Franklin Covey Company

Welcome to the Q2 2020 FranklinCovey earnings conference call. My name is Adrienne, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session. During the question-and-answer session, if you have a question, please press star then 1 on your touchtone phone. Please note this conference is being recorded. I'll now turn the call over to Derek Hatch. Derek Hatch, you may begin.

Thank you. On behalf of FranklinCovey, we'd like to welcome you to our conference call to discuss our second quarter fiscal 2020 financial results and hope that you are all staying safe and are well at this time. 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. The forward-looking statements are based upon management's current expectations and are subject to various risks and uncertainties including, but not limited to, the ability of the company to stabilize and grow revenues, the acceptance of and renewal rates of the all-access pass, the ability of the company to hire productive sales professionals, general economic conditions, competition in the company's targeted marketplace, market acceptance of new products 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, including the forthcoming 10-Q for the second quarter of fiscal 2020, which is expected to be filed next week. 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 reflect management's current expectations, and we undertake no obligation to update or revise these forward-looking statements to reflect events or circumstances after the date of today's presentation, except as required by law. With that out of the way, we'd like to turn the time over to Mr. Bob Whitman, our Chairman and Chief Executive Officer. Bob? Thanks, Derek.

Good afternoon, everyone. We appreciate you joining us today. In these challenging times, we've been doing a lot lately to help our clients and even non-clients respond to the new changes and challenges they face. For example, as you can see in slide three, Nearly a month ago, we created a special set of digital materials for our All Access Pass holder organizations entitled Leading Through Uncertainty that provides those leaders and organizations with a guide for utilizing various of the All Access Pass resources to help them lead through change or to build the skills of proactivity and resiliency throughout the organization, lead in a remote environment, etc., These resources are providing clients with the ability to engage their workforces, provide team building and development opportunities for the remote workers, and utilize digital assets in training, as well as, you know, the option of having even higher engagement by having Franklin County training consultants facilitate these sessions live online, a capability in which we've invested for more than a decade. Similarly, in the education division, as you can see in slide four, We curated a special collection of family educational resources and provided them to all of our education clients. In addition, given that so many families are now in a homeschooling situation, we've also provided these resources to all access pass holders, organizations, and made them free of charge to the general public on our website, leaderinme.org. These robust resources include hundreds of videos, articles, and tools from families to be used with their children at home, including animated videos which are very popular that teach life skills, coloring pages, in-home activities for families, award-winning videos made by students, student speaking contests, and our Leader in Me weekly newsletter which features relevant tools and articles for schools and families in these challenging times. You might want to check out these resources yourself at leaderinme.org. Also, our employees, many of whom have always worked remotely, are now all working remotely. We are pleased to report that with only a few exceptions, they and their families are safe and healthy. I can't adequately express how much we appreciate the extraordinary lengths to which our employees are going to serve our clients always and now more than ever. You know, we're glad to have the chance to talk with you today. In this uncertain environment, really there are four things we'd like to take away from today's discussion. You can see on slide five. that our results for the second quarter were very strong and even better than we expected. And as a result, we entered the third quarter with real strength, operationally and financially, and with significant liquidity. Our results for the second quarter, as you can see, reflected the compounding power of the same key factors that have driven our accelerated results over the past quarters and years. Second, we're grateful that we also entered this period not only strong strategically, not only strong financially and operationally, but strategically with solutions in the business model that are really valued by our clients. While the coming months will undoubtedly contain a lot of uncertainty and challenges, this strength on all three fronts is allowing us to really provide services to our clients that they value. We've