Franklin Covey - Earnings Call - Q3 2020

Executive Summary

• Q3 FY2020 revenue fell to $37.1M as on‑site training/coaching was largely postponed; gross margin expanded to 72.3% (+146 bps YoY), Adjusted EBITDA was $(3.6)M, and diluted EPS was $(0.79), driven in part by a $10.2M tax valuation allowance.
• Management emphasized that “more than 100%” of the decline was from rescheduling on‑site engagements; booking pace has recovered with ~80% of new deliveries live‑online and U.S./Canada bookings near prior‑year levels.
• Subscription metrics remained durable: reported subscription revenue grew ~18% YoY; deferred subscription revenue $42.8M (balance sheet) and unbilled deferred revenue $33.4M; All Access Pass retention >80% in Q3 and >90% LTM.
• CFO outlined a directional outlook (not formal guidance): Q4 Adjusted EBITDA ~ $4M; FY2021 Adjusted EBITDA directionally similar to FY2019 ($20.6M); FY2022 directionally similar to ~$30M Adjusted EBITDA expected pre‑COVID.

What Went Well and What Went Wrong

What Went Well

• Subscription resilience: reported subscription revenue +18% YoY; AAP renewals >80% in Q3 and LTM retention >90% (10th straight quarter).
• Rapid pivot to live‑online: ~80% of new bookings delivered live‑online; NPS scores comparable/slightly higher than on‑site; booking pace regained prior‑year levels in U.S./Canada.
• Strategic pipeline holds up: advanced‑stage pipeline additions began pacing ahead of prior‑year in mid‑May and continued through July, supporting forward revenue visibility.

Management quotes:

• “More than 100% of the decline… resulted from the need to reschedule… on‑site” engagements; “we expect… a significant majority… will be rescheduled and not lost”.
• “Our subscription business has been strong and durable even in the middle of the pandemic”.
• “We expect to emerge… and resume our aggressive march… high rates of growth in adjusted EBITDA and cash flow”.

What Went Wrong

• On‑site delivery halted: ~$20M of >$30M of scheduled on‑site revenue moved out of the quarter; management estimates ~70% will still be executed over coming quarters.
• International weakness: China/Japan and licensees closed for long periods; international accounted for ~$5.3M lost contribution in Q3.
• Adjusted EBITDA and EPS pressure: Q3 Adjusted EBITDA $(3.6)M vs $3.1M in prior‑year; net loss $(11.0)M driven by a $10.2M valuation allowance on deferred tax assets amid pandemic uncertainty.

Transcript

Speaker 0

Hello and welcome to the Third Quarter twenty twenty Franklin Covey Earnings Conference Call. My name is Michelle and I will be the operator for today's conference. 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 the Corporate Controller, Derek Hatch. Sir, you may begin.

Speaker 1

Thanks, Michelle. On behalf of Franklin Covey, I would like to welcome everyone to our conference call this afternoon to discuss our third quarter fiscal twenty twenty results. Before we get started, I would 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 revenue the duration and the intensity of the COVID-nineteen pandemic and the corresponding recovery from the pandemic the acceptance of and renewal rates for the All Access Pass the ability of the company to hire 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, including the effects of the COVID-nineteen pandemic, 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 to Mr. Bob Whitman, our Chairman and Chief Executive Officer. Bob?

Speaker 2

Good, Derek. Thanks so much. Thanks to everyone for joining us today. We're really happy to have a chance to talk with you. Hope each of you is doing well and that each of you is well.

Obviously the ninety or so days since we last reported have been some of the most noteworthy in recent history both nationally and globally. And while many of us have been through a lot in the past, none of us has lived through a time quite like this. As a result, all of us whether individuals, schools or companies are dealing with uncertainties we've never faced before. Despite these challenges, however, we're grateful actually that our rate of progress has strengthened as we'll talk about today that many areas have been actually quite a bit stronger than we might have guessed. We believe this reflects our compelling strategy, strong operations and in some cases the relative firming up of the snow that we talked about in last call in a number of areas.

As we'll address later, the rate of our progress leads us to expect that we will resume being a very high EBITDA growth, high cash flow growth company as we have been in the past quarters as we move beyond this period. I'd like to jump right in and start out by reviewing our results for the third quarter. We entered just in context, we entered fiscal twenty twenty with strong momentum, having seen revenue grow $15,600,000 or 7.5% in 2019 and having seen adjusted EBITDA increase $8,700,000 or 73%. We expected this momentum to continue. It's being driven by the things that we knew it should be driven by and even accelerate in 2020.

As a result, we expected revenue growth in the high single digits, meaning 18,000,000 to $20,000,000 with adjusted EBITDA and cash flow expected to increase between 3550% for the year to between 27,000,000 and $32,000,000 Consistent with this plan and the expectation for 2020, just as a reference point, Slide three, through the second quarter ended February, had very strong year to date results. Year to date revenue had been up 7.8%, subscription and related revenue had grown 22% to All Access Pass and related revenues had grown 25%. Adjusted EBITDA had already increased $4,900,000 or 118% and cash flow from operating activities increased $4,000,000 or 30% to $17,400,000 That meant that latest twelve months through the second quarter adjusted EBITDA had increased $9,400,000 or 59% reaching $25,500,000 for the latest twelve months, really almost getting us into the lower end of the range expected by our full year fiscal twenty twenty guidance of 27,000,000 to $32,000,000 And that was our two historically strongest quarters still ahead of us. With that performance, we ended the third quarter with the expectation of achieving actually the high end of this year's adjusted EBITDA net cash generated range. I'll give you that background only to say that we were grateful to start that we were on track, had been on track that we entered this time as strong strategically operationally and financially with significant liquidity.

However, in April, when we reported on our strong second on these results, the external environment obviously was one of significant and constantly changing uncertainty. How COVID COVID-nineteen virus and its related stay at home restrictions impact society at large? How would it affect individuals, businesses and schools? And obviously really much of this uncertainty remains. These factors had a significant impact on our business in the third quarter.

As you can see in Slide four, our revenue for the third quarter was $37,100,000 that was down $18,900,000 compared to $56,000,000 in last year's third quarter. As we'll discuss in further detail, more than 100% of this decline in revenue resulted from the need to reschedule coaching and training engagements that had been scheduled on-site at client locations, which they were not possible to deliver due to stay at home restrictions. Actually the majority of this decline occurred in our international operations where our offices in China and Japan and in many of our licensees were closed due to strict stay at home orders for much of the quarter. As we'll discuss in a minute, we have been able to rebook many of these engagements live online. And we ultimately expect to retain and really not lose the vast majority of the revenue that require rebooking.

On the other hand, as we'll discuss more detail in a minute, also, our subscription revenue proved to be extremely durable even in the middle of the pandemic. And so I think you're taking those two points, almost all of the more than 100% of the impact was as a result of not being able to carry out live training and consulting events, which thankfully we've been able to reschedule the Bullcob live online. And thankfully the other part of our business is subscription side which doesn't the activities of which really don't affect the quarter because they're just put on the balance sheet for subscription accounting actually retains strength. We'll talk about that more in a minute. Our gross margin remained strong, even increased 146 basis points to 72.3% in the quarter.

