Franklin Covey Co. (NYSE:FC) Q2 2023 Earnings Call Transcript March 29, 2023

Operator: Good day and thank you for standing by. Welcome to the Second 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. 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.

Derek Hatch: Thank you. Good afternoon, everyone. On behalf of Franklin Covey, I want to welcome you to our earnings call for the second quarter of fiscal 2023, and I want to hope that your family -- you and your families are enjoying some nice warm west spring weather on today as well. Before we begin, we'd like to remind everybody that this presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based upon management's current expectations and are subject to various risks and uncertainties, including but not limited to, the ability of the company to stabilize and grow revenues, the acceptance of renewal rates of our subscription offerings, including the All Access Pass and Leader in Me's memberships, the duration and recovery from the COVID-19 pandemic, the ability of the company to hire productive sales professionals, general economic conditions, competition in the company's targeted marketplace, market acceptance of new offerings or services and marketing strategies, changes in the company's market share, changes in the size of the overall market for the company's products, changes in the marketing and 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. I too hope you're doing well. I'm joined here today by Steve Young, our CFO; Jen Colosimo, President of our Enterprise Division; Sean Covey, President of our Education Division and several members of our executive team. We're happy to have Colleen Dom here, our Head of Operations as well. We're also happy to have Bob Whitman, our Executive Chairman, with us also. In the midst of an increasingly uncertain economic environment, we are pleased to report that our second quarter revenue was $61.8 million or 9% higher than prior year. In constant currency, our second quarter revenue grew approximately 11% to $62.7 million, even after lower than anticipated sales in China and the decrease in rental income, which combined made up an additional $1.1 million of impact.

We're also pleased to report that adjusted EBITDA for the fourth quarter was $8.2 million. In constant currency, adjusted EBITDA for the quarter was $8.4 million and would have been even higher if not for China and the absence of the rental income. The current economic environment obviously continues to be a challenging one for both companies and investors. Everyone is hiking in deeper snow now than they were even 90 days ago. Based on the strength of the quarter and year-to-date results and our confidence in the strength of our pipelines, even in this environment, we're pleased to be able to reiterate our full year adjusted EBITDA guidance in constant currency of between $47 million and $49 million. As to revenue, compared to our estimate at the beginning of the year of $294 million, we expect revenue to be impacted by approximately $3.5 million due to FX, an additional $2.5 million because of slower than expected recovery of sales in China and Japan, and by an additional $4 million to reflect the expected impact of the deeper snow through which our clients are now hiking.

Importantly, as you know, Franklin Covey's strategy, business model and approach were really developed and refined with times like these in mind. Specifically, five key elements of Franklin Covey strategy and business model were each designed on one hand to allow us to take advantage of opportunities. The kinds of opportunities we continue to see and on the other hand to build in resilience and to enable us to achieve strong growth in revenue, adjusted EBITDA and cash flow even in challenging economic circumstances. The individual and collective strength of these five strategic elements which you can see shown in Slide 4 is being reflected in our second quarter year-to-date and latest 12-month results. These five elements of our strategy and business model are as follows.

The first is, that we've chosen to help clients -- the types of challenges we've chosen to help clients address are mission critical and extremely durable. As you know, we help organizations and schools achieve the kinds of results that require the collective action of significant numbers of people. These kinds of challenges are mission critical and extremely durable, and they don't become less important or easier when the external environment becomes more difficult, in fact quite the opposite. As a result, a number of what are now among our largest client relationships were first established during and immediately after the great financial crisis. A key metric which shows both potential clients ongoing desire to address these challenges and their trust in selecting us as their partner, is our ability to win new clients or new logos, in both good and more challenging times.

We're pleased that our contracted new logo revenue in the second quarter year-to-date and for the latest 12 months has remained very strong. A second key element of our strategic strength is the effectiveness of our solutions in helping clients address these challenges. This builds tremendous client commitment and loyalty, which in turn results in achieving strong growth in subscription and subscription services revenue, having a significant percent of clients who enter into multi- year contracts, achieving strong levels of contracted revenue and high levels of revenue retention, and having clients purchased significant amounts of services to help them achieve their objectives. We are pleased that even in the current economic environment all four of these metrics remained strong in the second quarter, year-to-date and for the latest 12 month periods.

