Franklin Covey Co (FC) 2021 Q1 法說會逐字稿

Welcome to the Q1 2021 Franklin Covey Earnings Conference Call.

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

(Operator Instructions) I'll now turn the call over to Derek Hatch, Corporate Controller.

Derek, you may begin.

Thank you.

Good afternoon, ladies and gentlemen.

On behalf of Franklin Covey, I would like to welcome you to our quarter financial results call this afternoon, and welcome, everyone, to 2021.

We hope everybody had a safe and healthy beginning to the new year, and hopefully, you'll enjoy today's presentation.

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

Forward-looking statements are based upon management's current expectations and are subject to various risks and uncertainties, including, but not limited to, the ability of the company to stabilize and grow revenues; the acceptance of and renewal rates for our subscription offerings, including the All Access Pass and Leader in Me memberships; the duration and recovery from the -- the duration of, 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 this afternoon to Mr. Bob Whitman, our Chairman and Chief Executive Officer.

Bob?

Thanks.

Thanks, Derek.

Good afternoon, everyone.

We're happy to have the opportunity to talk with you today.

We're pleased that in the first quarter of fiscal 2021, our operations continue to demonstrate their strength, agility and ability to progress even during the continuing pandemic.

Specifically, as you can see on Slide 3, in the first quarter, revenue was strong, driven particularly by the strength in growth of All Access Pass and related sales.

Gross margins increased by 359 basis points compared to those in last year's strong first quarter.

Operating SG&A declined by $4.4 million.

Adjusted EBITDA was $3.7 million versus an expectation of between $2 million and $2.5 million.

Our net cash provided by operating activities increased 60%, or $4.1 million to $10.9 million, substantially exceeding even the $6.8 million of net cash provided by operating activities in last year's first quarter.

And we ended the quarter with approximately $49 million of liquidity, up from $42 million at the end of the fiscal year in August and up from $39 million at the start of the pandemic.

So we're pleased with the continued progress in the first quarter.

And I'd like to discuss those results in more detail in just a moment.

But first, just thought we'd provide a little context.

In our year-end conference call a little over 2 months ago, we reported that in our enterprise division in North America, which accounts for approximately 70% of total enterprise sales and where All Access Pass and related sales account for 84% of total sales on the way to 90%, we reported first, as you can see on Slide 4, Chart 1A on Slide 4 in the production corner, we expect All Access Pass subscription sale that we -- as expected, reported All Access Pass subscription sales had remained strong throughout the pandemic to date, growing 18% in North America for the period March through August.

And as indicated, we said that we expected All Access Pass subscription sales to continue to be strong through this year's fiscal first quarter and on an ongoing basis thereafter.

Second, as shown in Chart 1B on Slide 4, we said that after the initial disruption of live on-site coaching and training services during the first 6 weeks of the pandemic, our quick pivot to delivering training and coaching services live online, the capability we've had for more than a decade, allowed our add-on services to rebound quickly.

We report that as a result by July our new bookings of services had returned to essentially the same levels we had achieved in the prior year.

We said that we expected this booking trend to continue in Q1 and beyond.

Third, and on Chart 1C, in our international operations, we reported that despite having had only nationed All Access Pass subscription businesses in most of our international operations, and that's a relatively small base of All Access Pass subscription revenue to cushion them, they had begun to recover.

As we said, and we expected these operations to strengthen further as the year progressed, and that the accelerated focus on All Access Pass in these offices would, over the next few years, allow them to achieve a strong base of subscription and related (inaudible) achieve revenue retention rates and build up of deferred revenue similar to that currently being achieved in our North American operations.

And finally, as indicated in 1D, we said that in our Education Division, which accounts for just under 20% of total sales, we had achieved very high Leader in Me subscription school retention in last fiscal year.

And that remarkably in the middle of the pandemic, we had also added 300-plus new schools, almost all of which came on during the pandemic.

We said that notwithstanding a continued difficult school environment, we expect their subscription retention to remain high and even increase in fiscal 2021, and then we expected to add even more new Leader in Me schools in fiscal 2021 than in fiscal '20.

While the environment has continued to be challenging, we're happy to report that as indicated in Slide 5, these positive trends have continued and even accelerated through the first quarter and are continuing to -- continue to accelerate in the second quarter.

As shown, when the All Access Pass subscription sales continued to be very strong in the first quarter and invoiced amounts accelerated even faster, building the foundation for future acceleration of actual subscription sales.

Second, All Access Pass-related sales rebounded quickly are now exceeding the levels achieved last year, even pre-pandemic.

1C, sales in China, Japan and among our other international offices have continued their strong recovery.

And finally, Leader in Me membership retention from existing Leader in Me schools has been very strong in the first quarter, as we'll talk about in sales to new schools, we're off to a very encouraging start.

Diving a little deeper, I'd like to address each of these points so that you have some background and transparency on them.

First, as shown in Chart 1A in Slide 6, total company All Access Pass subscription sales grew 16% in the first quarter to $17 million and grew 17% to $65 million for the latest 12 months.

In addition, as also shown in Chart 1B in Slide 6, total company All Access Pass amounts invoiced, which were added to the balance sheet and which formed the basis for accelerated future growth in sales -- we got some paper shuffling in the back here, sorry, somewhere -- increased -- we're seeing our invoiced amounts increase an extremely strong 55% in the first quarter.

And even excluding a large government All Access Pass contract, growth was still very -- growth in invoice sales was still a very strong 32%.

This establishes a strong foundation for accelerating future growth.

