Welcome to the Q2 2021 Franklin Covey Earnings Conference Call. My name is Adrienne, and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will be conducting a question-and-answer session. [Operator Instructions] Please note this conference call is being recorded.

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

Thank you, Adrienne. Hello, everyone. On behalf of Franklin Covey, I would like to welcome you to our conference call to discuss our financial results for the second quarter of fiscal 2021.

Before we begin, I’d 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 our subscription offerings, including the All Access Pass and Leader in Me memberships, the duration and recovery from the COVID-19 pandemic, the ability of the company to hire productive sales professionals, general economic conditions, competition in the company’s targeted marketplace, market acceptance of new offerings or services and marketing strategies, changes in the company’s market share, changes in the size of the overall market for the company’s products, changes in the training and spending policies of the company’s clients, and other factors identified and discussed in the company’s most recent annual report on Form 10-K and other periodic reports filed with the Securities and Exchange Commission.

Many of these conditions are beyond our control or influence, any one of which may cause future results to differ materially from the current -- 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 Mr.

Bob Whitman, our Chairman and Chief Executive Officer.

Bob?.

Thanks, Derek. Hello to everyone. We appreciate you joining us today, we’re really happy to have the opportunity to talk with you. We are really pleased that our second quarter results were strong and even stronger than expected.

We believe this again emphasized the strength, quality and durability of Franklin Covey’s value proposition and our strong subscription business model. Specifically, in the second quarter, as you can see in slide three, revenue was strong, driven particularly by the strength and growth of All Access Pass and related sales.

Gross margins increased 559 basis points compared to last year’s already strong second quarter. Our operating SG&A declined by $2.4 million.

Adjusted EBITDA increased to $5.1 million which is a level $1.1 million or 26% higher than the $4 million of adjusted EBITDA achieved in last year’s strong pre-pandemic second quarter and to the level significantly higher than our expectation of achieving between $1.5 million and $2 million in adjusted EBITDA for the quarter.

Our cash flow is also strong. Net cash provided by operating activities year-to-date increased 26% or $4.5 million to $21.9 million, ahead of the $17.4 million achieved in last year’s second -- year-to-date second quarter.

And finally, we ended the quarter with approximately $55 million in liquidity, which is up from the $39 million liquidity we had at the start of the pandemic one year ago. So we are pleased to be in this position. I’d like to discuss these results in more detail in just a moment but first some context.

This strong and stronger than expected performance reflects the continuation and acceleration of four key trends we discussed in the past three quarters, which continued in this quarter.

Specifically, as indicated in slide four, these trends are; first, that the growth of All Access Pass sales has been very strong; second, the All Access Pass related services have continued to be strong and are now even higher than they are very strong levels we had pre-pandemic; third, our international operations have continued to rebound; and fourth, despite continued uncertainty during the first-half of the year, trends in our education business are really encouraging.

I’d like to provide a little more detail in each of these trends. First, as expected, the growth of All Access Pass and related sales, which accounts for 83% of our enterprise sales in North America continue to be very strong.

As shown in Chart A in slide five, you can see the total company All Access Pass pure subscription sales grew 13% in the second quarter to $17.5 million have grown 14% year-to-date for the first six months and 15% for the total 12 months period at which the entirety of the pandemic to-date to $67 million.

In addition, as shown in Chart B, total company All Access Pass amounts invoiced had been growing even faster, growing 16% in the second quarter to $22.5 million and 30% year-to-date to $38.4 million.

Importantly, much of this 30% year-to-date growth in All Access Pass invoiced amounts has been added to the balance sheet and will establish the foundation for accelerated sales growth in future quarters. Importantly to us, All Access Pass performance has been strong across all the key elements which we pay attention to.

The number of All Access Pass sales to new logos increased meaningfully both in the second quarter and in the latest 12-month.

As shown in Chart C our annual revenue retention has continued to exceed 90% and also the sale of multiyear contracts has continued to be strong with our balance of unbilled deferred revenue related to multiyear contracts increasing to $37.4 million as shown in Chart D.

Second, the sale of All Access Pass related services which has delivered primarily Live-Online was also very strong in the second quarter. Chart A and slide six shows the strong booking trend for All Access Pass add-on services almost all of which are now being delivered Live-Online.

As you can see in Chart C, with the beginning of the pandemic in March of last year, bookings of services delivered live on-site at client locations were necessarily cancelled and the year-over-year dollar volume of services declined with delivered engagements down $6.9 million in North America in the third quarter.

However, in the fourth quarter of fiscal 2020, new bookings increased levels nearly equal to those achieved in the fourth quarter of the prior year in ‘19. These strong bookings in turn drove an increase in the dollar volume of services actually delivered.

As a result instead of being of off] [ph] $6.9 million as is in the third quarter, the dollar volume of services delivered in the fourth quarter was off only $1.1 million.

This same positive trend continued in the first quarter and accelerated in the second quarter with the result that in the second quarter sales were actually higher and year-to-date actually services revenue in North America has exceeded the levels achieved in last year’s second quarter and first six months period pre-pandemic.

As shown in Chart B, 92% of our services are now being delivered to clients Live-Online. This is important because with 92% of services are now being delivered Live-Online that momentum can continue regardless of when and whether the organizations return to their offices.

