Franklin Covey - Earnings Call - Q1 2019
January 9, 2019
Transcript
Speaker 0
Welcome to the Q1 twenty nineteen Franklin Covey Earnings Conference Call. My name is Angela, and I will be your operator for today's I will now turn the call over to Derek Hatch. Mr. Hatch, you may begin.
Speaker 1
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 twenty nineteen, which ended on November 3038. 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 ks 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. We'd also like to point out on the next slide that we have adopted in May 2014, the FASB issued ASU 20 fourteen-nine, 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 20 fourteen-nine on September 1 or the 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 $3,100,000 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 $1,100,000 of additional revenue in the first quarter, which primarily impacted the Education Division and recording $1,000,000 more of adjusted EBITDA, which also primarily impacted 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, I'd like to turn the time over to Mr. Bob Whitman, our Chairman and Chief Executive Officer.
Speaker 2
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 four, specifically, we said that we expected reported adjusted EBITDA to increase from $11,900,000 in fiscal twenty eighteen to between 18,000,000 and $22,000,000 in fiscal twenty nineteen, which is growth of 50% to 85%, and then increase to between 35,000,000 and $40,000,000 in fiscal twenty twenty one, which will be more than triple the $11,900,000 in fiscal twenty eighteen.
We expected also that the sum of reported adjusted EBITDA plus the change in deferred revenue would increase from 23,300,000 in fiscal twenty eighteen to between 30,000,000 and $34,000,000 in fiscal twenty nineteen, which is growth of between 2945%, and then increase to between 47,000,000 and $52,000,000 in fiscal twenty twenty one. And finally, our net cash generated to increase from $15,000,000 in fiscal twenty eighteen to between 18,000,000 and $22,000,000 in fiscal twenty nineteen, and then to between 35,000,000 and $40,000,000 in fiscal twenty twenty one. We're really happy to reaffirm 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 twelve months were somewhat stronger than expected. They've given us a good push up the mountain toward achieving our 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're 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 on slide five. First, that our first quarter results were strong and got us off to a somewhat stronger than expected start. These results strengthen and support 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 twelve months continue to affirm 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, I'll remind you of the four factors that are driving this model's success.
Third, just in perspective, not only our adjusted EBITDA and net cash generated expects 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 two thousand companies in terms of 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 then address each of these three takeaways in more detail now, starting with takeaway one, the strong first quarter results. As you can see in 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 four ninety basis points as a percentage of sales, and adjusted EBITDA increasing to $3,200,000 which is a $2,600,000 increase compared to adjusted EBITDA of $600,000 in last year's first quarter. As mentioned, about a million of that $2,600,000 increase came from the six zero six revenue standard.
The rest of it, though, the other $1,600,000 increase really was all operations. I'll review these results in more detail in a moment at the full company level. First, I'd like to dive a little deeper and review the performance of each of the divisions. First, on slide seven, 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 slide seven in the upper left hand chart, the Enterprise Division's net sales grew 12.3% to $42,100,000 in the first quarter.
That's a $4,600,000 increase compared to the $37,500,000 in net sales in last year's first quarter. For the latest twelve months, sales grew 14% to $163,700,000 which is a $20,200,000 increase compared to the $143,600,000 we had for the same latest twelve 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 $52,300,000 That's growth of $14,900,000 compared to our $37,300,000 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. On the lower left chart, our balance of billed deferred revenue in the Enterprise Division grew 30.9% to $29,300,000 at the end of the first quarter.
That's an increase of $6,900,000 compared to our $22,400,000 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 $22,900,000 an increase of $8,000,000 compared to our $14,900,000 balance of unbilled deferred at the end of last year's first quarter. Going to slide eight, As shown in the first quarter, gross profit in the Enterprise division grew 11% to $29,900,000 an increase of $2,900,000 compared to twenty seven point one million in last year's first quarter. Gross profit grew 18.9% to $121,000,000 for the latest twelve months. That's an increase of $19,300,000 compared to the $101,800,000 for the same latest twelve month period last year.
