Welcome to the Q2 2021 Franklin Covey Earnings Conference Call. My name is Adrian and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later we'll be conducting a question-and-answer session. [Operator Instructions]

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

Derek Hatch - Corporate Controller, Central Services, Finance

Thank you, Adrian. Hello, everyone. On behalf of Franklin Covey, I would like to welcome you to our conference call to discuss our financial results for the second quarter of fiscal 2021. Before we begin, I'd like to remind everybody that this presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based upon management's current expectations and are subject to various risks and uncertainties, including but not limited to the ability of the Company to stabilize and grow revenues, the acceptance of and renewal rates for our subscription offerings including the All Access Pass and Leader in Me memberships, the duration and recovery from the COVID-19 pandemic, the ability of the Company to hire productive sales professionals, general economic conditions, competition in the Company's targeted marketplace, market acceptance of new offerings or services and marketing strategies, changes in the Company's market share, changes in the size of the overall market for the Company's products, changes in the training and spending policies of the Company's clients and other factors identified and discussed in the Company's most recent Annual Report on Form 10-K and other periodic reports filed with the Securities and Exchange Commission. Many of these conditions are beyond our control or influence, any one of which may cause future results to differ materially from the Company's current expectations. And there can be no assurance that Company's actual future performance will meet management's expectations. These forward-looking statements are based upon management's current expectations and we undertake no obligation to update or revise these forward-looking statements to reflect events or circumstances after the date of today's presentation except as required by law.

With that out of the way we'd like to turn the time over to Mr. Bob Whitman, our Chairman and Chief Executive Officer. Bob?

Robert A. Whitman - Chair and Chief Executive Officer

Thanks, Derek and hello to everyone. We appreciate you joining us today. Really happy to have the opportunity to talk with you. We're really pleased that our second quarter results were strong and even stronger than expected. We believe this again emphasizes the strength, quality, and durability of Franklin Covey's value proposition and of our strong subscription business model.

Specifically in the second quarter, as you can see in Slide 3, revenue was strong driven particularly by the strength and growth of All Access Pass and related sales. Gross margins increased 559 basis points compared to last year's already strong second quarter. Our operating SG&A declined by $2.4 million. Adjusted EBITDA increased to $5.1 million, which is the level $1.1 million or 26% higher than the $4 million of adjusted EBITDA achieved in last year's strong pre-pandemic second quarter and so the level significantly higher than our expectation of achieving between $1.5 million and $2 million in adjusted EBITDA for the quarter.

Our cash flow was also strong. Net cash provided by operating activities year-to-date increased 26% or $4.5 million to $21.9 million, ahead of the $17.4 million achieved in last year's second - year-to-date second quarter. And finally, we ended the quarter with approximately $55 million in liquidity, which is up from the $39 million in liquidity we had at the start of the pandemic one year ago. So we're pleased to be in this position.

Like to discuss these results in more detail in just a moment, but first some context. This strong and stronger-than-expected performance reflects the continuation and acceleration of four key trends we've discussed in the past three quarters and which continued in this quarter. Specifically, as indicated in Slide 4, these trends are first that the growth of All Access Pass sales has been very strong. Second that All Access Pass related services have continued to be strong and are now even higher than the very strong levels we had pre-pandemic. Third, our international operations have continued to rebound. And fourth, despite continued uncertainty during the first half of the year trends in our education business are really encouraging. I'd like to provide a little more detail on each of these trends.

First, as expected, the growth of All Access Pass and related sales which accounts for 83% of our enterprise sales in North America continued to be very strong. As shown in Chart A in Slide 5, you can see total Company All Access Pass pure subscription sales grew 13% in the second quarter to $17.5 million, have grown 14% year-to-date for the first six months and 15% for the total 12 months, the period which is the entirety of the pandemic to date, to $67 million.

In addition, as shown in Chart B, total Company All Access Pass amounts invoiced have been growing even faster growing 16% in the second quarter to $22.5 million and 30% year-to-date to $38.4 million. Importantly, much of this 30% year-to-date growth in All Access Pass invoiced amounts has been added to the balance sheet and will establish the foundation for accelerated sales growth in future quarters. Importantly, to us All Access Pass performance has been strong across all the key elements, which we pay attention to. The number of All Access Pass sales to new logos increased meaningfully both in the second quarter and in the latest 12 months.

As shown in chart C, our annual revenue retention has continued to exceed 90% and also the sale of multi-year contracts has continued to be strong with our balance of unbilled deferred revenue related to multi-year contracts increasing to $37.4 million as shown in Chart D.

Second, the sale of All Access Pass related services which is delivered primarily live online was also very strong in the second quarter. Chart A in Slide 6 shows the strong booking trend for All Access Pass add-on services, almost all of which are now being delivered live online. As you can see in Chart C, with the beginning of the pandemic in March of last year bookings of services delivered live on-site at client locations were necessarily canceled and the year-over-year dollar volume of services declined with delivered engagements down $6.9 million in North America in the third quarter. However, in the fourth quarter of fiscal 2020 new bookings increased levels nearly equal to those achieved in the fourth quarter of the prior year in '19. These strong bookings in turn drove an increase in the dollar volume of services actually delivered. As a result instead of being up $6.9 million as in the third quarter, the dollar volume of services delivered in the fourth quarter was off only $1.1 million. This same positive trend continued in the first quarter and accelerated in the second quarter with a result that in the second quarter sales were actually higher and year-to-date actually services revenue in North America has exceeded the levels achieved in last year's second quarter and first six months period pre-pandemic.

As shown in Chart B, 92% of our services are now being delivered to clients live online and this is important because with 92% of services now being delivered live online our momentum can continue regardless of when and whether organizations return to their offices.

