Franklin Covey Co. (FC) Q4 2016 Earnings Report, Transcript and Summary

Welcome to the fourth quarter 2016 Franklin Covey earnings conference call. My name is Ann and I will be your operator for today’s call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Derek Hatch, Corporate Controller. Please go ahead.

Thank you, Ann. Good afternoon, everyone and on behalf of the company, I would like to welcome you to our fourth quarter and fiscal 2016 earnings call this afternoon. Before we get started, I’d 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 ability of the company to hire productive sales professionals, general economic conditions, competition in the company’s targeted marketplace, market acceptance of products and 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 training and spending policy of the company’s clients and other factors identified and discussed in the company’s most recent annual report on Form 10-K and other periodic reports filed with the Securities and Exchange Commission. Many of these conditions are beyond our control or influence, any one of which may cause future results to differ materially from the company’s current expectations and there can be no assurance that the company’s actual future performance will meet management’s expectations. These forward-looking statements are based upon management’s current expectations and we undertake no obligation to update or revise these forward-looking statements to reflect events or circumstances after the date of today’s presentation except as required by law. With that out of the way, I would like to turn the time over to Mr. Bob Whitman, our Chairman and Chief Executive Officer. Bob?

Good afternoon, everyone. We appreciate each of you joining us. We're happy to have the chance to talk today and I’d like to briefly discuss just four things. First, I’ll talk about the continued significant growth of All Access Pass and how our key assumptions about how All Access Pass can affect and significantly increase lifetime value of our customers who are playing out today. Second, I’ll review our progress results for the fourth quarter and full year on both a reported basis and on an apples-to-apples pre-deferral basis. Third, just touch on five things which we believe will help to accelerate our growth in the coming quarters, things we're excited about and we think hopefully you will be as well. And finally, provide an update on our outlook and guidance for fiscal 2017. I’m going to start to out with on the -- talk about All Access Pass. As you can see in slide 3, we achieved significant All Access Pass growth again in fourth quarter. As you can see, we invoiced 13.7 million in All Access Pass and All Access Pass related services, representing significant growth compared to the 6 million in the third quarter, the 3.1 million in second quarter and then almost 400,000 in the first quarter. The 13.7 million invoiced in the fourth quarter is actually greater than all of the All Access Pass Amounts invoiced for the first three quarters. Combined, we felt very good about the momentum then. For the full year, we invoiced 23.2 million in All Access Pass and pass holder related services and products of which approximately 16 million was recognized as revenue in the year with 7.25 million being added to the balance sheet as deferred revenue at year end with an embedded contribution to adjusted EBITDA in that 7.5 million, approximately 6.2 million, which we recognized in fiscal 2017. Second point is All Access Pass’s share of total amounts invoiced in the offices that have been selling it has also increased significantly. There's also, as you can also see, in slide 3, the second line from the bottom, All Access Pass’s share of the total amounts invoiced by these offices increased significantly over the past three quarters for those offices which are selling it, which are primarily the US direct offices, the English speaking direct offices in the UK and Australia and our government group. As shown, the amounts invoiced related to the All Access Pass increased from just 2% of amounts invoiced in the first quarter when we were first just testing All Access Pass to 14% in the second quarter, to 26% in the third and 47% in the fourth quarter. For the year as a whole, All Access Pass’s related amounts invoiced accounted for approximately 24% of those offices’ total amounts invoiced for the full year. Third point about All Access Pass is that, it's also been a key driver in the company’s significant growth in overall intellectual property sales. As you can see in slide 4, the amount of high margin intellectual property that's been invoiced including All Access Pass, single content intellectual property licenses and the sales of training manuals to client employee facilitators, has also grown significantly since the introduction of the All Access Pass. As you can see, after a 7% decline in last year’s first quarter in total IP sales, year-over-year growth in total invoiced intellectual property was up 29.3% in the second quarter, 31% in the third quarter and up 27% in the fourth quarter, even against what is typically a very tough year-over-year comp for the fourth quarter. This growth in intellectual property related sales has been exciting and significant. In the last few quarters, it’s also been offset by a multi-quarter decline in revenue from on-site training days delivered by our consultants and so the total impact of those intellectual property sales hasn't been seen in the overall result. However with the increasing amounts of add-on services being purchased by All Access Pass holders, we expect that in the coming quarters, these declines in on-site services will flatten and only turn positive and then this great terrific growth on the IP side will then become more prominent in driving growth. Finally, as it relates to All Access Pass, as a result of All Access Pass, we expect the lifetime value of our customers to increase significantly. We’ve said in the past that we expected the All Access Pass will significant increase the lifetime value of our customers as a result of, a, having a higher initial sales, b, providing a natural path for selling more add-on services and training materials and, c, having a high renewal rate. Our indications to date, although, it’s still relatively early are that each of these benefits is likely to be realized. First, in terms of average spend, as you can see in slide 5, the average spend for customers who became All Access Pass holders in fiscal 2016 is significantly higher than it was for those same customers in fiscal 2015 before they became All Access Pass holders. As shown, 264 clients who were active facilitator clients in fiscal 2015 became All Access Pass holders in fiscal 2016. For the full year of 2015, these 264 clients spent 9.8 million, whereas in fiscal 2016, these same clients who are now All Access Pass holders spent 14.5 million, an overall increase of 48%. Second, so the average spend we think is proving to be higher in almost every case and that's just the starting point. Second, add-on services, although, the majority of All Access Pass holders purchased the pass just a few months ago, cumulatively, they have purchased 3.1 million of additional services and products through the end of October, an amount already equal to approximately 13% of the original spend on their All Access Pass purchase. We expect the purchases of service and products to continue to increase as we hope discovery days with each new All Access Pass holder and as their usage of All Access Pass increases. So that we think led to their initial sales, how do we get even bigger is you add on additional services, which historically as we’ve sold facilitator materials, there hasn't been a natural path for going bigger, because they just are now facilitated by materials each year. Now, we're in there with this pass, helping them figure out how to use it and then recognizing that for some of these uses, they want to have additional services and help from us. Third then renewal rate, the third aspect of the lifetime value, average spend, add-on services and then the renewal rate, we're just now receiving -- reaching the first annual renewal dates for the first All Access Pass holders we bought in last year's first quarter. Because this first group included only 19 purchasers, we tested it. The sample size is small. In addition, this group did not benefit from the full services now provided by our pass holder services group, which was just being formed at that time. Nevertheless, of this group of 19, 10 of this group have already renewed or upgraded most ahead of their renewal date, which is just now arriving. And having met with all of these pass holders, we fully expect that all but three and maybe all but two of the remaining pass holders are set to renew before the end of the quarter for a total of 16 or 17 out of 19. So 84%, if it’s 16. But we feel really good given -- about that. Again, it's a small sample size. The indications are good, but now that we're really well organized, we have a whole pass holder services team that’s now well organized and focused on ensuring pass holder delight, renewal, expansion and add-on services. And with this group, there's an initial call that happens with a new pass holder and their client partner in one of our All Access Pass implementation specialists within days of their purchase. In this call, the pass holder typically plans out their first usage of their pass. In addition within the first 30 days, this is usually followed up by an onsite, what we call the discovery day in which a team arrives on site, not with the purpose of selling or the intent of selling something new, but making sure they understand the full jobs to be done, which the customer has and meeting additional internal stakeholders who themselves begin to plan their own additional impact journeys. And as a result of this process, the vast majority of pass holders have already scheduled impact journeys, which take them well beyond the first year and into their second or third year of their pass. And beyond or even beyond and based on our ongoing work with these clients, we expect that the vast majority of All Access Pass holders are likely to renew their passes on or before their anniversary date. So we will continue to report on that as the quarter’s progress. Obviously, the biggest renewals will start to come somewhat in the second quarter, but really beginning in the third and fourth quarters of next year. So having a strong renewal rate can begin to drive accelerated revenue and profit growth in the second, third and fourth quarter, where today, we're benefiting only from new sales and our traditional delivered channels as we have those new sales and then add-on renewals that are at both a higher renewal rate and on a much higher purchase price. We expect this will begin to drive some additional revenues. So the combination of having higher initial sale, significant add-on sales of services and products and a high renewal rate is expected to significantly increase the average lifetime value of our customers. We're trying to follow this sales process, so that rather than trying to rush into it that we're doing a method and thought – methodically, we're going in and making sure we understand what they're doing, expanding the passes, et cetera and we're really having some success at the -- if we add an additional 3 million of services, if we add pass expansions that have occurred and also pass upgrades where they bought a smaller pass and then upgraded, we now actually have 5 million of add-on services and expansions in this early stages where only of say 1000 pass holders, we've only had these discovery days with about 170 or so today, because they've bought so recently. And that process has been established. So we're excited about the potential for this and we'll talk more about that in a few minutes. Now, second, now, I’d like to just review the results for the fourth quarter and year and I’m going to turn the time over to Steve to lead that discussion. Steve, thanks.

