Franklin Covey Co. (NYSE:FC) Q3 2020 Earnings Conference Call July 9, 2020 5:00 PM ET

Company Participants

Derek Hatch – Corporate Controller of Central Services Finance

Robert Whitman – Chairman and Chief Executive Officer

Paul Walker – President and Chief Operating Officer

Stephen Young – Chief Financial Officer and Corporate Secretary

Sean Frontz – Senior Delivery Consultant

Conference Call Participants

Andrew Nicholas – William Blair & Company L.L.C.

Jeffrey Martin – ROTH Capital Partners, LLC

Marco Rodriguez – Stonegate Capital Markets, Inc.

Samir Patel – Askeladden Capital Management LLC

Zachary Cummins – B. Riley FBR, Inc.


Hello and welcome to the Third Quarter 2020 Franklin Covey Earnings Conference Call. My name is Michelle, and I will be the operator for today’s conference. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] Please note that this conference is being recorded.

I will now turn the call over to the Corporate Controller, Derek Hatch. Sir, you may begin.

Derek Hatch

Thanks Michelle. On behalf of Franklin Covey, I would like to welcome everyone to our conference call this afternoon to discuss our third quarter fiscal 2020 results.

Before 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 stabilize and grow revenues, the duration and the intensity of the COVID-19 pandemic and the corresponding recovery from the pandemic, the acceptance of and renewal rates for the All Access Pass, the ability of the Company to hire sales professionals, general economic conditions, competition in the Company’s targeted marketplace, market acceptance of new products 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 including the effects of the COVID-19 pandemic 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 Whitman

Good, Derek. Thanks so much. Thanks to everyone for joining us today. We are really happy to have a chance to talk with you. Hope each of you is doing well and that each of you is well. Obviously, the 90 or so days since we last reported have been some of the most noteworthy in recent history, both nationally and globally. And then for many of us who have been through a lot in the past, none of us has lived through a time quite like this. As a result, all of us, whether individuals, schools or companies, are dealing with uncertainties we have never faced before.

Despite these challenges, however, we are grateful actually that our rate of progress has strengthened, as we will talk about today that many areas have been actually quite a lot – a bit stronger than we might have guessed. And we believe this reflects our compelling strategy, our strong operations, and in some cases, the relative firming up of the snow that we talked about in the last call in a number of areas.

As we will address later, the rate of our progress leads us to expect that we will resume being a very high EBITDA growth, high cash flow growth company as we have been in the past quarters as we move beyond this period.

I would like to jump right in and start out by reviewing our results for the third quarter. Just as a context, we entered fiscal 2020 with strong momentum, having seen revenue grow $15.6 million or 7.5% in 2019, and having seen adjusted EBITDA increase $8.7 million or 73%. We expected this momentum to continue. It’s being driven by the things that we knew it should be driven by and even accelerate in 2020.

As a result, we expected revenue growth in the high-single digits, meaning $18 million to $20 million with adjusted EBITDA and cash flow expected to increase between 35% and 50% for the year to between $27 million and $32 million.

Consistent with this plan and the expectation for 2020, just as a reference point, in Slide 3, through the second quarter ended February, we had – thankfully had very strong year-to-date results. Year-to-date revenue has been up 7.8%. Subscription and related revenue had grown 22%. All Access Pass and related revenue had grown 25%. Adjusted EBITDA had already increased $4.9 million or 118% and cash flow from operating activities have increased $4 million or 30% to $17.4 million.

That meant that latest 12 months through the second quarter, adjusted EBITDA had increased $9.4 million or 59%, reaching $25.5 million for the latest 12 months, really almost getting us into the lower end of the range expected by our full-year fiscal 2020 guidance of $27 million to $32 million, and that with our two historically strongest quarters still ahead of us.

With that performance, we ended the third quarter with the expectation of achieving actually the high end of this year’s adjusted EBITDA and net cash generated range. I give you that background only to say that we were grateful to start that we were on track, had been on track that we entered this time as strong strategically, operationally and financially with significant liquidity.

However, in April, when we reported on our strong second – on these results, the external environment obviously was one of significant and constantly changing uncertainty, how would COVID-19 virus that’s related to stay-at-home restrictions impact society at large, how would it affect individuals, businesses and schools. And obviously really, much of this uncertainty remains. These factors had a significant impact on our business in the third quarter.

As you can see in Slide 4, our revenue for the third quarter was $37.1 million that was down $18.9 million compared to $56 million in last year’s third quarter. As we will discuss in further detail, more than 100% of this decline in revenue resulted from the need to reschedule coaching and training engagements. They have been scheduled on-site at client locations in which they were not possible to deliver due to stay-at-home restrictions.

Actually, the majority of this decline occurred in our international operations, where our offices in China and Japan and in many of our licensees were closed due to strict stay-at-home orders for most of the quarter.

As we will discuss in a minute, we have been able to rebook many of these engagements Live-Online. We already expect to retain and really not lose the vast majority of the revenue that required rebooking. On the other hand, we will discuss more detail in a minute.

Also, our subscription revenue proved to be extremely durable even in the middle of the pandemic. And so I think taking those two points, almost all of – more than 100% of the impact was as a result of not being able to carryout live training and consulting events, which thankfully we have been able to reschedule the bulk of Live-Online, and thankfully the other part of our business is subscription side, the activities of which really don’t affect the quarter because they are just put on the balance sheet for subscription accounting, actually retaining some strength. We will talk about that more in a minute.

Our gross margin remains strong, even increased 146 basis points to 72.3% in the quarter. Also, as you can see increased 214 basis points year-to-date and 131 basis points for the last 12 months. And these increases reflect the increased share of revenue related to high margin subscription sales.

Third, SG&A. We have a highly variable and performance-tied cost structure that was designed to flex meaningfully to provide a significant offset if we were, at any time, an offset to revenue and gross margin in a downturn, and it did. As shown, operating SG&A declined $6.1 million in the quarter, offsetting 48% of the $12.8 million decline in gross profit in the quarter related to the need to reschedule these on-site engagements.

Fourth, adjusted EBITDA declined $6.7 million in the third quarter, reflecting that the $12.8 million decline in gross profit was meaningfully offset by that decline in operating SG&A. And finally, cash flow from operating activities remained strong through the quarter at $18.7 million.

Stepping back from this, I’d like to address four key takeaways that I hope you will find useful as we unpack these numbers and provide some important insights. Takeaway one, as I’ve noted, is more than a 100% of the decline in revenue and adjusted EBITDA in the third quarter resulted from this need to reschedule revenue due to the worldwide stay-at-home restrictions.

As noted the majority of this related to our international operations whose offices were closed during most of the quarter and who do not yet have substantial subscription businesses cushion them.

Thanks to our immediate shift to delivering coaching and training Live-Online. The capability we developed over the past 10 years, we schedule a significant portion of the engagement which had to be rescheduled and actually our booking pace for coaching and training services gained very strong traction and accelerated since early May.