Third, as shown in Slide 7, performance in our international operations has also strengthened in the second quarter. Sales in China, Japan, Germany and among other international direct offices and licensee partners continued to improve, continuing the trend established in both the fourth and first quarters. At the start of the pandemic, we had rescheduled substantially all live on-site training engagements in these countries. Since these countries were just starting to sell All Access Pass and therefore did not have a strong base of durable subscription revenue to cushion them, sales in these countries declined significantly compared to the third quarter of fiscal '19 and actually the decline started a little earlier in China in the middle of last year's second quarter with the onset of the coronavirus there.

As shown in last year's fourth quarter while still operating well below the levels achieved in the prior year's fourth quarter, sequential sales and sales as a percentage of the prior year in these countries began to improve significantly. Year-over-year sales improved further in the first quarter. We expect sales in these operations to continue to strengthen in the second quarter and we're pleased that they did. As shown in the second quarter, international sales were ahead of our expectations and just 14% lower than in last year's second quarter with most of this decline - year-over-year decline represented in Japan and UK, which have had a series of ruling shutdowns in their economy, which we expect will strengthen.

Importantly, another reason for actually a little bit of the decline is that we are having a good conversion of sales to All Access Pass, and that is putting - instead of putting the revenue into the quarter, just putting on our balance sheet and this is driving an increase in our balance of deferred revenue internationally that will help to drive strong sales force growth in the future.

Finally, as shown in Slide 8, in the Education Division, despite an educational environment which has continued to be very challenging, we've seen a strengthening in the trends of our education business both in the second quarter and year-to-date. This strengthening includes, number one, the number of Leader in Me schools which have renewed or are ready to renew their leader in Me membership increased to 1,059 during the second quarter compared to 725 schools at the same time last year.

And second, the number of new Leader in Me schools who have contracted by the end of the first quarter were in the process of contracting and is almost equal to that achieved in last year's second quarter pre-pandemic. Just note that there are also some positive trends in the education market overall despite the challenges, which we all know about. We expect these will help our education business during the remainder of this fiscal year and into next fiscal year. These trends include, one, increasing confidence among those in educational communities that most schools will be opened in the fall of this year, not certain but more confident. Second, that is shown in Slide 9 and as shown on Slide 9, the three COVID-19 stimulus bills passed by Congress in March last year, December and this March dedicated nearly $200 billion towards stabilizing budgets in K-12 schools with a disproportionate amount of that help coming to Title One schools where Leader in Me is often the strongest. And three, the third trend is that social-emotional learning for students called SEL which plays to the strength of Leader in Me continues to gain momentum. Its importance is being talked about everyday in the press. It's becoming increasingly required by districts.

Just one more note. To take advantage of the stimulus funding and SEL movement, or social emotional learning, our education team has added to its positioning efforts, helping the schools to take on the issues of learning recovery and the student and teacher mental wellness as these become the pressing topics the education community is trying to address and the Leader in Me is really designed to deliver on. Early indicators suggest this expanded positioning is working well. And so we believe these businesses and market trends will work in our favor. There is still be a difficult environment this year, but we're confident in the future of our education subscription business. We've been conservative about our expectations this year and feel good about our ability to meet those.

With this context, I'd like ask - turn the time to Steve Young and ask him to dive a bit deeper into our performance for the second quarter. Steve?

Stephen D. Young - Chief Financial Officer and Corporate Secretary

Thank you, Bob and everyone. I'm pleased to be on the line with you today to talk a little bit more about our second quarter results. So as shown in Slide 10, our performance for the second quarter was stronger than expected and showed positive momentum in almost every front. Our adjusted EBITDA for the second quarter was $5.1 million, an increase, as Bob said, of $1.1 million or 26% compared to last year's second quarter, an amount substantially exceeding our expectation of achieving second quarter adjusted EBITDA of between $1.5 million and $2 million. These results are even more notable given that last year's second quarter was itself very strong.

Our cash flow and liquidity positions also increased significantly. As shown in Slide 11, our net cash generated for the quarter of $5.2 million was $4.2 million higher than the $1 million of net cash generated in last year's second quarter. This reflects strong growth in adjusted EBITDA and significant growth in All Access Pass contracts invoiced resulting in our balance of billed and unbilled deferred revenue increasing by almost $13.2 million or 16% to $95.9 million in the second quarter.

As shown in Slide 12, our cash flow from operating activities for the second quarter increased $4.5 million or 26% to $21.9 million compared to the $17.4 million in last year's second quarter. This strong cash flow reflects that an additional benefit of our subscription model is that we invoice upfront and collect the cash from invoiced amounts faster than we recognize all of the income. As a result, we ended our fiscal year in August with more than $40 million of total liquidity, comprised of $27 million of cash and $15 million on an undrawn revolving line, which was an amount higher than at the start of the pandemic.

We are pleased that we added further to this liquidity during this year's first half. We ended the second quarter with $55 million of total liquidity, comprised of $40 million in cash, which means we had no net debt and with our $15 million revolving credit facility still undrawn and available.

So this good performance was driven by, first, strong revenue. As shown in Slide 13, our second quarter revenue of $48.2 million was driven by very strong performance in our North America operations and the continued outstanding performance of All Access Pass. Where as shown in Chart A of Slide 14, companywide All Access Pass subscription sales grew 13% in the second quarter, 14% year to date and 16% for the last 12-month pandemic period. And in addition to the All Access Pass subscription revenue recognized in the quarter, Chart B shows that we also achieved a very strong 16% growth in All Access Pass amounts invoiced to $22.5 million in the second quarter and grew 30% year-to-date to $38.4 million. Most of the significant growth in All Access Pass amounts invoiced was not recognized in the quarter but was added to the balance sheet as deferred revenue. This will, of course, be recognized and help accelerate our results in future quarters. These new invoiced amounts included strong sales of new logos, a continued quarterly and last 12-month revenue retention rate of greater than 90%, as shown in Chart C a large number of All Access Pass expansions and as shown in Chart D a significant volume of multi-year All Access Passes, which increased our unbilled deferred revenue significantly over last year's amount. Sales of services were also very strong in the second quarter. Services revenue in North America grew $7.7 million in the second quarter compared to $7.1 million in the prior year.

