Nehal Chokshi: Okay. Great. That’s helpful. And then, fiscal 4Q was a poor free cash flow quarter. And so, I believe that benefited your fiscal 1Q. But do you expect these working capital accounts to continue to tilt back favorably as we work through the remainder of fiscal year ’24 and therefore, help us think about modeling free cash flow relative to your EBITDA guidance for fiscal year ’24?
Steve Young: Yeah. So, we haven’t really, as you know, given free cash flow guidance. The changes in the elements of working capital that were significant in Q1, we expect those changes to remain, but not necessarily change again at those same rates each quarter. We do expect to have a significant amount of additional key free cash flow this year compared to last year based upon the operations of the business, the cash that comes in from our subscription business and these elements of working capital behaving meaningfully. We expect to have a good free cash flow for the year. Now, Nehal, I’m sure you remember that last year, our second half of the year as we predicted through — after Q2, was significantly more than Qs 1 and 2.
And we wouldn’t expect that amount of increase in the second half of this year compared to the first half, because the first half is going to be a good free cash flow half. But overall, it will be significantly — I’m safe in saying without giving an actual forecast that it will be significantly higher than last year.
Nehal Chokshi: Okay. I mean, when I look at fiscal year ’19 and fiscal year ’22, your free cash flow has systemically been above your adjusted EBITDA. I think what you’re trying to signal here while fiscal year ’23 was a clear deviation from that fiscal year ’19 to fiscal year ’22 trend, you expect an improvement from that fiscal year ’23 level, but perhaps not quite to the free cash flow to EBITDA ratios that you’re achieving in fiscal year ’19 to fiscal year ’22. Is that correct?
Steve Young: Yes. I think in our future years, we will reestablish a clear relationship between adjusted EBITDA and free cash flow that will generally be maintained. But yes, we would model out free cash flow to be a bit lower than adjusted EBITDA.
Nehal Chokshi: For fiscal year ’24, specifically?
Steve Young: Yes.
Nehal Chokshi: Yes. And then, how would you think about beyond fiscal year ’24 then?
Steve Young: Again, I think and if you look at the elements of adjusted EBITDA versus the elements of free cash flow, we’ll always be — well, not always because of the elements of working capital move around, but the relationship between adjusted EBITDA and key free cash flow will be that free cash flow will be modeled at a lower level than adjusted EBITDA.
Nehal Chokshi: Is that largely because you expect to be saturating on the percent of customers that are going to be paying upfront?
Steve Young: No. I think the percentage paying upfront will be maintained. It’s more like if you just model it out, if you look at adjusted EBITDA and compared to adjusted — compared to the amounts that are included in adjusted EBITDA compared to free cash flow, you have investment, CapEx and CAPD spending as an example. So, while the expense for CAPD or CapEx is in depreciation, the expense for CAPD is in cost of sales, but has a delay to it. So, an increase in our spending and the amount we’re spending in CapEx and CAPD are amounts that are on the income statement are below adjusted EBITDA. So, those are the kind of things that just create the theoretical or mathematical difference between them.
Nehal Chokshi: Yes. Understood. Moving to a different topic, and then I’ll let someone else speak. But why are you expecting the services attached to remain depressed in Q2? And then, what will drive that improvement in Q3 and Q4?
Paul Walker: Yeah, great question. So, as far as what will drive the improvement in Q3 and Q4, as I mentioned earlier, primarily a couple of factors. One, the delivery of services of coaching and delivery days to schools that signed up late in Q4. Last year, we talked about that last quarter as those roll through and we’re able to get those scheduled and delivered. Much of that delivery happens later in the year with the timing of schools and when they’re out for the summer, et cetera. So that’s why it would shift into the back half of the year. And then second, we’re bringing — we’re excited about three new solutions that are coming out. We typically see bumps in services delivery for new solutions, and we’ve launched Leading and Working at the Speed of Trust that launched last month in the end of November, and then 7 Habits 5.0 is coming out late Q3 and early Q4.
And then, Difficult Conversations, which we think is one that our clients will want to utilize a lot of services for, that will be coming out here in the next month or so. So, I think that’s what helps shift it in the back half. As related to the first half, why have they been down? Why were they down a little bit towards the end of last year and the first quarter of this year? One is that we launched a solution a couple of years ago called Unconscious Bias. It’s a great solution. We launched it actually prior to some of the events that unfolded in the U.S. that drove a lot of big DEI initiatives, and we rode a wave for a while there and had a bit of a tailwind because our solution was really good. It was in high demand by our clients, and it was a solution that our clients didn’t feel comfortable delivering on that topic themselves.
