Franklin Covey Co. (FC) Q2 2018 Earnings Report, Transcript and Summary

Welcome to the Q2 2018 Franklin Covey Earnings Conference Call. My name is Adrian, 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. Derek Hatch you may begin.

Thanks, Adrienne. On behalf of Franklin Covey, I would like to welcome everyone to our earnings release call to discuss the second quarter fiscal 2018 and its financial results. Before we begin today's festivities, I would 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 grow - 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 product, changes in the training and spending policies of our clients and other factors identified and discussed in our most recent annual report on Form 10-K and other periodic reports filed with the Securities and Exchange Commission. Many of these conditions are beyond our control or influence, any one of which may cause future results to differ materially from the 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. In addition, we will be referencing certain non-GAAP financial measure during this presentation. Please refer to the appropriate reconciliations of these measures as found in the appendix to this presentation. With that, I would like to turn the time over to Mr. Robert Whitman our Chairman and Chief Executive Officer. Bob?

Thanks, Derek, and hello to everyone. We're delighted to have the chance to talk with you today. Let me just start up by saying that two years ago, as you know we determined that we could better serve our clients’ needs, substantially expand the breadth and depth of their impact in their organizations, if we were to give them access to our full collection of world-class content and offerings through a subscription-based model. Since then, as you know, All Access Pass has transformed the way in which our clients engage with us, the pervasiveness of their reach and impact in their own organizations, and the flexibility and agility with which they can develop leaders and teams in order to improve their organization's performance and results. So, it’s really fundamentally changed both our interactions with their customers, and the way in which -- their opportunity for impacting their organizations. It’s also increased the lifetime value of our customers, because these clients -- our clients’ initial purchase with the All Access Pass covers significantly larger population than it used to. Second, the annually recurring revenue retention among pass holders is greater than 90%. So that revenue sticks with us. Many of the pass holders end up increasing both the size of the population covered by their pass and extending and end up extending their passes’ duration, which gives us that income for a longer period of time with a bigger population. And fourth, the pass holders were also purchasing significant amount of add-on services to help them accelerate the results within their organization. And we feel like we’re uniquely able to provide that combination of best-in-class content together with services that help people really engage on issues where they really want to have the need to have impact. So, we are really encouraged and excited by our momentum. There are four key takeaways, which I hope you'll glean from our remarks today. As you can see in Slide 3, the takeaways are, first, that our stronger than expected second quarter and year-to-date results we believe established a solid foundation for the significant increases in revenue, adjusted EBITDA and cash flow we expect for the full year fiscal '18 and beyond. Second, the magnitude and significant growth of our balances of deferred revenue are providing increasing visibility into and the strength and foundation for accelerated future growth as that balance gets bigger and bigger. Third, the momentum of our subscription business is accelerating, really driven by the significant value our customers are receiving and their retention of their revenue and add-on services and past expansion. And finally, the inflection point that you're seeing in our results is really the -- is being driven by the interplay of four key factors which I'd like to just describe a little bit to you today. So first, let's go through the highlights of the second quarter. Slide 4 provides some quick highlights on the key results for the second quarter and year-to-date. As shown, our revenue grew 10.3% in the second quarter and 15.2% year-to-date through the second quarter. Importantly, all of the company's major operating units achieved revenue growth in the second quarter. Second, total subscription and subscription-related revenue grew 55% year-over-year in the second quarter and 57% year-to-date. Subscription and related revenue in the Enterprise division grew even more rapidly at 81% in the second quarter and 104% year-to-date, All Access Pass. Deferred revenue built on the balance sheet at the end of the second quarter was $32.1 million, a year-over-year increase of $16 million or 99%, effectively a doubling of the deferred revenue that’s unbilled. We also had a significant increase in deferred revenue unbilled. And so, the combination of those two at the end of the second quarter was $47.2 million, a year-over-year increase of $29 million, or in percentage-wise, it's a big percent at 165% compared to the $17.8 million of total deferred revenue balances billed and unbilled we had at the end of last year’s second quarter. Really encouraging is the fact that our gross margin percentage increased significantly in the quarter to 70.3%. It's 392-basis-point year-over-year increase reflecting the high profitability of the subscription revenue, and of the All Access Pass, and the membership in education, our leader in the membership offering and education. Adjusted EBITDA turned out to be approximately $700,000 better than guidance even after making even more significant growth investments. We’ll talk about that. The net cash provided by operating activities increased $2.6 million year-to-date even after making these significant investments. In addition to these factors on this shown on Slide 4, our number of paid subscribers, subscription - subscribers grew 36% year-over-year in the second quarter, and 46% in the enterprise division. I’d now like to provide a paragraph or two on each of these key metrics. If you look at slide 5, you can see revenue grew 10.3% as we said in the second quarter to $46.5 million, growth of $4.3 million compared to the $42 million of revenue reported in the second quarter of fiscal 2017. Year-to-date, revenue grew 15.2% to $94.5 million, growth of $12.5 million compared to $82 million we generated year-to-date for the second quarter of fiscal 2017. As you can see in the middle, our subscription, our total subscriptions and subscription related revenue across both the Enterprise and Education divisions grew an even more significant 55% in the second quarter and 57% year-to-date. And the subscription related revenue - our Enterprise division grew at 81% in the second quarter and 104% year-to-date driven by All Access Pass and Pass related sales. This significant growth in our subscription and related revenue was partially offset by declines in our now much smaller legacy facilities and on-site delivery channels, and so the decline is now becoming substantially less or the drag from that from declines is now much less. In Enterprise division, revenue grew $3.2 million or 10% in the second quarter to $36.3 million year-to-date. Through the second quarter, Enterprise revenue grew $10.9 million or 17.4% to $73.8 million. As I mentioned, importantly, all of the Enterprise divisions’ major operating units achieved revenue growth from the second quarter, including our offices in China, Japan, the UK and Australia along with all of the direct offices in the U.S. With the launch of our new All Access Pass Global Portal, which was just launched here last month in now 16 languages, our international licensee network has just begun to sell the All Access Pass. And their excitement level about All Access Pass is extraordinarily high, and they started to make sales of it and we expect substantial New Pass sales between now and the end of the year from them. In the Education division, revenue grew $1.2 million in the quarter or 15% to $9 million year-to-date. So, the second quarter revenue grew $1.6 million or 10% to $18.2 million. The education division added several new licensee partners to their network during the second quarter including three new partners in China. This brings the total number of licensee partners in the education division alone to 51. We believe the education division will be able to build a licensee network comparable in size to that, to at least what we currently have in our enterprise division's licensee network, which generates approximately $75 million gross revenues today resulting in royalties to Franklin Covey of approximately $10 million. And we're getting going in a really great start in the education licensee business and ultimately, we believe it could have that same potential. Going to deferred revenue growth in slide 6, our deferred revenue balance has increased $47.2 million in the second quarter. That’s billed and unbilled. Growth of $29 million, up 165% year-over-year from only $17.8 million in the last year second quarter. You can see the deferred revenue billed on the balance sheet increased to $32 million which is basically a doubling from last year’s second quarter. And the unbilled deferred revenue which represents businesses contracted, but unbilled and off the balance sheet end of the quarter at $15.1 million, which is up sevenfold compared to our $1.7 million unbilled we had at the end of last year second quarter. Just reporting briefly on just the EBITDA and gross margin. As we noted, it was higher than our adjusted EBITDA was higher than our guidance in the second quarter. You can see in slide 7 that we were pleased that adjusted EBITDA was approximately $700,000 higher than our guidance. We do expect to be giving guidance in our second quarter reported EBITDA would be, as much as a $1 million lower than that reported in the last year’s second quarter, reflecting a combination of the significant investments we were making, and the of the significant investments we were making and the fact that we would have a lot of what we're selling would be deferred. But we were pleased that our actual adjusted EBITDA was only $300,000 lower than last year's second quarter despite those investments reflecting two key benefits of our new business model. One, the high recurring and more predictable revenue, the nature of it resulting from this high level of client satisfaction with their offerings and this is indicated by our very high revenue retention rate. The other point is our higher and increasing gross margins. Our reported revenue was for $4 million higher year-over-year at 10.3% increased to $46.5 million. As is shown in the slide 7, our gross margin percent increase as we noted before 392 basis points in the second quarter to 70.4%. So, this combined strong revenue growth with the higher gross margin generally results in gross margin dollars increasing $4.7 million or 17% to $32.7 million compared to $28 million in the last year’s second quarter. And interestingly, this $4.7 million increase in gross margin dollars almost entirely covered our $35 million in planned increased growth investments which we’ll itemize here in a minute. But despite the really significant increases in investment for content, implementation, specialties et cetera, this increase in gross margin dollars almost covered it. Year-to-date for the second quarter, our gross margin percent increased 430 basis points to 69.4% from 65.1% year-to-date last year. Our gross margin dollars increased by $12.3 million year-to-date which is up 23% to $65.6 million. And our adjusted EBITDA increased $3.1 million year-over-year through the second quarter. For us, this is an important concept because you’ll hear in a few minutes, we expect our - the expense side of our business to have - to grow at a much lower rate going forward than it did this last year when we had all these big investments we make. And so, this increasing gross margin against relatively flat cost structure we think will allow us to flow through a lot of what we - a lot of increased revenue in the coming years. If you just - going down through in Enterprise, just talking about slide 24 and you can go to it in appendix, and there you can just see it broken out by division. In Enterprise division second quarter revenue was $36.3 million growth of $3.2 million or 10% compared to revenue of $33 million in last year's second quarter. Enterprise division gross margin increased a significant 510 basis points to 75% from 69.9% last year second quarter. And this combination of higher revenue and higher gross margin percentage increased the Enterprise division gross margin dollars by $4.1 million or 17.8%. This growth in gross margin dollars slightly more than offset the $4 million of additional growth investments made specifically in the Enterprise division resulting in a small growth of $100,000 in actual EBITDA after these investments for the quarter. Just to give you an idea of what these investments are, the All Access Pass investment including many other things, investment for new All Access Pass content including, including three significant new courses which we added to the All Access Pass including Clayton Christensen, Christensen new innovation course entitled Find Out Why; a new frontline unit level leader course entitled the Six Critical Practices for Leading A Team; and a new mid-level manager course entitled Four Essential Roles of Leadership, Leadership. We also in this year we have recourse, brought on, we now have with the Jhana team that came on, we have the investment there that reflects as an increased investment each quarter. And this is a very talented team which generates additional make clearing content an ongoing basis. We also made investments in the new global All Access Pass portal, which is now done, as I mentioned and then launched into that, now we’ll just be amortizing at the same level. And we also had the cost of localizing our All Access Pass content in 16 languages worldwide. And with this new portal we now can offer it for sale which is great. Year-to-date through the second quarter, the enterprise divisions revenue, as you can see there grew $10.9 million or 17.4% to $73.8 million compared to $62.9 million last year. The gross margin increased year-to-date 570 basis points to 73.6% from 67.9% last year. And this combination really driven almost tripling of the enterprise divisions EBITDA year-to-date to $7.4 million through the second quarter compared to $2.6 million last year. Importantly, this $4.8 million increase year-to-date in divisional EBITDA for enterprise was after covering more than $6.8 million of planned increased growth investments, so year-over-year. The Education's division revenue of $9 million in the second quarter reflected year-over-year growth to 14.85 or $1.2 million. The education division adjusted EBITDA in the second quarter was negative $0.9 million just about a $1 million negative slightly less than last year second quarter EBITDA point, negative $0.6 million in the quarter. As you know this reflects both the fact that the staffing and marketing investments we make in the education division during the first and second quarters, in order to be in position to generate contracts for hundreds of new schools whose revenue isn't recognized