Franklin Covey - Earnings Call - Q2 2020

Executive Summary

• Q2 FY2020 delivered resilient growth despite COVID disruptions: revenue rose 7% to $53.7M, gross margin expanded 171 bps to 71.9%, and Adjusted EBITDA climbed 321% to $4.1M; diluted EPS improved to $0.08 vs $(0.25) YoY.
• Subscription engine drove performance: All Access Pass (AAP) and related sales increased 28% YoY; billed deferred subscription revenue reached $48.0M and unbilled deferred revenue $34.8M, supporting visibility into future periods.
• Management withdrew FY2020 guidance given COVID timing uncertainty, with quarterly guidance suspended until Q3 update in 60–90 days; prior Adjusted EBITDA guidance ($27–$32M) should no longer be relied upon.
• Liquidity remains solid: $24.8M cash at quarter-end and full $14.9M revolver drawn post-quarter to maximize flexibility; operating cash flow for H1 rose 30% to $17.4M.

What Went Well and What Went Wrong

What Went Well

• Subscription momentum and mix shift: AAP and related services +28% YoY; total subscription and related revenue +24% YoY, driving margin expansion and EBITDA flow‑through.
• High retention and multi‑year structure: Historical AAP annual revenue retention >90% for nine straight quarters; multi‑year AAP contracts rose to 34%, reinforcing predictability and lifetime value.
• Strategic digital delivery: Rapid pivot to live‑online and on‑demand modalities kept client engagements on track; NPS for online delivery comparable to in‑person per management.
  “Our net promoter scores when we deliver [live online] are really every bit as high as they are when we deliver live in person.” – Paul Walker, President, Enterprise.

What Went Wrong

• Asia impact and delivery timing gaps: China revenue nearly halted; Japan slowed in late quarter, with rebuilding pipelines ahead; many onsite days rescheduled to later quarters, creating revenue timing gaps.
• Guidance visibility impaired: Education renewals (May–Aug) and client decision‑making delays under remote operations reduced near‑term forecasting confidence; quarterly and annual guidance suspended.
• SG&A percent discrepancy: Management cited operating SG&A at 64.4% of revenue (392 bps YoY improvement), while the press release reported SG&A at 67.4% (down from 71.3%), likely reflecting different classification (operating vs total SG&A).

Transcript

Speaker 0

Welcome to the Q2 twenty twenty Franklin Covey Earnings Conference Call. My name is Adrienne, and I'll be your operator for today's call. Please note this conference is being recorded. I'll now turn the call over to Derek Hatch. Derek Hatch, you may begin.

Speaker 1

Thank you. On behalf of Franklin Covey, we'd like to welcome you to our conference call to discuss our second quarter fiscal twenty twenty financial results and hope that you are all staying safe and are well at this time. Before we begin, we'd like to remind everybody that this presentation contains forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward looking statements are based upon management's current expectations and are subject to various risks and uncertainties, including, but not limited to, the ability of the company to stabilize and grow revenues the acceptance of and renewal rates of the All Access Pass the ability of the company to hire productive sales professionals general economic conditions competition in the company's targeted marketplace market acceptance of new products or services and marketing strategies, changes in the company's market share, changes in the size of the overall market for the company's products, changes in the training and spending policies of the company's clients and other factors 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, including the forthcoming 10 Q for the second quarter of fiscal twenty twenty, which is expected to be filed next week.

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 involve 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 to Mr. Bob Whitman, our Chairman and Chief Executive Officer.

Bob?

Speaker 2

Thanks, Derek. Good afternoon, everyone. We appreciate you joining us today. In these challenging times, we've been doing a lot lately to help our clients and even non clients respond to the new changes and challenges they face. For example, as you can see in slide three, nearly a month ago we created a special set of digital materials for our All Access Pass holder organizations entitled Leading Through Uncertainty that provides those leaders and organizations with a guide for utilizing various of the All Access Pass resources to help them lead through change or to build the skills of productivity and resiliency throughout the organization, lead in a remote environment, etcetera.

These resources are providing clients with the ability to engage their workforces, provide team building and development opportunities for the remote workers, and utilize digital assets and training as well as the option of having even higher engagement by having FranklinCamp training consultants facilitate these sessions live online, a capability in which we've invested for more than a decade. Similarly in the education division, as you can see in slide four, we curated a special collection of family educational resources and provided them all of our education clients. In addition, given that so many families are now in homeschooling situation, we've also provided these resources to all access pass holders, organizations, and made them free of charge to the general public on our website leaderinme.org. These robust resources include hundreds of videos, articles, and tools from families to be used with their children at home, including animated videos which are very popular that teach life skills, coloring pages, in home activities for families, award winning videos made by students, student speaking contests, and our Leader in Me weekly newsletter which features relevant tools and articles for schools and families in these challenging times. You might want to check out these resources yourself at leaderinme.org.

Also, our employees, many of whom have always worked remotely, are now all working remotely. We are pleased to report that with only a few exceptions, they and their families are safe and healthy. I can't adequately express how much we appreciate the extraordinary lengths to which our employees are going to serve our clients always and now more than ever. We're glad to have the chance to talk with you today. In this uncertain environment, really there are four things we'd like to take away from today's discussion.

You can see on Slide five. First, that our results for the second quarter were very strong and even better than we expected. And as a result, we ended the third quarter with real strength operationally and financially and with significant liquidity. Our results for the second quarter, as you can see, reflected the compounding power of the same key factors that have driven our accelerated results over the past quarters and years. Second, we're grateful that we also entered this period not only strong financially and operationally, but strategically with solutions in the business model that are really valued by our clients.

While the coming months will undoubtedly contain a lot of uncertainty and challenges, this strength on all three fronts is allowing us to really provide services to our clients that they value. We've consistently invested in content, technology based delivery, portals, microlearning, language availability with 21 languages, wide variety of delivery modalities subscription business model. As a result, we're in a unique position to be able to serve our clients in whatever circumstance they find themselves in today. Whenever this period ends, expect to come out of it having increased our strategic importance to our clients. Third, we expect that the same three factors that have driven our accelerated growth in adjusted EBITDA and cash flow over the past many quarters will continue to do so as we come out of this downturn.

We expect we don't know when that exactly will be obviously, but we expect that these three factors, namely our strong subscription offerings, the fact that we have very high lifetime customer value and retention and the high flow through of incremental to incremental EBITDA and cash flow, which our business model has driven, will continue to drive very high rates of growth in adjusted EBITDA and cash flow again in the future once we get past this period. And then fourth, we really are grateful to be in a position to provide our clients with the kinds of solutions, modalities and assistance they need during these times. And as a result, we exit this period with an even deeper, more enduring relationship with our clients. I'd like to just briefly address each of these. I think they're all relevant to the current situation even going over the financial results here is because it shows the patterns which we expect will both made us strong going into this period as well as will make us strong coming out.

