Welcome to the Q1 2019 Franklin Covey earnings conference call. My name is Angela, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. During the question-and-answer session, if you have a question, please press star then one on your touch-tone phone. Please note this conference is being recorded. I will now turn the call over to Derek Hatch. Mr. Hatch, you may begin.
Thanks, Angela. Good afternoon, ladies and gentlemen, and happy New Year. On behalf of Franklin Covey company, I'd like to welcome you to our conference call to discuss our financial results for the first quarter of fiscal 2019, which ended on November 30th, 2018. Before we begin, we'd like to remind everybody that this presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements are based upon management's current expectations and are subject to various risks and uncertainties, including but not limited to the ability of the company to stabilize and grow revenues, the acceptance of and renewal rates of the All Access Pass, the ability of the company to hire productive sales professionals, general economic conditions, competition in the company's targeted marketplace, market acceptance of new products or services and marketing strategies, changes in the company's market share, changes in the size of the overall market for the company's products, changes in the training and spending policies of the company's clients and other factors discussed and identified in the company's most recent annual report on Form 10-K and other periodic reports filed with the Securities and Exchange Commission.
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. There can be no assurance the company's actual future performance will meet management's expectations. These forward-looking statements are based upon management's current expectations. 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. We'd also like to point out on the next slide that we have adopted in May 2014, the FASB issued ASU 2014-09, which is revenue from contracts with customers. This is the new revenue recognition standard that everybody's heard a lot about, and we just wanted to point out that we adopted ASU 2014-09 on September 1st or the beginning of this quarter, using the modified retrospective approach.
Under this transition method, we applied the new standard to contracts which were not completed as of the adoption date and recognized a cumulative effect adjustment which reduced retained earnings by $3.1 million net of tax. The comparative prior period information has not been restated and continues to be presented according to revenue accounting standards, which were in effect for those periods. The impact of the implementation of the new revenue recognition standard resulted in us recognizing $1.1 million of additional revenue in the first quarter, which primarily impacted the Education division, and recording $1 million more of adjusted EBITDA, which also primarily impacted the Education division. Refer to the appendix for additional information regarding the adoption of the new revenue recognition standard. With that out of the way, I'd like to turn the time over to Mr. Bob Whitman, our Chairman and Chief Executive Officer.
Thanks, Derek. Good afternoon, everyone. We really appreciate you joining us today. In our year-end report two months ago, we said that having crossed the bridge in our transition to our subscription business model, we now expected to generate high rates of growth in adjusted EBITDA and cash flow going forward. As shown in slide four, specifically, we said that we expected reported adjusted EBITDA to increase from $11.9 million in fiscal 2018 to between $18 million and $22 million in fiscal 2019, which is growth of 50%-85%, and then increase to between $35 million and $40 million in fiscal 2021, which would be more than triple the $11.9 million in fiscal 2018.
We expected also the sum of reported adjusted EBITDA plus the change in deferred revenue would increase from $23.3 million in fiscal 2018 to between $30 million and $34 million in fiscal 2019, which is growth of between 29% and 45%, and then increase to between $47 million and $52 million in fiscal 2021. Finally, our net cash generated to increase from $15 million in fiscal 2018 to between $18 million and $22 million in fiscal 2019, and then to between $35 million and $40 million in fiscal 2021.
We're really happy to reaffirm these expectations today, that we still expect this kind of really rapid growth in EBITDA and cash flow, and of course, that is strengthened by the very strong first quarter performance we had. We're happy to report that this revenue, EBITDA, and cash flow for the first quarter and for the latest 12 months were somewhat stronger than expected.
They've given us a good push up the mountain toward achieving our longer objectives for this year and beyond. Just for a second, just want to share that it's really a very exciting and rewarding time to be at Franklin Covey. First, because we're really solving important problems for our clients in a way that they really value. This is resulting in us having deep, pervasive, ongoing relationships with our clients, and that means a lot to all of our associates.
Equally exciting and rewarding is that as a result of this customer impact and the strength of our distribution and our subscription business model, we're achieving our performance expectations and commitments and are growing top and bottom line and are positioned for really exciting growth this year and beyond. It's really a great time to be at Franklin Covey. There are three takeaways we'd like to get from today's call.
As you can see in slide five. First, that our first quarter results were strong and got us off to a somewhat stronger than expected start. These results strengthen and support our expectation of achieving 50%-80% growth in adjusted EBITDA this year and 20%-50% growth in net cash generated. Second, that our results in the quarter and latest 12 months continue to affirm the value and effectiveness of our All Access Pass and Leader in Me membership models. In a minute, I'll remind you of the four factors that are driving this model's success.
Third, just in perspective, not only are adjusted EBITDA and net cash generated expects to grow very rapidly on an absolute basis this year and beyond, but to grow at a rate that would place us in the top 10% of the Russell 2000 companies in terms of expected EBITDA growth over the next three years. This should provide us the opportunity for significant value creation as we meet these targets. I'd just like to step back and then address each of these three takeaways in more detail now, starting with takeaway one, the strong first quarter results.
As you saw in our press release, our first quarter results were strong, with revenue growing 12.3%, our selling, general, and administrative costs declining 490 basis points as a percentage of sales, and adjusted EBITDA increasing to $3.2 million, which is a $2.6 million increase compared to adjusted EBITDA of $600,000 in last year's first quarter. As mentioned, about $1 million of that $2.6 million increase came from the 606 revenue standard. The rest of it, though, the other $1.6 million increase really was all operations. I'll review these results in more detail in a moment at the full company level. First, I'd like to dive a little deeper and review the performance of each of the divisions. First, on slide seven, I'll start with the results of the enterprise division, which accounted for approximately 80% of our total revenue in the first quarter.
