Earnings Call Transcript - FC Q4 2024

Operator, Operator

Good day, and thank you for standing by. Welcome to the Q4 Franklin Covey Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Derek Hatch, Corporate Controller. Go ahead, Derek.

Derek Hatch, Corporate Controller

Thanks, Mark. Hello, everyone, and thanks for joining us today. We're glad to have the opportunity to talk with you today about our fourth quarter and fiscal year ended August 31, 2024. Participating on our call this afternoon are Paul Walker, our CEO; Steve Young, our CFO; Jennifer Colosimo, President of our Enterprise division; Sean Covey, President of our Education division; and other members of the executive team. As we get started, I would like to remind everyone that this presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based upon management's current expectations and are subject to various risks and uncertainties, including, but not limited to, the ability of the Company to grow revenues, the acceptance of and renewal rates of our subscription offerings, including the All Access Pass and Leader in Me memberships, the ability of the Company to hire productive sales and other client-facing 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 overall size of the 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 on management's current expectations, and we undertake no obligation to update or revise these forward-looking statements to reflect events or circumstances after the date of today's presentation, except as required by law. With that out of the way, we'd like to turn the time over to Mr. Paul Walker, our Chief Executive Officer. Paul, take it away.

Paul Walker, CEO

Thank you, Derek. Welcome, everyone. It's great to be with you today. There are two things that I am excited to share during our time together. First is the strength of the results we achieved in the fourth quarter and for the year, where fourth quarter revenue grew 8% and full-year revenue was $287.2 million compared to the $284 million we had expected. Fourth quarter adjusted EBITDA grew 39%, and for the year, adjusted EBITDA was $55.3 million versus the $48.1 million that we achieved in fiscal '23. Cash flows from operating activities grew 69% for the year, and free cash flow grew 121% in the year. These results are a continued reflection of what we anticipated when we converted to a subscription business model nine years ago. As shown on Slide 4, since our conversion, we've achieved significant growth in revenue, adjusted EBITDA and cash flow. The second thing I want to talk about today, and this is something I've been looking forward to discussing, is that having substantially completed our transition to subscription and having made major investments in technology and content to solidify our position of leadership, we're now ready to make the necessary growth investments to shift our ongoing revenue growth from mid-to-high single digits to consistent double-digit growth. This increased growth will be driven by investments in two key areas. First, further expansion of our penetration within existing clients. Even though we've already expanded our average revenue per client from $39,000 to $85,000 since our conversion to subscription, within the vast majority of our clients, we remain only about 10% penetrated with lots of headroom for further expansion and growth. The second area of investment is in winning significantly increased numbers of new logos. Even though we've won thousands of logos, we're only scratching the surface of the potential within the large markets we serve. Accordingly, I'm pleased to tell you that we're making approximately $16 million of incremental net growth investments into the following areas, which you can also see reflected on Slide 5. The first of these areas is adding client-facing sales and support roles to increase the penetration bandwidth of those client partners who will now be responsible solely for client expansion. The second area of investment is that we're providing significant additional marketing and closing resources to help those client partners who will now be focused solely on winning new logos. And the third area is that we're making investments into central sales leadership and sales operations functions, including having hired a new Chief Revenue Officer. Her name is Holly Proctor, and establishing an expanded revenue operations function that's going to allow us to scale our sales force even more rapidly in the future. We expect these investments to show impact in the back half of fiscal '25 and then to fundamentally shift our growth curve thereafter. As shown in Slide 6, we expect reported revenue to grow approximately 4.5% or $13 million in fiscal '25. You should note that this will be an investment year where we expect much of the new invoiced revenue to end up on the balance sheet. We then expect to begin a pattern of double-digit revenue growth as the impact of these growth investments accelerates our growth to 10% or around $30 million in fiscal '26. We then model accelerating growth to 12% or approximately $40 million in fiscal '27 and then to 14% growth or approximately $50 million in fiscal '28. As also shown on Slide 6, we expect the impact of these investments to decrease adjusted EBITDA in fiscal '25 to a range of approximately $40 million to $44 million, which will then grow to $48 million in fiscal '26 to approximately $60 million in fiscal '27 and then to approximately $75 million in fiscal '28. This is an exciting time for us. Having successfully converted to our technology-enabled subscription model and having made significant investments in content and technology, which have further enhanced our strategic position, while at the same time continuing to grow adjusted EBITDA and cash flow, we're now ready to make the next jump forward, that of accelerating our growth. I'd like to now turn some time over to Steve to talk about our Q4 and fiscal year results in a little bit more detail and also get into guidance.