The gross margin percent was 71% compared to 72% in last year's first quarter, reflecting a slightly higher mix of services than in last year's first quarter. For the latest twelve months, gross profit of 73.9 percent was 300 points higher than the same latest twelve month period last year, reflecting the impact of high gross margin sales of the All Access Pass and Leader in Me subscriptions. Well, here are just All Access Pass Enterprise. In terms of 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 twenty nineteen as our growth investments moderated, and in the first quarter they did.
In the first quarter, as you can see, SG and A to sales percentage improved by two ninety 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 and 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 twenty nineteen and beyond. Finally, as to EBITDA, the Enterprise Division's EBITDA grew 29% in the first quarter to 5,800,000 It's a growth of $1,300,000 compared to $4,500,000 in the first quarter of fiscal twenty eighteen. For the latest twelve months, EBITDA increased 44% to $22,200,000 which is growth of 6,800,000 compared to the $15,400,000 EBITDA for the same latest twelve month period last year. I really feel great about the growth of the Enterprise Division's EBITDA, particularly in what is its smallest quarter in terms of invoiced revenue.
It's really the potential for achieving this kind of high EBITDA and high cash flow growth that 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 is shown on slide 29 in the appendix, Invoice amounts in the Enterprise Division grew 10% in the first quarter to $38,800,000 to $3,500,000 increase compared to the $35,300,000 of invoiced amounts in last year's first quarter. And for the latest twelve months, invoiced amounts also grew a strong 10% to 169,900,000.0 an increase of $15,300,000 compared to the same latest twelve month period last year. To me, is one of the really exciting and important things as we've seen to move the enterprise division's invoiced and reported growth back up in the double digit range and above. It's really showing the power of this model as it moves forward.
In terms of total contracts signed, as also shown in slide 29, total contracts signed grew 12.5 in the first quarter to $39,000,000 That's an increase of $4,300,000 compared to the $34,700,000 in contracts signed during last year's first quarter. So, the Enterprise Division really had a very strong first quarter, very strong latest twelve months. High flow through of incremental revenue, strong gross margins driven, as we'll talk about in a minute, by the success and impact of the All Access Pass. I'll now take you through the Education Division, which accounted for approximately 20% of our total revenue in the quarter. As shown on slide nine, in the first quarter, the Education Division's net sales grew 12.8% to $10,300,000 That's an increase of $1,200,000 compared to $9,200,000 in last year's first quarter.
This increase included a revenue benefit of $1,100,000 resulting from the change in the six zero six accounting standard, but it also reflects that there was $670,000 of the spillover 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 the latest twelve months, net sales grew 4.2% to $46,400,000 an increase of $1,800,000 compared to $44,600,000 in net sales for the same period a year ago. And again, I'll just remind you from the two months ago script that excluding the large Education Foundation contract in both years, their growth actually was 10% for that period. Gross profit Education's gross profit increased $1,000,000 or 17.6% in the first quarter and increased $1,300,000 for the latest twelve months. Education's gross profit percent of 61.7% was two fifty six basis points higher than last year's first quarter.
And for the latest twelve months, the gross profit percent was 20 basis points higher than in the same latest twelve month period last year. As with the Enterprise Division, in the first quarter, SG and A as a percentage of sales improved significantly four sixty basis points, with SG and A declining from 66.5% of sales in last year's first quarter to 61.9% this year, reflecting the swallowing of the additions of costs they had last year 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 twenty eighteen, so it moved to breakeven. For the latest twelve months, Education's EBITDA was $4,300,000 compared with $6,300,000 for the latest twelve months ended Q1 fiscal twenty eighteen, reflecting on the positive side the benefit of the six zero six 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 will be good to be on an apples to apples basis.
In terms of invoiced revenue, as shown on slide 30, in the appendix, the Education Division's invoiced revenue was $5,200,000 in this year's first quarter compared to $6,200,000 last year. This invoiced amount received no benefit from the adoption of six zero six accounting but was negatively impacted by the spillover impact of the expiration of the Education Foundation contract. Invoice revenue for the latest twelve 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'll now review the total company wide results in more detail. Slide 10 shows some data about total company revenue, as shown in the upper left hand corner.
