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Text: Many of these conditions are beyond our control or influence, any one of which may cause future results to differ materially from the Company's current expectations.
And there can be no assurance that Company's actual future performance will meet management's expectations.
With that out of the way we'd like to turn the time over to Mr. Bob Whitman, our Chairman and Chief Executive Officer.
We appreciate you joining us today.
Really happy to have the opportunity to talk with you.
We're really pleased that our second quarter results were strong and even stronger than expected.
We believe this again emphasizes the strength, quality, and durability of Franklin Covey's value proposition and of our strong subscription business model.
Specifically in the second quarter, as you can see in Slide 3, revenue was strong driven particularly by the strength and growth of All Access Pass and related sales.
Gross margins increased 559 basis points compared to last year's already strong second quarter.
Our operating SG&A declined by $2.4 million.
Adjusted EBITDA increased to $5.1 million, which is the level $1.1 million or 26% higher than the $4 million of adjusted EBITDA achieved in last year's strong pre-pandemic second quarter and so the level significantly higher than our expectation of achieving between $1.5 million and $2 million in adjusted EBITDA for the quarter.
Our cash flow was also strong.
Net cash provided by operating activities year-to-date increased 26% or $4.5 million to $21.9 million, ahead of the $17.4 million achieved in last year's second -- year-to-date second quarter.
And finally, we ended the quarter with approximately $55 million in liquidity, which is up from the $39 million in liquidity we had at the start of the pandemic one year ago.
So we're pleased to be in this position.
Like to discuss these results in more detail in just a moment, but first some context.
This strong and stronger-than-expected performance reflects the continuation and acceleration of four key trends we've discussed in the past three quarters and which continued in this quarter.
Specifically, as indicated in Slide 4, these trends are first that the growth of All Access Pass sales has been very strong.
Second that All Access Pass related services have continued to be strong and are now even higher than the very strong levels we had pre-pandemic.
Third, our international operations have continued to rebound.
And fourth, despite continued uncertainty during the first half of the year trends in our education business are really encouraging.
I'd like to provide a little more detail on each of these trends.
First, as expected, the growth of All Access Pass and related sales which accounts for 83% of our enterprise sales in North America continued to be very strong.
As shown in Chart A in Slide 5, you can see total Company All Access Pass pure subscription sales grew 13% in the second quarter to $17.5 million, have grown 14% year-to-date for the first six months and 15% for the total 12 months, the period which is the entirety of the pandemic to date, to $67 million.
In addition, as shown in Chart B, total Company All Access Pass amounts invoiced have been growing even faster growing 16% in the second quarter to $22.5 million and 30% year-to-date to $38.4 million.
Importantly, much of this 30% year-to-date growth in All Access Pass invoiced amounts has been added to the balance sheet and will establish the foundation for accelerated sales growth in future quarters.
Importantly, to us All Access Pass performance has been strong across all the key elements, which we pay attention to.
The number of All Access Pass sales to new logos increased meaningfully both in the second quarter and in the latest 12 months.
Second, the sale of All Access Pass related services which is delivered primarily live online was also very strong in the second quarter.
Chart A in Slide 6 shows the strong booking trend for All Access Pass add-on services, almost all of which are now being delivered live online.
As you can see in Chart C, with the beginning of the pandemic in March of last year bookings of services delivered live on-site at client locations were necessarily canceled and the year-over-year dollar volume of services declined with delivered engagements down $6.9 million in North America in the third quarter.
However, in the fourth quarter of fiscal 2020 new bookings increased levels nearly equal to those achieved in the fourth quarter of the prior year in '19.
These strong bookings in turn drove an increase in the dollar volume of services actually delivered.
As a result instead of being up $6.9 million as in the third quarter, the dollar volume of services delivered in the fourth quarter was off only $1.1 million.
This same positive trend continued in the first quarter and accelerated in the second quarter with a result that in the second quarter sales were actually higher and year-to-date actually services revenue in North America has exceeded the levels achieved in last year's second quarter and first six months period pre-pandemic.
As shown in Chart B, 92% of our services are now being delivered to clients live online and this is important because with 92% of services now being delivered live online our momentum can continue regardless of when and whether organizations return to their offices.
Third, as shown in Slide 7, performance in our international operations has also strengthened in the second quarter.
Sales in China, Japan, Germany and among other international direct offices and licensee partners continued to improve, continuing the trend established in both the fourth and first quarters.
At the start of the pandemic, we had rescheduled substantially all live on-site training engagements in these countries.
