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spk05: Welcome to the Q4 2020 Franklin Covey Earnings Conference call. My name is Adrienne, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session. During the question-and-answer session, if you have a question, please press star, then 1 on your touchtone phone. Please note this conference is being recorded. Now turn the call over to Corporate Controller Derek Hatch. Derek Hatch, you may begin.
spk01: Thank you. Good afternoon, ladies and gentlemen. On behalf of FranklinCovey, I'd like to welcome you to our earnings call for our fourth quarter and full fiscal year 2020. Hope you are all doing well and are staying safe. Before we begin today's presentation, I would like to remind everyone that this presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based upon management's current expectations and are subject to various risks and uncertainties, including but not limited to the ability of the company to stabilize and grow revenues, the acceptance of and renewal rates for our subscription offerings, including the All Access Pass and Leader in Me memberships, the duration and recovery from the COVID-19 pandemic, the ability of the company to hire productive sales professionals, general economic conditions, competition in the company's targeted marketplace, market acceptance of new offerings or services and marketing strategies, changes in the company's market share, changes in the size of the overall market for the company's product, products, changes in the training and spending policies of the company's clients, and other factors identified and discussed in the company's most recent annual report on Form 10-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 Mr. Bob Whitman, our Chairman and Chief Executive Officer. Bob?
spk03: Thanks, Derek. Hello, everyone. We're happy to have the opportunity to talk with you today. Thank you for joining us. We're pleased that in the fourth quarter, FranklinCovey's operations demonstrated their strength, agility, and ability to progress even in the midst of the pandemic. We're grateful for that. Specifically, our revenue was stronger than expected. Gross margins increased substantially. Our SG&A declined. Our adjusted EBITDA was $8.9 million in the quarter versus an expectation of $4 million. bringing that brought full year adjusted EBITDA to 14.3 million, which also exceeded our expectation of 9.4 million. Our cash flow was strong and we're grateful that we ended the quarter and year with approximately 42 million in liquidity, a level higher than when the pandemic started. We'll discuss these details and results in more detail in just a moment, but first maybe provide some context. At the onset of the pandemic, we communicated that although everything was in flux and was uncertain, we believed, as shown in slide three, as you can see there, that All Access Pass subscription and related revenue would continue to be strong and durable, and that this would continue to drive strong performance in our core North American operations, which accounted for 70% of our total enterprise sales, and in which All Access Pass and related sales account for approximately 80% of the total revenue in North America. As indicated in the chart 1A on slide three, we believe that All Access Pass subscription sales would not only be very strong and durable, it would continue to grow throughout the pandemic. That is indicated in 1B, that as for All Access Pass add-on services, after the initial disruption of the delivery of live on-site services, we believe that our pivot to delivering add-on coaching and training services live online would allow this revenue to rebound relatively quickly. Second, as indicated in chart 1C, we believe that in our international direct and licensee operations, which collectively account for approximately 25% of our total enterprise division revenues, despite having only nation all access pass subscription businesses and thus only a small base of All Access Pass subscription revenue to cushion them, our international enterprise teams, we believe, would begin to improve due to the strength of our offerings in those countries and the quality of our teams and their ability also to pivot to live online delivery. We expected that their growth would strengthen further as they accelerate their conversion to selling All Access Pass. And then finally, in the education division, we believe which accounts for approximately 22% of total sales. We expect that we'd achieve strong retention of existing leader in these schools and that even the middle of the storm, the existing schools would be committed and retain their subscriptions. And hopefully we would find a way to add several hundred new leader in these schools, despite the huge disruption of the school environment. So while the external environment has continued to be challenging, we're pleased that, as indicated in slide four, our results have turned out to be as strong or stronger than expected in each of these areas, and that this strength is continuing and even accelerating through the first two months of our first quarter, which ends November 30th. Some additional detail first on our enterprise business in North America. As you can see in slide five, All Access Pass subscription sales have been strong and resilient throughout the pandemic, growing 11% in the fourth quarter and 17% for the full fiscal year. In addition, amounts invoiced, new pass sales, and multi-year contracts have all continued to grow, and our All Access Pass revenue retention rate again exceeded 90% for the year. Second, in the upper right-hand corner, with our almost immediate pivot to booking coaching and training engagements live online, we were able to continue to meet the needs of our customers remotely. And as a result, bookings and sales of All Access Pass add-on services also rebounded quickly. As you can see in slide six, after approximately the first six weeks of the pandemic, new bookings of services in our North American operations turned positive. By mid-July, our booking pace was equal to that achieved at the same time last year, and then strengthened even further, exceeding last year's pace by the end of August, the end of our fiscal year. Pleased to say that these strong bookings have continued through October. With bookings increasing, which is what we'd call a lead or predictive measure, the lag measure, which is actual invoice sales of services, also rebounded significantly. As you can see in the lower right-hand corner of slide six, initially in the third quarter as the pandemic started, bookings were reduced and the year-over-year dollar volume of services followed because everything needed to be canceled and then tried to reschedule. And delivered engagements were down 6.9 million in North America in the third quarter. However, in the fourth quarter, new bookings increased to the point They were nearly equal to those we achieved in the fourth quarter of 2019, as you can see from the line graph. And that drove in actual invoice sales, and this in turn drove in an increase in the volume of services delivered. As a result, instead of being off $6.9 million as in the third quarter, the dollar volume of services delivered in the fourth quarter was off only $1.1 million, and bookings were actually up. As a consequence, the same positive trends continued into our first quarter date with bookings continuing to be up and with invoice sales of services following and increasing now to essentially the same level as in last year's first quarter. Importantly, you can see in the upper right-hand corner, 87% of our clients have now shifted to live online delivery of services. This is important. is really important. With 87% of our clients now having shifted to live online delivery, any susceptibility to future cancellations has been reduced substantially. And so now we have a model which, you know, really can, we think, plow through good times and bad as it relates to being able to deliver everything subscription. As you can also see in slide seven, which looks a lot like slide five, This combination of strong All Access Pass subscription sales and the strong rebound in All Access Pass add-on services has kept the performance of our core North American business strong, with essentially all of the relatively small decline in revenue in the fourth quarter being attributable to declines in our legacy facilitator materials order business. So otherwise, with the All Access Pass, the services coming back almost to where they were the last year, bookings ahead, that's given us a really strong run to start the new year. We now expect that we will actually exceed in the first quarter the levels of profitability that we achieved in the first quarter of fiscal 2020 in North America, which is an even stronger than expected rebound in those operations. As recently as last quarter, we said that we thought that might take us an extra year to get to that point, and we're very grateful and pleased that we're at that point now. Second, as always, as also shown in slide seven, international operations, which are sales in China, Japan, Germany, and among other direct offices and licensees, sales in these operations also improved substantially in the fourth quarter compared to the third quarter. As noted, as you'll recall, the need to reschedule substantially all training engagements in these countries and these countries' lack of a strong base of durable subscription revenue to cushion them, unlike in North America, resulted in sales in these countries declining to only 4.1 million in the third quarter compared to approximately 12.7 million in the third quarter fiscal 19. However, in