Franklin Covey - Earnings Call - Q1 2020
January 9, 2020
Transcript
Speaker 0
Welcome to the Q1 twenty twenty Franklin Covey Earnings Conference Call. My name is Cynthia, and I will be your operator for today's call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. Please note that this conference is being recorded.
I will now turn the call over to Derek Hatch. Derek, you may begin.
Speaker 1
Thank you, Cynthia. Hello, everyone, and Happy New Year. On behalf of Franklin Covey, we'd like to welcome you to our 2020 conference call to discuss our earnings this day. 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 hire or to stabilize and grow revenues the acceptance and renewal rates for the All Access Pass the ability of the company to hire productive sales professionals general economic conditions competition in the company's targeted marketplace market acceptance of new products or services and marketing strategies, changes in the company's market share, changes in the size of the overall market for the company's product, changes in the training and spending policies of the company's clients and other factors identified and discussed 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 on management's current expectations and we undertake no obligation to update or revise these forward looking statements to reflect events or circumstances after the date of today's presentation, except as required by law. With that out of the way, I would like to turn the time over to our Chief Executive Officer, Mr. Bob Whitman.
Speaker 2
Thanks, Derek. Good afternoon and Happy New Year. We hope all of you had a great holiday. We really appreciate you joining us today. We're really pleased to report that our strategic and financial momentum continued to be very strong in the first quarter.
As you know, our goals and expectations for fiscal twenty twenty and for years to come are really twofold. First, to continue to be the leader in what we view as the most strategically important and lucrative segments of the performance improvement industry. And second, to consistently generate extremely high rates of growth in adjusted EBITDA and cash flow. Our first quarter and latest twelve months results were very strong actually on both of these objectives. Strategically, we had a significant number of large All Access Pass client wins and expansions in the first quarter.
And as shown on slide three, our All Access Pass and related sales grew 22%. We retained more than 90% of our All Access Pass subscription revenue for the sixteenth straight quarter. And a significant 32% of All Access Passes are now multi year passes, up from 22% at the end of last year's first quarter. Driven by this, we had very strong financial results in the quarter. Our revenue grew 8.9%.
Our gross margin percent increased by three thirty seven basis points to 71.7. As a result, adjusted EBITDA increased 56.5% or 1,800,000.0 to 5,000,000 for the quarter, and grew a similar percentage, 55% or 8,000,000 for the latest twelve months. And actually a little faster, 8,800,000.0 for the latest twelve months in constant currency. These results have gotten us off to a strong start toward our expectation and guidance of increasing adjusted EBITDA from 20,600,000.0 in 2019 to between 27,000,000 and $32,000,000 in fiscal twenty twenty, which represents growth of between 3155%. We expect to build on this momentum over the balance of fiscal twenty twenty and beyond.
Specifically, as we discussed in our year end conference call and as shown on slide four, over the next three years, we expect to grow adjusted EBITDA in constant currency from the 20,600,000.0 we achieved in fiscal twenty nineteen to between 27,000,000 and $32,000,000 in fiscal twenty twenty, so noted growth of between 3155%. And then to between 36,000,000 and $41,000,000 in fiscal twenty twenty one and to between 45,000,000 and $50,000,000 in fiscal twenty twenty two. We also expect to increase our net cash generated to between 25,000,000 and $30,000,000 in fiscal twenty twenty, and then to between 35,000,000 and $39,000,000 in fiscal twenty twenty one, and to between 44,000,000 and $49,000,000 in fiscal twenty twenty two. Today, we'd like to briefly review our financial results and then address four key topics which underlie our expectation of continuing to achieve this very rapid growth in adjusted EBITDA and cash flow in fiscal twenty twenty, 2021, 2022 and for the foreseeable future thereafter. First, I'd like to dig a little deeper into our financial results for the first quarter and for the latest 12.
First, revenue. Our revenue, as you can see in slide five, grew 8.9% or $4,800,000 in the first quarter, and grew $14,500,000 or 6.7% for the latest twelve months. Our total subscription related revenue grew 21% or $5,800,000 for the quarter to $33,600,000 and grew 23.3% or $24,200,000 to $128,000,000 for the latest twelve months. Our invoice revenues grew 8.4% or $3,800,000 in Q1. This was led by US and Canada, where invoice revenue grew a little over 10% for the second straight quarter.
Our balance of billed and unbilled deferred subscription revenue grew $16,800,000 or 26 percent in the first quarter to $82,700,000 compared to a balance of $65,900,000 at the end of last year's first quarter, and compared to $47,700,000 balance at the end of the first quarter of fiscal twenty eighteen. In addition, our total value of contracts signed in the quarter grew 17.5% or 7,900,000.0, our strongest contracting quarter in the last several years. Very strong contracting quarter. And that increased to 53,100,000.0. As shown on slide six, the high flow through of this revenue drove a 56.5% or 1,800,000.0 increase in adjusted EBITDA in the first quarter, with adjusted EBITDA increasing to $5,000,000 from $3,200,000 in the first quarter of fiscal twenty nineteen.
For the latest twelve months, 55% of the $14,400,000 of revenue growth we generated flowed through to increased adjusted EBITDA. This resulted in adjusted EBITDA increasing $8,000,000 or 55% to $22,400,000 for the latest twelve months, up from $14,400,000 for the same twelve month period a year ago. Constant currency adjusted EBITDA grew an even greater 61% or $8,800,000 to $23,300,000 for the latest twelve months. This high flow through of increases in revenue to increase in adjusted EBITDA again demonstrates the combined power of our strong high single digit revenue growth, our increasing gross margin percentage, and the fact that SG and A has been declining as a percentage of sales. Both the enterprise and education divisions achieved strong revenue growth in the first quarter.
As you can see in slide seven, in the enterprise division, which accounted for 78% of total company revenue in the quarter, revenue grew 8.7%, invoice sales grew 7.8%, the value of contracts signed grew 18.2, All Access Pass and related sales grew 22%, And deferred revenue, billed and unbilled, all related to the All Access Pass invoice sales grew 31%. So a very strong revenue momentum in the Enterprise division. As you can see in slide eight, in addition to achieving strong revenue growth, the Enterprise Division's gross margin dollars increased an even more significant 15.4% in the first quarter. This reflected the combined impact of strong revenue growth and a four thirty three basis point increase in gross margin percentage. In addition, operating SG and A as a percentage of sales declined slightly for the quarter even after covering the cost of adding 23 new client partners in the Enterprise division in fiscal twenty nineteen.