Since these countries were just starting to sell All Access Pass and therefore did not have a strong base of durable subscription revenue to cushion them, sales in these countries declined significantly compared to the third quarter of fiscal '19 and actually the decline started a little earlier in China in the middle of last year's second quarter with the onset of the coronavirus there.
As shown in last year's fourth quarter while still operating well below the levels achieved in the prior year's fourth quarter, sequential sales and sales as a percentage of the prior year in these countries began to improve significantly.
Year-over-year sales improved further in the first quarter.
We expect sales in these operations to continue to strengthen in the second quarter and we're pleased that they did.
As shown in the second quarter, international sales were ahead of our expectations and just 14% lower than in last year's second quarter with most of this decline -- year-over-year decline represented in Japan and UK, which have had a series of ruling shutdowns in their economy, which we expect will strengthen.
Finally, as shown in Slide 8, in the Education Division, despite an educational environment which has continued to be very challenging, we've seen a strengthening in the trends of our education business both in the second quarter and year-to-date.
This strengthening includes, number one, the number of Leader in Me schools which have renewed or are ready to renew their leader in Me membership increased to 1,059 during the second quarter compared to 725 schools at the same time last year.
And second, the number of new Leader in Me schools who have contracted by the end of the first quarter were in the process of contracting and is almost equal to that achieved in last year's second quarter pre-pandemic.
Just note that there are also some positive trends in the education market overall despite the challenges, which we all know about.
We expect these will help our education business during the remainder of this fiscal year and into next fiscal year.
These trends include, one, increasing confidence among those in educational communities that most schools will be opened in the fall of this year, not certain but more confident.
Second, that is shown in Slide 9 and as shown on Slide 9, the three COVID-19 stimulus bills passed by Congress in March last year, December and this March dedicated nearly $200 billion toward stabilizing budgets in K-12 schools with a disproportionate amount of that help coming to Title One schools where Leader in Me is often the strongest.
And three, the third trend is that social-emotional learning for students called SEL which plays to the strength of Leader in Me continues to gain momentum.
Its importance is being talked about everyday in the press.
It's becoming increasingly required by districts.
Just one more note.
To take advantage of the stimulus funding and SEL movement, or social emotional learning, our education team has added to its positioning efforts, helping the schools to take on the issues of learning recovery and the student and teacher mental wellness as these become the pressing topics the education community is trying to address and the Leader in Me is really designed to deliver on.
Early indicators suggest this expanded positioning is working well.
And so we believe these businesses and market trends will work in our favor.
There is still be a difficult environment this year, but we're confident in the future of our education subscription business.
We've been conservative about our expectations this year and feel good about our ability to meet those.
With this context, I'd like ask -- turn the time to Steve Young and ask him to dive a bit deeper into our performance for the second quarter.
I'm pleased to be on the line with you today to talk a little bit more about our second quarter results.
So as shown in Slide 10, our performance for the second quarter was stronger than expected and showed positive momentum in almost every front.
Our adjusted EBITDA for the second quarter was $5.1 million, an increase, as Bob said, of $1.1 million or 26% compared to last year's second quarter, an amount substantially exceeding our expectation of achieving second quarter adjusted EBITDA of between $1.5 million and $2 million.
These results are even more notable given that last year's second quarter was itself very strong.
Our cash flow and liquidity positions also increased significantly.
As shown in Slide 11, our net cash generated for the quarter of $5.2 million was $4.2 million higher than the $1 million of net cash generated in last year's second quarter.
This reflects strong growth in adjusted EBITDA and significant growth in All Access Pass contracts invoiced resulting in our balance of billed and unbilled deferred revenue increasing by almost $13.2 million or 16% to $95.9 million in the second quarter.
As shown in Slide 12, our cash flow from operating activities for the second quarter increased $4.5 million or 26% to $21.9 million compared to the $17.4 million in last year's second quarter.
This strong cash flow reflects that an additional benefit of our subscription model is that we invoice upfront and collect the cash from invoiced amounts faster than we recognize all of the income.
As a result, we ended our fiscal year in August with more than $40 million of total liquidity, comprised of $27 million of cash and $15 million on an undrawn revolving line, which was an amount higher than at the start of the pandemic.
We are pleased that we added further to this liquidity during this year's first half.
We ended the second quarter with $55 million of total liquidity, comprised of $40 million in cash, which means we had no net debt and with our $15 million revolving credit facility still undrawn and available.
So this good performance was driven by, first, strong revenue.
As shown in Slide 13, our second quarter revenue of $48.2 million was driven by very strong performance in our North America operations and the continued outstanding performance of All Access Pass.
