Franklin Covey Co. (NYSE:FC) Q3 2023 Earnings Call Transcript

Franklin Covey Co. (NYSE:FC) Q3 2023 Earnings Call Transcript June 28, 2023

Franklin Covey Co. beats earnings expectations. Reported EPS is $0.26, expectations were $0.22.

Operator: Good day and thank you for standing by. Welcome to the Third Quarter 2023 Franklin Covey Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Derek Hatch, Corporate Controller. Please go ahead.

Derek Hatch: Thank you, Victor. Good afternoon, everyone. On behalf of Franklin Covey, I want to welcome you to our third quarter fiscal 2023 earnings call. Before we begin this afternoon, I would like to remind everyone that this presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based upon management’s current expectations and are subject to various risks and uncertainties, including but not limited to, the ability of the company to grow revenues, the acceptance of renewal rates of our subscription offerings, including the All Access Pass and Leader in Me memberships, the ability of the company to hire productive sales and other client facing professionals, general economic conditions, competition in the company’s targeted marketplace, market acceptance of new offerings or services and marketing strategies, changes in the company’s market share, changes in the size of the overall market for the company’s products, changes in the training and spending policies of the company’s clients and other factors identified and discussed in the company’s most recent Annual Report on Form 10-K and other periodic reports filed with the Securities and Exchange Commission.

Many of these conditions are beyond our control or influence, any one of which may cause future results to differ materially from the company’s current expectations and there can be no assurance the company’s actual future performance will meet management’s expectations. These forward-looking statements are based 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’d like to turn the time over to Mr. Paul Walker, our Chief Executive Officer. Paul?

Paul Walker: Thank you, Derek. Hello, everyone. Thanks for joining us today. We are glad to have the chance to talk to you today. Joining me on the call are Steve Young, our CFO; Jennifer Colosimo, President of our Enterprise Division; Sean Covey, President of our Education Division and other members of our executive team. We’re also happy to have Bob Whitman, our Executive Chairman and Chairman of the Board with us also. I’d like to start-off by expressing how pleased we are with the continued strength, durability, and growth of the business and of our business model. This strength and durability are evident in our third quarter year to date and latest 12 months results, and we’re pleased to reaffirm our fiscal 2023 guidance, that we expect to achieve adjusted EBITDA between 47 million and 49 million in constant currency.

I’d like to begin today by briefly sharing a few headlines from the quarter. First, our revenue growth continued to be strong. As you can see shown in Slide 4, since the conversion of our subscription business model in fiscal 2017, our subscription and subscription services sales have grown by more than $150 million to $222.2 million. We’re pleased that driven by the continued strength of our subscription business, both our overall revenue growth and our subscription and subscription services revenue growth continued to be strong in the third quarter and for the year to date and latest 12 month periods. For overall company revenue, as you can see on Slide 5, in the third quarter, total company revenue grew 8% or 9% in constant currency, or $5.3 million on top of the strong 13% growth achieved in last year’s third quarter.

A quarter which benefited from comping against the pandemic impacted third quarter in the prior year. For the year to date and latest 12 month periods, revenue grew a strong 10% and 11% respectively or 12% year to date and 13% for the latest 12 months in constant currency. Growth of our subscription and subscription services revenue was even stronger, particularly considering the pandemic comp enhanced growth last year. As shown on Slide 5, in the third quarter, our total subscription and subscription services revenue grew 9% or $4.9 million on top of the strong 31% growth achieved in last year’s third quarter. For the year to date and latest 12 month period, subscription and subscription services revenue grew a strong 15% and 17%, respectively.

I’d like to briefly provide additional context on our year-over-year revenue growth and its comparison to growth over the past several years. For total company revenue, as shown in Slide 6, for the latest 12 month period through fiscal 2022’s third quarter, our total latest 12 month revenue growth was a very significant $48.8 million. Again, as noted, the magnitude of this growth partially reflected benefiting from comping against the pandemic impacted periods in fiscal years 2020 and 2021. In comparison with that significant growth, our percentage revenue growth for the latest 12 month period through this year’s third quarter was lower. However, as you can see on an absolute dollar basis, the $28.4 million of revenue growth we achieved in the latest 12 month period through this year’s third quarter was very strong.