In the first quarter of fiscal twenty nineteen, the company's net sales grew 12.3% to $53,800,000 an increase of $5,900,000 compared to net sales of $47,900,000 in last year's first quarter after absorbing a $400,000 adverse foreign exchange impact. For the latest twelve months, net sales grew 11.5% to $215,700,000 an increase of $22,300,000 compared to $193,000,000 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 $65,800,000 I mean, just a couple of years ago we only had about $8,000,000 of deferred revenue, so that's grown significantly. That increased to $65,800,000 is growth of $18,100,000 compared to a balance of $47,700,000 of billed and unbilled deferred at the end of last year's first quarter. In the lower left hand chart, our balance of billed deferred grew 32% in the first quarter to $41,400,000 an increase of $9,900,000 compared to a $31,400,000 balance of billed deferred at the end of last year's first quarter.
And finally, on the lower right, our balance of unbilled deferred increased 50% in the first quarter to $24,400,000 an increase of $8,200,000 compared to the 16,300,000.0 balance of billed and unbilled deferred last year. Going quickly to Slide 11. Gross profit grew 11.9% in the first quarter to 36,800,000.0 and grew $19,900,000 or 15% in the latest twelve 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 twelve months, margin increased two ten basis points to 70.6% from 68.4% in the same period last year.
I've already noted that the SG and A as a percentage of sales in both divisions and therefore for the company overall improved, reflecting the lower pace of incremental growth spending. As we mentioned, we got past that last year. And this reduction in SG and A as a percentage of sales will help more and more of the revenue we drive flow through. Adjusted EBITDA for the first quarter increased to $3,200,000 It's an increase of $2,600,000 compared to $600,000 of adjusted EBITDA in the first quarter of fiscal twenty eighteen. This was after absorbing an adverse foreign exchange impact of $150,000 Of this $2,600,000 increase, as we've noted, approximately $1,000,000 resulted from the change in accounting related to the adoption of the six zero six revenue standard.
The remaining $1,600,000 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 twenty eighteen. We achieved this despite the $400,000 spillover impact on adjusted EBITDA of the education contract. For the latest twelve months, adjusted EBITDA increased 30% to $14,400,000 compared to $11,100,000 for the same period in last year's first quarter. And finally, flows from operating activities. Cash flows from operating activities increased by a big percent, two forty eight percent, to $8,100,000 for the first quarter of fiscal twenty eighteen.
That's an increase of $5,800,000 compared with the $2,300,000 of cash flow from operating activities for the first quarter of twenty eighteen. This reflected the combination of the first quarter's strong operating results and also positive changes in working capital where we had huge collections from the sales we made in the fourth quarter and back half of last year. As shown on slide 28 in the appendix, for the latest twelve months, our net cash generated increased 46% to $15,900,000 That's a $5,000,000 increase compared to the net cash generated of $10,900,000 for the same latest twelve 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 it out for you fairly in a straightforward way that you can understand. We really were very pleased with this 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, so we're excited about it. As indicated in slide 13, I'll now transition to the second key takeaway for the quarter and latest twelve 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 twelve months continue to firm and validate the effectiveness of our All Access Pass and Leader in Me subscription models. As I explained 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 Pass's continued strong growth. Second, its compelling unit economics third, its high annual revenue retention rate and both economic and strategic durability and fourth, its high flow through of incremental sales to EBITDA and cash flow, which create very compelling sales force expansion economics. These factors Each continue to be very strong in the first quarter and for the latest twelve months.
I'll just touch on these briefly. First, All Pass' strong growth. Sales of All Access Pass continued to grow very rapidly in the first quarter and for the latest twelve months. As shown in slide 15, All Access Pass and related sales grew 51% in the first quarter to $19,200,000 an increase of $6,500,000 compared to 12,700,000.0 in All Access Pass and related sales in last year's first quarter. For the latest twelve months, All Access Pass and related sales grew 62.2% to $66,800,000 an increase of $25,600,000 compared to $41,000,000 in the same latest twelve month period last year.
