Franklin Covey - Earnings Call - Q2 2019
April 4, 2019
Transcript
Speaker 0
Welcome to the Q2 twenty nineteen FranklinCUVY Earnings Conference Call. My name is Erin, 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. Mr. Hatch, you may begin.
Speaker 1
Thank you, Erin. Good afternoon, ladies and gentlemen. On behalf of Franklin Covey, I would like to welcome you to our second quarter earnings presentation this afternoon. Before we begin, I'd like to remind everyone that this presentation contains forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward looking statements are based upon management's current expectations and are subject to various risks and uncertainties, including, but not limited to, the ability of the company to stabilize and grow revenues the acceptance of and renewal rates 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 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, we'd like to turn the time over today to Mr. Bob Whitman, our Chairman and Chief Executive Officer.
Speaker 2
Thanks, Derek. Good afternoon, everyone. We really appreciate you joining us today. As you know, we've crossed the bridge in this transition to our subscription business model. As we've said before, we expect to now generate high rates of growth in adjusted EBITDA and cash flow going forward.
To remind you on Slide three what our expectations have been, we expect the reported adjusted EBITDA to increase from $11,900,000 last year to between 18,000,000 and $22,000,000 this year. It represents growth of 50% to 85 in that range, And then increase to between 26,000,000 and $31,000,000 in fiscal twenty twenty, and to between 35,000,000 and $40,000,000 in fiscal twenty twenty one. Reported adjusted EBITDA plus the change in deferred revenue, we expect to increase to between 30,000,000 and $34,000,000 this year, and then to between 38,000,000 and $42,000,000 in fiscal twenty twenty, and to between 47,000,000 and $52,000,000 in fiscal twenty twenty one. And then net cash generated, which is very close to reported adjusted EBITDA, is expected to increase again in the range of 8,000,000 to 18,000,000 to $22,000,000 this year to between 26,000,000 and 31 next year, and to between 35,000,000 and 40,000,000 in fiscal twenty twenty. Affirm these expectations, and there are three things that we hope you'll take away from today's call, you can see in slide four.
First, that we achieved strong second quarter results, which were ahead of our expectations. This better than expected performance was driven both by higher than expected sales and strong gross margins. The results reflect the growth and impact of our high recurring revenue, high margin, high flow through, low capital intensity subscription business model, and we're really pleased with how that's moving forward. We're rapidly climbing up the mountain and are on a strong trajectory to meet our objectives for fiscal twenty nineteen and in the coming years. Second, this growth is being driven by our subscription based business model.
It's driving the growth. It's also driving attractive subscription metrics and compelling economics. In the second quarter, All Access Pass and related sales grew 33% year over year and subscribers grew 29%. With all access pass, we are creating high lifetime customer value, really significant visibility into future revenue, and strategic and structural durability. We'll touch on that.
In addition, our key subscription metrics are now putting us in the company of some of the top subscription businesses. Third takeaway is that we are continuing to aggressively expand our sales force to take advantage of what we believe is an extraordinary sales force unit expansion opportunity. The economics created by the combination of our high lifetime customer value, the one year payback period we have for hiring a new salesperson, and the relatively low customer acquisition cost we have relative to initial purchase price, it's less than one, at one times the original purchase price, it's really creating compelling sales force unit expansion economics. We have a lot of headroom for sales force growth, we are executing on that opportunity. So, I'd like to just address each of these takeaways in a little more detail, starting with takeaway one, our performance.
As noted, we achieved strong second quarter results, which were ahead of our expectations. This was, as I noted, driven by higher than expected sales and gross margins and reflects the high flow through, relatively fixed cost, low capital intensity model that we've talked about. As you can see on slide six, our revenue growth was strong and very broad based. Reported revenue grew 8.2% in the second quarter, 10.3 year to date, and 11% for the latest twelve months. Adjusted for changes in foreign exchange rates, our reported revenue grew 9.6% in the second quarter and 11.4% year to date, with strong growth in both divisions.
Our balance of billed and unbilled deferred revenue, all related to subscription sales, grew 36% in the quarter. That's an increase of $17,000,000 compared to last year's second quarter. Billed deferred revenue or invoiced revenue grew 24% or $7,500,000 compared to last year's second quarter, and unbilled deferred revenue grew 60 one percent nine $500,000 compared to last year's second quarter. Total contract signed or contracted revenue grew 6.8% in the quarter, 7.4% year to date, and 4.5% for the latest twelve months, but the subscription portion of that grew 23% in the quarter and 27% year to date. Profitability and cash flow metrics also increased significantly as this increased revenue flowed through as expected.
As you can see on Slide seven, in addition to the sales information we've talked about, gross profit grew 8% in the quarter, 10% year to date, and 13% for the latest twelve months. Our gross margin percent remained strong at 70.2%, even with accelerated growth in All Access Pass related add on and support services. We expected operating SG and A as a percentage of sales to improve this year, and it has. Operating SG and A as a percentage of sales improved three forty six basis points in the second quarter, coming in at 68.3% compared to 71.8 in last year's second quarter and has improved four twenty three basis points year to date. Adjusted EBITDA increased $1,600,000 to $1,000,000 from a deficit of $700,000 in last year's second quarter.
There's a little rounding here, but we rounded down for your benefit. In some places, shows that you would think that's $1,700,000 but rounding makes it really $1.6 Year to date for the second quarter, EBITDA increased $4,200,000 to $4,100,000 and in constant currency has increased $4,800,000 year to date. For the latest twelve months, adjusted EBITDA increased 48.6% to $16,100,000 That's growth of $5,300,000 compared to the $10,800,000 in adjusted EBITDA in the same latest twelve month period last year. Finally, net cash flow provided by operating activities increased 44.7% in the second quarter to 13,600,000.0 That's an increase of $4,000,000 compared to $9,400,000 in last year's second quarter. I'll now just briefly touch on each of the divisions.
I'll start with a review of the results for the Enterprise Division, which accounted for approximately 80% of our total revenue in the second quarter. As with the company overall, our revenue in the Enterprise division was strong and very broad based. We had strong growth throughout all of the offices in The U. S. And Canada.
We also had strong growth in each of our international direct offices. We also had growth in our international licensee operations when adjusted for FX. As you can see in slide eight, also our balance of billed and unbilled deferred sorry, reported revenue of 8.3% in the quarter, 10.3% year to date, and 13.6% for the latest twelve months. And adjusted for changes in foreign exchange rates, reported revenue actually grew 9.7 in the second quarter and has grown 11.6% year to date. Our balance of billed and unbilled deferred revenue in the Enterprise Division grew 36.2% in the second quarter, with billed deferred revenue growing 20.5%, unbilled deferred revenue growing 65.6%, which is building a lot of the contracted revenue that's not yet showing on our balance sheet that will help us in the future quarters.
