Franklin Covey Company

Welcome to the Q1 2020 FranklinCovey Earnings Conference Call. My name is Cynthia, 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 1 on your touch-tone phone. Please note that this conference is being recorded. I will now turn the call over to Derek Hatch. Derek, you may begin.

Thank you, Cynthia. Hello, everyone, and Happy New Year. On behalf of FranklinCovey, we'd like to welcome you to our first quarter of fiscal 2020 conference call to discuss our earnings this day. 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 hire or to stabilize and grow revenues, the acceptance and renewal rates for 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 product, changes in the training and spending policies of the company's clients, and other factors identified and discussed in the company's most recent annual report on Form 10-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, 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 our Chief Executive Officer, Mr. Bob Whitman. Thanks, Derek.

Good afternoon and Happy New Year. We hope all of you had a great holiday. We really appreciate you joining us today. We're really pleased to report that our strategic and financial momentum continues to be very strong in the first quarter. As you know, our goals and expectations for fiscal 2020 and for years to come are really twofold. First, to continue to be the leader in what we view as the most strategically important and lucrative segments of the performance improvement industry. And second, to consistently generate extremely high rates of growth and adjusted EBITDA and cash flow. Our first quarter and latest 12 months results were very strong actually on both of these objectives. Strategically, we had a significant number of large all-access past client wins and expansions in the first quarter. And as shown on slide three, Our all-access pass and related sales grew 22%. We retained more than 90% of our all-access pass subscription revenue for the 16th straight quarter, and a significant 32% of our all-access passes are now multi-year passes, up from 22% at the end of last year's first quarter. Driven by this, we had very strong financial results in the quarter. Our revenue grew 8.9%. Our gross margin percent increased by 337 basis points to 71.7%. As a result, our adjusted EBITDA increased 56.5% or 1.8 million to 5 million for the quarter and grew a similar percentage, 55% or 8 million for the latest 12 months and actually a little faster, 8.8 million for the latest 12 months in constant currency. These results have gotten us off to a strong start toward our expectation and guidance of increasing adjusted EBITDA from 20.6 million in 2019 to between 27 and 32 million in fiscal 2020, which represents growth of between 31 and 55 percent. We expect to build on this momentum over the balance of fiscal 2020 and beyond. Specifically, as we discussed in our year-end conference call and as shown in slide four, Over the next three years, we expect to grow adjusted EBITDA in constant currency from the 20.6 million we achieved in fiscal 2019 to between 27 and 32 million in fiscal 2020. It's a noted growth of between 31 and 55%, and then to between 36 and 41 million in fiscal 2021, and to between 45 and 50 million in fiscal 2022. We also expect to increase our net cash generated to between $25 and $30 million in fiscal 2020, and then to between $35 and $39 million in fiscal 2021, and to between $44 and $49 million in fiscal 2022. Today, we'd like to briefly review our financial results and then address four key topics which underlie our expectation of continuing to achieve this very rapid growth in adjusted EBITDA and cash flow in fiscal 2020. 20, 21, 22, and for the foreseeable future thereafter. First, I'd like to dig a little deeper into our financial results for the first quarter and for the latest 12 months. First, revenue. Our revenue, as you can see in slide five, grew 8.9 percent or 4.8 million in the first quarter and grew 14.5 million or 6.7 percent for the latest 12 months. Our total subscription related revenue grew 21% or 5.8 million for the quarter to 33.6 million and grew 23.3% or 24.2 million to 128 million for the latest 12 months. Our invoice revenues grew 8.4% or 3.8 million in Q1. This was led by US and Canada where invoice revenue grew a little over 10% for the second straight quarter. Our balance of billed and unbilled deferred subscription revenue grew 16.8 million, or 26% in the first quarter, to 82.7 million, compared to a balance of 65.9 million at the end of last year's first quarter, and compared to a 47.7 million balance at the end of the first quarter of fiscal 2018. In addition, our total value of contracts signed in the quarter grew 17.5%, or 7.9 million, our strongest contracting quarter in the last several years, very strong contracting quarter. And that increased to 53.1 million. As shown in slide six, the high flow through of this revenue growth drove a 56.5% or 1.8 million increase in adjusted EBITDA in the first quarter. with adjusted EBITDA increasing to $5 million from $3.2 million in the first quarter of fiscal 19. For the latest 12 months, 55% of the $14.4 million of revenue growth we generated flowed through to increased adjusted EBITDA. This resulted in adjusted EBITDA increasing $8 million, or 55%, to $22.4 million for the latest 12 months, up from $14.4 million for the same 12-month period a year ago. Constant currency adjusted EBITDA grew an even greater 61%, or 8.8 million, to 23.3 million for the latest 12 months. This high flow-through of increases in revenue to increase in adjusted EBITDA again demonstrates the combined power of our strong high single-digit revenue growth, our increase in gross margin percentage, and the fact that SG&A has been declining as a percentage of sales. Both the enterprise and education divisions achieved strong revenue growth in the first quarter. As you can see in slide 7, in the enterprise division, which accounted for 78% of total company revenue in the quarter, revenue grew 8.7%. Invoice sales grew 7.8%. The value of contracts signed grew 18.2%. All excess pass and related sales grew 22%. and deferred revenue, build and unbuild, all related to the all-access path, invoice sales grew 31%, so a very strong revenue momentum in the enterprise division. As you can see in slide 8, in addition to achieving strong revenue growth, the enterprise division's gross margin dollars increased an even more significant 15.4% in the first quarter. This reflected the combined impact of strong revenue growth and a 433 basis point increase in gross margin percentage. In addition, operating SG&A as a percentage of sales declined slightly for the quarter, even after covering the cost of adding 23 new client partners in the enterprise division in fiscal 19, and also the cost associated with the conversion of the German office to a direct office this year. So for the latest 12 months, SG&A as a percentage of sales declined a significant 241 basis points. So the combination of these factors, you know, improving revenue, improving gross margins, improving SG&A as a percentage of revenue, drove a 47% or $2.5 million increase in adjusted EBITDA in the enterprise division for the quarter, with adjusted EBITDA increasing to $7.7 million. from 5.3 million in last year's first quarter. For the latest 12 months, adjusted EBITDA increased 41.4% in the enterprise division, or 8.2 million to 28 million. As shown in slide nine, strong quarterly and latest 12 months performance reflects continuation of the strong growth in revenue in adjusted EBITDA in the enterprise division over many quarters. As you can see, you know, in slide nine, In the last 10 quarters, enterprise divisions' latest 12-month revenue has grown from $135.9 million to $174.3 million, growth of $38.5 million. And during the same period, latest 12-month adjusted EBITDA increased from $10.7 million to $28 million, growth of $17.3 million. So this represents a 45% flow-through of increases in revenue over that period, to increases in adjusted EBITDA. So this model is continuing to drive strong revenue growth, high gross margins, declining revenue, and accelerated growth in adjusted EBITDA. As shown in the slide in 11, in the education division, the majority of whose revenue and profitability occurs in the fourth quarter, as you know, when schools are out and teachers and administrators are available to go through training, revenue grew 7.1% in the first quarter. Education's gross margin percentage declined 172 basis in this year's first quarter due primarily to an increase in the mix of services they sold relative to intellectual property licenses. This is expected to reverse in the second half of the year when price increases kick in in the fourth quarter and when we have a very high absorption of our coaches in the third and fourth quarters. The SG&A also increased in the quarters. You know education invests early on to make sure we're ready to service all the revenue later on. It reflected the increased commissions on increased revenues. The SG&A increase also reflected investments in new client partners, the addition of symposium marketing events in this year's first quarter, and an increase in the amortization of deferred commissions. Education's pipeline of opportunities is strong, and we expect significant growth in its revenue and EBITDA in fiscal 2020 as a whole. Again, we're really pleased with the strength of our first quarter and for the latest 12 months. This momentum has gotten us off to a strong start toward our growth objectives for the year, and we expect this momentum to further accelerate in the coming years, as we'll discuss later. Now I'd like to address four key topics which underline our expectation of achieving this very rapid growth and adjusted EBITDA and cash flow in 20, 21, 22, and for the foreseeable future thereafter. As shown in slide 12, these topics include, number one, just touching on the greatest points of leverage in our business model, those points of leverage that are driving the high flow through of increases in revenue to increases in adjusted EBITDA. Topic two is really addressing why the strategic space in which we play is so attractive and why we are winning in that space. Topic three, which I'll ask Paul Walker to cover, is where we see opportunities to accelerate revenue growth in the future. And topic four, which I'll ask Steve Young to address, is how we plan to utilize the significant amount of excess cash we expect to generate over the next three years. Turning to topic one, the points of greatest leverage in our business model. There are three that I'd like to address. The first point of leverage is that because all excess pass is generating high gross margins, Our gross margin dollars are growing even faster than our revenue. As you can see in slide 14, over the last two years, the enterprise division's gross margin percentage has increased 156 basis points from 73.9% for the latest 12 months ending Q1 fiscal 19 to 75.5% for the latest 12 months in the quarter just ended. As a result, as noted, the enterprise division's gross margin dollars have grown even faster than its revenues. The second point of leverage is that with this increase in gross margin, a higher and higher percentage of our revenues are also all excess past revenues that have this high gross margin. As you can see in slide 15, there's quite a bit of information on this table, but in the upper portion of the table, you'll see that all excess past and related sales revenues and enterprise division have grown from 41.2 million at the end of the latest 12 months for Q1 fiscal 18 to 85.8 million