until about the fourth quarter in which - the quarter in which Education division generates nearly one-half of its annual revenue and substantially all of its annual EBITDA is one major factor. And the second, as we mentioned last quarter is there is a change in the structural leader in the subscription offering where we are now including several on-site delivery days as part of the membership offerings, charging for these training days outside of the membership. This adds real value, we think to the schools. It also results still and - the revenue from those on-site days, they get recognized - the revenue gets recognized over 12 months and it used to get recognized in the first two quarters. And of course, that'll flip over them in the last two quarters. That will benefit us a little bit in the third and fourth quarters. Net cash provided by operating activities, shown in slide 8, you can see was $9.4 million year-to-date, an increase of $2.6 million compared to last year. So that kind of covers hopefully just at least at a high level the results for the quarter. I wanted to also go - as you can see in slide 9, the second bullet - the second outline point we want to talk about is the significant growth in our deferred revenue balances provides us with meaningfully increased visibility. As you can see in slide 9, our total balance of deferred revenue build and unbilled as we’ve noted before increased to $47.2 million in the second quarter. That's really a substantial growth of $29.4 million or 65% compared to the $17.8 million in total deferred revenue balances billed and unbilled we had at the end of last year. And you can see that breaks out between billed and unbilled revenue. And we expect the magnitude of our deferred revenue balances, billed and unbilled, to continue to increase in each of the coming quarters providing us and you with greater and greater visibility into and predictability of our future revenue. The third general point was to just touch on it that our subscription momentum is accelerating and that's being driven by the value our customers are receiving as we've talked about. Our very high annual recurring revenue retention and our customer significant add-on purchase of impact driving services are indicative. We believe that the value they are seeing that we are adding to their businesses. For example, just to give you a couple of examples, client examples, one client initially purchased an All Access Pass for approximately 150 leaders in order to pilot the use of the All Access Pass generally. And specifically, to implement our speed of trust content with a group of leaders within the organization. That pilot went very well. And upon renewal, the company expanded - decided to expand the All Access Pass to cover not only the 150 leaders they already had, but to go to 1,000 leaders and to help ensure a strong implementation impact after having experienced that they also purchased more than 50 days of onsite delivery services to go with us. This is a client who had really tested it, tried it, decided it was for them and went long. Another client initially when we were looking at the other day, initially purchased an All Access Pass covering approximately 200 leaders. Again, with the success of their initial initiative, at the end of their first year as a pass holder, they expanded their pass from 200 leaders to 1,500 leaders and purchased almost 200 days of add-on services. Recently, we were talking - the other day when we talked about, they renewed their pass for these same 1,500 leaders but another division said the company who knew of the results they were getting purchased its own pass for an additional 1,500 leaders. So, this is the kind of thing. Our objective is to develop deep, which means that all levels throughout the organization, pervasive through all divisions ongoing hypertension relationships with our clients. Sometimes this pervasiveness starts at the top with a divisional leader or higher. So, that's a great place to start. But often like in these two examples, initiative starts out in the field, because of its impact moves up through the organization and gets bigger and bigger as it goes. We have literally hundreds and hundreds of customers for whom, like these clients, All Access Pass is now viewed as an indispensable part of how they develop leaders and how they drive business outcomes. I can tell you for every team, nothing is as exciting for us. Nothing is more exciting than to have pervasive client successes. I mean, that gets talked about throughout the organization. You just know that that's what we're about as an organization and it's very exciting. It's this kind of impact that's driving the significance in an accelerated momentum because when we retain all, substantially - a substantial portion of all the revenue in the past, and then add on services that take it to more than 100% of what the initial pass was, we're already in growth land even without the sale of new passes except for the declines in the legacy business which, of course, is getting less and less. So, as a consequence, the subscription business is really driving the overall growth of the company. Couple of points. First, our subscription-related growth continues to be very strong in the second quarter year-to-date and for latest 12 months. So, you can see on slide 10, for the latest 12 months, our subscription and related revenue, plus our change in deferred revenue, billed and unbilled increased to $112 million, growth of $37 million or 50%, compared to the $75 million in total subscription revenue and change in deferred for we have for the same period last year. So, moving from $75 million to $112 million, and that's really at this point without anybody - any of our offices in China or in Japan having been able to sell this or any of our licensee partners. So, we feel like we're now in a position where they can sell it or this can accelerate further. Second, we also achieved strong year-over-year growth in our number of paying subscribers. As you can see in slide 11, our total number of paying subscribers across both our Enterprise and Education divisions increased over 0.5 million in the second quarter. That's an increase of 140,000 or 39% from the approximately 370,000 paying subscribers that we had at the end of last year second quarter. You can see how that breaks out between the Enterprise and Education divisions. Slide 12, you can see the breakout in Enterprise that 360,000 of those paying members are in the Enterprise division and that balance grew by 50% from 240,000 last year. And in the Education division as you can see in slide 13, we had approximately 150,000 paying subscribers the end of this year second quarter that represents growth of approximately 20,000 subscribers or 15% compared to the 130,000 subscribers we had end of the second quarter of fiscal 2017. You should see on slide 14, we also as I've noted before achieved continued significant growth in add-on services. This has moved from only about 5% of past revenue in the first year in 2016 to about 26% of average revenue in 2017 to now a number that's close to 40% of average outstanding subscription revenue balances. And so, this is - what happened is we've mentioned those two examples, as clients get in they try it out they then find problems to which they can attach it. Some of those problems are meaningful and that’s important enough that they want us to help them implement them, and we add those services on. Finally, in this section, we're also pleased that our subscription businesses key indicators continue to place among what are considered best-in-class subscription companies. An independent study of subscription companies to which I referred last quarter included data on all 56 of the publicly traded SaaS companies identified those companies the study considered best-in-class. As you can see in slide 15, this was at least - this wasn't all of them. This was just a sampling of those they consider best in class. This designation was based on these companies’ achievement of all three of the factors you can see on slide 16 which is certain growth in subscription revenue, which is at least 20%, having gross margin that was substantial on the Pass side of at least 70% independent of services. And having growth efficiency which is the sum of their subscription-related revenue growth plus their free cash flow margin at least 30%. And so, if you had - to get the growth - for instance, if you had 25% growth and 5% cash flow margin, you'd get there. According to study these best-in-class public subscription-based countries are valued as the total enterprise value-to-revenue move between 4.2 and 10 times revenue. And we're encouraged that as indicated in slide 16, our subscription business continues to also achieve all three of these best-in-class SaaS standards. And the combination of our Pass sort of making variably initial purchases, expanding their pass over populations and extending the term of their passes, having more than 90% annual revenue retention, and then having them purchase add-on services is definitely increasing the lifetime value and customers driving the momentum of the business. Finally, our inflection point is being driven by the interplay of four key factors which I’d just like to note. As you can see on slide 17, with our transition to subscription accounting, as we know, the portion of the given contract’s value that’s recognized upfront has declined while the amount that’s deferred as increased. And we’ve also had an impact in our legacy business. But it’s really also giving, as we talked about, this great visibility with deferred revenue now being at $47.2 million. Slide 18 identifies four factors that are underpinning the inflection point that you’re starting to see in our reported results, and which has already happened in the cash flow in other words. These four factors showed on slide 18 are as follows. Notice taking on figure A, B, C and D is just - so what each is saying or at least is indicating. As shown on figure A in slide 18, during the initial transition to All Access Pass since 2017, this shows you - the green bar is our legacy - revenue from our legacy onsite and facilitated businesses versus new subscription revenue. And you can see they roughly equaled the growth in the subscription business. Even though these weren’t all the same customers. We had some of all these people converted over, but a lot of our subscription revenue came from new customers. But nevertheless, interrupted our talking about it, having over salespeople talk about it, just interrupted clients. They didn’t know exactly if they hadn’t yet bought an All Access Pass. They might, they were waiting to do anything until they could do it. And so really the growth in one was offset by the other. This year in 2018, you can see there’s a positive gap between the growth versus subscription related business and the decline in our increasingly smaller legacy business. And so, for us, this green bar is - even if the percentage decline continued unabated for the next few years. We have the same percentage decline in the legacy business year-over-year. Because it's on such a smaller base, it'll become fewer and fewer dollars will be represented by that. And the gap between the growth in our subscription business which has been obviously going at high rates as we've talked about here versus that is the first factor is that positive gap between the growth of our subscription business and the decline of legacy. So, that's an important thing that is really happening, we expect to continue to happen. The second factor shown in Figure B of that same is the positive relationship between the growth in revenue and the increase in central and support cards. They noted earlier in fiscal 2019 and beyond our incremental investments in new content and portals will continue, but we roll these small increments compared to fiscal 2018’s elevated levels. In addition, our central and central support cost we expect to remain essentially flat. As a result - as indicated, that Figure B in fiscal 2019 and beyond is significantly higher portion of increases in revenue and gross margin dollars are expected to flow through the increases in adjusted EBITDA and cash flow. So, that's the second thing driving this inflection. The third factor shown in Figure C is the relationship between the growth and revenue and the growth in adjusted EBITDA. A powerful combination of accelerated revenue growth high and increasing gross margins highly variable commission-based selling class and a relatively flat central and content cost structure mean that is shown in Figure C, a high percentage of the significant increases revenue we expect to achieve in fiscal 2018, 2019, 2020 and beyond are expected to flow through to accelerated increases in adjusted EBITDA. Then finally, as it relates to cash flow, the relationship between the growth in adjusted EBITDA and the growth in pretax cash flow as you can see in figure D in slide 18, in fiscal 2019 and beyond, cash flow is expected to grow even more rapidly than reported revenue, in fact significantly more rapidly. This is due to the fact that the accounting for subscription sales because it experienced the recognition of the amount of subscription revenue over the term of the subscription contract even though almost all of our subscription revenue is billed upfront at the time it’s contracted. It means that the accounting recognition of the deferred revenue therefore significantly lags the collection of cash. And as a result, cash flow growth is expecting to grow even more rapidly than reported revenue or even adjusted EBITDA. So, the interplay of these four factors is expected to drive significantly increased growth in enterprise value. And we believe that as these factors become increasingly visible in the coming quarters and it’s better - and are better understood that the gap between the net present value of our expected cash flows and our market value will continue to narrow. So, conclusions, going back there just to slide 19, just hitting on the points we've made. First, our stronger than expected second quarter and year-to-date results we believe established the foundation for significant increases in revenue, adjusted EBITDA and cash flow growth that we expect in 2018 and beyond. Second, the significant growth in our deferred revenue balances provides a meaningful increased visibility into the strength and foundation for our accelerated future growth that this can - the momentum is being driven by our subscription business which in turn is being driven by the lifetime value of our customers and the value they're getting from our offerings. And fourth, that this inflection point we've hit in our operating results is actually expected to accelerate because of the interplay among those four key metrics which each of which is also hitting an inflection point. So, at this point, I'd like to turn the time over to Steve Young to discuss our guidance. As I do, however, I just like to say that we truly are excited about the progress we're making with the company, in the marketplace, and with our customers. We continue to believe that we have a significant opportunity for growth as organizations, enterprises of all types, and all sizes around the globe seek to develop their leaders, improve the productivity of their frontline employees, advance their cultures, and improve the results. And we believe that we are uniquely poised perhaps to address those involved - involving these. So, thanks very much. Steve?

