Franklin Covey - Earnings Call - Q4 2020

Executive Summary

• Q4 revenue fell to $49.0M as onsite services remained disrupted, but subscription strength and a rapid pivot to live‑online delivery drove gross margin expansion to 77.3% (+437 bps YoY) and positive EPS of $0.07.
• All Access Pass (AAP) remained resilient: subscription revenue rose 11% YoY in Q4, AAP revenue retention exceeded 90% for FY20, and deferred + unbilled deferred reached >$100M, enhancing visibility.
• Education durability persisted: ~2,200 Leader in Me membership renewals and 320 new schools despite budget headwinds; subscription revenue for Leader in Me grew 11% for FY20.
• FY21 Adjusted EBITDA guidance reinstated at $20–$22M (non‑GAAP); management also outlined internal targets of ~$30M in FY22 and ~$40M in FY23 (non‑GAAP).
• Potential catalysts: reinstated FY21 EBITDA guidance, improving live‑online bookings back to pre‑pandemic pace, and strong subscription retention underpinning multi‑year visibility.

What Went Well and What Went Wrong

• What Went Well

  • Mix shift to subscriptions lifted gross margin to 77.3% in Q4 (vs. 72.9% LY); management cited “strength and resilience” of AAP and digital modalities as key drivers.
  • Bookings for add‑on coaching and services rebounded to pre‑pandemic levels by July and exceeded last year by August as clients shifted to live‑online; 87% of clients had transitioned to live‑online delivery, reducing cancellation risk.
  • Education resilience: ~2,200 renewals and 320 new schools added to Leader in Me in FY20 despite school disruptions; Leader in Me subscription revenue grew 11% YoY.

• What Went Wrong

  • Q4 revenue down 25% YoY to $49.0M as international direct offices/licensees and education onsite services remained pressured; Enterprise international licensee revenue fell to $1.33M vs. $3.30M LY.
  • Net income and Adjusted EBITDA declined YoY: Q4 net income $1.0M ($0.07) vs. $5.9M ($0.41) LY; Adjusted EBITDA $8.9M vs. $13.4M LY, reflecting lower services revenue.
  • Effective tax rate headwind: $1.1M additional tax expense in Q4 from increased valuation allowance on deferred tax assets due to multi‑year cumulative losses and pandemic uncertainty.

Transcript

Speaker 0

Welcome to the Q4 twenty twenty Franklin Covey Earnings Conference Call. My name is Adrienne, and I'll be your operator for today's call. At this time, all participants are in a listen only mode. Later, we'll conduct a question and answer session. Please note this conference is being recorded.

I'll now turn the call over to Corporate Controller, Derek Hatch. Derek Hatch, you may begin.

Speaker 1

Thank you. Good afternoon, ladies and gentlemen. On behalf of Franklin Covey, I'd like to welcome you to our earnings call for our fourth quarter and full fiscal year 2020. Hope you are all doing well and are staying safe. Before we begin today's presentation, 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 revenues the acceptance of and renewal rates for our subscription offerings, including the All Access Pass and Leader in Me memberships the duration and recovery from the COVID-nineteen pandemic the ability of the company to hire productive sales professionals general economic conditions competition in the company's targeted marketplace market acceptance of new offerings or services and marketing strategies changes in the company's market share changes in the size of the overall market for the company's products changes in the training and spending policies of the company's clients and other factors identified and discussed in the company's most recent annual report on Form 10 ks and other periodic reports filed with the Securities and Exchange Commission. Many of these conditions are beyond our control or influence, many 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

Thanks, Derek. Hello, everyone. We're happy to have the opportunity to talk with you today. Thank you for joining us. We're pleased that in the fourth quarter, Franklin Covey's operations demonstrated their strength, agility and ability to progress even in the midst of the pandemic.

We're grateful for that. Specifically, our revenue was stronger than expected. Gross margins increased substantially. Our SG and A declined. Our adjusted EBITDA was $8,900,000 in the quarter versus an expectation of $4,000,000 bringing that brought full year adjusted EBITDA to $14,300,000 which also exceeded our expectation of 9,400,000.0 Our cash flow was strong, and we're grateful we ended the quarter and year with approximately 42,000,000 in liquidity, a level higher than when the pandemic started.

We'll discuss these details and results in more detail in just a moment, but first, maybe provide some context. At the onset of the pandemic, we communicated that although everything was in flux and was uncertain, we believed, as shown in slide three, as you can see there, that All Access Pass subscription and related revenue would continue to be strong and durable, and that this would continue to drive strong performance in our core North American operations, which accounted for 70% of our total enterprise sales and in which All Pass and related sales account for approximately 80% of the total revenue in North America. As indicated in the chart one a on slide three, we believe that All Access Pass subscription sales would not only be very strong and durable, but would continue to grow throughout the pandemic. But as indicated in one b, that as for All Access Pass add on services, after the initial disruption of the delivery of live on-site services. We believe that our pivot to delivering add on coaching and training services live online would allow this revenue to rebound relatively quickly.

Second, as indicated in chart one c, we believe that in our international direct and licensee operations, which collectively account for approximately 25% of our total enterprise division revenues, Despite having only nation All Access Pass subscription businesses and thus only a small base of All Access Pass subscription revenue to cushion them, our international enterprise teams, we believe, will begin to improve due to the strength of our offerings in those countries and the quality of our teams and their ability also to pivot to live online delivery. We expected that their growth would strengthen further as they accelerate their conversion to selling All Access Pass. And then finally, in the education division, we believe, which accounts for approximately 22% of total sales, We expect that we'd achieve strong retention of existing Leader Me schools and that even in the middle of the storm, the existing schools would be committed and retain their subscriptions. And that, hopefully, we would find a way to add several 100 new Leader in Me schools despite the huge disruption of the school environment. So while the external environment has continued to be challenging, we're pleased that, as indicated in slide four, our results have turned out to be as strong or stronger than expected in each of these areas and that this strength is continuing and even accelerating to the first two months of our first quarter, which ends November 30.

Some additional detail on our first on our enterprise business in North America. As you can see in slide five, All Access Pass subscription sales have been strong and resilient throughout the pandemic, growing 11% in the fourth quarter and seventeen percent for the full fiscal year. In addition, amounts invoiced, new pass sales and multiyear contracts have all continued to grow. And our All Access Pass revenue retention rate again exceeded 90% for the year. Second, in the upper right hand corner, with our almost immediate pivot to booking coaching and training engagements live online, we were able to continue to meet the needs of our customers remotely.

And as a result, bookings and sales of All Access Pass add on services also rebounded quickly. As you can see in slide six, after approximately the first six weeks of the pandemic, new bookings of services in our North American operations turned positive. By mid July, our booking pace was equal to that achieved at the same time last year and then strengthened even further, exceeding last year's pace by the August, the end of our fiscal year. Pleased to say that these strong bookings have continued through October. With bookings increasing, which is what we'd call a lead or predictive measure, the lag measure, which is actual invoice sales of service, has also rebounded significantly.

As you can see in the lower right hand corner of slide six, initially, in the third quarter as the pandemic started, bookings were reduced, and the year over year dollar volume of services followed because everything needed to be canceled and then tried to reschedule. And the delivered engagements were down 6,900,000 North America in the third quarter. However, in the fourth quarter, new bookings increased the point that they were nearly equal to those we achieved in the fourth quarter of nineteen, as you can see from the line graph. And that drove in actual invoice sales, and this in turn drove an increase in the volume of services delivered. As a result, instead of being off 6,900,000.0 as in the third quarter, the dollar volume of services delivered in the fourth quarter was off only 1,100,000.0 and bookings were actually up.