for the latest 12-month period. As also shown with this strong growth, all excess past and related sales have increased from 29 percent of our total enterprise division sales two years ago to 49 percent of total enterprise division sales here for the latest 12-month period through this year's first quarter. We expect All Access Pass and related sales to continue to grow as a percentage of sales, increasing to more than 75% of total Enterprise Division sales over the next few years, with the balance being made up of licensee royalties, which will also be related to All Access Pass, and then some of our legacy on-site and facilitator revenue and miscellaneous revenue would make up the difference. With this strong growth in all excess paths and related sales has also come a significant increase in the amount of our deferred revenue balances. As you can see in slide 16, our balance of deferred revenue, billed and unbilled, has increased from 18.1 million at the end of fiscal 17's first quarter to more than 82.7 million at the end of this year's first quarter. With this has come significantly increased visibility into what we expect to be our future growth. We already know it's on our balance sheet and so a significant amount of what we're expecting and forecasting in the future is already on our balance sheet. The third and final point of leverage is that all excess passes high revenue retention rate is creating high lifetime customer value and this is allowing SG&A to decline as a percentage of sales. It was illustrated in slide 17 The combination of all access passes attractive gross margins and high revenue retention as well as high add-on services attachment and the fact that it's sticky and we're retaining this is creating very high lifetime customer value. This high retention is allowing operating SG&A to decline as a percentage of sales in the enterprise division because we're retaining substantially all the revenue that we're selling. The combination of these three points of leverage Again, strongly enjoying gross margins, the increasing share of our revenue that's being generated is subscription related, and the high retention of that revenue is really creating very strong operating leverage in the income statement. Topic two is nearly addressed quickly. Why the strategic space in which we play is so attractive and why we're winning. We often get questions on We're trying to get a little better understanding of the strategic space in which we play and why it is that we're winning and retaining the revenue that we are, and our passes are being renewed. So we wanted to address that. Just to say that first, the market for organizational performance in which we play is huge and expanding. When you think about it, almost every organization's largest investment is in its people, its collective investment in its people. and therefore its biggest opportunity for organizational performance improvement most often lies in increasing the collective performance of its people. In pursuit of this improvement, it's estimated that organizations globally spend more than $90 billion on outsourced learning and development solutions and services. They spend an additional approximately $220 billion for their learning and development staffs and for internal content development, And then in addition to the learning and development budgets, there are countless additional billions spent on consulting and other performance initiatives outside the learning and development spend. So there's a lot of money, effort, and time spent on this topic. Second, we are playing in what we believe is the largest and most strategic and most lucrative space in this market, and we're winning. In slide 19... Just the organizational performance market can generally be captured as shown in that slide. At the bottom of the pyramid is the job of developing skills and capabilities in individual learners. On the left-hand side of the bottom row is developing personal and interpersonal skills. And on the right-hand side, you have technical skills. Currently, the vast majority of training at the bottom of the pyramid, so to speak, is focused on the bottom right-hand side on developing technical skills. Increasingly, enterprises are turning to online and do-it-yourself video content to provide this kind of training, and they should. It's an economically smart way to leverage new technology while engaging individual learners online, especially with an increasingly dispersed workforce. As you move to the left-hand side of the bottom of the pyramid, beyond technical skills into the terrain of personal and interpersonal skills, And even more importantly, as you go up the pyramid to developing leaders who can achieve results and engage their people, and even higher to the top, to help organizations achieve major strategic initiatives that require large-scale change in human behavior, you'll find the very challenges that line leaders and C-level executives value most and have the budgets to address. These are organizations' must-win challenges, challenges such as closing an operational gap, improving sales performance, measurably increasing trust throughout an organization or improving an organization's key customer loyalty metrics. Leaders not only invest a significant portion of their outsourced learning and development budgets to address these challenges, but also a disproportionate share of their internal learning and development budgets as well as portions of their operating budgets are focused on addressing these problems. We are winning and retaining and expanding our business with organizational customers seeking to address just these kinds of challenges. In doing so, we're gaining access not only to the large outsourced learning and development budgets, the $90 billion piece, but also to the internal learning and development spend, the $220 billion piece, as well as to portions of organizations' operating budgets. Just three quick notes on that. As to winning at bigger portions of clients' outsourced learning and development budgets, there's a large financial service firm which has now been an all-access pass holder for nearly three years. who during this period has expanded their pass from 100 users to more than 8,000 users. Additionally, they are contracting for many dozens of training days, what we refer to as add-on services each year. This client has expanded its pass holder population rapidly in three short years because of the depth and breadth of content in the All Access Pass. Each time they encounter a new need in the organization, they consult with their FranklinCovey implementation specialist to determine how that need might best be met through the content and tools in the All Access Pass, and most often it can be. As this process has played out again and again, their commitment to All Access Pass has increased significantly. It's important to note that this client's not investing more money in addressing their needs than they did previously. In fact, they're spending a little bit less than they did traditionally, but they've shifted almost all of their spend away from their other historical providers and toward FranklinCovey and their All Access Pass. Similar things are happening with internal learning and development spend where we're winning, where people are recognizing they can take the content in All Access Pass and weave that content and the tools in All Access Pass throughout their leadership development frameworks. And in so doing, again, they're displacing a number of their former internal and external offerings. We have one example of a multinational Fortune 100 company who purchased Snowlex's path three years ago as a pilot with a relatively small population of 200 leaders, who recently increased their path to cover all 30,000 leaders in their organization and signed a three-year contract. Again, accessing not only the outsourced spend, but also their internal. And finally, we're also winning, as I noted, an important client's operating budgets. For example, the CEO of a large retail organization you'd know made the decision to implement our four disciplines of execution solutions systematically throughout their hundreds of stores using all access paths. As a result, their revenue and profits are at historic highs. They give credit to this whole process to four disciplines, and the organization has gained an increasing capability and tool set to execute strategies. So we're winning in all three budgets, and the reason we're winning, finally, is first because our well-known best-in-class branded solutions are focused on and known for their track record in delivering measurable outcomes on exactly these critical challenges that we talked about. Due to the importance of the challenges just outlined, organizations seek out best-in-class solutions that have a track record and credibility for delivering outcomes, and this is absolutely where FranklinCovey shines. FranklinCovey is known and trusted for being the partner of choice for organizations facing challenges, the solution to which require behavioral change at scale. Whereas most content in the learning and development space is unbranded and relatively undifferentiated, FranklinCovey's solutions and insights are well-known, best-selling, branded, and trusted. They receive 9s and 10s NPS scores from participants and buyers, and have a great track record and reputation for delivering desired outcomes. And so, with this branded content on important problems, that's the first reason we're winning, and the second is because they all access past structure. has an extremely compelling value proposition. With all access paths, the clients receive unlimited access to all of our well-known and trusted solutions, many of which are shown in slide 20. And they get that for their entire passholder population. And finally, as shown in slide 21, with all access paths, these solutions are available in an almost limitless combination of delivery modalities. They're available in 21 languages worldwide, so people can implement these solutions worldwide. They get the services of an implementation specialist who can help to curate and design impact journeys to meet specific needs the client has, as noted in this one client who's gone to pretty much every leader in their organization. The solutions can be purchased with add-on coaching and delivery services to help a client to achieve its desired outcomes. And all this is available at a price per population trained that's less than or equivalent to that typically charged for a single course in a single modality. And for clients who are already purchasing access to video libraries that help individuals develop technical skills or personal skills, All Access Pass is extremely additive because it allows organizations to transcend these basic skills and also address their more pressing 80-20 challenges. So delivering on this compelling value proposition is a key reason why sales of All Access Pass are growing rapidly, why we are retaining substantially all of the All Access Pass and related revenue we sell, and why past holder organizations are not only renewing their passes, but are doing so for multiple years. We have a similar value proposition in education, where educational institutions, again, are buying a subscription to the Leader in Me, finding enormous value in it, and expanding within their, of course, the school retains, we retain these schools, and they're expanding within districts. With that, I'm gonna ask Paul Walker, our present Chief Operating Officer, to address topic three, which is where we see opportunities for even more accelerated revenue growth in the future.

