Franklin Covey Co Q3 FY2022 Earnings Call

Welcome to the Q3 2022 Franklin Covey Earnings Conference Call. My name is Darryl, and I will be your operator for today's call. Please note, this conference is being recorded. I will now turn the call over to Derek Hatch. Derek, you may begin.

Thanks, Darryl. Good afternoon, everyone. On behalf of FranklinCovey, it's my pleasure to welcome you to our earnings call for the third quarter of fiscal 2022. Before we get to the good stuff, I 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 renewal rates of 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 that 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?

Thank you, Derek. Hi, everyone. We're grateful that you're with us today, and we hope your summers are off to a very good start. I'm joined today by Steve, Jen, Sean, and the rest of our executive team. We're also happy to have Bob on the line with us today as well. We are happy to be able to talk to you today and report our strong Q3 results and are really pleased that, again, the results were strong for not only the quarter, but year-to-date and for the latest 12 months, even stronger than expected. I'd like to start with a few revenue headlines, as you can see on Slide 4. Revenue growth for the quarter was strong, increasing 13%. And importantly, this 13% growth was after factoring in the impact of COVID-related lockdowns in China and other COVID-related impacts in Japan. Excluding China and Japan, revenue grew 19% in the third quarter. And our year-to-date and latest 12 months revenue growth has also been very strong where, again, even after factoring in the recent impact in China and Japan, revenue has grown 19% year-to-date and 24% for the latest 12 months. Our subscription and subscription services revenue growth was even stronger for the quarter, year-to-date and also for the latest 12 months. Total subscription and subscription services revenue grew 31% in the third quarter and has grown 31% year-to-date and 36% for the latest 12 months, with All Access Pass subscription and subscription services revenue growing 32% in the third quarter, 29% year-to-date and 32% for the latest 12 months to $136.2 million; and Leader in Me subscription and subscription services revenue growing 28% in the third quarter, 38% year-to-date and 49% for the latest 12 months to $54 million. The durability and visibility into our future revenue growth also continue to expand. Our balance of deferred revenue, both billed and unbilled, increased 21% over last year's third quarter to $116.5 million. And as shown on Slide 5, in our North America Enterprise operations, the percent of our All Access Pass contracts, which are multiyear was 42% and the percent of our total All Access Pass subscription revenue represented by these multiyear contracts increased to 58%, has also shown the average lifetime value of our All Access Pass customers continued to increase in the third quarter, year-to-date and for the latest 12 months. Our average revenue per client increased to $47,000. Revenue retention continued to be well above 90%, and our services attach rate increased to 66% for the latest 12 months. I'd like to point out a few profitability metrics, and these are reflected in Slide 6. Our gross margin percentage for the quarter remained very strong at 77.3% and has increased 55 basis points to 77.6% year-to-date and 40 basis points to 77.5% for the latest 12 months. Operating SG&A as a percent of sales for the quarter improved 275 basis points from 63.6% to 60.8%. It's also improved 392 basis points year-to-date, moving from 65.9% to 61.9% and 229 basis points for the latest 12 months from 64.2% to 61.9%. The flow-through of incremental revenue to increases in adjusted EBITDA for the quarter was 31% and has been 40% year-to-date and 27% for the latest 12 months. As a result of strong revenue growth and high flow-through, adjusted EBITDA increased 27% or $2.3 million in the quarter to $10.9 million, 66% or $11.4 million year-to-date to $28.9 million and 50% or $13.1 million for the latest 12 months to $39.4 million. Net cash provided by operating activities was $39.5 million, an increase of $8.7 million or 28% compared to the same nine-month period last year. During the third quarter, we returned a significant amount of capital to shareholders, investing $20.3 million to repurchase approximately 500,000 shares. And even after investing $20.3 million in share repurchases, we ended the quarter with $67.1 million of liquidity, comprised of $52.1 million in cash and with our full $15 million revolving credit line undrawn. As we'll discuss in a few minutes, as a result of these continued strong results and the strength of the key factors driving and underlying this growth, we're confident in increasing our guidance and outlook. As shown on Slide 7, first, while, of course, some quarters' revenue growth will be higher than others, we're increasing our revenue outlook for fiscal '23 and beyond, from the expectation of growing our rolling 12 months revenue from low double digits to expecting that rolling 12 months revenue growth now that it will be at least in the low teens, call it, 12% or 13-ish percent and moving toward the mid and then high teens in the quarters and years to come. We expect this accelerating revenue to be driven by and reflect the ongoing growth in our high-margin, high-recurring subscription and subscription services revenue. Second, we're increasing our adjusted EBITDA guidance again for fiscal '22. As you know, our initial guidance was that for fiscal '22 adjusted EBITDA would increase to a midpoint of $35 million, an increase of $7 million or 25% compared to adjusted EBITDA of $28 million in fiscal '21. Our most recent guidance was for fiscal 2022's adjusted EBITDA to increase to a midpoint of $38.5 million, representing year-over-year growth of 38%. We now expect adjusted EBITDA for fiscal 2022 to increase to between $40 million and $41.5 million. The middle of this range reflects more than 45% growth in adjusted EBITDA compared with the $28 million achieved in fiscal 2021. We'll discuss this guidance in a bit more detail in a few minutes. Third, we're increasing our outlook for adjusted EBITDA growth for fiscal '23, fiscal '24 and fiscal '25. We now expect that adjusted EBITDA will grow from between $40 million to $41.5 million in fiscal '22 and between $47 million to $48.5 million in fiscal '23. This compares to our previous adjusted EBITDA outlook of approximately $45 million for fiscal '23. We then expect that adjusted EBITDA will increase to approximately $57 million in fiscal '24 versus what we said previously $55 million. And then to increase to approximately $67 million in fiscal '25, a level at which we would expect adjusted EBITDA as a percentage of sales to be approaching 20%. With this impressive and strong expected growth in revenue and adjusted EBITDA, we also should generate significant amounts of cash flow which, as we'll discuss in more detail in a few minutes, we plan to reinvest in the business at high rates of return and also return substantial amounts to shareholders through ongoing share repurchases. I'd now like to turn some time to Steve to dig a little deeper into our results.

