Franklin Covey Co (FC) Q1 2021 Earnings Call Transcript

Thank you. Good afternoon ladies and gentlemen. On behalf of Franklin Covey, I would like to welcome you to our quarterly financial results call this afternoon, and welcome everyone to 2021. We hope everybody had a safe and healthy beginning to the new year, and hopefully, you'll enjoy today's presentation. Before we begin today's presentation, we want to remind everybody that this presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based upon management's current expectations and are subject to various risks and uncertainties, including, but not limited to, the ability of the company to stabilize and grow revenues; the acceptance of and renewal rates 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 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 this afternoon to Mr. Bob Whitman, our Chairman and Chief Executive Officer. Bob?

Thanks, Derek. Good afternoon, everyone. We're glad to have the opportunity to speak with you today. We’re pleased to report that in the first quarter of fiscal 2021, our operations showed remarkable strength and adaptability despite the ongoing pandemic. Specifically, as highlighted in Slide 3, our revenue was robust, largely fueled by the growth of All Access Pass and related sales. Gross margins improved by 359 basis points compared to last year's impressive first quarter. We also saw a decline in operating SG&A by $4.4 million. Adjusted EBITDA reached $3.7 million, surpassing our initial expectation of $2 million to $2.5 million. Moreover, our net cash from operating activities rose by 60% or $4.1 million to $10.9 million, significantly exceeding last year’s $6.8 million generated in the first quarter. We concluded the quarter with about $49 million in liquidity, up from $42 million at the end of the fiscal year in August and from $39 million at the start of the pandemic. We are satisfied with the continued advancements in the first quarter, and I’d like to delve into those results in more depth shortly. However, let’s first provide some context. In our year-end conference call just over two months ago, we shared that within our enterprise division in North America, which constitutes about 70% of total enterprise sales and where All Access Pass and related sales make up 84% of total sales, we noted that All Access Pass subscription sales have remained strong throughout the pandemic, increasing by 18% in North America from March to August. We indicated our expectations for All Access Pass subscription sales to remain robust throughout this year’s fiscal first quarter and beyond. Additionally, we mentioned that after the initial disruption to live on-site coaching and training services during the first six weeks of the pandemic, our quick transition to delivering these services live online—a capability we've possessed for over a decade—allowed our add-on services to recover swiftly, with new bookings returning to levels seen in the prior year by July. We anticipated this booking trend to continue in Q1 and moving forward. Furthermore, in our international operations, we reported that despite a limited All Access Pass subscription business in most areas, they started to show signs of recovery, and we expect these operations to strengthen as the year unfolds while enhancing the focus on All Access Pass in those locations. In our Education Division, which makes up just under 20% of total sales, we achieved exceptional subscription retention rates for Leader in Me schools in the last fiscal year, noting the addition of over 300 new schools during the pandemic. While navigating a difficult educational environment, we expect retention rates to remain high and to welcome even more new Leader in Me schools this fiscal year compared to last. Despite the ongoing challenges, we are pleased to report that, as indicated in Slide 5, these positive trends have continued and even accelerated through the first quarter and are continuing to gather momentum in the second quarter. All Access Pass subscription sales remained very strong in the first quarter, with invoiced amounts increasing even more rapidly, setting a foundation for future growth in actual subscription sales. All Access Pass-related sales rebounded quickly and are now surpassing levels from last year, even prior to the pandemic. Sales in China, Japan, and our other international offices have also shown significant recovery. Additionally, the retention rate for Leader in Me membership from existing schools has been impressive this first quarter, and our initial sales to new schools indicate a promising start. Now, let’s explore each of these points further to provide context and clarity. First, as illustrated in Chart 1A on Slide 6, total company All Access Pass subscription sales increased by 16% in the first quarter to $17 million, and grew by 17% to $65 million for the past 12 months. As indicated in Chart 1B on Slide 6, All Access Pass amounts invoiced—critical for future sales growth—rose by an extraordinary 55% in the first quarter. Excluding a large government contract, the growth still stood at an impressive 32%. This establishes a solid foundation for accelerating future growth. Notably, All Access Pass performance is robust across all key metrics we monitor, including substantial increases in new clients both in the first quarter and over the latest 12 months, during which 9 of the 12 months coincided with the pandemic, yet we continued to see increases in new clients each quarter; an annual revenue retention rate exceeding 90% for both the quarter and the past year; and the sale of multiyear contracts, with unbilled deferred revenue from these contracts growing by 19% in Q1 compared to Q1 '20, reaching $40.5 million. We are encouraged that all fundamental metrics and drivers are exhibiting strength. As shown in Chart 1A on Slide 7, across North America, our swift transition to booking and delivering coaching and training online has enabled us to meet customer demands remotely. Interestingly, the flexibility of live online delivery has often led clients to expand their utilization of add-on services due to the ease of coordination and execution. The trend in bookings for these add-on services, predominantly delivered online, remains strong through December. The uptick in bookings, which serves as a leading indicator, has translated into stronger actual invoiced sales of delivered services. Following the pandemic onset in March, bookings for live on-site services were inevitably canceled, but by the fourth quarter of fiscal 2020, new bookings rose to levels almost equal to those of the same quarter in fiscal '19, fueling an increase in the dollar volume of delivered services. Consequently, instead of a decline of $6.9 million in the third quarter, the dollar volume of services delivered in the fourth quarter