Also as you can see increased two fourteen basis points year to date and 131 basis points for the latest twelve months. And these increases reflect the increased share of revenue related to high margin subscription sales. Third, SG and A, we have a highly variable and performance tied cost structure that was designed to flex meaningfully to provide a significant offset if there were at any time an offset to revenue and gross margin in a downturn and it did. As shown, operating SG and A declined $6,100,000 in the quarter offsetting 48% of the 12,800,000 decline in gross profit in the quarter related to the need to reschedule these on-site engagements. Fourth, adjusted EBITDA declined $6,700,000 in the third quarter, reflecting that the $12,800,000 decline in gross profit was meaningfully offset by that decline in operating SG and A.

And finally, flow from operating activities remained strong through the quarter at 18,700,000.0 Stepping back from this, I'd like to address four key takeaways that I hope you'll find useful as we unpack these numbers and provide some important insights. Takeaway one, I've noted, is more than 100% of the decline in revenue and adjusted EBITDA in the third quarter resulted from this need to reschedule revenue due to the worldwide stay at home restrictions. As noted, the majority of this related to our international operations whose offices were closed during much of the quarter and who do not yet have substantial subscription businesses to cushion them. Thanks to our immediate shift to delivering coaching and training live online, a capability we developed over the past ten years, we've scheduled a significant portion of the engagement which had to be rescheduled And actually our booking pace for coaching and training services gained very strong traction and accelerated since early May. And so we believe that the area of biggest impact in the quarter that of having to reschedule is was well on the way to being addressed.

Our booking pace as we'll talk about more in the last six weeks or eight weeks has now regained the same levels we had last year in The US and Canada. And so we believe that in coming quarters that impact will address itself. We continue to have weakness in China and Japan although both are increasing or improving for Q4 as well as among our licensee partners. So the biggest challenge we believe is on the way to getting addressed. Second is that our subscription business has been strong and durable even in the middle of the pandemic.

The rapid growth of our subscription business obviously has driven our accelerated growth in adjusted EBITDA and cash flow over the past several years. And even in the third quarter, subscription revenue grew significantly and contracted invoice subscription revenue also continued very strong throughout the third quarter and has accelerated further in June. Third takeaway is that this strength in the middle of the storm is not just by happenstance. It is based on deep strategic and operational roots including the importance of the challenges which we're helping our clients address. Those haven't gone away in these times.

The flexibility of our offerings across a wide range of modalities allows us to shift immediately to where more than 80% of our new bookings are live online now and we're converting a bunch of the old days there. And third, the strength of our business model, which flexed on the downside and which has high flow through on the upside. Finally, we'll give some outlook as to what we expect going forward. We do expect to emerge from this period and be able to resume our aggressive march up the mountain of being achieving high rates of growth and adjusted EBITDA and cash flow. And we believe we're establishing now the foundation for doing that.

So I'd like to just address each of these key takeaways so you have some more context. First, the idea that more than all of the decline related to these need to rebook. More than ten years ago, just after SARS actually, we were concerned about it. We met and allocated significant resources to developing very strong live online coaching and training delivery capabilities. Not many other people were.

You had pure digital and you had pure live on-site. We felt like really you need to be able to deliver this content. We need to be able to do it, get the same Net Promoter Scores that we were getting. So we've tested this a lot and done a lot of this training. More than 190 of our consultants across both divisions have the capability to deliver our coaching, training, and impact journeys on both our own proprietary Adobe supported platform called LiveClick as well as on all the other major live platforms, live online platforms including Zoom, Microsoft Teams, WebEx, and GoToMeeting.

Our consultants are expert at facilitating and delivering live online and actually they are in the same high 70s net promoter scores with their live online delivery that they achieve when delivering live on-site at client locations. And actually have a little higher rating on the question how likely is it that you would recommend your instructor. It's in the 80s, mid 80s anyway, but it's actually a point higher with live online. For years we had believed that with the quality of our content and our consultants and our digital support tools, this live online capability would ultimately become a unique competitive advantage, both relative to traditional live on-site only providers and actually also to digital only providers. Despite our vision of this though and despite our capabilities, clients actually typically continue to choose to have these coaching and consulting engagements done live on-site at their business or school locations.

A lesser of this is that in The US and Canada in last year's third quarter, we started the quarter with six fifty nine, and this is in the enterprise business, six fifty nine coaching and training engagements already on the books and added an additional nine twenty engagements for delivery in the third quarter ending the quarter with almost 1,600 coaching and training engagements. Essentially all of them were for live on-site delivery at client locations. Similarly, we began this year's third quarter with eight eighty four coaching and training engagements on the books which was 34% higher than in last year's third quarter. And again, almost all of these engagements were scheduled live on-site at client or school locations. However, all know, pandemic related concerns and stay at home restrictions made this on-site delivery virtually impossible during most of the third quarter.

This meant that substantially all of this third quarter revenue had to either be rescheduled live online and typically not into the same quarter since many companies and schools were just trying to get their bearings during the third quarter. In addition, given the uncertainty as to when offices might reopen, and uncertainty which obviously continues, the pace of new bookings of coaching and training agents was also much lower throughout March and April as many organizations figured they'd be back in their offices by May or June and they'd just go ahead and do it live on-site then. But as that started to become more clear, they've converted a substantial number of those to live online. These same factors had actually an outsized impact on our offices in China and Japan which were closed for long periods of time during these countries' multiple lockdowns since these areas traditionally had done very little live online or digital training and didn't have a large base of All Access Pass subscription revenue to provide revenue stability. We knew that our international licensee partners would experience similar challenges than they have.

The amount of revenue that was involved in these on-site engagements that had to be rescheduled was very substantial, totaling approximately $30,000,000 across the company. Last year, it would have been $30,000,000 plus this year. As I mentioned, because of our investments in developing strong live online delivery capability, we moved immediately to provide many live online client demos daily. All day long teams were showing clients how it could work. They were surprised by how engaging it was.

Many of our training engagements, therefore, that we lost have already been rescheduled or in the process of being rescheduled. And we expect that a significant majority of these on-site engagements, which have been postponed, will only be rescheduled and not lost and not displace other revenue. However, finally, even with our rapid response, more than 20,000,000 of the revenue of that over 30,000,000 had to be rescheduled. It just wasn't possible to deliver it. And that represented more than 100% of the company's total decline in revenue in the quarter.

As mentioned, unusual amount of that occurred in our international offices. If you look at, sorry, it's shown on slide eight. You get an idea of the mix of this. Whereas our international operations, you can see they're accounted for 29% of our revenue in the third quarter of fiscal twenty nineteen. These operations accounted for $5,300,000 of lost contribution in this year's third quarter.

So this is kind of looking at the EBITDA impact. By contrast, our U. S./Canadian operations, accounted for 56% of our total Enterprise Division revenue in last year's third quarter, accounted for only $1,400,000 of reduced contribution. And this again is a reflection of the strong subscription orientation in The U. S.

