Franklin Covey Co. (FC) Q4 2017 Earnings Report, Transcript and Summary

Welcome to the Q4 2017 Franklin Covey Earnings Conference Call. My name is Ally and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Later we'll conduct a question-and-answer session. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Derek Hatch, Corporate Controller. Please go ahead.

Thanks, Ally. Ladies and gentlemen, on behalf of Franklin Covey, it's my pleasure to welcome you to our fourth quarter fiscal 2017 earnings and investor call. Before we get stated however, I would just 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 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 of which may cause future results to differ materially from the company’s current expectations. And there can be no assurance the company’s actual future performance will meet management’s expectations. These forward-looking statements are based upon 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?

Thanks Derek. I would like to thank everyone for joining us today. We appreciate you being with us. We're really delighted to have the chance to talk to you today. As you know Franklin Covey is a content company and we have a collection of the world's best content solution for addressing problems that as we say require a large-scale change in human behavior. Historically, as you know, we've sold this content to clients one course and often one team at a time. Two years ago we termed that converting our historical course by course sales and delivery model to a subscription model in which we would provide our customers one, unlimited access to our entire collection of best-in-class content. Second, with the ability to assemble, integrate and deliver this content through an almost limitless combination of delivery modalities in 16 languages worldwide soon and number three, at a cost per fluctuation trained, which was less than or equal to that offered by other providers for just a single course and then of course with an array of affordable add-on's implementation service as we possibly that that would extremely valuable value proposition for our customers. One so strongly would have the potential to change the basis for competition in our industry and would be extremely compelling ultimately for our shareholders. We also knew that during our business model transition, it would be disruptive both to our financial reporting since it would result in subscription accounting treatment and also to our historical course by course business model. I think one of the fundamental theses of Clayton Christensen, the Innovator's Dilemma, the dilemma is do you go ahead and disrupt yourself with the pain that that requires because you have to transition or you wait and hope that somebody else won't disrupt you. So, the bad news is that it is expected, it has been disruptive. Over the last two years, the percentage of any given subscription sales was recognized upfront has declined significantly and the portion is recognized over time as deferred revenue, billed and unbilled has increased significantly. As we'll discuss in a minute we now believe we are in an inflection point where the recognition of this large bank of deferred revenue that we've been building up every quarter, doesn't detract from our reported results. It will actually help drive strong reported and really at this point economic revenue growth. As also expected on the bad news side, the strength of our new subscriptions that have served our business model and have focus on it, almost maniacal focus on it has disrupted our traditional facilitator and on-site sales. In Slide 3, just as a reference for Adobe Systems who went through a transition and what we recognize we don't belong in the same paragraph we're not claiming along the same paragraphs, but along the same sentence as Adobe, but Adobe announced in 2011 its decision to move from a unit by unit block software model to a subscription model and that went through a similar transition. As you can see in Slide 3 during its business model transition its traditional block software business declined for more than 83% of total revenue when it's transition started in 2011 to only 14% of its total revenues total revenue in 2016. During the same time despite the fact their sufficient revenue increased from 11% of sales to more than 78% of sales and overall revenues for the company grew 54%, Adobe as you can see had three years’ worth of dramatic growth of its subscription business was basically fully offset by declines in its traditional block software business and total revenue was really flat as you see that data pretty flat in that 2011, '12, '13 and '14 period. But by the end of that period, the dramatic growth in the new business overwhelmed both the sites, the declining size of the historical business and then all of a sudden there was a huge pop in revenue. There was growth in revenue in '16, in '15 but a huge pop more than $1 billion in revenue in '16. Again, while we don't claim to belong in the same zip code as Adobe, we've had a similar experience during our transition. The dramatic growth of our subscription business during the past years of our business model transition has mostly been offset by the decline in our traditional facilitator and on-site business that's flattening our total revenue and causing some on the phone and when does revenue get growing. As we'll discuss in a moment, we believe we are now at the inflection point, where the magnitude and significant growth rate of our subscription business will increasingly more than offset the ongoing declines and are now much smaller historical on-site facilitator channels, as a result as we will also discuss further, we expect both our reported and economic revenue growth to accelerate in fiscal 2018 and beyond and even be double-digit kind of growth which target the topline growth. The substantial portion of our business is already well on the way to becoming primarily subscription based and we'll talk about the subscription and subscription-related revenue already accounts for more than 70% of the revenue and binding contracts in our English-speaking direct offices in U.S., Canada, U.K. and Australia and we expect to increase to approximately 80% to 85% of total revenues in the coming years. Also, we'll be launching in All Access Pass at our offices in China and Japan later this year and already more than 80% of our education business is related to a subscription over the schools have a binding subscription and they're adding services to that. So, in as much as substantially all of our business is now or the majority of our business is already subscription is moving more that way, I am going to focus my comments today primarily on our subscription business, acknowledging that our version of the box software business is going to continue to decline. It won't fully -- it won't be completely out of our hair for a couple more years. It will continue to be somewhat of a drag, but we think despite that drag, just like with Adobe, they still had some drag in the '14, '15 and '16 but it became so much less that the growth, this explosive growth of the subscription business overwhelmed it. One more note, well just specific I would just say that I would like to respond to four questions which were often asked, I am going to direct my comments to these four questions. You see those on Slide four. First, what are some of the key indicators of the transition to the subscription business model is on track, is on track and if so why do you think it is? Second, what factors are responsible for the significant growth in the subscription business? What are the strength and what are the strategic factors or operational factors that are allowing that growth to occur? Third, what are the opportunities you see for accelerating both the growth of the business and the strength of our strategic position in the marketplace and forth, when will you hit the inflection point where the new business model is more than offsetting the disruption of the old and you will expect reporting an economic growth to accelerate. I would like to respond to each of those questions in just a moment, but one more note. The same things has underpinned the success of the subscription model also complicate the accounting for it somewhat. Unfortunately, companies like Salesforce, Adobe, Microsoft and others, have been doing this for years and since there are now well-established standard defined metrics against which to measure the performance strength momentum of the subscription as a service company, we're going to use those same metrics in today's discussion in all of our communications in the future. Over the last quarters, you would have been better served, we probably have been better served if we had used those same metrics in prior quarters instead of in a sense to customizing terms, but we're going to use the standard terms today and in the future. As you know these metrics typically include such things as reported revenue, deferred revenue build, deferred revenue unbilled, which includes the as yet unbilled portion of any binding, noncancelable, extended term contracts and in the total deferred revenue, which is billed and unbilled and so the sum of those two measures, which when added the amount of revenue reported provides a report on the total economics when you have revenue plus the sum of all deferred revenue go nonbillable but can measure of the economic engine. Other of those metrics measure more a specific time period over the next 12 months whatever. Other measures including recurring revenue number of subscribers etcetera and the definition of each of these we've included in the appendix, so that you'll know what we're using and what the basis for that definition is. Specifically, these definitions came directly from sales forces, public filings and we thought we would use them out of aspiration, not because of the comparability model, but we belong at least to the same peer group for the same grouping of subscription. For those who would like to have more information about the economics of deferred revenue, this billed and unbilled, we've included some examples in the appendix, which we would be happy to talk about individual or in the question-and-answer part. Finally, once I've addressed the four question, just note that I'll turn the time to Steve Young who will provide some information which we hope you'll find helpful in reconciling the reported and deferred revenue billed and unbilled numbers to the guidance we provided to you all before we started reporting our results, utilizing the same common definitions and translate that, at least gives you some basis for understanding what that means. Now I'd like to address the four questions outlined above. So, first question one, in terms of the key indicators that show the transition to our subscription business model is on track, which is kind of Slide 15 raises the question, Slide 5 I mean, raises the question. As you can see on Slide 6 All Access Pass and pass-related revenue plus the change in deferred billed and unbilled in our enterprise division has been extremely strong. It grew $40.7 million, more than 200% almost 300% in fiscal 2017 from $23.2 million in fiscal 2016 to $63.8 million in fiscal '17. So that's one metric is how is it going in the enterprise business with All Access Pass and we'll spend some more time talking about that. As shown on Slide 7, our education business leader in the subscription-related service revenue plus the change again in deferred revenue billed and unbilled, grew $5.5 million or 15.4% in fiscal 2017 from $35.6 million in fiscal '16. So, it was up to $41.1 million total and the education business has been in the subscription model for several years and they started several years before and so they're now at a point where the 15% growth a year has become relatively predictable and again a lot of the definitive contract. As shown in Slide 8, our total subscription-related revenue plus change in deferred revenue. So, this is combining enterprise All Access Pass with Leader in Me, you see that crossed over the $100 million mark in fiscal 2017 ending at 107 million, which was growth of $44 million. The blend of the two of the enterprise and education was $43.8 million of growth, 69% growth compared to the $63.3 million we generated in total subscription revenue in 2016. So, you