As shown in slide seven in the upper left-hand chart, the enterprise division's net sales grew 12.3% to $42.1 million in the first quarter. That's a $4.6 million increase compared to the $37.5 million in net sales in last year's first quarter. For the latest 12 months, net sales grew 14% to $163.7 million, which is a $20.2 million increase compared to the $143.6 million we had for the same latest 12-month period a year ago. As shown, in addition to our 12.3% growth in reported revenue in the enterprise division, in the upper right-hand corner, you can see that our balance of billed and unbilled deferred revenue grew 40% in the first quarter to $52.3 million. That's growth of $14.9 million compared to our $37.3 million balance of billed and unbilled deferred revenue at the end of last year's first quarter.
We're building up a big balance of future revenue. In the lower left chart, our balance of billed deferred revenue in the enterprise division grew 30.9% to $29.3 million in the first quarter, at the end of the first quarter. That's an increase of $6.9 million compared to our $22.4 million balance of billed deferred revenue at the end of last year's first quarter. In the lower right, our balance of unbilled deferred revenue grew 54% in the first quarter to $22.9 million, an increase of $8 million compared to our $14.9 million balance of unbilled deferred at the end of last year's first quarter. Going to slide eight, as shown, in the first quarter, gross profit in the enterprise division grew 11% to $29.9 million, an increase of $2.9 million compared to $27.1 million in last year's first quarter.
Gross profit grew 18.9% to $121 million for the latest 12 months. That's an increase of $19.3 million compared to the $101.8 million for the same latest 12-month period last year. The gross margin % was 71% compared to 72% in last year's first quarter, reflecting a slightly higher mix of services than in last year's first quarter. For the latest 12 months, gross profit of 73.9% was 300 basis points higher than the same latest 12-month period last year, reflecting the impact of high gross margin sales of the All Access Pass and Leader in Me subscriptions. Well, here, just All Access Pass enterprise. In terms of selling general administrative expenses, this is an important point. We expected our selling general and administrative expenses in the enterprise division to decline as a percentage of sales in fiscal 2019 as our growth investments moderated.
In the first quarter, they did. In the first quarter, as you can see, SG&A to sales % improved by 290 basis points in the enterprise division compared to last year, declining from 60.2% of sales in last year's first quarter to 57.3% in this year's first quarter. This reduction in SG&A's % of sales is one of the factors that will drive high flow-through of increases in revenue to increases in adjusted EBITDA and cash flow in fiscal 2019 and beyond. Finally, as to EBITDA, the Enterprise division's EBITDA grew 29% in the first quarter to $5.8 million. That's growth of $1.3 million compared to $4.5 million in the first quarter of fiscal 2018. For the latest 12 months, EBITDA increased 44% to $22.2 million, which is growth of $6.8 million compared to the $15.4 million EBITDA for the same latest 12-month period last year.
Really feel great about the growth of the Enterprise division's EBITDA, particularly in what is its smallest quarter in terms of invoiced revenue. It's really the potential for achieving this kind of high EBITDA and high cash flow growth that drove our decision three years ago to disrupt our already attractive Enterprise business model in favor of the new subscription model. In terms of invoiced revenue, which isn't shown on this chart but is shown in slide 29 in the appendix, invoiced amounts in the Enterprise division grew 10% in the first quarter to $38.8 million. That's a $3.5 million increase compared to the $35.3 million of invoiced amounts in last year's first quarter. For the latest 12 months, the invoiced amounts also grew a strong 10% to $169.9 million, an increase of $15.3 million compared to the same latest 12-month period last year.
To me, this is one of the really exciting and important things as we've seen, to move the Enterprise division's invoiced and reported growth back up in the double-digit range and above. That's really showing the power of this model as it moves forward. In terms of total contracts signed, as also shown in slide 29, total contracts signed grew 12.5% in the first quarter to $39 million. That's an increase of $4.3 million compared to the $34.7 million in contracts signed during last year's first quarter. The Enterprise division really had a very strong first quarter, very strong latest 12 months. High flow-through of incremental revenue, strong gross margins, driven, as we'll talk about in a minute, by the success and the impact of the All Access Pass. I'll now take you through the Education division, which accounted for approximately 20% of our total revenue in the quarter.
As shown in slide nine, in the first quarter, the Education division's net sales grew 12.8% to $10.3 million. That's an increase of $1.2 million compared to $9.2 million in last year's first quarter. This increase included a revenue benefit of $1.1 million resulting from the change in the 606 accounting standard, but it also reflects that there was $670,000 of the spillover revenue decline in the first quarter related to the expiration of the large Education Foundation contract in last year's second quarter, which we discussed in detail in our year-end report two months ago. For the latest 12 months, net sales grew 4.2% to $46.4 million, an increase of $1.8 million compared to $44.6 million in net sales for the same period a year ago.
Again, I'll just remind you from the two months ago script, that excluding this large Education Foundation contract in both years, their growth actually was 10% for that period. Gross profit. Education's gross profit increased $1 million or 17.6% in the first quarter and increased $1.3 million for the latest 12 months. Education's gross profit percent of 61.7% was 256 basis points higher than in last year's first quarter. For the latest 12 months, the gross profit percent was 20 basis points higher than in the same latest 12-month period last year.
As with the Enterprise division in the first quarter, SG&A as a percentage of sales improved significantly, 460 basis points, with SG&A declining from 66.5% of sales in last year's first quarter to 61.9% this year, reflecting kind of the swallowing of the additions of cost they had last year and the stabilized spending for this year. Education division's EBITDA increased $700,000 in the first quarter from negative $700,000 in the first quarter of 2018, so it moved to break even. For the latest 12 months, Education's EBITDA was $4.3 million, compared with $6.3 million for the latest 12 months ended Q1 fiscal 2018, reflecting on the positive side, the benefit of the 606 accounting in the first quarter, but it was much more than offset by the impact of the expiration of the Education Foundation contract in last year's second quarter.
It will be good to be on an apples to apples basis. In terms of invoiced revenue as shown in slide 30 in the appendix, the Education division's invoiced revenue was $5.2 million in this year's first quarter compared to $6.2 million last year. This invoiced amount received no benefit from the adoption of 606 accounting but was negatively impacted by the spillover impact of the expiration of the Education Foundation contract. Invoiced revenue for the latest 12 months was even with the same period, despite the significant impact of the Foundation contract. Stepping back up with this background on each of the divisions, we will now review the total company-wide results in more detail. Slide 10 shows some data about the total company revenue.