And Canada and among our English speaking international offices and the earlier stages of subscription development in China and Japan. We're pleased I mentioned that the booking momentum for new coaching and training engagements however has increased significantly and 80% of those new bookings are now live online. And it's really accelerated over the past two months and surprisingly now tracking ahead of our booking pace at the same time last year. As you can see in slide nine, just to give you some visibility on this, you can see the pickup of the booking of new coaching and training delivery engagements beginning in mid April. As shown, since then bookings have accelerated.

As a result in The US and Canada, we are now back to booking levels nearly equal to those being achieved last year at this time. Also on the same Slide nine, you can see that our mix of delivery on new bookings has shifted to approximately 80% live online now. And so we're getting the same pace of bookings almost as we had last year at this time despite ongoing uncertainty. And people are very willingly doing it live online and we think this is important. In addition to an improving coaching and training at booking pace, as you can see on slide 10, we're also very encouraged by the pace of additions to our overall advanced stage pipelines.

This consists of both invoice revenue and deals which are in our calculations very, very highly likely to close either 85% to 95% depending if it's A or B status. This trend began pacing ahead of prior year starting in mid May and the accelerated pace has continued through July to date. And so the things that are not recognized in our third quarter, the things that are recognized really didn't have very much to do with the quarter itself or what was generated in the quarter. We had deferred revenue already on the balance sheet that was coming in, we knew. And we had all these bookings that then couldn't be delivered on-site and that's really the story of the third quarter.

However, the important thing for us looking forward is that the activities and booking pace on things that when booked really go on the balance sheet and don't have an impact much in the third or fourth quarters that build the foundation for next year thankfully have been strong. Second major takeaway is related to the subscription business which again didn't have much impact at all in the quarter except for the deferred revenue piece but has an important impact on the future. This is the area in which we expect to feel the least impact from the current pandemic. We have an $84,000,000 pure subscription business excluding add on services. And you can see in Slide 12, our subscription revenue has grown from just $19,600,000 in 2016 to $80,900,000 for the latest twelve months to this year's second quarter with All Access Pass subscription revenue growing from 11,900,000.0 to $58,000,000 and Leader in Me subscription revenue growing from $7,600,000 in 2016 to $22,500,000 This subscription business has been characterized by rapid growth, strong gross margins, high revenue retention rates and a very strong lifetime customer value and has been a key driver behind the accelerated growth in adjusted EBITDA and cash flow we have achieved over the past several years.

This strong growth and strong economics together with the low customer acquisition cost to lifetime customer value has caused some of you to let us know that you believe that this part of the business alone, which represents about 40% of our revenue and has been increasing by about 800 basis points a year, is worth at least five times its revenue or greater than 400,000,000 just this portion of the business alone, which has been durable. And we're not making and stating opinion on it, but we believe that it is a very robust business. Importantly, as shown, our total subscription revenue as well as both Leader and Me revenue continued to grow in the third quarter and you can see increased to $84,000,000 for the trailing twelve months, latest twelve months through the third quarter. So this was strong 18% growth in the quarter itself. I'll just give you some quick bullet point data on the subscription business.

First, our billed and unbilled deferred revenue. We expected that 100% of the 22 plus million deferred revenue was scheduled to be recognized in the third quarter would be recognized and all of it was. You can see that's broken into billed deferred revenue as shown in Slide 13. We had $47,900,000 of billed deferred revenue on the books at the end of the second quarter, which is $8,400,000 or 21% higher than at the end of the second quarter a year ago. As of this amount, we expect to get the full $22,300,000 that was scheduled to be recognized and as we did, as a result, our revenue in the third quarter increased 18%, subscription revenue with All Access Pass subscription revenue growing slightly higher 19% and Leader in Me growing 14%.

You see the unbilled deferred revenue also on Slide 13, where we had a balance of $34,800,000 of unbilled deferred revenue at the end of the second year related primarily to multi year contracts and that number was 39% or $9,800,000 higher than the $25,000,000 balance we had at the same time last year. Again, we expected that substantially all of this would be that was supposed to be invoiced in the quarter would be invoiced and all of it was. We had concerns that the pace of decision making in the midst of all this would be held up that that would affect potentially renewals and new pass sales. As you can see in Slide 14, our renewals historically have been very strong. In every case over the last nine quarters, the latest twelve months, revenue retention percentage has exceeded 90%.

We had expected our revenue retention rate during the third quarter however would likely be lower due to just all the disruption. And while we weren't sure what to expect, we are very pleased that despite the difficult and unusual business environment, our All Access Pass revenue retention rate was actually higher than 80% for the third quarter. And with this strong performance, our latest twelve month revenue retention actually exceeded 90% again for the tenth straight quarter. Subsequent to the end of the quarter, we've actually had a couple of other accounts come in that were delayed and weren't counted in the quarter that actually boost that revenue retention a bit higher. Second, we were concerned that the invoice sales of All Access Passes to new organizations or new logos would be impacted.

But again it has continued to be strong. As you can see in slide 15, the sale of All Access Passes to new logos continued strong during the quarter coming in at 92% of the level achieved in last year's Q3 in U. S. And Canada. And the sale of All Access Pass to new logos was even stronger in June.

As a result, as you can see also on Slide 15, as a result the sale of All Access Pass to new logo companies for the four months March through June came in right at 100 percent of the level achieved for the same period last year. Third, the pace at which All Access Pass holders entered into multi year contracts has also been strong. But it might have been reasonable to expect that fewer All Access Pass holders would enter into or renew multi year contracts during the third quarter with all the uncertainty. As you can see in Slide 16, the dollar amount of multi year All Access Pass contracts actually increased a little bit to $3,900,000 from $3,500,000 in last year's third quarter and our balance of unbilled deferred revenue increased to $33,400,000 from $23,700,000 at the end of last year. As a result, the combination of maintaining high revenue retention and entering to new logo sales, our invoice subscription revenue in total was 86 percent of the amount we invoiced in the prior year.

It was $11,800,000 versus 13,700,000.0 last year. And again, if you look through June on things that renewed just a little late, that gap closes even further. In the education division, approximately, historically 88% of Leader in Me schools in The US and Canada have renewed their Leader in Me subscription membership in a given year. The vast majority of these renewals have occurred during our fiscal third and fourth quarters matching schools' budget cycles and so this year it's right in the middle of the storm. With more than 2,700 Leader in Me schools to renew, it might not have been unreasonable to get interested in that the renewal rate would drop substantially.

As you can see in slide 17, the tremendous disruption in schools in March when schools and their administrators were scrambling to teach LIFE online and ensure that those who depended on school meals could still pick them up, etcetera, resulted in us starting April with nine sixty seven Leader in Me schools having renewed or committed to renew their subscription membership. And that number was four thirty four or 31% fewer than at the same time in fiscal twenty nineteen. However, our education team has been working around the clock and they've really made up very substantial ground since then. As of yesterday, this July 8, this number had increased to nineteen ninety four retained schools that either already signed contracts or are awaiting return of a contract to which they've committed. And that's now just 141 schools or 8% behind where we were at this time last year.

