Franklin Covey Co. (FC) Q1 2019 Earnings Report, Transcript and Summary

Welcome to the Q1 2019 Franklin Covey Earnings Conference Call. My name is Angela, and I will be your operator for today's call. [Operator Instructions] Please note this conference is being recorded. I will now turn the call over to Derek Hatch. Mr. Hatch, you may begin.

Thanks, Angela. Good afternoon, ladies and gentlemen, and Happy New Year. On behalf of Franklin Covey Company, I'd like to welcome you to our conference call to discuss our financial results for the first quarter of fiscal 2019, which ended on November 30, 2018. Before we begin, we'd like to remind everybody that this presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based upon management's current expectations and are subject to various risks and uncertainties including but not limited to, the ability of the company to stabilize and grow revenues, the acceptance of and renewal rates of 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 discussed and identified 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 anyone 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. We also like to point out on the next slide that we have adopted in May 2014 the FASB issued ASU 2014-09, which is Revenue from Contracts with Customers. This is the new revenue recognition standard that everybody's heard a lot about and we just wanted to point out that we adopted ASU 2014-09 on September 1 towards beginning of this quarter, using the modified retrospective approach. Under this transition method, we applied the new standard to contracts which were not completed as of the adoption date and recognized a cumulative effect adjustment, which reduced retained earnings by $3.1 million net of tax. The comparative prior period information has not been restated and continues to be presented according to revenue accounting standards, which were in effect for those periods. The impact of the implementation of the new revenue recognition standard resulted in us recognizing $1.1 million of additional revenue in the first quarter, which primarily impacted the Education Division and recording $1 million more of adjusted EBITDA, which also primarily impacted the Education Division. Refer to the appendix for additional information regarding the adoption of the new revenue recognition standard. And with that out of the way, we'd like to turn the time over to Mr. Bob Whitman, our Chairman and Chief Executive Officer.