As shown in the upper left-hand corner, in the first quarter of fiscal 2019, the company's net sales grew 12.3% to $53.8 million. An increase of $5.9 million compared to net sales of $47.9 million in last year's first quarter, after absorbing a $400,000 adverse foreign exchange impact. For the latest 12 months, net sales grew 11.5% to $215.7 million, an increase of $22.3 million compared to $193 million in net sales for the same period one year ago. In the upper right-hand corner, the company's balance of billed and unbilled deferred grew 38% in the first quarter to $65.8 million.
Just a couple years ago, we only had about $8 million of deferred revenue, that has grown significantly. That increase to $65.8 million is growth of $18.1 million compared to a balance of $47.7 million of billed and unbilled deferred at the end of last year's first quarter.
In the lower left-hand chart, our balance of billed deferred grew 32% in the first quarter to $41.4 million, an increase of $9.9 million compared to a $31.4 million balance of billed deferred at the end of last year's first quarter. Finally, in the lower right, our balance of unbilled deferred increased 50% in the first quarter to $24.4 million, an increase of $8.2 million compared to the $16.3 million balance of billed and unbilled deferred last year. Going quickly to slide 11. Gross profit grew 11.9% in the first quarter to $36.8 million and grew $19.9 million or 15% in the latest 12 months. Our gross profit percentage in the first quarter remained strong at 68.3% compared to 68.6% in last year's first quarter. For the latest 12 months, gross margin increased 210 basis points to 70.6% from 68.4% the same period last year.
I have already noted that the SG&A as a percentage of sales in both divisions, and therefore for the company overall, improved, reflecting the lower pace of incremental growth spending. As we mentioned, we got past that last year. This reduction in SG&A as a percentage of sales will help more and more of the revenue we drive flow through. Adjusted EBITDA for the first quarter increased to $3.2 million. It is an increase of $2.6 million compared to $600,000 of adjusted EBITDA in the first quarter of fiscal 2018. This was after absorbing an adverse foreign exchange impact of $150,000. Of this $2.6 million increase, as we have noted, approximately $1 million resulted from the change in accounting related to the adoption of the 606 revenue standard.
The remaining $1.6 million reflected 260% growth in adjusted EBITDA and represents an operating improvement compared to the $600,000 in adjusted EBITDA received in the first quarter of fiscal 2018. We achieved this despite the $400,000 spillover impact on adjusted EBITDA of the education contract. For the latest 12 months, adjusted EBITDA increased 30% to $14.4 million compared to $11.1 million for the same period in last year's first quarter. Finally, cash flows from operating activities increased by a big percent, 248%, to $8.1 million for the first quarter of fiscal 2018. That's an increase of $5.8 million compared with the $2.3 million of cash flow from operating activities for the first quarter of 2018.
This reflected the combination of the first quarter's strong operating results and also positive changes in working capital, where we had huge collections from the sales we made in the fourth quarter and back half of last year. As shown in slide 28 in the appendix, for the latest 12 months, our net cash generated increased 46% to $15.9 million. That's a $5 million increase compared to the net cash generated of $10.9 million for the same latest 12-month period last year. Stepping back from that, there was a lot. Thank you for enduring. It's a lot of data, but hopefully it lays it out for you fairly in a straightforward way that you can understand. We really were very pleased with this strong first quarter performance. It's given us a strong push up the mountain.
It continues to validate the key assumptions behind this multi-year transition, so we're excited about it. As indicated in slide 13, I'll now transition to the second key takeaway for the quarter and latest 12 months, which will be much shorter, mercifully. As shown in slide 14, our second key takeaway is that the strong results for the quarter and latest 12 months continue to affirm and validate the effectiveness of our All Access Pass and Leader in Me subscription models. As I explained specifically as it relates to All Access Pass, there are four factors that are driving All Access Pass' success. Really, the same applies to the Leader in Me. First, All Access Pass has continued strong growth. Second, its compelling unit economics. Third, its high annual revenue retention rate in both economic and strategic durability.
Fourth, its high flow-through of incremental sales to EBITDA and cash flow, which create very compelling sales force expansion economics. Each of these factors continue to be very strong in the first quarter and for the latest 12 months. I'll just touch on these briefly. First, All Access Pass' strong growth. Sales of All Access Pass continued to grow very rapidly in the first quarter and for the latest 12 months. As shown in slide 15, All Access Pass and related sales grew 51% in the first quarter to $19.2 million, an increase of $6.5 million compared to $12.7 million in All Access Pass and related sales in last year's first quarter. For the latest 12 months, All Access Pass and related sales grew 62.2% to $66.8 million, an increase of $25.6 million compared to $41 million in the same latest 12-month period last year.
For the third consecutive year since its introduction, All Access Pass and related revenue grew more than 60% on a year-over-year basis. That, for us, is a very strong, powerful engine moving us forward. Second, All Access Pass' strong unit-level economics continued to create high lifetime customer value. In slide 16, you can see that the combination of the four elements shown there collectively continue to create high lifetime customer value. Each of these elements, again, continued to be very strong in the first quarter and for the latest 12 months. First, All Access Pass' initial purchase amount is relatively large compared to that of our legacy business model. This is driven by the fact that customers receive such value from having access to our entire collection of solutions that they are purchasing seats for much larger user populations.
This establishes the foundation for strong unit-level economics, including reducing our customer acquisition cost as a percentage of sales. As shown in the upper right corner of slide 16, All Access Pass' average initial sales price has increased since inception, and increased an additional 5.5% in the first quarter to $33,900, compared to an initial average purchase price of $32,100 in last year's first quarter, and back at $21,000 just a couple of years ago at inception. Second, All Access Pass' high gross margins continued. As you can see, more than 74%, including services, is a primary driver of the 300 basis point increase in the Enterprise division's overall gross margin to 73.9% over the latest 12 months. Third, All Access Pass holder organizations purchased a substantial amount of add-on services to help them achieve their business objectives.
