Welcome to the Q2 2020 Franklin Covey Earnings Conference Call. My name is Adrianne and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions] Please note this conference is being recorded.

I will now turn the call over to Derek Hatch. Derek Hatch, you may begin..

Thank you. On behalf of Franklin Covey, we would like to welcome you to our conference call to discuss our second quarter fiscal 2020 financial results and hope that you are all staying safe and are well at this time.

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

Forward-looking statements are based upon management’s current expectations and are subject to various risks and uncertainties, including but not limited to the ability of the company to stabilize and grow revenues; the acceptance of and renewal rates for the All Access Pass; the ability of the company to hire productive sales professionals; general economic conditions; competition in the company’s targeted marketplace; market acceptance of new products or services and marketing strategies; changes in the company’s market share; changes in the size of the overall market for the company’s products; changes in the training and spending policies of 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, including the forthcoming 10-Q for the second quarter of fiscal 2020, which is expected to be filed next week.

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 would like to turn the time over to our Mr.

Bob Whitman, our Chairman and Chief Executive Officer.

Bob?.

first to the potential impacts which delays in decision-making caused by current circumstances could impact the timing of renewals and new sales from companies and particularly in the education division for both the annual membership renewal of the majority of Leader in Me schools and the addition of new Leader in Me schools normally takes place between May and August.

We will address this more. Second, so the first is just the delayed decision-making. People not able, they go out their normal processes, the school district isn’t getting together, if they are, they are doing it by videoconference etcetera and this has changed the decision-making.

Second concern is the potential impact, which the fact that people are working home could have unplanned training and coaching engagement which organizations have typically scheduled to take place on side of their offices even though they have been available live online or digitally.

It now means that people sequestration means that these trading engagements now need to be done live online or digitally. Both of which are available and very capably delivered through All Access Pass and Leader in Me or they need to be rescheduled. Many of these have already been reschedules or in the process of being rescheduled live online.

We believe that people do not intend to cancel a very small minority or really going to be canceled and even those who want to continue to have onsite days are rebooking them, postponing it with the hope that, that will be done later on this summer.

However, the shift in the timing of delivery will cause your revenue to move from one quarter into another and create revenue gaps and uncertainty.

And then the third major area of concern is as to the time required to ramp up our recently reopened offices in China and Japan following their operations having been closed or restricted for a portion of the second quarter, they are back in operations and things are generally back in the office making calls.

They are going to need to rebuild their pipelines. So the impact of these factors is not expected to be long-lasting. However, it does create gaps and the uncertainty as to their timing and magnitude makes it difficult to provide accurate quarterly guidance or an update our annual guidance today.

Nothing would please us more than to be able to tell you as we have done each quarter there. Our guidance for next quarter is X and for the year it’s Y. And then you go back and hope to exceed those numbers.

However, in this environment and with education’s biggest quarters coming up really coming up in the end of the third quarter in May and in our fourth quarter, we can’t be confident in our guidance. So we are not providing any at this time.

We expect that in 60 days to 90 days when we report on our third quarter performance we should be in a much better position to provide more guidance and we look forward to doing that at that time. Now moving forward, I would like to ask Paul Walker to talk about some recent – what’s happening with our clients in this environment in both divisions.

Paul?.

Thanks, Bob and good afternoon to everyone on the call. It’s good to be with you today. Despite the current uncertainty, we are pleased that in the enterprise division many organizations have now begun to get their bearings and move forward.

And for these organizations, our focus is now shifting to critical priorities which you might expect like, sharpening their organization’s focus and execution, building the capabilities of their sales forces, establishing or increasing trust of their stakeholders. Each of these areas and others are areas where we are really we have expertise.

And these solutions are found and available to our All Access Pass holders. And our strategic relevance and importance to our customers is being demonstrated and reinforced everyday.

In our discussion with significant portion of our Pass holders over the past 30 days they have continued to express how important and impactful our solutions are to them, particularly in this current business environment.

And just to give you a glimpse into what we are seeing, while a few are requesting changes, for example, to the pass holder populations upon renewal or flexibility in the timing of payments. Almost all have reaffirmed their commitment to be All access Pass.

And because of the relevance of our solutions, new clients are also purchasing new All Access Passes even in the month of March during the middle of the storm, this current environment that we are in. To help address the organization’s needs and we are graceful to be in a position to be serving both existing and new and potential customers.

If I may I’d just like you give you just a little bit of color on what we are seeing in both the enterprise and education divisions.

And you can see on Slide 13 and some examples of these earlier this week and new clients who are seeking to practically work on strengthening their culture of trust and inclusion and they want to do it right no and not delay because they believe that having a strong culture will be an even bigger asset to them during these times of uncertainty and so they move forward with a purchase of a two year term All Access Pass for approximately 4000 people which for us is a very nice size pass one of our largest execution clients is a second example called us last week to let us know that they needed the 4 Disciplines of Execution now more than ever and express that they are 100% committed to the 4 Disciplines of process and ongoing subscription with us another one of our large multiyear pass holders.