Third, as shown in slide seven, performance in our international operations has also strengthened in the second quarter. Sales in China, Japan, Germany and among other international direct offices and licensee partners continue to improve continuing the trend established in both the fourth and first quarters.

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

Since these countries were just starting to sell All Access Pass and therefore did not have a strong base of durable subscription revenue to cushion them, sales in these countries declined significantly compared to the third quarter of fiscal ‘19.

Now actually this decline started a little earlier in China in the middle of last year’s second quarter with the onset of the Coronavirus there.

As shown in last year’s fourth quarter, while still operating well below the levels achieved in the prior year fourth quarter, sequential sales and sales as a percentage of the prior year in these countries began to improve significantly. Year-over-year sales improved further in the first quarter.

We expect the sales in our -- in these operations to continue to strengthen in the second quarter and we are pleased that they did.

As shown in the second quarter international sales were ahead of our expectations and just 14% lower than in last year’s second quarter, with most of this decline -- year-over-year decline represented in Japan and U.K., which have had a series of rolling shutdowns in their economy which we expect to strengthen.

Importantly, another reason for actually a little bit of the decline is that we are having a good conversion of sales to All Access Pass and that is putting -- instead of putting the revenue into the quarters putting on our balance sheet and this is driving an increase in our balance of deferred revenue internationally that will help to drive some strong sales force growth in the future.

Finally, as shown in slide eight, in the education division, despite an educational environment, which is continuing to be very challenging, we have seen a strengthening in the trends of our education business both in the second quarter and year-to-date.

The strengthening includes that number one the number of Leader in Me schools, which have renewed or already to renew their Leader in Me membership increased to 1,059 during the second quarter, compared to 725 schools at the same time last year.

And second, the number of new Leader in Me schools who have contracted by the end of the first quarter or in the process of contracting is almost equal to that achieved in last year’s second quarter pre-pandemic.

Just to note that there are also some positive trends in the education market overall despite the challenges which we all know about and we expect these will help our education business during the remainder of this fiscal year and into next fiscal year.

These trends include; one, increasing confidence among those in educational community that most schools will be open in the fall of this year, not certain but more confident; second, that is shown on slide nine and is shown on slide nine, the three COVID-19 stimulus bills passed by Congress in March last year December and this March dedicated nearly $200 billion towards stabilizing budgets in K-12 schools with a disproportionate amount of that help coming to Title One schools for Leader in Me is often the strongest; and three, the third trend is that Social-Emotional Learning for students called FCO [ph], which plays to the strength of Leader in Me continues to gain momentum.

It importance is being talked about every day in the press. It’s becoming increasingly acquired by districts. Just one more note.

To take advantage of the stimulus funding and the FCO movement or Social-Emotional Learning, our education team has added to its positioning efforts helping schools take on the issues of learning recovery and the student and teacher mental wellness, these have become the pressing topics the education community is trying to address and the Leader in Me is really designed to deliver on.

Early indicators suggest this expanded position is working well and so we believe these business and market trends will work in our favor, still be a difficult environment this year, but we are confident in the future of our education subscription business.

We are being conservative bout our expectation this year and feel good about our ability to meet those. With this context, I’d like to ask -- turn the times to Steve Young and ask him to dive a bit deeper into our performance for the second quarter.

Steve?.

Okay. Thank you, Bob, and everyone. I am pleased to be on the line with you today to talk us a little bit more about our second quarter results. So as shown in slide 10, our performance for the second quarter was stronger than expected and showed positive momentum in almost every front.

Our adjusted EBITDA for the second quarter was $5.1 million, an increase, as Bob said, a $1.1 million or 26%, compared to last year’s second quarter and amount substantially exceeding our expectation of achieving second quarter adjusted EBITDA of between $1.5 million and $2 million.

These results are even more notable given that last year’s second quarter was itself very strong. Our cash flow and liquidity positions also increased significantly. As shown in slide 11, our net cash generated for the quarter of $5.2 million was $4.2 million higher than the $1 million of net cash generated in last year’s second quarter.

This reflects strong growth in adjusted EBITDA and significant growth in All Access Pass contracts invoiced resulting in our balance of billed and unbilled deferred revenue increasing by almost $13.2 million or 16% to $95.9 million in the second quarter.

As shown on slide 12, our cash flow from operating activities for the second quarter increased $4.5 million or 26% to $21.9 million, compared to the $17.4 million in the last year’s second quarter.

The strong cash flow reflects the -- an additional benefit of our subscription model is that we invoiced upfront and collect the cash from invoiced amounts faster than we recognize all of the income.

As a result, we ended our fiscal year in August with more than $40 million of total liquidity comprised of $27 million of cash and $15 million on undrawn revolving line, which was an amount higher than we -- than at the start of the pandemic. We are pleased that we added further to this liquidity during this year’s first half.

We ended the second quarter with $55 million of total liquidity, comprised of $40 million in cash, which means we had no net debt and with our $15 million revolving credit facility still undrawn and available. So this good performance was driven by first strong revenue.

As shown on slide 13, our second quarter revenue of $48.2 million was driven by very strong performance in our North America operations and the continued outstanding performance of All Access Pass.

Where as shown in Chart A of slide 14, companywide All Access Pass subscription sales grew 13% in the second quarter, 14% year-to-date and 16% for the last 12 month pandemic period.