Importantly, All Access Pass performance is strong across all of the key elements that we look at for All Access Pass, including sales to new logos, which increased substantially, both in the first quarter and for the latest 12 months, 9 of those 12 months, of course, took place during the pandemic and still had new logos increase every quarter; annual revenue retention, which continued to exceed 90%, both for the quarter and for the latest 12 months, as you can see in 1C; and the sale of multiyear contracts, which, as shown in 1D, were unbilled deferred revenue related to multiyear contracts grew 19% over Q1 -- in Q1 compared to Q1 '20 to $40.5 million.

So we're really pleased that all of the key underlying metrics and drivers were strong.

As shown in Chart 1A, then on Slide 7, in addition, in North America, as previously noted, our almost immediate pivot to booking and delivering coaching and training engagements live online allowed us to continue to meet the needs of our customers remotely.

And interestingly, the flexibility which live online delivery provides has, in many cases, also resulted in clients expanding the extent of their use of add-on services because they see it so simple to get people together and do it.

As shown, the strong booking trend for add-on services, almost all of which are now being delivered online, which, by July, had resulted in our booking pace equaling that achieved at the same time in the prior year and then to exceeding it by the end of August, has continued strong through December.

The increase in bookings, which is a lead measure, a predictive measure to this booked but not yet recognized, drove an increase in the lag measure, which is the actual invoice sale of services having been delivered in both booking and sales and services have continued to strengthen.

As you can see in Chart 1 of Slide 7, with the beginning of the pandemic in March, bookings of live on-site services were necessarily canceled.

The stay-at-home restrictions and the year-over-year volume of services followed down, with delivered engagements down 6.9 million in North America in the third quarter.

However, in the fourth quarter of fiscal 2020, new bookings increased to the level nearly equal that we'd achieved in the fourth quarter of fiscal '19.

And this, 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.

The total bookings were up year-over-year and invoice of sales which followed were only off $200,000 compared even to last year's very strong first quarter.

And when you add in December's results for the first 4 months of fiscal 2021, September through December, actual sales of services delivered exceeded those achieved for the same 4-month period last year, which is a very strong period for us last year pre-pandemic.

As shown in Chart 1B in Slide 7, it's important that 87% of our clients have now shifted to live online delivery of services.

This is important.

With 87% of our clients now having shifted to live online, our susceptibility to future cancellations have been reduced substantially.

So we're very pleased with the trends continuing here.

Let me just turn to our international operations.

Second, as you can see in Slide 8, sales in China, Japan, Germany and among our other direct offices and licensee partners in the first quarter, improved substantially compared to both the third and fourth quarters.

At the start of pandemic, we had to reschedule substantially all live on-site training engagements in these countries.

And 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 to only $4.1 million in the third quarter, compared to $12.7 million in the third quarter of fiscal '19.

However, in the last year's fourth quarter, while still operating well below the levels achieved in last year's fourth quarter, sequential sales in these countries increased 70% to $7 million from the $4.1 million in sales in this year's third -- in last year's third quarter.

And we had said we had expected that our international operations would continue to strengthen in the first quarter, and we're pleased that they did.

As shown in the first quarter, international sales were $9.9 million, ahead of our expectation of $9 million.

And while still below the level achieved last year, this represented an increase of $2.9 million or 41% compared to the $7 million achieved in the fourth quarter and was 2.4x the amount -- the $4.1 million amount achieved in the third quarter.

Importantly, in addition to the significant recovery in reported sales, our international operations have also seen strong increases in All Access Pass amounts invoiced, which are starting to build the balance of deferred revenue on the balance sheet that will drive sales in these countries in the future.

So we feel good about the direction in these countries and strategically also the acceleration of their shift to All Access Pass.

Finally, as shown in Slide 9, in the Education Division, despite an environment that continues to be very challenging, as we all know, we've seen some strengthening in trends in the first quarter, including: One, that the number of Leader in Me schools, which have renewed or are ready to renew their Leader in Me membership contracts, has increased to 615, compared to 450 schools at the same time last year.

Second thing is that the number of new Leader in Me schools contracting -- were in the process of contracting after being down in the fourth quarter, an equal to that achieved in last year's first quarter, which was, of course, pre-pandemic.

And so considering the current education environment, we feel very good and encouraged about these trends in education.

Let me now dive a little deeper into our first quarter performance.

Looking at Slide 10, as you can see our first quarter performance was stronger than expected and showed thankfully, and we're grateful showed positive momentum on almost every front.

Our adjusted EBITDA for the first quarter was $3.7 million, exceeding our expectation of achieving adjusted EBITDA of between $2 million and $2.5 million.

These results are even more notable in light of the fact that last year's first quarter was itself very strong.

Next, as shown on Slide 11, our cash flow and liquidity position were also very strong.

As shown on Slide 11, our net cash generated for the quarter of $532,000 in our -- one of our lowest quarters was $4.9 million higher than last year's first quarter.

This reflects almost entirely that our significant growth in new All Access Pass contracts invoice resulted in our net deferred revenue position, not going down as much.

We're pulling stuff off the balance sheet versus what you added on actually improved by $6 million versus the prior year.

As you can see in Slide 12, also, our cash flow from operating activities for the first quarter was $10.9 million, which was $4.1 million, or 60% higher than last year's $6.8 million.

This strong cash flow reflects the additional benefit of our subscription business model is that we invoice upfront and collect all of the cash faster, then we recognize all of the income.

And so it actually generates cash faster than it generates income.

