Franklin Covey Co Q1 FY2022 Earnings Call

Welcome to the Q1 2022 Franklin Covey Earnings Conference Call. My name is Adrienne and I’ll be your operator for today’s call. At this time all participants are in a listen-only mode. Later we’ll conduct a question-and-answer session. I’ll now turn the call over to Derek Hatch. Derek Hatch, you may begin.

Thanks Adrienne. Good afternoon, ladies and gentlemen and Happy New Year. On behalf of Franklin Covey, it’s my pleasure to welcome you to our earnings call this afternoon to discuss the first quarter of fiscal 2022. 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 product; changes in the training and spending policies of the Company’s clients and other factors identified and discussed in the Company’s most recent annual report on Form 10-K and other periodic reports filed with the Securities and Exchange Commission. Many of these conditions are beyond our control or influence, any one of which may cause future results to differ materially from the Company’s current expectations, and there can be no assurance the Company’s actual future performance will meet management’s expectations. These forward-looking statements are based upon management’s current expectations and we undertake no obligation to update or revise these forward-looking statements to reflect events or circumstances after the date of today’s presentation, except as required by law. With that out of the way, we’d like to turn the time over to Mr. Paul Walker, our Chief Executive Officer. Paul?

Thanks, Derek. Good afternoon, everyone. I’m here with Steve Young and Bob Whitman. We're glad to have the chance to talk with you today, and we're very pleased to report that our first quarter results were strong. As shown on slide 3, total revenue in the first quarter increased by 27% or $12.9 million to $61.3 million. For the most recent 12-month period, revenue grew by 26% or $48.9 million to $237.1 million. Adjusted EBITDA for the first quarter rose to $9.9 million, an increase of $6.2 million or 167% compared to the $3.7 million of adjusted EBITDA. Apologies for the interruption, our phone line cut out, so I'm on a different line now. Let’s return to slide 4 to discuss the strong growth across each key metric. As noted, in the first quarter, subscription revenue increased by 31% or $6.7 million to $28.4 million, and over the latest 12 months it grew by 22% or $19.1 million to $106.2 million. Total subscription and subscription services revenue in the first quarter increased by 32% or $10.8 million to $43.9 million, and for the latest 12 months it grew by 31% or $39.4 million to $168 million. Additionally, in the first quarter, the total of billed and unbilled deferred revenue increased by 24% or $23.7 million to $121.1 million. We are very pleased with the strong results in our subscription business and the company overall. Today, we’d like you to take away four key points from our discussion. I'll summarize these, which are shown on slide 5, and then we'll delve into each one. First, our results in the first quarter were exceptionally strong, reflected in every key P&L category, including revenue growth, gross margin improvement, adjusted EBITDA, and cash flow. Second, this strong performance was driven by our rapidly growing subscription business model. Third, we anticipate that the entire business will increasingly focus on subscription and subscription services in the coming years. Finally, we are excited about the market opportunities ahead of us and are committed to executing on them at scale. Now, I’d like to ask Steve Young to discuss takeaway number one, the strength of our first quarter and the latest 12-month results. Steve?