Thanks. Thank you, Bob. Excited to talk a little bit about our guidance. As you can all remember, our guidance for this year is that we expect net sales to increase from $185 million to approximately $212 million, a 14% increase. We expect deferred revenue on our balance sheet to increase by more than $15 million, at least a 36% increase. And we expect adjusted EBITDA for the year to increase from $7.7 million to a range of $10 million to $15 million. Our year-to-date results support the annual guidance and we reaffirm guidance. Because our year-to-date adjusted EBITDA was $3.1 million higher than last year. That means obviously that if our Q3 and Q4 results are just equal to last year, we would still be slightly within our annual adjusted EBITDA guidance. So, we're reaffirming that guidance. But as I already talked about how we're pleased that our Q2 result was better than our guidance, we're happy about that. So, I’ll just jump to Q3 We expect that our Q3 result will be somewhat higher than last year, up to approximately $500,000 higher. That’s the adjusted EBITDA level. We expect sales and gross margin to be higher than last year, offset by the increased cost related to growth investments that we've talked about previously and that Bob just talked about also. So, the information that Bob discussed is obviously critical to understanding our guidance, particularly, we still believe that we are now at the inflection point and that future results will benefit from increased sales, continued strong gross margin and high flow through of increased earnings to increased cash. So, I know I don't need to say it but I will anyway. You need remember that we're - that we are still in a significant accounting and business transition and could report results that are different than what we just talked about. Particularly, I just want to impress again of the many factors that could cause a difference. That would include a mix shift in sales between subscription and non-subscription sales which could result in lower reported net sales. Another way of saying that is if our subscription business accelerates more than we think, we could have lower than expected net sales and yet still be happy. So, thank you, Bob. That’s our guidance.