saw a diminished decrease of only $1.1 million. This positive trend persisted in the first quarter, with total bookings rising year-over-year and invoiced sales only slightly down by $200,000 compared to last year's notable first quarter. Including results from December for the initial four months of fiscal 2021, actual sales of delivered services exceeded those of the same period last year. As depicted in Chart 1B on Slide 7, it is noteworthy that 87% of our clients have now transitioned to live online service delivery, significantly reducing our vulnerability to future cancellations. We are very pleased to see these trends continue. Turning to our international operations, as shown in Slide 8, sales in China, Japan, Germany, and among our other direct offices and licensee partners improved significantly compared to both the third and fourth quarters. At the pandemic's outset, we had to postpone nearly all live on-site training engagements in these countries. Since they had only just begun selling All Access Pass and lacked a solid base of sustainable subscription revenue for buffer, their sales dwindled to $4.1 million in the third quarter, down from $12.7 million in the third quarter of fiscal '19. Nevertheless, in last year’s fourth quarter, while still operating below last year's levels, sequential sales in these countries rose 70% to $7 million from the $4.1 million in the third quarter. We anticipated that our international operations would continue to strengthen in the first quarter, and we are pleased that they did, with international sales reaching $9.9 million, exceeding our expectation of $9 million. Though still below last year's figures, this marks an increase of $2.9 million or 41% compared to the $7 million from the fourth quarter, and 2.4 times the $4.1 million from the third quarter. Moreover, our international operations have also seen substantial growth in All Access Pass amounts invoiced, laying the groundwork for future sales in these locales. We feel optimistic about the trajectory in these regions and the strategic acceleration towards All Access Pass. Lastly, as illustrated in Slide 9, despite a persistently challenging environment, we have observed improvements in trends within our Education Division during the first quarter. Notably, the number of Leader in Me schools renewing or preparing to renew their membership contracts has risen to 615, up from 450 schools at the same time last year. New Leader in Me schools are in the process of contracting after experiencing a decline in the fourth quarter, and are now on par with last year’s first quarter, which occurred before the pandemic. Given the current educational landscape, we are encouraged by these trends. Now, let’s take a closer look at our first quarter performance. As indicated in Slide 10, our first-quarter performance exceeded expectations and, thankfully, demonstrated positive momentum across nearly every front. Our adjusted EBITDA for the first quarter was $3.7 million, exceeding our forecast of $2 million to $2.5 million. These results are especially impressive considering that last year's first quarter was notably strong. Moving to Slide 11, our cash flow and liquidity position remain robust. Our net cash generated in this quarter, at $532,000 during one of our lower-performing quarters, was $4.9 million higher than last year’s first quarter. This increase primarily stems from the success of our new All Access Pass contracts invoiced, which helped maintain our net deferred revenue position. We saw an improvement of $6 million versus the prior year in our balance sheet position. Our cash flow from operating activities for the first quarter reached $10.9 million, marking a $4.1 million, or 60%, increase from last year's $6.8 million. This strong cash flow results from the advantageous nature of our subscription model, where we invoice upfront and collect cash faster than we recognize income. Consequently, we concluded our fiscal year in August with over $40 million in total liquidity, comprising $27 million in cash and an undrawn $15 million revolving credit facility, which was even higher than the amount at the pandemic's start. We were pleased to have further bolstered this liquidity during the first quarter, closing with $49 million in total liquidity, made up of $34 million in cash, indicating no net debt, and our $15 million revolving credit facility remains undrawn and available. We are quite satisfied with our financial position. As demonstrated on Slide 13, this strong performance was attributed to significant growth. Our total revenue was $48.3 million, slightly outperforming our expectations, primarily driven by our North American operations and the success of All Access Pass. As illustrated in Slide 14, company-wide All Access Pass subscription sales experienced a 16% increase in the first quarter. Alongside the recognized subscription revenue, we also achieved an impressive 55% growth in All Access Pass amounts invoiced. Even without considering a significant government contract, the growth in amounts invoiced remained a robust 32%. Much of this substantial growth in invoiced amounts was not recorded in the quarter but is now reflected on the balance sheet as deferred revenue, destined to increase our results in subsequent quarters. These new invoicing amounts included strong sales to new clients, a continued revenue retention rate exceeding 90% for both the quarter and the latest 12 months, a wide range of All Access Pass expansions, and a large influx of multiyear All Access Pass contracts that surged the unbilled deferred revenue, set to convert into future sales. All Access Pass add-on sales also performed exceptionally well during the first quarter. Our add-on service booking momentum, a lead indicator for actual sales, rebounded to levels seen in the previous year as early as July. The pace of booking continued to accelerate beyond that in August and throughout the first quarter and into December, resulting in a healthy volume of bookings, translating into strong revenue from delivered services worldwide. These services reached $9 million, slightly exceeding the figures from last year's very strong first quarter, during which we observed significant growth in add-on sales. In addition, on Slide 15, it’s clear that All Access Pass has significantly contributed to gross margin growth in the first quarter. Our gross margin percentage stood at 75.3%, a 359 basis point improvement compared to 71.7% in the first quarter of fiscal 2020, and increased by 275 basis points from the most recent 12 months. Consequently, our gross margin for the Enterprise Division rose to 80.6% in the first quarter, compared to 75.3% from the previous year's first quarter, a 530 basis point increase. Meanwhile, our SG&A expenses registered at $32.7 million, down $4.4 million from last