Thank you, Paul. It’s nice to have you back. Nice to be with everyone today to report this good quarter and just give a little bit more in-depth look at the highlights that Paul mentioned. As you can see on slide 7, some of the key highlights for the quarter include the following. Revenue, as mentioned, in the first quarter grew 27% or $12.9 million to $61.3 million. And revenue for the latest 12-month period through the first quarter, grew 26% or $48.9 million to $237.1 million, benefited partially from the fact that last year’s first quarter was impacted by the pandemic. This strong first quarter revenue growth was broad-based across both the Enterprise and Education Divisions. In the Enterprise Division, revenue grew 22% or $8.8 million to $48.1 million, reflecting both the strength of our performance in North America, where sales grew 22% and in our international direct offices, where sales grew 27%. Growth in both of these areas was driven by our strong subscription and subscription services sales, which increased 27% in the first quarter. The Education Division also had a very strong first quarter with revenue growing 56% or $4.2 million. Our gross margin percentage in the quarter increased 240 basis points to 77.7% from 75.3% in last year’s first quarter. Gross margin percentages remained very strong across every operating unit, with a significant portion of this first quarter increase in gross margin percentage resulting from the fact that we achieved more normalized margins in the Education Division. This resulted from better absorption of certain fixed coaching costs, compared to last year when schools were struggling to adapt to the pandemic environment and utilized fewer coaching days during the first and second quarters. Our overall Company gross margin percentage for the latest 12-month period, increased 339 basis points to 77.7%. Operating SG&A as a percentage of sales improved 612 basis points in the quarter to 61.5% of sales, compared to 67.6% of sales in last year’s first quarter, and improved 409 basis points to 63.2% for the latest 12-month period. As shown in slide 8, adjusted EBITDA for the first quarter increased $6.2 million, or 167% to $9.9 million, compared to $3.7 million in the first quarter of FY21. The strong result also represents an increase of almost $5 million, compared to the pre-pandemic first quarter of FY20. For the latest 12-month period, adjusted EBITDA increased $21.1 million, or 162% to $34.2 million. Finally, as shown in slide 8, our cash flow and liquidity positions are also very strong. Our cash flows from operating activities remain very strong at more than $10 million for the quarter. As shown in slide 9, our free cash flow for Q1 of FY22 is $9.4 million versus $10.4 million in Q1 of last year, both we think good strong numbers. These strong cash flow metrics reflect an additional benefit of our subscription model, specifically that we invoice upfront and collect cash from these invoiced amounts even faster than we recognize all of the subscription revenue associated with these subscription contracts. As noted, with this strong cash flow, we ended the quarter with $66 million of total liquidity made up of $51 million in cash plus $15 million in credit facility remaining undrawn and available. So, we’re pleased with the results of the first quarter and the trailing four quarters. So, back to you, Paul.