In fact, as you can see, the $28.4 million of growth in the latest 12-month period through this year’s third quarter represents the second highest dollar amount of growth for any comparable period in any of the past six years. It was exceeded only by 2022s growth, which as noted benefited from a comparison against the pandemic period. And to normalize for last year’s pandemic benefited comparison is also shown in Slide 6. Our more than $77.2 million growth on a rolling two-year basis over the last two years exceeded that of any other two-year period since our business model conversion, both in terms of absolute dollars of growth and percent of growth. Importantly, if we were to achieve the same strong $28.4 million of revenue growth in the next 12 months that we did in the last 12 months, that level of growth would itself represent approximately 10% revenue growth in the coming year.

From a year-over-year comparison standpoint, by the end of the first quarter this fall, we expect to lap the COVID influenced more difficult growth percentage comps. And beginning in the second quarter of fiscal 2024 comparisons will return to a more apples-to-apples basis. This same pattern has played out in our subscription and subscription services revenue. As you can see shown in Slide 7, for the latest 12 month period through fiscal 2022’s third quarter, our subscription and subscription services revenue grew by an extremely strong $50.7 million. Again benefiting from comping against pandemic impacted periods in fiscal 2020 and 2021. Again, in comparison with that very large growth, our percentage revenue growth for the latest 12 month period was lower.

However, on an absolute dollar basis our $32 million of subscription and subscription services revenue for the latest 12 months through this year’s third quarter was very strong, representing the second highest 12 months dollar growth amount over the past six years exceeded only by 2022’s growth, which as we’ve noted benefited from its comparison to a pandemic impacted period. And again, to normalize for last year’s pandemic benefited comparison on a rolling two-year basis, our $82.7 million of subscription and subscription services revenue growth for the last two-year period far exceeded that of any other two-year period since our business model conversion both in terms of absolute dollars of growth and percent of growth. The second thing I’d like to note is that the durability of our sales also continues to increase and the extent of our visibility into future sales growth continues to expand.

Since our conversion to our subscription business model in fiscal 2016, our balance of deferred subscription sales both billed and unbilled has grown consistently and rapidly. As shown in Slide 8, our balances of deferred subscription sales billed and unbilled have grown from $17.8 million in fiscal 2016 to $140.9 million for the latest 12 months through this year’s third quarter. And this strong growth in deferred subscription sales continued to grow strongly in the third quarter increasing $24.4 million or 21% to $140.9 million, up from $116.5 million in last year’s third quarter. Achieving this strong growth in our balance of differed subscription sales in the third quarter provides an extremely strong foundation for our continued ability to achieve significant future sales growth as all of this deferred sales balance is recognized in the coming quarters and years.

Adding another dimension to the increasing durability of our revenue is that at the same time our deferred subscription sales balances are increasing, the average duration of our subscription contracts is also increasing. As a result of the significantly increasing percentage of our All Access Pass contract value that is represented by multi-year contract of at least two-years. As also shown in Slide 8, for the latest 12 months through this year’s third quarter, in our North American enterprise operations, the percent of our total All Access Pass contracts represented by multi-year contracts of at least two years, increased to 52%, up from 42% at the end of the third quarter last year. And the percentage of contract amounts we have invoiced represented by those multi-year contracts of at least two years increased to 57%, up from 51% at the end of the third quarter fiscal 2022.

The third point I’d like to make is that our gross margin and operating SG&A as percent of sales remain extremely attractive. As shown in Slide 9, our gross margin percent has increased steadily over the years improving from 67.6% in fiscal 2016 to 75.8% for the latest 12 months through this year’s third quarter. As also shown in Slide 9, our gross margin percent in the third quarter was a strong 75.9% and was 76.1% year to date and 75.8% for the latest 12 months. We’re also pleased that operating SG&A as a percent of sales in the third quarter improved to further 157 basis points to 59.3%, compared to 60.8% in last year’s third quarter. And that for the year to date and latest 12 month periods, operating SG&A as a percent of sales improved 140 basis points to 60.5% and 211 basis points to 59.8% respectively.

Fourth, adjusted EBITDA growth continued to be strong. The combination of strong revenue growth, significant gross margins and declining operating SG&A as a percent of sales has increased – has resulted in significant increases in adjusted EBITDA. As shown in Slide 10, since the beginning of the pandemic’s impact in 2020, adjusted EBITDA has increased more than $30 million from $14.3 million in fiscal 2020 to $44.9 million for the latest 12 month period, reflecting a 37% flow through of the $83 million increase in sales during that same period. We’re pleased that this robust growth in adjusted EBITDA continued in the third quarter increasing to a higher than expected $11.9 million, compared to the $10.9 million in last year’s third quarter.