Where as shown in Chart A of Slide 14, companywide All Access Pass subscription sales grew 13% in the second quarter, 14% year to date and 16% for the last 12-month pandemic period.
And in addition to the All Access Pass subscription revenue recognized in the quarter, Chart B shows that we also achieved a very strong 16% growth in All Access Pass amounts invoiced to $22.5 million in the second quarter and grew 30% year-to-date to $38.4 million.
Most of the significant growth in All Access Pass amounts invoiced was not recognized in the quarter but was added to the balance sheet as deferred revenue.
This will, of course, be recognized and help accelerate our results in future quarters.
These new invoiced amounts included strong sales of new logos, a continued quarterly and last 12-month revenue retention rate of greater than 90%, as shown in Chart C a large number of All Access Pass expansions and as shown in Chart D a significant volume of multi-year All Access Passes, which increased our unbilled deferred revenue significantly over last year's amount.
Sales of services were also very strong in the second quarter.
Services revenue in North America grew $7.7 million in the second quarter compared to $7.1 million in the prior year.
Second, as shown in Slide 15, the strong All Access Pass sales drove significant growth in our gross margin percentage again in the second quarter.
As shown, our gross margin percentage in the second quarter increased 559 basis points to 77.5% from 71.9% in the second quarter of last year.
As shown also, our gross margin percentage has increased 459 basis points year-to-date and 392 basis points for the last 12 months.
In the Enterprise Division, driven by the significant growth of the All Access Pass and related sales, our gross margin percentage increased to 81.7% compared to 76.1% in last year's second quarter, an increase of 562 basis points.
Third, our operating SG&A in the second quarter was $2.4 million lower than last year's second quarter and $6.8 million lower than the first half of last year.
And finally, the combination of these factors resulted in adjusted EBITDA growing to the $5.1 million, an increase of $1.1 million or 26% compared to the just over $4 million of adjusted EBITDA achieved in last year's strong second quarter and significantly higher than our expected amount.
The strong second quarter also resulted in adjusted EBITDA for the first six months of this year, reaching $8.8 million, a level only $200,000 less than the first half of fiscal 2020 which of course was pre-pandemic.
Importantly, as noted, we also had strong invoiced and multiyear sales in the second quarter because most of these new invoice sales were subscription sales.
These amounts were not recognized in the quarter, but went on to the balance sheet and added to our balance of billed and unbilled deferred revenue which will add to and be recognized in future quarters.
As a result, as shown in Slide 16, our total balance of billed and unbilled deferred revenue increased to $95.9 million, reflecting growth of $13.2 million or 16% to our balance of $82.7 million at the end of last year second quarter.
As noted last year approaching $100 million of billed and unbilled deferred revenue is a big landmark for our subscription business and helps to provide significant stability and visibility into our future performance.
This strong combination of factors continues to drive our expectation that we will generate very high growth in adjusted EBITDA and cash flow in fiscal 2021 and on an ongoing basis.
So we're pleased with the second quarter result and, Bob, turn the time back over to you.
Just continuing, as shown in Slide 17, as reviewed last quarter, we expect to generate adjusted EBITDA of between $20 million and $22 million in fiscal 2021 and we are pleased to be off to a very strong start toward this objective.
Achieving that range in adjusted EBITDA would represent an approximately 50% increase in adjusted EBITDA compared to the $14.4 million of adjusted EBITDA we achieved in fiscal 2020.
And also as we've noted previously, our target is to see adjusted EBITDA now increase by approximately $10 million per year every year thereafter to at least to approximately $30 million in fiscal 2022, to $40 million in 2023 and so on.
And these targets reflect our expectation that we'll be able to achieve at least high single-digit revenue growth each year, which is growth of approximately $20 million per year.
But on an average approximately 50% of that amount of growth in revenue will flow through to increases in adjusted EBITDA and cash flow.
As we also said previously, we fully expect to achieve an adjusted EBITDA to sales margin of approximately 20% over the next few years as adjusted EBITDA approaches $60 million and to become $1 billion market cap company even at the adjusted EBITDA multiple of around 15% that is conservative relative to our adjusted EBITDA growth rate, which is more like 35%.
And this of course doesn't reflect the multiple of -- that we'd ever get a multiple of revenue which is often achieved by companies with similarly successful subscription-based business models.
So looking forward, as we've discussed, substantially all our growth has been and is being driven by growth in All Access Pass and related sales.