consistently invested in content, technology-based delivery, portals, micro-learning, language availability with 21 languages, a wide variety of delivery modalities, and in our subscription business model. And as a result, we're in a unique position to be able to serve our clients in whatever circumstance they find themselves in today. And whenever this period ends, we expect to come out of it having increased our strategic importance to our clients. Third, we expect that the same three factors that have driven our accelerated growth and adjusted cash flow over the past many quarters will continue to do so as we come out of this downturn. We expect, we don't know when that exactly will be obviously, but we expect that these three factors, namely our strong subscription offerings, the fact that we have very high lifetime customer value and retention, and the high flow through of incremental to incremental EBITDA and cash flow, which our business model has driven, will continue to drive very high rates of growth and adjusted EBITDA and cash flow again in the future once we get past this period. And then fourth, we really are grateful to be in a position to provide our clients with the kinds of solutions, modalities, and assistance they need during these times. And as a result, we expect to exit this period with an even deeper, more enduring relationship with our clients. So I'd like to just briefly address each of these. I think they're all relevant to the current situation, even going over the financial results here, is because it shows the patterns which we expect both made us strong going into this period as well as will make us strong coming out. As noted in slide six, our results for the second quarter were very strong. And as I mentioned, as a result, we entered the third quarter with strength operationally, financially, and with significant liquidity. Our strong second quarter performance reflected the strength of the same key factors that have driven our accelerated results over the past quarters and years, namely strong high single-digit revenue growth, Second, accelerated growth in subscription sales. Third, increasing gross margins. And fourth, declining operating SG&A as a percentage of sales. This has resulted in a high flow-through of incremental revenue to increases in adjusted EBITDA and cash flow. As you know from reading our earnings release, and it's shown in slide seven, we had a very strong second quarter results on all four of those key metrics. despite the fact that our operations in China and Japan were closed or restricted for a portion of the quarter. As you can see, revenue grew 3.4 million or 6.7% in the second quarter. This also grew 8.2 million or 7.8% year-to-date, and 14 million or 6.4% for the latest 12 months. Not shown on this. JustD, but I increased $3.1 million. That's obviously a big percentage, 321% in the second quarter. increased 4.9 million or 118% year-to-date, and 9.4 million or 58.6% for the latest 12 months. The flow-through continued to be high. Incremental revenue to incremental adjusted EBITDA, 91% flowed through for the second quarter, 60% year-to-date, and 67% for the latest 12 months. So that trend has continued. And our cash flow from operating activities continued to be strong through the second quarter, increasing again 30% or $4 million to $17.4 million. And as strong as these reported metrics were, excluding China and Japan, which as I noted were closed down for summer most of the quarter, the country's performance was even stronger. As you can see on the right-hand side, Excluding the offices in China and Japan, revenue grew 4.9 million or 11.2% in the second quarter, 9 million or 9.9% year-to-date, and 14.7 million or 7.6% for the latest 12 months. And also adjusted EBITDA grew 4 million in the second quarter and would have grown 5.7 year-to-date and 10.8. So just stepping back from it, it's a very strong quarter. It showed resiliency in the face of some challenges in Asia, and we're really happy with it and pleased to enter this new period with that kind of strength. I'd like to briefly touch on a couple of metrics. First, as you show in slide six, we had really strong revenue growth on all metrics. Our revenue, as reported, grew 3.4 million, or 6.7 percent in the second quarter. 7.8 percent year-to-date and 6.4 percent for the latest 12 months. Our total subscription and related revenue grew 24 percent or 6.1 million in the second quarter to 31.4 million, grew 21 percent or 11 million year-to-date and 22 percent or 24 million latest 12 months for a total of 133.7 million. OLX's past and related revenue grew 28 percent, or 5.1 million in the second quarter, to 23.4 million. It's grown 25 percent year-to-date and 27 percent, or 19.6 million, for the latest 12 months. Our total invoiced revenue, some of which, of course, goes on the balance sheet, grew 9.2 percent, or 4.5 million, in the second quarter to 53 million. This was led by the U.S. and Canada whose invoice revenue grew 15.1% or 3.7 million. So the U.S. and Canada has been getting stronger and stronger. DrivenBiolix has passed