Thank you very much, Paul. Good afternoon, everyone. It's a pleasure to be here today to discuss our positive results. We are very satisfied with the continued strength and growth of our revenue, adjusted EBITDA, and cash flow. As Paul mentioned, while our overall results were strong, they were even stronger when excluding Enterprise's international operations, which were affected by COVID-related issues in China and Japan. Specifically, excluding those operations, revenue growth increased from a solid 13% to 19%. To give you more insight into the factors behind these results, I will report on three key areas of the company: our Enterprise business in North America, our Education business primarily in North America, and our international Enterprise business. In our Enterprise business in North America, which represents about 53% of total revenue, results were robust. Revenue grew 20% in the third quarter, with a year-to-date growth of 19% and 22% over the last 12 months. Subscription and subscription services revenue saw even higher growth at 27% for the third quarter, 25% year-to-date, and 27% in the past 12 months. Our deferred revenue balance, both billed and unbilled, grew by 16% compared to the previous year, and the proportion of All Access Pass revenue from multiyear contracts rose to 58%, up from 52% in the same quarter last year. In our Education business, which makes up around 22% of total revenue, results were also strong. Education revenue grew by 21% in the third quarter, 33% year-to-date, and 42% over the last 12 months. Subscription and subscription services revenue in Education rose 28% in the third quarter, 38% year-to-date, and 49% in the past year. Our deferred revenue balance in Education also increased significantly, growing 49% in the third quarter. Regarding our international Enterprise operations, we faced mixed results due to COVID-related impacts in China and Japan. In several locations including the U.K., Ireland, Germany, Austria, Switzerland, and Australia, which represent about 36% of total international sales, we experienced significant growth. Revenue in these regions increased by $1.3 million or 41% for the quarter, and has grown 48% year-to-date and 60% in the last 12 months. Subscription and subscription services sales in these markets, which account for roughly 86% of total sales, rose dramatically by 77% in the quarter, 81% year-to-date, and 100% over the past year. However, in China and Japan, which comprise approximately 64% of our international sales, widespread lockdowns affected our business significantly. Revenue here declined by $2.6 million or 46% to $3.1 million in the quarter but showed less severe year-to-date decline of 15% and just 6% over the last year, primarily reflecting the impact from the latest restrictions. With easing COVID restrictions in both countries, we anticipate a rebound in sales and expect them to contribute positively to our international and overall growth in FY '23. Now, to provide further detail, in the third quarter, our revenue grew by 13% to $66.2 million, an increase of $7.4 million compared to $58.7 million in the same quarter last year. Not only did we see strong revenue growth, but our profitability and cash flow growth were even more impressive. Our gross margin percentage remained robust at 77.3%, and our operating SG&A as a percentage of sales decreased by 274 basis points to 60.8% for the quarter. Adjusted EBITDA increased by 27% or $2.3 million, reaching $10.7 million in the third quarter compared to $8.6 million in the same quarter of FY '21. Furthermore, our cash flow and liquidity were also very strong. Cash provided by operating activities increased by 28% to $39.5 million through the third quarter. This strong cash flow benefits from our subscription model, allowing us to collect cash faster than we recognize subscription revenue. Consequently, we ended the third quarter with $67.1 million in liquidity, even after investing $20.3 million on repurchasing around 500,000 shares. Our liquidity consisted of $52.1 million in cash, resulting in no net debt, and we still have our $15 million revolving credit facility fully undrawn. Paul, I'll hand it back to you.