This strong growth in All Access Pass and related sales has continued strong through the pandemic you've heard and we expect it to continue to drive significant growth in the future.
Like to just briefly highlight three factors that we expect will continue to drive significant growth in our subscription business and which will drive the very significant growth in sales and profitability in the coming quarters and years.
As shown in Slide 18, these are first driven by growth in All Access Pass.
We expect substantially all of the Company's sales to be subscription and subscription-related within the next three to four years.
Second, we expect that the already significant lifetime customer value of an All Access Pass holder will actually continue to increase.
And third that as we continue to aggressively grow our salesforce and our licensee network, the volume of new high lifetime value All Access Pass logos will accelerate.
Just like to touch on each of these three quickly.
First, as indicated in Slide 19 driven by growth in All Access Pass-related sales we expect that substantially all of the Company's sales will be subscription and subscription-related within three to four years.
As this almost complete conversion to subscription and related revenue occur we expect virtually the entire Company to be able to generate the same kinds of growth in revenue, gross margins, revenue retention and customer impact we've seen in our subscription business over the past five years.
We expect this almost total transition to be driven by the following three things.
One -- first, by the continued strong growth of All Access Pass and related sales in the Enterprise Division in North America where All Access Pass already accounts for 83% of sales.
As shown in Slide 20, All Access Pass and related sales represented only 13% or $13.7 million of total sales in North America in 2016 when we first introduced All Access Pass.
The dramatic, sustained, compounded growth since then has resulted in All Access Pass and related increasing to $94.3 million for the latest 12 months through this year's second quarter.
And with annual All Access Pass-related sales growth expected to continue to grow at more than a double-digit pace and with our historical legacy sales now at very low levels and expect to remain flat or decline a little bit further, we expect All Access Pass and related sales to increase to more than 90% of total North America enterprise sales over the next few years.
The second major driver to becoming almost totally subscription and related is the conversion of the majority of our international operations to All Access Pass and related in the coming years.
In addition to the 83% of North America enterprise sales, which were already All Access Pass, the growth in penetration of All Access Pass has also progressed rapidly in our English-speaking international direct offices.
As you can see in Slide 21 from having almost no subscription sales in these offices just five years ago, All Access Pass and related sales for latest 12 months now account for 74% of total sales in the UK and 69% in Australia for the last 12 months.
Both these offices are well in their way toward the same 90% penetration we expect to achieve in North America.
As you know, our largest international direct offices are in China and Japan, both of which are in the early stages of conversion to All Access Pass but accelerating.
Having made the conversion to All Access Pass in the US and Canada, the UK and Australia, we know what the play is.
We are confident the China and Japan will also convert the vast majority of their revenue to All Access Pass and related in the coming years.
And then the final driver of increased subscription penetration is the other area of the company is our education division, which accounts for 22% of sales.
Slide 22 shows within our K-12 business, 70% of our sales were subscription -- were pure subscription for the latest 12-month period through this year's second quarter.
Slide 22 also shows the significant increase in subscription sales in our K-12 business over the past years and we expect both our K-12 and higher ed businesses to continue to advance toward the same 90% subscription that we are close to in North America, which we're on the way to in the UK and Australia and which we will achieve also in China and Japan.
With this combination of the 82% and everything else moving, we expect virtually the entire business to reflect the higher growth, higher margin, higher retention properties for subscription operations in the coming years as you've seen.
And the impact will be what we've already seen in North America and on the total business.
I'd now like to ask Paul Walker to address the other two elements behind our expected accelerated growth in our subscription business.
For the second factor that we expect will continue to drive significant growth in profitability as shown there in Slide 23, point number two, is that the already significant lifetime customer value of our All Access Pass holders has increased and will continue to increase in the future.
As shown in Slide 24, All Access Pass has, first there at the top, a relatively large and increasing pass size of $38,000, up from $31,000 just a year ago.
Second, the pass has an annual revenue retention rate of greater than 90% which was the case even throughout the pandemic.
Third, a services attachment rate of 44% and I think important to note that that's up from just 17% a few years ago.
The combination of All Access Pass, the pass itself and the related attached services now total approximately $55,000 per pass-holding customer and that numbers continue to increase.
And then fourth as shown here, the blended gross margin on the pass and the related services combined have a gross margin of greater than 85%.
These strong economics are driving a very significant lifetime customer value.
In fact, this customer value is quite a bit higher than we had under our previous legacy pre-subscription model.
For example, as shown in Slide 25 a prior client, an example client, spending $10,000 in a given year under our legacy model, typically spend about twice that or $20,000 over three years and has a gross margin of about 70%.