Thank you, Bob and thank you everyone for being on the call today. So over the past couple of years, three factors have created some of the lumpiness in our reported results. Number one, the impact of foreign exchange, two, the yearly changes in revenue related to a major government agency contract that we've talked about before, and, three, the shift toward having much larger amounts of deferred revenue related to amounts invoiced. For example in fiscal ’16, the non-repeat of the government agency contract reduced reported revenue by 6.6 million and adjusted EBITDA by 3.9 million. Number two, the foreign exchange fluctuations reduced reported revenue by 900,000 and adjusted EBITDA by 800,000. The impact of increases in deferred revenue during the year was greater than the sum of these two factors, reducing reported revenue by 8.6 million and impacting adjusted EBITDA by 7.5 million. For FY ’17, there won't be any year-over-year impact from the government agency contract, because the contract was fulfilled in fiscal ’15 and generated no revenue or adjusted EBITDA in ’16 against which we need to compare. And while no one can predict FX changes, for the first time in years, we're starting the year in a position we’re assuming year-end FX rates remain stable, there will be no gain or loss from FX in fiscal ’17 with the increase in the yen offset by the declines in the pound. So a steady term. At least, we are in a better position beginning this year than we have been in for years related to FX. However as just discussed, as a result of All Access Pass and other intellectual property licenses, we've been generating a significantly increased amount of very high margin deferred description revenue and we expect this subscription type revenue to continue to grow, both in total and as a percentage of the total amounts invoiced. While the ultimate economics in cash flow from a contract invoiced with a subscription component and one without it are essentially the same and the cash flow is identical, as you know, the accounting methodology for such contracts results in only a portion of the amount invoiced with respect to that contract being recognized in the period in which it was sold with the balance being amortized over the ensuing months. And as much as a meaningfully high share of amounts invoiced was deferred in fiscal 2016 than in prior years and because we believe that deferred revenue will continue to increase in the future, I would like to review our results from both an apples-to-apples meaning amounts invoiced basis, which considers amounts actually invoiced before splitting those amounts into recorded revenue and deferred revenue and on an as reported basis after the economics of the invoice contract having been split between recognized revenue and deferred revenue. Just a note regarding the amounts invoiced approach. Amounts invoiced is the actual amount billed to clients. It is not the concept of contract value sometimes utilized by subscription service companies where the total 12-month value of contracts in place at the end of a period is counted as contract value. Rather amounts invoiced is the actual amount built to customers, where the cash has either already been received or a valid enforceable receivable is in place and will be recognized as revenue. Also note that in as much as the deferred revenue portion relates to intellectual property, it has an extremely high gross margin. So now, I'd like to briefly talk about the fourth quarter and -- results for the fourth quarter and for the year. As you can see in slide 6, in the fourth quarter of FY ’16, amounts invoiced were 73.1 million, 2.4 million increase compared to the 70.7 million of amounts invoiced in the fourth quarter of FY ‘15, an increase of 3.4%. As a result of the significant year-over-year growth in All Access Pass in the fourth quarter and an increase in the percentage of Leader in Me schools that renewed intellectual property coaching descriptions, which was an increase from 94 -- to 94% from 90% last year. The share of amounts invoiced which was recorded as deferred revenue in the quarter increased meaningfully. In FY ’15, 93% of the amounts invoiced was recognized as revenue in the quarter. In FY’16, however, only 88.6% of the amounts invoiced was recognized as revenue in the quarter with the balance, an amount of 8.3 million reflected in a net increase in deferred revenue on the balance sheet. So revenue, deferred revenue as shown on slide 7, in the fourth quarter of FY ’16, the net increase in deferred revenue was 8.3 million, 151% increase compared to the 3.3 million change in deferred revenue during the fourth quarter of FY ‘15. For our gross margin in the fourth quarter of FY ’16, the gross margin profit percentage increased to 70.4% compared to 69% in the fourth quarter last year, even excluding the 8.3 million increase in extremely high gross margin percentage deferred revenue generated in that quarter. So we’re pleased that the gross margin percentage could increase even after we’re deferring such a significant amount of very high margin revenue. Adjusted EBITDA, as shown in slide 7, reported adjusted EBITDA for the fourth quarter was 6.2 million with an additional, 16.2 of additional -- with an additional 7.4 million of adjusted EBITDA contribution embedded in deferred revenue compared to FY ’15 where reported adjusted EBITDA was 17.3 million with an additional 3.1 million embedded in deferred revenue. As also shown on slide 7, in the fourth quarter, 7.4 million of the amount of adjusted EBITDA contribution generated in the quarter remained embedded on the balance sheet at year end. This compares to only 3.1 million in the fourth quarter of last year. So we're pleased with the result in the fourth quarter, especially when you consider the amount recorded and amount reflected on the balance sheet. So for the full year, it's a similar story or result where we consider both the recorded amount and the deferred amount that's on the balance sheet. So in revenue, as you can see on slide 8, we invoice 208.7 million in FY ’16. This represented a decrease of 3.7 million or 1.7% compared to the 212.4 million invoiced in FY ‘15. Fiscal 2015 did include the 6.6 million in revenue from the large federal government agency contract fulfilled in ’15 and therefore generated no revenue in ’16. For the rest of the business other than this contract, we invoiced 205.8 million in ’15 -- in FY ’16, we invoice 208.7 million after absorbing $900,000 impact from foreign exchange, reflecting a 2.9 million increase compared to the 205.8 million invoiced for the rest of the business in fiscal ’15. So in revenue, there were some growth. Once you consider the rest of the business, so that's what was reflected in revenue. However shown also on slide 8, with the introduction and significant growth in All Access Pass during the year and within the increased percentage of Leader in Me schools that renewed the intellectual property and coaching subscription in FY ’16, which again was 94% versus 90% similar to Q4, the share of the amounts invoiced which was recognized as revenue in the year compared to the portion which was deferred shifted. As shown on slide 8, in FY ’15, 209.9 million or 98.8% of the amounts invoiced was recognized in revenue in the year. In FY ’16 however only 200.1 million or 95.9% of the 208.7 amount invoiced during the quarter was recognized in the year. The 208 in the year recognized in the year with an 8.6 million increase to amount of deferred revenue on the balance sheet. So again very similar to the need to consider both reported amount and the deferred amount when looking at what actually we believe went on during the quarter. And again this deferred amount shown on slide 8, in FY ’16, the deferred amount was 8.6 million increase compared to a 2.5 million change in deferred revenue for the full year before. Very important point that that needs to be considered when reviewing all of our financial statements. Gross profit, again, we’re pleased that the gross profit percentage increased to 67.6% compared to 65.8% last year, even again as you consider the 8.6 million increase in this highly -- high gross margin deferred revenue that was generated but not recognized until next year. Adjusted EBITDA as also shown on slide 8, reported adjusted EBITDA for FY ’16 was 26.9 million with a 7.5 million increase in adjusted EBITDA contribution embedded in deferred revenue on the balance sheet compared to FY ’15 where we reported adjusted EBITDA of 31.9 million with an additional 1.9 million in adjusted EBITDA contribution embedded in deferred revenue on the balance sheet. FY15’s result included a 3.9 contribution to adjusted EBITDA from the large federal government agency that we have talked about. The contract that was fulfilled in 2015 and did not generate adjusted EBITDA in FY ’16. For the rest of the business, other than that contract, recognized adjusted EBITDA in FY ’15 was 28 million with 1.9 million of adjusted EBITDA contribution embedded in deferred revenue. This reflects that as with the revenue and gross profit, a significantly increased share of adjusted EBITDA contribution generated in the year was embedded in deferred revenue at the end of the fourth quarter. As shown also on slide 8, for the year, 7.5 million of adjusted EBITDA contribution generated in the year remained embedded on the balance sheet. This compares to 1.9 million in the prior year. So starting with 26.9 million reported adjusted EBITDA, then considering the 7.5 million increase in adjusted EBITDA contribution embedded in deferred revenue at year-end and then adjusting for the 900,000 of -- for the negative impact of foreign exchange, the total adjusted EBITDA generated during the course of the full-year fell within our original guidance of 34 million to 36 million, even after allowing from additional compensation expense that would have been occurred had the adjusted EBITDA been recognized in the year. So the last point on this is our cash flow from operating activities was very strong for the year, indicative of the fact that the economics of the business follows amounts invoiced and not the amounts recorded as shown on slide 9. Cash flow from operating activities for the year was 32.7 million, 6.5 or 24.7 increase compared to the 26.2 million in cash flow from operating activities last year. This strong cash flow again indicates the fact that the economics of the business follows the amounts invoiced lived for which we bill and collect and not necessarily the amount we report. So our liquidity remains strong, even after returning more than 43 million to shareholders in the form of stock buybacks during the year. We ended the year with only 5 million in net debt and a 35 million availability under our credit facility. So Bob.