As a consequence, these same positive trends continued into our first quarter to date with bookings continuing to be up and with invoice sales of services following and increasing now to essentially the same level as in last year's first quarter. Importantly, you can see in the upper right hand corner, 87% of our clients have now shifted to live online delivery of services. This is important. We view it as really important. With 87% of our clients now having shifted to live online delivery, any susceptibility to future cancellations has been reduced substantially.

And so now we have a model which, you know, really can can we think plow through good times and bad as it relates to being able to deliver everything subscription. As you can also see in slide seven, which looks a lot like slide five, this combination of strong All Access Pass subscription sales and the strong rebound in All Access Pass add on services has kept the performance of our core North American business strong with essentially all of the relative relatively small decline in revenue in the fourth quarter being attributable to declines in our legacy facilitator materials order business. So otherwise, with the All Access Pass, the services coming back almost as though they were the last year, bookings ahead, that's given us a really strong run to start the new year. And we now expect that we will actually exceed in the first quarter the levels of profitability EBITDA that we achieved in the 2020 in North America, which is an even stronger than expected rebound in those operations. As recently as last quarter, we said that we thought that might take us an extra year to get to that point, and we're very grateful and pleased that we're at that point now.

Second, as always, as also shown in Slide seven, in international operations, which are sales in China, Japan, Germany, among our other direct offices and licensees, sales in these operations also improved substantially in the fourth quarter compared to the third quarter. As noted, and as you'll recall, the need to reschedule substantially all training engagements in these countries, and these countries lack of a strong base of durable subscription revenue to cushion them unlike in North America resulted in sales in these countries declining to only $4,100,000 in the third quarter compared to approximately $12,700,000 in the third quarter of fiscal twenty nineteen. However, in the fourth quarter, while still operating well below the levels achieved in last year's fourth quarter, sequential sales in these countries increased 70% to $7,000,000 up from 4,100,000 in the third quarter and are expected to increase further to approximately 9,000,000 in the first quarter. And then we expect to continue to build back through the year back toward this 10 to $11,000,000 a quarter pace. Finally, as you can see in slide eight, in the education division, despite the extreme difficulty of their environment, approximately 2,200 existing Leader in Me schools renewed their subscriptions in fiscal twenty twenty.

We said, again, over 2,000 schools renewed, and almost 1,500 of these schools renewed after the pandemic started when schools' day to day turmoil was at a peak. It's very difficult to even talk to these schools as they were scrambling to still deliver lunches, figure out how to teach live online, deal with all the problems they had. And it was a tremendous it's a tremendous credit to our team and to our clients and to the quality offering that almost 1,500 of these schools renewed after the pandemic started. In addition, during the same time period, we'd hope that we'd be able to sell you know, have new schools join. And in fact, 320 new schools became leader in these schools most again during this period.

It's a number lower than last year, which we expected, which is 500 last year, but still in our view remarkable. Despite an environment which continues to be very challenging for schools, as you know, during the first quarter to date, we are seeing improvements in a number of key lead measures, including that of the number of new schools contracted or already contracting 50 schools versus 28 at the same time last year. Second, the number of Leader in Me memberships renewed or ready to sign contracts at 583 versus four twenty two at the same time last year. And third, the number of coaching days booked, being 1,284 versus eleven forty nine at the same time last year. So combination of always so, again, we were glad that the, the things that we hoped at the start of this period have turned out to be a stronger stronger, than expected in almost every case.

And the combination of these positive trends drove our better than expected performance in the fourth quarter. I'd to now dive a little deeper into our fourth quarter and full year fiscal twenty twenty performance. As you can see in Slide nine, our fourth quarter performance was stronger than expected and showed positive momentum as we said in almost every front. Our adjusted EBITDA going down to the bottom first was 8,900,000.0 more than doubling our expectation of $4,000,000 for the quarter. This brought adjusted EBITDA for the full year to $14,300,000 which is higher than our expectation of 9,400,000.0 And while lower than last year's adjusted EBITDA of $13,400,000 for the reasons just discussed.

We were really pleased with this result and the strength of the recovery in the fourth quarter. In addition, our cash flow and liquidity position remained very strong. As shown in slide 10, our net cash generated for the quarter, though less than in last year's fourth quarter, was a strong 21,400,000.0. And as shown in slide 11, our cash flow from operating activities for the year came in at 27,600,000.0, just 2,900,000.0 lower than in last year than last year's 30,500,000.0. As

Speaker 3

you

Speaker 2

may recall, actually, it was only two years ago in fiscal twenty eighteen that our cash flow from operating activities was 16,900,000.0 during a strong economic year generally. So we feel very good about the 27,600,000.0 in cash flow from operating activities given this year's challenges. We ended our fiscal year with $42,000,000 in total liquidity comprised of 27,000,000 in cash, which means we have no net debt and with an additional 15,000,000 undrawn and available under our revolving credit facility. This strong performance was driven first by stronger revenue, as you can see in slide 12. Our revenue, our fourth quarter revenue of $49,900,000 was stronger than expected despite the fact that a lot of what we sold in the quarter and a lot of what we invoiced, of course, went on the balance sheet.

This was driven the higher revenues, though, were driven by the continued strength of our North American operations, which in turn were driven by All Access Pass. Whereas just discussed, in the fourth quarter, subscription sales grew 11%. And in addition to the revenue, actually, as I mentioned, recognized in the quarter, we also achieved high levels of invoiced All Access Pass sales, most of which were added to the balance sheet with deferred revenue. These new invoice sales included growth in in new logo sale sales of new logos, a continued revenue retention rate of greater than 90%, a large volume of All Access Pass expansions, and an even larger volume of multiyear passes than in the prior year. And that with all of that, All Access Pass add on bookings, which we just talked about, of services also rebounded strongly as we showed coming almost up to where we were in the prior year's fourth quarter despite the lag in booking due to the early days of the pandemic.

You can also see in Slide 12, we had strong gross margins again in the fourth quarter. Our gross margin percentage came in at 77.3%. That's up four thirty seven basis points from the 72.9% achieved in the fourth quarter of fiscal twenty nineteen, and that's up again two fifty six basis points for the year. Third, our SG and A was lower. SG and A for the fourth quarter came in at $28,900,000 which is $5,200,000 lower than the 34,100,000.0 in last year's fourth quarter and an improvement of 7,600,000.0 And while some of that is variable SG and A costs related to reduced sales volume, A lot of it also reflected cost initiatives that we had been taking that we've been implementing throughout the year, not specifically related to COVID, but just had been had implemented in the spring as part of our annual planning, and that's starting to flow through in the fourth quarter.

Finally, the combination of these factors resulted in adjusted EBITDA coming in, as we said, at 8.9 for the quarter and 14,300,000 for the full year. We mentioned that we had very strong invoice and multiyear sales in the fourth quarter, All Access Pass, and the renewals of subscriptions of the Leader in Me membership. Because most of these new invoice sales were subscription sales. As you know, these amounts were not recognized in the quarter that went on to our balance sheet and will add to and be recognized this year and future periods. As a result, however, as shown on slide 13, our total balance of billed and unbilled deferred revenue increased to more than a 100,000,000, barely, but but a big landmark.