Our contracted revenue grew 9.2% in the second quarter, 10.7% year to date, and 6.1% for the latest twelve months. This is driven by contracted All Access Pass and related revenue, which grew 29% in the quarter and 39% year to date. The Enterprise Division is expected. There's a lot of flow through of this incremental revenue. Gross profit increased 8.3% in the second quarter, 9.5% year to date, and 16.5%.
Of course, it grew more rapidly in constant currency. Our gross margin percentage remained very strong at 75.1%, even with strong growth in All Access Pass add on support services. Our operating SG and A as a percentage of sales improved two sixty five basis points in the second quarter, coming in at 65.5% compared to 68.1% in last year's second quarter and has improved three fourteen basis points year to date. Finally, adjusted EBITDA increased $3,800,000 in the second quarter, a growth of 50.9% compared to $2,500,000 in last year's second quarter. This reflected flow through of incremental revenue to incremental adjusted EBITDA of 42.3%.
Adjusted for FX, the growth was even stronger. Adjusted EBITDA increased to $4,100,000 which was growth of 64% year to date for quarter. The Then year to date for the second quarter adjusted EBITDA increased 9,000,000 which is a growth of 43.4% compared to $6,300,000 last year. And again flow through of 36%, which is again higher in constant currency. Adjusted EBITDA for the latest twelve months grew 47.1% to $21,100,000 That's growth of $6,700,000 compared to 14,300,000.0 Stepping back from it, the expectation was that once we got through the major investments that we made last year that we would achieve strong growth in the Enterprise division driven by our subscription business, that we would have very high gross margins that would flow through to increases in adjusted EBITDA, that we would generate a lot of cash flow, and we're pleased that that was occurring.
We've got strong pipelines of business and of course our largest quarters are still ahead of us in the third and fourth quarter for the Enterprise Division. We expect to have a very strong back half of the year as well. The Education Division, maybe we'll turn to that quickly. As you know, the vast majority of the Education Division revenue and adjusted EBITDA is typically recognized in the third and fourth quarters due to budget cycles and to the availability of professional development days in the summer in North America. And you can see that seasonality.
There's a slide 30 in the appendix that gives you an idea of what the full year looks like. However, the second quarter showed real strength, and education's pipeline of advanced sales opportunities is really strong. We expect to have a very strong year over year growth in the late third quarter and particularly in the fourth quarter. As you see in slide 10, revenue growth was 7.7% in the quarter and 10.2% year to date. Reported revenue growth for the latest twelve months was 3.1%.
But excluding the impact of the expiration of this large multi year education foundation contract in last year's second quarter, which reduced year over year revenue, latest twelve months revenue growth for the Education Division would have been 11.8%. We're now past the impact of that particular contract and won't need to talk about it in future quarters. Adjusted for changes in foreign exchange, reported revenue grew 9.4% for the Education Division in the second quarter and 11.1% year to date. Balance of billed and unbilled deferred revenue in the Education Division grew 33.5% in the second quarter, with billed deferred revenue growing 37.6 and unbilled growing 17.3%. Contracted revenue declined due to the usage of deferred revenue and to the or the non repeat of the contract, 11% in the second quarter, 14% year to date, and 1% for the latest twelve months.
Profitability metrics improved. Gross profit increased 5.2% in the second quarter and 11.6% year to date, 2.8% for the latest twelve months. Excluding non repeated contract, gross profit grew 10.6% for the latest twelve months. Gross margin was 56%. Operating SG and A as a percentage of sales improved four seventy five basis points in the second quarter, coming in at 65.4% compared to 70.1% in last year's second quarter.
It has improved four thirty eight basis points year to date. So, through the whole company, the SG and A as a percentage of sales is improving. SG and A is remaining flat except for increases in commissions. And adjusted EBITDA for Education was a deficit of $900,000 That compares to a deficit of $1,200,000 in last year's second quarter. Year to date for the second quarter adjusted EBITDA in the Education Division was negative $1,200,000 which is an improvement of $800,000 compared to negative $2,000,000 year to date last year.
So again, have a very strong pipeline in education and expect a strong second half of the year. Stepping back for the company overall, we're really pleased with the company's performance for the second quarter and year to date. We are pleased with the momentum that's building for the back half of the year and excited that we've really gotten a good push up the mountain toward our objectives with about almost $5,000,000 improvement in adjusted EBITDA year over year against our guidance for the year. Stepping back now and talk about the business. Takeaway two.
Our subscription based business model is driving this overall growth, as well as our attractive subscription metrics and compelling economics. In the second quarter, All Access Pass and related sales grew 33% year over year. And our number of paid subscribers All Access Pass subscribers grew 29%. With All Access Pass, we are creating high lifetime customer value, also visibility into future revenue, and what we believe is really increased strategic and structural durability. In addition, our key subscription metrics are putting us in the company of some of the top subscription businesses.
As you can see in slide 13, All Pass and related sales growth continued to be very strong in the second quarter and year to date. As shown, All Access Pass and related sales in the second quarter grew 33% to $18,300,000 an increase of $4,500,000 compared to $13,700,000 in last year's second quarter. Year to date, All Pass and related sales have grown 42% to $37,500,000 an increase of $11,000,000 compared to $26,500,000 last year for the same period. And for the latest twelve months, All Access Pass and related sales have grown 50% to $71,300,000 That's an increase of $24,000,000 compared to $47,000,000 for the same latest twelve month period last year. The value of all Access Pass related contracts signed in the second quarter also increased 28.5%, and the balance of deferred revenue billed grew 21%.
As you can see on '14, this growth reflects the continued significant growth in the number of paid All Access Pass subscribers. As you can see, the number of paid All Access Pass subscribers reached 397,000 at the end of the second quarter. That's an increase of 89,000 or 29% compared to the 308,000 we had a year ago. And encouraging and exciting for us is that the average All Access Pass and related revenue per subscriber also increased 17%. We're having both expansion of revenue per paying customer as well as the number of paying customers.
That's driven revenue growth that's actually even higher than the subscriber growth. In terms of quality metrics, Alex Pass is not only growing rapidly, but it's achieving key subscription metrics consistent with those being achieved by some of the subscription businesses with the most compelling economics and valuations. You see in slide 15, these metrics include annual recurring revenue, annual revenue retention of more than 90%, add on services rate of more than 45%, which is highly correlated with high customer retention and expansion, a total revenue retention rate, including year over year same client subscription and services revenue when you had services in more than 100%. A relatively large initial purchase price, which reflects the relatively large size of the populations for which All Access Pass is typically purchased, but this relatively large purchase price establishes the foundation for strong unit level economics, including reduced customer acquisition costs as a percentage of sales, which is less than one. Our customer acquisition costs I mentioned are attractive, less than one.