A major airline is facing a great deal of uncertainty right now and while they are not in a position to expand their pass the fact that they are in the middle of a multiyear pass with us gives them tremendous capacity to utilize the All Access Pass and cut back on investments that they may have made with other providers and we are currently engaged with them to transition live onsite training to live online training and are introducing a significant number of our digital offerings to their employees so that they can make a big push on leader and employee development.

While their associates have the increased time to focus on their development just a couple of more here another seeking to expand our solutions to a large group of employees they are doing this because these employees are now working remotely and so they are considering expanding their already significant path with us to an additional population of about the 100 people to meet the needs of this new remote working work force I mean finally the lead of our sales performance practice is receiving regular calls from senior sales leaders who want help if they try to stabilize revenue with existing customers and look for ways to grow sales in the current environment as a result for the month of March that just ended our All Access Pass revenue which is a combination of new passes plus renewals actually drew over March of last year in U.S.

and Canada if I may just for a minute similarly in education and education division at a very difficult time for schools, and in a month with unprecedented disruption, including school closings, school scrambling to deliver lunches, providing packets of homework, teaching lessons digitally, etcetera, we all know what it is like in that environment.

As Bob noted earlier, our education division has done a great job providing clients and non-clients with not in schools with free access to Leader in Me student and family resources.

They also continue to stay close to these schools with new and existing schools to help and maintain and expand the commitment to their students and as a result even in a very difficult month school. We are seeing school commitment to Leader in Me process continue.

And just a couple of examples that you can see on Slide 14 during the month of March 248 Leader in Me schools renewed their subscriptions 38 new schools entered in the contracts to provide the Leader in Me to their students and faculty last week a district entered into a contract of its design to train 8400 high school students in leadership skills and will all be delivered via the Zoom platform.

Another large district called this week to schedule final conversations for on boarding their 20 schools in the Leader in Me this summer and finally another one of our client partners has 10 new school districts we have put a lot of focus on districts but 10 new school districts were planning to start Leader in Me this year And so while in the coming months, we expect, will undoubtedly contain plenty of uncertainty and challenges we're grateful that we entered this period, as Bob mentioned, not only strong financially but for lot of momentum best in class offerings and a business model that are really valued by our clients and as a result when this period does end we expect to exit it having increase our strategic importance to our clients and hopefully it has been a great help and a great partner to them throughout this entire time.

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

Thanks. And we’ll just – thanks very much, Paul.

We'll just quickly hit a couple of other points then open it up for questions Just metaphorically, I mean, for those who have been mountain climbers, you feel like you are making great progress up the mountain then there is a massive snow storm or an avalanche and your strength is not less your capability as a climber is not less, but you are in deep snow and your progress is less, but the fact that you can progress at all through the deep snow is a testament for the strength not an indictment of lack of strength.

And I think that’s how we felt last few weeks is that we are in deep snow right now, but we are moving for the examples that Paul talked about in the enterprise and education division. I actually suggested in some areas the snow is getting more firm than others.

It depends on individual clients their circumstance may mean that we are in deeper snow, but that will continue for a while. We don’t know when we will be out of the deeper snow, but we are moving forward.

Our clients are moving forward and we expect that as we go forward as kind of identified in Slide 15 that the same three factors that have helped move us up the mountain so rapidly in the last few years, we will also do the things that allow us both the power through the deep snow and accelerated as we get on to more firm footing.

So well, the timing and trajectory will likely be uncertain, the three ideas, the power of our subscription model, our high lifetime customer value and a business model that generates high flow-through will really be very powerful assets to have. You can just touch – just touching one slide on each of those points.

The power of our subscription business model on Slide 16 and as you can see in Slide 17 that we have grown rapidly. Our total subscription rate of revenue in the second quarter grew 24%, has grown 21% year-to-date and 22% for the latest 12 months.

All Access Pass portion of that has grown more rapidly at 28% in the quarter, a significant 34% of our All Access Passes are now multi-year passes from 27% at the end of last year’s second quarter. That’s providing a lot of structural strength here.

All Access Pass and related sales have grown from just $47 million at the end of – for the latest 12 months ended in fiscal 2018 2 years ago in second quarter to $91 million for the latest 12 months of ‘20 and during the same period of time, All Access Pass and related sales have increased from 32% of our total enterprise division sales to now 52% and we expect that over the next 3 years or so that will increase to around 75%.

With this strong growth in All Access Pass and related sales and leader in these subscription sales has also come as we have noted the significant increase in the amount of our deferred revenue balances, build and un-build, which got to $82.7 million, that’s up from just $18 million at the end of 2017 second quarter.

The second driver of our growth, so the first is the subscription model, the second is the high lifetime customer value and you know in slide – the next slide if I can read it, 18, annual revenue – high relative average price, high good gross margin as services attachment rate that’s now increased to just over 50% and more than 90% annual revenue retention.

And this has created a virtuous cycle which is establishing what we believe is a high expected lifetime customer value. That’s of course being tested in these times as Paul said having had discussions with the huge percentage of our total All Access Pass holders. They remain almost entirely committed.