For the third consecutive year since its introduction, Pass and related revenue grew more than 60% on a year over year basis. So that, for us, is a very strong, powerful engine moving us forward. Second, All All Access Pass' strong unit level economics continued 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 twelve months. First, All Access Pass' 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 that they are purchasing seats for much larger user populations. This establishes the foundation for strong unit level economics, including reducing our customer acquisition costs as a percentage of sales. As shown in the upper right corner of this, of slide 16, All Access Pass' average initial sales price has increased since inception and increased an 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 Passes' 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 the Enterprise Division's overall gross margin to 73.9% over the latest twelve months. Third, all excess pass holder organizations purchased a substantial amount of add on services to help them achieve their business objectives.
A strong services attachment rate is a 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. We love to see that number stay high. For the latest twelve months, All Pass holders purchased $0.45 of add on services for every $1 of subscription revenue. 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 sixteenth 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 holder 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 100% or more of a combination of its prior year pass amount plus an increase in the services amounts that it had 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 that 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 and 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, etcetera, etcetera, 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 in slide 17, on addressing the eightytwenty of the biggest challenges organizations face, challenges which require a large scale sustainable change in human behavior and culture. Franklin Covey helped organizations achieve results by changing mindsets and behaviors at 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. And leaders not only have budgets to address these challenges, but they also seek out best in class solutions that 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 packaged goods company. This organization began utilizing the LXS Pass three years ago to develop leaders who would be better equipped to lead in a rapidly changing global environment. Our work with them quickly scaled, and in the second year they expanded their paths 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 twelve 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 expand their 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 liters that in the coming days this organization will expand their current pass from 1,500 liters to 2,000 liters and from a one year pass to a three year pass. At the same time, they have reduced the number of service providers they are working with. In fact, 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. They're able to do this because of the depth and breadth of the solutions, tools, and modalities provided in the All Access Pass and because of the critical nature of the jobs they've hired us to help them with changing the behaviors of their key leaders across the world so they can better compete in today's environment. The importance of the problems Franklin Covey addresses and the effectiveness of its solutions in solving them creates strategic durability with our clients. As shown in slide 18, this strategic durability is reflected by All Access Pass' high revenue retention on the subscription piece and by the 100% total revenue retention, including services. It's also in value of the fact that over the latest twelve months upon renewal, the average All Access Pass holder organization increased its pass value by 17%.
And that's a big statement. They're getting enough value that not only are they renewing, but they're renewing and expanding. In addition to this strategic durability, which I'd say is really driven by the problems we're solving, it also has two elements of structural durability. First, all Access Pass purchasers contract and pay for their pass at least a full year in advance. That gives structural stability that people are not deciding every month whether or 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 twelve months, 22% of pass holder 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 abilities there. Reflective of this is that 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 $116,000,000 in 2016 to $239,000,000 in fiscal 'seventeen and further to $354,000,000 at the end of the first quarter.
This $354,000,000 is equal to more than twice the Enterprise Division's total reported revenue in fiscal twenty eighteen, 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 half a billion within the next fifteen months or so. Just make a note that similar in education, similar to how All Access Pass expands its population upon renewal, we have a similar growth pattern with Leader in Me. Leader in Me is our, as you know, whole school transformation model, which is now in over 3,500 schools in 800 districts.
When Leader in Me schools renew their membership, subscription, etcetera, districts expand their Leader in Me population not by increasing the number of students in a 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 Louisiana, we established a workforce initiative with the purpose of building college and career ready high school graduates. This school district chose In the first year, they started up 10 Leader in Me schools. Each year since then, two districts have added about 10 to 15 new schools between them.
Currently, now have 59 Leader in Me schools and will add another 20 schools this year with the stated intention of bringing it to all of their 151 schools over the next five to seven years. We have lots of headroom for penetrating more school districts. Finally, I'll just say All Access Passes and leader. Me have high gross margins, high revenue retention, and that makes it possible for us to ramp up new client partners to break even 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 of accelerated growth in EBITDA and cash flow is the successful hiring and ramp up of new client partners. In 2021, 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 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, as you can see on this chart, the average ramp, as you're familiar with, historically followed a great trajectory with All Access Pass. We're ahead of this trajectory for the people hired since 2016.