Steve Young, CFO

Thank you very much, Paul. I'm very excited about the results for our quarter and for the year that we just ended. As you can see on Slide 7, in Q4, revenue came in at $84.1 million, up 8%, and stronger than expected. With that, FY '24 revenue for the year came in at $287.2 million compared to the $284 million, again, that we had expected. In Q4, adjusted EBITDA was $22.9 million, reflecting growth of 39% compared to the $16.5 million last year. For the full year FY '24, adjusted EBITDA came in at $55.3 million, which was $55.8 million in constant currency and was an increase of 15% or $7.2 million compared to the $48.1 million in adjusted EBITDA achieved last year, which itself was up from the $42.2 million in FY '22. Cash flows from operating activities grew 72% or $25.6 million during Q4 to $60.3 million. Free cash flow was $48.9 million, reflecting growth of 121% or $26.8 million. In addition, the foundation for future growth is being established by the increase in our balance of deferred revenue, which increased 9% to $107.9 million and will be recognized as revenue in the coming quarters. We're really encouraged by the double-digit increase in our services booking rate in the fourth quarter in our North America business, and importantly, that the strong momentum has continued in this year's first quarter in both September and October. Importantly, these increases in booking pace will translate to year-over-year increases in recognized services revenue in the coming quarters. I'd like to now briefly provide some more detail on the factors underlying our performance in three key areas of the Company, specifically our Enterprise business in North America, the Enterprise business internationally, both in our direct offices and international licensee operations, and our Education business. I'll start with the Enterprise division results. In FY '24, our Enterprise division generated $208.8 million or 73% of the Company's overall revenue, with the Education division generating $73.5 million or 26% of the Company's revenue. The Enterprise division's revenue grew 2% for the year and 8% for the quarter, whereas Education division grew 5% for the year and was flat for the fourth quarter. Slide 8 shows our results in the Enterprise business in North America, which represents 75% of our Enterprise division revenue. Revenue in North America for FY '24 grew $6.2 million or 4% to $156.5 million, due to a very strong fourth quarter in which our revenues increased 17% to $45.1 million. Subscription revenue in North America for FY '24 was $89.1 million, reflecting 4% growth over the prior year and was $22.6 million in the fourth quarter, representing 3% growth. The combination of subscription and subscription services revenue in North America was $138.9 million for FY '24, reflecting 3% growth over the prior year and was $36.7 million for the fourth quarter, representing 4% growth. Our balance in billed deferred revenue was $49.2 million, which is down 1%. And our balance of unbilled deferred revenue is $68.4 million, which is down 15% based upon the timing and signing of certain contracts that particularly impacted our balance of unbilled deferred revenue. The percentage of North America's All Access Pass contracted for multiyear periods increased to 56% from 54% and the percentage of our invoiced revenue represented by multiyear contracts remained consistent with last year at 59%. As shown on Slide 9, revenue from our international direct operations, which account for approximately 16% of our total Enterprise division revenue was $33.1 million, a decrease of $2.1 million as a result of China's revenues decreasing $2.5 million for the year due to challenging business conditions in China. Our international licensee revenue was $11.2 million, a decrease of $400,000 or 4% from the $11.6 million last year. This decrease was primarily also due to economic challenges in certain countries. Finally, as shown on Slide 10, revenue in our Education business grew 5% to $73.5 million for the year, on top of the 13% growth in FY '23 and 26% growth in FY '22. Revenues for the fourth quarter were flat at $24.1 million after being up 18% in the third quarter. Education invoiced amounts grew to $81.4 million in FY '24, which represents 5% growth over the prior year. The invoiced amounts in Q4 decreased 2% or $800,000 to $44.4 million. Education subscription and subscription services revenue grew 3% to $67 million during the year, on top of the 13% growth generated in FY '23 and the 29% growth generated in FY '22. Education subscription and subscription services revenue for the quarter was $22.6 million and flat to the prior year. Education's balance of deferred subscription revenue increased 19% or $7.9 million to $48.5 million, again, establishing a strong foundation for continued growth in future years. Now a little bit of cash, cash flows and the balance sheet, as shown on Slide 11, our cash flows from operating activities for FY '24 increased 69% or $24.5 million to $60.3 million. Our free cash flow, as I mentioned, increased 121% or $26.8 million in FY '24 to $48.9 million, particularly reflecting the increase in earnings and positive changes in working capital. In FY '24, we invested $30.7 million to purchase 776,000 shares. Over the last three years, we have purchased 2,247,000 shares at a cost of over $90 million. We still have over $111 million in total liquidity at the end of FY '24, including $48.7 million in cash and $62.5 million available under the revolving credit facility. So, the Company remains in a strong position to continue to execute on our key objectives and return value to shareholders. So, after that financial information, now turning to guidance for FY '25. We expect revenue in the range of $295 million to $305 million, reflecting that as sales growth accelerates in the back half of the year, a portion of that growth will go on the balance sheet as deferred revenue. Reflecting on our significant growth investments for FY '25, we expect adjusted EBITDA in the range of $40 million to $44 million. For the first quarter of FY '25, we expect revenue to be just over $70 million and adjusted EBITDA to be approximately $7.5 million to $8.5 million, reflecting the Q1 impact of the $16 million in incremental growth investments that we've talked about. Now, while it is, of course, challenging to forecast long-term results, we want to make sure that our investors and analysts understand our expectations and have the information you need to model our business and benchmark our progress going forward. As such, we are providing revenue and adjusted EBITDA targets as we view them today for FY '26, FY '27 and FY '28. As Paul said earlier, our revenue targets are that revenue will increase 10% or $30 million to $330 million in FY '26 and will increase approximately 12% or $40 million to $370 million in FY '27. And as we model out further to FY '28, our target is revenue growth of almost 14% or approximately $50 million to $420 million. Our adjusted EBITDA targets are that adjusted EBITDA will increase 14% to $48 million in FY '26, and then increased 25% or $12 million to $60 million in FY '27. And again, as we model out the future, we target adjusted EBITDA growth of 25% again to $15 million or $75 million of adjusted EBITDA in FY '28. So we're very excited about the steps we have taken and will be taking in FY '25 to position this great company for the next chapter of growth and returns. So, I'll now turn time back over to Paul.