At present we expect that the school renewal rate will again end up at greater than 80% reflecting these schools' strong commitment to the Leader in Me program. Finally, as the expected sale of Leader in Me memberships to new schools, expected that would be impacted by the very challenging current environment and it has been. As shown in slide 18 through July 8, two eighty new schools had purchased or awaiting signed contracts on purchase of new Leader Me memberships. This represents approximately 65% of the number of new Leader in Me schools we had contracted at the same time last year. However, based on our current pipeline and taking into account the initial significant disruption in March and the fact that it kind of moved everything back about six weeks, We expect the pace of sale of new school memberships will increase and reach approximately 400 by the end of the fourth quarter.

That's a number that 75% of the number achieved last year and a number we would feel very good about. Fact review is a very strong indication of the significant value schools place on the Leader Me that during the difficult period since March 1 more than 1,200 schools have renewed their Leader in Me memberships with all they had going on and 130 of these new schools have become Leader in Me schools. So I'm really pleased that our subscription business remains so durable even in these times and that the primary impact in our business which has been the inability to deliver training and coaching is on the way to being addressed because of our significant success with live online training. So I'll just quickly turn the time over to Paul Walker to discuss our third takeaway that related to the factors which were underpinning the strategic durability of the subscription business. Paul?

Speaker 3

Thanks Bob and good afternoon everyone. The third important takeaway that I want to talk about is the strength and durability of our subscription business really does have deep operational and strategic roots. There are three areas in which it's rooted. First is the importance of the challenges that we help clients address and the strength of our solutions in addressing them second being the flexibility and accessibility of our offerings across a wide range of modalities and the third, the strength of our business model. As you're familiar, five years ago, we made the decision to move to a subscription model because we believed it would be the best way for us to fulfill our mission and to serve and build the lifetime value of our clients.

We felt that if we made the move, not only would we be better, a better and more strategic partner to our clients, we would also create a more profitable enduring and high growth business. And while we've enjoyed high subscriber satisfaction and renewal rates from the beginning, some have asked how resilient we thought our subscription business would be in a downturn. And as you know, we've had a front row seat watching the answer to that question play out over the past few months. And we are very encouraged, as Bob mentioned, about how resilient our All Access Pass and Leader in Me subscription businesses have been even in the middle of this pandemic. I'd just like to talk for a minute about why this resiliency?

Why in the middle of this current storm did the Enterprise division contract nearly the same amount of new logo sales, achieve more than 80% revenue retention and have even more clients enter in the multiyear contract than in last year's third quarter. And similarly during the massively disruptive time for schools, Y as the Education Division had more than two eighty new schools purchased Leader in Me and nearly 3994 Leader in Me schools renew their contracts. We believe there are three key reasons that our revenue retention remains high and our lifetime customer value is also high and growing. First among those is that we're helping our clients to successfully address some of their most important and intractable organizational challenges. During the third quarter, our clients wrestled through the same historic challenges that each of us here on this call has experienced.

They moved large populations of employees from their office or school to remote work environments. They narrowed focus to the few critical must do activities, often with fewer resources than they had pre pandemic. They had to figure out how to generate sales and retain customers in an extremely difficult selling environment. They had to address culture. And to the extent they had deficiencies in their culture, those get amplified in times like these.

And most recently, most every one of our clients is very proactively focused and thoughtfully addressing diversity, inclusion and bias within their organization. And through all of this, all of this change and disruption, the need for more capable leaders, those leaders who can execute, build trust and establish effective cultures has never been more important. And these are challenges that are very important for all organizations, companies, schools, etcetera. And they view these as must win games. And these are exactly the challenges which we have focused and against which we've allocated all of our R and D and innovations investments over the past many years.

Our clients needed solutions to these challenges, especially during these times and because they had their All Access Pass subscription or their Leader in Me membership, they had the tools and resources that they needed. So that first point, we're on the key must win games and we feel like we have the best in class content and tools to help with those. The second is that our decision to offer and support the accessibility of our content and solutions in multiple delivery modalities is a unique and tremendous asset for our clients. When the pandemic hit, the need to address these must win gains didn't go away. In fact, in many cases, became more acute.

But overnight, our clients needed entirely new and flexible ways in which to deploy solutions to address their challenges. And they often needed to be able to do so globally and at scale. Our ability to offer everything we do live online, digitally self paced and via micro push is not only a benefit to our clients, but it is also a significant competitive advantage for our company. Our clients routinely tell us that we have the most robust and effective live online delivery capability of any of the providers with whom they work. As Bob addressed, this strength allowed us to pivot literally overnight and reschedule a significant portion of our canceled on-site delivery days.

And additionally, as you stated, in the Enterprise division in The U. S, we're seeing new bookings in June and July return to nearly the same pace we experienced a year ago. And as you would expect and as we've talked about, the mix has shifted almost completely to live online. The third point and final point here would be that our value proposition is extremely compelling to our clients. Each client, and we've talked about this in the past, receives complete access to our best in class solutions.

They're available in all modalities and in more than 19 languages around the world. Each also receives the expert services of an implementation specialist or a Leader in Me coach, who's dedicated to ensuring that they receive and realize the behavior change and outcomes that they're seeking. And all of this is offered to each client at a price per person trained that is equal to or less than the typical cost of training one person in one content area in just a single modality. The strength of this value proposition, including the fact that the price per user decreases as the pass holding population increases, is causing many of our clients right now to make the decision to consolidate providers and double down with Franklin Covey. In fact, I'd like to just share briefly four examples, recent examples of clients who and how they're benefiting from this value proposition.

The first, a major airline in the middle of this massively disruptive time felt it vital to train and retrain significant portions of their leader population. They believed and believe now that the capability of their leaders to engage employees, lead through change and create a culture of high performance is going to be extremely important as they work through the most challenging environment they've ever faced and have to find new ways of succeeding. A second example, we have a large consulting firm we work with who doubled down on their commitment to achieve on time project delivery to free up and create more bandwidth, to take on the addition of many new projects that are servicing because of COVID-nineteen. And, rather than pausing their four disciplines of execution initiative, which they were using to create this bandwidth and improve their efficiency, they didn't want to pause it until they could bring everybody back live in person. And they went ahead and aggressively moved forward and are using our live online capability and were engaged with multiple teams doing dozens of delivery days and coaching sessions right now.

Third example, a CEO of a midsized healthcare company chose in the middle of a highly disruptive time to continue with plans to reinvent their culture to make it more collaborative, more innovative, more inclusive. And rather than pause, they're accelerating this initiative to emerge even stronger. And finally, one of our great new school districts in Newark, New Jersey just recently made the decision to implement They're using Leader in Me to immediately and proactively address the impact of COVID that it's having on their school community to address uncertainty and to help with mental wellness and social emotional challenges among both their students and their staff. For these reasons and others, as Bob has mentioned, we believe that we'll emerge from this period stronger with a deeper and more enduring relationships and that we'll count even more clients as clients for life.

Bob, I'll turn it back to you.