Thank you, Steve, for that insightful overview. I would like to highlight five key drivers that contributed to our strong results, as shown on Slide #12. Firstly, the markets we target are substantial, experiencing significant growth and fragmentation, resulting in ample opportunities for us to capture substantial market shares. Secondly, we are concentrating on the most vital, profitable, and sustainable areas within these markets. The challenges and opportunities we assist our clients with are enduring, allowing us to build partnerships in both prosperous and tough times. The third factor is the robustness of our subscription model, which serves as a strong catalyst for our growth, increasing revenue predictability, and bolstering profitability and cash flow. Fourthly, we have compelling growth opportunities, driven by our expansive and developing markets and the strength of our business model, which fosters numerous exciting pathways for growth. Finally, our strong cash flow can be reinvested to generate significant additional value for our shareholders. Let’s elaborate on each of these points. The attractiveness of our chosen markets speaks volumes; each is vast, growing, and fragmented. Slide 14 illustrates our focus on three expansive and growing markets: the Enterprise learning market, valued at about $99 billion and expanding by roughly $3 billion annually; the Education market, with a size of $600 billion and a growth of around $1 billion each year; and the market for business leaders who are investing from their operational budgets to enhance performance, which is likely worth trillions. Each of these markets is highly fragmented, with leading players only accounting for about 1% to 2% of sales, providing us with a remarkable opportunity to grow and establish substantial market presence. We also focus on significant, profitable, and durable spaces in these markets. While various factors can add value to organizations, the most impactful opportunity lies in mobilizing collective efforts towards the organization’s highest priorities. For each strategic, operational, or cultural initiative, organizations already have pockets of excellence alongside variable performances. However, what sets top organizations apart is the consistency and widespread adoption of their best practices, something we help organizations achieve, allowing them to enhance performance predictably and systematically. The third driver highlights our subscription model's strength, which continues to propel our growth and predictability of revenues. As much of our business transitions to subscription over the next few years, we anticipate an acceleration in our revenue and profitability growth. The data shows that our subscription services revenue grew by 31% in the third quarter and has a similar growth year-to-date. The All Access Pass and Leader in Me subscriptions are major contributors to this growth, showcasing the health of our subscription model. Moreover, we are witnessing an increase in the durability and predictability of our revenue, evidenced by our deferred revenue growth, which rose 21% to $116.5 million by the end of the third quarter. The high flow-through of incremental subscription revenue to profitability and cash flow is another advantage of our subscription model. As we transition towards predominantly subscription-based services, we foresee an overall revenue growth moving towards mid-teens and beyond. Our investments in content, technology like the newly launched impact platform from our Strive acquisition, and expanding our sales force position us to seize growth opportunities effectively. Finally, our robust cash flow is not only generating value but can also create additional significant value for shareholders. Our goal is to grow revenue in the low to mid-teens while enhancing our adjusted EBITDA significantly. We have also successfully returned cash to shareholders through share repurchases, increasing shareholder value while investing in growth. With these five drivers outlined, I would now like to pass it back to Steve for insights on our outlook and guidance.