Thank you, Steve. I’d like to emphasize that our strong performance is a result of the continued and accelerated momentum of three main trends we've discussed in previous quarters. As shown on slide 10, the first trend is that sales in our Enterprise Division in North America remain robust, fueled by growth in All Access Pass subscriptions and subscription services. In the first quarter, North American revenue rose by 22%, or $6 million, totaling $33.4 million. Over the past 12 months, Enterprise revenue in North America increased by 23%, or $23.8 million, reaching $125.6 million compared to $101.8 million last year. The second trend, highlighted in the middle column, indicates that our international sales are gaining strength. Although pandemic-related issues persist in Japan and some licensee locations, causing total international revenue to be below fiscal 2020 levels, we are pleased that revenue from our international direct offices grew by 24% in the first quarter compared to the first quarter of fiscal 2021, and increased by 36% over the most recent 12-month period. The focused promotion of All Access Pass in these international markets has contributed to significant increases in our deferred revenue internationally, laying a solid foundation for future sales growth. The third trend is that our Education Division has seen substantial improvement. This is evident through the rise in Leader in Me schools renewing their memberships to 706 in the first quarter of fiscal 2022, up from 560 in the prior year. Additionally, we added 129 new Leader in Me schools during the first quarter, which is an 80-school increase compared to 49 new schools in the first quarter of fiscal 2021. This growth in both new and retained schools, along with an uptick in coaching and training days delivered, resulted in strong performance for the Education Division, where revenues rose by $4.2 million, or 56%, totaling $11.7 million compared to $7.5 million in the previous year's first quarter. Adjusted EBITDA for the Education Division also improved, increasing by $2.5 million to $200,000 from a loss of $2.3 million in the same quarter last year. The second notable point on slide 11 is that our strong performance stems from the accelerating success of our subscription business model. As illustrated on slide 12, total subscription and subscription services sales rose by 32% in the first quarter to $43.9 million, up by $10.8 million from $33.2 million in the previous year. Over the last 12 months, subscription sales increased by 31%, or $39.4 million, reaching $168 million. Our combined deferred revenue, both billed and unbilled, also saw substantial growth in the first quarter, climbing by 24%, or $23.7 million, to $121.1 million, compared to $97.4 million at the end of the first quarter of fiscal 2021. This significant and rapidly growing deferred revenue provides considerable stability and visibility into our future revenue growth. The breakdown between billed and unbilled deferred revenue is also illustrated on slide 12. Our deferred subscription revenue grew by 19%, or $10.8 million, to $67.8 million in the first quarter, compared to $56.9 million in the same quarter last year, while unbilled deferred revenue increased by 32%, or $12.9 million, to $53.4 million from $40.5 million in the previous year's first quarter, highlighting the ongoing rise in the percentage of our All Access Pass contracts that now involve multiyear agreements. For example, by the end of our first quarter in fiscal 2022, 42% of All Access Pass contracts in North America, representing 55% of the total contract value, were multiyear contracts. It's crucial to note that we have achieved notable growth in subscription and subscription services in both the Enterprise and Education Divisions. As shown in slide 13, in the Enterprise Division, All Access Pass subscription and subscription services sales grew by 27%, or $7.1 million, to $33.1 million compared to $26 million in the prior year. Over the most recent 12 months, these sales increased by 29%, or $26.7 million, reaching a total of $119.7 million compared to $93 million in the same period last year. The number of new All Access Pass logos in North America during the first quarter remained strong, with annual revenue retention exceeding 90%. As I mentioned earlier, sales of multiyear contracts also continued to be strong. As presented in slide 14, in the Education Division, Leader in Me subscription and subscription services sales rose by 51%, or $3.6 million, for a total of $10.8 million, compared to $7.1 million in the same period last year. For the recent 12-month period through this year's first quarter, subscription sales in the Enterprise Division grew by 36%, or $12.7 million, reaching $48.3 million, an increase from $35.6 million for the same period last year. We're very optimistic about our subscription business. In slide 15, we’d like to share that we expect our entire business to shift increasingly towards subscription and subscription services in the coming years. As highlighted in slide 16, for the latest 12-month period, subscription sales grew by 31%, reaching $168 million, accounting for $70.9 million of total sales of $237.1 million. Given the rapid growth, we anticipate that subscription services will constitute a larger portion of our overall business in the years ahead. For instance, in North America, subscription sales accounted for 84% of total sales over the last 12 months, and this is projected to rise to about 90% over the next three years. As depicted in slide 17, All Access Pass subscription and subscription services sales made up only 13% of total sales in North America in 2016 at the inception of All Access Pass. This sustained growth has culminated in these sales reaching $104.9 million in the last 12 months up to this year’s first quarter. With the anticipated continued growth in All Access Pass subscription and services sales and the diminishing levels of traditional sales, we expect subscription sales to rise to approximately 90% of total North American Enterprise sales in the next three years. Similarly, subscription sales are expected to dominate our international operations in the upcoming years. We have also seen rapid growth in subscription sales across our English-speaking direct offices, as noted on slide 17, where All Access Pass sales now constitute 83% of total sales in the UK and 72% in Australia, both headed towards the same 90% penetration we aim for in North America. Our largest international offices are located in China and Japan, where we are in the early stages of transitioning to All Access Pass and making significant strides. With successful conversions in the U.S., Canada, the UK, and Australia, we are confident that China and Japan will follow suit in turning a large portion of their revenue into All Access Pass sales. In fact, in fiscal '21, All Access Pass subscription sales made up one-third of Japan's total sales, even during their initial transition period. We are enthusiastic about this progress. Given the nature of our Leader in Me subscription model, over 90% of sales in our Education Division are already from subscription services. As we move toward nearly complete conversion to subscription services, we expect the entire company to replicate the strong growth in revenue, margins, retention, and customer impact that we have experienced in our subscription business over the last five years. Lastly, as shown in slide 18, we want to discuss the significant market opportunities before us. We see four key reasons to be excited about these markets and our capacity to operate effectively on a larger scale. First, the markets we target are substantial and growing quickly. Our focus is on three primary markets: the enterprise learning market, the education market, and the market where business leaders invest to enhance performance from operating budgets. The global enterprise learning market is valued at about $381 billion, with approximately $99 billion spent on external providers, and it grows at about 3% annually. Similarly, the education market is also vast, with $726 billion spent annually in the U.S. by K-12 schools, of which $59 billion goes toward instructional resources and services beyond faculty salaries. This sector is experiencing over 2% growth, equating to approximately $16 billion per year. The third market, where business leaders invest in performance improvements, amounts to trillions in expenditures, generally growing at the pace of GDP or around 3%—a value comparable to hundreds of billions annually. All these markets are highly fragmented, with the largest players comprising only about 1% to 2% of the market share, indicating ample opportunity for us to increase our market presence. The second point of excitement is that we lead in a crucial and lucrative position within each of these markets, focusing on helping organizations achieve results that require collective efforts from many leaders and individuals. As indicated in slide 20, while various aspects like providing useful information and skill development add value, achieving an organization's most important objectives depends on collective action from everyone working together towards the organization’s highest priorities. The third point is that helping organizations achieve such meaningful collective progress is vital to them, and that is the area where Franklin Covey excels. As shown in slide 21, we have unique strengths that enable us to assist organizations in navigating challenges that require sustained collective action, our advantages include: 1) world-class content addressing major organizational opportunities and challenges that is recognized as market-leading; 2) tremendous flexibility in delivering content and services through diverse modalities, devices, and languages; 3) a broad global reach with a vast sales and delivery network; and 4) our strong thought leadership, which is highlighted by best-selling books, a highly-followed leadership podcast, and contributions to industry publications. These strengths explain why, throughout the disruptions caused by the pandemic, many organizations and schools have continued to purchase, expand, and renew their All Access Pass and Leader in Me subscriptions, as well as support services from Franklin Covey to meet their key objectives. These strengths are also responsible for the significant lifetime value of our customers. Despite our existing strong positions, as shown in slide 23, we are committed to making ongoing investments in these key areas, including expanding our content, technology platforms, sales forces, and thought leadership. With the expansive and growing fragmented markets we serve, our leadership in each of these markets, and our ongoing investments, we believe we have a unique opportunity to solidify our status as the top leader in these targeted markets. We are excited about our achievements and the future of our subscription business as we continue to contribute valuable resources to better serve our clients. Now, I’d like to turn it back to Steve for our outlook and guidance.