the fourth quarter, while still operating well below the levels achieved in last year's fourth quarter, sequential sales in these countries increased 70% to $7 million, up from $4.1 million in the third quarter, and are expected to increase further to approximately $9 million in the first quarter. And then we expect to continue to build back through the year, back toward this $10 to $11 million a quarter pace. Finally, as you can see in slide eight, in the education division, despite the extreme difficulty of their environment, approximately 2,200 existing leader in these schools renewed their subscriptions in fiscal 2020. We said again, over 2,000 schools renewed and almost 1,500 of these schools renewed after the pandemic started when schools day-to-day turmoil was at a peak. It was very difficult to even talk to these schools as they were scrambling to still deliver lunches, figure out how to teach live online, deal with all the problems they had. And it's a tremendous credit to our team and to our clients and to the quality offering that almost 1,500 of these schools renewed after the pandemic started. In addition, during the same time period, we'd hope that we'd be able to have new schools join, and in fact, 320 new schools became Leader in Me schools, most again during this period. It's a number lower than last year, which we expected, which was 500 last year, but it's still, in our view, remarkable. Despite an environment which continues to be very challenging for schools, as you know, During the first quarter to date, we are seeing improvements in a number of key lead measures, including that of the number of new schools contracted or ready to contract being 50 schools versus 28 at the same time last year. Second, the number of Leader in Me memberships renewed or ready to sign contracts at 583 versus 422 at the same time last year. And third, the number of coaching days booked being 1,284 versus 1,149 at the same time last year. So again, we were glad that the things that we hoped at the start of this period have turned out to be stronger, stronger than expected in almost every case. And the combination of these positive trends drove our better than expected performance in the fourth quarter. I'd like to now dive a little deeper into our fourth quarter and full year fiscal 20 performance. As you can see in slide nine, our fourth quarter performance was stronger than expected and showed positive momentum as we've said at almost every front. Our adjusted EBITDA going down to the bottom first was 8.9 million, more than doubling our expectation of four million for the quarter. This brought adjusted EBITDA for the full year to 14.3 million, higher than our expectation of 9.4. And while lower than last year's adjusted EBITDA of 13.4 million for the reasons just discussed, we were really pleased with this result and the strength of the recovery in the fourth quarter. In addition, our cash flow and liquidity position remained very strong. As shown in slide 10, our net cash generated for the quarter, though less than in last year's fourth quarter, was a strong 21.4 million. And as shown in slide 11, our cash flow from operating activities for the year came in at 27.6 million, just 2.9 million lower than last year's 30.5 million. As you may recall, actually it was only two years ago in fiscal 2018 that our cash flow from operating activities was 16.9 million during a strong economic year generally. So we feel very good about the $27.6 million in cash flow from operating activities given this year's challenges. We ended our fiscal year with $42 million in total liquidity comprised of $27 million in cash, which means we have no net debt, and with an additional $15 million undrawn and available under our revolving credit facility. This strong performance was driven first by stronger revenue, as you can see. In slide 12, our fourth quarter revenue of $49.9 million was stronger than expected, despite the fact that a lot of what we sold in the quarter and a lot of what we invoiced, of course, went on the balance sheet. The higher revenues, though, were driven by the continued strength of our North American operations, which in turn were driven by All Access Pass, whereas just discussed, in the fourth quarter, subscription sales grew 11%. And in addition to the revenue, actually, as I mentioned, recognizing the quarter, we also achieved high levels of invoiced All Access Pass sales, most of which were added to the balance sheet as deferred revenue. These new invoice sales included growth in new logo sales, sales of new logos, a continued revenue retention rate of greater than 90%, a large volume of All Access Pass expansions, and an even larger volume of multi-year passes than in the prior year. And that, with all of that, All Access Pass add-on bookings, which we just talked about, of services also rebounded strongly, as we showed, coming almost up to where we were in the prior year's fourth quarter, despite the lag in booking due to the early days of the pandemic. You can also see in slide 12 We had strong gross margins again in the fourth quarter. Our gross margin percentage came in at 77.3%. That's up 437 basis points from the 72.9% achieved in the fourth quarter of fiscal 19. And that's up again 256 basis points for the year. Third, our SG&A was lower. SG&A for the fourth quarter came in at 28.9 million, which is 5.2 million lower. than this 34.1 in last year's fourth quarter, and an improvement of 70.6. And while some of that is variable SG&A costs related to reduced sales volume, a lot of it also reflected cost initiatives that we had been taking, that we'd been implementing throughout the year, not specifically related to COVID, but just had been implemented in the spring as part of our annual planning, and that's starting to flow through in the fourth quarter. Finally, the combination of these factors resulted in adjusted EBITDA coming in, as we said, at 8.9 for the quarter and 14.3 million for the full year. We mentioned that we had very strong invoice and multi-year sales in the fourth quarter, all excess past, and the renewals of subscriptions of the Leader in Me membership. because most of these new invoice sales were subscription sales. As you know, these amounts were not recognized in the quarter, but went onto our balance sheet and will add to and be recognized this year and in future periods. As a result, however, as shown in slide 13, our total balance of billed and unbilled deferred revenue increased to more than $100 million, barely, but a big landmark. This 100 million mark is a mark that a lot of subscription companies talk about and think about. It reflected growth of 12.1 million or 13.7% compared to our balance of 88.1 at the end of last year's fourth quarter. So that growth of 13.7 shows the strength of our invoicing despite the environment. This large balance of build and unbuild deferred also provides significant stability of and visibility into our future performance. As we'll discuss in more detail when we offer guidance for fiscal 21 in a moment and our outlook targets, in short, we expect to be, again, be a very high adjusted EBITDA growth, high cash flow growth company in fiscal 2021 and in the coming years. Specifically, in fiscal 2021, as we'll discuss in more detail, we expect to generate adjusted EBITDA between 20 and 22 million. This reflects an approximately 50% increase in adjusted EBITDA compared to the 14.4 million of adjusted EBITDA achieved in fiscal 2020. Thereafter, our target is to see adjusted EBITDA increase by around 10 million per year each year thereafter to around 30 million in fiscal 2022. into around $40 million in fiscal 2023, as there's an illustration of that in slide 14. These targets reflect our expectation that we will achieve high single-digit revenue growth, which is growth of approximately $20 million a year, and that on average, approximately 50% of that growth in revenue will flow through to increases in adjusted EBITDA and cash flow, and so therefore the growth of $10 million a year or so EBITDA. With this high flow through, we also expect to be moving toward and ultimately achieve an adjusted EBITDA to sales margin, percentage margin of 20% in the coming years. So with that report on our results, I'd like to now address three key questions outlined or identified in slide 15. First, address the question, And we may have, maybe somebody might need to mute. I hear some noise, I'm not sure, in the background. But first question is, what is the most important driver of this high expected growth in EBITDA and cash flow going forward? Second question, what is making all access paths and related revenues so strong, resilient, and durable? What's behind that? And third, what's the expected trajectory and speed of our climb up the mountain? And that's really more our guidance section. So really just to address those two questions and then turn the time to Steve for guidance. Question one, what is the most important driver of our expected high EBITDA, high cash flow growth? Simply put, the single most important driver is the strength of our subscription business generally. and particularly the strength of our All Access Pass subscription and related revenue engine in the enterprise division. The importance of All Access Pass is best demonstrated by the strength and resilience of our core North American operations, which account for 70% total enterprise division sales, and where All Access Pass and related sales account for approximately 80% of that. So why is All Access Pass the most important driver of growth and adjusted EBITDA and cash flow going forward? Three reasons. The first reason is that it's the engine that has driven