Thanks Derek. Good afternoon, everyone. We really appreciate you joining us today. In our year-end report, two months ago, we said that having crossed the bridge in our transition to our subscription business model, we now expect to generate high rates of growth in adjusted EBITDA and cash flow going forward. As shown in Slide 4, specifically we said that we expect reported adjusted EBITDA to increase from $11.9 million in fiscal '18 to between $18 million and $22 million in fiscal '19, which is growth of 50% to 85%, and then increase to between $35 million and $40 million in fiscal 2021, which would be more than triple the $11.9 million in fiscal '18. We expected also that reported - the sum of reported adjusted EBITDA plus the change in deferred revenue would increase from $23.3 million in fiscal '18 to between $30 million and $34 million in fiscal '19, which is growth of between 29% and 45%, and then increase to between $47 million and $52 million in fiscal 2021. And, finally, our net cash generated to increase from $15 million in fiscal '18 to between $18 million and $22 million in fiscal '19 and then to between $35 million and $40 million in fiscal 2021. We're really happy to have reaffirmed that these expectations today that we still expect this kind of really rapid growth in EBITDA and cash flow and of course that is strengthened by the very strong first quarter performance we had. We're happy to report that this revenue, EBITDA, and cash flow for the first quarter and for the latest 12 months were somewhat stronger than expected, and they have given us a good push up the mountain toward achieving our longer objectives for this year and beyond. Just for a second, I just want to share that it's really a very exciting and rewarding time to be at Franklin Covey. First, because we're really solving important problems for our clients in a way that they really value. This is resulting in us having deep pervasive ongoing relationships with our clients, and that means a lot to all of our associates. Equally exciting and rewarding is that, as a result of this customer impact and the strength of our distribution and our subscription business model, we are achieving our performance expectations and commitments and are growing top and bottom line and are positioned for really exciting growth this year and beyond. So it's really a great time to be at Franklin Covey. There are three takeaways we'd like to get from today's call as you can see in Slide 5. First, that our first quarter results were strong and got us off to a somewhat stronger than expected start. These results strength supported our expectation of achieving 50% to 80% growth in adjusted EBITDA this year and 20% to 50% growth in net cash generated. Second, that our results in the quarter and latest 12 months continue from the value and effectiveness of our All Access Pass and Leader in Me membership models, and I'll remind you of the four factors in a minute - in a minute, I'll remind you the four factors that are driving this model’s success. Third, just in perspective, not only our adjusted EBITDA and net cash generated is expected to grow very rapidly on an absolute basis this year and beyond, but to grow at a rate that would place us in the top 10% of the Russell 2000 companies in terms of the expected EBITDA growth over the next three years. This should provide us the opportunity for significant value creation as we meet these targets. I’d just like to step back and address each of these three take takeaways in more detail now, starting with takeaway one, the strong first quarter results. As you can see as you saw in our press release, our first quarter results were strong with revenue growing 12.3%, our selling, general, and administrative costs declining 490 basis points as a percentage of sales, and adjusted EBITDA increasing to $3.2 million, which is a $2.6 million increase compared to adjusted EBITDA of $600,000 in last year's first quarter. As mentioned, about $1 million of that came - of that $2.6 million increase came from the 606 revenue standard. The rest of it though, the other $1.6 million increase really was all operations. I'll review our - these results in more detail in a moment at a full company level, but, first, I'd like to dive a little deeper and review the performance of each of the divisions. First on Slide 7, I'll start with the results of the Enterprise Division, which accounted for approximately 80% of our total revenue in the first quarter. As shown on the Slide 7, in the upper left-hand chart, the Enterprise Division's net sales grew 12.3% to $42.1 million in the first quarter. That's a $4.6 million increase compared to the $37.5 million in net sales in last year's first quarter. For the latest 12 months, net sales grew 14% to $163.7 million, which is a $20.2 million increase compared to the $143.6 million we had for the same latest 12-month period a year ago. As shown, in addition to our 12.3% growth in reported revenue in the Enterprise Division, in the upper right-hand corner, you can see that our balance of billed and unbilled deferred revenue grew 40% in the first quarter to $52.3 million. That's a growth of $14.9 million compared to our $37.3 million balance of billed and unbilled deferred revenue at the end of last year's first quarter. So we're building up a big balance of future revenue. The lower left-hand chart have balance of billed deferred revenue in the Enterprise Division grew 30.9% to $29.3 million in the first quarter - at the end of the first quarter. That's an increase of $6.9 million compared to a $22.4 million balance of billed deferred revenue at the end of last year's first quarter. And in the lower right, our balance of unbilled deferred revenue grew 54% in the first quarter to $22.9 million, an increase of $8 million compared to our $14.9 million balance of unbilled deferred at the end of last year's first quarter. Going to Slide 8. As shown, the first quarter gross profit in the Enterprise Division grew 11% to $29.9 million, an increase of $2.9 million compared to $27.1 million in last year's first quarter. Gross profit grew 18.9% to $121 million for the latest 12 months, that's an increase of $19.3 million compared to the $101.8 million for the same latest 12-month period last year. Gross margin percent was 71% compared to 72% in the last year first quarter, reflecting a slightly higher mix of services than in last year's first quarter. And for the latest 12 months, gross profit of 73.9% was 300 basis points higher than the same latest 12-month period last year, reflecting the impact of high gross margin sales of the All Access Pass and Leader in Me subscriptions, well here is just All Access Pass in the Enterprise. In terms of the selling, general, and administrative expenses, this is an important point. We expect our selling, general, and administrative expenses in the Enterprise Division to decline as a percentage of sales in fiscal 2019. As we - as our growth investments moderated and in the first quarter they did. In the first quarter, you can see SG&A to sales percentage improved by 290 basis points in the Enterprise Division compared to last year, declining from 60.2% of sales in last year's first quarter to 57.3% in this year's first quarter. This reduction in SG&A as a percentage of sales is one of the factors that will drive high flow through of increases in revenue to increases in adjusted EBITDA and cash flow in fiscal '19 and beyond. Finally as to EBITDA. The Enterprise Division's EBITDA grew 29% in the first quarter to 5.8 million, growth of 1.3 million compared to 4.5 million in the first quarter of fiscal '18. For the latest 12 months EBITDA increased 44% to 22.2 million, which is a growth of 6.8 million compared to the 15.4 million EBITDA for the same latest 12-month period last year, really feel great about the growth of the Enterprise Division, EBITDA particularly in - what is it - so smallest quarter in terms of invoice revenue. Truly the potential for achieving this kind of high EBITDA and high cash flow growth have drove our decision three years ago to disrupt our already attractive Enterprise business model in favor of the new subscription model. In terms of invoice revenue, which isn't shown on this chart but it's shown in Slide 29 in the appendix, invoiced amounts in the Enterprise Division grew 10% in the first quarter to $38.8 million, that's a $3.5 million increase compared to the $35.3 million of invoiced amounts in last year's first quarter and for the latest 12 months the invoiced amounts also grew a strong 10% to $169.9 million, an increase of $15.3 million compared to like - the same latest 12-month period last year. To me this is one of the really exciting and important things as we've seen to move Enterprise Division's invoiced and reported growth back up in the double-digit range and above. That's really showing the power of this model as it moves forward. In terms of the total contract signed, that's also shown in Slide 29, total contract signed grew 12.5% in the first quarter to $39 million, that's an increase of $4.3 million compared to the $34.7 million in contract signed during last year first quarter. So the Enterprise Division really had a very strong first quarter, very strong latest 12 months, high flow through of incremental revenue, strong gross margins driven as we'll talk about in a minute about the success and the impact of the All Access Pass. I'll now take you through the Education Division, which accounts for - that's accounted for approximately 20% of our total revenue in the quarter. As shown on Slide 9, in the first quarter, the Education Division's net sales grew 12.8% to $10.3 million, that's an increase of $1.2 million compared to $9.2 million in last year's first quarter. This increase included a revenue benefit of $1.1 million, resulting from the change in the 606 accounting standard but it also reflects that there were $670,000 of the spill-over revenue decline in the first quarter related to the expiration of the large Education Foundation contract in last year's second quarter, which we discussed in detail in our year-end report two months ago. For latest 12 months, net sales grew 4.2% to $46.4 million, an increase of $1.8 million compared to $44.6 million in net sales for the same period a year ago. And, again, we just remind you from the two months ago script that excluding the - this large Education Foundation contract in both years their growth actually was 10% for that period. Gross profit, Education's gross profit increased to $1 million or 17.6% in the first quarter and increased $1.3 million for the latest 12 months. Education's gross profit percent of 61.7% was 256 basis points higher than last year's first quarter and for the latest 12 months the gross profit percent was 20 basis points higher than in the same latest 12-month period last year. As with the Enterprise Division in the first quarter, SG&A as a percentage of sales improved significantly, 460 basis points, with SG&A declining from 66.5% of sales in last year's first quarter to 61.9% this year, reflecting kind of the swallowing of the additions of cost they had last year and the stabilized spending for this year. Education Division's EBITDA increased $700,000 in the first quarter from negative $700,000 in the first quarter of '18 to sort of move to breakeven. For latest 12 months, Education's EBITDA was $4.3 million compared with $6.3 million for the latest 12 months ended Q1 fiscal '18, reflecting, on the positive side, the benefit of 606 accounting in the first quarter, but it was much more than offset by the impact of the expiration of the Education Foundation contract in last year's second quarter. The impact of this contract will be over after the second quarter, so it'd be good to be on an apples-to-apples basis. In terms of invoiced revenue, which is shown in Slide 30, the Education - in the appendix, the Education Division's invoiced revenue was $5.2 million in this year's first quarter compared to $6.2 million last year. This invoiced amount received no benefit from the adoption of 606 accounting, which was negatively impacted by the spill-over impact of the expiration of the Education Foundation contract. Invoice revenue for the latest 12 months was even with the same period despite the significant impact of the Foundation contract. Stepping back up with this background on each of the divisions, we will now review the total company-wide results in more detail. Slide 10 shows total - some data about the total company revenue, it's shown in the upper left-hand corner. In the first quarter of fiscal '19, the company's net sales grew 12.3% to $53.8 million, an increase of $5.9 million compared to net sales of $47.9 million in last year's first quarter after absorbing a $400,000 adverse foreign exchange impact. For the latest 12 months, net sales grew 11.5% to $215.7 million, an increase of $22.3 million compared to $193 million in net sales for the same period one year ago. In the upper right hand corner, the company's balance of billed and unbilled deferred grew 38% in the first quarter to $65.8 million. I mean just a couple years ago we only had about $8 million of - three years we had $8 million of deferred revenues, that's grown significantly - that increased to $65.8 million, this growth of $18.1 million compared to a balance of $47.7 million of billed and unbilled deferred at the end of last year's first quarter. Lower left hand chart, our balance of billed deferred grew 32% in the first quarter to $41.4 million, an increase of $9.9 million compared to a $31.4 million balance to bill deferred at the end of last year's first quarter. And finally, in the lower right, our balance of unbilled deferred increased 50% in the first quarter to $24.4 million, an increase of $8.2 million compared to the $16.3 million balance of billed and unbilled deferred last year. Going quickly to Slide 11, gross profit grew 11.9% in the first quarter to $36.8 million and grew $19.9 million or 15% in the latest 12 months. Our gross profit percentage in the first quarter remained strong at 68.3% compared to 68.6% in last year's first quarter. And for the latest 12 months, gross margin increased 210 basis points to 70.6% from 68.4% in the same period last year. Already noted that the SG&A as a percentage of sales in both divisions and therefore for the company overall improved reflecting the lower pace of incremental growth spending that as we mentioned, we got past that last year, and this reduction in SG&A as a percentage of sales will help more and more of the revenue we drive that flow through. Adjusted EBITDA for the first quarter increased to $3.2 million, it's an increase of $2.6 million compared to 600,000 adjusted EBITDA in the first quarter of fiscal '18. This is after absorbing the adverse foreign exchange impact of 150,000. Of this $2.6 million increase as we've noted, approximately $1 million resulting from the change in accounting related to the adoption of the 606 revenue standard, but the remaining $1.6 million reflected 260% growth in adjusted EBITDA and represents an operating improvement compared to the 600,000 in adjusted EBITDA received in the first quarter of fiscal '18, and we achieved this despite the $400,000 spill-over impact on adjusted EBITDA of the