And in addition to the All Access Pass subscription revenue recognized in the quarter, Chart B shows that we also achieved a very strong 16% growth in All Access Pass amounts invoiced to $22.5 million in the second quarter and grew 30% year-to-date to $38.4 million.

Most of the significant growth in All Access Pass amounts invoice was not recognized in the quarter, but was added to the balance sheet as deferred revenue. This will of course be recognized and help accelerate our results in future quarters.

These new invoiced amounts included strong sales of new logos, a continued quarterly and last 12 month revenue retention rate of greater than 90%.

As shown in Chart C, a large number of All Access Pass expansions and as shown in Chart D, a significant volume of multiyear All Access Passes, which increase our unbilled deferred revenue significantly over last year’s amount. Sales of services were also very strong in the second quarter.

Services revenue in North America grew $7.7 million in the second quarter, compared to $7.1 million in the prior year. Second, as shown in slide 15, the strong All Access Pass sales drove significant growth in our gross margin percentage again in the second quarter.

As shown, our gross margin percentage in the second quarter increased 559 basis points to 77.5% from 71.9% in the second quarter of last year. As shown also, our gross margin percentage has increased 459 basis points year-to-date and 392 basis points for the last 12 months.

In the enterprise division driven by the significant growth of the All Access Pass and related sales, our gross margin percentage increased to 81.7%, compared to 76.1% in last year’s second quarter, an increase of 562 basis points.

Third, our operating SG&A in the second quarter was $2.4 million lower than last year’s second quarter and $6.8 million lower than the first half of last year.

And finally, the combination of these factors resulted in adjusted EBITDA growing to the $5.1 million, an increase of $1.1 million or 26%, compared to just over $4 million of adjusted EBITDA achieved in last year’s strong second quarter and significantly higher than our expected amount.

The strong second quarter also resulted in adjusted EBITDA for the first six months of this year, reaching $8.8 million, a level only $200,000 less than the first half of fiscal 2020, which of course was pre-pandemic. Importantly, as noted, we also have strong invoiced and multiyear sales in the second quarter.

Because most of these new invoice sales were subscription sales, these amounts were not recognized in the quarter, but went onto the balance sheet and added to our balance of billed and unbilled deferred revenue, which will add to and be recognized in future quarters.

As a result, as shown in slide 16, our total balance of billed and unbilled deferred revenue increased to a $95.9 million, reflecting growth of $13.2 million or 16% to our balance of $82.7 million at the end of last year’s second quarter.

As noted last year, approaching $100 million of billed and unbilled deferred revenue is a big landmark for our subscription business and helps to provide significant stability and visibility into our future performance.

This strong combination of factors continues to drive our expectation that we will generate very high growth in adjusted EBITDA and cash flow in fiscal 2021 and on an ongoing basis. So we are pleased with the second quarter result and Bob I am turning time back over to you..

Well, thanks so much, Steve.

Just continuing, as shown on slide 17, as reviewed last quarter, we expect to generate adjusted EBITDA between $20 million and $22 million in fiscal 2021 and we are pleased to be off to a very strong start toward this objective, achieving that range and adjusted EBITDA would representing approximately 50% of increase in adjusted EBITDA compared to the $14.4 million of adjusted EBITDA we achieved in the fiscal 2020.

And also as we have noted previously our target is to see adjusted EBIT now increased by approximately $10 million per year every year here after to at least to approximately $30 million in the fiscal 2022 to $40 million in 2023 and so on, and these targets reflect our expectation that we will be able to achieve at least high single-digit revenue growth each year, which is growth of approximately $20 million per year and then on average approximately 50% of that amount of growth in revenue will flow through to increases in adjusted EBITDA and cash flow.

As we also said previously, we fully expect to achieve an adjusted EBITDA to sales margin of approximately 20% over the next few years as adjusted EBITDA approaches $60 million and to become a $1 billion market cap company even at the adjusted EBITDA multiple of even around 15% that is conservative relative to our adjusted EBITDA growth rate, which is more like 35% and this of course doesn’t reflect the multiple of that we would ever get a multiple of revenue which is often achieved by companies with similarly successful subscription based business models.

So looking forward, as we have discussed, substantial all our growth has been and it is being driven by growth in All Access Pass and related sales. This strong growth in All Access Pass and related sales has continued strong through the pandemic that you have heard and we expect it to continue to drive significant growth in the future.

I’d like to just briefly highlight three factors that we expect will continue to drive significant growth in our subscription business and which will drive a very significant growth in sales and profitability in the coming quarters and years.

As shown in slide 18 these are; first, driven by growth in All Access Pass, we expect substantially all of the company’s sales to be subscription and subscription related within the next three to four years; second, we expect that the already significant lifetime customer value of an All Access Pass holder will actually continue to increase; and third, that as we continue to aggressively grow our sales force and our licensee network, the volume of new high life -- high lifetime value All Access Pass logos will accelerate.

I’d just like to touch on each of these three quickly. First, as indicated in slide 19, driven by growth in All Access Pass and related sales we expect that substantially all of the company’s sales will be subscription and subscription related within three years to four years.

As this almost complete conversion to subscription and related revenue occurred we expect virtually the entire country to be able to generate the same kinds of growth in revenue, gross margins, revenue retention and customer impact, we have seen in our subscription business over the past five years.

We expect this almost total transition to be driven by the following three things; one, first, by the continued strong growth of All Access Pass and related sales in the enterprise division in North America where All Access Pass already accounts for 83% of sales.