Second, as shown in Slide 15, the strong All Access Pass sales drove significant growth in our gross margin percentage again in the second quarter. As shown, our gross margin percentage in the second quarter increased 559 basis points to 77.5% from 71.9% in the second quarter of last year. As shown also, our gross margin percentage has increased 459 basis points year-to-date and 392 basis points for the last 12 months.

In the Enterprise Division, driven by the significant growth of the All Access Pass and related sales, our gross margin percentage increased to 81.7% compared to 76.1% in last year's second quarter, an increase of 562 basis points. Third, our operating SG&A in the second quarter was $2.4 million lower than last year's second quarter and $6.8 million lower than the first half of last year.

And finally, the combination of these factors resulted in adjusted EBITDA growing to the $5.1 million, an increase of $1.1 million or 26% compared to the just over $4 million of adjusted EBITDA achieved in last year's strong second quarter and significantly higher than our expected amount. The strong second quarter also resulted in adjusted EBITDA for the first six months of this year, reaching $8.8 million, a level only $200,000 less than the first half of fiscal 2020 which of course was pre-pandemic. Importantly, as noted, we also had strong invoiced and multiyear sales in the second quarter because most of these new invoice sales were subscription sales. These amounts were not recognized in the quarter, but went on to the balance sheet and added to our balance of billed and unbilled deferred revenue which will add to and be recognized in future quarters.

As a result, as shown in Slide 16, our total balance of billed and unbilled deferred revenue increased to $95.9 million, reflecting growth of $13.2 million or 16% to our balance of $82.7 million at the end of last year second quarter. As noted last year approaching $100 million of billed and unbilled deferred revenue is a big landmark for our subscription business and helps to provide significant stability and visibility into our future performance. This strong combination of factors continues to drive our expectation that we will generate very high growth in adjusted EBITDA and cash flow in fiscal 2021 and on an ongoing basis.

So we're pleased with the second quarter result and, Bob, turn the time back over to you.

Robert A. Whitman - Chair and Chief Executive Officer

Thanks so much, Steve. Just continuing, as shown in Slide 17, as reviewed last quarter, we expect to generate adjusted EBITDA of between $20 million and $22 million in fiscal 2021 and we are pleased to be off to a very strong start toward this objective. Achieving that range in adjusted EBITDA would represent an approximately 50% increase in adjusted EBITDA compared to the $14.4 million of adjusted EBITDA we achieved in fiscal 2020. And also as we've noted previously, our target is to see adjusted EBITDA now increase by approximately $10 million per year every year thereafter to at least to approximately $30 million in fiscal 2022, to $40 million in 2023 and so on. And these targets reflect our expectation that we'll be able to achieve at least high single-digit revenue growth each year, which is growth of approximately $20 million per year. But on an average approximately 50% of that amount of growth in revenue will flow through to increases in adjusted EBITDA and cash flow.

As we also said previously, we fully expect to achieve an adjusted EBITDA to sales margin of approximately 20% over the next few years as adjusted EBITDA approaches $60 million and to become $1 billion market cap company even at the adjusted EBITDA multiple of around 15% that is conservative relative to our adjusted EBITDA growth rate, which is more like 35%. And this of course doesn't reflect the multiple of - that we'd ever get a multiple of revenue which is often achieved by companies with similarly successful subscription-based business models.

So looking forward, as we've discussed, substantially all our growth has been and is being driven by growth in All Access Pass and related sales. This strong growth in All Access Pass and related sales has continued strong through the pandemic you've heard and we expect it to continue to drive significant growth in the future.

Like to just briefly highlight three factors that we expect will continue to drive significant growth in our subscription business and which will drive the very significant growth in sales and profitability in the coming quarters and years. As shown in Slide 18, these are first driven by growth in All Access Pass. We expect substantially all of the Company's sales to be subscription and subscription-related within the next three to four years.

Second, we expect that the already significant lifetime customer value of an All Access Pass holder will actually continue to increase. And third that as we continue to aggressively grow our salesforce and our licensee network, the volume of new high lifetime value All Access Pass logos will accelerate. Just like to touch on each of these three quickly.

First, as indicated in Slide 19 driven by growth in All Access Pass-related sales we expect that substantially all of the Company's sales will be subscription and subscription-related within three to four years. As this almost complete conversion to subscription and related revenue occur we expect virtually the entire Company to be able to generate the same kinds of growth in revenue, gross margins, revenue retention and customer impact we've seen in our subscription business over the past five years. We expect this almost total transition to be driven by the following three things.

One - first, by the continued strong growth of All Access Pass and related sales in the Enterprise Division in North America where All Access Pass already accounts for 83% of sales. As shown in Slide 20, All Access Pass and related sales represented only 13% or $13.7 million of total sales in North America in 2016 when we first introduced All Access Pass. The dramatic, sustained, compounded growth since then has resulted in All Access Pass and related increasing to $94.3 million for the latest 12 months through this year's second quarter. And with annual All Access Pass-related sales growth expected to continue to grow at more than a double-digit pace and with our historical legacy sales now at very low levels and expect to remain flat or decline a little bit further, we expect All Access Pass and related sales to increase to more than 90% of total North America enterprise sales over the next few years.

