Franklin Covey Co (FC) 2021 Q3 法說會逐字稿

Welcome to the Q3 2021 Franklin Covey Earnings Conference Call. My name is Adrienne, and I'll be your operator for today's call. (Operator Instructions) Please note, this conference is being recorded.

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

Thank you, Adrienne. Good afternoon, ladies and gentlemen. On behalf of Franklin Covey, I would like to welcome you to our conference call to discuss the third quarter of fiscal 2021 financial results and hope everyone is having a great summer.

Before we begin this presentation, 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 our subscription offerings, including the All Access Pass and Leader in Me memberships; the duration and recovery from the COVID-19 pandemic; the ability of the company to hire productive sales professionals; general economic conditions; competition in the company's targeted marketplace; market acceptance of new offerings or services and marketing strategies; changes in the company's market share; changes in the size of the overall market for the company's products; changes in the training and spending policies of the company's clients; and other factors identified and discussed in the company's most recent annual report on Form 10-K and other periodic reports filed with the Securities and Exchange Commission. Many of these conditions are beyond our control or influence, any one of which may cause future results to differ materially from the company's current expectations. And there can be no assurance the company's actual future performance will meet management's expectations. These forward-looking statements are based on management's current expectations and we undertake no obligation to update or revise these forward-looking statements to reflect events or circumstances after the date of today's presentation, except as required by law.

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

Thanks very much, Derek. Good afternoon, everyone. We're happy to have the opportunity to talk with you today. I really appreciate you joining us. We're pleased to report, as you saw in the press release, that our third quarter results were strong and even stronger than expected. We believe this again reflects the strength, power, quality and durability of our customer value proposition and of the high-growth, durable subscription business model that we have created.

Just some highlights, as shown on Slide 3, revenue was up 58% in the quarter, and it was also greater than fiscal '19's strong third quarter. Gross margin percentage was up 587 basis points. Our operating SG&A as a percentage of sales improved to 63.6%. Adjusted EBITDA increased $12.2 million in the quarter to $8.6 million. Our net cash from operating activities increased 65% to $30.9 million. And we ended the quarter with $51 million in liquidity even after making a major investment in the acquisition of Strive.

I just like to provide a little more detail on each of these key highlights. Revenue in the third quarter was $58.7 million, which obviously represented a big increase compared to the $37.1 million of revenue in last year's third quarter which, of course, was impacted by the COVID pandemic. Importantly, though, this $58.7 million of revenue was not only significantly higher than last year's third quarter, it was also higher than the $56 million in revenue achieved in the strong third quarter of fiscal '19 pre-pandemic, which itself represented a big increase compared to the $50.5 million of revenue achieved in the third quarter of fiscal 2018. This strong growth was driven primarily by the strength in growth of All Access Pass and also of our subscription business in Education.

All Access Pass, we see -- we're in Slide 4. In the third quarter, All Access Pass subscription sales increased 17% to $19.2 million, a growth of $2.8 million compared to the third quarter of fiscal 2020. Importantly, this represented a growth of 40% compared to the $13.8 million in All Access Pass sales achieved in the strong third quarter of fiscal 2019. When you take subscription plus subscription services, sales grew 43% to $29.7 million in the third quarter compared to $20.8 million in the third quarter of fiscal 2020 but also grew 39% compared to the $21.4 million in All Access Pass subscription and subscription services sales in the third quarter of fiscal 2019.

Our total balance of deferred subscription revenue grew 26% in the third quarter to $55.3 million, an increase of $11.4 million compared to our balance of $43.9 million at the end of last year's third quarter. This represented a very strong growth of 39% compared to our deferred revenue balance of $39.9 million in the third quarter of fiscal '19. And then finally, our balance of unbilled deferred revenue grew 23% to $41.3 million in this year's third quarter and grew 74% compared to our $23.7 million balance of unbilled deferred revenue in the third quarter of fiscal '19, reflecting -- this reflects, of course, a significant and ongoing increase in the percentage of our All Access Pass contracts, which are now multiyear.

We've talked in the past sort of having roughly 1/3 of our contracts multiyear. It's now more than 40%. And the 40% of contracts represent 52% of -- all of our All Access Pass subscription revenue is now in multiyear contracts in North America. And that's really encouraging and exciting that people are seeing that value and that we already have deferred revenue not just for 2022 fiscal year but already significant amounts for 2023.

Our revenue growth was strong, as we talked about. And as shown on Slide 5, the growth of our profitability and cash flow related to this revenue growth was even more significant. Gross margin percentage for the company increased 587 basis points to 78.2% in the third quarter compared with 72.3% in last year's third quarter, 70.8% in the third quarter of fiscal '19 and 69.2% in the third quarter of fiscal '18. Gross margins in the Enterprise Division itself actually grew to 81.5% in the third quarter.

Operating SG&A as a percentage of sales, as I mentioned, declined to 63.6%, representing a significant improvement compared to the third quarter of fiscal 2020, was also a little lower than the 65.3% achieved in fiscal 2019's third quarter and the 68% achieved in the third quarter of fiscal '18.

Note that adjusted EBITDA increased to $8.6 million in the third quarter. That's an increase of $12.2 million compared to adjusted EBITDA loss of $3.6 million last year, but it also represents a significant increase compared to the $3.1 million in adjusted EBITDA achieved in the third quarter of fiscal '19 and compared to the $600,000 adjusted EBITDA achieved in fiscal '18. Looking at year-to-date adjusted EBITDA increased to $17.4 million, which is a big increase compared to the $5.4 million in year-to-date adjusted EBITDA through last year's third quarter. It's also big compared to the $7.2 million in year-to-date adjusted EBITDA achieved in the very strong first 3 quarters of fiscal '19 and $0.5 million of year-to-date adjusted EBITDA achieved in fiscal '18. Importantly, adjusted EBITDA for the latest 12 months through the end of this year's third quarter totals $26.3 million, a level which not only substantially exceeds the $18.8 million achieved for the same latest 12-month period last year but also the $18.6 million in latest 12 months adjusted EBITDA achieved for the same period in fiscal '19. You'll note that this $26.3 million in latest 12 months adjusted EBITDA is also well ahead of our existing full year guidance of $20 million to $22 million of adjusted EBITDA for fiscal 2021 as a whole. So more on that in a moment.