As shown in slide 20, All Access Pass and related sales represented only 13% or $13.7 million of total sales in North America in 2016 when we first introduced All Access Pass.

The dramatic sustain compounded growth since then has resulted in All Access Pass and related increasing to $94.3 million for the latest 12 months through this year’s second quarter.

With then -- and with annual All Access Pass related sales growth expected to continue to grow at more than a double-digit pace and with our historical legacy sales now at very low levels and expected to remain flatter decline a little bit further, we expect All Access Pass and related sales to increase to more than 90% of total North America enterprise sales over the next few years.

The second major driver to becoming almost totally subscription and related is the conversion of the majority of our international operations to All Access Pass and related in the coming years.

In addition to the 83% of North America enterprise sales, which are already All Access Pass, the growth and penetration of All Access Pass has also progressed rapidly in our English speaking international direct offices.

As you can see in slide 21 from having almost no subscription sales in these offices just five years ago, All Access Pass and related sales for the latest 12 months now account for 74% of total sales in the U.K. and 69% in Australia for the last 12 months.

Both these offices are well on their way toward the same 90% penetration we expect to achieve in North America. As you know, our largest international direct offices in China and Japan, both of which are in their early stages of conversion to All Access Pass but accelerating. Having made the conversions All Access Pass in the U.S. and Canada, the U.K.

and Australia, we know what the play is. We are confident that China and Japan will also convert the vast majority of their revenue to All Access Pass and related in the coming years. And then the final driver of increased subscription penetration is the other area of the country is our education division which accounts for 22% of sales.

Slide 22 shows within our K-12 business 70% of our sales have been -- were subscription -- were pure subscription for the latest 12 months through this year’s second quarter.

Slide 22 also shows the significant increase in subscription sales in our K-12 business over the past year and we expect both our K-12 and higher ed businesses to continue to advance toward the saying 90% subscription that we are close to in North America which we are on the way to in the U.K.

and Australia, and in which we will achieve also in China and Japan with this combination of the 82% the -- I mean everything else moving we expect virtually the entire business to reflect the higher growth -- higher margin higher retention properties versus subscription operations in the coming years as you have seen and the impact will be what we have already seen in North America and on the total business.

I’d now like to ask Paul Walker to address the other two elements behind our expected accelerated growth in our subscription business.

Paul?.

Thank you, Bob, and good afternoon to everyone on the phone. For the second factor that we expect will continue to drive significant growth and profitability as shown there in slide 23 point number two. It’s that -- the already significant lifetime customer value of our All Access Pass holders has increased and will continue to increase in the future.

As shown in slide 24, All Access Pass has first they are at the top, a relatively large and increasing pass size is $38,000 up from $31,000 just a year ago. Second, the pass has an annual revenue retention rate of greater than 90% which was the case even throughout the pandemic.

Third, our services attachment rate of 44% and I think important to note that that’s up from just 17% a few years ago. The combination of All Access Pass the pass itself and the related attached services is now total approximately $55,000 per pass holding customer and that numbers continued to increase.

And then fourth as shown here, the blended gross margin on the pass and the related services combined have a gross margin of greater than 85%. These strong economics are driving a very significant lifetime customer value. In fact this customer value is quite a bit higher than we had under our previously legacy pre-subscription model.

For example, as shown in slide 25, a prior client, an example client spending $10,000 in a given year under our legacy model, typically spend about twice that or $20,000 over three years and the gross margin of about 70%.

In contrast, a typical All Access Pass customer today spends approximately $55,000 on a combination of their pass and their related services in their first year, $49,500 in their second year and $44,500 in their third year for a three-year total of $149,000 between the pass and the related services.

Stated a minute ago, whereas the old model was about a 70% gross margin this new blended margin on All Access Pass and related is greater than 85%. So that’s the second reason.

The third reason is indicated here -- as indicated here in slide 26, the third factor for driving our expectation of significant revenue and profitability growth is that as we continue to aggressively grow our sales force and our licensee network the volume of new All Access Pass logos will accelerate.

The combination of; one, our high and growing lifetime customer value; second, our less than one-to-one cost of acquiring a new customer; and third, our approximately one year payback on the investment in hiring a new client partner makes the economics of growing our sales force extremely compelling.

As shown in slide 27, over the past five years we have added 74 net new client Partners in our direct offices. More than half of these client partners are only midway through their five-year ramp up to $1.3 million in annual sales volume.

We expect these ramping client partners to generate significant revenue growth over the next few years as they complete their ramp and we also have a lot of headroom to add additional client partners. As shown in slide 28, this is just the U.S. and Canada example alone, where we currently have 179 client partners across both enterprise and education.

We have room to add at least an additional 435 client partners in the coming years.

We expect that the combination of ramping the existing client partners and hiring at least 30 net new client partners each year will allow us to add a significantly increasing number of new logos, which in turn will generate very significant and increasing lifetime customer value.

And so, we believe that the combination of these three factors will continue to drive significant growth in sales and profitability in the quarters and years to come. Bob, I will turn it back to you..

Great. And I will turn it to Steve Young to address our guidance now. Thank you very much, Paul.

Steve?.

And I will keep the ball. So our guidance for FY ‘21, as discussed in past quarters is, we expect to generate adjusted EBITDA between $20 million and $22 million and we affirm that guidance. This result would be an approximately 50% increase, compared to the $14.3 million of adjusted EBITDA achieved last year.