Thanks, Steve. We’ll obviously be delighted to answer your questions here in a moment. Just saying one other note is for the full year, we were delighted that some of the amounts recognized plus the increase in the amount deferred and the FX guidance from the original range, if you look at the -- and really the entire difference between where we were in June, if you take the actuals for the first nine months and then look at the amount that would have been for the fourth quarter, be about approximately 3.5 million of additional deferred -- we had thought at that point that we might have as much as 5 million increase in deferred revenue to get to the lower end of our guidance range of 31 to 36. And we ended up with $8.3 million increase in deferred revenues, so with almost 90% -- 88% contribution after deferred commissions, et cetera that if you take the first three quarters actual and then add the fourth quarter produced versus what we thought the extra 3.3 million of course also gets into the 31 range for the first three quarters as reported in the last quarter, adjusted for that. Before we go to questions, just want to touch on some things that we believe will help to accelerate our growth in the coming quarters. As you know, over the past couple of years, our growth rate has slowed, some of this slowing was due to foreign exchange headwinds as the non-repeat of the major government agency contract. But for reasons we’ve discussed in previous quarters, our growth in our US direct offices has also been slow. We believe the following things can actually begin to accelerate growth in our direct offices in the coming quarters and really for the company overall. So just five bullet points. First, growth from All Access Pass renewals, upgrades, expansions and add-on services, we’ve already talked about that, we believe you're just now beginning to gain traction on what will prove to be an enormous opportunity for growth through pass forward renewal expansions, add-on services. What we've seen today with All Access Pass is just the new sales and add on. If assuming these renewals occur at a high rate, it doesn't affect first quarter very much, because it’s only 300,000 of revenue, but as you move into the second, third and fourth quarters where you could have for the revenues were 3 million, I mean the amounts invoiced for 3 million, 6 million and then 13, obviously a renewal rate of 80% or something like that in those quarters without a lot, the new sales would start to really provide growth, and because a lot of that happened in the direct offices. So it will support growth there. In addition because our sales approach and pass forward services approach is focused not only ensuring high levels of pass holder satisfaction, but on identifying expanded customer populations and needs, there's a big opportunity for add-on services. I noted before that during the last five months, basically, we’ve sold more than 3 million of additional services and materials to pass holders and more than an additional 2 million in pass upgrades and expansions by having these meetings. We’ve only had meetings with about a fifth of those who’ve purchased, I mean, those were all scheduled, but there is a new concept to these discovery days. So we see a significant opportunity for continuing to expand revenue within existing accounts and we believe that it will have real impact on that in the coming quarters. Should begin to become apparent in this quarter and the second and third quarter. Second, we see significant headroom for continued growth in new All Access Pass sales, even with the more than 23 million of invoiced All Access Pass and pass related amounts during fiscal ’16, most of which occurred just in the last 7 months of the year. We believe we're just getting started and we have lots of headroom for continued growth. The potential for increasing All Access Pass sales includes increased sales to our 3100 active client organizations in our English speaking direct offices. Despite the market of All Access Pass, growth to date only 13% or 401 of these 3075 active client organizations have purchased an All Access Pass to date, leaving lots of room for growth and we say that active client bought something in the last couple of years. And that doesn't include all the others who, like I'm loyal to my dentist, I just haven't been there may be in the last year or two, it doesn’t mean that I’m not loyal to him, when they have the need, they'll come back, but there are 3075 who have been with us, who've been spending seven each of the last years that most of whom still have not had a chance to purchase. Second, increased sales to the more than 9900 accounts that were assigned to our client partners that are not yet actually -- actually doing business with us. Each client partner has a number of assigned accounts, some of them of course fitting that first category as being active clients. But as you know, bigger portion fit in client response for prospects. All Access Pass is opening a lot of new doors and to date, 178 of our All Access Pass sales have actually come from these 9900 assigned accounts who were otherwise not clients. But that's just less than 2% penetration. So we're really excited about the potential for growth in these accounts, these people get invited to events, they have lots and lots of face to face meetings with and this offering is in this way of delivering our content is resonating with those folks. And then third opportunity is for new sales, our increased sales in our international direct and licensee partner offices. To date, All Access Pass has not been available for sale in our non-English speaking international direct offices, a few exceptions. In our international license partner offices. We believe there's an enormous opportunity for All Access Pass to grow outside the US. To address this potential, we're currently in the process of translating localizing the 16 most popular course and solution areas, including the All Access Pass into all of the 14 major languages. Supporting this expansion, we're supporting this expense with an updated portal that meets all the international data privacy standards and we're also beginning to train client partners that's already ongoing to get ready for -- to the end of February. All Access Pass will then be available for sale in most countries by March 1st. And we expect that will begin to create a new wave of growth in the third and fourth quarters. With All Access, it’s always providing a real opportunity for global sales. This is an important initiative for us because when a client goes in, they can buy all of our content for a designated population and they can do it and they want that solution applied across the world and we can do that because of our licensee network or our direct offices as and we now will be able to -- we’ll have the offering -- all the offerings also translated, we think this will be an exciting thing. It will take -- takes a while before training them now, we think this is an exciting opportunity which will start really in March 1st. So we’ve talked about that. One growth in expansion sales of existing All Access Pass, two new sales of All Access Pass is to people who are our clients who are or who are. Third, this expansion in direct and licensee partner offices and we think those will all help. Next is growth in China. Over the past 12 years, our operations in China have been running -- have been operated by a highly valued licensee partner. During that time, the business grew steadily to over 10 million in revenue, paying is 1.5 million license fees and those selling our solutions established relationships with a number of key multi-national companies, local Chinese companies, many of whom themselves are very large and state owned enterprises. Two years ago, the term of that license ended. Given importance of China in the world, the large number of our -- and the net large number of our US clients who have operations there, it is our desire to make sure the full range of our solutions is available in the market where previously it was just certain courses. We ultimately made the decision not to renew our license, but to go direct. With the cooperation of our partner, we agreed on a multi -- mutually beneficial two-year transition plan that would allow our partner to continue to receive income during the transition period and would allow us to make a smooth transition of both employees and clients to Franklin Covey. We hired the previous leader of our licensee partners business in China with our partner’s approval as the leader of these offices during the transition and we're delighted to say that substantially all of the employees who have been working on our business have remained with us. As a result of that -- as a result, as of September 1st, we are now operating or have been operating three direct offices in China, in Beijing, Shanghai and Guangzhou. We believe we can make a great impact in China and are excited about our offices and the people and clients there. A number of us recently were in China to participate in some very well executed special thought leadership events in Beijing and Shanghai to formally introduce our new direct operations to hundreds -- literally hundreds of organizations. We were thrilled with the strength of our team there, with the stature of their -- stature of their clients, we had a lunch that included some really big US names that were there, Johnson & Johnson, Mary Kay, other big organizations, but also some really large Chinese companies. Our team there is off to a great start. The events were very well received as a result, already resulted in numerous new opportunities, sales opportunities. We expect this transition from the -- from being a licensee that produced $1.5 million and $2 million of royalties will pick up revenue and hope our top line growth will pick up probably 7 million or so of revenue this year. In terms of EBITDA, the contribution probably won't be a lot in this -- extra in this first year because last year, under the license agreement, they had an extraordinarily high payment that was due. So the increase in profitability won't be as much in this first year, but thereafter it's larger than it would have been and we expected to grow from there. As I mentioned also, maybe the next area of growth for us is growth in our international education licensee partners. The education division continue to grow well in fiscal ’16, achieving 15% growth in the fourth quarter and 22% growth for the year after a flattish year last year. Got right back to growing as they've done for years and they've added 500 new Leader in Me schools during the fiscal year. Perhaps most importantly, their focus over the past many years on helping schools achieve quality outcomes is really paying off. This year, we retain 94% of the schools that are part of the Leader in Me network of schools which is really remarkable. It was high last year at 90%. That increase of 4% was meaningful in terms of the amount of deferred revenue that was generated and added to our deferred revenue for the quarter. We believe that the opportunity to grow the Leader in Me is as strong outside of the United States as it is within of our 3000 schools, about 900 currently lay outside the US and just recently, we signed a contract with SOMOS Education, one of the largest education providers in Brazil to bring Leader in Me to both private and public Brazilian schools. This is a ten-year contract, which guarantees us a minimum of 15 million in royalties over that period of time and it's really important from the impact standpoint as well. We expect to continue to sign more of these large multi-year contracts outside the US with licensees in education specifically, which is evidence of the relevance of our education solution whether at home or abroad. Finally, a final way of maybe leveraging our growth. And this has been one that's ongoing, one of our key ongoing growth initiatives that you can see in slide 10 is the additional ramp up of new client partners. As you can see, as of August 31, we have 205 client partners, an increase of 24 compared to the 180 we had at the end of fiscal 2015. This increase of 24 client partners represents a 13% increase to our overall sales force. Since 2012, it’s a little less than the 30 that we've targeted, but we made some decisions with the transition of leadership in a couple of our regions this year that have made sense to let them get the new managing directors on board and so these 24 met our objective as it was revised mid-year. During fiscal ’17, we expect to hire an additional net 30 client partners. The plans are in place and that would bring our client partner count to 234 by year end and that net addition and the 234 does not include the 10 client partners that we have in China. With that, Steve, I'll just turn this over to you to review our outlook and guidance and then we will go to questions and answers.