Education contract. For the latest 12 months, adjusted EBITDA increased 30% to $14.4 million compared to $11.1 million for the same period in last year's first quarter. And finally, cash flows from operating activities increased by a big percent, 248% to $8.1 million for the first quarter of fiscal '18. That's an increase of $5.8 million compared with the $2.3 million of cash flow from operating activities for the first quarter of '18. This reflected the combination of the first quarter strong operating results and also positive changes in working capital where we had huge collections from the sales we made in the fourth quarter in the back half of last year. This is shown on Slide 28 in the appendix. For the latest 12 months, our net cash generated increased 46% to $15.9 million, that's a $5 million increase compared to net cash generated of $10.9 million for the same latest 12-month period last year. So, stepping back from that, there was a lot. Thank you for enduring. It's a lot of data, but hopefully it lays out for you fairly smooth, in a straightforward way that you can understand, we really were very pleased with the strong first quarter performance. It's given us a strong push up the mountain, it continues to validate the key assumptions behind this multi-year transition and so we're excited about it. As indicated in the Slide 13, I'll now transition to the second key takeaway for the quarter and that is 12 months, which will be much shorter, mercifully. As shown on Slide 14, our second key takeaway is that the strong results for the quarter and latest 12 months continue to affirm and validate the effectiveness of our All Access Pass and Leader in Me subscription models. That explains specifically as it relates to All Access Pass there are four factors that are driving All Access Pass's success and really the same applies to the Leader in Me. First, All Access Passes continued strong growth. Second is compelling unit economics. Third, it's high annual revenue retention rate in both economic and strategic durability. And, fourth, it's high flow-through of incremental sales to EBITDA and cash flow, which create very compelling sales force expansion economics. Each of these continued factor - each of these factors continue to be very strong in the first quarter and for the latest 12 months. I'll just touch on these briefly. First, All Access Pass's strong growth. Sales continue - sales of All Access Pass continued to grow very rapidly in the first quarter and for the latest 12 months. As shown in Slide 15, All Access Pass and related sales grew 51% in the first quarter to $19.2 million, an increase of $6.5 million compared to $12.7 in All Access Pass and related sales in last year's first quarter. For the latest 12 months, All Access Pass and related sales grew 62.2% to $66.8 million, an increase of $25.6 million compared to $41 million in the same latest 12-month period last year. For the third consecutive year since its introduction, All Access Pass and related revenue grew more than 60% on a year-over-year basis, so that, for us, a very strong powerful engine moving us forward. Second, All Access Pass's strong unit level economics continue to create high lifetime customer value. On Slide 16, you can see that the combination of the four elements shown there collectively continue to create high lifetime customer value and each of these elements, again, continue to be very strong in the first quarter and for the latest 12 months. First, All Access Pass's initial purchase amount is relatively large compared to that of our legacy business model and this is driven by the fact that customers receive such value from having access to our entire collection of solutions where they are purchasing seats for much larger user populations. This establishes the foundation for strong unit level economics, including reducing our customer acquisition cost as a percentage of sales. As shown in the upper right corner of this - of Slide 16, All Access Pass's average initial sales price has increased since inception, an increase in additional 5.5% in the first quarter to $33,900 compared to an initial average purchase price of $32,100 in last year's first quarter and back at $21,000 just a couple of years ago at inception. Second, All Access Pass's high gross margins continued and as you can see more than 74%, including services, is a primary driver of the 300 basis point increase in Enterprise Division's overall gross margin to 73.9% over the latest 12 months. Third, All Access Pass holder organizations purchase substantial amount of add-on services to help them achieve their business objectives. The strong services attachment raise the tangible reflection of the importance clients place on addressing the organizational challenges and it actually is an important predictor of client retentions in subscription offerings. So, we love to see that numbers stay high. For latest 12 months, All Access Pass holders purchase $0.45 of add-on services for every $1 of subscription revenue. And, fourth, All Access Pass's revenue has proven to be very sticky. As shown there, the revenue retention, again, exceeded 90% in the first quarter for the 16th straight quarter. Importantly, this more than 90% annual contracted revenue retention when combined with the year-over-year retention of add-on services from the prior year for those same Pass from the organizations is equal to more than 100% of the combined prior year All Access Pass and services amount each year. In other words, upon renewal, each All Access Pass is generating revenue equal to more than a 100% or more of the combination of this prior year Pass amount plus an increase in the service amounts that it had in the prior year, this provides a very strong foundation for future growth. Another element of the All Access Pass that I think is important is, the revenue is durable both strategically and structurally. I'll tell you what I mean by that. This is true, because we're solving the problems that really matter to our clients. By analogy, pharmaceutical companies have become giants by identifying seemingly intractable health problems in creating solutions to effectively address them. Merck, as we know, delivered penicillin to World War II battlefields, created vaccines to combat childhood diseases, developed a breakthrough HIV treatment, invented cholesterol-lowering drugs to combat heart disease, et cetera, et cetera, developed other drugs to combat diabetes and cancer. In a similar way, Franklin Covey solutions are focused not on nice to have skills training like so many learning and development companies, but rather, as shown on Slide 17, on addressing the 80:20 of the biggest challenges organizations face, challenges which require a large scale sustainable change in human behavior and culture. Franklin Covey helped organizations to achieve results by changing mindsets and behaviors of scale. Our high impact best selling solutions harness the power of people working together to solve the most intractable performance challenges. Big organizational challenges such as closing a major operational gap, improving sales performance, measurably increasing trust or improving key customer loyalty metrics are the very challenges that line leaders and C level executives seek to solve and have the budgets to address in both good times and bad. The leaders not only have budgets to address these challenges, but they also seek out best-in-class solutions. They have a track record and credibility for delivering outcomes. This is where Franklin Covey shines. The importance of gaining change in human behavior, culture and leadership transcends industries, company size and time. The solutions we provide through All Access Pass are relevant to organizations of all sizes, both in strong and weaker times. For example, we're working with a large global consumer package goods company. This organization began utilizing the All Access Pass three years ago to develop leaders who would be better equipped to lead in a rapidly changing global environment. I work with them, quickly scaled and in the second year they expanded their Pass from 200 to 1,500 leaders. In the process, our team co-created with this organization 22 unique leadership impact journeys to address their mid and senior leader development needs. Over the past 12 months, this client has faced a number of business headwinds, which have led them to reduce their workforce and scale back on numerous initiatives across the organization. However, in the midst of their downturn, they are choosing to significantly expanded work with us. They are so pleased with the results of their implementation of the All Access Pass and the development of the initial 1,500 leaders, that in the coming days this organization will expand their current Pass from 1,500 leaders to 2,000 leaders, and from a one-year Pass to a three-year Pass, the same time they have reduced the number of service providers they are working with, they've reduced it down to just Franklin Covey and one other. And so we're just getting a bigger share of the dollars they are spending. And they're able to do this because of the depth and breadth of the solutions tools and modalities provided in the All Access Pass, because of the critical nature of the jobs they've hired us to help them with, changing the behaviors of the key leaders across the world, so they can better compete in today's environment. The imports of the problems Franklin Covey addresses in the effectiveness solutions and solving them create strategic durability with our clients. As shown in Slide 18, this strategic durability is reflected by All Access Pass's high revenue retention on the subscription fees and by the 100% total revenue retention including services. So also in value of the fact that over the latest 12 months upon renewal, the average All Access Pass holder organization increased its past value by 17%, and that's a big statement. They're gaining enough value that not only are they renewing, but they're renewing and expanding. In addition to this strategic durability, which would say is really driven by the problems we're solving, it's also as two elements of structural durability. First, All Access Pass purchasers contract and pay for their past, at least a full year in advance. That gives structural stability that people are not deciding every month further not to continue. And second, as shown in Slide 19, an increasing percentage of Pass holders are also entering into binding multi-year contracts each year. For the latest 12 months, 22% of Pass for the organizations extended into multi-year contracts up from 6% a year ago. So the combination of this strategic and structural durability is creating significant visibility and predictability. A lot of ability that reflected this is as shown on Slide 20, the expected net present value of future revenue from all of our All Access Pass contracts currently in place has increased from approximately $116 million in 2016, to $239 million in fiscal '17 and further to $354 million at the end of the first quarter. This $354 million equal to more than twice the Enterprise Division's total reported revenue in fiscal '18 and that's really important. It means that the magnitude certainty of and visibility into future expected revenue is increasing every day. We expect this to increase to more than $0.5 billion within the next 15 months or so. Just make a note, this is similar in Education, similar to how All Access Pass expand this population upon renewal, we have a similar growth pattern with Leader in Me. Leader in Me is our, as you know, a whole school transformation models, which is now in over 3,500 schools, in 800 districts. When Leader in Me schools renew their membership, subscription, et cetera, districts expand their Leader in Me population not by increasing the number of students in the school, because they already have all of them but by increasing the number of schools within the districts which are in Leader in Me. Just one example in - excuse me, in Louisiana, we established a workforce initiative with the purpose of building college and career-ready high school graduates. This school district chose Leader in Me as a vehicle to achieve this, stretching across two large school districts. In the first year, they started up 10 Leader in Me schools, each year since then these two districts have added about 10 to 15 new schools between them. Currently, there are now 59 Leader in Me schools and we'll add another 20 schools this year with the stated intention of bring it to over 151 schools over the next five to seven years, and we have lots of headroom for penetrating more school districts. Finally, I'll just say All Access Passes and Leader in Me have high gross margins, high revenue retention and that makes it possible for us to ramp up new client partners to breakeven within one year and that's allowing us to accelerate our sales force hiring. Just note on Slide 21, one of our most important drivers of growth in revenue and have accelerated growth in EBITDA and cash flows is the successful hiring and ramp-up of new client partners. In 21, you can see that since 2012, we've added 76 net new client partners in the Enterprise Division alone, including a net increase of six client partners since we reported in November. Additionally, we're in the final stages of making offers to four new client partners, which will bring us to 10 new hires against our commitment to hire 20 for the year and we clearly expect to meet our commitment of 20 net new client partners this year. In addition, you can see on this chart, the average ramp, as you are familiar with, has been - it has historically followed a great trajectory. With All Access Pass, these trajectories - we're ahead of the trajectory for the people hired since 2016 were approximately 20% ahead of our historical ramp rate. And so, we have a huge amount of headroom for growth in the number of claim partners we can hire in the US in both Enterprise and Education Divisions, and even more headroom in our international Direct Offices. So that's a lot, let me conclude. Final takeaway is simply that not only our adjusted EBITDA and net cash generated expect to grow rapidly on an absolute basis, but also really to other organizations. We expect the combination of three things, as you know, to drive accelerated growth in adjusted EBITDA and cash flow. First, revenue growth in the subscription model, which has high margin, high recurrence, high flow-through. Second is our highly variable selling costs, meaning that there is a high flow-through and a predictable flow-through of incremental dollars. And, third, is the fact that our SG&A and capital expenditures will grow much more slowly than in the past couple of years. As a result, not only our adjusted EBITDA and net cash generated expect to grow very rapidly on an absolute basis, but we're at rate which replaces in the top 10% of the Russell 2000 companies in terms of the expected growth in EBITDA over the next three years and we believe this provides us with substantial headroom for increasing shareholder value as we deliver on this high growth in EBITDA and cash flow in fiscal '19 and beyond. So, Stephen, it's the time for you to review our guidance and we'll open it up for questions.