As a result, we ended our fiscal year in August with more than $40 million in total liquidity comprised of $27 million of cash and our $15 million revolving credit facility undrawn, an amount that was even higher than we had at the start of the pandemic, and we were pleased that we added further to this liquidity during the first quarter, ending the first quarter with $49 million of total liquidity, comprised of $34 million of cash, which means no net debt, and with our $15 million revolving credit facility still undrawn and available.

So we're pleased with the financial position.

This strong performance was driven by, you can see on Slide 13, strong growth.

Our revenue growth -- our revenue was $48.3 million.

It was strong and a little bit stronger than we would have thought, driven by -- particularly by our North American operations, which, in turn, was driven by the performance of All Access Pass.

As you can see in Slide 1A of -- Slide 14, company-wide All Access Pass subscription sales grew 16% in the first quarter.

And in addition to the All Access Pass subscription revenue actually recognized in the quarter, as we've talked about and as shown in Chart 1B of Slide 14, we also achieved an extremely strong 55% growth in All Access Pass amounts invoiced.

And as I mentioned, even excluding a large government contract, growth in All Access Pass amounts invoiced was still a very strong 32%.

As you know, most of the significant growth in All Access Pass amounts invoiced was not recognized in the quarter, but it was added to the balance sheet as deferred revenue that will be recognized in future quarters accelerating our results in those quarters.

And as noted previously, also these new invoice amounts included strong sales to new logos, continued quarterly and latest 12 months revenue retention rate of greater than 90%, as you can see in 1C, large number of All Access Pass expansions; and shown in 1D, a large volume of multiyear All Access Passes, which increased our unbilled deferred revenue, which, of course, will flow into sales in future quarters.

All Access Pass add-on sales were also very strong in the first quarter.

As we mentioned previously, our add-on services booking momentum, which is a lead indicator to actual add-on sales, returned to levels equal to the prior year as early as July, and our booking pace accelerated beyond that in August and through the first quarter and through December.

This is resulting in a strong booking pace.

That's resulted also then in strong actual delivered revenue core worldwide.

These services increased to $9 million, which was a bit above actually even that achieved pre pandemic in last year's very strong first quarter, where we actually saw a very significant growth of add-on sales compared to the prior year.

Second, as you can see in Slide 15, All Access Pass drove also gross -- strong gross margin growth, again in the first quarter.

Our gross margin percent was 75.3%.

It's up 359 basis points from the 71.7% achieved in the first quarter of fiscal 2020 and up 275 basis for the latest 12 months.

As a result, our gross margin percentage for the Enterprise Division in the first quarter increased to 80.6% compared to 75.3% in last year's first quarter, an increase of 530 basis points.

You can see our SG&A was lower than last year.

Our -- it came in at $32.7 million, which was $4.4 million lower than last year's first quarter.

And finally, the combination of these factors resulted in adjusted EBITDA, as we mentioned before, coming in at $3.7 million in the first quarter compared to an expectation of between $2 million and $2.5 million, and just $1.3 million lower than in last year's very strong quarter despite the slower recovery in our international operations.

We mentioned again that our -- we had strong invoice and multiyear sales in the first quarter.

And because most of these sales are not recognized that build up our balance deferred revenue, which, as you can see on Slide 16, our total balance of billed and unbilled deferred revenue increased to $97.4 million, reflecting growth of $14.7 million, or 18%, compared to our balance of $82.7 million at the end of last year's first quarter.

As noted last quarter, I'll just note again, approaching $100 million of deferred revenue, billed and unbilled deferred revenue, is a big landmark for subscription businesses.

This provides significant stability of and visibility into our future performance.

And this strong combination of factors, both reported sales, new bookings, balance sheet improvement and an increase in balance of deferred revenue continues to drive our expectation that we will generate very high rates of growth in adjusted EBITDA and cash flow in 2021 and on an ongoing basis.

As you can see in Slide 17, we've seen this before, we expect to generate adjusted EBITDA between $20 million and $22 million in fiscal 2021, and we're pleased to be off to a strong start towards this objective.

Achieving $20 million to $22 million in adjusted EBITDA would represent approximately 50% increase in adjusted EBITDA compared to the $14.4 million we achieved in 2020.

Our target is to see adjusted EBITDA then increase by approximately $10 million per year each year thereafter to approximately $30 million in 2022 to approximately $40 million in 2023.

These targets reflect our expectation that we will achieve at least high single-digit revenue growth each year, growth that's approximately $20 million per year revenue growth.

Then on average, approximately 50% of that amount of growth in revenue will flow through to increases in adjusted EBITDA and cash flow, reflecting our high gross margin -- strong gross margins and variable selling costs.

We fully expect to achieve an adjusted EBITDA to sales margin of 20% in the coming years and really to become a $1 billion market cap company in the coming years, even at an adjusted EBITDA multiple that's conservative relative to our adjusted EBITDA growth rate and without relying on multiples of revenue, which we should increasingly be able to garner.

Looking forward, I'd now like to address the 3 factors that we expect to drive us towards the achievement of these strong objectives and of our being a consistently, we hope and expect high adjusted EBITDA growth, high cash flow growth company.

On the navigation, Slide 18, those 3 points are the 3 drivers.

Growth driver number one is the strength of the All Access Pass economic engine, which we've talked about.

Growth driver number two is that we're making significant ongoing investments in areas that are -- our customers value most and in which we already have significant competitive advantages.

And third is actually the strength of our organization and leadership and our teams throughout the world.

As shown on Slide 19, growth driver number one is the strength of the All Access Pass economic engine.

In Slide 20, you see the All Access Pass and related sales have driven the vast majority of our growth in revenue and adjusted EBITDA over the past 5 years.