Thanks, Bob. While our high flow through of incremental revenue to incremental adjusted EBITDA on cash flow means that we can hit our targets for growing EBITDA at 30 to 40% compounded, even at just high single-digit revenue growth, we have a number of opportunities we're working on for accelerating that growth into the future, and I'd like to share three of those here today. The first is to further penetrate the existing All Access Pass holding clients that we have. Bob shared a minute ago three examples of clients where they started out with an initial population of 200 to 300 users, and then in one case have expanded now to 8,000, and in another case expanded to 30,000 users. And important to note, even in those companies we still see expansion opportunity up and above those numbers. And that same opportunity that exists in those organizations exists across our entire All Access Pass client base today. to try to quantify that. Obviously, those are big numbers, but if we did that, just even a modest amount across our current all-access pass holding base, there's 5X or more the all-access pass seat potential inside our client base. And we know that those examples, that's a lot bigger growth than 5X, going from 200 or 300 to 8,000 or even 30,000. So lots of headroom there. The way that we do that is... The moment a client becomes an all-access path holder, they're assigned an implementation specialist. And that implementation specialist, along with their client partner, are in there immediately and engage with the client formally at least quarterly. And it's very much a land and expand model for us. We make sure that we're doing a good job with the first job they hired us to do. And our process is set up to uncover additional jobs we can help that client with and additional populations which we can serve. And each of those additional populations represents expansion within that logo. And so lots of opportunity there. We're on that, and we feel good about the momentum and the trajectory there. The second way in which we see revenue growth accelerating in the future is to land more new logos, to bring on more new all-access past clients. We're really pleased with the tremendous growth that we've achieved with the All Access Pass to date. As you'll know, All Access Pass and related sales have grown from a significant 15.7 million in their first year to 85.8 million in the last 12 months. And even with this success, we're just scratching the surface. As we've talked about in previous quarters, Even excluding the small business market, which we in the future see as a potential market for us, there are more than 50,000 accounts in the U.S. alone in our addressable market, which are not yet all-access pass holders. To take advantage of this opportunity, we're adding a significant number of new client partners every year, and we're seeing these client partners ramp up on or ahead of expectation. Over the past two years, we've refined our recruiting process and profile. We now have five full-time recruiters, We've created a new more immersive sales school, and we've invested significantly in sales leadership. And with these investments, we expect to continue to add at least 25 net new client partners a year and have a lot of headroom there in the years to come to add those client partners. And the third point I would touch on where we see the opportunity for accelerated revenue growth would be in our international operations. We now have direct offices in five of the seven largest economies in the world, the U.S., China, Japan, Germany and the UK, and these are in addition to our operations in Canada and Australia. And it's important to note that in each of these countries, we have the same or maybe even greater potential for growth as we do in the U.S. And it's the same strategy. We'll achieve that growth through the expansion from existing all-access path-holding clients and through winning new logos through our Salesforce expansion efforts, which are the same there as they are in the U.S. and just using our same land and expand and our high-earned ramp processes that we've identified and been executing for the last few years. So we feel really good about the momentum we have today, and we see opportunity to only accelerate that in the future.