year's first quarter. Ultimately, these factors culminated in adjusted EBITDA at $3.7 million this first quarter, contrasting with our forecast of $2 million to $2.5 million, and only $1.3 million lower than last year's robust quarter, despite the slower recovery in our international operations. We want to emphasize again the strength of our invoicing and multiyear sales in the first quarter. As the majority of these sales are not yet recognized, they contribute to building our deferred revenue balance. Our total balance of billed and unbilled deferred revenue increased to $97.4 million, reflecting a growth of $14.7 million or 18% when compared to last year's first quarter balance of $82.7 million. As we previously noted, nearing $100 million of deferred revenue is a significant milestone for subscription businesses. This indicates a stable and predictable future performance. The combination of reported sales, new bookings, balance sheet improvement, and increased deferred revenue bodes well for our expectations of achieving high growth rates in adjusted EBITDA and cash flow in 2021 and beyond. We project adjusted EBITDA between $20 million and $22 million for fiscal 2021, a promising start toward this goal, representing nearly a 50% increase from the $14.4 million achieved in 2020. Our aim is to see adjusted EBITDA increase by approximately $10 million each subsequent year, targeting around $30 million in 2022 and approximately $40 million in 2023. These targets are based on our expectation of achieving at least high single-digit revenue growth annually, equating to about $20 million per year. On average, we anticipate that roughly 50% of that revenue growth will flow through to increases in adjusted EBITDA and cash flow due to our high gross margins and variable selling costs. We fully expect to reach an adjusted EBITDA to sales margin of 20% in the coming years and aspire to become a $1 billion market cap company, even at a conservative adjusted EBITDA multiple relative to our growth rate and not relying on revenue multiples, which we should be increasingly able to secure. As we look ahead, I’d like to address three factors that we anticipate will drive us toward fulfilling these strong objectives and solidifying our position as a consistently high growth company in adjusted EBITDA and cash flow. In Slide 18, the three growth drivers are outlined. The first driver is the strength of the All Access Pass economic engine, which we have discussed. The second is our ongoing investments in areas valued by our customers where we already possess competitive advantages. The third is the overall strength of our organization, leadership, and teams worldwide. As depicted in Slide 19, the first growth driver is the strength of the All Access Pass economic engine. In Slide 20, we can see that All Access Pass and related sales have been the primary contributors to our revenue and adjusted EBITDA growth over the past five years. Since 2015, annual All Access Pass and related sales have surged from negligible figures to over $90 million by fiscal year 2020, reflecting a remarkable compounded annual growth rate of between $10 million and $20 million each year. This growth has been a major contributor to our overall revenue increase during these years, effectively mitigating the decline in our legacy businesses and leading to 84% of our revenue now being derived from All Access Pass and related sales in the Enterprise Division in North America. In the first quarter, All Access Pass subscription sales rose by $2.3 million, or 16%, relative to the same period last year. Over the latest 12 months, even through nine months of the pandemic from March to November, subscription sales still grew by 17% compared to the same timeframe last year. As noted in Chart 1A of Slide 22, our sales and invoicing have demonstrated substantial growth, including a notable 55% increase in our amounts invoiced, which includes a significant government contract, while even excluding that, there was still a robust growth of 32% or $3.4 million. Another aspect driving the All Access Pass is its compelling business model economics. This model supports strong gross margins, high revenue retention rates, and enables a reduction in operating SG&A as a percentage of revenue, resulting in high flow-through rates. This should allow for approximately 50% of incremental revenue growth to contribute to adjusted EBITDA and cash flow increases. We benefit from the visibility and predictability associated with our growing balance of billed and unbilled deferred revenue, which is approaching $100 million. The predictability of the key operating metrics for All Access Pass, such as an annual revenue retention rate exceeding 90% and the fact that over a third of All Access Pass holders are entering into multiyear contracts, contributes significantly to our stability and predictability. The second growth driver is our ongoing investments in the areas where we excel. We are directing significant resources toward our unique competitive advantages. All Access Pass is distinct; it is not just another typical subscription service, but one that provides meaningful access to targeted and essential skills content. Franklin Covey has carefully constructed its strategic framework to create best-in-class solutions for the challenges that matter most to our customers. Our top-tier solutions address vital needs, foster behavioral change at scale, ensure compliance with commitments, and nurture leadership across all levels. As highlighted in Slide 27, our offerings include well-regarded programs, such as the 4 Disciplines of Execution and Speed of Trust, alongside new, popular solutions like 6 Critical Practices for Leading a Team and Unconscious Bias. Furthermore, we are continuously investing in new content and solutions, including a novel change management solution and additional leadership offerings. Flexibility represents a significant competitive edge as we provide best-in-class solutions for pressing customer needs. We've invested heavily in technology, digital learning resources, and design to deliver content flexibly across various formats, including digital formats, micro-learning, live online, and live on-site coaching in multiple languages worldwide. This growth in All Access Pass-related sales has surged from nonexistent levels to over $90 million, with a high revenue retention rate exceeding 90%. The average size of passes has risen from $29,800 to $40,000 in the most recent 12 months, accompanied by a substantial balance of deferred revenue. Lastly, Slide 31 illustrates our dedicated sales force of 247 client partners or associates across various countries, including the U.S., Canada, China, Japan, Australia, the U.K., Ireland, Germany, Austria, and Switzerland, with plans to add 20 new client partners this fiscal year.