the vast majority of our growth in revenue and adjusted EBITDA over the past several years. As you can see in slide 16 on the left side, All Access Pass and related sales have grown from zero to $90 million since 2016, a huge compound average growth rate, obviously, and absolute revenue growth of between $10 and $20 million of growth each year. This growth in all excess passive-related revenue has generated the vast majority of our net revenue growth for the company overall in almost every year. It's more than offset the runoff of our legacy facilitator and onsite business, replacing that business with higher revenue per client, much higher revenue per client, much more resilient and retained revenue, as you know. OLX's past and later revenue has also been the primary driver of the significant increase in our gross margin from 67.4% in 2017 to overall 73.3% in fiscal 2020. And it's also accounted for substantially all of our growth and growth margin dollars during these years. So the first reason is it's been the growth engine. The second reason we think All Access Pass is expected to be our most important driver of growth is that All Access Pass has continued to be strong in good times and bad throughout this pandemic, as we mentioned. As you can see in slide 17, in the fourth quarter, All Access Pass subscription sales grew 1.6 million or 11% compared to the same period last year. And for the six months from March 1st through August 31st has grown 15% compared to the same six month period a year ago, which has really been actually right in the heart of the pandemic. As previously noted, again, just shown to remind us in slide 18, as a result of the rapid rebound of all excess past add-on sales, these bookings and sales of services, which actually over the years, although not contractual, have repeated on a same client basis at greater than 90%, similar to the subscription revenue, are now back and running at the same level as last year. The third final reason why we think All Access Pass is such an important growth driver is that All Access Pass and related sales are expected also to account for an ever-increasing percentage of our business. And therefore, the positive impact of this subscription model will become increasingly pervasive. As you can see in slide 19, all access pass related sales already account for 80% of the enterprise division sales in North America. All access pass have increased from 0%, as we said, to approximately 80%. of sales in fiscal 2020. And we expect this share to continue to grow. Similarly, leader in me membership and related coaching subscription accounts for approximately 80% of revenue in the education division. So it's already substantial, but it'll continue to increase in those operations, which have already made the conversion. The other reason why we believe a pay is the most important driver is because in the parts of the world that aren't yet primarily subscription, all access pass for leader me we expect that they will become so we expect that the approximately 36 million of annual revenue that's done in our international direct offices and among our international licensee partners for today all access pass is just nation and is just beginning will now accelerate quite rapidly and over the next years we'll see the majority of that 36 million add To the growth of our subscription revenue and then and it'll then we expect have the same durable and resilient properties that we have elsewhere. In terms of the second question, then, if you look at the slide 20 may ask Paul Walker to address this is what's behind this resiliency in both all access pass and leader in me. Paul, let me just turn the time to you. Paul, as you know, is our President and Chief Operating Officer. You may call on Sean Covey and Jen Colosimo also to weigh in.
spk07: Thank you, Bob, and good afternoon, everyone. So, yeah, to the question, you know, what is behind All Access Pass' strong resiliency and its durability? In our experience, there are three key reasons why All Access Pass is both growing rapidly and at the same time proving to be quite resilient. During the pandemic, our clients are wrestling through the same historic challenges that each of us is experiencing. They moved large populations of employees to remote work environments. They're attempting to get their remote teams to focus efforts on the most important must-do activities. They're working hard to increase revenue and retain customers. And they're rapidly trying to enhance their culture, including thoughtfully addressing topics such as diversity, equity, inclusion, and bias. And in this environment, of course, the need for more capable leaders has never been more important. And these, among many others, are what our clients see as really must-win games for them, the very important challenges that they're trying to address. And helping our clients successfully address challenges like these and doing it at scale is exactly where FranklinCovey shines. A key reason for the All Access Passes growth is that both before and during the pandemic, our clients needed solutions to these challenges, and frankly, FranklinCovey's best-in-class solutions are best in class at addressing just those very problems. In our July call, you'll remember we reported that through the early months of the pandemic, almost all of our existing all-access pass holders had renewed their passes as they come up for renewal, with many of them choosing to either expand the population or extend the duration of their pass. We shared a couple of examples then. One was a major airline. That when airline traffic was off 90% made the decision to continue with their all access pass and they were using it to train and retrain their leaders. To operate in what was becoming obviously an extremely difficult environment. We also shared a large hospitality company chose to continue with its path so that they could double down their focus On their ability to execute and as an update. We're now happy to share that that client. recently made the decision to extend that pass by an additional three years making that what is now currently a five-year all access pass contract and i'd like to briefly share three additional examples from our fourth quarter examples of all access pass and leader and meet clients who in the middle of the pandemic and extremely difficult times not only renewed their subscriptions with us but also expanded their populations or extended the term slide 21 is just a simple graphical representation of these three, but the first is a financial services firm. And they saw their sales fall swiftly and dramatically in the early stages of the pandemic. They determined that one of the most important priorities had to be equipping their large sales organization with skills and tools necessary to increase conversion rates and shorten sales cycles. As a result, at the same time, they were cutting costs everywhere they could. They not only expanded their All Access Pass, but they chose to extend it for three additional years, knowing that they were going to need access to that content, not just for one year, but for a number of years to complete the transformation they were after. The second is a hospital system. And, you know, experiencing, like many hospital systems, have a significant decrease in revenue due to a pause in elective surgeries. They tripled the size of their population covered by the All Access Pass. And they extended their pass for an additional three years. They recognize that there's no time when strong leadership is more important than in times of serious challenge, and they felt it was essential to equip their frontline leaders with the tools they were going to need to respond. And then from our great education division, we had a large school district in Texas. This is a cool story. They'd implemented Leader & Me in two of their 20 schools and initially thought they would need to put Leader & Me on hold so that they could direct resources toward Technology to prepare to deliver school virtually However, the superintendent who had some children in a leader in me school in the district. And was had a front row seat to how leader in me was helping not only the students, but also the faculty In the school that we're using it decided he needed to find a way to keep leader and me in there and they were able to get creative and and allocate funds differently. And they freed up enough funds to not only continue with those two schools, but they actually expanded leader and me to all 20 schools in the district and we're now engaged in the implementation of those with them. And so these examples highlight the important challenges that our clients face and their commitment to utilizing Franklin cubby solutions to address them. Hundreds of organizations have sought out renewed expanded and extended their all access pass and leader and me memberships during the pandemic today. And while I won't take the time to review them all here. You might find it enlightening to read some of the additional examples related to all access pass on slide 22 and then some of the leader me examples on slide 23 The second contributing factor. We believe the reason why Alex has passed and leader me continue to be strong and resilient and durable is the fact that our customers can use these services and solutions. It's very flexible for our clients to deploy them, and they also have a very strong value proposition. Just to speak to a minute about flexibility. When the pandemic hit overnight, our clients needed entirely new and flexible ways to deploy our solutions to address their organizational and performance challenges. And as a result of our more than a