Thanks so much, Paul. Now I'd like to ask Steve Young to address topic four, how we plan to use the excess cash we expect to generate over the next three years, and also review our guidance.

Okay. Thanks, Bob. Good afternoon, everyone, and happy new year from me also. As Bob mentioned, over the next three years, we do expect to generate a very significant amount of excess cash. We expect to utilize this cash to create additional shareholder value in at least two primary ways. First, by continuing to make value creating investments in the company. The large amount of excess cash flow we expect to generate in the coming three years is already after allocating large amounts for innovations and new content and continuing to make ongoing investments in technology and portal capabilities. So as we've always said, we intend to run the business in a way that it can grow. In addition to our investments in new content and what we've talked about, from time to time there may be opportunities to invest in tuck-in acquisitions, such as our acquisition of Jonna, that can add new capabilities that will add value to our passholder customers. We would, of course, expect to earn a high rate of return on these types of investments. So the second thing we plan to do is by continuing to return capital to our shareholders. As you know, FranklinCovey has a history of returning capital to our shareholders. As you can see on slide 24, over the years, we have invested more than $150 million in stock repurchases and retired more than 11 million shares. Last month, we repurchased an additional $13.8 million of stock, bringing our total investment over these years in stock repurchases to greater to more than $167 million at a weighted average purchase price of $13.86 per share. So the return on these stock repurchases has been very attractive to our shareholders. The expected trajectory of our growth in net cash generated in coming years that we've talked about makes it attractive, we believe, under almost any discounted cash flow analysis to continue to opportunistically repurchase shares. So we believe we can still increase the value of the company and the value to shareholders. So our guidance, we expect net sales to grow, as we've talked about, at a rate of high single digits in fiscal 2020. and expect that a significant portion of these sales increases will flow through to increases in adjusted EBITDA. Our fiscal 2020 guidance remains, therefore, that in constant currency, adjusted EBITDA will increase from 20.6 million last year to a range of 27 to 32 million this year. Anywhere in that range, of course, represents really strong growth in adjusted EBITDA, growth that we've talked about between 31% and 55%. So now Q2. Despite the investments that we're still making in sales associates, new content, et cetera, we expect adjusted EBITDA in Q2 to grow by approximately 1.5 million compared to last year. to approximately 2.5 million. Bob?

Thanks, Steve and Paul. So, just in conclusion, we are pleased with our strong results and the trajectory of our expected results, pleased with our strong business model, which we expect to continue to generate very high rates of growth and adjusted EBITDA and cash flow. We feel good about the strong and growing position of what we believe is the most attractive and lucrative part of the performance improvement market. and we believe that we have several great opportunities to further accelerate our revenue growth in the coming years while retaining a high flow-through of this revenue, and we expect to utilize excess cash to add shareholder value. So we appreciate your support and look forward to taking advantage of this tremendous growth ahead of us. Now I'll turn the time over to you all for questions. So we'll ask our operator to open the line.