can see on this idea that we're moving to being a subscription company obviously is getting closer and closer to that. In Slide 9 you can see the total number of paying subscribers. You can see the definition of that. These are all current contracts with people who are current on their payments, but in our case to pay up front. As you can see in Slide 9, our total number of paying subscribers to our subscription offerings in both units was 468,000 at year-end 2017, which is an increase of 168,000 or 56% from the approximately 300,000 subscribers we had at the end of fiscal 2016. So, for us again we're focused on a lot of -- looking at a lot of different metrics. For us this is an important one because we're trying -- part of what we're trying to do is build the pervasive ongoing relationships with our clients. We want them to engage with us and expand their populations and so this growth in subscriber population is a function certainly of increased number of passes, but it also reflects that within the passes that we sold in the past, there has been a significant expansion in the populations covered by them as we go in and find other problems that they have or challenges they have in the company for which they're hiring other vendors are no vendors today, that's allowing to move forward. And so, this is an important metric from strategically as we want to keep the total subscribers growing actually have the number of passes. As you can see in Slide 6, sorry, moving to Slide 10 sorry, so just break the subscribers out between our enterprise and education subscribers. As you see in Slide 10, 320,000 of the total 468 on the previous slide are in our enterprise division almost all of which are All Access Pass subscribers. This 320,000-person subscriber base is up 146,000. So very high percent from the 174,000 subscribers we had at the end of fiscal 2016 was 84%. As also shown on that same Slide 10, 148,000 of the 168,000 are in our education division, almost all of which are subscribed in our leader and the membership offering and this 148,000 base is up 21,000 or 17% from the 127,000 subscribers we had at the end of fiscal '16. So for us on this key thing are we reaching and keeping these populations as reflective of the fact that we're selling a lot of new passes. We're retaining more than 90% of the revenue. We're expanding these passes and getting the chance to serve more customers inside them as we'll talk about in a minute when we look at the revenue, or the revenue you already saw we'll discuss more in a minute is that these people, or these passholders and the buyers are also buying additional service add-on services that have helped to drive that. So, let me just refer you back if you were to -- if I can to Slide 6, which shows the growth in our enterprise division for All Access Pass and you see that in the top bar fiscal 2017, where we sold approximately 49.7 million of binding contracts both building and to be build. We sold and recorded 13.3 million of add-on services as people have found out that we have services that can help them drive their results. Slide 11, one last metric in terms of some of what we're following to say are we on track for the business. In the future we will report the official annually recurring revenue number, but we're still making sure that our version of that number is exactly consistent with how other people do it. And so, in this case, this is the surrogate slide for today, which tells you what the total amount of contracted revenue that's going to come in over the next 12 months. It excludes other contracts like our licensees -- licensee partners have contracts with us have minimum royalty payments that are contractual. As you may know it hurt our campus. We used to have a campus, now we're just operating one building of it but at least revenue from the part that we used to occupy and so those things, which will add up to another $13 million or $14 million not included in this contractual revenue although they're there and it doesn't include a course stuff that service is another thing, if they're going to be offered under these binding contracts, this is really intellectual property licenses and not necessary -- not all the other businesses attached to it, but this is kind of the recurring idea of revenue can count on that's going to flow through. A lot of it's already in deferred or whatever and that's what that is. And so, for us, the combination of those factors the with tremendous growth in the All Access Pass and all the things that we just talked about with respect to the expanding population and services, the continued growth in the education division in license revenue we're now substantially every new school that's added first by the license whether it includes intellectual property and coaching. And then other implementation services are added on. So, the combination of the pretty dramatic growth in All Access Pass, the continuing strong growth in Leader in Me, which is more mature, the growth in our total subscription revenue crossing over 100 million in terms of that revenue plus the binding contracts. So, getting so that with one more turn of the flywheel, that number could easily be in the 130 or 140 million range and the next more than that. So certainly, the balance is tilting in favor completely of subscription and whom as we add Japan and China this year, our licensees also have not -- or not yet selling. It won't affect our income statement because we don't have the deferred revenue from them, that will allow them to achieve the same kinds of revenue accelerations. We believe that we really are -- we're excited about the really quite dramatic growth in the subscription business already and feel like when we get all the engines in place with China and Japan and then just other people -- other groups that we've now integrated like sales performance and others in the past that didn't have the access to this that we have some really strong engines we can even accelerate this growth going forward. The second question the short one is kind of where the strategic factors behind the significant growth in the subscription business. You can see on Slide 13 over the years, we have focused -- we've always said, how do we really differentiate ourselves in the marketplace, because we're in a marketplace in training and the training portion of our business, we're in a marketplace that consists of a lot of small operators, professors and universities who developed a course or whatever it might be great content but they don't put the weight behind it to have film-driven courses. Millions of dollars that we put behind a course having all the delivery modalities etcetera the apps and the things that go with them. So that's our industry and so we said, look we want to differentiate ourselves, but we don't want also to just be part of the industry, the training industry because really the performance improvement industry is a much bigger map that people hire a lot of other people to help them get business results that require change in human behavior and so we started back as early as 2004 through 2003 decide we did not want to be a training company per se. Building just capabilities and what the CEOs and everybody else want is outcome. They want the capabilities that lead to outcomes and so with that commitment at a time when others weren’t really doing it at a time when we weren’t really profitable either, we invested tens and tens of millions of dollars in new content and since then, really since 2003 we've invested more than $150 million in content directly and in practices to help drive the application of that content through the impact that we develop the entire execution practice, the sales performance practice, the customer loyalty practice. In education before that, before the Leader in Me, which we decided will be an integrated offering trend to deliver specific outcome. we just sold materials and things to school. And so, for us now even before the transition to All Access Pass around $90 million of our revenue that we reported each year was related to some kind helping drive an outcome. So, for us why we want to differentiate ourselves in the whole industry and say that we're a credible partner with any organization on any major topic. If they're trying to derive an outcome like improved performance, whether that's somebody like a Marriott driving guest satisfaction, trying to distance themselves from their competitors or a big shopping supermarket chains or technology firms or sales organizations that are trying to differentiate the way sell complex, high-value things, we now are engaged all the time on those kinds of things. So, for us best in class content to serum med 4 goes back to George Merck who back in -- with more than 100 years ago defined some big intractable health problems that they wanted to address and put all the resources after them. We've done the same with some big intractable problems whose solution requires a change, a fundamental and lasting change in human behavior. So, we said, that's going to be our homework. We want to have the best in class content we want and honestly, I've been on hundreds, literally hundreds of sales calls and make just short of 400 I think and it's not a question that our customers view both the content as best in class, so yes, sure. If I am going to do anything in that category it's your content. We have their branded content driven by best-selling books etcetera, but the content says, oh my gosh, your people are amazing and we've built this deep capability to help deliver based on some of the more intractable problems they want, somebody else help facilitate it. And so, we did not -- we do not want to just be a content company that tosses content out that anybody can do just by putting on a portal and say you get access to it even if it's the best content, we want to have the capabilities also to deliver outcomes for them. Second is wanted to have the most flexible delivery modalities. Now we used to get asked the question and this is identified just what the modalities are, so people used to have, so we're going to be an online training company, what percentage of your revenue comes from online training? And we would say look, we'll answer the question. We think it's the wrong question though because for us it's turned out to be the case but then we just always experience that people who buy our stuff aren't buying modalities. They're buying outcome. The use of modality to get larger to the end of the road and so for us our determination and commitment to building on these modalities wasn't so that we could get a merit badge for the number of the modalities in which we deliver our content it was at a place like Marriott, we can certify all their managers throughout the U.S. where they have concentrations live. At the same time across the hall we could be certifying all of their managers in the Caribbean and South America live online. At the same time pre-shift meeting at the Marriott Marquis Hotel in New York, we could be training 125 housekeepers with a five-minute video vignette because of these massive film libraries that we build to support our content. And so, for us flexible delivery modalities is a way, was and is a way of saying we want you to be able utilize the content in a very flexible format and finally we want the broadest and deepest sales and distribution capabilities. So, as you see here in terms of best-in-class serum on Slide 15 we've built, we've built this best-in-class content. As we mentioned and developed these practices that I've mentioned that, our delivery modalities as you can see Slide 17 if you look at this from a magazine to just a training magazine, it shows all the different trading modalities. We haven’t chosen -- my we haven't done much in gamification, although we're testing that right now with a few clients and so you see some X down at the bottom. We haven’t used of lot of academic institutions to partner with us to date, but otherwise our content can be flexibly delivered to all the rest of them and that's part of the investment that we have made. And then finally in terms of distribution, 10 years ago, there were a lot -- obviously there were a lot of global companies, but most of them did not deal with their people issues globally. They had everybody pick their own team they were going to train on. Now that