Earnings Call: Q3 2021

Jun 30, 2021

Welcome to the Q3 2021 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 Derek Hatch, Corporate Controller. Derek Hatch, you may begin. Thank you, Adrian. Good afternoon, ladies and gentlemen. On behalf of Franklin Covey, I would like to welcome you to our conference call to Discuss the Q3 of fiscal 2021 financial results and hope everyone is having a great summer. Before we begin this We'd like to remind everyone that this presentation contains forward looking statements within the meaning of the Private Securities Litigation Reform Act Of 1995. Forward looking statements are based upon management's current expectations and are subject to various risks and uncertainties, including, but not limited to, the ability of the company to stabilize and grow revenues, the acceptance of and renewal rates 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 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 product, changes in the training and spending policies of the These 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 Many of these conditions are beyond our control or influence, any one of which may cause future results to differ materially from the company's current expectations, And there can be no assurance the company's actual future performance will meet management's expectations. These forward looking statements are based on management's current expectations, And we undertake no obligation to update or revise these forward looking statements to reflect events or circumstances after the date of today's presentation, except as required by law. With that out of the way, we'd like to turn the time over to Mr. Bob Whitman, our Chairman and Chief Executive Officer. Bob? Thanks very much, Derek. Good afternoon, everyone. We're happy to have the opportunity to talk with you today. Really appreciate you joining us. We're pleased to report, as you saw in the press release, that our 3rd quarter results were strong and even stronger than expected. We believe this again reflects the strength, power, quality and durability of our customer value proposition and of the high growth, Durable subscription business model that we have created. Just some highlights as shown in Slide 3, Revenue was up 58% in the quarter and it was also greater than in fiscal 2019's strong third quarter. Gross margin percentage was up 5.87 basis points. Our operating SG and A as a percentage Sales improved to 63.6 percent. Adjusted EBITDA increased $12,200,000 in the quarter to 8,600,000 Our net cash from operating activities increased 65 percent to $30,900,000 and we ended the quarter with $51,000,000 in liquidity Even after making a major investment in the acquisition of STRIVE. Just like to provide a little more detail on each of these key highlights. Revenue in the Q3 was $58,700,000 which obviously represented a big increase compared to the $37,100,000 of revenue In last year's Q3, which of course was impacted by the COVID pandemic. Importantly though, this $58,700,000 of revenue was not only significantly higher than Last year's Q3, it was also higher than the $56,000,000 in revenue achieved in the strong Q3 of fiscal 2019 pre pandemic, which itself Represented a big increase compared to the $50,500,000 revenue achieved in the Q3 of fiscal 2018. This strong growth was driven primarily by the strength and growth of All Access Pass and also of our subscription business in Education. All Access Pass, we see we're in Slide 4. In the Q3, All Access Pass subscription sales Increased 17 percent to $19,200,000 It's growth of $2,800,000 compared to the Q3 of fiscal 2020. Importantly, this represented growth of 40% compared to the $13,800,000 in All Access Pass sales achieved in the strong Q3 For fiscal 2019, when you take the subscription plus subscription services, Sales grew 43% to $29,700,000 in the Q3 compared to $20,800,000 in the Q3 of fiscal 2020, But also grew 39% compared to the $21,400,000 in All Access Pass subscription and subscription services sales in the Q3 of fiscal 20 Our total balance of deferred subscription revenue grew 26% in the Q3 to $55,300,000 The increase of $11,400,000 compared to our balance of $43,900,000 at the end of last year's Q3. This represented very strong growth of 39% compared to our deferred revenue balance of $39,900,000 in the Q3 of fiscal 2019. And then finally, our balance of unbilled deferred revenue grew 23% to $41,300,000 in this year's Q3 And grew 74% compared to our $23,700,000 balance of unbilled deferred revenue in the Q3 of fiscal 2019, Reflecting this reflects of course a significant ongoing increase in the percentage of our All Access Pass contracts, which are now multiyear. We've talked in the past of having roughly a third of our contracts multiyear. It's now more than 40%. And the 40% of contracts represents 52% of all of our All Access Pass subscription revenue It is now in multiyear contracts in North America and that's really encouraging and exciting that people are seeing that value And that we already have deferred revenue not just for 2022 fiscal year, but already significant amounts for 2023. Our revenue growth was strong as we talked about and is shown in Slide 5. The growth of our profitability and cash flow related to this revenue growth Was even more significant. Gross margin percentage for the company increased 5.87 basis points To 78.2% in the 3rd quarter, it compares with 72.3% in last year's 3rd quarter, 70.8% in the Q3 of fiscal 201969.2% in the Q3 of fiscal 2018. Gross margins in the Enterprise division itself actually grew to 81.5% in the 3rd quarter. Operating SG and A as a percentage of sales, as I mentioned, declined to 63.6%, representing a significant improvement compared to the Q3 of fiscal 2020, It was also a level lower than the 65.3% achieved in fiscal 2019 Q3 And the 68% achieved in the Q3 of fiscal 2018 noted that adjusted EBITDA increased $8,600,000 in the 3rd quarter, That's an increase of $12,200,000 compared to adjusted EBITDA loss of $3,600,000 last year, But it also represents a significant increase compared to the $3,100,000 in adjusted EBITDA achieved in the Q3 of fiscal 2019 And compared to the $600,000 adjusted EBITDA achieved in fiscal 2018, looking at year to date, Adjusted EBITDA increased to $17,400,000 which is a big increase compared to the $5,400,000 in year to date adjusted EBITDA Through last year's Q3, it's also big compared to the $7,200,000 in year to date adjusted EBITDA achieved And a very strong first three quarters of fiscal 2019 and the $500,000 of year to date adjusted EBITDA achieved in fiscal 2018. Importantly, adjusted EBITDA for the latest 12 months through the end of this year's Q3 totals $26,300,000 A level which not only substantially exceeds the $18,800,000 achieved for the same latest 12 month period last year, But also the $18,600,000 in latest 12 months adjusted EBITDA achieved for the same period in fiscal 2019, You'll note that this $26,300,000 in latest 12 months adjusted EBITDA is also well ahead of our existing Full year guidance of $20,000,000 to $22,000,000 of adjusted EBITDA for fiscal 2021 as a whole, so more on that in a moment. Our cash flow was also strong with net cash generated through the 3rd quarter increasing to $11,000,000 That's an increase of $23,200,000 Compared to negative $12,200,000 in net cash generated during the same year to date period last year, it was also well ahead of the negative 4 net cash generated for the same year to date period in fiscal 2018 and the $7,200,000 for the same period in 2018. And then finally, our Net cash provided by operating activities increased 65 percent to $30,900,000 through the 3rd quarter. That compared to $18,700,000 for that same period last year, dollars 18,600,000 in 2019 for the same period and $8,600,000 in 2018. So we ended the quarter with strong liquidity of approximately 51,000,000 Even after investing $10,600,000 for the acquisition of STRIVE, which Paul will talk about later in this call, and this liquidity level is up from the $37,000,000 We had at the start of the pandemic a year ago, even after the investment in STR1VE. So we're grateful to be in a strong balance sheet position. We'll discuss these results in more detail in just a moment, but wanted to give you the same context we provided in the past three quarters. And so that you can say what's behind the make sure you understand each of the components behind this performance. As you can see in Slide 6, The four trends are as follows. 