decade of investing in technology and technology enabled capabilities, our clients were able to immediately access our content and solutions through live online, digitally self-paced and micro push delivery modalities. In fact, we routinely hear from our clients and our customers that we have the most robust and effective live online delivery capability of any of the providers with whom they work. And the flexibility of the All Access Pass is allowing our clients and our users to deploy solutions in almost any circumstance. The second point related to the value proposition. Our clients tell us that not only are our solutions and flexibility important to them, but that our all access pass and leader and me customer value propositions are equally compelling. As shown in slide 24, and we've reviewed these before, but I think it's helpful to just review them again here. Each all access pass client receives the following. They receive one, a full collection of our best in class content and solutions. And of course, point two there, that's available in all modalities. very, very important right now, which allows them to deliver in virtually any segment of time and on any device. And third, all of this is available in more than 20 languages now worldwide. I think the number is actually 21. And at no additional cost to them included in that offering is access to the services of an expert implementation specialist who works to ensure that the clients are able to achieve the progress that they're seeking. And then finally, all of this is offered at a price per person trained that is equal to or less than the typical cost of training one person in one content area in just a single modality. And so the strength of the value proposition, the flexibility, it's resulting in many of our clients making the decision to consolidate providers and significantly increase their business with FranklinCovey. It's driving deeper, stronger, more pervasive and enduring relationships with our clients. And as you see on slide 25, This competitive advantage enables us to significantly increase the average lifetime value of a customer. Finally, I'd like to, you know, as it relates to what's behind this strength and resiliency, I'd like to speak to just the business model itself and why it creates so much durability for FranklinCovey, structural durability for FranklinCovey. Of course, the most important source of durability and resilience comes from meeting clients' needs in a way that allows them to make the progress they're seeking. And when this happens, we create clients for life. And that's really our mantra. We want to maintain these clients for life. Our content solutions, our value proposition, and client engagement processes are all focused in point at that primary objective. And our subscription model also creates a more profitable, durable, and high-growth business for FranklinCovey. In addition to the All Access Pass subscription, Our business model provides clients with easy-to-access coaching and training facilitation services. Now, as Bob mentioned earlier, these are delivered almost entirely digitally or live online. The model also encourages multi-year contracts, which establish both greater visibility and increased structural durability. As shown also on slide 25, the average all-access pass-holding organization purchases approximately 44 cents of add-on services for every dollar of subscription revenue. Indicative of the value which clients place on these services is that our annual same client service revenue retention rate, as Bob mentioned a minute ago, has exceeded 90%. A very high retention rate for services, which also is consistent with the very high retention rate we have for all access pass subscription revenue. And in more than one-third of our all access passes, they are for multi-year periods. And these multi-year contracts are firm. and the unbilled deferred revenue associated with these contracts now totals $38.5 million. And as with our one-year All Access Pass contracts, the contractual amounts of unbilled deferred revenue are billed one year in advance. And so as you can see, and hopefully get a feel for this, that the All Access Pass is really proving to be strong and resilient and durable and a real asset for our clients. And Bob, I'll turn that back over to you.
spk03: Thanks, Paul, very much. I'll just now turn the time to Steve to review our guidance and outlook. Steve?
spk04: Okay, thank you, Bob and Paul, and good afternoon, everyone. It's nice to be with you today. As you recall, when we reported our third quarter results, we said that because there was so much uncertainty in the external environment, our outlook would not constitute guidance. the external environment continues to have substantial uncertainty. However, given the four quarters of additional, four months of additional history that we have and the fact that we continue to see positive trends in the business driven by the strength of the all-access pass, we now feel that we can provide guidance for FY21. Our guidance for FY21 is that we expect to generate adjusted EBITDA of between 20 and 22 million. This result would reflect an approximately 50% increase in adjusted EBITDA next year compared to the 14.3 million of adjusted EBITDA achieved in FY20. This expected growth reflects the continued strong performance of our North America operations where all excess past and related sales account for approximately 80% of sales. Underpinning this guidance are the following expectations. First, the recognition during FY21 of more than $60.6 million of deferred revenue already on the balance sheet. and a portion of the $39.6 million of unbuilt deferred revenue which has been contracted. This provides significant visibility into our revenue and gross margin for FY21. Second, in addition to the recognition of the deferred revenue, the factor which is expected to have the greatest impact in our FY20 run result is also one in which we have high confidence and that is the strength of the All Access Pass and related sales. We expect that All Access Pass will continue to achieve, one, strong growth in both sales and invoice sales, two, high revenue retention rates, three, strong sales of new logos, And fourth, continued growth in pass expansion and multi-year contracts. We also expect that all access pass add-on sales will continue to be strong. Driven by this, in FY21, we expect our operations in North America to achieve an adjusted EBITDA level higher than in FY19. and even somewhat higher than what we had originally expected to achieve in FY20. Third underpinning of guidance is we expect our revenue in Japan, China, and among our licensees and other international will continue to strengthen. The increase in all access pass, which we expect to achieve in these countries, will, of course, result in a portion of those new sales being added to the balance sheet as deferred revenue. And our fourth underpinning of guidance is that in education, we expect to continue to achieve strong retention of both schools and revenue among existing LeaderandMe schools. In addition, Despite what we expect will continue to be a challenging and budget constrained environment for education in FY21, we still expect to receive growth in the number of new leader in me schools beyond the 320 new schools achieved in FY20. So we feel comfortable with this guidance for FY21. Now, a little bit about the first quarter of this year, FY21. We expect that adjusted EBITDA in the quarter will be between $2 million and $2.5 million, compared to $5 million last year, reflecting what Bob and Paul talked about, which is the strong performance by all access paths in North America, offset by the same general expectations just outlined for the International Operations and Education. So we expect adjusted EBITDA in Q1 and Q2 to be less than last year, and adjusted EBITDA in Q3 and Q4 to be significantly higher than last year. Please remember that a big reason for this is that Q1 and Q2 of this year will be compared to the very strong pre-pandemic Q1 and Q2 quarters of last year. While Q3 and Q4 of this year will be compared to the pandemic impacted Q3 and Q4 of last year. So since last year was a tale of two halves, the first half being, in my words, extremely strong, And then the second half of the year being pandemic impacted, that's primarily the reason that while we see continued strengthening of our results this year, still we expect to be down in Q1 and Q2 and up significantly in Q3 and in Q4. So that's our guidance. Just a little bit about comments about the internal targets beyond FY21 that Bob also mentioned a little bit. So as Bob mentioned, and as we just said, we expect this year to fall to between 20 and 22 million. And due to the fact that we have extremely high flow-through of incremental sales to incremental adjusted EBITDA, and high single-digit revenue growth, we expect that our adjusted EBITDA would be around 30 million in FY22 and around 40 million in FY23. And this high acceleration to continue until we get to approximately that 20% adjusted EBITDA to sales margin that we often talk about. So part of the reason I repeated that is because it's important and partly for you to note that while dramatic changes in the world environment could impact our expectations, we wanted to share these as our internal targets and assumptions and also wanted to share that not only are these our targets, but that when you read our proxy, you'll see that full vesting of our executive teams long-term in incentive pay awards depend on achieving these strong multiyear growth goals. So that's our discussion on guidance. Bob, turn it back to you or open it up for questions.