There will be some of course who aren’t able to continue because their circumstance, but we believe the retention rate will end up being very high. Some may ask to renew a month later or something, but I mean, generally, it’s going to be extremely high. And so we feel good about that.

And then the third driver as we said is just the high flow-through created by the single-digit revenue growth which adds around $20 million or more than a little over $20 million of revenue a year has been adding strong increase in gross margins which has increased our gross margins by several hundred basis points and a declining operating SG&A as a percentage of sales, which has allowed that increased gross margin to flow through.

Final point is that we really are grateful to be in a position to provide our clients with the kinds of solutions they need during these times. As a result, we really do expect that this period will be one that allows us to deepen and strengthen and create enduring, deeper, more pervasive ongoing clients for life type relationships.

I think it’s also for our employees who are extremely mission-oriented, this is a time we are in the value of what they do is right to the fore and they – I don’t know I report sincerely they have never been more engaged.

And we have always had highly engaged employees, but they are with our clients daily by videoconference or phone making a difference. And for our shareholders, to you, our shareholders, we appreciated the trust and confidence you have extended to us and we begin and end each day committed to ensuring that, that trust is well placed.

With that, we will now turn it – open this for questions and be delighted to take any questions?.

Thank you. [Operator Instructions] And our first question comes from Alex Paris of Barrington Research. Your line is open..

Hi, Alex..

Good afternoon, everyone. This is Chris Howe sitting in for Alex. I hope everyone is safe and healthy..

Hi, Chris. Thank you. We hope you are as well..

I guess just starting off with these two questions that I had top of mind.

Can you provide some more color on the typical sales cycle for All Access Pass and for education? And how does that sales cycle currently look? And then my follow-up question to that is in relation to contracts of different lengths whether they would be multiyear or other contracts? Do these contracts renew automatically, these multiyear contracts?.

That’s okay, great.

Paul and Sean, do you want to address those questions? Paul, do want to start?.

Sure. I will start. Hey, Chris. I will start with the sales cycle and how contracts work in the Enterprise Division for All Access Pass. So, the sales cycle, there are two different sales we make, right, one is the sale to a new logo, a new All Access Pass.

And that sales cycle can be varying lengths, but an average, it’s 100 to 120 days or so on average. And as far as what we are seeing, we don’t know exactly what that’s going to look like in the coming couple of months. I mentioned a minute ago, in March, we were happy to see All Access Pass sales continue to stay strong.

The renewal is the other sale that we make of course. When we go for renewal, that sales cycle is – it will work from the day we set the pass. We are doing everything we can over the next year to set up that renewal.

And so, there is a whole process that we engage around with our clients and our passholder engagement process, we call it, that ensures we are doing all the steps necessary to ensure that, that pass does renew on time, a year later hopefully it expands and they add more seats etcetera.

In terms of any contract, multi-year or otherwise, clients do sign -- when the contract term is over, they do sign for another contract term.

And so, while there is language in the contract that says that it’s going to renew, we keep that language in there because that makes the contracting process easier, but the clients do commit and reup so to speak. If we are in multi-year agreement, then of course that discussion doesn’t need to happen until the end of that multi-year agreement.

So, if a client signs for 3 years to give the example a minute ago of the airline, they are in the middle of a 3-year deal. We are not talking about whether they will or won’t renew, because they will have –it’s we are year and a half away from that conversation because they are in the middle of that multi-year contract..

That’s great. I think it is helpful..

Yes.

And as we look at these multi-year contracts, people within these contracts and we take into consideration this uncertain environment and the difficulty in placing a timeline against this environment, what portion or how should I think of this, what portion of multi-year contracts extend beyond this uncertain environment? In other words which ones are up for renewal or what portion is up for renewal this calendar year?.

So, we are signing these contracts all the time.

And so there – the exact portion that’s up for renewal in the next, do you say in the fiscal year or the calendar year?.

Calendar year?.

In the calendar year, Bob and Steve, I would say maybe a third. They stretch out one to two to three years..

Yes. There is $36 million of revenue. And I think the actual contracts as you say stand out over several years. The renewal dates, I mean not renewal, but when they will – actually be invoiced, the majority will be invoiced over the next 18 months or so, but the contracts extend much longer.

And that’s important I think because what tends to happen, no one knows what the pattern of this recovery will be, but if history serves, you look at things absent sequestration, when do organizations resume spending and so forth and making decisions. And historically after a couple of months, organizations are back making decisions.

And so, even in the great financial crisis about 4 months later, the booking pace and everything still was back to basically the normal booking pace, but you lost that 3 or 4 month period.

Here, we have the advantage that the deferred revenue and the multiyear contracts bridge over that period largely even single-year contracts, which we have a huge number of those, really don’t – they come up, the renewals come up pretty evenly throughout the year. And so, we are not facing an extraordinary number of renewals.

For example in this quarter, our third quarter, we have around 13 million of passes up for renewal in this quarter. Paul, I think we have got somewhere close to half of those done now.