In constant currency adjusted EBITDA in the third quarter was $12.3 million. Year-to-date through the third quarter, adjusted EBITDA increased $2.7 million or 9% to $31.6 million or $32.9 million in constant currency. And for the latest 12 month period, adjusted EBITDA increased 14% to $44.9 million, representing flow through of 19%. Building on this strength and as I mentioned previously, we’re pleased to reaffirm our fiscal 2023 guidance that we expect to achieve adjusted EBITDA between $47 million and $49 million in constant currency. We then expect adjusted EBITDA and constant currency to increase to approximately $57 million in fiscal 2024 and to approximately $67 million in fiscal 2025 and then to continue to increase aggressively each year thereafter.

Finally, as it relates to the purchase of stock during the third quarter after continuing to make growth investments in the business, we invested $25 million to purchase 664,000 shares. Over the past five quarters, we’ve invested $50 million to purchase a total of 1.26 million shares or a significant 8.8% of the company’s total shares that were outstanding at the beginning of the five quarter period. We’re pleased to have been able to purchase such a significant amount of stock at what we view as a compelling value. The ongoing strength of these outcomes reflects the power of our continued focus on three fundamental priorities. First, being our clients’ partner of choice for addressing the challenges that really matter to them. Second, accomplishing that first priority with a strong and profitable business mode.

And third, reinvesting these profits in cash flow at high rates of return to create even more value for shareholders. As shown in Slide 11, our first priority being our clients’ partner of choice for addressing the challenges that really matter to them translates into high client and revenue retention. Strong growth in revenue and an increasingly large and growing lifetime customer value. Our second priority, accomplishing the first priority with a strong and profitable business model results in a significant portion of our revenue growth flowing through the increases in adjusted EBITDA and cash flow. Importantly, this means that shareholders can earn significant cash on cash returns on their investment, at the same time they see the value of their investment continue to grow.

And our third priority, reinvesting these profits and cash flow at high rates of return to create even more value translates into the creation of substantial additional compounding shareholder value. Shareholders benefit from both the expected continued increase in the value of the company and the prospect of owning an increasing share of it. I’d like to briefly report on our strong progress in each of these three priorities in our third quarter year-to-date and for the latest 12 months. To accomplish our first priority, that of being our clients partner of choice in addressing the challenges that really matter them, we’ve organized the entire company around being the partner of choice for our clients and helping them address their mission critical opportunities and challenges.

We want to be so effective at doing this as they become clients for life. This loyalty in turn translates into high durability of our revenue and significant growth in the lifetime value of our customers. This is reflected in the following outcomes as you can see shown in Slide 12: Consistently winning new logos or clients. Having subscription and subscription services sales continue to increase as a percent of total company sales, retaining substantially all of our subscription revenue. Increasing our average subscription contract size, increasing the percent of logos and multi-year contracts. Continuing to have clients purchase a considerable amount of services to help them achieve their performance breakthroughs. And achieving a high and growing lifetime customer value.

We’re pleased as you can see in Slide 13 that each of these key outcomes remained strong in the third quarter and has for the year to date and for the latest 12 months. In fact, Slide 14, as you can see, provides additional information on some of these outcomes. As shown, subscription and subscription services sales for the latest 12 months now account for 79% of total company sales. Average subscription and subscription services revenues increased from approximately $20,000 when we launched AAP to $77,000 to the end of fiscal 2022. As noted a moment ago, the percentage of clients who are now in a multi-year contract continues to increase and the percent of the dollar amount of contracts we invoice represented by those multi-year contracts continues to increase.

And finally, our clients continue to purchase considerable amounts of services. Services which are an important part of our solution and a unique point of strategic differentiation. Just a brief report on our second priority, which is to accomplish priority one with a strong and profitable business model. And doing so, such that a significant percent of our sales growth flows through to increases in adjusted EBITDA and cash flow. As shown in Slide 15, the strength of our business models reflected in the following outcomes: First, continuing to achieve strong gross margins; Second, having a cost of acquiring a customer that is less than the sales generated even in the first year of a subscription contract; Third, having operating SG&A decrease as a percent of sales even as we grow; And finally continuing to grow our adjusted EBITDA, which has significant increases to free cash flow.