This $100,000,000 mark is a mark that a lot of the subscription companies talk about and think about. It reflected growth of $12,100,000 or 13.7% compared to our balance of 88.1 at the end of last year's fourth quarter. So that growth, you know, that growth of 13.7 shows the strength of our invoicing despite the environment. This large balance of billed and unbilled deferred also provides significant stability of and visibility into our future performance. As we'll discuss in more detail when we offer guidance for fiscal twenty one in a moment and our outlook targets, we in short, we expect to be, again, be a very high adjusted EBITDA growth, high cash flow growth company in fiscal twenty twenty one and in the coming years.

Specifically, in fiscal twenty twenty one, as we'll discuss more detail, we expect to generate adjusted EBITDA between '20 and 22,000,000. This reflects an approximately 50% increase in adjusted EBITDA compared to 14,400,000.0 of adjusted EBITDA achieved in fiscal twenty twenty. Thereafter, our target is to see adjusted EBITDA increase by around 10,000,000 per year each year thereafter to around 30,000,000 in fiscal twenty twenty two and to around 40,000,000 in fiscal twenty twenty three as, you know, there's an illustration of that slide 14. These targets reflect our expectation that we will achieve high single digit revenue growth, which is growth of approximately $20,000,000 a year. And that on average, approximately 50% of that growth in revenue will flow through to increases in adjusted EBITDA and cash flow.

And so therefore, the growth of $10,000,000 a year or so in EBITDA. With this high flow through, we also expect to be moving toward and ultimately achieve an adjusted EBITDA to sales margin percentage margin of 20% in the coming years. So with that report on our results, I'd like to now address three key questions outlined or identified in Slide 15. First, address the questions and we may have maybe somebody will need to might need to mute. I hear some noise, I'm not sure in the background.

But first question is, what is the most important driver of this high expected growth in EBITDA and cash flow going forward? Second question, what is making All Access Pass and related revenue so strong, resilient, and durable? What's behind that? And third, what's the expected trajectory and speed of our climb up the mountain? And that's really more our guidance section.

So really just to address those two questions and then turn the time to Steve for guidance. Question one, you know, what is the most important driver of our expected high EBITDA, high cash flow growth? Simply put, the single most important driver is the strength of our subscription business generally, and particularly the strength of our All Access Pass subscription and related revenue engine in the enterprise division. The importance of All Access Pass is best demonstrated by the strength and resilience of our core North American operations, which account for 70% total enterprise division sales, and where All Access Pass and related sales account for approximately 80% of that. So why is All Access Pass the most important driver of growth in adjusted EBITDA and cash flow going forward?

Three reasons. The first reason is that it's the engine that has driven the vast majority of our growth in revenue and adjusted EBITDA over the past several years. As you can see in slide 16, in the left side, all Access Pass related sales have grown from zero to $90,000,000 since 02/2016, a huge compounded average growth rate, obviously, and absolute revenue growth of between 10 and $20,000,000 of growth each year. This growth in All Access Pass and related revenue has generated the vast majority of our net revenue growth for the company overall in almost every year. It's more than offset the runoff of our legacy facilitated on-site business replacing that business with much higher revenue per client, much more resilient and retained revenue as you know.

All Access Pass and related revenue has also been the primary driver of the significant increase in our gross margin from 67.4% in 2017 to overall 73.3% in fiscal twenty twenty. And it's also accounted for substantially all of our growth in gross margin dollars during these years. That so the first reason is it's been the growth engine. The second reason we think All Pass is expected to be our most important driver of growth is that, All Access Pass has continued to be strong in good times and bad throughout this pandemic as we as we mentioned. As you can see in slide 17, in the fourth quarter, All Access Pass subscription sales grew 1,600,000 or 11% compared to the same period last year.

And for the six months, from March 1 through August 31, it's grown 15% compared to the same six month period a year ago, you know, which has really been actually right in the heart of the pandemic. As previously noted and is again just shown to remind us in slide 18, as a result of the rapid rebound of All Access Pass add on sales, these sale bookings of, and sales of of services, which actually over the years, although not contractual, have repeated on a same client basis at greater than 90%, similar to the subscription revenue, are now back are now back and running at the same level as as last year. And the the third and final reason why we think All Pass is such an important growth driver is that All Access Pass related sales are expected also to account for an ever increasing percentage of our business. And therefore, the positive impact of this subscription model will become increasingly pervasive. As you can see in slide 19, All Access Pass related sales already account for 80% of the Enterprise division sales in North America.

All Access Pass have increased from 0%, as we said, to approximately 80% of sales in fiscal twenty twenty, and we expect this share to continue to grow. Similarly, Leader in Me membership and related coaching subscription accounts for approximately 80% of revenue in the education division. So it's already substantial, but it'll continue to increase, in those operations, which have already made the conversion. The other reason why we believe that AEP is the most important driver is because in the parts of the world that aren't yet, primarily subscription, All Access Password, Leader. Me, we expect that they will become so.

We expect that the approximately 36,000,000 of annual revenue that's done in our international direct offices and among our international licensee partners for today, All Access Pass is just nation and is, just beginning. We'll now accelerate quite rapidly, and over the next years, we'll see the majority of that 36,000,000 add to the growth of our subscription revenue, and then and it'll then we expect have the same durable, and resilient properties that we have, elsewhere. In terms of the second question then, if you look at the slide 20, I'm gonna ask Paul Walker to address this. What's behind this resiliency in both All Access Pass and and Leader in Me? Paul, let me just turn the time to you.

Paul, as you know, is our president and chief operating officer, and you may call on Sean Covey and Jen Colisimo also to weigh in.

Speaker 3

Thank you, Bob, and good afternoon, everyone. So, yeah, to to the question, you know, what is behind All Access Pass' strong resiliency and its and its durability? In our experience, there are three key reasons why, All Access Pass is both growing rapidly and at the same time proving to be quite resilient. During the pandemic, our clients are wrestling through the same historic challenges that each of us is experiencing. They moved large populations of employees to remote work environments.

They're attempting to get their remote teams to focus efforts on the most important must do activities. They're working hard to increase revenue and retain customers, and they're rapidly trying to enhance their culture, including thoughtfully addressing topics such as diversity, equity, inclusion, and bias. And in this environment, of course, the need for more capable leaders has never been more important. And these, among many others, are are what our clients see as really must win games for them, the very important challenges that they're trying to address. And helping our clients successfully address challenges like these and doing it at scale is exactly where Franklin Covey shines.

A key reason for the all access passes growth is that both before and during the pandemic, our clients needed solutions to these challenges. And, frankly, Franklin Covey's best in class solutions are the are best in class at addressing just those very problems. In our July call, you'll remember we reported that through the early months of the pandemic, almost all of our existing all access pass pass holders had renewed their passes as they come up for renewal with many of them choosing to either expand the population or extend the duration of their pass. We shared a couple of examples then. One was a major airline that when airline traffic was off, 90% made the decision to continue with their all access pass, and they were using it to train and retrain their leaders to operate in what was becoming, obviously, an extremely difficult environment.