The second major driver to becoming almost totally subscription and related is the conversion of the majority of our international operations to All Access Pass and related in the coming years. In addition to the 83% of North America enterprise sales, which were already All Access Pass, the growth in penetration of All Access Pass has also progressed rapidly in our English-speaking international direct offices. As you can see in Slide 21 from having almost no subscription sales in these offices just five years ago, All Access Pass and related sales for latest 12 months now account for 74% of total sales in the UK and 69% in Australia for the last 12 months. Both these offices are well in their way toward the same 90% penetration we expect to achieve in North America.

As you know, our largest international direct offices are in China and Japan, both of which are in the early stages of conversion to All Access Pass but accelerating. Having made the conversion to All Access Pass in the US and Canada, the UK and Australia, we know what the play is. We are confident the China and Japan will also convert the vast majority of their revenue to All Access Pass and related in the coming years. And then the final driver of increased subscription penetration is the other area of the company is our education division, which accounts for 22% of sales.

Slide 22 shows within our K-12 business, 70% of our sales were subscription - were pure subscription for the latest 12-month period through this year's second quarter. Slide 22 also shows the significant increase in subscription sales in our K-12 business over the past years and we expect both our K-12 and higher ed businesses to continue to advance toward the same 90% subscription that we are close to in North America, which we're on the way to in the UK and Australia and which we will achieve also in China and Japan. With this combination of the 82% and everything else moving, we expect virtually the entire business to reflect the higher growth, higher margin, higher retention properties for subscription operations in the coming years as you've seen. And the impact will be what we've already seen in North America and on the total business.

I'd now like to ask Paul Walker to address the other two elements behind our expected accelerated growth in our subscription business. Paul?

Paul Walker - President, Chief Operating Officer and President Enterprise Division

Thank you, Bob, and good afternoon everyone on the phone. For the second factor that we expect will continue to drive significant growth in profitability as shown there in Slide 23, point number two, is that the already significant lifetime customer value of our All Access Pass holders has increased and will continue to increase in the future.

As shown in Slide 24, All Access Pass has, first there at the top, a relatively large and increasing pass size of $38,000, up from $31,000 just a year ago. Second, the pass has an annual revenue retention rate of greater than 90% which was the case even throughout the pandemic. Third, a services attachment rate of 44% and I think important to note that that's up from just 17% a few years ago. The combination of All Access Pass, the pass itself and the related attached services now total approximately $55,000 per pass-holding customer and that numbers continue to increase. And then fourth as shown here, the blended gross margin on the pass and the related services combined have a gross margin of greater than 85%. These strong economics are driving a very significant lifetime customer value.

In fact, this customer value is quite a bit higher than we had under our previous legacy pre-subscription model. For example, as shown in Slide 25 a prior client, an example client, spending $10,000 in a given year under our legacy model, typically spend about twice that or $20,000 over three years and has a gross margin of about 70%. In contrast, a typical All Access Pass customer today spends approximately $55,000 on a combination of their pass and the related services in their first year, $49,500 in their second year and $44,500 in their third year for a three-year total of $149,000 between the pass and the related services. Stated a minute ago, whereas the old model was about a 70% gross margin, this new blended margin on All Access Pass and related is greater than 85%. That's the second reason.

The third reason is indicated here - as indicated here in Slide 26, the third factor for driving our expectation of significant revenue and profitability growth is that as we continue to aggressively grow our sales force and our licensee network, the volume of new All Access Pass logos will accelerate. The combination of one, our high and growing lifetime customer value; second, our less than one-to-one cost of acquiring a new customer and third our approximately one-year payback on the investment in hiring a new client partner makes the economics of growing our sales force extremely compelling.

As shown in Slide 27, over the past five years we've added 74 net new client partners in our direct offices. More than half of these client partners are only midway through their five-year ramp-up to $1.3 million in annual sales volume. We expect these ramping client partners to generate significant revenue growth over the next few years as they complete their ramp and we also have a lot of headroom to add additional client partners. As shown in Slide 28, this is just the US and Canada example alone where we currently have 179 client partners across both enterprise and education. We have room to add at least an additional 435 client partners in the coming years. We expect that the combination of ramping the existing client partners and hiring at least 30 net new client partners each year will allow us to add a significantly increasing number of new logos, which in turn will generate very significant and increasing lifetime customer value. And so we believe that the combination of these three factors will continue to drive significant growth in sales and profitability in the quarters and years to come.

Bob, I'll turn it back to you.

Robert A. Whitman - Chair and Chief Executive Officer

Great. And I'll turn it to Steve Young to address our guidance now. Thank you very much, Paul. Steve?

Stephen D. Young - Chief Financial Officer and Corporate Secretary

And I'll keep the ball. So our guidance for FY '21 as discussed in past quarters is we expect to generate adjusted EBITDA between $20 million and $22 million and we affirm that guidance. This result would be an approximately 50% increase compared to the $14.3 million of adjusted EBITDA achieved last year. This expected growth reflects everything that Bob and Paul talked about, including the continued strong performance of our North America operations.

Underpinning this guidance for the year are the following expectations that we talked about last quarter and that are still consistent with our year-to-date results. First, that a significant portion of the deferred revenue on the balance sheet and a portion of the contracted unbilled deferred revenue will clearly flow through to recorded sales as expected.

Second, that the All Access Pass will continue to achieve, one, strong growth in both sales and invoiced sales, high revenue retention rates, strong sales of new logos and continued growth in pass expansion and multi-year contracts. We also expect that All Access Pass add-on sales will continue to be strong.

Third, that net sales in Japan, China and among our licensees will continue to strengthen. The increase in the All Access Pass sales which we expect to achieve in these countries will, of course, result in a portion of the new sales to be added to the balance sheet as deferred revenue.

And four, that in education we expect to continue to achieve strong retention of both schools and revenue among existing Leader in Me schools. And despite the fact that the environment could be challenging and budget-constrained for education in the remainder of FY '21, we still expect to achieve growth in a number of new Leader in Me schools beyond the 320 schools achieved in FY '20. So that's our overall guidance that we are affirming that guidance.