As you can see on Slide 16, we’re pleased that these outcomes also – we made strong progress in each of these areas in the third quarter. As shown in Slide 17, these specific outcomes are as follows: gross margin remains very strong even after absorbing education division, symposium expenses, and increased travel related to on-site delivery. Operating SG&A as a percent of revenue continues to decline and we’re achieving strong flow-through of incremental revenue of growth and adjusted EBITDA due to our relatively fixed cost structure and high growth margin and contribution levels. And finally, a brief report on our third priority to reinvest these profits and cash flow at high rates of return to create even more value. As shown in Slide 18, successfully achieving this priority is reflected in the following outcomes, investing capital in the business at high rates of return, and returning substantial amounts of excess cash to shareholders in the form of stock buybacks.

As shown in Slide 19, we’re pleased that our investments have met each of these key outcomes over time. And as shown on Slide 20 during the third quarter, as I mentioned, we returned more than $25 million to shareholders by purchasing 664,000 shares. And over the last five quarters, we’ve invested $50 million to repurchase approximately 1.26 million shares or 8.8% of the company’s total shares. Steadily advancing each of these priorities is placing us in a special category of companies. A company that consistently and simultaneously seeks to strengthen and expand our strategic mode in the most important and lucrative space in our chosen markets generate high rates of growth in adjusted EBITDA and cash flow, and third, a company that generates outsized cash on cash and long-term returns for shareholders by investing that cash to create additional value.

Consistent with this, as I said, we’re pleased to reaffirm our guidance that we expect to achieve adjusted EBITDA between 47 million and 49 million in constant currency for fiscal 2023. We’re pleased that for the latest 12 months through the third quarter, our adjusted EBITDA is already close to the low-end of that range and as we’ll discuss in a minute, we expect further growth in adjusted EBITDA in the fourth quarter. We then expect adjusted EBITDA in constant currency to increase to approximately 57 million in fiscal 2024 and to approximately 67 million in fiscal 2025 and then to continue to increase meaningfully each year thereafter. I’d now like to turn some time to Steve to discuss our results and quarter for the quarter and year-to-date in a little more detail.

Steve?

Steve Young: Thank you, Paul. Good afternoon, everyone. It’s a pleasure to be with you today. I’d like to briefly provide more detail on the factors underlying this strong performance focusing on the results in three key areas of our company. Specifically our enterprise business in North America. The enterprise business internationally in both our direct offices and international licensee partner operations and our education business, which is primarily in North America. As shown in Slide 21, results in our enterprise business in North America continued to be strong in the third quarter year-to-date and latest 12 months. Reported sales in North America, which account for 73% of total enterprise division sales grew 3% in the third quarter on top of 20% growth in last year’s record third quarter.

9% year to date and 11% in the latest 12 months. We are pleased with the 23% growth we’ve achieved an enterprise business in North America over the past two-years. The first year of which, as Paul noted is benefited from comping to the prior year COVID impacted result. As noted, we expect the beginning in Q2 of FY 2024, our year-over-year comparisons will return to be an apples-to-apples basis. Subscription and subscription services sales in North America grew 3% for the quarter on top of 29% growth in last year’s third quarter. Subscription and subscription services sales increased 9% year to date and 12% for the latest 12 months. We’re pleased with the growth rates we’ve achieved in the enterprise business in North America, particularly in light of the fact this growth is comping over pandemic impacted quarters.

Our balance of deferred sales billed and unbilled in North America grew 19%, compared to last year’s third quarter balance, establishing a strong base for next year’s growth. And the percent of North America’s All Access Pass invoiced sales represented by multi-year contracts, as mentioned, increased from 57% for the latest 12 months ended this year up from 51% for the latest 12 months last year. And the percentage of contracts that were for multi-year periods increased to 52% from 42% in the latest 12 months last year. As shown in Slide 22, revenue in our international operations, which accounts for approximately 17% of our total Enterprise Division revenue increased 1.7 million or 23% in the quarter, primarily driven by improved results in China.

As also shown in Slide 22, our international licensee partner sales increased 9% in the third quarter, 10% year to date, and 16% in the latest 12 months. We’re pleased with these results, particularly considering the adverse impact of FX and a challenging geopolitical environment. Finally, the results in our Education Division, which accounts for approximately 24% of total company sales, continued to be strong in the third quarter year to date and latest 12 months. As shown in Slide 23, education sales grew 18% or 2.6 million in the third quarter, 23% year-to-date, and 21% in the latest 12 months. Education, subscription and subscription services sales growth was strong increasing 19% in the third quarter, 24% year to date, and 22% in the latest 12 months.