Good afternoon, everyone. Just a second on guidance, and thank you, Bob, and thank you for being on the call today. So, as Bob mentioned, just as a reminder, our current guidance for the year is that adjusted EBITDA will increase from the $11.9 million last year to a range of between $18 million and $22 million this year. But the sum of adjusted EBITDA plus the change in deferred revenue on our balance sheet will increase from the $23.3 million last year to a range of $30 million to $34 million this year. And the net cash generated, as we defined on Slide 28 in the appendix, will increase from $15 million last year to a range of $18 million to $22 million this year, and we're happy to reaffirm this guidance for the year. With year-over-year growth of adjusted EBITDA on $2.6 million in the first quarter, we are pleased to have gotten off to a strong start toward achieving the growth reflected in this full year guidance. We expect to retain this $2.6 million year-over-year adjusted EBITDA growth year-to-date through the second quarter. The second quarter's reported adjusted EBITDA is expected to be essentially the same as last year's second quarter, reflecting that substantially all of the growth in sales in the second quarter will be subscription sales, whose revenue will be recognized over time. But that the increased sequential cost for marketing for new client partners, et cetera, will be recognized in the quarter. In the third quarter, we expect strong growth in both this high margin, high flow through revenue, and in adjusted EBITDA, with even stronger year-over-year growth in adjusted EBITDA in our seasonally high fourth quarter. In the second quarter we expect revenue to grow at a rate of 4% to 6% before moving back to the high-single digit revenue growth in our third and fourth quarters. This 4% to 6% allows for some expected impact of our government business from the current federal government shutdown and for the final spill-over impact from the non-renewal of the Education Foundation contract in last year's second quarter. So again we're very pleased with our strong performance in the first quarter. We expect to have a banner year in 2019 with very strong growth in adjusted EBITDA and cash flow. Thanks Bob.