Thank you again, Paul. We have talked about this guidance before, but I will go over it again and provide more details. As displayed on Slide 29, our initial guidance from last fall indicated that in FY '22, adjusted EBITDA would rise to a mid-point of $35 million, which marked an increase of $7 million, or 25%, compared to the adjusted EBITDA of $28 million in FY '21. Our latest guidance projected FY '22 adjusted EBITDA to grow to a mid-point of $38.5 million, reflecting year-over-year growth of 38%. We are now revising our adjusted EBITDA guidance for FY '22 to a range of $40 million to $41.5 million, with the midpoint signifying more than 45% growth in adjusted EBITDA compared to the $28 million from last year. This guidance is based on a few expectations. First, we expect to recognize the deferred revenue currently on the balance sheet, which is secure and provides significant visibility into our revenue for the fourth quarter next year and beyond. Second, in addition to the recognition of deferred revenue, we anticipate continued strong growth in sales from our All Access Pass and Leader in Me subscription services, an assumption we are confident about. Third, while we anticipate recovery next year from the recent pandemic lockdowns in China, which usually accounts for about 5% of sales, and restrictions in Japan, which typically represents around 4% of sales, our guidance assumes minimal improvement in their operations in the fourth quarter compared to this year's third quarter. Fourth, in our Education business, we expect to maintain strong retention of both schools and revenue among existing Leader in Me schools and to grow our new Leader in Me schools to 11, surpassing the levels achieved in our strong fiscal 2021. For the year, Education will significantly increase the number of coaching days delivered in its Leader in Me schools this year due to our team's efforts to have revenue recognized more evenly throughout the year and the lifting of COVID restrictions, allowing these coaching days to be distributed evenly, unlike last year when most were recognized in the fourth quarter. In line with this guidance, we expect adjusted EBITDA in the fourth quarter to be between $11.1 million and $12.6 million, compared to a robust $10.6 million in the fourth quarter of FY '21. This expectation signifies strong growth in North America, particularly in our English-speaking offices in the U.K. and Australia, and in Education, somewhat offset by declines in operations in China and Japan and by the timing of Education coaching days recognized in last year's fourth quarter, many of which were recorded earlier this year. We predict approximately 7% revenue growth in the fourth quarter, factoring in the declines in China and Japan, along with the previously mentioned timing shifts in Education coaching days this year. Total revenue growth for the year, including the fourth quarter, is anticipated to be 15%. Regarding our targets for FY '23 through FY '25, as illustrated in Slide 30, you may recall that by the end of the first quarter, we adjusted our original targets of achieving $40 million of adjusted EBITDA in FY '23 and $50 million in FY '24 to a new target of $45 million in adjusted EBITDA for '23 and $55 million for FY '24. As mentioned earlier, our targets are set to achieve between $47 million and $48.5 million in fiscal 2023. We also anticipate that adjusted EBITDA will rise to approximately $57 million in FY '24, up from our earlier estimate of around $55 million, and reach about $67 million in FY '25, at which point we would expect adjusted EBITDA as a percentage of sales to be nearing 20%. While dramatic changes in the world, environment, economy, and other factors could affect these expectations, we want to reiterate that these are our current targets. Now, back to Paul.