Thank you, Paul. So, let’s have a look at our guidance. Our guidance for FY22 is that we expect to generate adjusted EBITDA between $34 million and $36 million. The midpoint of this range would reflect an approximately 25% increase in adjusted EBITDA, compared to the $28 million achieved in FY21. Underpinning this guidance are the expectations that are consistent primarily to what we had in the past. First, the recognition during FY22 of a large portion of the $67.8 million of deferred revenue currently on the balance sheet and the billing of a large portion of the $53.4 million of unbilled deferred revenue, which has been contracted. This provides significant visibility into our revenue for the balance of the year. Second, in addition to the recognition of deferred revenue, the factor which is expected to have the greatest impact on FY22 results is also one in which we have high confidence. That is the strength of our All Access Pass and related sales. Third, we expect that our revenue 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, as you understand, result in a portion of the new sales revenue being added to the balance sheet, as deferred revenue. Fourth, in the Education Division, we expect to continue to achieve strong retention of both schools and revenue among existing Leader in Me schools and expect to grow the number of new Leader in Me schools to a level even higher than we achieved last year. So now, Q2. In Q2, in the second quarter, we expect that adjusted EBITDA will be between $5.8 million and $6.8 million, compared to $5.1 million in the second quarter of FY21. Obviously, we recognize that with our strong first quarter performance, our latest 12-month adjusted EBITDA of $34.2 million would already put us within our full year guidance range, even without any further year-over-year improvement in adjusted EBITDA for the rest of the year. Our expectation of achieving further year-over-year growth in adjusted EBITDA in Q2 would put us even higher in that range. Recognizing this, we will consider our guidance range when we report our fiscal Q2 quarter performance and make adjustments at that time. So now, with that guidance, let’s look at our targets for the coming years. As shown in slide 24, building on the $34 million to $36 million of adjusted EBITDA we expect to achieve this year and driven substantially by the expected continued growth of All Access Pass, our target to have adjusted EBITDA increased by around $10 million per year thereafter to be around $45 million in FY23 and around $55 million in FY24. This represents an expected adjusted EBITDA compounded annual growth rate of approximately 25% per year over the coming years. These targets reflect achieving low double-digit revenue growth, and approximately 40% of that growth in revenue will flow through to increases in adjusted EBITDA and cash flow, even after significant growth investments in marketing, our sales force, technology and expansion into some new content areas. While dramatic changes in the world environment and other factors could impact our expectations, we want to share that these are our current targets. I also want to point out once again that not only are these our targets, but when you read our proxy statement, you’ll see that the executive team long-term incentive pay awards depend on achieving these strong multiyear growth targets. So Paul, back to you.

