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Edited Transcript of FC.N earnings conference call or presentation 5-Nov-20 10:00pm GMT

·69 min read

Q4 2020 Franklin Covey Co Earnings Call SALT LAKE CITY Nov 7, 2020 (Thomson StreetEvents) -- Edited Transcript of Franklin Covey Co earnings conference call or presentation Thursday, November 5, 2020 at 10:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Derek Hatch * Michael Sean Merrill Covey Franklin Covey Co. - President of Franklin Covey Education * Paul S. Walker Franklin Covey Co. - President & COO * Robert A. Whitman Franklin Covey Co. - Chairman & CEO * Stephen D. Young Franklin Covey Co. - CFO & Corporate Secretary ================================================================================ Conference Call Participants ================================================================================ * Jeffrey Michael Martin ROTH Capital Partners, LLC, Research Division - Director of Research & Senior Research Analyst * Marco Andres Rodriguez Stonegate Capital Markets, Inc., Research Division - Director of Research & Senior Research Analyst * Patrick Retzer * Samir Patel Askeladden Capital Management LLC - Founder & Portfolio Manager * Trevor Romeo William Blair & Company L.L.C., Research Division - Associate ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Welcome to the Q4 2020 Franklin Covey Earnings Conference Call. My name is Tia, and I'll be your operator for today's call. (Operator Instructions) Please note this conference is being recorded. I'll now turn the call over to Corporate Controller, Derek Hatch. Derek Hatch, you may begin. -------------------------------------------------------------------------------- Derek Hatch, [2] -------------------------------------------------------------------------------- Thank you. Good afternoon, ladies and gentlemen. On behalf of Franklin Covey, I'd like to welcome you to our earnings call for our fourth quarter and full fiscal year 2020. I hope you're all doing well and are staying safe. Before we begin today's presentation, 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 stabilize and grow revenues; the acceptance of and renewal rates for our subscription offerings, including the All Access Pass and Leader in Me memberships; the duration and recovery from the COVID-19 pandemic; the ability of the company to hire productive sales professionals; general economic conditions; competition in the company's targeted marketplace; market acceptance of new offerings or services and marketing strategies; changes in the company's market share; changes in the size of the overall market for the company's products; changes in the training and spending policies of the company's clients; and other factors identified and discussed in the company's most recent annual report on Form 10-K and other periodic reports filed with the Securities and Exchange Commission. Many of these conditions are beyond our control or influence, any one of which may cause future results to differ materially from the company's current expectations. And there can be no assurance the company's actual future performance will meet management's expectations. These forward-looking statements are based on management's current expectations, and we undertake no obligation to update or revise these forward-looking statements to reflect events or circumstances after the date of today's presentation, except as required by law. With that out of the way, we'd like to turn the time over to Mr. Bob Whitman, our Chairman and Chief Executive Officer. Bob? -------------------------------------------------------------------------------- Robert A. Whitman, Franklin Covey Co. - Chairman & CEO [3] -------------------------------------------------------------------------------- Thanks, Derek. Hello, everyone. We're happy to have the opportunity to talk to you today. Thank you for joining us. We're pleased that in the fourth quarter, Franklin Covey's operations demonstrated their strength, agility and ability to progress even in the midst of the pandemic. We're grateful for that. Specifically, our revenue was stronger than expected. Gross margins increased substantially. Our SG&A declined. Our adjusted EBITDA was $8.9 million in the quarter versus an expectation of $4 million, bringing -- that brought full year adjusted EBITDA to $14.3 million, which also exceeded our expectation of $9.4 million. Our cash flow was strong, and we're grateful we ended the quarter and year with approximately $42 million in liquidity, a level higher than when the pandemic started. We'll discuss these details and results in more detail in just a moment, but first, maybe provide some context. At the onset of the pandemic, we communicated that although everything was in flux and was uncertain, we believe, as shown on Slide 3, as you can see there that All Access Pass subscription and related revenue would continue to be strong and durable and that this would continue to drive strong performance in our core North American operations, which accounted for 70% of our total enterprise sales and in which All Access Pass and related sales account for approximately 80% of the total revenue in North America. As indicated in the Chart 1A on Slide 3, we believe that All Access Pass subscription sales would not only be very strong and durable, it would continue to grow throughout the pandemic. As indicated in 1B, that as for All Access Pass add-on services, after the initial disruption of the delivery of live on-site services, we believe that our pivot to delivering add-on coaching and training services live online would allow this revenue to rebound relatively quickly. Second, as indicated in Chart 1C, we believe that in our international direct and licensee operations, which collectively account for approximately 25% of our total enterprise division revenues, despite having only nascent All Access Pass subscription businesses and thus only a small base of All Access Pass subscription revenue to cushion them, our international enterprise teams, we believe, will begin to improve due to the strength of our offerings in those countries and the quality of our teams and their ability also to pivot to live online delivery. We expected that their growth would strengthen further as they accelerate their conversion to selling All Access Pass. And then finally, in the Education Division, we believe -- which accounts for approximately 22% of total sales, we expect that we'd achieved strong retention of existing Leader in Me schools and that even in the middle of the storm, the existing schools would be committed and retain their subscriptions. And hopefully, we would find a way to add several hundred new Leader in Me schools despite the huge disruption of the school environment. So while the external environment continued to be challenging, we're pleased that, as indicated in Slide 4, our results have turned out to be as strong or stronger than expected in each of these areas and that this strength is continuing and even accelerating through the first 2 months of our first quarter, which ends November 30. Some additional detail on our -- first on our Enterprise business in North America. As you can see on Slide 5, All Access Pass subscription sales have been strong and resilient throughout the pandemic, growing 11% in the fourth quarter and 17% for the full fiscal year. In addition, amounts invoiced, new pass sales and multiyear contracts have all continued to grow, and our All Access Pass revenue retention rate again exceeded 90% for the year. Second, in the upper right-hand corner, with our almost immediate pivot to booking, coaching and training engagements live online, we were able to continue to meet the needs of our customers remotely. And as a result, bookings and sales of All Access Pass add-on services also rebounded quickly. As you can see in Slide 6, after approximately the first 6 weeks of the pandemic, new bookings of services in our North American operations turned positive. By mid-July, our booking pace was equal to that achieved the same time last year and then strengthened even further, exceeding last year's pace by the end of August, the end of our fiscal year. I'm pleased to say that these strong bookings have continued through October. With bookings increasing, which is what we'd call a lead or predictive measure, the lag measure, which is actual invoiced sales of service, has also rebounded significantly. As you can see in the lower right-hand corner of Slide 6, initially, in the third quarter, as the pandemic started, bookings were reduced, and the year-over-year dollar volume of services followed because everything needed to be canceled and then tried to reschedule. And delivered engagements were down $6.9 million in North America in the third quarter. However, in the fourth quarter, new bookings increased to the point they were nearly equal to those we achieved in the fourth quarter of '19, as you can see from the line graph. And that drove then actual invoiced sales. And this in turn drove an increase in the volume of services delivered. As a result, instead of being off $6.9 million as in the third quarter, the dollar volume of services delivered in the fourth quarter was off only $1.1 million, and bookings were actually up. As a consequence, we see the same positive trends continued into our first quarter-to-date, with bookings continuing to be up and with invoiced sales of services following and increasing now to essentially the same level as in last year's first quarter. Importantly, you can see in the upper right-hand corner, 80%, 70% of our clients have now shifted to live online delivery of services. This is important. We view it as really important. With 87% of our clients now having shifted to live online delivery, any susceptibility to future cancellations has been reduced substantially. And so now we have a model which really can, we think, plow through good times and bad as it relates to being able to deliver everything subscription. As you can also see in Slide 7, which looks like Slide 5, this combination of strong All Access Pass subscription sales and the strong rebound in All Access Pass add-on services has kept the performance of our core North American business strong with essentially all of the relatively small decline in revenue in the fourth quarter being attributable to declines in our legacy facilitator materials order business. So otherwise, with the All Access Pass, the services coming back almost to where they were last year, bookings ahead, that's given us a really strong run to start the new year, and we now expect that we will actually exceed in the first quarter the levels of profitability, EBITDA, that we achieved in the first quarter of fiscal 2020 in North America, which is an even stronger-than-expected