Great. With that, we'll open it for questions and turn it back to the operator.

[Operator Instructions] Our first question is from Alex Paris with Barrington Research. Please go ahead.

This is Chris Howe sitting in for Alex. I have two areas of concentration for these questions. The first is just in regard to - excuse me if you mentioned this, the average Pass holder population. What is the average Pass holder population, and how would you characterize its growth moving forward? And just to follow up on that, you mentioned the average purchase price increased to 33,900 approximately. What is your - what are your goals as you head to 2021 in regard to mix between price and volume and perhaps extending contracts more towards these multi-year time frames?

So first question then, if I heard it correctly is just kind of what's the average size of the typical All Access Pass contract, and that is – population, so the average population , I mean, roughly around 200 people in the average population, and that's expanded some of course from the start, where it was more like a 120 or 130 in the early parts of that. So the way we're doing a better job at finding bigger populations inside organizations and the reputation and referrals from other organizations has helped us there. We've typically had a price increase each year, but as you know we have a scaled pricing schedule, which is greater the population the better absolute price you have. And so, when you look at the revenue per Pass, you've got the positive of having an increase in price, and that’s somewhat impacted though by, as you expand – as they expand population. They qualify for the volume discounts that increase our revenue per customer, it reduces our revenue per seat sum, but of course we're really focused on revenue per customer. And so, I think the trends going forward is that with the significant increase in the number of multi-year contracts, we expect over the next couple of years that from the 20s in terms of having mid-20% of our contracts being multi-year contracts, with that, we'll move toward 50% over the next two or three years. Paul, I don't know, if you want to add any color or commentary?

