Welcome to the Q2 2017 Franklin Covey Earnings Conference Call. My name is Danielle, and I will be your operator for today’s call. At this all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Derek Hatch, Corporate Controller. Derek, you may begin.

Thank you. Good afternoon, ladies and gentlemen. On behalf of Franklin Covey Company, I would like to welcome you to our earnings call to discuss the financial results for the second quarter of fiscal 2017. Before we begin this afternoon, I’d like to remind everyone that this presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based upon management’s current expectations and are subject to various risks and uncertainties, including, but not limited to, the ability of the company to stabilize and grow revenues, the acceptance of and renewal rates for the All Access Pass, the ability of the company to hire productive sales professionals, general economic conditions, competition in the company’s targeted marketplace, market acceptance of new products or services and marketing strategy, changes in the company’s market share, changes in the size of the overall market for the company’s product – products, changes in its training and spending policies of the company’s clients and other factors identified and discussed in the company’s most recent annual report on Form 10-K and on other periodic reports filed with the Securities and Exchange Commission. Many of these conditions are beyond our control or influence, any one of which may cause future results to differ materially from the company’s current expectations. And there can be no assurance of the company’s actual future performance will meet management's expectations. These forward-looking statements are based on current – management’s current expectations, and we undertake no obligation to update or revise these forward-looking statements to reflect events or circumstances after the date of today’s presentation, except as required by law. With that out of the way, we’d like to turn the time over to Mr. Bob Whitman, our Chairman and Chief Executive Officer. Bob?

Well, thanks, Derek. Good afternoon, everyone. We appreciate you joining us. We’re delighted to have the chance to talk with you today. We’re pleased that our operations for the second quarter came in almost entirely as expected. We’re particularly encouraged by the momentum this is building with All Access Pass, and we believe the company is well positioned to accelerate growth and meet our expected performance through the balance of the year and in future years. Today, I’d like to briefly address – I’ll just focus my comments on four questions, which some of you have asked. Those questions you can see on slide three. First, how is All Access Pass going? Second, how are the factors which could drive increased lifetime value of our customers related to All Access Pass tracking? Third, when do we expect the success of All Access Pass to translate into accelerated growth for the U.S. direct offices, and then for the overall business? And then finally, how do we expect to utilize our excess cash and credit line capacity? So I’ll just a focus on those four. I’d like to briefly address each of these questions. First, slide four, address how the All Access Pass is going. We introduced the All Access Pass in the first quarter of fiscal ‘16, as you know. As shown on slide five, we invoiced $375,000 of All Access Pass sales in that quarter. In the next quarter, in that second quarter of that year, we invoiced, as you can see, $3.08 million. All Access Pass amounts invoiced and accelerated, and we generated a $5.8 million of actual passes in the third quarter and $12.2 million in the fourth quarter. So for the full fiscal year 2016, All Access Pass amounts invoiced totaled $21.5 million. The reason I’m talking…

Well, thank you, Bob. That's exciting. I'm committed. [indiscernible] tomorrow. Good afternoon, everyone. Excited to be with you today. As I start, I'd first like to remind everyone, even though Bob has also talked about it, but especially to remind those that are new to the company, that we are in a transition period in which a larger portion of our invoiced revenue is deferred and then recognized over a contract term, usually one year rather than recognized upfront. This means that our reported results are and will be significantly impacted by this deferral. Internally therefore, we focus our attention on both our reported results and also upon the change in deferred revenue. So I'll speak briefly about both of those measures. As you've seen and as shown on Slide 13, our financial results in Q2 were within guidance. The reported adjusted EBITDA loss was 400,000 compared to the guidance of a 1.5 million loss. The sum of the reported adjusted EBITDA plus the change in applicable deferred sales less certain costs was 1.4 million, within the guidance of 1 million to 2 million. So let me talk about the reported results first. As you read in the press release and can see on Slide 13, while our adjusted EBITDA was within guidance, it was still as expected, less than last year and a loss. For the first six months of the year, adjusted EBITDA is a negative 3.2 million. Since we are affirming our guidance for the year, that adjusted EBITDA is expected to be between $10 million and $14 million, a logical question could be why do we think that adjusted EBITDA expected in the second half of the year will be so much higher, more than $13 million higher, than the amount reported in the first half…

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

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

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

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

Hi guys. This is actually Trevor Romeo in for Tim today. The first is a quick housekeeping, I guess. Could you tell us what the operating cash flow and CapEx for the quarter were?