We also shared a large hospitality company chose to continue with its pass so that they could double down their focus, on their ability to execute. And as an update, we're now happy to share that that client recently made the decision to extend that pass by an additional three years, making that what is now currently a five year all access pass contract. And I'd like to to briefly share three additional examples from our fourth quarter, examples of all access pass and Leader of Me clients who, in the middle of the pandemic and extremely difficult times, not only renewed their subscriptions with us but also expanded their populations or extended the term. Slide 21 is just a simple graph representation of these three, but the first is a financial services firm. And they saw their sales fall swiftly and dramatically in the early stages of the pandemic.

They determined that one of the most important priorities had to be equipping their large sales organization with skills and tools necessary to increase conversion rates and shorten sales cycles. As a result, at the same time, they were cutting costs everywhere they could. They not only expanded their all access path, but they chose to extend it for three additional years knowing that they were going to need access to that content not just for one year, but for for a number of years to complete the transformation they were thereafter. The second is a hospital system. And, you know, experiencing, like many hospital systems, have a a significant decrease in revenue due to pause in elective surgeries.

They tripled the size of their population covered by the all access pass, and they extended their pass for an additional three years. They're they recognize that there's no time when strong leadership's more important than in times of serious challenge, and they felt it was essential to equip their frontline leaders with the tools they were gonna need to respond. And then from our great education division, we had a large school district in Texas. This is a cool story. They'd implemented Leader in Me in two of their 20 schools and initially thought they would need to put Leader in Me on hold so that they could direct, you know, resources toward technology to prepare to deliver school virtually.

However, the superintendent who had some children in a Leader Me school in the district and was had a front row seat to how Leader in Me was helping not only the students, but also the faculty in in the school that were using it, decided he needed to find a way to keep Leader in there. And they were able to get creative and and allocate funds differently, and they freed up enough funds to not only continue with those two schools, but they actually expanded Leader and Me to all 20 schools in the district, and we're now engaged in the implementation of those with them. And so these examples highlight the important challenges that our clients face and their commitment to utilizing Franklin Covey solutions to address them. Hundreds of organizations have sought out, renewed, expanded, and extended their All Access Pass and Leader in Me memberships during the pandemic to date. And while I won't take the time to review them all here, you might find it enlightening to read some of the additional examples related to All Access Pass on slide 22 and then some of the Leader in Me examples on slide 23.

The the second contributing factor we believe, the reason why All Access Pass and Leader in Me continue to be strong and resilient and durable is the fact that our customers can use these services and solutions to to they're they're they create a it's very flexible for our clients to deploy them, and they also have a very strong value proposition. Just to speak to a minute about flexibility. When the pandemic hit overnight, our clients needed entirely new and flexible ways to deploy our solutions to address their organizational and performance challenges. And as a result of our more than a decade of investing in technology and technology enabled capabilities, our clients were able to immediately access our content and solutions through live online, digitally self paced, micro push delivery modalities. In fact, we routinely hear from our clients and our customers that we have the most robust and effective live online delivery capability of any of the providers with whom they work, and the flexibility of the All Access Pass is allowing our clients and our users to deploy solutions in almost any circumstance.

The second point related to the value proposition. Our clients tell us that not only are our solutions of flexibility important to them, but that our All Pass and Leader in Me customer value propositions are equally compelling. As shown in slide 24 and and we've reviewed these before, but I think it's helpful to just review them again here. Each All Access Pass client receives the following. They receive, one, a full a full collection of our best in class content and solutions.

And, of course, point two there, those that's available in all modalities. Very, very important right now, which allows them to deliver in virtually any segment of time and on any device. And third, all of this is available in more than 20 languages now worldwide. I think the number is actually 21. And at an addition and and at no additional cost to them included in that offering is access to an expert the services of an expert implementation specialist who works to ensure that the clients are able to achieve the progress that they're seeking.

And then finally, all of this is offered 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. And so the strength of of the value proposition, the flexibility, it's it's resulting in many of our clients making the decision to consolidate providers and significantly increase their business with Franklin Covey. It's driving deeper, stronger, more pervasive, and enduring relationships with our clients. And as as you see on slide 25, this competitive advantage enables us to significantly increase the average lifetime value of a customer. Finally, I'd like to to you know, as it relates to what's behind the strength and resiliency, I'd like to speak to just the business model itself and why it creates so much durability, for Franklin Covey, structural durability for Franklin Covey.

Of course, the most important source of durability and resilience comes from meeting clients' needs in a way that allows them to make the progress they're seeking. And when this happens, we create clients for life, and that that's really our mantra. We want to maintain these clients for life. Our content solutions, our value proposition, and client engagement processes are all focused in point at that primary objective. And our subscription model also creates a more profitable, durable, and high growth business for Franklin Covey.

In addition to the All Access Pass subscription, our business model provides clients with easy to access coaching and training facilitation services. Now as Bob mentioned earlier, these are delivered almost entirely digitally or live online. The model also encourages multiyear contracts, which establish both greater visibility and increased structural durability. As shown also on slide 25, the average all access pass holding organization purchases approximately 44¢ of add on services for every dollar of subscription revenue. Indicative of the value which clients place on these services is that our annual same client service re revenue retention rate, as Bob mentioned a minute ago, has exceeded 90%.

A very high retention rate for services, which also is consistent with the very high retention rate we have for All Access Pass subscription revenue. And in more than one third of All Access Passes, they are for multiyear periods. And these multiyear contracts are firm. They're and unbilled deferred revenue associated with these contracts now totals $38,500,000. And as with our one year all access pass contracts, the contractual amounts of unbilled deferred revenue are billed one year in advance.

And so as you can see and hopefully get a feel for for this, that the All Access Pass is it's really proving to be strong and resilient and durable and a real asset for our clients. And Bob, I'll turn that back over to you.

Speaker 2

Thanks, Paul, very much. I'll just now turn the time to Steve to review our guidance and outlook. Steve?

Speaker 4

Okay. Thank you, Bob and Paul and good afternoon everyone. It's nice to be with you today. As you recall, when we reported our third quarter results, we said that because there was so much uncertainty in the external environment, our outlook would not constitute guidance. The external environment continues to have substantial uncertainty.

However, given the four quarters of additional four months of additional history that we have and the fact that we continue to see positive trends in the business driven by the strength of the All Access Pass, we now feel that we can provide guidance for FY21. Our guidance for FY21 is that we expect to generate adjusted EBITDA between 20,000,000 and 22,000,000 This result would reflect approximately 50% increase in adjusted EBITDA next year compared to the $14,300,000 of adjusted EBITDA achieved in FY 2020. This expected growth reflects the continued strong performance of our North America operations where all excess pass and related sales account for approximately 80% of sales. Underpinning this guidance are the following expectations. First, the recognition during FY21 of more than 60,600,000.0 of deferred revenue already on the balance sheet and a portion of the $39,600,000 of unbilled deferred revenue, which has been contracted.

This provides significant visibility into our revenue and gross margin for FY21. Second, in addition to the recognition of the deferred revenue, the factor which is expected to have the greatest impact in our FY20 run result is also one in which we have high confidence and that is the strength of the All Access Pass and related sales. We expect that All Access Pass will continue to achieve one, strong growth in both sales and invoiced sales two, high revenue retention rates three, strong sales of new logos and fourth, continued growth in pass expansion and multiyear contracts. We also expect that all Access Pass add on sales will continue to be strong. Driven by this in FY twenty twenty one, we expect our operations in North America to achieve an adjusted EBITDA level higher than in FY19 and even somewhat higher than what we had originally expected to achieve in FY20.