And so we believe the area of biggest impact in the quarter that had to reschedule is, it was well on the way to being addressed. Our booking pace, as we will talk about more in the last six weeks or eight weeks has now regained the same levels we had last year in the U.S. and Canada. And so we believe that in coming quarters that impact will address itself.

We continue to have weakness in China and Japan although both are increasing or improving for Q4 as well as among our licensee partners. So the biggest challenge we believe is on the way to getting addressed.

And second is that our subscription business has been strong and durable even in the middle of the pandemic. The rapid growth to our subscription business obviously has driven our accelerated growth in adjusted EBITDA and cash flow over the past several years. And even in the third quarter, subscription revenue grew significantly and contracted invoice subscription revenue also continued very strong throughout the third quarter and has accelerated further in June.

Third takeaway is that this strength in the middle of the storm is not just by happenstance. That is based on deep strategic and operational roots, including the importance of the challenges which were helping our clients address. Those haven’t gone away in these times. The flexibility of our offerings across a wide range of modalities allowed us to shift immediately to where more than 80% of our new bookings are Live-Online now and we are converting a bunch of the old days there.

And third, the strength of our business model which flexed on the downside of which has high flow through on the upside. Finally, we’ll give some outlook as to what we expect going forward. We do expect to emerge from this period and be able to resume our aggressive march of the mountain being a high – achieving high rates of growth in adjusted EBITDA and cash flow, and we believe we are establishing now the foundation for doing that.

So I’d like to just address each of these key takeaways so you have some more contexts. First, the idea that more than all of the decline related to these are need to rebook. More than 10 years ago, just after SARS, actually, we were concerned about it. We met and allocated significant resources to developing very strong Live-Online coaching and training delivery capabilities.

Not many other people were, you had pure digital and you had pure live on-site. We felt like, really you need to be able to deliver this content. We need to be able to do it, get the same net promoter scores that we were getting. And so we’ve tested this a lot and done a lot of this training. More than 190 of our consultants across both divisions have the capability to deliver our coaching, training and impact journeys on both our own proprietary Adobe supported platform called LiveClicks as well as on all the other major Live-Online platforms, including Zoom, Microsoft Teams, WebEx, and GoToMeeting.

Our consultants are expert at facilitating and delivering Live-Online, and actually they were in the same high 70s net promoter scores with their Live-Online delivery that they achieved when delivering live on-site at client locations and actually have a little higher rating on the question, how likely is it that you would recommend your instructor? It’s in the 80s, mid-80s anyway, but it’s actually a point higher with Live-Online.

So for years, we believe that with the quality of our content and our consultants and our digital support tools, this Live-Online capability will only become a unique competitive advantage both relative to traditional live on-site-only providers and actually also to digital-only providers. Despite that our vision of this though and despite our capabilities, clients actually typically continued to choose to have these coaching and consulting engagements done live on-site of their businesses or school location. Cluster of this is that in the U.S. and Canada in last year’s third quarter.

We started the quarter with 659 – and just – this is in the Enterprise business, 659 coaching and training engagements already on the books and added an additional 920 engagements for delivery in the third quarter, ending the quarter with almost 1,600 coaching and training engagements. Essentially all of them were for live on-site delivery at client locations.

Similarly, we began this year’s third quarter with 884 coaching and training engagements on the books, which was 34% higher than last year’s third quarter. And again, almost all of these engagements were scheduled live on-site at client or school locations.

However, as we all know pandemic-related concerns and stay-at-home restrictions made this onsite delivery virtually impossible during most of the third quarter. This meant that substantially all of this third quarter revenue had to either be rescheduled Live-Online and typically not into the same quarter since many companies and schools were just trying to get their bearings during the third quarter.

In addition, given the uncertainty as to an offices might reopen and then certainty which obviously continues the pace of new bookings of coaching and training engagements was also much lower throughout March and April as many organizations figured they get back in their offices by May or June, and they just go ahead and do it live on-site then that started to become more clear, they’ve converted a substantial number of those to Live-Online.

These same factors had actually an outsized impact on our offices in China and Japan, which were closed for long periods of time during these countries multiple lockdowns, since these areas traditionally had done very little Live-Online or digital training and didn’t have a large base of All Access Pass subscription revenue to provide revenue stability.

We knew that our international licensee partners experienced similar challenges than they have. And so the amount of revenue that was involved in these onsite engagements they had to be rescheduled was very substantial totaling approximately $30 million across the company in the last year, would have been $30 million plus this year.

As I mentioned because of our investments in developing strong Live-Online delivery capability, we moved immediately to provide many Live-Online client demos daily, all-day long teams were showing clients how it work. They were surprised by how engaging it was. Many of our training engagements therefore that we lost have already been rescheduled or in the process of being rescheduled. And we expect that a significant majority of these onsite engagement had been postponed, will ultimately be rescheduled and not lost and not displace other revenue.

However, finally, even with our rapid response, more than $20 million of the revenue of that over $30 million had to be rescheduled. It just wasn’t possible to deliberate and that represented more than a 100% of the company’s total decline of revenue in the quarter and as mentioned, an unusual amount of that occurred in our international offices.

As shown on Slide 8, you get an idea of the mix of this, whereas our international operations, you can see they’re accounted for 29% of our revenue in the third quarter of fiscal 2019. These operations accounted for $5.3 million of lost contribution in this year’s third quarters. This is kind of looking at the EBITDA impact.

By contrast, our U.S., Canadian operations, which accounted for 56% of our total enterprise user revenue in last year’s third quarter accounted for only $1.4 million of reduced contribution. And this again is a reflection of the strong subscription orientation in the U.S. and Canada and among our English speaking international offices and the earlier stages of subscription development in China and Japan.

We are pleased as I mentioned that the booking momentum for new coaching and training engagements however has increased significantly and 80% of those new bookings are now Live-Online and it’s really accelerated over the past two months. And it’s surprisingly now tracking ahead of our booking pace at the same time last year.

As you can see in Slide 9, just to give you some visibility on this. You can see the pickup of the booking of new coaching and training delivery engagements beginning in mid-April. As shown, since then bookings have accelerated. As a result, in the U.S. and Canada, we are now back to booking levels nearly equal to those being achieved last year at this time.

Also on the same Slide 9, you can see that our mix of delivery on new bookings has shifted to approximately 80% Live-Online now. So we’re getting the same pace of bookings almost as we had last year at this time, despite ongoing uncertainty, and people are very willingly doing it Live-Online, and we think this is important.

In addition to an improving coaching and training e-booking pace, as you can see on Slide 10, we are also very encouraged by the pace of additions to our overall advanced stage pipelines. And this consists of both invoice revenue and deals which are, in our calculations, very, very highly likely to close either 85% to 95%, depending if it’s A or B status.

This trend began pacing ahead of prior year starting in mid-May and its accelerated pace has continued through July to date. And so the things that are not recognized in our third quarter, the things that are recognized really didn’t have very much to do with the quarter itself or what was generated in the quarter. We had deferred revenue already on the balance sheet that was coming in, we knew, and we had all these bookings that then couldn’t be delivered on the site, and that’s really the story of the third quarter.