Our cash flow was also strong with net cash generated through the third quarter increasing to $11 million. That's an increase of $23.2 million compared to negative $12.2 million in net cash generated during the same year-to-date period last year. It was also well ahead of the negative $4.8 million net cash generated for the same year-to-date period in fiscal '18 and the $7.2 million for the same period in '18. And then finally, our net cash provided by operating activities increased 65% to $30.9 million through the third quarter. That compared to $18.7 million for the same period last year, $18.6 million in '19 for the same period and $8.6 million in '18. So we ended the quarter with strong liquidity of approximately $51 million, even after investing $10.6 million for the acquisition of Strive, which Paul will talk about later in this call. And this liquidity level is up from the $37 million in liquidity we had at the start of the pandemic a year ago even after the investment in Strive. So we're grateful to be in a strong balance sheet position.

We'll discuss these results in more detail in just a moment, but I wanted to give you the same context we provided in the past 3 quarters. And so you can see what's behind the -- make sure you understand each of the components behind this performance. As you can see on Slide 6, the 4 trends are as follows. First, so we talked about All Access Pass sales and continue to achieve strong growth. Second, that All Access Pass subscription services sales have continued to grow and are now significantly higher than even their pre-pandemic levels a year ago. Third, our international operations have continued to strengthen. And fourth, the performance and trends in our Education business have also strengthened substantially both in terms of retention revenue, number of new Leader in Me schools and outlook.

Now just a little more detail on each of these key trends. First, as expected, All Access Pass subscription sales, which now account for 82% of Enterprise sales in North America continued strong. As you can see in Chart 1 on Slide 7, total company All Access Pass subscription sales grew 17% in the third quarter to $19.2 million. Year-to-date growth was 15% and the latest 12 months' growth is 14%. The $19.2 million in All Access Pass subscription sales in the third quarter compares to $16.4 million in All Access Pass subscription sales in the third quarter of '20, $13.8 million in the third quarter of '19 and $11.1 million in the third quarter of '18.

In addition, as shown in Chart 2 on Slide 7, our All Access Pass deferred revenue balance grew an even more rapid 25.9% in the third quarter to $44.2 million, which represents an increase of 36.8% compared to last year's balance and at the end of the -- the $32.3 million balance of deferred revenue at the end of the third quarter of even fiscal '19. And that's been broad-based across all the key elements. The number of All Access Pass new logos increased 93% in the third quarter of this year compared to last year.

Annual revenue retention continued to exceed 90%, as shown in Chart 3 on the same slide. And the sale of multiyear contracts has also continued strong with our balance of unbilled deferred revenue increasing 25% to $40.5 million compared to $32.4 million in the third quarter of '20. It's up 74% compared to the $23 million balance of unbilled deferred revenue we had at the end of the third quarter of fiscal '19, as you can see in Chart 4.

The second trend relates to the subscription services. Sales of All Access Pass subscription services increased to $10.5 million in the third quarter, making it our highest subscription services quarter ever. This compared to All Access Pass subscription services sales of $4.4 million in the third quarter of fiscal '20, $7.6 million in the third quarter of '19 and $5 million in '18, which is shown also on Slide 8. Also shown, for the first time, our All Access Pass subscription and subscription services sales exceeded $100 million for the latest 12-month period. That's a big landmark.

Going to Chart 9, talking about subscription services, shows the strong booking trend for All Access Pass subscription services, almost all of which have now being delivered live online. As you can see in Chart 3 on that Slide 9, since the beginning of the pandemic in March of last year, bookings of services delivered live on-site at client locations were necessarily canceled, and the year-over-year dollar volume of our services declined with delivered engagements down $6.9 million in North America in the third quarter.

However, with our quick pivot to delivering services live online in the fourth quarter of fiscal 2020, new bookings increased to a level nearly equal to that achieved in the fourth quarter of fiscal '19 just 3 months into the pandemic, and these strong bookings, in turn, drove an increase in the dollar volume of services actually delivered. As a result, instead of being off $6.9 million in the third quarter, the dollar volume of services delivered in the fourth quarter was off only $1.1 million. The same positive trend continued in the first quarter, accelerated in the second quarter and continued through the third quarter where sales of subscription services exceeded by 16%, the highest level ever achieved in any quarter.

As shown in Chart 2, again, the vast majority of our subscription services are now delivered to clients live online, meaning that our momentum can continue regardless of the point and whether certain organizations return to their offices.

Third, as shown on Slide 10, performance in our international operations has continued to strengthen through the third quarter. As previously reported, at the start of the pandemic, we had to reschedule substantially all live on-site trade engagements in our international offices as well since these countries were just starting to sell All Access Pass and, therefore, did not have a strong base of durable subscription revenue to cushion them. Sales in these countries declined significantly compared to the third quarter of fiscal '19. However, as shown in last year's fourth quarter, while still operating well below the levels achieved in the prior year fourth quarter, sequential sales and sales as a percent of the prior year in these countries improved significantly. Year-over-year sales improved further in the first and second quarters. We expect sales to continue to strengthen in the third quarter, and we're pleased that they did.

In the third quarter, international sales were ahead of our expectations and just 13% lower than in the third quarter of '19. And a portion of that 13% down is reflecting the fact that we're starting to add more subscription sales in those offices as well, which are going on to the balance sheet rather than onto the income statement.

While there continue to be pandemic-related challenges in Japan and in certain licensee operations, we're pleased with the strong rebound overall in our international operations. Importantly, in addition to significant recovery in reported sales shown on Slide 10, our international operations have seen significant increases, as I mentioned All Access Pass deferred revenue.

So finally, on these trends, we've also seen a real strengthening in the performance and overall market trends in our Education business in the third quarter. As shown on Slide 11, the strengthening of Education's performance includes the number of Leader in Me schools, which have renewed or are ready to renew their Leader in Me membership, increased to 1,921 during the third quarter compared to 1,681 at the same time last year. The number of new Leader in Me schools we contracted by the end of the third quarter or in the process of contracting is 90 greater than that achieved by the end of last year's third quarter, 305 schools versus 215.

