Welcome to the Q2 2021 Franklin Covey Earnings Conference Call. My name is Adrienne, and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will be conducting a question-and-answer session. Please note this conference call is being recorded. I will now turn the call over to Derek Hatch, Corporate Controller. Derek, you may begin.

Thank you, Adrienne. Hello, everyone. On behalf of Franklin Covey, I would like to welcome you to our conference call to discuss our financial results for the second quarter of fiscal 2021. Before we begin, I’d like to remind everybody that this presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based upon management’s current expectations and are subject to various risks and uncertainties, including but not limited to, the ability of the company to stabilize and grow revenues, the acceptance of and renewal rates 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 current expectations, and there can be no assurance that 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 would like to turn the time over to Mr. Bob Whitman, our Chairman and Chief Executive Officer. Bob?

Thanks, Derek. Hello to everyone. We appreciate you joining us today. We are really happy to have the opportunity to talk with you. We are really pleased that our second quarter results were strong and even stronger than expected. We believe this again emphasized the strength, quality and durability of Franklin Covey’s value proposition and our strong subscription business model. Specifically, in the second quarter, as you can see in slide three, revenue was strong, driven particularly by the strength and growth of All Access Pass and related sales. Gross margins increased 559 basis points compared to last year’s already strong second quarter. Our operating SG&A declined by $2.4 million. Adjusted EBITDA increased to $5.1 million, which is a level $1.1 million or 26% higher than the $4 million of adjusted EBITDA achieved in last year’s strong pre-pandemic second quarter, and to a level significantly higher than our expectation of achieving between $1.5 million and $2 million in adjusted EBITDA for the quarter. Our cash flow is also strong. Net cash provided by operating activities year-to-date increased 26% or $4.5 million to $21.9 million, ahead of the $17.4 million achieved in last year’s year-to-date second quarter. And finally, we ended the quarter with approximately $55 million in liquidity, which is up from the $39 million liquidity we had at the start of the pandemic one year ago. So we are pleased to be in this position. I’d like to discuss these results in more detail in just a moment, but first some context. This strong and stronger than expected performance reflects the continuation and acceleration of four key trends we discussed in the past three quarters, which continued in this quarter. Specifically, as indicated in slide four, these trends are; first, that the growth of All Access Pass sales has been very strong; second, the All Access Pass related services have continued to be strong and are now even higher than they were at very strong levels we had pre-pandemic; third, our international operations have continued to rebound, and fourth, despite continued uncertainty during the first-half of the year, trends in our education business are really encouraging. I’d like to provide a little more detail on each of these trends. First, as expected, the growth of All Access Pass and related sales, which accounts for 83% of our enterprise sales in North America continues to be very strong. As shown in Chart A in slide five, you can see the total company All Access Pass pure subscription sales grew 13% in the second quarter to $17.5 million and have grown 14% year-to-date for the first six months and 15% for the total 12-month period during which the entirety of the pandemic to-date reached $67 million. In addition, as shown in Chart B, total company All Access Pass amounts invoiced had been growing even faster, growing 16% in the second quarter to $22.5 million and 30% year-to-date to $38.4 million. Importantly, much of this 30% year-to-date growth in All Access Pass invoiced amounts has been added to the balance sheet and will establish the foundation for accelerated sales growth in future quarters. Importantly to us, All Access Pass performance has been strong across all the key elements which we pay attention to. The number of All Access Pass sales to new logos increased meaningfully both in the second quarter and in the latest 12 months. As shown in Chart C, our annual revenue retention has continued to exceed 90%, and also the sale of multiyear contracts has continued to be strong with our balance of unbilled deferred revenue related to multiyear contracts increasing to $37.4 million, as shown in Chart D. Second, the sale of All Access Pass related services which is delivered primarily through Live-Online was also very strong in the second quarter. Chart A in slide six shows the strong booking trend for All Access Pass add-on services, almost all of which are now being delivered Live-Online. As you can see in Chart C, with the beginning of the pandemic in March of last year, bookings of services delivered live on-site at client locations were necessarily cancelled, and the year-over-year dollar volume of services declined, with delivered engagements down $6.9 million in North America in the third quarter. However, in the fourth quarter of fiscal 2020, new bookings increased levels nearly equal to those achieved in the fourth quarter of the prior year in ‘19. These strong bookings in turn drove an increase in the dollar volume of services actually delivered. As a result, instead of being off $6.9 million in the third quarter, the dollar volume of services delivered in the fourth quarter was off only $1.1 million. This same positive trend continued in the first quarter and accelerated in the second quarter, resulting in the second quarter where sales were actually higher and year-to-date services revenue in North America has exceeded the levels achieved in last year’s second quarter and first six months period pre-pandemic. As shown in Chart B, 92% of our services are now being delivered to clients Live-Online. This is important because with 92% of services being delivered Live-Online, that momentum can continue regardless of when and whether the organizations return to their offices. Third, as shown in slide seven, performance in our international operations has also strengthened in the second quarter. Sales in China, Japan, Germany, and among other international direct offices and licensee partners continue to improve, continuing the trend established in both the fourth and first quarters. At the start of the pandemic, we had rescheduled substantially all live on-site training engagements in these countries. Since these countries were just starting to sell All Access Pass and therefore did not have a strong base of durable subscription revenue to cushion them, sales in these countries declined significantly compared to the third quarter of fiscal ‘19. Now, actually this decline started a little earlier in China in the middle of last year’s second quarter with the onset of the Coronavirus there. As shown in last year’s fourth quarter, while still operating well below the levels achieved in the prior year fourth quarter, sequential sales and sales as a percentage of the prior year in these countries began to improve significantly. Year-over-year sales improved further in the first quarter. We expect the sales in our international operations to continue to strengthen in the second quarter, and we are pleased that they did. As shown in the second quarter, international sales were ahead of our expectations and just 14% lower than last year’s second quarter, with most of this decline represented in Japan and U.K., which have had a series of rolling shutdowns in their economy, which we expect to strengthen. Importantly, another reason for the slight decline is that we are having a good conversion of sales to All Access Pass, and that is putting revenue onto the balance sheet and driving an increase in our balance of deferred revenue internationally that will help to drive some strong sales growth in the future. Finally, as shown in slide eight, in the education division, despite an educational environment which continues to be very challenging, we have seen a strengthening in the trends of our education business both in the second quarter and year-to-date. The strengthening includes that number one, the number of Leader in Me schools that have renewed or are in the process of renewing their Leader in Me membership increased to 1,059 during the second quarter, compared to 725 schools at the same time last year; and second, the number of new Leader in Me schools contracted by the end of the first quarter or in the process of contracting is almost equal to that achieved in last year’s second quarter pre-pandemic. Just to note that there are also some positive trends in the education market overall despite the challenges which we all know about, and we expect these will help our education business during the remainder of this fiscal year and into next fiscal year. These trends include; one, increasing confidence among those in the educational community that most schools will be open in the fall of this year; not certain, but more confident; second, as shown on slide nine, the three COVID-19 stimulus bills passed by Congress in March last year, December, and this March dedicated nearly $200 billion towards stabilizing budgets in K-12 schools, with a disproportionate amount of help coming to Title One schools where Leader in Me is often the strongest; and three, Social-Emotional Learning for students, known as SEL, which plays to the strength of Leader in Me continues to gain momentum. Its importance is being discussed every day in the press and is becoming increasingly acquired by districts. Just one more note. To take advantage of the stimulus funding and the SEL movement, our education team has added to its positioning efforts, helping schools address the issues of learning recovery and student and teacher mental wellness, which have become pressing topics the education community is trying to address, and the Leader in Me is really designed to deliver on. Early indicators suggest this expanded position is working well, and we believe these business and market trends will work in our favor. It will still be a difficult environment this year, but we are confident in the future of our education subscription business. We are being conservative about our expectations this year and feel good about our ability to meet those. With this context, I’d like to turn the time to Steve Young and ask him to dive a bit deeper into our performance for the second quarter.