As noted in Slide six, our results for the second quarter were very strong. And as I mentioned, as a result, we entered the third quarter with strength operationally, financially and with significant liquidity. Our strong second quarter performance reflected the strength of the same key factors that have driven our accelerated results over the past quarters and years, namely strong high single digit revenue growth second, accelerated growth in subscription sales third, increasing gross margins and fourth, declining operating SG and A as a percentage of sales. This has resulted in a high flow through of incremental revenue to increases in adjusted EBITDA and cash flow. As you know from reading our earnings release and as shown in Slide seven, we had a very strong second quarter results on all four of those key metrics despite the fact that our operations in China and Japan were closed or restricted for a portion of the quarter.

As you can see, revenue grew $3,400,000 or 6.7% in the second quarter, grew eight point this also grew $8,200,000 or 7.8% year to date and $14,000,000 or 6.4% for the latest twelve months, not shown on this. Adjusted EBITDA increased $3,100,000 that's obviously a big percentage, 321% in the second quarter and increased $4,900,000 or 118% year to date and 9,400,000.0 or 58.6% for the latest twelve months. The flow through continued to be high. Incremental revenue to incremental adjusted EBITDA 91% flowed through for the second quarter, 60% year to date and 67% for the latest twelve months. So that trend has continued.

And our cash flow from operating activities continued to be strong through the second quarter increasing again 30% or $4,000,000 to $17,400,000 And as strong as these reported metrics were excluding China and Japan, which as I noted were closed down for summer most of the quarter, the company's performance was even stronger. As As you can see on the right hand side, excluding the offices in China and Japan, revenue grew $4,900,000 or 11.2% in the second quarter, 9,000,000 or 9.9% year to date and $14,700,000 or 7.6% for the latest twelve months. And also adjusted EBITDA grew $4,000,000 in the second quarter and would have grown 5,700,000.0 year to date and 10,800,000.0 So just stepping back from it, it was a very strong quarter. Showed resiliency in the face of some challenges in Asia and we're really happy with it and pleased to enter this new period with that kind of strength. I'd like to briefly touch on a couple of metrics.

First, as you've shown in Slide six, we had really strong revenue growth on all metrics. Our revenue as reported grew $3,400,000 or 6.7% in the second quarter, 7.8% year to date and 6.4% for the latest twelve months. Our total subscription and related revenue grew 24% or $6,100,000 in the second quarter to $31,400,000 grew 21% or $11,000,000 year to date and 22% or $24,000,000 latest twelve months for a total of 133,700,000. All Access Pass and related revenue grew 28%, or 5,100,000.0 in the second quarter to 23,400,000.0. It's grown 25% year to date and 27% or $19,600,000 for the latest twelve months.

Our total invoiced revenue, some of which of course goes on the balance sheet, grew 9.2% or 4,500,000.0 second quarter to $53,000,000 This was led by The U. S. And Canada whose invoice revenue grew 15.1% or $3,700,000 So The U. S. And Canada has been getting stronger and stronger driven by All Access Pass and grew 15% or $3,700,000 during the quarter.

Year to date invoice revenue has grown 8.8 or 8,300,000.0 in latest twelve months, 7,300,000.0 or $16,400,000 to $242,000,000 Our balance of billed and unbilled deferred subscription revenue grew a very strong 18200000.0% in the second quarter to 82,700,000 compared to a balance of $64,500,000 at the end of last year's second quarter. And finally, in addition, our total value of contracts signed in the second quarter grew 9.7% or $4,800,000 to $53,800,000 and it's grown 13% to $107,000,000 for the latest twelve months. The buildup of that contracted revenue is very helpful to us as we move into this period. We felt very good about our revenue growth for the quarter. As we noted, we had very high flow through of incremental revenue to incremental adjusted EBITDA as you can see in Slide nine.

91% or $3,100,000 of our increase in revenue in the second quarter flowed through to increases in adjusted EBITDA. This resulted in adjusted EBITDA increasing to $4,100,000 from $1,000,000 in the second quarter of fiscal twenty nineteen. And excluding our offices in China and Japan, adjusted EBITDA actually grew faster, grew $4,000,000 during the second quarter. Year to date, adjusted EBITDA has increased $4,900,000 or 118%. The flow through has been 60% and in the latest twelve months adjusted EBITDA increased $9,400,000 or 59% to 25,500,000.0 despite a more than $1,000,000 negative impact from Japan and China in the second quarter and that's up $16,000,000 for the same twelve month period last year, showing a 67% flow through.

This flow through obviously is very high and again it reflects the four factors. Obviously the high single digit revenue growth which has been increased but with the exception of China and Japan increasing, our increasing gross margin percentage where gross margin percentage increased 171 basis points in the second quarter, two fifty seven basis points year to date and 130 basis points for the latest twelve months. Third, the fact that operating SG and A as a percentage of sales has declined and during the second quarter, it declined to 64.4% of revenue, which is a three ninety two basis point improvement compared to 68.3 in last year's second quarter. And as you can see in the appendix in Slides twenty three and twenty eight, we also achieved strong revenue growth and very high EBITDA growth in the enterprise division in the second quarter and had strong growth in the education division. So we were really pleased with the strength of the second quarter and year to date performance.

We were pleased that for the latest twelve months adjusted EBITDA had reached $25,500,000 with the third and fourth quarters to go and of course we're pleased with the momentum. As we said, we entered the third quarter as a consequence with a robust third quarter pipeline, almost $25,000,000 of cash on the balance sheet and all $15,000,000 available under our revolving credit line. Importantly, once this current period of uncertainty is over, whenever that is, we expect that these same factors that have driven our past performance will drive accelerated growth in adjusted EBITDA and cash flow again in the future. That's just a quick review of our results. Going on to Slide 10, we want to talk about the current environment.

We're pleased that not only did we enter the third quarter with strong momentum and strong financially, Really as important as we enter the period strong strategically, meaning our relationships with our customers, the value they place in our solutions. As you all know, for more than a decade, really we have invested in creating digital courses and content, content that can be delivered live online, blended impact journeys. Five years ago we added microlearning and much of our innovations budget in the last few years has been around on demand and blended delivery offerings, portals and other things. As a consequence, we expect that we will not only retain a very high percentage of our clients during this time, but also increase our value to them as they try new methods of delivery they might not otherwise have tried. We expect to exit this period really with even deeper, stronger, and more pervasive client engagements and relationships.

As to the current situation, obviously it's a difficult one just generally. All of you are living in it and hopefully getting through it. We're all living in it and so are all of our clients. In our experience during times of significant uncertainty, of course it's natural for there to be a period of time in which for both individuals and organizations focus, energy, and bandwidth is directed to getting their bearings and adapting just to the immediate circumstances. During such times, normal business and decision making processes are often interrupted and the past few weeks has seen exactly this.

For the first time also, of course, organizations must also adapt to having the vast majority of their employees working remotely. In the context of this environment, I'd like to address the areas of greater and lesser uncertainty for Franklin Covey. I'll first start with the areas in which we have a lot of confidence. The areas which historically have been very predictable, which we expect to continue to be predictable include the following. First, our deferred revenue.