In addition to the strong booking performance, Education reported performance also increased significantly in the third quarter. Education's third quarter revenue grew 44.8% over last year's third quarter. It also grew 7.3% compared to fiscal '19's third quarter. This reflects, among other things, the addition of some new, large, multiyear district contracts that were started during the third quarter, all of which are expected to bring on additional revenue over the coming quarters and years, also includes a substantial increase in number of coaching days.

Our gross profit in Education division also improved 1,140 basis points in the quarter from a gross margin of 57.3% to 68.7%. And finally, adjusted EBITDA for the Education Division increased by $2.7 million over last year's third quarter and was also up $1.3 million compared to even fiscal '19's third quarter. Our education -- our international licensing network also showed substantial improvements in revenue and adjusted EBITDA during the quarter.

So conclusion on Education, there are also trends in the overall education market, which we expect will help our Education business during the remainder of this fiscal year and into the next fiscal year, including the increasing conference in the educational community that most schools will be opened and largely back to normal in the fall of this year. And the 3 big COVID stimulus bills passed by Congress dedicated nearly $200 billion towards stabilizing budgets in K-12 schools.

So with that overview in detail, I'd like to now ask Steve Young to dive a bit deeper into the performance for the third quarter and go through the financials. Steve?

Thank you, Bob, and good afternoon, everyone. It's nice to be with you. So I'll just jump right in.

As shown in Slide 12, and as Bob talked about, our performance for the third quarter was stronger than expected and showed positive momentum on almost every front. As you know, our adjusted EBITDA for the third quarter was $8.6 million, an increase of $12.2 million compared to last year's third quarter of negative $3.6 million and an amount substantially exceeding our expectation of adjusted EBITDA of between $4 million and $4.5 million. Importantly, this $8.6 million in adjusted EBITDA is also significantly higher than the $3.1 million of adjusted EBITDA achieved in the strong third quarter of FY '19. As also shown, both year-to-date and last 12 months' adjusted EBITDA substantially exceeded that achieved in both FY '20 and FY '19 and our last 12 months' adjusted EBITDA of $26.3 million, as Bob said, it substantially exceeds our full year guidance of $20 million to $22 million for FY '21.

Our cash flow and liquidity position also increased significantly. As you can see on Slide 13, our net cash generated year-to-date through the third quarter was $11 million. This was $23.2 million higher than the negative $12.2 million of net cash generated in last year's third quarter and was also higher than the negative $4.8 million in net cash generated in FY '19 and this negative $7.2 million generated in FY '18. This increase in net cash generated reflects strong growth in adjusted EBITDA and that our balance of billed and unbilled deferred revenue increased by almost $17.1 million or 25% to $96.6 million in the third quarter.

Also, as shown on Slide 14, our cash flows from operating activities year-to-date for the 3 quarters ended May 31, 2021, increased $12.1 million or 65% to $30.9 million compared to $18.6 million last year -- or $18.7 million last year, $18.6 million through the third quarter of '19 and $8.6 million through the third quarter of '18. This strong cash flow reflects an additional benefit of our subscription model, specifically, that we invoice upfront and collect the cash from invoice amounts even faster than we recognize all of the revenue. With this strong cash flow, we ended the quarter with $51 million in total liquidity compared to $36 million -- which is comprised of cash of $36 million and $15 million of our revolving credit facility still undrawn and available even after, as Bob also said, paying the $10.6 million during this quarter related to the acquisition of Strive.

This was -- this overall good performance was driven by, first, strong revenue growth. As shown in Slide 15, our third quarter revenue of $58.7 million was not only higher than the $37.1 million in last year's third quarter but also higher than the $56 million of revenue achieved in the third quarter of FY '19. This strong revenue growth was driven in part by very strong performance in our North American operations driven by the continued outstanding performance of the All Access Pass.

Additionally, as shown in Chart 1 of Slide 16, company-wide All Access Pass subscription sales grew 17% in the third quarter, 15% year-to-date and 14% even during the last 12 months pandemic period.

And in addition to the All Access Pass subscription revenue recognized in the quarter, chart 2 shows that we also achieved a very strong increase in our balance of All Access Pass deferred revenue, which grew 26% or $9.1 million to $44.2 million in the third quarter. Our balance of All Access Pass deferred revenue, not only grew substantially compared to last year's third quarter but consistent with many other measures, was also 37% or $11.8 million higher than that achieved in the third quarter of FY '19 pre-pandemic. This All Access Pass deferred revenue will be recognized in future periods and helped to accelerate our growth.

This significant growth in All Access Pass deferred revenue resulted from, one, strong All Access Pass sales to new logos; two, a continued quarterly and last 12 months revenue retention rate of greater than 90%, as shown in Chart 3, and a large number of All Access Pass expansions; and as shown in Chart 4, a significant volume of multiyear All Access Passes.

Sales of All Access Pass subscription sales shown on Slide 16 were also strong in the third quarter, growing 136% compared to last year's third quarter and up 37% compared to the third quarter of FY '19.

Then second, as shown in Slide 17, our strong All Access Pass sales drove significant growth in our gross margin percentage again in the third quarter. As shown, our gross margin percentage increased 587 basis points in the third quarter to 78.2%, up from 72.3% in the third quarter of FY '20 and up from 70.8% in the third quarter of FY '19. As also shown, year-to-date, our gross margin percentage increased 514 basis points and has increased 489 basis points for the last 12 months. In the Enterprise Division, driven by the significant growth in the All Access Pass and related sales, our gross margin percentage increased to 81.5% compared to 78.1% in last year's third quarter, an increase of 340 basis points and an increase of 713 basis points from the 74.3% in gross margin percentage achieved in the third quarter of FY '19.

Third, as shown in Slide 17, our operating SG&A in the third quarter was only 63.6% of revenue. This is a level significantly lower than the 82.1% of revenue in the prior year and also lower than the 65.3% of revenue in the third quarter of FY '19.

Finally, the combination of these factors resulted in SG&A growing $8.6 million in the third quarter, an increase, like we said, of $12.2 million. This is a level significantly higher than the expectation of adjusted EBITDA of $4 million to $5 million for the quarter. The strong third quarter also resulted in adjusted EBITDA for the first 9 months of FY '21 of $17.4 million and for the last 12 months, $26.3 million.