For the third quarter of fiscal 2021 we expect that adjusted EBITDA will be between $4 million and $4.5 million compared to the adjusted EBITDA loss of $3.6 million in last year's pandemic-impacted third quarter. Please note that among - that the amount of adjusted EBITDA expected in Q3 is not only more than $7.5 million higher than last year, it is also higher than the adjusted EBITDA result of $3.1 million achieved in the third quarter of FY '19. So that's our guidance.

Now our general targets for years beyond 2021. As we said before, building on the $22 million of adjusted EBITDA that we expect to achieve this year and driven substantially by the expected continued growth of All Access Pass, our target is to have adjusted EBITDA increase by around $10 million per year to around $30 million in FY '22 and to around $40 million in FY '23. These targets reflect our expectations of being able to grow at least high single-digit revenue growth and approximately 50% of that growth in revenue will flow through to increases in adjusted EBITDA. While changes in the world's business outlook and many other factors could impact our expectations, we wanted to share these as our current internal targets and assumptions.

We also want to mention again that not only are these our targets but then when you read our last proxy, you noted that these are the targets that are tied - that are tied to us achieving our LTIP awards.

So that's our guidance, Bob, and turn the time back over to you.

Robert A. Whitman - Chair and Chief Executive Officer

Great. Thanks so much and really want to express appreciation to the whole Franklin Covey team and to all of you for your support and guidance throughout this past year. We're delighted to be where we are and grateful and really excited about what's ahead of us.

At this point, we'll open it to questions.

Question & Answers

Operator

Thank you. [Operator Instructions] And our first question comes from Andrew Nicholas, William Blair. Your line is open.

Andrew Nicholas - William Blair - Analyst

Hi. Good afternoon.

Robert A. Whitman - Chair and Chief Executive Officer

Hi. How are you?

Andrew Nicholas - William Blair - Analyst

Good, good. First, I was kind of hoping you could outline specifically where you saw better than expected performance in the second quarter and - at least relative to your internal expectations. And then kind of relatedly, trying to get a better feel for the rationale for maintaining the full-year guide. Looks like what's implied for fourth quarter adjusted EBITDA is a decent step-down from your historical averages in the fourth quarter and even in the fourth quarter of last year. So is that a function of some conservatism or is there a pretty meaningful increase in expense spend in the back half of this year? Just kind of help me pick that apart a little bit if you wouldn't mind.

Robert A. Whitman - Chair and Chief Executive Officer

Great. Yeah. Taking the last question first, I think your observation is our observation too which, yes, primarily we think conservatism just recognizing that a lot of our education sales occur in the first quarter that environment continues to be uncertain, although like we said, we feel there are some good things there. It just felt like while the trend being up versus expectation in the first and second quarters and feeling good about the third, it's possible that at this time next quarter we'd be adjusting our guidance. We just felt like it was probably wise just to get a better handle on where education is looking going into the fourth quarter, which we will have a really good handle on we think by May and June. So it's really primarily that. There is no expectation of anything - any of the existing trends not continuing, if that's helpful.

We will have some additional spend that will be in the function of new hiring - hiring of new salespeople, which we have new sales classes coming on. Those aren't massive incremental investments, but those are some. There are some there. Also, although it doesn't affect adjusted EBITDA as much, there will be some expense. Last year, the bonuses and other things, of course, were - well, some of that will hit adjusted EBITDA and reduce. It's not enough to change the general trends. So it's more just trying to feel like we have a really good handle. By the time we would - if we were to change our guidance we do that knowing where we believe education is. Does that respond [Phonetic] on the second half of that question?

Andrew Nicholas - William Blair - Analyst

Got it. That's helpful.

Robert A. Whitman - Chair and Chief Executive Officer

And next to the question of where we -

Andrew Nicholas - William Blair - Analyst

And then just - yeah [Speech Overlap], sorry.

Robert A. Whitman - Chair and Chief Executive Officer

Yeah. As to the quarters where we over performed a bit, Paul and Jen and Sean, would you like to address that? There were a couple of areas of overperformance.

Paul Walker - President, Chief Operating Officer and President Enterprise Division

Yeah, sure. Hi, Andrew. This is Paul. I will just take a quick comment on, first of all, as noted in the prepared remarks All Access Pass, I mean, it continues to chug along and do very, very well. And so that was - we saw great growth there in the number of new logos, revenue retention stayed high again and services have come back quite nicely and even a bit ahead of where we maybe thought they would have been in the second quarter. And then also international direct while we knew it would improve it's - it was only off 14% in the second quarter and that - so that continues to strengthen for us.

Then, of course, our gross margins as we convert to All Access Pass and the mix of business shifts, that continues to benefit our gross margins greatly which, of course, drops to the bottom line. So I'd say, those would be three on the enterprise side.

Robert A. Whitman - Chair and Chief Executive Officer

Yeah.

Andrew Nicholas - William Blair - Analyst

Got it. No, that's all helpful color. And then maybe as my follow-up, Bob, you mentioned it in your response to the second part of my question earlier or touched on it a bit. But just kind of sticking with education, I was wondering if you could speak a little bit more to kind of how you're seeing that recovery unfolds, what the cadence might look like there? And maybe at what point are you anticipating returning to pre-pandemic revenue levels? Is that something we can reasonably expect in fiscal '22 or is it another year or two out from there?

Robert A. Whitman - Chair and Chief Executive Officer

Yeah. Great. Thanks. Sean, would you like to address the first part and I'll just do the very end?

M. Sean Merrill Covey - President, Education Division

Yeah, sure. Thank you. So I think that we're - here's what we're seeing right now is we're starting to get a lot more phone calls accepted, visits accepted. In the first quarter our delivered coaching days were down 55%. This quarter they're down about 24%. We expect them to be up in the third quarter by probably about 25%. So it's going the right direction. So we're having more opportunities to get into schools. That's a really good thing. Schools are opening up. It's different by state, by county and district, but that's a positive trend.