You can see, since 2015, annual All Access Pass and related sales have grown from really nothing to more than $90 million through fiscal year 2020, reflecting a huge compounded average growth rate and average absolute All Access Pass and related revenue growth of between $10 million and $20 million each year.

This growth in All Access Pass and related sales has generated the vast majority of the total revenue growth for the company overall during these years and almost every individual year, more than offsetting the early runoff of our legacy facilitator and on-site businesses, which are now largely behind us with 84% of our revenue now in the Enterprise Division in North America coming from All Access Pass and related.

Second, as you can see in Slide 21, in the first quarter, company-wide All Access Pass subscription sales grew $2.3 million, or 16%, compared to the same period.

And for the latest 12 months, including 9 months of the pandemic from March to November, All Access Pass subscription sales still grew 17%, compared to the same 9-month period a year ago -- or full -- latest 12 months a year ago.

Again, as shown in Chart 1A of Slide 22, we've noted this, that All Access Pass sales grew, the add-on services grew, and that, importantly, our amounts invoiced of new sales that are put on the books grew 55%, including a large government All Access Pass contract, but even excluding that, we still -- could grew 32%, or $3.4 million.

The other thing about All Access Pass that's really driving it, is shown in Slide 23, that's compelling business model economics.

As you can see, it's driving strong gross margins.

It's high revenue retention.

It's allowing us to reduce our operating SG&A as a percentage of revenues to it's reducing operating costs.

That's giving us a high flow-through with a combination of strong gross margins and declining operating costs.

And as a percentage of sales, it is expected to allow approximately 50% of incremental revenue growth to flow through the increases in adjusted EBITDA and cash flow.

And then in terms of the visibility and predictability, the large and growing balance of billed and unbilled deferred revenue, which is approaching $100 million, as we talked about.

And then also the predictability of the All Access Pass' key operating metrics, including annual revenue retention of more than 90%, the fact that more than 1/3 of All Access Passes are entering -- holders are entering into multiyear contracts, and that our add-on services, which have now proven to be extremely durable, averaged 45%.

All of this, we believe, gives us significant durability, visibility and predictability.

Growth driver number two is the ongoing investments we're making in areas where we're already strong.

We're making significant investments behind the things that are our actually distinct and competitive advantages.

And these are the things our customers value most.

I'd just say that All Access Pass is not just another typical, as we say, all-you-can-eat subscription service, providing unlimited access to large amounts of undifferentiated skills content.

Rather, All Access Pass is a subscription service, I'd say with a punch, where it's illustrating in 25 really 4 powerful strategic punches.

Franklin Covey has purposely and systematically build its strategic [NAC] to establish best-in-class competitive moats in each of the following 4 areas that are important to our customers.

As you can see in Slide 26, moat number one is having the best-in-class solutions to our clients' highest impact, must-win opportunities and challenges.

At any given time, most organizations have several high-impact opportunities, which have achieved or challenges, which overcome, we have a significantly disproportionate positive impact -- a disproportionately positive impact on their organization's result.

These opportunities and challenges include things like successfully and systematically implementing a new or refined strategy.

Number two, getting an entire organization to nimbly adjust the necessary changes we've all had this past year; third, achieving a major nonlinear operational breakthrough, such as increasing sales performance or improving customer experience; four, establishing the foundation for winning an engaging culture; five, developing leaders at all levels, leaders who, as Eisenhower suggested, get people to want to do the things that must be done.

And so while the rewards for achieving organizational breakthroughs in these areas can be truly significant, even greater organizations often struggle to consistently address and achieve them.

These are challenges which can't be solved just by letting people search through a content library and pick topics interesting to them, rather achieving breakthroughs in these areas requires collective organizational and behavioral change at scale.

When you step back from this, you recognize that there are certain things like strategic consulting that can have a big impact, they're just not very scalable and doesn't get behavioral change.

You've got other things that are really scalable where you can have lots of people take courses, but it doesn't have much impact.

Where we're playing is at the intersection of those two.

It's high impact with high scalability.

And these are the -- exactly the kinds of high-impact challenges on which Franklin Covey has focused its solution development, efforts and budgets for more than a decade.

And as a result, we now have the acknowledged best-in-class blockbuster solutions for addressing exactly these kinds of blockbuster challenges.

As you can see in Slide 20 -- what you can see in Slide 25, some of those solutions.

As you can see in Slide 27, our best-in-class solutions include a bunch of great solutions, including 4 disciplines of execution, the speed of trust, 4 essential rules of leaders, multipliers and a wide variety of other offerings, including our 2 most recent best-selling solutions, 6 critical practices for leading a team and overcoming Unconscious Bias and unleash potential.

And of course, these are in addition to our historical strong things, solutions like Leader in Me education and 7 Habits of Highly Effective People, both of which continue to set all-time usage records, even though they're now a minority of our offerings.

But even with this very strong collection of best-in-class solutions, we're making ongoing investments in new contents and end solutions, including a new change management solution, new leadership offerings.

Let me just refer to -- in Slide -- I've got some -- it looks like I've got a numbering problem in one of these slides, but we're also the flexibility, as you can see, in Slide 27 is also a big competitive moat for us because having best-in-class solutions for our clients' biggest opportunities and toughest problems is critical.

However, they've also got to be able to deliver that and access it flexibly.

So we've made significant ongoing investments in technology portals, digital learning assessments, micro learning, coaching, and the latest instructional design -- instructional design investments, sorry.

We've now got flexibility across a wide variety of modalities, including digital, micro learning, live online, live on-site coaching or any combination of thereof in almost any segment of time, as you can see on Slide 27, on any device in more than 20 languages worldwide, with digital live online or live coach and other services available to support them.