spk03: I think that's it. Thank you so much, Steve. Why don't we just open it now? Thanks, everyone. We'll open it for your questions at this point.
spk05: Thank you. We'll 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. Once again, if you have a question, please press star then 1 on your touchtone phone. And our first question comes from Andrew Nicholas from William Blair. Your line is open.
spk11: Hi, thank you. Actually, it's actually Trevor Romeo in for Andrew. Hi, Trevor. Taking the questions. I'm doing well. You guys are doing well, too. Just have a few questions here. I think first one, I think last quarter, you had mentioned about $20 million worth of training engagements that was either postponed or delayed from third quarter. Just wondering if any of that was, uh, was recognized in the fourth quarter and whether you still expect about 70% of that to ultimately be realized over time.
spk03: Yeah. Yes. I think the, uh, it's a little hard to track as we've found because the same clients that had things booked in the third quarter and canceled, you know, sometimes it was a rescheduling of their exact thing that they had. And in other cases they just went ahead with a different initiative or, They viewed it as a new booking. And so I think dividing exactly what it is, we attempted to do to kind of parse that. But certainly the same clients that retained, where they renewed their all-access pass and who did have services in place are the same clients who are now booking new services. So I think what's recognized for the first little while, we were able to track that they were, in fact, rescheduled engagements and we mentioned that we thought that about 70% of those engagements would reschedule because they were attached to an Alex's past that had the existing initiatives going and think that's really probably still right. But we're not able to exactly reconcile whether the whether it was exactly that group in that location or not. And so I think the main thing is that our booking pace in an initial few weeks And maybe in the first month or so we could we could track it now didn't and believe that now almost all of the the new Bookings that we're having are in fact all new and so it's hard to kind of parse that but but thankfully it's the same customers and same clients moving forward and booking At a pace higher now than even in last year at this time Okay Understood, thanks
spk11: And then just, I guess, a follow-up on the cost side. The margins in the quarter were pretty solid despite the revenue decline year over year. You pointed out a number of expenses that were reduced, some of which I'd assume are probably temporary, some of which you said were already in the plan prior to COVID. Just wanted to ask how quickly you'd see or you'd expect to see, I guess, some of those expenses come back online to the extent some of them are temporary, and how much, you know, if you'd see any of those as permanent savings going forward.
spk03: Yeah, thanks. Great question. I'd say the majority of these we think will be permanent. Here's the reason. We, every year, have been pushing. We have this goal that Steve spoke about that is to get to an EBITDA margin of 20%. And so every year we, well, we don't expect to get there in a year, Every year we take on projects, and this year we redid a lot of our IT infrastructure, some supply chain infrastructure. We redid part of our innovation alignment and technology groups. We've challenged, you know, as part of the normal business planning process in February and March, a lot of those costs, and there were millions that have been taken out of that, a million and a half in education just in permanent cost structure. The part that will come back is that around 10% of our commission, I mean, if the commission expense, let's say, is 15%, about 10% of it's truly variable, the rest being draws and so forth. And so as revenue comes back of the five plus million of costs that were lower in fourth quarter, that related to a $15 million decline in revenue. you know, a million and a half, that would come back. We'll come back in the form of commissions and our travel expenses, we think won't, you know, need to recover to the same level they were before, but because our sales force is actually doing very well at making lots and lots of sales calls, but that'll come back some too. And so if you think of it as the 7 million for the year that was taken out a little less than half of it would probably two, two and a half million will come back. And the, and the rest of it would be a permanent reduction. Steve, I don't know if you wanted to add to that or fix that.
spk04: No fixing. I think that's exactly right, Bob.
spk11: Great. Okay, great. Well, thank you. Thanks for the great questions, Trevor.
spk03: Thank you very much.
spk05: And our next question comes from Marco Rodriguez from Stonegate Capital. Your line is open.
spk03: Hi, Marco.
spk10: Marco, if you're on mute. Sorry, can you guys hear me?
spk03: Yes. Now we can.
spk10: Hi, Marco. Hi, guys. Sorry about that. I was wondering if maybe you can talk a little bit more, Bob, on the transition to the online delivery for your training and coaching. Maybe if you can talk to the feedback you may have received from customers. You know, was it an easy transition? There were some difficulties. And then did you ever get any kind of sense that you guys could possibly transition that business to more of a permanent nature online when things return to normal? Or is this just sort of kind of a temporary solution to the particular problem that everyone's operating under now?