And our retention has been strong. As you can see that's been - we've been up about 300 schools compared to last year in terms of the number of schools that we're maintaining. The thing that's still a little bit uncertain is just decision making by some of the districts and people are still kind of holding out longer than usual. So we do believe that we'll get more schools in in the fourth quarter than we did last year. We brought in 320 last year. We think we'll be that this year. And it's hard to say, but I think that it might be mid-year next year before we fully recover next fiscal year. But the trends are going in the right direction and we expect - we expect things to improve in the third quarter and the fourth.

Bob, what would you add?

Robert A. Whitman - Chair and Chief Executive Officer

Yeah. No that was great. And I just - I would just put really hardly anything. The only thing I'd add is just give perspective on numbers that in fiscal '19 we added 520 new schools, last year was 320 which was amazing in a way given the environment. As Sean said, we think we'll do somewhat better than that, maybe close to 400 this year, but expect to be kind of back on that track to 500 plus next year.

Andrew Nicholas - William Blair - Analyst

Got it. And then, sorry, just if I could squeeze one more in on education. How much of your targets for '22 and '23 are dependent on kind of a re-acceleration in that business? And I'm just kind of thinking about if there is some disruption to the fall calendar or into next year's school year, if that is a meaningful deterrent or if you think that kind of the momentum in the enterprise business is enough to overcome that at least [Phonetic] temporarily?

Robert A. Whitman - Chair and Chief Executive Officer

Yeah. That's a great question. That's really a great question. And the short answer is that our guidance - our outlook of being able to generate $10 million or so EBITDA growth a year is really not very dependent on either the growth of education or even our international operations because All Access Pass related sales have been growing by close to $20 million a year on their own in North America and UK and Australia. And so just if those keep on pace, that's 80% of what we're talking about, does not include much - does not include a big recovery or none of it requires a big recovery. And when we gave those numbers, we knew this is a little uncertain. So we felt like we should just assume that education and international recovered more slowly. They're doing better than we thought at the time we gave that outlook. So most of the outlook is driven by North America All Access Pass sales.

Andrew Nicholas - William Blair - Analyst

Great. Okay. Thank you. Have a nice weekend.

Robert A. Whitman - Chair and Chief Executive Officer

Thanks for great questions. [Indecipherable]

Operator

And your next question comes from Marco Rodriguez from Stonegate Capital. Your line is open.

Robert A. Whitman - Chair and Chief Executive Officer

Hi, Marco.

Marco Rodriguez - Stonegate Capital - Analyst

Good afternoon, everyone. Hey, guys. Thanks for taking my questions.

Robert A. Whitman - Chair and Chief Executive Officer

Thank you.

Marco Rodriguez - Stonegate Capital - Analyst

Hey. I was wondering if you could maybe spend a little more time on the salesforce and the client partners. Just kind of wondering what sort of activities you might have - or you're expecting rather in the second half of '21. Are there maybe any sort of new different incentive structures you might be playing around with or thoughts as far as accelerating pace of hiring or changes in hiring strategies, any sort of marketing events?

Robert A. Whitman - Chair and Chief Executive Officer

Yeah. Paul and Jen, do you want to address that?

Paul Walker - President, Chief Operating Officer and President Enterprise Division

Jen, do you want to take that one?

Jennifer Colosimo - President, Enterprise Division

Yes. Thanks, Marco. Jen Colosimo. In terms of what we're seeing and what's driving the acceleration is really the ecosystem of the hiring happening and a strong sales enablement process around onboarding. We're seeing them get much quicker starts, which has been wonderful to see throughout the pandemic. That linked up with what we're seeing in thought leadership, we have increasing exposure in thought leadership in terms of article placement, what we're getting in terms of podcast and more social. It's the ecosystem of marketing, the sales enablement and a really strong management team executing on strategy and building an inclusive environment. So all of those together have accelerated what we're seeing happening in terms of our on-boarding and our ability to continue hiring at the pace that we have.

Paul, what would you add?

Paul Walker - President, Chief Operating Officer and President Enterprise Division

I would just add - I think that was great. I would just add that we've recently added one more recruiter to our staff of internal recruiters, recognizing that we're going to accelerate the number of new client partners being added. So now we have a team of six that do that full time for us in addition to what Jen said.

And then as far as down the road, I think we'll look at as we grow towards having many hundreds of client partners, for example, just in North America, I imagine the structure will look a little bit different there. And we might - up to this point, we haven't really divided our sales force out among different-sized organizations. I think we're having - well, I don't think we are having discussions about that. I think in the years to come, we will do some about that we think will even accelerate our ability to add more client partners in earlier. And we might get to a point where we're actually north of net 30 [Phonetic] a year.

Marco Rodriguez - Stonegate Capital - Analyst

Got it. Very helpful. And then kind of sticking around with the client partner activities. Just obviously given the pandemic and you had a slide in your presentation where a lot of the interactions or the vast majority of the interactions have shifted to kind of an online delivery model. Now that the vaccines are sort of rolling out, how are you guys going to thinking about that impact as it relates to client partner travel? And maybe if you can speak to what you might be expecting or how you're thinking about your overall employee base and the whole work-from-home experience?

Jennifer Colosimo - President, Enterprise Division

Paul, I can speak to that.

Paul Walker - President, Chief Operating Officer and President Enterprise Division

Great. Thanks, Jen.

Jennifer Colosimo - President, Enterprise Division

Of course, Marco, if a client wants to see us face to face - in fact, I was on with several client partners today that have face to face meeting scheduled, lunches breakfasts events at their office space, if that client is returning whether to a hybrid model or to an all-in-office model, we of course want to meet with them.