Sure. Thanks, Bob, and good afternoon, everyone. As you look there on slide 33, in addition to a growing number of client partners who continue to ramp at or above our expectations, which they themselves represent a great revenue driver for us as a company. But on Slide 33, we've also built a network of approximately 80 international licensee partner offices, which cover most of the countries in the world. These partner offices generate gross revenues of approximately $50 million and may pay Franklin Covey a royalty that's equal to about 15% of these revenues. These licensee partner offices are strategically very important to us. Not only do they work to penetrate their local markets, but they also provide services to global clients with local offices. This allows, for example, a global client in Germany who buys an All Access Pass to roll out that solution in many countries around the world that have access to All Access support resources in any country that they might be operating in. As shown in Slide 34, the fourth strategic moat is the power, reach, and influence of Franklin Covey's industry-leading thought leadership. Our years of investment in research and development and our thought leadership partnerships not only result in solutions that provide enormous value for clients, but they create a large treasure trove of research and case studies that we use to broaden our thought leadership. Franklin Covey and its key thought leaders published works that often become best sellers, presenting principles and solutions to help our clients. Our key thought leaders in each solution area also write white papers and articles. They contribute to publications, deliver podcasts and webinars, and speak at some of the world's most influential events. Franklin Covey's industry-leading thought leadership includes best-selling books as well. To date, we've sold more than 50 million copies of books worldwide in over 50 languages. And to put that $50 million number in perspective, the number of books we've sold as part of our thought leadership strategy is greater than the amount sold by several of our top competitors combined. To achieve best-seller status, a book typically needs to sell a little over 250,000 copies. To reach 50 million copies sold and counting is unprecedented in the industry. These books typically achieve best-seller status not only in the U.S. and Canada, but also in other countries throughout the world. Our practice and thought leaders regularly publish articles and podcasts in various publications and outlets and speak at client events and on the World Business Forum stage. This strong thought leadership helps to establish our position as a partner of choice for organizations seeking best-in-class solutions globally and at scale. And so Bob, I'll turn it back to you to talk about growth driver number three.