A strong services attachment rate is a tangible reflection of the importance clients place on addressing their organizational challenges, and it actually is an important predictor of client retention in subscription offerings. We love to see that number stay high. For the latest 12 months, All Access Pass holders purchased $0.45 of add-on services for every $1 of subscription revenue. Fourth, All Access Pass' revenue has proven to be very sticky. As shown there, the revenue retention again exceeded 90% in the first quarter for the 16th straight quarter. Importantly, this more than 90% annual contracted revenue retention, when combined with the year-over-year retention of add-on services from the prior year for those same pass holder organizations, is equal to more than 100% of the combined prior year All Access Pass and services amount each year.
In other words, upon renewal, each All Access Pass is generating revenue or 100% or more of the combination of its prior year pass amount, plus an increase in the service amounts that it had the prior year. This provides a very strong foundation for future growth. Another element of the All Access Pass that I think is important is that the revenue is durable, both strategically and structurally. I'll tell you what I mean by that. This is true because we're solving the problems that really matter to our clients. By analogy, pharmaceutical companies have become giants by identifying seemingly intractable health problems and creating solutions to effectively address them.
Merck, as we know, delivered penicillin to World War II battlefields, created vaccines to combat childhood diseases, developed a breakthrough HIV treatment, invented cholesterol-lowering drugs to combat heart disease, et cetera, et cetera, developed other drugs to combat diabetes and cancer. In a similar way, Franklin Covey solutions are focused not on nice-to-have skills training, like so many learning and development companies, but rather, as shown in slide 17, on addressing the 80/20 of the biggest challenges organizations face. Challenges which require a large-scale, sustainable change in human behavior and culture. Franklin Covey helps organizations achieve results by changing mindsets and behaviors at scale. Our high-impact, bestselling solutions harness the power of people working together to solve the most intractable performance challenges.
Big organizational challenges such as closing a major operational gap, improving sales performance, measurably increasing trust, or improving key customer loyalty metrics are the very challenges that line leaders and C-level executives seek to solve and have the budgets to address in both good times and bad. Leaders not only have budgets to address these challenges, but they also seek out best-in-class solutions that have a track record and credibility for delivering outcomes. This is where Franklin Covey shines. The importance of gaining change in human behavior, culture, and leadership transcends industries, company size, and time. The solutions we provide through All Access Pass are relevant to organizations of all sizes, both in strong and weaker times. For example, we're working with a large global consumer packaged goods company.
This organization began utilizing the All Access Pass three years ago to develop leaders who would be better equipped to lead in a rapidly changing global environment. Our work with them quickly scaled, and in the second year, they expanded their pass from 200 to 1,500 leaders. In the process, our team co-created with this organization 22 unique leadership impact journeys to address their mid and senior leader development needs. Over the past 12 months, this client has faced a number of business headwinds, which have led them to reduce their workforce and scale back on numerous initiatives across their organization. However, in the midst of their downturn, they are choosing to significantly expand their work with us.
They are so pleased with the results of their implementation of the All Access Pass and the development of the initial 1,500 leaders that in the coming days, this organization will expand their current pass from 1,500 leaders to 2,000 leaders, and from a one-year pass to a three-year pass. At the same time, they have reduced the number of service providers they are working with. In fact, they've reduced it down to just Franklin Covey and one other. We're just getting a bigger share of the dollars they are spending, and they're able to do this because of the depth and breadth of the solutions, tools, and modalities provided in the All Access Pass, and because of the critical nature of the jobs they've hired us to help them with, changing the behaviors of their key leaders across the world so they can better compete in today's environment.
The importance of the problems Franklin Covey addresses and the effectiveness of solutions in solving them creates strategic durability with our clients. As shown in slide 18, this strategic durability is reflected by All Access Pass' high revenue retention on the subscription fees and by the 100% total revenue retention, including services. It's also in value of the fact that over the latest 12 months upon renewal, the average All Access Pass holder organization increased its pass value by 17%. That's a big statement. They're getting enough value that not only are they renewing, but they're renewing and expanding. In addition to this strategic durability, which I'd say is really driven by the problems we're solving, it also has two elements of structural durability. First, All Access Pass purchasers contract and pay for their pass at least a full year in advance.
That gives structural stability that people are not deciding every month whether or not to continue. Second, as shown in slide 19, an increasing percentage of pass holders are also entering into binding multi-year contracts each year. For the latest 12 months, 22% of pass holder organizations extended into multi-year contracts, up from 6% a year ago. The combination of this strategic and structural durability is creating significant visibility and predictability. A lot of ability there. Reflective of this is that, as shown in slide 20, the expected net present value of future revenue from all of our All Access Pass contracts currently in place has increased from approximately $116 million in 2016 to $239 million in fiscal 2017, and further to $354 million at the end of the first quarter.
This $354 million is equal to more than twice the Enterprise Division's total reported revenue in fiscal 2018, and that's really important. It means that the magnitude, certainty of, and visibility into future expected revenue is increasing every day. We expect this to increase to more than a half a billion within the next 15 months or so. Just make a note that in education, similar to how All Access Pass expands its population upon renewal, we have a similar growth pattern with Leader in Me. Leader in Me is our whole school transformation model, which is now in over 3,500 schools and 800 districts.
When Leader in Me schools renew their membership, subscription, et cetera, districts expand their Leader in Me population, not by increasing the number of students in a school because they already have all of them, but by increasing the number of schools within the districts which are in Leader in Me. Just one example, in Louisiana, we established a workforce initiative with the purpose of building college and career-ready high school graduates. This school district chose Leader in Me as the vehicle to achieve this, stretching across two large school districts. In the first year, they started up 10 Leader in Me schools. Each year since then, these two districts have added about 10 to 15 new schools between them.