And the expectation of achieving $100,000,000 in annual recurring revenue in only approximately four years is really quite aggressive growth. And so, we're pleased that the quality metrics are also showing up and staying strong. So, on slide 16, our lifetime customer value is growing. Combination of the high initial purchase price, strong gross margins, good attachment, service attachment rate with sticky annual retention is building strong lifetime value. This, of course, is being driven by the effectiveness of our solutions at addressing customers' most intractable performance challenges.
Challenges such as successfully executing on a major strategic initiative or achieving high levels of customer loyalty or building high levels of trust on a team or throughout an entire organization, or building leaders at all levels who win with all stakeholders. These are all challenges the solution to which requires change in human behavior at scale. I read the other day a comment by the renowned physicist Richard Feynman who was quoted as saying, Physics would be a lot harder if electrons had feelings. And that means a lot to us, because electrons don't need to buy into their task or collaborate or communicate clearly or build trust or work together effectively, but people in organizations certainly do. And so, organizations successfully address these challenges which require large scale change in human behavior, not just skills, but where you get people working together, creates customers for life and builds strategic durability.
We're seeing this time after time as customers repeat, expand, and extend their contracts. To build on customer success and reinforce this, we are committed to consistently adding content and capabilities to the All Access Pass to help clients achieve these desired outcomes. You can see in slide 17, since inception we've added to the original offering 1,200 microlearning articles and tools which came through the acquisition of Jonna and subsequent development. Broad coaching capabilities which we initially achieved with the acquisition of Robert Gregory and have been expanded to provide implementation coaching to drive home the capabilities that we're training people on. We have three new major courses that can be offered in all modalities, live and digital.
We've localized additional content in 18 languages. At the end of this month, we'll be adding our newest major course offering to the All Access Pass, one on unconscious bias, is receiving a lot of advanced billing and demand from clients. It's building a culture that recognizes the unleashes the capability of all its people, allowing people to recognize that overcoming unconscious bias and leveraging the talents of all people is a big opportunity. There are some big organization wide contracts that we're discussing right now. We'll also be updating our on demand digital library and also adding another offering on accountability.
We're also in the documentation phase now of finishing licensing agreements with two really significant new thought leaders and authors. We will announce those when they are completed. Looking forward, we are also working to increase our assessment capabilities as well as to increase our capabilities in data and analytics. There's a lot going on in our industry around you in pockets in that area. I think there's some great opportunities for partnerships and licensing agreements in that area.
We're also implementing other technical enhancements to better serve our clients. So, there's a lot going on there all the time and the path is getting stronger and stronger at the same time our clients are getting significant value from it and repeating and extending. Slide 18, you can see that reflective of this lifetime value is that we have, in addition to the $55,500,000 balance of deferred All Access Pass subscription revenue, the expected net present value of future revenue from All Access Pass contracts is growing rapidly from $115,000,000 in 2016 when we introduced All Access Pass to $355,000,000 at the end of this year's second quarter. We expect to get over the $500,000,000 mark in the next twelve months or so. In addition to that, All Access Pass has two elements that provide what I'd call structural durability.
One is that All Access Pass purchasers contract for and pay their subscription at least a full year in advance. And second, an increasing percentage of pass holders are entering into multi year contracts. As you can see in slide 19, for the latest twelve months, 27% of passfull organizations entered into multi year contracts. That's up from just 10% a year ago. It's a trend that will move forward.
We'll expect to move that over a third in the coming quarters and move toward 50% in the coming years. Just one last note on All Access Pass is that in slide 20, to simultaneously achieve top tier growth in subscription related sales, as we've talked about here, the top tier subscription, economic and customer metrics we've talked about. And at the same time, being top tier rates of growth in adjusted EBITDA and cash flow is a rare combination. And we're grateful for our clients. We're grateful for our team.
For us, achieving the intersection of these three factors reinforces the prospect also of creating significant increases in value for our customers and our shareholders. Final takeaway number three is that we are continuing to aggressively expand our sales force to take advantage of an extraordinary sales force unit expansion opportunity. Just again, bullet points. The economics created by the combination of one, this high lifetime customer value. Two, the fact that we have a one year payback period for hiring and ramping up a new salesperson.
We get the cost back including marketing and salary and computers and travel and cover in the first year. This relatively low customer acquisition cost relative to the initial purchase price provides compelling unit economics. Fortunately, we also have compelling headroom for growth. We have lots of room for growth. We're executing on this opportunity.
Over the next three years, we expect to add at least 75 net new client partners or salespeople to our existing base of two thirty. In addition, we expect to see 70 of our existing two thirty salespeople 70 are still well into are still ramping up, and we expect to see 70 of these client partners complete their accelerated ramp up over the next few years as well. The combination of these factors is expected to add tens of millions of dollars in additional growth revenue to that already expected to be generated from ongoing sales growth from our 160 fully ramped client partners. The combination of these factors is expected to accelerate our revenue, adjusted EBITDA and cash flow growth. I think there are three things that put us in a strong position to execute on this unit expansion opportunity.
First, as you can see in Slide 22, we have a strong track record of successfully hiring and ramping up salespeople. As you can see, since 2012, we've added 110 net new client partners to our direct sales forces, many of which are still in ramp up. As also shown on that slide, the average revenue ramp up for these new client partners has followed a great trajectory. New client partners have averaged more than 200,000 in sales in their first year, more than $500,000 in their second, and then typically reach at least $1,300,000 in revenue by their fifth year, and then grow beyond that. As I mentioned, All Access Pass' strong economics are accelerating the ramp rate for new client partners.
Because they're retaining the revenue that they sell much more than the old model did, our already strong ramp rate is improving. As a result, the ramp rate for new classes of client partners hired since the beginning of fiscal twenty sixteen is approximately 20 ahead of that historical ramp rate of 200,500, 800, 1,000,000, 1,000,000, three. And we expect that this will continue to provide us some upside on the ramp up. With our relatively low customer acquisition costs, as we've noted, and All Access Pass has high margins, as Ed noted, typically break even on our approximately $150,000 total first year investment in a new client partner by the end of the first year. In the bullet three, we have a lot of headroom for growth in the number of client partners we can hire.