Okay. Thank you, Bob, and everyone. I am pleased to be on the line with you today to discuss our second quarter results. As shown in slide 10, our performance for the second quarter was stronger than expected and showed positive momentum on almost every front. Our adjusted EBITDA for the second quarter was $5.1 million, which, as Bob said, is an increase of $1.1 million or 26% compared to last year’s second quarter, and it amounts to substantially exceeding our expectation of achieving second quarter adjusted EBITDA in the range of $1.5 million to $2 million. These results are even more notable given that last year’s second quarter was also very strong. Our cash flow and liquidity positions also increased significantly. As shown in slide 11, our net cash generated for the quarter was $5.2 million, which was $4.2 million higher than the $1 million of net cash generated in last year’s second quarter. This reflects strong growth in adjusted EBITDA and a significant increase in All Access Pass contracts invoiced, resulting in our balance of billed and unbilled deferred revenue increasing by almost $13.2 million or 16% to $95.9 million in the second quarter. As shown on slide 12, our cash flow from operating activities for the second quarter increased by $4.5 million or 26% to $21.9 million, compared to the $17.4 million in last year’s second quarter. The strong cash flow reflects one of the additional benefits of our subscription model in that we invoice upfront and collect cash from invoiced amounts faster than we recognize all of the income. As a result, we ended our fiscal year in August with more than $40 million of total liquidity, comprised of $27 million of cash and $15 million on an undrawn revolving line, which was higher than we had at the start of the pandemic. We are pleased that we added further to this liquidity during this year’s first half. We ended the second quarter with $55 million of total liquidity, comprised of $40 million in cash, which means we had no net debt, and our $15 million revolving credit facility is still undrawn and available. This performance was driven first by strong revenue. As shown in slide 13, our second quarter revenue of $48.2 million was driven by very strong performance in our North America operations and the continued outstanding performance of All Access Pass. As shown in Chart A of slide 14, companywide All Access Pass subscription sales grew 13% in the second quarter, 14% year-to-date, and 16% for the last 12 months during the pandemic. In addition to the All Access Pass subscription revenue recognized in the quarter, Chart B shows that we also achieved a very strong 16% growth in All Access Pass amounts invoiced to $22.5 million in the second quarter, growing 30% year-to-date to $38.4 million. Most of the significant growth in All Access Pass amounts invoiced was not recognized in the quarter, but added to the balance sheet as deferred revenue. This will, of course, be recognized and help accelerate our results in future quarters. These new invoiced amounts included strong sales of new logos, a continued quarterly and last 12 month revenue retention rate of over 90%. As shown in Chart C, a large number of All Access Pass expansions, and as shown in Chart D, a significant volume of multiyear All Access Passes, which increased our unbilled deferred revenue significantly over last year’s amount. Sales of services were also very strong in the second quarter. Services revenue in North America grew to $7.7 million in the second quarter, compared to $7.1 million in the prior year. Second, as shown in slide 15, strong All Access Pass sales drove significant growth in our gross margin percentage again in the second quarter. As shown, our gross margin percentage in the second quarter increased 559 basis points to 77.5% from 71.9% in the second quarter of last year. As shown also, our gross margin percentage has increased 459 basis points year-to-date and 392 basis points for the last 12 months. In the enterprise division, driven by the significant growth of All Access Pass and related sales, our gross margin percentage increased to 81.7%, compared to 76.1% in last year’s second quarter, an increase of 562 basis points. Third, our operating SG&A in the second quarter was $2.4 million lower than last year’s second quarter and $6.8 million lower than the first half of last year. Finally, the combination of these factors resulted in adjusted EBITDA growing to $5.1 million, an increase of $1.1 million or 26% compared to just over $4 million of adjusted EBITDA achieved in last year’s strong second quarter, which is significantly higher than our expected amount. The strong second quarter also resulted in adjusted EBITDA for the first six months of this year, reaching $8.8 million, a level only $200,000 less than the first half of fiscal 2020, which was pre-pandemic. Importantly, we also have strong invoiced and multiyear sales in the second quarter. Because most of these new invoice sales were subscription sales, these amounts were not recognized in the quarter, but went onto the balance sheet and added to our balance of billed and unbilled deferred revenue, which will be recognized in future quarters. As a result, as shown in slide 16, our total balance of billed and unbilled deferred revenue increased to $95.9 million, reflecting growth of $13.2 million or 16% compared to our balance of $82.7 million at the end of last year’s second quarter. Approaching $100 million of billed and unbilled deferred revenue is a major milestone for our subscription business, providing significant stability and visibility into our future performance. This strong combination of factors continues to drive our expectation that we will generate very high growth in adjusted EBITDA and cash flow in fiscal 2021 and on an ongoing basis. So we are pleased with the second quarter result and Bob, I am turning the time back over to you.