1st, as we talked about All Access Pass sales and continue to achieve strong growth. 2nd, that All Access Pass subscription services sales have continued to grow and are now significantly higher than even their pre pandemic levels a year ago. 3rd, our international operations have continued to strengthen. And 4th, the performance and trends in our Education business have also strengthened Substantially, both in terms of retention revenue, number of new leader in new schools and outlook. Now just a little more detail on each of these Key trends. First, as expected, All Access Pass and subscription sales, which Now account for 82% of enterprise sales North America continued strong. As you can see in Chart 1 and on Slide 7, Total company All Access Pass subscription sales grew 17% in the Q3 to 19,200,000 Year to date growth is 15% and latest 12 months growth is 14%. The $19,200,000 in All Access Pass subscription sales in the 3rd compares to $16,400,000 in All Access Pass subscription sales in the Q3 of 2020, dollars 13,800,000 in the Q3 of 2019 and Point 1 in the Q3 of 2018. In addition, as shown in Chart 2 on Slide 7, Our All Access Pass deferred revenue balance grew an even more rapid 25.9% in the 3rd quarter to $44,200,000 Which represents an increase of 36.8% compared to last year's balance and at the end of the 32.3 balance of deferred revenue at the end of the Q3 of even fiscal 2019. And that's been broad based Across all the key elements, the number of All Access Pass new logos increased 93% in the Q3 of this year compared to last year. Annual revenue retention continued to exceed 90%, as shown in Chart 3 on the same slide. And the sale of multiyear contracts is also continuing strong with our balance of unbilled deferred revenue increasing 25% to $40,500,000 Compared to $32,400,000 in the Q3 of 2020, it's up 74% compared to the $23,000,000 balance of unbilled For revenue we had at the end of the Q3 of fiscal 2019, as you can see in Chart 4. The second trend relates to these subscription services. Sales of All Access Pass subscription service increased to $10,500,000 in the 3rd quarter, Making it our highest subscription services quarter ever. This compared to All Access Pass subscription services sales of $4,000,000 in the Q3 of fiscal 2020 $7,600,000 in the Q3 of 2019 $5,000,000 in 2018, Which is shown in also in Slide 8. Also shown for the first time, our All Access Pass subscription and subscription services sales Exceeded $100,000,000 for the latest 12 month period and that's a big landmark. Going to Chart 9, talking about subscription services, shows the strong booking trends for Alex's past subscription services, Almost all of which have now been being delivered live online. As you can see in Chart 3 on that Slide 9, it's 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 our services declined with delivered engagements down $6,900,000 in North America in the Q3. However, with our quick pivot to delivering services live online in the Q4 of fiscal 2020, new bookings increased to a level nearly That achieved in the Q4 of fiscal 2019, just 3 months into the pandemic, these strong bookings in turn drove an increase in the dollar volume of services Actually delivered. As a result, instead of being off $6,900,000 in the 3rd quarter, the dollar volume of services delivered in the 4th quarter was off only 1 $1,000,000 The same positive trend continued in the Q1, accelerated in the Q2 and continued through the Q3 where sales Subscription services exceeded by 16%, the highest level ever achieved in any quarter. As shown in Chart 2, again, the vast majority of our subscription services are now delivered to clients live online, meaning that our momentum can continue regardless whether certain organizations return to their offices. 3rd, as shown in Slide 10, performance in our international operations This continued to strengthen throughout the through the Q3. As previously reported, at the start of the pandemic, we had to reschedule substantially all live on-site training engagements in our international offices as well. 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 Q3 of fiscal 2019. However, as shown in last year's Q4, while still operating well below the levels achieved in the prior year's Q4, sequential sales and sales as Percent of the prior year in these countries improved significantly. Year over year sales improved further in the 1st and second quarters. We expect the sales to continue to strengthen in the Q3 and we're pleased that they did. In the Q3 international sales were ahead of our expectations and just 13% lower And in the Q3 of 2019 and a portion of that 13% down is reflected in the fact that we're starting to add more Subscription sales in those offices as well, which are going on to the balance sheet rather than on to the income statement. Well, there continue to be pandemic related challenges in Japan and in certain licensee operations. We're pleased with the strong rebound Overall in our international operations, importantly, in addition to significant recovery in reported sales shown in Slide 10, Our international operations have seen significant increases as an international expansion for revenue. So finally, on these trends, we've Also seeing real strengthening in the performance and overall market trends in our Education business in the 3rd quarter. As shown in Slide 11, the strengthening of Education's performance includes the number of Leader in Me schools, which have New or ready to renew their Leader in Me membership increased to 1921 during the Q3 compared to 16.81 at the same time last year. The number of new Leader in May schools who contracted by the end of the Q3 or in the process of contracting is 90 Greater than that achieved by the end of last year's Q3 were 305 schools versus 215. In addition to the strong booking Education's reported performance also increased significantly in the 3rd quarter. Education's 3rd quarter revenue grew 44.8% over last year's 3rd quarter. It also grew 7.3% compared to fiscal 2019's Q3. This reflects, among other things, the addition of some new large multi Your district contracts that were started during the Q3, all of which are expected to bring on additional revenue over the coming quarters years, Also includes a substantial increase in number of coaching days. Our gross profit in Education division also improved 11.40 basis points in the quarter from a gross margin of 57.3% to 68.7%. And finally, adjusted EBITDA for the Education Division increased by $2,700,000 over last year's Q3 and was also up $1,300,000 compared to even fiscal 2019 Q3. Our education our international licensing network also showed substantial Improvements in revenue and adjusted EBITDA during the quarter. So conclusion on education, there are also trends in the overall education market, which we We expect it will help our education business during the remainder of this fiscal year and into the next fiscal year, including the increasing conference In the educational community that most schools will be