Okay. A little bit on guidance. So based upon the success of the All Access Pass, we've decided to modify our offerings and business practices to make the All Access Pass experience even better for our customers. These future changes could include adding content from thought leaders outside the company, localizing content, including additional assessments and developing webcast for our pass holders. These future changes in offerings of business practices will result in a much larger portion of our invoiced amounts being deferred over the term of the underlying contracts and agreements. Meaning that our deferred revenue on the balance sheet is expected to grow significantly in FY ’17. For guidance this year, we need to consider both the expected amount of reported adjusted EBITDA and the expected change in deferred revenue less applicable costs as recorded on the balance sheet and I know from talking to many of you that you are very familiar with this concept. In FY ’16, as you remember, we reported 26.9 million of adjusted EBITDA and an increase in deferred revenue less applicable cost of 7.5 million, as we've seen on slide 8. The sum of these two numbers is 34.4 million. While we do not know the mix of deferred sales versus recorded sales in FY ’17, we do expect that the sum of these two numbers will grow from 34.4 million in FY ’16 to between 35 million and 38 million pre-FX in FY ’17. As I said before, we expect the amount of reported EBITDA in FY ’17 to potentially decrease and maybe significantly and the amount of deferred revenue on the balance sheet to increase significantly. As to how this amount is likely to spread throughout the year, as always, our first quarter includes significant investments in new hires and this year will also include investments in localization and training necessary to launch All Access Pass globally at the end of the second quarter. Reflecting these investments, the results for first quarter could be 1 million or 1.5 million lower than last year with year-over-year growth beginning in the second quarter and beyond. So a last point. Last year in FY ’16, our All Access Pass invoiced amounts were 21.5 million plus services. Of the 21.5 million, we deferred 9 million. In FY ’17, that same invoiced amount with that same invoiced amount, we would defer the total 21.5 million. Additionally, we might do make changes in the business that would require us to defer a portion of our facilitator sales. So as you would expect, we're holding ourselves to a commitment of growing our invoiced amount as we've always talked about. It's just that is impossible right now for us to predict accurately the amount of those increased sales that will be deferred. So, Bob that’s..