Well, thanks so much, Steve. Just continuing, as shown on slide 17, as reviewed last quarter, we expect to generate adjusted EBITDA between $20 million and $22 million in fiscal 2021, and we are pleased to be off to a very strong start toward this objective. Achieving that range in adjusted EBITDA would represent approximately a 50% increase in adjusted EBITDA compared to the $14.4 million of adjusted EBITDA we achieved in fiscal 2020. As we have noted previously, our target is to see adjusted EBITDA increase by approximately $10 million per year hereafter to approximately $30 million in fiscal 2022 to $40 million in 2023 and so on. These targets reflect our expectation that we will be able to achieve at least high single-digit revenue growth each year, which is growth of approximately $20 million per year. On average, approximately 50% of that amount of growth in revenue will flow through to increases in adjusted EBITDA and cash flow. As we also said previously, we fully expect to achieve an adjusted EBITDA to sales margin of approximately 20% over the next few years as adjusted EBITDA approaches $60 million and to become a $1 billion market cap company even at an adjusted EBITDA multiple of around 15%, which is conservative relative to our adjusted EBITDA growth rate, which is more like 35%. This does not reflect the multiple that we would achieve as a multiple of revenue, which is often attained by companies with similarly successful subscription based business models. So looking forward, as we have discussed, all our growth has been driven by growth in All Access Pass and related sales. This strong growth in All Access Pass and related sales has continued strong through the pandemic as you have heard, and we expect it to continue to drive significant growth in the future. I’d like to briefly highlight three factors that we expect will continue to drive significant growth in our subscription business and which will drive significant growth in sales and profitability in the coming quarters and years. As shown in slide 18, these are; first, driven by growth in All Access Pass, we expect substantially all of the company’s sales to be subscription and subscription related within the next three to four years; second, we expect that the already significant lifetime customer value of an All Access Pass holder will increase; and third, as we continue to aggressively grow our sales force and our licensee network, the volume of new high lifetime value All Access Pass logos will accelerate. I’d just like to touch on each of these three briefly. First, as indicated in slide 19, driven by growth in All Access Pass and related sales, we expect that substantially all of the company’s sales will be subscription and subscription related within three to four years. This almost complete conversion to subscription and related revenue would mean that we could generate the same types of growth in revenue, gross margins, revenue retention, and customer impact that we have seen in our subscription business over the past five years. We expect this nearly total transition to be driven by the following three things; first, by the continued strong growth of All Access Pass and related sales in the enterprise division in North America where All Access Pass already accounts for 83% of sales. As shown in slide 20, All Access Pass and related sales represented only 13% or $13.7 million of total sales in North America in 2016 when we first introduced All Access Pass. The dramatic sustained compounded growth since then has resulted in All Access Pass and related increasing to $94.3 million for the latest 12 months through this year’s second quarter. With annual All Access Pass related sales growth expected to continue to grow at more than a double-digit pace, we expect All Access Pass and related sales to increase to more than 90% of total North America enterprise sales over the next few years. The second major driver toward becoming almost totally subscription and related is the conversion of the majority of our international operations to All Access Pass and related in the coming years. In addition to the 83% of North America enterprise sales, which are already All Access Pass, the growth and penetration of All Access Pass has also progressed rapidly in our English-speaking international direct offices. As you can see in slide 21, from having almost no subscription sales in these offices just five years ago, All Access Pass and related sales for the latest 12 months now account for 74% of total sales in the U.K. and 69% in Australia. Both of these offices are on their way towards the same 90% penetration we expect to achieve in North America. As you know, our largest international direct offices in China and Japan are both in their early stages of conversion to All Access Pass, but accelerating. Having made the conversions to All Access Pass in the U.S. and Canada, the U.K. and Australia, we are confident that China and Japan will also convert the majority of their revenue to All Access Pass and related offerings in the coming years. Lastly, the final driver of increased subscription penetration is in our education division, which accounts for 22% of sales. Slide 22 shows that within our K-12 business, 70% of our sales for the latest 12 months through this year’s second quarter have been pure subscription. Slide 22 also shows the significant increase in subscription sales in our K-12 business over the past year, and we expect both our K-12 and higher education businesses to continue to advance towards the same 90% subscription that we are close to in North America and are on the way towards in the U.K. and Australia, and that we will achieve in China and Japan. With this combination, we expect virtually the entire business to reflect the higher growth, higher margin, and higher retention properties versus subscription operations in the coming years, as we have already seen in North America. I’d now like to ask Paul Walker to address the other two elements behind our expected accelerated growth in our subscription business.