Thank you, Steve. So, we feel great about our momentum, and we look forward to reviewing and updating, as Steve mentioned, our guidance range at the end of our second quarter this year. And with that, we’ll now ask Adrienne to open up the line for questions.

Thank you. We’ll now begin the question-and-answer session. And our first question comes from Marco Rodriguez, Stonegate Capital. Your line is open.

Good afternoon, everyone. Thank you for taking my questions. I was wondering, maybe if you could talk a little bit more about the performance in the quarter, obviously really strong, well ahead of guidance. What were sort of the big surprises for you guys?

Yes, that's a great question. First, regarding EBITDA growth, as Steve mentioned, we benefited more than expected from the number of education coaching sessions we delivered in the first quarter. The coaches have a fixed cost component, and we managed to deliver numerous sessions as schools resumed operations. This positively impacted our margins, contributing to the bottom line. Generally, revenue retention was strong, and we added new clients effectively. Additionally, we had an outstanding quarter in the Enterprise Division, achieving record levels in delivering services to our All Access Pass clients in North America. Overall, these factors highlight the success of our coaching and school services in the first quarter. Our clients are thriving with live online services, and as we increase our delivery in this format, we are witnessing continued growth in our services. Those are probably the key points, Marco.

Got it. Very helpful. And I know you touched on it, or Steve touched on the guidance and you guys are obviously cognizant of the annual EBITDA guidance, what you’ve done in Q1, what you’re expecting for Q2 and you made some comments which are helpful. But I’m just trying to kind of dive in a little bit deeper, kind of walk us through the decision-making process there to not update the guidance higher. Are there any sort of things that you are trying to be more conservative on and you think that is maybe a bit more of an unknown today before the call?

No. We have discussed this topic extensively and feel confident about the current state of the business and its future direction. We have decided to wait until after the second quarter to reassess our guidance and any potential revisions. We're simply choosing to do this at the end of the second quarter. Steve, do you have any additional thoughts to share on this?

No, Paul. The only thing I’d add is that, as you know, Marco, our fourth quarter is a very large quarter for adjusted EBITDA because of all the things that go on in that quarter in Education and otherwise. And it gives us an opportunity to be closer to that very important quarter, just have a little better visibility maybe into that quarter, after another quarter goes by.

Got it. Understood. And then, if I could sneak one more in here, you discussed a little bit here in the prepared remarks the market opportunity that is present. And I know that you guys have always taken a great deal of investments, are making a great deal of investments into your client partners and business development efforts. I was wondering if maybe you can discuss any sort of initiative or additional investments that you might be making into your overall marketing efforts whether that’s the additional client partners, your business development or online events, anything here that we should be looking at for calendar year ‘22? Thanks.

That's an excellent question, Marco. These are indeed very large markets. To give you some insights, at the end of fiscal '21, which was in November, we reported adding 19 new client partners last year, falling just short of our goal of 20, with one coming in after the year ended. We're optimistic about this and plan to add a net of 30 this year. That’s the figure we’re targeting. As for acceleration, I’m not sure we’ll surpass 30 this year, but not long ago we were adding only 5 or 6 partners, then it rose to 10 or 12, and subsequently to 20. I believe we can grow from 30 to 40 and beyond. We anticipate investing more in sales personnel to effectively tap into the market opportunities we have ahead of us. On the marketing front, it's a similar situation. We're in the process of a major branding initiative, developing new messaging to promote our presence more vigorously than before. Our online events have been attracting significantly more attendees, and that trend is ongoing. With increased marketing efforts, we're seeing continual growth in audience engagement with Franklin Covey and our offerings. We recognize the potential to ramp up these efforts, and those discussions are actively taking place. We envision a bright future with considerable opportunities ahead.

And our next question comes from Jeff Martin from Roth Capital Partners. Your line is open.

Thanks. Good afternoon. It's great to see the strong results this quarter. Paul, I wanted to get an update on the Strive platform launch, which I believe was scheduled for the beginning of this year. Do you have a timeline for that? Additionally, I would like to understand what you believe the near-term and long-term benefits of that platform will be.