Speaker 2

Thanks, Paul, very much. Steve, I'd like to turn the turn over to Steve Young now just to address kind of what our general view of the immediate and longer term future looks like from our vantage point. Steve?

Speaker 4

Okay. Thank you, Bob and Paul. So our fourth point in this presentation is that we expect to emerge from this period and resume our march up the mountain of being a company with high rates of growth in adjusted EBITDA and cash flow as we've talked about. In April, as you remember, we felt that circumstances were so uncertain and there were so many questions that we couldn't answer that we couldn't with confidence give guidance for the quarter or the year. We also at that time said that we hope to have a better sense of where things were heading by this time, by the time we report this quarter.

We still don't know what will happen in the world in the coming months and year, whether world will shut down again etcetera, etcetera. And there's still much uncertainty about our expectations going forward recognizing the disruptions that may still be caused by COVID-nineteen. Therefore, what we're about to say is not guidance per se and includes many assumptions. That said, if the same trends that we're seeing in our business and what Bob and Paul have talked about already today, if those trends continue, then in our fourth quarter we would expect adjusted EBITDA to be in the range of approximately $4,000,000 This number reflects our belief that the enterprise divisions All Access Pass subscription business will continue to do well on revenue retention and new pass sales. But that due to subscription accounting, most of that contracted and invoiced revenue will not benefit the fourth quarter, but will be placed on the balance sheet of deferred revenue to be recognized over time.

This estimate also assumes that the Leader in Me membership renewals will be relatively strong. But like all Access Pass subscription revenue, most of this contracted subscription revenue will be recognized over time. And that due to ongoing uncertainties in education related to school openings and budgets, the number of new schools entered into and going through the live online onboarding process will be less than what we'd expect next year. Finally, this number of adjusted EBITDA reflects that we expect the results in China, Japan and our license e network will continue to improve, but to a level which in the fourth quarter would still be significantly below the revenue and profitability levels that they achieved in fiscal twenty nineteen. So that's our look at the fourth quarter.

Second, if the current trends and progress were to continue then we would expect that our adjusted EBITDA results in fiscal twenty twenty one with maybe a quarter or so of cushion would be directionally similar to the results we achieved in fiscal twenty nineteen, which is a year in which we our adjusted EBITDA was $20,600,000 And that our fiscal result in 2022 with maybe a quarter or so of cushion would be similar to the result that we expected to achieve this year with adjusted EBITDA of around $30,000,000 So achieving such results we believe would signal that we have resumed our accelerated climb up the mountain toward being consistently high adjusted EBITDA growth, high cash flow growth company. So Bob, that's look going forward.

Speaker 2

Thanks. We'll now get ready to turn the time over to questions. But just say in conclusion that you know, I wanna really express, admiration and appreciation first to the, all of the Franklin Covey associates. You know, in the middle of, the storm, they you know, they're making more sales calls, albeit live online, than ever before. Our implementation specialists are spending more hours.

Our consultants have all refined their skills and are teaching or facilitating, you know, huge numbers of of of of engagements, every week. They've done it with tremendous excellence. Our technology and and marketing and product teams have supported this. Our Jonah team with the weekly micro push learning has has been able to adjust on the dime and keep relevant topics up front and center. We have launched new offerings and are about to launch some new that are really relevant, including the unconscious bias offering that we launched a year or so ago.

It's accelerating with the new best what we expect to be a best selling book based on preorders, Liz Wiseman multipliers. And so I think we're we're in a position where relative to customers, they're they're in a time in a in a position where many of them are looking for to have fewer suppliers and getting more value from those who they do partner with. We think we're in a good position for that. We also appreciate each of you and recognize that, you know, we all I mean, really, if we're able to accomplish what we're talking about now, you know, the net present value of the change impacted by this, you know, compared to where we were six months ago when we purchased stock at $36 a share and and thinking it was worth more than that, know, really, the net present value in our minds is a few dollars less, but it hasn't fundamentally changed this. And so I'm you know, if I in April, if I had thought we'd be in a position to be saying this today, I would have been thrilled.

You know, still recognizing it's difficult circumstance, but I just wanna thank everybody for putting us in this position. With that, let's open it for questions.

Speaker 0

Thank you, sir. We will now begin the question and answer session. If you have a question,

Speaker 5

I think you said you estimate maybe about $20,000,000 of what was previously estimated to be $30,000,000 in revenue tied to on-site training, coaching days, that sort of thing was postponed in the quarter. I just want to make sure that I understood that correctly. And then relatedly, you could give any color on how you'd expect that $20,000,000 or so of revenue to kind of flow into the next several quarters?

Speaker 2

Yes. So first of all, Andrew, yes, that was right. If you look at $56,000,000 that we did in last year's third quarter and subtract, say, the $22,000,000 of subscription revenue that we had this year, That leaves you with a little over 30,000,000 of revenue that's not related to subscription, which, you is subject to being impacted because it related to, in one form or another, to online coaching or delivery except for that small portion that didn't. So so if you net down the portion that was already gonna be live online, you know, that brought brings it down to about 30,000,000. And and, you know, once at the time in April, was some people were still in their offices.

Others expected they'd be back in their offices, but essentially all of that 20,000,000 just had to get moved. That included both what was on the books and what was within the pipeline about to go on the books. In terms of the positioning of that, we don't know exactly the percentage that'll be kept. We believe about 70% of those engagements will actually still be because they were tied to something important that the organization's gonna try to get done. We'll ultimately come in.

We'll lose, you know, the difference that, you know I mean, that won't I mean, we may pick it up on new booking pace, but it won't be those same engagements being rescheduled. The majority of that has already been rescheduled, and the rest of that is we are working to reschedule. And so I think, you know, we'll end up, you know, with of of that 20, we'll end up with say $14,000,000 of that that ultimately will come in the combination of probably some in the fourth quarter and the rest in the first quarter. Paul, I don't know if you want to add any other insight to that.

Speaker 3

I think that's good, Bob. I don't have anything else to add. Some of

Speaker 2

it relates to Sean in education also where normally it would all happen in the summer, but with all the disruption, Sean, some of that will now be in the first quarter.

Speaker 6

Yeah. Yeah. Some will be there's some that's been rescheduled in the fourth quarter, some that's been rescheduled in the first, and and a little bit into the second, and some that hasn't is still floating, and they're still trying to decide based upon school opening times. Right.

Speaker 5

Got it. Got it. Makes sense. Thank you.

Speaker 2

Makes sense.

Speaker 5

And then maybe bigger picture, how do you think the the current environment has maybe permanently affected clients' preference between consuming content virtually as compared to on-site? And then tied up with that, is there any way that we should think about the difference in revenue and profitability between in person and online delivery methods?

Speaker 2

Sure. Thanks. Paul, do you want to address that?

Speaker 3

Sure. Sure. In terms of the permanency and maybe overall, I think things are have shifted for sure. And some of it will go back, but I think the amount that goes back, it won't get back to where it was. So I think we'll see virtual delivery, what we call live online delivery, will be something that will be here to stay.