I would just say that everything you said Bob that, we also see that upon renewal, we get expansion. And so, the longer we get into this thing and you mentioned out the ‘21, ‘22, we'll go through another couple of year's worth of renewal cycles with these clients, which will have them add-on as well, so I think we'll probably see that average size increase from that standpoint as well.

Does that response suit you?

Yes, that was very helpful. And then my second area of concentration is just on the sales force. You mentioned your net new hires so far have been 10 with the goal of reaching 20 for this year. So assuming you reach 20 with that existing sales force, what is the timeframe for that entire sales force to be completely ramped up in line with the incremental revenue that you mentioned from the last call and just when it would be fully optimized and matured?

Paul, do you want to address this?

So our ramp, if you remember back on Slide 21, with the five-year ramp, so we expect a new client partner in their first full year that will generate $200,000 that will increase to $500,000 and to $800,000 and to $1.1 million and finally $1.3 million. And, at that point, we consider them fully ramped. So the class we hired this year, depending on when we're hiring them in the year, roughly five years from now, that class is ramped, and we intend to continue to hire net 20 per year. These are Enterprise Division numbers we're talking about. Sean will mention Education in a second, but net 20 a year and then each class ramps at that schedule.

Just to clarify, the goal, the 20 - the net 20 hire goal is for the Enterprise Division. This year we're kind of holding the line on Education, because we added a lot in the last couple of years and they're kind of swallow it. We've built a lot of infrastructure and made investments last year. But Sean, I don't know, if you want to address anything more on sales force growth?

No, just the ramp rate for the Education client partners is about the same, it's 2, 5, 8, 11 over four, five-year period. And we find a lot of client partners who can get well over $2 million, so we're encouraged by that. It's about the same ramp rate.

I think what you’re headed toward is that if we were to hire net 20 salespeople a year for five straight years with only the first class being fully ramped, we'd add another $60 million of revenue just on the - just classes one through five with only one of the classes being fully ramped. And when fully ramped, if you stop hiring then, the total revenue would end up around 90 million just from the ramp up of five straight classes, even at 20. So it's an important initiative as we mentioned, All Access Pass is helping us meet that initiative even more than it has historically just because of the one-year payback on new hires.

Our next question is from Tim McHugh with William Blair. Please go ahead.

Hi, it's actually Trevor Romeo on for Tim. First, I just wondering if you could talk a little bit more about the invoices for Education being down 17%. I know you called out the impacts from the large Education Foundation contract, but are there any other factors that are accelerating that decline? And would that metric still be declining if you remove that impact?

I'll let chime in. Let me just put in context that we reported, I think in last quarter that the total impact on revenue for the pay in latest 12 months on invoice revenue was around $4 million from this - $3.5 million from this Education contracts. So you can see a quite substantial in itself, but Sean, I don't know if you want to add?

So contract signed was down some, and again, the two big reasons are; one, the big Education Foundation contract not renewing as we've talked about quite a bit. The second primary reason for this being down is the fact that we changed the Leader in Me implementation model. We basically - it's the same cost that we stretched it out over more years. So we still get the same revenue, but we get it over more time, and so a lot of the workshops that were traditionally scheduled in previous years didn't hit in this first quarter and won't hit this year but we'll hit - it's a good thing for the long term, but it hurts us in the short term. Between those two that accounts for most of the impact for the lack of growth, just looking forward, I feel like we've got good growth ahead of us for many reasons. Our pipeline looks healthier than last year. We're getting better results for schools the outcomes that we're getting, and naturally spreading school talk with each other and helping them achieve academic results, attendance improvements and so forth. And, again, our penetration is so lower in 2% of the schools in North America and 8% of the districts. Between district growth and school growth, we feel really good about our future and consider this impact of the Foundation contract kind of a one-year blip. It not only hurt us in the revenue impact immediately, but also just in the opportunity cost of focusing on this and now we've got our focus elsewhere. So I feel fundamentally there is not a major concern in the market and the market changes.

And my expectation is that with this change of model, while the revenue per school would be slightly less in the year; for the year, we expect the velocity to increase and have - we probably have our biggest addition of new schools and we have more new schools added this year than we've had for several years aside from the Foundation contract.

And then, Steve, I think you mentioned at the end that second quarter might see an impact from the government shutdown, I'm sure it's probably depend on how long this goes on, but how much of an impact are you expecting at this point?

We really haven't put a number to that, it's just a comment to say there are a few things going on that would cause us to think that maybe our revenue won't be the normal 7% to 9% but more like 4% to 6%. Our government shutdown being one of those, but I really don't have a number to put out there of what the impact might be, partially because of what you said, we don't know how long it's going to go and it can be so specific to a specific government contract that decides to delay implementation or something for a couple of months.

Just putting in context and I think that's a great answer would be, putting in context, it doesn't have the potential for really big, big impact because only a portion of our government business in federal government to start with in much of this and Department of Defense that has continued contracts and so forth. But the idea that in the agencies and other things - and we have a lot of state and local businesses that is unaffected by, but we are just noting that it could hit us by $1 million or so this quarter of stuff that we'd plan to deliver that might get pushed and that we're doing $1 million, if it were $1 million to $1.5 million just in the order of magnitude that would shave off a point or two of growth. And so that plus the impact we know we're going to have on the - from the Education contract causes just to be a little conservative on that one.

And then just one more quick one. Do you have a sense, at this point, of the full-year impact from ASC 606? And whether it would hurt or help any of the quarters this year?