Thank you, Steve. Why don’t we open it to questions? Our operator will probably tell us how to do that?

[Operator Instruction] And the first question comes from Tim McHugh from William Blair. Please go ahead.

Hi, thanks. I know there is new slide towards the back of the Investor deck. I think 28 and it breakout kind of the direct revenue in the Enterprise division from All Access Pass. I guess, it gets essentially flat sequentially, and I guess they are technically down by a small amount. But given the growth in the subscription business, I want to think there's a seasonality and where I would have thought that that would be a building number. So why -- I guess, why wasn't it?

Tim you said that you're seeing the other direct offices that grew -- there total growth was -- you are looking at 87 of revenue from those offices versus 73 last year?

You know what I'm looking at as the slide that in Q1 there is $8.6 million of revenue from All Access Pass and then Q2, there's $8.4 million.

Okay, so you've done the other direct officers. So, this is reconciling to the actual reported revenue. So, this isn't tracking and the contracted revenue which was substantially higher in the second quarter. We can factor, let me give you that, I think scale maybe to break out we can answer this specific, so we had higher. We had substantially higher all access pass contracted sales in the second quarter than the first. And the order, it appose remote here, but in the order of $13.2 million versus like $7.8 million in the U.S. direct offices. So, it was just what you think that the amount of contracted revenue would go up sequentially and we expect it to continue to do so. It's just that because of almost all of that revenue is this contracted as deferred, very little of it showed up in the quarter. We can give you the exact details, Steve?