The addressable market for performance improvement in the enterprise side is more than $40,000,000,000 in The US alone. We also have a similar opportunity in education. As you can see in slide 23, of the 55,000 companies just in The US alone, only 11,000 have even been assigned to our client partners to work with, to meet with. 4,000 of those are active customers. There are 7,000 that have been assigned that are not yet customers, and we do a lot of things to help those folks become customers.
We still have 44,000 unassigned accounts giving us headroom to add another 400 salespeople in The US alone. There are similar, in the enterprise business, similar opportunities in The UK, Japan, Australia, Germany, Austria, Switzerland, and now China, of course with three direct offices in China. We have a similar opportunity in education where there are 150,000 K-twelve schools in The US and Canada, of which 47,000 have been assigned out to salespeople. We have a remarkable number, 2,700 active schools, but that leaves a lot of assigned schools that are not yet customers, plus another 103,000 unassigned schools. So, we have a big opportunity for growth, we've been building the infrastructure to do that.
To support and accelerate this sales force expansion, we now have four recruiters on staff who review thousands of resumes and LinkedIn profiles and actually conduct more than 3,000 live and video based interviews each year to find our 20 to 25 new client partners. In addition, we now have a high intensity five week sales training school for all new recruits. We've always had some sales academy work and a lot of online work. We now have a very rigorous five week sales training school for all recruits. In addition to these recruitment and training efforts over the past year or so, we've also significantly expanded both the volume and breadth of our marketing and global thought leadership efforts, all with the goal of generating or nurturing leads, raising our brand awareness worldwide, and softening the beaches for our sales force.
As shown in slide 24, in addition to our collection of bestselling books, prospective clients can access our brand and thought leadership through webcasts and live events or through a weekly subscription based digital newsletter that features interviews with renowned authors and experts all on the topic of leadership. We also host a weekly radio program on iHeartRadio, soon to be a national syndication. And our practice leaders now author recurring columns in Forbes and in Inc. Magazines, as well as generate ongoing strategic articles, interviews, and industry specific trade publications. We also host multiple weekly podcasts and main stage keynotes at leading conferences, including the World Business Forum.
We've always had a strong lineup of what have become bestselling books and have sold more than 44,000,000 books worldwide. This notwithstanding, our current book pipeline is actually the most robust in our history. Next week we release our newest book, Cracking the Code to Customer Devotion. And we are currently creating works aimed at first level in senior leaders as well as specific workplace topics including unconscious bias, strategy execution, and accountability. We expect the combination of these recruitment, sales training, marketing, and thought leadership efforts to help us take advantage of the opportunity to accelerate the hiring and successful ramp up of large numbers of new client partners.
So, finally, in conclusion, these three takeaways you've seen. We had a strong second quarter. It's indicative of the business model that we have been trying to build over the last few years. And we expect that growth and impact this high recurring revenue, high margin, high flow through, low capital intensive subscription business model will help us to continue to meet our objectives in 2019 and in the coming years. Second, the subscription business is driving that.
As we've talked about, All Access Pass and related sales grew 33% year over year and subscribers 29%. And finally, the sales force having strong offerings that are compelling and connecting with customers, we now are focusing an increased effort on our something we've done for years, on this unit expansion. So with that, I just wanted to step back and say this is an exciting time to be at Franklin Covey. It is really exciting for all of our people because the nature of our client engagements is just more profound. We've always had this idea of developing customers for life and having deep, pervasive, ongoing relationships with clients.
What we're doing now is our whole customer engagement process is all exactly aligned against that objective. So, we're excited about it. We appreciate your support. We appreciate the efforts of our nearly 1,000 associates throughout the world and are excited about our opportunities for continued growth. So with that, I'll turn the time over to Steve Young for our outlook and guidance.
Speaker 3
Hey, thank you, Bob. We are excited about the future and pleased to be able to share some guidance with you this afternoon. So as indicated on Slide 26, we have said that over the next three years, we expect to achieve significant growth in adjusted EBITDA, net cash generated and adjusted EBITDA plus change in deferred revenue, and we reaffirm those expectations. As Bob said, and as it also shows on Slide 26, in constant currency, we do expect adjusted EBITDA will increase from $11,900,000 to a range of between 18,000,000 and $22,000,000 this year, which is a growth of 50% to 85%. Two, we expect that the sum of adjusted EBITDA plus the change in deferred revenue on our balance sheet will increase from $23,300,000 last year to a range of between 30,000,000 and $34,000,000 this year.
And three, that net cash generated, as we define it in the appendix, will increase from $15,000,000 last year to a range of between $18,000,000 and $22,000,000 this year. And we think those are pretty good growth expectations, and we affirm this guidance. With year over year growth in adjusted EBITDA of $4,800,000 year to date in constant currency, we are pleased to have gotten off to a strong start toward achieving the growth reflected in this full year guidance. We do expect to retain this $4,800,000 of year to date adjusted EBITDA growth and add to it in the third quarter. The third quarter's reported adjusted EBITDA in constant currency is expected to be as much as $500,000 higher than the $588,000 in adjusted EBITDA achieved in last year's third quarter.
This guidance allows for some potential impact of the delay and rescheduling of certain government business to the fourth quarter as a result of the federal government shutdown. It also provides for the fact that substantially all of the growth in sales in the third quarter is expected to be in subscription sales, whereas you know the revenue will be recognized over time, but the increased sequential cost for marketing and for hiring new client partners will be recorded in this quarter. So we're excited about our start. We're excited about the year, excited about the third quarter. So Bob, that's official guidance.
Speaker 2
Great. Thanks, Steve. All right. At this point, thanks so much. We'll now open the line up, if we could, for questions.
Speaker 4
Thank
Speaker 0
And your first question comes from Tim McCaw with William Blair.
Speaker 5
Hi, Tim.
Speaker 2
Hey, how are guys doing?
Speaker 6
Good. Are you?
Speaker 5
Good. Can I just first ask on digging the margins a little bit, guess? The improvement this year has been, I guess, mostly SG and A leverage versus kind of the gross margin being more flattish year over year, which is kind of opposite of last year, right? And I guess, as you talk about the growth of subscription revenue and the high flow through of that, I guess why aren't we seeing that in the gross margin? And then secondly, as sales force hiring starts to ramp up here, do we keep seeing SG and A leverage?