We're approximately 20% ahead of our historical ramp rate, and so we have a huge amount of headroom for growth in the number of client partners we can hire in The US in both the 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 are our adjusted EBITDA and net cash generated expected to grow rapidly on an absolute basis, but also relative 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's a high flow through and a predictable flow through of incremental dollars. And third is the fact that our SG and A and capital expenditures will grow much more slowly than in the past couple of years. As a result, not only are our adjusted EBITDA and net cash generated expected to grow very rapidly on an absolute basis, but we're at a rate which would place us in the top 10% of Russell two thousand companies in terms of expected growth in EBITDA over the next three years. 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 twenty nineteen and beyond.
Steve, I'm going turn the time to you to review our guidance and we'll open it for questions.
Speaker 3
Okay. 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 $11,900,000 last year to a range of between 18,000,000 and $22,000,000 this year, that the sum of adjusted EBITDA plus the change in deferred revenue on our balance sheet will increase from the $23,300,000 last year to a range of $30,000,000 to $34,000,000 this year. And that net cash generated, as we define it on slide 28 in the appendix, will increase from $15,000,000 last year to a range of 18,000,000 to $22,000,000 this year.
And we're happy to reaffirm this guidance for the year. With year over year growth of adjusted EBITDA in $2,600,000 in the first quarter, we're pleased to have gotten off to a strong start toward achieving the growth reflected in this full year guidance. We expect to retain this $2,600,000 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, etcetera, 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 spillover impact from the nonrenewal 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.
Speaker 2
Great. With that, we'll open it for questions and turn it back to the operator.
Speaker 0
Thank you. We will now begin the question and answer session. Our first question is from Alex Paris with Barrington Research. Please go ahead.
Speaker 4
Good afternoon everyone. This is Chris Howe sitting in for Alex.
Speaker 2
Hi Chris, how are you?
Speaker 4
I'm good. Have two areas of concentration for these questions. 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 $33,900 approximately.
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 timeframes.
Speaker 2
Great. So first question then, if I have it correctly, is just kind of what's the average size of the typical All Access Pass contract? And that is if I got that right, That's population. So, the average population is roughly around 200 people in the average population. And that's expanded some of course from the start where it was more like 01/2020 or 01/1930 in the early part.
So, 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, have a scaled pricing schedule which is the greater the population, the better absolute price you have. When you look at the revenue per pass, you've got the positive of having an increase in price and it's somewhat impacted though by as they expand populations, they qualify for the volume discounts that increase our revenue per customer. It reduces our revenue per seat some, but of course we're really focused on revenue per customer. 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-twenty percent of our contracts be multi year contracts, that will 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
Speaker 5
just say that I agree with everything you said, Bob, that we also see that upon renewal we get expansion. So, the longer we get into this thing, and you mentioned out to 2122, we'll go through another couple of years' worth of renewal cycles with these clients, which we'll have them add on as well. I think we'll probably see that average size increase from that standpoint as well.
Speaker 2
Does that respond, Suji?
Speaker 4
Yeah, 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 on
Speaker 6
the last call and just when it
Speaker 4
would be fully optimized and matured?
Speaker 2
Paul, do you want to address that?
Speaker 5
Sure, yeah. Our ramp, if you remember back on slide 21, it's a five year ramp. So we expect a new client partner in their first full year that they'll generate $200,000 that'll increase to 500,000 then to $800 then to 1,100,000,000.0 and finally 1,300,000,000.0 And at that point, we consider them fully ramped. So the class we hire this year, depending on when we hire 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.
Speaker 2
Chris, just to clarify, the net 20 higher end 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. They're kind of swallowed. We 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.
Speaker 6
No, just the ramp rate for the education client partners is about the same. It's two, five, eight, one, one over a four or five year period. We find a lot of client partners can get well over $2,000,000 so we're encouraged by that. It's about the same ramp rate.
Speaker 2
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 $60,000,000 of revenue just classes one through five with only one of the classes being fully ramped. When fully ramped, if you stopped hiring the total revenue would end up around $90,000,000 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.
Speaker 5
That's it. Thank you, Bob.
Speaker 2
Thanks very much. You have a wonderful day.
Speaker 0
Our next question is from Tim McHugh with William Blair. Please go ahead.
Speaker 7
Hi, it's actually Trevor Hi, how's calling me on for it going guys?