open and largely back to normal in the fall of this year. And the 3 big COVID stimulus bills passed by Congress dedicated nearly $200,000,000,000 towards stabilizing budgets in K-twelve schools. So with that Overview and detail, I'd like to now ask Steve Young to dive a bit deeper into the performance for the Q3 and go through the financials. Steve? Thank you, Bob, and good afternoon, everyone. It's nice to be with you. So I'll just jump right in. As shown in Slide 12 and as Bob talked about, our performance for the 3rd Quarter was stronger than expected and showed positive momentum on almost every front. As you know, our adjusted EBITDA for the Q3 was $8,600,000 an increase of $12,200,000 compared to last year's 3rd Quarter of negative $3,600,000 and amount substantially exceeding our expectation of between $4,000,000 $4,500,000 Importantly, this $8,600,000 in adjusted EBITDA is also significantly higher than the $3,100,000 of adjusted EBITDA achieved in the strong Q3 of FY 2019. As also shown, both year to date and last 12 months adjusted EBITDA substantially exceeded that achieved in both FY 2020 FY 2019 and our last 12 months adjusted EBITDA of 26 $300,000 as Bob said, substantially exceeds our full year guidance of $20,000,000 to $22,000,000 for FY 2021. Our cash flow and liquidity position also increased significantly as you can see on Slide 13. Our net cash generated year to date through the Q3 was $11,000,000 This was $23,200,000 higher than the Negative $12,200,000 of net cash generated in last year's Q3 And was also higher than the negative $4,800,000 in net cash generated in FY 2019 and This is negative $7,200,000 generated in FY 2018. This increase in net cash generated It reflects strong growth in adjusted EBITDA and that our balance of billed and unbilled deferred revenue Increased by almost $17,100,000 or 25 percent to $96,600,000 in the 3rd quarter. Also as shown in Slide 14, our cash flows from operating activities Year to date for the 3 quarters ended May 31, 2021 increased 12,100,000 Or 65 percent to $30,900,000 compared to 18.6 $1,000,000 last year or $18,700,000 last year, dollars 18,600,000 through the Q3 of 2019 And 8.6% through the Q3 of 'eighteen. This strong cash flow reflects an additional benefit of our subscription model, specifically that we invoice upfront and collect the cash from invoice amounts even Faster than we recognize all of the revenue. When this strong cash flow, we ended the quarter with $51,000,000 in total liquidity compared to 36, Which is comprised of cash of $36,000,000 $15,000,000 of our revolving credit facility still undrawn And available even after, as Bob also said, paying the $10,600,000 during this quarter related to the acquisition of STRIVE. This was this overall good performance was driven by 1st, strong revenue growth. As shown in Slide 15, our 3rd quarter revenue was $58,700,000 was not only higher than the $37,100,000 in last year's Q3, but also higher than the $56,000,000 Revenue achieved in the Q3 of FY 2019. This strong revenue growth was driven in part by very Strong performance in our North American operations, driven by the continued outstanding performance of the All Access Pass. Additionally, as shown in Chart 1 of Slide 16, company wide All All Access Pass subscription sales grew 17% in the 3rd quarter, 15% year to date and 14% Even during the last 12 months pandemic period. And in addition to the All Access Pass subscription revenue Recognized in the quarter, chart 2 shows that we also achieved a very strong increase in our balance of All Access Pass deferred revenue, which grew 26 percent or $9,100,000 to $44,200,000 in the 3rd quarter. Our balance of All Access Pass deferred revenue not only grew substantially compared to last year's Q3, But consistent with many other measures was also 37% or $11,800,000 higher than that achieved In the Q3 of FY 2019 pre pandemic, the SolEx as past deferred revenue will be in future periods and help to accelerate our growth. This significant growth in All Access Pass deferred revenue Resulted from 1, strong All Access Pass sales to new logos 2, a continued quarterly and last 12 months revenue retention rate of greater than 90% As shown in Chart 3 and a large number of All Access Pass expansions and as shown in Chart 4, A significant volume of multiyear All Access Passes. Sales of All Access Pass Subscription sales shown in Slide 16 were also strong in the 3rd quarter, growing 136 percent compared to last year's Q3 and up 37% compared to the 3rd quarter Of FY 2019. Then second, as shown in Slide 17, our strong All Access Pass Sales drove significant growth in our gross margin percentage again in the 3rd quarter. As shown, our gross margin percentage increased 5.87 basis points in the 3rd quarter To 78.2%, up from 72.3% in the Q3 of FY 'twenty And up from 70.8% in the Q3 of FY 'nineteen. As also shown, year to date, our gross margin percentage increased 5 14 basis And has increased 4.89 basis points for the last 12 months. In the Enterprise division, driven by the significant growth in the All Access Pass and related sales, Our gross margin percentage increased to 81.5% compared to 78.1% in last Cheers. 3rd quarter, an increase of 3.40 basis points and an increase of 7.13 basis points From the 74.3 percent in gross margin percentage achieved in the Q3 of FY 2019. 3rd, as shown in Slide 17, our operating SG and A in the 3rd quarter Was only 63.6 percent of revenue. This is a level significantly lower than the 80 2.1 percent of revenue in the prior year and also lower than the 65.3 percent of revenue in This is a level significantly higher than the expectation of adjusted EBITDA of $4,000,000 to $5,000,000 for the quarter. The strong Q3 also resulted in adjusted EBITDA for the 1st 9 months of FY 'twenty one of $17,400,000 And for the last 12 months, dollars 26,300,000 As you noticed in all of these, we not only compared to FY 20, but FY 2019 because FY 2019 was such a good pre pandemic year. I just wanted to show that we're not only just rebounding From the pandemic, but also growing compared to pre pandemic numbers. Importantly, As noted, our balance sheet of billed and unbilled deferred revenue, which will add to and be recognized in future quarters, Increased to $96,600,000 reflecting growth of $19,300,000 Or 25% compared to our balance of $77,300,000 at the end of last year's 3rd quarter. This large balance of billed and unbilled deferred revenue will help us provide significant stability of And visibility into our future performance. This strong combination of factors continue to drive our that we'll achieve high rates of growth in adjusted EBITDA and cash flow in FY 2021, FY 2022 on an ongoing basis So we're very pleased with the result of the 3rd quarter that is broad based in almost every area doing a little bit better or better than we expected. So Bob, turn it back over to you. Thanks, Steve. Just a couple of points on looking forward. As we've discussed, substantially, our growth has been driven by The All Access Pass subscription and subscription services sales and the strong growth has continued throughout the pandemic as we've shown and we expect All Access To continue to drive the future. So driven, we expect really that substantially all of the company's sales will be subscription and subscription services Within 3 to 4 years, as we mentioned last quarter, thought we'd give you a little background in the 3 bullet points as to why we think that will be the case. First, the growth of Wix Technologies has passed subscription sales to continue to increase in Our Enterprise division in North America, where those sales already account for 82%. Turning to Slide 18, All Access Pass subscription and subscription services sales represented only 13% or $13,700,000 