As you noticed in all of these, we not only compared to FY '20 but FY '19 because FY '19 was such a good pre-pandemic year. I just wanted to show that we're not only just rebounding from the pandemic but also growing compared to pre-pandemic numbers.

Importantly, as noted, our balance sheet of billed and unbilled deferred revenue, which will add to and be recognized in future quarters, increased to $96.6 million, reflecting growth of $19.3 million or 25% compared to our balance of $77.3 million at the end of last year's third quarter. This large balance of billed and unbilled deferred revenue will help us provide significant stability of and visibility into our future performance. This strong combination of factors continue to drive our expectation that we'll achieve high rates of growth in adjusted EBITDA and cash flow in FY '21, FY '22 on an ongoing basis thereafter. So we're very pleased with the result of the third quarter, that is broad-based, in almost every area doing a little bit better or better than we expected.

So Bob, I turn it back to over to you.

Thanks, Steve. Just a couple of points looking forward. As we've discussed, substantially all our growth is being driven by growth in All Access Pass subscription and subscription services sales. And the strong growth has continued throughout the pandemic, as we've shown. We expect All Access Pass to continue to drive the future. So we expect really that substantially all of the company's sales will be subscription and subscription services within 3 to 4 years, as we mentioned last quarter. I thought we'd give you a little background on the 3 bullet points as to why we think that will be the case.

First, the growth of -- we expect All Access Pass subscription and subscription sales to continue to increase in our Enterprise Division in North America where those sales already account for 82%. As shown on Slide 18, All Access Pass subscription and subscription services sales represented only 13% or $13.7 million of total sales in North America in 2016 when we first introduced the All Access Pass. Dramatic sustained compounded growth since then has ruled in All Access Pass, with subscription services sales increasing to $103.2 million for the latest 12 months through this year's third quarter. From reports that have been sent to us by others, achieving $100 million in subscription and service revenue in only 5 years places us among a relatively elite group of SaaS companies, actually, with the median time for those who actually make it to $200 million being around 9 years.

And as shown on Slide 19, All Access Pass subscription and services sales now accounts for 82% of sales in North America with the continued expectation of double-digit growth in All Access Pass revenue. And with legacy sales now at very low levels and expected to remain flat or even decline a bit further, we expect All Access Pass and subscription services to increase to more than 90% of total North America enterprise sales over the next few years. So that's the first big engine.

The second major driver to having the business become almost totally subscription and subscription services is the expected conversion of the majority of our international operations to All Access Pass and subscription in the coming years. In addition to the 82% in North America, which are already there, we've also progressed rapidly in our English-speaking direct offices.

As you can see on Slide 19, from having no subscription sales at all in these offices just 5 years ago, All Access Pass subscription and subscription service sales for the latest 12 months now accounts for 72% of total sales in the U.K. and 72% in Australia. Both these offices are well on their way toward the same 90% penetration we expect to achieve in North America. As you know, our largest international direct offices are in China and Japan, both of which are in the early stages of conversion to All Access Pass. But importantly, Japan this year will have 1/3 of its sales as All Access Pass subscription and subscription services. And China has now begun selling new contracts, entered some new large All Access Pass contracts that will start to be recognized. So I think we expect, again, international will get to that same level.

And finally, the Education Division which represents, as you know, 22% of total sales, reported subscription sales already account for 65% of sales for the latest 12 months, and we expect both K-12 and higher ed to continue to advance toward 90% in subscription and subscription services in the coming years.

So with the combination of all these, we expect the vast majority of the business to reflect the same high-growth, high-margin, high-retention properties of our subscription operations in the coming few years, and that's really encouraging.

Now I'd just like to turn the time to Paul Walker to touch on 3 factors that we expect will continue to drive this growth, kind of what's underlying it. Paul?

Thanks, Bob, and hello, everyone. Good afternoon. So I'll briefly describe these 3 factors and then go way through just a bit of depth on each.

The first factor that we expect will continue to drive the significant growth in our subscription sales and profitability is that the already significant lifetime customer value of our All Access Pass holding organizations will continue to increase. The second factor is that as we continue to aggressively grow our sales force and our licensee network, the volume of new high lifetime value All Access Pass logos will accelerate. And third, recent acquisitions of Strive and then Jhana, which you'll recall that we acquired in mid-2017, together, they're accelerating our ability to address larger and larger populations inside new and existing All Access Pass clients, further helping to accelerate the growth of the pass inside those organizations.

And so just briefly discussing and describing these 3 in a bit more detail. First, All Access Pass and subscription services revenue will continue to climb, and that will drive increasing lifetime customer value. As shown on Slide 20, in our North American operations, All Access Pass has, first, a relatively large and continually increasing average pass size now at $43,000, which is up from $37,000 just a year ago; second, an annual retention rate of greater than 90%, which has been true all the way through the pandemic; and third, a subscription services attach rate of 48%, up from just 17% a few years ago.

The combination of revenue from the All Access Pass subscription itself and from attached subscription services totaled approximately $61,000 per pass holding customer in the third quarter, which was up 13% from $54,000 just a year ago. The blended gross margin on all of this continues to be greater than 85%, and these strong economics are driving a very significant lifetime customer value. And additionally, as Bob mentioned and Steve alluded to earlier, in North America, more than 40% of passes, representing 52% of subscription revenue, are now under a multiyear contract. And stepping back from that, just to think about that for a minute, from where we were a number of years ago, that amount of revenue under contract set to come in is a significant thing for us and for our client partners as well.

The second point -- the second factor, as we've discussed in the past and as shown in Slide 21, we have a lot of headroom for continued client partner growth. We expect that the continued addition of at least 30 net new client partners each year will help drive significant subscription and subscription services growth since almost all these new people have to sell as All Access Pass or, in the case of Education, Leader in Me subscriptions.

Additionally, we expect significant growth to come from the approximately 120 existing client partners that we've hired over the past few years who are still in their ramp process. As you'll recall, each new client partner that we hire is expected to generate annual revenues in their first year of $200,000; then their second year, $500,000; then $800,000 going to $1.1 million; and then $1.3 million over their first 5 years with us. And we define $1.3 million as being fully ramped. And then we, of course, expect their revenues will continue to grow thereafter. Today, we have approximately 120 client partners in our North American Enterprise and Education Divisions who, depending on their year of hire over the past 4 years, fall somewhere along this ramp curve. And the natural ramp of these client partners, even net of attrition, the normal attrition that we might expect to see, would result in tens of millions of additional dollars of revenue growth in the coming years. And so the combination of ramping those we have and hiring the net 30 a year, we believe, will generate significant subscription revenue growth for us.