Paul Walker, CEO

Thank you, Steve. Before we start the Q&A session, I want to address a preliminary question regarding our growth investments. These investments aim to significantly boost our revenue from current clients while also acquiring new clients. Over the last 18 months in our North America Enterprise segment, we’ve been testing strategies to deepen our engagement with existing clients and to attract more new clients. We've discovered two key insights. First, when it comes to expanding our business within existing clients, we have numerous client partners adept at this task. However, we were previously asking them to balance expansion with acquiring new clients. We've found that by allowing them to focus solely on expanding existing accounts and by providing additional resources such as implementation strategists and senior consultants, we can enhance their already strong performance in penetrating these accounts. While our average annual revenue per account exceeds $85,000, several accounts have grown significantly larger. Given the success of our expansion pilot, we formalized this initiative as Project Expand nine months ago. Second, concerning our efforts to secure new accounts, we learned that if we create a separate team of client partners dedicated exclusively to acquiring new clients, as opposed to having them juggle both roles, we can greatly improve results. By offering these partners enhanced lead generation and closing support, we significantly boost the number of new logos they can win. These new clients can then be handed over to our expansion team, who will aim to grow their revenue to $85,000 per year, and beyond. Recognizing the promise of this focused strategy, we established Project Land about nine months ago. Thus, we have Project Expand and Project Land. In the past nine months, while we maintained a strong performance in the fourth quarter, we have reorganized our sales team into expander and hunter roles. We've strengthened our sales leadership, sales operations, and client support resources for both efforts and have added new client partners focused on hunting for new accounts. Transitioning our sales team into dedicated Expand and Land groups is an essential step on our path to becoming a rapidly growing organization. Looking back, the first step was transitioning to a subscription-based business model, which has driven significant growth in revenue, adjusted EBITDA, and cash flow. The second step involved enhancing our content and technology capabilities to scale effectively and maximize customer lifetime value. The third step, which we are currently implementing, is transforming our direct sales approach to accelerate revenue and adjusted EBITDA growth. I appreciate the opportunity to speak first, and now I'd like to hand it over to Paul.