increasingly for us to take advantage to have a global footprint where somebody there in the U.S. with a truck contractors in China or Germany and know that across the world they're going to get that same solution. So anyway, so for us the things that have driven -- have driven this growth in the past, these pillars two years ago because we've made the investment in all those things, it's not just that it would that be great if you were a subscription service company, wouldn't it be cool if you did it in a format. It's because we had the world's best collection of the best-in-class content, we already had the flexibly delivery modalities and we also have this distribution that we could do it and so Slide 21 we introduced the All Access Pass. And as you can see on Slide 22, the value proposition is this. Instead of one course at a time, you can -- your pass forward fluctuation that you sign up for. So 100 people in your company or 100 leaders or whatever it is or 1,000 early or 10,000 provides that whole population with unlimited access to Franklin Covey's entire collection of best in class content. So instead of having to say gosh, you have a bunch of great content again as I said which one do I want to do, we say look, frankly you got a lot of needs in your company and you don't have to make one decision of how you're going to do business with Franklin Covey because you're going to get the whole library let's get started with a given problem today where we'll move forward. The second thing value proposition on Slide 23 is that with all that content, you have the ability to assemble, integrate and deliver our content and solutions through an almost limitless combination of delivery modalities like live online, online webcast, podcast, integration of pieces of content if you want to break up and use our concepts or film vignettes or whatever and other training you do versus having a viable course that they can do it in an existing training offerings and recently we'll talk about this in a minute through the acquisition of Jhana we now this micro learning, push learning where you can take the content in bite-size pieces without even knowing you're ever taking a course. And so, for us that was the second value proposition. So, all the content within almost internet delivery, part of that delivery flexibility was you also get the services and the implementation specialists at no additional cost. Now this is an investment we've made to say there is going to be some organizational design capability who is going to work with two new organizations because these people if you have been a general contractor your own home trying to get a project, that's not a lot of fun. Most of the people learning and development are trying to have during that same world where it's a great idea but gee by the time you have to schedule the class and decide which continent and symbol etcetera and customize issues too much and so we said, whom, look we've got somebody who is going to be your partner, who is going to help you identify what do, figure out all the ways in which you might want to do it, help you assemble the legal blocks in a way that it is going to work exactly for you. We also have some ad-on services they can buy from us if they want us to actually do this for themselves and so that's a key part of it. And Slide 24 another access that globally in 16 major languages we made a huge investment this past year to localize all the core content in the All Access Pass. We haven’t been able in all 16 major languages, that part is done. It will be delivered through the new port. We have new portal, making huge investment in new portal. This is an ongoing, we've been swallowing that investment in this past year and be swallowed some more here in the coming quarters. But it's a new state-of-the-art portal in terms of -- that meets all the international data privacy standard etcetera that needs to do and very, very strong and robust platform. And so, with that idea you get all the content, interest, delivery, flexibility, you get the help to do it, you can do it anywhere on Slide 25 all that at a cost per population trained, which is less than or equal on a per person basis is less than or equal to that available from other providers for just a single course in a single delivery modality. So, it's not surprising that it's a compelling offering but we had to think differently and say look, if we look at the price per person trained you won't do this, but if you look at the revenue and lifetime value per customer, which is our real unit of measure which is how much business is the customer doing with us, we believed that we do four things. One we get a higher initial pass, with that kind of value proposition that just instinctively know they can serve a bigger population. So, it start out on Slide 26 with a large population size to start with. Then as we get in there with them and start to analyzing things that actually there would be opportunities to expand populations, another part of this virtuous cycle. Then for some of those engagements, it would be -- they would be important enough issues that they would add on implementation service services and get in that the add-on services you saw and that they would also renew at high rates so. That the basis where we think it's being successful. Is very compelling and were in a unique position we believe in our industry to offer it just because of the investments over 10 to 15 years. Slide 27 reads the third question where the opportunities we see for accelerated both the growth of the business and the strength of our strategic position in the marketplace. I'll just hit a bullet point 4 on slide 28 just shows one salesperson who sell 10 new passes a year adds 20% of add-on services which is less and has a 90% revenue renewal rate that, that fills person just selling 10 new paths can add up 2.3 million of revenue by the 10th year so that's a great thing for a sales person to come in who in the past had to go say well I got to find some new customers some new problem-solving every day if I can just get the pass in there, have to keep it, I am going to build a recurring revenue base. Multiply this by the 217 salespeople we had at year-end half of whom are still in ramp and significant role ramp and there's embedded growth there plus than the new people we're adding and that's what we're playing for. We believe there is enormous opportunity to have an impact in our clients and also to grow. We see opportunities, you can see the slide 29 in all of our -- in all three of the puzzle pieces, all three in content assurance Slide 30 we've added new content for the past this year. We Clayton Christensen's Find Out Why, which is based on his best-selling book competing against the sole idea that the start of the innovation is really understanding what job have we done that the customer has. We've added the Jhana acquisition, which included both the new platforms from micro leaning, but also there is enormous library of very high quality research, corporate executive board type research around what helps managers be effective, but can be dissembled easily. We also acquired in May, Robert Gregory Partners to add coaching capabilities so that when our clients do want more help, we can give it to them. So, we see ongoing opportunities. We have many, many conversations going on right now with people that we think around a specific problems we're trying to solve. Again, we're not trying to solve all the problems in the world, but we pick eight key big and tactical problems that organizations have. We want to have best in class content and solutions around those. We're having conversations with a number of people there. So that's an opportunity for continued growth. It's also been an area of continued investment. We're making ongoing investments in content. We've historically had a budget around 4% a year and we've increased that. this year and next year at least we're going to be going at 6% a year spend and honestly if we have the opportunity to do more and we think it's going to solidify our hold on this part of the business, we'll do more. In Slide 31, another opportunity for growth as I mentioned is the ramp of a client partner we already have, the 218, but then the addition of new client partners and you can see in Slide 32. In the U.S. there are 94,000 companies or company units with at least 200 employees. Today we only have 11,000 those assigned to sales people in the U.S. of which 4,000 are active accounts and 7,000 are not yet assigned to anybody. So, they're not being called upon. They might get invited to an event, but we try to focus all of our marketing dollars behind it and historically there is a big opportunity for us to expand that pilot book by hiring new sales people, but also through marketing to get the word out to a lot more people. We also have the 83,000 unsigned accounts and then in Slide 33, again this is just that we think an opportunity for us is if we can make this transition, this just shows you again something we don't just like the NFL compared with my touch football team. But the transition because of a transparent business model that has very high recurring revenue, predictable margins etcetera, the pool of revenue, right where you look at where the transition period was, just the idea of what Adobe was going to do, increase the pool and when they actually did increase it more, we like to be credible enough that in terms of the traction we're getting that over time our shareholder can benefit from at least directionally what that is. Finally Slide 34, when will we hit the inflection point where the new business falls more than offset the structure of the old model. Slide 35 again is the slide you saw first, Slide 3, which just shows you that Adobe had that transition to get through and we have two, but on Slide 36 in the subscription business as you all know better than we do is that the inflection point in reported results is preceded by an inflection point in deferred revenue both billed and unbilled because it goes on the balance sheet first to run the books first and then it comes through. And so, you see on Slide 36 is that while the green line which is total revenue was flat, there in several years in 2013. 2014, they hit an inflection point on their billings, on the deferred revenue that they were billing and contracted, but not billing and that they hit an inflection point there and then the inflection point in reported followed it, we believe the fourth quarter was going to be -- obviously the fourth quarter was a huge inflection point in terms of number of amount of deferred revenue that was booked. But we expect that the first quarter will continue to be strong, not strong in a crazy sense because it was a bit strong, very strong and as you saw in our guidance, we expect that the we really have hit the point where after the flat years where for us the subscription business hasn’t been flat. It's been growing 30%, 40%, 50% a year, but of a small base than now getting a bigger base is being offset. But we're now at the point where we'll be able to put a crossover and so on Slide 37 as we had, we hope a lot of new subscribers, a lot more back play, a lot more contractual revenue and yet our historical business we disrupted it so much smaller we've already completely overcome the loss in on-site revenue with that on sales that we'll hit that inflection point. So, thanks very much for letting me go through that. Just to say that we're excited about all three of those things. We feel like there is enormous huge -- there is enormous effort that the entire organization has been mobilized around this. We are glad that the traction is there in terms of the revenue we're booking. We're going to continue to make investments. So, we're going to accelerate our revenue growth. Thankfully we're accelerating our revenue growth and we'll accelerate our EBITDA growth too, but our EBITDA and cash flow will grow little less in '18 than it would otherwise, because we're making heavy investments, we think that's a wise thing to do if you can get us into double digit growth land on a predictable way and so we're going to continue to do that. And with that, Steve I am going to turn the time to you just to maybe talk about how to connect the dots with all this deferred revenue and our original guidance and give us the new guidance.