First subscription revenue remained very strong in the second quarter year-to-date and for the latest 12 months. As shown in Slide 6, total company subscription and subscription services revenue grew 15% in the second quarter, has grown 18% year-to-date and 22% for the latest 12 months, with All Access Pass subscription, subscription services revenue growing 11% in the second quarter, which was on top of 29% growth in the second quarter of last year, 15% year-to-date, which was on top of 28% growth year-to-date, through the second quarter of last year and 22% in the latest 12 months. And in our education business Leader in Me subscription and subscription services revenue grew 30% in the second quarter, 27% year-to-date and 23% in the latest 12 month period.

Second, as shown in Slide 7, the percent of our North America All Access Pass subscription contract value represented by multi-year contracts of at least two years has increased significantly. From 47% in last year's second quarter to 55% in this year's second quarter. This reflects our clients long term commitment to address their big opportunities and challenges utilizing our solutions. Third, we also achieved strong levels of invoice revenue and high revenue retention. Again, we're pleased with the significant levels of revenue that we contracted during the second quarter and in the year-to-date and latest 12-month periods. As shown in Slide 8, invoice revenue in the Education Division grew 30% or $1.8 million in the second quarter, 29% year-to-date and 19% for the latest 12 months and our balance of deferred education revenue increased $3.1 million or 18% to $20.2 million.

As shown in Slide 9, invoice revenue in our international licensee partner operations grew 13%, with some partners operating well above pre-pandemic levels, while others to economies were harder hit are working their way back to pre-pandemic levels. Invoice revenue in China and Japan, continued to be below prior year, but is expected to improve in the back half of this year. As shown in Slide 10, in the Enterprise Division, in last year's second quarter, we established a new high watermark for a second quarter for the total amount of All Access Pass amounts invoiced. With invoiced amounts increasing 25% or $5.6 million to $28.5 million, which was somewhat benefited by comparing to the prior year's pandemic impacted result. We're pleased that even against this high watermark and in a more difficult environment, we were able to further increase the total amount of All Access Pass amounts invoiced in this year's second quarter and for the year-to-date and latest 12 month periods.

Invoice amounts grew 4% or $1.2 million to $29.8 million in the second quarter, 8% or $3.4 million year-to-date and 11% or $9.7 million for the latest 12 month period. We're pleased with the ongoing strength of the total amounts we invoiced during the second quarter and the fact that this growth rate was less than last year's second quarter primarily reflects two factors. First, that we were comping against the magnitude of last year's 25% growth; and second, that in this environment while the number of All Access Pass clients who renewed or expanded their All Access Pass in this year's second quarter increased. These increases were somewhat offset by an increase in the average size of the All Access Pass contracts, not able to renew in the second quarter.

Importantly, as shown in Slide 11 for the entire company, our balance of billed and unbilled deferred revenue at the end of the quarter was $145.8 million, reflecting growth of $26.5 million or 22% versus last year. Of this $26.5 million increase in total deferred revenue, $5.8 million was growth in deferred subscription revenue representing growth of 8%, with the other $20.7 million, reflecting 42% growth in unbilled deferred revenue, which has not yet been invoiced, but which will be invoiced with a 100% surety in the coming quarters. This growth in unbilled deferred increases visibility and predictability into future revenue and provides a meaningful tailwind for growth in our invoiced amounts in the coming quarters. Fourth, as shown in Slide 12 purchases of All Access Pass subscription services also grew in the quarter.

The amount of All Access Pass subscription services revenue in the Enterprise Division has grown significantly over the years, increasing from 44% of total subscription sales in fiscal 2020 to 52% in fiscal 2021, it then increased significantly to 62% of subscription sales in fiscal 2022, which again was somewhat benefited by comping against the prior year's pandemic impacted results and it's remained at this high level through this year's second quarter. In last year's second quarter, sales of subscription services in the quarter grew a very significant $3.9 million or 53%. We are pleased that even against a difficult comp, and in a more difficult environment, we were able to achieve growth in the amount of services purchased in this year's second quarter of $200,000 or 2%.

This reflects the ongoing commitment of our clients have in solving their must-win challenges even in this difficult environment. The third element of our strategy is the significant diversity in our base of clients in the industries and segments in which we operate in the Enterprise Division and that our Education Division serves a completely different market. This diversity provides a strong foundation for growth and can limit the extent of concentrated impact of economic storms that may occur. No individual client accounts for more than 2% of our revenue. And as you can see on Slide 14, we have no significant concentration of revenue in any particular industry. Fourth, the strength of our subscription business model is driving strong growth in revenue, adjusted EBITDA and cash flow.