Third underpinning of guidance is we expect our revenue in Japan, China and among our licensees and other international will continue to strengthen. The increase in all access pass which we expect to achieve in these countries will of course result in a portion of those new sales being added to the balance sheet as deferred revenue. And our fourth underpinning of guidance is that in education we expect to continue to achieve strong retention of both schools and revenue among existing Leader in Me schools. In addition, despite what we expect will continue to be a challenging and budget constrained environment for education in FY21, we still expect to receive growth in the number of new leader in May schools beyond the three twenty new schools achieved in FY 2020. So we feel comfortable with this guidance for FY 'twenty one.

Now a little bit about the first quarter of this year, FY 'twenty one. We expect that adjusted EBITDA in the quarter will be between $2,000,000 and 2,500,000.0 compared to 5,000,000 last year reflecting what Bob and Paul talked about which is the strong performance by All Access Pass in North America offset by the same general expectations just outlined for the international operations and education. So we expect adjusted EBITDA in Q1 and Q2 to be less than last year and adjusted EBITDA in Q3 and Q4 to be significantly higher than last year. Please remember that a big reason for this is that Q1 and Q2 of this year will be compared to the very strong pre pandemic Q1 and Q2 quarters of last year while Q3 and Q4 of this year will be compared to the pandemic impacted Q3 and Q4 of last year. So since last year was a tale of two halves, the first half being, in my words, extremely strong and then the second half of the year being pandemic impacted, that's primarily the reason while we see continued strengthening of our results this year, still we expect to be down in Q1 and Q2 and up significantly in Q3 and in Q4.

So that's our guidance. Just a little bit about comments about the internal targets beyond FY21 that Bob also mentioned a little bit. So as Bob mentioned and as we just said, we expect this year to fall to between 20,000,000 and 22,000,000. And due to the fact that we have extremely high flow through of incremental sales to incremental adjusted EBITDA and high single digit revenue growth, we expect that our adjusted EBITDA would be around $30,000,000 in FY 2022 and around $40,000,000 in FY 2023. And this high acceleration to continue until we get to approximately that 20% adjusted EBITDA to sales margin that we often talk about.

So part of the reason I repeated that is because it's important and partly for you to note that while dramatic changes in the world environment could impact our expectations, we wanted to share these as our internal targets and assumptions. And also wanted to share that not only are these our targets but that when you read our proxy you'll see that full vesting of our executive team's long term incentive pay awards depending on achieving these strong multiyear growth goals. So that's our discussion on guidance. Bob, turn it back to you. We'll open it up for questions.

Speaker 2

I think that's it. Thank you so much, Steve. Why don't we just open it now? Thanks, everyone. We'll open it for your questions at this point.

Speaker 0

Thank you. We'll now begin the question and answer And our first question comes from Andrew Nicholas from William Blair. Your line is open.

Speaker 5

Hi. Thank you. It's actually it's actually Trevor Romeo in for Andrew.

Speaker 2

Hi, Trevor. How are you?

Speaker 5

Taking the questions. I'm doing well. Thank you.

Speaker 6

Guys are doing well too.

Speaker 5

Just have a few questions here. I think first one, I I think last quarter, you had mentioned about $20,000,000 worth of training engagements that was either postponed or delayed from third quarter. Just wondering if if any of that was was recognized in the fourth quarter and whether you still expect about 70% of that to ultimately be realized over time.

Speaker 2

Yeah. Yes. I think the, it's a little hard to track as we found because the same clients that had things booked in the third quarter and canceled, you know, sometimes it was a rescheduling of their exact thing that they had. And in other cases, they just went ahead with a different initiative or they did they viewed it as it was a new booking. And so I think dividing exactly what it is, is then, you know, we attempted to do to kinda parse that.

But, certainly, the same clients that, that, you know, retain where they renewed their all access pass and who did have services in place are the same clients who are now booking new services. So I think what's recognized for the first little while we were able to track that they were in fact rescheduled engagements, and we mentioned that we thought that about 70% of those engagements would reschedule because they were attached to an access pass that had existing initiatives going and think that's really probably still right, but we're not able to exactly, you know, reconcile whether the whether it was exactly that group in that location or not. And so I think the main thing is that our booking pace, in an initial few, you know, weeks, and maybe in the first month or so, we could we could track it. No. It didn't.

And believe that now almost all of the the new, bookings that we're having are in fact all new, and so it's hard to kinda parse that. But, but, thankfully, it's the same customers and same clients moving forward and booking at a pace higher now than even in last year at this time.

Speaker 5

Okay. Understood. Thanks. Then just, I guess, a follow-up on the cost side. The margins in the quarter were pretty solid despite the revenue decline year over year.

You pointed out a number of expenses that were reduced, some of which I'd assume are probably temporary, some of which you said were know, already in the plan prior to to COVID. Just wanted to ask how quickly you'd see or you'd expect to see, I guess, some of those expenses come back online to the extent some of them are temporary, and how much or, you if you see any of those as as permanent savings going forward.

Speaker 2

Yeah. Thanks. Great question. I'd say that the majority of these we think will be permanent. Here's the reason.

We, every year, have been pushing. We have this goal that Steve spoke about that is to get to an EBITDA margin of 20%. And so every year, we well, we don't expect to get there in a year. Every year, we take on projects. And this year, we redid a lot of our IT infrastructure, some supply chain infrastructure.

We redid part of our innovations alignment and technology groups. We've challenged, you know, as part of the normal business planning process in February and March, a lot of those costs. And there were millions have been taken out of that, a million and a half in education just in permanent cost structure. The part that will come back is that around 10 percent of our of our commission I mean, of the commission expense, let's say, is 15%, about 10% of it's truly variable, the rest being your draws and so forth. And so as as revenue comes back, you know, that's if this of this of the 5 plus million of costs that were lower in fourth quarter, that related to a $15,000,000 decline in revenue, you know, a a million and a half that would come back, will come back in the form of commissions.

And our travel expenses, we think, won't, you know, need to recover, you know, to the same level they were before. But because our sales force is actually doing very well at making lots and lots of sales calls, but that'll come back some too. And so if you think of it as the 7,000,000 for the year that was taken out, a little less than half of it would probably $2.02 and a half million will come back, and the and the rest of it would be a permanent reduction. Steve, I don't know if you want to add to that or fix that. No.

Speaker 4

No. No fixing. I I think that's exactly exactly right, Bob.

Speaker 2

Great.

Speaker 5

Okay, great. Well, thank you. That was

Speaker 2

Thanks for the great questions, Trevor. Thank you very much.

Speaker 0

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

Speaker 2

Hi, Marco.

Speaker 0

Marco, if you're

Speaker 7

on mute. Yep.

Speaker 6

Sorry. Can you guys hear me?

Speaker 0

Yes.

Speaker 2

Now we can. Hi, Marco.

Speaker 6

Hi, guys. Sorry. Sorry about that.

Speaker 8

I was wondering if maybe you can talk a little bit more, Bob, on the the transition to the online delivery for, you know, your training and coaching. Maybe if you can talk to the the the feedback you may have received from customers. You know, what was it an easy transition? There were some difficulties. And then did you ever get any kind of sense that you guys could possibly transition that business to more of a permanent nature online when things return to normal, or is this just sort of kind of a temporary solution to the the particular problem that everyone's operating under now?