Thank you, Bob, and good afternoon to everyone on the phone. For the second factor we expect to drive significant growth and profitability, as shown in slide 23 point number two, is the already significant lifetime customer value of our All Access Pass holders has increased and will continue to increase in the future. As shown in slide 24, All Access Pass has a relatively large and increasing average pass size of $38,000, up from $31,000 just a year ago. Second, the pass has an annual revenue retention rate of over 90%, which was the case even throughout the pandemic. Third, our services attachment rate has increased to 44%, up from just 17% a few years ago. The combination of All Access Pass and its related services is now totaling approximately $55,000 per pass holding customer, and that number continues to rise. Fourth, as shown here, the blended gross margin on both the pass and the related services combined exceeds 85%. These strong economics are driving very significant lifetime customer value. In fact, this customer value is considerably higher than we had under our previous pre-subscription model. For example, as shown in slide 25, a prior client spending $10,000 in a given year under our legacy model typically spent about twice that or $20,000 over three years and achieved a gross margin of about 70%. In contrast, a typical All Access Pass customer today spends approximately $55,000 on a combination of their pass and related services in their first year, $49,500 in their second year, and $44,500 in their third year for a three-year total of $149,000 between the pass and the related services. Additionally, whereas the old model offered about a 70% gross margin, the new blended margin on All Access Pass and related offerings exceeds 85%. So that is the second reason. The third reason is indicated in slide 26; as indicated here, the third factor for driving our expectation of significant revenue and profitability growth is that as we continue to aggressively grow our sales force and our licensee network, the volume of new All Access Pass logos will accelerate. The combination of our high and growing lifetime customer value; secondly, our less than one-to-one cost of acquiring a new customer; and thirdly, our roughly one-year payback on the investment in hiring a new client partner makes the economics of growing our sales force extremely compelling. As shown in slide 27, over the past five years, we have added 74 net new client partners in our direct offices. More than half of these client partners are only midway through their five-year ramp-up to $1.3 million in annual sales volume. We expect these ramping client partners to generate significant revenue growth over the next few years as they complete their ramp, and we also have ample room to add additional client partners. As shown in slide 28, this applies to just the U.S. and Canada alone, where we currently have 179 client partners across both enterprise and education. We have room to add at least an additional 435 client partners in the coming years. We expect that the combination of ramping existing client partners and hiring at least 30 net new client partners each year will allow us to add a significantly increasing number of new logos, which in turn will generate very significant and increasing lifetime customer value. Therefore, we believe that the combination of these three factors will continue to drive significant growth in sales and profitability in the quarters and years to come. Bob, I will turn it back to you.