As shown in Slide 11, we had $47,900,000 of billed deferred revenue on the books at the end of the second quarter. Substantially all of this highly profitable revenue will be recognized over the next four quarters. Second, our unbilled deferred revenue, as you can also see in Slide 11, in addition to the deferred revenue, we also had $34,800,000 of unbilled deferred revenue in the second quarter primarily related to multi year All Access Pass contracts. All of this revenue is under contract and the vast majority of this unbilled deferred revenue will be invoiced over the next six quarters so we don't see risk to that. Third, our All Access Pass subscription renewals.

As illustrated in Slide 12, historically our annual revenue retention of All Access Pass subscription revenue has been very high, exceeding 90% in each of the last nine quarters. As we'll address in a minute, we believe that most of our clients intend to renew their passes still. Fourth, All Access Pass add on services revenue. All Access Pass related services totals about 33,000,000 a year spread throughout the year. Historically these services on a same store basis have also repeated year over year at a high rate of more than 90%.

Fifth, Leader in Me memberships historically between 8791% of the more than 2,700 Leader in Me schools in The US and Canada have renewed their subscription memberships in a given year. Now as to the areas of uncertainty, the areas of greater uncertainty for us over this period are not therefore about the strength of our solutions or about our client impact or about client's commitment, fundamental commitment or about the strength of our business model. Rather, the uncertainty primarily relates to three things. First, to the potential impact which delays in decision making caused by current circumstances could impact the timing of renewals and new sales from companies and particularly in the education division where both the annual membership renewal of the majority of Leader in Me schools and the addition of new Leader in Me schools normally takes place between May and August. We'll address this more.

Second impact, so the first is just delayed decision making. People not able, they don't have their normal processes, the school district isn't getting together, if they are they're doing it by video conference, etcetera. It just has changed the decision making. Second concern is the potential impact which the fact that people are working from home could have on planned training and coaching engagements which organizations have typically scheduled to take place on-site at their offices even though they've been available live online or digitally. It now means that people's sequestration means that these trade engagements now need to be done live online or digitally, both of which are available and very capably delivered through All Access Pass and Leader in Me or they need to be rescheduled.

Many of these have already been rescheduled or are in the process of being rescheduled live online. We believe that people do not intend to cancel. A very small minority are really gonna be canceled and that even those who want to continue to have on-site days are rebooking them, postponing it with the hope that that'll be done later on this summer. However, the shift in the timing of delivery will cause revenue to move from one quarter into another and create revenue gaps and uncertainty. And then the third major area of concern is as to the time required to ramp up our recently reopened offices in China and Japan following their operations having been closed or restricted for a portion of the second quarter.

They're back in operation. The teams are generally back in the office making calls. They're going to need to rebuild their pipelines. The impact of these factors is not expected to be long lasting. However, it does create gaps and the uncertainty as to their timing and magnitude makes it difficult to provide accurate quarterly guidance or to update our annual guidance today.

Nothing would please us more than to be able to tell you as we have done each quarter that our guidance for the next quarter is X and for the year it's Y and then go back and hope to exceed those numbers. However, in this environment and with education's biggest quarters coming up, really coming up at the end of the third quarter in May and in our fourth quarter, we can't be confident in our guidance, so we're not providing any at this time. We expect in sixty ninety days when we report on our third quarter performance, we should be in a much better position to provide more guidance and we look forward to doing that at that time. Now moving forward, I'd like to ask Paul Walker to talk about some recent what's happening with our clients in this environment in both divisions. Paul?

Speaker 3

Thanks Bob and good afternoon to everyone on the call. It's good to be with you today. Despite the current uncertainty, we're pleased that in the Enterprise Division many organizations have now begun to get their bearings and move forward. And for these organizations, focus is now shifting to critical priorities which you might expect like sharpening their organization's focus and execution, building the capabilities of their sales forces, establishing or increasing trust with their stakeholders. Each of these areas and others are areas where we're really we have expertise and these solutions are found and available to our all of its pass holders.

Our strategic relevance and importance to our customers is being demonstrated and reinforced every day. In our discussions with a significant portion of our pass holders over the past thirty days, they've continued to express how important and impactful our solutions are to them, particularly in this current business environment. Just to give you a glimpse into what we're seeing, while a few are requesting changes, for example, to their pass holder populations upon renewal or flexibility in the timing of payments, almost all have reaffirmed their commitment to the All Access Pass. Because of the relevance of our solutions, new clients also purchasing new All Access Passes even in the month of March during the middle of the storm, this current environment that we're in, help address the organization's needs. And we're grateful to be in a position to be serving both existing and new and potential customers.

If I may, I'd just like to give you just a little bit of color on what we're seeing in both the enterprise and education divisions. And you can see on Slide 13 some examples of these. Earlier this week, a new client who is seeking to proactively work on strengthening their culture of trust and inclusion, and they wanna do it right now and not delay because they believe that having a strong culture will be an even bigger asset to them during these times of uncertainty. And so they move forward with a purchase of a two year term all access pass for approximately 4,000 people, which for us is very nice sized pass. One of our largest execution clients, here's a second example, called us last week to let us know that they needed the four Disciplines of Execution now more than ever and expressed that they're 100% committed to the four Disciplines process since their ongoing subscription with us.

Another, one of our large multiyear pass holders, a major airline, is facing a great deal of uncertainty right now. And while they're not in a position to expand their pass, the fact that they're in the middle of a multiyear pass with us gives them tremendous capacity to utilize the All Access Pass and cut back on investments that they may have made with other providers. And we're currently engaged with them to transition live on-site training to live online training and are introducing a significant number of our digital offerings to their employees so that they can make a big push on leader and employee development while their associates have the increased time to focus on their development. Just a couple of more here. Another, seeking to expand our solutions to a large group of employees.

They're doing this because these employees are now working remotely so they're considering expanding their already significant paths with us to an additional population of about 800 people to meet the needs of this new remote working workforce. And then finally, the leader of our sales performance practice is receiving regular calls from senior sales leaders who want help as they try to stabilize revenue with existing customers and look for ways to grow sales in the current environment. As a result, for the month of March that just ended, our All Access Pass revenue, which is a combination of new passes plus renewals, actually grew over March in The U. S. And Canada.

If I may just for a minute, similarly in education, in the Education Division, at a very difficult time for schools And in a month with unprecedented disruption, including school closings, schools scrambling to deliver lunches, providing packets of homework, teaching lessons digitally, etcetera, we all know what it's like in that environment. As Bob noted earlier, our education division has done a great job providing clients and non clients schools with free access to Leader in Me student and family resources. They also continue to stay close to these schools with new and existing schools to help them maintain and expand their commitment to their students. As a result, even in a very difficult month, we're seeing school commitment to Leader in Me process continue. And just a couple of examples of that you can see on Slide 14.