Is that true?.

Yes, that’s right. We are about 7 of the 13, yes..

So, it isn’t a huge portion that’s exposed to any particular period of time, which is helpful..

And would you like me to comment, Bob, on the education side?.

Yes, please, Sean..

Sure. Chris, just to address your questions on the education side..

Okay..

Sure. Yes, so the sell cycle in education typically is a pretty long sell cycle and it starts usually in the fall if school start to investigate whether or not they are not interested in our Leader in Me home school improvement system. And they typically will make decision starting in January.

Most schools will – usually by May that kind of made up their mind that they are going or not between May and August, they are starting and implementing.

And then because of that, the retention cycle is on the same as Bob mentioned, we have about 2,700 schools that are trying to keep in the system and keep their subscriptions going and the retention rate has been really high historically around last year was 88%. It’s always been around that. And that also starts in May and run through August.

And so we are – that’s coming up and we have had a lot of conversation with schools already and indications are really good that people intend to stay with us. But that’s basically how the renewal cycle works with us, with multiyear contracts – go ahead, Bob..

No, I was just going to mention you noted or Paul noted earlier that there were 225 schools even in March that did – we normally wouldn’t have a high percentage of schools in March at it, but 225 or so did renew in the middle of the storm recognizing they needed – they were so committed needed to what we are doing in education so?.

Yes which was a little slower than last year, but not too far behind, which was encouraging to say. In some schools, we found just aren’t – they just say please call us back in 2 or 3 weeks when we have – we can get our bearings a little bit more. So that’s kind of how the sales cycle work on the education side..

That’s great. I appreciate all the color and that’s all I have for now and I will hop back into queue. Thanks everyone..

Thanks, Chris..

And our next question comes from Andrew Nicholas from William Blair. Your line is open..

Hi, good afternoon..

Hi..

I realized the current environment makes any sort of outlook for the remainder of the year difficult. So I totally understand the hesitancy to provide updated guidance and makes sense to me. I just – I am thinking that investors will typically point to 2009 for some sort of proxy on how the business can be behaved in a more cyclical environment.

And I think in ‘09 if you account for the sale of the consumer solutions business you are down roughly 15% or so on the top line.

So I was just kind of wondering with that as context if you could talk a little bit about the differences in the business between then and now and what way you would expect the business to be more or less resilient versus 9 obviously All Access Pass is a key difference, but any color on that would be helpful?.

No, that’s a great question. In 2009 period on which of course started the Lehman bankruptcy started right in that start of our first quarter and so that year our revenue went from about $133 million to previous year down to $124 million.

So it was a little less than the total, I guess the 8.5% decline if that’s with your math is exactly you are directionally correct.

And almost all of that decline for us occurred in that first 4 month period when organizations were wondering we have had part of that which is the Christmas period anyway which tends not to have a lot of resale, but it reaches over that those four months included a period where people just weren’t sure they were going to survive.

And what happened was at least then we didn’t have All Access Pass, we didn’t have contractual revenue multiyear contracts or anything, but even then people were committed to what they were doing and most of the business, a lot of our business than was in terms of these onsite days, we didn’t have live online or digital delivery or those kinds of things.

But what people did is postpone them. And so it turned out that we lost very little of the business, but because it postponed a few months delaying this, look, we would like to schedule this in February, I mean, reschedule from October, November, we are going to see if you are around, if we are, we are still committed and people did pick it back up.

And so we really held our own really well, I mean, year-over-year through March, the second 6 months of that period. Interesting during that period is we actually – the decline of 8% or so is a mix of two things.

One, we actually grew our execution business, our sales performance and customer royalty business that year and our trust business and that was offset by some declines in the more traditional back then time management training things like that.

So how we are different now actually, we don’t know of course how the – what the pattern will be this time, every pattern is different that we always read.

We knew – but I think the things going into it, we have many – much of our business on contracts, multiyear contracts that obviously over that 3 to 4 months we would have all of our multi-year which is at and a significant portion of just the 1 year contract that bridge it. The services rather than being one-off are really tied to initiatives.

We have a bigger percentage of our business today. It is in things like execution and sales performance. So that’s – it’s a place for people in these times historically at least really doubled down.

So that’s what I need and we are seeing that now with our Head of our sales performance track just getting a number just unsolicited calls from sales leaders at major companies.

And so I think you are going to have some differences, we don’t know what the pattern will be, but the idea of where we are now is I think a much more solid place even though it turned out that last time wasn’t horrible after those first few months..

That’s really helpful. Thank you. And then….

That’s great question..

Just one more – on the cost structure, I am just – can you give us kind of a high level view of how much of your cost base today is fixed versus variable and then what type of opportunities you might have to pull back on spending if the economy remains challenged for a longer period of time?.

Yes, thanks. Great. First of all, we have – our cost structure by design flexes quite significantly. I mean if you first start with our sales force, our client partners, which are a major part of our total investment and cost structure, they are all on condition.