Steve?

I will look up the exact amount.

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

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

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

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

Okay, perfect. And maybe just one more, if I could. With respect to, I guess, investments in All Access Pass, maybe particularly internationally, I guess to use a cliché, what inning would you say we're in there?

In terms of the investments side, I think we are, we're kind of at the end of the biggest part of the investment cycle on that. We, starting about 9 months ago, we committed to making sure that we can have a worldwide, our whole worldwide licensing network could sell All Access Pass. We committed to localizing all the contents. Sean, why don't you just speak to that and so we get to where we are.

Yes, sure. Yes. So we're really excited about this because what we've done for the past year is prepare our international partners to sell All Access Pass. And so we started with localization efforts. And so we basically taken the core All Access Pass content, and we worked with all of the partners over the last year or so to localize everything. So we have 15 All Access Pass by May. We'll have 15 languages across the globe, which will cover 95% of the revenue we have across the world. There's some obscure languages we'll get to later, but for now, we've got the 15 quarter core languages. And in addition, the partners have all been trained and they're ready to go. We're just waiting for the new portal to be finished and we'll, in the fourth quarter of this year, we'll start selling in a major way across the globe.

Yes. So we've invested in the localization around $3.5 million, new portal. That's, again, nearly complete. We're just nearing the end of that of another couple of million dollars. And then, we spent lots of SG&A, as we've flown people in from around the world to various locations in Europe and South America and Asia to train them. But we feel like we're at the, close to the end of that spending part. And we're getting ready to start to begin to harvest. Should we go back to question one?

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

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

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

Yes. It is somewhat different, just because if we had a client that had a large -- we could get credit for a small client that renewed, and yet in habit, act like it was a high renewal rate when the revenue didn't renew or conversely, big -- we cannot count a big one, that have revenue loss and [indiscernible]. We decided that we felt at least that primarily for modeling purposes and for you all to try to be easy as we gave revenue renewal, but we can respond to the other one as well. As we mentioned, revenue renewal has been in excess of 90%, thus far. We've had 100 or so passes come up for renewal. We had 19 in the first quarter. Of that, on an actual amount basis, 15 of the 19 renewed on time in the quarter. There's another one that either has renewed or is going to, we know that accounting thing when they've committed, I don't know if it's signed for sure. But we think the percentage renewal then will be 16 of 19, with one other still working that's because of a change in management decision maker, we hope it will get, but if you look at it either will be 16 of the 19 or 17 of 19. In the second quarter, we have kind of the same phenomenon, where you got what percentage of them actually renewed on time versus those that we think will still renew, but for some reason, it wasn't exactly by February 28. About 73% of the passes, that passes, representing more than 90% of the revenue, because many of them also increased their revenue, have renewed on time, we think there are only about five or six that, for sure, aren't going to. And so although one of these will converge. Yes, we felt like the easiest thing is to report on revenue because that's what's going to drive the model and the economics and that's why we're using the 90% plus. But we can, from time to time, be happy to answer the other two. My guess is the pass renewal, the customer renewal, will be in the 80% to 85% range and the revenue renewal, north of 90%.

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

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

Jeff, good topic. This is Shawn Moon. So the significant business we had last few years with 2 organizations that have been going through a very, very disruptive merger and that disruption still is happening. The Sales Performance practice is a practice that's comprised of fewer accounts but larger deals. And so when one of them had a hiccup like this, it had disproportionate impact. We're pleased with the pipeline activity that's happened and expect, despite the fact that the dust is not settled on these two organizations and a lot of moving pieces and decision makers have transitioned out entirely. And so you can imagine that process is starting over. There's some good momentum there and as Steve mentioned and as Bob mentioned, we feel like some good improvement in the third and fourth quarter with Sales Performance practice. But that [multiple speakers] without accounting on that. There's no accounting on that [indiscernible]...