And then the third point that I'll touch on briefly is the recent acquisition of Strive coupled with Jhana is accelerating our ability to address larger and larger populations.

During the third quarter, we were pleased to complete the acquisition of Strive, which led meaningfully to our technology platform, our strategic capabilities and overall impact. A key benefit resulting from Strive is that it will increase our ability to address ever larger client populations. The unique combination of Strive's platform, coupled with Franklin Covey best-in-class content and subscription services, will accelerate our ability to help clients predictably achieve employee behavior change at scale. Strive's intuitive social learning platform will enable seamless integration and deployment of Franklin Covey best-in-class content, our services, technology and metrics to provide a highly engaging and impactful learning experience with maximum impact.

When combined with Jhana, a push-based, just-in-time digital coach for leaders and individual contributors, the All Access Pass platform is taking a significant leap forward in its ability to support large-scale impact journey rollouts for entire organizations while simultaneously allowing individual learners to focus on their own skill development. And so it's for these 3 reasons and others that we feel very positive about the future of our ability to continue to grow our subscription and subscription services business.

And with that, I'll turn it back to you, Bob.

And Paul, thanks so much. And I'll turn it to Steve to talk about our guidance and outlook.

Okay. Thank you again. So as you know, in past quarters, we have confirmed our guidance that we expect to generate adjusted EBITDA of between $20 million and $22 million this year. Based on the strong performance in the third quarter and year-to-date and our expectations of a strong fourth quarter, we're glad to now be in a position to adjust that guidance upward. Our new guidance is that we expect adjusted EBITDA for FY '21 to be between $24.5 million and $26.5 million. The middle of this range would reflect adjusted EBITDA growth of more than 75% compared to the $14.4 million of adjusted EBITDA achieved in last year FY '20.

With our last 12 months adjusted EBITDA through the third quarter already at $26.3 million, if our fourth quarter result is at least the same as last year's strong fourth quarter, our results for the fourth quarter would already be at the -- near the top end of that range. And we do expect to achieve strong growth in revenue in the fourth quarter. However, we are also making some significant growth investments and will incur other costs in the fourth quarter that will partially offset the adjusted EBITDA growth we could otherwise expect from our expected growth in revenue.

These growth investments include: the hiring of a significant number of new client partners to position ourselves for strong growth in FY '22 and beyond; two, some new strategic marketing investments that we expect will broaden our reach; three, costs associated with the acquisition of Strive; four, some other growth investments. We also expect that there will be some extra, say, "coming out of the pandemic" cost, including some increased travel and profit-based compensation, which will impact costs in the fourth quarter. These additional investments notwithstanding, we still expect the fourth quarter to be a very strong quarter.

As for our outlook for FY '22, '23 and beyond, in past quarters, we've said that we expected adjusted EBITDA in FY '22 to increase to approximately $30 million and adjusted EBITDA in FY '23 to increase further to approximately $40 million. Based on the strong performance in FY '21 to date and expected through the fourth quarter, we now expect the trajectory of our results in FY '22 and '23 will also be somewhat higher than our previous outlook. We expect to increase and provide more detail on our outlook for future years when we report year-end results in November.

So Bob, that's guidance and outlook.

Great. Thanks so much, Steve.

We're excited about the future.

Yes. Really, we feel great about our momentum, pleased to be in a position to increase our guidance and really excited about the business.

Just before we turn to Q&A, I'd like to thank our absolutely tremendous associates around the world for their continued and unwavering commitment to our mission, to our clients and to excellence in all they do. They're amazing. I'd also like to recognize and thank our great leaders. Our top leadership roles are all filled by extremely talented, experienced and committed individuals who have the combination of a long tenure and yet, because of their relatively young age, many years of strong service still ahead of them. They lead in a way that engages their teams and predictably grows their operations and our overall business strategically, culturally and financially.

I'm thrilled that given the strong results, trends and strategic position of Franklin Covey's business, we are now prepared to make some key promotions on the executive team that will help to further accelerate our progress. Really excited about each of these. Our executive team has functioned as a true partnership for many years. And our goal has been to have each leader continue to increase his or her responsibilities while still keeping all members of our executive team kind of on the playing field and contributing in both old and new ways even as their roles change. That will continue to be the case with the following key leadership promotions that will take place effective September 1.

First, over the past couple of years, Paul Walker has overseen substantially all our day-to-day operations. And I have focused the majority of my efforts working closely with Paul, Steve and the executive team on our key strategic initiatives, our innovation strategy agenda and on capital transactions. I'm excited personally to now move over one chair at the table, in addition to serving as Chairman of the Board, become Executive Chairman of the company effective September 1. As Executive Chairman, I will continue to work on the same strategic areas in which I focused over the past few years. And as Chairman, I will spend even more time working to ensure that the tremendous capabilities of our remarkable Board are fully utilized.

I'm thrilled to announce that Paul Walker will become our new CEO effective September 1. The Board, the executive team and I all have tremendous confidence and trust in Paul. He's fully prepared for this expanded role. Paul is a completely trusted partner who has tremendous capabilities, instincts and drive that engages everyone to come to the best decisions. He also executes with excellence.

The idea that Paul could become our next CEO has been something the Board and I began discussing nearly 10 years ago. With that potential in mind, Paul was first given the responsibility for running our central region, then for simultaneously overseeing the central region and our operations in the U.K. and Ireland, then for leading all North American operations for the Enterprise Division, then serving as President of the entire Enterprise Division, which has been such a strong growth engine and, most recently, as the company's Chief Operating Officer who has done an absolutely incredible job, including all the way through the pandemic.