So while they get a draw this equal to between 50% and 70% of the target, there is a lot of flex which is natural, but we hope they won’t have to put, but I mean there is a natural flex and they are also with the delivery consultants who have paid, paid on a per day basis.

Also many years ago we decided to structure all of our major manager compensation and of course, senior compensation so that a very significant portion of that is based on result paid through performance. And so there is a natural flex in that just whether it is a like a 30% flex in the total cost structure.

Just as a consequence of delay in which it is structured at the executive team level, it is even more extreme where it in a targeted compensation base salaries and so forth are represent depending each individual for me roughly 27% or something is base salary.

And so I think that part of it is helpful because it flexes on its on its own beyond that the majority of our costs are related to people we don’t have a lot of essential costs haven’t increased for years so we have had ongoing projects have once in a right now unrelated to this time we were trying to take out costs all the time we have done that you see our SG&A as a percentage of revenue having been declining for like eight or nine quarters it is not just because revenues have been increased results because of costs initiatives and we have those are ongoing which we think we can save millions more and so I think we have I think what it can be known as a costs I have to just natural given to what we have done and so we feel like that will be hopefully 20 to flex if not then obviously we have historically been wanting to do what was necessary starting with the executive bench to do what is necessary for that became the issue is that responsive..

Great. Thank you..

Okay. Thanks Andrew..

And the next question comes from Marco Rodriguez with Stonegate Capital. Your line is open..

Good afternoon. Hi guys. Thanks for taking my questions here..

Thanks for your questions..

I was wondering that you spoke a little bit about the impact you guys saw in Asia China and Japan and I believe you gave some revenue figures there may be you could give us a little bit more information a little bit more color in regard to the cadence kind of how you saw that the revenue unfold as many parts started to go through a lockdown and then if you can may be also talk about what you are currently seeing in terms of the cadence of revenues and how that kind of come back to give us some sort of framework to look at here..

Paul you want to address that?.

Sure, sure. Hi Marco.

So China and Japan were they were both impacted a little bit differently so China of course they the country took dramatic action and did so quite really right at the time of the Chinese new year which was there were impacted throughout the majority almost all of our second quarter and for them it was and culturally even an interesting and challenging thing if people have to go work from home which is an uncommon thing over there not just in our company but generally in China and so we saw a big fall off in revenue I mean nearly completely in China just staying on China for a minute what we have seen is they have come back is we are pleased with how quickly clients have began engaging in conversations again of course in China now they have the law is such that you cannot have all of your work force in the office at the same time so we have people work from home a part of the day come in the office for a part of the day and then flip with the other half of the office but they were engaged with customers they are engaged with us lot of selling activity has started again they are not quite yet to the point where they want to have necessarily training programs that are unless they are done virtually but the conversations have ramped up quite quickly after what was a pretty dramatic shutdown there in that country.

Japan was little bit different we had activity that happened well end of the quarter it kind of normal selling quarter upon till kind of the final month of the quarter in February and of course they locked down as well but their lockdown was a bit different and so we didn’t see a complete fall off revenue like we did in china and we have been able to maintain revenue there conversations with clients have continued drive the process probably a bit more like the U.S.

right now we are they are still conversations going in then they are able to still drive business there. And they are kind of now also coming back out the other side a little bit in terms of clients expressing willingness to begin talking about getting things back on the books etcetera. I don’t know if that’s….

Marco, I would note also that the pattern we expect to be a little different here only because of China, it was not yet selling they are just starting to sell the All Access Pass in the fall, because we had to build a separate firewall behind. We had a separate portal behind their firewall, the Chinese firewall. In Japan, it just started.

And so they don’t have the same base of subscription revenue or in-place impact journeys contracted services, but nevertheless the business activity is starting to show you look at hotel occupancy rates and they are edging up. It’s not fast. It’s going from 18 to 22 to this week I saw the deals like was around 25.

And so the business environment is starting to edge back up and even in the absence of contractual revenue like we have in the U.S..

Understood. That’s helpful.

And then shifting gears a little bit here and following up on our prior question on the sales process or sales cycle, just trying to better understand here in North America, the importance level of your client partner is actually being on a plane and going to meet their clients for the new logos or for the renewals?.

Bob I can – I will address that if you want..

Sure..

Yes. So our client partners, first, they are almost 100% of them are geographically proximate to the territories in which their clients reside. So they are scattered throughout the country, throughout North America and most of them within a – well, they all live within an easy drive to their clients.

Obviously, they are not driving the declines right now to go see clients face to face. And so they are doing that via videoconference. That’s a pretty common thing for us though. Our sales force spends even in the non-current pandemic environment they spend their time meeting with clients either via platforms like Zoom or face-to-face.

And so it’s a pretty easy transition for them to do that via – they all work from home anyway and their customers are spending a lot of time with clients on the phone on Zoom etcetera. And so they are doing that. Interestingly, clients have in our space they have a good deal of time to talk to us too.

So right now, they are available and we are spending a lot of time with our existing clients and perspective clients.