One of the things that we're seeing right now, and as Bob mentioned earlier in his remarks, that we've had the capability to deliver that way for more than a decade, but client appetite and interest in that just wasn't there. If push came to shove, they'd rather just do it the way they've always done it, is live in person on-site. And that was one of the things, frankly, that plagued us a bit in March, April, early May is that our clients were thinking, well, if all things are equal, we'll just wait until this pandemic's gone, and we'll get back together in the in the summer or early fall. And as that's looking maybe less likely, they're now coming back saying, hey. We don't wanna delay these important initiatives, so let's let's really take a look at doing them live online.

And I think what they'll see is that that that that's a very effective way. For us, the Net Promoter Scores, as we mentioned, are equally high, actually slightly higher when we deliver live online. And so I think we'll see more and more of our clients even post pandemic when we're all hopefully back in our offices going about our normal business, that clients will will will prefer that. In terms of if that happens and as that happens, that doesn't that doesn't negatively impact us at all. In fact, you know, our our revenue and margins are just as good on that business.

It's actually a real win for the clients. They're not paying any travel costs for us or for their own people. And so there there there might be a chance for them to do even more training and more delivery than stretch their training dollars further either in the form of more delivery or in more All Access Pass subscription seats because some of those budget dollars aren't going towards training. But one other point I just make sorry, Bob, and I'll stop is that because it's convenient and people don't have to leave their office, and we typically deliver it in chunks throughout the day, so we might do two or three couple hour chunks and there's time to get work done in between. There is a scenario too where clients will do more of this kind of training and actually the volume of training might be higher in that environment than it would have been when we all had to travel somewhere and invest the time to travel and be there for a whole day and then go back to the job.

And so we don't know yet what the long term consequences will be, but we see there could be a lot of positives there.

Speaker 6

Yes, Paul, if I could add, this is Sean. Similar on the education side, I think there's going be a significant shift in continuing once we get back to normal and doing a lot more live online and on demand training. The education space was not as advanced as the enterprise space in the use of technology. So it's been a big comeuppance for them. There's been a lot of shifting, a lot of investment in the technology.

And so I think on a net net, I think it's going be a real positive thing for us because, you know, we deliver 5,000 coaching days a year. A lot of these I think will go live online. It's less wear and tear on our people. We get the scores are just as high, and there's a lot less travel. And in in a Leader in Me membership, travel's included.

So this would be a savings for us not to have to travel. So I I think it's gonna be a significant shift in education. It'll be too I think it'll be helpful thing for us and our clients.

Speaker 5

Great, thank you very much.

Speaker 2

Great, thanks Andrea. Just one note that our margins would increase a little bit because we build through to the clients' travel revenue at no reported margins. It doesn't change the dollars, but the reported margins would be affected positively a little bit because we get no margin on the travel revenue. Otherwise, it should be the same.

Speaker 5

Got it. Thanks.

Speaker 2

Thanks so much.

Speaker 0

Okay. And the next question in the queue comes from Jeff Martin with Roth Capital Partners. Your line is open.

Speaker 7

Hey, Jeff. Good afternoon, guys. Hope you're all doing safe and well.

Speaker 2

We are. I hope you are as well.

Speaker 7

Fine. Thank you. I wanted to get a sense from you, Bob, what the impact on add on services to the All Access Pass subscriptions impact has been. Have you seen that be weighed on like the live events have been impacted?

Speaker 2

Yeah. Because yes. A good chunk of what got what got moved out of the third quarter was actually add on services for, related to All Access Pass engagements just because, again, a lot of times they'll invite you know, they want somebody on-site to facilitate a major initiative with their senior leaders or whatever it is. What's happened, I think, though, is that, you know, you always thought you couldn't do stuff live online. Now a lot of that's shifting.

We hardly ever did any execution engagements, for example, on big execution initiatives live online. And we're now doing those daily, and they're recognizing, wow. This is actually can be can happen just fine. But it I mean, it's had the same short term impact. But, again, because the the service revenue that's attached to All Access Pass historically on a same store basis, to speak, same client basis, we were retaining a 100% of the, almost a 100% of the service revenue every year.

That's been dented this quarter, but as we're now rebooking, a significant portion of what we're rebooking is actually add on services for All Access Pass that are being done live online. Don't know, Paul, if you want to add anything to that.

Speaker 3

Think that's exactly right, Bob.

Speaker 7

Okay. And then with respect to their scheduling, I'm curious to know a little bit of the transgression throughout the quarter. Were you doing any rescheduling of in person live events where you had to subsequently rebook them as online events? Just curious to how that transpired.

Speaker 2

Paul and Sean, do you want to address?

Speaker 3

Sure. I'll take enterprise. Yes, initially, as we mentioned, we entered the quarter with about 34% more engagements on the books than we had a year ago. All of this vast majority of those were all live in person at the client location. And those all needed to be rescheduled.

And there were there were a few clients, you know, early on who were saying, let's go ahead and reschedule into q four, and they went back on the books as live on-site at the client location. But we we, in earnest, started to try to work with each client to say, you know, why don't we just just do this live online? And so that's so so there are some that have gone out on the books in, you know, in the later q four and into q one that are just the client said, let's just pause, and we'll do it live on-site. But the vast majority are back on the books now is actually live online. And the mode we've adopted is to try is to say to the clients, let's get them scheduled that way.

And then if conditions are such that we can come on-site, you want that at the time, that's an easy change for us to make so that we don't go through another raft of cancellations because we have all these live on-site days on the books that if COVID stays, like it looks like it might for a little while longer, we don't want to relive that experience again. The vast majority that are out there are live online now.

Speaker 6

Yeah, Jeff, this is Sean. In our world, it's about two thirds of the days that are booked going forward are live online. It was more than that. And now live is starting to pick up in certain pockets, certain states, in some districts. We expect that to continue in that direction.

And as I shared before, the majority of these days were rebooked in the fourth quarter. Some went into the first and some are still pending decisions from the schools and districts.

Speaker 7

Okay. And then for project live versus live online, is it the same arrangement in terms of terms and revenue and margin impact? Or are there any differences?

Speaker 3

It's the same. It's it's essentially the same arrangement. The client signs a contract. It's got the same cancellation terms to it. The there there's a slight different they they can book it to be a day or they can do segments over

But once we're done delivering the engagement, whether it was a day of time or segments over a couple of days, it's it's the same revenue and profitability to us as a company. I mean so so as a client, your experience is slightly different, but the economics are the same for us.

Speaker 7

Great. Thanks. That's all for me.

Speaker 2

Thanks, Jeff.

Speaker 0

Thank you. And the next question in the queue comes from Marco Rodriguez with Stonegate Capital. Your line is open. Please proceed.

Speaker 7

Afternoon, Thank you. Thank you for taking my question. You. Wondering if maybe you could talk a little bit more about the pipeline here. You guys kind of highlighted that you're back up to where your bookings in your pipeline was, I think, at this time of last year.

Can you maybe talk about what you're seeing inside that pipeline? Is there any sort of pressure from a pricing aspect or different types of terms that are necessary to basically incent some of the customers?

Speaker 2

Paul, do you want to address that and show them?

