct offices in -- the English-speaking direct offices in which we're flat for a couple of years during the transition would start to grow.

It's great to see on Slide 23 for us that, that's now, even the way we used to measure it with change in deferred revenue alone without unbilled, that we're up in that 8% range each of the last 2 quarters.

And that's still with the drag.

So we feel like we're now at a point where the inflection, as I mentioned on Slide 18, should continue to accelerate because each of the 4 factors that's driving it is accelerating.

So thanks to you, and we look forward to talking to you one-on-one.

Thank you so much.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating and you may now disconnect.