And as a result, again, as shown on Slide 30, All Access Pass-related sales have jumped as a result.

They've increased from 0 to more than $90 million.

Latest 12 months for revenue tension has been high at more than 90%.

More than 35% of parceling clients are signing multiyear contracts.

Our average path size has grown from 29,800 to 40,000 in the latest 12 months.

And again, our balance of billed and unbilled deferred revenue is really significant.

Maybe looking at Slide 31, which is the third puzzle piece.

You can see on Slide 32, Franklin Covey has built a direct sales force of 247 client partners or sales associates in the U.S. and Canada and China, Japan, Australia and in the U.K., Ireland, Germany, Austria and Switzerland.

In addition, we expect to add 20 net new client partners this fiscal year to the 247 client partners we had at the end of Q1.

And Paul, let me turn the time to you to maybe talk about also the licensee network that we've built and the other strategic moats that we have.

Sure.

Thanks, Bob, and good afternoon, everyone.

As you look there on slide -- if we go to Slide 33, in addition to a growing number of client partners who are -- continue to ramp at or above our expectations, which they and of themselves represent a great revenue driver for us as a company.

But on Slide 33, we've also built a network of approximately 80 international licensee partner offices, which cover most of the countries in the world.

These partner offices generate gross revenues of approximately $50 million and may pay Franklin Covey a royalty that's equal to about 15% of these revenues.

These licensee partner offices are strategically very important to us.

Not only do they work to penetrate their local markets, but they also provide services to global clients with local offices.

And so this allows, for example, a global client in Germany who buys an All Access Pass to roll out that solution in many countries around the world that have access to All Access support resources in just about any country that they might be operating in.

And then, as shown in Slide 34, the fourth strategic moat is the power, reach and influence of Franklin Covey's industry-leading thought leadership.

Our years of investment in research and development and our thought leadership partnerships not only result in solutions that provide enormous value for clients, but they create a large treasure trove of research and case studies that we use to broaden our thought leadership.

As shown in Slide 35, Franklin Covey and its key thought leaders published would often become best sellers, which present the principles and solutions to help our clients.

Our key thought leaders in each solution area also write white papers and articles.

They contribute to publications.

They deliver podcasts and webinars and they speak at some of the world's most influential events.

Franklin Covey's industry-leading thought leadership includes best-selling books as well.

And to date, we've sold more than 50 million copies of books worldwide in more than 50 -- in over 50 languages.

And to put that $50 million number in perspective, the number of books that we've sold as part of our thought leadership strategy is greater than the amount sold by a large number of our top competitors combined.

To achieve best-seller status, a book typically needs to sell a little over 250,000 copies.

And so to reach 50 million copies sold and still counting is unprecedented in the industry.

These books typically achieve best-seller status, not only in the U.S. and Canada, but also in other countries throughout the world.

And in addition, our practice and thought leaders regularly published articles and podcasts in a variety of publications and outlets and speak at client events and on the World Business Forum stage.

This strong thought leadership helps to establish our position as a partner of choice for organizations that are truly seeking best-in-class solutions around the world and at scale.

And so Bob, I'll turn it back to you to talk about growth driver number three.

I'll maybe -- okay.

In fact, Paul, why don't you just go ahead and talk about the strength of our organization with these people get through you.

So...

Okay.

Great.

You see the navigation slide there, 36.

So speaking about the strength of our organization, this is really kind of our third growth driver.

And ours is a culture where our leaders are experienced and trusted.

Our processes are disciplined and strong, and our team members are really highly engaged.

Most organizations correctly attribute their success to the strength of their people, and they're correct in doing so.

However, with the opportunity of having a front row seat deep inside the operations of thousands of organizations with whom we work, we know that Franklin Covey's organization, our leaders and processes and our culture are extremely strong.

In fact, they're among the strongest that we see.

As to our leaders being highly trusted, in our recent annual employee engagement and culture survey, all of Franklin Covey associates were asked to rate on a 0 to 10 scale with 10 being the highest, how likely they would be to recommend their leader or manager as someone to work for.

And you can see on Slide 37, 94% rated their leader at 7 or above, and 83% rated their leader at 9 or a 10 on that question.

And this, even in the middle of the pandemic when leaders were being stretched and required to deal with a number of additional challenges.

As to our processes being strong, we do a lot of work with organizations, as I mentioned earlier, helping them institutionalize their ability to execute on their key priorities.

We know that every organization has pockets of great performance.

And we know that every organization has variability in that performance.

What differentiates the great performers from lesser performers is the extent of that variability.

You can see a little diagram of this in Slide 38.

Top performers' performance distribution curve is simply righter and tighter than that of their lesser performing counterparts.

In other words, on average, their performance is better and there's less variability among their units.

This institutionalization of great results requires strong and consistent processes.

We've implemented these same strong execution processes throughout our own operations.

We use the 4 disciplines of execution as an example.

And we're pleased that as a result of our strong leaders and strong processes, our leaders' performance distribution curve is very right and tight.

Illustrative of their strong execution is that as shown you'll see on Slide 39, in the first quarter, 12 of our 15 managing directors, so each country has a managing director.

And in the United States, we have 10 -- in United States and Canada, we have 10, and they lead our great sales teams.

But each -- 12 of our 15 managing directors met or exceeded their quarterly revenue objective in Q1, and the other 3 leaders who missed their goal missed by an aggregate of only 1.3% of the total direct office sales goal.

And collectively, the group, all 15, exceeded their revenue goal.

In addition, as you can see there on the right of this slide, 14 of the 15 managing directors met their EBITDA goal with the one who missed missing by only $50,000.