And also the cost associated with the conversion of the German office to a direct office this year. For the latest twelve months SG and A as a percentage of sales declined a significant two forty one basis points. The combination of these factors, improving revenue, improving gross margins, improving SG and A as a percentage of revenue drove a 47% or $2,500,000 increase in adjusted EBITDA in the Enterprise division for the quarter, with adjusted EBITDA increasing to 7,700,000 from 5,300,000.0 in last year's first quarter. For the latest twelve months, adjusted EBITDA increased 41.4% in the enterprise division or 8,200,000 to 28,000,000. As shown on slide nine, strong quarterly and latest twelve months performance reflects continuation of the strong growth in revenue and adjusted EBITDA in the Enterprise Division over many quarters.
As you can see, in slide nine, the last ten quarters Enterprise Division's latest twelve months revenue has grown from $135,900,000 to $174,300,000 growth of 38,500,000.0 And during the same period, latest twelve months adjusted EBITDA increased from 10,700,000.0 to 28,000,000, growth of 17,300,000. This represents a 45% flow through of increases in revenue over that period to increases in adjusted EBITDA. This model is continuing to drive strong revenue growth, high gross margins, declining revenue, and accelerated growth in adjusted EBITDA. As shown on slide 11, in the education division the majority of whose revenue and profitability occurs in the fourth quarter as you know, when schools are out and teachers and administrators are available to go through training. Revenue grew 7.1% in the first quarter.
Education's gross margin percentage declined 172 basis in this year's first quarter due primarily to an increase in the mix of services they sold relative to intellectual property licenses. This is expected to reverse in the second half of the year when price increases kick in in the fourth quarter and when we have very high absorption of our coaches in the third and fourth quarters. The SG and A also increased in the quarter. As you know, education invests early on to make sure we're ready to service all the revenue later on. Reflected the increased commissions on increased revenues.
The SG and A increase also reflected investment in new client partners, the addition of symposium marketing events in this year's first quarter, and an increase in the amortization of deferred commissions. Education's pipeline of opportunities is strong, and we expect significant growth in its revenue and EBITDA in fiscal twenty twenty as a whole. Again, we're really pleased with the strength of our first quarter and for the latest twelve months. This momentum has gotten us off to a strong start toward our growth objectives for the year, and we expect this momentum to further accelerate in the coming years as we'll discuss later. Now I'd like to address four key topics which underline our expectation of achieving this very rapid growth in adjusted EBITDA and cash flow in 2021, 2022 and for the foreseeable future thereafter.
As shown in slide 12, these topics include number one, you know, just touching on the greatest points of leverage in our business model. Those points of leverage that are driving the high flow through of increases in revenue to increases in adjusted EBITDA. Topic two is really addressing why the strategic space in which we play is so attractive and why we are winning in that space. Topic three, which I'll ask Paul Walker to cover, is where we see opportunities to accelerate revenue growth in the future. Topic four, which I'll ask Steve Young to address, is how we plan to utilize the significant amount of excess cash we expect to generate over the next three years.
Turning to Topic one, the points of greatest leverage in our business model. There are three that I'd like to address. The first point of leverage is that because All Access Pass is generating high gross margins, our gross margin dollars are growing even faster than our revenue. As you can see in slide 14, over the last two years the Enterprise Division's gross margin percentage has increased 156 basis points from 73.9% for the latest twelve months ending Q1 fiscal twenty nineteen to 75.5% for the latest twelve months in the quarter just ended. As a result, as noted, the Enterprise division's gross margin dollars have grown even faster than its revenues.
The second point of leverage is that with this increase in gross margin, a higher and higher percentage of our revenues are also All Access Pass revenues that have this high gross margin. As you can see in slide 15, there's quite a bit information on this table, but in the upper portion of the table you'll see that All Access Pass and related sales in Enterprise Division have grown from 41,200,000.0 at the end of the latest twelve months for Q1 fiscal twenty eighteen to 85,800,000.0 for the latest twelve month period. As also shown with this strong growth, Pass and related sales have increased from 29% of our total Enterprise Division sales two years ago to 49% of total Enterprise Division sales here for the latest twelve month period through this year's first quarter. We expect TOLICS Pass and related sales to continue to grow as a percentage of sales, increasing to more than 75% of total enterprise division sales over the next few years, with the balance being made up of licensee royalties, which will also be related to All Access Pass, and then some of our legacy on-site and facilitator revenue and miscellaneous revenue would make up the difference.
With this strong growth in All Access Pass and related sales has also come a significant increase in the amount of our deferred revenue balances. As you can see in slide 16, our balance of deferred revenue, billed and unbilled, has increased from 18,100,000 at the end of fiscal seventeen's first quarter to more than 82,700,000.0 at the end of this year's first quarter. With this has come significantly increased visibility into what we expect to be our future growth. We already know it's on our balance sheet and so a significant amount of what we're expecting and forecasting in the future is already on our balance sheet. The third and final point of leverage is that All Access Pass' high revenue retention rate is creating high lifetime customer value, and this is allowing SG and A to decline as a percentage of sales.
It was illustrated in slide 17, the combination of All Access Pass' attractive gross margins and high revenue retention, as well as high add on services attachment and the fact that it's sticky and we're retaining this is creating very high lifetime customer value. This high retention is allowing operating SG and A to decline as a percentage of sales in the enterprise division because we're retaining substantially all the revenue that we're selling. The combination of these three points of leverage, again, and growing gross margins, the increasing share of our revenue that's being generated that is subscription related, and the high retention of that revenue is really creating very strong operating leverage in the income statement. Topic nearly addressed quickly why the strategic space in which we play is so attractive and why we're winning. We often get questions on trying to get a little better understanding of the strategic space in which we play and why it is that we're winning and retaining the revenue that we are and our passes are being renewed, so we wanted to address that.