Three key factors underly the strength and growth of our subscription business and its ability to drive strong growth in adjusted EBITDA and cash flow. First, is that the lifetime customer value of a typical subscription contract is large and growing. For example, as shown in Slide 16, and as we showed last quarter, the typical All Access Pass contract with this relatively large initial value, high annual revenue retention, strong gross margins and significant amount of recurring All Access Pass subscription services, ultimately becomes an asset worth hundreds of thousands of dollars. Second, is that the increasing duration of our subscription contracts further increases their durability and their value. And third -- the third point is that our constant -- our cost of acquiring a new All Access Pass subscription is not only much less than the contracts lifetime value, but even less than a clients first year All Access Pass spend.

The combination of these factors allows for the achievement of significant growth in All Access Pass and Leader In Me revenue, with high flow-through of incremental revenue to increases in adjusted EBITDA and cash flow. Finally, our significant liquidity provides us the flexibility to take advantage of opportunities for accelerated growth. Over the years, we've built up and maintained significant liquidity and have no net debt. As a result, subject to rigorous budgeting and investment processes, we've been able to consistently make investments in three important areas: first, we've always been able to make significant ongoing investments in growing our business through organic investments, in growing our sales force, building our client facing teams and investing in content and technology.

Second, we've also utilized our liquidity to make a series of tuck-in acquisitions that have provided us with key strategic capabilities. And at the same time, over the years, we've returned almost $200 million to shareholders in the form of stock repurchases. We're pleased that even after investing $25 million of excess liquidity for stock repurchases in the last four quarters, which includes approximately $3.8 million of stock repurchases in the second quarter. We ended the second quarter with $55.1 million in cash and with our full $15 million revolving credit facility undrawn. During the second quarter, our Board of Directors both replenished our stock repurchase authorization and increased it to $50 million. In addition, subsequent to the end of the quarter, we entered into a new credit facility, at an attractive rate that increases our revolving credit amount from $15 million to $62.5 million, providing us with significant flexibility for both repurchasing stock and making strategic acquisitions.

The individual and collective power of these five key elements has been very evident in the strength of our business over the past years and in our continuing strength in the second quarter, year-to-date and latest 12 month periods. As a result of this ongoing strength, as we'll discuss in our guidance section in a few minutes we expect to generate adjusted EBITDA between $47 million and $49 million in constant currency in fiscal '23 and in constant currency to be able to achieve our targets of $57 million in adjusted EBITDA in fiscal '24 and $67 million in fiscal '25. I'd now like to ask Steve to share us some headlines on key revenue and profitability metrics and to review our performance for the quarter and year-to-date period.

Steve Young: Thank you, Paul. Good afternoon, everyone. It's nice to be with you. As Paul said, I'd like to start by sharing some headlines regarding our revenue. As Paul mentioned, as you can also see in Slide 18, our revenue growth in the second quarter continued to be strong, with revenue increasing 9% to $61.8 million compared to the $56.6 million in last year's second quarter. In constant currency, our revenue grew an even more rapidly 11%, even after lower than anticipated sales in China and a decrease in rental income, which combined made up an additional $1.1 million impact. As also shown, our revenue growth year-to-date through the second quarter was 11%, with growth of 14% in constant currency and for the last 12 months through the second quarter, revenue grew 12% and grew 15% in constant currency.

Our subscription and subscription services revenue grew even more rapidly. As you can also see on Slide 18, total subscription and subscription services revenue grew 15% in the second quarter, 18% year-to-date and 22% in the last 12-month period, with All Access Pass subscription and subscription revenue growing 11% in the second quarter. And as Paul mentioned, on top of 29% growth last year and growing 15% year-to-date. On top of 28% of year-to-date growth last year and growing 22% in the last 12 months. And Leader in Me subscription and subscription services revenue growing 30% in the second quarter, 27% year-to-date and 23% in the latest 12-month period. Durability of our revenue is also continuing to increase and our visibility into future revenue growth continued to expand.