spk03: I'll just give a little color and then ask Paul maybe to give a little bit more. But I think this is a capability that we've had for more than a decade. And whenever we've implemented it, which is often in a circumstance where a team is a remote team or it's a team that doesn't work all in the same location or it might include international teams, whenever we've done it over the years, our feedback, which we collect net promoter scores, from the participants and about the material they went through and the instructor. And it's always been very high. But nevertheless, people have just been, you know, had been used to doing everything on site. I think people have recognized that actually we're getting the same net promoter scores on both the instructor and the content. maybe even a little higher because the flexibility actually is good. And so I think the fact that probably more groups will be working remotely in the future will mean that probably there's a permanent piece that will be where this will just be the way people do it. I think also the flexibility where you're not paying the travel costs and, you know, having to get a conference room and people missing the whole day, you can do these things, break them up into three segments during a day, giving a half hour in between these. It gives people flexibility where they can actually, we think more people are actually at a higher level in the organization are also attending the training. So our guess is this will be a permanent shift. Of course, people, you know, some of it will come back on site. But we think there's a permanent shift in this capability that we developed right after actually the MERS epidemic. We thought we need to really be good at this. we have our own platform called LifeClicks that actually many clients prefer, but all of our consultants and coaches have always been able to do this on multiple platforms and have become experts at doing it here. So, Paul, I don't know what color you'd add to that.
spk07: You know, I don't think I would, Bob. That was really complete. Maybe one thing, Marco, is As this has shifted permanently, not all of it, I'm sure some of it will come back, as Bob said, back to live in person, but I think a substantial amount of this will be delivered in the future like it's being delivered today live online. We think that actually could be a driver of more services for us in the future than what we sold in the past because we'll now have this blended mix of clients delivering live online and and then some still going back to the old way of live in person. But the net, we think there's a net gain for us here and more services days in the future because of the new flexibility and the ways that clients can utilize these days, uh, in ways that frankly you couldn't have when it was in person. So we, we see it as a very positive trend.
spk03: I'll maybe add to that Marco, uh, just what's happened in their marketing events and uh, also sales calls with salespeople.
spk07: So yeah, sure. So, of course, the same thing is happening in the delivery for which we charge clients. We've also made the same shift in our marketing events. And you'll know from past calls we've talked about the hundreds of marketing events we hold where people traditionally would gather in a hotel ballroom and get an executive overview of one of our solutions and how it could address a challenge they have. We've converted all of those to live online. And the number of registrations and the attendance rate is not a little bit more. It's many multiples more than what we used to to drive to our live in person events. And so from a lead flow standpoint and an opportunity standpoint, there's, there's a lot more discussions happening. That is one thing that even as the, when the world gets back to quote normal, we're going to want to continue to do, uh, I think we're going to want to cement that shift to live online marketing events because we can get to so many people, uh, more easily. And then the same thing is true with our, with our client partners. Bob mentioned a minute ago, the activity levels of the client partners, have not gone down. In fact, in many cases, they've increased. We can get access to our buyers and potential buyers and our clients, and they're increasingly becoming more and more comfortable engaging with us on Zoom or whichever platform. And our people are quite good at that as well. And so that's proving to be really, really helpful. Our implementation specialists, they're just all day, every day on with clients on Zoom, coaching and advising them. And so this is one of the silver linings here is we're developing new capability or finally getting to use capability that we've had latent that our clients weren't taking advantage of, and it's accelerating the level of activity inside the organization.
spk10: Got it. Very helpful. And then I'm not sure if I missed this, but on the booking strength you guys saw on the enterprise side of the business, can you Maybe talk a little bit more about the drivers behind that. Is that just sort of a function of clients? Like you had pointed out when the pandemic kind of started that, you know, kind of seeing some volatility in the past where clients will just kind of press pause and try to figure where things are and then kind of resume on their normal way once they've kind of got a lay of the land. So wondering if that is basically kind of helping that snap back in the bookie strength that you saw or if maybe there are some other items, some other sales and marketing items that maybe you've been pushing here in the last few months to kind of bring that back up? Paul? Sure.
spk07: I think it's a combination of the two things you said. In the early days, back in March, very early part of April, there was a lot of uncertainty and people were spending their time getting their employees out of the office and home to work. And so there just was not capacity or bandwidth on the client side. To do to do they just they put on hold from the training things they had planned as that has settled down and as people have become, you know, accustomed to and comfortable working at home. Because the things we were trying to address with them were important and they you know they did not want to cancel those forever. They needed to get them back on the calendar. And so that's certainly driving some of it is while the world's not normal. for many of our clients, they're now in a more normalized mode working from home and they want, they need to make progress. They, they, some of the challenges they were facing before are only more acutely felt now. And so they, they kind of need to get on with solving those. And so that's driving, I would say the lion's share of it is just the importance of the problem. They need our help. They want our help and they're comfortable now doing it live online. Uh, we have done some things marketing and sales wise to tout out what we think is some differential capability. to deliver these services live online, whether it be coaching or training. And we've equipped our salespeople with that. We've done quite a bit on the marketing front, out there on social media, et cetera, having some of our clients share their experiences. And that's helped as well, especially those clients who maybe aren't quite as technically savvy, trying to understand, well, how would this work in a live online environment? And once we get in there and do the first session, they routinely say, that was fantastic. Let's keep doing this. And so... We think, and Bob mentioned earlier in the prepared remarks, that it's the strength of that, that kind of whatever twists and turns might come next pandemic-wise, we've now transitioned almost all the delivery to live online. We don't have a lot of sessions booked out there that are scheduled to be live in person. And so, you know, we don't see really susceptibility to cancellations in the future now that these clients are comfortable and we're very comfortable delivering that way.
spk10: Got it. And last good question. Just wondering if you can maybe give us a little update on the client partner hiring expectations for this fiscal year. I know that this last one, there were some challenges there, but any sort of update there?
spk07: Paul, do you want to continue? Bob, you want me to take that? Sure. Sure. You'll see in the slides, we're at 254 client partners currently. And as we mentioned in our July call, we're exactly on track with what we shared with you then, that we were going to intentionally pause in Q3 and Q4 last year. We've resumed, we're recruiting, and we have our next batch of sales academy, which is what we call our sales school, is scheduled for early in January. We'll recruit through the fall here, fill that up, and then we expect to be back on the same quarterly cadence that was getting us to approximately net 30 client partners a year. And so that'll begin again in January. So we're recruiting right now. We have hired a couple of folks over the last month or two when we've seen somebody we just had to get. We didn't want to lose them. Now all the efforts going into that January kind of fire the engine back up.
spk10: Got it. Thanks a lot, guys. I really appreciate the time. Thanks, Marco.
spk03: Maybe it's just on this general topic of changes in delivery, one thing that might be interesting is that Actually, we believe, you know, we've always had these tremendous coaches and facilitators that are just some of the best people in the world at facilitating content. What's happened is, you know, I think there are a lot of people who might have said, well, gosh, I'll have my employees just do live online, I mean, just online training, are now recognizing when you have an option of having really a world-class facilitator and you can still do it remotely. they can do it from their home, that it actually is giving us a big leg up versus those who just have these online subscriptions. You get the benefit of the online subscription, which we have too, all the content digitally, but with somebody who can come in and coach for an hour, can teach for a half day, whatever, it's really been a great pivot, I think. Thank you.