In our guidance, we're not expecting any of those big deals that are tend to be binary and hard to predict from the land. We're not including that in our forecast. There are a couple of other large contracts, Jeff they’re being worked on, but we feel have a good – have some upside to them because we’re not forecasting them, but it is, as Steve said, lumpy and – but last year, they had the a year ago, they had big first and second quarters and then smaller third and fourth. And so even without the renewal of the big contracts, we expect some growth in the sales performance practice in the back half of the year compared to the prior year. And if one of these or more of these larger contracts comes in, then that would obviously be to our upside.

Right, right. Okay. And then could you walk us through the deferred revenue line on the balance sheet? I have – according to my tally, All Access Pass deferred revenue increased close to $4 million from Q1 to Q2 of this year. And you had a little less than $1 million bill to the deferred revenue line on the balance sheet, wondering if you could help reconcile that.

Yeah. So the – look, if you look on slide 13, the change in deferred revenue, this $2.1 million, that’s our net number of maybe close to the $4 million that you’re talking about recognized related to All Access Pass less amount that’s going back to the other way in the Education practice. So the net change in deferred is $2.1 million. The balance sheet is a little less just because there are deposits and other amounts that affect deferred revenue on the balance sheet that aren’t subscription revenue-related. And so all of the deferral that we’re talking about is in that deferred revenue account on the balance sheet that aren’t subscription revenue related. And so all of the deferral that we’re talking about is in that deferred revenue account on the balance sheet. But that balance sheet accounts for some other deferred revenue – things that are called deferred revenue, even though they’re not related to subscription-type business.

Okay.

So does that help?

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

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

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

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

Thanks, Bob. Yeah, they’re doing quite well. In fact, this is something we track very carefully. It's what happens with all of our new classes of client partners. And what we’ve seen, generally, the trend for a few years now is that we’re doing better and better with them. They ramp faster. They’re contributing earlier in their career with us. And that’s only accelerating now with All Access Pass. And it’s being driven primarily for a couple of reasons. One, the pass to client partners had to learn about a lot of our solutions in order – before they could really be out there and maybe effective. And now, with All Access Pass, we simplified that somewhat because there's, while the solutions are contained within the pass, what we're out there selling is the path to get to specific job that they need to do. It's that helpful but on the learning front. But primarily, what's helping it, as Bob mentioned earlier, the initial transaction size is larger. And in some cases, it's a lot larger than what these new client partners used to sell. When we would hire a new client partner in the past, they were focused oftentimes on making a facilitator sell that might have been $4,000 or $5,000 and now these All Access Pass sales that are replacing those facilitator sales are $15,000 or $20,000 or even $25,000. And so while the sales cycle's a little bit longer, as Bob mentioned, for them, they don't have historic sales cycle to compete with. And they get the benefit of having a transaction that's two to three to four times larger and that's really helping…

[Indiscernible] renewal…

Yes. And then you get into year two, and they have the renewable business. They're not waking up again and having to resell everything from the first year, plus the growth expectation. They have some of that growth expectation built in, in the form of the renewal. So we're happy with helping all of our client partners and particularly, it's helping those newer ones greatly.

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

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

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

Good afternoon. First of all, I wanted to congratulate you guys on the progress on the transition plan. I think what you're going through is transformative in terms of creating shareholder value. And thus far, you've met or exceeded the expectations and your renewal rate is off the charts. So nice work on that. I didn't hear or see anything with regard to stock bought back since you last reported. Did you buy back any stock?

We did.

69,922 shares.

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

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

Yes.

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

Yes. We continue to buy, Sorry. We continue to buy after the tender offer, the Dutch Auction [indiscernible], so we continue to buy. And then, as I say, in the last six quarters, we purchased around 55 million or eight quarters, I guess, 55 million of stock and 45 million in the last six quarters. So 35 of that was the Dutch and the rest of it, the other 20 million in the six quarters, the other 30 million was open market purchases. So historically, we've been able to buy more and more in the market, $1 million week, sometimes, we think we know things that are going on to make us, so we're not in the market. But just in terms of major trends or whatever, like this successful access that makes us think we should be a little cautious until the public knew what was happening with renewal rate and other things. So now that we're reporting it to, transparently, we think we can now go ahead and buy some more.