Just to say that first, the market for organizational performance in which we play is huge expanding. When you think about it, almost every organization's largest investment is in its people, it's collective investment in its people. And therefore its biggest opportunity for organizational performance improvement most often lies in increasing the collective performance of its people. In pursuit of this improvement, it's estimated that organizations globally spend more than $90,000,000,000 on outsourced learning and development solutions and services. They spend an additional approximately $220,000,000,000 for their learning development staffs and for internal content development.
And then in addition to the learning and development budgets, there are countless additional billions spent on consulting and other performance initiatives outside the learning and development spend. So there's a lot of money, effort, and time spent on this topic. Second, we are playing in what we believe is the largest and most strategic and most lucrative space in this market, and we're winning. In slide 19, the organizational performance market can generally be captured as shown in that slide. At the bottom of the pyramid is the job of developing skills and capabilities in individual learners.
On the left hand side of the bottom row is developing personal and interpersonal skills, and on the right hand side you have technical skills. Currently, the vast majority of training at the bottom of the pyramid, so to speak, is focused on the bottom right hand side on developing technical skills. Increasingly enterprises are turning to online and do it yourself video content to provide this kind of training, and they should. It's an economically smart way to leverage new technology while engaging individual learners online, especially with an increasingly dispersed workforce. As you move to the left hand side of the bottom of the pyramid beyond technical skills into the terrain of personal and interpersonal skills, Even more importantly, as you go up the pyramid to developing leaders who can achieve results and engage their people, and even higher to the top, to help organizations achieve major strategic initiatives that require large scale change in human behavior, you'll find the very challenges that line leaders and C level executives value most and have the budgets to address.
These are organizations must win challenges. Challenges such as closing an operational gap, improving sales performance, measurably increasing trust throughout an organization, or improving an organization's key customer loyalty metrics. Leaders not only invest a significant portion of their outsourced learning and development budgets to address these challenges, but also a disproportionate share of their internal learning and development budgets as well as portions of their operating budgets are focused on addressing these problems. We are winning and retaining and expanding our business with organizational customers seeking to address just these kinds of challenges. In doing so, we're gaining access not only to the large outsourced learning and development budgets, the $90,000,000,000 piece, but also to the internal learning and development spend, the $220,000,000,000 piece, as well as to portions of organizations operating budgets.
Just three quick notes on to that. As to winning a bigger portions of clients outsourced learning and development budgets, there's a large financial service firm which has now been an pass holder for nearly three years, who during this period has expanded their pass from 100 users to more than 8,000 users. Additionally, are contracting for many dozens of training days, what we refer to as add on services each year. This client has expanded its pass holder population rapidly in three short years because of the depth and breadth of content in the All Access Pass. Each time they encounter a new need in the organization, they consult with their Franklin Covey implementation specialist to determine how that need might best be met through the content and tools in the All Access Pass, and most often it can be.
This process has played out again and again. Their commitment to All Access Pass has increased It's important to note that this client's not investing more money in addressing their needs than they did previously. In fact, they're spending a little bit less than they did traditionally, but they've shifted almost all of their spend away from their other historical providers and toward Franklin Covey and their All Pass. Similar things are happening with internal learning and development spend where people are recognizing they can take the content in All Access Pass and weave that content and the tools in All Access Pass throughout their leadership development frameworks. And in so doing, again they're displacing a number of their former internal and external offerings.
We have one example of multinational Fortune 100 company who purchased SonalXis Pass three years ago as a pilot with a relatively small population of 200 leaders who recently increased their pass to cover all 30,000 leaders in their organization and signed a three year contract. Again, accessing not only the outsourced spend but also their internal. And finally, we're also winning, as I noted, a portion of clients' operating budgets. For example, the CEO of a large retail organization, you'd know, made the decision to implement our four disciplines of execution solution systematically throughout their hundreds of stores using All Access Pass. As a result, their revenue and profits are at historic highs.
They give credit to this whole process to four disciplines, And the organization has gained an increasing capability and toolset to execute strategies. So we're winning in all three budgets. And the reason we're winning, finally, is because our, first because our well known best in class branded solutions are focused on and known for their track record in delivering measurable outcomes on exactly these critical challenges that we talked about. Due to the importance of the challenges just outlined, organizations seek out best in class solutions that have a track record and credibility for delivering outcomes. And this is absolutely where Franklin Covey shines.
Franklin Covey is known and trusted for being the partner of choice for organizations facing challenges, the solutions of which require behavioral change at scale. Whereas most content in the learning and development space is unbranded and relatively undifferentiated, Franklin Covey's Solutions and Insights are well known, best selling, branded, and trusted. They receive 9s and 10s NPS scores from participants and buyers, and have a great track record and reputation for delivering desired outcomes. And so with this branded content on important problems, that's the first reason we're winning. And the second is because the All Pass structure has an extremely compelling value proposition.
With All Access Pass the clients receive unlimited access to all of our well known and trusted solutions, many of which are shown in slide 20. And they get that for their entire pass holder population. And finally as shown in slide 21, with All Access Pass these solutions are available in an almost limitless combination of delivery modalities. They're available in 21 languages worldwide so people can implement these solutions worldwide. They get the services of an implementation specialist who can help curate and design impact journeys to meet specific needs the client has, as noted in this one client who's gone to pretty much every leader in their organization.
The solutions can be purchased with add on coaching and delivery services to help a client to achieve its desired outcomes. And all this is available at a price per population trained that's less than or equivalent to that typically charged for a single course in a single modality. And for clients who are already purchasing access to video libraries that help individuals develop technical skills or personal skills, All Access Pass is extremely additive because it allows organizations to transcend these basic skills and also address their more pressing eightytwenty challenges. So delivering on this compelling value proposition is a key reason why sales of All Access Pass are growing rapidly, why we are retaining substantially all of the All Access Pass related revenue we sell, And why pass holder organizations not only are we renewing their passes but are doing so for multiple years. We have a similar value proposition in education.
Educational institutions again are buying a subscription to Leader in Me, finding enormous value in it, and expanding within their, of course the school retains, we retain these schools and they're expanding within districts. With that, I'm gonna ask Paul Walker, our President and Chief Operating Officer to address topic three, is where we see opportunities for even more accelerated revenue growth in the future.