Speaker 2

Yeah. I'll just give a little color and then ask Paul maybe to give a little bit more. But I think this is a capability that we've had for more than a decade. And whenever we've implemented it, which is often in a circumstance where a team is a remote team or it's a team that doesn't work, you know, all in the same location or it might include international teams, whenever we've done it over the years, you know, our feedback, which we we we collect Net Promoter Scores from the participants and about about the both the about the material they went through and the instructor, and it's always been very high. But, nevertheless, people have just been, you know, had been used to doing everything on-site.

I think people have recognized that, actually, we're getting the same net promoter scores on both the instructor and and, on the content, and maybe even a little higher because of the flexibility actually is good. And so I think the fact that probably more groups will be working remotely in the future will mean that probably there's a permanent piece that will be where this will just be the way people do it. I think also the flexibility where you're not paying the travel cost and, you know, having to get a conference room and people missing the whole day, you can do these things, break them up into three segments during a day, giving a half hour in between these. It gives people flexibility where they can actually we think more people are actually at a higher level in the organization are also attending the training. So I our our guess is this will be a permanent shift.

Of course, people, you know, some of it will come back on-site, but we think there's a permanent shift in this capability that we developed right after actually the MIRROR's epidemic. We thought we need to really be good at this. We have our own platform called LiveClicks that actually many clients prefer, but all of our consultants and coaches, have always been able to do this, on multiple platforms and become experts at doing it here. So, Paul, I don't know what color you'd add to that.

Speaker 3

You know, I I I don't think I would, Bob. That was really complete. Maybe one one thing, Marco, is as this has shifted permanently, not not not all of it. I'm sure some of it will come back, as Bob said, back to live in person, but I think a substantial amount of this will be delivered in the future like it's being delivered today live online. That we think that actually could be a a driver of a of more services for us in the future than what we sold in the past because we'll now have this blended mix of clients delivering live online and then some still going back to the old way of live in person.

But the net we think there's a net gain for us here in more services days in the future because of the new flexibility and the the ways that clients can utilize these days in in in ways that, frankly, you couldn't have when it was in person. So we we see it as a very positive trend.

Speaker 2

I'll maybe add to that, Marco, just what's happening in our marketing events and, also sales calls with salespeople. So Yeah. Sure. So, of course, the same

Speaker 3

thing is happening in the delivery for which we charge clients. We've also made the same shift in our marketing events, and you'll know from past calls we've talked about that the hundreds of marketing events we hold where people traditionally would gather in a hotel ballroom and and get an executive overview of one of our solutions and how it could address the challenge they have. We've converted all of those to live online. And and the number of registrations and the attendance rate is is not a little bit more. It's many multiples more than what we used to to drive to our live in person events.

And so from a lead flow standpoint and an opportunity standpoint, there's there's a lot more discussions happening. That is one thing that even as the when the world gets back to, quote, normal, we're gonna wanna continue to do I think we're gonna wanna cement that shift to live online marketing events because we can get to so many people more easily. And then the same thing is true with our with our client partners. Bob mentioned a minute ago, the activity levels of the client partners have not gone down. In fact, in many cases, they've increased.

We we can get access to our buyers and potential buyers and our clients, and they're increasingly be becoming more and more comfortable engaging with us on Zoom or whichever platform, and and our people are quite good at that as well. And so that's proving to be, really, really helpful. Our implementation specialists there, you know, just all day, every day on with clients on Zoom, coaching and advising them. And so this is, one of the silver linings here is is it's it's we're developing new capability or finally getting to use capability that we've had latent that our clients weren't taking advantage of, and it's accelerating, the level of activity inside the organization.

Speaker 8

Got it. Very helpful. And then I'm not I'm not sure if I missed this, but on the booking strength you guys saw on the enterprise, side of the business, can you maybe talk a little bit more about the drivers behind that? Is that just sort of a function of clients? Like you had pointed out when the pandemic had kind of started that you have kind of seen some volatility in the past where clients will just kind of press pause and try to figure where things are and then kind of resume on their normal way once they've kind of got a got a lay of the land.

So wondering if that that is basically kind of helping that snapback in the booking strength that you saw or if maybe there are some other items, some other sales and marketing items that maybe you're you've been pushing here in the in the last few months to kind of bring that back up.

Speaker 2

Paul?

Speaker 3

Sure. I think it's a combination of the the two things you said. In the early days back in March, very April, there was a lot of uncertainty, and people were spending their time getting their employees out of the office and home to work. And so there just was not capacity or bandwidth on the client side to to do to do they they just they put on hold, some of the training things they had planned. As that has settled down and as people have become, you know, accustomed to and comfortable working at home, because the things we were trying to address with them were important, and they, you know, they they did not wanna cancel those forever.

They they needed to get them back on the calendar. And so that's certainly driving some of it is while the world's not normal, for many of our clients, they're now in a more normalized mode working from home, and they want they need to make progress. They they some of the challenges they were facing before are only more acutely felt now. And so they they kinda need to get on with solving those. And so that's driving, I would say, the the lion's share of it.

It's just the importance of the problem. They they need our help. They want our help, and they're comfortable now doing it live online. We have done some things marketing and sales wise to tout out what we think is some differential capability to deliver these services live online, whether it be coaching or training. And we've equipped our salespeople with that.

We've done quite a bit on the marketing fronts, out there on social media, etcetera, having some of our clients share their experiences. And that that's helped as well, especially those clients who, you know, maybe aren't quite as technically savvy trying to understand, well, how would this work in a live online environment? And once we get in there and do the first session, they they routinely say, that was that was fantastic. Let's keep doing this. And so we think and Bob mentioned earlier in the prepared remarks that it's the strength of that that that kinda whatever whatever twists and turns might come next pandemic wise.

We we've now transitioned almost all the delivery to live online. We don't have a lot of sessions booked out there that are scheduled to be live in person, and so, you know, we don't see really susceptibility to cancellations, in the future now that these clients are comfortable, and we're very comfortable delivering that way.

Speaker 8

Got it. And last quick question. Just wondering if you can, maybe talk give us a little update on the, client partner, hiring expectations for for this fiscal year. I know that this last one, there were some some challenges there. But, any order any sort of update there?

Speaker 2

Paul, do you wanna continue?

Speaker 3

Bob, you want me to take that? Sure. Sure. You'll see in the slides, we're we're at we're at 254, client partners currently. And as we mentioned in our July call, we're exactly on track with what we what we shared with you then that we were going to intentionally pause in in in q three and q four last year.

We've resumed. We're recruiting, and we have our our next batch of sales academy, which is what we call our our sales school, is is scheduled for early in January. We'll recruit through the fall here, fill that up, and then we expect to be back on the same quarterly cadence that was getting us to approximately net 30 client partners a year. And so that that'll begin again in January. So we're recruiting right now.

We have hired a couple of folks over the last month or two when we've seen somebody we just had to get. We don't wanna lose them. Now all the efforts going into that January, kinda fire the engine back up.

Speaker 8

Got it. Thanks a lot, guys. Really appreciate the time.

Speaker 2

Thanks, Marco. Maybe it's just, on this general topic of changes in delivery. One thing that might be interesting is that, actually, we believe you know, we've always had these tremendous coaches and and facilitators that are just some of the best people in the world at facilitating content. What's happened is, you know, I think there are a lot of people who might have said, well, gosh. I'll have my employees just do live on I mean, just online training are now recognizing when you have an option of having really a world class facilitator, and they you can still do it remotely.