rebound in those operations. As recently as last quarter, we said that we thought that might take us an extra year to get to that point, and we're very grateful and pleased that we're at that point now. Second, as always -- as also shown in Slide 7, in international operations, which are sales in China, Japan, Germany and among our other direct offices and licensees, sales in these operations also improved substantially in the fourth quarter compared to the third quarter. As noted and as you'll recall, the need to reschedule substantially all train engagements in these countries and these countries lack of a strong base of durable subscription revenue to cushion them, unlike in North America, resulted in sales in these countries declining to only $4.1 million in the third quarter compared to approximately $12.7 million in the third quarter of fiscal '19. However, in the fourth quarter, while still operating well below the levels achieved in last year's fourth quarter, sequential sales in these countries increased 70% to $7 million, up from $4.1 million in the third quarter and are expected to increase further to approximately $9 million in the first quarter. And then we expect to continue to build back through the year back toward this $10 million to $11 million a quarter pace. Finally, as you can see on Slide 8, in the Education Division, despite the extreme difficulty of the environment, approximately 2,200 existing Leader in Me schools renewed their subscriptions in fiscal 2020. Let me say that again, over 2,000 schools renewed, and almost 1,500 of these schools renewed after the pandemic started when school's day-to-day turmoil was at a peak. It's very difficult to even talk to these schools as they were scrambling to still deliver [launches], figure out how to teach live online, deal with all the problems they had. And it's a tremendous credit to our team and to our clients and to the quality of the offering that almost 1,500 of these schools renewed after the pandemic started. In addition, during the same time period, we'd hope that we'd be able to sell -- have new schools joined. And in fact, 320 new schools became Leader in Me schools most again during this period. It's a number lower than last year, which we expected, which was 500 last year, but still, in our view, remarkable. Despite the environment which continues to be very challenging for schools, as you know, during the first quarter-to-date, we are seeing improvements in a number of key lead measures, including that of the number of new schools contracted or ready to contract being 50 schools versus 28 at the same time last year; second, the number of Leader in Me memberships renewed or ready to sign contracts of 583 versus 422 at the same time last year; and third, the number of coaching days booked being 1,284 versus 1,149 at the same time last year. So the combination of all the -- so again, we were glad that the things that we hoped at the start of this period have turned out to be stronger than expected in almost every case. And the combination of these positive trends drove our better-than-expected performance in the fourth quarter. I'd like to now dive a little deeper into our fourth quarter and full year fiscal '20 performance. As you can see on Slide 9, our fourth quarter performance was stronger than expected and showed positive momentum, as we said, in almost every front. Our adjusted EBITDA, going down to the bottom first, was $8.9 million, more than doubling our expectation of $4 million for the quarter. This brought adjusted EBITDA for the full year to $14.3 million, which is higher than our expectation of $9.4 million. And while lower than last year's adjusted EBITDA of $13.4 million for the reasons just discussed, we're really pleased with this result and the strength of the recovery in the fourth quarter. In addition, our cash flow and liquidity position remained very strong. As shown on Slide 10, our net cash generated for the quarter, though less than in last year's fourth quarter, was a strong $21.4 million. And as shown on Slide 11, our cash flow from operating activities for the year came in at $27.6 million, just $2.9 million lower than last year's $30.5 million. As you may recall, actually, it was only 2 years ago in fiscal 2018 that our cash flow from operating activities was $16.9 million during a strong economic year generally, so we feel very good about the $27.6 million in cash flow from operating activities given this year's challenges. We ended our fiscal year with $42 million in total liquidity, comprised of $27 million in cash, which means we have no net debt and with an additional $15 million undrawn and available under our revolving credit facility. This strong performance was driven first by stronger revenue as you can see in Slide 12. Our revenue -- our fourth quarter revenue of $49.9 million was stronger than expected despite the fact that a lot of what we sold in the quarter and a lot of what we invoiced, of course, went onto the balance sheet, this was driven -- higher revenues, though, were driven by the continued strength of our North American operations, which, in turn, were driven by All Access Pass, where, as just discussed, in the fourth quarter, subscription sales grew 11%. And in addition to the revenue, actually, as I mentioned, recognized in the quarter, we also achieved high levels of invoiced All Access Pass sales, most of which were added to the balance sheet, in the deferred revenue. These new invoiced sales included growth in new logo sales -- sales of new logos, a continued revenue retention rate of greater than 90%, a large volume of All Access Pass expansions and an even larger volume of multiyear passes than in the prior year. And that -- with all of that, All Access Pass add-on bookings, which we just talked about, of services also rebounded strongly, as we showed, coming almost up to where we were in the prior year fourth quarter despite the lag in bookings due to the early days of the pandemic. You can also see on Slide 12, we had strong gross margins again in the fourth quarter. Our gross margin percentage came in at 77.3%. That's up 437 basis points from the 72.9% achieved in the fourth quarter of fiscal '19, and that's up again 256 basis points for the year. Third, our SG&A was lower. SG&A for the fourth quarter came in at $28.9 million, which is $5.2 million lower than the $34.1 million in last year's fourth quarter and an improvement of $7.6 million. And while some of that is variable SG&A costs related to reduced sales volume, a lot of it also reflected cost initiatives that we have been taking -- that we've been implementing throughout the year, not specifically related to COVID, but just had been had implemented in the spring as part of our annual planning. And that's starting to flow through in the fourth quarter. Finally, the combination of these factors resulted in adjusted EBITDA coming in, as we said, at $8.9 million for the quarter and $14.3 million for the full year. I mentioned that we had very strong invoiced and multiyear sales in the fourth quarter, All Access Pass and the renewals of subscriptions of the Leader in Me membership. Because most of these new invoiced sales were subscription sales, as you know, these amounts were not recognized in the quarter but went on to our balance sheet and will add to and be recognized this year and future periods. As a result, however, as shown on Slide 13, our total balance of billed and unbilled deferred revenue increased to more than $100 million, barely, but a big landmark. This $100 million mark is a mark that a lot of the subscription companies talk about and think about and reflected growth of $12.1 million or 13.7%, compared to our balance of $88.1 million at the end of last year's fourth quarter. So that growth of 13.7% shows the strength of our invoicing. Despite the environment, this large balance of billed and unbilled deferred also provides significant stability of and visibility into our future performance. As we'll discuss in more detail when we offer guidance for fiscal '21 in a moment and our outlook targets, we -- in short, we expect to be -- again be a very high adjusted EBITDA growth, high cash flow growth company in fiscal 2021 and in the coming years. Specifically, in fiscal 2021, as we'll discuss in more detail, we expect to generate adjusted EBITDA of between $20 million and $22 million. This reflects an approximately 50% increase in adjusted EBITDA compared to $14.4 million of adjusted EBITDA achieved in fiscal 2020. Thereafter, our target is to see adjusted EBITDA increase by around $10 million per year each year thereafter to around $30 million in fiscal 2022 into around $40 million in fiscal 2023 as there's an illustration of that, Slide 14. These targets reflect our expectation that we will achieve high single-digit revenue growth, which is growth of approximately $20 million a year. And that, on average, approximately 50% of that growth in revenue will flow through to increases in adjusted EBITDA and cash flow so therefore the growth of $10 million a year or so in EBITDA. With this high flow-through, we also expect to be moving toward and ultimately achieve an adjusted EBITDA to sales margin -- percentage margin of 20% in the coming years. So with that report on our results, I'd like to now address 3 key questions outlined or identified in Slide 15. First, address the questions. And we may have -- maybe somebody will need to -- might need to mute. I hear some noise, I'm not sure, in the background. But first question is, what is the most important driver of this high expected growth in EBITDA and cash flow going forward? Second question, what is making All Access Pass and related revenue so strong, resilient and durable? What's behind that? And third, what's the expected trajectory and speed of our climb up the mountain, and that's really more our guidance section. So really just to address those 2 questions and then turn the time to Steve for guidance. Question one: What is the most important driver of our expected high EBITDA, high cash flow growth? Simply put, the single most important driver is the strength of our subscription business generally and particularly the strength of our All Access Pass subscription and related revenue engine in the Enterprise Division. The importance of All Access Pass is best demonstrated by the strength and resilience of our core North American operations, which account for 70% of total Enterprise Division sales and where All Access Pass and related sales account for approximately 80% of that. So why is Access -- All Access Pass the most important driver of growth in adjusted -- in cash flow going forward? Three reasons. The first reason is that it's the engine that has driven the vast majority of our growth in revenue and adjusted