Yeah. We’re talking about reported revenue. I’ll just repeat what Bob said or the other one. Since we’re talking about reported revenue, and we have a lot of our deferred sales that occur in the fourth quarter of the prior-year, what that means is that large chunk of deferred revenue that goes on, on the balance sheet is going to come off evenly in the first and second quarter. So, a big piece of the amount of revenue recording is the reversal of that deferred, of the prior-year. Plus, a little bit that comes in from the sales of that quarter. So that’s the kind of thing that tends to smooth out on first and second quarter. The relationship with the balance sheet deferred to the P&L. If that's making sense, Tim.

Yeah, I mean I'll just -- I get what you're saying. Maybe I’ll look more....

But your main point is right. The like I said, the total contracts of All Access Pass sales was up a lot. From something like 7, 8, to 13 to or so, in those offices and that then of course puts more on the deferred. That’s why our deferred balance went up. It will start to benefit these future quarters. We’re happy to walk that through and give you a summary sheet afterwards if you’d like.

No, that’s fair. Let me ask as long as you’re talking kind of contract signed, the education business. I think it’s -- the second quarter where the contract signed number is down year-over-year. Can you talk through what’s happening there?

Yeah, Sean, would you like to address the specific, please?

Yeah, sure. Yeah, well, most of the year, we spend sort of the - the first half of the year, we spend working on trying to get new school to sign up. We don’t watch the numbers so carefully the first couple of quarters. I think we’re building for the third and fourth quarters. And so, we came in about where we expected for the second quarter. We typically have to hire a lot of marketing resources and sales resources early the first half of the year and deliver in the third and fourth quarters. And so, the reason our EBITDA is slightly down for the second quarter is because of the amount of investments we had to make so we can deliver on the third and fourth quarters.

Tim, just the contracted amount, so as you’re talking about. The actual contracts signed because so many of the schools do it in the third and fourth quarter, right, before they get here for delivery is about even with last year. What happened though is I made a note, it wasn’t probably very clear is that in the past, we would be receiving revenue recognized in the quarter in contract and recognize that the rate to these onsite delivery date and we would have that and that would be part of our kind of gross contracted amounts. And what happened is we decided that it adds more value to the customer to include some of those on-site days. And so, in the first quarter and the second quarter, there's more than $1 million of that revenue which historically would have been recognized in the quarter and would have shown up as - therefore, at least been even with last year in the second quarter. But because it's now included in a subscription it is being amortized equally throughout the course of the year. As a consequence, the first and second quarters reached down by about $1 million each because of that. And then the third and fourth quarters that will reverse and they'll be $1 million higher than really what we're contracting. So, really, we think the answer is education was flat, normally flat this time of year in terms of contracts just because of the nature of the contract is cycled. The pipeline is really strong but actual signed contracts is - in our review this week was just flat - is basically flat year-to-date.

Okay. Just to follow up. Bob, that comment you made though is true of revenue, right? I mean your - the contract signed metric you disclosed obviously adjust for deferred revenue movements.

Yeah. You're seeing the contract for them now but for the change in accounting on the on-site days would be basically flat with last year.

Okay.

Yeah. So, I believe that’s the answer.

All right. And then lastly, I mean you made a comment about basically the cash flow being - growing faster than EBITDA in the future and that being depressed I guess. I guess I understand that how is the shift accounting-wise makes the numbers noisy, but can you revisit that? I mean how is free cash flow, I guess, depressed by the change at the moment that's going out of the business model?

Yes, I said that. I misspoke. I was saying the cash flow will grow faster than reported because it’s - because that gets built before the revenue is recognized. So, if I said depressed on the wrong -- I modified the wrong part of the sentence because no cash flow should grow faster than reported revenue now, now that we trust the transition because we are building that contract revenue up front and it'll come in well ahead of when the revenue comes in.

Okay. All right. Thank you.

Thanks.

And our next question comes from Alex Paris from Barrington Research. Please go ahead.

Good afternoon. This is Chris Howe, sitting in for Alex.

Chris?

Hi. I had a question as it relates to the multiyear agreements. Were there any multiyear agreements this quarter from new customers as opposed to existing? And if you can just give an update or further insight on the progress of these multiyear engagements, how has it been going and what have been the pushbacks from new customers in the adoption?

Sure. Paul - Paul, would you like to address that?

You bet, yeah. Hi, Chris, thanks for your question. So, as we mentioned I think last quarter in our call, we really began focusing on multiyear contracts in last year's fourth quarter and really just in August of last year's fourth quarter. And we saw some nice growth in those obviously from virtually none to a fair number. That's continued in our second quarter. We didn't have as many in Q1. We had a number of them in the second quarter. And specific to your question, we're seeing them both from clients upon their renewal and we're also seeing some of those that are signing multiyear as new customers as well. I would say right now, we’re probably still 3:1 in terms of those renewing versus signing multi-year versus those who are new, but that number continues to grow. This is nearly native for our sales people. And I would say, it’s actually less a function of client not wanting to do it and more a function of just us learning how to do it and making sure that we present our contracts at multi-year, every time that we can. We’ve been reworking our proposals and our whole contracting system. So that becomes a default for us into the future. So, we’re actually pleased with the growth in the multi-year contracts. And like I say, they’re - we’re starting to see those happen even on the first year that a client ends up with us, but the majority are still coming upon renewal which I think, well would be the case. That you have a client whose, as Bob mentioned earlier in the two examples, where a client chooses to get started, they’re not quite sure yet how far that initiative will go, how many people it will cover. And I think a natural point to get would be upon renewal, but we of course wanted to get multi-year anytime we can.

That color is very helpful. And I have one last question for Steve. You had reaffirmed the deferred revenue increase of $15 million for fiscal 2018. Any guidance or insight into unbilled revenue, unbilled? And as far as fiscal year 2019, would you be able to provide any bird’s eye view of where you’re trending towards, whether it’s scenario one or two which was provided on the last call?

Well, first of all, looking at the unbilled. No, we haven’t - as Paul said, each quarter, the first and second quarter of this year, we had more unbilled than we had before. But as you remember we had a significant amount of unbilled revenue that we entered into Q4 of last year. So, I think it would be reasonable to say that we’re going to have unbilled deferred that Paul talked about in the third quarter and an increase amount in the fourth quarter but not prepared to say that the fourth quarter amount will be as much as it was last year. It might be but really it could be less in quarter that we really introduced the focus with more of our sales people and really look at the unbilled deferred. So, absent that fourth quarter of last year being so significant we expect our unbilled to continue to grow as we've talked about and be an important part of the business. And I hope that makes sense. And as far as 2019 - does that answer the unbilled?

Yes, it does. Thank you.

Okay. And as far as 2019 we really haven't given any guidance into 2019. I think it's obvious that we expect our revenue to grow. And we would expect our mix of revenue to continue to shift toward deferred, which means that our deferred on the balance sheet would expect to continue to grow but haven’t attached a numbers to that as guidance yet.