And collectively, of course, this group exceeded, they actually exceeded EBITDA by about $1 million collectively.

And finally, to the engagement of our associates around the world, as shown on Slide 40, again on the same recent culture survey that we conducted.

We -- Franklin Covey associates were asked to rate on a 0 to 10 with 10 being the highest again, how likely they would be to recommend Franklin Covey as a great place to work, somebody that they would want to invite their friends and people that they know to come in and join, and we're pleased that 92% of employees gave a rating of 7 or higher, and 69% gave a rating of a 9 or a 10.

We have just a phenomenal group of associates around the world.

We're so grateful for their efforts.

They are tireless workers.

And not only do they bring a tremendous amount of energy and passion, this is a group that executes very, very well.

And I think you see that in the results that we've talked about today.

And so Bob, I'll turn to you for any comments, and I think you want to move on to guidance probably.

Yes.

Thanks, Paul.

Yes.

So stepping back from it, we feel very -- we all wish we were in the pandemic, but we're grateful pandemic has proven that the (inaudible) solutions that we have are really valued by our clients.

The business model and the subscription version of this has been extremely strong and positive.

Our teams, who could have just hunkered down in the tents with avalanches coming down on them, didn't.

They got out of their tents and started climbing back up and regained traction very quickly.

And so we're really pleased and grateful to be where we are with strong people, strong teams, strong offerings, the financial resources to continue to make good investments and significant liquidity to cushion us.

And with that, I'd like to ask Steve Young to review our outlook and guidance.

Steve?

Thank you, Bob and Paul.

I enjoyed hearing about the business.

And I'm also very excited about where we are in the direction that we're going.

Pleased to talk a little bit about guidance and targets.

So our guidance for FY '21, as discussed last quarter, is that we expect to generate adjusted EBITDA of between $20 million and $22 million.

This result would be an approximately 50% increase in adjusted EBITDA compared to the $14.3 million of adjusted EBITDA achieved last year.

This expected growth reflects everything that Bob and Paul have talked about, including the continued strong performance of our North America operations, our All Access Pass and other things.

Underpinning this guidance for the year are the following expectations that we talked about last quarter and are consistent with our first quarter results: First, the recognition to sales during FY '21 of more than $60.6 million of deferred revenue already on the balance sheet at the end of last year and the recognition of a portion of the $39.6 million of unbilled deferred revenue, which we had contracted.

These balances provided and provide significant visibility into our revenue and gross margin for FY '21.

Second, in addition to the recognition of deferred revenue, the factor which is expected to have the greatest impact on our FY '21 result is also a factor in which we have high confidence, that is the strength of All Access Pass and related sales.

We expect that All Access Pass will continue to achieve strong growth in both sales and invoiced amounts.

We'll achieve high revenue retention rates, strong sales of new logos and continued growth in pass expansion and multiyear contracts.

We also expect that All Access Pass add-on sales will continue to be strong.

Driven by this, in FY '21, we expect our operations in the U.S. and Canada, including government, to achieve an adjusted EBITDA contribution level higher than in FY '19 and even somewhat higher than we had originally expected to achieve in FY '20.

So the third underpinning of our guidance, we expect that our revenue in Japan, China and among our licensees will continue to strengthen.

The increase in All Access Pass, which we expect to achieve in these countries will, of course, result in a portion of the new sales being added to the balance sheet as deferred revenue.

And the fourth underpinning of guidance is in education.

We expect to continue to achieve strong retention of both schools and revenue among existing Leader in Me schools.

In addition, despite the fact that we could continue to be in a challenging and budget-constrained environment for education in the remainder of FY '21, we still expect to achieve growth in the number of new Leader in school -- Leader in Me schools that we add this year compared to the number we added last year.

So affirming our annual guidance and feel comfortable with that.

For our second quarter of this year, we expect that adjusted EBITDA will be between $1 million and $1.5 million, compared to $4.1 million in adjusted EBITDA in last year's very strong second quarter and still reflecting the expected strong performance of All Access Pass in the U.S./Canada and government and the same general expectations just outlined for international operations and education.

Please remember that last quarter, we did say we expected Q2 this year to be less than the very strong Q2 last year.

Please also remember that our second quarter has typically been the lowest adjusted EBITDA quarter of the year due primarily to the holiday season.

And please also remember that even $1 million of adjusted EBITDA in Q2 would be more than the second quarter result in FY '18 or the second quarter result in FY '19.

Our second quarter result last year was just a very strong second quarter, representing the momentum that we had and talked about at the time and are beginning to see again.

So that's guidance.

Now just a couple of thoughts related to general targets for the coming years and repeating a lot of what Bob said.

Building on our $20 million to $22 million of adjusted EBITDA we expect to achieve this year and driven substantially by the expected continued growth in All Access Pass, our target is to have adjusted EBITDA increase by around $10 million per year to around $30 million in FY '22 and around $40 million in FY '23.

These targets reflect our expectation of being able to achieve, as Bob talked about, high single-digit revenue growth of around $20 million, 50% full of that revenue to adjusted EBITDA.

So those are our targets.

While changes in the world business outcome and many other factors could impact our expectation, we want to share these as our current internal targets and our assumptions and expectations.

We also wanted to share, again, like we did last quarter than order for the executive team to receive full long-term incentive pay, we need to achieve those targets.

So that's our guidance and a few thoughts about coming years.

So thank you, Bob.

Thanks, Steve.

And with that, we just thank each of you and open this to questions.

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

Just wanted to start with the sequential strength in international sales this quarter.