This expected growth reflects everything that Bob and Paul talked about including the continued strong performance of our North America operations. Underpinning this guidance for the year are the following expectations that we talked about last quarter and that are still consistent with our year-to-date results.

First that a significant portion of the deferred revenue on the balance sheet and a portion of the contracted unbilled deferred revenue will clearly flow through to recorded sales as expected.

Second that the All Access Pass will continue to achieve, one, strong growth in both sales and invoice sales, high revenue retention rates, strong sales of new logos and continued growth in Pass expansion and multiyear contracts. We also expect that All Access Pass add-on sales will continue to be strong.

Third that net sales in Japan, China and among our licensees will continue to strengthen. The increase in the All Access Pass sales which we expect to achieve in these countries will of course result in a portion of new sales be added to the balance sheet as deferred revenue.

And four that in education we expect to continue to achieve strongly tension of both schools and revenue among existing Leader in Me schools.

And despite the fact that the environment could be challenging and budget constrained for education in the remainder of FY ‘21, we still expect to achieve growth in the number of new Leader in Me schools beyond the 320 schools achieved in FY ‘20. So that’s our overall guidance that we affirm that guidance.

For the third quarter of fiscal 2021, we expect that adjusted EBITDA will be between $4 million and $4.5 million, compared to adjusted EBITDA loss of $3.6 million in last year’s pandemic impacted third quarter. Please note than the amount of adjusted EBITDA expected in Q3 is not only more than $7.5 million higher than last year.

It is also higher than the adjusted EBITDA result of $3.1 million achieved in the third quarter of FY ‘19. So that’s our guidance. Now our general targets for years beyond 2021.

As we said before, building on the $22 million of adjusted EBITDA that we expect to achieve this year and driven substantially by the expected continued growth of All Access Pass. Our target is to have adjusted EBITDA increase by around $10 million per year to around $30 million in FY ‘22 and to around $40 million in FY ‘23.

These targets reflect our expectations of being able to grow at least high single-digit revenue growth and approximately 50% of that growth in revenue will flow through to increases in adjusted EBITDA.

While changes in the world’s business outlook and many other factors could impact our expectations, we wanted to share these as our current internal targets and assumptions.

We also want to mention again that not only are these our targets but then when you read our last proxy you noted that these are the targets that are tied to us achieving our LTIP awards. So that’s our guidance Bob and turn the time back over to you..

Great. Thanks so much. And really we want to express appreciation to the whole Franklin Covey team and to all of you for your support in guidance and throughout this past year. We are delighted to be where we are and grateful and really excited about what’s ahead of us. So at this point, we will open to questions..

Thank you. [Operator Instructions] And our first question comes from Andrew Nicholas from William Blair. Your line is open..

Hi. Good afternoon..

Hi.

How are you, Andrew?.

Hi..

Good. Good.

First I was kind of hoping you can outline specifically where you saw better than expected performance in the second quarter and at least relative to your internal expectations? And then kind of relatedly trying to get a better feel for the rationale for maintaining the full year guide, it looks like what’s implied for fourth quarter adjusted EBITDA is a decent step down from your historical averages in the fourth quarter and even in the fourth quarter of last year? So is that a function of some conservatism or is there a pretty meaningful increase in expense spend in the back half of this year, just kind of help me pick take that apart a little bit if you wouldn’t mind?.

Great. Yeah.

Taking the last question first, I think, your observations our observation too which are, as primarily we think conservatism just recognizing there’s a lot of our education sales occur in the first quarter, that environment continues to be uncertain, although like we say we feel just some good things that are just felt like well the trend being up versus expectation in the first and second quarters and feeling good about the third, it’s possible that to this time next quarter we will be adjusting our guidance.

We just felt like it was probably wise just to get a better handle on where education’s looking going into the fourth quarter, which will have a really good handle on we think by May and June. So it’s really primarily that. There’s no expectation of anything -- any of the existing trends not continuing, if that’s helpful.

We will have some additional spend that will be in the function of new hiring -- hiring of new salespeople which are we have new sales classes coming on. Those aren’t massive incremental investments, but those are some. There are some there also although it doesn’t affect adjusted EBITDA as much, there will be some expense.

Last year the bonuses and other things, of course, we are -- well, some of it will hit adjusted EBITDA and reduce a bit. It’s not enough to change the general trends.

It’s more just trying to feel like we have a really good handle by the time we would if we did -- were to change our guidance, we do that knowing where we believe with the education is, that response on the second half of that question..

Got it, That’s helpful..

And as to the….

And then -- yeah. Second - sorry..

Yeah. As to the quarters where we over performed a bit, Paul and Jen and Sean would you like to address that. There were a couple of areas of over performance..

Yeah. Sure. Hi, Andrew. This is Paul. I will just take a quick comment on, first of all, as noted in the prepared remarks, All Access Pass continues to chug along and do very, very well. And so that was we saw great growth there in the number of new logos.

Revenue retention stayed high again and services have come back quite nicely and even a bit ahead of where we maybe thought they would have been in the second quarter. And then also international direct, well, we knew it would improve. It’s -- it was only off 14% in the second quarter and that’s -- that continues to strengthen for us.