Thank you, Jeff. Happy New Year. Strive is progressing as planned. Earlier today, around 2 o'clock, we moved into Phase 2 after completing Phase 1, which involved an initial group of pilot customers we worked with throughout the fall. This phase allowed us to run Franklin Covey content on the Strive platform, which had already been operational. We received excellent feedback from clients, reflected in high NPS and usage scores, with many clients opting for more services. Those pilot clients are currently discussing expanding their engagement due to the benefits they’ve experienced. Phase 2 involves reaching out to a broader group of our client partners as we prepare for a larger rollout. Over the next few months, we will engage with more customers and prospects using a larger sales team, replicating the successes from the pilot phase. Phase 3 will encompass the full launch later this year, making Strive the default platform for all our clients. We’re achieving the milestones we set out in our project plan, with the Strive team doing excellent work. Regarding the benefits for customers and how this may impact our business, the primary advantage of Strive is its ability to integrate learning into a cohesive experience, similar to a Peloton bike. Before Peloton, individuals could exercise in isolation without a streamlined experience. Strive will unify our content and facilitate cohort-based learning, resulting in more personalized experiences over time. It incorporates essential elements to foster behavioral change, moving beyond passive content consumption to significantly changing team and organizational behaviors. The advantages for us include a more compelling value proposition that enhances our ability to attract new clients. We expect Strive will ease the workload for learning and development administrators, allowing them to manage larger groups more effectively. Additionally, we anticipate an increase in the sale of our services, including delivery and coaching, as Strive proves its effectiveness.

Great. That’s very helpful. Thanks. I wanted to get a sense for hiring in the quarter of new client partners. And I asked the question from the perspective of trying to understand the sales and marketing expense. If there weren’t a lot of hires in Q1, when are you expecting groups to be hired in order to help us better model out SG&A for the balance of the year on a quarterly basis?

That’s a great question. So, as I mentioned a minute ago, we hired 19 new last year. Q1 is never our large hiring quarter. It’s the time when we kick off the New Year, we’re deeply involved in those activities. So, you can expect that the net 30 add fairly evenly spread across Q2, Q3, Q4, maybe it weighs a little bit more towards Q3 and Q4.

Okay, great. And then, last question. Could you parse out growth between new logos and pass expansion. My understanding is new logos have been strong. And based on your commentary, it seems like they continue to be strong. But help us understand kind of from a big picture standpoint, how much of the revenue growth is coming from pass expansion and how much is coming from new logos?

Yes, that's a great question. In Education, we noted that new schools, representing new logos for them, saw substantial growth. In our Enterprise Division in North America, the All Access Pass experienced a 23% increase in new logos over the latest 12 months, and this trend continued into Q1. New logos are contributing significantly to our growth, alongside the expansion of existing customers, which is also occurring. Revenue retention is over 90%, and we observed impressive service growth in the first quarter, achieving record levels. Overall, our growth is driven by a balanced contribution from three key areas: new logos, the expansion of existing All Access Pass seats, and services growth, with new logos up 23% over the most recent 12 months.

And your next question comes from Alexander Paris from Barrington Research.

Yes, I apologize. I was on mute. Thank you for addressing my questions; many have already been answered, but I have a few follow-ups. Considering the strong performance in the first quarter regarding both revenues and adjusted EBITDA, which was partly influenced by coaching and services, and your guidance for second quarter adjusted EBITDA being slightly below both my estimate and the consensus estimate, I wonder if it's possible that we may have been too optimistic about Q2. Did Q1 impact Q2 in any way in your thinking, perhaps pulling some revenue forward?

No. Our business is not as beneficial to compare sequential quarters; it is more useful to look at year-over-year comparisons. Our second quarter tends to reflect a smaller adjusted EBITDA due to delivering fewer services. It is typically a larger quarter for subscription revenue, particularly from All Access Pass subscriptions, while services decrease because clients generally prefer not to have services delivered during the holiday period. This leads to differences between the quarters. The first quarter often has more services, allowing us to recognize that revenue immediately, alongside a solid subscription quarter. The second quarter typically sees fewer services and higher subscription revenue that is recognized over time. This situation is simply a matter of timing, not borrowing from one quarter to the next. Steve, do you have anything to add?