Of total sales in North America in 2016 when we first introduced the All Access Pass, dramatic sustained Added growth since then, Israel and All Access Pass and subscription services sales increasing to 103 $200,000 for the latest 12 months through this year's Q3. Some reports have been sent to us by others achieving $100,000,000 in subscription And service revenue in only 5 years, places us among a relatively elite group of SaaS companies actually With the median time for those who actually make it $200,000,000 being around 9 years. And as shown on Slide 19, All Access Pass subscription service sales now accounts for 82% of sales in North America With the continued expectation of double digit growth in All Access Pass revenue and with legacy sales now at very low I wasn't expected to remain flat or even decline a bit further. We expect All Access Pass and subscription services to increase More than 90% of total North America enterprise sales over the next few years. So that's the first big engine. The second major driver Having the business become almost totally subscription and subscription services, the expected conversion of the majority of our international operations Tallix has passed in subscription in the coming years. In addition to the 82% in North America, Which are already there. We've also progressed rapidly in our English speaking direct offices. As you can see in Slide 19, Having no subscription sales at all in these offices just 5 years ago, All Access Pass subscription and subscription service sales For the latest 12 months, Nao accounts for 72% of total sales in the U. K. And 72% in Australia. Both these officers will on their way toward the same 90% penetration we expect to achieve in North America. As you know, our largest international Officer in China and Japan, both of which are in the early stages of conversion to All Access Pass. But importantly, Japan this year will have a third Of its sales, All Access Pass subscription and subscription services and China has now begun Selling new contracts that has entered some new large All Access Pass contracts that will start to be recognized. So I think we expect Again, international will get to that same level. And finally, the Education division, Which represents, as you know, 22% of total sales. Reported subscription sales already account for 65% Sales for the latest 12 months and we expect both K-twelve and Higher Ed to continue to advance toward 90% And subscription services in the coming years. So with the combination of all these, we expect the vast majority of the business to reflect the same high growth, High margin, high retention properties of our subscription operations in the coming few years, and that's truly encouraging. Now I'd just like to turn the time to Paul Walker to touch on 3 factors that we expect will continue to This growth kind of what's underlying it. Paul? Thanks, Bob, and hello, everyone. Good afternoon. I'll briefly describe these three factors and then go into just a bit of depth on each. The first factor that we expect will continue to drive this significant growth Our subscription sales and profitability is that the already significant lifetime customer value of our All Access Pass Holding Organizations We'll continue to increase. The second factor is that as we continue to aggressively grow our sales force and our licensee network, the volume of new High lifetime value All Access Pass logos will accelerate. And 3rd, recent acquisitions of Strive and then Jhana, which you'll recall that we acquired in Mid 2017, that together they're accelerating our ability to address larger and larger populations inside new and existing All Access Pass clients, Further helping to accelerate the growth of the pass inside those organizations. And so just briefly discussing and describing these 3 in a bit more detail. First, All Access Pass and subscription services revenue will continue to climb and that will drive increasing lifetime customer value as shown in Slide 20. In our North American operations, All Access Pass has, first, a relatively large and continually increasing average path size, Now at $43,000 which is up from $37,000 just a year ago. 2nd, an annual retention rate of greater than 90%, And third, a subscription services attach rate of 48%, up from just 17% a few years ago. The combination of revenue from the All Access Pass subscription itself and from attached subscription services totaled approximately 61,000 dollars per pass holding customer in the 3rd quarter, which was up 13% from $54,000 just a year ago. The blended gross margin on all of this continues to be greater than 85% And these strong economics are driving a very significant lifetime customer value. And additionally, as Bob mentioned and Steve alluded to earlier, In North America, more than 40% of passes representing 52% of subscription revenue are now under a multiyear contract. And stepping back from that, just to think about that for a minute from where we were a number of years ago, that amount of revenue under contract set to come in It's a significant thing for us and for our client partners as well. The second point, the second factor, as we've discussed in the past and is On Slide 21, we have a lot of headroom for continued client partner growth. We expect that the continued addition of at least 30 net New client partners each year will help drive significant subscription and subscription services growth since almost all these new people have to sell as All Additionally, we expect significant growth to come from the approximately 100 20 existing client partners that we've hired over the past few years who are still in the ramp process. As you'll recall, each new client partner that we is expected to generate annual revenues in their 1st year of $200,000 then their 2nd year $500,000 then $800,000 Going to $1,100,000 and then $1,300,000 over their 1st 5 years with us. And we define $1,300,000 as being fully ramped, and then we, of course, expect their Today, we have approximately 120 client partners in our North American Enterprise and Education divisions, Who, depending on their year of hire over the past 4 years, fall somewhere along this ramp curve. And the natural ramp of these Partners, even net of attrition, the normal attrition that we might expect to see would result in tens of 1,000,000 of additional dollars of revenue Growth in the coming years. And so the combination of ramping those we have and hiring the net 30 a year, We believe we'll generate significant subscription revenue growth for us. And then the third point that I'll touch on briefly is the recent acquisition of STRIVE, Coupled with Jhana, is accelerating our ability to address larger and larger populations. During the Q3, we were pleased to complete the acquisition of STR1VE, Which led meaningfully to our technology platform, our strategic capabilities and overall impact. A key benefit resulting from Strive is that it will increase our ability to address ever larger client populations. The unique combination of Strive's platform, Coupled with Franklin Covey's best in class content and subscription services, we'll accelerate our ability to help clients predictably achieve employee behavior change At scale, Strive's intuitive social learning platform will enable seamless integration and deployment of Franklin Covey's best in class content, Our services, technology and metrics to provide a highly engaging and impactful learning experience with maximum impact. When combined with Jhana, a push based just in time digital coach for leaders and individual contributors, The All Access Pass platform is taking a significant leap forward and its ability to support large impact journey rollout for entire organizations, while simultaneously allowing