Why don’t we open it for questions, thanks Steve and let’s just open it for question.

[Operator Instructions] And we have a question from Tim McHugh from William Blair. Please go ahead.

Just two questions, one given your strategy about the complexity in the business. Do you have a plan or a kind of goal you would care to share with - as it relates to cash flow or free cash flow. I think you're kind of getting there with all the other things but I wondering if that's just a better way to look at it. And secondly…

No, sorry I didn’t mean to interrupt you, I was just saying to Steve, I think that's actually really good suggestion and one that would be good. I think that some we should do and we'll do. That's a really good thing because the cash flow is, I think your insight is great. So, yes.

We don't have an exact number.

I don't know how they will do that and we’ll send it out.

And just the midpoint of the kind of - if we do all the adjustments and kind of look at it, EBITDA adjusted for invoice, I guess kind of a high-single digit growth rate and maybe at the midpoint. I guess, given all you described about the positive trends as it relates to this, are there some offsets in there that I guess why not better than that. I guess what are kind of the pros and cons and kind of maybe holding that back as you think through the next year.

Well, one thing is - the plain English version is one concept is, you want to give us a little bit of room to hit within our number considering things that we can now envision. There's a possibility like in the past that something will happen that we don't envision right now that will cause us to have to go down a little bit. So the bottom end of our range we believe is a little bit conservative. So as we go forward there are several things going on. One is that we will have an increase in costs related to the additional sales people that we've hired and the bonuses that we would incur from hitting our numbers. Going the other way, we had a pretty big write-off of a receivable last year that we do not expect to repeat in the current year so that would be a positive. We expect China to be a positive. So, as far as a headwind if you will that would keep the number down, it would be related to cost, really developing and accelerating this all access pass. Adding the 30 salespeople and the annualization of the 24 that we hired last year and the bonuses that would be related to us hitting our numbers.

As usually, Tim, your insights are correct. I mean the numbers to which we're being held and which was holding our people too would be to produce at the very high end or above the top end of that range. And we're just trying to give some flexibility since this is new and we’ve got some investments to make although they are not huge, they are still meaningful.

If we're trying to just the profitability of deferred revenue I guess. When we look at the increase in deferred revenue, it is as we the kind of the ratio you're describing for Q4 the right way you would tell us we can think about that in the future?

Yes, yes.

And that really includes deferred commissions that relate to that even though we paid the commission there's a true deferred commission expense and a little bit of cost to sale. But on the IP it's really…

So we do have a sales people at the time that they actually complete the transaction with the customer and we have a valid receivable so as we defer the revenue, we also list a portion of that commission as essentially a prepaid commission. So, the flow through of the 85% to 88% flow through when that deferred revenue hits the P&L last year.

And you'll be able to track it on the balance sheet because it will either be in deferred revenue or in…

You probably noticed that we broke out separately on the balance sheet deferred revenue, just sort of be easier for somebody to track that piece of it.

And the expenses.

And then the expenses are in our prepaid expenses, but you can consider that to be 85% to 88%.

And our next question is from Jeff Martin from ROTH Capital Partners. Please go ahead.

Question on the - may have to defer $21 million on similar amount from fiscal ‘15. I'm curious on what may affect that you say you may have to versus you will have to. And second part of the question is, why would you have to defer the whole thing in fiscal ‘17 versus a smaller portion - much smaller portion of that in ‘16.

I mean – Steve, do you want to go ahead first?

Well, first of all. So when we say defer, defer the amount, to defer the amount over the term of the contracts, so we where to begin any time we would have a sale, we would begin recording that revenue one set a year contract, one 12th every month over the life of the contract rather than taking the deferred revenue at the end. And the things that I mentioned things like adding content to the make available for our new customers and making localized content available and allowing what we sell to them in the future to change that's what changes the accounting such that we would not be allowed to record a portion upfront and defer a portion like we did last year, we just need to defer the entire amount and record it over the period of the contract.

And I guess I'm just curious why it would - why the percentage would shift that much more [indiscernible] this year.

Here's the idea Jeff, let me just. If you break our - if you break the way that we can account for revenue into four groups, which I think [indiscernible] [00:52:52] I'm thinking about it going forward be one is intellectual property, two is portals, portal services and thing. Third is services and fourth is products. As we have introduced All Access Pass, historically we've sold a manual to a facilitator that whole thing if it's a $200 manual, it's been treated of course as a product sale because it is fully delivered at that time, we could choose to - if that's what we continue to do in the future that group matures over the years and we convert that group over the next two or three years, ultimately we go into All Access Pass. But what we did with All Access Pass is to split that $200 manual into the IP portion and into the manual and now I’d buy for 100 people I would be paying a $170 a person, say $17,000 dollars for the intellectual property and they can buy manuals or not because some people in Silicon Valley or other places may just want the content delivered on their iPad or whatever else and never buy a manual and so we've already separated in All Access Pass the IP from the actual physical manual. And with the IP, we've added a bunch of richness to it, so in addition to the actual manual or the content that’s now digital or they can print out, but it's digital. We give them - they can intersperse the training, they can include our insights module, our digital assets, so they have - we've outlined hundreds of different ways in which people can take our content interspersing digital content with it. And so one idea is hey let's only give that value to All Access Pass holders where you know and when they buy the IP and if they choose to buy a manual, it’s only if you buy the Pass that you can get the benefit of those other ways of adding to the value and the impact of the training. But then on the other hand, we hate to put our client partners and our clients in the pay, so if they're not in a position to buy the Pass, why if they buy let’s say you know $200 of manual, why won't we break it off so that they can either buy the manual or not, buy the IP and just do it on their iPad. And if they want to intersperse the learning with this very digital assets. And so the reason why it would go I mean depends on their - depending on our choices, we could either have a slow transition over a period of years and just keep our manuals the same and as those convert eventually over two or three or four years we can convert it. The other is, we think there's a real competitive advantage to saying, hey look, if it's IP, it's IP and so in those manuals that we sold, $8 million of facilitator manuals in the fourth quarter. If we split that between IP and manual, we could move the whole thing in one year to one, the transition would all occur in one year because the IP portion would be deferred but then in 2018 it would come back but the real point is in the accounting point is we think that it would give us a competitive advantage. So I think Steve just pointing out that depending on those choices if we said everything that’s IP whether in the form of a manual or All Access Pass that portion of it was going to be treated as subscription revenues so we have the flexibility to add all this value to those being trained. All portals which we already one 12th there, then services as delivered and manuals as delivered, two things would happen. One, it would be a huge increase in deferred revenue in one year, it would also be over in one year. But it would also then from a competitive standpoint say that other people can only sell a manual because that we compete. So other people can’t sell an All Access Pass they saw one course, other people have to sell a course with a manual so they can’t - they're not - they don't dare do subscription. And we can say hey, listen look at all the riches we can bring to it and so - to the extent we make those decisions to have all people get that - get those additional services. It would force the accounting, it would also make a big impact in one year on the reported. The cash flow wouldn't change and we'd be across the bridge a lot faster.

On the client partner side, could you kind of give a high level sense of how these client partners’ sales approach are shifting? How are they managing the traditional side of the Franklin Covey business versus the All Access Pass side that would be helpful thanks?

