Derek Hatch - Corporate Controller, Central Services, Finance Michael Sean Merrill Covey - EVP of Global Solutions & Partnerships, Executive Officer and Education Practice Leader Paul Walker - EVP of Global Sales and Delivery Robert Whitman - Chairman, CEO and President Shawn Moon - EVP of Strategic Markets and Executive Officer Stephen Young - CFO and Corporate Secretary.

Brett Jones - Luzich Partners Jeff Martin - Roth Capital Partners John Lewis - Osmium Partners Kevin Liu - B. Riley & Company Marco Rodriguez - Stonegate Capital Markets Patrick Retzer - Retzer Capital Management Samir Patel - GLG Partners Travis Wiedower - Wiedower Capital Trevor Romeo - William Blair.

Welcome to the Q2 2017 Franklin Covey Earnings Conference Call. My name is Danielle, and I will be your operator for today’s call. At this all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded. I will 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 Company, I would like to welcome you to our earnings call to discuss the financial results for the second quarter of fiscal 2017.

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

Forward-looking statements are based upon management’s current expectations and are subject to various risks and uncertainties, including, but not limited to, the ability of the company to stabilize and grow revenues, the acceptance of and renewal rates for the All Access Pass, the ability of the company to hire productive sales professionals, general economic conditions, competition in the company’s targeted marketplace, market acceptance of new products or services and marketing strategy, changes in the company’s market share, changes in the size of the overall market for the company’s product – products, changes in its 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 on 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 of the company’s actual future performance will meet management's expectations.

These forward-looking statements are based on current – 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?.

one, a higher initial sales size; two, a high revenue renewal rate; and three, meaningful amounts of add-on purchases of services and training materials. First, in terms of All Access Pass increase in the average sales size.

Partially 40% of the more than $1,100 All Access Passes purchased today have been purchased by customers that previously were active Franklin Covey facilitator customers. They bought materials, training materials from us and had certified facilitators who delivered those. That's about 40%.

For the vast majority of these customers, their initial Pass spent alone on the All Access Pass was substantially greater than their average total annual spend as a previous Franklin Covey facilitator customer.

So right out of blocks, the amount they spent just on the Pass itself, without any Pass expansions or add-ons, was substantially larger and substantial in the range, depending on the size of the customer, could be 3 or 4 times as large to 20% larger. But it's a significant amount from those, for the vast majority of customers.

As each customers have renewed their passes, a majority have actually renewed and expanded the size of their All Access Pass. So about 2/3 of those that have renewed have also expanded the size of their Pass, finding value in it and finding new populations to reach with it.

So the initial purchase size by new customer, and also then, for new customers who weren't previous Franklin Covey customers, which makes, of course, a lot of new sales, the initial purchase size by new customers is also substantially larger than for similar new customers before the introduction of All Access Pass.

Historically, the easiest first thing for a new customer to do was to buy a class or have us come and train one class or whatever. Here, they're making a more strategic decision, where they're hiring us around, some job to be done they're trying to get done, typically for at least 100 people and often expanding beyond that.

So on the first point, in terms of All Access passing, Pass increase in average sale size, it is substantially increasing the average purchase amount for the vast, vast majority of our customers. Second, as having a high revenue renewal rate, our target has been to achieve an annual revenue renewal rate of 85% or greater.

While it's still relatively early in the All Access Pass life cycle, this last quarter, because we had a lot more renewals this quarter, we are very encouraged that more than 90% of the All Access Pass amounts up for renewal through the first and second quarters renewed on time or earlier.

We, that means that if it was due then, they renewed and over 90% have done that. We expect actually the additional passes that were renewable in the second quarter will still renew, but in the third quarter.

So we're finding that some people in their sales, their cycle inside their company, they intend to do it, but they need to get a group together to decide to expand the pass. And so for us, over time, we will keep reporting on the cumulative renewal against cumulative amounts renewed, amounts renewable that, at this point, stands north of 90%.

Given this and the visibility we have into specific accounts, and all the things that they're doing with us, we also expect a 90% or more of the significantly increased amounts of All Access Pass revenue up for renewal in the third and fourth quarters, will also renew.

If we're able to continue to achieve this high revenue renewal rate, which we're very focused on and believe we will be able to do, this combination of a higher initial sales size and a higher annual, high annual revenue renewal rate would result in the lifetime value of the vast majority of our All Access Pass holders being substantially larger than it was before these customers became All Access Pass holders.

Finally, as to adding on sales of this materials and services, to date, as previously noted, from inception of All Access Pass to date, All Access Pass holders also purchased $7.25 million of add-on sales of services and training materials.

This amount is equal to 21% now of the total amount of All Access Passes sold since inception, and that's increased from just 8% at the end of the year fiscal '16. So as we're getting with our customers in understanding what they're trying to get done, many of them are buying more services from us, also more training materials.

So again, we believe that the combination of a higher initial sales size, high renewal rate and the potential for meaningful amount of add-on sales will significantly increase the average lifetime value of our customers.

We'll keep reporting on this, but it feels that, the key that's there are maybe a little ahead of what we had thought at this point. We expect this increase in customer lifetime value will also provide a significant benefit for our client partners, both those that are seasoned as well as those that are renewed.

As larger and larger amounts of new All Access Pass revenue is added to increasingly large amount of renewal revenue and giving them in place base of revenue that it continues to increase, making new sales easier to obtain new growth with new sales and so just filling the gap from the past. Moving on to the third question, as we see on Slide 7.

Just to -- really Slide 8 just to highlight the question. When do we expect the success of All Access Pass to translate into accelerated growth for the U.S. direct offices, specifically in for the overall business in general? If you please, we'll move on from there to Slide 9.

As to when the success of All Access Pass is expected to translate into meaningful growth for the U.S. direct offices and for the company overall, I'd say that we expect that the answer is essentially now.

Actually, we expect that the combined impact of significant All Access Pass renewals and, together with new All Access Pass sales, will begin to be very visible in this, our third quarter, which will end May 31.

For this particular discussion, when I talk about revenue, I just want to note that I'll be talking about amounts of revenue invoiced, including that portion, which is recognized as revenue and the portion which is deferred, that by saying that upfront that I will have to repeat every single time the amounts invoiced on that.

So let me just say, we were pleased that the combination of new All Access Pass sales and the high renewal of prior year All Access Pass sales had a positive impact already on our direct offices in the second quarter. These offices grew over the last year, for the first time in several quarters, pre-deferral.

And while amounts grew only 2%, it was still positive. But behind that 2% modest growth was the two of the three U.S. regions actually achieved meaningful growth in the quarter, both of those had sold lots of All Access Pass and amounts in last year's second quarter. One of the offices grew by 10.1% year-over-year and the other grew 8.5%.

We now believe that all of our offices are positioned for growth in the third and fourth quarter at the U.S. offices and others. I'd like to maybe briefly provide some additional context as to why we expect that the growth in our U.S. direct offices will accelerate in the coming quarters. All Access Pass sales grew rapidly last year.

However, All Access Pass' higher sales size and more strategic focus also stood at our normal sales cycle somewhat, as we've noted in the past.

Though All Access Pass' 74 day sales cycle is relatively short for an enterprise sale, it's nevertheless longer than the historical 27 day sales cycle for when that some of those customers were simply ordering training manuals.

The combined impact of, number one, this longer sales cycle applied to an accelerating portion of our total revenue, which was All Access Pass in last year's second and third, and fourth quarters.

And two, the fact that All Access Pass sales, sometimes, replaced our traditional facilitator in on-site days sales, which go smaller in size, it can average only 27 days to complete.