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However, the important thing for us looking forward is that the activities and booking pace on things that when booked really go on the balance sheet and don’t have an impact much in the third or fourth quarters, but build the foundation for next year thankfully have been strong.

Second major takeaway is related to the subscription business, which again didn’t have much impact at all in the quarter except for the deferred revenue piece, but has an important impact on the future. This is an area in which we expected to feel the least impact from the current pandemic. You have an $84 million pure subscription business excluding add-on services.

And you can see in Slide 12, our subscription revenue has grown from just $19.6 million in 2016 to $80.9 million for the latest 12 months through this year’s second quarter with All Access Pass subscription revenue growing from $11.9 million to $58 million and Leader in Me subscription revenue growing from $7.6 million in 2016 to $22.5 million.

This subscription business has been characterized by rapid growth, strong gross margins, high revenue retention rates, and a very strong lifetime customer value and has been a key driver behind the accelerated growth in adjusted EBITDA and cash flow we have achieved over the past several years.

This strong growth and strong economics together with a low customer acquisition cost to lifetime customer value has caused some of you to let us know that you believe that this part of the business alone, which represents about 40% of our revenue, and it has been increasing by about 800 basis points a year is worth at least 5x its revenue or greater than $400 million just this portion of the business alone, which has been durable. And we’re not making or stating an opinion on it, but we believe that is a very robust business.

Importantly, as shown, our total subscription revenue as well as both Leader in Me revenue continue to grow in the third quarter, and you can see increased to $84 million for the trailing latest 12 months through the third quarter. And so this was a strong 18% growth in the quarter itself.

I’ll just give you some quick bullet point data on the subscription business. First, our billed and unbilled deferred revenue. We expected that 100% of the $22 million plus deferred revenue was scheduled to be recognized in the third quarter would be recognized and all of it was.

You can see that’s broken into billed deferred revenue as shown in Slide 13. We had $47.9 million of billed deferred revenue on the books at the end of the second quarter, which is $8.4 million or 21% higher than at the end of the second quarter a year-ago. Of this amount, we expect to get the full $22.3 million that was scheduled to be recognized and as we did. As a result, our revenue in the third quarter increased 18%. Subscription revenue with All Access Pass subscription revenue going slightly higher 19% and Leader in Me growing 14%.

You see the unbilled deferred revenue, also on Slide 13, where we had a balance of $34.8 million of unbilled deferred revenue at the end of the second year related primarily to multiyear contracts. And that number was 39% or $9.8 million higher than the $25 million balance we had at the same time last year.

Again, we expect substantially all of this would be invoiced – that was supposed to be invoiced in the quarter would be invoiced and all of it was. We had concerns that the pace of decision-making in the midst of all this would be held up and that that would affect potentially renewals and new pass sales.

As you can see, however, in Slide 14, our renewals historically been very strong in every case, over the last nine quarters, the latest 12 months, revenue retention percentage has exceeded 90%. We had expected our revenue retention rate during the third quarter, however, would likely be lower due to just all the disruption. And while we weren’t sure what to expect, we are very pleased that despite the difficult and unusual business environment, our All Access Pass revenue retention rate was actually higher than 80% for the third quarter.

And with this strong performance, our latest 12 months revenue retention actually exceeded 90% again for the 10 straight quarter. Subsequent to the end of the quarter, we’ve actually had a couple of other accounts come in that were delayed and weren’t counted in the quarter that actually boosts that revenue retention a bit higher. Second, we were concerned that the invoice sales of All Access Passes to new organizations or new logos would be impacted, but again, it has continued to be strong.

As you can see in Slide 15, the sale of All Access Passes to new logos continued strong during the quarter coming in at 92% of the level we have achieved in last year’s Q3 in U.S. and Canada. And the sale of All Access Passes to new logos was even stronger in June. And as a result, as you can see, also on Slide 15, as a result, the sale of All Access Passes to new logo companies for the four months, March through June, came in right at 100% of the level achieved for the same period last year.

Third, the pace at which All Access Passholders entered into multiyear contracts has also been strong. Well, it might have been reasonable to expect that pure All Access Passholders would enter into or renew multiyear contracts during the third quarter with all the uncertainty.

As you can see in Slide 16, the dollar amount of multiyear All Access Pass contracts actually increased a little bit to $3.9 million from $3.5 million in last year’s third quarter. And our balance of unbilled deferred revenue increased to $33.4 million from $23.7 million at the end of last year.

As a result, the combination of maintaining high revenue retention and entering to new logo sales, our invoice subscription revenue in total was 86% of the amount we invoiced in the prior year. It’s $11.8 million versus $13.7 million last year. And again, if you look through June on things that renewed just a little late that gap closes even further.

In the Education Division, approximately historically 88% of Leader in Me schools in the U.S. and Canada have renewed their Leader in Me subscription membership in the given year. The vast majority of these renewals have occurred during our fiscal third and fourth quarters, matching schools budget cycles. And so this year, it’s right in the middle of the storm. With more than 2,700 Leader in Me schools to renew, it might not have been unreasonable interest in the renewal rate would drop substantially.

As you can see in the Slide 17, the tremendous disruption in schools in March when schools and their administrators were scrambling to teach Live-Online and ensure that those who depended on school meals could still pick them up, et cetera, resulted in starting April with 967 Leader in Me schools having renewed or committed to renew their subscription membership and that number was 434 or 31% fewer than at the same time in fiscal 2019.

However, our education team has been working around the clock, and they’ve really made a very substantial ground since then. As of yesterday, July 8, this number had increased to 1,994 retained schools that have either already signed contracts or we’re awaiting return of a contract which they’ve committed, and that’s now just 141 schools or 8% behind where we were this time last year. At present, we expect that the school renewal rate will again end up at greater than 80% reflecting these schools strong commitment to the Leader in Me program.

Finally, as the expected sale of Leader in Me memberships to new schools, expected that would be impacted by the very challenging current environment than it has been. As shown in Slide 18, through July 8, 280 new schools had purchased or awaiting signed contracts on purchase of new Leader in Me memberships. This represents approximately 65% of the number of new Leader in Me schools we had contracted at the same time last year.

However, based on our current pipeline and taking into account, the initial significant disruption in March and the fact that it kind of moved everything back about six weeks. We expect the pace of sale of new school memberships will increase and reach approximately 400 by the end of the fourth quarter. That’s a number that 75% of the number achieved last year, the number we would feel very good about.

Fact reviewed a very strong indication of the significant value schools place on the Leader in Me that during the difficult periods since March 1, more than 1,200 schools have renewed their Leader in Me memberships with all they had going on and 130 of these new schools had become Leader in Me schools.

So I’m really pleased that our subscription business remains so durable even in these times, and that the primary impact on our business, which has been the inability to deliver training and coaching is on the way to being addressed because of our significant success with Live-Online training.

So I’ll just quickly turn the time over to Paul Walker to discuss our third takeaway that related to the factors which were underpinning the strategic durability of the subscription business. Paul?