Speaker 3
Thanks, Bob. While our high flow through of incremental revenue to incremental adjusted EBITDA and cash flow means that we can hit our targets for growing EBITDA at 30% to 40% compounded, even at just high single digit revenue growth. We have a number of opportunities we're working on for accelerating that growth into the future, and I'd like to share three of those here today. The first is to further penetrate the existing All Access Pass holding clients that we have. Bob shared a minute ago three examples of clients where they started out with an initial population of two to 300 users, and then in one case have expanded now to 8,000, and in another case expanded to 30,000 users.
And important to note, even in those companies, we still see expansion opportunity up and above those numbers. And that same opportunity that exists in those organizations exist across our entire All Access Pass client base today to try to quantify that. You know, obviously, those are those are big numbers. But but if we did that, just even a modest amount across our current All Access Pass holding base, there's five x or more the the All Access Pass seat potential inside our client base. And we know that those examples, that's that's a lot bigger growth than five x going from two or 300 to 8,000 or even 30,000.
So lots of headroom there. The way that we do that is the moment a client becomes an All Access Pass holder, they're assigned an implementation specialist. And that implementation specialist, along with their client partner, are in there immediately and engage with the client formally, at least quarterly. And, you know, it's very much a land and expand model for us. We we we make sure that we're doing a good job with the first job they hired us to do.
And our process is set up to uncover additional jobs we can help that client with, and additional populations which we can serve. And each of those additional populations represents expansion within that logo. And so lots of opportunity there, we're on that, and we feel good about the momentum and the trajectory there. The second way in which we see revenue growth accelerating in the future is to land more new logos, to to bring on more new All Access Pass clients. We're really pleased with the tremendous growth that we've achieved with the All Access Pass to date.
As you'll know, we All Access Pass and related sales have grown from a significant $15,700,000 in their first year to $85,800,000 in the last twelve months. And even with this success, we're just scratching the surface. As we've talked about in previous quarters, even excluding the small business market, which we in the future see as a potential market for us, there are more than 50,000 accounts in The US alone in our addressable market, which are not yet All Access Pass holders. To take advantage of this opportunity, we're adding significant significant number of new client partners every year, and we're seeing these client partners ramp up on or ahead of expectation. Over the past two years, we've refined our recruiting process and profile.
We now have full five full time recruiters. We've created a new, more immersive sales school, and we've invested significantly in sales leadership. And with these investments, we expect to continue to add at least 25 net new client partners a year and have a lot of headroom there in the years to come to add those client partners. And the third point I would touch on where we see the opportunity for accelerated revenue growth would be in our international operations. We now have direct offices in five of the seven largest economies in the world, The US, China, Japan, Germany, and The UK.
And these are in addition to our operations in Canada and Australia. And it's important to note that in each of these countries, we have the same or maybe even greater potential for growth as we do in The US. And it's the same strategy. We'll achieve that growth through the expansion with from existing All Access Pass holding clients and through winning new logos through our Salesforce expansion efforts, are the same there as they are in The US. And just using our same land and expand and our hire and ramp processes that we've identified and been executing for the last few years.
So we feel really good about the momentum we have today and we see opportunity to only accelerate that in the future.
Speaker 2
Thanks so much Paul. Now I'd like to ask Steve Young to address topic four, how we plan to use the excess cash we expect to generate over the next three years and also review our guidance.
Speaker 4
Okay. Thanks Bob. Good afternoon everyone and happy New Year from me also. As Bob mentioned, over the next three years, we do expect to generate a very significant amount of excess cash. We expect to utilize this cash to create additional shareholder value in at least two primary ways.
First, by continuing to make value creating investments in the company. The large amount of excess cash flow we expect to generate in the coming three years is already after allocating large amounts for innovations and new content and continuing to make ongoing investments in technology and portal capabilities. So as we've always said, we intend to run the business in a way that it can grow. In addition to our investments in new content and what we've talked about, from time to time there may be opportunities to invest in tuck in acquisitions such as our acquisition of Jhana that can add new capabilities that will add value to our pass holder customers. We would of course expect to earn a high rate of return on these types of investments.
So a second thing we plan to do is by continuing to return capital to our shareholders. As you know Franklin Covey has a history of returning capital to our shareholders. As you can see on Slide 24, over the years we have invested more than $150,000,000 in stock repurchases and retired more than 11,000,000 shares. Last month we repurchased an additional 13,800,000.0 of stock, bringing our total investment over these years in stock repurchases to greater to more than 167,000,000 at a weighted average purchase price of $13.86 per share. So the return on these stock repurchases has been very attractive to our shareholders.
The expected trajectory of our growth in net cash generated in coming years that we've talked about makes it attractive we believe under almost any discounted cash flow analysis to continue to opportunistically repurchase shares. So we believe we can still increase the value of the company and the value to shareholders. So our guidance, we expect net sales to grow as we've talked about at a rate of high single digits in fiscal twenty twenty and expect that a significant portion of these sales increases will flow through to increases in adjusted EBITDA. Our fiscal twenty twenty guidance remains therefore that in constant currency adjusted EBITDA will increase from $20,600,000 last year to a range of $27,000,000 to $32,000,000 this year. Anywhere in that range of course represents really strong growth in adjusted EBITDA growth that we've talked about between 3155%.
So now Q2. Despite the investments that we're still making in sales associates, new content, etcetera, we expect adjusted EBITDA in Q2 to grow by approximately 1,500,000.0 compared to last year to approximately 2,500,000.0. Bob?
Speaker 2
Thanks Steve and Paul. So just in conclusion,
Speaker 5
we are
Speaker 2
pleased with our strong results and the trajectory of our expected results. Pleased with our strong business model which we expect to continue to generate very high rates of growth and adjusted EBITDA and cash flow. We feel good about the strong and growing position of what we believe is the most attractive and lucrative part of the performance improvement market. And we believe that we have several great opportunities to further accelerate our revenue growth in the coming years while retaining high flow through of this revenue and we expect to utilize excess cash to add shareholder value. We appreciate your support and look forward to taking advantage of this tremendous growth ahead of us.
Now I'll turn the time over to you all for questions. So we'll ask our operator to open the line.
Speaker 0
Thank you. We will now begin the question and answer session. If you are using a speakerphone, you may need to pick up the handset first before pressing the numbers. And our first question comes from Andrew Nicholas. You may begin.