During the month of March, two forty eight Leader in Me schools renewed their subscriptions. 38 new schools entered into contracts to provide the Leader in Me to their students and faculty. Last week, a district entered into a contract that's designed to train 8,400 high school students in leadership skills and will all be delivered via the Zoom platform. Another large district called this week to schedule final conversations for onboarding their 20 schools in the Leader in Me this summer. And finally, another one of our client partners has 10 new school districts.

You know, we put a lot of focus on districts, but 10 new school districts who are planning to start Leader in Me this year. And so while the coming months we expect will undoubtedly contain plenty of uncertainty and challenges, we're grateful that we entered this period, as Bob mentioned, not only strong financially but with a lot of momentum, best in class offerings and a business model that are really valued by our clients. And as a result, when this period does end, we expect to exit it having increased our strategic importance to our clients and hopefully have been a great help and a great partner to them throughout this entire time. So Bob, I'll turn it

Speaker 2

back to you. Thanks. Thanks very much, Paul. We'll just quickly hit a couple of other points and then open it for questions. Metaphorically, mean, for those who have been mountain climbers, you feel like you're making great progress up the mountain then there's a massive snowstorm or an avalanche.

Your strength isn't less, your capability as a climber isn't less, but you're in deep snow and your progress is less. But the fact that you can make progress at all through the deep snow is a testament to the strength, not an indictment of the lack of strength. I think that's how we felt the last few weeks is that we're in deep snow right now but we're moving forward. The examples that Paul has talked about in the enterprise and education division actually suggested in some areas the snow is getting more firm. In others, it depends on individual clients.

Their circumstance may mean that we're in deeper snow, and that will continue for a while. We don't know when we'll be out of the deeper snow, but we are moving forward. Our clients are moving forward and we expect that as we go forward, as kind of identified in slide 15, that the same three factors that have helped move us up the mountain so rapidly in the last few years will also be the things that allow us both to power through the deep snow and accelerate it as we get onto more firm footing. While the timing and trajectory will likely be uncertain, the three ideas, the power of our subscription model, our high lifetime customer value and a business model that generates high flow through will really be very powerful assets to have. Just touching one slide on each of those points, The power of our subscription business model on Slide 16.

And you can see in Slide 17 that we've grown rapidly. Our total subscription related revenue in the second quarter grew 24%, has grown 21% year to date and 22% for the latest twelve months. All Access Pass portion of that has grown more rapidly at 28% in the quarter. 34% of our All Access Pass are now multi year passes, up from 27% at the end of last year's second quarter. That's providing a lot of structural strength here.

All Access Pass and related sales have grown from just $47,000,000 at the end of for the latest twelve months in fiscal twenty eighteen, two years ago, the second quarter, to $91,000,000 for the latest twelve months of 'twenty. And during the same period of time, All Access Pass and related sales have increased from 32% of our total enterprise division sales to now 52% and we expect that over the next three years or so that will increase to around 75%. With this strong growth in Alex's past and related sales and Leader in Me subscription sales has also come as we've noted a significant increase in the amount of our deferred revenue balances billed and unbilled, which topped got to $82,700,000 That's up from just $18,000,000 at the end of twenty seventeen second quarter. The second driver of our growth, so subscription model. The second is the high lifetime customer value.

And on slide the next slide, if I can read it here, '18, annual revenue retention, high relative average price, high good gross margin, services attachment rate has now increased to just over 50% and more than 90% annual revenue retention. And this has created a virtuous cycle which is establishing what we believe is a high expected lifetime customer value that's of course being tested in these times. As Paul said, having had discussions with a huge percentage of our total All Access Pass holders, they remain almost entirely committed. There will be some of course who aren't able to continue because of their circumstance. But we believe the retention rate will end up being very high.

Some may ask to renew a month later or something, but I mean generally it's going to be extremely high. And so we feel good about that. And then the third driver as we said is just the high flow through created by the high single digit revenue growth, which adds around $20,000,000 or more than a little over $20,000,000 of revenue a year has been adding. Strong increase in gross margins, which has increased our gross margins by several 100 basis points and a declining operating SG and A as a percentage of sales which has allowed that increased gross margin to flow through. Final point is that we really are grateful to be in a position to provide our clients with the kinds of solutions they need during these times.

As a result, we really do expect that this period will be one that allows us to deepen and strengthen and create enduring, deeper, more pervasive, ongoing clients for life type relationships. I think it's also for our employees who are extremely mission oriented. This is a time when the value of what they do is brought to the fore. Don't know. Reports I from the field that they've never been more engaged.

We've always had highly engaged employees, but they're with our clients daily by video conference or phone making a difference. And for our shareholders, to you our shareholders, we appreciate the trust and confidence you've extended to us and we begin and end each day committed to ensuring that that trust is well placed. With that, we'll now open this for questions and be delighted to take any questions.

Speaker 0

Thank you. We'll now begin the question and answer session. And our first question comes from Alex Paris from Barrington Research. Your line is open.

Speaker 4

Hi Alex. Good afternoon everyone. This is Chris Howe sitting in for Alex. I hope everyone

Speaker 2

is and Chris. Thank you. We hope you are as well.

Speaker 4

I guess just starting off with these two questions that I had on top of mind. Can you provide some more color on the typical sales cycle for All Access Pass and for education? And how does that sales cycle currently look? And then my follow-up question to that is to contracts of different lengths, whether they be multiyear or other contracts. Do these contracts renew automatically, these multiyear contracts?

Speaker 2

Yes. Okay, great. Paul and Sean, you want to address those questions? Paul, do you want to start?

Speaker 3

Sure. I'll start. Hey, Chris. I'll start with the sales cycle and how the contracts work in the enterprise division for All Access Pass. The sales cycle there's two different sales we make.

Right? One is a sale to a new logo, a new new All Access Pass. And that sales cycle is can can be varying lengths, but on average, it's a 100 and a 100 to a 120 so on average. And as far as what we're seeing, we don't know exactly what that's going to look like in the coming couple of months. As I mentioned a minute ago, in March, we were happy to see All Access Pass sales continue to stay strong.

The renewal is the other sale that we make, of course, when we go for renewal. That sales cycle is from the day we set the pass, we're doing everything we can over the next year to set up that renewal. And so there's a whole process that we engage around with our clients, our pass holder engagement process, we call it, that ensures that we're doing all the steps necessary to ensure that, that pass does renew on time a year later. Hopefully, it expands and they add more seats, etc. In terms of any contract, multiyear otherwise, clients do sign when the contract term is over, they do sign for another contract term.

So while there's language in the contract that says that it's going to renew, we keep that language in there because that makes the contracting process easier, but the clients do commit and re up, so to speak. If we're in a multiyear agreement, then of course that discussion doesn't need to happen until the end of that multiyear agreement. If a client signs for three years, I gave the example a minute ago of the airline, they're in the middle of a three year deal. We're not talking about whether they will or won't renew because they still have we're a year and a half away from that conversation because they're in the middle of that multiyear contract. That's great.

Does that help Okay. You

Speaker 4

Yes. As we look at these multiyear contracts, people within these contracts and we take into consideration this uncertain environment and the difficulty in placing a time line against this environment, what portion or how should I think of this, what portion of multi year contracts extend beyond this uncertain environment? In other words, which ones are up for renewal or what portion is up for renewal this calendar year?