Okay. So the last thing I, this may seem a bit redundant, but I just want to verify it because the numbers are so large versus the stock price. But your guidance remains EBITDA plus change in deferred revenue for the fiscal year of $35 million to $38 million or 2.5 to, so you're talking about $2.5 to $2.75 a share for a stock at $16.05 at the close today.

We recognize, this transition hasn't been easy for some people to, I mean, the hope of it is easy, but I think the actuality of it is, both those, the computers that follow us think that doesn't get us deferred, many of them haven't picked up on this deferred revenue idea. And so you have some pressure there. Also, this transition, as I talked about, the fact that we were offsetting sales that had a shorter sales cycle, until we can start to anniversary, the renewals meant that despite the success in All Access, we were flat on revenues in direct offices. So we understand why people maybe have been a little reticent. But hopefully, that we can discipline this in the following quarters.

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

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

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

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

Yes, sure. This is Sean Covey. We are going to be launching that in May, June time frame. And again, we worked for the last many 8 months to localize All Access Pass into 15 languages and to train 55 partners and how to position and sell and service this. And so we're excited about the fourth quarter. I expect them, much like the U.S., it's going to take some time. But I think next year, it will become a much bigger percentage of our revenue and the following year, bigger than that. And the partners, in general, are very excited by it. They feel like it's about time. They feel like it's going to create a lot of momentum with their clients, and, so we're in a good spot right now.

And what we'll do also, Marco, is that, we want to have this 1 offering, 1 company worldwide. And while we've had distribution worldwide, individual offices whether in the U.S. or other offices places would choose their favorite. They just focus particularly on 1 offering or 1 practice versus the other. By creating a strong set of line with similar pricing across the world, et cetera, we are already seeing, on the U.S. side, and the number of global sales that are happening on this side that are benefiting the licensees already. But we expect this will open, really open the door to over the next year or 2, really building an acceleration in what we're doing together across the world and really leveraging this, not just the revenue, but the global impact that we can have by having truly global accounts, so.

Got you. It's helpful. And then, in terms of -- on Slide 6, you have the percentage of, I guess, site or locations that are selling All Access Pass here. Is there sort of a target range you guys are looking at? And a certain time frame where you'll have everybody doing that?

Yes. Let me probably do a good job of explaining this slide. So first of all, this is the percentage there, the 49% year-to-date is the percentage of total revenue from those offices that are selling All Access Pass that is represented by All Access Pass revenue. In other words, if there was $100 million of revenue in all the offices, this would say that 49 million of it, it's a made up number obviously, 49 million of it is actually All Access Pass. And so all of the U.S. direct offices, government, UK, Australia and higher education which sold to universities. All of those have been selling. And this is reflective of 49% of everything that they've sold this year on an as-invoiced basis has been All Access Pass versus 8%. Our international direct offices, all the English-speaking ones now do it, but China and Japan will be on the same time frame as the licensees because they'll have this new portal that has all the international data privacy protections and all the languages, including theirs in it. But we believe that realistically, I mean, if we were up 50 million or so this year, that will represent a little more than half of the total revenue or invoiced amounts in the offices that are selling it. This year, we're believing that with one more year of renewals, assuming we're able to continue the renewal rate, that, that would move up to two thirds of all the revenue next year would be All Access Passes themselves or Pass-related add-on revenues. So still be ongoing business. The first time somebody engages with you, they'll do something else or there'll be some specific needs. So we'll probably always have 25% or 30% of our business that doesn't come through the pass, but then feeds in the prospect with these customers understand the benefits of the solutions we have and I'll say a better way to buy it and expand it is through the Pass. Is that helpful, Marco?

Yes, that's very helpful. Appreciate that. And then, last quick question and I'll jump back in queue. I know it's still a little bit early here in terms of the renewal rate, but last couple of quarters, I believe, you've said you hit that 90% renewal rate. I'm just wondering if you might be able to share any sort of anecdotal information from customers that you're talking to about what's kind of driving that a bit higher? And then, what you might be hearing from people that aren't renewing as well? What their maybe are concerns or reasons for not renewing.