Operator, Operator

And our first question will come from Jeff Martin with ROTH Capital Partners.

Jeff Martin, Analyst

I apologize, I missed the majority of your prepared remarks. So if this is a redundant question, please forgive me. But, was just curious on the timing of the hiring. You announced in the press release, you've got a couple of executive hires in process or in the plan for fiscal '25. And then at what point will these new teams and this new sales strategy be fully in place?

Paul Walker, CEO

Great to talk to you today, Jeff. First of all, one of the hires we announced today is Holly Procter, our new Chief Revenue Officer. We brought Holly on board in early June, so she’s been with us for the fourth quarter and into the first couple of months of Q1. To answer your second question, as I mentioned earlier, we've implemented a new organizational structure and are fully engaged with our client partners, whether they're expanding or seeking new clients. We have filled nearly all of the supporting roles, including sales leadership, and we're moving forward quickly. Once we were confident that this was the right direction, we took action and began executing.

Jeff Martin, Analyst

Great. And then how would you characterize the current environment in terms of decision-making, clients expanding passes, maybe taking it into other areas of the organization?

Paul Walker, CEO

I would say that regarding the macro environment, it has been fairly steady for 18 months. While it’s not comparable to the zero interest rate days after COVID, it has remained consistent, and we've had success selling within that environment. There has been a slight increase in uncertainty leading up to the election, but now that it's over, I believe that uncertainty will lessen. When discussing client decision-making, I've noticed that many CEOs are focused on leadership, culture, execution, and sales performance. I attended the World Business Forum recently, where most discussions revolved around building high-performance cultures that are resilient and adaptable to current demands. This aligns with our focus, and I expect it will positively impact our ability to acquire new clients and expand our existing relationships.

Operator, Operator

Our next question will come from Steven with Northland Capital Markets.

Unidentified Analyst, Analyst

I was wondering if you could give us the narrative on the 2% decline in subscription invoice for the quarter.

Paul Walker, CEO

You bet. The 2% is overall yes. So, Steve, great question. As far as the invoice subscription growth in the quarter, we had a good quarter. It was down slightly. Is that 2% company-wide?

Steve Young, CFO

Company-wide.

Paul Walker, CEO

Yes. So, we mentioned that Education had a flattish quarter a minute ago. They were up 18% in Q3. Reported was up 18% in Q3, little flattish in Q4. And so, a lot of our growth came in the fourth quarter from the rebound in services. We had a good services quarter and some growth in some non-subscription areas, and it was a good quarter on the invoice subscription side, but not a big growth quarter. Nothing extremely noteworthy to report other than, yes, we were up 5% for the year, and Ed pulled forward a lot of theirs into Q3, as I mentioned. Is that helpful, Steve?

Unidentified Analyst, Analyst

Yes, that's very helpful.

Operator, Operator

And our next question will come from Samir Patel.

Samir Patel, Analyst

Yes, I'll start with kind of just a high-level observation, which is, I think it's interesting that you're making these investments to accelerate growth. If you're talking about getting the kind of teens growth in the out years and you put that together with your EBITDA margin, you think about kind of the traditional rule of 40 in SaaS and those types of companies being valued at, say 5x revenues on average, and you look at where, obviously, your stock is trading. I mean, I think turning this into a consistent high-growth subscription business is absolutely the right thing to do. So, excited about that. The two questions that I have are as follows. The first is, sort of why now and why sort of a big bullet as opposed to your traditional strategy of kind of growing your sales force every year, adding heads, kind of why the big bullet approach? And then the second is, maybe you could compare and contrast so that we can get an idea as shareholders of kind of the ROIC you expect on this investment, right? What do you think your revenue growth rate would have been in the absence of these investments, right? Like where do you think your EBITDA and your long-term growth rate would kind of ended up without these? And obviously, you kind of articulated where they are with these. So, how do you think about kind of the return on that investment you're choosing to make in the sales force.