individual learners to focus on their own skill development. And so it's for these three reasons and others that we feel very positive about the future of our ability to continue to grow our subscription and subscription services business. And with that, I'll turn it back to you, Bob. And Paul, thanks so much. And I'll turn it to Steve to talk about our guidance and outlook. Okay. Thank you again. So as you know, in past quarters, we have confirmed Our guidance that we expected to generate adjusted EBITDA of between $20,000,000 $22,000,000 this year. Based on the strong performance in the Q3 year to date and our expectations of a strong 4th quarter, we're glad to now be in a position to adjust that guidance upward. Our new guidance is that we expect adjusted EBITDA for FY 2021 to be $24,500,000 $26,500,000 The middle of this range would reflect adjusted EBITDA growth Of more than 75% compared to the $14,400,000 of adjusted EBITDA achieved in last year FY 2020. With our last 12 months adjusted EBITDA through the 3rd quarter Already at $26,300,000 If our 4th quarter result is at least the Same as last year's strong Q4, our results for the Q4 would already be at the near the top end of that range. And we do expect to achieve strong growth in revenue in the 4th quarter. However, we're also making some The adjusted EBITDA growth we could otherwise expect from our expected growth in revenue. These growth investments include the hiring of a significant number of new client partners To position ourselves for strong growth in FY 2022 and beyond. 2, some new strategic marketing investments That we expect will broaden our reach 3, costs associated with the acquisition of Stripe For and some other growth investments, we also expect that there will be some extra, Say coming out of the pandemic costs, including some increased travel and profit based Compensation, which will impact costs in the 4th quarter. These additional investments notwithstanding, We still expect the Q4 to be a very strong quarter. As far our outlook for FY 2022, 2023 and beyond, In past quarters, we have said that we expected adjusted EBITDA in FY 'twenty two to increase to approximately 30,000,000 And adjusted EBITDA in FY2023 to increase further to approximately $40,000,000 Based on the strong performance in FY2021 to date And expected through the Q4, we now expect the trajectory of our results in FY 'twenty two and 'twenty three We'll also be somewhat higher than our previous outlook. We expect To increase and provide more detail on our outlook for future years when we report year end results in November. So, Bob, that's guidance and outlook. Great. Thanks so much, Steve. Thanks so much, Steve. Thanks so much, Steve. Yes. Really are great. We feel great about our momentum, pleased to be in a position to increase our guidance and really excited about the business. Just before we turn to Q and A, I'd like to thank our absolutely tremendous associates around the world for their continued and unwavering commitment to our mission, To our clients and excellence in all they do, they're amazing. I'd also like to recognize and thank our great leaders. Our top leadership roles are all filled by extremely talented, experienced and committed individuals who have the combination of a long tenure And yet because of their relatively young age, many years of strong service still ahead of them. They lead in a way that engages their teams Predictably grows their operations in our overall business strategically, culturally and financially. I'm thrilled that given the strong results, trends and strategic position of Franklin Covey's business, we are now prepared to make some key promotions on the executive team that will help to further accelerate our progress. Really excited about each of these. Our executive team has functioned as a true partnership Many years, our goal has been to have each leader continue to increase his or her responsibilities, while still keeping all members of our executive team On the playing field and contributing in both old and new ways even as their roles change. That will continue to be the case following key Leadership promotion that will take place effective September 1. First, over the past couple of years, Paul Walker has overseen substantially all our day to day operations, And I have focused the majority of my efforts working closely with Paul, Steve and the executive team on our key strategic initiatives, our innovation strategy and agenda On capital transactions, I'm excited personally to now move over one chair at the table in addition to serving as Chairman of the Board, become Executive Chairman The company effective September 1. As Executive Chairman, I will continue to work in these same strategic areas in which I've focused over the past few years. As Chairman, I will spend even more time working to ensure that the tremendous capabilities of our remarkable Board are fully utilized. I'm thrilled to announce that Paul Walker will become our new CEO effective September 1. The Board, the executive team and I all have tremendous confidence and Paul, he's fully prepared for this expanded role. Paul is a completely trusted partner who has tremendous capabilities, instincts and drive, Engages everyone to come to the best decisions. He also executes with excellence. The idea that Paul could only become our next CEO It has been something the Board and I began discussing nearly 10 years ago. With that potential in mind, Paul was first given responsibility for running our central region, Then for simultaneously overseeing the central region and our operations in the U. K. And Ireland, then for leading all North American operations for the Enterprise Then serving as President of the entire Enterprise division, which has been such a strong growth engine and most recently as the company's Chief Operating Sir, Rudy has done an absolutely incredible job including all the way through the pandemic. Over the past 6 years, Paul and I have worked hand Every day and most evenings together with the other members of the exec team's launch and grow All Access Pass from what was just an idea We're now generating more than $100,000,000 of subscriptions, subscription service revenue on the way to having All Access Pass in the Enterprise division Our leaders in the membership in the Education division represent substantially all of the company's revenues and operations in the next few years. During this time, Paul led the execution of our strategy to increase client partner hiring, served on all our strategic committees And I assume essentially all other key operational responsibilities. And since September 1, 2020, in his role as Chief Operating Officer, Paul has effectively Running the business day to day, so making this transition to CEO is largely a recognition of what he's already been doing and the transition will be seamless. Some additional great news is that Steve Young will remain CFO for at least the next several years, continuing to provide that tremendous and This is the knowledge, leadership and influence we all count on. Jennifer Colosimo, President of the Enterprise Division will now assume full responsibility for overseeing the entire Enterprise division, including not only the U. S. And Canada operations, which have achieved tremendous growth under her leadership, But all the leadership Enterprise Division is International Operations and we're really excited about Jen's expanded leadership role and Full confidence in her ability. She's an amazing person and amazing leader. Sean Covey will also continue to lead and serve as President of the Education Division, which she's done and continues So brilliant effectively. And really our top 30 other leaders will continue at least the top 30, but all of