spk05: And our next question comes from Jeff Martin from Roth Capital. Your line is open.
spk08: Hi, Jeff. Good afternoon. Hi, Bob. How are you doing?
spk06: Great.
spk08: How are you? Doing well, thanks. We're just curious to get your perspective on the potential shift in your value proposition as a result of working under these conditions and the issues that Are there new issues with new opportunities to use your content in different ways? And how do you see that continuing to shift over time?
spk03: Maybe Paul and Sean can address it. One of the things I think has happened, Jeff, most people, just like they thought they needed to be in the office all the time and just like they thought you know, that if you went to training, that was okay. I'm going to go off site. And therefore it's something I'll do once or twice a year. I think people are recognizing that, wow, there's a lot they can do. We implemented a big execution engagement, which with our most senior consultants, there's a major company who at first was thinking, gosh, I don't know that I can really do it this way. And now they can see how flexible it is and how many more of their leaders they can involve. how the levels they can take it to with some additional budget, but not much more, particularly if they expand the pass. And I think it's changing the value proposition. I think it's changing the paradigm of how many people in the organization might be going through regular training. It's changed the paradigm about the time segments in which that training can occur that, hey, you don't have to do it all day training. There's a couple hours in the morning that can happen. the level of people that can be involved and benefit from it has led us to have a lot of passes expanded where people say, gosh, I can see taking this now to a lot more people. And I think finally, the breadth of the content and so forth that people have recognized the past has, has resulted in a number of a value proposition that says, hey, I'm gonna consolidate my spend. I might be spending less, but I'm gonna consolidate my spend in fewer suppliers and use, uh, all access paths as the foundation for it. We've had a number of clients in this environment who have maybe, you know, they've all been in budget constants, of course, but they've, uh, they, they've increased their budget with us. So I don't know if that's responsive, Jeff, but those are some ways in which I think there's a, the value proposition probably has changed some.
spk08: Yep. Uh, that's exactly what I was looking for. Um, And I wanted to touch on sales effectiveness and efficiency. I don't know if you have looked at your client partners versus your traditional matrix of what you expect them to contribute in years one through five. Is there any shift in that as a result of selling remotely environment?
spk07: Paul and Sean and Jen, do you want to? Sure, I'll respond for enterprise and then Sean can for education. So from an expectation of the, you know, the five-year ramp we talk about that a client partner as they work their way up to being fully ramped up, we're not seeing the need to change those expectations at all. You know, I think what will be interesting to see play out over time, not because of the current pandemic situation, but just as we, as these new client partners are only selling all access paths, and building up this base of subscription revenue that repeats at such a high rate, in those future years, years three, four, five, we may see that client partners can do more revenue than they used to do under the old model. And that's something we continue to look at carefully. But we wouldn't certainly bring the ramp rates down at all or the expectations down. In terms of just the overall effectiveness of the sales force, as I mentioned with Marco's question a minute ago, We're seeing, and we have such a great sales force there. They are, they're incredibly effective. They work tirelessly and, uh, they're the, the, the rates of the level, the things we look at the indicators, both of activity and output are as high or higher right now. Um, as they were pre pandemic, they've been very creative at, and, and focused on improving skills to, to hold meetings live online and, And it is a little bit more difficult to get to customers. We have to be more creative to get to a brand-new customer in this environment than we did before. But through social media, and I mentioned all of the people coming to marketing events, significantly more coming that way creates a lot of inbound flow to them. So we're really pleased with what they're doing, and I think the ramp rates are still the ramp rates. Sean, I don't know if anything different for education.
spk09: I just echo pretty much what you said, Paul. I think we expect the round price to be the same. In many ways, doing everything virtually creates more efficiency and less wear and tear on our client partners. With education, every client partner has a lot of schools. There's a lot of travel involved. So in many ways, it's been a nice break from all the travel. We are right now finding it. It has been hard the first couple of months, the fiscal year, to get a hold of schools because of, you know, so many changes and so much chaos at the school level trying to figure everything out. We found in the last few weeks it's starting to open up more. People are kind of settled into learning how to do live online learning. And so it's kind of smoothing out now.
spk08: Great. That's helpful. And then last question on the... you know, the slow rebound in the international business. I was curious what kind of level you think it gets back to by the end of fiscal 21 relative to pre-pandemic levels.
spk03: Paul, do you want to respond?
spk07: Yeah, so you, first of all, you saw the really pretty significant improvement from Q3 to Q4 that we shared earlier. And into our Q1, that continues to be the case, that their business is strengthening and rebounding in those international offices. It's a little bit different by office. So in the U.K., for example, they will mirror the North American operations very, very closely, and they are mirroring it closely. And the reason for that is they have so much of their business is subscriptions. um similarly australia will fall while australia is not a big operation for us it'll follow a similar curve as north america china and japan are the two places where it fell off the most it's coming back nicely uh we we won't be all the way back certainly to fiscal 20 levels by the end of the year but we believe by the end of the year we'll be back up to where we were uh fiscal 19 and back up to those levels but the good news is that the business as it comes back we're significantly making sure that it comes back as all access pass business and so you know that that will while the business is down and they start to build it back up we don't want to build it back up with the old traditional business we want to build it back up with the new all access pass subscription business we can do that now because our portals are up and running in china and and the folks are they're actually having a nice q1 all access pass quarter in japan right now and so So back up to 2019 levels by the end of 21 with a much greater mix of all-access pass subscription business in those offices, which should really help us in the years in 22 and beyond.
spk03: And, Jeff, just one addition. We think we'll be at the booking pace. I mean, we'll be at the run rate. If you can look at slide 7, you're seeing that even the expectation of Q1 is back to almost 9 million versus a normal of 12 million. And so we think in the next few quarters, you'll get back to that normal pace in the quarter, but just not for the year.
spk08: So the run rate will get back. Okay. Thanks for your time, guys. Thanks so much, Chip.
spk05: And our next question comes from Samir Patel from Escalating Capital. Your line is open.
spk02: Hey. Hey, Samir. I know it's a cliche, but great quarter, guys. So three questions. The first, you maintained guidance for 21 at $20 million or so, even though you outperformed last quarter's expectations for Q4, and you have continuing momentum into Q1. So are there negative offsets I'm missing, or are you just being conservative? And then also, Steve, do you have guidance for the deferred revenue build?
spk03: Yeah, I think that last half of the question is probably the reason for being a little more conservative is that we feel really good about, as we said, North America, which is the main engine, we think we'll get back and even be above where it was targeted to be originally in 20. And because of the slower build in international and because it will be all access paths that helps And when it rebounds, we want it to rebound with subscription revenue, not the old traditional revenue. That revenue won't show up in the year as much. And so there will be more deferred revenue put on the books and, therefore, less recognized. We're being conservative, we hope, to start with. But part of it is just because as this rebounds, we want to use this time to transition those international operations overseas. And Steve, John, the deferred revenue question. Hi, Samir. So...