Education’s balance of deferred subscription sales, billed and unbilled, increased 15% in the third quarter and year-over-year retention of Leader in Me schools remained very high at approximately 90% for the latest 12 months. Now, cash flows from operating activities. As shown in Slide 24, our cash flows from operating activities were $25.9 million at the end of the third quarter. This is consistent with our expectation that cash flows would strengthen in the back half of this fiscal year. Finally, even after investing more than 50 million of excess liquidity for stock purchases in the last five quarters as mentioned, including the 25 million of stock purchase we did in this quarter. We ended the quarter with more than 100 million in liquidity, including 39.3 million in cash and with the full 62.5 million revolving credit agreement undrawn.

So now, going on to guidance. As Paul noticed, previously said and as shown in Slide 25, we’re pleased to reaffirm again that our guidance is we expect to achieve adjusted EBITDA of between 47 million and 49 million in constant currency for FY 2023. As noted, for the latest 12 month period through the third quarter, our adjusted EBITDA is already very close to the low-end of that range. We expect further growth in adjusted EBITDA, of course, in the fourth quarter. As we do each year, we expect to provide formal FY 2024 guidance when we report year-end results. However, our projected outlook is that we expected adjusted EBITDA and constant currency to increase to approximately 57 million in FY 2024 and to approximately 67 million in FY 2025 and then continue to increase each year thereafter.

Because of significant percentage of the company’s growth in revenue flows through to adjusted EBITDA, achieving these future adjusted EBITDA targets only requires revenue growth in the high-single-digit to low-double-digit ranges. However, our multi-year revenue outlook is to move from high-single-digits growth to low-double-digits and into low teens in coming years. As noted earlier, the company’s latest 12 month revenue growth of 11% was on top of 17% growth in FY 2022 that of course benefited from company against 2021’s pandemic impacted numbers. Consistent with this guidance, noting our third quarter year to date adjusted EBITDA after the constant currency adjustment of 1.3 million is 32.9 million. We expect adjusted EBITDA in the fourth quarter to be between 14.1 million and 16.1 million in constant currency.

We feel good about achieving this result. As to revenue, consistent last quarter’s update, we expect revenue for the year to be approximately 284 million, reflecting approximately 81.4 million of revenue for the fourth quarter. We have confidence in these targets, despite the possibility of dramatic changes in the world geopolitical environment, the economy, and other factors could impact our expectations. So, Paul, back to you.

Paul Walker: Thank you, Steve. Appreciate that. We’re now ready to begin the transition of the Q&A portion of the call. And as we do, I’d like to begin by addressing three questions. Some of you have previously indicated you have an interest in. First, some have asked how potential uncertainty in the current economic environment is impacting or how it may impact the durability of our subscription business? I thought I’d provide you just a little bit of color about what we’re seeing right now across our Enterprise All Access Pass business, and I’ll make just maybe four quick points here. First, as you know, we’ve chosen to organize the entire company around the most important must win challenges and opportunities our clients face.

Therefore, one aspect of durability is solution durability. Our solutions to these must win challenges and opportunities are viewed as best-in-class at driving collective action and behavior change. And these challenges and opportunities continue regardless of the external environment. Second, as we reported, we continue to be pleased with our growth in a number of new logos, growth which shows clients continued to desire and need to invest to address their top challenges and opportunities. Year-over-year revenue from new logos has grown in each of the first three quarters this fiscal year. Third, an increasing and sizable portion of our clients recognize that they benefit from a long-term partnership with Franklin Covey. After considerable focus and effort over the past few years, we’ve grown the percentage of clients in the U.S. and Canada who are on one of these multi-year contracts from zero to, as we’ve said, 52% at the end of the third quarter.

And of course, the associated revenue is 57% of our subscription revenue. And this growing base of multi-year clients creates tremendous durability and future visibility and predictability of revenue. Interesting point, not only is the annual revenue [retention in] [ph] these multi-year contracts at least 100% during the term of their contract. At the conclusion of their multi-year contract term, the beginning of a next contract period, our already high revenue retention percent is even higher with these multi-year contract clients. In fact, it’s 50% higher than that of their single-year term peers on an already high base. Finally, last quarter, we reported that while the vast majority of our large and growing subscription business was unaffected by the macro environment, those few clients who were combined with the high comp over the prior year’s elevated growth percentage, partially due to the COVID impact the previous year, that did have some impact in the quarter on revenue retention and overall All Access Pass growth rates.