Currently, they now have 59 Leader in Me schools, and will add another 20 schools this year with the stated intention of bringing it to all of their 151 schools over the next five to seven years. We have lots of headroom for penetrating more school districts. Finally, I'll just say All Access Passes and Leader in Me have high gross margins, high revenue retention, that makes it possible for us to ramp up new client partners to break even within one year. That's allowing us to accelerate our sales force hiring. Just note on slide 21, one of our most important drivers of growth in revenue and of accelerated growth in EBITDA and cash flow is the successful hiring and ramp-up of new client partners.
In 2021, you can see that since 2012, we've added 76 net new client partners in the Enterprise division alone, including a net increase of six client partners since we reported November. Additionally, we're in the final stages of making offers to four new client partners, which will bring us to 10 new hires against our commitment to hire 20 for the year. We clearly expect to meet our commitment of 20 net new client partners this year. In addition, as you can see on this chart, the average ramp, as you're familiar with, has historically followed a great trajectory. With All Access Pass, we're ahead of this trajectory. For the people hired since 2016, we're approximately 20% ahead of our historical ramp rate.
We have a huge amount of headroom for growth. The number of client partners we can hire in the U.S. in both the enterprise and education divisions, and even more headroom in our international direct offices. That's a lot. Let me conclude. Final takeaway is simply that not only are our adjusted EBITDA and net cash generated expected to grow rapidly on an absolute basis, but also relative to other organizations. We expect the combination of three things, as you know, to drive accelerated growth and adjusted EBITDA and cash flow. First, revenue growth in the subscription model, which has high margin, high recurrence, high flow-through. Second is our highly variable selling costs mean that there's a high flow-through and a predictable flow-through of incremental dollars.
Third is the fact that our SG&A and capital expenditures will grow much more slowly than in the past couple of years. As a result, not only are our adjusted EBITDA and net cash generated expected to grow very rapidly on an absolute basis, but we're at a rate which would place us in the top 10% of Russell 2000 companies in terms of expected growth in EBITDA over the next three years. We believe this provides us with substantial headroom for increasing shareholder value as we deliver on this high growth in EBITDA and cash flow in fiscal 2019 and beyond. Steve, I'm going to turn the time to you to review our guidance, we'll open for questions.
Good afternoon, everyone. Just a second on guidance. Thank you, Bob, and thank you for being on the call today. As Bob mentioned, just as a reminder, our current guidance for the year is that adjusted EBITDA will increase from the $11.9 million last year to a range of between $18 million and $22 million this year. That the sum of adjusted EBITDA plus the change in deferred revenue on our balance sheet will increase from the $23.3 million last year to a range of $30 million-$34 million this year. That net cash generated, as we define it on slide 28 in the appendix, will increase from $15 million last year to a range of $18 million-$22 million this year. We're happy to reaffirm this guidance for the year.
With year-over-year growth of adjusted EBITDA on $2.6 million in the first quarter, we're pleased to have gotten off to a strong start toward achieving the growth reflected in this full year guidance. We expect to retain this $2.6 million year-over-year adjusted EBITDA growth year to date through the second quarter. The second quarter's reported adjusted EBITDA is expected to be essentially the same as last year's second quarter, reflecting that substantially all of the growth in sales in the second quarter will be subscription sales, whose revenue will be recognized over time. That the increased sequential cost for marketing, for new client partners, et cetera, will be recognized in the quarter. In the third quarter, we expect strong growth in both this high margin, high flow-through revenue and in adjusted EBITDA, with even stronger year-over-year growth in adjusted EBITDA in our seasonally high fourth quarter.
In the second quarter, we expect revenue to grow at a rate of 4%-6% before moving back to the high single-digit revenue growth in our third and fourth quarters. This 4%-6% allows for some expected impact of our government business from the current federal government shutdown and for the final spillover impact from the non-renewal of the Education Foundation contract in last year's second quarter. Again, we're very pleased with our strong performance in the first quarter. We expect to have a banner year in 2019 with very strong growth in adjusted EBITDA and cash flow. Thanks, Bob.
Great. With that, we'll open it for questions and turn it back to the operator.
Thank you. We will now begin the question-and-answer session. If you have a question, please press star, then one on your touch-tone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you are using a speakerphone, you may need to pick up the handset first before pressing the pound number. Once again, if you have a question, please press star, then one on your touch-tone phone. Our first question is from Alex Paris with Barrington Research. Please go ahead.
Good afternoon, everyone. This is Chris Howe sitting in for Alex.
Hi, Chris. How are you?
I'm good. I have two areas of concentration for these questions. The first is just in regard to, excuse me if you mentioned this, the average passholder population. What is the average passholder population, and how would you characterize its growth moving forward? Just to follow up on that, you mentioned the average purchase price increased to $33,900 approximately. What are your goals as you head to 2021 in regard to mix between price and volume and perhaps extending contracts more towards these multiyear time frames?
First question then, if I have it correctly, is just what's the average size of the typical All Access Pass contract?
Yes.
If I got that right. The average population is roughly around 200 people in the average population. That's expanded some, of course, from the start where it was more like 120 or 130 in the early part. We're doing a better job at finding bigger populations inside organizations, the reputation and referrals from other organizations has helped us there. We've typically had a price increase each year. As you know, we have a scaled pricing schedule, which is the greater the population, the better absolute price you have. When you look at the revenue per pass, you've got the positive of having an increase in price, that's somewhat impacted, though, by as they expand populations, they qualify for the volume discounts that increase our revenue per customer. It reduces our revenue per seat some. Of course, we're really focused on revenue per customer.
I think the trends going forward is that with the significant increase in the number of multi-year contracts, we expect over the next couple of years that from the 20s, in terms of having mid 20% of our contracts be multi-year contracts, that that'll move toward 50% over the next two or three years. Paul, I don't know if you want to add any color commentary.
I would just say that I agree with everything you said, Bob, we also see that upon renewal, we get expansion. The longer we get into this thing, you mentioned out to 2021, 2022, we'll go through another couple of years' worth of renewal cycles with these clients, which we'll have them add on as well. I think we'll probably see that average size increase from that standpoint as well.
Yeah. Does that respond to it too?