And then, of course, our gross margins as we convert to All Access Pass and the mix of business shifts that continues to benefit our gross margins greatly, which of course, drops the bottomline. So I would say, those would be three on the enterprise side..

Yeah..

Got it. No. That’s all helpful color. And then maybe as my follow-up, Bob you mentioned it in response to the second part of my question earlier or touched on it a bit, but just kind of sticking with education. I was just wondering if you could speak a little bit more to kind of how you are seeing that recovery unfold.

What the cadence might look like there.

And maybe at what point are you anticipating returning to pre-pandemic revenue levels, is that something we can reasonably expect in fiscal ‘22 or is it another year or two out from there?.

Yeah. Great. Thanks.

Sean, would you like to address the first part and I will just take the very end?.

Yeah. Sure. Thank you. So I think that we are -- here’s what we are seeing right now is, we are starting to get a lot more phone calls accepted, visits accepted are in the first quarter are delivered. Coaching days were down 55%. This quarter they are down about 24%. We expect them to be up in the third quarter by probably about 25%.

So it’s going in the right direction. So we are having more opportunities to get into schools. That’s a really good thing. Schools are opening up. It’s different by state, by county and district, but that’s a positive trend.

And our retention has been strong as you can see, that’s been -- we have been up about 300 schools compared to last year in terms of the number of schools that we are maintaining.

And the thing that’s still a little bit uncertain is just decision-making by some of the districts and people are still kind of holding out longer than usual and so we do believe that we will get more schools in the fourth quarter than we did last year. We brought in 320 last year. We think we will beat that this year.

And it’s hard to say, but I think that, it might be mid-year next year before we fully recover next fiscal year. But the trends are going in the right direction and we expect things to improve in the third quarter and the fourth quarter.

Bob what would you add?.

Yeah. No. That was great. And I have just -- I would just put a really hardly anything to that. Only thing I’d add is, just with respect to numbers that in fiscal ‘19 we added 520 new schools, last year was 320, which was amazing in a way given the environment.

As Sean said, we think we will do somewhat better than that, maybe close to 400 this year, but we expect to be kind of back on that track to 500 plus next year or so..

Got it. And then, sorry, just if I can squeeze one more….

Yeah..

…in on education, how much of your targets for ‘22 and ‘23 are dependent on kind of a reacceleration in that business and I am just kind of thinking about if there is some disruption to the fall calendar or in the next year school year if that is a meaningful deterrent or if you think that kind of the momentum in the enterprise is enough to overcome that at least temporarily?.

Yeah. That’s a great question. That’s really a great question.

And the short answer is that, our guidance -- our outlook we will be able to generate $10 million or so EBITDA growth a year is really not very dependent on either the growth of education or even our international operations because All Access Pass and related sales have been growing by close to $20 million a year on their own in North America and U.K.

and Australia. And so just if those keep on pace, that’s 80% of what we are talking about does not include much -- does not include a big recovery or none of it requires a big recovery and when we gave those numbers we knew it was a little uncertain. So we felt like we should just assume that education and international recovered more slowly.

They are doing better than we thought at the time we gave that outlook. So, most of the outlook is driven by North America All Access Pass sales..

Great. Great. Thank you. Have a nice weekend..

Thanks for the great questions you all too. Thanks..

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

Hi, Marco..

Good afternoon, everyone. Hey, guys. Thanks for taking my questions..

Thank you..

I was wondering -- hey.

I was wondering if you can maybe spend a little more time on the sales force and the client partners, just kind of wondering what sort of activities you might have expect or you are expecting rather in the second half of ‘21 or there may be any sort of new different incentive, structure you might be playing around with or thoughts as far as accelerating pace of hiring or changes in hiring strategies, any sort of marketing events?.

Yeah.

Paul and Jen, do you want to address that?.

Jen, do you want to take that one?.

Yes. Thanks, Marco. Jen Colosimo. In terms of what we are seeing and what’s driving the acceleration is really the ecosystem of the hiring happening and a strong sales enablement process around onboarding. We are seeing them get much quicker starts, which has been wonderful to see throughout the pandemic.

That linked up with what we are seeing in thought leadership. We have increasing exposure in thought leadership in terms of article placement. What we are getting in terms of podcasts and more social. It’s the ecosystem of marketing, the sales enablement and a really strong management team executing on strategy and building an inclusive environment.

So all of those together have accelerated, what we are seeing happening in terms of our onboarding and our ability to continue hiring at the pace that we have.

Paul, what would you add?.

I would just add, I think, Jen, I would just add that we have recently added one more recruiter to our staff of our internal recruiters recognizing that we are going to accelerate the number of new client ours being added to now we have a team of six. They do that full time for us in addition to what Jen said.

And then as far as down the road, I think, we will look at -- as we know as we grow towards having many hundreds of client partners, for example, just in North America, I imagine the structure look little bit different there and we might -- up to this point we haven’t really divided our sales force out among different sized organizations.

I think we -- where we are having discussed, well, I don’t think, we are having discussions about that I think in the years to come, we will do some about that we think we will even accelerate our ability to add more client partners in earlier and we might get to a point where we are actually north of net 30 a year..

Got it. That’s very helpful. And then kind of sticking around with the client partner activities, just obviously given the pandemic and you had a slide in your presentation where a lot of the interactions or sort of the vast majorities of the interactions have shifted to kind of an online delivery model.