I am sure the decision-making process will go little bit slower not because of our inability to engage with them via Zoom or videoconference, but for them to go and get approvals from other people in their organization before sign off, the fact that they are all not working in the same office.

That requires some extra routes for them to jump through on the client side. But in terms of our selling ability, it doesn’t really diminish what we can do right now in terms of selling..

Got it.

And last quick question, if you can just kind of update your thoughts in how you think this impact will play into our hiring targets for additional CPs?.

I will just stay on that one, Bob, if it’s okay. So we commit – as we know we are very committed to hiring and then we have hired throughout this year already. We are 255 client partners in the sales force now. And what we have decided to do is just shift by a couple of months, the next two classes of client partnering.

And we are doing that primarily because we want to give – we want these new client partnership come in to be successful and we just don’t think maybe exactly right now with the environment to bring them in. And so we are just going to take everything we are planning on doing and just shift it back a couple of months..

Thanks a lot guys. Appreciate your time..

Well, thank you..

And your next question comes from Samir Patel from Franklin Covey. Your line is open..

Samir, how are you?.

Very good. Thanks for taking my questions. Paul, can you repeat, I think you said if I heard you correctly that bookings for both renewals and new sales, were actually up in March.

Did I hear that correctly in our enterprise segment if you could just cover that again?.

Yes, they were. In the U.S. and Canada, the revenue from new passes and renewals grew over March a year ago..

Okay, that’s good to hear. And so that’s interesting kind of given the disruption.

The follow-up question to that point on that would be also the part of that would be because we had strong pipeline and some clients really positioned to make a good decision and they did so but as Paul said earlier starting with a new client now the sales process may be longer than what it would have been so we close business thankfully we close business that was already positioned we also because of the sales cycle this is the stuff that we were talking about before hand completed this would be we expect this would be a little deeper snow and harder to we are having lots of those conversations but there will be some gap likely in the sales cycle as your -- we have things in all stages that have been -- seeing that the trend of it is going to be a little harder I think.

Right.

I mean that is understandable given disruption over the last few weeks I was just impressed that you actually manage close deals that were already in process so that’s good the related question Paul I think you mentioned something about renewals some of the renewals may be happening a month later or something about payment terms I was curious if you could delve into that a little bit with may be an eye for I understand the great portion of your client basis probably doing fairly well but then you may have the company’s like Marriott right where obviously they are probably very committed to your 4 Disciplines Of Execution but if there is no one staying in hotels they are going to have near term challenges and they are laying off significant portion of the work force so if you could may be talk to kind of where you see that in your client base and what exactly it is that you are seeing with regards to some of those challenge clients..

Sure. And you just expressed it well.

So there are clients are across the spectrum right now from they are industries that are doing very, very well and they are looking to expand right now and we had a number of those conversations interestingly in even in these times where they are sending employees to work from home and the original path they want they need access and consider those populations as potential they hadn’t yet considered we would hope they would but having considered them yet as potential pass holding employees but now that they are working remotely and they want to find ways to engage them and successfully from home there any conversations but that’s about expanding so you kind of have that end of the spectrum and then you have the complete other end I mentioned a minute ago example where they are not looking to expand and in their case during a multiyear that’s great for them and we have somewhere I am sure we will because we want to be good partners we will want them to asked to extend may be some preferential payment terms they are differential payment terms to them just to get the renewal on time what we might collect the cash just a little bit later to help them out and there might be a few that will say we just ask some of our employees to take some extended time off we may not be able to use the pass fully for the next couple of months could we get a month or two on the back end we want to stay with the pass and major things that will take one off to try to do right by our client we think of our clients as clients for life.

And that's an important thing for us.

Anytime we lose a client, we're like, dang, what did we not do that we may be should have done that we could have retained that client and so we approach everyone on these discussions that way thankfully right now we are seeing most of them are planning on either utilizing the passes as we would hope they are even utilizing in a differential ways today than they might have a month ago they are aggressively talking to us about how did they convert what they use to do in person to live online and thankfully for them and for us we have all that capability in the All Access Pass and so it is a client by client conversation it is where our client partners our implementations specials are doing everyday right now and we have been able to have contact with nearly every pass holder in the last 30 days just to check and see where they are and get a good sense most helpful..

Understood. Thanks.

And do you have I don’t know if you have this up on the top of your head but do you have any sort of analysis around what percentage of All Access Pass base is related to industries like you say a apparel retail or hotels or airlines those sorts of particularly challenged industries at the moment?.

I don’t have the exact number I would tell you we our client’s a re kind of a good cross section, a represented sample, if you will, of the Fortune kind of 5000 companies.

So they span all of those from technology but we don’t have a particularly heavy concentration in any industry really it is an interesting cross section got there to we are not we don’t have a massive problem because we're all loaded up in one industry that's really struggling.

At the same time, we won't also have an easy time because all of our clients are company that are driving right now. So it is a big cross section..

Sure. That’s helpful. Thank you so much..

Thanks..

Our next question comes from Zach Cummins from B. Riley. Your line is open..