They can do it from their home, but it actually is giving us a big leg up, versus those who just have these online subscriptions. You get the benefit of the online subscription, which we have too, all the content, you know, digitally. But with somebody who can come in and coach for an hour, can teach for a half day, whatever, it's really been a great, pivot, I think. So

Speaker 0

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

Speaker 7

Jeff. Good afternoon. Hi, Bob. How are you doing?

Speaker 2

Great. How are you?

Speaker 7

Doing well. Thanks. Was just curious to get your perspective on the potential shift in your value proposition as a result of working under these conditions and the issues that are there new issues with new opportunities to use your content in different ways? How do you see that continuing to shift over time?

Speaker 2

You know, let maybe Paul and Sean can address it. One of the things that I think has happened, Jeff, is, you know, they most people, just like they thought they needed to be in the office all the time, they're just like they thought, you know, that if you went to training, that was okay. I'm gonna go off and, therefore, it's something I'll do once or twice a year. I think people are recognizing that, wow. They there's a lot they can do.

We we implemented a big execution engagement, which with our, you know, most senior consultants. There's a major company who at first are thinking, gosh. I don't know if I can really do it this way. And now they can see how flexible it is and how many more of their leaders they can involve, how how how the levels they can take it to, you know, with for, you know, some additional budget, but not much more, particularly if they expand the pass. And I think what that's what I think it's changing the value proposition.

I think it's changing the the paradigm of how many people in the organization might be going through regular training. It's changed the paradigm about the time segments in which that training can occur that, hey. You don't have to do it all day training. There's a couple hours in the morning that can happen. The, the level of people that can be involved and benefit from it has led us to have a lot of passes expanded where people say, gosh.

I can see taking this now to a lot more people. And I think finally, the breadth of the content so far that people have recognized the pass has has resulted in a number of a value proposition that says, hey. I'm gonna consolidate my spend. I might be spending less, but I'm gonna consolidate my spend in fewer suppliers and use All Access Pass as the foundation for it. We've had a number of clients in this environment who have maybe you know, they've all been in budget constancy, of course, but they've they've increased their budget with us.

So I don't know if that's responsive, Jeff, but those are some ways in which I think there's a the value proposition probably has changed some.

Speaker 7

Yep. That's exactly what I was looking for. And I wanted to to touch on sales effectiveness and efficiency. I don't know if you have looked at your client partners versus your traditional matrix of what you, you know, expect them to contribute in years one through five. Is there any shift in that as a result of, you know, selling from selling remotely environment?

Speaker 2

Paul and Sean and Jen, do wanna

Speaker 3

Sure. I'll I'll respond for, for enterprise, and then Sean can for education. So from an expectation of the, you know, the five year ramp we talk about that, that a client partner as they work their way up to being fully ramped up, we we're not seeing the need to change those expectations at all. You know, I I think what what will be interesting to see play out over time, not because of the of the current pandemic situation, but just as we as these new client partners are only selling all access pass and building up this this base of subscription revenue that that re repeats at such a high rate in the in those future years, years three, four, five, we may see that client partners can do more revenue than they used to do under the old model, and that's something we continue to look at carefully. But we wouldn't certainly bring the ramp rates down at all or the expectations down.

In terms of just the overall effectiveness of the Salesforce, as I mentioned, with Marco's question a minute ago, we're we're seeing and we have such a great Salesforce. They're they are they're incredibly effective. They work tirelessly. And, their the the rates the level the things we look at, the indicators both of activity and output are as high or higher right now, as they were pre pandemic. They've been very creative at and and focused on improving skills to to hold meetings live online, and and, it is a little bit more difficult to get to customers.

We have to be more creative to get to a brand new customer in this environment than than we did before. But, you know, through social media, and I mentioned all of the people coming to marketing events, significantly more coming that way creates a lot of inbound flow to them. So we're really pleased with what they're doing, and and I think the ramp rates are still the ramp rates. Sean, I don't know if anything different for education.

Speaker 6

I just echo pretty much what you said, Paul. I think we expect the run price to be the same. In many ways, doing everything virtually creates more efficiency and less wear and tear on our on our client partners. With education, you've got a lot of

Speaker 7

every client partner has a

Speaker 3

lot of schools. There's a lot of travel involved.

Speaker 6

So in many ways, it's been it's been a nice break from all the travel. We are we are right now finding it. It has been hard the first couple of months this fiscal year to get ahold of schools because of, you know, so many changes and so much chaos at the school level trying to figure everything out. We found in the last few weeks, it's starting to open up more. People are kinda settled into learning how to do live online learning.

And, so it's it's kinda smoothing out now.

Speaker 7

Great. That's helpful. And then last question on on the, you know, the slow rebound in the international business. I was curious what what kind of level you think it gets back to by the end of fiscal twenty one relative to a pre pandemic levels.

Speaker 2

Paul, do you wanna respond?

Speaker 3

Yeah. So you you you, first of all, you you saw the the the really pretty significant improvement from q three to q four that we shared earlier. And, in the into our q one, that continues to be the case that the the business is strengthening and rebounding in those international offices. It's a little bit different by office. So in The UK, for example, they're they they will mirror the the the North American operation very, very closely, and they are mirroring it closely.

And the reason for that is they have so much of their business as subscription. Similarly, Australia will follow well, while Australia is not a a big operation for us, it'll follow a similar curve as North America. China and Japan are the two places where it fell off the most. It's coming back nicely. We we won't be all the way back certainly to fiscal twenty levels by the end of the year, but we believe by the end of the year, we'll be back up to where we were at fiscal nineteen and back up to those levels.

The but the the good news is that the business as it comes back, we're we're significantly making sure that it comes back as All Access Pass business. And so, you know, that that will, the business is down and we start to build it back up, we don't wanna build it back up with the old traditional business. We wanna build it back up with the new All Access Pass subscription business. We can do that now because our portals are up and running in China, and, and and the folks are they're actually having a nice q one All Access Pass quarter in Japan right now. And so so back up to 2,019 levels by the '21 with a with a much greater mix of All Access Pass subscription visits in those offices, which should really help us in the years, in '22 and beyond.

Speaker 2

And, Jeff, just one addition. We think we'll be at the booking pay I mean, we'll be at the run rate. If you can if you can look at slide seven, you're seeing that the even the expectation of q one is back to almost 9,000,000 versus a normal of 12. And so we think in the next few quarters, you'll get back to that normal pace in the quarter, but just not for the year. So the run rate will get back.

Speaker 9

Yep.

Speaker 7

Okay. Thanks for your time, guys.

Speaker 2

Thanks so much, Chip.

Speaker 0

And our next question comes from Samir Patel from Escalating Capital. Your line is open.

Speaker 5

Hey. Hey, Samir.

Speaker 9

I know it's a cliche, but great quarter, guys. So three questions. First, you maintained guidance for 2021 at $20,000,000 or so, even though you outperformed last quarter's expectations for Q4 and you have continuing momentum into Q1. So are there negative offsets I'm missing? Or are just being conservative?

And then also, Steve, do you have guidance for deferred revenue build?