Okay. So, Bob just talking about the future maybe I'll jump into future guidance first and then I'll go back in Canada, that are on our guidance. So good afternoon, everyone. So, the information that Bob discussed is obviously critical to understanding our guidance and our numbers for FY '18. Particularly that the expected dramatic increases in our subscription business is partially reported as an increase to net sales on our income statement and partially reported as an increase in deferred sales on our balance sheet. While decreases in other areas of our traditional business like facilitator sales, directly impact reported net sales. Everything considered, we expect reported net sales next year to increase from $185 million this year to approximately $212 million next year a 14% increase. Essentially all of the increase in net sales is attributed to our emphasis on the subscription business. For their subscription business, this is an increase of almost 25% next year. We also expect deferred sales on our balance sheet to increase by more than $15 million or 36% or 36% increase next year and we expect to continue our focus on selling multiyear agreements. On the cost side as Bob talked about, while we have a high flow through of incremental sales to incremental adjusted EBITDA and while we have identified certain cost savings given the size of our current opportunity, we've also decided to invest in other primarily growth related costs as Bob talked about. These costs include implementation specialists, which are very critical important I think content development, content amortization and then of course commissions, bonuses and support staff related to be in a position that we can seize this opportunity that's in front of us. Given these cost changes and based upon the $212 million of recorded net sales, we expected that adjusted EBITDA calculated the same way we've always calculated adjusted EBITDA to increase from $7.7 million to a range of $10 million to $15 million. This increase of course excludes the anticipated $15 million increase in deferred sales on the balance sheet and excludes the amount of multiyear contracts entered into during the year, which last year was $16.5 million of unbilled multiyear future contracts. To summarize next year, we expect to increase net sales increase deferred revenue on our balance sheet and expect to focus on selling multi-year agreements. So, we want to improve all three measures that I talked about. Now just a little bit on Q1, the seasonality of the education division sales causes most of their adjusted EBITDA generated in our fourth quarter just like in prior years and causes their adjusted EBITDA to be less than last year in Q1. The current concentration of adjusted EBITDA in our enterprise business is also toward the fourth quarter. That said we do still expect adjusted EBITDA in our first quarter to increase over last year by an amount around $1 million of adjusted EBITDA and remembering that the majority of our year-over-year expected increases is in our fourth quarter. Please also realize that our guidance is based upon our internal analysis and our internal expectations and we take it very seriously. We are still in the middle of a significant transition of our business and we could report results that are different than our current expectations. Many things could cause a difference including a simple change in the mix of sales between subscription and non-subscription business would have a significant impact on the reported amount even if the value or the economics being generated or essentially the same. So, about that's how looking at FY '18 numbers.