Thank you, Steve. We feel great about our momentum, and I look forward to continued accelerating growth. And with that, Darryl, we'd like to open the line for questions, if you would.

And our first question comes from Marco Rodriguez.

I was wondering if you could talk a little bit more about the client partner hirings. If I heard you correctly, you're targeting 40 new net CP hires in fiscal '23, but I missed some of the commentary surrounding that. So if you can maybe talk about the main drivers that are moving you from a net 30 to a net 40? And should we basically sort of assume that this 40 level per year is a new run rate level going forward?

That's a great question. You've been with us for a long time, and you remember when we acknowledged that expanding the sales force is crucial for our company's growth and revenue. Initially, we hired a net of 10 per year, then increased that to net 20. Currently, we are at net 30 and aiming for net 40. I don't expect us to reach 40 next year, as we have plans to exceed that in the next two years. You may hear us discussing net 50 and net 60 in the near future. To support this growth, we need to strengthen our recruitment efforts, including expanding our recruiting team to attract those numbers. We’ve been focused on this throughout the year and are confident in our progress. Once we have the right people, we also need to ensure our onboarding, sales enablement, and sales management systems can support them. We are fortunate to have long-tenured employees with low turnover because we do a great job of helping them ramp up and they see their potential for success here. We have been preparing for this next significant leap to net 40 in a way that will enable us to go beyond that in the following years.

And that support staff. Is that fully in place now to hit that 40 in fiscal '23?

Yes, it is. The support staff consists of the Managing Directors leading the sales team and the sales enablement personnel who are enhancing the sales tools. You can expect to reach 40 going forward, and we may increase that target next year as we discuss fiscal '24 and '25.

Got it. Very helpful. Then, in terms of the international licensees, outside of China and Japan, it obviously sounds like results are pretty strong, and it sounds like it's partly being driven by All Access Pass adoption. And while I understand the headwinds that are present in China and Japan, can you maybe talk a little bit about where they are, China and Japan, that is in regards to them implementing All Access Pass?

Yes, of course. So thanks, Marco. We have had significant progress in Japan in terms of AAP and AAP services. As of the end of this last quarter, Japan is 45% of their business that's AAP and AAP services, which will, as we expect, lead to significant returns and that same sort of flywheel we talk about all the time, those same economics apply in Japan. And again, they were restricted by the government requirements in Japan. We're seeing a real turn. And China's percentages are significantly growing. We probably would be seeing a higher percentage if we just hadn't seen such a downturn in their business and their ability to conduct business with the COVID restrictions in their environment. We'll be able to talk more about that as we end up the fiscal year.

Got it. Very helpful. Now, regarding the balance sheet, in our last call we discussed your cash balance, and it’s great to see the significant stock buyback you executed in the quarter. However, we also talked about potential uses of that cash for acquisitions or smaller deals that align with your historical strategies. Can you provide an update on the acquisition landscape and your current activity in that area?

Absolutely. When considering potential acquisitions, we focus on acquiring capabilities we currently lack. For example, a few years ago we acquired Robert Gregory Partners, which enhanced our coaching and executive coaching capabilities. We also acquired Jhana for its micro-push content capabilities and Strive, a platform that supports our client offerings. We evaluate potential content acquisitions too, although we often opt to license content rather than buy it outright. If we encounter an organization with valuable content that also possesses additional capabilities or a strong customer base, we see opportunities for conversion at a high rate, especially for clients who may be satisfied with their current providers but would benefit from our All Access Pass offerings. We consider these acquisitions through our framework of the 4 Cs. Boyd Roberts, who is present, leads this initiative, and we continually engage in discussions around these targets while exploring various future opportunities. Currently, our primary focus is fully integrating Strive and launching it, but we're aware of the potential for greater activity in acquisitions as we consider how to utilize the cash on our balance sheet.

And our next question comes from Alex Paris.