Speaker 3

So we're signing these contracts all the time. And so the exact portion that's up for renewal in the next do you say in the fiscal year or the calendar year? Calendar year. In the calendar year, Bob and Steve, would say maybe a third. They stretch out over one to two to Yes. Three

Speaker 2

There's $36,000,000 of revenue and I think the actual contracts, as you say, extend out over several years. The renewal dates, I mean, not renewal, but when they'll actually be invoiced. You know, the majority will be invoiced over the next eighteen months or so, but the contracts extend much longer. And that's important I think because what tends to happen you know, no one knows what the pattern of this recovery will be, but if history serves, you look at things, absent sequestration, when do organizations resume spending and so forth and making decisions. Historically, after a couple of months, organizations are back making decisions.

Even in the great financial crisis, about four months later, the booking pace and everything was back to basically the normal booking pace but you lost that three or four month period. Here we have the advantage that the deferred revenue and the multi year contracts bridge over that period largely even single year contracts which we have a huge number of those really don't all they come up, the renewals come up pretty evenly throughout the year. And so we're not facing an extraordinary number of renewals. For example, in this quarter, our third quarter, we have around $13,000,000 of passes up for renewal this quarter. Paul, I think we've got somewhere close to half of those done now.

Is that true?

Speaker 3

Yeah. That's right. We're we're about seven of the 13. Yeah.

Speaker 2

Yeah. So it isn't a huge portion that's exposed to any particular period of time which is helpful. Would you like me to

Speaker 5

comment, Bob, on the education side? Yeah, please, Sean. Sure, Chris. Just to address your questions on the education side. Yes.

Yeah, so the cell cycle in education typically is a pretty long cell cycle and it starts usually in the fall. Schools start to investigate you know, whether or not they're interested in our Leader in Me whole school improvement system. And they typically will make decisions starting in January. Most schools will, usually by May, they've kind of made up their minds if they're going go or not. And between May and August, they're starting and implementing.

And then because of that, the retention cycle is on the same. As Bob mentioned, we have about 2,700 schools that we're trying to keep in system and, you know, keep their subscriptions going. Our retention rate has been really high historically. Last year was 88%. It's always been around that.

And that also starts in May and runs through August. And so we're you know, that's that's coming up. And we've had a lot of conversations with schools already and indications are really good that people intend to stay with us. But that's basically how the renewal cycle works with us. With multi year contracts Go ahead, Bob.

Speaker 2

No, I was just gonna mention that you noted earlier or Paul noted earlier that there were two twenty five schools even in March that did We normally wouldn't have a high percentage of schools in March, but 225 or so did renew in the middle of the storm recognizing they needed they were still committed and needed what what we're doing in education. So

Speaker 5

Yeah. Which was which was a little slower than last year, but not too far behind, which was encouraging to see. And some schools we found just aren't they just say, well, please call us back in two or three weeks when we have when we can get our our bearings a little bit more. So that's that's kinda how the sales works on the education side, Chris.

Speaker 2

That's great. I appreciate all

Speaker 4

the color and that's all I have for now and I'll hop back in the queue. Thanks everyone.

Speaker 2

Thanks Chris.

Speaker 0

And your next question comes from Andrew Nichols from William Blair. Your line is open.

Speaker 2

Hi, good afternoon. Hi, Andrew. I

Speaker 6

realize the current environment makes any sort of outlook for the remainder difficult. So I totally understand the hesitancy to provide updated guidance and makes sense to me. I just I'm thinking that investors will typically point to 2,009 for some sort of proxy on the business could be behave in a more cyclical environment. And I think in 02/09, if you account for the sale of the Consumer Solutions business, you were down roughly 15% or so on the top line. So I was just kind of wondering with that as context, if you could talk a little bit about the differences in the business between then and now?

And in what ways you'd expect the business to be more or less resilient versus two Obviously, thousand and All assets passed is a key difference, any color around that would be helpful.

Speaker 2

That's a great question. In 2009 period, which of course started the Lehman bankruptcy started right in the start of our first quarter. And so that year, our revenue, you said, went from about 133,000,000 the previous year down to 124,000,000 So it was a little less than the total, I guess, point 5% decline if that's what the math is exactly, but you're directionally correct. And almost all of that decline for us occurred in that first four month period when organizations were wondering, we had part of that which is the Christmas period anyway, tends not to have a lot of new sales, but it bridged over that. Those four months included a period where people just weren't sure they were gonna survive.

What happened was at least back then we didn't have All Access Pass, we didn't have contractual revenue, multi year contracts or anything. But even then, people were committed to what they were doing and most of the business, a lot of our business then was in terms of these on-site days. We didn't have live online or digital delivery or those kinds of things. What people did is postpone them. It turned out that we lost very little of the business, but because it postponed a few months, they said, look, we'd like to schedule this in February, reschedule it from October and November.

We're gonna see if we're around. If we are, we're still committed. People did pick it back up and so we really held our own really well year over year from March through the second six months of that period. Interesting during that period is we actually the decline of 8% or so was a mix of two things. One, we actually grew our execution business, our sales performance and customer loyalty business that year, and our trust business, and that was offset by some declines in the more traditional back then time management training and things like that.

How we're different now I think, we don't know of course what the pattern will be this time. Every pattern is different and we all wish we knew. But I think the things going into it, have much of our business on contracts, multi year contracts that obviously bridge over that. If the period were four months, we'd have all of our multi years that bridge that and a significant portion of just the one year contracts that bridge it. The services rather than being one off are really tied to initiatives.

We have

Speaker 5

a

Speaker 2

bigger percentage of our business today that is in things like execution and sales performance. It's a place where people in these times, historically at least, really doubled down and said that's what I need and we're seeing that now with our head of our sales performance practice getting a number of unsolicited calls from sales leaders at major companies. And so I think those are some differences. We don't know what the pattern will be but the idea of where we are now is I think a much more solid place even though it turned out that last time wasn't horrible after those first few months.

Speaker 6

That's really helpful. Thank you. And then That's a great question. Just one more on the cost structure. I'm just could you give us kind of a high level view of how much of your cost base today is fixed versus variable?

And then what type type of opportunities you might have to pull back on spending if the economy remains challenged for a longer period of time?

Speaker 2

Yes, thanks, great. First of all, have our cost structure by design flexes quite significantly. I mean if you first start with our sales force, our client partners, are a major part of our total investment and cost structure, they're all on commission. So while they get a draw that's equal to between 5070% of their target, there's a lot of flex that's just natural there. We hope that they won't have to flex but I mean there's a natural flex in there also with the delivery consultants who are paid on a per day basis.

Also many years ago we decided to structure all of our major manager compensation and of course senior compensation. That a very significant portion of that is based on, is all paid for performance. There's a natural flex in that just, mean if, where there's like a 30 flex in the total cost structure just as a consequence of the way in which it's structured. At the executive team level it's even more extreme where compared in the targeted compensation, the base salaries and so forth are represented depending which individual. For me, roughly 27% or something is base salary I think that part of it is helpful because it flexes on its own.