Speaker 3

Sure. Sure. What we're as we showed in that chart earlier on I can't remember the slide number now, it's probably around 15 or so. What we're seeing right now, the actual pipeline for Q4, the overall pipeline is not as full as it was at this point in Q4 last year because we went through Q3 and not as much was going in. What we're showing in that slide is that beginning in about May, the amount that was now moving in though to the advanced stages of the pipeline has actually started to pace even with and is now ahead of what it was last year.

If you take out the fact that there was less that went into the Q4 pipeline during Q3, however, starting in about mid May and continuing all the way through June and July, the rate that's now going in and advancing is greater than it was last year. That's one of the we won't have sales as high in Q4 this year as we had in Q4 last year for that reason. But what's encouraging is that it seems like now and starting in May, as our salespeople out there working with clients, clients are moving decisions again more quickly than they were in March and April, and things are moving into that advanced stage and closing actually for us at a little bit of a surprising rate. To the second point of your question, we're not having to discount really much and certainly not any more than we have historically as we get into a unique client situation depending on the deal. There are some situations where we're choosing to extend some terms.

We've categorized all of our clients into kind of those that are in industries and situations where they're thriving, those that are disrupted and those that are kind of devastated. And so when we have a devastated client like we have clients that are in industries that are related to travel right now. It's really, really hard for them. They need the tools we have right now, maybe more than ever. And so we're we're trying to be as flexible as we can to be a good partner because we're taking the view with all of these clients that, look, we're it's not just a statement that we want to be your partner for life.

We really mean that. And so we'll work very carefully with Steve and think about terms we can extend and also look at our cash flow situation, try to do the best we can for each client. And so we're making some of those decisions. But I would say that that's not what's driving our pipeline. I think the pipeline is just the result of clients getting back in and realizing that, hey, we need to move these things forward.

Let's talk again. It looks like we might be in an unsettled environment for a while, but let's not have that slowdown what we're doing. And so we're pleased by that pipeline momentum.

Speaker 7

Thanks. That's very helpful. Then in regards to the client partners, you maybe update us on the hiring plans for the remainder of this year and then possibly into next? And if you could also maybe just talk a little bit about the fact that obviously everyone's going through these social distancing efforts. I mean have you had to change your hiring practices?

And if so, kinda walk us through how that's working?

Speaker 3

Sure. Bob, you want me to take that one? Sure. Yeah. So so as you yeah.

We're we're right now, we're at 252 client partners. And actually, we're up 25 from where we were in Q3 last year. So we've had a meaningful addition over the past year. And that's having not made any hires during Q3, this quarter that just ended. And we chose to pause our hiring in Q3, Q4.

And actually, we're going to continue to keep it paused into the first quarter of this next year for one simple reason. And that is that it's you know, we we wanna give these people that join us every advantage they can, and this is a difficult environment to get started in. And so our plan right now is that we'll resume we're recruiting, but we'll resume really recruiting in earnest in the fall. And we'll prepare to have our next big crop of client partners start up and go through our sales academy, kind of our sales school in early January. And then we'll be back to our normal cadence where quarterly, we're bringing in a good cohort of client partners in Q2, Q3, Q4 next year and get back on that pace of adding roughly net 30 client partners a year.

So we have paused it just primarily for that reason to give people the best chance they can. In terms of social distancing, was your was it just sorry. Remember, was your question social distancing on what that looks like from a salesperson with their clients or inside their own company? Could you just restate that again?

Speaker 7

Yeah. No. Just from the hiring aspects, I mean, I would assume that most, at least prior, the hiring was all face to face

Speaker 8

Yeah. Meet and greet, if you will.

Speaker 7

So how how that's sort of changing?

Speaker 3

Okay. Yeah. Great question. So, yeah, we've we've have hired a few people during this period. And when we do it, we're on like you, we're on Zoom thirteen hours a day.

And so that has all moved to that environment. And we've actually had a few replacements. Interestingly enough right now, this is a time for us to be we're doing we're we're somewhat aggressive on the recruiting side at the moment because a number of our traditional competitors are not faring as well as we are. We don't we don't wish them ill at all, but that's just kind of the the the statement of fact. And so 's a number of people interested in joining Franklin Covey, and we have replaced where we've had a book of business that we felt really could help somebody needed to tend to right away even in this environment.

And so we've done all that virtually, and we've actually adapted our sales school process and done that completely virtually as well. And it's it's it's working really well. In fact, it's informing some changes we think we'll make to that sales school when we resume it again in January in earnest. We think there's some things that we'll do more live online that'll be beneficial.

Speaker 7

Got it. And then last question for me. Just circling back here on Leader in Me. Just kind of help us think through. I'm wondering about that program and its benefits to a school or a school system if, if students aren't actually in the classroom.

Speaker 6

Yeah. Sure. Well, we think, and we're positioning it this way, that it's more beneficial than ever before. We can we have a lot of digital materials and tools. For example, there are leadership guides for all the students at different age groups.

Right? And these can all be for example, teachers could give assignments. They could do the leadership guides online digitally. A lot of schools are wanting to buy physical materials and have them complete them at home as well. So it can be done that way.

We also have a lot of digital tools for parents to support students at home. We you know, everything we have that's been in a live setting is now available in live online or in on demand digitally. So all the all the materials are really in a good spot to do that. We also feel that one of the key things we teach in Leader in Me is, you know, we empower students to lead their own learning. That's really one of the core paradigms that we have in Leader in Me.

So we feel that that will be advantageous at a time like this where we're going to be working with schools to say here are some ways in which you can further empower students at home to take responsibility for their own learning And, so that that's gonna be a big benefit. As well, the, you know, we've got this, tool called Leader Me Weekly, which is a micro push tool, and it has tips and suggestions. Every week, we're coming out with new ideas on how to virtually implement a Leader in Me for teachers, for parents, for students at home. And the entire focus of that team has gone to, you know, virtual implementation. So every week we've got these bite sized videos, applications, suggestions, best case examples, etcetera that are coming, you know, to the schools.

So anyway, I don't know if that answers your question, but we think we're in a good position to do this well.

Speaker 7

Got it. Thank you. Very helpful. Thank you guys. Really appreciate your time.

Speaker 2

Thanks, Marco. Appreciate you.

Speaker 0

And the next question in the queue comes from Samir Patel with Aspladen Capital. Your line is open. Please proceed.

Speaker 2

There. Hi, Samir.

Speaker 9

Hey. So first question is for Paul. So your Slides eight and nine or nine and ten, I guess it is, where you're talking about the bookings and the pipeline. Just to be clear, when you're talking about those bookings, that's not including the rescheduling previous the previous on-site days, right? You're talking about actual new business.

Am I understanding that correctly?

Speaker 3

Yes. This is new business. There might be a few reschedules in there depending on the client. The client may have canceled the previous engagement, and now they're booking something different with us. But it's

Speaker 9

But it's not but but that's not whole not wholesale. It's it's this isn't counting, like, the stuff where you had stuff in q three, and you went back to the client and said, okay. We'll do q instead?

Speaker 3

That's right.