The only thing I’d add, Paul, is that we anticipate some changes in our SG&A, meaning we’ll hire a few people here and there. I can’t predict exactly how travel will be affected by the new pandemic. There will also be some additional investments in growth, but primarily related. So, there will be a slight impact compared to Q1, but the services are the main point.

Got you. That’s very helpful. So, like you said, Steve, earlier to another question, the reason for waiting to Q2 is just to be a little bit closer to Q4, the all-important Q4?

Yes.

Yes. All right, makes sense. And then, let me see. I guess, the last question I’ll ask is what are you seeing in terms of inflationary cost pressures and then your ability to pass it on? And as part of that question, I’m just wondering about strategy with regard to price increases on both AAP and Leader in Me.

Yes. I think we are experiencing some inflationary pressures primarily in our labor costs as we work to attract talent to the organization. Regarding your second question, we have consistently implemented annual price increases since launching the All Access Pass. We intend to continue this practice this year and have already planned a larger increase compared to last year, when we didn't adjust prices much due to the pandemic. While there is a slight response to rising costs, the main reason for this larger increase is the significant enhancement in the value of the All Access Pass with the addition of Strive and other new content we have recently incorporated and will be adding this year. Therefore, we see an opportunity to implement this increase. Similarly, Sean, would you like to share your thoughts on the price increase strategy in Education?

Yes, it's quite similar to our approach in the Enterprise. We plan to implement annual price increases of 3% to 5%. We have recently made a significant increase in service prices because of the high quality and value of our coaching staff, and we've noticed that the market can support it. This strategy of ongoing 3% to 5% increases is set for the foreseeable future. Regarding the All Access Pass, we continuously add valuable new content, much like introducing new attractions at a theme park, which we believe will enhance our pricing power moving forward. For instance, we are introducing a new component to our curriculum focused on whole school social-emotional learning, which we currently lack. This substantial upgrade is expected to help justify price increases next year and for many years ahead.

Great. That’s helpful. And then, I guess, the very last and related question. Obviously, labor costs are up across the board within the economy, both through existing people as well as trying to bring new people into the organization. Any changes on compensation philosophy with regard to client partners, for example?

We are recognizing that we need to offer slightly higher compensation to attract the client partners with the experience we require. However, I believe our compensation plan remains very competitive. It’s an appealing model for our client partners as we are developing a substantial base of recurring revenue, which they find attractive. Alongside this, we are investing in the business to enhance the value of the All Access Pass. We are very satisfied with the client partners we are bringing on board. Just yesterday, we conducted Sales Academy with our new team, and they are a talented group. We are optimistic about our ability to continue attracting great talent while consistently evaluating our compensation strategy to ensure we stay competitive.

And this concludes our question-answer session. I’ll turn the call back over to Paul Walker for final remarks.

Thanks, Adrienne. Bob, you’ve been with us here today. Is there any final thoughts you’d like to share before I wrap up the call?

Well, I’d just say, Paul, first of all, a great report, and we’re grateful for the support of all of our shareholders. Maybe I’d just note that as you look at this report and the ongoing strength of the business, recognize that six years ago when we made the decision to transition the Company’s business model to subscription, we expected, first, it would allow us to significantly increase our importance to our customers that it would be reflected in the significant increase in the lifetime value of our customers; second, it would allow us to increase both the scale, durability, and visibility of our revenue; third, that it would drive increases in our gross margins, profitability, and cash flow; and finally, that it would really allow us to unleash the collective passion, capabilities, and dedication to our clients and our people. And I’m just thrilled to say that in this report, you can see that each of those things is happening. And really, my confidence to just say that led by you, Paul and Jenn and Sean and Steve, all of our leaders throughout the world, our great teams and our tremendous associates that I think we’re really positioned to not only continue to achieve these objectives but to accelerate them. So, thanks for the chance to reflect on that. But it’s, I think, a really exciting time for the Company and feel like we’ve got a lot of big summits ahead of us that we’re well on the way to. Thanks.

Yes. Thanks, Bob. I could not agree more. So thanks, everybody, for joining today. We appreciate you. And have a great rest of your evening.

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