I’m going to ask Paul Walker to just to respond to that.

Sure, thanks Bob. Just a couple of thoughts. First of all as far as converting, we hope that as time goes on here, all of our clients will want to become Pass holders that’s certainly the goal we have is that we - as we engage with them now that we're talk to them about the value and the benefit because there are great value - great benefits and value to them to convert over. How it's changing the way client partners work day in day out, one of the things that we're focusing heavily on is just making sure that as we go in and call on our clients, we’re really identifying what's the real job they're hiring us to do and ensuring that we're connected clearly to a strong business case that affects lot of people. It's a big initiative going on inside the organization because we know that not only will increase the size of the initial path and connect us to something that's really got legs to it. But also increases our chances to go in and improves our odds of going in and having this discovery day Bob talked about earlier, where we can expand the population, expand the size of the pass and expand the number of jobs we can help that client with on the back end. So we're focusing really heavily with the client partners on really getting back to some of the basic selling, in a very strategic way, larger deals, more transformational deals that is, as Bob mentioned, is increasing the initial size of the deal and it’s also increasing the amount of revenue we're doing with these clients post initial pass sale.

And I think Jeff and I was changing so we're in the past when we were in the more product launch mode, and again, we've talked about this in the past, we were there we were doing a lot of more promotional things, we had a big initiative, we were getting a new product pushed out. Now this is much more a day to day make your ten hours a week of sales calls, on those ten hours a week face to face meetings you're going to have a number of meetings with people who just bought passes, the discovery day, you’ll have new meetings with people who just attend it. And your day on a look pretty much the same quarter after quarter, year over year and well I don't mean that, okay if last year's first quarter we did a promotion or something that will be pushed on one product, you'll lose that on for the first year they do year-over-year. Then creates something we're - just big pipeline is growing all the time and they'll add a lot more sales on and that's what's happening. Something north of 70% of our opportunities that are in sales force right now, salesforce.com are related in one way or another Total Access Pass and it's just the nature, once they go in there even if somebody say they just wanted to train one course, you're going to say well fine, we can turn the other buttons off, so you don't see anything else. But still the most economical and flexible way to implement that one course is accessing the content through an All Access Pass where you we can have all these other digital assets to help you out, and hey by the way, if during the year you decide to do something else, you've already got it and we can help you find value. So it's really changing the whole sales approach to something that's not promotional, that’s happened as we've talked before the average opportunity size went down with these product oriented and facilitator sales. The average opportunity is going way up, the sales cycle are a little longer just because you have to sign a contract with but the deals are so much bigger and the pathway to doing something meaningful is there, so we think the tradeoff is going to really pay off.

Reaching a level of 12 million in the fourth quarter, your fourth quarter into the launch seems to be indicative of succession in this area. I mean, do you expect that to continue to ramp at the pace that we’ve seeing, I mean, are we going to get to 20 million a quarter [indiscernible] [01:01:02] unreasonable to think.

I think in fact, I’d really appreciate you raising that. As you know our fourth quarter is historically the time we saw most of our IP and so that the big facilitator quarter as a consequence it was the big year of - the big quarter of conversion. So I think if we add something like 4 million to 5 million, maybe 5 million to 6 million of invoiced amounts per quarter until we come up against the renewals, it's our first quarter, I think if we got something between 5 million to 6 million of new sales. That would be a good thing given our normal seasonality of when people you know the sales cycle for people. The second quarter you pick that up again, a similar amount 5 million to 6 million invoiced announced and you start to pick up a percentage of the renewal. I think it's more like that, so I think the year over year will be impressive but the sequential will follow seasonality for a while and then hopefully over time the seasonality will just get less.

Our next question is from Marco Rodriguez from Stonegate Capital Markets. Please go ahead.

A bit of a follow up on the All Access Pass here. I know in the past you had described that business or that service or how you'd like to describe it as kind of an incremental revenue generation for Franklin Covey and it sounds like obviously this it's been doing very well and you're changing some of the services that you're adding in there. Should we characterize that business as still incremental revenues or are you seeing perhaps some of your existing clients switching the way they're buying from you?

I think number one the first thing is it will convert – we only want to cannibalize all of our existing clients. Because the average sales size for our facilitator clients I say average, but this is the mean across 2000 of them is around $9,000, $8,500 a year they spent in the year they spent the most, in over three years they spend about twice that amount. So the typical facilitator is loyal and buying every year, but they might buy at a different time, where they might skip over three years, they generate $15,000 of revenue. For us with All Access Pass, the initial sales side, the initial sale has averaged about 28,000 in the initial sale. We're getting about 20% of that amount even in this early stage of increased either services or expansions or upgrades on those passes and then hoping for an 80% renewal rate. And so, over those same three years rather than getting $16,000 we're thinking in terms of having more like 60,000 or 65,000. And so number one, we really want to get all of our existing customers across the bridge and yet like say to-date, only about 12% or 13% of those people have gotten across the bridge. So we have a long you know a lot of headroom to get that done but that's number one and every one that we convert we - they have that advantage. So that's a major objective but we don't want to do it as a promotion or something, we just want to go out there and have discussions and meet them where they are and over the next two or three years get them all across. To your second point though really a significant portion of our sales more than half have come from people who aren’t active clients, is there somebody who were once a client and no longer want to train in that way but see this as a new way of doing things. We're from this list of the 9,900 signed accounts who are not yet customers, this is giving a whole new way of doing the business with them - going to market with them because many times they don't want to buy a course, they've got a big learning in development group is actually once the content to weave in to other things they're already doing. They want to add concepts or lessons from what we do and our film libraries et cetera into the stuff they already do in their organization to enrich it. That's a whole new way of engaging with this and so more than half of the sales have occurred with clients who are not active clients. Those who are like you say they hope will dramatically increase the lifetime value of those who were clients but we think this approach is really targeted at the job to be done that every person out there who has any responsibility for performance improvement is in our target. So we really see it both ways and we expect lots of headroom in both.

So you also addressed changing or rather uptick in the All Access Pass with additional languages and kind of launching that overseas. I don't know if I missed that but was there a timeline associated with that?

I apologize, it was very clear, we’ll have that localization work done by the end of February so that we can launch across the world March 1. And so those people are now going through say, Paul was down in Phoenix yesterday for the review of all the training materials and the training process for all those people. Sean and his team tomorrow morning we have a call with all the partners to get them ready for this. And they actually have weekly call on this, I’m on it tomorrow. So we expect them to be ready to go March 1 to get selling this. So that by the end of the third quarter or the start of the fourth quarter, we are to start see some traction given the sales cycle internationally. Also in the offices in Japan and now China we have a similar timeline.

And last quick question just in regard to your outlook here, you used this word a transition period, where then your future results will be a little bit more predictable for you guys on a quarter to quarter basis or have you. Can you help define what that transition period is timeline wise, are we talking next year, three years, five years.

That's great, it’s tight a little bit to Jeff’s question as well. To the extent - let's say we went all the way and starting tomorrow every sale we make this year - that we made last year we do with these additional services so that IP portion is 112 that the portals are already 112 and then services and products are sold on that. That way if we did that immediately then the transition of the you know really other than mix between services and products and IP at least all the IP and portals would have transitioned in one year because everything we sell whether it's a pass or it’s an individual course where we're splitting the IP from the manual and having them buy the manual separately, we’d get it done real quickly. So our idea really for the - number one because our customers we can then have this strategic advantage with them. But number two to get across the bridge quickly we want this transition period to be as short as possible and if we go to that immediately then that shortens the time so that over the two years you get across the bridge instead sort of over three or four.