You talked a little bit about it in your prepared remarks, but I'm just curious if you could maybe flesh out the key drivers of the improvement versus last quarter a little bit further.

And then maybe more specifically, I want to understand how much of that rebound is a function of continuation of -- or a rebound in traditional product sales versus maybe some success expanding the reach of the All Access Pass product in those regions.

Great.

Thanks.

Paul, would you like to address that?

Paul, perhaps you can hear me, or I'll start out.

I'm sorry, I was talking into my mute button.

Thanks, Andrew, for the question.

To the first part about just maybe adding a bit more color to the sequential growth from Q4 to Q1.

The drivers of that, frankly, the main driver of that is just the increased stability in China and Japan.

They were hit particularly hard earliest at the beginning of the pandemic.

And so things on the ground there have improved in those countries.

People have gotten back to work.

And our teams have done a nice job of filling the pipelines back up again.

And so they were working on that in earnest back in our late Q2, Q3, Q4, and you're just kind of seeing the momentum build back into the business there.

We expect to continue to see the business there built.

We -- in Q2 -- Q2 is our smallest quarter in that part of the world because of the holidays and because of the Chinese New Year.

And so revenues may not be exactly at the levels.

They will be a little less than what they were this quarter.

But on a percentage basis, I think you'll still continue to see the same sequential improvements and certainly year-over-year as we move into Q2 here and into Q3.

As far as to how much of that is coming from traditional business versus All Access Pass, they are -- All Access Pass is coming online, and Japan had a nice quarter with All Access Pass.

China is just getting started.

We're deep into that with them right now.

That actually isn't driving yet the performance you're seeing because those sales, of course, are going on the balance sheet.

And we'll recognize -- we'll begin recognizing those over the next 9 to 12 months.

And so a lot of that is traditional products that you're seeing reflected in the Q1 numbers, but I think it is important to note that we are feeling quite good about the momentum around All Access Pass in those countries.

And then, of course, we haven't mentioned much on this call, but in the U.K. and in Australia, we've been selling All Access Pass for years.

And their results look much more like what we talk about in the U.S. and Canada in terms of subscription growth, add-on services growth, et cetera.

I don't know, Andrew, if that's helpful or if you have any other questions there.

That's helpful.

And then for my follow-up, I just wanted to ask about education and weakness in revenue this quarter.

Any more color you can provide there on the drivers of the decline?

What, if anything, is timing-related there?

And then maybe any color on how the sales conversations have evolved over the past couple of months.

I know it's a very fluid environment.

So any more color on that business would be helpful.

Sure.

Sean -- thanks so much.

Sean, would you like to address education?

Yes.

Thank you, Andrew.

Sure.

The sales in the quarter were down quite a bit, primarily for one reason.

It's because a lot of our delivery days, coaching and delivery that we typically do a lot of in the first quarter, we just didn't do it.

It was down about over 50% delivery days.

Coaching and consulting, because what happened is in September, October, November, you've got schools coming on with the pandemic.

We just got a lot of school saying we just don't have time right now.

Please call us back in 2 or 3 months.

We're trying to figure out busing schedules and lunches and going online and then they kept changing.

And so we found it very difficult to get to school with our training and consulting.

And so that's the -- that was the biggest hit for the first quarter.

So we couldn't recognize any revenue for those consulting and coaching days.

Encouraging thing is that -- is rebounding.

We were down over 50% in the first quarter.

Right now, we're tracking at about 17% down to the second, and it looks like it just keeps improving all the time.

So we're pleased with that.

And then I think, in general, regarding sales and how that's going, what we're pleased with is our retention is really good.

We're way ahead of last year.

We have over 615 schools that have committed to come on to renew their memberships compared to 450 last year.

And even though we had a really good first quarter last year in getting new schools up and going this year, we're a little over last year after the first quarter in terms of the number of new schools that have committed to come on.

So we're encouraged with the retention numbers that the new schools -- has been the delivered days, coaching and consulting days that it serves in the first quarter.

A lot of these days are already contracted, and so they will be recognized before the end of the year.

They have to be because it's just part of their contract, and we'll recognize the revenue for them.

So some of it is -- a lot of it is timing.

And we're also -- anyway, Bob, anything else you'd add?

No, no.

I think that last point is worth emphasizing that with the revenue -- the decline in revenue being primarily related to the delivery of services, the vast majority of those services are under contract already, and they -- you mentioned that, Sean.

But therefore, it's not lost revenue for the year, it will, in fact, come in.

It just isn't recognized until either it's delivered or until the contract year ends, and so we will get that revenue.

Is that helpful?

No, that makes sense.

Yes, that's part of why I asked is I assume that was a good chunk of it.

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

First question is with All Access Pass remaining, if you include the unbilled long-term deferred, you're growing in the upper teens in terms of the growth rate.

With the legacy business, I assume it's relatively stable at this point with a new level of a portion of the business.

Just wondering to get your view on whether a high single-digit growth rate for the overall business, if All Access Pass continues to grow at high teens rate, shouldn't we see the overall business grow a little bit faster than the upper single digits?

Yes.

Thanks, Jeff.

We should.

And I think what you've seen in North America, if you look at the booking pace for invoice sales over the last 6 quarters, it -- pre-pandemic, it was higher than 10%, and it has been in recent quarters as well.

So I think ultimately, that drives that top line growth in the All Access Pass and related being high will ultimately should ultimately, of course, could pull the overall average up.

For some years, as you noted, we've had offsetting that growth with some decline in the historic legacy business.

That's now, as you pointed out, on the flatter part of that curve.