So congrats on the beat and raise, congrats on the raised guidance and outlook. And with regard to guidance and the outlook, I was wondering if we can talk macro for a bit, maybe a little additional color. Typical questions that we're asking on these conference calls is the impact of inflation and how you're dealing with it as well as the specter of recession and how the industry behaves in that sort of environment. So a little more color there on those macro issues, please?

Great question. We anticipated this topic might arise during our call. While we can't predict whether a recession will occur or its potential severity, we can evaluate our current position and preparedness for such an event. We are confident in our level of readiness. I would like to highlight five reasons for this confidence. First, our focus is on solving critical problems for our clients, which often become even more essential during tough times. The need for effective strategy execution and organizational skills is heightened when challenges arise. Companies can't afford missteps during difficult periods, so we are addressing issues that are very relevant, especially in challenging times. Second, we ensure that our solutions substantially improve client performance across their organizations. This unique focus places us in an important market position. The third point is our subscription business model, which is new for us. Unlike past downturns, we are now operating under a model where most contracts are for at least a year and staggered throughout the year. This provides visibility and stability. Additionally, almost half of our contracts and more than half of our revenue come from multiyear agreements, ensuring a steady income flow in the future. The fourth point is our strong cash generation. In uncertain economic times, cash is crucial, and we are fortunate to have a strong cash position. Lastly, we are committed to not growing at the expense of others. Since launching the All Access Pass, we’ve seen increased value for our clients, allowing them to limit the number of vendor partnerships they maintain while potentially spending less overall with us. This has been evident with several large clients throughout the years. We believe there is opportunity in the current climate, and we are entering this period from a position of strength. Regarding inflation, we don't have a significant supply chain or associated costs. While some travel and labor costs may rise, we are less vulnerable to the effects of inflation compared to other businesses.

Great I appreciate that thorough answer, and I agree with those points. So you could argue that, particularly with the percentage of subscription and subscription-related services that the company should grow right through a downturn? Obviously, depending on the length and severity of the downturn. But the problems that your customers have will only increase in tough economic times, and you got the increasing component of recurring revenues.

Yes. So that's great.

And then the Q4 challenges, I think Steve did a good job outlining those. China and Japan, you're not expecting significant recovery in the fourth quarter versus the third quarter experience, but you do expect as the COVID lockdowns diminish and COVID continues to improve, hopefully, that you expect a return to growth for both of those countries in fiscal '23? Just wanted to clarify.

We have experienced fluctuations in our business, especially in China, which was significantly affected during the first wave of the pandemic. However, it rebounded to pre-pandemic levels a little over a year ago, before experiencing another decline in the past one and a half quarters. We anticipate that the factors that contributed to the previous recovery will reemerge, although we do not expect this to occur in the fourth quarter. We believe growth will resume as we enter the next fiscal year. In Japan, the situation is somewhat different, with a gradual return to growth already underway. We expect both countries will play a role in our growth in the coming year.

And our next question comes from Samir Patel.

Congratulations on a great quarter, and thank you for finally repurchasing shares. I have two questions. The first one builds on what Alex asked earlier. Could you provide a more detailed retrospective on your experience during COVID with the affected customers? Specifically, I'm referring to the hotels and airlines, and I'm looking at your press release from December 2020 when you were selected by Best Western to provide services to over 2,000 properties in North America. That was during one of the COVID variants when they decided to sign a significant new contract with you. Many people are likely curious about the resilience of your business model. As you mentioned, subscription revenues continued to grow throughout COVID, and you were signing major deals in the hospitality sector. My first question is, could you elaborate a bit more on that experience as a reflection on the recent crisis you faced?