Over the past 6 years, Paul and I have worked hand in hand every day and most evenings together with the other members of the exec team to launch and grow All Access Pass from what was just an idea to it now generating more than $100 million in subscription and subscription service revenue, on the way to having All Access Pass in the Enterprise Division and Leader in Me membership in the Education Division, represents substantially all of the company's revenues and operations in the next few years. During this time, Paul led the execution of our strategy to increase client partner hiring, served on all our strategic committees and assumed essentially all other key operational responsibilities. And since September 1, 2020, in his role as Chief Operating Officer, Paul has effectively been running the business day-to-day. So making this transition to CEO is largely a recognition of what he's already been doing and the transition we see him with.

Some additional great news, Steve Young will remain CFO for at least the next several years, continuing to provide that tremendous and consistent knowledge, leadership and influence we all count on. Jennifer Colosimo, President of the Enterprise Division, will now assume full responsibility for overseeing the entire Enterprise Division, including not only the U.S. and Canada operations, which have achieved tremendous growth under her leadership, but all the Enterprise Division's international operations. And we're really excited about Jen's expanded leadership role and have full confidence in her ability. She is an amazing person, an amazing leader. Sean Covey will also continue leading, serving as President of the Education Division, which he's done and continues to do so very effectively. And really, our top 30 other leaders will continue -- at least the top 30, but all of the top 30 will continue in their roles.

So in conclusion, I'll just say I've had the privilege of being associated with the company in one role or another since I joined the Board of the Covey leadership in '93, became Chairman of the Board of Franklin Covey in '99 following the merger and then was asked to serve as both Chairman of the Board and as CEO, which I've done for the past 21 years. In my ongoing role as Chairman of the Board and as a large shareholder, and I don't intend to sell any shares, in my new role as Executive Chairman, I'll remain involved in our most important strategic decisions, key financial matters and acquisitions and other capital transactions. Mainly, I'll do everything I can to help Paul and to help Franklin Covey continue to win in any other way that we can think of, and I'm excited to remain close partners with Paul and the executive team for many years to come.

These changes, along with the strong momentum of the business, make it really an exciting time for Franklin Covey. We feel great about our strategy, our business model, our financial position and our leadership bench strength. I love this company. I love my involvement, our people, our shareholders, our clients and our mission and look forward to continuing this involvement. Appreciate our more than 1,000 associates and partners around the world and appreciate each of you in your ongoing commitment to Franklin Covey. So with that long thing, I'm excited about this change. I'll now open the time for question and answers.

(Operator Instructions) And our first question comes from Andrew Nicholas from William Blair.

Congratulations to each of you, Jen, Bob and Paul on the new roles. I guess to start, in terms of the guidance and the guidance change, you touched on the increased spending in the fourth quarter. So I was hoping you could spend a little bit more time on exactly what those investments are. I know, Steve, you listed them, but if we could get maybe a few examples of what those spending initiatives look like. And then relatedly, is there any way to quantify that spend? And should we view that as kind of a onetime set of initiatives? Or are these kind of a multi-quarter spend that you're kind of leaning into growth with?

Thanks, Andrew. I'll try to give you a little more context and invite Paul and Steve to add on. I think there's some in both categories. I think the general ones that we always do are the continued investment in client partners. It's a little bit more back-end loaded this year because we didn't hire as many in the first half and, therefore, we're adding more in this back half. So we have more of those folks coming on in the fourth quarter than we might normally have. We have also kind of a onetime expenditure in some marketing initiatives. We've been working with some firms. And these aren't big dollar amounts. But incrementally, the combination of the marketing, which is maybe $0.5 million of extra and involved with really increasing our footprint around the world, in thought leadership and some things that we'll be announcing later this year, these are really kind of the outsourced work that we've been doing. Our client partners incrementally are adding maybe $0.5 million or so in the fourth quarter.

I think the ones that are just more onetime are that -- in last year's fourth quarter, we had reserved a bunch for compensation and then profit sharing and so forth. Most of our compensation is tied to results. And because the overall results for the year were going to be lower because of the pandemic, we reversed some of those things in the fourth quarter. This year, the opposite will be true. And so that's more meaningful, a couple of million dollars swing between those two. And I think those are the primary things.

We also have some travel coming back, not a lot, but there is some coming back as offices open and clients expect you to be there and see them. And so those expenses will come back a little more than they were in last year's fourth quarter, and that will be somewhat ongoing. But basically, the thought is that it's possible that the fourth quarter could be higher than the end of our -- top of our range. But we do have some expenses relating to those areas that we're talking about in the fourth quarter. Is that helpful at all?

Yes, very much so. Maybe for my follow-up, switching gears a little bit. I know you touched on it in your prepared remarks, but I was hoping we could spend a little bit more time on Strive. I think, more specifically, you mentioned the ability to target large groups. Can you flesh that out a little bit further? And then maybe bigger picture question, if you could just kind of go through the top 1 or 2 things that Strive brings to Franklin Covey that maybe you're most excited about.

Sure. Paul, would you like to take that?

Sure. Andrew, so I would just -- to begin here, in addition to some of the increases, the costs that will pick up in the fourth quarter that Bob mentioned, there are some costs related to the integration of Strive as well and getting prepared to come out in our next fiscal year with Strive in a big way.

But to answer your question specifically, so we're very excited about Strive. Strive is a platform upon which we can, we think, more effectively distribute, administer, provide access to our solutions to clients. And so if you think, in the past, we've had a great platform with All Access Pass. And on that platform, we pull in some disparate pieces. We pull in our ability to have people experience content, our assessment capability. We pulled Jhana into that. And there's a constellation of resources and services that we provide clients on that platform.

Well, Strive, they've been out there the last few years as a start-up focused primarily in the leadership space. And they were a content company first. They were a platform company first. And they created a platform that is even better than what we've had just inside the All Access Pass portal where users -- administrators can deploy content to larger populations. The focus -- their focus was on driving behavior change through technology. Our focus is on driving behavior change through the great content and solutions we have. And so we married these 2 things together. And our clients now, if you say, what are the 1 or 2 things, it's really the user experience and the outcomes that organizations will achieve as our content now runs on the Strive platform. It will be easier. It will be even more digestible. We'll be able to provide metrics in real time. The engagement will be even higher both when organizations are just trying to deploy something to thousands and also when individuals themselves are going in, working on their own skill development.