In fact, Paul, why don't you go ahead and discuss the strength of our organization as these people engage with you. So...

Great. You see the navigation slide there, 36. So speaking about the strength of our organization, this is really kind of our third growth driver. Ours is a culture where our leaders are experienced and trusted. Our processes are disciplined and strong, and our team members are really highly engaged. Most organizations correctly attribute their success to the strength of their people, and they're correct in doing so. However, with the opportunity of having a front-row seat deep inside the operations of thousands of organizations with whom we work, we know that Franklin Covey's organization, our leaders, processes, and culture are extremely strong. In fact, they're among the strongest that we see. In our recent annual employee engagement and culture survey, all of Franklin Covey associates were asked to rate on a 0 to 10 scale with 10 being the highest, how likely they would be to recommend their leader or manager as someone to work for. As shown on Slide 37, 94% rated their leader at 7 or above, and 83% rated their leader at 9 or a 10 on that question, even in the middle of the pandemic when leaders were being stretched and required to deal with significant additional challenges. As for our strong processes, we do much work with organizations, as I mentioned earlier, helping them institutionalize their ability to execute on key priorities. We know that every organization has pockets of great performance. What differentiates the great performers from lesser performers is the extent of that variability. You can see a little diagram of this in Slide 38. Top performers' performance distribution curve is simply righter and tighter than that of their lesser-performing counterparts. In other words, on average, their performance is better, and there’s less variability among their units. This institutionalization of great results requires strong and consistent processes. We've implemented these same strong execution processes throughout our own operations. We use the 4 Disciplines of Execution as an example. We're pleased that as a result of our strong leaders and strong processes, our leaders' performance distribution curve is very right and tight. Illustrative of their strong execution is that as shown you'll see on Slide 39, in the first quarter, 12 of our 15 managing directors, each country has a managing director, and in the United States, we have 10 and they lead our great sales teams. But each 12 of our 15 managing directors met or exceeded their quarterly revenue objective in Q1, and the other 3 leaders who missed their goal missed by an aggregate of only 1.3% of the total direct office sales goal. Collectively, the group, all 15, exceeded their revenue goal and 14 of the 15 managing directors met their EBITDA goal, with the one who missed missing by only $50,000. Collectively, this group exceeded EBITDA by about $1 million. To the engagement of our associates around the world, as shown on Slide 40, again on the same recent culture survey that we conducted, Franklin Covey associates were asked to rate on a 0 to 10 with 10 being the highest again, how likely they would be to recommend Franklin Covey as a great place to work, and we're pleased that 92% of employees gave a rating of 7 or higher, and 69% gave a rating of a 9 or a 10. We have just a phenomenal group of associates around the world. We're so grateful for their efforts. They are tireless workers. This is a group that executes very, very well, and I think you see that in the results we've talked about today. So Bob, I'll turn to you for any comments, and I think you want to move on to guidance probably.