and grew 15% or 3.7 million during the quarter. Year-to-date invoice revenue has grown 8.8% or 8.3 million. In the latest 12 months, 7.3 or 16.4 million to 242 million. Our balance of billed and unbilled deferred subscription revenue grew a very strong 18.2 million or 28% in the second quarter to 82.7 million compared to a balance of 64.5 million at the end of last year's second quarter. And finally, in addition, our total value of contracts signed in the second quarter grew 9.7% or 4.8 million to 53.8 million and has grown 13% to $107 million for the latest 12 months. And the buildup of that contracted revenue is very helpful to us as we move into this period. So, we felt very good about our revenue growth for the quarter. As we noted, we had very high flow through of incremental revenue to incremental adjusted EBITDA. As you can see in slide nine, 91 percent or 3.1 million of our increase in revenue in the second quarter flowed through to increases in adjusted EBITDA. This resulted in adjusted EBITDA increasing to $4.1 million from $1 million in the second quarter of fiscal 2019. And excluding our offices in China and Japan, adjusted EBITDA actually grew faster. It grew $4 million during the second quarter. Year-to-date, adjusted EBITDA has increased $4.9 million or 118%. The flow-through has been 60%. And In the latest 12 months, adjusted EBITDA increased $9.4 million, or 59% to $25.5 million, despite a more than $1 million negative impact from Japan and China in the second quarter. And that's up $16 million for the same 12-month period last year, showing a 67% flow-through. This flow-through obviously is very high, and again, it reflects the four factors. Obviously, the high single-digit revenue growth, which has been increased, but with the exception of China and Japan increasing, our increase in gross margin percentage, where gross margin percentage increased 171 basis points in the second quarter, 257 basis points year-to-date, and 130 basis points for the latest 12 months. Third, the fact that operating SG&A as a percentage of sales has declined during the second quarter, It declined to 64.4% of revenue, which is a 392 basis point improvement compared to 68.3% in last year's second quarter. And as you can see in the appendix in slides 23 and 28, we also achieved strong revenue growth and very high EBITDA growth in the enterprise division in the second quarter and had strong growth in the education division. So we were really pleased with the strength of the second quarter and year-to-date performance. We were pleased that for the latest 12 months, adjusted EBITDA had reached $25.5 million with the third and fourth quarters to go. And, of course, we're pleased with the momentum. As we said, we entered the third quarter as a consequence with a robust third quarter pipeline, almost $25 million of cash on the balance sheet, and all $15 million available under our revolving fund. credit line. Importantly, once this current period of uncertainty is over, whenever that is, we expect that these same factors that have driven our past performance will drive accelerated growth in adjusted EBITDA and cash flow again in the future. So, that's just a quick review of our results. Going on to slide 10, we want to talk about the current environment. So, we're pleased that not only did we enter the third quarter with strong momentum and strong financially, But, you know, really as important as we enter the period of strong strategically, meaning our relationships with our customers, the value they place in our solutions. And, you know, as you all know, for more than a decade, really, we have invested in creating digital courses and content, content that can be delivered live online, blended impact journeys. Five years ago, we added microlearning. And much of our innovations budget in the last few years has been around on-demand and blended delivery offerings, portals, and other things. As a consequence, we expect that we will not only retain a very high percentage of our clients during this time, but also increase our value to them as they try new methods of delivery they might not otherwise have tried. And we expect to exit this period really with even deeper, stronger, and more pervasive client engagements and relationships. As to the current situation, obviously it's a difficult one just generally. All of you are living in it and hopefully getting through it. We're all living in it and so are all of our clients. In our experience, during times of significant uncertainty, of course it's natural for there to be a period of time in which for both individuals and organizations, focus, energy, and bandwidth is directed to getting their bearings and adapting just to the immediate circumstances. During such times, Normal business and decision-making processes are often interrupted, and the past few weeks has seen exactly this. The first time also, of course, organizations must also adapt to having the vast majority of their employees working remotely. In the context of this environment, I'd like to address the areas of greater and lesser uncertainty