Beyond that, the majority of our central costs haven't increased for years. We've had ongoing projects and have ones that are right now unrelated to this time where we're trying to take out costs all the time. We've done that. You see our s g and a as a percentage of revenue having been declining for like eight or nine quarters, it's not just because revenue's been increasing but it's also because of cost initiatives. And we have those that are ongoing which we think can save millions more.

And so I think we've, I think a lot that can be done on the cost side is just natural given what we've done. We feel like that will be hopefully plenty to flex. If not, obviously we have historically been willing to do what was necessary particularly starting with the executive team to do what's necessary if that became the issue but is that responsive? Great, thank you. Okay.

Thanks, Smedes.

Speaker 0

And our next question comes from Marco Rodriguez from Stonegate Capital. Your line is open.

Speaker 2

Hey, Marco.

Speaker 7

Good afternoon. Hi, guys. Thanks for taking my questions here.

Speaker 2

Thanks for your questions.

Speaker 7

Yes. I was wondering, you spoke a little bit about the impact you guys saw in Asia, China and Japan. And I believe you gave some revenue figures there. Maybe you could give us a little bit more information, a little bit more color in regard to the cadence, kind of how you saw the revenue unfold as many parts started to go through lockdown? And then if you can maybe also talk about what you're currently seeing in terms of the cadence of revenues and how that's kind of coming back to give us some sort of a framework to look at here?

Speaker 2

You bet. Paul, do you want to address that?

Speaker 3

Sure. Hi, Marco. China and Japan both impacted a little bit differently. So China, of course, they the country took dramatic action and did so quite early right at the time of Chinese New Year, which was so very they were impacted throughout the majority, almost all of our second quarter. And for them, it was culturally even an interesting and challenging thing as people had to go work from home, which is an uncommon thing over there, not just in our company but generally in China.

We saw a big falloff in revenue, nearly completely in China. Just staying on China for a minute, what we've seen as they've come back is we're pleased with how quickly clients have begun engaging in conversations again. Of course, in China now, the law is such that you can't have all of your workforce in the office at the same time, so we have people work from home a part of the day, come in the office for a part of the day, and then flip with the other half of the office. But we're engaged with customers. They're engaged with us.

A lot of selling activity has started again. They're not quite yet to the point where they wanna have necessarily training programs unless they're done virtually, but the conversations have ramped up quite quickly after what was a pretty dramatic shutdown there in that country. Japan was a little bit different. We had activity that happened well into the quarter. It was kind of a normal selling quarter up until kind of the final month of the quarter in February.

And of course, they locked down as well, but their lockdown was a bit different. And so we didn't see a complete fall off of revenue like we did in China, and we've been able to maintain revenue there. Conversations with clients have continued throughout the process, probably a bit more like The US right now where there, you know, there are still conversations going and they're able to still drive business there. They're kind of now also coming back out the other side a little bit in terms of clients expressing willingness to begin talking about getting things back on the books, etcetera.

Speaker 5

I don't know if that's

Speaker 2

And Marco, I would note also that the pattern we expect to be a little different here only because China was not yet selling. They just started to sell the All Access Pass in the fall because we had to build a separate behind well, a separate portal behind their firewall, the Chinese firewall. And Japan had just started and so they didn't have they don't have the same base of subscription revenue or in place impact journeys contracted services. But nevertheless, the business activity is starting to show. You look at hotel occupancy rates and they're edging up.

It's not fast. It's going from 18 to 22 to this week. If I saw the day, was around 25%. And so the business environment is starting to edge back up and even in the absence of contractual revenue like we have in The U. S.

Speaker 7

Understood. That's helpful. And then shifting gears a little bit here and following up on a prior question on sales process or the sales cycle. Just trying to better understand here, in North America, the importance level of your client partners actually being on a plane and going to meet their clients for the new logos or for the renewals?

Speaker 3

Bob, I can address that if you want.

Speaker 2

Our

Speaker 3

client partners, first, are almost 100% of them are geographically proximate to the territories in which their clients reside. They're scattered throughout the country, throughout North America, and most of them live within a well, they all live within an easy drive to their clients. Obviously, they're not driving to the clients right now to go see clients face to face, and so they're doing that via video conference. That's pretty common thing for us, though. Our Salesforce spends the even in in the non, current pandemic environment, they spend their time meeting with clients either via, platforms like Zoom or face to face.

And so it's a pretty easy transition for them to do that via they they all work from home anyway, and and they're they're accustomed to spending a lot of time with clients on the phone, on Zoom, etcetera. And so they're doing that. Interestingly, clients have in our space, they have a good deal of time to talk to us too. Right now, they're available, and we're spending a lot of time with our existing clients and prospective clients. I'm sure the decision making process will go a little bit slower, not because of our inability to engage with them via Zoom or video conference, but for them to go and get approvals from other people in their organization before they sign off.

The fact that they're all not working in the same office, that requires some extra hoops for them to jump through on the client side. But in terms of our selling ability, it doesn't really diminish what we can do right now in terms of selling.

Speaker 7

Got it. Last quick question, if you can just kind of update your thoughts in how you think this impact will play into your hiring targets for additional CPs?

Speaker 3

I'll just stay on that one, Bob, if it's okay. As you know, we're very committed to hiring, and we have hired throughout this year already. We are at two fifty five client partners in the Salesforce now. And what we've decided to do is just shift by a couple of months the next two classes of client partner hiring. And we're doing that primarily because we wanna give you know, we want these new client partners to come in and be successful, and we just don't think maybe exactly right now is the environment to bring them in.

We're just going to take everything we're planning on doing and just ship it back a couple of months.

Speaker 0

And our next question comes from Samir Patel from Franklin Covey. Your line is open.

Speaker 2

Samir, how are you?

Speaker 8

Pretty good. Thanks for taking my questions. Paul, can you repeat, I think you said, if I heard you correctly, that bookings for both renewals and new sales were actually up in March. Did I hear that correctly, Enterprise segment? If you could just go over that again.

Speaker 3

Yes, they were. S. And Canada, we the revenue from new passes and renewals grew over March a year ago.

Speaker 8

Okay. Okay. That's good to hear. And so that's interesting kind of given the disruption. The

Speaker 2

follow-up Yes, it's question good that point on

Speaker 9

Sorry, go ahead.

Speaker 2

The point on that would be also though that part of that would be because we had a strong pipeline and some clients really positioned to make a decision and they did so. As Paul said earlier, starting with a new client now, the sales process may be longer than it would have been. Thankfully, closed business that was already positioned. Also because of the sales cycle, this is stuff that we were talking about beforehand that completed. We expect this will be a little deeper snow and harder to We're having lots of those conversations, but there'll be some gap likely in the sales cycle as you're we have things in all stages of it, but the front end of it is going to be a little harder, I think.