Thank you. We will now begin the question and answer session. If you have a question, please press star, then 1 on your touchtone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you're using a speakerphone, you may need to pick up the handset first before pressing the numbers. And once again, if you have a question, please press star, then 1 on your touchtone phone. And our first question comes from Andrew Nicholas. You may begin.

Hi, everyone. Good afternoon.

Hi, Andrew. How are you?

Great. Great. First question, I just kind of want to touch on gross margins a little bit. Obviously, a really strong quarter, up, I think, 340 basis points compared to last year. You talked a bit about it, but I was hoping you could flesh out the primary drivers there a bit more, speak to whether or not there were any unique items in the quarter to call out, and then how we should think about gross margin progressing throughout the remainder of the year.

Great. Thanks. I think there weren't any specific special one-time items. I think the primary thing at work here is the increasing mix of all access paths and related sales and and they just have very high gross margins. What we've said is that over time, we believe that from time to time, we'll have big jumps like this in a quarter, but in the longer term, we expect the gross margin percentage will increase some each year, but it'll edge up because on one hand, the positive thing that'll be pulling it upward is the increasing mix of all excess past, leader in May subscription sales. But we also believe that the strength of those offerings is really made more strategic by the addition of services. And so as services continue to get added to the subscription revenue, you know, they're a little bit lower margin. The combined margins will still really be good and will come, you know, balanced together. Also, you know, there could be some shift depending how we, you know, where if we develop all the content ourselves, it's all capitalized in the capitalized development cost. Sometimes we license content also and it has a little different accounting treatment and may shift the mix between gross margin and SG&A. But I think long-term, we would think, as we've said in the past, we would think that gross margins will edge up not by hundreds of basis points a year or anything like that, but adding somewhere around maybe 100 basis points a year of gross margin for the foreseeable future. And some quarters will be bigger than others, but that's the general trend.

Great. Thank you. And then another one on Tuck and M&A. obviously one area of focus would be content, adding content. But just wondering if you could speak maybe a little bit more to the type of content that you'd be focused on. I know on slide 19 you touched a little bit on the technical skills part of the pyramid where you haven't typically concentrated. Would it ever make sense to be more aggressive there, or is that outside of the strategic direction of where you're trying to serve clients?

Great. First of all, I'll say that in terms of acquisitions, most content acquisitions, because the thought leaders typically don't have a company, they're thought leaders, they might be professors, they might be authors, oftentimes acquiring the content occurs more in the, it's less capital intensive because really it's entering into a long-term license to acquire rights and then developing the courseware and content and technology delivery And so we don't see significant opportunities for acquiring companies that have lots of content just because in our industry it's been a very highly fragmented business with lots of small operators that tend not to, you know, they just don't, they're not really acquisition targets for content generally. More like with Liz Wiseman's content, you know, licensing or with Clayton Christensen in recent years, you have the ability to license the content. So the tuck-in acquisitions we're talking about fit. For example, JANA gave us new capabilities. It gave an ability to deliver micro-learning in a whole different delivery method with the JANA weekly and accessing this library of best-in-class articles and content that can be navigated by an individual user. And so I think it's probably, those kinds of areas, to your point, Strategically, we have some technical capabilities in our content libraries. There are plenty of people focused on that. It tends to be relatively undifferentiated. And we think the world's gonna be well served with probably another dozen people who come up with their own libraries of technical content, et cetera. So we think that part of the market will be well served and will give organizations plenty of options for rotating content among providers. For us, we want to make sure that the eight or ten key jobs to be done on which we're focused, these critical must-win games that organizations have, that we can get that content to them in unique and interesting ways that they can access it. So it's that kind of thing, you know, assessment engines, different things like that, that will probably be on our M&A targets to fill in capabilities more than content, if that's responsive. It is. Thanks a lot. Thanks very much.

And our next question comes from Jeff Martin. You may begin.

Thanks. Good afternoon, guys. Hey, Jeff. Hey, Bob. How are you?

Great.

How are you? Good. We covered gross margin, but I was curious if we could go through the same walk for an SG&A in terms of as a percentage of sales, what kind of trend per year. Last year, I believe it was close to 400 basis points improvement. I mean, should we expect a couple hundred basis points leverage on SG&A for the next several years?

Yeah, I'll let Steve address.

Why don't you, Steve, why don't you address? Hi, Jeff. So we do expect leverage in SG&A, obviously, as a combination of reducing costs in some areas, having fixed costs that we're able to control and remain fixed or semi-fixed, and then also that would leave areas where SG&A will increase primarily for additional salespeople and commissions paid to salespeople, implementation specialists, content development, and those types of things. But in general, not audit quality, but we talk about SG&A increasing at a rate, maybe half the rate, that sales increases. A way to test if all this is working out is the targets that we talked about at the beginning of the presentation and that we've discussed. If you have revenue that's growing, let's say, 8% for discussion, And the adjusted EBITDA is growing at the rates that are indicated on those targets. And most of that, in our minds, even though Bob talked about gross margins increasing a little bit over time, most of that leverage is coming from the reduced percentage of SG&A to sales. Was that responsive enough?

Sure. That's helpful. And then I wanted to say congratulations on the large client wins and expansions. That's really good to hear. I was just curious if there's anything different in the sales process or the delivery process that's helping that effort.

Paul, do you want to address that?

Sure. Hi, Jeff. Hi, Paul.

I would say nothing substantially different. I think what's happening is we're now more than four years into this, And I would give our salespeople and our sales leaders great props for how they've helped us transition this business. And just every month that goes by, the salespeople become more comfortable. We've become better at positioning this. We're getting better at entering higher-end organizations where you naturally can address these larger populations. And I think it's just the continued turns of the flywheel there on how we go to market and then the market's receptivity to what we're doing. Nothing unusual or extraordinary, which is good, I think.