Speaker 2
Yes. Thanks, Tim, On the two questions. First of all, the principal reason we haven't seen the growth same growth in margin percentage this year is our focus. After we acquired the Robert Gregory company, we recognized that drive home results, having coaching and other services attached to our training is really a powerful way of driving home change. We've had an increased mix of services revenue this year that's been
We've grown the add on services revenue both in percentage of attach rate and dollars. That's been the primary thing that's just offset what would otherwise have been some additional growth just because of the higher gross margin of the subscription portion. We think it'll be stable in this range and probably increase somewhat going forward now that we've made that big push. There was kind of a big push and now it'll level off and we should have some continued growth there. But that's the primary thing at work on the gross margins.
Again, we feel really good about the level of gross margins and particularly in the enterprise side we're at 75% blended or so. That is good. In terms of the sales force leverage, yeah, we do believe, honestly, Tim, that we'll have the same the leverage in the operating model will continue. That's basically because if you look at what will happen is adding net 20 to 25 sales people a year on average that group will be on staff for about half the year. At $150,000 a person we'll be adding about 1,000,000 point dollars of annualized cost on average for the year.
We cover that with revenue and gross margin that's generated from them. And so, it's built into our model. And so, these expectations that we'll have EBITDA growth of these high rates but with flow through of 45 to 50% already incorporates the idea. And so, With the high gross margins, generally the addition of salespeople because it's relatively flat each year, mean it's 20 to 25 every year for the next five years is what's in our plan, it should keep the leverage I think can flow through very high. Is that helpful?
Speaker 5
Yeah, that's helpful. And then on a geographic basis, can you talk about, I guess to the extent I know it's smaller than The U. S, but U. K. And Europe, certainly, guess, U.
K. Given all the political uncertainty there right now, how are client are you seeing the same kind of client engagement? Is there any impact on decision making and ability for them to think about longer term subscriptions?
Speaker 2
Paul, do you want to respond to that?
Speaker 6
Yes. Sure. Hi, Tim. So far, we're not seeing any challenges there. Of course, there's there's some FX impact for us as the pound versus the dollar transitions, but we're our our business is growing in The UK, has been growing steadily now quarter over quarter for quite some time, And we continue to win new business and expand the work we're doing with current clients.
And then Germany is a new thing for us. As we talked last quarter, we've just taken that business back in Germany, Switzerland and Austria from our licensed partner, but had nice business in the second quarter there in Germany. And our partners in Europe are also doing well right now. So we're not seeing anything right now that would indicate there there's any kind of a problem there.
Speaker 5
Okay. Great.
Speaker 6
Just one more note. All and and All Access Pass continues to to do well there also. In in The UK, it's now we're up to we've converted about 70% of our business now. Overall in The UK is now All Access Pass and related. And so while they launched at the same time as The US, being an English speaking country, they've kind of quickly mirrored what's happened in The US with All Access Pass in terms of percentage of overall business, which I think is helping too because we get the same expansion, retention rates, everything else that comes along with All Access Pass is playing out in that part of the world as well for us.
Speaker 5
Okay, great. And just want to kind of a numbers one in the weeds for Steve. I guess as subscription revenue gets more important here, want to understand it. So the I guess you said it grew 16% to $23,000,000 I think last quarter you had said it grew 36% to $28,000,000 So subscription revenue, I thought there would be a steady kind of gradual sequential build to it. So I'm surprised to see it down that much.
I guess what why is there quarterly volatility in the subscription revenue?
Speaker 3
So Tim, in all of our revenue, as you know, we look at it quarter over quarter for the prior year just because we think that, that growth is more consistent than the sequential growth. And we do have quarter over quarter of the prior year significant growth in
Speaker 2
each quarter. So Tim, also just sequentially and there's an exhibit in the back on slide 32, if I can read the number there, that shows sequentially subscription sales in the first quarter were 9.7%, and they grew to 15.9% in the second quarter. So I think your idea is that we have generally last year we had 7.8 in the first quarter, 13.9 in the second, 17.3 in the third, and 30,000,000 in fourth. And then our first quarter is always smaller. At least throughout the course of the year, we've had both year over year for the quarter and good sequential growth.
32 allows you to compare both. Sales
Speaker 5
though, right? That's not revenue, right? If I'm wrong, I guess, if it's annual subscriptions and you got such a high renewal rate, I'm just I don't understand why it would have been almost $28,000,000 last quarter and 23,000,000 and change this quarter. Is services I guess why would it be down that much sequentially in revenue? I guess I understand the sales.
Speaker 2
Yeah, I don't think it was. Maybe
Speaker 7
can follow-up on think
Speaker 2
you're right. It shouldn't be and I don't think it is. Maybe I misspoke something last quarter in some way because I think you'll see that we had strong growth in both. Maybe we can
Speaker 5
for Maybe raising my numbers are off. I'll follow-up.
Speaker 2
That's unlikely.
Speaker 3
Tim, as you're saying, this schedule on page 32 is the invoiced amount, the subscription amount. And the recorded revenue then, as you know, brings in the change in deferred revenue on the balance sheet. So we can just go through how that works.
Speaker 5
All right, fair enough. Thank you.
Speaker 2
That's a good question. That will help us to better explain it in the future. Thanks.
Speaker 0
And your next question comes from Jeff Martin with Roth Capital. Jeff, your line is open.
Speaker 8
Thanks. Good afternoon, guys.
Speaker 2
Hi, Jeff.
Speaker 3
Bob, you talked a
Speaker 8
little bit about the add on services, the Robert Gregory. Was curious if there are common trends or themes that clients are trending towards in terms of what types of add on services on a broad basis throughout the portfolio
Speaker 2
Yeah, that they're Paul, do you wanna speak to that?
Speaker 6
Sure. Hey, Jeff. So a couple of broad trends. One is an increasing trend that is coaching as a form of support for reinforcement. And so whether somebody participates in acquiring the basic knowledge via an instructor led session or a completely self paced online session or a blend of the two, The a lot of our clients are increasingly wanting to add coaching on the back of that.
So you as a participant of that, if you're a leader, you may have individual one on one coaching sessions for six or eight weeks to drive home what you've learned and to make sure that you're able to apply to the leader with your team. Or, there may be a group of leaders that go through cohort coaching, where they're going through this experience together and they're coached for six or eight weeks. So that's a growing trend we see, and it's one of the reasons that we wanted to to to purchase through Robert Gray reorganization when we did was to capitalize on that. That's that's a growing one. And then, you know, we've always had a lot of services that come in the form of delivering of actually helping the client install install the actual learning.
So for example, our four disciplines of ex execution solution, we do some installation upfront there a few days with clients, and then they take it themselves from there. I would say those are probably the two biggest for us, the post delivery training or coaching and then the actual help in in training and facilitating during the installation phase.
Speaker 8
Okay. That's helpful. Thanks, Paul. Bob, why don't they touch on the multiyear contracts trending to 50% over time? What gives you comfort that that is likely to happen?