As also shown in Slide 18, our balance of deferred subscription revenue billed and unbilled, at the end of the second quarter increased $26.5 million or 22%, to a $145.8 million. And finally, as also shown in Slide 18, for the last 12 months through the second quarter in our North America enterprise operations, the percentage of our total All Access Pass invoiced revenue represented by multiyear contracts of at least two years, increased to 55% up from 47% last year. I'd also like to share some headline profitability metrics. As shown in Slide 19, our gross margin percentage in the second quarter remained very strong at 76.4%, representing the combination of 46 basis point increase in gross margin in the Enterprise Division and a 150 basis point decrease in gross margin overall, primarily reflecting an approximately 500 basis point decline in Education Division gross margin percentage, resulting primarily from conducting several large in-person marketing events during the quarter.

The 150 basis point decrease in gross margin in the quarter is consistent with the year-to-date gross margin decrease of 159 basis points and 163 basis point decrease for the latest 12 months. Operating SG&A as a percentage of sales continued to improve in the second quarter, decreasing another 54 basis points to 63.2% compared to 63.5% in last year's second quarter and improving 133 basis points to 61.2% year-to-date. And for 242 basis points for the latest 12 month period to 60.2%. Adjusted EBITDA in last year's second quarter increased $2.9 million or 57% to a record $8 million. We are pleased that even after significantly increasing our investment in hiring new salespeople at the end of last year and expanding our other client facing teams and making significant investments in completing the development of our Impact Platform, as expected adjusted EBITDA in this year's second quarter increased further from the $8 million to $8.2 million, which is $8.4 million in constant currency.

Year-to-date, adjusted EBITDA increased $1.7 million or 9% to $19.7 million and in constant currency increased $2.7 million or 15% to $20.6 million. For the latest 12 months, adjusted EBITDA grew $6.8 million or 18% to $43.9 million and in constant currency grew 24% to $46 million. Our cash provided by operating activities during the first half of this year was $11.2 million compared with $23.2 million in the first two quarters last year. The difference was primarily attributable to changes in working capital during the year, related to more cash used to pay accounts payable and accrued liabilities, plus changes in the growth of deferred revenue compared to the prior year. During the first two quarters of FY '23, our collection of accounts receivable remained strong and provided the necessary cash to support our operations, payer obligations and make critical investments.

We expect our cash flow from operating activities in the back half of the year to be strong and even stronger than the back half of last year. As Paul noted, even after investing $25 million of our excess liquidity for stock repurchases in the last four quarters, including $3.8 million in stock repurchases in the second quarter. We ended the quarter with $55.1 million in cash and with our full $15 million revolving credit facility undrawn. Our strong and increasing liquidity adds Franklin Covey optionality, as we continue to invest in our business, evaluate potential acquisition opportunities and continue to look at ways to further enhance shareholder value. Finally, I'll make a little more detail -- provide a little more detail on the factors underlying this strong performance, focusing on the results of key areas of our company, specifically in our Enterprise business in North America.

In our Enterprise business internationally both in our direct offices and international licensee partner operations and in our education business almost all of which is in North America. First, as shown in Slide 20, results in our Enterprise business in North America were strong in the second quarter year-to-date and in the latest 12 months. Revenue in North America, which accounts for about 73% of total Enterprise Division revenue grew 8% in the second quarter, 12% year-to-date and at 15% in the latest 12-month period. Our U.S., Canada area of business grew at a strong 11% in the quarter, but was tempered by an 11% softening in our government revenue. Subscription and subscription services revenue in North America grew 7% in the quarter, 13% year-to-date and 19% for the latest 12 months.

Our balance of deferred revenue billed and unbilled in North America grew 23 -- 22% compared to last year's second quarter balance. And the percentage of North Americas. All Access Pass invoiced revenue represented by multiyear contracts, increased to 55% for the latest 12 months as we've said before, in the second quarter, up from 47% last year. Second, as shown in Slide 21. Revenue growth was strong in our offices in the UK, Ireland, Germany, Austria, Switzerland and Australia countries which together make up approximately 48% of total international sales and where All Access Pass makes up a substantial portion of those sales. Revenue in these offices grew 8% in the second quarter, 10% year-to-date and 20% in the latest 12-month period. All Access Pass subscription and subscription services sales which make up approximately 83% of total sales in these countries, grew 4% in the quarter and 9% year-to-date and 22% for the latest 12-month period.