Thanks Steve and we've taken that into account obviously in the guidance we've given and that's why there is a wider range is that if we have an investment opportunity or if we have a chance to disrupt our existing business even more we will also. With that we'll open it to questions I think. So, thank each of you for -- just like say this, thank you to each of you for the effort you've made over these years to really try to understand what's behind. I think we felt tremendous support from you all as our shareholders. Obviously like everybody we're happy to be here today, think that we were making that transition tractions there but we appreciate your support during the years when it's been the Adobe years and we hope you'll get the other part of the Adobe years going forward. Steve is also going also provide some reconciliation I apologize.

I was happy to go off. So just a little bit about reconciling our results to our guidance for last year. We had hoped to provide some information that will help you in looking at our reported and our deferred revenue both billed and unbilled numbers compared to the guidance that we've given and reconciled between the guidance we gave and the buckets that we now look at of reported deferred and then unbilled deferred. As you know when we gave our guidance last year, it was the sum of two numbers, reported adjusted EBITDA and the change in deferred revenue less certain costs would be between $35 million and $38 million. At that time and even at the end of Q3 we didn't anticipate that we would choose to have a large portion of our deferred revenue be unbilled, even though other SaaS companies generate lots of unbilled deferred revenue. Our result for the year in those three buckets was $7.7 million of adjusted EBITDA at the 2.1 of commissions related to unbilled deferred revenue for a starting point of the $9.8 million, very close to our guidance of $10 million to $14 million that Bob talked about plus $29.6 million of deferred revenue less certain costs at 15%. Of that $29.6 million $17.7 million was from billed deferred revenue and $11.9 million was from unbilled deferred revenue. The sum of those three numbers is math $39.4 million. If you choose to exclude the unbilled deferred revenue, the math is $27.5 million. In a slide in the back in the appendix we lay out all of these numbers and provide the ways to look at the result depending on how a person chooses to treat unbilled deferred revenue. We would be happy to discuss this of course. For us, we intend to focus on improving all three measures in the coming years, deferred sales both billed and unbilled and reported revenue as a way that we can see to in the coming year and in future years to maximize value and cash.

Thanks Steve. Also in the back there is a calculation of where unbilled revenue came from was the decision we made as we had a bunch of clients hundreds who were midterm wanting to expand the term of their contract to better match now we've been in there talking about impact journeys as we call them. So, their team is be on. It didn't make sense for them to have a contract a plane flight for less than the journey they're going to be taking and so we knew they were willing to do it and historically we would have discredited, we would have taken the $10.9 million of contract amount that they originally signed up for. Credited them with the other $4 million that was still remaining. We have ticked up the $6 million in deferred revenue, so we could bill it. Instead many of these clients if any of them have the will, even though they have already paid us in the past. They were saying gee, it would be helpful just on their normal billing cycle or whatever it is do it when they're not -- when their natural renewal day comes in. they were willing to sign bigger contracts with expanded populations. For us, the income we're going to get in the year the equivalent of the revenue we're going to get in the next year is exactly the equivalent of little better than the equivalent if we had bought it before and there is another $6.5 million of contract value that we know was going to come in plus locked in our relationships with customers. So, we've got data there that you can sort through and happy to answer that. So, with that, now we'll open it for questions. Thank you.

Thank you. We'll now open the lines for questions. [Operator instructions] And our first question comes from Jeff Martin from Roth Capital Partner. Please go ahead.

Thanks. Good afternoon, guys.

Hey Jeff.

I was hoping you could help explain the unbilled deferred revenue from the perspective of the duration of the license or the agreement in the past. I assume that's a multiyear agreement causing that portion of it to be…

In extended terms here is basically what it is, these are contracts that are on average had terms of about 13 months. On these expansions, they now have an average of 19 months. So, it's not multi-multiyear but there's extended terms. Their original contract term with $10.9 million. It's now $16.7. So, the $16.7 million increase. So, the $6 million increase is a combination of extended pop first extended passholder size because they also expanded their populations by an average of 15% and then they extended the term on these as well.

About their ROI for multi-year.

Yeah, there are a bunch of multiyear ones, but I am just saying there are also bunch that all of them have extended terms, but the extended duration and yes a number of them are multiple years actually in that as well. Just keep going if it's not, we will try to answer in…

No, that's helpful.

But I can say this, of that amount of the $16 million amount $16.7 million, amount about half of it just a little less than half of it will actually be recognized as revenue in the next 12 months and so for us there is $7 million something like that. It's approximately that amount will come through in the next 12 months anyway. So, it has a similar effect as though we build it in terms of the impact on income and so one of the ways you'll see it the back it's our call them three view C is that you look at the total revenue that's going to come in, in the next 12 months, we picked up a little bit, more than we would've had chosen to just go ahead and credit these contracts and yet still have this extra $6 million of their contract value that's going to come in, in future periods.

Right, right. That makes sense. If I can ask to clarify something on your Slide 11 your contracted revenue which is close to $50 million explicit for next year, I assume that that's to be recognized over the next 12 months, that's the portion to be recognized as revenue over the next 12 months, is that right.

Yes, that's what it is.

We got other contractual revenue but this is really the -- this is the subscription revenue.

And it is to come in over the next 12 months and intended to show the significant increase in that number given there is more visibility in the future because that number is growing so rapidly.

Yeah so there is another $7 million since you said you about half or there is another $9 million of what we contracted year that is not in that number because there is not coming in the next 12 months is that part of the $16.7 million that's going to come in the next 12 months that will come in in the following 12 months the bulk of it also some test. Right is it fair to say your gross margins should be up in fiscal '18 because of the start of the revenue recognition here if you're taking 15% of cost allocated out of it when you're talking about the build in deferred?

Yes.

I don't want to start getting line by line guidance request here but was just curious if you could help us ballpark the magnitude of the gross margin, what range it should be in for next year, are we talking in a five-basis point or five percentage points are we talking one percentage point.

Couple of 100 basis points. Part of this also and the reason for that is we got obviously extremely high margin deferred revenue coming in and also the new pass sales are also extremely higher margin. We're also adding on the more and more services. And those services have lower margins. So, on balance as the mix between services we've always loved the course the corporate executive board model and everything but what I really love is the Gartner model where two thirds of the revenue comes from subscription roughly and another third comes from services. We've chosen to solve problems that people will hire us a lot -- they will hire us to help them and amongst these problems we'll add services. So, I think you can shift based on mix shift it could change, but in terms of the basic balance, we think it will be in the range of 150 to 200 basis points change in gross margin.

Okay. That's helpful. And then last question and I'll hop off, so other can ask, but in terms of your investment in implementation specialist content development and some of the other areas, can you give us an order of magnitude of what that investment is going to be?

Yes. So, each one of those is a few million dollars. So, you add them all up and it's probably if you put into commissions that are related and everything else, it will be $7 million to $10 million depending on how you look at it. So, something $8.5 million, $9 million. So, which is significant amount of investment. Again, when you add the content development, the amortization of the content development that we capitalized last year, the implementation specialist and the bonuses and commissions related to that it was like $9 million.

Okay. That's very helpful.

So, for us, guidance of EBITDA is after swallowing that, after swallowing that we still expect good expansion, and it won't be that. Just one last thing Jeff because you and others are so careful thinking multiyear in '19 we don't expect to have that same thing. In '19 will have less growth in it, we should say and so there will be more flow through on the incremental revenue dollars that come in '19 than on '18 just because we've had these big things like localizing all the content into 16 languages, $3.5 million portal millions of dollars. Hiring the implementation for the first time and specialist the first time $4 million and so after that it will be more incremental but anyway we feel like it's the right thing to do. It will keep the revenue growing. So, we're on it.