Yeah, that was very helpful. Then my second area of concentration is just on the sales force. You mentioned your net new hires so far have been 10, with the goal of reaching 20 for this year. Assuming you reach 20, with that existing sales force, what is the timeframe for that entire sales force to be completely ramped up in line with the incremental revenue that you mentioned on the last call, and just when it would be fully optimized and matured?
Paul, do you want to address this?
Sure, yeah. Our ramp, if you remember back on slide 21, it's a five-year ramp. We expect a new client partner in their first full year that they'll generate $200,000. That'll increase to $500,000, then to $800,000, then to $1.1 million, and finally $1.3 million. At that point, we consider them fully ramped. The class we hire this year, depending on when we hire them in a year, roughly five years from now, that class is ramped. We intend to continue to hire net 20 per year. These are enterprise division numbers we're talking about. Sean will mention education in a second, but net 20 a year, then each class ramps at that schedule.
Just to identify, the net 20 hiring goal is for the enterprise division. This year, we're kind of holding the line on Education because we added a lot in the last couple of years, and they're going to swallow it. We built a lot of infrastructure and made investments last year. Sean, I don't know if you want to address anything more on sales force growth.
No, just the ramp rate for the Education client partners is about the same. It's 2.5, 8, 1.1 over a four or five-year period. We find a lot of client partners can get well over $2 million. We're encouraged by that. It's about the same ramp rate.
I think what you're headed toward is that if we were to hire net 20 salespeople a year for five straight years, with only the first class being fully ramped, we'd add another $60 million of revenue just classes one through five, with only one of the classes being fully ramped. When fully ramped, if you stopped hiring then, the total revenue would end up around $90 million just from the ramp-up of five straight classes, even at 20. It's an important initiative. As we mentioned, LXS Path is helping us meet that initiative even more than it has historically just because of the one-year payback on new hires.
That's it. Thank you, Bob.
Thanks very much.
Thank you, everyone.
Thanks.
Our next question is from Tim McHugh with William Blair. Please go ahead.
Hi, it's actually Trevor Romeo for Tim.
Hi, Trevor.
Hi, how's it going, guys?
Great. How are you?
Good. I was just wondering if you could talk a little bit more about the invoices for education being down 17%. I know you called out the impact from the large education foundation contract, but are there any other factors that are accelerating that decline? Would that metric still be declining if you remove that impact?
Great. I'll let Sean expand. Let me just put it in context that we reported, I think, in the last quarter that the total impact on revenue in the latest 12 months on invoice revenue was around $4 million from this $3.5 million from this education contract. You can see it was quite substantial in and of itself. Sean, I don't know if you want to add.
Sure. Yeah. Contract signed was down some and, again, the two big reasons are, one, the big education foundation contract not renewing, as we've talked about quite a bit. The second primary reason for this being down is the fact that we changed the Leader in Me implementation model. Basically, it's the same cost, but we stretched it out over more years. We still get the same revenue, but we get it over more time. A lot of the workshops that were traditionally scheduled in previous years didn't hit this first quarter or won't hit this year, but will hit. It's a good thing for the long term, but it hurts us in the short term. Between those two, that accounts for most of the impact for the lack of growth.
Just looking forward, I feel like we've got good growth ahead of us for many reasons. Our pipeline looks healthier than last year.
We're getting better results with schools, the outcomes that we're getting, and that's really spreading. Schools talk with each other, helping them achieve academic results, attendance improvements, and so forth. Again, our penetration is so low. We're in 2% of the schools in North America and 8% of the districts. Between district growth and school growth, we feel really good about our future. Consider this impact of the foundation contract as kind of a one-year blip. It not only hurt us in the revenue impact immediately, but also just in the opportunity cost of focusing on this. Now we've got our focus elsewhere. I feel fundamentally there's not a major concern in the market and the market changes.
The expectation is that with this change of model, while the revenue per school will be slightly less for the year, we expect the velocity to increase and probably have our biggest addition of new schools. We have more new schools added this year than we've had for several years, aside from the foundation contract.
Okay, got it. Thanks. That's helpful. Steve, I think you mentioned at the end that second quarter might see an impact from the government shutdown. I'm sure it probably depends on how long this goes on, but how much of an impact are you expecting at this point?
Really haven't put a number to that. It was just a comment to say there are a few things going on that would cause us to think that maybe our revenue won't be the normal 7%-9%, but more like 4%-6%, government shutdown being one of those. I really don't have a number to put out there of what the impact might be, partially because of what you said, you don't know how long it's going to go. It can be so specific to a specific government contract that decides to delay implementation or something for a couple of months.
I think that's a great answer. To put it in context, it doesn't have the potential for a really big impact because only a portion of our government business is in the federal government to start with, and much of it's in Department of Defense that has continued contracts and so forth. The idea that in the agencies and other things, and we have a lot of state and local businesses unaffected by it, but we're just noting that it could hit us by $1 million or so this quarter of stuff that we'd planned to deliver that might get pushed. If it were $1 million-$1.5 million, just order of magnitude, that would shave off a point or two of growth.
That plus the impact we know we're going to have from the education contract causes us just to be a little conservative on that one.
Okay. Makes sense. Just one more quick one. Do you have a sense at this point of the full-year impact from ASC 606 and whether it would hurt or help any of the quarters this year?
Yes. We essentially still believe what we said last year, is that we're expecting essentially a slightly positive but immaterial impact from 606 for the year. The $1 million benefit that we saw in Q1, we would expect to be less, but a little bit of benefit in Q2. Essentially no benefit in Q3. Due to the timing of recognizing revenue under 606 versus 605, we would actually go the other way in Q4 and have a decrease to our revenue in Q4 as an impact of 606. Up in Q1, up a little bit in Q2, pretty even in Q3, down by maybe $1 million or almost in Q4. We end up with a slightly positive, I'd say $500,000 or something like that, but immaterial impact for the year.
Okay, perfect. Thank you very much.
Thanks.
Our next question is from Jeff Martin with Roth Capital Partners. Please go ahead.
Thanks. Good afternoon, everyone.
Hey, Jeff.
How you doing, Bob?