Sure. On the first one, I think what's happening is we have a process. We view the sale of the All Access Pass as really the start of a new kind of relationship with our clients. And so literally, on the day-to-day buy, if not before, the day the contract is signed, there's an implementation specialist call, where we have an orientation on the portal and other things, but the people are just buying electronics, as you know, digital data, digital stuff, which is there, of course, in large quantities. They're also be able to download and print out training manuals, they're able to download and train on iPads or whatever else. And so we've tried day one to get them off to a quick start as to what are some things there, some progress they're trying to make, areas of progress they're trying to make in their organization, and get them using it right away. We then moved in with we call a discovery day, where we say look if you're do willing to commit a couple of hours or 3 hours of some of your senior executive's time, will commit a consultant to come. And with our salesperson to spend a morning with you and identify other things that others in the organization are trying to get done. And with that, [Indiscernible] it's not really a sale because we're there really to serve you, make sure they get full value out of it but the result is, many of these people are saying, gosh, I'd like to expand the pass to cover my population of that population. So one of the things that's happening on those that renew is two thirds of those that are renewing are renewing for a pass size that is greater than their initial pass size. So they're having gone through the process and recognizing now the value they can get from it, they're identifying different population. We actually have some, who in this process, have added on simple populations around a single content or maybe other different front line customer service employees buy it as single content Pass for Leading Customer Loyalty or Sales Performance Pass. We have some strategic initiatives that get identified. One large customer who would bought a small Pass, a $35,000 Pass, then just bought a $305,000 Pass to cover, Paul, how many people. And then.

A couple of thousand.

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

85. 85, and consulting.

Consulting to Asia which had another $300,000 or more of revenue. So that's the process. I think what we're finding is the people are utilizing the pass that most of them have. When it comes up for renewal, it's not a surprise because they're using, this may already have we call it impact journey, they may already have an execution initiative going here or a Speed of Trust initiative there that's a strategic thing they're trying to get done and the content is delivered through that. So those who are not, I'd say the single reason, again we haven't had [Indiscernible]. We had two that we know aren't going to renew in the first quarter and maybe 5 out of the 117 [Indiscernible] we know are not going to renew. So we have a small population inside there, 2 thankfully. But I'd say the most frequent thing out of the 7 or 8 is a change in the leader who bought it. The person who bought the pass and who understood the value proposition, they may either moved on in the company or they moved out of the company and all of a sudden, we're there with the replacement, who has to be resolved. We view that as a mistake on our part, because that's the whole reason for this discovery process is so that we can go in and even if one of the people happens to change, that we know and that's other people and we're doing, and that's a good thing, that, that new person who comes in, it might be the administrator of this. They say, hey, let me talk to the executives, each of whom is saying, Oh, yes, I got this big initiative going. I got this going. But that's the main reason. Paul,…

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

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

We are including that because it's part -- I think as they renew, they step up revenue. And so that is why if you have ultimately 80% to 85% of the passes renew, the revenue will be north of -- will be higher because of those pass expansions and upgrades. Today, again, because of the population size, I think the numbers are better than we expect they'll be long term. And so we've had a number of people who've renewed at significant double-digit multiples of their pass size, we don't think that's -- if you have one or two of those, that can skew the data and that's what we're trying to avoid here. But the idea of the people expanding their population by 10% or 15% and the two thirds of the people might do that is a pretty reasonable result of this discovery process of using it, I would think.

Got it. And then, you said the back half of this year and then maybe longer term and you got more and more of your revenues coming off the balance sheet. Are you expecting gross margin to ultimately be higher than you've been able to report historically? Or should it just remain in a fairly similar range?

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

[Indiscernible]

Pardon? Increased margin percentage, sorry.

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

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

Paul?