And so it's -- think of it as, in a way, kind of like what Peloton did combining the bike, the instructor, the live sessions, the metrics, the social aspect of that all into one seamless system. Strive is going to help us bring all of that together in our use case, which is around learning and driver and driving behavior change at scale.

Perfect. Perfect. And again, congrats on the new role.

Thank you.

Thanks, Andrew.

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

Paul, congratulations, well deserved. And Bob, that was a very nice way to introduce that to him. So compliments to you on what you put together there.

Thank you. Yes, well, it's a great partnership.

I wanted to jump in here. Third quarter was an impressive quarter to start out. Were there any particular areas that were stronger than what you had thought, maybe new logos, maybe higher average customer spend? What were things that surprised you to the upside in the quarter? And what does that implicate for the future?

Paul, do you want to take that?

I'll share a couple. Yes, I'll share 1 or 2. And then Jen, please jump in and Education, too, Sean.

So Jeff, I think a couple of things that were pleasantly surprising, we had high expectations already but even came in higher, one was new logos. That metric continues to climb for us every quarter. You do recall, during the pandemic, we reported that, actually, new logos, that was an area where I wasn't quite sure what was going to happen in the darkest days of the pandemic. And new logos really hung in there quite well, and we're seeing an acceleration there.

And the other, as we mentioned, we had a fantastic subscription services quarter. And I said, the more we get into this, the more I think, even as we come out of the pandemic and, certainly, some of our clients will want to go back and have us come on-site again in person, I think the fact that the world has shifted, and we can do both, we can do live online and live in-person, I think, is going to continue to lead to greater demand for services overall. And so I think there's some of that driving the increase in services business.

And then the third leg of that stool is client expansion and retention was great also in the quarter. So the combination of those things really helped on the revenue side. And of course, that business, as we talk about, is a high-margin business. So we're continually -- as more and more of the business converts to All Access Pass, with the high margin that flows through the bottom line, that's driving both revenue and EBITDA. Those would be at least 3.

Jen, anything you would add to that on Enterprise and then maybe, Sean, to say a word or 2 about Ed.

Sure. I think from an Enterprise Division, Jeff, one of the -- Paul mentioned expansion, as clients stay with us and they expand. And that makes sense. And it came, definitely, to play in this quarter in that, typically, a client will hire us to do a particular large-scale behavior change. And as they complete that, start to see some results, they have the opportunity to work with our implementation specialists, which is very unique in the industry in the way that we provide them to our clients. They work with our implementation specialists to uncover either additional populations to go after the same job to be done or they work -- they see other opportunities that they could utilize what was in their pass. And so we are seeing significant expansion. And we did, as Paul mentioned, have an increase in new logo.

In addition, I think our team, our Franklin Covey team, all individual contributors, are firing on all cylinders. As Paul mentioned, we have a significant opportunity with those that are in ramp, and we are seeing newer client partners find success quicker, our sales enablement. So I would also attribute a lot to our people but also our value proposition of all that's in the All Access Pass and how that leads to expansion.

Great. That's very helpful.

Jeff, this is Sean. Should I -- do you want me to share a little bit about what's going on in Ed?

That would be great.

Yes. So just to follow up with what Paul and Jen shared, similar in Education, retention is stronger than we supposed, not only in the number of schools that we're retaining but also the dollars per retained school, the average amount is increasing. I think a lot of this is because the market is back to normal. I think people are making decisions again. They are -- a lot of -- there's a lot of pent-up demand of people who have been kind of waiting on the sidelines to see how things are going to turn out. But because everyone feels like things are going to be largely back to normal come fall, decisions are being made.

So we have got a lot of new schools coming on, a lot higher than last year, new districts. If you recall, a few sessions ago, we talked about Leader in Me 4.0 and how it's more district-friendly. We're seeing the results of that now and we're bringing on some really sizable districts, many of them all over the country that maybe, a few years ago, we weren't prepared to do. And those are coming in starting in the third quarter. So that's helping us quite a bit as well. So between retention, new schools and new districts that we're getting to, I think that's what's caused the increase in the third quarter.

And is Strive something that will be applied to the Education Division and not just Enterprise? Just curious.

Yes. Ultimately, I think it's going to start more on the Enterprise side that will start -- I think all the innovations there will be able to be fully utilized at some point in Education as well.

Yes. And Jeff, I'll just say one of the great things with Strive is also the great people that are adding to our team, and we're grateful for that. And there's some very, very strong technology-oriented people and great people all the way through.

Great. Well, I look forward to seeing a demo on that soon.

Then my other question centers around kind of your high-level growth outlook. I think, in the past, you've articulated pretty clearly that you view yourself as kind of an 8% perpetual growth business, at least for the foreseeable future. With subscription sales and add-on sales in the high teens to low 20% growth rate, and as we get to critical mass, it seems like that growth rate is somewhat conservative. You add the technology platform of Strive that addresses the larger population. What's your outlook or what's your view on growth acceleration from that 8% level going forward?

Yes. I think you've identified the factors that would argue for a higher growth rate in the future. I think the combination -- in the past, we knew that the growth of subscription was being offset partially by the decline in the legacy business. Now that, that has largely flattened out, even the same growth we've been already achieving would mean that, with less drag, you'd be a bit higher. So I think we're thinking, going forward, that we can move into that low, I mean, call it, 10% anyway, that we can grow 10% or so. We still have some conversion in our international operations that will create some -- add more in deferred revenue. But I think it's natural that with the growth rate of our subscription, the things you mentioned, that it will tend to edge up a bit going forward.

Great. And congratulations on a really strong quarter.

Thanks so much.

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

Once again, just congratulations to everybody with all the promotions and the movements, all very well deserved.

I had a couple of quick follow-ups here. Just coming back on the Strive acquisition, the integration aspects, maybe if you can talk a little bit about that as far as the complexity levels and when you expect to have that fully integrated?

Paul, would you?

Do you want me to talk about that, Bob? Sure.

Yes, it would be great.

Marco, so the -- Bob mentioned this team, the team that came with Strive, they were the inventors of it. This is an amazing team. In fact, it would be fun to do a demo and have the chance to meet some of the key people on that team. So Strive for us will power kind of 3 use cases, if you want to think of them this way. One is, when a client has a job to be done, say, developing first-level leaders, and they want to take them through our 6 critical practices content, we'll do that now on the Strive platform, which will do all the things I talked about a minute ago when I was explaining to Andrew how Strive will benefit the client.