Great, thanks.
Hi, Bob.
Hi.
Bob, if I could, on slide 37, the direct office revenue breakdown, wanted to touch on onsite and facilitator, because I thought onsites had been seeing some decline due to the transition to All Access Pass. Does that onsites number in the first quarter of this year include add-on services for All Access Pass?
It does, yeah. In fact, what we're going to do in future quarters, Jeff, is that we're going to break out the onsite and facilitator between that portion that is an add-on sale to an All Access Pass, including manuals, and that which is the legacy. It's just what you said. We had a decline in the legacy side more than offset by the growth in the add-on sales to All Access Passes. We're going to break that out for you, starting going forward, we'll break that into All Access Pass plus add-on services, plus add-on materials, which are small. You have the total for All Access Pass and add-ons, so that'll reconcile, and then you can see the decline in other facilitator and other onsite.
Got it. Okay. The decline in facilitator this year's first quarter, is there anything to glean from that? Were there abnormalities in the quarter relating to that?
Yeah, there's one-
Is anything structurally going on?
Yeah, there's one structural thing. About $850,000 of that relates to a contract. It's an old contract. In the old days, we sold some IP contracts, not All Access Pass ones, that always showed up in the facilitator delivery channel just because we had a small number of those. That contract, it's an ongoing contract. It just happened in a different quarter this year than last year. About $800,000 of that difference is a timing difference of this one contract. Otherwise, it's just the normal decline in facilitator, which is now getting very small. It's getting so that both the decline in legacy onsite and legacy facilitator, although it'll be $7 or $8 million in total this year and cause a drag of 200 or 300 basis points on total revenue growth, is becoming pretty small as a percent.
Okay. Then in terms of your outlined expectations for 2021, could you give some high-level detail or insight into what the assumptions are? Is that just growing at the 7%-9% rate on revenue on a net basis and adding 20 salespeople a year? Is that kind of the core of what the assumptions are behind that?
Yes. It is. It's a 7%-8% revenue growth with high flow-through of incremental revenue in the 50%-60% flow-through range of incremental revenue to incremental EBITDA this year, 45%-50% next year, then about 40% thereafter with a ramp-up of about 20 new salespeople a year and the margins maintained.
Okay.
It's kind of the play we're running right now. Yeah.
Yep, that's helpful. Thanks very much.
Thanks so much, Jeff.
Our next question is from Marco Rodriguez with Stonegate Capital. Please go ahead.
Hi, guys. Good afternoon. Thanks for taking my questions.
Yeah, thank you.
I was wondering if maybe you could just talk a little bit more about the quarter strength you saw. Obviously, you made a couple mentions that it exceeded your expectations. If you could maybe talk a little bit about the drivers there that helped that performance.
Yeah. The revenue growth, again, we're pegging all of our numbers, as we just said in Jeff's question, at around 7% or 8% revenue growth. The first thing is that revenue grew faster in the first quarter than that, both on a reported, invoiced, and contracted basis. That's good news just in that our conversion of the pipeline was a bit stronger. Our pipelines are bigger, and I think our sales force is getting better at doing it. I don't know, Paul, if you have anything to add to that.
That's what I was going to say. We've talked in prior calls that the big shift in the way that we sell, we didn't used to have to work through procurement departments and get a contract for every sale. A lot of our sales were the reorder of a facilitator purchase. For three years we've been at this now, and our sales force is getting more adept, frankly, at finding these opportunities, but then progressing them, and so we get more confident in the pipeline. I think we saw that in Q4 as well, frankly.
Right. Yeah, that combined with the rapid growth in All Access Pass and also the high amount of deferred revenue we have on the books that benefits the quarter. Again, I think just our costs were a little better. We were more conservative in our forecasting than we ended up on costs. Our revenue was a bit better, and so it just flowed through.
Got you. Then on the expense side, you mentioned how obviously you're a little bit more conservative or you spent a little bit less in the quarter. Were any sort of larger items delayed, or was it just more of process improvements in terms of your overall spend?
No, it's a combination. We have some process improvement spending where we've challenged costs, a lot of it is just that we had such big increases in investment last year that the rate of growth of our expenses is just less because we've really made all the investments in the ERP system and in the implementation specialists, et cetera. The growth is now really on the margin, that's really what underpins our guidance and expectation of having very high flow-through of incremental revenues. Our expenses were pretty much incremental. You know, our sales force is paid on commission on the margin. Our implementation specialists will add one or two a year. Most of our sales leadership is heavily based on growth, it's a pretty high flow-through and variable cost. There's no deferred or delayed spending on anything of any substance.
Got you. Lastly, if maybe you can kind of update us on the international licensees, just kind of where they are and how they're progressing with the All Access Pass model.
Sure. You can see they had a strong quarter. Where was that slide?
It was slide 38.
37 or 38. They had a nice quarter, up 11%. I think Sean mentioned this on the last call, and we've talked about it too, that we were delayed by.
Eight months
eight months in being able to launch the All Access Pass for our licensee partners around the world. That really kind of froze them last year. They geared up for it. A lot of training was done. We didn't help them with that delay. That's now behind us. We had a great conference with them in September to kick off and kind of retrained everybody and re-galvanized everybody. I think it's a focus thing. They were able to not have that delay in front of them. We're starting to see All Access Pass grow. We had some nice All Access Pass sales. They actually grew through the quarter. October a little better than September, November a little better than October. December was good again. We're pleased that that's now starting to grow in those licensee offices as well.
Got it. Thanks a lot, guys. I appreciate your time.
Thank you, Marco.
Our next question is from Samir Patel with Askeladden Capit al. Please go ahead.
Hey.
Hey, Samir.
first, just a housekeeping question. I don't know if it was you or Paul, Bob, but I think you mentioned that your target in a few years is 50%, five, zero, 50% penetration of multi-year contracts.
Yep.
Yep.
Okay. Just wanted to make sure. Okay, cool. The second question, unless I missed it and hear any-
Oh, sorry.
Sure. Go ahead.