In our offices in China and Japan, which account for approximately 52% of total international sales, widespread COVID related lockdowns in China over the past 18 months, which started to loosen in the second quarter together with a very cautious and return to normalcy post COVID in Japan and the negative impact of FX impacted results in these two countries as revenue declined by 17% in the second quarter, 12% year-to-date and 23% in the latest 12-month period. Our strong overall company results were after absorbing these impacts in China and Japan. These are pressures appear to be easing and we are expecting growth in these countries in the third quarter and beyond. As also shown in Slide 21, our international licensee partner revenue increased 13% in the second quarter, 11% year-to-date and 16% in the last 12 months.

Our licensee partners operations continue to strengthen despite world economic conditions. Finally, as shown in Slide 22, the results of our Education business which account for approximately 24% of the total company revenues were very strong. With Education revenue growing 28% or $3.1 million in the second quarter. Excluding approximately $600,000 of low margin symposium marketing revenue where our clients and prospective clients gather to hear best practices and techniques surrounding the Leader In Me process revenue still grew $2.5 million or 23%. Education revenue increased 25% year-to-date, and 20% in the last 12 months. Education subscription and subscription services revenue growth was very strong, increasing 30% in the second quarter, 27% year-to-date and 23% in the last 12 months.

Educations balance of deferred subscription revenue grew 18% in the second quarter. And our year-over-year, retention of Leader in Me schools remained very high at approximately 90% for the latest 12 months. So, Paul, I'll turn the time back to you.

Paul Walker: Thank you, Steve. Thanks for taking us through that. Maybe just stepping back for just a minute before we move to guidance and outlook. In this environment, we're often asked, couple of questions, first, whether organizations and schools are still engaging us on major behavioral change initiatives? And second, how we're thinking about the ongoing growth of our revenue generating client facing roles including client partners? The answer to the first question whether organizations or schools are still engaging us on major behavioral change initiatives is an emphatic, yes. While it's true that some organizations are hunkering down as occurred during the early stages of the pandemic, many others see this as a critical time to strengthen their organizations by putting extraordinary focus on major strategic objectives, increasing the capability of their leaders, by building more strength into our culture, and by increasing the effectiveness of every individual to narrow focus to the most important organizational priorities.

Last week, we convened a group of Chief Human Resource Officers and Chief Learning Officers from 17 of the largest companies in the country. Collectively, they employ more than 2 million people. We spent the entire day discussing the areas in which they and their CEOs are most focused, and how they are organizing to drive collective action on their most important objectives. Over and over, we heard these leaders discuss the high correlation between leadership capability and financial performance, the importance of culture and the power of focusing and aligning organizations to improve execution. Franklin Covey is the trusted partner to our clients in each of these areas. As shown on Slide 23, I'd like to briefly touch on a few recent client wins that illustrate the type of positive momentum we're seeing across the majority of our client base right now.

First is the recent new client win with a large organization is engaging us on a major sales transformation initiative that will touch more than 5,000 of their sales professionals around the world. This is a five year All Access Pass contract. A second is a large multinational information technology consultancy, whose All Access Pass actually expired six months ago, resulting in a non-renewal at that time, as the client wrestled with what was an uncertain economy and what that might mean for their business. However, in the second quarter just ended we won this client back for a new three-year contract with significant subscription services attached. A third is the large transportation company that expanded their All Access Pass seats from 1,500 to 9,000 in the second quarter, so that we can now help them address the entirety of their leadership population globally.

And maybe just one more from my Enterprise Division, a leading global food and beverage company renewed their Pass in the second quarter and at the same time expanded their All Access Pass seats, so that they can scale our project management unconscious bias, seven habit (ph) solutions further into their organization. And also importantly in our Education Division, where the team has successfully been pivoting from selling Leader in Me, not only to individual schools, but also to entire districts and states. We won our second state funded contract and have closed district-wide sales with more than twice the number of districts this year, than we had at the same point last year. To answer the second question, how are we thinking about the ongoing growth of our revenue generating client facing sales roles including client partners?