spk04: As you recall, our deferred revenue added to the balance sheet last year was more than $8 million. The year before, it was like $11 million. And this year, it was just over $2 million added to the balance sheet. So we think in the coming years that the amount we added to the balance sheet, as Bob was talking about, would be more like the $8 million to $11 million. We're not giving specific guidance on that, but it will be significantly more – we think, than it was this year, reflecting everything that Bob and Paul just talked about. And the other thing related to this guidance, whether it's conservative or not, one of the things I might not be able to emphasize enough is that Q1 and Q2 of last year, FY20, were very, very strong quarters. We were on a path that we thought we were going to have an extremely good year And so for our first two quarters, we're comping against those two quarters. So we expect to be behind last year halfway through the year. And the fact that we then have significant growth in the year shows that everything we're talking about will pop out and be more visible in the third and fourth quarters.
spk02: Perfect. Okay, cool. Second question, Paul, with regards to the international business, you seem to have a pretty confident recovery outlook, despite the new wave of lockdowns in Europe, for example. You've talked about it a few times, but maybe go over it again. What's changed for those customers since March until now, where the COVID spikes and restrictions and whatnot don't actually impact the sales? Is it essentially just them being comfortable with live online now and also having the lay of the land and not deferring decisions?
spk07: Yeah, I think, I think that's part of it. And so, you know, take Europe, for example, Europe and Germany, uh, is, is where our direct operation, Germany and the UK, we've got, uh, the live online capability is there. It's primarily what we sell is all access pass. And so the uncertainty, uh, that they saw over there and we saw over here, I think as they go back into lockdown, it'll be, it remains to be seen exactly what happens, but, uh, I, I, we're, we're, they're more comfortable in a custom delivering and what we don't have this time. When we went into the pandemic back in March and into lockdowns, everything we had on the books was substantially everything we had in the books was live in-person delivery. And so the choice the clients had was convert to live online, which they weren't sure about, weren't sure if that was going to work. And also they were trying to make that decision while sending everybody home or just cancel the session. And so many at that point chose to cancel. The different circumstance now where a lot of these employees hadn't even returned to the office, they're accustomed to working from home and the sessions we have on the books aren't booked live in person, they're booked live online already to begin with. And so we expect that they'll continue with those and we won't see anywhere near the kind of disruption now that we saw then. Remains to be seen what happens throughout Asia where we don't have that, you know, China, Japan, I hope they don't go back into the same kinds of lockdowns they had before. because our business there is not as live online delivery friendly yet. Not so much our capability. We have the capability to do it. But in a place like China, it's just that's not how they are accustomed culturally to receiving training in their homes. They're not set up for it as well. But as you speak to Europe specifically, we don't think it will be as disruptive. And right now we're not seeing the lockdowns in China and Japan like we are in Europe.
spk02: And what about the licensing network?
spk07: Yeah, it's kind of a similar story. So the licensee network will continue to have – we don't expect that they're rebounding as much this year. And built into the guidance that we've given is that that business will – their first two quarters will look more like Q3 and Q4 last year for us, and then it'll start to rebound somewhat later in the year. But for many of them, it'll continue to be a slower build back in the licensee business. And we're aggressively working to try to continue to convert them to all-access pass as well. It's country dependent and those places where the local governments have the ability to pour in quite a bit of stimulus they're faring better right now. And in some of the, some of the countries where that's not the case. It's a more difficult road. And we don't, we don't quite see them tracking at the same rate as our international direct offices, but we do expect them to strengthen from where they were at the worst parts of the pandemic.
spk02: Okay, perfect. Third and final question for Sean or Bob. You know, education margins are still a bit of a drag. I know you guys did that sales reorg a while back. Any comments on how that's going, whether the selling process has improved in efficiency?
spk09: Sean, do you want to address? Yeah, sure. Sure. Hi. Yeah, so we feel really good about it. You know, we reorganized, went to one sales team, one sales leader, and So far it's been really good. We feel like the communication has been better. The person that is leading, Meg Thompson, that is leading our sales team now is kind of our expert on district focus, selling to districts. And I think that is a very important part of our future. We find that our districts are – that's where we get the highest retention rate. And so we're really using that advantage and training everybody on how to get to districts Sam Meymand, This is why it's one of the reasons why we feel like this year we can bring on more schools, even in this tough environment we can bring on more schools and last year's is through our district focus so that is off to a really good start. Sam Meymand, We're glad we did it. We feel like it's right decision. And I think it's going to show up down the road.
spk03: Dave Kuntz, There's been about, as I said, about a million and a half dollars of just permanent costs taken out of that infrastructure. independent of sales levels that will at least improve the margins by a few hundred basis points. We think the main thing will be, to Sean's point, the ramp up of sales people we've already hired under this new structure and with the new models we expect to improve this year. Although I'd say, as I did say, I think the environment won't be friendly, but our efforts will be good. Our efforts and and capabilities are stronger in an environment that's probably not that much more friendly.
spk09: Yeah. Yeah, just to add to what Bob said, on the retention side, just retaining all the memberships that we have in the subscription business, that came in pretty solid last year, and we expect that to continue this year. You know, the more challenging thing will just be bringing on new schools and new districts. Yeah, but we have found in the last few weeks that things are opening up, so a lot more willingness to talk and explore with us, which is great.
spk02: Understood. Thanks. Appreciate the caller. Thanks, Drew.
spk05: And our next question comes from Patrick Retzer from Retzer Capital. Your line is open.
spk06: Good afternoon, gentlemen. I don't have any questions everything's been covered I just wanted to compliment you guys on the effective reaction and adjustment of the business to the pandemic and let you know I love the guidance for the current year so congratulations and keep up the good work thanks very much Pat that's very nice thank you
spk05: And we have no further questions. I'll turn the call back over to Bob Whitman for final remarks.
spk03: Thanks very much. Well, I just want to express to each of you how much we appreciate you through this whole period. We've had many discussions with both our great analysts who spend enormous amounts of effort to really understand and model this. And I want to thank each of you for the really remarkable efforts and the detail into which you've gone to really understand the business. Also for our shareholders, We have so many sophisticated investors as our shareholders, which we're grateful for and we admire. Your questions have been great. And also, I think just the recognition that, you know what, this may be a good time to be a, you know, I think many of you have expressed that, you know, you see this as an opportunity and we do too. But we appreciate you. And thanks for making the time to join us today. We, of course, delighted to answer any individual questions offline. Thanks very much. And we'll talk soon. Thank you.
spk05: Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. And you may now disconnect.
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