Thank you, Steve.

And the next question comes from Jeff Martin from ROTH Capital Partners. Please go ahead.

Thanks. Hi, Bob and Steve. How are you?

Hi, Jeff. How are you?

Very well, thanks. Bob, I want to get a better understanding of your - what components go into your revenue retention rate? Is it just All Access Pass or does that include other items such as the add-on services?

Yeah. The retention rate is only with regard to contracts which - really just the All Access Pass contracts themselves. And so, when we say more than 90% of the revenue from those contracts is retained then add-on services is on top of that. And that’s not contractual so we’re not measuring that.

Okay. And that remains above 90%, I think you said?

Yeah. So, the annual revenue retention is above 90% and then the add-on sales are in the zip code of 40% add on to that, so suddenly had a $100,000 purchase they would - of the past. We’ve retained over 90% over 90,000 and then add to that 90,000 about 40% in services to get 90% of what but it’s, yeah. The annual revenue retention is on just contracted revenue.

And then, can you give us a sense of how many of your clients pay over the last 5 or 10 years have transitioned to us in the past and what do you think full saturation is on a percent of basis of the client base?

Percentage of it moved to All Access Pass…

Yeah. So, I’ll answer in two different ways. One of them is in the initial year-and-a-half, Jeff, about 40% of the purchasers of All Access Pass were active customers in a different channel. But, because they bought so much more - because they increased their investment so much - when they bought the pass. Those higher percent of the - about 20% of the initial of the - about 20% of the initial All Access Pass revenue was replacement revenue, if that makes sense because they were spending half of the amount that they spent when they stepped up to the pass. And so, that was essentially is one way. In terms of the percentage of the customers, so that was a percentage of the Pass holders that were previous customers. I think you were asking - I think you were asking what percentage of our customers have come over? Of the 4,300 or so active accounts, which include small accounts, too, we've had around 400 of those come across, because we still have - the others are still either doing this legacy business or in the pipeline for a potential conversion to All Access Pass and about 70% of those are in our pipeline, but it doesn’t mean they're moving through it as fast as we’d like, but that’s kind of where it is. We got a lot of customers who still buy episodically outside of the Pass, and there's an opportunity for us to convert over time. Is that helpful?

It is, it is. And then are you still seeing a pretty high percentage of the clients that are purchasing All Access Pass are new clients?

No. So, it isn’t as much. So, nowadays, the initial ones for who it made sense got plenty of chances to come across. And so, nowadays, it’s in the range of about 20% of new pass sales in terms of units would come from existing active clients, but that would only represent about 10% of All Access Pass contracted revenue because that’s replacing old revenue because they're buying twice as much now. So…

Got it. Okay. Okay. And then was there - do you have a number for the revenue contribution from acquired businesses in Q2?

Yes. Steve?

I don't have that in front of me. In the quarter, it’s about $1 million for Robert Gregory, give or take. If you like $1 million between $1 million or a $1.2 million.

Okay. And then last question is maybe for Bob and Steve as well in terms of the leverage in the model next year, I think that’s one of the focal points for people to focus on here. What do you think - what’s your view on what kind of leverage you can deliver to the EBITDA line next year on each $1 of revenue?

Yeah…

Incremental to incremental revenue.

I mean, we really haven't given any guidance for next year. So, I don't know, I don't like to throw out a number. I mean in the past, we talked about 30% fall through of incremental sales to incremental adjusted EBITDA and with some other things we’re doing. It could even be higher than that for a period of time. So, it’s - in that range as what we’ve normally talked about and we just haven't given guidance for FY 2019.

In last quarter’s report, we included a sensitivity chart, Jeff that you might find helpful just in getting the relationships, it showed under different revenue growth rates, the incremental flow through of revenue that wasn’t a forecast but just to give you at least shows how the models work and you’ll see there's well north of 30%, 30% to 35% just because we’ve been investing so heavily in things that at least have proved next year until you have a higher to normal flow through given the nature of the deferred revenue coming in and so forth.

Thanks very much, guys.

Should have an - the increase in revenue should be at a high and a good margin. Cost grow at a rate that's much slower than the rate of growth of revenue. And then also, the other things that impact cash flow, of course, are development costs. And we've had a fairly significant amount with the portal on our ERP system etcetera that would also impact our cash but would not be repeated enough on 2019.

Okay. Thank you.

And our next question comes from Marco Rodriguez with Stonegate Capital.

Good afternoon, guys. Thank you for taking my questions.

Thanks, Marco. How are you?

Good, doing well. Thanks. How are you?

Great, thanks.

Just a follow-up on the prior question here on the leverage in the model. Obviously, you guys have communicated in the past that you've got a model where there’s 30% to 40% flow-through revenue to EBITDA. If we're starting to think on to 2019, I mean where do you think could be at the lower? Do you think it could you be more in the lower end? Or the higher end of that sort of range based on having a lot of those investments that you've made over the last 12 months kind of subsiding if you will?

So, I think that what we've talked about is all accurate as far as the growth and revenue at a high margin. Our cost growing, our rate last slower. And that we'd have less going out in our CapEx type of cost. But really, aren't prepared to say what percentage we think that's going to be in 2019 yet. Don’t have the - don't have the numbers. And before we really went through and looked at that with the intent of disclosing it to the world, I hate to just throw out a hunch as to what that percentage is going to be. Well, it's going to be - it's going to be what I would call good.

Right. Got you. Okay. And then in terms of the ERP costs that you're - you’ve been incurring here for the last few quarters, how much longer is that going to remain?

We’re essentially done with the system implementation. There are some costs that we're going to incur. This will probably surprise you that every once in a while there's a new - some bugs in a new ERP implementation that take a while for us to fix and we'll incur some costs in that as far as capitalizing our costs. I think we're essentially finished with capitalizing that project.

Okay. And last quick question here on the gross margin line. Some very nice upside at least compared to our model at 70%. Was there any IP sales or higher than normal IP sales and maybe kind of got the number here a little bit higher than normal, more than expected?

No, I can't think of anything in there that would be like a onetime type of thing you're talking about, can't really think of, no. I think it's a reasonable gross margin percentage.

Got it. Thanks a lot for your time, guys.

Thanks, Marco.

And the next question comes from Kevin Liu from B. Riley.

Hi. Good afternoon. First question. Just as you look at the international direct offices, now that they have the ability to sell the All Access Pass as well, can you talk about what sort of accounting impact headwind you expect kind of going into the second half of the year? And then related to that, just what sort of uplift you might get in terms of either the deferred revenue or just kind of invoiced amounts that you'd expect out of those international operations?