Now that the vaccines are sort of rolling out, how are you guys thinking about that impact as it relates to client partner travel? And maybe if you can speak to what you might be expecting or how you are thinking about your overall employee base and the whole work-from-home experience?.

Paul, I can speak to that..

Great. Thanks, Jen..

I -- of course, Marco if a client wants to see us face-to-face, in fact I was on with several client partners today that have face-to-face meeting scheduled, lunches, breakfast, events at their office space. If that client is returning whether to a hybrid model or to an all-in office model we of course want to meet with them.

So it really is very client dependent as you see in the marketplace what that client is expecting to do and how they will hope to interact with us. I do not expect this to return anytime soon to the same sort of travel that we had previously simply because the clients aren’t looking to that kind of travel.

So from a travel standpoint we are looking at what makes sense based on our client bias, which as you might expect is differential dependent on province or state in Canada and the U.S..

Got it. Very helpful. Thank you guys for your time. Appreciate it..

Thanks, Marco. Appreciate it very much..

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

Hey, Jeff..

Thanks. Good afternoon.

How are you?.

Good.

How are you, Jeff?.

Good. Thanks. Good. Thanks.

I was curious if you could expand on the opportunity within education, specific to how the stimulus programs benefit you and how they are going to need to basically reinvigorate the teachers and the students back to kind of normal? And are you doing anything for Social-Emotional Learning different than you otherwise would have when you go work with existing and new schools?.

Great.

Sean, would you like to address?.

Yes. Yes. Hi, Jeff..

Hi, Sean..

Sure. Yeah. Here’s what we are seeing. We are thrilled about the three big COVID bills. It’s going to bring a lot of money in. The amount the $200 million over the last year compares to about $50 -- $200 billion, excuse me, compares to about $50 billion that typically the federal government spends on K-12 education. So it’s like a threefold increase.

This will help supplement for some of the budget cuts and so that’s a good thing. It will also help with Title One schools primarily, which is where we are strongest, over 60% of our businesses with Title One schools. These are schools that have high poverty. So we are doing a lot to try to take advantage of this.

We have in the last just few weeks we have bet on bigger requests for proposals RFPs than we ever have before and a lot of these are around what we call learning recovery. Learning loss is a big factor. The schools are very concerned that students have lost a whole year of learning and that’s going to impact them long-term.

And so we have added to our positioning this whole learning recovery nosecone on top of our marketing and positioning where we are going out to schools and districts, and saying, hey, Leader in Me is actually really good at helping you recover learning. We have got a solution to help you do that.

So we are taking advantage of this by going after stimulus money. We are targeting it. We recently hired a person that’s a specialist in this area. There’s a lot of money to be had and this won’t just be for a few months this will last for a couple of years, all this money. So it’s a kind of a long-term play over the next two years to three years.

Student and teacher wellness is another big factor. There’s been a lot of trauma for students and for teachers, just as the changes and that we are in school without the hybrids the amount of stress that’s created, that’s been a huge factor.

In fact those are the top two hot topics right now is, what do we do with all this learning loss and what can we do with helping, meant helping with wellness with teachers and students. So we have -- we are also going after that.

We have actually created just in the last two months some new products that are part of Leader in Me, but they are kind of again adjacencies to it to go after teacher and student wellness. So we feel like this is a big opportunity for us and we think SEL Social-Emotional Learning is right down our alley.

So we are going to -- this is why we are pretty bullish about the future as we feel like we can really take advantage of the stimulus money, do a little bit of repositioning of the Leader in Me to take it to leverage these hot topics that we are seeing right now.

So, Jeff, is that responsive to your question?.

Yeah. That’s very helpful. I mean I think it’s intuitive that, that Leader in Me plays an important role here and it strengthens the value proposition..

Right..

It’s kind of way I see it..

Yeah..

Yeah..

So it does. It does..

Okay. I have a couple of more real quick here. I was curious, Bob, if you could elaborate on where you are with respect to the rollout of the All Access Pass subscription model internationally. I know that’s hard to do because you have got to decipher bridged up across regions.

But from a high level how much of the international markets are actively selling All Access Pass now….

Yeah..

…which ones are kind of pending some additional work that needs to be done? And with respect to the license partners kind of same question, how much -- how many of them or what percentage of them are actively selling All Access Pass today?.

Great. Yeah. We mentioned in this script that in the prepared remarks that, in the English speaking in U.K. and Australia there already is about 70% All Access Pass. And so that’s been going concurrently.

Paul, do you want to talk about the efforts to convert the licensees and our international -- our offices in Japan and China and Germany?.

Yeah. You bet. Hi, Jeff. Okay. So in Japan, we have now well underway. In fact, Japan is approaching a quarter of their client base is now converted to All Access Pass.

And we kind of see -- we see that playing out as maybe a third, a third, a third over the next three years such that three years from now they will be -- their business will look very much like the U.S. and Canada’s business today.

And as Bob mentioned, that’s driving our ability to say, we think that, in three years to four years time we will have 90% or so of the whole company will be subscription related. So that’s Japan. They are quarter the way in. Probably get to a third by the end of this fiscal year and then we will move on from there.

China is right on their heels, where now we have the portal up in China, it’s up and running. We are doing a significant amount of sales training, getting all the market -- all the things we did in the U.S. and the U.K. and Australia to get to where we are. We are doing in Japan and now we are starting to do in China.