Those two factors, the increase of the sales cycle and the loss – or the offsetting of business, the historical that had short sales cycles, combined to offset the growth of All Access Pass, and then in this year’s first quarter, more than offset the growth as the new – as the sales cycle overcame – it was a little longer, again, in the first quarter.

Starting -- so really, on a net basis, we haven't seen the growth in the direct offices during that early period. Starting on this year's third quarter, however, 2 things are different. One, our quarterly results were up against quarters from last year, which we also sold substantial amounts of All Access Pass.

So the change in the sales cycle effect will be much less than those quarters, though nothing that will be less than it was. The second though is more important. We now have substantial amounts of revenue renewal that is renewable from last year's All Access Pass sales. These passes are up for renewal and this will help to offset any other declines.

I'll give you -- I'll speak to that more. Let me speak to, specifically to the impact of All Access Pass revenue renewal because we believe it's the single most important thing in understanding the new business model, the most important factor by far in driving accelerated revenue growth in our direct office.

As we get high revenue renewal rates on the All Access Pass' invoiced in last year's third and fourth quarters, which are now renewable in this year's third and fourth quarters, this should help us to really accelerate growth.

The significant compounded effect of achieving a high All Access Pass revenue renewal rate on the increasingly large amounts of All Access Pass is sold in last year's third and fourth quarters increases the percentage of prior revenue that's retained in subsequent quarters, so the percentage of last year's revenue is retained in this year's quarters, providing an elevated platform of retained revenue in each quarter.

This creates a strong foundation for achieving sustained and accelerating growth. Starting in this year's second quarter just ended, All Access Pass renewals began to have significant impact on the magnitude of the percent and amount of prior year invoiced amounts, which is retained in the quarter before the addition of new All Access Passes.

How much is in place without the sale of new passes? The higher the percentage of prior year's revenue is retained, the less difficult, of course, it is to achieve revenue growth.

As you can see now on Slide 9, in this year's first quarter, after deducting the amount of year-over-year revenue decline in our traditional facilitator and on-site delivery channels and adding back the small amount of additional revenue from the 90% renewal of only -- the only $375,000 of All Access Pass revenue sold in last year's first quarter, approximately 63%, as you can see on the left side, the bar at the left, approximately 63% of the amount of last year's first quarter revenue was retained prior to the addition of new All Access Pass sales.

So after the declines in facilitator and on-site, which actually, always happen. They are normally filled back by the facilitator and on-site sales, they're now being filled by longer sales cycle All Access Pass sales.

After all of that, it was 63% of revenue in place of the prior year before making new All Access Pass sales within -- with the longer sales cycle in the first -- I mean, the longer All Access Pass sales cycle generally and only $375,000 of All Access Pass sales up for renewal in the quarter. We didn’t completely fill that gap in the first quarter.

In the second quarter, however, significantly increased amount of All Access Pass revenue, $2.7 million in the U.S. offices was up for renewal. And again, more than 90% renewed.

As a result, as you can see on slide nine, the second bar, the base of prior year revenue that was retained in this year's second quarter prior to new All Access Pass sales increased to 74% of the prior year's revenue, with the gap being covered by new All Access Pass sales shrinking to 26% of last year's second quarter sales from 37% in the first quarter.

Because new All Access Pass sales somewhat more than covered the remaining gap, U.S. direct offices achieved overall revenue growth in the second quarter. And third, just walking through this so that, and make sure that I'm explaining this. The amount of fiscal 2016 third quarter All Access Pass revenue up for renewal in the U.S.

direct offices, as you can see at the top of that, the top band above these bars, moved up from $2.7 million in the second quarter to $4.7 million in this quarter.

Assuming the same 90% revenue renewal rate, which we believe we will be able to achieve, the base of prior year revenue retained in this year's third quarter, our current quarter, prior to making any new All Access Pass sales, is estimated approximately 82% of the prior year, with the gap needing to be covered by new All Access Pass sales shrinking further to approximately 18% of this year's, last year's third quarter revenues compared to 37% in the first quarter.

So we believe this should make achieving revenue growth even more attainable, the higher and higher this is. As a percentage of prior year's revenue, which is retained [Audio Gap] obviously, the amount of new All Access Pass sales necessary in order to achieve growth becomes less and less.

There's a gap between retained revenue and the amount of new All Access Pass revenue needed in order to achieve growth expected to shrink.

And with that gap being more than covered by new All Access Pass revenue, which itself then the following year is expected to renew at high rate, high renewal rate, creates the potential for a powerful compounded impact on future revenue growth.

Again, in slide nine, to show what might happen in fiscal '18, the retained revenue, just, we already know what sales were made in last, this year, first and the second quarters, and so we're applying the same numbers, as shown on slide nine, the retained revenue as a percentage of prior year revenue, could increase to 85% in next year's first quarter compared to only 63% in this year's first quarter to 86% in next year's second quarter compared to 74% this year, and then increase to more than 87% in next year's third and fourth quarters.

So even if this, the amount of new All Access Pass sales was absolutely constant and didn't increase at all, because it's occurring on top of a larger and larger base, our ability to retain and then sustain growth, we believe, will increase significantly.

This growth amounts invoiced would drive significant growth in cash flow and fiscal '18 would also drive an accelerated amount of recognized revenue as the large amounts of deferred revenue from these coming, from the quarter's already gone and passed, plus the ones ahead of us, are recognized.

And so when will it impact the overall growth of the company, with growth already being achieved in our international licensee and education divisions and our foreign direct offices, the reacceleration of revenue growth in our direct offices in the U.S. could significantly increase our overall growth as a company. Finally, fourth question, slide 10.

How do we expect to utilize our excess cash and credit line capacity? Despite the transition to subscription accounting, which suppresses EBITDA and earnings during the transition, our cash flow, of course, has continued to be very strong and predictable. As you know, we've received that cash up front.

We built upfront on the contract to sign when the pass is sold. And not month by month, even though that's how we recognize the revenue. Our guidance, we've given prior guidance, we expect to generate after-tax cash flow, or what we're calling net cash generated of approximately $22 million in fiscal 2017. So that's an estimate of after-tax cash flow.

And so we expect the cash flow to continue to be good. And as a percentage of reported EBITDA, obviously, a higher number than normal because we're not reporting very much because of the deferral. Historically, after making the investments that can help to grow the business, we've utilized a significant portion of any excess cash to repurchase shares.

Over the past 6 quarters, for example, we've repurchased 45 million of shares and over the past 8 quarters, 57 million. We'll continue to make a number of compelling investments in portals, localization and new content related to All Access Pass. We'll continue to invest in new client partners, all the things we've been doing.

However, it could, but the $22 million is, we expect this year of free cash, after-tax cash flow is after those investments. So it continues to be easy for us to decide to use our excess cash and the availability under our credit facility to continue to aggressively repurchase shares. For us, this is an easy decision. First, maybe for 3 reasons.

I'll just note, those at least you know how we're thinking, you can see where we're wrong. First, because the ratio of our expected net cash generated to our market cap in total enterprise value is so attractive.

With our net after-tax cash generated expected to be approximately $22 million and our total enterprise value of approximately $230 million, our expected after-tax cash flow to enterprise value is approximately 9.6%.

So even if we had no expectation of growth, purchasing shares, in our minds, will be, will provide a return to our shareholders that exceeds our weighted average cost of after tax, our after tax weighted average cost of capital. And as I see it, at least, we utilized our excess cash to repurchase share.