Behind that share is those people are involved in more and more important things and getting bigger populations. It just becomes part of their culture of what they're doing. When they say, "It's going to take me three years to change my sales force's ability to sell in the way I want to sell or to drive my customer loyalty metric," they're starting to recognize, and we're starting to be strong enough to tell them that when they sign up for that, if instead of taking antibiotics for a week, if it's going to take three weeks to get rid of it, we just tell them up front, "It's going to take you three years to get this challenge done. If you sign up for it, let's sign up for it and go together." That's what's driving it.
Right. No, that makes sense. The second question, I don't think you really discussed it, but you put out a press release about acquiring your operations in, I think, the German-speaking markets in Europe. I was just curious, you did China, you've done that. Is that sort of a trend? As context, you've talked about the different selling model and so on and so forth that kind of optimizes for All Access Pass. I'm curious to what extent you kind of see your licensing network as capable of delivering that and to what extent maybe in certain markets you'd want to go direct over time.
We feel very good about our ability of our licensee operations to get up to speed and sell as they've worked on it. We've trained them. They're all in and committed. They've invested large sums of money to do the translation. We believe they'll be very successful with All Access Pass. As you know, for us, that doesn't affect deferred revenue because their payment to us is on an invoice basis. China was a different question, which was simply an opportunity. We felt like we were coming to the end of our contract term with our previous licensee, we just felt like to build the brand and to build the distribution in China, we needed to do that. It was a different situation here in Germany, it's not part of a strategy to acquire our international licensee partner operations.
It just turned out that there was a business change for our previous licensee partner in Germany that made it not possible for him to move forward, our choice was to either try to find a different partner and get that new partner up to starting over and moving up to speed or to acquire the operation there. We decided that while there'd be very few markets in the world where we would do so, now with that, the 4 largest economies we're all direct in with the U.S., Japan, China, and Germany. It just felt like the better idea, rather than starting over there, they have a good sales force. We have a lot of good business there. We send a lot of All Access Pass business that way that needs to be delivered.
It just felt like a good opportunity to be direct there. We don't anticipate doing that anymore in the future. It was just opportunistic and situational.
Okay, cool. Thanks.
Thanks, Samir.
Our next question is from Zach Cummins with B. Riley FBR. Please go ahead.
Hi, Zach.
Hi, Bob, and Steve. I just want to say congrats on the strong start to the year. Steve, I just wanted to ask you, did you quantify the expected impact to the revenue line in the Education Segment in terms of related to the loss of that foundation contract?
For the quarter, it would round about $700,000 of revenue and $300,000-$400,000 of adjusted EBITDA.
In the second quarter, it'll be about half that, then it'll be over.
Understood. That's helpful. In terms of your guys' progress with All Access Pass and your international direct offices, should we expect this to follow a similar trajectory or ramp as similarly to how it was rolled out here domestically? Or just kind of how should we be thinking about this as they start to ramp up on All Access Pass?
Paul, you want to-
I'll take that, Zach. I don't know the trajectory will be exactly the same in some of these offices. Just a bit of context. We launched in the U.K. and Australia at the same time we did in the U.S. and Canada, they're way down the road like we are, and have converted about as much of their business to All Access Pass as we have here in the U.S. and Canada. That's an easier dive for us. Those are English-speaking countries. Japan is now selling All Access Pass. That's a new phenomenon since we launched the portal for them with Japanese language. I think candidly, it'll be a little bit of a slower conversion for them just because it's Japan and the language and the culture.
We expect that the trajectory, the shape of the curve will look the same, but it just may be a little bit more elongated with them. China, of course, kind of a similar thing. China, we won't actually start selling All Access Pass until the spring. We're just finishing up their portal. We have to do a separate version of the portal and install it in China for them. I think what will happen is we'll have a year or two as we get going in each of these countries, and then it'll really start to go in these countries. What my bet is.
Great. That was helpful. I think all of my other questions are kind of asked by the previous analysts on the call. I appreciate you taking the time to answer my questions and congrats again on the strong start to the year.
Thanks very much, Zach.
Thank you.
Our next question is from Patrick Retzer with Retzer Capital Management. Please go ahead.
Good afternoon, gentlemen. Congratulations on a great start to meeting your guidance for the fiscal year.
Thanks, Pat.
It wouldn't be a Franklin Covey call if we didn't talk about returning capital to shareholders. You talked about that quite a bit last quarter, I think were silent on it this call. Is there anything you can add there?
Yeah, I think we can just add a couple of things. One, we had very good cash collections during the fall and the first part of the second quarter. We also have a good amount available on our credit line and available under our purchase authorization, we haven't changed in our desire to do that. I think we'll have the liquidity and intent to do it. During the quarter, we did not, but just getting ourselves ready to be in that position. There's nothing particular there, but we'll remind, you're very well-versed in exactly what we bought when, but it's been over about approximately $80 million over the last four years. We anticipate that the excess cash will be returned to shareholders in that form.
Occasionally, we're in the middle of something, whether it's like the acquisition of our German office or something else that because we have knowledge of something that could be perceived as being material, that we can't do anything, and from time to time, we're in windows like that. Otherwise, we intend to be purchasers.
Okay. Notwithstanding being locked up for some reason, I mean, the stock is down about 25% from a year ago. I would think all other things being equal, this would be an opportune time. Would you agree?
We agree. I think if you look at the expected growth in EBITDA and cash flow, our current value doesn't reflect the price to future cash flow is a low one compared to if we believe we're going to be in the top 10% of all Russell 2000 companies. We do think it's opportunistic.
Okay.
Thanks for reminding me.
Well, I'm with you. Keep up the good work.
Thanks very much, Pat.
Bye.
We have no further questions at this time. Speakers, any closing remarks?
Just to thank everyone for being part of this, and we also look forward to seeing many of you here at our Analyst and Investor Day next week. I think you'll find it a chance to go deep on understanding more of some of these things. We won't go into this detail on the financial side, but a lot on the business side and answer any questions that you have. We look forward to seeing you next week, and thanks for being on the call today. Thanks so much.
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.