the top 30 will continue in their roles. So in conclusion, I'd just say I've had the privilege of being associated with the company in one role or another since I joined the Board of the Covey Leadership Center in 93, Became Chairman of the Board of Franklin Covey in 99 following the merger and then was asked as both Chairman of the Board and as CEO, which I've done for the past 21 years. In my ongoing role as Chairman of the Board and as a large shareholder and I don't intend to sell any shares, my new role as Executive Chairman, I'll remain involved in our Amy, I'll do everything I can to help Paul and to help Franklin Covey continue to win in any other way that we can think of and I'm excited to remain We're close partners with Paul and the executive team for many years to come. These changes, along with the strong momentum of The business make it really an exciting time for Franklin Covey. We feel great about our strategy, our business model, our financial position Our leadership bench strength, I love this company. I love my involvement in our people, our shareholders, our clients and our mission and look forward to continuing this involvement. Appreciate our more than 1,000 associates and partners around the world and appreciate each of you and your ongoing commitment to trade clean companies. So that long thing, I'll Thank you. We'll begin the question And our first question comes from Andrew Nicholas from William Blair. Your line is open. Hi, thank you. Good afternoon and Congratulations to each of you, Chen, Bob and Paul on the new roles. Yes, no problem. I guess to start, in terms of the guidance and the guidance change, you touched on the increased Spending in the 4th quarter. So I was hoping you could spend a little bit more time on exactly what those investments I know Steve you listed them, but if we could get maybe a few examples of what those spending initiatives look like? And then relatedly, Is there any way to quantify that spend? And should we view that as kind of a one time set of Initiatives or are these kind of a multi quarter spend that you're kind of leaning into growth with? Thanks, Sandra. I'll try to give you a little more context and then invite Paul and Steve to add on. I think there's some in both The general ones that we always do are the continued investment in client partners. It's a little bit more back end loaded this year because we didn't hire There are as many in the first half and therefore we're adding more in this back half. So we have more of those folks coming on in the Q4 than we might normally We are also kind of a one time expenditure in some marketing initiatives. We've been working with some firms. These aren't big Dollar amounts, I mean, but incrementally, the combination of the marketing, which is Maybe a $500,000 of extra and involved with really increasing our footprint around the world And thought leadership and some things that we'll be announcing later this year, these are really kind of the outsourced work that we've been doing. Our client partners incrementally are adding maybe a $500,000 or so in the Q4. I think the ones that Just more one time are that in last year's Q4, we had reserved Thanks for compensation and profit sharing and so forth. The most of our compensation is tied to Results and because the overall results for the year were going to be lower because of the pandemic, we reversed some of those things in the Q4. This year, The offices will be true. And so that's more meaningful, a couple of $1,000,000 swing between those two. And I think those are the primary things. We also have some travel coming back, not a lot, but there is some coming back as offices And clients expect you to be there and see them. And so those expenses will come back a little more than they were in last year's 4th And that will be somewhat ongoing. But basically the thought is that it's possible that the 4th quarter could be higher than the End of our top of our range, but we do have some expenses relating to those areas that we're talking about in the Q4. Did that help you at all? Yes, very much so. Thank you. Maybe for my follow-up, switching gears a little bit. I know you touched on it in your prepared remarks, but I was hoping we could spend a little bit more time on STR1VE. I think More specifically, you mentioned the ability to target large groups. Could you flesh that out a little bit further? And then maybe bigger picture question, If you could just kind of to go through the top 1 or 2 things that STRIVE brings Franklin Covey that maybe you're most excited about? Sure. Paul, would you like to take that? Sure. Hi, Andrew. So I would just at the beginning here, in addition to Some of the increases, the costs that will pick up in the Q4 that Bob mentioned, there are some costs related to integration of STR1VE as well and getting prepared to come out in our next fiscal year with STR1VE in a big way. But to answer your question specifically, so we're very excited about STR1VE. STR1VE is a platform upon which We can we think more effectively distribute administer, provide access to our solutions to clients. And so if you think in the past, we've had a great platform with All Access Pass. And on that platform, we pull in some disparate pieces. We pull in our ability to To have people experience content, our assessment capability, we pull Jana into that. And there's a constellation Resources and services that we provide clients on that platform. With Strive, they've been out there the last few years as a start up, focused primarily on in the leadership space. And they were a content company first. They were a platform company first and they created a platform that is even better than what we've had Just inside the All Access Pass portal, where users, administrators can deploy content To larger populations, the focus their focus was on driving behavior change through technology. Our focus is on driving behavior change through the great content solutions we have. And so we marry these two things together. And our clients now, if you said, what are It's really the user experience and the outcomes that organizations will achieve as our content now runs on this Stripe It will be easier. It will be even more digestible. We'll be able to provide metrics in real time. The engagement will be even higher, Both organizations are trying to deploy something to 1,000 and also when individuals themselves are going in working on their own skill development. And so it's Think of it as in a way kind of like what Peloton did, combining the bike, the instructor, The live sessions, the metrics, the social aspect of that all into one seamless system, Strive is going to help us bring all of that together in our use case, which is around learning and driving behavior change at scale. Perfect. Perfect. Well, thanks very much and again congrats on the new role. Thank you. Thanks, Andrew. And our next question comes from Beth Martin from ROTH Capital Partners. Your line is open. Thanks. Good afternoon, guys. And Paul, congratulations. Hey, Jeff. Well deserved. And Bob, that was a very A nice way to introduce that to them. So, compliments to you on what you put together there. Thanks, Jeff. Yes, it's a great partnership. I wanted to jump in here. 3rd quarter was an impressive quarter To start out, were there any particular areas that were stronger than what you had thought, Maybe new logos, maybe higher average customer spend, what would think that Surprise you to the upside in the quarter, and what does that implicate for the future? Paul, do you want to I'll share a couple. Yes, I'll share 1 or 2 and then Jen, please jump in and education too, Sean. So Jeff, I think a couple of things that were pleasantly surprising, we had high expectations already, but