Great. And I will turn it over to Steve Young to address our guidance now. Thank you very much, Paul.

And I will keep the ball rolling. Our guidance for FY 2021, as discussed in previous quarters, is that we expect to generate adjusted EBITDA between $20 million and $22 million and we affirm that guidance. This result would represent an approximate 50% increase compared to the $14.3 million of adjusted EBITDA achieved last year. This expected growth reflects everything that Bob and Paul discussed, including the continued strong performance of our North America operations. Underpinning this guidance for the year are the following expectations that we talked about last quarter and that are still consistent with our year-to-date results. First, that a significant portion of the deferred revenue on the balance sheet and a portion of the contracted unbilled deferred revenue will clearly flow through to recorded sales as expected. Second, that the All Access Pass will continue to achieve strong growth in both sales and invoice sales, high revenue retention rates, strong sales of new logos, and continued growth in pass expansion and multiyear contracts. We also expect that All Access Pass add-on sales will continue to be strong. Third, that net sales in Japan, China, and among our licensees will continue to strengthen. The increase in All Access Pass sales which we expect to achieve in these countries will result in a portion of new sales being added to the balance sheet as deferred revenue. Fourth, in education, we expect to continue to achieve strong retention of both schools and revenue among existing Leader in Me schools. Despite the fact that the environment could be challenging and budget-constrained for education in the remainder of FY 2021, we still expect to achieve growth in the number of new Leader in Me schools beyond the 320 schools achieved in FY 2020. So that’s our overall guidance, and we affirm that guidance. For the third quarter of fiscal 2021, we expect that adjusted EBITDA will be between $4 million and $4.5 million, compared to adjusted EBITDA loss of $3.6 million in last year’s pandemic impacted third quarter. Please note that the adjusted EBITDA expected in Q3 is more than $7.5 million higher than last year. It is also higher than the adjusted EBITDA result of $3.1 million achieved in the third quarter of FY 2019. So that’s our guidance. Now our general targets for years beyond 2021. Building on the $22 million of adjusted EBITDA that we expect to achieve this year, driven substantially by the expected continued growth of All Access Pass, our target is to have adjusted EBITDA increase by around $10 million per year to around $30 million in FY 2022 and to around $40 million in FY 2023. These targets reflect our expectations of being able to grow at least high single-digit revenue growth, with approximately 50% of that growth in revenue flowing through to increases in adjusted EBITDA. While changes in the world’s business outlook and many other factors could impact our expectations, we wanted to share these as our current internal targets and assumptions. We also want to mention again that not only are these our targets, but when you read our last proxy, you noted that these targets are tied to us achieving our LTIP awards. So that’s our guidance Bob and I will turn the time back to you.

Great. Thanks so much. We want to express appreciation to the entire Franklin Covey team and to all of you for your support and guidance throughout this past year. We are delighted to be where we are and grateful and truly excited about what’s ahead of us. At this point, we will open the floor to questions.

Thank you. Our first question comes from Andrew Nicholas from William Blair. Your line is open.

Hi. Good afternoon.

Hi. How are you, Andrew?

Hi.

Good. Good. First I was kind of hoping you could outline specifically where you saw better-than-expected performance in the second quarter relative to your internal expectations? And then kind of relatedly trying to get a better feel for the rationale for maintaining the full year guidance. It looks like what’s implied for fourth quarter adjusted EBITDA is a decent step down from your historical averages in the fourth quarter and even in the fourth quarter of last year. So is that a function of some conservatism or is there a pretty meaningful increase in expense spend in the back half of this year? Just kind of help me take that apart a little bit if you wouldn’t mind?