Speaker 6
Hi everyone. Good afternoon.
Speaker 2
Hi Andrew. How are you?
Speaker 6
Great, great. First question, I just kind of want to touch on gross margins a little bit. Obviously, a really strong quarter, up, I think, three forty basis points compared to last year. You talked a bit about it. I was hoping you could flush out the primary drivers there a bit more, speak to whether or not there were any unique items in the quarter to call out and then how we should think about gross margin progressing throughout the remainder of the year?
Speaker 2
Great, thanks. I think there weren't any specific special one time items. I think the primary thing at work here is the increasing mix of all excess pass and related sales, and they just have very high gross margins. What we've said is that over time we believe that from time to time we'll have big jumps like this in a quarter. But in the longer term we expect the gross margin percentage will increase some each year, But it'll edge up because on one hand, the positive thing that will be pulling it upward is the increasing mix of All Access Pass and Leader in Me subscription sales.
But we also believe that the strength of those offerings is really made more strategic by the addition of services. And so as services continue to get added to the subscription revenue, you know, they're a little bit lower margin. The combined margins will still really be good and will come you know, balance together. Also, you know, there could be some shift depending how we you know, where we if we develop all the content ourselves, it's all capitalized in the in the in development capitalized development cost. Sometimes we license license content also, it has a little different accounting treatment and may shift the mix between gross margin and SG and A.
But I think long term, we would think, as we've said in the past, we would think that gross margins will edge up not by hundreds of basis points a year or anything like that, but adding somewhere around maybe 100 basis points a year of gross margin for the foreseeable future. And some quarters will be bigger than others. That's the general trend.
Speaker 6
Great. Thank you. And then another one on tuck in M and A. Obviously, one area of focus would be content, adding content. But just wondering if you could speak maybe a little bit more to the type of content that you'd be focused on.
I know on Slide 19 you touched a little bit on the technical skills part of the pyramid where you haven't typically concentrated. Would it ever make sense to be more aggressive there? Or is that outside of the strategic direction of where you're trying to serve clients? First
Speaker 2
of I'll say that in terms of acquisitions, most content acquisitions, because the thought leaders typically don't have a company, they are thought leaders. They might be professors. They might be authors. Often times acquiring the content occurs more in the it's less capital intensive because really it's entering into a long term license to acquire rights and then developing the courseware and content and technology delivery. And so we don't see significant opportunities for acquiring companies that have lots of content just because in our industry it's been a very highly fragmented business with lots of small operators that tend not to they're not really acquisition targets for content generally.
More like with Liz Wiseman's content, or with Clayton Christensen in recent years, you have the ability to license the content. So the tuck in acquisitions we're talking about fit. For example, Johna gave us new capabilities. It gave an ability to deliver microlearning in a whole different delivery method with Jana weekly and accessing this library of best in class articles and content that can be navigated by an individual user. And so I think it's probably those kinds of areas, to your point, strategically, know, while we have some technical capabilities in content libraries, There are plenty of people focused on that.
It tends to be relatively undifferentiated. And we think the world's gonna be well served with probably another dozen people who come up with their own libraries of technical content, etcetera. So we think that part of the market will be well served and will give organizations plenty of options for rotating content among providers. For us, we want to make sure that the eight or 10 key jobs to be done on which we're focused, these critical must win games that organizations have, that we can get that content to them in unique and interesting ways that they can access it. So it's that kind of thing, assessment engines, different things like that that will probably be on our M and A targets to fill in capabilities more than content, if that's responsive.
Speaker 6
It is, thanks a lot.
Speaker 2
Thanks very much.
Speaker 0
And our next question comes from Jeff Martin. You may begin.
Speaker 7
Good afternoon, Hey,
Speaker 2
Jeff.
Speaker 7
Hey, Bob. How are you?
Speaker 2
Great. How are you?
Speaker 7
Good. We covered gross margin, but I was curious if we could go through the same walk for SG and A in terms of as a percentage of sales, what kind of trend per year? Last year, I believe it was close to 400 basis points improvement. I mean should we expect a couple of 100 basis points leverage on SG and A for the next several years?
Speaker 2
Yes, I'll let Steve address. Why don't you, Steve, why don't you address?
Speaker 4
Hi, Jeff. So we do expect leverage in SG and A obviously as a combination of reducing costs in some areas, having fixed costs that we're able to control or remain fixed or semi fixed. And then also that would leave areas where SG and A will increase primarily for additional salespeople and commissions paid to salespeople, implementation specialists, content development, and those types of things. But in general, not audit quality, but we talk about SG and A increasing at a rate maybe half the rate that sales increases. And a way to test if all this is working out is the targets that we talked about at the beginning of the presentation and that we've discussed.
If you have revenue that's growing let's say 8% for discussion and the adjusted EBITDA is growing at the rates that are indicated on those targets and most of that in our minds, even though Bob talked about gross margins increasing a little bit over time, most of that leverage is coming from the reduced percentage of SG and A to sales. Sure. So is that responsive
Speaker 7
That's helpful. And then I wanted to say congratulations on the large client wins and expansions. That's really good to hear. Was just curious if there's anything different in the sales process or the delivery process that's helping that effort.
Speaker 2
Paul, do you want to do this?
Speaker 3
Sure. Hi, Jeff. Hi, Paul. I would say nothing substantially different. You know, we're now I think what's happening is we're now more than four years into this.
And I would give our salespeople and our sales leaders great props for how they've helped us transition this business. And just every month that goes by, the salespeople become more comfortable. We become better at positioning this, we're getting better at entering higher end organizations where you naturally can address these larger populations. So I think it's just the continued turns of the flywheel there on how we go to market and then the market's receptivity to what we're doing. Nothing unusual or extraordinary, which is good, I think.
Speaker 7
Okay, great. And then last question on the international direct effort. Was just curious if you could give an update on some of the recent offices you've taken from a licensed model to a direct model, how those are performing and what you see as their potential and if you see additional taking licensing markets and making those direct as well.