EBITDA over the past several years. As you can see on Slide 16, on the left side, All Access Pass-related sales have grown from 0 to $90 million since 2016, a huge compounded average growth rate, obviously, and absolute revenue growth of between $10 million and $20 million of growth each year. This growth in All Access Pass and related revenue has generated the vast majority of our net revenue growth for the company overall. And in almost every year, it's more than offset the run-off of our legacy facilitator and on-site business, replacing that business with higher revenue per client, much more -- much higher revenue per client, a much more resilient and retained revenue as we -- as you know. All Access Pass and related revenue has also been the primary driver of the significant increase in our gross margin from 67.4% in 2017 to overall 73.3% in fiscal 2020. And it's also what accounted for substantially all of our growth in gross margin dollars during these years. So that -- so the first reason is it's been the growth engine. The second reason we think All Access Pass is expected to be our most important driver of growth is that All Access Pass has continued to be strong in good times and bad throughout this pandemic, as we mentioned. As you can see on Slide 17, in the fourth quarter, All Access Pass subscription sales grew $1.6 million or 11% compared to the same period last year and for the 6 months, from March 1 through August 31, has grown 15% compared to the same 6-month period a year ago, which has really been actually right in the heart of the pandemic. As previously noted and as again just shown -- remind us in Slide 18, as a result of the rapid rebound of All Access Pass add-on sales, these sales -- bookings of -- and sales of services which actually, over the years, although not contractual, have repeated on a same client basis at greater than 90%, similar to the subscription revenue, are now back and running at the same level as last year. And the third and final reason why we think All Access Pass is such an important growth driver is that All Access Pass-related sales are expected also to account for an ever-increasing percentage of our business. And therefore, the positive impact of this subscription model will become increasingly pervasive. As you can see on Slide 19, All Access Pass-related sales already account for 80% of the Enterprise Division sales in North America. All Access Pass have increased from 0%, as we said, to approximately 80% of sales in fiscal 2020, and we expect this share to continue to grow. Similarly, Leader in Me membership and related coaching subscription accounts for approximately 80% of revenue in the Education Division. So it's already substantial, but it will continue to increase in those operations, which you've already made the conversion. The other reason why we believe AAP is the most important driver is because in the parts of the world that aren't yet primarily subscription, All Access Pass or Leader in Me, we expect that they will become so. We expect that the approximately $36 million of annual revenue that's done in our international direct offices and among our international licensee partners, where, today, All Access Pass is just nascent and is just beginning, will now accelerate quite rapidly. And over the next year, we'll see the majority of that $36 million add to the growth of our subscription revenue, and then -- and it'll then, we expect, have the same durable and resilient properties that we have elsewhere. In terms of the second question, and if you look at Slide 20, I'm going to ask Paul Walker to address this. Is what's behind this resiliency in both All Access Pass and Leader in Me. Paul, let me just turn the time to you. Paul, as you know, is our President and Chief Operating Officer. And he may call on Sean Covey and Jen Colosimo also to weigh in. -------------------------------------------------------------------------------- Paul S. Walker, Franklin Covey Co. - President & COO [4] -------------------------------------------------------------------------------- Thank you, Bob, and good afternoon, everyone. So yes, to the question what is behind All Access Pass's strong resiliency and its durability, in our experience, there are 3 key reasons why All Access Pass is both growing rapidly and at the same time proving to be quite resilient. During the pandemic, our clients are wrestling through the same historic challenges that each of us is experiencing. They move large populations of employees to remote work environments. They're attempting to get their remote teams to focus efforts on the most important must-do activities. They're working hard to increase revenue and retain customers, and they're rapidly trying to enhance their culture, including thoughtfully addressing topics such as diversity, equity, inclusion and bias. And in this environment, of course, the need for more capable leaders has never been more important. And these, among many others, are what our clients see as really must-win games for them, the very important challenges that they're trying to address. And helping our clients successfully address challenges like these and doing it at scale is exactly where Franklin Covey shines. A key reason for the All Access Pass's growth is that both before and during the pandemic, our clients needed solutions to these challenges. And frankly, Franklin Covey's best-in-class solutions are best in class at addressing just those very problems. In our July call, you'll remember we reported that through the early months of the pandemic, almost all of our existing All Access Pass holders had renewed their passes as they come up for renewal, with many of them choosing to either expand the population or extend the duration of their pass. We shared a couple of examples then. One was a major airline that, when airline traffic was off 90%, made the decision to continue with their All Access Pass, and they were using it to train and retrain their leaders to operate in what was becoming obviously an extremely difficult environment. We also shared a large hospitality company chose to continue with its pass so that they could double down their focus on their ability to execute. And as an update, we're now happy to share that, that client recently made the decision to extend that pass by an additional 3 years, making that what is now currently a 5-year All Access Pass contract. And I'd like to briefly share 3 additional examples from our fourth quarter. Examples of All Access Pass and Leader in Me clients, who in the middle of the pandemic and in extremely difficult times not only renewed their subscriptions with us, but also expanded their populations or extended the term. Slide 21 is just a simple graphical representation of these 3. But the first is a financial services firm, and they saw their sales fall swiftly and dramatically in the early stages of the pandemic. They determined that one of the most important priorities had to be equipping their large sales organization with skills and tools necessary to increase conversion rates and shorten sales cycles. As a result, at the same time, they were cutting costs everywhere they could. They not only expanded their All Access Pass, but they chose to extend it for 3 additional years, knowing that they were going to need access to that content, not just for 1 year, but for a number of years to complete the transformation they were after. The second is a hospital system. And experiencing, like many hospital systems have, a significant decrease in revenue due to a pause in elective surgeries, they tripled the size of their population covered by the All Access Pass, and they extended their path for an additional 3 years. They recognize that there's no time when strong leadership is more important than in times of serious challenge, and they felt it was essential to equip their frontline leaders with the tools they were going to need to respond. And then from our great Education Division, we had a large school district in Texas. This is a cool story. They've implemented Leader in Me in 2 of their 20 schools and initially thought they would need to put Leader in Me on hold so that they could direct resources toward technology to prepare to deliver school virtually. However, the superintendent who had some children in a Leader in Me school in the district and was -- had a front-row seat to how Leader in Me was helping not only the students but also the faculty in the schools that were using it decided he needed to find a way to keep Leader in Me in there, and they were able to get creative and allocate funds differently. And they freed up enough funds to not only continue with those 2 schools, but they actually expanded Leader in Me to all 20 schools in the district, and we're now engaged in the implementation of those with them. And so these examples highlight the important challenges that our clients face and their commitment to utilizing Franklin Covey solutions to address them. Hundreds of organizations have sought out, renewed, expanded and extended their All Access Pass and Leader in Me memberships during the pandemic to date. And while I won't take the time to review them all here, you might find it enlightening to read some of the additional examples related to All Access Pass on Slide 22 and then some of the Leader in Me examples on Slide 23. The second contributing factor, we believe, the reason why All Access Pass and Leader in Me continue to be strong and resilient and durable is the fact that our customers can use these services and solutions to the -- it's very flexible for our client to deploy them, and they also have a very strong value proposition. Just to speak to a minute about flexibility. When the pandemic hit, overnight, our clients need an entirely new and flexible way to deploy our solutions to address their organizational and performance challenges. And as a result of our more than a decade of investing in technology and technology-enabled capabilities, our clients were able to immediately access our content and solutions through live online, digitally self-paced and micro push delivery modalities. In fact, we routinely hear from our clients and our customers that we have the most robust and effective live online delivery capability of any of the providers with whom they work. And the flexibility of the All Access Pass is allowing our clients and our users to deploy solutions in almost any circumstance. The second point related to the value proposition. Our clients tell us that not only are our solutions and flexibility important to them but that All Access Pass and Leader in Me customer value propositions are equally compelling. As shown on Slide 24, and we've reviewed these before, but I think it's helpful to just review them again here. Each All Access