Speaker 2
Great, how are you?
Speaker 7
Good. First, I was just wondering if you could talk a little bit more about the invoices for education being down 17%. I know you called out the impact 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?
Speaker 2
I'll let Sean let me just put it in context. We reported, I think, in last quarter that the total impact on revenue in the latest twelve months on invoice revenue was around $4,000,000 from this $3,500,000 from this education contract. So you can see it was quite substantial in and of itself. But Sean, I don't know if you want to add. Sure.
Speaker 6
Yeah, 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, but 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 this first quarter or won't hit this year, but will 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 with schools, the outcomes that we're getting. And that's really spreading. Schools talk with each other, helping them achieve academic results, attendance improvements and so forth. And, again, our penetration is so low. We're in 2% of the schools in North America and 8% of the districts.
So between district growth and school growth, we really good about our future. And consider this impact of the foundation contracts, 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's not a major concern in the market and the market changes.
Speaker 2
And the expectation is that with this change of model, while the revenue per school will be slightly less in the year, for the year, we expect the velocity to increase and probably have our biggest addition of new schools. We have more new schools added this year than we've had for several years aside from the foundation contract.
Speaker 7
Okay, got it. Thanks. That's helpful. Steve, I think you mentioned at the end that second quarter might see an impact from the government shutdown. I'm sure it probably depends on how long this goes on, but how much of an impact are you expecting at this point?
Speaker 3
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 six 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. You 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.
Speaker 2
Just to put it in context so I think that's a great answer. To put it in context, it doesn't have the potential for a really big, big impact because only a portion of our government business is in federal government to start with and much of it is in Department of Defense that has continued contracts and so forth. The idea that in the agencies and other things and we have a lot of state and local businesses unaffected by it, but we're just noting that it could hit us by a million or so dollars this quarter of stuff that we'd plan to deliver that might get pushed. And that would if it were a million to a million and a half dollar, just order of magnitude, that would shave off a point or two of growth. So that plus the impact we know we're going to have from the education contract causes us just to be a little conservative on that one.
Speaker 7
Okay, makes sense. And then just one more quick one. Do you have a sense at this point of the full year impact from ASC six zero six and whether it would hurt or help any of the quarters this year?
Speaker 3
Yes. We're essentially still believe what we said at the last year is that we're expecting essentially a slightly positive but immaterial impact from six zero six for the year. So the $1,000,000 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 six zero six versus six zero five, we would actually go the other way in Q4 and have a decrease to our revenue in Q4 as an impact of 06/2006. So up in Q1, up a little bit in Q2, pretty even in Q3, down by maybe $1,000,000 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.
Speaker 7
Okay, perfect. Thank you very much.
Speaker 2
Thanks.
Speaker 0
Our next question is from Jeff Martin with Roth Capital Partners. Please go ahead.
Speaker 8
Thanks. Good afternoon, everyone. How are doing, Bob?
Speaker 2
Hi, Jeff. Great. Thanks.
Speaker 8
Steve, hi, Bob.
Speaker 3
Bob, if I
Speaker 8
could, on Slide 37, the direct office revenue breakdown, I wanted to touch on Onsites and Facilitator because I thought Onsites had been, seeing some decline due to the transition to All Access Pass. Does that Onsites number in the first quarter of this year include add on revenue? Yes.
Speaker 2
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 an All Access Pass, including manuals and that which is the legacy because it's just what you said. We had a decline in the legacy side more than offset by the growth in the add on sales So we're going to break that out for you and starting going forward we'll break that into All Access Pass plus add on services plus add on materials which are small. So you have the total for all access paths and add ons, so that'll reconcile and then you can see the decline in other facilitator and other on-site.
Speaker 8
Got it. Okay. Now the decline in facilitator to this year's first quarter, is there anything to glean from that? Were there abnormalities in the quarter relating to that? Or is there structural going on?
Speaker 2
Yeah, there's one structural thing. About $850,000 of that relates to a contract. It's an old contract. In the old days we sold some IP contracts, not All Access Pass ones, that always showed up in the facilitator delivery channel just because we had a small number of those. That contract occurred it's an ongoing contract.