As we use it to repurchase shares, our shareholders are effectively getting a very attractive after-tax dividend under investment with all the optionality on our growth. And so we're saying, it's easy for us to use it because of the cash yield, number one.

Second, because we have grown a lot in the past and expect to grow in the future, and the IRR, we believe, we can earn by repurchasing our shares, is much more attractive than most things we can invest in elsewhere and maybe more than most of our shareholders could invest in elsewhere.

And then, third, it made more value approaches, I suppose, because we believe that almost no value is being given by the market to our biggest growth engine, which is our direct offices. From time to time, Steve and I do what amounts to an informal back-of-the-envelope analysis that evaluate each of our operating units.

While the analysis is far from that quality, and we do not have the intent to break up the business, we find this exercise useful. Utilizing our most recent thinking, as I mentioned, we believe that our current market capitalization, almost no value is being attributed to our biggest growth engine, our direct office division.

We believe that our Education business, including our international Education business, where we recently signed a 10-year license agreement with minimum required royalty payments payable to the company of $16.3 million over the life of the agreement. We believe that business, with all its components, is worth approximately $80 million, so we think.

We believe that our international licensee division, which is expected to generate approximately $9 million of EBITDA this year, and has contractual minimum royalties, which increase in almost every year, is probably worth something like 100 million.

So if you do that, the 80 million and the 100 million from the current enterprise value, that leaves only approximately 50 million to 60 million of value that's being attributed to our direct office business, a business that is expected to generate approximately 150 million in revenue, which generates significantly more EBITDA contribution than the other divisions combined, and which even if all of the central costs of the company were allocated against that division rather than allocated to [indiscernible], we'll still generate at least 15 million of adjusted EBITDA.

So it's implying, to us at least, that what we consider as our biggest growth engine and the engine is ruling out All Access Pass is effectively being valued at 3 times to 3.5 times EBITDA. So hopefully, [that was helpful for what you asked] how we're using our cash and why.

And so if you have asked this question, how we think of value and how do we make those decisions, that's an attempt to be responsive on that. In conclusion, I'll just say, on the four questions. How is All Access Pass going, we believe it's going really well.

We believe, as I mentioned, we're likely to exceed $50 million of total revenue this year, total amounts invoiced this year from All Access Pass and Pass related amounts.

However, the factors going, which could drive increased lifetime value, how are they tracking, , all of them are just continuing to be true and each is tracking a little above what we would have thought to expect. When do we expect the success to translate into growth? Now, this quarter and incoming quarters.

And how do we expect to utilize our excess cash, credit line capacity? We expect to, after investments in the business, to use it to continue to aggressively repurchase stocks. So Steve, with that, I'm going to turn over to you to talk about anything you'd like to talk about operations and our guidance..

Well, thank you, Bob. That's exciting. I'm committed. [indiscernible] tomorrow. Good afternoon, everyone. Excited to be with you today.

As I start, I'd first like to remind everyone, even though Bob has also talked about it, but especially to remind those that are new to the company, that we are in a transition period in which a larger portion of our invoiced revenue is deferred and then recognized over a contract term, usually one year rather than recognized upfront.

This means that our reported results are and will be significantly impacted by this deferral. Internally therefore, we focus our attention on both our reported results and also upon the change in deferred revenue. So I'll speak briefly about both of those measures.

As you've seen and as shown on Slide 13, our financial results in Q2 were within guidance. The reported adjusted EBITDA loss was 400,000 compared to the guidance of a 1.5 million loss. The sum of the reported adjusted EBITDA plus the change in applicable deferred sales less certain costs was 1.4 million, within the guidance of 1 million to 2 million.

So let me talk about the reported results first. As you read in the press release and can see on Slide 13, while our adjusted EBITDA was within guidance, it was still as expected, less than last year and a loss. For the first six months of the year, adjusted EBITDA is a negative 3.2 million.

Since we are affirming our guidance for the year, that adjusted EBITDA is expected to be between $10 million and $14 million, a logical question could be why do we think that adjusted EBITDA expected in the second half of the year will be so much higher, more than $13 million higher, than the amount reported in the first half of the year? So the answer is – that anticipated – those anticipated increase – the anticipated increase in just three areas of the business make up the expected change.

First, Education has always generated most of its adjusted EBITDA in the second half of the year. This year should follow that same pattern. We expect that the Education adjusted EBITDA alone could be $9 million more in the second half of the year than it was in the first half of the year, due to the normal seasonality of that great practice.

Second, the direct offices are expected to benefit in the second half of the year in several ways, including what Bob just talked about. Additionally, our new operation in China is doing very well. But the second quarter result in China is expected to always be the lowest of the year, due to the Chinese New Year.

Therefore, the second half of the year is expected to generally be higher than the first half.

Other international direct offices are expected to have improved results just due to the increased sales that we normally generate in the second half of the year compared to the first half of the year, and we do see this trend in current momentum in those offices.

The domestic sales should benefit from, as Bob talked about, the previously deferred sales now being recognized from the increased add-on sales to AAP customers and improved on-site sales compared to the first 2 quarters or the first half of the year.

The increase to adjusted EBITDA resulting from these items and reflected in the direct offices are expected to be more than $5 million increase in the second half of the year compared to the first half of the year. Third, the Sales Performance practice. Just due to the nature of our Sales Performance practice, as we often said, our sales are lumpy.

We expect that due to the lumpiness and what we didn't see in the first half of the year and what we do see coming in the second half of the year, we expected that the adjusted EBITDA in that practice could be $1 million or $2 million more in the second half of the year compared to the first half of the year.

So you sum those things up and you see that it's reasonable for -- we think it's reasonable, anyway, to expect at the second half of the year, recognize adjusted EBITDA will be significantly increased from the first half of the year. Now turning to deferred revenue.

Our guidance for adjusted EBITDA, as we just talked about, is between $10 million and $14 million. Our guidance for the sum of reported adjusted EBITDA, plus the change in deferred revenue less certain costs at 15%, is between $35 million and $38 million.

So you just do the math, and the easy math shows that the expected change in deferred revenue is the gap between those 2 numbers, is between $21 million and $28 million of increased deferred revenue on the balance sheet.

This change in deferred revenue is expected to be generated almost entirely from invoiced AAP pass contracts and invoiced Education coaching contracts. Bob discussed why we believe that our direct offices are a meaningful inflection point, and we all see that.

The financial impact to deferred revenue that we need in the second half of the year comes from what Bob discussed, from the 90% renewal rate of existing AAP customers and from selling a significant amount of All Access Pass contracts to new customers.

As Bob also said, the renewal rates that we have experienced so far are greater than 90%, and we expect the amount of invoiced amounts to customers to increase in Q3 and in Q4 compared to Q2. So in order to hit these numbers we're talking about, we just need those trends to continue. So our experience so far supports our expectations.

And as Bob also said, we do recognize that our results so far are derived from a small number of customers compared to the number of customers that will need to renew in Q3 and in Q4.

For the coaching portion of this in Education, or Education, the coaching portion of the Education business has been accounted for like a subscription business for several years. So the increase in deferred revenue is consistent with the way, what they have seen for some time.

And really, probably the most significant reason, one of the most significant ideas of why deferred revenue will be so much higher in the second half of the year as compared to the first half of the year is, in the first half of the year, All Access Pass sales are adding deferred revenue to the balance sheet and the Education division is recognizing deferred revenue from the balance sheet more than what they're putting on in the first half of the year, and then in the second half of the year, particularly in the fourth quarter, they're compounding rather than offsetting.