Paul Walker

Thanks, Bob and good afternoon, everyone. The third important takeaway that I want to talk about is that the strength and durability of our subscription business really does have deep operational and strategic roots. There are three areas in which it’s rooted. First is the importance of the challenges that we help clients address and the strength of our solutions in addressing them. Second, being the flexibility and accessibility of our offerings across a wide range of modalities. And the third, the strength of our business model.

As you’re familiar, five years ago, we made the decision to move to a subscription model because we believed it would be the best way for us to fulfill our mission and to serve and build the lifetime value of our client.

We felt that if we made the move, not only would we be better, a better and more strategic partner to our clients, we would also create a more profitable enduring and high growth business. And while we’ve enjoyed high subscriber satisfaction and renewal rates from the beginning, some have asked how resilient we thought our subscription business would be in a downturn.

And as you know, we’ve had a front row seat watching the answer to that question play out over the past few months. And we are very encouraged as Bob mentioned about how resilient our All Access Pass and Leader in Me subscription businesses have been even in the middle of this pandemic.

I just like to talk for a minute about why this resiliency, why in the middle of this current storm did the Enterprise Division contract nearly the same amount of new logo sales, achieved more than 80% revenue retention and have even more clients entering the multiyear contract than in last year’s third quarter, and similarly during the massively disruptive time for schools, why is the Education Division had more than 280 new schools purchased Leader in Me and nearly 2,000, 1,994 Leader in Me schools renewed their contracts.

We believe there are three key reasons that our revenue retention remains high and our lifetime customer value is also high and growing. First, among those is that we’re helping our clients to successfully address some of their most important and intractable organizational challenges.

During the third quarter, our clients wrestled through the same historic challenges that each of us here on this call have experienced. They moved large populations of employees from their office or school to remote work environments. They narrowed focus to the few critical must do activities often with fewer resources than they had pre-pandemic. They had to figure out how to generate sales and retain customers in an extremely difficult selling environment. They had to address culture and to the extent they had deficiencies in their culture those get amplified in times like these.

And most recently, most every one of our clients is very proactively focused and thoughtfully addressing diversity, inclusion and bias within their organization and through all of this, all of this change and disruption, the need for more capable leaders, those leaders who can execute, build trust and establish effective cultures has never been more important.

And these are challenges that are very important for all organizations, companies, schools, et cetera, and they view these as must-win games. And these are exactly the challenges which we have focused and against which we’ve allocated all of our R&D and innovations investments over the past many years. Our clients needed solutions to these challenges, especially during these times, and because they had their All Access Pass subscription or their Leader in Me membership, they had the tools and resources that they needed.

So that first point, we’re on the key must-win games. And we feel like we have the best-in-class content and tools to help with those. The second is that our decision to offer and support the accessibility of our content and solutions and multiple delivery modality is a unique and tremendous asset for our client.

When the pandemic hit, the need to address these must-win games didn’t go away. In fact, in many cases, it became more acute. But overnight, our clients needed entirely new and flexible ways in which to deploy solutions to address their challenges. And they often needed to be able to do so globally and at scale. Our ability to offer everything we do Live-Online digitally self paced and via micro push is not only a benefit to our clients, but it is also a significant competitive advantage for our company.

Our clients routinely tell us that we have the most robust and effective Live-Online delivery capability of any of the providers with whom they work. As Bob addressed, this strength allowed us to pivot literally overnight and reschedule a significant portion of our canceled onsite delivery days. And additionally, as he stated, in the Enterprise Division, in the U.S., we’re seeing new bookings and June and July returned to nearly the same pace we experienced a year ago. And as you would expect, and as we’ve talked about, the mix has shifted almost completely to Live-Online.

The third point and final point here would be that our value proposition is extremely compelling to our clients. Each clients and we’ve talked about this in the past, receives complete access to our best-in-class solution. They’re available in all modalities in a more than 19 languages around the world.

Each also receives the expert services of an implementation specialist or a Leader in Me coach, who’s dedicated to ensuring that they receive and realize that behavior change and outcomes that they’re seeking. And all of this is offered to each client 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.

The strength of this value proposition, including the fact that the price per user decreases as the pass holding population increases is causing many of our clients right now to make the decision to consolidate providers and double down with Franklin Covey.

In fact, I’d like to just share briefly four examples, recent examples of clients who and how they’re benefiting from this value proposition. The first major airline in the middle of this massively disruptive time, felt it vital to train and retrain significant portions of their leader population.

They believed and believe now that the capability of their leaders to engage employees lead through change and create a culture of high performance is going to be extremely important as they work through the most challenging environment they’ve ever faced and have to find new ways of succeeding.

Second example, we have a large consulting firm we work with who doubled down on their commitment to achieve on-time project delivery to free up and create more bandwidth to take on the addition of many new projects that are servicing because of COVID-19.

And rather than pausing their four disciplines of execution initiative, which they were using to create this bandwidth and improve their efficiency, they didn’t want to pause it until they could bring everybody back live and in person, and they went ahead and aggressively move forward and are using our Live-Online capability and we’re engaged with multiple teams doing dozens of delivery days and coaching sessions right now.

Third example, a CEO of a midsized healthcare company chosen the middle of a highly disruptive time to continue with plans to reinvent their culture, to make it more collaborative, more innovative, more inclusive, and rather than pause, they’re accelerating this initiative to emerge even stronger.

And finally, one of our great new school districts in Newark, New Jersey just recently made the decision to implement Leader in Me district-wide signing a six-year contract. And they’re using Leader in Me to immediately and proactively address the impact of COVID that it is having on their school community to address uncertainty and to help with mental wellness and social emotional challenges among both their students and their staff.

And so for these reasons and others, as Bob has mentioned, we believe that we will emerge from this period stronger with a deeper and more enduring relationships and that we’ll count even more clients as clients for life.

Bob, I’ll turn it back to you.

Robert Whitman

Thanks Paul very much. I’d like to turn the call over to Steve Young now just to address kind of what our general view of the immediate and longer-term future looks like from our vantage point, Steve?

Stephen Young

Thank you, Bob and Paul. So our fourth point in this presentation is that we expect to emerge from this period and resume our march up the mountain of being a company with high rates of growth in adjusted EBITDA and cash flow as we’ve talked about.

In April, as you remember, we felt that circumstances were so uncertain, and there were so many questions that we couldn’t answer, that we couldn’t with confidence, give guidance for the quarter or the year. We also at that time said that we hope to have a better sense of where things were heading by this time, by the time we report this quarter.

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We still don’t know what will happen in the world in the coming months and year where the world was shutdown again, et cetera, et cetera. And there’s still much uncertainty about our expectations going forward recognizing the disruptions that may still be caused by COVID-19.

Therefore, what we’re about to say is not guidance per se, and includes many assumptions. That said if the same trends that we’re seeing in our business and what Bob and Paul have talked about already today, if those trends continue, then in our fourth quarter, we would expect adjusted EBITDA to be in the range of approximately $4 million. This number reflects our belief that the Enterprise Divisions All Access Pass subscription business will continue to do well on revenue retention and new pass sales.