Okay, great. And then last question on the international direct effort. I was just curious if you could give an update on some of the recent offices you've taken from a licensed model to a direct model, how those are performing and what you see as their potential. And if you see additional, you know, taking – licensee markets and making those direct as well.

Sure. To the last point, you know, we're now, as we mentioned, we're now direct in most of the, well, in the largest economies, the U.S., China, Japan, Germany, and the U.K., and then, of course, we're direct in Canada and Australia. So I think we're not necessarily on a quest to convert licenses back to direct operations. It's there's been some opportunities that have come up, and we did that most recently in Germany, as you know, but that's, I think, where we feel good about the direct operations that we have and in the places where we have them. To the first question you asked, the transition of Germany has gone well. So, of course, it was really Germany, Switzerland, and Austria is what we picked up when we converted, when we say we converted Germany, Germany, of course, being the biggest economy there. We're significantly growing the number of client partners in Germany. We run that now out of our UK operation, which has been growing nicely for the past few years. In Germany, we're running the same play. All access paths, related, everything Bob talked about on the call here. For us, it's the same strategy everywhere in the world. It's hire client partners. It's ramp them successfully. We sell all access paths everywhere. We land, we expand, and and we're pleased with the momentum in international directs as well. We're just getting to China now, and Japan really. This is kind of the year where we start now that we're fully localized and have our portal up and running in China. So we expect to see continued momentum there as well.

Great. Thanks for that, Paul.

Thanks, Jeff. Okay, great.

Sorry, and our next question comes from Marco Rodriguez. You may begin.

Hi, Marco. Hey, Bob. How are you guys?

Great, thanks. Hope you are too.

Oh, great. Yes, I am. Thank you. Thanks, obviously, for taking my questions. I wanted to maybe start on the client partner side. Can you maybe describe or discuss what the sort of hiring landscape looks like for you guys? Has things sort of changed? Is there more competition for talent out there?

Sure. Hey Marco, I'll take that, this is Paul. So, we've talked, I talked a minute ago about our hiring process, so we feel great about it. We added a significant number of new client partners last year. We're adding, we continue to add this year, and as we've refined our profile of client partner, we're really pleased with the client partners that we're able to attract in the enterprise division, and Sean can speak to education as well. It is a good, tight labor market out there. The economy is doing nicely and unemployment is low. And I would say we're really pleased with the people we're able to attract. I think one of the biggest contributing factors to why we're able to attract who we're attracting today is we are growing and thriving as an organization. And that's a compelling thing for somebody, especially somebody who's been in our industry before. we've made investments that others have not made, and that's paying off and people are attracted to us. And so we feel great about the candidates we're getting. We feel really good about what our team is doing to ramp those folks, and we feel great about the fact that these new classes of client partners the last couple of years are all at or above the expectations that we had for them in enterprise. And Sean can comment on that.

Yeah, sure. Hi, Marco. Hello. Yeah, on the education front, we feel similar. It's a really attractive time to get people right now. I think a lot of it is the education industry is being disrupted quite a bit, and a lot of these big companies are just being shaken right now, and so we're picking up a lot of really good client partners from former companies like Pearson Education and so forth. So if I were to look at the last eight client partners we hired this year versus what we hired a year or two ago, I just think we're We're getting better quality people with more experience. We always try to hire people that have education experience, but they don't necessarily have to have it. They just need to have good sales experience. But I feel really good about our processes and feel, you know, over the last many years we've improved every year in our hiring capabilities.

Got it. And then in terms of the implementation specialists, they seem to have been doing a really good job here for you guys in terms of increasing the the wallet share you have with your existing clients. I was wondering maybe if you can talk a little bit about them in terms of do you have the right numbers, the right heads, and if you can talk a little bit about maybe their targets. Are they kind of hitting them? Are there any things that they need to kind of work on to kind of accelerate that increase in wallet share?

This is Paul. I'll respond to that as well. So we do feel great about them, and thanks for acknowledging them. They're doing a wonderful job. And what we do, we have a formula. We add them formulaically, and they're added as a percentage of all access pass sales. So we kind of have a model for how many clients and how much revenue an implementation specialist can work with and do a really good job with. And then as sales grow, we add more. And so it's a variable model that way. And yeah, they are. They're hitting their targets. Their compensation, they're paid a base salary, and then they have a variable compensation that's tied to logo retention and revenue growth inside that account. And so to retain the logo, they've got to ensure that we do a really good job serving the client around the thing they initially purchased the all-access pass to accomplish. And then the revenue growth, of course, comes as they develop more relationships. And I would say the client partner stays very involved as well. And so the two of them together develop additional relationships, look for additional populations, and that's what drives the other portion of their compensation is the expansion of revenue and the addition of add-on services. And so they're a great team. You know, it's a team we didn't even have four years ago. And they're doing wonderful work.

Excellent. And last quick question, maybe if you can talk a little bit about the international licensees, just kind of where they are in terms of their implementation of the All Access Pass and their sales cycle.

Sure. So All Access Pass is now available in 21 languages. Right, Adam? Yeah, 21 languages. It continues to grow there. And so all of our licensing partners, they've been trained on it. They're selling it. We're quite pleased with how that business is building for them. Of course, they continue to pay us 15% of sales, of their growth sales, but their businesses are also converting from what was our traditional legacy business to the all-access pass, which helps them grow more rapidly, and they see the kinds of growth that we're seeing here. We had one of our licensee partners in Q1, near the end of the quarter, closed a very, very large all-access pass. In fact, one of the biggest ones we had in the company. And it was really kind of a thrilling thing for that to come from one of our licensee partners. And so they're doing great. They're doing great. And I think the important thing to note there is across the enterprise division, we run the same strategy, the same play, the same recruiting profile, the same hire and ramp processes, really everywhere in the world. And it does not make much of a difference, if any difference at all, whether it's a direct operation country or a licensee country.