Speaker 8

Right. I mean that's understandable given the disruption over the last few weeks. I was just impressed that you actually managed to close the deals that were already in So that's good. The related question, Paul, I think you mentioned something about renewals, some of the renewals maybe happening a month later or something about payment terms. I was curious if you could delve into that a little bit with maybe an eye for I understand a great portion of your client base is probably doing fairly well.

But then you may have the companies like Marriott, right, where obviously, they're probably very committed to your four disciplines of execution. But if there's no one staying in hotels, then they're going to have near term challenges and they're laying off a significant portion of the workforce. So if you could maybe talk to kind of where you see that in your client base and what exactly it is that you're seeing with regards to some of those challenged clients?

Speaker 3

Sure. And you just expressed it well. So there are clients that are across a spectrum right now from they're in industries that are doing very, very well and they're looking to expand right now. And we had a number of those conversations interestingly enough even in these times where they're sending employees to work from home and the original path, they need access. They hadn't even considered those populations as potential.

They hadn't yet considered it. We'd hoped they would, but hadn't considered them yet as potential pass holding employees. Now that they're working remotely and they want to find ways to engage them and set them up to work successfully from home, they're in conversations with us about expanding. So you kinda have that end of the spectrum, and then you have the complete other end. I mentioned a minute ago, know, an airline example where they're not looking to expand.

And in their case, they're in a multiyear, so that's great for them. We have somewhere I'm sure we will, because we want to be good partners, we'll want to be asked to extend maybe some preferential payment terms or differential payment terms to them just to get they'll renew on time, but we might collect the cash just a little bit later to help them out. And there might be a few that'll say, we've just asked some of our employees to take some extended time off. We may not be able to use the pass fully for the next couple of months. Could we get a month or two on the back end?

We want to stay with the past. And those are things that we'll take one off to try to do right by our clients. We think of our clients as clients for life and that's an important thing for us. Anytime we lose a client, we're like, Dang, what did we not do that maybe should have done that we could have retained that client? We approach everyone on these discussions that way.

Thankfully, right now, we're seeing most of them are either utilizing the PASS They're even utilizing it in differential ways today than they might have a month ago. They are aggressively talking to us about how do they convert what they used to do in person to live online. And and thankfully for them and for us, we have all of that capability in the All Access Pass. It's a client by client conversation.

It's what our client partners and our implementation specialists are doing every day right now. We've been able to have contact with nearly every pass holder in the last thirty days just to check and see where they are and get a good sense for how we can be most helpful.

Speaker 8

Understood. And do you have I don't know if you have this off the top of your head, but do you have any sort of analysis around what percentage of your All Access Pass base is related to industries like, say, apparel retail or hotels or airlines or those sorts of particularly challenged industries at the moment?

Speaker 3

Don't have the exact number I would tell you. Our clients are kind of a good cross section represented sample, if you will, of the Fortune kind of 5,000 companies. They span all of those from technology, but we don't have a particularly heavy concentration in any industry really. Is an interesting cross section from healthcare so we're not we won't have a massive problem because we're all loaded up in one industry that's really struggling. At the same time, we won't also have an easy time because all of our clients are companies that are thriving right now.

It's a good cross section.

Speaker 8

Sure. That's helpful. Thank you so much.

Speaker 0

A Our next question comes from Zach Cummings from B. Riley. Your line is open.

Speaker 9

Hi, good afternoon. Thanks for taking my questions.

Speaker 2

Thank you.

Speaker 9

Yes. I guess there's been a lot of questions on the enterprise side of it. But I guess just over on the education portion of this, it sounds like a lot of your renewals typically come during this kind of, say, May through August time frame. Can you talk a little bit more about how you're trying to navigate that renewal cycle given the current climate? And is there a potential that you could be extending some of these renewal windows beyond that August timeframe?

Speaker 2

Sean, would you like to address?

Speaker 5

Sure. Yes. Well, most of the renewals, again, was shared. We have about 2,700 trying to get renewed. And they they start I mean, they started here in March, and they just accelerate through the rest of the year.

And so and we, in in the month of April, increases a little bit over March, and then May, it starts to hit really hard through July and and some into August. So what we're doing is we've been diligently making lots of phone calls. In in many cases, some of the schools have said, you know what? We love you guys. Wait two or three weeks.

Give us a callback. So we've tried to be sensitive to certain states and districts where they're not really ready to talk with us. A lot are, and that's why we had a lot of, renewals in the month of March. We're finding that the more urban districts, the larger districts,

Speaker 3

are more

Speaker 5

prepared for these kinds of this kind of downturn and to go digitally, and so they're quicker to get back to us. The more rural areas are a little bit slower. We feel like because Leader in Me is a thing, it's a it's a it's an implementation process. It's not just like a one and done. And then when we sell it up front, it's we sell a process that's three to five years long, and most of them are in that three to five year window right now.

So we feel pretty good about our ability to retain our retention rate comparable to what it's been in the past. And thus far, we have we're not hearing people say, you know, we're not gonna we're not gonna renew. It's primarily been call us back in a few weeks. So we we feel pretty confident. We have, we have coaching relationships with all these schools.

These are coaches that go to the schools every year, and we're we're still doing a lot of We've converted to a live online over Zoom coaching process. We're getting we've been doing this for a long time already, so the schools are comfortable with it, and we're we're comfortable with it. So that's going along pretty well. So our our process is to, all hands on deck.

We have client partners that have contacts with the schools. We have what we call education quality partners. There's another key role that we utilize that has a really good relationship with each of their schools, and we have coaches. So we have got, like, three touch points with each school, and we feel, you know, we're just going as fast as we can, trying to balance kind of consideration for their situations with, you know, our our desire to try to get them committed for next year. And, yeah.

So there's there's some possibilities that things will get pushed. I'm sure there's gonna be some of that, and there'll be maybe some extensions that we'll we'll give people. But in most part, the schools have a budget. Most of their budgets turn over in in July and August. They wanna spend the money when they have it.

They've got long term relationships with us. And we we feel pretty confident and, you know, it's lot of unpredictable things right now, but we feel pretty confident that most will renew on time. And I think it you know, we're starting to get a lot of calls right now, Zach, around, you know, people calling us back. We called a couple weeks ago saying, hey. I'm ready to talk now.

Just this week, we're starting to to hear a lot of that. So hope that adds a little bit of color.

Speaker 9

No, absolutely. And I think you briefly mentioned some of the coaching services you do. I know that in your fiscal 3Q and 4Q, you tend to have more services related to the education segment. I mean, you describe what portion of these can be done remotely or an online format? And I guess what portion of those require somebody to be on-site at these schools?

Speaker 5

Well, all of them can be done either we can do them live, we can do them live online, which is like over Zoom, and we can do them on demand. And we've developed the on demand capability just like in the last few weeks. We've been working on this for some time. We just we just kind of accelerated once it's hit. So I think, in most cases, they can all be delivered either live online or on demand as well as live.