So they're big numbers that they're compound rather than offset. So we think it's reasonable to expect that the amount of deferred revenue that we put on the balance sheet will be significantly more in the second half of the year than in the first half of the year.

And as we always talk about, we expect the vast majority of our adjusted EBITDA and our adjusted EBITDA plus change in deferred, to come in the fourth quarter. So Bob, thank you..

Thanks, Steve.

So we're firming our guidance, and we're also expecting actually that in the third quarter that whereas a lot of it is always back-end loaded, but as you've seen in our quarterly guidance, we expect that a substantial increase in both the sum of reported and deferred as well as, well, the reported amount in the third quarter should be a good bump because of the same factors.

So with that….

Within in the third quarter and then more in the fourth quarter….

Yes, so an increase we think in the third quarter over last year and a significant increase in the fourth. So with that, why don't we just open it to questions? And we've got our team here so you can post the questions and we can make sure they get answered..

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. And we have our first question. Our first question comes from Tim McHugh of William Blair. Go ahead Tim. Your line is now open..

Hi guys. This is actually Trevor Romeo in for Tim today. The first is a quick housekeeping, I guess.

Could you tell us what the operating cash flow and CapEx for the quarter were?.

Steve?.

I will look up the exact amount..

Yes, Steve. And one moment [indiscernible] exactly. We didn't put that on the slide. And so we're just making sure you get the accurate information. Why don't you get to the second question, and Derek will be right back with that answer..

Sure. Okay.

So the second question, I guess, would be, would any of the proposed cuts to the federal government budget possibly impact the grants or funding for the Education business?.

Yes.

So Sean, do you want to speak to it?.

I don't think so because most of our, most of the funds that are funding the leaders in these schools are not coming from federal grants. We've had one of those in the past, right to the top grant, that finished its course 1 year ago. And most of our funding is from local school buckets or district funding or sometimes, community support.

So I don't think, we don't anticipate it having any impact..

Okay, perfect. And maybe just one more, if I could.

With respect to, I guess, investments in All Access Pass, maybe particularly internationally, I guess to use a cliché, what inning would you say we're in there?.

In terms of the investments side, I think we are, we're kind of at the end of the biggest part of the investment cycle on that. We, starting about 9 months ago, we committed to making sure that we can have a worldwide, our whole worldwide licensing network could sell All Access Pass. We committed to localizing all the contents.

Sean, why don't you just speak to that and so we get to where we are..

Yes, sure. Yes. So we're really excited about this because what we've done for the past year is prepare our international partners to sell All Access Pass. And so we started with localization efforts. And so we basically taken the core All Access Pass content, and we worked with all of the partners over the last year or so to localize everything.

So we have 15 All Access Pass by May. We'll have 15 languages across the globe, which will cover 95% of the revenue we have across the world. There's some obscure languages we'll get to later, but for now, we've got the 15 quarter core languages. And in addition, the partners have all been trained and they're ready to go.

We're just waiting for the new portal to be finished and we'll, in the fourth quarter of this year, we'll start selling in a major way across the globe..

Yes. So we've invested in the localization around $3.5 million, new portal. That's, again, nearly complete. We're just nearing the end of that of another couple of million dollars. And then, we spent lots of SG&A, as we've flown people in from around the world to various locations in Europe and South America and Asia to train them.

But we feel like we're at the, close to the end of that spending part. And we're getting ready to start to begin to harvest.

Should we go back to question one?.

Yes, from question one. So from our statement of cash flows, the net cash provided by operating activities for the first half of the year is $6.8 million. And you asked about CapEx. CapEx for the first half of the year is $3.9 million..

And our next question comes from Jeff Martin of Roth Capital Partners. Go ahead Jeff. Your line is now open..

Bob, can you clarify on All Access Pass renewals you referred to as revenue renewal rate, is that different from a client renewal rate? And if so, could you give us what the client renewal rate is?.

Yes. It is somewhat different, just because if we had a client that had a large -- we could get credit for a small client that renewed, and yet in habit, act like it was a high renewal rate when the revenue didn't renew or conversely, big -- we cannot count a big one, that have revenue loss and [indiscernible].

We decided that we felt at least that primarily for modeling purposes and for you all to try to be easy as we gave revenue renewal, but we can respond to the other one as well. As we mentioned, revenue renewal has been in excess of 90%, thus far. We've had 100 or so passes come up for renewal. We had 19 in the first quarter.

Of that, on an actual amount basis, 15 of the 19 renewed on time in the quarter. There's another one that either has renewed or is going to, we know that accounting thing when they've committed, I don't know if it's signed for sure.

But we think the percentage renewal then will be 16 of 19, with one other still working that's because of a change in management decision maker, we hope it will get, but if you look at it either will be 16 of the 19 or 17 of 19.

In the second quarter, we have kind of the same phenomenon, where you got what percentage of them actually renewed on time versus those that we think will still renew, but for some reason, it wasn't exactly by February 28.

About 73% of the passes, that passes, representing more than 90% of the revenue, because many of them also increased their revenue, have renewed on time, we think there are only about five or six that, for sure, aren't going to. And so although one of these will converge.

Yes, we felt like the easiest thing is to report on revenue because that's what's going to drive the model and the economics and that's why we're using the 90% plus. But we can, from time to time, be happy to answer the other two.

My guess is the pass renewal, the customer renewal, will be in the 80% to 85% range and the revenue renewal, north of 90%..

Perfect. That's helpful. And then, wanted to get an update, if there is any to talk about on the Sales Performance contracts that were discussed last quarter as being delayed, mainly due to a merger of 2 of your large customers there.

If there is any update on potential timing there?.

Yes, Shawn Moon, I'll have him address this, and also Paul Walker, who's involved in a major contract there..

Jeff, good topic. This is Shawn Moon. So the significant business we had last few years with 2 organizations that have been going through a very, very disruptive merger and that disruption still is happening. The Sales Performance practice is a practice that's comprised of fewer accounts but larger deals.

And so when one of them had a hiccup like this, it had disproportionate impact. We're pleased with the pipeline activity that's happened and expect, despite the fact that the dust is not settled on these two organizations and a lot of moving pieces and decision makers have transitioned out entirely.

And so you can imagine that process is starting over. There's some good momentum there and as Steve mentioned and as Bob mentioned, we feel like some good improvement in the third and fourth quarter with Sales Performance practice. But that [multiple speakers] without accounting on that. There's no accounting on that [indiscernible]....

In our guidance, we're not expecting any of those big deals that are tend to be binary and hard to predict from the land. We're not including that in our forecast.

There are a couple of other large contracts, Jeff they’re being worked on, but we feel have a good – have some upside to them because we’re not forecasting them, but it is, as Steve said, lumpy and – but last year, they had the a year ago, they had big first and second quarters and then smaller third and fourth.

And so even without the renewal of the big contracts, we expect some growth in the sales performance practice in the back half of the year compared to the prior year. And if one of these or more of these larger contracts comes in, then that would obviously be to our upside..

Right, right. Okay. And then could you walk us through the deferred revenue line on the balance sheet? I have – according to my tally, All Access Pass deferred revenue increased close to $4 million from Q1 to Q2 of this year.

And you had a little less than $1 million bill to the deferred revenue line on the balance sheet, wondering if you could help reconcile that..

Yeah. So the – look, if you look on slide 13, the change in deferred revenue, this $2.1 million, that’s our net number of maybe close to the $4 million that you’re talking about recognized related to All Access Pass less amount that’s going back to the other way in the Education practice. So the net change in deferred is $2.1 million.