even came in higher. One, what was new logos? That metric continues to climb for us every quarter. You Recall during the pandemic, we reported that actually new logos that was an area where I wasn't quite sure what was going to happen in the darkest days of the pandemic and new logos Really hung in there quite well and we're seeing an acceleration there. And the other as we mentioned, we had a fantastic Subscription services quarter. And the more we get into this, the more I think even as we come out of the pandemic and certainly some of our will want to go back and have us come on-site again in person. I think the fact that the world has shifted and we can do both, we can do live Online and live in person, I think is going to continue to lead to greater demand for services overall. And so I think there's some of that driving the increase in services business. And then The 3rd leg of that stool is client expansion or retention was great also in the quarter. So the combination of those things really helped on the revenue side. And of course that business as we talk about it is just a high margin business. So we're continually as more and more of the business converts to All Access Pass With the high margins that flows through the bottom line that's driving both revenue and EBITDA, those would be at least 3. Jan, anything you would Add to that on enterprise and then maybe Sean ought to say a word or 2 about it. Sure. I think from an enterprise division, Jeff, one of the Paul mentioned expansion as clients stay with us and they expand and that makes And it came definitely to play in this quarter in that typically a client will hire us to do a particular large scale behavior change. And as they complete that, start to see some results, they have the opportunity to work with our implementation specialists, which is very unique in the industry in the way that we provide them to our clients. They work with our implementation specialists To uncover either additional populations to go after the same jobs to be done or they work at they see other opportunities That they could utilize what was in their past. And so we are seeing significant expansion and we did, as Paul mentioned, have an increase in new logo. In addition, I think our team, our Franklin Covey team, all individual contributors are firing on all cylinders. As Paul mentioned, we have a significant opportunity with those that are in ramp and we are seeing newer client partners find success Our sales enablement, so I would also attribute a lot to our people, but also our value proposition of all that's in the All Access Pass and how that leads to expansion. Great. That's very helpful. Yes. Hi, John. This is Sean. Hey, Sean. Yes. Hi. Should I want me to share a little bit about what's going on in Ed? That would be great. Yes. So just to follow-up with what Paul and Jen shared a similar in education, retention is stronger than we supposed and not only the number of schools that are That we're retaining, but also the dollars per retained school, the average amount is increasing. I think a lot of this is because the market is back to normal. I think people are making decisions again. They are There's a lot of pent up demand of people kind of waiting on the sidelines to see how things are going to turn out. But because everyone feels like things are going to be largely back to normal come fall, Decisions are being made. So we have got a lot of new schools coming on, a lot higher than last year, new districts. If you recall, A few sessions ago, we talked about Leader in Me 4.0 and how it's more district friendly. We're seeing the results of that now and We're bringing on some really sizable districts, many of them all over the country, that maybe a few years ago we weren't prepared to do. And Those are coming in starting in Q3, so that's helping us quite a bit as well. So between retention, new schools and New districts that we're getting to, I think that's what's caused the increase in the Q3. And is STRIVE something that will be applied to the Education division and not just Enterprise? Just curious. Yes. Ultimately, I think it's going to start more on the enterprise side, but we'll start, I think all the innovations there will we'll be fully utilized at some point in education as well. Okay. And Jeff, I'll just say one of the great things With STRIVE is also the great people that are adding to our team and we're grateful for that and there's some very, very strong Technology oriented people and great people all the way through. Great. Well, I look forward to seeing a demo on that soon. Then my other question centers around kind of your high level Growth outlook, I think in the past you've articulated pretty clearly that you view yourself as kind of an 8% Perpetual growth business, at least for the foreseeable future, with subscription sales and add on sales In the high teens, the low 20% growth rate and as we get to critical mass, it seems like that growth rate is Somewhat conservative, you add a technology platform of STRIVE that addresses the larger population. What's your outlook What's your view on growth acceleration from that 8% level going forward? I think you've identified the factors that would argue For a higher growth rate in the future, I think the combination in the past, we knew that the growth of subscription was being offset Partially by the decline in the legacy business, now that that has largely flattened out, even the same growth we've been already achieving It would mean that with less drag, you'd be a bit higher. So I think we're thinking going forward that we can Move into that low, I mean, call it 10% anyway that we can grow 10% or so. We still have some conversion in our international That will create some add more into per revenue, but I think it's natural that with the growth rate of our Subscription, the things you mentioned, they will tend to edge up a bit going forward. Great. Thanks for the time and congratulations on a really strong quarter. Thanks, Sebastien. And our next question comes from Marco Rodriguez with Stonegate Capital. Your line is open. Good afternoon, everybody. Hi, Marco. Once again, just congratulations to everybody with all the promotions and the movements, all very well deserved. I had a couple of quick follow ups here. Just coming back on the STRIVE acquisition, The integration aspects, maybe if you can talk a little bit about that as far as the complexity levels and when you expect to have that fully integrated? Paul, would you? Do you want me to talk about that, Bob? Sure. Yes, it would be great. Thanks. Hi, Marco. So the Bob mentioned this team, the team that came with STRiVE, they came with it, they were the inventors of it. This is an amazing team. In fact, it would be fun To do a demo and have you have a chance to meet some of the key people on that team. So Strive for us will power kind There's 3 use cases, if you want to think of them this way. One is when a client has a job to be done, say, developing 1st level leaders and we want to take them through our 6 critical practices content. We'll do that now on the Strive platform, which will do all the things I talked about a And I was explaining to Andrew how Striiv will benefit the client. So the first thing we're doing right now is we're making all of our content Striveable, if you will. So we're just getting it ready so that the assessments all tied together and everything is on that platform. We expect that work to largely be done and be ready to go in January. The second use case for them is that's when Franklin Covey, when our people are delivering services and We're guiding the client through that. They've hired us not only for our content, but they want our expertise in delivering the training and doing the coaching. 