But that due to subscription accounting, most of that contracted and invoiced revenue will not benefit the fourth quarter, but will be placed on the balance sheet of deferred revenue to be recognized over time. This estimate also assumes that the Leader in Me membership renewals will be relatively strong. But like All Access Pass subscription revenue, most of this contracted subscription revenue will be recognized over time.

And that due to ongoing uncertainties in education related to school openings and budgets, the number of new schools entered into and going through the Live-Online onboarding process will be less than what we’d expect next year.

Finally, this number of adjusted EBITDA reflects that we expect the results in China, Japan, and our licensee network will continue to improve, but to a level which in the fourth quarter would still be significantly below the revenue and profitability levels that they achieved in fiscal 2019. So that’s our look at the fourth quarter.

Second, if the current trends and progress were to continue, then we would expect that our adjusted EBITDA results in fiscal 2021 with maybe a quarter or so of cushion would be directionally similar to the results we achieved in fiscal 2019, which is a year in which our adjusted EBITDA was $20.6 million. And that our fiscal result in 2022 with maybe a quarter or so of cushion would be similar to the result that we expected to achieve this year with adjusted EBITDA of around $30 million.

So achieving such results, we believe would signal that we have resumed our accelerated climb up the mountain toward being a consistently high adjusted EBITDA growth, high cash flow growth company.

So Bob, let’s look going forward.

Robert Whitman

Thanks. We will now get ready to turn the time over to questions, but I just say in conclusion that I want to really express admiration and appreciation, first to the all of the Franklin Covey associates. In the middle of the storm, they’re making more sales calls albeit Live-Online than ever before.

Our implementation specialists are spending more hours. Our consultants have all refined their skills and they’re teaching or facilitating huge numbers of engagement every week. They’ve done it with tremendous excellence. Our technology and marketing and product teams have supported this. Our Jhana team with the weekly micro push learning has been able to adjust on the dime and keep relevant topics at front and center.

We have launched new offerings and are about to launch some new that are really relevant, including the unconscious bias offering that we launched a year or so ago. This is accelerating with the new best – what we expect to be a bestselling book based on preorders. Liz Wisemans, multipliers and say we’re in a position where relative to customers, they’re in a time, in a position where many of them were looking to have fewer suppliers and getting more value from those who they do partner with. And we think we’re in a good position for that.

We also appreciate each of you and recognize that we all, I mean, really, if we’re able to accomplish what we’re talking about now, the net present value of the change impacted by this compared to where we were six months ago, when we purchased stock at $36 a share and thinking it was worth more than that. Really the net present value in our minds is a few dollars less, but it hasn’t fundamentally changed this.

In April, if I had thought we’d be in a position to be saying this today, I would have been thrilled. We are still recognizing its difficult circumstance, but I just want to thank everybody for putting us in this position.

With that, let’s open it for questions.

Question-and-Answer Session


Thank you, sir. We will now begin the question-and-answer session. [Operator Instructions] The first question in the queue comes from Andrew Nicholas with William Blair. Please proceed.

Robert Whitman

Hi, Andrew. Good afternoon.

Andrew Nicholas

Hi, good afternoon. First question, I just want to make sure I understood your comments correctly. I think you said you estimate maybe about $20 million of what was previously estimated to be $30 million in revenue tied to on-site training, coaching days, that sort of thing was postponed in the quarter. I just want to make sure that I understood that correctly. And then relatedly, if you could give any color on how you’d expect that $20 million or so of revenue to kind of flow in through the next several quarters?

Robert Whitman

So first of all, Andrew, yes, that was right. If you look at $56 million that we did last – in last year’s third quarter and subtract, say the $22 million of subscription revenue that we had this year that leaves you with a little over $30 million of revenue that’s not related to subscription, which was subject to being impacted because it related to, in one form or another to online coaching or delivery, except for that small portion that didn’t. So if you net down the portion, it was already going to be Live-Online that brings it down to about $30 million.

And once – the time in April, there were some – some people were still in the office – their offices, others expected they’d be back in their offices, but essentially all of that, that $20 million just had to get moved. That included both what was on the books and what was already within the pipeline about to go on the books.

In terms of the positioning of that, we don’t know exactly the percentage that will be kept. We believe about 70% of those engagements will actually still be because they were tied to something important that the organization is going to try to get done, will ultimately come in, will lose the difference that won’t – I mean, we may pick it up on new booking pace, but it won’t be those same engagements being rescheduled.

The majority of that has already been rescheduled and the rest of that is we’re working to reschedule. And so I think we’ll end up with – of that $20 million. We’ll end up with, say $14 million of that, that ultimately will come in, in the combination of probably the – some in the fourth quarter and the rest in the first quarter.

Paul, I don’t know if you want to add any other insights to that?

Paul Walker

I think that’s good, Bob. I don’t have anything else to add.

Robert Whitman

And some of it relates to Sean in Education also where normally it would all happen in the summer, but with all the disruption, Sean, some of that will now be in the first quarter.

Sean Frontz

Yes. Some will be – there are some that’s been rescheduled in the fourth quarter. Some that’s been rescheduled in the first and a little bit into the second, and some that hasn’t is still floating, and they’re still trying to decide based upon school opening times.

Andrew Nicholas

Got it. Makes sense. Thank you.

Robert Whitman

Thank you.

Andrew Nicholas

And then maybe bigger picture, how do you think the current environment has maybe permanently affected clients’ preference between consuming content virtually as compared to on-site? And then tied up with that, is there any way that we should think about the difference in revenue and profitability between in-person and online delivery method?

Robert Whitman

Sure. Thanks. Paul, do you want to address that?

Paul Walker

Sure. In terms of the permanency or maybe overall, I think things have shifted for sure, and some of it will go back, but I think the amount that goes back, it won’t get back to where it was. So I think we’ll see virtual delivery, what we call Live-Online delivery will be something that will be here to stay.

One of the things that we’re seeing right now, and as Bob mentioned earlier in his remarks that we’ve had the capability to deliver that way for more than a decade, but client appetite and interest in that just wasn’t there. If push came to shove, they’d rather just do it the way they’ve always done it, which is live in-person on-site.

And that was one of the things, frankly, that plagued us a bit in March, April early May, is that our clients were thinking. Well, if all things are equal, we’ll just wait until this pandemic’s gone and we’ll get back together in the summer or early fall. And as that’s looking maybe less likely, they’re now coming back saying, hey, we don’t want to delay these important initiatives, so let’s really take a look at doing them Live-Online. And I think what they’ll see is that that’s a very effective way. For us, the net promoter scores, as we mentioned are equally high, actually slightly higher when we deliver Live-Online.

And so I think we’ll see more and more of our clients even post-pandemic when we’re all hopefully back in our offices, going about our normal business that clients will prefer that. In terms of if that happens and as that happens, that doesn’t negatively impact us at all.