And they will probably be on a similar path in Japan probably trail six months or eight months, just because they are not quite there yet. But we are starting in China. We have -- but we have actually sold a couple of All Access Passes. Have a really interesting one. We are excited about. Right now we are talking with the client over there.

And it’s important to note that in China we do a lot of all a delivery to U.S. multi-national and other multi-national companies that have a presence in China. So we are delivering the All Access Pass to clients all over in China right now.

But we are talking specifically here about sales made in China to companies in China and that’s why we are just getting going right now. So that’s Japan and China in the licensee partners. We are actually -- it’s -- that business is growing, All Access Pass is growing pretty well inside the licensee operations.

We have one of our partners in the Benelux region. Their business looks now like the U.S. They are right near 90% of their business is now All Access Pass and related. Our Middle East operation is well north of 50% All Access Pass and related. Singapore, Hong Kong, Taiwan they are about a third of the way there. So we are pleased.

It’s a little bit of a different dive getting them as our licensee partners across on that, but every month every quarter their business is converting. And I think we are on a similar timeline with them as we are in China and Japan.

I think we are looking at three years from now maybe four at the outside marker there substantially everything in enterprise whether it’s direct or licensee sold will be at that kind of 90%-ish All Access Pass and related..

Yeah.

And Jeff, the -- and the thing of course as it relates the whole business model and you -- well, you asked the question, but when you start having more than 90% retention of all the revenue around the world versus the old model, which is 60% or 65% and starting from that base every year and then with the new customer engagement model allows you to stay inside with the clients and help those clients to grow and expand and increase their lifetime value is both strategically and financially a very different thing as you are seeing in those markets..

Sure. Sure. That’s great detail. Thanks for that. And then final question is, with respect to gross margins, I mean, you detailed the All Access Pass model is generating for mature clients, generating 85% in gross margin.

Is that what you are seeing across the client base or was that a unique example? And where do you see, once you are fully rolled out with All Access Pass to the level of degree that you are in North America internationally, where do you see the gross margin profile in the business looking like at that point?.

Yeah. Yeah. And Steve you may want to add some things to this or just maybe set the context and say that the 85% gross margin is a pretty good balanced what it should be for an All Access Pass client. Because that’s a balance of subscription plus 45% services, so it gives you that blend.

And so as -- directionally as the -- as that becomes the norm across the world, that -- our margins will continue to creep up as they have.

That might not happen every quarter because you may add more services, the mix may not stay every quarter be exactly the same mix, but we have seen there were services repeat really at about the same -- on a same-store basis or same client basis, so about the same level.

So we think that’s a model that our gross margins will tend to increase over time. Some things work against that and muted a little bit is that, as services grow in some areas where they don’t yet have, they are selling All Access Pass not as much add-on services. They will get to 85%.

But it won’t be -- it could mute the overall companies a little bit as that happens.

But I think overall you can think of a world where the margins will move toward that and we will always have 10% of our legacy, because that’s a good way to act, somebody has a corporate meeting and they want to invite one of our consultants to come and deliver training there and they don’t yet.

That’s a lead in to do an All Access Pass or somebody gives a speech. And so we will always have 10% that will be there. But the rest of it will tend to move toward that. I don’t know, Steve, what you would add to that..

No, Bob. That’s exactly what I’d say. Our gross margin is primarily a function of mix. The pandemic, the one of the benefits of the pandemic if you will or one of the impacts is the mix shifted toward subscription.

So, just as Bob was saying if the mix, well, the subscription business will continue to grow over time and that will cause the margin to go up. If the other areas as they come back could have some reduction for a while and particularly travel, maybe 100 basis points of our improvement is related to travel.

When travel comes back it will impact our gross margin but not our EBITDA. So, Bob, exactly what you say….

Yeah. And Jeff….

… a little....

Jeff the reason why that travel does, sorry, Steve go ahead..

No. Go ahead..

No. What are you explaining just try that how travel plays into that. It’s not our corporate travel. It’s travel of consultants to client sites..

Yeah. So the reason it doesn’t impact….

Yeah..

It doesn’t impact our adjusted EBITDA, because, well, we bill the customers and get reimbursed. But it’s a meaningful amount that hits revenue and cost of sales with zero margin. So you can -- you just think of the sale with zero margin. So it impacts our gross margin percentage a bit while not hurting our adjusted EBITDA.

So that means there just be a little bit of a coming out of the pandemic adjustment to gross margin and then a long-term increase of gross margin as the mix of the whole company shifts more percentage-wise toward subscription..

Got it. Thanks for the color and have a nice holiday weekend..

Right. You too, Jeff. Thanks so much..

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

All right. Again, thanks to each of you for your support and confidence through this period. We are grateful to you. Grateful to our team. I just want to express maybe publicly the -- maybe you have heard from our amazing executive team that they really are incredible.

And just in every area you couldn’t have better leaders who have more engaged employees, in the middle of this pandemic our employee engagement scores actually went up. They are already high. You would expect we have a good culture.

But they actually went up to new levels just showing that what trust does even in difficult times trust and leadership does and so I live and admire our people and both our executive team and all of our leaders and people and just I think it’s an important point there, so one of our huge strategic advantage.

So thanks to all of you and have a great holiday weekend and we look forward to talking to any of you who would like to follow-up just as soon as you would like. Thanks so much..

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