Mark, I'd just add to that that, you know, in many of these countries, our local license partners, and we don't license just as it happens to be the legal way we do business. We view them as direct, you know, really as full of partners. They really have tremendous stature in their countries. You know, these are people who are well-known in this learning and development space. They may have been senior leaders in in organizations and just have a passion for this. And as a consequence, in many of these countries, they are really looked to as the person, the company or their organization or the individual is the one who's asked to speak on issues relating to leadership, who's interviewed on television if there's a leadership issue in the country or whatever. And so we have a tremendous group of partners that have invested their own capital alongside us to build these operations. And so we feel really, really great about having this network. But now outside approximately 10 countries in Central Africa and those under U.S. embargo, we really have a licensee network that operates and at least has a footprint in essentially every country in the world.

Got it. Thanks a lot, guys. Appreciate your time.

Thank you, Martha.

And our next question comes from Zach Cummins. You may begin.

Hey, Zach. Hey, Bob. How's it going? Congrats on a strong start to the year. Just a question around the new client wins in this quarter. I guess more of the question is really around is how are you getting into the door at new customers to begin with, and is it typically the displacement of an existing vendor is how you get into the door, or is it trying to focus on maybe a new leadership area that hasn't been addressed before at the company.

Yeah. Paul, you can address first. Sure. Yeah. So, hey, Zach.

So we, there are, it won't be too long with this answer here, but there are two primary entry points for us inside a new customer. And Bob mentioned these earlier as he outlined kind of that strategic pyramid slide, I remember. But we enter and sell to either senior learning and development leaders, so the chief learning officer, the head of talent development, etc., And they're primarily purchasing capability development, either leadership development or development for individuals across the organization. They might be thinking about things like culture, et cetera. Or we sell to the second entry point is to the line organization itself, the CXO level person, chief sales officer, chief executive officer, chief operating officer, et cetera. And so our sales people are out every day. They each have 100 accounts assigned to them. And some of those accounts are existing and some are prospective. And they're calling on those accounts and using our marketing collateral. And what usually happens is that they identify a need a client has. And whether we end up displacing another competitor or not, sometimes we do, sometimes we don't. A lot of our competitors actually also, or a lot of our clients purchase at the bottom part of that pyramid, the technical skills. We're working alongside another organization. They're addressing the technical side and we're addressing more of the performance side. enablement on the business outcome side. And so it's the salespeople out there with really good marketing behind them. We do a lot of marketing events where we invite people to come and learn more about how we might help them. And that's our go-to-market process.

And so in that market, Zach, when you've got people who are already purchasing things, a lot of our big wins are coming from organizations deciding that rather than doing business with 20 different suppliers and having to serve as their own general contractor with formats that don't exactly match, the quality doesn't match, it's not implementable across the world, but what's happening is that more and more some of these larger organizations who either already are customers or not yet customers are being compelled by the value proposition and saying, gosh, if I can get the world's best content on these topics I'm trying to get solved, services to help me get them done, In all the languages across the world, it's set to that whole value proposition. We're winning an increasing share of the dollars that these clients have. In fact, even in some cases where the client is in their own mini-recession where they might be cutting back, laying off 10,000 employees, they're coming to us and saying, look, we're not going to be spending as much, but we've got to make darn sure the money we are spending is having the greatest impact it can have. and having a single focus on a couple of jobs to be done, we've won, you know, significant increases in revenue to us at the same time that client is spending the same or less. And so it's a combination of those things. When we talk about the big wins this last, you know, and we have big wins every, you know, thankfully every quarter, but we've had some, you know, really good expansions and some big new wins in those areas and also in execution.

Got it. That's extremely helpful. And, Just over on the education side of it, any sort of update on the rollout of the district model that you were talking about on the Q4 earnings call? I mean, have you seen any sort of uptick in interested buyers or any sort of receptiveness to this new model?

Yeah, sure. Yes, we think it's going really well. We're calling it LeaderMe 4.0, and it's got this district component to it. What we're finding is we've got a lot more – we're having a lot more discussions at higher levels. The cell force is very excited about where this is headed. So we're having a lot of – a lot of the district discussions are leading to big community discussions with multi-districts, sometimes state-level discussions. So initially, we've only been doing this for a few months. We feel really good about it so far. And we've got the pipeline of districts we have right now compared to last year is we have many fold more, which is really encouraging. It's also a new type of sell. So we're having to learn how to sell the districts. We've got maybe a third of our client partners are pretty experienced with districts and the rest aren't. And so there's some learning curve here for sure. And I think it's going to take us a good year to really get really good at it. But it's definitely the right direction. Early results are good. My guess is in the past, whereas like last year we brought on 30 new districts, we could bring up to 100 new districts this year. And the pipeline looks really strong. But it's going to take some time to really get it across all the client partners, the capability.

Okay. Got it. That's helpful. Appreciate the color. Well, I think that's all the questions I had for now, but congrats on a strong start to the year, and best of luck with Q2.

Well, thanks very much, Seth.

And our next question comes from Patrick Retzer. You may begin.

Good afternoon, gentlemen. Congratulations on another good quarter.

Thanks very much. Hope you're doing well.

Thank you. I had a question about the knowledge ventures transaction. You bought $10 million worth of stock. I would have thought your appetite would have been substantially larger than that. I'm wondering if you're saving a lot of dry powder to essentially put a floor under the stock here. Yeah. If you bought it at 3514, I would think here in the 33 area, you'd be quite aggressive when the restrictions come off.