The balance sheet is a little less just because there are deposits and other amounts that affect deferred revenue on the balance sheet that aren’t subscription revenue-related. And so all of the deferral that we’re talking about is in that deferred revenue account on the balance sheet that aren’t subscription revenue related.

And so all of the deferral that we’re talking about is in that deferred revenue account on the balance sheet. But that balance sheet accounts for some other deferred revenue – things that are called deferred revenue, even though they’re not related to subscription-type business..

Okay..

So does that help?.

It does. I would guess that for the third and fourth quarters, we should expect to see a pretty significant build in deferred revenue as renewals come in and as you continue to sell, if you continue to sell, in the ballpark of $7 million to $8 million a quarter on average of All Access Pass, you should see that number build pretty nicely..

Right. So everything that you just said, plus the fact that Education is selling their coaches – coaching business significantly in the third and, especially in the fourth quarter, so they’re adding a significant amount to the deferred balance in the second half of the year also..

Got it. That makes sense. Okay, and then the last question, Bob. A question for Bob. I was curious, your client partners, how – some of the incoming class over the past, say, 12 months has performed in terms of selling the All Access Pass now, how that might compare to previous newer partner performance partner performance..

Thanks, Jeff. Let me ask Paul Walker to – I’ll ask Paul Walker to respond there..

Thanks, Bob. Yeah, they’re doing quite well. In fact, this is something we track very carefully. It's what happens with all of our new classes of client partners. And what we’ve seen, generally, the trend for a few years now is that we’re doing better and better with them. They ramp faster. They’re contributing earlier in their career with us.

And that’s only accelerating now with All Access Pass. And it’s being driven primarily for a couple of reasons. One, the pass to client partners had to learn about a lot of our solutions in order – before they could really be out there and maybe effective.

And now, with All Access Pass, we simplified that somewhat because there's, while the solutions are contained within the pass, what we're out there selling is the path to get to specific job that they need to do. It's that helpful but on the learning front.

But primarily, what's helping it, as Bob mentioned earlier, the initial transaction size is larger. And in some cases, it's a lot larger than what these new client partners used to sell.

When we would hire a new client partner in the past, they were focused oftentimes on making a facilitator sell that might have been $4,000 or $5,000 and now these All Access Pass sales that are replacing those facilitator sales are $15,000 or $20,000 or even $25,000.

And so while the sales cycle's a little bit longer, as Bob mentioned, for them, they don't have historic sales cycle to compete with. And they get the benefit of having a transaction that's two to three to four times larger and that's really helping….

[Indiscernible] renewal….

Yes. And then you get into year two, and they have the renewable business. They're not waking up again and having to resell everything from the first year, plus the growth expectation. They have some of that growth expectation built in, in the form of the renewal.

So we're happy with helping all of our client partners and particularly, it's helping those newer ones greatly..

Great. Bob, I just want, and Steve, I want to congratulate you on nearing the endpoint of this transition and hitting that inflection point in the next quarter. So….

Well, thanks so much. We appreciate your patience and also of your thoughts for us and understanding that condition too, seriously..

And our next question comes from Patrick Retzer of Retzer Capital. Go ahead Patrick. Your line is now open..

Good afternoon. First of all, I wanted to congratulate you guys on the progress on the transition plan. I think what you're going through is transformative in terms of creating shareholder value. And thus far, you've met or exceeded the expectations and your renewal rate is off the charts. So nice work on that.

I didn't hear or see anything with regard to stock bought back since you last reported.

Did you buy back any stock?.

We did..

69,922 shares..

We bought a little bit less than 100,000 shares, and we're spending a little more than $1 million, between $1 million and $2 million..

Yes. So it wasn't much in the last quarter. I will say that we intend to be very active in this coming quarter..

Yes..

Okay. I was going to say, just over 1 year ago, you did a big Dutch Auction at $17.75. You've made great progress since then. So I would think it'd be aggressive, but I wanted to verify that. And then, the….

Yes. We continue to buy, Sorry. We continue to buy after the tender offer, the Dutch Auction [indiscernible], so we continue to buy. And then, as I say, in the last six quarters, we purchased around 55 million or eight quarters, I guess, 55 million of stock and 45 million in the last six quarters.

So 35 of that was the Dutch and the rest of it, the other 20 million in the six quarters, the other 30 million was open market purchases. So historically, we've been able to buy more and more in the market, $1 million week, sometimes, we think we know things that are going on to make us, so we're not in the market.

But just in terms of major trends or whatever, like this successful access that makes us think we should be a little cautious until the public knew what was happening with renewal rate and other things. So now that we're reporting it to, transparently, we think we can now go ahead and buy some more..

Okay. So the last thing I, this may seem a bit redundant, but I just want to verify it because the numbers are so large versus the stock price.

But your guidance remains EBITDA plus change in deferred revenue for the fiscal year of $35 million to $38 million or 2.5 to, so you're talking about $2.5 to $2.75 a share for a stock at $16.05 at the close today..

We recognize, this transition hasn't been easy for some people to, I mean, the hope of it is easy, but I think the actuality of it is, both those, the computers that follow us think that doesn't get us deferred, many of them haven't picked up on this deferred revenue idea. And so you have some pressure there.

Also, this transition, as I talked about, the fact that we were offsetting sales that had a shorter sales cycle, until we can start to anniversary, the renewals meant that despite the success in All Access, we were flat on revenues in direct offices. So we understand why people maybe have been a little reticent.

But hopefully, that we can discipline this in the following quarters..

And our next question comes from Marco Rodriguez of Stonegate Capital. Go ahead Marco. Your line is now open. .

Just a couple of quick follow-ups. I guess just a real quick housekeeping one, I don't think I heard the cap [despend] for the first half of '17..

It was, for the first half, was $2.3 million..

$2.3 million, got you. Okay. And then, I also wanted to get some clarification here on the All Access Pass, and it's launched with licensees and overseas.

Where are you guys on that again?.

Yes, sure. This is Sean Covey. We are going to be launching that in May, June time frame. And again, we worked for the last many 8 months to localize All Access Pass into 15 languages and to train 55 partners and how to position and sell and service this. And so we're excited about the fourth quarter.

I expect them, much like the U.S., it's going to take some time. But I think next year, it will become a much bigger percentage of our revenue and the following year, bigger than that. And the partners, in general, are very excited by it. They feel like it's about time.

They feel like it's going to create a lot of momentum with their clients, and, so we're in a good spot right now..

And what we'll do also, Marco, is that, we want to have this 1 offering, 1 company worldwide. And while we've had distribution worldwide, individual offices whether in the U.S. or other offices places would choose their favorite. They just focus particularly on 1 offering or 1 practice versus the other.

By creating a strong set of line with similar pricing across the world, et cetera, we are already seeing, on the U.S. side, and the number of global sales that are happening on this side that are benefiting the licensees already.

But we expect this will open, really open the door to over the next year or 2, really building an acceleration in what we're doing together across the world and really leveraging this, not just the revenue, but the global impact that we can have by having truly global accounts, so..

Got you. It's helpful. And then, in terms of -- on Slide 6, you have the percentage of, I guess, site or locations that are selling All Access Pass here.

Is there sort of a target range you guys are looking at? And a certain time frame where you'll have everybody doing that?.

Yes. Let me probably do a good job of explaining this slide. So first of all, this is the percentage there, the 49% year-to-date is the percentage of total revenue from those offices that are selling All Access Pass that is represented by All Access Pass revenue.