Speaker 2

Yes. I think that last half of the question is probably the reason for being a little more conservative is that we feel really good about, as we said, North America, which is the main engine, we think we'll get back and even be above where it was targeted to be originally in '20. The and that the because of the slower build in international and because it will be all access pass that helps, you know, that and when it rebounds, we want it to rebound with subscription revenue, not the old traditional revenue. That revenue won't show up in the year as much. And so so there'll be more deferred revenue put on the books and therefore less recognized.

We're being conservative, we hope, to start with, but but part of it is just because as these rebounds, we wanna use this time to transition those international operations over. And Steve, on the deferred revenue question, we do expect Hi, Sameer. That

Speaker 0

growth in

Speaker 4

So as you recall, our deferred revenue added to the balance sheet last year was more than $8,000,000 The year before, it was like $11,000,000 And this year, it was just over $2,000,000 added to the balance sheet. So we think in the coming years that the amount we add to the balance sheet, as Bob was talking about would be more likely the eight to 11. We're not giving specific guidance on that, but it will be significantly more we think than it was this year reflecting everything that Bob and Paul just talked about. And the other thing related to this guidance whether it's conservative or not, one of the things might not be able to emphasize enough is that Q1 of Q2 of last year, FY 2020, were very, very strong quarters. We were on a path that we thought we were going to have an extremely good year.

And so for our first two quarters we're comping against those two quarters. And then we'll so we expect to be behind last year halfway through the year. And the fact that we then still have significant growth in the year shows that everything we're talking about will pop out and be more visible in the third and fourth quarters.

Speaker 9

Perfect. Okay, cool. Second question, Paul, with regards to the international business, you seem to have a pretty confident recovery outlook despite the new wave of lockdowns in Europe, for example. You've talked about it a few times, but maybe go over it again. What's changed for those customers since March until now where the COVID spikes and restrictions and whatnot don't actually impact the sales?

Is it essentially just them being comfortable with live online now and also having the lay of the land and not deferring decisions?

Speaker 3

Yes. I think I think that's part of it. And so and and, you take Europe, for example. Europe and Germany is is where our direct operation Germany and The UK, We've got the live online capability is there. It's primarily what we sell as All Access Pass.

And so the uncertainty that they saw over there and we saw over here, I think as they go back into lockdown, we it'll be it remains to be seen exactly what happens, but I I we're we're they're more comfortable in a custom delivering. And what we don't have this time, when when we went to the pandemic back in March and into lockdowns, everything we had on the books was was substantially everything we had in the books was live in person delivery. And so the the choice the clients had was convert to live online, which they weren't sure about, weren't sure if that was gonna work, and also they were trying to make that decision while sending everybody home or just cancel the session. And so many at that point chose to cancel. It's a different circumstance now where a lot of these employees hadn't even returned to the office.

They're accustomed to working from home, and the sessions we have on the books aren't booked live in person. They're booked live online already to begin with. And so, we we expect that they'll continue with those, and we won't see anywhere near the kind of disruption, now that we saw then. Remain, you know, remains to be seen what happens throughout Asia where we don't have that you know, China, Japan, I hope they don't go back into the same kinds of lockdowns they had before, because our business there isn't is not as live online delivery friendly yet. Not so much our capability.

We have the capability to do it. But in place like China, it's just that's not how they are accustomed culturally to receiving training in their homes. They're not set up for it as well. And so, but as you speak to Europe specifically, we don't think it'll be as disruptive. And right now, we're not seeing the lockdowns in China and Japan, like we are in Europe.

Speaker 9

And what about the licensing network?

Speaker 3

Yeah. It's kind of a it's kind of a similar story. So the licensing network will continue to have their their we don't expect that they're rebounding as much this year. And built into the guidance that we've given is that that business will their first February will look more like Q3 and Q4 last year for us, and then it'll start to rebound somewhat later in the year. But for many of them, it'll continue to be a slower build back in the licensee business.

And we're, you know, aggressively working to try to continue to convert them to All Access Pass as well. It's it's it's country dependent. In those places where the the the local governments have the ability to pour in quite a bit of stimulus, they're faring better right now. And in some of the some of the countries where that's not the case, it's it's a more difficult road. And, we don't we don't quite see them tracking at the same rate as our international direct offices, but we do expect them to strengthen from where they were at the, you know, worst parts of the pandemic.

Speaker 9

Okay. Perfect. Third and final question for Sean or Bob. Education margins are still a bit of a drag. I know you guys did that sales reorg a while back.

Any comments on how that's going, whether the selling process has improved in efficiency?

Speaker 2

Sean, you wanna address?

Speaker 6

Yeah. Sure. Sure. Hi. Yeah.

So we feel really good about it. You know, we we reorganized, went to one sales team, one sales leader. And so far, it's been really good. We feel like the communication has been better. The person that is leading, Meg Thompson, that is leading our sales team now is kind of our expert on district focus, selling to districts.

And I think that is a very important part of our future. We find our our districts are that's where we get the highest retention rate. And so we're really using that advantage and training everybody on how to get to districts. And this is why this is one of the reasons why we feel like this year, we can bring on more schools. Even in this tough environment, we can bring on more schools than last year is is through our district focus.

So that is off to a really good start. We're glad we did it. We feel like it's the right decision, and I think it's gonna show up down the road.

Speaker 2

Samir, there's been about, as I said, about a million and a half dollars of just permanent costs taken out of that infrastructure independent of, you know, sales levels that will at least improve, you know, improve the margins by a few 100 basis points. We think the main thing will be, to Sean's point, the ramp up of salespeople we've already hired under this new structure and with the new models, we expect to to improve this year. Although I'd say as I did say, I think, you know, the environment won't be friendly, but our efforts will be good. You know, our efforts and and capabilities are stronger in an environment that's probably not that much more friendly.

Speaker 6

Yeah. Yeah. Just to to add to what Bob said, on the retention side, just retaining all the memberships that we have in the subscription business, that that came in pretty solid last year. We expect that to continue this year. You know, the the more challenging thing would just be bringing on new schools and new districts.

Yeah. But we we have found in the last few weeks that things are opening up some a lot more willingness to talk and explore with us, which is great.

Speaker 9

Understood. Thanks. Appreciate the color.

Speaker 8

Thank you, sir.

Speaker 0

And your next question comes from Patrick Retzer from Investor Capital. Your line is open.

Speaker 2

Good afternoon, gentlemen. Hi, Pat. I don't have any questions. Everything's been covered. I just wanted to compliment you guys on the effective reaction and adjustment of the business to the pandemic and let you know I love the guidance for the current year.

Congratulations and keep up the good work. Thanks very much, Pat. That's very nice of you. Thank you.

Speaker 0

And we have no further questions. I'll turn the call back over to Bob Whitman for final remarks.

Speaker 2

Thanks very much. Well, I just want to express to each of you how much we appreciate you through this whole period. We've had many discussions with both our great analysts who spend enormous amounts of effort to really understand and model this. And I want to thank each of you for the really remarkable efforts and detail into which you've gone to really understand the business. Also, for our shareholders, we have so many sophisticated investors as our shareholders, which we're grateful for and that we admire.

Your questions have been great. And also, I think just the recognition that, you know what, this may be a good time to be a you know, I think many of you have expressed that, you know, you see this as an opportunity, and and we do too. But we appreciate you, and thanks for making the time to join us today. We'd be, of course, delighted to answer any individual questions offline. Thanks very much and we'll talk soon.

Thank you.

Speaker 0

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