Paul Walker, CEO

Great. Those were some excellent questions. I'll address a few of them, and Steve will assist with some as well. Regarding the timing, I mentioned earlier that we've anticipated this moment for a couple of years. If we look back nine years ago, we fundamentally changed the company's business model, transitioning to a subscription model. That decision was the right move for our customers and has proven beneficial for the company and our shareholders, establishing a recurring revenue model. After shifting to a subscription model, we invested annually at twice the rate into content and technology compared to our previous model, which was crucial for providing enough content for our subscribers and developing technology to support scalability. As we adapted to the subscription format and increased our investments, we realized we would eventually need to rethink our sales approach. Initially, it wasn't a significant challenge since the business was smaller, allowing salespeople to manage both new business acquisition and existing customer expansion. However, as the business grew, it became difficult to maintain effectiveness on both fronts. We anticipated this shift and waited until we fully completed our transition to subscription, which we have now accomplished. In terms of why we are making a significant move now rather than opting for smaller adjustments, we have been gradually testing and refining our approach over the last 18 months. While we could proceed more slowly, the priority is to divide our organization into two distinct groups: one focusing on expanding our existing customer relationships, which currently average $85,000 but have the potential to double, and the other concentrating on acquiring new customers. We want to equip both teams with the necessary resources to pursue these strategies effectively and drive significant growth for the company. We are confident and ready to move forward, having brought together a strong team, including current staff and new members with experience in scaling businesses rapidly. We are excited about these developments. Looking back at our growth since we switched to a subscription model, our compounded growth rate over the past eight or nine years has been around 5%. We hope to increase this, potentially reaching higher single digits. Based on our projections, we anticipate growth rates moving to 10%, 12%, and then 14% in a relatively short timeframe. Ultimately, this should result in a company that not only grows adjusted EBITDA and cash flow but also experiences much faster revenue growth, leading to a more significant valuation than we see today. Steve, do you have any additional insights to share?

Steve Young, CFO

No, Paul, just thinking the same thing. As you mentioned, we end up with two groups with leaders and organizations that support the new logo group and the expand group, our total organizations. And it's kind of like being straddled defense if the individual salespeople then have not made the full transition. So it's a big transition that's really messy if you're in the middle of it. So, we decided to get on with it and get it done. Even though Samir, as you noted, in the past, these are kind of things we would do over time. This circumstance just didn't fit an ability to do that. And then, we looked at the growth rate that we've been achieving versus the size of the opportunity, anticipated that that would change and it would be good, but we're just not comfortable that there's a match there. There should be a way to grow faster and this is a big part of that movement.

Samir Patel, Analyst

That makes a lot of sense to me. As a follow-up, if I can ask one more question. You mentioned in a previous call about the technology aspect, specifically the Impact Platform and utilizing AI to provide customers with more tailored coaching and learning journeys. Can you elaborate on the technological initiatives you have in place to boost growth? This could include efforts to simplify onboarding or enhance the client experience on the platform. I assume these initiatives will also contribute to achieving a higher growth rate. Reflecting on your history from a decade ago, when you primarily used physical printed booklets for marketing, it highlights how far you’ve come.