In fact, our revenue and margins are just as good on that business. It’s actually a real win for the client because they are not paying any travel costs for us or for their own people. And so there might be a chance for them to do even more training and more delivery and stretch their training dollars further either in the form of more delivery or in more All Access Pass subscription seats because some of those budget dollars aren’t going towards training.

One other point I’ll just make, sorry Bob, and I’ll stop, is that – because it’s convenient and people don’t have to leave their office and we typically deliver it in chunks throughout the day, so we might do two or three couple hour chunks and there’s time to get work done in between. There is a scenario, too, where clients will do more of this kind of training and actually the volume of training might be higher in that environment than it would have been when we all had to travel somewhere and invest the time to travel and be there for a whole day and then go back to the job. And so we don’t know yet what the long-term consequences will be, but we see there could be a lot of positives there.

Sean Frontz

Yes, Paul, if I could add, this is Sean. Just similar on the Education side, I think there’s going to be a significant shift in continuing once we get back to normal in doing a lot more Live-Online and on-demand training. The Education space was not as advanced as the Enterprise space and the use of technology. And so it’s been a big comeuppance for them. And there’s been a lot of shifting, a lot of investment in the technology.

And so I think on a – net-net, I think it’s going to be a real positive thing for us because we deliver 5,000 coaching days a year. A lot of these I think will go Live-Online. It’s less wear and tear on our people. We get the scores, are just as high, and there’s a lot less travel. And Leader in Me membership travels included. So this would be a savings for us, not to have to travel. So I think it’s going to be a significant shift in Education, and it be to. I think it will be a helpful thing for us and our clients.

Andrew Nicholas

Great. Thank you very much.

Robert Whitman

Great. Thanks, Andrew. Just one note that our margins would increase a little bit because we build through to the clients is travel revenue at – our reported margin. It doesn’t change the dollars. The reported margins would be affected positively a little bit because we get no margin on the travel revenue, but otherwise it should be the same.

Andrew Nicholas

Got it. Thanks.

Robert Whitman

Thanks so much.


Okay. And the next question in the queue comes from Jeff Martin with ROTH Capital Partners. Your line is open.

Robert Whitman

Hi, Jeff.

Jeffrey Martin

Good afternoon, guys. Hope you are all doing safe and well.

Robert Whitman

Yes. I hope you are as well.

Jeffrey Martin

Fine, thank you. I wanted to get a sense for me, Bob, what the impact on add-on services to the All Access Pass subscriptions impact has been? Have you seen that be weighed on like the live events have been impacted?

Robert Whitman

Yes. A good chunk of what got moved out of the third quarter was actually add-on services for – related to All Access Pass engagements just because, again, a lot of times they’ll invite, they want somebody on-site to facilitate a major initiative with their senior leaders or whatever it is.

What’s happened, I think though is that, you always thought you couldn’t do stuff Live-Online. Now a lot of that shifted. We hardly ever did any execution engagements, for example, big execution initiatives Live-Online and we’re now doing those daily, and they are recognizing well, this is actually – it can happen just fine.

But I think it had the same short-term impact, but again because the service revenue that’s attached to All Access Pass historically on the same-store basis, so to speak, same-client basis, we were retaining a 100% of the – almost a 100% of the service revenue every year, that’s been dented this quarter. But as we’re now rebooking, a significant portion of what we’re rebooking is actually add-on services for All Access Pass that being done Live-Online. I don’t know, Paul, if you want to add anything to that?

Paul Walker

I think that’s exactly right, Bob.

Jeffrey Martin

Okay. And then with respect to the scheduling, I’m curious to know a little bit of the transgression throughout the quarter. Were you doing any rescheduling of in-person live events where you had to subsequently rebook them as online events? Just curious to know how that transpired?

Robert Whitman

Paul and Sean, do you want to address?

Paul Walker

Sure. I’ll tell take enterprise. So yes, initially, as we mentioned, we entered the quarter with about 34% more engagements on the books than we had a year ago. Vast majority of those were all live in-person at the client location and those all needed to be rescheduled. And there were a few clients early on who were saying, let’s go ahead and reschedule into Q4. And they went back on the books as live on-site at the client location.

But we in earnest started to try to work with each client to say, why don’t we just do this Live-Online? And so that’s – so there are some that have gone out on the books in the later Q4 and into Q1 that are just the clients. So let’s just pause and we’ll do it live on-site, but the vast majority are back on the books now is actually Live-Online.

And the mode we’ve adopted is to try – is to say to the clients, let’s get them scheduled that way. And then if conditions are such that we can come on-site and you want that at the time, that’s an easy change for us to make. So that we don’t go through another raft of cancellations because we have all these live on-site days on the books that if COVID stays like it might for a while longer. So we don’t want to relive that experience again. So the vast majority that are out there are Live-Online now.

Sean Frontz

Yes, Jeff. This is Sean. And in our world, it’s about two-thirds of the days that our book going forward are Live-Online. It was more than that. And now live is starting to pick up in certain pockets, certain states and some districts. We expect that to continue in that direction. And as I shared before, the majority of these days were rebooked in the fourth quarter, some went into the first and some are still pending decisions from the schools and the districts.

Jeffrey Martin

Okay. And then for the same project Live versus Live-Online, is it the same arrangement in terms of terms and revenue and margin impact? Or are there any differences?

Robert Whitman

It’s the same – it’s essentially the same arrangement. The client signs a contract. It’s got the same cancellation terms to it. There’s a slight difference. They can book it to be a day or they can do segments over the day, but once we’re done delivering the engagement, whether it was a day of time or segments over a couple of days, it’s the same revenue and profitability to us as a company. I mean, so as a client, your experience is slightly different, but the economics are the same for us.

Jeffrey Martin

Great. Thanks. That’s all for me.

Robert Whitman

Thanks, Jeff.


Thank you. And the next question in the queue comes from Marco Rodriguez with Stonegate Capital. Your line is open. Please proceed.

Marco Rodriguez

Hi. Good afternoon, guys. Thank you.

Robert Whitman

Hi, Marco.

Marco Rodriguez

Hey, thank you for taking my questions.

Robert Whitman

Thank you.

Marco Rodriguez

Wondering if maybe you could talk a little bit more about the pipeline. You guys kind of highlighted that your backup to where your bookings and your pipeline was I think at this time of last year. Can you maybe talk about what you’re seeing inside that pipeline? Is there any sort of pressure from a pricing aspect or different types of terms that are necessary to basically incent some of the customers?

Robert Whitman

Paul, do you want to address that?

Paul Walker

Sure. So as we showed in that chart earlier on – I can’t remember the slide number now, it’s probably around 15 or so. But what we’re seeing right now, that the actual pipeline for Q4, the overall pipeline is not as full as it was at this point in Q4 last year because we went through Q3 and not as much was going in. What we’re showing in that slide is that beginning in about May, the amount that was now moving in though to the advanced stages of the pipeline is actually started to pace even with and is now ahead of what it was last year.