We’re pleased to report that our revenue retention percentage strengthened meaningfully in the third quarter, compared with the second; and we’re expecting the fourth quarter to be even stronger, returning to roughly the same strong quarterly retention levels we achieved throughout last fiscal year and in the first quarter of fiscal 2023. We continue to feel incredibly good and have a high level of confidence about the durability of our All Access Pass subscription business. If I could, maybe a second question that’s come up from time to time is related to how we’re thinking about the growth of our sales force? Specifically, the key client facing revenue generating roles of client partner, implementation strategist, and Leader in Me coach. As we reported last quarter, from the end of fiscal 2012 through the end of fiscal 2022, we’ve grown our number of client partners by 250% from a 120 to 300.

Additionally since the launch of our subscription business in fiscal 2016, we’ve created and grown two additional key client facing account roles implementation strategists in our Enterprise division, and a Leader in Me coaches in our Education Division from zero to approximately 150 people. Today, the professionals in these three roles represent far and away the largest client facing organization in our company’s history, and a team that is among the largest in our industry. Each of these roles is critical to driving new client subscriptions, retention expansion, and the sale of subscription services. As we prioritize the successful development and ramp of each of these associates, we expect to fiscal 2023 with approximately 450 client facing professionals and then anticipate that we will hire roughly 40 net new professionals across these three client facing roles in fiscal 2024.

Additionally and importantly, the ultimate revenue potential and expectation for a new client partners growth beyond his or her initial ramp up is increasing significantly. Prior to the launch of our subscription business we did not have a contractual and consistent recurring revenue model. As a result, once the client partner reached their top and ramp up goal of achieving 1.3 million in annual sales, it was more difficult for them to consistently achieve revenue growth above that $1.3 million fully ramped level. And because they had to replace a lot of revenue each year, when they did grow above the $1.3 million level, in the aggregate, these fully ramped client partners tended to grow their revenue by only 2% or 3% each year. Today, nearly eight years into our conversion to subscription, our data and experience demonstrate that the average client partner once ramped to $1.3 million will continue to grow their revenue by approximately 10% for at least the next five years.

This significantly increased growth rate for fully ramped client partners is made possible by a combination of important factors, including: our high levels of client and revenue retention, the fact that more than 50% of our clients are in a multi-year contract, the significant headroom we have for expansion within nearly every one of our clients, the addition of implementation strategist and Leader in Me coach roles, and our increasing sales enablement and sales management capabilities. The combination of these factors gives us tremendous confidence to continue expanding each of these key client facing account roles and it gives us confidence in our ability to generate significant future revenue growth. And third question, before we open to your questions today is, what led us to decide to invest $50 million to purchase more than 8% of the company’s outstanding shares over the past five quarters, while continuing to make significant growth investments in the business?

Sometimes we’re asked to share how we approach the decision to purchase shares. I’d like to briefly share our framework. First, we work to ensure that we’re making all of the high return internal investments in content, technology, sales force expansion, and client facing team expansion necessary to meet our growth objective and expand our strategic moat. Second, we want to ensure that we always have the liquidity available to quickly complete small tuck-in acquisitions, which can further strengthen our strategic moat, such as we did with Jhana, Robert Gregory, and Strive. Third, we want to always maintain additional significant liquidity to provide plenty of cushion to be able to accelerate expansion when opportunities arise, and to provide a margin of safety.

As Steve mentioned earlier, even after continuing to make significant ongoing investments in technology, content, and sales force and client facing team expansion and utilizing $50 million of excess liquidity to purchase shares over the past five quarters we’re pleased to currently still have more than $100 million of liquidity. Fourth, the determination to utilize $50 million of excess cash to purchase shares has been an easy one over the past five quarters and is really pretty straightforward. It’s because we have an extremely strong conviction that at current values our stock has and continues trade at very significant discount to its true value. We believe the returning capital to shareholders in the form of stock purchases offers a great way to increase shareholder value, both because of the high expected rate of return on the investment, and because of the increased share of the company they own.