Paul Walker, CEO

Yes. It's quite remarkable to reflect on where the business stood before we transitioned to a subscription model. At that point, we lacked a strong technology focus. Over the past nine years, we've not only adopted subscription but significantly enhanced our technology capabilities. To address your question directly, 90% of our clients have successfully migrated to the Impact Platform. We recently conducted a buyer NPS survey, which we perform regularly, and the results showed a very high NPS. The shift to the Impact Platform has benefited our clients, enabling them to implement our solutions on a larger scale without compromising impact or quality in influencing behavior. Typically, in our industry, achieving scale requires a shift to asynchronous, on-demand, self-paced learning solutions. While there's nothing inherently wrong with that, we aim to be a partner that fosters collective action and a shared approach within organizations. The Impact Platform enables us to utilize various delivery methods, including instructor-led, live online, blended learning, self-paced learning, and micro content, allowing clients to maintain the desired impact while achieving greater scale. Our incorporation of AI has been substantial. We now employ AI to recommend and customize implementation journeys for clients and individual users. Additionally, we've launched the Franklin Covey AI coach, which assists those utilizing our resources and provides daily support when they encounter challenges, offering best practice recommendations from Franklin Covey. Currently, we have an exciting pilot project in our execution business, where we teach organizations our four disciplines of execution methodology. This process encourages individuals to make daily or weekly commitments to activities that drive leading indicators toward their organization's important lagging goals. We now track millions of these commitments, analyzing whether they have influenced the results. AI is being used to help individuals identify the most impactful commitments or activities to undertake each week that would be most predictive. We're enthusiastic about this and the overall advancements in our technology. You'll notice from that slide that even as we've increased our annual spending on content and technology, we've made additional investments to expedite our scaling efforts.

Operator, Operator

And our next question will come from Dave Storms with Stonegate.

Dave Storms, Analyst

Just want to kind of start with maybe more of a short-term question. Just trying to think about the cadence of the margin outlook for 2025. Steve, guidance there points to a pretty significant step back in margins as you ramp this program. Should we be thinking about the J-curve for this to maybe extend throughout all of 2025? Or do you anticipate Q1 being maybe a low watermark for the year?

Steve Young, CFO

The step down is related to the incremental investment. While a lot of that investment has been made, it isn't fully reflected in the first quarter. It's not exactly a J-curve this year; the benefits will start to be noticeable in FY '26, particularly in the latter part of that fiscal year as the investments we’re making now are annualized. This isn’t a one-time investment like in content; we are hiring people for the long term. The additional EBITDA we expect is driven by the extra revenue generated, which is largely geared towards subscription revenue. Initially, this revenue will appear on the balance sheet and then will be recognized as income over the next 12 months. As we continue our hiring and ramp up our efforts, sales and invoices will increase throughout this year, contributing to the balance sheet and being recognized next year, leading to accelerated earnings.

Dave Storms, Analyst

My second question is just maybe could you help us understand what maybe the new life cycle of a client partner may be after this transition or through this transition? I know before there was talk around, it took five years for a client partner to really be fully ramped. Do you see a difference between the expanders versus hunters and how quickly they get up to speed? Anything of that nature would be very helpful.

Paul Walker, CEO

Yes, that's a very insightful question. We believe that we will significantly reduce the ramp-up time with this transition. To provide some context, we've been asking the same individuals to both acquire new clients and grow existing ones. This means that one person is responsible for a range of tasks, including identifying potential prospects, generating interest, closing deals, successfully launching new clients into the All Access Pass, and managing ongoing relationships, renewals, and contract expansions. This is quite a lot for one person to master, and it might not be the most effective setup for a sales organization. Moving forward, and really starting now, individuals will either focus on existing accounts, with additional resources to help manage and engage those accounts, or they will focus on prospecting to expand within those existing accounts. Our goal is to improve from our current average penetration of 10% to something much higher. By narrowing the focus for individuals on specific tasks and encouraging specialization, the role becomes vitally important yet more defined. Everyone in the organization will concentrate on expanding client relationships and retaining them. The same applies to acquiring new clients, where the team will focus on effectively converting leads and increasing the average size of new clients through additional training. This is a long way of saying that the ramp-up time for client partners should decrease, and we’ve seen evidence of this in our testing. We're looking forward to seeing this fully realized in fiscal '25.

Operator, Operator

Yes, our next question, sorry, will come from Alex Paris with Barrington Research.

Alex Paris, Analyst

I have a couple of follow-up questions after hearing the earlier ones. First, regarding the new investment of $16 million this year, it appears to offer very attractive returns based on your long-term targets. Steve, you mentioned that much of this investment is in Q1, but not exclusively in Q1. How much of it is allocated to Q1? Will the remainder be distributed throughout the rest of the year, or is most of it concentrated in the first half?