In other words, if there was $100 million of revenue in all the offices, this would say that 49 million of it, it's a made up number obviously, 49 million of it is actually All Access Pass. And so all of the U.S. direct offices, government, UK, Australia and higher education which sold to universities. All of those have been selling.

And this is reflective of 49% of everything that they've sold this year on an as-invoiced basis has been All Access Pass versus 8%.

Our international direct offices, all the English-speaking ones now do it, but China and Japan will be on the same time frame as the licensees because they'll have this new portal that has all the international data privacy protections and all the languages, including theirs in it.

But we believe that realistically, I mean, if we were up 50 million or so this year, that will represent a little more than half of the total revenue or invoiced amounts in the offices that are selling it.

This year, we're believing that with one more year of renewals, assuming we're able to continue the renewal rate, that, that would move up to two thirds of all the revenue next year would be All Access Passes themselves or Pass-related add-on revenues. So still be ongoing business.

The first time somebody engages with you, they'll do something else or there'll be some specific needs.

So we'll probably always have 25% or 30% of our business that doesn't come through the pass, but then feeds in the prospect with these customers understand the benefits of the solutions we have and I'll say a better way to buy it and expand it is through the Pass.

Is that helpful, Marco?.

Yes, that's very helpful. Appreciate that. And then, last quick question and I'll jump back in queue. I know it's still a little bit early here in terms of the renewal rate, but last couple of quarters, I believe, you've said you hit that 90% renewal rate.

I'm just wondering if you might be able to share any sort of anecdotal information from customers that you're talking to about what's kind of driving that a bit higher? And then, what you might be hearing from people that aren't renewing as well? What their maybe are concerns or reasons for not renewing..

Sure. On the first one, I think what's happening is we have a process. We view the sale of the All Access Pass as really the start of a new kind of relationship with our clients.

And so literally, on the day-to-day buy, if not before, the day the contract is signed, there's an implementation specialist call, where we have an orientation on the portal and other things, but the people are just buying electronics, as you know, digital data, digital stuff, which is there, of course, in large quantities.

They're also be able to download and print out training manuals, they're able to download and train on iPads or whatever else.

And so we've tried day one to get them off to a quick start as to what are some things there, some progress they're trying to make, areas of progress they're trying to make in their organization, and get them using it right away.

We then moved in with we call a discovery day, where we say look if you're do willing to commit a couple of hours or 3 hours of some of your senior executive's time, will commit a consultant to come. And with our salesperson to spend a morning with you and identify other things that others in the organization are trying to get done.

And with that, [Indiscernible] it's not really a sale because we're there really to serve you, make sure they get full value out of it but the result is, many of these people are saying, gosh, I'd like to expand the pass to cover my population of that population.

So one of the things that's happening on those that renew is two thirds of those that are renewing are renewing for a pass size that is greater than their initial pass size. So they're having gone through the process and recognizing now the value they can get from it, they're identifying different population.

We actually have some, who in this process, have added on simple populations around a single content or maybe other different front line customer service employees buy it as single content Pass for Leading Customer Loyalty or Sales Performance Pass. We have some strategic initiatives that get identified.

One large customer who would bought a small Pass, a $35,000 Pass, then just bought a $305,000 Pass to cover, Paul, how many people. And then..

A couple of thousand..

A couple of thousand people as they saw this initiative roll out and they've also booked..

85. 85, and consulting..

Consulting to Asia which had another $300,000 or more of revenue. So that's the process. I think what we're finding is the people are utilizing the pass that most of them have.

When it comes up for renewal, it's not a surprise because they're using, this may already have we call it impact journey, they may already have an execution initiative going here or a Speed of Trust initiative there that's a strategic thing they're trying to get done and the content is delivered through that.

So those who are not, I'd say the single reason, again we haven't had [Indiscernible]. We had two that we know aren't going to renew in the first quarter and maybe 5 out of the 117 [Indiscernible] we know are not going to renew. So we have a small population inside there, 2 thankfully.

But I'd say the most frequent thing out of the 7 or 8 is a change in the leader who bought it. The person who bought the pass and who understood the value proposition, they may either moved on in the company or they moved out of the company and all of a sudden, we're there with the replacement, who has to be resolved.

We view that as a mistake on our part, because that's the whole reason for this discovery process is so that we can go in and even if one of the people happens to change, that we know and that's other people and we're doing, and that's a good thing, that, that new person who comes in, it might be the administrator of this.

They say, hey, let me talk to the executives, each of whom is saying, Oh, yes, I got this big initiative going. I got this going. But that's the main reason. Paul, I don't know if there's another one that pops out. I think it's really primarily that is a change.

In one case, we lost 2 of the passes we lost in the first quarter actually, somebody they had a rule inside their company that you couldn't buy intellectual property without going through the legal department, which will be recognized and we usually go through that way. This customer had felt like, hey, I can do this myself.

And they to show this person that they couldn't, they chose not to renew it for a year, and teaches the personal lesson. But I think I hope that's not a trend. So, but that's kind of the flavor and overtime, we'll be happy to report on what it is.

We're very on top of it and try to Monday afternoon, at 1:30, the only discussion is the 100 passes, next passes that are coming up and what the status is and all that's been going on. But we, of course processed at least we expect started the year in advance.

And if we do the right things, if we've got the right they have the implementation planning, call it, we had the discovery day process, if there's usage by at least 30% of the population in the first period of time, if we have quarterly visits, if -- and so forth, if we have those things going, those are the lead indicators.

And we didn't have all these the first two quarters last year. So we're grateful that it's been 90% because we had to come in late on some of this. We hope that going forward, that it will be a smooth -- smoother -- it's been smooth. The process will be run consistently.

It's taking about 4 months since we implemented the discovery day process to actually get up to over north of 90%. Let's see if it's sort of 100% on new passes, and we still have some older passes to catch up on..

And our next question comes from Kevin Liu of B. Riley & Co. Go ahead Kevin, your line is now open..

First question I have was just in terms of the renewal rates that you're reporting, are you including kind of the upsells to existing clients in there? And then if so, can you kind of quantify what the typical upsell amount is?.

We are including that because it's part -- I think as they renew, they step up revenue. And so that is why if you have ultimately 80% to 85% of the passes renew, the revenue will be north of -- will be higher because of those pass expansions and upgrades.

Today, again, because of the population size, I think the numbers are better than we expect they'll be long term. And so we've had a number of people who've renewed at significant double-digit multiples of their pass size, we don't think that's -- if you have one or two of those, that can skew the data and that's what we're trying to avoid here.

But the idea of the people expanding their population by 10% or 15% and the two thirds of the people might do that is a pretty reasonable result of this discovery process of using it, I would think..

Got it. And then, you said the back half of this year and then maybe longer term and you got more and more of your revenues coming off the balance sheet.

Are you expecting gross margin to ultimately be higher than you've been able to report historically? Or should it just remain in a fairly similar range?.

We think it should improve a little bit. We'll just wait and see exactly how that turns out, but what we're seeing right now is that the All Access Pass itself has a very high renewal rate. The facilitator business also had a high renewal rate. But we believe that based upon the mix of business, we will see a little bit of improvement, right, yes..

[Indiscernible].

Pardon? Increased margin percentage, sorry..

And our next question comes from Travis Wiedower of Wiedower Capital. Go ahead Travis, your line is now open..

Do you think there's any opportunity to decrease the sales cycle of the All Access Pass in the future? Or do you expect that number to be kind of static around that 76 days?.

Paul?.

It's a good question. We spend a lot of time, as you can imagine, thinking about that and reviewing what the sales process looks like and how to be more efficient and effective there. It could. A couple of things that as we made this transition that are new for us.