Thank you, Paul. Looking at the bigger picture, while we all wish we could move past the pandemic, we are thankful that it has highlighted the value of our strong solutions to our clients. Our business model, especially the subscription aspect, has been very robust and favorable. Our teams did not shy away during tough times; instead, they rose to the challenge and quickly regained momentum. We are pleased and grateful for our strong workforce, solid management, excellent offerings, and the financial resources we have to continue investing wisely, along with significant liquidity for support. Now, I would like to invite Steve Young to discuss our outlook and guidance. Steve?

Thank you, Bob and Paul. I enjoyed hearing about the business. I'm also very excited about where we are and the direction that we're going. Pleased to talk a little bit about guidance and targets. So our guidance for FY '21, as discussed last quarter, is that we expect to generate adjusted EBITDA of between $20 million and $22 million. This result would be an approximately 50% increase in adjusted EBITDA compared to the $14.3 million we achieved last year. This expected growth reflects everything that Bob and Paul have talked about, including the continued strong performance of our North America operations, our All Access Pass, and other things. Underpinning this guidance for the year are the following expectations that we talked about last quarter and are consistent with our first quarter results: First, the recognition to sales during FY '21 of more than $60.6 million of deferred revenue already on the balance sheet at the end of last year, and the recognition of a portion of the $39.6 million of unbilled deferred revenue, which we had contracted. These balances provided and provide significant visibility into our revenue and gross margin for FY '21. Second, in addition to the recognition of deferred revenue, the factor which is expected to have the greatest impact on our FY '21 result is also a factor in which we have high confidence, that is the strength of All Access Pass and related sales. We expect that All Access Pass will continue to achieve strong growth in both sales and invoiced amounts. We'll achieve high revenue retention rates, strong sales of new clients, and continued growth in pass expansions and multiyear contracts. We also expect that All Access Pass add-on sales will continue to be strong. Driven by this, in FY '21, we expect our operations in the U.S. and Canada, including government, to achieve an adjusted EBITDA contribution level higher than in FY '19 and even somewhat higher than we had originally expected to achieve in FY '20. So the third underpinning of our guidance, we expect that our revenue in Japan, China, and among our licensees 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 the new sales being added to the balance sheet as deferred revenue. The fourth underpinning of guidance is in education. We expect to continue to achieve strong retention of both schools and revenue among existing Leader in Me schools. In addition, despite the fact that we could continue to be in a challenging and budget-constrained environment for education in the remainder of FY '21, we still expect to achieve growth in the number of new Leader in Me schools that we add this year compared to the number we added last year. So affirming our annual guidance and feel comfortable with that. For our second quarter of this year, we expect that adjusted EBITDA will be between $1 million and $1.5 million, compared to $4.1 million in adjusted EBITDA in last year's very strong second quarter and still reflecting the expected strong performance of All Access Pass in the U.S./Canada and government and the same general expectations just outlined for international operations and education. Please remember that last quarter, we did say we expected Q2 this year to be less than the very strong Q2 last year. Please also remember that our second quarter has typically been the lowest adjusted EBITDA quarter of the year due primarily to the holiday season. Even $1 million of adjusted EBITDA in Q2 would be more than the second-quarter result in FY '18 or the second-quarter result in FY '19. Our second quarter result last year was just a very strong second quarter, representing the momentum that we had and talked about at the time and are beginning to see again. So that's guidance. Now just a few thoughts related to general targets for the coming years and repeating a lot of what Bob said. Building on our $20 million to $22 million of adjusted EBITDA we expect to achieve this year and driven substantially by the expected continued growth in All Access Pass, our target is to increase adjusted EBITDA by around $10 million per year to around $30 million in FY '22 and around $40 million in FY '23. These targets reflect our expectation of being able to achieve high single-digit revenue growth of around $20 million, 50% flow of that revenue to adjusted EBITDA. Those are our targets. While changes in the world business outcomes and many other factors could impact our expectation, we want to share these as our current internal targets and our assumptions and expectations. We also wanted to share, again, like we did last quarter, that in order for the executive team to receive full long-term incentive pay, we need to achieve those targets. So that's our guidance and a few thoughts about coming years. Thank you, Bob.