Sure. I don't know, Paul if you want to address it first, or you want me to…

Bob, I would just say - Hi, Kevin. That - so, we are - we actually won’t be. So, we’ve been selling the All Access Pass in the UK and in Australia really since day one, also since the end of the - or early 2015. Those are already in the numbers, and those are being - the accounting those in those offices looks very much like it does here in the US. In Japan, the portal was now just available and so there will be some sales. We expect to make some sales and are already talking to a number of clients and closing deals there. So, there will be some impact there in the form of deferred revenue. China won't actually come online until the fall. We have to set up a separate instance of our portal in China behind their firewall, and so there won't be any impact in this fiscal year from China.

Thanks, Paul. The other thing I'd mention is our licensee network. They're now selling the All Access Pass more. We will continue to receive our royalty as they bill, so there won't be any impact in our licensee network.

Got it. And actually, along the licensee front. As you look at the growth there, I mean it's been flattish for the first half but kind of an on an improving growth trajectory versus Q1. So just kind of curious where you’d expect the growth rate on the licensee piece to be once you exit the year?

Do you want to…

This is Sean. I'll give that a shot. Sure. I think there's been a lot of pent-up sales because the licensee network has been waiting for the new portal with 16 languages. And so, I believe that you pressed the first half of the year somewhat, and we’re flat year-to-date. I believe we're going to see some good solid growth going forward in the third and fourth quarters, because now we are starting to sell it. Just in the last few weeks, we've sold many. And there's a lot of pent-up excitement around it. So, I believe, I'm not going to quote anything, but I believe we're going to have good solid growth for the third and fourth quarters. And I think it will continue as the licensees in a similar fashion to the U.S. and the direct offices. I think they'll transition to the All Access Pass pretty rapidly. So, I think next year, it might be 30% to 40% of the sale, the following year over 50%, and then just maybe 75% in the third year as we transition the All Access Pass. There's nothing, I feel just one more comment. I feel that the network is strong. We've got several new partners in place in areas like Vietnam that are coming on strong and France. And so, we think it's pretty healthy at this point.

That's great. And just one last question for me. I certainly appreciate all the new disclosures around specific revenue breakouts on the enterprise side. As we look at those numbers, is there kind of a significant headwind you’d anticipate on the facilitator side over time, How should do you expect that to continuously decline down towards zero or do you think it stabilizes at some level? And then conversely as you look at your All Access Pass numbers given what you're seeing on the contracting side, is there a point in time that you can share with us when you expect that to maybe account, for say, half the business or more?

Yeah, Kevin on slide 18, it’s at least illustrative - without mentioning a specific numbers, but I can give you an idea. If you look slide 18 figure A, do you see that?

Yeah.

Yeah. And so, the green bar is the expected decline in the legacy business over the next few years compared to the growth in the blue line of the subscription side. And so, we think in rough terms that you'll have -- the legacy business will decline maybe $7 million or $8 million of drag maybe higher than that this year but then it'll be down to - rate and then it will be higher than that in 2018 but it will be down to $7 million or $8 million of decline next year going down to $3 million or $4 million. So, there’ll be some base of it that continues. But its drag on results is less this year. It will be even less next year. And so, the growth rate in subscription will start to become more and more the growth rate in the business. Your question about when will it become, in the Enterprise division licensees. As I and Steve said, the accounting won't change that. But over time, really, we think that All Access Pass and Pass related services will end up being around 80-plus percent of the total business. So, if you take a $175 million of Enterprise division total revenues subtract out portion that's license fees of around $10 million or $12 million in terms of royalties. The rest of it probably 80% of that in the next two years will be All Access Pass or Pass related.

Got it. Thanks for taking the question.

Thanks very much.

And the next question comes from Samir Patel from Askeladden Capital. Please go ahead.

Hey, guys. You've almost left me question-less, so good job. I think I do have one - I do have one though. So, Steve, you kind of talked about the Q3 and Q4 comparisons. And looking at slide I think it’s 6 here, yes, slide 6 in your slide deck, your build deferred revenue balance is already off about $16 million year-on-year. And looking at the balance sheet, I know the balance sheet deferred revenue item kind of includes some stuff that isn't really related to the subscription business but the balance sheet shows deferred revenue being down about $5 million. So, given that Q3 and Q4, your big sales quarters and typically seasonally would expect to build a lot of deferred revenue during that period and then kind of burn some of that maybe in the first half of the year. But given that during the first half the year, you've more or less been invoicing what you've been burning. When you talk about that more than $15 million number, I mean, it seems like $15 million would actually be a fairly low estimate. When you say more than $15 million, could it be meaningfully more than that or is it likely be kind of close to that $15 million maybe $20 million range? Because it just seems like you should book a lot more deferred revenue in the - in Q3 and Q4, and widen that gap year-on-year that you're showing on slide 6. Meaning you should book more - you should invoice more revenue than you actually built in Q3 and Q4?

So, yes, Q3 and Q4 are the quarters that we put most of the deferred revenue on the balance sheet. And let’s just say that our sales go according to what our targets would be inside than it would be and it would be more than $15 million. So, again, not prepared really, say -- we’re a little bit intentionally in saying that -- reaffirming our guidance. So, I wouldn’t really like to change our guidance in that. But we do expect to have a good fourth quarter and add a significant amount to our balance sheet.

Okay. All right. That's all I got. Thanks.

Thank you.

Thanks.

And the next question comes from Patrick Retzer from Retzer Capital.

Good afternoon, gentlemen. Congratulations on a great quarter. And thanks for an excellent presentation. I only had one question. Historically, you've been very active and aggressive buying back stock, and I understand you've been making investments in the business for the last quarter or two. But I'm wondering how you're thinking about stock buybacks over the second half of the fiscal year here.

I hope that we've demonstrated over time our willingness to use excess cash to buy back stock. That's still the intention that we have. As you mentioned, we've had the ERP project, the portal development, the international - converting the international - the all-access pass into the 16 languages and some earn-outs, all of which use excess cash. But we still have the same idea that we've had all along is when we have excess cash returning that to shareholders. You might just note that if we go back a long period of time like there's like 15 years or something, we've actually retired almost 10 million shares including the management loan program and the tender offers. I think it's about 10 million Shares. Of course, we've offered some of share-based comp and other things. But we still have the same idea of aggressively buybacks, buying back stock with excess cash.

Okay. Well, thank you and keep up the good work.

Thanks, Pat.

Thank you.

And our next question comes to John Lewis of Osmium Partners. Please go ahead.

Hey, guys, how are you?

Hi, John. How are you?

Nice work today. Just a couple quick ones for you I guess you guys have spent around I think ballpark $14 million or $15 million on the ERP system. Have you - is there any - how much did it cost to put the portal in 15 languages. So, I was just curious how much of a weight did those two activities have been?