Steve Young, CFO

Yes, the investment will be more front-end loaded. There will be continued investments, hiring people, etc., throughout the year. But it will be mostly front-end loaded. And there are $2 million or $3 million of the $16 million recorded in the first quarter and a fair portion of the total $16 million started in the first quarter.

Alex Paris, Analyst

I see what you're saying.

Steve Young, CFO

So, it's $16 million of personnel and marketing and everything else. So that's all started in the first quarter. We had incremental expenses that caused our adjusted EBITDA in the first quarter to be lower than it otherwise would have been by a couple of million dollars or so. But then the full annualization of the investments will go into next year.

Alex Paris, Analyst

Okay, so $2 million to $3 million was spent in the first quarter. Will the entire $16 million be used during fiscal 2025?

Steve Young, CFO

The $16 million is the 2025 portion of the investment. That's the amount recorded in the year.

Alex Paris, Analyst

Okay. So, $2 million to $3 million in the first quarter. I guess we'd have to increase from there, right, in order to get to $16 million, right? Then you got $13 million, $14 million more to spend over Q2, Q3 and Q4.

Steve Young, CFO

Yes, Q2 will see a significant increase in expenses with the largest incremental change occurring during that quarter. We are hiring throughout Q1, so while some expenses will be reflected in Q1, we will experience the full impact of expenses for the managers, salespeople, and others we've mentioned in Q2. There will still be increases in Q3 and Q4, but the most substantial change in expenses will happen in Q2.

Alex Paris, Analyst

Helpful. Second question, I wanted to get an update on new launches. We've talked about it on previous calls. I think earlier this year, it was Speed of Trust and the companion piece working at the Speed of Trust. More recently, navigating difficult conversations. And then I think this fall, you had targeted a 7 Habits 5.0 refresh. It hasn't been done in nine years. Have those all been launched and on schedule? And what's been the initial feedback or initial results?

Paul Walker, CEO

Yes. Great question and great memory. The feedback has been great. Maybe Jen Colosimo is on the line and a lot of those impact the Enterprise division. Jen, do you want to share a little color on those three?

Jennifer Colosimo, President of Enterprise Division

Yes. Let's start with the 7 Habits. So thrilled, and it launched last week. So as you mentioned, it's been nine years. We've got all new video, really applying the practices reimagined to today's workforce. Paul mentioned some of those in his comments. Interpersonal skills being change ready, agile, and many clients talking about innovation. We're thrilled. And again, it launched a week ago. So, in terms of results, you'll have to hold that one in your memory and ask us next time. In terms of trust, one of the things we're most lucky about really is that we have the best trust solution in the world. And frankly, it has grown every year. The new solution launched, both, as you mentioned, leading at the Speed of Trust and working at the Speed of Trust, and this topic comes up in everything as a key topic for organizations, building trust for so many ways. Our new solution has higher Net Promoter Scores. We've superseded our previous booking pace. We've mentioned our increase in booking pace in Q3 and especially Q4 continuing right now. We are seeing a lot of people interested in Trust. It relates partially to what Paul said about the platform as well. We have so many multiple ways to deploy. Our AI coach can give you Trust coaching behavior as an individual and we're really driving collective behavior change. So Trust, great results. We also had significantly larger attendees at marketing events last fiscal year than we had the year before. I attribute a lot of that to what you mentioned, both navigating difficult conversations and leading and working at the Speed of Trust. And we've had significant marketing events leading up to and in the coming months related to the 7 Habits.

Alex Paris, Analyst

Good. And I appreciate that additional color. Sounds like those investments are working as well. Last question on the Education division. As I recall, you had a large statewide implementation in Q3, which pulled forward some revenue from Q4. I'm wondering if you can quantify that pull forward, number one. Number two, can you quantify or at least give us some additional color on the expected impact of the end of the ESSER program? I know you have a large corporate sponsor that's expected to offset that to some degree going forward.

Sean Covey, President of Education Division

Yes, this is Sean. Would you like me to proceed, Paul?

Paul Walker, CEO

Yes, great.