Thanks, Steve. And with that, we just thank each of you and open this to questions.

Our first question comes from Andrew Nicholas from William Blair.

I would like to begin by discussing the sequential growth in international sales this quarter. You mentioned it briefly in your opening remarks, but I am interested in further details about the main factors contributing to the improvement compared to last quarter. Specifically, I would like to know how much of this rebound can be attributed to a continuation or resurgence in traditional product sales, as opposed to the success of expanding the reach of the All Access Pass product in those areas.

Great. Thanks. Paul, would you like to address that?

I'm sorry, I was talking into my mute button. Thanks, Andrew, for the question. To the first part about just adding a bit more color to the sequential growth from Q4 to Q1, the main driver of that is the increased stability in China and Japan. They were hit particularly hard earliest at the beginning of the pandemic, and so things on the ground there have improved in those countries. People have gotten back to work, and our teams have been filling the pipelines for those countries in earnest back in our late Q2, Q3, Q4, and they're just kind of seeing momentum build back into the business. We expect to continue to see that build. Q2 is our smallest quarter in that part of the world because of the holidays and because of the Chinese New Year. So revenues may not reach exact levels. They will be a little less than what they were this quarter, but on a percentage basis, I think you'll still continue to see consistent sequential improvements as we move into Q2 and into Q3. As for how much of that is from traditional business versus All Access Pass, All Access Pass is coming online, and Japan had a nice quarter with All Access Pass. China is just getting started. We're deep into that with them right now. That’s not driving the performance you’re seeing because those sales, of course, are going on the balance sheet, and we’ll recognize those over the next 9 to 12 months. A lot of that is traditional products that you’re seeing reflected in the Q1 numbers, but we feel quite good about the momentum around All Access Pass in those countries. Additionally, in the U.K. and Australia, we've been selling All Access Pass for years, and their results look much more like what we talk about in the U.S. and Canada in terms of subscription growth and add-on services growth, etc. I don't know, Andrew, if that's helpful or if you have any other questions there.

That's helpful. And then for my follow-up, I just wanted to ask about education and weakness in revenue this quarter. Any more color you can provide there on the drivers of the decline? What, if anything, is timing-related there? And then maybe any color on how the sales conversations have evolved over the past couple of months. I know it's a very fluid environment. So any more color on that business would be helpful.

Sure, Sean, thank you very much. Would you like to address education?

Thank you, Andrew. The sales in the quarter saw a significant decline mainly due to fewer delivery days, coaching, and consulting sessions that are usually prevalent in the first quarter. We experienced over a 50% decrease in these activities. The situation during September, October, and November was challenging, as many schools, prompted by the pandemic, informed us that they did not have the time to engage with us, asking us to reconnect in a couple of months as they were busy managing their busing schedules and lunches while transitioning online. This made it difficult for us to provide our training and consulting services, which contributed to the revenue shortfall in the first quarter. However, we are seeing a rebound. While we were down over 50% in the first quarter, we are currently tracking a decline of about 17% for the second quarter, with ongoing improvements. We are particularly pleased with our retention rates, which are significantly better than last year. We have over 615 schools committed to renewing their memberships, up from 450 last year. Despite a strong first quarter last year in onboarding new schools, we have seen growth in the number of new schools committed to joining compared to the same period last year. Although delivery days, coaching, and consulting were impacted in the first quarter, many of these services are already contracted and will be recognized before the year ends as part of their contracts. So, some of this is a matter of timing. Bob, do you have anything to add?

It's important to note that the revenue decline is mainly due to service delivery, and most of those services are already under contract. Therefore, this is not a loss of revenue for the year; it will actually come in. It will just be recognized when it is delivered or when the contract year concludes, so we will receive that revenue. Does that clarify things?

And the next question comes from Jeff Martin from ROTH Capital Partners.