And kind of execution is required to make that happen?
Speaker 2
First of all, I think the reason why it's happening is that clients are engaging on challenges they're trying to address or opportunities they're trying to take advantage of that they recognize upfront or you're not going to change the behavior of the whole organization in one twelve month period. So I think the strength both the nature of what people are utilizing in the past for the kind of challenges where they're trying to change we had a hospital system that recently signed up a seven year contract. They said the kind of cultural change we're going to need to drive home, we're going to need to stay on this. And so the reason people do it is because they've got impact journeys, we call them, or things they're trying to accomplish that are just going to extend beyond a year. They recognize that if they one, it's good to recognize that and sign up for a contract.
If they'll lock in multiple years, they also get to lock in the price for those subsequent years actually get a discount on the second year if they do it. So if they have a problem they're trying to address that they're really serious about addressing or a challenge and they know it's going to be an ongoing effort, it makes sense to do it. I think for us, having our sales force learn to sell it is one of the big drivers. Recognizing that they really kind of owe our clients that perspective that the challenges are going to be ones that are to drive change through the entire organization and sustain it will take a longer time. Our sales force historically in the old model wasn't selling that way in most cases.
And so I think there's been a transition there. But the thing that gives us confidence, and Paul, you may want to add to this, is just that the nature of problem when we have multiple impact journeys going within an existing client that extend beyond the duration, almost all of which extend beyond the duration of the contract itself, it makes perfect sense to talk to those clients about it. We're just building sales capabilities. We didn't do it at all two years ago. We did it some last year.
Now an increasing percentage of the sales force just has that basic mindset and skill to do it. And customers are really we had a brand new salesperson last year who just decided she wasn't going to sell anything but multi year contracts and didn't. And so she met her first year number. She already had her second year number already. All of that was going to be retained and had other contracts in place.
I think people are just catching the vision. Paul, I don't know what you want to add.
Speaker 6
No, you said it well, Bob. That's great.
Speaker 8
Great.
Speaker 4
Your next question comes from
Speaker 0
Marco Rodriguez with Stonegate Capital.
Speaker 9
Hi, Marco. Good afternoon, guys. Hey, thanks for taking my questions.
Speaker 2
Thank you.
Speaker 9
Hey, I was wondering if a couple of quick, I guess, housekeeping items. On Slide 14, your subscription seats, The $3.97 for q two of this fiscal, is that enterprise, or is it total?
Speaker 2
Yeah. That that that's just I should have spelled it out there. Apologize. It says AAP is All Access Pass subscription seats. This is Enterprise only on slide 14.
This is the number of paid subscription seats in just the enterprise division. It doesn't include any of the seats in education.
Speaker 9
Gotcha. Okay. And then in terms of the new course that you guys are getting ready to put out here at the end of the month, the Unconscious Bias, Was that content that you guys have licensed or is something you guys created in house?
Speaker 2
Adam, do you want to speak to this? Yeah, 100 I'm Merrill, as you know, runs our whole innovations group, has been the lead on this.
Speaker 9
Yeah, hi Marco. That
Speaker 7
is content that we did develop in house. It originated with some government work we had done a year ago. We've developed it through that process and kind of a custom work. And then last year we decided to take this mainstream and went through our normal process of testing and development. And we're really excited about it.
There's been a lot of interest in this. It's going be a very powerful course.
Speaker 9
Gotcha. And are you guys sort of, I guess, surveying, if you will, your customers to try and get a better feel as far as what sort of content you guys should be creating or licensing going forward?
Speaker 2
Yeah, we are, Mark. I mean, last year, these implementation specialists and the way we engage clients, we had forty four thousand hours of face to face voice to voice or one on one customer discussions last year with just our implementation specialists identifying what are the challenges the organization has, matching up our content to solve them. And in that, collect that data and serve it up and review it in our monthly product development efforts and understand really what are the challenges they're facing where we might not have everything that would be the most impactful solution. We're utilizing that roadmap driven by our clients as well as stuff we do in the market generally. 100,000 sales calls we make a year.
We're gathering that data and we have a list of 11 problems we're trying to solve. We have solutions to eight of them now. There are three others that we're working on that are really we know they're significant. Our clients would like us to help them solve them. They would hire us to do it if we had them.
And so it gives us a good product development roadmap for the next two or three years.
Speaker 9
Gotcha. And then kind of shifting gears here to the education side of the business. Maybe if you
Speaker 4
could give us a little bit
Speaker 9
of an update on the progress that you're making here in terms of the sales strategy kind of changes going direct to the school districts?
Speaker 2
Great. Sean, would you like to address that?
Speaker 10
Yes I can. Yeah,
Speaker 6
well
Speaker 10
we feel, we're making really good progress on this. We have as you know, there are 15,000 school districts in The US and Canada, we're in 800, so we've got a lot of headroom for growth there. And what we're doing is we're spending
Speaker 11
a lot
Speaker 10
of time training our client partners on how to penetrate into districts. We're putting our focus on the best way to expand is if we have three schools in a district, three Leader Me schools in a district that has 50 schools, our focus is going on going to the next 10 schools in that district instead of going to 10 other schools in new districts. So our focus is more on districts, we're training around it. And then what's helping us most I believe is just the research that we have that's come out over the last, year showing the impact efficacy of Leader in Me on behavior improvements, on academic scores, on attendance and so forth and this is allowing us to penetrate districts and get into districts that we could before because we didn't have the data and we didn't have the CASEL certification which we now do and so this is helping us penetrate into districts that wouldn't even look at us before because we just didn't have the data And the more sophisticated the district, the bigger the district generally, the more data they require. So I feel like we're making really good progress.
We also have a new model instead of, know, traditionally we've sold to single Leader in Me schools. We have a new model we we launched last year called the district model, Leader in Me district model where we go to a district and we say, it's less expensive. You can get to more schools in a more economic manner where we'll certify your own people to run this inside of your district. It's it's higher profits for us. The ratio the margins are better for us.
It's not as much money per school as we're getting now, but we find it's more sticky and this new model is, going really well. We have about 50 schools in it right now. We expect to add another 150 to 200 this year in this model.
Speaker 9
So again, this is one of
Speaker 10
the big, big ideas we have for the future and I think it's going be very key. I think the most promising thing is our retention rate where we have penetration in districts is much higher. It's in the mid nineties compared to, you know, high eighties elsewhere. Is that helpful?
Speaker 9
Absolutely. I appreciate your guys' time. That's all I've got.
Speaker 2
Thanks so much, Michael.