It's a good question. We spend a lot of time, as you can imagine, thinking about that and reviewing what the sales process looks like and how to be more efficient and effective there. It could. A couple of things that as we made this transition that are new for us. In the past, a lot of our facilitators sales didn't require us to go through legal and didn't require us to go through procurement. But because of the initial -- because the size of these passes are larger, there's a technical component, there's -- they're buying an IP pass, there's a legal component there. So there are more people that are involved in the decision or at least involved in procuring it on the client side. That has been the case in the past. So I’m not sure that it's 100% within our control to shrink that down, but we are working on controlling on our side is understanding how are we most efficient with the client and effective and uncovering any concerns they have now. I bet it can. That’s the bet.

And Travis in neither two sides to the question also. Because we got the new sales which Paul has been speaking to and that has all this process, because the passes are automatically renewable, unless canceled, and because we're in with these clients, on the renewal, of course, it's very short. So I think the weighted average -- whether we're able to materially move the first-time sale, we have ideas for. By the way, we're working on it. And think that also, by more – better targeting of the specific circumstance customers find themselves in, where you’re able to speak right to that circumstance and then having discover it. Our marketing materials we get people raising their hands, but we can, perhaps, influence that. But for sure, the renewal cycle, when the person's already expecting it, I mean, the renewal cycle, these people already expecting it. You call them and they are -- you're going to meet and figure what the size of the pass is in most of these cases. And so I think the weighted average sales cycle will change, along with the increased retention of revenue.

Thank you. And then, one more question from me. On the – on the past couple of conference calls, you have talked about how All Access Pass has cannibalized some of your other business. Is that – can you just kind of update us there? Is that – are you still seeing that? Or has that stabilized?

Well, no. It will continue. I think, we’ll – I mean, I think, honestly, it's a little bit like capital – the iPhone 7 cannibalizes buyers of iPhone 6 in the sense that they’re stepping up. They’re still buying content from us, they just decided to do it in a different form. I think we’ve said in the past is that we expect that our base of historical facilitator business, will – they’ll continue to be a base, so the rate of decline on that and offsetting will – the slope will change over time. But we like that trait. We want them to – if they’re making an average purchase of $8,000 or $10,000 and repeating that every – they’re buying that amount every couple or 3 years, but on average, over 3 years, they’re spending, say, $16,000 or $17,000. And if we can get them, in day one, spend $25,000 or $30,000 on a new pass, and then go in an upgrade that we want that to happen all day. The thing that's happening, you say, we got 40% of our purchasers have come from the ranks of our active facilitator clients. And so we’ve – but – that is moving – sold 40% of our client. We only sold about 21% of those clients to date have converted. So we actually have a lot to do still in converting them over. We won’t ever convert them all. But I think this, for us, we view it as something that, if that’s how they want to continue to buy from us, we're delighted to have them do so, but we're making it easy for them also to make the decision to move into a pass. What's happening, though, is the cannibalization -- I say when we cannibalize, we think we've significantly increased the lifetime value, both the initial sale and otherwise. It also, though, because the base – because we've already cannibalized them, if we had forever the same percentage decline every quarter, this amount in revenue renewal is more than – in this quarter, the amount of revenue – new revenue from renewing 90% plus of last year’s All Access Pass revenue would, we think, pretty much cover the decline in those other products. Maybe that wasn't exactly your point. Can you ask it, push me on it if I didn't respond properly. Travis, does that respond to, sorry.

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

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

So on site, it also cannibalize, but that's starting to swing back around now. We had declines of a couple of million dollars a quarter and reduction in on-site sale days. And some of those same customers, it's not that they were no longer customers, they just decided I'll buy the All Access Pass, and then decide if I wanted to deliver services later. What's happened now, as we mentioned last quarter, there has been a trend towards, I mean, maybe we'll start to trend we hope that with these add-on sales, that some of those services are going to be bought. Actually, this last quarter, we had more on-site days delivered than we had in the prior year, despite whatever cannibalization occurred, and we expect that again this quarter. And it looks like through the fourth quarter, it's going to happen. So I think it's just the nature of what they'll buy on, on-site instead of buying it upfront as much as an alternative. They'll buy the pass and then decide how to do it longer term. But thankfully, I wouldn't have expected us to get across that bridge. I'm not sure we are across it fully, but it looks like, at least this last quarter, this quarter or next quarter, are lining up to actually have increases in those on-site sales. And so whatever cannibalization is occurring is being offset by an increase in on-site sales through the pass.