Totally agree Bob, I just want to make the point that we're not just deciding here what accounting to introduce, we're deciding what business practices to implement and that will drive the accounting. So we're not just deciding to change our account and what we've done. What we're talking about is if we're going to allow our customers to have different services over the time of their contract that requires us to go subscription so that's the business practice that’s driving the account.

Did that answer that Marco, [indiscernible] we're thinking the business practices are going to change so that it's on the short side of that possible transition not the long side.

Our next question is from Kevin Liu from B. Riley & Company. Please go ahead.

Just in terms of the Q4 in which amounts for All Access Pass. Could you just talk about whether any of those were multi-year in nature or those are all 12 months or less.

The nature of the contract generally has been a one year contract. This automatically renewable if they don't let us know within six - 90 days, sorry I was going to say 60, within 90 days and so they're all one year, they've all been one year contracts. Actually in recent days, we've had requests as we get in there with people saying well gosh, I’ve already plotted out what I'm going to be doing for the next three years. I'd rather not have to worry about a price increase and changes et cetera, we were reticent to do that because the way the offering was structured, one year made sense because we couldn't give them additional content that they didn't buy in the original past because a portion of those recorded IP upfront and only the digital assets were recognized over time. As we made the decision, wait a second, we can get lots of, we think we are getting lots of these multi-year contracts. If we tell them that whatever content that we develop or come up with in the meantime whatever changes in the portal we do they’ll get the benefit from that it's been restricted not because they weren't willing, they were already plotting out through two and three year impact journeys. It was that we didn't want - we couldn't promise them that they get the benefits of upgrades in our offering So that's part of what we've been talking that if we say we're going to do what's right for the customer we're going to give it competitive advantage. We're going to be able to tell them hey, in addition to the courses, hey we're going to have people - we're going to have really premium webcast that helps you get additional value. We're going to add anything you buy, you get the new content, if we have a new course you'll get it. Two things will happen, one it will drive the transition faster, but also it will we think drive more of these multi-year contracts because people are already thinking in longer terms, we're just - our business practice was forcing them to get to a shorter. That makes sense.

Yeah understood. And maybe more generally on that just in terms of how your invoicing today, are you primarily billing on kind of a monthly or quarterly basis, are you actually doing a full year upfront?

We bill upfront, the pay on normal terms and so I think that's reflected if you see in the cash flow, the cash flow was 33 million, which is just build invoice. So by the time we're recognizing we've had to cash flow long time.

And then just lastly for me certainly over the course of fiscal ’16, you guys have turned quite a bit of capital to shareholders while do have some upticks and some of the product development costs for next year I'm just curious whether you expect to continue to return significant amount of free cash flow to shareholders.

I doubt, it will be 43 million but yes we’ll continue to generate cash and we expect to do something with cash and expect that that will include purchasing shares opportunistically.

Our next question is from Alex Paris from Barrington Research. Please go ahead.

Good afternoon, this is Chris Howe sitting in for Alex Paris. Most of my questions have been asked but I did have a few left over. You mentioned the discovery dates with current AAP partners is still ongoing. I was just wondering at what point do you think you will have visited the majority of the existing AAP partners.

That's a great question. Every Tuesday morning we ask the whole team that question have a review of it. We did 90 new discovery days in the last two weeks and there is a - the idea is we want these done. We want them all done by year end, calendar year-end, we won't get them all done with the holidays but our guess is over the next 90 days or so we will have - we will have had those discovery days, not all of it is us by the way I mean some people just can't get their team together until after Christmas. But our idea going forward is the call within two days, the initial call where they have this hour plus planning session and that discovery day within 30 and that's the standard. So all of that data is now in, we track red, yellow, green and its green if it's being held within 30 days, we just didn't think of it and we didn't think of discovery day until, I mean we didn't come up with that as the best way to do it until we tested it for a few months. So I think it'll be probably into the - well into the second quarter, say by end of January or so by the time all those that we're in a year-end, we'll have the discovery day. One thing we did for a lot of these passengers not recognizing that we wouldn't have as some of them have a little longer time so they had a 14 month contract or something so they didn't lose, if they couldn't get things planned in time, they would still get a full year's value this first year.

And just a follow up on that. Of the ones that you’ve had the chance to visit thus far. What percentage have converted or upgraded to additional services and maybe you can share some additional thoughts on some of the early successes you've had during the discovery process?

So first all, I’ll let Paul, you untie some of the success they've had in the discovery process.

For these the discovery days that we hold, they’re anywhere from a few hours to an entire day and sometimes we do it will do a couple different sessions with the same client the idea is if you can imagine we might have sold the path to the head of learning and development or Chief Learning Officer and he or she purchased the path for a specific purpose say a leadership development initiative but they've now invited us then come to this discovery day and around that table might be the Head Of Sales, might be an operational lead, it might be somebody else in another running another part of the business and we're sharing with them how we partner with organizations like theirs and outlining how they might be able to leverage the pass. And oftentimes that does lead then to additional sales. I would say about a third of our clients that we've done discovery days with are actually adding on additional seats, additional services. One example we had a client in Texas, brought the pass for a leadership development initiative, they came back into the discovery day and they invited their head of sales to come and the head of sales purchased for his population that actually doubled the size of the original pass and then added on 12 consulting days. So it took what was initially around $40,000 sale and took it up to $120,000 or so engagement over the first year. And so that's just kind of a high level how it works and what we're seeing.

And mathematically we've sold about 5 million of add-on services, expansions, upgrades or products in these first 100 plus discovery days. And so I don't you know I don't know that if we do 800 more we'll get to 40 million. But I’m saying I think the idea is that we think about a third of them what will do something new initially and with this discovery day process is a one-time thing, we expect to visit every quarter to update as we think there's a whole another way. I mean the number of large deals that we have now and large opportunities is like 20 times the number we had last year at this time because people see now how they can use this to do things that never would have considered. We go in and when we tell them hey, look you can do this yourself or you can go I want to continue and you can get up to help you a little bit up front and certify your people or we can do it for you. Once you give them option if not hiring you, then they raise their hand to say well hey, I'd like some help and that's what's it – were historic we didn’t never did that, we sold them the manuals and said they go at it. So I think there's a lot of opportunity, happy to give you more examples if you'd like to call, we can go over ten client examples specifically what happened if that’s helpful.

Now thank you for the additional color. It’s been very helpful and we'll follow up.

[indiscernible] if anybody has some specific questions and want to see how this really works. We're happy to be completely transparent on, hey, we’ll pick 20 at random, you can pick numbers one, five, seven, nine and whatever and we’ll just tell you exactly what happened in the discovery days and what came from but if you want to get a better sense we could schedule an hour some time and do that would be happy to do so.

And our next question is from Samir Patel from Askeladden Capital Management. Please go ahead.