Speaker 3
Sure. To the last point, we're now, as I mentioned, we're now direct in most of the well, in the largest economies, The US, China, Japan, Germany, and The UK, and then of course we're directing Canada and Australia. So I think we're not necessarily on a quest to convert licenses back to direct operations. There's been some opportunities that have come up and we did that most recently in Germany, as you know, but that's I think where we feel good about the direct operations that we have and in the places where we have them. To the first question you asked, transition of Germany has gone well.
So of course, was really Germany, Switzerland, and Austria is what we picked up when we say we converted Germany. Germany, of course, being the biggest economy there. We're significantly growing the number of client partners in Germany. We run that now out of our UK operation, which has been growing nicely for the past few years. And so we see and that in Germany, we're running the same play, All Access Pass related, everything Bob talked about on the call here.
And so we just expect to for us, it's the same strategy everywhere in the world. It's higher client partners. It's ramped them successfully. We sell All Access Pass everywhere we land, we expand, we're pleased with the momentum in international directs as well. We're just getting to China now and Japan really.
This is kind of the year where we start now that we're fully localized and have our portal up and running in China. So we expect to see continued momentum there as well.
Speaker 7
Great. Thanks for that, Paul.
Speaker 3
You bet.
Speaker 2
Thanks, Jeff
Speaker 8
and Okay, great.
Speaker 0
Sorry. And our next question comes from Marco Rodriguez. You may begin.
Speaker 8
Hi Marco. Hey Bob, how are you guys?
Speaker 2
Great, thanks. Hope you are too.
Speaker 8
Oh great, yes I am. Thank you. Thanks obviously for taking my questions. I wanted to maybe start on the client partner side. Can you maybe describe or discuss what the sort of hiring landscape looks like for you guys?
Has things sort Is there more competition for talent out there?
Speaker 3
Sure. Hey, Marco, I'll take that. This is Paul. We've talked I talked a minute ago about our hiring process. So we feel great about it.
We added a significant number of new client partners last year. We're adding we continue to add this year. And as we've refined our profile of client partner, we're really pleased with the client partners that we're able to attract in the enterprise division. Sean can speak to education as well. Is a good tight labor market out there.
The economy is doing nicely and unemployment is low. And I would say we're really pleased with the people we're able to attract. I think one of the biggest contributing factors to why we're able to attract who we're attracting today is we are growing and thriving as an organization. And that's a compelling thing for somebody, especially somebody who's been in our industry. We've made investments that others have not made and that's paying off and people are attracted to us.
So we feel great about the candidates we're getting. We feel really good about what our team's doing to ramp those folks. And we feel great about the fact that these new classes of client partners the last couple of years are all at or above the expectations that we had for them in enterprise. Sean can comment on Sean, go Yeah, sure.
Speaker 9
Yeah, hi Marco. Yeah. On the education front, we feel similar. It's a really attractive time to get people right now. I think a lot of it is the education industry is being disrupted quite a bit.
And a lot of these big companies are, you know, just being shaken right now. And so we're picking up a lot of really good client partners from former companies like Pearson Education and so forth. So if if if we are if I were to look at the last eight client partners we hired this year versus what we hired a year or two ago, I just think we're we're getting better quality people with more experience. We always try to hire people that have education experience, but they don't necessarily have to have it. They just need to have good sales experience.
But I feel really good about our processes and feel, you know, over the last many years, we've improved every year in our hiring capabilities.
Speaker 8
Got it. And then in terms of the implementation specialists, they they seem to have been doing a really good job here for you guys in terms of increasing the wallet share you have with your existing clients. I was wondering maybe if you can talk a little bit about them in terms of do you have the right numbers, the right heads? And if you can talk a little bit about maybe Are they kind of hitting them?
Are there any things that they need to kind of work on to kind of accelerate that increase in wallet share?
Speaker 3
This is Paul. I'll respond to that as well. So we do feel great about them, and thanks for acknowledging them. They're doing a wonderful job. And what we do, we have the right we we we have a formula.
We add them formulaically, and they're added as a percentage of all access pass sales. So we kinda have a a model for how many clients and how much revenue an implementation specialist can work with and do a really good job with. And then as sales grow, we we add more. And so it's it's a variable model that way. And, yeah, they are.
They're hitting their targets. Their their compensation, they're paid a base salary, and then they have a variable compensation that's tied to logo retention and revenue growth inside that account. And so to retain the logo, they've got to ensure that we do a really good job serving the client around the thing they initially purchased the All Access Pass to accomplish. And then the revenue growth, of course, comes as they develop more relationships. And I would say the client partner stays very involved as well.
And so the two of them together develop additional relationships, look for additional populations, and that's what drives the other portion of their compensation is the expansion of revenue and the addition of add on services. And so we they're a great team. You know, it's a team we didn't even have four years ago, and they're doing wonderful work.
Speaker 8
Excellent. And last quick question. Maybe if you can talk a little bit about the international licensees, just kind of where they are in terms of their implementation of the All Access Pass and their sales cycle?
Speaker 3
Sure. So they we are so All Access Pass is now available in 21 languages. Right, Adam? Yep. 21 languages continues to to grow there.
And so it's it's all of our licensed partners have been trained on it. They're selling it. We're we're quite pleased with how that that business is building for them. Of course, they continue to pay us 15% of sales, of their gross sales, but their businesses are also converting from what was our traditional legacy business to the All Access Pass, which helps them grow more rapidly. They see the kinds of growth that we're seeing here.
We had one of our licensee partners in Q1, near the end of the quarter, closed a very, very large All Access Pass. In fact, one of the biggest ones we had in the company. And it was really kind of a thrilling thing for that to come from one of our licensee partners. And and so we're it's it's it's they're doing great. They're doing great.
And we're it's I think the important thing to note there is across the enterprise division, we run the same strategy, the same play, the same recruiting profile, the same hiring ramp processes, really everywhere in the world. And it does not make much of a difference, if any difference at all, whether it's a direct operation country or a licensee country.
Speaker 2
Mark, I'd just add to that. In many of these countries, our local licensed partners, and we don't licenses as it happens to be the legal way we do business, we do them as direct really as pullout partners. They really have tremendous stature in their countries. These are people who are well known in this learning and development space. They may have been senior leaders in organizations and just have a passion for this.