Sean Covey, President of Education Division

We experienced significant fourth-quarter revenue pull forward in the third quarter due to a large state deal, which added a couple of million dollars that we anticipated would be realized later. The majority of this revenue will materialize over the next two years, as this is a multiyear agreement with the state, and we have more similar projects on the way, which we are very excited about. The ESSER funding, the COVID stimulus money, officially concluded at the end of September. We are comfortable with our current position and believe the impact on us will be minimal. This confidence stems from the fact that we are already halfway through this transition, as many clients utilized these funds in the initial years after they were released. We have had discussions with clients who have expressed that they used additional funds to partner with us earlier and are now looking for ways to reinvest. Furthermore, we have become adept at securing grants. Last year, we obtained $1.5 million, and we are optimistic about raising between $3 million and $5 million this year, thanks to our dedicated grant department. There is a significant amount of grant money available right now, and we are well-positioned to capitalize on these opportunities. We assist our partnering districts in writing grants, which should help mitigate any losses from the end of the ESSER funding. Additionally, we maintain a strong collaboration with a foundation focused on fostering character development in students, which routinely supports hundreds of schools yearly. We remain very positive about the future due to the size of the projects we're securing. We're expanding our reach beyond individual schools to districts and now entire states that recognize the value of our offerings. With our market penetration at only 3%, there is substantial room for growth. Lastly, we are launching a new solution designed primarily for high schools in the spring. Although we have primarily focused on elementary and middle schools, there is considerable opportunity and need in high schools, and we believe this new initiative will drive significant growth in the coming years.

Alex Paris, Analyst

That's great color, Sean. I appreciate it. And then, I guess I lied, I have one last question in terms of the guidance. Overall company revenue in the fourth quarter was up 8%. And for the year, I don't have that number in front of me. But you're guiding at the midpoint to about 4.5% revenue growth for fiscal 2025. And perhaps you addressed this previously, but what do you attribute that to, the deceleration? Does it have anything to do with the investments, the economy, the end of the ESSER funds? What can you say about that?

Paul Walker, CEO

We're guiding to a midpoint of approximately 4.5%, which aligns with what you mentioned. This year, we experienced growth of a little over 2%, meaning we anticipate double that growth next year, although we're not particularly pleased with that figure. We did see slightly more growth in the fourth quarter, thanks to a rebound in our services and an acceleration in some of our non-subscription areas during that time. Looking ahead, we expect that our recent hires and the reorganization of our sales force will lead to increased subscription sales throughout the year, with a ramp-up later in the year. This increase in sales will reflect on our balance sheet but may not fully contribute to reported revenue this fiscal year. That's the essence of our 4.5% guidance. In reality, the output from our operations might exceed that, but we anticipate it will land in that range. Additionally, there may be some disruptions as we transition to the new structure in the coming weeks and during this first quarter, which also contributes to the 4.5% estimate. Steve, do you have anything to add?

Steve Young, CFO

No, same thing, Alex. As we pointed out, we had a really good fourth quarter, and much of that revenue was recorded as delivered. Additionally, the increase in our balance sheet at year-end wasn’t significant. As Paul mentioned, we are building up the balance sheet from our new sales, and many of the sales we experienced in the fourth quarter were recorded then. Thus, the engine is ramping up more than the change in revenue from 2% to 4.5% might imply.

Alex Paris, Analyst

And then the same thing on adjusted EBITDA, you're talking about $16 million in incremental growth investments. There are moving parts, of course, but if I added $16 million to the top end of that range of $44 million, you're at $60 million, which is roughly in line with expectation. Is that the way to think about it?

Paul Walker, CEO

That is the way to think about it, yes.

Alex Paris, Analyst

Okay. So in other words, without these investments, adjusted EBITDA would be pretty much in line with analyst expectations for fiscal 2025?

Paul Walker, CEO

That's exactly how we see it.

Operator, Operator

This now concludes our question-and-answer session. I would like to turn it back over to Paul Walker. Go ahead, Paul.

Paul Walker, CEO

Thank you, Mark. Thanks, everybody, for joining today and for your great questions. We're very excited about where we're headed and feel good about last year, and just want to, again, thank you for being on the journey with us and look forward to ongoing conversations. Have a great evening.

Operator, Operator

Thank you, everyone, for your participation in today's conference call. This does conclude the program. You may now disconnect.