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

No, I apologies. I should ask more carefully.

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

I got a question and a comment. The question is, I know that at first, when you're selling the All Access Pass, they weren't automatically renewable. And I know at some point, they shifted to be automatically renewable. So a, can you just kind of give me the date on which you started selling the automatically renewable passes. And then b, if it's a relevant question, have you seen any sort of delta in client renewal behavior once it was sort of automatic opt in versus automatically, versus they had to manually opt in?

On the second question, we have, we started last year in the second quarter with a thought of automatically renewable. And we didn't have it in the first quarter. We did have it in the second. We haven't seen material differences. What is different, though, is the process. When it's automatically renewable, they don't need to go through their whole legal department again, sign up a whole new intellectual property contract. They just need to give us notice of their intent. And of course, we still go back, we don't, we're not feeling entitled. We expect to have to earn that business and make sure they're getting usage. And we want to make, we don't want anybody who doesn't want to be in to stay in. So we're not tricking people to stay in. But what is happening is, at least when we talk to them and when their intent to renew is there, rather than having to go back and say, well, I've got to go back legal and sign up a whole new agreement to simply renewing an existing one, and so for most organizations, they're able to do that without that whole process. So it's making it easier that it hasn't changed the renewal much because our process is the same regardless of the contractual terms.

Got you, okay. And the comment is really, I appreciate all the transparency you guys are trying to provide, but I think it actually gets a little bit muddy when you're, like on Slide 9, I think you're trying to put too many factors in there. If you look at all the other companies that have your business model, like whether it's CEB or Gartner or Forrester, CoStar or [indiscernible], they kind of whole standardized on client retention, wallet retention, I think you should start, as it becomes more relevant here over the next few quarters, it's a more material part of your business, I think it will be really helpful for the investor community if you started putting that in your 8-K, just a table, that had, hey, on an LTM basis, here's the client and here's the dollar renewal of All Access Pass or Education or the whole subscription business or however you want to parse that.

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

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

Yes, a couple of quick ones. One, I think in the last quarter, you were talking about potentially adding new content to the platform. Any comment or updates on how you seeing adding any verticals or new content to your current All Access Pass?

Yes. Well, first, yes. We have 2 new pieces of content that will be added in the next 6 to 8 months. We haven't announced those yet, but we have, one represents a redo of it some existing content, our great leaders content. We had a substantial revision of that. The other is a whole new content category that we're currently developing. The course and related content for, that will be released, I think it's an outside thought leaders who were doing some stuff. But in that regard, we expect there, we're having some acquisition discussions on content, one of the things, a few add-on services discussions. And so we expect that a key part of what we're going to be doing here over the next year, and we have committed team to it, is we've got a map of what their capabilities we're trying to build, the content that relates to those and the providers of that. And we have 18 or 20 conversations that are going on about that. But the only thing that is materialized are these 2 pieces of content since we last reported.

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

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

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

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

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

Right. Yes. So on the 2 sides. As Steve said, I think we expect our gross margin to increase a little bit. We also have somewhat a reduction on marketing costs on renewals. The two of those things, plus some streamlining we've done making sure we're kind of organizing everything under one play, I think will, actually, positively impact the operating portion of the cash flow. At the same time, we're spending more and maybe an offsetting amount in terms of dollars change in terms of new investments for content and such. But the idea that we -- if we're correct about this, what's happening here, that having aggressive share buyback and we have authorization left under our existing authorization, we still have room. And we also have a lot of room on our credit facility. And so that's a topic for our board to finalize on, but in the past, we've not been cautious. As you know, one year ago, when we did the Dutch Auction, so something like that. At least my own view is that we ought to be similarly aggressive using all the cash that we don't have to invest in the business, substantially all to repurchase our shares. We're not seeing many things to buy. They're more exciting than buying more of ourselves. And so we feel that whether it's sort of Dutch Auction or open market purchases, we hope that this time next quarter, you will be able to see that we're able to say that we purchased quite a bit.

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

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

The revenue is not All Access Pass?