Well, the ERP, we probably combined a couple of numbers there, maybe our content development acquisitions and everything. We've spent about $7 million on the ERP project, give or take. And we spent $3 million, $3.5 million, $4 million, $3.5 million on the localization of the content, and then a couple of million on the portal and the ongoing development of the portal that we’ll have for some time.

Got it. Okay, that's helpful. How about just looking through your M&A pipeline, do you see anything in the marketplace that you're - do you still have a lot of conversations going, or where are you on bringing new content into the platform that you think could be meaningful?

Yeah, as you said, John, probably most will only end up being M&A, per se, but it’s just at licensing and so forth. We - I think we have a good map of what things we think were missing, we're very intent in aggressively having discussions on the few pieces that we think we really need. There's, of course, lots and lots of content available but we have a good map I think with where we need it. And we're having those conversations, and we expect in the next probably in the third quarter or early in the fourth quarter to announce some new, new content partnerships that we've been working on.

Great. And I think are you, Bob, are you going to present it at the GBC conference down in mid-April in San Diego?

Yes. Yeah, in San Diego.

Okay.

Yes.

Okay. Will you be having - Will you update - Will you just be giving the presentation - or giving - or do you have something more - I don't know if there will be a presentation for that.

Yeah. There is just - They've asked to give us a little more strategic context for what we're doing. So, there will be some more strategic stuff. But in terms of numbers, we won't be updating anything there. It's just two weeks right before the…

Yeah. Got it. Well, thanks so much and we'll talk to you guys later.

Thank you, John.

And our last question comes from Shawn Boyd from Next Mark Capital. Please go ahead.

Hi. Can you hear me okay?

Yeah. Thank you, Shawn.

Okay. Great. Now, I’ll keep it quick here. If I'm looking at the numbers right, when we look at slide 5, the subscription is subscription-related growth and enterprise. We've been $13.7 million in the fourth quarter, and that’s up about $1 million from the last quarter, so, sequentially, from November to February quarters. Given what you're seeing in your deferred, and the contracts signed, et cetera, should we be thinking about that kind of a million dollar increase per quarter going forward or does that start to accelerate at an even higher rate as we keep kind of moving with this mix shift?

So, this kind of goes back to Tim's question at the beginning. And while we've been here, I kind of looked up something to help answer that a little bit. So, when we talk about reported numbers in Q1 and Q2, they're flattened quite a bit by what we've talked about, the interaction between the balance sheet, deferred and the reported number. From this, we're talking about reported numbers. So just for interest, our actual invoiced amount of All Access Pass in the second quarter was more than $6 million more than in the first quarter. So, we had significant sequential increase between Q1 and Q2 of the contracts that we entered into and to build. And then that significant increase is muted by the fact that a good portion of those sales in our second quarter would be in the last six weeks of the quarter to say. So, we have a very small amount of that sequential increase actually reflected in the reported number but it was a significant increase. So, yeah, our eventual growth rate of the - related to the All Access Pass and subscription business lags more behind our invoiced number and our reported number should increase significantly more than $1 million a quarter for our All Access Pass.

Got it. Got it. Okay. And then kind of maybe going - part and parcel with this question is also on the contract signed. So - and I'll be honest, I forget which slide I got that off of, but on the contracts signed growth just looking at Enterprise, year-over-year that was up about 6%?

Right. So, slide 23.

Slide 23. Okay.

Yes.

And so, that also struck me given everything else that we're talking about in terms of the growth in deferreds that that number is likely to accelerate in the back half of the year. Am I thinking about it right?

Yes. Yeah, that is correct. And you can see in that slide also, it’s reduced further by the fact that with the change in unbilled contracts, we billed up this big balance of unbilled deferreds. We include that here. But if you took it out, if you just took the reported net sales plus the change in deferred billed sales, you had $40 million in Q2 versus this year in the Enterprise versus - I'm just understanding here, 37.14. And so, you’ve gone - it had been 8% growth in actual contracted and billed kind of the reported - the 14-plus change in deferred number is more like 8%, offset a little bit by the decline in the deferred which is just amortizing off each quarter until we get to the fourth quarter. So, we agree with you that it should be - it should accelerate both because of the sales in contracts of new All Access Pass and because the legacy business offset which is part of this as it continues to decline. Its drag will be less and less on this. So, our subscription growth was well ahead of this number.

Got it. Got it. Okay. Last one for me. As the mix - as the progress continues here and the mix becomes more and more subscription-related, at what point do you think you all could guide not just to revenues and just to EBITDA for the full year, but also subscription and subscription-related revenues for the year? Do you think maybe we could get that for FY 2019 or where do you need the model that you could start to provide that?

I think we could, yeah. So, I think that it's a good request but we haven't done that to-date but it's not because we can't be able to. So, I think we could usually do that, I mean choose to do that for 2019. And if that helps everybody understand what's going on a little better…

Like you said, we predicted it all the time…

Yeah. Even though we don’t disclose it.

Right.

We’re predicting that. We’re just - every week. here’s a significant amount of effort on that. We just want to make sure before we go out to the world that the pattern becomes stable and represented over the future. So, we’re only into this two and a half years. And we started it at zero and we’ve got early adopters and everything else. So, you're not a 100% certain that your experience today is representative of what you're going to experience in the future. But obviously, as the numbers get - the numbers get larger and the growth rates and things become more consistent, then we would feel comfortable releasing that information. But as you would expect we spent a lot of time predicting and analyzing All Access Pass has done and what it might do.

Yeah. I understand that and I appreciate it and it just seems that with the progress you guys have made so far which has been quite a bit. It’s probably getting to that point where you could make it a little more transparent. Would be real helpful. So, thank you so much and keep up the good work.

Thank you very much.

And this concludes your question-and-answer session. I’ll turn the call back over to Bob for final remarks.

Yeah. We just -- thank you. We just like to thanks -- thanks to each of you for attending today and for your great questions and we're delighted to talk offline with anyone who'd like to pursue any further questions or has any other data requests. But thanks to you so much for your great support. I’ll just say as we conclude we really are generally enthused to what was going on. We expect that our direct offices in the English speaking direct offices which were flat for a couple of years during the transition we started to grow which is great to see on slide 23 for us that that's now in the way we used to measure it with change in deferred revenue along without unbilled that we're up in that 8% range in the last two quarters and that's still is a drag. So, we feel like we're now at a point where the inflection as I mentioned on slide 18 should continue to accelerate because each of the four factors that’s driving it is accelerating. So, thanks to you and we'll look forward to talking to you one on one. Thank you so much.

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