Pass client receives the following. They received, one, full -- a full collection of our best-in-class content and solutions. And of course, point two, that's available in all modalities, very, very important right now, which allows them to deliver in virtually any segment of time and on any device. And third, all of this is available in more than 20 languages now worldwide, I think the number is actually 21, and at an addition -- and at no additional cost to them, included in that offering is access to an expert -- the services of an expert implementation specialist who works to ensure that the clients are able to achieve the progress that they're seeking. And then finally, all of this is offered at a price per person trained that is equal to or less than the typical cost of training one person in one content area in just a single modality. And so the strength of the value proposition, the flexibility, it's resulting in many of our clients making the decision to consolidate providers and significantly increase their business with Franklin Covey. That's driving deeper, stronger, more pervasive and enduring relationships with our clients. And as you see on Slide 25, this competitive advantage enables us to significantly increase the average lifetime value of the customer. Finally, I'd like to -- as it relates to what's behind the strength and resiliency, I'd like to speak to just the business model itself and why it creates so much durability for Franklin Covey -- structural durability for Franklin Covey. Of course, the most important source of durability and resilience comes from meeting clients' needs in a way that allows them to make the progress they're seeking. And when this happens, we create clients for life, and that's really our mantra. We want to maintain these clients for life. Our content solutions, our value proposition and client engagement processes are all focused in point at that primary objective. And our subscription model also creates a more profitable, durable and high-growth business for Franklin Covey. In addition to the All Access Pass subscription, our business model provides clients with easy-to-access coaching and training facilitation services. Now as Bob mentioned earlier, these are delivered almost entirely digitally or live online. The model also encourages multiyear contracts which establish both greater visibility and increase structural durability. As shown also on Slide 25, the average All Access Pass holding organization purchases approximately $0.44 of add-on services for every $1 of subscription revenue. Indicative of the value which clients place on these services is that our annual same client service revenue retention rate, as Bob mentioned a minute ago, has exceeded 90%, a very high retention rate for services, which also is consistent with the very high retention rate we have for All Access Pass subscription revenue. And in more than 1/3 of All Access Passes, they are for multiyear periods. And these multiyear contracts are firm, and unbilled deferred revenue associated with these contracts now totals $38.5 million. And as with our 1-year All Access Pass contracts, the contractual amounts of unbilled deferred revenue are billed 1 year in advance. And so as you can see and hopefully get a feel for this that the All Access Pass is it's really proving to be strong and resilient and durable and a real asset for our clients. And Bob, I'll turn that back over to you. -------------------------------------------------------------------------------- Robert A. Whitman, Franklin Covey Co. - Chairman & CEO [5] -------------------------------------------------------------------------------- Thanks, Paul, very much. I'll just now turn the time to Steve to review our guidance and outlook. Steve? -------------------------------------------------------------------------------- Stephen D. Young, Franklin Covey Co. - CFO & Corporate Secretary [6] -------------------------------------------------------------------------------- Okay. Thank you, Bob, and Paul, and good afternoon, everyone. It's nice to be with you today. As you recall, when we reported our third quarter results, we said that because there was so much uncertainty in the external environment, our outlook would not constitute guidance. The external environment continues to have substantial uncertainty. However, given the 4 quarters of additional -- 4 months of additional history that we have and the fact that we continue to see positive trends in the business driven by the strength of the All Access Pass, we now feel that we can provide guidance for FY '21. Our guidance for FY '21 is that we expect to generate adjusted EBITDA of between $20 million and $22 million. This result would reflect an approximately 50% increase in adjusted EBITDA next year compared to the $14.3 million of adjusted EBITDA achieved in FY '20. This expected growth reflects the continued strong performance of our North America operations, where our All Access Pass and related sales account for approximately 80% of sales. Underpinning this guidance are the following expectations. First, the recognition during FY '21 of more than $60.6 million of deferred revenue already on the balance sheet and a portion of the $39.6 million of unbilled deferred revenue, which has been contracted. This provides significant visibility into our revenue and gross margin for FY '21. Second, in addition to the recognition of the deferred revenue, the factor which is expected to have the greatest impact in our FY '20 run result is also one in which we have high confidence, and that is the strength of the All Access Pass and related sales. We expect that All Access Pass will continue to achieve, one, strong growth in both sales and invoiced sales; two, high revenue retention rates; three, strong sales of new logos; and fourth, continued growth in pass expansion and multiyear contracts. We also expect that All Access Pass add-on sales will continue to be strong. Driven by this, in FY '21, we expect our operations in North America to achieve an adjusted EBITDA level higher than in FY '19 and even somewhat higher than what we had originally expected to achieve in FY '20. Third underpinning of guidance is we expect our revenue in Japan, China and among our licensees and other international will continue to strengthen. The increase in All Access Pass, which we expect to achieve in these countries will, of course, result in a portion of those new sales being added to the balance sheet as deferred revenue. And our fourth underpinning of guidance is that in education, we expect to continue to achieve strong retention of both schools and revenue among existing Leader in Me schools. In addition, despite what we expect will continue to be a challenging and budget-constrained environment for education in FY '21, we still expect to receive growth in the number of new Leader in Me schools beyond the 320 new schools achieved in FY '20. So we feel comfortable with our -- this guidance for FY '21. Now a little bit about the first quarter of this year, FY '21. We expect that adjusted EBITDA in the quarter will be between $2 million and $2.5 million compared to $5 million last year, reflecting what Bob and Paul talked about, which is the strong performance by the -- by All Access Pass in North America, offset by the same general expectations just outlined for the international operations and education. So we expect adjusted EBITDA in Q1 and Q2 to be less than last year and adjusted EBITDA in Q3 and Q4 to be significantly higher than last year. Please remember that a big reason for this is that Q1 and Q2 of this year will be compared to the very strong pre-pandemic Q1 and Q2 quarters of last year, while Q3 and Q4 of this year will be compared to the pandemic-impacted Q3 and Q4 of last year. So since last year was a tale of 2 halves, the first half being, in my words, extremely strong, and then the second half of the year being pandemic-impacted, that's primarily the reason that while we see continued strengthening of our results this year, still, we expect to be down in Q1 and Q2 and up significantly in Q3 and in Q4. So that's our guidance. Just a little bit about -- comments about the internal targets beyond FY '21 that Bob also mentioned a little bit. So as Bob mentioned and as we just said, we expect our -- we expect this year to fall to between $20 million and $22 million. And due to the fact that we have extremely high flow-through of incremental sales to incremental adjusted EBITDA and high single-digit revenue growth, we expect that our adjusted EBITDA would be around $30 million in FY '22 and around $40 million in FY '23 and this high acceleration to continue until we get to approximately 20% adjusted EBITDA to sales margin that we often talk about. So part of the reason I repeated that is because it's important and partly for you to note that while dramatic changes in the world environment could impact our expectations, we wanted to share these as our internal targets and assumptions and also wanted to share that not only are these our targets, but that when you read our proxy, you'll see that full vesting of our executive team's long-term incentive pay awards depend on achieving these strong multiyear growth goals. So that's our discussion on guidance. Bob, I'll turn it back to you or open it up for questions. -------------------------------------------------------------------------------- Robert A. Whitman, Franklin Covey Co. - Chairman & CEO [7] -------------------------------------------------------------------------------- I think that's it. Thank you so much, Steve. Why don't we just open it now? Thanks, everyone. We'll open it for your questions at this point. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) And our first question comes from Andrew Nicholas from William Blair. -------------------------------------------------------------------------------- Trevor Romeo, William Blair & Company L.L.C., Research Division - Associate [2] -------------------------------------------------------------------------------- It's actually Trevor Romeo in for Andrew. I just had a few questions here. I think first one, I think last quarter, you had mentioned about $20 million worth of training engagements that was either postponed or delayed from the third quarter. Just wondering if any of that was recognized in the fourth quarter and whether you still expect about 70% of that to ultimately be realized over time? -------------------------------------------------------------------------------- Robert A. Whitman, Franklin Covey Co. - Chairman & CEO [3] -------------------------------------------------------------------------------- Yes, yes. I think the -- it's a little hard to track as we found because the same clients that had things booked in the third quarter and canceled, sometimes it was a rescheduling of their exact thing that they had. And in other cases, they just went ahead with a different initiative, or they did -- they viewed it as a new booking. And so I think dividing exactly what it is, we attempted to kind of parse that. But certainly, the same clients that retain -- where they renewed their All Access Pass and who did have services in place are the same clients who are now booking new services. So I think what's recognized for the first little while, we were able to track that they were, in fact, rescheduled engagements. And we mentioned that we thought that about 70% of those engagements would reschedule because they were attached to an All Access Pass that had the existing initiatives going and think that's really probably still right, but we're not able to exactly reconcile whether the -- whether it was exactly that group in that location or not. And so I think the main thing is that our booking pace in an initial few weeks and maybe in the first month or so, we could track it, now didn't, and believe that now, almost all of the new bookings that we're having are, in fact, all new. And so it's hard to kind of parse that. But thankfully, it's the same customers and same clients moving forward and booking at a pace higher now than even in last year at this time. -------------------------------------------------------------------------------- Trevor Romeo, William Blair & Company L.L.C., Research Division - Associate [4] -------------------------------------------------------------------------------- Okay. Understood. And then just, I guess, a follow-up on the cost side. The margins in the quarter were pretty solid despite the revenue decline year-over-year. You pointed out a number of expenses that were reduced, some of which I'd assume are probably temporary, some of which you said were already in the plan prior to COVID. I just wanted to ask how quickly you'd see or you'd expect to see, I guess, some of those expenses come back online to the extent some of them are temporary. And how much -- or if you see any of those as permanent savings going forward. -------------------------------------------------------------------------------- Robert A. Whitman, Franklin Covey Co. - Chairman & CEO [5] -------------------------------------------------------------------------------- Thanks. Great question. I'd say the majority of these, we think, will be permanent. Here is the reason. We, every year, have been pushing -- we have this goal that Steve spoke about that is to get to an EBITDA margin of 20%. And so every year, we -- well, we don't expect to get there in a year. Every year, we take on projects. And this year, we redid a lot of our IT infrastructure, some supply chain infrastructure. We redid part of our innovation alignment and technology groups. We've challenged, as part of the normal business planning process in February and March, a lot of those costs and millions have been taken out of that, $1.5 million in education, just in permanent cost structure. The part that will come back is that around 10% of our commission -- I mean, the commission expense, let's say, is 15%. About 10% of it is truly variable, the rest being draws and so forth. And so as revenue comes back, that -- of the $5-plus million of costs that were lower in fourth quarter, that related to a $15 million decline in revenue, $1.5 million of that would come back -- will come back in the form of commissions. And our travel expenses, we think, won't need to recover to the same level they were before, but -- because our sales force is actually doing very well at making lots and lots of sales calls, but that will come back some, too. And so if you think of it as the $7 million for the year that was taken out, a little less than half of it, probably $2 million, $2.5 million, will come back and the rest of it would be a permanent reduction. Steve, I don't know if you want to add to that or fix that. -------------------------------------------------------------------------------- Stephen D. Young, Franklin Covey Co. - CFO & Corporate Secretary [6] -------------------------------------------------------------------------------- No fixing. I think that's exactly right, Bob. -------------------------------------------------------------------------------- Operator [7] -------------------------------------------------------------------------------- And our next question comes from Marco Rodriguez from Stonegate Capital. -------------------------------------------------------------------------------- Marco Andres Rodriguez, Stonegate Capital Markets, Inc., Research Division - Director of Research & Senior Research Analyst [8] -------------------------------------------------------------------------------- Sorry. Can you guys hear me? -------------------------------------------------------------------------------- Robert A. Whitman, Franklin Covey Co. - Chairman & CEO [9] -------------------------------------------------------------------------------- Now we can. -------------------------------------------------------------------------------- Marco Andres Rodriguez, Stonegate Capital Markets, Inc., Research Division - Director of Research & Senior Research Analyst [10] -------------------------------------------------------------------------------- Sorry about that. I was wondering if maybe you can talk a little bit more, Bob, on the transition to the online delivery for your training and coaching. Maybe if you can talk to the feedback you may receive from customers. Was it an easy transition? Were there some difficulties? And then did you ever get any kind of sense that you guys could possibly transition that business to more of a permanent nature online when things return to normal? Or is this just sort of kind of a temporary solution to a particular problem that everyone is operating under now? -------------------------------------------------------------------------------- Robert A. Whitman, Franklin Covey Co. - Chairman & CEO [11] -------------------------------------------------------------------------------- Yes. I'll just give a little color and then ask Paul maybe to give a little bit more. But I think this is a capability that we've had for more than a decade. And whenever we've implemented it, which is often in a circumstance where a team is a remote team or it's a team that doesn't work all in the same location or it might include international teams, whenever we've done it over the years, our feedback, which we collect Net Promoter Scores from the participants and about the -- both the -- about the material they went through in the instructure, it's always been very high. But nevertheless, people have just been -- had been used to doing everything on site. I think people have recognized that actually we're getting the same Net Promoter Scores on both the instructure and on the content, maybe even a little higher because the flexibility actually is good. And so I think the fact that probably more groups will be working remotely in the future will mean that probably there's a permanent piece that will be -- where this will just be the way people do it. I think also the flexibility where you're not paying the travel cost and having to get a conference room and people missing the whole day, you can do these things, break them up into 3 segments during a day, giving a 0.5 hour in between these, it gives people flexibility where they can actually -- we think more people who are actually at a higher level in the organization are also attending the training. So our guess is this will be a permanent shift. Of course, people -- some of it will come back on site. But we think there's a permanent shift in this capability that we developed right after actually that mirrors epidemic, we felt we need to really be good at this. We have our own platform called LiveClicks that actually many clients prefer, but all of our consultants and coaches have always been able to do this on multiple platforms as they become experts of doing it here. So Paul, I don't know what color you'd add to that. -------------------------------------------------------------------------------- Paul S. Walker, Franklin Covey Co. - President & COO [12] -------------------------------------------------------------------------------- I don't think I would, Bob. That was really complete. Maybe one thing, Marco, is as this has shifted permanently, not all of it, I'm sure some of it will come back, as Bob said, back to live in-person, but I think a substantial amount of this will be delivered in the future like it's being delivered today, live online. That -- we think that actually could be a driver of more services for us in the future than what we've sold in the past because we'll now have this blended mix of clients delivering live online and then some still going back to the old way of live in-person. But the net -- we think there's a net gain for us here in more services days in the future because of the new flexibility and the ways that clients can utilize these days, in ways that frankly you couldn't have when it was in person. So we see it as a very positive trend. -------------------------------------------------------------------------------- Robert A. Whitman, Franklin Covey Co. - Chairman & CEO [13] -------------------------------------------------------------------------------- Maybe add to that, Marco, just what's happening, there are marketing events and also sales calls with salespeople. -------------------------------------------------------------------------------- Paul S. Walker, Franklin Covey Co. - President & COO [14] -------------------------------------------------------------------------------- Yes, sure. So of course, the same thing is happening in the delivery for which we charge clients, and we've also made the same shift in our marketing events. And you'll know from past calls, we've talked about the hundreds of marketing events we hold where people traditionally would gather in a hotel ballroom and get an executive overview of one of our solutions and how it could address the challenge they have. We've converted all of those to live online. And the number of registrations and the attendance rate is not a little bit more. It's many multiples more than what we used to drive to our live in-person events. And so from a lead flow standpoint and an opportunity standpoint, there's a lot more discussions happening. That is one thing that even as the -- when the world gets back to "normal", we're going to want to continue to do -- I think we're going to want to cement that shift to live online marketing events because we can get to so many people more easily. And then the same thing is true with our client partners, Bob mentioned a minute ago, the activity levels of the client