2nd use case that will follow that first use case is equipping our client facilitators to implement our content like I can today, but benefiting from the Strive platform as well. So it's another reason why you'd want to have the All Access Pass is because even if you're not purchasing subscription services from us, You'll get the benefit of an All Access Passholder from the technology that's there inside STRIVE, which will be inside our portal. And then the 3rd use case, which will come along kind of alongside those is this ability for even when you're not on a company sponsored journey, When I haven't been asked by Bob to go through with a cohort of people, a leadership development experience, I may have a Skill that I feel like I need to address or that my assessment has told me I need to work on public speaking or platform skills, but we have content in the past around More effectively presenting and I can go in and on the Strive platform, I can work on those skills myself. And rather than just Watching a video or page turning some online content, the Strive experience will be it will be back to the Peloton example, much more engaging and much more focused And has the pieces in there to make sure that even if I'm going through by myself, my behavior is more likely to change. There's more accountability built in, there's social And so over the coming months quarters, STR1VE needs to be able to do that across all of Our content and so that's the primary programming and engineering that goes behind that is getting Franklin Covey content into the Strive platform. I would say It's not a difficult time. It won't happen overnight. It will happen over the next number of months and you'll start we'll start to be able to really come out to our clients In January ish, we're doing some pilot testing with clients, in fact, right now. Just we were ready to go around as soon as we acquired them, and We're off on our way on the pilot. Got it. Understood. And then just kind of confirming here, obviously, you brought up the integration cost that will be there for STRIVE. I'm just trying to understand if those costs will be stripped out of your Adjusted EBITDA and then obviously your guidance or is it inclusive? They're included, Marco. Got it. Okay. And then last quick question for me, just kind of a higher level. It sounds like obviously confidence levels Our rising performance is very good here. Maybe if you can talk a little bit about looking out in the next 12 months, What do you think are the greatest opportunities for you to achieve and accelerate growth? And then at the same What is the greatest risk that you see out there that you might need to manage? Great. I could start and then have Riel join in. But the big opportunity We've seen I mean, people have been apart. They're now coming back together, whether that's office or whatever And there's a lot to get most organizations have to do to get there's a lot to do. And particularly in building their teams and building their leaders, etcetera, it's been more difficult for them during this period of time. And so I think a big opportunity As organizations take on big new opportunities of their own for our execution practices, they're trying to build leaders And really get all their teams together. They tend to look for things that where they we play where there's collective behavioral changes needed Among leaders building trust in a new environment, a new work environment, unconscious bias overcoming that and all these different ways of working, I think One big opportunity is a category, has lots of dimensions. I think that's a big thing. Also, you're trying to Make a break an operational breakthrough in a new world. We've always done well coming out of a A period of disruption and execution and other things as people say, gosh, I really want to pick something narrow and achieve A big opportunity. So on the opportunity side, I'd say those, Jen and Paul and what else would you add to them? Bob, I'll speak to that. I think Bob really spoke to where we have the biggest opportunity with clients as they think about The place and location as well as the space, the behavior change and the things that they need for their people. The other one that's been mentioned and Steve mentioned it and we talked about that is, I think we have a great opportunity in terms of our Thought leadership and our market and our positioning further strengthened by our work of integration of drive but many, many opportunities for as especially as we look for new logos to soften the beaches and have A new and distinctive message around who we are and what we do and how we can help you with those operational breakthroughs in moving a metric or obtaining collective behavior change. So I'm excited both about what client opportunity is, but also what we have to go after that from a marketing standpoint. Great, Jim. I think on the challenge side, I don't know, Paul, were you going to add anything or Sean To the opportunity side? No, Bob, go ahead. I'll just add on the opportunity side. Sorry, the opportunity to education. Thank you, Sean. Yes, sure. Yes, I think the opportunity in education is huge right now because Social emotional learning, SEL is more popular than ever because of all the mental wellness issues that have come up during COVID. Mental health for students and teachers has become a big issue. We address that so well in later in May. Combined with the stimulus money of the 200,000,000,000 top of the $50,000,000,000 the federal government normally spends, this $200,000,000,000 will be in the marketplace for 2.5 years. So it's a great opportunity and runway for new clients to join us. So we think there's a real bright future for education because of these trends. Great. And then Marco, on your question, was that helpful on the one side, On the opportunity side? Yes. That was great. Great. I think on the challenge right now, I mean, you can worry about a lot of things, but we the thing we are spending most of our time worried about is how do we, as an organization, take advantage of that opportunity in a In a funny way because everybody, every organization in the world has those challenges that we just talked about. We've got great distribution, great content, etcetera. But how can we scale it both in terms of delivering bigger and bigger population? We talked about that With Stryvus and the Ink. But also how do we get the word out? And how do we make sure that every person who's in that position can think, gosh, if I need Behavioral change at scale or I need to accomplish something that requires collective action. How do we make it more automatic For them, not just our salespeople to call on them and then let them know, but how do we actually help people understand that actually we've got this capability At a bigger scale and that's part of what we're investing in this Q4 is some new market. I think it's really Getting out there and taking advantage of what is really huge opportunity is, again, we've got the scale and And we've got the capabilities, but I think we need to we're trying to figure out how to scale it more quickly. Understood. I appreciate the time guys. That's all I have. Thanks. Thanks so much, Michael. And that concludes our question and answer session. I'll turn the call back over to Bob Whitman for final remarks. All right. Well, again, we thank each of you for your great For guidance and advice, we hope to continue to receive that and really hope you have all have a great force and we'll look forward to We're doing a good job here in the Q4 and ending up with a good year. So thank you so much to everyone. Thank you, ladies and gentlemen. This concludes today's conference call. Thank you for participating and may now disconnect.