We essentially still believe what we said at the - at the last year is that, expecting essentially a slightly positive but immaterial impact from 606 for the year. So we are - the million dollar benefit that we saw in Q1, we would expect to be less but a little bit of benefit in Q2, essentially no benefit in Q3 and then due to the timing of recognizing revenue under 606 versus 605, we would actually go the other way in Q4 and have a decrease to our revenue in Q4, as an impact of 606. So, up in Q1, up a little bit in Q2, pretty even in Q3, down by maybe a million or almost in Q4, so we end up with a slightly positive, I'd say, $500,000 or something like that, but immaterial impact for the year.

Our next question is from Jeff Martin with ROTH Capital Partners. Please go ahead.

Bob, if I could, on Slide 37, the Direct Office revenue breakdown, I wanted to touch on on-sites and facilitator, because I thought on-sites had been seeing some decline due to the transition of All Access Pass, does that on-site number in the first quarter of this year include add-on revenue?

What we're going to do in future quarters, Jeff, is that, we're going to break out the on-site and facilitator between that portion that is an add-on sale to All Access Pass, including manuals, and that which is the legacy, because it just what you said. We had a decline in legacy side more than offset by the growth in the add-on sales in - to All Access Pass, so we're going to break that out for you and for next - starting going forward and break that into All Access Pass plus add-on services plus add on materials, which are small. We'll see out the total for All Access Pass and add-on, so that'll reconcile and then you can see the decline in other facilitator and other on-site.

The decline in facilitator, this year's first quarter, is there anything to glean from that or are there abnormalities in the quarter relating to that - going on?

There is one structural thing, about $850,000 of that relates to a contract is an old contract. In the old days, we sold some IP contracts, not all our contracts is past wins that always showed up in the facilitator delivery channel just because that we had a small number of those, that contract occurred - it's ongoing contract, it just happened in different quarters this year than last year, so that about $800,000 of that difference is a timing difference of this one contract. Otherwise, it's just the normal decline in facilitator, which is now getting very small. So it's not - it's getting sort of both the decline in legacy on-site into, say, legacy facilitator, although it will be $7 million or $8 million in total this year, because of drag of 200 or 300 basis points on total revenue growth is becoming pretty small as a percent.

And then in terms of your outlined expectations for 2021, could you give us some high level detail in terms of - or insight into what the assumptions are? Is that just growing at the 7% to 9% rate on revenue on a net basis and adding 20 sales people a year, is that kind of a core of what the assumptions are behind that?

Yes, it is. It is a 7% to 8% revenue growth with high flow-through of incremental revenue in the 50% to 60% flow-through range of incremental revenue to incremental EBITDA this year; 45% to 50% next year; and then about 40% thereafter with the ramp up of about 20 new sales people a year and the margin is maintained.

Okay.

So it's kind of good play you're running right now.

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

I was wondering if maybe you could just talk a little bit more about the quarter strength you saw, obviously you made a couple of mentions that exceeded your expectations, if you can maybe talk a little bit about the drivers there that helped that performance?

Yes. I think we had the revenue growth, we are pegging all of our numbers as we just said in Jeff's question that around 7% or 8% revenue growth. So the first thing is that revenue grew faster in the first quarter than that both on a reported invoiced and contracted basis. So that's good news just in that our normal, our conversion of the pipeline was a bit stronger. Our pipelines are bigger and I think our sales force is getting better of doing it. I don't know, Paul, if you have anything to add to that?

That's what I was going to say. I think, we're getting this was that - we've talked in prior calls that the big shift in the way that we sell - we have to - we didn't used to have to work through procurement departments and get a contract for every sale, lot of our sales were the reorder of a facilitator purchase and so for three years we've been at this now and our sales force are getting more depth frankly at finding these opportunities but then progressing them and we get more confident in the pipeline and I think we saw that - in fact Q4 as well frankly.

So that combined with the rapid growth in All Access Pass and also the high amount of deferred revenue we have on the books that benefits in the quarter. So again, if you just - our costs are a little better, we were more conservative in our forecasting, we ended up on costs. Revenue was a bit better and so just going through.

And then on the expense side, you mentioned, obviously you're a little bit more conservative or you spent a little bit less in the quarter. Where any sort of larger items delayed or was it just more of a process improvements in terms of your overall spend?

No, but it's a combination. We had some process improvement spending. We were - we challenged costs, but lot of it is just that we made - we had such big increases in the investment last year that the rate of growth of our expense is just less because we've really made all the investments in the ERP system in the implementation specialist et cetera. So the growth is now really on the margin, and that's why - that's really what underpins our guidance and expectation of having very high flow-through of incremental revenues. Our expenses were pretty much incremental. As you know, our sales force is paid on commission on the margin. Our implementation specialist will add one or two a year. Most of our sales leadership is heavily based on growth. And so it's a pretty high flow through and variable cost, so there is nothing, no deferred or delayed spending on anything of any substance.

And lastly, if maybe you can kind of update us on the international licensee just kind of where they are and how they're progressing with the All Access Pass model?

Sure. You can see they had a very strong quarter, on slide, where was that slide, Slide 37 or 38, had a nice quarter, up 11%. And I think Sean mentioned this on the last call that and we've talked about it to that, that we were delayed by nearly eight months and being able to launch the All Access Pass for our licensee partners around the world, and that really kind of froze them last year. They geared up for, lot of training was done, and then we didn't help them with that delay, that's now behind us. We had a great conference with them in September to kick off and kind of retrained everybody and re-galvanized everybody. And I think they're just - it's a focus thing, they were able to not have that delay in front of them and that's we're starting to see All Access Pass grow. We had some nice All Access Pass actually grew through the quarter. So September - October, little bit in September, November little better than October, December was good again, and so we're pleased with that now starting to grow in those licensee office as well.

Our next question is from Samir Patel with Askeladden Capital. Please go ahead.

So first just a housekeeping question. I don't know if it was you or Paul, Bob, but I think you mentioned that your target in a few years is 50% penetration in multi-year contracts?

Yes.