Sure. To address your last question first, we share your observations regarding conservatism. Many of our education sales typically take place in the first quarter, and the environment remains uncertain. However, we are noticing some positive trends. Sales are trending upward compared to our expectations in the first and second quarters, and we have a positive outlook for the third quarter. It's possible that next quarter we will revise our guidance. We believe it's prudent to better assess the education sector as we approach the fourth quarter, which we expect to understand more clearly by May and June. This is the main reason for our current stance. We have no expectation that any existing trends will change, which I hope clarifies things. We will also incur some additional costs related to hiring new salespeople, as we have training classes scheduled. While these are not significant incremental investments, they are planned expenses. Additionally, there will be some expenses for bonuses, as last year these were lower. While this will impact adjusted EBITDA a bit, it shouldn't affect the overall trends. Our aim is to ensure we have a solid understanding of the education market before we consider any changes to our guidance, which should address the second part of your question.

Got it. That’s helpful.

And as to the quarters where we overperformed a bit, Paul and Jen and Sean, would you like to address that? There were a couple of areas of overperformance.

Yeah. Sure. Hi, Andrew. This is Paul. I will take a quick comment on, first of all, as noted in the prepared remarks, All Access Pass continues to chug along and do very, very well. We saw great growth there in the number of new logos. Revenue retention stayed high again and services have come back quite nicely and even a bit ahead of where we thought they might have been in the second quarter. Additionally, our international direct operations were expected to improve. It was off only 14% in the second quarter, and that continues to strengthen for us. Lastly, our gross margins, as we convert to All Access Pass and shift the mix of our business, continues to benefit our gross margins greatly, which, of course, drops to the bottom line. So I would say those would be three on the enterprise side.

Yeah.

Got it. No, that’s all helpful color. And then maybe as my follow-up, Bob, you mentioned it in response to the second part of my question earlier, or touched on it a bit, but just kind of sticking with education. I was just wondering if you could speak a little bit more to kind of how you are seeing that recovery unfold. What the cadence might look like there, and maybe at what point are you anticipating returning to pre-pandemic revenue levels? Is that something we can reasonably expect in fiscal 2022 or is it another year or two out from there?

Yeah. Great. Thanks. Sean, would you like to address the first part and I will just take the very end?

Yeah. Sure. Thank you. So I think that we are seeing more phone calls accepted, visits accepted. In the first quarter, coaching days were down 55%. This quarter, they are down about 24%. We expect them to be up in the third quarter by probably about 25%. So it’s going in the right direction. We are having more opportunities to get into schools. That’s a really good thing. Schools are opening up. It’s different by state, county, and district, but that’s a positive trend. Our retention has been strong as you can see, that’s been reflected in the 300 schools compared to last year in terms of the number of schools that we are maintaining. What’s still a little uncertain is just decision-making by some of the districts, and people are still kind of holding out longer than usual. We believe that we will get more schools in the fourth quarter than we did last year. We brought in 320 last year. We think we will beat that this year. It’s hard to say, but I think that it might be mid-year next year before we fully recover next fiscal year. The trends are going in the right direction, and we expect things to improve in the third quarter and the fourth quarter. Bob, what would you add?

I just want to add one more point. In fiscal 2019, we added 520 new schools, and last year we added 320, which was impressive considering the circumstances. As Sean mentioned, we anticipate doing somewhat better this year, aiming for close to 400, and we expect to return to the 500-plus range next year.

Got it. And then, sorry, just if I can squeeze one more in on education. How much of your targets for 2022 and 2023 are dependent on kind of a reacceleration in that business? I’m just kind of thinking about if there is some disruption to the fall calendar or in the next year school year, if that is a meaningful deterrent, or if you think that kind of the momentum in the enterprise is enough to overcome that at least temporarily?

Yeah. That’s a great question. The short answer is that our guidance, our outlook we will be able to generate $10 million or so EBITDA growth a year is really not very dependent on either the growth of education or even our international operations, because All Access Pass and related sales have been growing by close to $20 million a year on their own in North America and in the U.K. and Australia. So, if those keep on pace, that’s 80% of what we are talking about. This does not require a big recovery, and when we gave those numbers, we knew it was uncertain. We felt like we should just assume that education and international would recover more slowly. They are doing better than we thought at the time we gave that outlook. So, most of the outlook is driven by North America All Access Pass sales.

Great. Great. Thank you. Have a nice weekend.

Thanks for the great questions, you all too. Thanks.

Good afternoon, everyone. Hey, guys. Thanks for taking my questions.

Thank you.

I was wondering if you can maybe spend a little more time on the sales force and the client partners. Just kind of wondering what sort of activities you might expect in the second half of '21 or there may be any sort of new different incentive structure you might be playing around with or thoughts for accelerating the pace of hiring or changes in hiring strategies, any sort of marketing events?