Okay. Thanks for the thoughtful preparation for the call today, it's helpful. Appreciate it.

Thanks Jeff.

Our next question comes from Marco Rodriguez from Stonegate Capital. Please go ahead.

Good evening guys. Thank you for taking my questions. Hey a couple of quick follow-ups here just on guidance making sure I'm kind of understand some things. The adjusted EBITDA guidance of $10 million to $15 million. So that's back to your normal definition of adjusted EBITDA not the adjusted EBITDA plus deferred revenue that you guys were doing before in fiscal '17?

That's right.

Okay. And can you maybe talk a little bit about the range there? The dollar amount is not a huge difference, but percentagewise it's a fairly wide range, is that just -- what's going to drive the high end of that versus the low end?

Yes, so I think the first thing would be just mix. First thing is mix and we've read a transcript from the CFO for Adobe and he was saying that he had somebody a shareholder who got mad at him because they missed their earnings but it was because he disrupted is a box software business faster than he thought. So, we generated more deferred revenue and he was going to destroy it anyway but hey you destroyed it faster than you thought. So, there's that kind of stuff although that thing is getting smaller and smaller because our historic, but that's the first one. The other would just be us deciding that there is some opportunity to grow that there is a marketing investment we would want to make or whatever. So, we're leaving the range wide. We're going to obviously all want to be as high-end range we can, but actually tempered by if we think we can get kind of revenue growth that we're talking about here, net of the loss of the historical business hopefully our shareholders would want us make those investments. And so, we're just leaving is broad today hoping we assume that we'll -- and Steve gave some guidance on the first quarter, which is we hope good and so -- but that's the only reason. It's just more the historical facility -- we've already crossed over Marco, on the disruption we did of our traditional on-site business where somebody would just buy a course from us and have us deliver it. We've already crossed over on that one, where we were losing in the initial year '16 and the first part of '17 we had a deficit of about $2 million a quarter in revenue, which was the difference between the new add-on services we were adding to All Access Passholders and the amount of old on-site revenue we were losing and so that was a tough nut to crack. We covered that now. We more than covered it on volume variance. We're selling more days we have been since the second quarter but because passholders get a little better rate, 10% better rate, we've been off on the price variance a little, but we're crossing over on that now because we're anniversarying and so if those kinds of things that make a difference.

Got you. And then in terms of the guidance, I don't know if I heard this correctly or not, I thought I heard you say that is it going to exclude multi-year contracts and if so, can you help me understand why the guidance would exclude that?

Well a multiyear contracts are amounts that would not be recorded in our reported number or on our balance sheet as deferred revenue. So, these are multiyear -- the future years of multiyear agreements are not recorded anywhere in our financials. Now even though this year we had $16.5 million of all that unbilled deferred, again unbilled deferred mean it's not represented anywhere in our financials. It's not recorded and it's not deferred on the balance sheet. Even though it's a binding contract just like the other contracts come to the effective date yet. So, since that is so new to us, just primarily in the fourth quarter I'm not really comfortable saying exactly what we think it will be next year.

We're reporting it every quarter. So, every quarter will give you actual revenue growth, growth in deferred billed and growth in deferred unbilled like others do, but we just didn't feel like we knew less than $1 billion more than $10 million and so we just have been giving guidance on that.

But you're right Marco, that's on top of the reported and the change in deferred.

Okay. So, help me understand something here just to make sure I'm following how the contract may be is structured. So, let's just say hypothetically you got a client that's got a three-year contract is going to pay $100 a year, you're going to build the first year $100 that goes to deferred revenue, you recognize it over 12 months. Come Jan 1 the following year, the same process happens and so it was additional $200 that is this unbilled revenue there's nowhere on the balance sheet or obviously on the income statement, is that correct?

Yes. You got it. And so, if it was a three-year deal and your example, we would bill $100 a year and record that to deferred and amortize it over the term just like you said.

And just to note that these contracts that we're signing are noncancelable. These are not monthly paid deals where you can -- these are binding contracts, which we've always -- our customers have always honored when we have to and we make sure they…

And if I remember correctly, I know that you guys have talked about doing some multiyear type contracts. I think we're starting in the last quarter or so. Is there a significant push to have the sales force I guess really go after the multiyear contracts or was that just up to the client?

Well it's driven by what the client needs are, but sure we like other people and there is subscription business paid incentive. They get extra commission if they can get a multiyear contract and they did. And so, we think this will be a part of what we're trying to do. We're trying to drive two numbers. We want to drive the total amount -- total deferred revenue and we also want to drive each of the two pieces. So, we would like to -- if you look at something like sales force who grows the revenue by a certain percent and about the same percent growth in deferred build and the same percent in deferred unbilled, that keeps that pipeline. So, you have two-year visibility on our model. We want to do that and so we've got the incentives in place and Steve said, we're a little new on it. We hadn’t even introduced the possibility of it till the fourth quarter. So, we don't know and we have a lot of our business come in the fourth quarter. So, we're not expecting flood in the first couple of quarters, but we'll have some of that. We'll have some of it every quarter we report on it, but we'll be mounting building up momentum in the later quarters of the year.

Got you. And the bonus for the CPA or the salesperson that brings in a multiyear contract, they get enough bonus for signing that contract and then thereafter it's just a trail of commission if you will on the subscription or are there additional bonuses for retention?

Yeah, this is Paul. That's exactly right. So, at the time they close the deal they get their normal commissions for the first year plus an upfront bonus and then they'll still receive their normal commissions on year two if it's a the two-year deal or years two, three, four if it's a two, three, four-year deal. So, they are incented to go and try to find as many as they can. We're finding that some clients are willing to do that in year one, but there is a larger percentage that when they come to that first-year renewal, at that point at that point, they’ve had a year's worth of experience with the path and as they approach their second year, they're willing to instead of sign up for a second year, sign up for a second and a third or a second and a third and a fourth, but we're pushing on that with our salesforce.

Got you. Thanks a lot guys. I appreciate your help.

Thanks Marco. One thing I just mentioned organizationally is we now have these two businesses the enterprise business and education business now consolidated and Paul Walker has been leading our enterprise business except for the licensees and Sean Covey has been leading our education business plus licensees, those responsibilities have continued, but we've made each of them, we've named each of them Presidents of their respective divisions here today. And just want to congratulate them and congratulate you because it's great to have them assume additional responsibilities just for the totality of what they are responsible for our. Congratulations guys.

Our next question comes from John Lewis from Osmium Partners. Please go ahead.

Hey guys. Good afternoon. Nice work on the growth in All Access Pass subscribers that was quite a feat. Just a couple quick ones I guess first off you said you would increase your investment in content I guess just when you look at customer feedback the increasing spend on content do you have any gut feel of what incremental content will do in terms of the customer satisfaction for the subscription?