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So if you take out the fact that there was less that went into the Q4 pipeline during Q3, however, starting in about mid-May and continuing all the way through June and July, the rate that’s now going in and advancing is greater than it was last year. So that’s one of the – we won’t have sailed as high in Q4 this year as we had in Q4 last year for that reason.

But what’s encouraging is that it seems like now, and starting in May, as our sales people out there working with clients, the clients are moving decisions again more quickly than they were in March and April and things are moving into that advanced stage in closing, actually for us at a little bit of a surprising rate.

To the second point of your question, we’re not having to discount really much, and certainly not any more than we have historically as we get into a unique client situation depending on the deal. There are some situations where we’re choosing to extend some terms. We’ve categorized all of our clients into kind of those that are in industries and situations where they’re thriving, those that are disrupted and those that are kind of devastated.

And so when we have a devastated clients like we have clients that are in industries that are related to travel right now, that’s really, really hard for them. They need the tools we have right now, maybe more than ever. And so we’re trying to be as flexible as we can to be a good partner because we’re taking the view with all of these clients that look we’re – it’s not just a statement that we want to be your partner for life. We really mean that.

And so we’ll work very carefully with Steve and think about terms we can extend and also look at our cash flow situation, and try to do the best we can for each client. And so we’re making some of those decisions, but I would say that that’s not what’s driving our pipeline. I think the pipeline is just the result of clients getting back in realizing that, hey, we need to move these things forward. Let’s talk again. It looks like we might be in an unsettled environment for a while, but let’s not have that slowdown what we’re doing. And so we’re pleased by that pipeline momentum.

Marco Rodriguez

Thanks. That’s very helpful. Then in regards to the client partners, can you maybe update us on the hiring plans for the remainder of this year and then possibly into next? And if you could also maybe just talk a little bit about the fact that obviously everyone’s going through these social distancing efforts? I mean have you had to change your hiring practices and if so kind of walk us through how that’s working?

Paul Walker

Sure. Bob, do you want me to take that one?

Robert Whitman


Paul Walker

Yes. So yes, right now, we’re at 252 client partners. And actually, we’re up 25 from where we were in Q3 last year. So we’ve had a meaningful addition over the past year and that’s having not made any hires during Q3 this quarter that just ended. And we chose to pause our hiring in Q3, Q4, and actually we’re going to continue to keep it paused into the first quarter of this next year.

For one simple reason, and that is that it’s – we want to give these people that join us every advantage they can, and this is a difficult environment to get started in. And so our plan right now is that we’ll resume – we’re recruiting, but we’ll resume really recruiting in earnest in the fall, and we’ll prepare to have our next big crop of client partners start-up and go through our sales academy, kind of our sales school in early January.

And then we’ll be back to our normal cadence where quarterly we’re bringing in a good cohort of client partners in Q2, Q3, Q4, next year, and get back on that pace of adding roughly net 30 client partners a year. So we have paused it just primarily for that reason to give people the best chance they can.

In terms of social distancing, I was just – sorry, remember, is your question is also distancing on what that looks like from a salesperson with their clients or inside our own company. Can you just restate that again?

Marco Rodriguez

Yes. Just from the hiring aspects, I mean, I would assume that most – at least prior to the hiring was all face to face meet and greet if you will, so how that’s sort of changing?

Paul Walker

Okay. Yes. Great question. So yes, we’ve have hired a few people during this period and when we do it, we’re on like you, we’re on Zoom at 13 hours a day. And so that has all moved to that environment. And we’ve actually had a few replacements, interestingly enough right now. This is a time for us to be. We’re somewhat aggressive on the recruiting side at the moment because a number of our traditional competitors are not fairing as well as we are. We don’t wish them ill at all, but that’s just kind of a statement of fact.

And so there’s a number of people interested in joining Franklin Covey and we have replaced where we’ve had a book of business that we felt really could help somebody needed to tend to right away even in this environment. And so we’ve done all that virtually and we’ve actually adapted our sales school process and done that completely virtually as well.

And it’s working really well. In fact, it’s informing some changes we think we’ll make to that sales school when we resume it again in January in earnest. We think there’s some things that we’ll do more Live-Online that will be beneficial.

Marco Rodriguez

Got it. And then last question for me. Just circling back here on Leader in Me. Just kind of help us think through and wondering about that program and its benefits to a school or a school system if students aren’t actually in the classroom?

Paul Walker

Yes, sure. Well, we think and we’re positioning it this way that it’s more beneficial than ever before. We have a lot of digital materials and tools, for example, their leadership guides for all the students at different age groups, right. And these can all be, for example, teachers could give assignments, they could do the leadership guides online digitally. A lot of schools are wanting to buy physical materials and have them complete them at home as well. That can be done that way. We also have a lot of digital tools for parents to support students at home.

So everything we have that’s been in a live setting is now available in Live-Online or in on-demand digitally, so all the materials are really in a good spot to do that. We also feel that one of the key things we teach in Leader in Me is we empower students to lead their own learning. That’s really one of the core paradigms that we have in Leader in Me.

So we feel that that will be advantageous at a time like this, where we’re going to be working with schools to say, here are some ways in which you can further empower students at home to take responsibility for their own learning. And so that’s going to be a big benefit as well. We’ve got this tool called Leader in Me Weekly, which is a micro push tool and it has tips and suggestions.

Every week, we’re coming out with new ideas on how to virtually implement a Leader in Me for teachers, for parents, for students at home. And the entire focus of that team has gone to virtual implementation. And so every week, we’ve got these bite-sized videos, applications, suggestions, best case examples, et cetera, that are coming to the schools. So anyway, I don’t know if that answers your question, but that’s – we think we’re in a good position to do this well.

Marco Rodriguez

Got it. Thanks. Very helpful. Thank you guys.

Robert Whitman

Thanks Marco. Appreciate you.


Okay. And the next question in the queue comes from Samir Patel with Askeladden Capital. Your line is open. Please proceed.

Samir Patel

Hi there.

Robert Whitman

Hi, Samir.

Samir Patel

Hey, so first question is for Paul. Your Slides 8 and 9 or 9 and 10, I guess it is where you’re talking about the bookings and the pipeline. Just to be clear when you’re talking about those bookings that’s not including the rescheduling of previous on-site days, right. You’re talking about actual new business. Am I understanding that correctly?

Paul Walker

Yes. This is new business. There might be a few reschedules in there, depending on the client. The client may have canceled the previous engagement and now they’re booking something different with us. But it’s primarily…

Samir Patel

Okay. But it’s not – but that’s not wholesale. This isn’t counting like the stuff where you had stuff in Q3 and you went back to the client and said, okay, we’ll do it in Q4 instead?

Paul Walker

That’s right.

Samir Patel

Okay. I just want to make sure I understood that. Thanks. And Bob, I guess a higher-level question is, and you brought up the share repurchase and when I’m looking at where the stock prices were, when I’m looking at kind of the things you’re saying about the ability to take even more share from competitors with regards to having a great online solution already with regards to the breadth and depth of content and the modalities. I mean, how do you guys think about capital allocation going forward, right?