Yeah. Paul and Jen, do you want to address that?

Jen, do you want to take that one?

Yes. Thanks, Marco. In terms of what we are seeing and what’s driving the acceleration is really the ecosystem of the hiring happening and a strong sales enablement process around onboarding. We are seeing new hires getting up to speed much quicker, which has been wonderful to observe throughout the pandemic. That, linked with our increased exposure in thought leadership through article placements and podcasts, along with more social media engagement, forms an ecosystem of marketing, the sales enablement, and a strong management team executing on strategy and building an inclusive environment. So all of these factors combined have accelerated the onboarding process and our ability to continue hiring at pace. Paul, what would you add?

I would just add that we have recently added one more recruiter to our staff of internal recruiters, recognizing that we are going to accelerate the number of new client partners being added to our team. Now we have a recruitment team of six. They are dedicated full-time to this task in addition to what Jen mentioned. As for down the road, as we grow towards having hundreds of client partners, I imagine the structure will look a little different, and we are discussing possibly breaking our sales force out among different organizations. I think we are initiating discussions about that now, and in the coming years, we will accelerate our ability to add more client partners and might even exceed net 30 a year.

Got it. That’s very helpful. And then kind of sticking around with the client partner activities, just obviously given the pandemic, you had a slide in your presentation indicating that a lot of the interactions or the vast majority of the interactions have shifted to an online delivery model. Now that vaccines are rolling out, how are you guys thinking about that impact as it relates to client partner travel? And could you speak to your overall employee base and the entire work-from-home experience?

Of course, Marco. If a client wants to see us face-to-face, in fact, I was on with several client partners today who have face-to-face meetings scheduled, lunches, and events at their office spaces. If that client is returning, whether to a hybrid model or to an all-in office model, we of course want to meet with them. So it really is very client-dependent as you see in the marketplace concerning their preferences for meetings. I do not expect this to return anytime soon to the same level of travel we experienced previously, simply because the clients aren’t looking for that kind of travel right now. From a travel standpoint, we are evaluating what's necessary based on our client needs, which, as you might expect, varies by province or state in Canada and the U.S.

Got it. Very helpful. Thank you guys for your time. Appreciate it.

Thanks, Marco. We appreciate it very much.

Thanks. Good afternoon. How are you?

Good. How are you, Jeff?

Good. Thanks. I was curious if you could expand on the opportunity within education, specific to how the stimulus programs benefit you and how they will assist in reinvigorating teachers and students back to something close to normal. Are you doing anything for Social-Emotional Learning differently than you would have when working with existing and new schools?

Great. Sean, would you like to address that?

Yes. Hi, Jeff. We are thrilled about the three significant COVID relief bills. They will bring substantial funding into the education sector. The $200 billion over the last year stands in stark comparison to the typical $50 billion that the federal government spends on K-12 education, which indicates a threefold increase. This influx of funds will help supplement budget cuts stemming from previous years and that’s a positive development. It will also primarily benefit Title One schools, where we have a significant footprint; over 60% of our business is with Title One schools. We are actively pursuing larger requests for proposals (RFPs) more than ever. A lot of these proposals focus on what we refer to as learning recovery. Schools are understandably concerned that students have lost an entire year of learning and this poses long-term implications. Therefore, we have integrated a learning recovery focus into our marketing strategy, highlighting how Leader in Me can support their recovery efforts. We have brought on a specialist in this area. There’s a significant amount of funding to tap into, and this will not just be a temporary boost; we’re looking at a two to three-year horizon. Another pressing issue is student and teacher wellness; both groups have experienced considerable trauma throughout this pandemic. Those topics are currently at the forefront, with discussions around learning loss and wellness being paramount. We are also pursuing new products aligned with Leader in Me and these adjacency areas. We see this as a substantial opportunity and are optimistic about our positioning amidst the SEL (Social-Emotional Learning) wave, aligning with the current market demands. So, Jeff, does that answer your question?

Yeah. That’s very helpful. I mean, it's intuitive that Leader in Me plays an important role here and strengthens your value proposition.

Yes.

Okay. I have a couple of more real quick here. I was curious, Bob, if you could elaborate on where you are with respect to the rollout of the All Access Pass subscription model internationally. I know that's hard to assess because you've got to consider different regions. But from a high level, how much of the international markets are actively selling All Access Pass now, and which ones are pending additional work?

Great. Yeah. We mentioned in the script that in the English speaking U.K. and Australia, there already have about 70% of All Access Pass sales. So that’s been progressing. Paul, do you want to talk about the efforts to convert the licenses and our international offices in Japan and China and Germany?