for FranklinCovey. I'll first start with the areas in which we have a lot of confidence. The areas which historically have been very predictable, which we expect to continue to be predictable, include the following. First, our deferred revenue. As shown in slide 11, we had $47.9 million of billed deferred revenue on the books at the end of the second quarter. Substantially, all of this highly profitable revenue will be recognized over the next four quarters. Second, our unbilled deferred revenue. As you can also see in slide 11, In addition to the deferred revenue, we also had $34.8 million of unbilled deferred revenue in the second quarter, primarily related to multi-year All Access Pass contracts. All of this revenue is under contract, and the vast majority of this unbilled deferred revenue will be invoiced over the next six quarters, so we don't see a risk to that. Third, our All Access Pass subscription renewals, as illustrated in slide 12, Historically, our annual revenue retention of All Access Pass subscription revenue has been very high, exceeding 90 percent in each of the last nine quarters. As we'll address in a minute, we believe that most of our clients intend to renew their passes still. Four is All Access Pass add-on services revenue. All Access Pass related services totals about $33 million a year, spread throughout the year. Historically, these services on a same-store basis have also repeated year-over-year at a high rate of more than 90%. And fifth, Leader in Me memberships, historically between 87% and 91% of the more than 2,700 Leader in Me schools in the U.S. and Canada have renewed their subscription memberships in a given year. Now, as to the areas of uncertainty, the areas of greater uncertainty for us over this period are not, therefore, about the strength of our solutions. or about our client impact, or about client's commitment, fundamental commitment, or about the strength of our business model. Rather, the uncertainty primarily relates to three things. First, to the potential impact which delays in decision-making caused by current circumstances could impact the timing of renewals and new sales from companies, and particularly in the education division. where both the annual membership renewal of the majority of Leader in Me schools and the addition of new Leader in Me schools normally takes place between May and August. We'll address this more. Second, in fact, so the first is just delayed decision-making. People not able, they don't have their normal processes. The school district isn't getting together. If they are, they're doing it by video conference, et cetera, and it just has changed the decision-making. Second, The concern is the potential impact which the fact that people are working from home could have on planned training and coaching engagements which organizations have typically scheduled to take place on-site at their offices, even though they've been available live online or digitally. It now means that people's sequestration means that these training engagements now need to be done live online or digitally, both of which are available online. and very capably delivered through All Access Pass and Leader and Me, or they need to be rescheduled. Many of these have already been rescheduled or are in the process of being rescheduled live online. We believe that people do not intend to cancel. A very small minority are really going to be canceled, and that even those who want to continue to have on-site days are rebooking them, postponing it with the hope that that will be done later on this summer. However, the shift in the timing of delivery will cause revenue to move from one quarter into another and create revenue gaps and uncertainty. And then the third major area of concern is as to the time required to ramp up our recently reopened offices in China and Japan, following their operations having been closed or restricted for a portion of the second quarter. They're back in operation. The teams are generally back in the office making calls. they're going to need to rebuild their pipelines. So the impact of these factors is not expected to be long-lasting. However, it does create gaps, and the uncertainties, their timing and magnitude, makes it difficult to provide accurate quarterly guidance or to update our annual guidance today. Nothing would please us more than to be able to tell you, as we have done each quarter, that our guidance for the next quarter is X, and for the year it's Y, and then go back and hope to exceed those numbers. However, in this environment and with education's biggest quarters coming up, really coming up at the end of the third quarter in May and in our fourth quarter, we can't be confident in our guidance, so we're not providing any at this time. We expect that in 60 to 90 days when we report on our third quarter performance, we should be in a much better position to provide more guidance, and we look forward to doing that at that time. Now, moving forward, I'd like to ask Paul Walker to talk about what's happening with our clients in this environment in both divisions. Paul?