In the past, a lot of our facilitators sales didn't require us to go through legal and didn't require us to go through procurement. But because of the initial -- because the size of these passes are larger, there's a technical component, there's -- they're buying an IP pass, there's a legal component there.

So there are more people that are involved in the decision or at least involved in procuring it on the client side. That has been the case in the past.

So I’m not sure that it's 100% within our control to shrink that down, but we are working on controlling on our side is understanding how are we most efficient with the client and effective and uncovering any concerns they have now. I bet it can. That’s the bet..

And Travis in neither two sides to the question also. Because we got the new sales which Paul has been speaking to and that has all this process, because the passes are automatically renewable, unless canceled, and because we're in with these clients, on the renewal, of course, it's very short.

So I think the weighted average -- whether we're able to materially move the first-time sale, we have ideas for. By the way, we're working on it. And think that also, by more – better targeting of the specific circumstance customers find themselves in, where you’re able to speak right to that circumstance and then having discover it.

Our marketing materials we get people raising their hands, but we can, perhaps, influence that. But for sure, the renewal cycle, when the person's already expecting it, I mean, the renewal cycle, these people already expecting it. You call them and they are -- you're going to meet and figure what the size of the pass is in most of these cases.

And so I think the weighted average sales cycle will change, along with the increased retention of revenue..

Thank you. And then, one more question from me. On the – on the past couple of conference calls, you have talked about how All Access Pass has cannibalized some of your other business.

Is that – can you just kind of update us there? Is that – are you still seeing that? Or has that stabilized?.

Well, no. It will continue. I think, we’ll – I mean, I think, honestly, it's a little bit like capital – the iPhone 7 cannibalizes buyers of iPhone 6 in the sense that they’re stepping up. They’re still buying content from us, they just decided to do it in a different form.

I think we’ve said in the past is that we expect that our base of historical facilitator business, will – they’ll continue to be a base, so the rate of decline on that and offsetting will – the slope will change over time. But we like that trait.

We want them to – if they’re making an average purchase of $8,000 or $10,000 and repeating that every – they’re buying that amount every couple or 3 years, but on average, over 3 years, they’re spending, say, $16,000 or $17,000.

And if we can get them, in day one, spend $25,000 or $30,000 on a new pass, and then go in an upgrade that we want that to happen all day. The thing that's happening, you say, we got 40% of our purchasers have come from the ranks of our active facilitator clients. And so we’ve – but – that is moving – sold 40% of our client.

We only sold about 21% of those clients to date have converted. So we actually have a lot to do still in converting them over. We won’t ever convert them all.

But I think this, for us, we view it as something that, if that’s how they want to continue to buy from us, we're delighted to have them do so, but we're making it easy for them also to make the decision to move into a pass.

What's happening, though, is the cannibalization -- I say when we cannibalize, we think we've significantly increased the lifetime value, both the initial sale and otherwise.

It also, though, because the base – because we've already cannibalized them, if we had forever the same percentage decline every quarter, this amount in revenue renewal is more than – in this quarter, the amount of revenue – new revenue from renewing 90% plus of last year’s All Access Pass revenue would, we think, pretty much cover the decline in those other products.

Maybe that wasn't exactly your point. Can you ask it, push me on it if I didn't respond properly. Travis, does that respond to, sorry..

I'm reaching Travis again. Travis, you're back on the line..

Thank you. Sorry, I jumped out of the queue and then try to jump back in. Sorry about that. It's okay. Yes, I think I was kind of specifically referring to, in the past, you talked about how it's cannibalizing, serving your on-site sales and how it's kind of replaced that. I mean, obviously [indiscernible] it's a lot easier....

So on site, it also cannibalize, but that's starting to swing back around now. We had declines of a couple of million dollars a quarter and reduction in on-site sale days. And some of those same customers, it's not that they were no longer customers, they just decided I'll buy the All Access Pass, and then decide if I wanted to deliver services later.

What's happened now, as we mentioned last quarter, there has been a trend towards, I mean, maybe we'll start to trend we hope that with these add-on sales, that some of those services are going to be bought.

Actually, this last quarter, we had more on-site days delivered than we had in the prior year, despite whatever cannibalization occurred, and we expect that again this quarter. And it looks like through the fourth quarter, it's going to happen.

So I think it's just the nature of what they'll buy on, on-site instead of buying it upfront as much as an alternative. They'll buy the pass and then decide how to do it longer term. But thankfully, I wouldn't have expected us to get across that bridge.

I'm not sure we are across it fully, but it looks like, at least this last quarter, this quarter or next quarter, are lining up to actually have increases in those on-site sales. And so whatever cannibalization is occurring is being offset by an increase in on-site sales through the pass..

Okay. Great. Thank you. That is helpful. And I should have clarify on-site in early..

No, I apologies. I should ask more carefully..

And our next question comes from Samir Patel of Askeladden Capital. Go ahead Samir. Your line is now open..

I got a question and a comment. The question is, I know that at first, when you're selling the All Access Pass, they weren't automatically renewable. And I know at some point, they shifted to be automatically renewable. So a, can you just kind of give me the date on which you started selling the automatically renewable passes.

And then b, if it's a relevant question, have you seen any sort of delta in client renewal behavior once it was sort of automatic opt in versus automatically, versus they had to manually opt in?.

On the second question, we have, we started last year in the second quarter with a thought of automatically renewable. And we didn't have it in the first quarter. We did have it in the second. We haven't seen material differences. What is different, though, is the process.

When it's automatically renewable, they don't need to go through their whole legal department again, sign up a whole new intellectual property contract. They just need to give us notice of their intent. And of course, we still go back, we don't, we're not feeling entitled. We expect to have to earn that business and make sure they're getting usage.

And we want to make, we don't want anybody who doesn't want to be in to stay in. So we're not tricking people to stay in.

But what is happening is, at least when we talk to them and when their intent to renew is there, rather than having to go back and say, well, I've got to go back legal and sign up a whole new agreement to simply renewing an existing one, and so for most organizations, they're able to do that without that whole process.

So it's making it easier that it hasn't changed the renewal much because our process is the same regardless of the contractual terms..

Got you, okay. And the comment is really, I appreciate all the transparency you guys are trying to provide, but I think it actually gets a little bit muddy when you're, like on Slide 9, I think you're trying to put too many factors in there.

If you look at all the other companies that have your business model, like whether it's CEB or Gartner or Forrester, CoStar or [indiscernible], they kind of whole standardized on client retention, wallet retention, I think you should start, as it becomes more relevant here over the next few quarters, it's a more material part of your business, I think it will be really helpful for the investor community if you started putting that in your 8-K, just a table, that had, hey, on an LTM basis, here's the client and here's the dollar renewal of All Access Pass or Education or the whole subscription business or however you want to parse that..

Okay. Thanks, Samir. That's a great idea. Steve, is not [indiscernible]. So I think it's going to happen..

And our next question comes from John Lewis of Osmium Partners. Go ahead John. Your line is now open..

Yes, a couple of quick ones. One, I think in the last quarter, you were talking about potentially adding new content to the platform.

Any comment or updates on how you seeing adding any verticals or new content to your current All Access Pass?.

Yes. Well, first, yes. We have 2 new pieces of content that will be added in the next 6 to 8 months. We haven't announced those yet, but we have, one represents a redo of it some existing content, our great leaders content. We had a substantial revision of that. The other is a whole new content category that we're currently developing.

The course and related content for, that will be released, I think it's an outside thought leaders who were doing some stuff. But in that regard, we expect there, we're having some acquisition discussions on content, one of the things, a few add-on services discussions.