Specifically, as it relates to the ability to create shareholder value by repurchasing shares, our analysis is that the price at which we’ve been purchasing shares reflects an extremely deep discount to what we believe is the true value. First and foremost, we believe that we’ve been purchasing shares at an extremely deep discount to the net present value of our expected future cash flows, a partial map of which we’ve shared with you by letting you know that we expect to achieve adjusted EBITDA of between 47 million and 49 million, and then 57 million and 67 million in constant currency in the coming two years. Second, we believe the multiple adjusted EBITDA reflected by the total enterprise value at which we are currently trading also represents a very significant discount to the multiple appropriate to the rate of growth in adjusted EBITDA and cash flow we have achieved and expect to achieve in the future.

Third, given the significant levels of adjusted EBITDA and cash flow being achieved, at current values, we can earn a remarkably high cash on cash return on our investment, a cash on cash return approaching 10%, and still retain all the upside. Fourth, whereas the discounted net present value, valuations of many companies has continued to depend heavily on the expectation of an expansion in market multiples, and or a high terminal value, we believe that at our current share price more than half of our total enterprise value is reflected in just the combination of the current cash we already have on the balance sheet and the more than 150 million of additional cash flow we expect to generate over the next few years. We find buying stock at a discount to be attractive.

I hope beginning the Q&A session with posing these three questions and answering them has been helpful. We’d now like to ask Victor if he’d open the lines for any additional questions that you have today.

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Q&A Session

Operator: Sure. [Operator Instructions] Our first question comes from the line of Jeff Martin from ROTH. Your line is open.

Jeff Martin: Great. Thanks. Good afternoon, everyone.

Paul Walker: Hi, Jeff.

Jeff Martin: Hi. Paul, could you expand a little bit more on the revenue retention impact that you saw in Q2? What maybe was more client specific than market related? And then what leads to conviction for significant improvement in Q4?

Paul Walker: Yes, great. Great question. So, as we reported at the end of second quarter, there were a handful of clients who – we used the metaphor, if you recall, deeper snow. But there were a handful of clients who were themselves not unaffected by some of the uncertainty in the environment. And while our – the percentage of clients we retain in any given quarter remain roughly the same. This handful of clients, some of whom were a few larger clients, who either didn’t renew or downgrade the size of their past drug on our – provided a drag on our revenue retention. We talked a bit about that quarter. That to the degree which that occurred in the second quarter, while there was some of that in the third quarter far less.

We had it with a much better revenue retention quarter in third quarter. And just what we’re seeing in our pipelines, the conversations we are having with our customers. As you know, we have a quarterly business review with every one of our subscribing clients where we sit down with them and we actually begin the renewal discussions far in advance of that final quarterly QBR. And so, in those discussions, the pipelines we’re seeing what I think was a bit of a bottoming out there in Q2 and a return to normal much more normalized retention rates in Q4 and as we move into next year.

Jeff Martin: Great. That’s helpful. And then wanted to, kind of bridge the gap between, let’s take North American Enterprise Division, for example, the gap between the subscription and subscription services revenue growing at 3% in the quarter, 9% year to date relative to high teens to low 20s percent growth in deferred revenue. Are clients just pushing out some of the projects, are they taking a pause? Is there anything underlying that dynamic?

Paul Walker: It’s a good question. Part of the comparison there on a percentage basis is, we’ve noted a few times here in today’s remarks that the 3% this year is comping over a very, very significant growth percentage last year. And so what we’re – frankly what we’re seeing is, if we normalize for that and just looked over a couple of years, we’re quite pleased with where the level and the size of that subscription-related services business at this point. If we had to go back a couple of years and pick where we thought that would be and what would be an exciting number, we’re about in same spot. It just came in with a really big first year of growth because of the comping over the pandemic. And then this year is a lower growth percentage.

To your specific question, we’re not, I mean, we’re not seeing a lot in clients pushing things out. We’re actually quite pleased with the number of clients who even in the environment are signing year contracts. There’s a meaningful jump this year year-over-year in the percentage of revenue that’s now multi-year and in the percent of clients, didn’t know if we’d ever get above 50% back in the day, thought we might get to about a third of our contracts being multi-year, now we are more than half. I think it speaks to clients recognizing that the types of challenges that they need and want to address, aren’t solved in a quarter or even a year. They view this as a long-term partnership with us, and I think we’re seeing that show up and being reflected in the numbers.