So the first thing we're doing right now is we're making all of our content Strive-able, if you will. So we're just getting it ready so that the assessment is all tied together and everything is on that platform. We expect that work to largely be done and be ready to go in January. The second use case would be -- so that's when Franklin Covey, when our people are delivering services, and we're guiding the client through that. They've hired not only for our content but they want our expertise and delivering the training and doing the coaching.

The second use case that will follow that first use case is equipping our client facilitators to implement our content like they can today but benefiting from the Strive platform as well. So it's another reason why you'd want to have the All Access Pass is because even if you're not purchasing subscription services from us, you'll get the benefit of an All Access Pass holder from the technology that's there inside Strive, which will be inside our portal.

And then the third use case, which will come along -- kind of alongside those, is this ability for -- even when you're not on a company-sponsored journey, when I haven't been asked by Bob to go through with a cohort of people, a leadership development experience, I may have a skill that I feel like I need to address or that my assessment has told me I need to work on public speaking or platform skills, well, we have content in the pass around more effectively presenting, and I can go in. And then on the Strive platform, I can work on those skills myself. And rather than just watching a video or page turning to some online content, the Strive experience will be -- it will be, back to the Peloton example, much more engaging and much more focused and has the pieces in there to make sure that even if I'm going through it by myself, my behavior is more likely to change. There's more accountability built in. There are social aspects built in.

And so over the coming months and quarters, Strive needs to be able to do that across all of our content. And so the primary programming and engineering that goes behind that is getting Franklin Covey content into the Strive platform. I would say it's not as difficult though it won't happen overnight. It will happen over the next number of months, and you'll start -- we'll start to be able to really come up to our clients in January-ish. We're doing some pilot testing with clients, in fact, right now, just we were ready to go around it as soon as we acquired them, and we're off on our way on the pilot.

Got it. Understood. And then just kind of confirming here, obviously, you brought up the integration costs that will be there for Strive. I'm just trying to understand if those costs will be stripped out of your adjusted EBITDA and then, obviously, your guidance. Or is it inclusive?

They're included, Marco.

Got it. Okay. And then last quick question for me, just kind of a higher level. It sounds like, obviously, confidence levels are rising. Performance is very good here. Maybe if you can talk a little bit about -- looking out in the next 12 months, what do you think are the greatest opportunities for you to achieve and accelerate growth? And then, at the same time, what is the greatest risk that you see out there that you might need to manage?

Great. I could start, and then have others sort of join in. But the big opportunity we've seen -- I mean, people have been apart. They're not coming back together, whether that's office or whatever or they're in their new way of working. And there's a lot to most organizations have to do to get -- there's a lot to do. And particularly, in building their teams and building their leaders, et cetera, it's been more difficult for them during this period of time. And so I think a big opportunity is, as organizations take on big new opportunities of their own for execution practices, they're trying to build leaders and really get all their teams together, they tend to look for things that -- we play where there's collective behavioral changes needed among leaders, building trust in a new environment, a new work environment, unconscious bias overcoming that. And all these different ways of working, I think, is one big opportunity as a category. It has lots of dimensions. I think that's a big thing.

Also, trying to make a break, an operational breakthrough, in a new world. We've always done well coming out of the period of disruption and execution and other things, people say, "Gosh, I really want to pick something narrow and achieve a big opportunity." So on the opportunity side, I'd say those -- Jen and Paul, what else would you add to that?

Bob, I'll speak to that. I think Bob really spoke to where we have the biggest opportunity with clients as they think about place, place and the location and as well as the space, the behavior change and the things that they need for their people. The other one that's been mentioned, and Steve mentioned it and we talked about that, is I think we have a great opportunity in terms of our thought leadership and our market and our positioning, further strengthened by our work, of integration of Strive, but many, many opportunities for -- especially as we look for new logos to soften the beaches and have a new and distinctive message around who we are and what we do and how we can help you with those operational breakthroughs, in moving a metric or obtaining collective behavior change. So I'm excited both about what our client opportunity is but also what we have to go after that from a marketing standpoint.

Great, Jen. And I think on the challenge side -- unless Paul, were you going to add anything or Sean to the opportunity side?

No. No, go ahead.

I'll just add, Bob, on the opportunity side.

Thank you, Sean.

Yes. Sure. Yes, I think the opportunity in Education is huge right now because social-emotional learning, SEL, is more popular than ever because of all the mental wellness issues that have come up during COVID. Mental health for students and teachers has become a big issue. We address that so well in Leader in Me. Combined with the stimulus money, the $200 billion on top of the $50 billion that the federal government normally spends, this $200 billion will be in the marketplace for 2.5 years. So it's a great opportunity and runway for new clients to join us. So I -- so we think there's a real bright future for Education because of these trends.

Yes. Great. And then, Marco, on your question. Was that helpful on the one side, on the opportunity side?

Yes, that was great.

Great. Then I think on the challenge right now, I mean you can worry about a lot of things, but we -- the thing we are spending most of our time worried about is how do we, as an organization, take advantage of that opportunity in a funny way because everybody -- every organization in the world has those challenges that we just talked about.

We've got great distribution, great content, et cetera, but how can we scale it both in terms of delivering bigger and bigger products. So we've talked about that with Strive. But also how do we get the word out and how do we make sure that every person who's in that position can think, gosh, if I need behavioral change at scale or I need to accomplish something that requires collective action, how do we make it more automatic for them -- not just our salespeople to call on them and then let them know, but how do we actually help people understand that, actually, we got this capability at a bigger scale. And that's part of what we're investing in, in this fourth quarter, is some new margin. But I think it's really getting out there and taking advantage of what is a really huge opportunity. Again, we've got the scale and we've got the capabilities, but I think we need to -- we're trying to figure out how to scale it more quickly.

And that concludes our question-and-answer session. I'll turn the call back over to Bob Whitman for final remarks.

All right. Well, again, we thank each of you for your great support, guidance and advice. We hope to continue to receive that and really hope you all have a great 4th, and we look forward to doing a good job here in the fourth quarter and ending up with a good year. So thanks so much everyone.

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