Yeah here is the way we think about it. I think on one end of the spectrum not very much. We're just adding one more course where we already have 30 in the category not very much, but category one where we are not deep in content for specific job to be done. So, say something for senior leaders where we've got some great content but we're not really deep in it. Making additional content that really allows us to penetrate a market like that that we're not deep in today would have -- would have a bigger impact than something else. There are certain things other categories like tool sets, that they would like to have that go with something like for example in sales performance, some fantastic tool sets, people only have to do that. And so, for us though our main idea is in acquisitions of companies although we've done through this you’re for many of these it's a perfect match to just license content because they love, they're somebody who doesn't have their own distribution. They don't have a sales force to go do this or implementation specialist and so for us, we think some increased frequency of usage is one thing that will help make it sticky. We think it's already stick but Jhana has been a great addition not just because it's buy side learning because it will be buy side is not great. What is great about it, we've got this fantastic team at Jhana who does -- has done this great work and build this massive research library of content around what helps management to be successful. They continue to crank up new content. Many of them are here at helping work on and so that kind of thing we're putting relevant content and new platform for us John with all the content they have. that capability was another reason we acquired Jhana because we now can take all of our content. We can molecular rise it so to speak blogger fire whatever and we can bring it down to where whatever the problem is whether it's sales or it's education or its senior leaders or whatever, we can have a version of Jhana that to give them the bite-size access to content and of course tis all of our film libraries everything work historically, Jhana may have referred you to other articles only. They can now refer you also when you click on it and you can get our film library to get additional learning on it. You get a module. You can sign up for a course and so things that give us either a new segment that we're not in today greater frequency of usage or a depth of the tools that help for implementation or the kinds of things we're thinking about and the discussions we're having.

Got it. That's super helpful. I guess another thing is we spent a lot of time looking at annual recurring revenue business as a trade and public equity and we found I think 43, 44 and companies that are measured with contractually obligated revenue of one year or longer and public equity today traded about 8.7 times sales with a median growth rate of about 37%. I think you guys have and I think it makes sense, it's usually high margin type revenue. I think you guys have built an unbelievable business going from $35 million in SaaS revenues you have on your Slide 37 and potentially having looks like $150 plus million for 2018 I don't know if it's or plus or minus a couple, but your business is valued at about something like two times ARR or a massive discount to the peer group. So, I guess my question is how do you think about I think you've talked a little bit about lifetime value of this sticky high growth business and I'm glad to see that you'll be buying back more stock, but how do you think about the growth and building of the sticky business in relation to shareholder value given the short term noise?

I think you framed it very well and we probably and we've learned a lot from you over the years and helping us think about it correctly. I think given the different volatile on growing the business and getting something that's stickier and stickier is the reason we've increased our budget from 4% to 6%, but that like as I mentioned when I said if they you happen to go to 8% for a year or two to allow us to build the business, that'll be our first priority is making investments. So, on one hand philosophically we're going to put whatever money we need to do it, luckily in a way for us there are a lot of the best content out there is not somebody who has their own distribution where you want to acquire them it's just a small -- another small training company or something. The bigger opportunity is actually somebody who is capital intensive as signing a license 10-year license to have the rights to their content and signing a bunch of those kinds of agreements that you can do a lot for not as much money on a given year and so we think we can be very aggressive at adding to the content in the areas that we're talking about. We have 20 plus conversations going right now which not mainly the four or five really good things, but we'll do all that, that we can because we have a map to answer your question, we have a map of where we think the highest impact is and those 20 -- there are a few that aren’t on the map they're off of that. And we're talking to but most of them are focused on specific capability or content area or customer where we think not only be great to be there but we think we can leverage the worldwide strength of Franklin Covey or our other content to leverage it. So, for us whatever we pay it’s a multiple of that that we get back. With all that said, if we have extra cash we’ll buyback stuff.

I appreciate that. And I guess one final one, what is 2018 look like for CP growth and how are your client partners doing in terms of - just any kind of color on ability to sell All Access passing the ramp rates and…

We know the numbers but I'd love to have Paul in.

Okay. Sounds good.

So, this is Paul, we intent - I had been talk about for years and you saw on the slide there has been steady client partner growth now for many, many years. We attend to hire pretty aggressively again this year and on our side be net 20 or so and then another.

This is Sean and on the education side we are probably higher in the range of 10 to net 30.

As you may be recall last year we said that we were going to - we consolidated all of the offices and sales forces into these new market teams and including the adjacent part of this strategic markets group. As we felt this year the net 12 or 14 made sense just because these people who had demand with them were already picking up a bunch of new responsibility but we just spoke this week at our new sales class - 24 of those hire has just started. So, we have a good start toward it, we will lose some but for the next 30 commitments what we’ve talked about and we have plans.

Just one last quick one if I could. I saw China's with $11 million and they just took that over. I know that’s a tough market to sell into but where do you see that going I mean is that obviously a huge market but what is your chance of being able to meaningfully grow that into a large business?

This is Paul. So, I was just actually there over two weeks ago, it's been a week with the team there. We have a - Sean actually really kind of built this one narrow part of the licensee network but we have a fantastic team in China really, really great leader over there. It was great to be with the team, they will grow meaningfully in fiscal '18 and that's an area the world where we think we can really do something pretty meaningful and special which was on the driving reasons to take it back over direct and to bring that over. So, we would like to focus and we intend to focus there and expect good things in the quarters near to come.

We are excited, they haven’t had the benefit nor as Japan of the All Access path so they’re still playing the game, we were playing at the company for the last many, many, many 30 years and so later this year they will start to enjoy the benefit of All Access path and what’s that doing for the rest of our business as well and we are excited for that and they are excited for that too.

Thank you, guys.

Our next question comes from Kevin Liu from B. Riley & Company. Please go ahead.

Just quick question on the education practice, appreciate kind of all the detail you has given us subscriptions versus kind of the add-on sales there. But if we look at the growth rate over the course of '17 it seemed a little bit slower within the fourth quarter obviously a bigger comp there but just kind of curious as to how that compared with Covey internal expectations and whether the business is now at kind of a mature enough point where he would expect growth to be a little bit more muted than what we've become accustomed too in the past.

This is Sean. So, education I mean if you go back look at the last six years before this fiscal year '17 we were growing at around 25% to 30% compound annual growth rate right. This last year slowed down about 15% on a gross basis, I think given that you've got bigger numbers, we know it's probably more going to be in that range, I think the growth won't continue at the same rate given the size of the business but we expect solid good growth double-digit growth for the foreseeable feature. Internationally as well we have a lot of - we have now 39 partners, licensee partners that's growing really well and we expect a lot of growth there. Our higher education group which is part of the education division, which is really small right now, which is only about $2 million in sales, we expect it will grow a lot faster. So, we looking at the next five years, we expect good solid growth and our penetration level right now we have 2,500 Leader in Me schools out of 130,000 in North America, 130,000 total K-12 schools. Their penetration level is really low. So, you like we can continue to increase our percent of penetration and there's a lot of continued growth. I did say one more thing to, we're starting to penetrate districts at a much bigger level. Right now, on average we have like two school per district. Most districts have 15 to 40 schools and so that's a big opportunity for us as well.

And Kevin just maybe one other thing that came out of our detailed business review here a few weeks ago, is I think the main reason for slowing a little bit was just a mix shift to where they signed -- there was a shift toward more subscription revenue in the fourth quarter, which of course for that time didn't affect fourth quarter very much. Their biggest quarter away from just the normal more just services business. More of these customers bought multiyear contract or multi-month and multiservice contract, coaching and such and so almost the entire difference in growth really can be attributed to the shift in mix that didn't help the year but will help this year.