Thanks, Pat. First of all, we think the knowledge capital transaction itself is going to be a great thing for allowing us to expand our shareholder base, and we think that's going to be a great thing. Over the years, we've had a number of important potential shareholders who have have hoped that someday Knowledge Capital would distribute the shares to the underlying institutions so that at least over some period of time there might be a source of shares. So we think that's a good thing. And that balancing the purchasing shares ourselves to allowing some other good shareholders to come in that will build our shareholder base and provide ongoing demand and conviction is a good thing. So while the shares have been distributed to institutions who we've known for 30 years, I've known for 30 years and have been shareholders for 20, and we believe based on their discussion with them, they'll be very disciplined holders, over time it will, and they've been investors, they're excited about what's going on in the company, over time it will probably provide some opportunities for new shareholders to buy. As to our own purchasing, as we've noted, we have an authorization of around 40 million, we invested 13.7 million in the last month or so in share repurchases, and we believe there will be opportunities to continue to purchase, and obviously we get the point that if we thought it was good at 35.50, it's also attractive at 35.50. 54. So I think, you know, again, I think hopefully the chart and the discussion that Steve had, we've shown a willingness and certainly purchased basically over 14 million shares in total, Steve?

$167 million, 12 million shares.

12 million shares over time. And so, yeah, we see this as an opportunity, but I think moreover, You know, we'll be there. We want to be an ongoing purchaser of shares and not just episodic. We've got the capacity and the cash flow and the track record and intent. And so I think you're right that rather than saying let's try to buy all of it at one time, we've got the people who receive those shares aren't necessarily sellers today. And we also have some people who we think if there are buyers that we'd like to – we might – share the purchase with them to get some new large shareholders into the company.

Okay, great.

Thank you. Thank you, Pat.

And our last question comes from Alex Paris. You may begin. Hey, Alex.

This is Chris sitting in for Alex. Hi, Chris. How are you? I'm doing well. Congrats on the quarter. Thank you. Start to the fiscal year. All of my questions have been asked, but just moving through my list, there are some remaining. As we move back to some of your comments that you made about retention of revenue and how that's creating leverage for the business, diving deeper into that, I imagine a material driver of that has been your sales force and the performance of it. More specifically, the retention of your top performing Salesforce members. And in addition, the new hires as they move through towards their incremental revenue goals, the different cohorts that you're bringing on. Can you just perhaps dig more into what you're seeing that's driving the success that you're seeing in retention on a more granular level?

Sure. Yeah, you make a couple of important points. First of all, with a fixed investment in a new client partner, and that investment is pretty much flat for the first three or four years, let's say you're paying them $100,000 or $120,000 a year, for the first three years, even though they're on commission, there's a guarantee that they're getting. And so with the more rapid ramp-up that we've referred to in previous quarters, we have this 200,000 500,000 800,000 million 1 million three goal our last our last four classes, the ones that have been hired since all access path in the enterprise division and since leader in the. Membership in the education division, you know the overall ramp rate has been a little bit ahead of that and so to your point there's leverage on a given fixed cost for those new people there's leverage. on the cost there, you're getting more revenue out of the same cost, 0.1, 0.2, is that also because you're retaining substantially all the revenue from these passes and people are expanding, adding on services, et cetera, you're not spending new marketing dollars to do that and you're using a fixed investment, largely fixed investment in implementation specialists in the sales force and getting more out of that without having to spend new money. And so the things behind that are these strategic things that as we're in there with the client, we're identifying one task that they're trying, one problem they're trying to solve or opportunity they're trying to take advantage of. And within that same client, they've got 10 others. They're just, they're either not doing anything about them today or they've hired others to do them. And that search that Paul talked about is when you're in there and able to find additional opportunities and you're not selling, you're really there servicing and people are saying, gosh, could you help me solve this one too? I've been, you know, the first thing has been so successful. Hey, would you give me help on this too? It's just an organic process that is driving this. But in the past, you know, a salesperson had to replace, you know, a good share of the revenue they sold in the first year. before they started to grow, and now they don't. So is that responsive?

That was responsive, yes. Thank you for the color. And that seems to be all I have for now. I did have one overall, one last question to ask you. It's been touched on many times, the growth that you're seeing in the international market space. It's more of a bird's-eye view. I know we're getting a little late in the call, but can you talk about just where you are within some of the markets in regard to the market potential that you see as far as whether you're in the early innings, late innings, and some different tailwinds that are benefiting you?

You bet. First of all, just one thought is that the markets are becoming increasingly global. 20 years ago, when we began our international partner network, there were a lot of international companies, of course, but they didn't approach this concept of building their whole workforces on a global basis. It was delegated to each country to figure out how they were going to do leadership development or how they were going to do cultural improvement. Today, that's not really an option. If you're a global company, your culture is your competitive advantage, and so This is creating a beachhead in many, many countries because wherever the client might be, whether they're in Germany when they buy the pass, they have 10 other countries in which they operate, or if they're in the U.S., they have 20 others, whatever, is creating a beachhead that is helping us seed every country in which we have licensees and also in their direct offices. Now with direct offices in five of the seven largest economies, many of the global clients are operating in all of those economies. So that's providing a good foundation. In terms of penetration, just generally though, when you look at across Japan, China, the UK, Australia, Germany, et cetera, we have around $40 million of revenue. And you look at that and say, If our U.S. revenues are more like $130 million in the enterprise side, you recognize that to be $40 million in all the other biggest economies, with all the headroom we have in the U.S., we're much less penetrated outside the U.S. And so I think for us, we see this as an imperative and a huge opportunity. It's needed by our clients. They're seeding us, giving us business to grow. They help us grow in those areas. We've got great client partner hiring things going, but we think, as Paul said, that this is a tremendous opportunity. They're both so big that, you know, you can't, you know, we're not going to get there anytime soon, but certainly we're further away from the potential internationally than we are in the U.S., and we're just getting started, we think, in the U.S., so we've got a lot to do.

That's very helpful. I appreciate the color.

Thank you, Dan. Thanks, Chris. Okay. There are no more questions.

And we have no further questions at this time. I will now turn the call back over to Bob for final remarks.

Great. Well, we just appreciate each of you. Thank you so much for your great questions. Thanks for your support over all these years, for helping us think through things as you do, and we view you as great partners. We appreciate you, and we look forward to a strong second quarter and year. Thanks so much.

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