Yes. Yes.

So for selling half of its All Access Pass and Pass related, the other part of the revenue is our traditional facilitator and on-site business primarily. It would be the biggest component of it. We also don't count, we have some other subscription revenue related to the Execution practice, called the My 4DX portal and our Customer Loyalty portal. We could report, it's reported certainly as subscription revenue, but it's not reported as All Access Pass. So the makeup would really be with on-site days that are sold, we had some travel, we had consultant travels, about 6.5% of the revenue that comes in as on-site revenue, we add on, there's about 6.5% on top of that, that's travel related for our consultant. There's miscellaneous stuff, there's primarily historical facilitator and on-site business and related add-ons there, too.

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

Yes. We're saying earlier, we think something like that might move from 49% or 50% to around two thirds. There's probably a place it will be something like it is the movement we still would expect. And still, you'd have one third just because certain customers aren't able to get, aren't able to buy in that way or the size of the population they have to buy is bigger than they'd want. And we like that as an entry point with new clients. We want to make sure there's an affordable entry point. So I think if we got 65% of the revenue that's flowing through All Access Pass in one way or another, we'll still have also part of that, in the future, that will also be add on to these single content passes. If we get in there and somebody has a whole big frontline population that wants Customer Loyalty, we'll sell them a single content pass through All Access. So that's I imagine tow thirds might be the goal.

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

Steve?

Well, this year, it is as we're going through this transition period going to the All Access Pass, I think the amount that we spend will be higher. It definitely will be higher this year, particularly from the more than $3 million spent to localize the content in the 15 languages that Shawn talked about. And then, the opportunity to go out and maybe some acquirer content from thought leaders out there that would be good for the pass, I think that for a period of time this year and next year, it could be higher. And then as we go along, I would expect the 4% that we normally have talked about for years to maybe be the amount that we would spend on a recurring basis to maintain the All Access Pass content, along with maintaining our other content. So, I think there will be a bubble that's higher than what we've seen historically, and then that percentage will come back closer to what we've historically thought as a normal amount. That's my answer.

Then as you guys in terms of you guys specifically talked about the growth rates you guys see for your business in previous calls. How much of that's coming from kind of the new customer acquisitions? And how much of that's coming from other geography? How much is coming from just increasing the ticket price of the purchase? Just kind of give me a little color on your thoughts.

Sure. First of all, in terms of new pass sales themselves, about 40% have come from new brand new customers to us. And so about 40% have come from active facilitator clients, about 40% have come from brand new customers, and then, that middle group is coming from people who were once customers, who, with All Access Pass now, will be coming customers again. We identify that separately. So when we think of that, I mean, right now, it's roughly half and half, between active clients and new, just I mean, if you split those groups. And then, it has thus far, at least the renewals, the amount of revenue to which they increase doesn't seem to be that related to where they came from. It's more what they're trying to get done. So overtime, the growth opportunity we see in kind of has three dimensions. One is with existing this first cycle of selling All Access Pass, half new, half old, and then going in and making sure that revenue sticks, and we add on sales. The next is that we've got around 7,000 potential customers that are assigned to our salespeople, that aren't yet customers. And so there's an ongoing, and we spend we'll have, Paul, how many events this year?

A couple hundred.

A couple hundred events, thought leadership events, plus another couple of hundred webcast and so forth. Just try to give that [Indiscernible] so that's kind of the next level. I mean, just in the U.S. alone, we have another 80,000 companies that aren't even assigned 80,000 companies and company units. They aren't small business per se. They've 100 to 200 person units. They are good targets for us and good target for All Access Pass that aren't even assigned yet. And so as you look at the dimensions, grow existing clients in that sort of revenue per client, grow within those that are assigned is a whole big opportunity and then grow beyond that by a combination of marketing, and then adding new salespeople. So we've got, we think, a large greenfield ahead of us of people we've never talked to and certainly, of those who are not yet customers. Is that response to you?

Yes thank you. And my last question just on the effective tax rate. I mean, obviously, the pretax income is going to be small this year. But moving on to like 2018, what tax rate should we be modeling in?

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

Thanks for taking my questions.

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

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

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