Speaker 4
Your next question comes from Zach Cummings with B. Riley FBR. Zach, your line is open.
Speaker 11
Hi, good afternoon. Thanks for taking my questions. Just sticking along that education theme, so I believe in the last earnings call and a little bit at the Analyst Day, you talked having a little bit more of an elongated business model for the Education segment, a little bit of a cheaper upfront cost and maybe attract some more customers to get on to the Leader in Me solution. Can you talk about the rollout of that and kind of the progress and whether you've seen some increased, I guess, increased attention or wanting to adopt that solution here in the education segment?
Speaker 2
Sure. Sean?
Speaker 10
Yeah, sure. Yeah. Yeah, so we started this last year and I think you know, one of the reasons our gross contracts are down year over year is because some of the schools entered into this last year where we basically, you know, we said over three years it's 80,000 to implement and install the Leader in Me. With some of these new models we have, you know, made it less expensive. It's the same amount, $80,000, but it's over four or five years.
And also the district model I just spoke of is also a less expensive way of getting started. So between the two of them, last year we had, know, of our four fifty schools that we brought on, had probably 200 of them go to this new model. We feel like over the long term it's going to be really good for us because we're going to, you know, be able to get more schools in. Our pipeline looks very promising right now. Last year we brought on, as I mentioned, four forty seven new schools.
We're looking at bringing on over 500 this year in The US and Canada and many more beyond that in other countries. So and we also think it's going to be stickier down the road because they're paying less upfront, they're, you know, we explained to them this is a four year or five year implementation model, even though they're not signing contracts for that, they're basically agreeing to it. We find that, know, once they've kind of set the stage for we're going to do this for four years or five years, they typically stay, the retention rate is helpful. So we feel it's promising, this is our second year of doing this and we think the future, the key to this is going to be getting more schools, it's all about net new schools and keeping them and keeping that retention rate as high as possible. So that's the bet we're making.
So we'll continue to have options. So we still have the traditional recommended model that we've been doing for many years. And last year, as just said, we introduced some new models with lower upfront costs. This year, we'll probably introduce another option as well that's lower upfront. Again, with the end in mind of getting, you know, several thousand, hopefully, five, six, seven, up to 10,000 schools that are that paying their annual, you know, membership fee, the subscription fee that we have, and then trying to create some more add ons from there.
Speaker 11
Understood. That's helpful context. And then on the enterprise side, I still have 4,000 active customers, but there's still 7,000 that are assigned but not yet customers. Can you talk about some of the approaches you take to really get into the door and drive some interest in in the All Access Pass? Paul?
Speaker 6
Sure. Yeah. So those so backing up for a second, we used to assign, geographies out to our Salesforce, And now we assign out a list of named accounts within a geography, so they're proximate to where our client partners live. And as you saw there on that slide, we have about 7,000 of the 11,000 assigned that are that are on someone's list, on a client partner's list, but we're not yet doing business with them. And so what we're doing I mean, that's the primary responsibility of a of a client partner is to go and prospect and to try to get into those accounts.
So we equip our client partners with sales and marketing tools to do that, and then we're constantly inviting people, decision makers or potential decision makers from those companies to come to our events. Bob talked about how we're doing increasingly more and more events on key topics like unconscious bias or different aspects of leadership. And so we'll invite people to come to those events. We will, through our thought leadership efforts, we're dripping on them with different pieces of thought leadership from whether it be on sales execution or strategy execution or leadership development. And so our our salespeople are out every day trying to prospect into those accounts.
That's the that's the primary activity, as I mentioned, that of theirs. And then those same activities that we're doing on the 40 or so thousand unassigned accounts. We're we're not just leaving those off to the side and not addressing addressing them at all. We're trying we we do attempt to market to the entire addressable market for us in The United United States and Canada, and then we flow those as leads to our salespeople also. We're just leaving those off to the side in reserve, and we haven't officially assigned them to our current Salesforce because we wanna use those as we hire these these net new client partners every year, and we'll and we'll find those accounts out at that time.
So we've got a robust marketing team and efforts and a big thought leadership effort, as Bob mentioned earlier in in his remarks as well.
Speaker 11
Great. I appreciate the additional insight and best of luck here in the second half of the year.
Speaker 2
Thanks, Eric. Thank you very
Speaker 6
much. Thanks.
Speaker 4
And your next question comes from Sameer Patel. Sameer, your line is open. Hey, Bob.
Speaker 2
Hi, Samir.
Speaker 4
On the two licensing deals, can you talk about how you think about the ROI? And then related to that, are these going to be part of versus in addition to the typical content development budget?
Speaker 2
Yeah, on the second question, it's included in our content development budget. We historically, as a company, spent 4%. We've had a content development and updating budget of 4% of the prior year's revenue. During the big investment phase in the last couple of years where we were adding the new portals, new technological capabilities, we moved that up to north of 7%. And going forward, we'll have a budget of between 67%.
And so any of these new content partnerships, etcetera, fall within that budget. So we don't expect to have a lumpy development budget. We've got plenty to do. We've got lots of content now. It's hardly ever the reason why we're not winning a deal is we don't have enough great content.
We're trying to open new avenues. And so what typically happens is that your licensing content, you're signing a multi year license agreement that has some kind of royalty payment that goes with it, that's included in that six to 7% total product development budget as well as whatever we have to do with that content to build it into coursework or vignettes or videos or whatever else. That all fits within the budget. So you can kind of look at the revenue going out a few years and know that we'll be spending about between 67% of each prior year's revenue the following year. And about half of that will be expensed and about half will be capitalized and run through that's reflected in our gross margins already, Steve.
Speaker 3
Right. Some will be in depreciation if it's related to the portal.
Speaker 4
Perfect. That's what I thought. Just wanted to make sure. And I'm 90% sure you're not going to tell me, but is one of these authors from Colorado?
Speaker 2
One certainly goes through Colorado frequently.
Speaker 9
Thanks guys. Thanks.
Speaker 0
And your next question comes from Patrick Retzer with Retzer Capital.
Speaker 9
Afternoon, Patrick. Congratulations on an excellent quarter. Thank you. You've been conspicuously silent on this call both in the handout and verbally about stock buybacks. You've got a long history of substantial buybacks.
You're piling up cash on the balance sheet. Do you think we'll see or hear anything on buybacks over the balance of the fiscal year?
Speaker 2
I do, Pat. Thanks very much. As you know, we have both cash and availability under our credit facility. As you know, this season for us, we've now collected a lot of receivable. We had a good quarter in terms of cash flow beyond the investments we'll make in these normal levels of investment in the business.