Sure. Hi, Jeff. Okay. So in Japan, we are well underway; in fact, Japan is approaching a quarter of their client base that has now converted to All Access Pass. We see that playing out in another third, a third, and a third over the next three years, such that in three years, their business will mirror U.S. and Canada’s operations today. As Bob mentioned, this drives our confidence that in three to four years, we will have 90% or so of the entire company operating on subscription related sales. That’s Japan, and they’re a quarter of the way in. They will probably reach one-third by the end of this fiscal year and move on from there. China is right on their heels; we have the portal up in China and running. We are conducting significant sales training, replicating in-market the strategies we successfully implemented in the U.S., U.K., and Australia to achieve where we stand. They will probably track a similar pace to Japan but be about six to eight months behind. However, we are now starting to sell a couple of All Access Passes. One of them is very interesting, and we are excited about it; currently, we are discussing it with the client there. In China, we primarily deliver services to U.S. multinationals and other foreign companies with operations there. Eventually, we expect their sales to begin to increase in sales with companies based locally in China. As far as licensee partners go, their business is also growing, with All Access Pass experiencing significant growth within those operations. We have one of our partners in the Benelux region whose business now looks very similar to the U.S. at nearly 90% of their operations coming from All Access Pass. Our Middle Eastern operation is also now well ahead of 50% All Access Pass and related. Singapore, Hong Kong, and Taiwan are about a third of the way through their conversion process. We are content with the pace of progress; it tends to align with the timeline for China and Japan of three to four years. Essentially, we anticipate that our entire enterprise, whether through direct sales or licensees, will have considerable penetration towards 90% of All Access Pass and related operations by then.

Yeah. And Jeff, the point of course that relates to whole business model and when you start having more than 90% retention of all the revenue around all over the world versus the old model, which is 60% or 65%, is starting from that base every year and then with a whole new customer engagement model allows you to stay in contact with those clients, help those clients grow, expand, and increase their lifetime value. That makes a significant difference for us both strategically and financially in those markets.

Sure. Sure. That’s great detail. Thanks for that. And then my final question is with respect to gross margins. I mean, you detailed the All Access Pass model generating an impressive 85% gross margin. Is that what you are seeing across the client base, or was that a unique example? Where do you see, once you’re fully rolled out with All Access Pass to the level you’re at in North America, what does the gross margin profile in the business look like at that point?

Yeah. And Steve, you may want to add points to this or just maybe set the context and say that the 85% gross margin is a pretty good balance for what it should be for the All Access Pass client; because that’s a balance of subscription sales plus services at about 45%, so it gives you that blend. So as directionally as that becomes the norm across the globe, our margins will continue to creep up as they have. That might not happen every quarter, because you may add more services, the mix may not remain exactly the same every quarter, but we have seen that there were services that repeat, really at just the same-store basis or same-client basis, so about the same level. We think that’s a model that our gross margins will tend to increase over time. Some things may work against that or mute it a little bit such that as services grow in areas where they don’t yet have selling All Access Pass, not as much add-on services, they will get to 85%. But it might impact the overall company gross margins a little bit as that occurs. Nonetheless, overall, you can expect that the margins will move toward that over time. We will always have around 10% of our legacy model existing, as that’s a good way to act; when someone has a corporate meeting and they want to invite one of our consultants to come and deliver training there, that can lead to a subsequent All Access Pass. So that will always represent about 10%. But the rest of it will likely continue to trend towards that area. I don’t know, Steve, what you would add to that.

No, Bob. That’s exactly what I would say. Our gross margin is primarily a function of mix. The pandemic, one of the benefits of the pandemic if you will, or one of the impacts is the mix shifted toward subscription. So just as Bob was saying, if the mix shifts towards subscription, then the gross margin will continue to increase over time. If the other areas return, they may experience some temporary reduction when travel comes back. It will impact our gross margin, but not our adjusted EBITDA. So, you can think of that as a little bit of a coming out of the pandemic adjustment to gross margin, and then a long-term increase of gross margin as the mix of the whole company shifts more percentage-wise towards subscription.

Got it. Thanks for the color, and have a nice holiday weekend.

You too, Jeff. Thanks so much.

And that concludes our question-and-answer session. I will turn the call back over to Bob Whitman for final remarks.

All right. Again, thanks to each of you for your support and confidence during this period. We are grateful for you, and also to our team. I just want to express publicly the amazing executive team; they really are incredible. Just in every area, you couldn’t have better leaders with more engaged employees. In the middle of this pandemic, our employee engagement scores actually went up. They were already high, you would expect we have a good culture, but they rose to new levels just showing how trust and leadership perform even in difficult circumstances. I admire our people, both our executive team and all of our leaders and employees, and that’s an important point. So one of our huge strategic advantages remains strong. So, again, thanks to all of you. Have a great holiday weekend, and we look forward to speaking with any of you who would like to follow up as soon as possible. Thanks so much.

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