And so we expect that a key part of what we're going to be doing here over the next year, and we have committed team to it, is we've got a map of what their capabilities we're trying to build, the content that relates to those and the providers of that. And we have 18 or 20 conversations that are going on about that.

But the only thing that is materialized are these 2 pieces of content since we last reported..

Got it. And then over the last 5 years or so, you've grown operating cash flow about 20% kind of as a ballpark average.

Given the opportunity in terms of your equity valuation and the business trajectory of All Access Pass, when you say aggressive repurchase of stock, I mean, if you look, yes, I guess in short, what, do you feel like, I know you don't want to give guidance to us but do you feel that 20% is a reasonable trajectory to continue, given all the investments over the next 3 to 5 years in terms of deferred revenue plus EBITDA? Or what do you think is a reasonable long-term trajectory, given what you're playing for here?.

John, just to make sure, when you say the 20%, are you saying repurchasing 20% of the shares....

Sorry. I should clarify that. Your operating cash flows grown at about 20%. And that's....

Yes. You can say what's the growth of cash....

I'm just saying, if you were to add, if you were to add in share repurchases at the current valuation on a per share basis, you could really do a lot for shareholder value..

Right. Yes. So on the 2 sides. As Steve said, I think we expect our gross margin to increase a little bit. We also have somewhat a reduction on marketing costs on renewals.

The two of those things, plus some streamlining we've done making sure we're kind of organizing everything under one play, I think will, actually, positively impact the operating portion of the cash flow. At the same time, we're spending more and maybe an offsetting amount in terms of dollars change in terms of new investments for content and such.

But the idea that we -- if we're correct about this, what's happening here, that having aggressive share buyback and we have authorization left under our existing authorization, we still have room. And we also have a lot of room on our credit facility. And so that's a topic for our board to finalize on, but in the past, we've not been cautious.

As you know, one year ago, when we did the Dutch Auction, so something like that. At least my own view is that we ought to be similarly aggressive using all the cash that we don't have to invest in the business, substantially all to repurchase our shares. We're not seeing many things to buy. They're more exciting than buying more of ourselves.

And so we feel that whether it's sort of Dutch Auction or open market purchases, we hope that this time next quarter, you will be able to see that we're able to say that we purchased quite a bit..

And our next question comes from Brett Jones of Luzich Partners. Go ahead sir, your line is now open..

First question is, when you guys give out the revenue of offices selling AAP and then the AAP revenue, what is that delta? Could you just kind of clarify what that revenue consists of?.

The revenue is not All Access Pass?.

Yes. Yes..

So for selling half of its All Access Pass and Pass related, the other part of the revenue is our traditional facilitator and on-site business primarily. It would be the biggest component of it. We also don't count, we have some other subscription revenue related to the Execution practice, called the My 4DX portal and our Customer Loyalty portal.

We could report, it's reported certainly as subscription revenue, but it's not reported as All Access Pass.

So the makeup would really be with on-site days that are sold, we had some travel, we had consultant travels, about 6.5% of the revenue that comes in as on-site revenue, we add on, there's about 6.5% on top of that, that's travel related for our consultant.

There's miscellaneous stuff, there's primarily historical facilitator and on-site business and related add-ons there, too..

Got it.

Then I guess of that kind of that revenue delta, how much of that is over time expected to be cannibalized? And how much is expected just kind of still exists?.

Yes. We're saying earlier, we think something like that might move from 49% or 50% to around two thirds. There's probably a place it will be something like it is the movement we still would expect.

And still, you'd have one third just because certain customers aren't able to get, aren't able to buy in that way or the size of the population they have to buy is bigger than they'd want. And we like that as an entry point with new clients. We want to make sure there's an affordable entry point.

So I think if we got 65% of the revenue that's flowing through All Access Pass in one way or another, we'll still have also part of that, in the future, that will also be add on to these single content passes.

If we get in there and somebody has a whole big frontline population that wants Customer Loyalty, we'll sell them a single content pass through All Access. So that's I imagine tow thirds might be the goal..

Sure.

Then, as you guys kind of switch to more All Access Pass model, is content development costs going to I mean, I guess, the content development costs going to increase on kind of the non-refresh cycle year as well? And if so, by what factor?.

Steve?.

Well, this year, it is as we're going through this transition period going to the All Access Pass, I think the amount that we spend will be higher. It definitely will be higher this year, particularly from the more than $3 million spent to localize the content in the 15 languages that Shawn talked about.

And then, the opportunity to go out and maybe some acquirer content from thought leaders out there that would be good for the pass, I think that for a period of time this year and next year, it could be higher.

And then as we go along, I would expect the 4% that we normally have talked about for years to maybe be the amount that we would spend on a recurring basis to maintain the All Access Pass content, along with maintaining our other content.

So, I think there will be a bubble that's higher than what we've seen historically, and then that percentage will come back closer to what we've historically thought as a normal amount. That's my answer..

Then as you guys in terms of you guys specifically talked about the growth rates you guys see for your business in previous calls.

How much of that's coming from kind of the new customer acquisitions? And how much of that's coming from other geography? How much is coming from just increasing the ticket price of the purchase? Just kind of give me a little color on your thoughts..

Sure. First of all, in terms of new pass sales themselves, about 40% have come from new brand new customers to us.

And so about 40% have come from active facilitator clients, about 40% have come from brand new customers, and then, that middle group is coming from people who were once customers, who, with All Access Pass now, will be coming customers again. We identify that separately.

So when we think of that, I mean, right now, it's roughly half and half, between active clients and new, just I mean, if you split those groups. And then, it has thus far, at least the renewals, the amount of revenue to which they increase doesn't seem to be that related to where they came from. It's more what they're trying to get done.

So overtime, the growth opportunity we see in kind of has three dimensions. One is with existing this first cycle of selling All Access Pass, half new, half old, and then going in and making sure that revenue sticks, and we add on sales.

The next is that we've got around 7,000 potential customers that are assigned to our salespeople, that aren't yet customers.

And so there's an ongoing, and we spend we'll have, Paul, how many events this year?.

A couple hundred..

A couple hundred events, thought leadership events, plus another couple of hundred webcast and so forth. Just try to give that [Indiscernible] so that's kind of the next level. I mean, just in the U.S. alone, we have another 80,000 companies that aren't even assigned 80,000 companies and company units. They aren't small business per se.

They've 100 to 200 person units. They are good targets for us and good target for All Access Pass that aren't even assigned yet.

And so as you look at the dimensions, grow existing clients in that sort of revenue per client, grow within those that are assigned is a whole big opportunity and then grow beyond that by a combination of marketing, and then adding new salespeople.

So we've got, we think, a large greenfield ahead of us of people we've never talked to and certainly, of those who are not yet customers.

Is that response to you?.

Yes thank you. And my last question just on the effective tax rate. I mean, obviously, the pretax income is going to be small this year.

But moving on to like 2018, what tax rate should we be modeling in?.

I think it's between 40% and 41% is our normal tax rate. And as you just said, the -- during this transition time, as our pretax income gets closer to 0 because of the impact of deferred revenue, the permanent differences can make extremely volatile and unusual effective tax rate. So I would just think of our business as between 40% and 41%..

Thanks for taking my questions..

And I'm showing no further questions at this time..

All right. We'd just like to thank everyone for spending the time with us today. Sorry, we went over a little bit, but thanks so much for the great questions. And we look forward to talking to each of you soon, either by phone, person or otherwise. Thanks again. Have a great day..

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