And so as All Access Pass and related continues, well, I think our point is that we think we can achieve $10 million year of EBITDA growth if we only grow in the high single digits because of the 50% flow-through.

But to the extent we got higher revenue growth and your point's one that we obviously believe, that could be a bit better.

So...

Okay.

That's helpful.

And then second question is on the content development and the thought leadership is clearly understood.

Thanks for the details on that.

But just curious, relative to, say, the last couple of years, what's your outlook or your level of optimism regarding your new content opportunities over the next couple of years?

We've seen there's some really big ones.

We -- because we're focusing on the challenges our -- the organizations that our clients are facing, and because we're always talking to them, we have more than 100,000 hours of sales conversations last year with clients and more than 40,000 conversations from our implementation specialists.

That really helps us hone in on exactly what they're looking for.

So we're very excited about 2 new offerings that we have coming out this year that we believe will hit things that our clients have needed.

They've -- if they don't get it from us, they need to get it from somebody else.

And given that they have an All Access Pass, they would love to just increase their spend with us and have those issues solved.

So we think actually that if you look back with all the things we've had historically, 2 of the biggest offerings in terms of usage are ones that have been introduced in the last couple of years.

One, 6 critical practices for leading a team is around frontline leaders, and it really gives a set of very practical useful skills and tools and mindsets around leaders being a frontline leader, and we're making another big investment in that content this year, but that's been a big one.

The other one is Unconscious Bias, which we've been developing for years.

It turned out, of course, this year, there's a particular emphasis on that, and that's been a good -- I mean, it's been a good thing for the offering.

It's been, I think, a good thing for our clients, and for us, to really deepen the understanding of how you can systematically identify biases of all kinds and how you can unleash people's potential better.

And so those are 2 examples of ones that have come out in the recent years that are actually some of the strongest offerings that we have, and we believe these 2 new ones will be the same.

So we have a map, a multiyear map of the things that we know our clients need.

And staying on those things, we're pretty confident that we're scratching a big itch, so to speak, of something that really is important and being responsive to their needs and their desire to do more with us within All Access Pass.

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

Wondering if maybe you can talk from a bit of a high level.

Just aside from any sort of coronavirus impacts that you might need to adjust to in the next few months or 12 months, can you maybe just talk about what are your strategic priorities that you're going to be focusing on here for the next 12 to 24 months?

You bet.

Now for us -- and maybe I'll start out and then ask Paul to -- or Sean to add to it a bit.

Priority number one for us is making sure that -- just exactly the question Jeff just asked, that our offerings are really both hitting the topics most important to our clients and that the flexibility and ability to access those offerings across the world easily, technologically and every other way, are really simple.

And so we are making big ongoing investments in portal technologies and user experience, in add-on services, in various format, doing new formats of that, providing coaching through [Jana] just on a weekly basis to follow things up.

We've got new micro learning investments that we're making.

So I think that's number one is making sure that our map is really lined up with the needs of our clients, number one.

Number two is building the sales force to support that because the needs are as large as our sales force has become, 250 up from 120 not very many years ago, we have a real opportunity to more than double that.

At 30 new net new client partners per year, it would be adding 150 new client partners to that existing count of 250 just over the next 5 years.

So there's a lot of focus on that and making sure that our -- we're building the infrastructure, mentoring, infrastructure, et cetera, to do that.

And then I think the third is that we are looking to expand into some new content areas that aren't just the ones that our clients are looking for now or capabilities they may not have picked out on their own, but that we see being utilized in certain areas that we think will be good.

So I think 2 of them are product development, one is expansion.

Paul, what would you add to that?

The only -- I think those are exactly right, Bob.

I would say maybe less strategic, but as kind of an operational big focus, and we've talked about this a lot.

But you can imagine a day when our international direct operations, when the percentage of their business that's All Access Pass and related is like it is in North America, what the growth rates could look like.

And so that continues to be a very big focus of ours, helping them.

And it won't all happen this year, but in the coming 2 or 3 years having their All Access Pass business look like North America is a big, big, big focus.

Got it.

Understood.

And then lastly, just kind of given your guys' expectations, it sounds like things are starting to turn around as they have been since last quarter.

Your expectations for positive cash flows, you guys have a good-sized amount of cash on the balance sheet.

Just kind of how are you guys thinking about that cash there and allocating?

I think we're thinking about it in 2 ways, Marco.

First is that in that third priority that I discussed, we think there are some opportunities for some bolt-on small acquisitions that we'll use some of that cash for that will enhance our abilities to serve clients and really extend our lead versus anyone else who's playing in our space in certain key areas.

And so I think that will be a use of some of the cash and it won't be large amounts.

And then -- but we expect to continue to generate cash flow that's really equivalent more or less to the EBITDA.

So on top of what we have, if we had $20 million and $30 million and $40 million, we think that because most of what we're doing is developing in-house or acquiring through license, the capital intensity of our business just isn't very high.

It isn't capital-intensive to add salespeople or to add new content or really even the technology investments are not that capital intensive.

And so as a result, we expect it will have -- as we have in the past, where we've used $170 million of cash in the past years to repurchase shares that we believe that with this kind of growth rate in EBITDA, that there'll be opportunities to -- for us to see the value perhaps before certain other investors do and to add a lot of additional value through the continued repurchase of shares.

And this concludes the question-and-answer session.

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

With that again, we just thank each of you for making the time to join us today and also for your -- the depth of your analysis and understanding, and we hope that this is helpful in terms of responding to questions, but we really appreciate the focus you have on the business and the support over the years.

And we feel good about where we're headed, and I appreciate you being with us on this client.

Thanks very much.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.

Thank you.