In contrast, a typical All Access Pass customer today spends approximately $55,000 on a combination of their pass and the related services in their first year, $49,500 in their second year and $44,500 in their third year for a three-year total of $149,000 between the pass and the related services.
Stated a minute ago, whereas the old model was about a 70% gross margin, this new blended margin on All Access Pass and related is greater than 85%.
That's the second reason.
The third reason is indicated here -- as indicated here in Slide 26, the third factor for driving our expectation of significant revenue and profitability growth is that as we continue to aggressively grow our sales force and our licensee network, the volume of new All Access Pass logos will accelerate.
The combination of one, our high and growing lifetime customer value; second, our less than one-to-one cost of acquiring a new customer and third our approximately one-year payback on the investment in hiring a new client partner makes the economics of growing our sales force extremely compelling.
As shown in Slide 27, over the past five years we've added 74 net new client partners in our direct offices.
More than half of these client partners are only midway through their five-year ramp-up to $1.3 million in annual sales volume.
We expect these ramping client partners to generate significant revenue growth over the next few years as they complete their ramp and we also have a lot of headroom to add additional client partners.
As shown in Slide 28, this is just the US and Canada example alone where we currently have 179 client partners across both enterprise and education.
We have room to add at least an additional 435 client partners in the coming years.
We expect that the combination of ramping the existing client partners and hiring at least 30 net new client partners each year will allow us to add a significantly increasing number of new logos, which in turn will generate very significant and increasing lifetime customer value.
And so we believe that the combination of these three factors will continue to drive significant growth in sales and profitability in the quarters and years to come.
And I'll turn it to Steve Young to address our guidance now.
And I'll keep the ball.
So our guidance for FY '21 as discussed in past quarters is we expect to generate adjusted EBITDA between $20 million and $22 million and we affirm that guidance.
This result would be an approximately 50% increase compared to the $14.3 million of adjusted EBITDA achieved last year.
This expected growth reflects everything that Bob and Paul talked about, including the continued strong performance of our North America operations.
Underpinning this guidance for the year are the following expectations that we talked about last quarter and that are still consistent with our year-to-date results.
First, that a significant portion of the deferred revenue on the balance sheet and a portion of the contracted unbilled deferred revenue will clearly flow through to recorded sales as expected.
Second, that the All Access Pass will continue to achieve, one, strong growth in both sales and invoiced sales, high revenue retention rates, strong sales of new logos and continued growth in pass expansion and multi-year contracts.
We also expect that All Access Pass add-on sales will continue to be strong.
Third, that net sales in Japan, China and among our licensees will continue to strengthen.
The increase in the All Access Pass sales which we expect to achieve in these countries will, of course, result in a portion of the new sales to be added to the balance sheet as deferred revenue.
And four, that in education we expect to continue to achieve strong retention of both schools and revenue among existing Leader in Me schools.
And despite the fact that the environment could be challenging and budget-constrained for education in the remainder of FY '21, we still expect to achieve growth in a number of new Leader in Me schools beyond the 320 schools achieved in FY '20.
So that's our overall guidance that we are affirming that guidance.
For the third quarter of fiscal 2021 we expect that adjusted EBITDA will be between $4 million and $4.5 million compared to the adjusted EBITDA loss of $3.6 million in last year's pandemic-impacted third quarter.
Please note that among -- that the amount of adjusted EBITDA expected in Q3 is not only more than $7.5 million higher than last year, it is also higher than the adjusted EBITDA result of $3.1 million achieved in the third quarter of FY '19.
So that's our guidance.
Now our general targets for years beyond 2021.
As we said before, building on the $22 million of adjusted EBITDA that we expect to achieve this year and driven substantially by the expected continued growth of All Access Pass, our target is to have adjusted EBITDA increase by around $10 million per year to around $30 million in FY '22 and to around $40 million in FY '23.
These targets reflect our expectations of being able to grow at least high single-digit revenue growth and approximately 50% of that growth in revenue will flow through to increases in adjusted EBITDA.
While changes in the world's business outlook and many other factors could impact our expectations, we wanted to share these as our current internal targets and assumptions.
So that's our guidance, Bob, and turn the time back over to you.
We're delighted to be where we are and grateful and really excited about what's ahead of us.
At this point, we'll open it to questions.

user
q2 sales $48.2 million versus refinitiv ibes estimate of $48.6 million.
affirms previously announced guidance & continues to expect adjusted ebitda to total between $20 million to $22 million in fiscal 2021.

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