So fantastic to see all the momentum on All Access Pass. My primary question is basically Tim’s question which I guess I'll ask a slightly different way. Again just to reiterate it sounds like you have all this fantastic momentum, you're getting clients spending a lot more money, you're reengaging clients who maybe weren't active in recent years. And yet your adjusted EBITDA guidance when you add back the deferred revenue portion is still not quite as high as I would've expected for 2017 and I guess that's because of some of the investments that you're making in the traditions. So we will count to 2018 right, when some of the one-time investments are kind of in the books and you also have the renewals on top of the new business that you're signing up. I mean is, I know it's early but would it be unreasonable to expect your adjusted EBITDA plus deferred number to be in excess of 40 million.

I think this right, it wouldn't be - we'd be expecting it.

So I mean basically you're kind of – you’re fundamental underlying business growth is actually higher than the adjusted EBITDA growth you're just reinvesting some of that and you'll see a significant acceleration from ’17 to ’18…

Exactly when Tim raised the question, one of the other reasons is we've had for the last few quarters I mean for more than a year maybe seven quarters we've had a decline in the services side of the business or the onsite delivery days. And we think that these add-on pass sales et cetera and these add-on service we’re going to reverse that but these are independent of the pass. It’s things where people used to just hire you independently and now you have to do it through the pass and this is what is declined some. I think part of our conservatism is to say we believe that whether it’s this quarter or next quarter or next quarter that that's going to turn with all these new services and offset that. But otherwise we do have a negative headwind onsite days that's pushing against us and that's part of our conservatism. We actually believe we're going to solve it, if so then we really are on the very conservative edge. If it takes us longer so solve than we think it might - than we hope, it might take us a little longer, but then once we get that solved, I think your point is exactly right, the investments aren't that many, I mean our investments are massive, we're not talking about investing 5 million, and 6 million and 7 million of expense in these things. These are incremental a $2 million of extra marketing and development expense so forth, so the real issue is can we overcome some of the trends we've had that have offset this growth and if we do it quickly enough that it all gets in this year or is it something that which we know we're going to solve it, but it takes longer. And so I think that's just a conservatism as I mentioned all of us have plans to do better in the next year certainly thought be in that range.

And actually good thing you brought that up because that was going to be my little follow up, which is, I'm not sure I completely understand those dynamics around the onsite days. Clearly there is increasing demand from your clients for your products or I mean that's pretty clear from the All Access Pass uptick. Can you just explain a little more depth exactly what's been going on with those onsite days the past, I think you mentioned seven quarters and why you expect that to reverse?

So the onsite days typically occur in one or two circumstances. One is where it's a brand new client, who doesn't know exactly what they're going to try to do and therefore they don't want to invest in certifying teachers inside their own companies, so it’s kind of a first time engagement, where we're in there and they come in and have a look at training and have this delivered for them. That's not what's been affected you know that still happens, they still got that passes like a great idea, but I just need a course tomorrow and week after tomorrow that's a good way of getting to know us after which they say, gosh this was great. And we then tell them about the pass and that they can get those same services like discount if they buy the pass. The second one where this really resides is that, there are some engagements that drive a lot of the service revenue. But which haven't been a sticky, so execution is a very sticky solution, but in the implementation we have lots of services up front, where a $90,000 track that somebody buys to take 25 managers through a track to get them certified in how to lead an execution engagement. That is, out of the $20 million we do in the execution practice only about $12 million of that is on the intellectual property side and $12 million is on the services side. And so, as we have provided more content for execution, where people can do more some of this on their own, two things happen. One, the populations are growing a lot and people are involved in the execution solution. But in the initial phase of them buying rather than having to buy services in order to do it and having to commit to this big heavier process, they can do it another way and so it’s primarily in a couple of categories like that and trust implementation where part of its focus with the sales force we’re going to sell all access, there's been less focus on selling that a little bit but it's more that if the client now is engaging us in buying the intellectual property in that, that period before they start actually implementing the solutions between the purchase et cetera, they just haven’t been buying services. And so I think that's the main area that's been affected is these implementations, we think it's just - and we can track them and think it's pretty much short term because they think there's new buyers now in fact are signing up for new services as we get in there on the discovery days. So we should see whether this quarter or next quarter is a flattening in the decline and then a starting back to turn it. We also have a - with this new - we have a new execution offering that I think will help drive. That's the circumstance that's been driving it, is a combination and it's really these bigger engagements, for now, the core content is being delivered to the All Access Pass rather than being simultaneous and the services are coming second, so I don’t know if that’s helpful a little bit.

Have you dimensionalized that with a number as far as how big that headwind is or has been?

We have, so in the third and fourth quarters, the headwind in the US direct offices was about $2 million a quarter. Now the margins are lower, so I mean the impact has been about $1.2 million, so let’s say 60% gross margin because it includes services and there's some travel associated that has no margin where they reimburse us for travel. So it hit has negatively about $1.2 million in the US direct offices in the third and fourth quarters. In the first quarter, my guess is it will be similar. On a year-over-year basis, it will be probably similar around a couple of million dollars, but it would have - and in each chase, in the fourth quarter it would have been more like it was in the third quarter but it's being offset by these new services. So as those get delivered, bookings them is one thing, delivery it might be 90 days later, we have some visibility into the idea that by -- into the second quarter, it should start to – it should flatten and start to turn by the third quarter and then we think it will be the amount of headwind will reduce every quarter after that. So maybe a year from now, we have no headwind hopefully or somewhere in that range and at least we’re flat. On a year-over-year basis, we would be growing that we get that 2 million back through additional services.

Okay. Got it. And one final thing, I know that one of the things we talked about previously was how you were looking to expand your sales focus for kind of your traditional benchmarking and Exxon Mobils, the big companies in the world to maybe more the middle market, maybe smaller companies, but it sounds like right now, you kind of have plenty of stuff on your hands just as far as getting existing clients on All Access Pass. Is that kind of still your next leg of growth kind of actually get through that?

First of all, I think most of our clients actually are in the middle market. Most of them are not Fortune 500 companies. We do business with all the Fortune 500, but it's not a deep penetration. We actually typically would have a deeper penetration with the 1000 to 500 person employers, that’s a really great spot for us and we have lots of business in the 200 to 500. So I think with us, the thing that has been an issue of growing -- if what your primary search -- primarily selling was a course, a specific course or a content area, even in a big company, we’re penetrated very deeply, because they were figuring which group was going to go through it. You are actually -- now, we were able to get more penetration in both. So I think really our strategy is to for -- we’ve organized so that the sales person, their collection of 60, 70 or 80 class signed accounts with whom they might be doing business with 20% of those today or 30% and the others are prospects is actually a pretty good mix of middle market big accounts and even smaller accounts with 200 or so employees. So I think the allocation of accounts is across markets. The approach is going to be the same though to go into those accounts as to what jobs they're trying to get done and have the All Access Pass be the methodology for delivering on it. And so I think our go to market will -- is really already across those. We don't go to small business per se and less than 200 hasn't been a target for us, but otherwise our mix is pretty much that -- in fact it would be helpful. Maybe it will just take note in a future conference call, we can give you a mix of -- how that mix -- what that mix looks like between large and medium and small accounts. Sorry, we’ve kept it so long, but this is -- really appreciate all the great questions.

And we have no further questions at this time. I’d like to turn the call over to Bob for closing remarks.

Great. Well, I just want to thank all of you so much for joining. We look forward to talking with you, if you’d like to catch up and thanks so much. We're very encouraged about what’s going on and appreciation your support and thoughtfulness. Thanks.

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