And the on demand is where the school go in go in and do their own training on a computer. Right? And then afterwards, they have discussions, virtual discussions with everybody else in the community they're doing the training with, around what they learned. So it's kind of the flipped classroom approach. So there there will be some schools that will prefer live and will say, you know, we want to wait until things have cleared up and we'd like to do live training when you know, maybe in the fall.

It normally would have done in the summer. That some of that will happen for sure. But in general, our approach is, hey. You have a live day in July. We're we're planning on doing it live online.

We also have an on demand option if you'd like to go that route. So that's kind of how we're approaching it.

Speaker 9

Got it. Got it. That's helpful. And just a final question for me, Bob, just going back to the flexibility of your cost structure. I mean, it sounds like many of your expenses are kind of naturally flexible in a sense.

But when I'm thinking about gross margin here in the coming quarters, it sounds like you still have your strong base of growing recurring revenue carries a higher margin. Would it be fair to assume that as that portion of the business becomes a bigger portion of the overall mix that we could still see some pretty strong gross margins here in the upcoming quarters?

Speaker 2

Steve, don't if you want to address that directly.

Speaker 10

So Bob, chime in too. Yes, so the light there is that if the recurring revenue and the subscription revenue becomes a higher percentage of our overall revenue, will that automatically will that mix cause our gross margin to go up? And I would say that yes, it would. There are also other factors that play into gross margin like our amortization expense, etcetera, that would become a larger portion of our sales. So there are some fixed components to gross margin and variable components and mix.

And all of those combined, I don't see a significant impact on gross margin percentage overall.

Speaker 9

Got it. That's helpful. Well, thanks again for taking my questions and best of luck here in the upcoming quarters.

Speaker 2

Thank you, Zach very much.

Speaker 0

And our next question comes from Jeff Martin from ROTH Capital. Your line is open.

Speaker 2

Hi, Jeff.

Speaker 11

Good afternoon. Hi, Bob.

Speaker 2

Good afternoon.

Speaker 5

Hope you're

Speaker 2

doing Hi, Jeff. Yeah, great. Hope you are too.

Speaker 11

I was curious if and I had a lot of distractions during this call, I apologize if it's questions that have been asked. But in terms of your on-site delivery and the conversion of that to online, are you able to give us an idea of how much you're effectively transitioning the on-site to an online delivery format currently?

Speaker 2

Sure. Paul, do you want take that? Sure. Hi, Jeff.

Speaker 3

So we we as as as Sean mentioned about education, the same thing is true in enterprise, that everything we do can be delivered live online. Actually have two different platforms we use with our clients. One an Adobe Connect platform. The other is Zoom, which we're all becoming very familiar with. So we can deliver all of the normal training we would have done, everything from a four disciplines track to a sales performance initiative to leadership development and traditional time management training.

All that can be done live online. For us, it's not a problem at all. In fact, our net promoter scores when we deliver that way are really every bit as high as they are when we deliver live in person. And so it's really the it's getting our customers comfortable with that. For many of them, that this a new thing for them.

And so we're finding that we're spending a lot of time educating them and helping giving them demos and helping them see and visualize how this could be a really good alternative. Some, of course, are much more adept at that and are already there than others. That's where our sales force is spending a lot of time right now. We, as you would expect in March, have seen a number of the live on-site programs. Not really canceled, just delay.

The clients called and said, Hey, we just can't do this on the day we had it scheduled. We are in conversations about rescheduling. What we've seen in the last, really particularly the last six or seven business days, is that a number of those clients now are saying, okay. It looks like this is gonna be maybe the new normal for a little for longer. You know?

This isn't gonna pass over in a couple of weeks. And so they're now back talking about, okay. Let's really look at that live online thing. Help me get comfortable with that. And we're starting to rebook some of the days that had canceled.

And and so, you know, percentage wise, we you know, we're probably right right now, we've probably rebooked 25% or so of those that had canceled or not but kind of delayed. We haven't actually had like I said before, haven't had that many that actually outright said, We're done. We're not doing this. Most are in kind of a we got to reeducate them on the live online idea or they're saying, you know what, maybe we'll do that in June or July when this passes. And so those are the conversations we're in right now.

Speaker 5

Okay. That's very helpful. Thank you

Speaker 11

for that. And then Bob, just wanted to get a sense of how you're thinking about the existing infrastructure within Franklin Covey. If you've had to make any changes to this point, if you're thinking that you might get to a place if we're in this situation for another two months, does that force you to look at your cost structure? How are you thinking about that?

Speaker 2

Jeff, we have one Monday a month, the afternoon is focused on business model. We've been dedicated to say, hey look, by the time we get to $300,000,000 of revenue, one month ago we thought it would be three years from now and maybe it still will be but you'd have to catch up a little bit if this affects the economy and us for the next quarter or two but it could still be fundamentally the same trajectory. You'd at $800,000,000 that you'd be at 20% EBITDA margin. Kind of independent of this situation, we have for years tried to take that. To your question, years ago, somebody took out all the infrastructure, the physical infrastructure in The US and Canada of offices and so forth.

It hasn't affected our revenue. Our client partners were already working primarily for their homes. And so that structure has been taken out. The practice structure we had, we recognized with All Access Pass you were much better off having a broader mandate We've eliminated that. Most of the structure in the field, we still have physical offices in The UK, in Germany, Japan and China, but really otherwise there's not infrastructure to take out there.

I think there, you're not there. I think sure in a going forward we've, in the past we've taken on what we needed to and those kinds of things where you could have the people who can generate revenue continue to generate that but take on costs, IT costs. Those are all on our list every month. But I think, yeah, there could be a time where several of those infrastructure, IT, etcetera could be challenged. What you've seen is that our central costs despite having added a lot to revenue over the past decade, Our central cost really, of these initiatives, we haven't allowed that to go much and that's declining as a percentage of sales.

So we have a list of projects we're already on, some of which are accelerating now just naturally because you say, this is something we can take on. But I think largely, it's not that there aren't millions of dollars there still because we know what those numbers are because they're on our list anyway. But we anticipate being able to do most of that without affecting people other than in the flex of their compensation.

Speaker 11

That's great to hear. Great. Thank you and good luck with everything.

Speaker 2

All right. Thanks so much, Jeff.

Speaker 0

Thank you. I'll now turn the call back over to Bob for final remarks.

Speaker 2

All right, well thank you very much for everyone's great questions, for your thinking on this. We'll look forward to any questions anybody else has. I'll just step back and say that it is really great to be involved with clients in a way that they really value and where they're talking about the importance of the strategic durability of actually working on every organization has problems, the solution to which require large scale change of human behavior, whether that's improving sales or customer loyalty or trust or whatever it is. I think in these times, once people settle out and I think that everybody's settling at a different level and it'll affect people differently, this is the most enduring thing is that the combination of solving problems they really need to get solved and doing it through a business model they really value, we think we're glad to be in this position although we don't like being in this position. If you're in this position, you're glad to have that set of assets.

Thanks very much. We'll look forward to talking further and answering questions as those come up. Thanks so much. Stay safe.

Speaker 0

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