First question is with All Access Pass remaining, if you include the unbilled long-term deferred, you're growing in the upper teens in terms of the growth rate. With the legacy business, I assume it’s relatively stable at this point with a new level of a portion of the business. Just wondering to get your view on whether a high single-digit growth rate for the overall business, if All Access Pass continues to grow at high teens rate, shouldn't we see the overall business grow a little bit faster than the upper single digits?

Yes. Thanks, Jeff. We should. If you look at the booking pace for invoice sales over the last 6 quarters, pre-pandemic, it was higher than 10%, and it has been in recent quarters as well. I think ultimately, that drives that top line growth in the All Access Pass and related should ultimately pull the overall average up. For some years, as you noted, we’ve had to offset that growth with some decline in the historic legacy business. That's now, as you pointed out, on the flatter part of that curve. So as All Access Pass and related continues to perform well, that will drive our overall growth rate as you point out.

Okay. That’s helpful. And then second question is on the content development and the thought leadership is clearly understood. Thanks for the details on that. But just curious, relative to the last couple of years, what’s your outlook or your level of optimism regarding your new content opportunities over the next couple of years?

We’ve seen some really big ones. Because we’re focusing on the challenges that our clients are facing, and we're always talking to them, we have more than 100,000 hours of sales conversations last year with clients and over 40,000 conversations from our implementation specialists. That really helps us hone in on exactly what they’re looking for. So we’re very excited about two new offerings that we have coming out this year that we believe will address things that our clients have been seeking. They need these solutions, and given that they have an All Access Pass, they would love to just increase their spend with us and have those issues solved. Two of the biggest offerings in usage over the last couple of years have been 6 Critical Practices for Leading a Team, focusing on frontline leaders, which provides practical skills and tools around leading teams. The other big offering is Unconscious Bias, which has gained particular emphasis this year. These are just a couple of examples of new offerings and with a strategic plan we have, we are confident about addressing significant challenges our clients face.

And our next question comes from Marco Rodriguez from Stonegate Capital.

Wondering if maybe you can talk from a bit of a high level. Just aside from any sort of coronavirus impacts that you might need to adjust to in the next few months or 12 months, can you maybe just talk about what are your strategic priorities that you're going to be focusing on here for the next 12 to 24 months?

Absolutely. To begin with, our top priority is ensuring that our offerings align with the key issues our clients care about, while also making it easy for them to access these services globally, both technologically and in other ways. We are investing significantly in portal technologies, user experience, additional services, and various delivery formats. That is our main focus. Secondly, we are working on expanding our sales force to meet the increasing demands, as we have substantial opportunities for growth. With 30 new partners annually, we could potentially increase our client partnerships from 250 to 400 over the next five years. Lastly, we are looking to branch into new content areas that not only meet our clients' current needs but also address critical gaps we foresee in the market. Paul, do you have anything to add?

I agree with you, Bob. While it may be less strategic, we are placing a strong operational emphasis on our international direct operations. We are focused on ensuring that the proportion of their business that comes from All Access Pass and related services reflects what we see in North America. Helping them achieve similar All Access Pass business levels is a key goal for the coming years.

Yes, and regarding the cash flow, we've got a good amount of cash, and we were thinking about it in two ways, Marco. First, in that third priority I discussed, we think there are opportunities for small bolt-on acquisitions that will enhance our abilities to serve clients; that will extend our lead versus anyone else in our space in key areas. So we see that as a use of some of the cash, not large amounts. We expect to continue to generate cash flow equivalent to EBITDA. So if we see $20 million or $30 million or $40 million, we think because most of our endeavors are developed in-house or acquired through licensing, the capital intensity of our business isn't very high. It's not capital-intensive to add salespeople or new content, and indeed, our technology investments aren’t capital intensive. We expect it to mirror the growth we’ve had in cash flow generation.

And this concludes the question-and-answer session. I'll now turn the call back over to Bob Whitman for final remarks.

With that again, we just thank each of you for making the time to join us today and also for the depth of your analysis and understanding. We hope that this is helpful in terms of responding to questions, but we really appreciate the focus you have on the business and the support over the years. We feel good about where we're headed, and I appreciate you being with us on this call. Thanks very much.

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

Thank you.