Hi, good afternoon. Thanks for taking my questions..

Thank you..

Yes. I guess there has a lot of questions and I am on the right side of it, but I guess just still around the education portion of this, it sounds like a lot of your renewals typically come during this head of say May through August timeframe.

Can you talk a little bit more about how you are trying to navigate that renewal cycle given the current climate? And is there potential that you could be extending some of these renewal windows beyond that August timeframe?.

Sean, would you like to address?.

Sure, yes. Yes, well most of the renewals again as was shared we have about 2,700 trying to get renewed.

And they start – I mean it started here in March and they just accelerate through the rest of the year and so – and we in the month of April increased a little bit over March and in May it starts to hit really hard through July and some into August.

So what we are doing is we have been diligently making lots of phone calls in many cases some of the schools have said, you know what, love you guys, wait 2 or 3 weeks, give us a call back.

So we have tried to be sensitive to certain states and districts where they are not really ready to talk with us, a lot are and that’s why we had a lot of renewals in the month of March. We are finding that the more urban districts, the larger districts are more prepared for this kind of downturn and to go digitally.

And so they are quicker to get back to us. The more rural areas are little bit slower. We feel like, because Leader in Me is a thing. It’s an implementation process, not just like a one and done. And in what we sell it upfront, it’s we sell a process of 3 to 5 years long and most of them are in that 3 year to 5 year window right now.

So we feel pretty good about our ability to retain our retention rate comparable to what it’s been in the past. And thus far we have – we are not hearing people say we are not going to renew. It’s primarily been call us back in a few weeks. So, we feel pretty confident. We have coaching relationships with all these schools.

These are coaches that go to the schools every year. And we are still doing a lot of coaching right now. We have converted to a live online over zone coaching process and we have been doing this for a log time already. So the schools are comfortable with it. And we are comfortable with it. So that’s going along pretty well.

So, our process is all hands-on deck. We have client partners at contacts with the schools. We have what we call education quality partners. It’s another key role that we utilized to have a really good relationship with each of their schools. And we have coaches. So we have about like three touch points with each school.

And we sell we are just going as fast as we can, trying to balance and consideration for the situations with our desire to try to get them committed for next year. And yes, so there is some possibilities that things will get pushed. I am sure there is going to be some of that.

And there will be maybe some extensions that will give people, but in most part, the schools have a budget, most of their budgets turnover in July and August. They want to spend the money when they have it. They have got long-term relationships with us.

And we feel pretty confident and it’s a lot of unpredictable things right now, but we feel pretty confident that most will renew on time. And I think we are starting to get a lot of calls right now back around people calling us bad, if you called a couple of weeks ago saying hey, I am ready to talk now.

Just this week, we are starting to hear a lot of that. So hope that adds a little bit of color..

Absolutely. And I think you briefly mentioned some of the coaching services you do, I know that in your fiscal 3Q and 4Q you tend to have more services related to the education segment.

Can you describe what portion of these can be done remotely or in online format and I guess what portion of those, require somebody to be onsite at these schools?.

Well, all of them can be done – either we can do them live, we can do them online, which is like other zone. And we can do online demand. And we have developed the on-demand capability just like in the last few weeks. We have been working on this for some time. We just kind accelerated once it’s hit.

So I think in most cases, they can all be delivered either live online or on demand as well as live.

And the on-demand is where the school go in and do their own training on a computer, right and then afterwards they have discussions, virtual discussions which everybody else in the community they are doing their training with around what they learned. So it’s kind of the flipped classroom approach.

So there will be some schools that will prefer live and we will say we want to wait until things have cleared up and we would like to live training maybe in the fall, normally would have been in the summer that some of that will happen for sure. But in general, our approach is hey, you have a live day in July.

We are planning on doing it live online and also have a on-demand option if you would like to go that route. So that’s kind of how we are approaching it..

Got it, got it. That’s helpful.

And just a final question for me, Bob, just going back to the flexibility, your cost structure everyday, it sounds like many of your expenses are kind of naturally flexible in a sense, but I am thinking about gross margins here in the coming quarters, it sounds like you still have your strong base of growing recurring revenue that carries a higher margin? So would it be fair to assume that as that portion of the business becomes bigger portion of the overall mix that we could still see some pretty strong gross margins here in the upcoming quarters?.

Steve, I don’t know want to address that directly?.

So, Bob, tying into that, so the life there is that if the recurring revenue and the subscription revenue becomes a higher percentage of our overall revenue will that automatically – will that mix cause our gross margin to go up. And I would say that yes, it would.

There are also other factors that play into gross margin like our amortization expense etcetera that would become a larger portion of our sales. So there are some fixed components to gross margin and variable components and mix. And all of those combined, I don’t see a significant impact on gross margin percentage overall..

Got it. That’s helpful. Thanks again for taking my questions and best of luck here in the upcoming quarters..

Thank you, sir. You bet..

And your next question comes from Jeff Martin from ROTH Capital. Your line is open..

Hi, Jeff..