As a consequence in many of these countries, they are really looked to as the person, the company or their organization or the individual is the one who's asked to speak on issues relating
Speaker 8
to
Speaker 2
leadership, who's interviewed on television if there's a leadership issue in the country or whatever. And so We have a tremendous group of partners that have invested their own capital alongside us to build these operations. So we feel really, really great about having this network. Now outside approximately 10 countries in Central Africa, and those under US embargo, we really have a licensee network that operates and at least has a footprint in essentially every country in the world.
Speaker 8
Got it. Thanks a lot guys. Appreciate your time.
Speaker 2
Thank you, Martin. And
Speaker 0
our next question comes from Zach Cummins. You may begin.
Speaker 2
Hey, Zach.
Speaker 10
Hey, Bob. How's going? On the strong start to the year. Just a question around the new client wins in this quarter. I guess more of the question is really around is how are you getting into the door at new customers to begin with?
And is it typically the displacement of an existing vendor is how you get into the door? Or is it trying to focus on maybe a leadership area that hasn't been addressed before at the company?
Speaker 2
Yeah. Paul, you can address first. You wanna ahead? Sure.
Speaker 3
I'll go. Yeah. So hey, Zach. So we there are I won't be too long with this answer here, but there are two primary entry points for us inside a new customer. And Bob mentioned these earlier, as he outlined kind of that strategic pyramid, I think, in the slide, I don't remember.
But we enter and sell to either senior learning and development leaders, so the Chief Learning Officer, Head of Talent Development, etcetera. And they're primarily purchasing capability development, either leadership development or or development for individuals across the organization. They might be thinking about things like culture, etcetera. Or we sell to the second entry point is to the to the line organization itself, the CXO level person, chief sales officer, chief executive officer, chief operating officer, etcetera. And so our salespeople are out every day.
They each have a 100 accounts assigned to them. And some of those accounts are existing and some are prospective. And they're calling on those accounts and using our marketing collateral. What usually happens is that they identify a need a client has. And whether we end up displacing another competitor or not, sometimes we do, sometimes we don't.
A lot of our competitors actually also a lot of our clients purchase at the bottom part of that pyramid, the technical skills. We're working alongside another organization. They're addressing the technical side and we're addressing more of the performance enablement for the business outcome side. And so we're just it's the salespeople out there with really good marketing behind them. We do a lot of marketing events we invite people to come and learn more about how we might help them.
That's our go to market process.
Speaker 2
In that market, Zach, you've got people who are already purchasing things, a lot of our big wins are coming from organizations deciding that rather than doing business with 20 different suppliers, having to serve as their own general contractor with formats that don't exactly match, the quality doesn't match, it's not implementable across the world. That's what's happening is that more and more some of these larger organizations who either already are customers or not yet customers are being compelled by the value proposition and saying, gosh, if I can get the world's best content on these topics I'm trying to get solved, services to help me get them done, in all languages across the world, etcetera, that whole value proposition, we're winning an increasing share of the dollars that these clients have. And in fact, even in some cases where the client is in their own mini recession where they might be cutting back, you know, laying off 10,000 employees, they're coming to us and saying, look, We're not gonna be spending as much, but we gotta make darn sure the money we are spending is having the greatest impact it can have. And as having a single focus on a couple of jobs to be done, we've won significant increases in revenue to us at the same time that client is spending the same or less.
And so it's a combination of those things. When we talk about the big wins this last know, we have big wins, thankfully, every quarter, but we've had some really good expansions and some big new wins in those areas and also in execution.
Speaker 10
It. That's extremely helpful. And just over on the education side of it, any sort of update on the rollout of the district model that you were talking about on the q four earnings call? Mean, have you seen any sort of uptick in interest buyers or more any sort of receptiveness to this new model?
Speaker 9
Yeah. Sure. Yes. It's we think it's going really well. It's we're calling it Leader Me four point o, and it's got this district component to it.
What we're finding is we've got a lot more we're having a lot more discussions at higher levels. The Salesforce is very excited about where this is headed. So we're we're having a lot of a lot of the district discussions are leading to big community discussions with multi district, sometimes state level discussions. So I we you know, initially, we've only been doing this for a few months. We feel really good about it so far.
And we've got the pipeline of districts we have right now compared to last year is we have, you know, many fold more, which is really encouraging. It's also a new type of sell, so we we're having to learn how to sell the districts.
Speaker 7
We've got
Speaker 9
maybe a third of our client partners are pretty experienced with districts and the rest aren't. And so there's some learning curve here for sure. And I think it's gonna take us a good year to really get, really good at it. But it's definitely the right direction. Early results are good.
My guess is in the past, whereas, like, last year, we brought on 30 new districts, we could bring up to a 100 new districts this year, and the pipeline looks really strong. But
Speaker 6
it's gonna
Speaker 9
it's gonna take some time to really get it across all the client partners, the capability.
Speaker 10
Got it. That's that's helpful. Appreciate the color. Well, I I think that's all the questions I had for now. But congrats on the strong start to the year, and best of luck with the q two.
Speaker 2
Well, thanks very much, sir.
Speaker 0
And our next question comes from Patrick Retzer. You may begin.
Speaker 11
Good afternoon, gentlemen. Congratulations on another good quarter.
Speaker 2
Thanks very much. Hope you're doing well.
Speaker 11
Thank you. I had a question about the Knowledge Ventures transaction. You bought $10,000,000 worth of stock. I would have thought your appetite would have been substantially larger than that. I'm wondering if you're saving a lot of dry powder to essentially put a floor under the stock here.
And if you bought it at $35.14 I would think here in the $33 area you'd be quite aggressive when the restrictions come off.
Speaker 2
Thanks Pat. First of all, we think the Knowledge Capital transaction itself is going to be a great thing for allowing us to expand our shareholder base. And that's going to be a great thing. Over the years we've had a number of important potential shareholders who have hoped that someday Knowledge Capital would distribute the shares to the underlying institutions. So that at least over some period of time there might be a source of shares.
So we think that's a good thing. And that balancing shares ourselves to allowing some other good shareholders to come in that will build our shareholder base and provide ongoing demand and conviction is a good thing. So while the shares have been distributed to institutions who we've known for thirty years, I've known for thirty years and have been shareholders for twenty, and we believe, you know, based on their discussion with them, they'll be very disciplined holders. Over time it will, and they've been investors, they're excited about what's going on in the company. You know, over time it will probably provide some opportunities for new shareholders to buy.