Speaker 9

Okay. Okay. Just wanted to make sure I understood that. And Bob, I guess a higher level question is brought up the share repurchase. And when I'm looking at where the stock price is or when I'm looking at kind of the things you're saying about the ability to take even more share from competitors with regards to having a great online solution already with regards to the breadth and depth of content and the modalities.

I mean, how do you guys think about capital allocation going forward, right? I mean, you invest more in share repurchases? Do you actually kind of coming out of this accelerate your ramp up of new client partners to continue to take share? I mean, just talk through that side of things a little bit. I think you did a great job discussing the operational side, but like I'd be interested in sort of

Speaker 6

the investment side of things.

Speaker 2

Yes, thanks. First of all, we're grateful that we have cash. We reported we had drawn on our credit line just out of the early on $15,000,000 and therefore we kind of had around $38,000,000 of cash in April and we still have approximately that amount today. We have a new bank credit agreement that we entered into yesterday and that will give us plenty of you know, we'll we'll end up repaying our not paying interest on the extra 15,000,000 we don't need because we can draw it anytime that we need it. We think we'll have plenty of capital.

For us, the investments will be we tend to use capital during three quarters of the year just for working capital. So as we believe that sales will start to ramp back up and we'll need some of that for working capital. But beyond that, think you've noted that we have a brand new offering coming out here in July, the multipliers content from Liz Wiseman that's been coming on for several years. That's in the queue. We have significant investments we're making on the technology side not because of this circumstance but obviously continuing to do that and the portal investments.

We're hiring salespeople. We've gotten, as Paul mentioned, even though the big just recruitment hires will be in January to start in January is what we're thinking. We are picking up people opportunistically, and we think there are gonna be some good opportunities to to gain some additional content and tools and things from people who just are not able to scale in this environment they may have thought they can work their way through. So I think in the intermediate term, we're gonna preserve cash, but in the we'll make those kinds of investments. Otherwise, we'll be preserving cash to make sure that we you know, whatever the opportunities look like in the future, whatever the uncertainties are, that we'll be able to continue to plow ahead and we've been able to keep all of our people busy and employed throughout this time.

Speaker 9

Understood. And on the content side, I mean, you guys mentioned, for example, diversity and then some of your clients shifting to having to have that remote work environment. I mean, that impacted your new content development in the sense of are you focusing more on maybe some of those areas that your clients are valuing right now?

Speaker 2

You know, we already thankfully had, and so no. Okay. I mean, beyond there are two thing there are two things that I'd say that we've doubled down on. One is the the on Johna. We're we're working on, you know, some enhancements to Johna that will connect the weekly newsletter to all of our digital libraries, etcetera.

It was always the plan, and that might be a thing that we're accelerating because of this. The other thing that we did accelerate that we spent a little money on is saying, gosh, with all of our great consultants and Live Online now being the thing and us being good at it, really good at it, you know, we're gonna we've made some, you know, not I mean, hundreds of thousand dollars investments in making sure we have professional backgrounds, the right, you know, power in the in their laptops, etcetera. But otherwise, I think we we always have a technology map, and this has just reinforced our commitment to something we already was in our three year plan.

Speaker 9

Got you. Thanks, appreciate it.

Speaker 2

Thanks, Sameer.

Speaker 0

And we do have one last question in the queue from Zach Cumming, and he is with B. Riley. Your line is open. Please proceed.

Speaker 2

Hello. Zach, how are you? Yeah.

Speaker 8

I'm great, Bob. How are you?

Speaker 2

Great. Thanks.

Speaker 8

Yes. Guess just on the education segment with the retention rate expected to be around 80% for the end of the year. I was just curious, are the lost clients, are they completely going away? Or could we see some of these renewals just being pushed and completed in the early part of FY twenty one?

Speaker 2

Great question. Sean, do you want to address from your perspective?

Speaker 7

Sure.

Speaker 6

Yeah. I think that, the lost clients are all many of them are reclaimable. You know, we're really pleased that we're gonna come in over 80%. Many of them that aren't are saying we love you guys. We're not sure what's gonna happen with our budgets or when we're gonna start up or or how we're gonna start up.

And so can we push pause? So we've developed a little package of pause. We're not counting anything, but we're not pushing them outside of the community either. So we've got a big group of schools in that bucket. So that's the primary thing we're seeing is just, you know, many of these schools just have uncertainty and volatility.

It's changing week to week. Right? Not sure if they're going to open. And then it's going to be a tiered schedule. Are you going come every other day or part of the day?

And they're dealing with so many of those things including things like busing, how they're to handle busing that a lot of them have just said, you know what? We really like this. We're in this for the long haul. We want to push pause or wait until the first quarter. So I expect that this year's renewal rate after factoring in the first quarter will be very comparable to the 88% that we've been at historically give or take a couple of percentage points.

Speaker 8

Got it. That's really helpful. And then just one question for Steve. Really appreciate I guess the general directionary expectations for both the longer term in terms of FY 2021 and FY 2022. I guess for those adjusted EBITDA targets that you laid out there today, how should we be thinking about the revenue line?

I know your prior adjusted EBITDA targets were assuming kind of a high single digit growth. So I was just kind of curious as to how you're thinking about revenues in order to achieve those adjusted EBITDA targets?

Speaker 4

Well, Zach, we haven't prepared exact forecast, if you will, related to revenue. But as you know, when there's a recession or pandemic impact and revenue goes down, then you normally accelerate that at a higher rate of growth than what is normal or typical. So we would expect, for example, Q3 of next year to be more than 8% or 9% revenue increase compared to Q3 this year or Q4. But then when we get back to comparing to 2019 and 2021, 2022, where we're growing EBITDA at about that $10,000,000 range clip, then that would be based upon an organic growth rate still of around that high single digit growth would be able to create that type of a flow through to adjusted EBITDA and cash.

Speaker 8

Got it. That's helpful. Appreciate that. Well, thank you.

Speaker 2

Just one other thought on sorry. No, go ahead. One other thought is if you just think of the EBITDA target and then assume that that's going to be as a business model, an EBITDA margin that will be increasing by 300 basis points a year, you'd say, well, fine, by the time you get to $30,000,000 we would have thought this year, the $30,000,000 I reported would be on somewhere around $245,000,000 So it would have been about 12% EBITDA margins increasing by 300 basis points a year, if that's helpful. So you can kind of back into the revenue from the EBITDA. That's probably about what it would relate to by the time we get to 2022 at $30,000,000 of EBITDA, it'd probably be in the 14% or 15% EBITDA margin.

Speaker 8

Got it. That's really helpful. Well, thanks for taking my questions and best of luck going forward.

Speaker 2

Thanks so much, Zach.

Speaker 3

Thank you.

Speaker 0

We have no further questions at this time. So I will now turn the call over to Mr. Bob Whitman for closing remarks.

Speaker 2

Thanks. Again, just wanted to express our appreciation to each of you. You've been great partners for all these years. We hope we've been great partners and we are excited to continue the journey together. We look forward to answering any questions that you have individually and thanks again for joining today.

Stay safe and well. Thanks.

Speaker 0

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