Thanks. Good afternoon. Hi, Bob..

Good afternoon..

I hope you are doing well..

Yes, great. Hope you are too..

What’s changed it and I had a lot of traction during this call so I apologize if this question has already been asked, but in terms of your onsite delivery and the conversion of that online, are you able to give us an idea of how much you are effectively transitioning the onsite to an online delivery format currently?.

Sure.

Paul, do you want to take that?.

Sure. Hi, Jeff. So we as Sean mentioned about education, the same thing is true in enterprise that everything we do can be delivered live online. We actually have two different platforms we use with our clients, one is an Adobe Connect platform there is Zoom which we are well becoming pretty familiar with.

And so we can deliver all of the normal training we would have everything from a four disciplines track to a sales performance initiative to leadership developments and traditional time management training. All that can be done live online. And so for us, it’s not a problem at all.

In fact, our net promoter scores when we deliver that way are really every bit as high as they are when we deliver live in person. And so it’s really the – it’s getting our customers comfortable with that from many of them. It’s that this is a new theme for them.

And so we are refining that we are spending a lot of time educating them and helping giving them demo to helping them see and visualize how this could be a really good alternative. Some of course are much more adept at that and already there and others. And so that’s where our sales force is spending a lot of time right now.

We – and as you would expect in March, have seen a number of live onsite programs and not really canceled, just delay. The clients called hey, we just can’t do on the day we had it scheduled. And so we are in conversation about rescheduling. What we have seen in the last, really particularly the last 6 or 7 business days.

And so a number of those clients now are saying okay, it looks like this is going to be maybe the new normal for a little – for longer. We think it will pass over in a couple of weeks. And so they are now back talking about okay, let’s really look at that live online saying how we get comfortable with that.

And we are starting to rebook some of the days that it cancelled. And so percentage wise, we are probably right now, we have probably rebooked 20% or 25% of those that had cancelled, but not kind of delayed. We haven’t actually had lot of this before. I haven’t had that many that actually all right said. We are done. We are not doing this.

Most are in kind of a we got to reeducate them on the live online idea or they are saying you know what maybe we will do that in June or July when this passes and so those are the conversation we are in right now..

Okay, that’s very helpful. Thank you for that. And then Bob, just wanted to get a sense as to how you are thinking about the existing infrastructure within Franklin Covey if you have had to make any changes at this point if you are thinking that you might get to place – if we are in the situation for another 2 months.

Would that force you to look at your cost structure or how are you thinking about that?.

Jeff, we have a one Monday a month, the afternoon is focused on business model.

We have been dedicated to say hey, look by the time we get to $300 million of revenue, which we before one month to go that will be – maybe so will be, but that’s a little if this affects the economy and does so for the next quarter or two, still be fundamentally the same trajectory, $300 million that you would be at 20% EBITDA margin and so independent, so kind of independent of this situation, we have for years trying to take that.

And so to your question years ago, we took out all the infrastructure, the physical infrastructure in the U.S. and Canada of offices and so forth. It hasn’t affected our revenue, our client partners who are already working primarily for their homes, And so that structure has been taken out.

Of the practice structure we had, we have recognized it’s All Access Pass, you are much better off having a broader mandate. And so we have eliminated that. So I think most of this structure in the field we still have physical offices in the UK, in Germany, Japan and China. But really otherwise that’s – there is not infrastructure to take out there.

So I think there, you are not there. I think sure going forward we have in the past we have taken on what we needed to and we are those kinds of things that you could have the people who can generate revenue continue to generate that but take on costs, IT costs. And those were all on our list every month.

But I think, yes, there could be a time where several of those infrastructure IT etcetera could be challenged.

What you've seen is that our central cost – despite having added a lot to revenue over the past decade our central costs really weak because of these initiatives we haven’t allowed that to grow much and that’s declining as a percentage of sales so we have listed project that we are already on, some of which we're accelerating now just naturally because you say, "Well, this is something we can take on but I think largely I mean there it is not that there are millions of dollars that are still because we know what those numbers are because they're on our list anyway but we anticipate they would do most without affecting people directly other than in the flex of their compensation..

Thank you and good luck with everything..

Alright. Thanks so much..

Thank you I will now turn the call back over to Bob for final remarks.

Alright. Well thank you very much for everyone, great questions for your thinking on this and for the year.

We look forward to any questions anybody else has, I will just step back and say that it is really great to be involved with clients in a way that they really value and where they are talking about the importance of things we have talked about for several quarters the strategic durability of actually working on problems every organization has problems the solution to which require a large scale change in human behavior whether that is improving sales or customer loyalty or trust or whatever it is I think it needs time.

So once people settle out and I think that everybody is settling at a different level and it will affect people differently, this is the most enduring phase.

That’s a combination of the solving problems, they really need to get solved and doing it through a business model they really value, we think we will – is we are glad to be in this position although we don’t like being in this position, if you are in this position, you are glad to have that set of assets. So thanks very much.

We look forward to talking through and answering questions as those come up. Thanks so much. Stay safe..

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