Yes, thank you for the question. Subscription revenue not only grew during the pandemic, but after the initial two quarters when we had to transition our subscription services, which had previously been reliant on in-person sessions, we successfully worked with clients to adapt to live online experiences. Once we overcame that initial hurdle, our subscription services revenue surged to unprecedented levels. Currently, services now constitute 66% of our All Access Pass subscription revenue, a significant increase from earlier when it was just 12%. This growth illustrates the rapid increase in both subscription and services revenue following those first two quarters of the pandemic. A noteworthy example is one of the largest airlines, which, despite a complete halt in travel, chose to invest in our services to revamp their organizational culture and develop their leadership capabilities. Another example is a major hotel chain that extended its partnership with us, committing to a new five-year contract during the pandemic. Additionally, a large industrial client we began with five years ago expanded from 100 users to 1,000 and eventually to 3,000. Now, we’re engaged in a three-year contract serving them enterprise-wide, where they streamlined their partnerships from over 30 to just four or five, with us being one of the key partners. While we don't wish for an economic downturn, we feel optimistic about our potential to support both current and prospective clients in challenging times because of the strength of our offerings and the complex problems our clients face. We believe we can become a reliable partner that organizations look to for support.

That's great. Very helpful information. My second question is for Steve. I know we've had differing opinions on this each quarter. Looking at Slide 30, in the past two quarters, Paul, you've increased your revenue outlook from high single digits to low teens growth. The midpoint of this year's EBITDA guidance has risen by about $6 million, and Steve, somehow your targets for the upcoming years have increased by $2 million. This is hopefully considering that next year China will recover from levels that are currently depressed due to restrictions on doing business there. So, is this merely conservative estimation, or is there some structural reason I am missing for the $6 million increase in your EBITDA this year compared to the previous target, while you're projecting only a $2 million increase in the following years?

Yes. Samir, you'll notice that we're anticipating about a $10 million increase from one year to the next in the following years. We believe that this amount represents a good year-to-year flow-through. This year, we saw a significant increase in adjusted EBITDA, rising from the pandemic-impacted $28 million to our projected end figure. We think that achieving an annual increase of $10 million is a reasonable target. Our guidance for FY '23 takes into account various factors we've discussed, such as hiring additional salespeople who may not be as productive in their first year, leading to extra costs in sales and marketing. We are also continuing to implement the Strive acquisition and engage in content and platform development at a higher level than this year, along with the resumption of business travel. So yes, Samir, there is a bit of conservatism in our outlook.

Those are front-loaded growth investments, right? But if Paul's talking about going from high single-digit growth to low teens in the near future and then onwards to 15%, 17%, 19%, I mean those out-year targets, if you start achieving that, are going to be looking higher than that, right? Would you agree with that statement?

Yes.

Yes.

And our next question comes from Jeff Martin.

I was wondering if you could provide some context. For North America Enterprise, you reported a revenue growth of 27%, while the growth in billed and unbilled deferred revenue was 16%, which is below expectations for growth acceleration in the coming years, potentially reaching the mid and upper teens. Can you help clarify why there is a difference between the deferred revenue growth and the realized revenue growth for Enterprise? I would appreciate any insights you can provide.

Great. Steve, do you want to talk about the walk from...

Yes, Jeff. I just want to remind everyone how this works. When we ship materials or deliver services, we record that revenue at the time of the transaction. When we invoice for a contract, we typically bill one year in advance, which we record as deferred revenue on the balance sheet. This revenue is recognized evenly over the next 12 months. For multi-year contracts, we bill the first year's amount and add it to the balance sheet, while the second and third years are recorded as unbilled deferred revenue, which is off the balance sheet. We track three levels: deferred revenue reduces evenly each month on the balance sheet, while unbilled deferred revenue comes in annual increments since we bill in advance. In the third quarter, we added $28.8 million to deferred revenue compared to $22.7 million last year. We also added $8 million to unbilled deferred revenue, slightly down from $9 million the previous year. However, in the last quarter, we added $4 million more to unbilled deferred and $3 million more in the first quarter. This shows how multi-year contracts were sold over these quarters. Overall, the year-to-date figures look strong for contracted amounts. Although this quarter's multi-year sales impacted the invoiced amounts, the percentage of multi-year sales increased. Was that too many words?