Just wanted to make sure. Okay, cool. The second question, unless I missed or I didn't hear any…

Sorry, there is people are just involved in more and more important things in getting bigger populations, it just becomes part of their culture of what they're doing. So we expect when they say three years change in my sales forces' ability to sell in the way we want to sell or to drive my customer loyalty metric, they're starting to recognize and we are certainly be strong enough to tell them that when they sign up for that. And for instance, if we take antibiotics for a week, we just sort of take three weeks to get rid of. We just don't know how upfront is going to take you three years to get this challenge done if you sign up or at least sign up so you can go together, so that's what's driving.

Right. Now that makes sense. The second question, I don't think you really discussed it, but there you'd out a press release about acquiring your operations in, I think, the German speaking markets and Europe. And I'm just curious, when you did China you've done that, is that sort of a trend and it's context. You've talked about the different selling model and so on and so forth that kind of optimizes for All Access Pass. I'm curious to what extent you kind of see your licensee network as capable of delivering that and to what extent maybe in certain markets you'd want to go direct over time?

Sure. We feel very good about our ability of our licensee operations to get up to speed and sell as they've worked on it. We've trained them. They're all in and committed, they've invested large sums of monies to do the translation. So we believe they will be very successful with All Access Pass. And, as you know, for us that doesn't affect deferred revenue, because their payment to us is on invoice basis. What was behind China and China with different question, which was simply an opportunity we felt like, it was coming to the end of our contract terms with our previous licensee and we just felt like to get to build the brand and to build new distribution in China and we do that. It was different situation here in Germany, so it's not part of the strategy to acquire International licensee partner operations, but it just turned out that there was a business change for our previous licensee partner in Germany that made it not possible for him to move forward and our choice was to either find a different - try to find a different partner and get that new partner up to starting over and moving up to speed or to acquire the operation there and we decided that whether it'd be very few markets in the world where we would do so. Now with that the four largest economies we are all direct and with the US, Japan, China and Germany. And so, we just felt like the better idea there is starting over there. They have a good sales force. We have a lot of good business there. We send a lot of All Access Pass business that way that needs to be delivered. And so, it just felt like a good opportunity to be direct there, but we don't anticipate doing that anymore in the future, which is to opportunistic and situational.

Our next question is from Zach Cummins with B. Riley FBR. Please go ahead.

I just want to say congrats on the strong start to the year. But, Steve, I just wanted to ask you, did you quantify the expected impact to the revenue line in the Education segment in terms of related to the loss of that Foundation contract?

For the quarter, we're around about $700,000 of revenue and $300,000 to $400,000 of adjusted EBITDA.

And in the second quarter, it'd be about half of that and then it will be over.

And then in terms of your guidance progress with All Access Pass and your international Direct Offices, should we expect this to follow a similar trajectory or ramp as similarly to how it was rolled out here domestically or just kind of how should we be thinking about this as they start to ramp up on All Access Pass?

I'll take that, Zach. So, I don't know whether the trajectory will be exactly the same in some of these offices. So just a bit of context. We launched in the UK and Australia at the same time we did in the US and Canada, and so they are way down the road like we are. And have converted about as much of their business to All Access Pass as we have here in the US and Canada. That's an easier diet for us. Those are English-speaking countries. Japan is now selling All Access Pass, so that's a new phenomenon since we launched the portal for them with the Japanese language. I think candidly, it will be a little bit of a slower conversion for them just because it's Japan and the language and the culture, but we expect that the trajectory - the shape of the curve will look the same, but it just maybe a little bit more elongated with them. And then China, of course, kind of a similar thing. In China, we won't actually start selling All Access Pass until the spring. We're just finishing up their portal. We have to do a separate version of the portal and install it in China for them. I think what will happen is, we'll have a year or two as we get going in each of these countries. And then it will really start to go in these countries. What would my bet is.

And I think all my other questions are kind of asked by the previous analyst on the call. So I appreciate you taking the time to answer my questions and congrats again on the strong start to the year.

Our next question is from Patrick Retzer with Retzer Capital Management. Please go ahead.

Congratulations on a great start meeting your guidance for the fiscal year. And one thing on Franklin Covey call if we didn't talk about returning capital to shareholders, you talked about that quite a bit last quarter, and more a thing, of course, silent on this call, is there anything you can add there?

Yes, I think we can just add a couple of things. One, we had very good cash collections during the fall and the first part of the second quarter. We also have a good amount available on our credit line and available into our purchase authorization and we haven't changed in our desire to do that, and so I think we will have the liquidity and intend to do it. During the quarter, we did not, but just - just getting ourselves ready to be in that position. So there's nothing there. But we'll remind - you're very well diversed and exactly what we bought around it. It's been over about approximately 80 million over the last four years. And so we anticipate that the excess cash will be returned to shareholders in that form. Occasionally we're in the middle of something, whether it's like the acquisition of our German office, so that's something else that's because it's - we have knowledge of something that could first be perceived as being material that we can't do anything, and from time from time we are in windows like that but otherwise we intend to be purchasers there.

Well, notwithstanding being locked up for some reason. I mean the stock is down about 25% from a year ago. I would think all other things being equal, this would be an opportune time moderately.

That we agree. I mean, I think if you look at the expected growth in the EBITDA and cash flow, our current value doesn't reflect that - the price to future cash flow is low when compared to, if you believe we're going to be in the top 10% of all Russell 2000 companies, but we do think it's substantial.

Okay.

But thanks for reminding me.

Keep up the good work.

We have no further questions at this time. Speakers, any closing remarks?

Just to thank everyone for being part of this and we also look forward to seeing many of you here at our Analyst and Investor Day next week. We think you will find it a chance to go deep on understanding more or some of these things. We won't go into this detail on the financial side, but a lot on the business side and answer any questions that you have. So, we look forward to seeing you next week, and thanks for being on the call today. Thank you so much.

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