The answer is that we continue to see this as a significant piece of our overall growth strategy. As you can see shown in the chart on Slide 24, since the end of fiscal 2012 through the end of fiscal '22, we've grown the size of our sales force by 250%, from 120 client partners to 300 client partners. And of these additions at least a third of added in just the past four years, meaning, we have a significant portion of our sales force who are still in ramp, many of whom are in the early stages of that ramp. These ramping client partners represent a significant source of future revenue growth, as the embedded future revenue from the successful ramp of these new client partners represents tens of millions of dollars of future revenue growth. While this growth in the number of new client partners has been occurring.

We've also been growing two additional important client facing revenue generating roles. Our All Access Pass implementation strategists and our Leader in Me coaches. These two groups play a critical part of our account management strategy. They partner with our client partners to expand add services and ensure the successful renewal of each of our All Access Pass and Leader In Me clients. As you can see shown in the chart on Slide 25, the number of people hired for these roles has also grown steadily, since the launch of our subscription business more than doubling from 70 in fiscal 2016 to 149 at the end of fiscal '22. As we continue to focus on hiring aggressively to match the magnitude of the big opportunity before us, there is enormous value to making sure each one of these people ramps successfully.

Therefore, both generally and particularly in this more difficult environment, we're going to spread the hiring of this and future years hiring's, a little more evenly, rather than bunching them all up at year end. This will allow us to ensure each of these people receives the right amount of ramp support both in the current environment and thereafter. We're pleased that because of our strong solutions and their ability to address must win objectives for our clients, our compelling subscription business and our strong business model we're able to make these ongoing investments to accelerate our growth in revenue, while at the same time accelerating our growth in adjusted EBITDA and cash flow. I want to express my huge appreciation to our amazing clients and to our teams of amazingly talented and committed people who serve them.

They make the impact we're having possible. I'd now like to turn the time to Steve to review our guidance and multiyear outlook. Steve?

Steve Young: Hey. Thank you again, Paul. So, everyone might want to refer to Slide 26. So, driven by the continued strength, strategic durability and future visibility provided by our All Access Pass and Leader in Me membership subscriptions, which due to their high revenue retention, high lifetime customer value and they're being highly attractive to new customers have resulted in accelerated growth over the past year. They have also driven strong performance through the first two quarters of this year. Based upon that primarily we are affirming our previously announced guidance that adjusted EBITDA for fiscal 2023 will increase to between $47 million and $49 million in constant currency, compared with the $42.2 million in adjusted EBITDA achieved in fiscal 2022.

We expect to achieve this growth even after continuing to make increased investments to add new client partners, other personnel and investments in delivery portals and content, and absorbing potentially challenging macroeconomic circumstances. This guidance also assumes that China and Japan will begin their post COVID-19 recovery in the second half of the year and does include the loss of approximately $1.4 million of adjusted EBITDA related to the loss in Q2 of a large tenant at our corporate campus. We remain confident in the strength of the All Access Pass, and the Leader in Me membership subscriptions, which have driven Franklin Coveys growth across recent years and which are expected to drive continued growth in FY '23 and in subsequent years.

Consistent with our overall guidance of adjusted EBITDA going to the $47 million to $49 million in constant currency, we expect adjusted EBITDA in the third quarter to be between $9.5 million and $10.5 million in constant currency. We feel very good about achieving this result, particularly given that last year's Q3 adjusted EBITDA result of $10.9 million was itself $2.3 million or 27% higher than the year before, making this year's Q3 adjusted EBITDA quarter our second largest Q3 ever, even after absorbing the $500,000 reduction in EBITDA from the loss of the tenant that we mentioned. As to revenue compared to our estimated at the beginning of the year of approximately $294 million, we expect revenue for the year to be impacted by approximately $3.5 million due to FX, an additional $2.5 million because of the slower than expected recovery of sales in China and Japan, and by an additional $4 million to reflect the expected impact of the deeper snow through which our clients are hiking.

We expect revenue in the third quarter to be approximately $70 million in constant currency, reflecting the factors just mentioned and in line with our full year revenue expectation of approximately $284 million. In line with our expectation of $47 million to $49 million of adjusted EBITDA in constant currency in FY '23. Our adjusted EBITDA targets for FY '24 and FY '25 remain unchanged at approximately $57 million and $67 million, respectively. While changes in the world economy and many other factors could impact our expectations these are our current targets. So Paul, back to you.

Paul Walker: Great. Thank you, Steve. We feel great about our continued momentum and are looking forward to accelerating growth. And with that, I think we ought to open up to your questions.

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