That's helpful. The reason for my question is to understand that deferred revenue growth is not declining, and that it eventually aligns with reported revenue growth. It seems that the third quarter was somewhat unusual in terms of the addition of multiyear contracts.

Yes, the multiyear sales showed strong performance for what we invoiced this quarter.

Great. And then I wanted to get a sense in terms of revenue growth acceleration. Key drivers, obviously continuing to expand the mix of subscription and related services is probably the biggest. But maybe help give us kind of a pecking order of where you expect the other most meaningful contributions will be? Obviously, client partner growth is going to be a big part of that and then rebound in Asia is going to help. But maybe just kind of help us prioritize, which are the most impactful beyond the increasing concentration of subscription? Yes, I believe you highlighted the key points. The most significant factor is that we now have a growth-oriented model, six years in the making. We retain nearly all our revenue and are adding services, which contributes to our expansion. The All Access Pass and related businesses are growing much faster than the mid-teens and low-teens growth rates we previously discussed. As these areas become a larger part of our business, the overall growth rate will naturally increase, as you pointed out. The main drivers of this growth include, as you noted, an increase in salespeople and more interactions with existing customers. There is significant potential to expand within our current All Access Pass clients; most of them are just starting with us and there’s plenty of room for growth. In addition to that, we’ll be welcoming new clients in the future. We need to focus on having the right sales team, being strategic in our marketing, and ensuring our subscription offerings remain attractive to clients. Ultimately, our model is designed for growth, and we are executing strategies to enhance that growth. As we refine and accelerate our efforts, our subscription base will continue to grow, which will in turn elevate the overall growth rate of the company.

Great. And then I wanted to get a sense with the impact platform, what are some of the opportunities to do things maybe a little different, enhance the value proposition once that's fully rolled out versus what you've been doing in the last 6, 7 years with the subscription model?

Thank you for referring to it as the impact platform. Our aim is to be the company that drives impact at scale, and we believe this name reflects that vision. To clarify, our platform operates on two levels: as a technology solution and as a unique industry offering. We are combining historically separate elements that companies have struggled to unify—high-quality content with cohort experiences. While individuals can gain insights by watching content alone, it fails to foster the collective understanding and behavioral changes necessary within organizations. Hence, what is essential is a shared space where individuals can come together effortlessly, engage in facilitated experiences, collaborate, and discuss application of what they've learned. Coaching can also be provided for organizations seeking support through one-on-one or team sessions. This comprehensive platform seamlessly integrates great content with our instructors, consultants, and client-facilitated options. It also includes self-follow-up and reinforcement needed to maintain behavior changes, all presented conveniently on a unified platform, which simplifies deployment for our clients. Before the launch of the Impact platform, clients struggled to cobble together their own solutions, resulting in a disjointed experience that required significant backend effort. We eliminate that complexity, enabling a more user-friendly, push-button process. For users, everything they need is readily available, removing the need for lengthy training sessions that often lead to forgetfulness and minimal behavioral change. Instead, the platform guides users through an ongoing, multimodal experience while tracking their behavioral progress over time. It is designed to be user-friendly and straightforward for administrators as well, addressing the challenging task of engaging individuals in sustained behavioral change. This creates attractive opportunities which should enhance our appeal to new clients, positively impacting our win rates and helping us acquire new customers. Additionally, the platform is built to facilitate the delivery of more integrated services as it seamlessly incorporates the people aspect provided by consultants. We anticipate seeing growth in service offerings as a result. Given that this platform simplifies large-scale deployment for buyers, we also foresee potential for increased expansion within our existing customer base. We are optimistic that the Impact platform will support our efforts to deepen our relationships with current clients.

And we have no more questions at this time. I'll turn it back to Paul Walker for final comments.

Thank you, Darryl. Thank you, everyone, for being with us today. Thanks for just continuing to be with us on this journey. We are grateful to you, and we're grateful to have been able to visit with you for a commit today, and we're grateful for a good third quarter. And we hope you have a great rest of your day and a great upcoming 4th.

And thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.