partners have not gone down. In fact, in many cases, they've increased. We can get access to our buyers and potential buyers and our clients. And they're increasingly becoming more and more comfortable engaging with us on Zoom or whichever platform, and our people are quite good at that as well. And so that's proving to be really, really helpful. Our implementation specialists there, just all day, every day on with clients on Zoom, coaching and advising them. And so this is -- one of the silver linings here is it's -- we're developing new capability or finally getting to use capability that we've had latent that our clients weren't taking advantage of, and it's accelerating the level of activity inside the organization. -------------------------------------------------------------------------------- Marco Andres Rodriguez, Stonegate Capital Markets, Inc., Research Division - Director of Research & Senior Research Analyst [15] -------------------------------------------------------------------------------- Got it. Very helpful. And then I'm not sure if I missed this, but on the bookings strength you guys saw in the enterprise side of the business, can you maybe talk a little bit more about the drivers behind that? Is that just sort of a function of clients like you had pointed out when the pandemic kind of started, but you had kind of seen some volatility in the past where clients will just kind of press pause and try to figure where things are. And then kind of resume on their normal way once they've kind of got a lay of the land. So wondering if that is basically kind of helping that snapback in the booking strength that you saw or if maybe there are some other items, some other sales and marketing items, that maybe you've been pushing here in the last few months to kind of bring that back up. -------------------------------------------------------------------------------- Robert A. Whitman, Franklin Covey Co. - Chairman & CEO [16] -------------------------------------------------------------------------------- Paul? -------------------------------------------------------------------------------- Paul S. Walker, Franklin Covey Co. - President & COO [17] -------------------------------------------------------------------------------- Sure. I think it's a combination of the 2 things you said. In the early days, back in March, very early part of April, there was a lot of uncertainty. And people were spending their time, getting their employees out of the office and home to work. And so there just was not capacity or bandwidth on the client side to do. They just -- they put on hold from the training things they had planned. As that has settled down and as people have become accustomed to and comfortable working at home, because the things we were trying to address with them were important, and they did not want to cancel those forever. They needed to get them back on the calendar. And so that's certainly driving some of it is -- while the world is not normal, for many of our clients, they're now in a more normalized mode working from home, and they want -- they need to make progress. They -- some of the challenges they were facing before are only more acutely felt now. And so they kind of need to get on with solving those. So that's driving, I would say, the lion's share of it, is just the importance of the problem. They need our help. They want our help, and they're comfortable now doing it live online. We have done some things marketing and sales-wise to tout what we think is some differential capability to deliver these services live online, whether it be coaching or training. And we've equipped our salespeople with that. We've done quite a bit on the marketing front out there on social media, et cetera, having some of our clients share their experiences. And that's helped as well, especially those clients who maybe aren't quite as technically savvy, trying to understand, well, how would this work in a live online environment. And once we get in there and do the first session, they routinely say, that was fantastic. Let's keep doing this. And so we think, and Bob mentioned earlier in the prepared remarks, that it's the strength of that, that kind of whatever twists and turns might come next pandemic-wise, we've now transitioned almost all of the delivery to live online. We don't have a lot of sessions booked out there that are scheduled to be live in-person. And so we don't see really susceptibility of the cancellations in the future now that these clients are comfortable and we're very comfortable delivering that way. -------------------------------------------------------------------------------- Marco Andres Rodriguez, Stonegate Capital Markets, Inc., Research Division - Director of Research & Senior Research Analyst [18] -------------------------------------------------------------------------------- Got it. And last quick question. Just wondering if you can maybe talk -- give us a little update on the client partner hiring expectations for this fiscal year? I know that this last one, there were some challenges there. But any sort of update there? -------------------------------------------------------------------------------- Robert A. Whitman, Franklin Covey Co. - Chairman & CEO [19] -------------------------------------------------------------------------------- Paul, do you want to continue? -------------------------------------------------------------------------------- Paul S. Walker, Franklin Covey Co. - President & COO [20] -------------------------------------------------------------------------------- Bob, do you want me to take that? Sure. -------------------------------------------------------------------------------- Robert A. Whitman, Franklin Covey Co. - Chairman & CEO [21] -------------------------------------------------------------------------------- Sure. -------------------------------------------------------------------------------- Paul S. Walker, Franklin Covey Co. - President & COO [22] -------------------------------------------------------------------------------- Yes. You'll see in the slides, we're at 254 client partners currently. And as we mentioned in our July call, we're exactly on track with what we shared with you then that we were going to intentionally pause in Q3 and Q4 last year. We've resumed, we're recruiting, and we have our next batch of sales academy, which is what we call our sales school, scheduled for early in January. We'll recruit through the fall here, fill that up, and then we expect to be back on the same quarterly cadence that was getting us to approximately net 30 client partners a year, and so that will begin again in January. So we're recruiting right now. We have hired a couple of folks over the last month or 2, when we've seen somebody, we just had to get -- we don't want to lose them. And now all the efforts going into that January kind of fire the engine back up. -------------------------------------------------------------------------------- Robert A. Whitman, Franklin Covey Co. - Chairman & CEO [23] -------------------------------------------------------------------------------- Thanks, Marco. And maybe just on this general topic of changes in delivery, one thing that might be interesting is that actually we believe -- we've always had these tremendous coaches and facilitators that are just some of the best people in the world at facilitating content. What's happened is I think there are a lot of people who might have said, oh, gosh, I'll have my employees just do live on -- I mean, just online training are now recognized when you have an option of having really a world-class facilitator and then you can still do it remotely, they can do it from their home, that actually is giving us a big leg up versus those who just have these online subscriptions, you get the benefit of the online subscription, which we have, too, all the content digitally. But with somebody who can come in and coach for an hour, teach for half a day, whatever, it's really been a great pivot. -------------------------------------------------------------------------------- Operator [24] -------------------------------------------------------------------------------- Our next question comes from Jeff Martin from ROTH Capital. -------------------------------------------------------------------------------- Jeffrey Michael Martin, ROTH Capital Partners, LLC, Research Division - Director of Research & Senior Research Analyst [25] -------------------------------------------------------------------------------- Was just curious to get your perspective on the potential shift in your value proposition as a result of working under these conditions and the issues that -- or the new issues with new opportunities to use your content in different ways? And how do you see that continuing to shift over time? -------------------------------------------------------------------------------- Robert A. Whitman, Franklin Covey Co. - Chairman & CEO [26] -------------------------------------------------------------------------------- Maybe Paul and Sean can address it. One of the things that I think has happened, Jeff, most people, just like they thought they needed to be in the office all the time. And just like they thought that if you went to training, that was okay, I'm going to go off-site, and therefore, it's something all do once or twice a year. I think people are recognizing that, wow, there's a lot they can do. We implemented a big execution engagement, which -- with our most senior consultants, there's a major company who at first are thinking, gosh, I don't know that I can really do it this way. And now they can see how flexible it is and how many more of their leaders they can involve, how -- the levels they can take it to with -- for some additional budget, but not much more, particularly if they expand the pass. And I think what that's -- I think it's changing the value proposition. I think it's changing the paradigm of how many people in the organization might be going through regular training. It's changed the paradigm about the time segments in which that training can occur that, hey, you don't have to do an all-day training. There's a couple of hours in the morning, that can happen. The level of people that can be involved and benefit from it has led us to have a lot of passes expanded where people say, gosh, I can see taking this now to a lot more people. And I think finally, the breadth of the content, so for the people who have recognized the pass has, has resulted in a number of value proposition that says, hey, I'm going to consolidate my spend. I might be spending less, but I'm going to consolidate my spend in fewer suppliers and use All Access Pass as the foundation for it. We've had a number of clients in this environment who have maybe -- they've all been in budget constraints, of course, but they've increased their budget with us. So I don't know if that's responsive, Jeff. But those are some ways in which I think there's a -- the value proposition probably has changed some. -------------------------------------------------------------------------------- Jeffrey Michael Martin, ROTH Capital Partners, LLC, Research Division - Director of Research & Senior Research Analyst [27] -------------------------------------------------------------------------------- Yes. That's exactly what I was looking for. And I wanted to touch on sales effectiveness and efficiency. I don't know if you have looked at your client partners versus your traditional matrix of what you expect them to contribute in years 1 through 5. Is there any shift in that as a result of selling from -- selling remotely environment? -------------------------------------------------------------------------------- Robert A. Whitman, Franklin Covey Co. - Chairman & CEO [28] -------------------------------------------------------------------------------- Paul and Sean or Jen, do you want to? -------------------------------------------------------------------------------- Paul S. Walker, Franklin Covey Co. - President & COO [29] -------------------------------------------------------------------------------- Sure. I'll respond for enterprise, and then Sean can for education. So from an expectation of the 5-year ramp we talk about that a client partner as they work their way up to being fully ramped, we're not seeing the need to change those expectations at all. I think what will be interesting to see play out over time, not because of the current pandemic situation, but just as we -- as these new client partners are only selling All Access Pass and building up this base of subscription revenue that repeats at such a high rate in those future years, years 3, 4, 5, we may see that client partners can do more revenue than they used to do under the old model, and that's something we continue to look at carefully. But we wouldn't certainly bring the ramp rates down at all or the expectations down. In terms of just the overall effectiveness of the sales force, as I mentioned with Marco's question a minute ago, we're seeing -- and we have such a great sales force. They're incredibly effective. They work tirelessly. And their -- the rates -- the level, the things we look at, the indicators both of activity and output are as high or higher right now as they were pre-pandemic. They've been very creative and focused on improving skills to hold meetings live online, and it is a little bit more difficult to get to customers. We have to be more creative to get to a brand-new customer in this environment than we did before. But through social media, and I mentioned all of the people coming to marketing events, significantly more coming that way, creates a lot of inbound flow to them. So we're really pleased with what they're doing, and I think the ramp rates are still the ramp rates. Sean, I don't know if anything different for education. -------------------------------------------------------------------------------- Michael Sean Merrill Covey, Franklin Covey Co. - President of Franklin Covey Education [30] -------------------------------------------------------------------------------- I'd just echo pretty much what you said, Paul. I think we expect the rent price to be the same. In many ways, doing everything virtually creates more efficiency and less wear and tear, on our client partners. With education, you've got a lot of -- every client partner has a lot of schools. There's a lot of travel involved. So in many ways, it's been a nice break from all the travel. We are right now finding it -- it has been hard the first couple of months this fiscal year to get a hold of schools because of so many changes and so much chaos at the school level trying to figure everything out. We found in the last few weeks, starting to open up more. People are kind of settled into learning how to do live online learning. And so it's kind of smoothing out now. -------------------------------------------------------------------------------- Jeffrey Michael Martin, ROTH Capital Partners, LLC, Research Division - Director of Research & Senior Research Analyst [31] -------------------------------------------------------------------------------- Great. That's helpful. And then last question on the slow rebound in the international business. I was curious what kind of level you think it gets back to by the end of fiscal '21 relative to pre-pandemic levels. -------------------------------------------------------------------------------- Robert A. Whitman, Franklin Covey Co. - Chairman & CEO [32] -------------------------------------------------------------------------------- Paul, do you want to respond? -------------------------------------------------------------------------------- Paul S. Walker, Franklin Covey Co. - President & COO [33] -------------------------------------------------------------------------------- Yes. So you -- first of all, you saw the really pretty significant improvement from Q3 to Q4 that we shared earlier. And into our Q1, that continues to be the case, that the business is strengthening and rebounding, those international offices. It's a little bit different by office. So in the U.K., for example, they will mirror the North American operation very, very closely, and they are mirroring it closely. And the reason for that is they have -- so much of their business is subscription. Similarly, Australia will follow -- while Australia is not a big operation for us, it will follow a similar curve as North America. China and Japan are the 2 places where it fell off the most. It's coming back nicely. We won't be all the way back certainly to fiscal '20 levels by the end of the year. But we believe by the end of the year, we'll be back up to where we were fiscal '19 and back up to those levels. But the good news is that the business, as it comes back, we're significantly making sure that it comes back as All Access Pass business. And so that will -- while the business is down and we start to build it back up, we don't want to build it back up with the old traditional business. We want to build it back up with the new All Access Pass subscription business. We can do that now because our portals are up and running in China. And the folks are -- they're actually having a nice Q1 All Access Pass quarter in Japan right now. And so back up to 2019 levels by the end of '21 with a much greater mix of All Access Pass subscription business in those offices, which should really help us in the years, in '22 and beyond. -------------------------------------------------------------------------------- Robert A. Whitman, Franklin Covey Co. - Chairman & CEO [34] -------------------------------------------------------------------------------- And Jeff, just one addition. We think we'll be at the booking pace -- I mean we'll be at the run rate. If you can look at Slide 7, you're seeing that the -- even the expectation of Q1 is back to almost $9 million versus a normal of $12 million. And so we think in the next few quarters, you'll get back to that normal pace in the quarter, but just not for the year. So the run rate, we'll get back at it. -------------------------------------------------------------------------------- Operator [35] -------------------------------------------------------------------------------- And our next question comes from Samir Patel from Askeladden Capital. -------------------------------------------------------------------------------- Samir Patel, Askeladden Capital Management LLC - Founder & Portfolio Manager [36] -------------------------------------------------------------------------------- I know it's a cliché, but great quarter guys. So 3 questions. The first... -------------------------------------------------------------------------------- Robert A. Whitman, Franklin Covey Co. - Chairman & CEO [37] -------------------------------------------------------------------------------- Thank you very much. -------------------------------------------------------------------------------- Samir Patel, Askeladden Capital Management LLC - Founder & Portfolio Manager [38] -------------------------------------------------------------------------------- You maintained guidance for '21 at $20 million or so even though you outperformed last quarter's expectations for Q4 and you have continuing momentum into Q1. So are there negative offsets I'm missing? Or are you just being conservative? And then also, Steve, do you have guidance for deferred revenue billed? -------------------------------------------------------------------------------- Robert A. Whitman, Franklin Covey Co. - Chairman & CEO [39] -------------------------------------------------------------------------------- Yes. I think that last half of the question is probably the reason for being a little more conservative, is that we feel really good about, as we said, North America, which is the main engine, we think we'll get back and even be above where it was targeted to be originally in '20. The -- and that the -- because of the slower build in international and because it will be All Access Pass that helps -- and when it rebounds, we want it to rebound with subscription revenue, not the old traditional revenue, that revenue won't show up in the year as much. And so there'll be more deferred revenue put on the books and therefore less recognized. We're being conservative, we hope, to start with it. But part of it is just because as this rebounds, we want to use this time to transition those international operations over. And Steve, on the deferred revenue question, we do expect growth in... -------------------------------------------------------------------------------- Stephen D. Young, Franklin Covey Co. - CFO & Corporate Secretary [40] -------------------------------------------------------------------------------- Samir, so as you recall, our deferred revenue added to the balance sheet last year was more than $8 million. The year before, it was like $11 million. And this year, it was just over $2 million added to the balance sheet. So we think in the coming years that the amount we add to the balance sheet, as Bob was talking about, would be more like the $8 million to $11 million. And we're not giving specific guidance on that, but it will be significantly more, we think, than it was this year, reflecting everything that Bob and Paul just talked about. And the other thing related to this guidance, whether it's conservative or not, one of the things might not be able to emphasize enough is that Q1, Q2 of last year, FY '20, were very, very strong quarters. We were on a path that we thought we were going to have an