That is our number one outside that's the next thing on the list for investments. So we tend to do it sometimes day by day and other times in larger blocks. But yes, it's on our it's still reason we've been building this up. We believe honestly we said now that we've made the big we've had the big investment years that we expect to continue to generate lots of excess cash. And given our expectations we can't think of a better use after investing in the business to return it to shareholders through repurchases.
That continues to be our strategy.
Speaker 0
Your next Thanks Pat. Question
Speaker 8
Thanks, Pat.
Speaker 0
Comes from John Lewis. John, your line is open.
Speaker 2
Good afternoon, guys. Hey, John.
Speaker 7
So just to go to slide 17, you know, back to the new content coming on the platform, Unconscious Bias, will you charge an incremental fee to pass holders for that? Or how will you price that? Or is that just an additional piece of value that comes with a pass?
Speaker 2
Additional piece of value. We've had good price increases every year in All Access Pass. We had a 7% price increase in each of the last well, we had a 10% I guess the first year and then 7% last year. Expect to have another price increase this fall. So part of the value is that we're not trying to do a lot of things outside the PAS.
Everything we're doing would be just add value to the PAS. We hope to continue to increase both the total revenue per pass and per user in the pass.
Speaker 7
Okay, that's helpful. You said that there's 11 areas of focus ideally for your All Access Pass and it sounds like your content in general. Can you give a broad area of the three areas that you don't have something that you would like to?
Speaker 2
Yeah, I mean, we have a map, John, and we haven't announced publicly what those are. I'll say just generally out in the world, something like change management. One of the biggest and most difficult things is to get a whole organization to make a broad change. And so that's an example of one of those three areas. That's the kind of thing where we've got plenty of content but organizing it around a framework where we own the entire framework, operating system for doing it, etcetera, that's an area that is challenging for almost every organization.
We have a couple of other big ones that come out. It's not like we've never run into it before but we're trying to say let's really put the full weight of the organization's capabilities and budget behind solving some of these intractable problems. So I suspect we'll always have headlights out ahead of what we have. There aren't just 11 that won't end there necessarily. But on the other hand, I think in those 11 it makes up 83% of the real reasons that people where they need scaled change in human behavior, we can cover a high percentage of all the money being spent in those 11.
Speaker 7
I take it the two significant authors are probably outside the Covey organization. Would you if you bring these two significant authors onto, you know, onto the All Access Pass and and into the Covey family, would those be incremental revenue streams or would those be part of how would you They'll
Speaker 2
be part of the All Access Pass. They'll just add value to it. And yeah, we've decided not to we're not going to do the pass and then have also, oh, here's a new course you can buy in addition. You have three different levels of the pass. You can buy a personal effectiveness pass, an All Access Pass or All Access Pass Plus, which includes additional content.
So some of these will go into different tiers, adding value, you know, to the other tiers, but we're not intending to do anything that's offered up.
Speaker 7
It'll help in price hikes. Okay. Just two other quick ones on this. Is is this, like, in the next one to three months or without tipping your hand or next year? Or how how what kind of time frame would you hope to be able to announce these type of deals?
Speaker 2
Yeah. I think in the next quarter, likely we'll at least announce one of them. When I was growing up they had these Paul Maison wine commercials that said we sell no wine before it's time. We signed no deal before it's time. These are finally curated.
They've taken a long time. But we're now in documentation. I suspect in the next ninety days we're likely to have one or both concluded.
Speaker 7
And you highlight that you guys have, I think, 44,000,000 books sold on your content today. Are these large scale, well known brands with They are. Books sold?
Speaker 2
They are.
Speaker 9
Okay.
Speaker 2
Yep.
Speaker 7
Great. Just to jump to slide 23. I know not to pick on this slide, but I think we've seen this slide for a number of years, the 4,000 active customers. You guys have talked about headroom for 900 to 1,000 client partners, but at 25 a year, it'll take thirty years to get there. So I guess my question is, what is the path to accelerate and be able to bring your solutions to customers that can use them in a more timely manner?
I mean, what how do we how do we I mean, it seems obvious. Either you need to do more deals or the size of the deals need to increase. But I guess, you know, the point of sharper point on the the point is it seems like you don't need to get, you know, higher, you know, higher average selling price in all access pass, new tools you can add, and I think we've had some emails on Better Works or Culture Amp, what they're doing, or doing something to create more pull demand from your end customer to really be able to scale it? I guess, how do we get outside of 4,000 customers?
Speaker 2
Well, I'd say geographically obviously it's just The US. We have access to a lot more customers to start with and we have more customers in The US. Second, sales force expansion. I don't think honestly that the lack I mean, what we're talking about is trying to grow our EBITDA 45% to 50% a year for the next several years. And so we're not holding back on growth, I think.
So for us, our target and we hope we can attract shareholders who want above everything really high growth in EBITDA and cash flow in a company that will deploy it in a smart way. We'd like to accelerate the revenue side. If we just add the twenty to twenty five year, which is not a bad number, we can meet all of these growth objectives and more if we do that. So to go beyond this, we're building infrastructure that could allow us to get to 30 to 40. But there are obviously a lot of clients and a lot of other people in the world that you're just not going to reach directly.
And so our thought leadership investments are one of those, whereas Paul mentioned, while we may only have 11,000 in The US assigned, we have now started these thought leadership and marketing efforts to reach the other 44,000 so they can raise their hands so that they have a chance even though a salesperson may not otherwise have called on them. Once they raise their hand, they will. So thought leadership is a way we can do it. We also have the opportunity to do strategic partnerships with people who have different clients. They access some of these clients in different ways.
And so there are lots of ways to expand distribution for us. If we continue to do just what we're doing, think we can grow EBITDA and cash flow at these high rates of return if we can do some of these additional things, which of course we're in discussions about, that could accelerate it further.
Speaker 7
Okay, well guys I appreciate it. Nice work on Q2 and thanks for your time today.
Speaker 2
Thanks, John.
Speaker 0
And there are no more further questions at this time.
Speaker 2
Okay. Well, thanks to everyone for spending the time with us this afternoon. Just stepping back, we really are excited about what's happening. And really more than excitement is there's a sense of satisfaction that comes from seeing the transition work, our sales force ramp up. We've got a lot of opportunity for us.
As John points out, there's a lot going on out in the world and we hope that we'll be the partner of choice for people who are trying to have an impact, who don't have either the brand, the distribution, or the capital that we have. So we think there'll be plenty of opportunities if there's one of those things out there that is the key to accelerating revenue. We're in a good place to do it. Very much. We look forward to talking to you all individually soon.
Thanks so much.
Speaker 4
Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.