So it really is very client-dependent as you see in the marketplace what that client is expecting to do and how they'll hope to interact with us. I do not expect us to return anytime soon to the same sort of travel that we had previously simply because the clients aren't looking to that kind of travel. So from a travel standpoint, we are looking at what makes sense based on our client bias, which as you might expect is differential dependent on province or state in Canada and the US.

Marco Rodriguez - Stonegate Capital - Analyst

Got it. Very helpful. Thank you guys for your time. Appreciate it.

Robert A. Whitman - Chair and Chief Executive Officer

Thanks, Marco. Appreciate it very much.

Operator

And the next question comes from Jeff Martin from Roth Capital Markets. Your line is open.

Robert A. Whitman - Chair and Chief Executive Officer

Hi, Jeff.

Jeff Martin - Roth Capital Markets - Analyst

Thanks. Good afternoon. How are you?

Robert A. Whitman - Chair and Chief Executive Officer

Good. How are you doing?

Jeff Martin - Roth Capital Markets - Analyst

Good. Thanks. Good. Thanks. Was curious if you could expand on the opportunity within education specific to how the stimulus programs benefit you and how they're going to need to basically reinvigorate the teachers and the students back to kind of normal. And are you doing anything for social and emotional learning different than you otherwise would have when you go work with existing and new schools?

Robert A. Whitman - Chair and Chief Executive Officer

Great. Sean, would you like to address?

M. Sean Merrill Covey - President, Education Division

Yes, yes. Hi, Jeff.

Jeff Martin - Roth Capital Markets - Analyst

Hi, Sean.

M. Sean Merrill Covey - President, Education Division

Sure. Yeah. Here is what we are seeing. We're thrilled about the three big COVID bills. It's going to bring a lot of money in. The amount - the $200 million over the last year compares to about - $200 billion, excuse me, compares to about $50 billion that typically the federal government spends in K-12 education. So it's like a three-fold increase. This will help supplement for some of the budget cuts and - so that's a good thing. It will also help with Title 1 schools primarily, which is where we are strongest. Over 60% of our business is with Title 1 schools. These are schools that have high poverty. So we're doing a lot to try to take advantage of this.

We have - in the last just few weeks we've bid on bigger requests for proposals, RFPs, than we ever had before. And a lot of these are around what we call learning recovery. Learning loss is a big factor. The schools are very concerned that students have lost a whole year of learning and that's going to impact them long term. And so we've added to our positioning this whole learning recovery [Indecipherable] on top of our marketing and positioning where we're going out to schools and districts and saying, hey Leader in Me is actually really good at helping you recover learning. We've got a solution to help you do that.

So we're taking advantage of this by going after stimulus money. We're targeting it. We recently hired a person that's a specialist in this area. There's a lot of money to be had. And this won't just be for a few months. This will last for a couple of years, all those money. So it's kind of a long-term play over the next two to three years. Student and teacher wellness is another big factor. There has been a lot of trauma for students and for teachers, just the changes and - that we're in school, we're out, the hybrids, the amount of stress that's created. That's been a huge factor.

In fact those are the top two hot topics right now is what do we do with all those learning loss and what can we do with helping meant - helping them with wellness with teachers and students. And so we're also going after that. We've actually created just in the last two months some new products that are part of Leader in Me, but they're kind of again with adjacencies to it to go after teacher and student wellness.

So we feel like this is a big opportunity for us. We think SEL, social emotional learning, is right down our alley. So we're going to - this is why we're pretty bullish about the future as we feel like we can really take advantage of the stimulus money, do a little bit of repositioning of the Leader in Me to take it to leverage these hot topics that we're seeing right now.

So, Jeff, is that responsive to your question?

Jeff Martin - Roth Capital Markets - Analyst

Yeah. That's very helpful. I mean, I think it's intuitive that Leader in Me plays an important role here. And it strengthens the value proposition is kind of the way I see it.

M. Sean Merrill Covey - President, Education Division

Yeah. It does. It does.

Jeff Martin - Roth Capital Markets - Analyst

Okay. I have a couple more real quick here. Was curious, Bob, if you could elaborate on where you are with respect to the rollout of the All Access Pass subscription model internationally. I know that's hard to do because you got to decipher across regions. But from a high level, how much of the international markets are actively selling All Access Pass now, which ones are kind of pending some additional work that needs to be done? And with respect to the license partners, kind of same question, how much - how many of them or what percentage of them are actively selling All Access Pass today?

Robert A. Whitman - Chair and Chief Executive Officer

Great. Yeah. We mentioned in the script that - the prepared remarks that in the English-speaking and UK and Australia they already at about 70% All Access Pass. And so that's been going concurrently.

Paul, do you want to talk about the efforts to convert the licensees and our offices in Japan and China and Germany?

Paul Walker - President, Chief Operating Officer and President Enterprise Division

Yeah, you bet. Hi, Jeff. Okay. So in Japan we've now - we're now well underway. In fact, Japan is approaching a quarter of their client base now converted to All Access Pass. And we kind of see - we see that playing out as maybe a third, a third, a third over the next three years such that three years from now there'll be - their business will look very much like the US and Canada, the business today. And as Bob mentioned that's driving our ability to say, we think that in three to four years time, we'll have 90% or so of the whole Company will be subscription-related. So that's Japan. They are quarter the way in, probably get to a third by the end of this fiscal year and then we'll move on from there.

China is right on their heels where now we have the portal up in China. It's up and running. We're doing a significant amount of sales training, getting all the - all the things we did in the US and the UK and Australia to get to where we are, we're doing in Japan and now we're starting to do in China. And they'll probably be on a similar path of Japan, probably trail six or eight months just because they're not - they're not quite there yet. But we're starting in China. We have - we've actually sold a couple of All Access Passes, have a really interesting one we're excited about. Right now, we're talking with a client over there.