As to our own purchasing, as we've noted, we have an authorization of around 40,000,000. We invested 13,700,000.0 in the last month or so in share repurchases. And we believe there will be opportunities to continue to purchase. And obviously we get the point that if you, you know, that if we thought it was good at $35.50, it's also attractive at $35.54. So so I think, you know again, think we're the hopefully, the chart and the discussion that Steve had, we've shown a willingness and certainly purchased basically over 14,000,000 shares in total, Steve.
Speaker 4
$167,000,000, 12,000,000 shares.
Speaker 2
12,000,000 shares over time. And so yeah. So we we see this as an opportunity, I think moreover, we'll be there. We want to be an ongoing purchaser of shares and not just episodic. We've got the capacity and the cash flow and the tracker credanza intent.
So I think you're right that rather than saying let's try to buy all of it at one time, the people who receive those shares aren't necessarily sellers today, and we also have some people who we think if there are buyers that we'd like to, we might share the purchase with them to get some new large shareholders into the company.
Speaker 5
Okay, great. Thank you.
Speaker 2
Thank you, Pat.
Speaker 0
And our last question comes from Alex Paris. You may begin.
Speaker 2
Hey, Alex.
Speaker 5
This is Chris sitting in for Alex.
Speaker 2
Hi, Chris. How are you?
Speaker 5
I'm doing well. Congrats on the quarter.
Speaker 2
Thank you.
Speaker 5
Start to the fiscal year.
Speaker 7
Yeah. All
Speaker 5
of my questions have been asked, but just moving through my list, there are some remaining. As we move back to some of your comments that
Speaker 2
you
Speaker 5
made about retention of revenue and how that's creating leverage for the business, diving deeper into that, I imagine a material driver of that has been your Salesforce and the performance of it, more specifically, retention of your top performing Salesforce members. And in addition, the new hires as they move through move through towards their incremental revenue goals, the different cohorts that you're bringing on. Can you just perhaps dig more into what you're seeing that's driving the success that you're seeing in retention on a more granular level?
Speaker 2
Yeah. Yeah. You made a couple of important points. First of all, with a fixed investment in a new client partner, and that investment is pretty much flat for the first three or four years. Let's say you're paying them 100 or $120,000 a year, for the first three years even though they're on commission, there's a guarantee that they're getting.
And so with the more rapid ramp up that we've referred to in previous quarters, we have this 200,000, 500,000, 800,000, million 1, million 3 goal. Our last our last four classes, the ones that have been hired since All Access passed in the enterprise division and since Leader in Me membership in the education division, you know, the overall ramp rate has been a little bit ahead of that. And so to your point, there's leverage on a given fixed cost for those new people. There's leverage on on the on the cost there. You're getting more revenue out of the same cost, point one.
Point two is that also because you're retaining substantially all the revenue from these passes and people are expanding, adding on services, etcetera, you're not spending new marketing dollars to do that, and you're using a fixed investment, largely fixed investment in implementation specialists in the sales force and getting more out of that without having to spend new money. And so the things behind that are these strategic things that as we're in there with the client, we're identifying one task that they're trying to one problem they're trying to solve or opportunity they're trying to take advantage of. And within that same client, they've got 10 others. They're just they're either not doing anything about them today or they've hired others to do them. And that search that Paul talked about is when you're in there and able to find additional opportunities and you're not selling, you're really there servicing and people are saying, Gosh, could you help me solve this one too?
The first thing's been so successful. Hey, would you give me help on this too? It's just an organic process that is driving this. But in the past, a salesperson had to replace a good share of the revenue they sold in the first year before they started to grow, and now they don't. Is that responsive?
Speaker 5
That was responsive, yes. Thank you for the color. And that seems to be all I have for now. I did have one overall one last question to ask you. It's been touched on many times, the growth that you're seeing in the international market space.
It's more of a bird's eye view. I know we're getting a little late in the call. But can you talk about just where you are within some of the markets in regard to the market potential that you see as far as whether you're in the early innings, late innings, and some different tailwinds that are benefiting you.
Speaker 2
You bet. First of all, just one one thought is that the markets are becoming increasingly global. You know, twenty years ago, we when we had our began our our international partner network, you know, were a lot of international companies of course, but they didn't approach this concept of building their whole workforces on a global basis. It was delegated to each country to figure out kind of how they were going do leadership development or how they were going to do cultural improvement. Today that's not really an option.
If you're a global company, your culture is your competitive advantage. And so this is creating a beachhead in many, many countries because wherever the wherever the client might be, whether they're in Germany when they buy the pass, they have 10 other countries in which they operate. Whereas in The US, they have 20 others, whatever, is creating a beachhead that is helping us seed every country in which we have licenses and also in our direct offices. You know, now with direct offices in five of the seven largest economies, you know, many of those, you know, many of the global clients are operating in all of those economies. So that's providing a good foundation.
In terms of penetration, just generally though, when you look at across Japan, China, The UK, Australia, Germany, etcetera, have around $40,000,000 of revenue. And you look at that and say, if our US revenues are more like 130,000,000 in the enterprise side, You recognize that to be $40,000,000 in all the other biggest economies, all the headroom we have in The US, we're much less penetrated outside The US. And so I think for us, we see this as an imperative and a huge opportunity. It's needed by our clients. They're seeding us, giving us business to get to grow they help us grow in those areas.
We've got great client partner hiring things going. But we think, as Paul said, that this is a tremendous opportunity They're both so big that you can't we're not going to get there anytime soon, but certainly we're further away from the potential internationally than we are in The US, and we're just getting started, we think, in The US. So so we've got a lot to do.
Speaker 5
That's very helpful. I appreciate the color. Thank you, Dan.
Speaker 2
Thanks, Chris. K. If there are no more questions
Speaker 0
And we have no further questions at this time. I will now turn the call back over to Bob for final remarks.
Speaker 2
Great. Well we just appreciate each of you. Thank you so much for your great questions. Thanks for your support over all these years, for helping us think through things as you do. We view you as great partners.
We appreciate you and we look forward to a strong second quarter and year. Thanks so much.
Speaker 0
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.