It just happened in a different quarter this year than last year. 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. It's getting so that both the decline in legacy on-site and deciding legacy facilitator, although it will be 7,000,000 or $8,000,000 in total this year and cause a drag of 200 or 300 basis points on total revenue growth is becoming pretty small as a percent.
Speaker 8
Okay. And then in terms of your outlined expectations for 2021, could you give some high level detail in terms 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 the core of what the assumptions are behind that?
Speaker 2
Yes, yeah it is. It's 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 margins maintained.
Speaker 8
Okay, okay.
Speaker 2
So it's kind of the play we're running right now.
Speaker 8
Yep, that's helpful. Thanks very much.
Speaker 2
Thanks so much, Jeff.
Speaker 0
Our next question is from Marco Rodriguez with Stonegate Capital. Please go ahead.
Speaker 9
Hi, good afternoon. Hey, guys. Good afternoon. Thanks for taking my questions.
Speaker 2
Yes. Thank you.
Speaker 9
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 exceeded your expectations. If you can maybe talk a little bit about the drivers there that helped that performance.
Speaker 2
Yeah. Think we had the revenue growth, again, we're pegging all of our numbers as we just said in Jeff's question at 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 conversion of the pipeline was a bit stronger. Our pipelines are bigger and I think our sales force is getting better at doing it.
Don't know, Paul, if you have anything to add to that.
Speaker 5
That's what was going to say. Think we're getting this was we've talked in prior calls that the big shift in the way that we sell, we didn't used to have to work through procurement departments and get a contract for every sale. A 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 is getting more adept frankly at finding these opportunities, but then progressing them so we get more confident in the pipeline. I think we saw that.
We saw Q4 as well, frankly. Yeah.
Speaker 2
And 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 the quarter. So again, think just our costs were a little better. We were more conservative in our forecasting than we ended up on costs. Our revenue was a bit better and so it just flowed through.
Speaker 9
Got you. 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. Were any sort of larger items delayed or was it just more of a process improvements in terms of your overall spend?
Speaker 2
No, it's a combination. We have some process improvement spending. We challenged costs, but a lot of it is just that we made we had such big increases in investment last year that the rate of growth of our expenses is just less because we've really made all the investments in the ERP system and in the implementation specialists, etcetera. So, the growth is now really on the margin, and that's really what underpins our guidance and expectation of having very high flow through of incremental revenue. Our expenses are pretty much incremental.
As you know, our sales force is paid on commission on the margin. Our implementation specialists 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. There's nothing no deferred or delayed spending on anything of any substance.
Speaker 8
Got
Speaker 9
you. Lastly, if maybe you can kind of update us on the international licensees, just kind of where they are and how they're progressing with the All Access Pass model?
Speaker 5
Sure. You can see they had a strong quarter. On slide where was that slide? Slide 38. '37 or 30 eight.
We had a nice quarter, up 11%. And I think Sean mentioned this on the last call that and we've talked about it too, that we were delayed by nearly eight months in 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 it, 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 regalvanized everybody. And I think they're just it's a focus thing. Were able to not have that delay in front of them. And so we're starting to see All Access Pass grow. We had some nice All Access Pass sales.
They actually grew through the quarter. So October is little better than September, November a little better than October, December was good again. And so we're pleased that that's now starting to grow in those licensee offices as well.
Speaker 3
Got it.
Speaker 9
Thanks a lot guys. Appreciate your time.
Speaker 2
Thank you, Marco.
Speaker 0
Our next question is from Samir Patel with Askeladdin Capital. Please go ahead.
Speaker 9
Hey.
Speaker 2
Hi, Sameer.
Speaker 9
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%, five-zero, 50% penetration in multiyear contracts?
Speaker 8
Yep.
Speaker 9
Okay. Just wanted to make sure. Okay, cool. The second question, unless I missed Sorry. It, I didn't hear any
Speaker 2
Go There's people involved in more and more important things and getting bigger populations. It just becomes part of their culture of what they're doing. When they say it's going take me three years to change my sales force's ability to sell in the way I want to sell or to drive my customer loyalty metric, they're starting to recognize and we're starting to be strong enough to tell them that when they sign up for that, instead of taking antibiotics for a week,
Speaker 6
if it's
Speaker 2
going to take three weeks to get rid it, just said, oh, my friend, it's going take you three years to get this challenge done. If you sign up for it, let's sign up for it and go together. So that's what's driving it.