extremely good year. And so for our first 2 quarters, we're comping against those 2 quarters. And then we'll -- so we'll be -- we expect to be behind last year halfway through the year. And the fact that we then still have significant growth in the year shows that everything we're talking about will pop out and be more visible in the third and fourth quarters. -------------------------------------------------------------------------------- Samir Patel, Askeladden Capital Management LLC - Founder & Portfolio Manager [41] -------------------------------------------------------------------------------- Perfect. Okay. Cool. Second question, Paul, with regards to the international business, you seem to have a pretty confident recovery outlook despite the new wave of lockdowns in Europe, for example. You've talked about it a few times, but maybe go over it again. What changed for those customers since March until now, where the COVID spikes and restrictions and whatnot don't actually impact the sales? Is it essentially just them being comfortable with live online now and also having the lay of the land and not deferring decisions? -------------------------------------------------------------------------------- Paul S. Walker, Franklin Covey Co. - President & COO [42] -------------------------------------------------------------------------------- Yes, I think that's part of it. And so take Europe, for example, Europe and Germany is where our direct operation -- Germany and the U.K. We've got -- the live online capability is there. It's primarily what we sell is All Access Pass. And so the uncertainty that they saw over there and we saw over here, I think as they go back into lockdown, it will be -- it remains to be seen exactly what happens. But they're more comfortable and accustomed delivering. And what we don't have this time, when we went into the pandemic back in March and into lockdowns, everything we had on the books was -- substantially, everything we had in the books was live in-person delivery. And so the choice the clients had was convert to live online, which they weren't sure about, weren't sure if that was going to work. And also they were trying to make that decision while sending everybody home or just cancel the session. And so many at that point chose to cancel. The different circumstance now where a lot of these employees haven't even returned to the office, they're accustomed to working from home, and the sessions we have on the books aren't booked live in-person. They're booked live online already to begin with. And so we expect that they'll continue with those, and we won't see anywhere near the kind of disruption now that we saw then. Remains to be seen what happens throughout Asia, where we don't have -- China and Japan, I hope they don't go back into the same kinds of lockdowns they had before because our business there is not as live online delivery friendly yet, not so much our capability. We have the capability to do it. But in a place like China, it's just that's not how they are accustomed culturally to receiving training in their homes. They're not set up for it as well. And so -- but as you speak to Europe specifically, we don't think it will be as disruptive. And right now, we're not seeing the lockdowns in China and Japan like we are in Europe. -------------------------------------------------------------------------------- Samir Patel, Askeladden Capital Management LLC - Founder & Portfolio Manager [43] -------------------------------------------------------------------------------- And what about the licensee network? -------------------------------------------------------------------------------- Paul S. Walker, Franklin Covey Co. - President & COO [44] -------------------------------------------------------------------------------- Yes. It's kind of a similar story. So the licensee network will continue to have -- we don't expect that they're rebounding as much this year and built into the guidance that we've given is that, that business will -- their first 2 quarters will look more like Q3 and Q4 last year for us. And then it will start to rebound somewhat later in the year. But for many of them, it will continue to be a slower build back in the licensee business. And we're aggressively working to try to continue to convert them to All Access Pass as well. It's country-dependent. In those places where the local governments have the ability to pour in quite a bit of stimulus, they're faring better right now. And in some of the countries where that's not the case, it's a more difficult road. And we don't quite see them tracking at the same rate as our international direct offices. But we do expect them to strengthen from where they were at the worst parts of the pandemic. -------------------------------------------------------------------------------- Samir Patel, Askeladden Capital Management LLC - Founder & Portfolio Manager [45] -------------------------------------------------------------------------------- Okay. Perfect. Third and final question for Sean or Bob. Education margins are still a bit of a drag. I know you guys did that sales reorg a while back. Any comments on how that's going, whether the selling process has improved in efficiency? -------------------------------------------------------------------------------- Robert A. Whitman, Franklin Covey Co. - Chairman & CEO [46] -------------------------------------------------------------------------------- Sean, do you want to address it? -------------------------------------------------------------------------------- Michael Sean Merrill Covey, Franklin Covey Co. - President of Franklin Covey Education [47] -------------------------------------------------------------------------------- Yes. Sure. Sure. Yes. So we feel really good about it. We reorganized, went to 1 sales team, 1 sales leader. And so far, it's been really good. We feel like the communication has been better. The person that is leading -- Meg Thompson is leading our sales team now, is kind of our expert on district focus, selling to districts. And I think that is a very important part of our future. We find our districts are -- that's where we get the highest retention rate. And so we're really using that advantage and training everybody on how to get the districts. And this is why -- this is one of the reasons why we feel like this year, we can bring on more schools. Even in this tough environment, we can bring in more schools than last year is through our district focus. So that is off to a really good start. We're glad we did it. We feel like it's the right decision, and I think it's going to show up down the road. -------------------------------------------------------------------------------- Robert A. Whitman, Franklin Covey Co. - Chairman & CEO [48] -------------------------------------------------------------------------------- Samir, there's been about -- as I said, about $1.5 million of just permanent costs taken out of that infrastructure, independent of sales levels, that will at least improve the margins by a few hundred basis points. We think the main thing will be, to Sean's point, the ramp-up of salespeople we've already hired under this new structure and with the new models we expect to improve this year. Although I'd say, as I did say, I think the environment won't be friendly, but our efforts will be good. Our efforts and capabilities are stronger in an environment that's probably not that much more friendly. -------------------------------------------------------------------------------- Michael Sean Merrill Covey, Franklin Covey Co. - President of Franklin Covey Education [49] -------------------------------------------------------------------------------- Yes. Yes. Just to add to what Bob said, on the retention side, just retaining all the memberships that we have in the subscription business, that came in pretty solid last year, and we expect that to continue this year. The more challenging thing would just be bringing on new schools and new districts. Yes. But we have found in the last few weeks that things are opening up some, a lot more willingness to talk and explore with us, which is great. -------------------------------------------------------------------------------- Operator [50] -------------------------------------------------------------------------------- Our next question comes from Patrick Retzer from Retzer Capital. -------------------------------------------------------------------------------- Patrick Retzer, [51] -------------------------------------------------------------------------------- I don't have any questions. Everything has been covered. I just wanted to compliment you guys on the effective reaction and adjustment of the business to the pandemic, and let you know I love the guidance for the current year. So congratulations and keep up the good work. -------------------------------------------------------------------------------- Robert A. Whitman, Franklin Covey Co. - Chairman & CEO [52] -------------------------------------------------------------------------------- Thanks very much, Pat. That's very nice of you. Thank you. -------------------------------------------------------------------------------- Operator [53] -------------------------------------------------------------------------------- And we have no further questions. I'll turn the call back over to Bob Whitman for final remarks. -------------------------------------------------------------------------------- Robert A. Whitman, Franklin Covey Co. - Chairman & CEO [54] -------------------------------------------------------------------------------- Thanks very much. I just want to express to each of you, I actually appreciate you through this whole period. We've had many discussions with both our great analysts, who spent enormous amounts of effort to really understand and model this. And I want to thank each of you for the really remarkable efforts and detail into which you've gone to really understand the business. Also for our shareholders, we have so many sophisticated investors as our shareholders, which we're grateful for and we admire, your questions have been great. And also, I think just the recognition that, you know what, this may be a good time to be a -- I think many of you have expressed that you see this as an opportunity, and we do too. But we appreciate you. And thanks for making the time to join us today. We are, of course, delighted to answer any individual questions off-line. Thanks very much, and we'll talk to you soon. Thank you. -------------------------------------------------------------------------------- Operator [55] -------------------------------------------------------------------------------- Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating, and you may now disconnect.