I think it's important to note that in China we do a lot of delivery to US multinational and other multinational companies that have a presence in China. So we're delivering the All Access Pass to clients all over in China right now. But we're talking specifically here about sales made in China to companies in China and that's where we're just getting going right now. So that's Japan and China.

In the licensee partners, we are actually - that business is growing - All Access Pass is growing pretty well inside the licensee operations. We have one of our partners in the Benelux region. Their business looks now like the US. They're - right near 90% of their business is now All Access Pass and related. Our Middle East operation is well north of 50% All Access Pass and related. Singapore, Hong Kong, Taiwan, they're about a third of the way there. So we're pleased. It's a little bit of a different dive getting them as our licensee partners across on that, but every month, every quarter, their business is converting. And I think we're on a similar timeline with them as we are in China and Japan.

I think we're looking at three years from now, maybe four at the outside marker there. Substantially everything in enterprise, whether it's direct or licensee sold, we will be at that kind of 90%-ish All Access Pass and related.

Robert A. Whitman - Chair and Chief Executive Officer

And, Jeff, and the thing of course as it relates to the whole business model and you asked the question, but when you start having more than 90% retention of all the revenue around the world versus the old model which was 60% or 65% and starting from that base every year and then with new customer engagement model allows you to stay inside with clients and help those clients to grow and expand and increase their lifetime value is both strategically and financially a very different thing as you're seeing in North America.

Jeff Martin - Roth Capital Markets - Analyst

Sure. That's great detail. Thanks for that. And then final question is with respect to gross margins. I mean, you detailed the All Access Pass model is generating for mature clients generating 85% gross margins. Is that what you're seeing across the client base or was that a unique example?

And where do you see, once you're fully rolled out with All Access Pass to the level and degree that you are in North America internationally, where do you see the - what do you see the gross margin profile of the business looking like at that point?

Robert A. Whitman - Chair and Chief Executive Officer

Yeah. Steve, you maybe want to add some things to this. I'll just maybe set the context and say that the 85% gross margin is pretty good balanced, what it should be for an All Access Pass client because that's a balance of subscription plus 45% services. So it gives you that blend. And so directionally as the - as that becomes the norm across the world that our margins will continue to creep up as they have. That might not happen every quarter because you may add more services.

The mix may not stay every quarter being exactly the same mix. But we've seen the services repeat really at about the same - the same-store basis or same client basis at about the same level. So we think that's a model that our gross margins will tend to increase over time. Some things that work against that and mute it a little bit is that as services grow in some areas where they don't yet have - they're selling All Access Pass, not as much add-on services, they'll get to 85%, but then it won't be - it could mute the overall companies a little bit as that happens. But I think overall, you can think of a world where the margins will move toward that and we will always have 10% of our legacy, because that's a good way to - somebody has a corporate meeting and they want to invite one of our consultants to come and deliver training there and they don't - that's a lead-in to do an All Access Pass or somebody gives a speech. And so we'll always have 10% that will be there, but the rest of it will tend to move toward that.

I don't know, Steve, what you would add to that.

Stephen D. Young - Chief Financial Officer and Corporate Secretary

No, Bob. That's exactly what I would say. Our gross margin is primarily a function of mix. The pandemic - one of the benefits of the pandemic, if you will, or one of the impacts is the mix shifted toward subscription. So just as Bob was saying if the mix - while the subscription business will continue to grow over time and that will cause the margin to go up, if the other areas as they come back could have some reduction for a while. And particularly travel, maybe 100 basis points of our improvement is related to travel. When travel comes back it will impact our gross margin, but not our EBITDA. So Bob, exactly what you - what you said -

Robert A. Whitman - Chair and Chief Executive Officer

Jeff, the reason why that travel does - sorry, Steve, go ahead.

Stephen D. Young - Chief Financial Officer and Corporate Secretary

No, go ahead.

Robert A. Whitman - Chair and Chief Executive Officer

No, why don't you explain just why that - how travel plays into that? It's not our corporate travel. It's travel of consultants to client sites. [Speech Overlap]

Stephen D. Young - Chief Financial Officer and Corporate Secretary

Yeah. So the reason it doesn't impact - it doesn't impact our adjusted EBITDA because, well, we bill the customers and get reimbursed. But it's a meaningful amount that hits revenue and cost of sales with zero margin. So you can just think of it as sale of zero margin. So it impacts our gross margin percentage a bit while not hurting our adjusted EBITDA. So that means there just be a little bit of a coming out of the pandemic adjustment to gross margin. And then a long-term increase of gross margin as the mix of the whole Company shifts more percentage wise towards subscription.

Jeff Martin - Roth Capital Markets - Analyst

Got it. Thanks for the color and have a nice holiday weekend.

Robert A. Whitman - Chair and Chief Executive Officer

Right. You too, Jeff. Thanks so much.

Operator

And that concludes our question-and-answer session. I'll turn the call back over to Bob Whitman for final remarks.

Robert A. Whitman - Chair and Chief Executive Officer

All right. Again, thanks to each of you for your support and confidence through this period. We're grateful to you, grateful to our team. Just want to express maybe publicly the - you've heard from our amazing executive team that they really are incredible. And just in every area you couldn't have better leaders who have more engaged employees in the middle of this pandemic.

Our employee engagement scores actually went up. They were already high. You'd expect we have a good culture. But they actually went up to new levels just showing that what trust does even in difficult times, trust and leadership does. And so I'd love to [Phonetic] admire our people and both our executive team and all of our leaders and people. And just, I think it's an important point. It's one of our huge strategic advantages.

So thanks to all of you and have a great holiday weekend and we look forward to talking to any of you who would like to follow up just as soon as you'd like. Thanks so much.

Operator

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Q2 2021

Earnings Transcript

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