No, I appreciate the color and then just a question on the All Access Pass economics, I guess when you guys first started down this path, you have been pretty hopeful that you could get an 80%-dollar retention rate. It seems like you've been able to exceed that and you're not talking any more in the range of 90%. What you feel has driven retention that high? Do you think it's sustainable over a long period of time and then related to that how is that caused you to rethink how aggressive you should be on the customer acquisition front?

I think first of all from a philosophical perspective I don't know somebody asked it, philosophically losing one customer is really a crime. Because we know they need it and we know the value proposition -- we know there's been something on it. Our basic thought first of all is that we should not lose a customer and when we do, we know the reason for every one of them and about 80% of those that we lose, we lose, we have lost and we lose it is because the person in the position who bought it has moved on either in the company or outside the company and we didn't do a good job of building a network of users inside that. And so, for us I think the reason why we've had more than 90% revenue retention today has been a combination of three things. One intense focus on we have this whole implementation specialist team that overseas. We shifted Colene’s responsibly from Head of Operations to Head of all Passholder Services midyear here and so that was a great team of people she has are focused and the whole company and honestly this is there is meeting in every week for beautiful four hours. We do every single we have heat index on anybody who is not coming in and try to understand the reasons. So that's one reason attention to us. Second, I think just the value proposition of the pass itself is good, but I think the key for us in the implementation specialist which is why we made the investment in them, is that you've got somebody who is an organizational design specialist who can sit down with you. Even in large companies most of these people think, I do not want to be my own general contractor and having somebody who they don't have to pay extra for who is there to help them, all of a sudden, they say, well hey what else you're trying to do and that person finds out they're spending money with 15 other vendors. So, we have a number of small companies who have dropped all of their vendors just we like there is path that's it. All other people development stuff that involves content is us. Middle sized companies have dramatically reduced many of them dramatically reduces and the larger companies who have their big staff etcetera still say oh my gosh this is fantastic resource to be able to integrate that in. So, I think the usability of the product, the focus from this team and the implementation specialist support where you really have somebody who is a partner but not just a salesperson as a partner who our sales people are fantastic, but somebody who really can speak the language of the people trying to implement the content or I don't know Mr. Covey if you would add anything to that.

No, I think that's it Bob. I think the investment and the implementation specialist and them supporting the passes the way they are.

All right. Thanks for taking the question.

Did that answer or at least partially?

He did drop off. Our next question comes from Samir Patel from Askeladden Asset Management. Please go ahead.

Hey guys.

Hey Samir. How are you?

I am doing pretty well. So, first one is a softball for Steve, I know that you don't want to give specific guidance for the change in unbilled deferred revenue for 2018, but considering that you kind of just signing these multi-year contracts, can we at least seem that it would be equal to or greater than $16.5 million from this year?

Well I hesitate to say that for sure. Even though, I think we're really excited about these multiyear agreements and think that that's going to grow. So, the only hesitation is sometimes we have what would be like an early adoption phenomenon like in the first quarter where we get a above all that might not be representative of the coming year. So that's my only hesitation. I don't have any hesitance in saying that I think that our unbilled deferred revenue over time is going to grow at a rate similar to our deferred revenue and our reported revenue just like other SaaS businesses. So, there is an hesitancy in saying it's going to grow. It's just not knowing for sure how the huge amount that we had are a really meaningful amount in the fourth quarter is going to play out compared to this year because we just did a lot in the fourth quarter.

Sure. Okay. That makes sense. Can you talk about a little bit just starting from the topline perspective of the multiyear arrangements, as you're going into clients right now for new sales renewals, I know you touched on this a little bit earlier but what level of them are gain multiyear arrangements at those different life stages like the initial sales and the one-year renewal. And when they do review for multiple years what's the average term? Is it two years three years? Is it four years?

Yeah this is Paul. I'll take that one, I would say that those that are as I said before typically we're finding that more of them are interested in multiyear when they come up on the renewal period. They’ve had experience with the past. We're just in the early days of talking to clients that are buying the path to their very first time about whether they would want to do multiyear. And certainly, some do when they one there when they what we sketched out with them as a multiyear set of impact journeys we call them, but I would say approaching somewhere in that 20% range of those who are renewing, who are interested in doing so for more than one year. Right now, typically they're doing two years. We're seeing some that are years things on the going longer than that but usually it's renewing for two years instead of one.

Okay. Cool and as far as the economics of this Steve what I am trying to tease out here is obviously day one, you signed this contract and as far as I understand it, the salesperson gets an additional incentive for signing that contract beyond what they normally would have gotten for signing a one-year contract. But then when the next year comes up, obviously it's much less work to get that revenue back in the door because it's already contracted so there is some economic savings where you are more profitable from a cash flow standpoint to have that revenue from last year just rolling through the door again with basically no incremental efforts. Is there any way you can quantify or dimensionalize the relative size of the initial incentive versus kind of the additional economics on the backend, do you understand what I am asking for?

The magnitude of the upfront bonus.

So, we pay extra bonus of 3%. So, I mean for us the economic trade is an easy one because we paid 3% for retaining 90% of the contracts instead of 100% and we can now guarantee that contract we're getting 100% on and we don't have marketing cost. We can spend the time with that client trying to add-on services and sales rather than trying to convince them that hey, to go on the next journey. So, for us we think the economic trade is easy and would make a bigger trade if we needed to, to make sure it happens, but we don't think -- we've now surveyed the industry pretty well with other people and again, we're different, but something in the 20% to 30% of renewals going for multiyear seems to be a good starting point for us. Over time it will grow just because it's a phenomena more on the renewal than it is on the initial sale and so as your base gets bigger, that should grow. As you're suggesting the multiyear audit grow just because your base of owners continues to grow and they're more, the propensity to expand there. The incentive I think economically is an easy one. There was an easy decision for us in the fourth quarter to decide that hey if we can get an extra $6 million or $7 million of contract value versus just crediting it and having a shorter contract, forget what it does to short-term deferred revenue that's been build. It's going to come in and more that's going to come in. So, it was an easy decision for us and it will continue to be easy that we're going to try to drive maximum contract value but I think we need a play and we're going to play with incentives and other things if there's a way to trigger more of it, we have plenty of room I think to do it.

Sure. And Steve on Slide 21, you talked about All Access targeted EBITDA margin 30% to 40%, obviously for the next year or two here still going through the transition period where the financial look messy, but I am curious with that number, A, is that including corporate overhead or not included corporate overhead? And then B. do you have a timeline in terms of how long do you think it's going to take to enter the transition and when you think like Adobe when you're going to get the other side of the curb and start reporting profits that's you're going to recognize.

That's just -- Steve is looking to me just because that was my slide.

I was wondering if I made a mistake.

That's the contribution margin really is what it's meant to be. This is the whole business, it's just the contribution when you substract out the marketing and sales cost implementation specialists etcetera, they're directly associated with the level.

Okay. That's all I got. Thank you.

And as we have no further questions, I would like to turn it back over to Bob for closing remarks.

All right. Thanks to everyone very much for your questions and first to sticking on the phone and we look forward to talk to anybody that has individual questions. We'll be delighted to talk to in the coming days. So, thanks very much. We look forward to talking to you soon.

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