Speaker 9
Right. That makes sense. The second question, I don't think you really discussed it, but you'd put out a press release about acquiring your operations in, I think, the German speaking markets in Europe. And I was just curious, you did China, you've done that. Is that sort of a trend?
As context, you've talked about the different selling model and so on and so forth that kind of optimizes for All Access Pass. So 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. We
Speaker 2
feel very good about our ability of our licensee operations to get up to speed and sell this. They've worked on it. We've trained them. They're all in and committed. They've invested large sums of money to do the translation.
So we believe they'll be very successful with All Access Pass. 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 well China was a different question, was simply an opportunity we felt like it was coming to the end of our contract term with our previous licensee. We just felt like to get to build the brand and to build the distribution in China we needed to do that. It was a different situation here in Germany, so it's not part of a strategy to acquire our 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. Our choice was to either try to find a different partner and get that new partner starting over and moving up to speed or to acquire the operation there. We decided while there would be very few markets in the world where we would do so, now with that the four largest economies were all direct in with The US, Japan, China, and Germany. So, it just felt like the better idea rather than 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. It was just opportunistic and situational.
Speaker 9
Okay, cool. Thanks.
Speaker 2
Thanks, Drew.
Speaker 0
Our next question is from Zach Cummins with B. Riley FBR. Please go ahead.
Speaker 10
Hi, Bob and Steve. 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?
Speaker 3
For the quarter, we're around about $700,000 of revenue and 300 to $400,000 of adjusted EBITDA.
Speaker 2
And in the second quarter, it will be about half that and then it will be over.
Speaker 10
Understood. That's helpful. And then in terms of your guys' 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?
Speaker 5
Paul, do
Speaker 2
want others?
Speaker 5
I'll take that, Zach. So, I don't know 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're 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 dive for us.
Those are English speaking countries. Japan is now selling All Access Pass. That's a new phenomenon since we launched the portal for them with the Japanese language. I think candidly it'll 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 may be a little bit more elongated with them.
And then China, of course, kind of a similar thing. 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'll happen is we'll have a year or two as we get going in each of these countries and then it'll really start to go in these countries, what my bet is.
Speaker 10
Great. That was helpful. I think all of my other questions are kind of asked by the previous analysts on the call. I appreciate you taking the time to answer my questions and congrats again on a strong start to the year.
Speaker 2
Thanks, Thank you.
Speaker 0
Our next question is from Patrick Retzer with Retzer Capital Management. Please go ahead.
Speaker 11
On a great start meeting your guidance for the fiscal year.
Speaker 2
Thanks, Phil.
Speaker 11
It wouldn't be a Franklin Covey call if we didn't talk about returning capital to shareholders, you talked about that quite a bit last quarter. And we're I think we're silent on it this call. Is there anything you can add there?
Speaker 2
Yeah, 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 under our purchase authorization. And we haven't changed in our desire to do that. And so I think we'll have the liquidity and intent to do it.
During the quarter, we did not, but just getting ourselves ready to be in that position. There's nothing particular there. We'll remind you're very well versed in exactly what we bought when, but it's been over about approximately $80,000,000 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 or something else that because we have knowledge of something that could be perceived as being material that we can't do anything.
From time to time, we're in windows like that. But otherwise, we intend to be purchasers.
Speaker 11
Okay. 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. Would you agree?
Speaker 2
We agree. I mean, I think if you look at the expected growth in EBITDA and cash flow, our current value doesn't reflect the price to future cash flow is a low one compared to if we believe we're going to be in the top 10% of all Russell two thousand companies. So we do think it's up to 10%. Okay. Thanks for inviting me.
Speaker 11
Well, I'm with you. Keep up the good work.
Speaker 2
Thanks very much, Pat. Bye.
Speaker 0
We have no further questions at this time. Speakers, any closing remarks?
Speaker 2
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. Think you'll find a chance to go deep on understanding more 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. Thanks so much.
Speaker 0
Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.