I mean, do you invest more in share repurchases? Do you actually kind of coming out of this accelerate your ramp up of new client partners to continue to take share? I mean, just talk through that side of things a little bit. I think you did a great job discussing the operational side, but I’d be interested in sort of the investment side of things.

Robert Whitman

Yes. Thanks. First of all, we’re grateful that we have cash. We reported we had drawn on our credit line just out of the – early on, with $15 million. And therefore, we kind of had around $38 million of cash in April, and we still have approximately that amount today. We have a new bank credit agreement that we entered into yesterday and that will give us plenty of – we’ll end up repaying our – not paying interest on the extra $15 million we don’t need because we can draw at anytime, but we need it.

So we think we’ll have plenty of capital. For us, the investments will be – we tend to use capital during three quarters of the year just for working capital, and so as we believe that sales will start to ramp back up and we’ll need some of that for working capital.

But beyond that, I think you’ve noted that we have a brand new offering coming out here in July. The Multipliers content from Liz Wiseman that’s been coming on for several years. That’s in the queue. We have significant investments we’re making on the technology side, not because of this circumstance, but we’re obviously continuing to do that and the portal investments. We’re hiring sales people. We’ve gotten – as Paul mentioned, there are – even though the big just recruitment hires will be in January – to start in January is what we’re thinking.

We are picking up people opportunistically, and we think there are going to be some good opportunities to gain some additional content and tools and things from people who just are not able to scale in this environment. They may have thought they can work their way through.

So I think in the intermediate term, we’re going to preserve cash, but we’ll make those kinds of investments. Otherwise, we’ll be preserving cash to make sure that we are – whatever the opportunities look like in the future or whatever the uncertainties are that we’ll be able to continue to plow ahead, and we’ve been able to keep all of our people busy and employed throughout this time.

Samir Patel

Understood. And on the content side, I mean, you guys mentioned for example, diversity, and then some of your clients shifting to having to have that remote work environment. I mean has that impacted your new content development in the sense of are you focusing more on maybe some of those areas that your clients are valuing right now?

Robert Whitman

We already thankfully had, and so no.

Samir Patel


Robert Whitman

I mean beyond – there are two things that I’d say that we’ve doubled down on. One is, on Jhana. We’re working on some enhancements to Jhana that will connect the weekly newsletter to all of our digital libraries, et cetera. It was always the plan, and that might be a thing that we’re accelerating because of this.

The other thing that we did accelerate, we spent a little money on, is saying, gosh, with all of our great consultants and Live-Online now being the thing, and us being good at it, really good at it, we’re going to – we’ve made some not – I mean, hundreds of thousand of dollars investments and making sure we have professional backgrounds, the right power in their laptops, et cetera. But otherwise, I think we always have a technology math, and this has just reinforced our commitment to something we – already was in our three-year plans.

Samir Patel

Got it. Thanks. Appreciate it.

Robert Whitman

Thanks, Samir.


And we do have one last question in the queue from Zach Cummins and he is with B. Riley. Your line is open. Please proceed.

Robert Whitman

Zach, how are you?

Zachary Cummins

Yes, great Bob. How are you?

Robert Whitman

Great. Thanks.

Zachary Cummins

Yes, I guess just in the Education segment, with retention rate expected to be around 80% for the end of the year, I was just curious, are – the lost clients, are they completely going away? Or could we see some of these renewals just being pushed and completed in the early part of FY 2021?

Robert Whitman

Great question. Sean, do you want to address from your perspective?

Sean Frontz

Sure. Yes, I think that the lost clients are – many of them are reclaimable. We’re really pleased that we’re going to come in over 80%. Many of them that aren’t are saying, we love you guys. We’re not sure what’s going to happen with our budgets or when we’re going to start up or how we’re going to start up. And so can we push pause? So we’ve kind of – we’ve developed a little package of pause. We’re not counting anything, but we’re not pushing them outside of the community either. So we’ve got a big group of schools in that bucket.

So that’s the primary thing we’re seeing. It’s just the – many of these schools just have this uncertainty and volatility. It’s changing week to week, right? Not sure if they’re going to open and then it’s going to be kind of a tiered schedule. You’re going to come every other day or part of the day. And they’re dealing with so much of those that – so many of those things, including things like bussing, how they’re going to handle bussing that a lot of them have just said, you know what, we really like this. We’re in this for the long haul. And we want to push pause or wait until the first quarter. So I expect that this year’s renewal rate after factoring in next – the first quarter, will be very comparable to the 88% that we’ve been at historically, give or take a couple of percentage points.

Zachary Cummins

Got it. That’s really helpful. And then just one question for Steve. I really appreciate, I guess, the general, direction-ary expectations for both the longer term in terms of FY 2021 and FY 2022. I guess for those adjusted EBITDA targets that you laid out there today, how should we be thinking about the revenue line? I know your prior adjusted EBITDA targets we’re assuming kind of a high single-digit growth. So I was just kind of curious as to how you’re thinking about revenues in order to achieve those adjusted EBITDA targets.

Stephen Young

Well, Zach, we haven’t prepared exact forecast if you will related to revenue. But as you know, when there’s a recession or pandemic impact and revenue goes down, then you normally accelerate that at a higher rate of growth than what is normal or typical. So we would expect, for example, Q3 of next year to be more than 8% or 9% revenue increase compared to Q3 this year or Q4.

But then when we get back to comparing to 2019 and 2021, 2022, where we’re growing EBITDA at about that $10 million range clip, then that would be based upon an organic growth rate still of around that high single-digit growth would be able to create that type of a flow through to adjusted EBITDA and cash.

Zachary Cummins

Got it. That’s helpful. I appreciate that. Well, thank you.

Robert Whitman

Zach, sorry, just one other thought on – sorry, Zach. I think you were just saying…

Zachary Cummins

No, no. Go ahead.

Robert Whitman

One other thought is that if you just think of the EBITDA target and then assume that that’s going to be as a business model and EBITDA margin that will be increasing by 300 basis points a year. You’d say, we’ll find by the time you hit to $30 million, we would have thought this year, the $30 million reported would be on somewhere around 245. So it would have been about 12% EBITDA margins increasing by 300 basis points a year, if that’s helpful. So you can kind of back into the revenue from the EBITDA, but that’s probably about what it would relate to by the time we get to 2022 at $30 million of EBITDA. It’d probably be in the 14% or 15% EBITDA margin.

Zachary Cummins

Got it. That’s really helpful. Well, thanks for taking my questions and best of luck going forward.

Robert Whitman

Thanks so much, Zach.

Stephen Young

Thank you.


We have no further questions at this time. So I will now turn the call over to Mr. Bob Whitman for closing remarks.

Robert Whitman

Thanks. Again just want to express our appreciation to each of you. You’ve been great partners for all these years. We hoped we’ve been great partners and we are very excited to continue the journey together, but look forward to answering any questions that you have individually. And thanks again for joining today. Stay safe and well. Thanks.


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