Franklin Covey Company

Welcome to the Q4 2020 Franklin Covey 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. Now turn the call over to Corporate Controller Derek Hatch. Derek Hatch, you may begin.

Thank you. Good afternoon, ladies and gentlemen. On behalf of FranklinCovey, I'd like to welcome you to our earnings call for our fourth quarter and full fiscal year 2020. Hope you are all doing well and are staying safe. Before we begin today's presentation, 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 stabilize and grow revenues, the acceptance of and renewal rates for our subscription offerings, including the All Access Pass and Leader in Me 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 product, 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 on 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. Hello, everyone. We're happy to have the opportunity to talk with you today. Thank you for joining us. We're pleased that in the fourth quarter, FranklinCovey's operations demonstrated their strength, agility, and ability to progress even in the midst of the pandemic. We're grateful for that. Specifically, our revenue was stronger than expected. Gross margins increased substantially. Our SG&A declined. Our adjusted EBITDA was $8.9 million in the quarter versus an expectation of $4 million. bringing that brought full year adjusted EBITDA to 14.3 million, which also exceeded our expectation of 9.4 million. Our cash flow was strong and we're grateful that we ended the quarter and year with approximately 42 million in liquidity, a level higher than when the pandemic started. We'll discuss these details and results in more detail in just a moment, but first maybe provide some context. At the onset of the pandemic, we communicated that although everything was in flux and was uncertain, we believed, as shown in slide three, as you can see there, that All Access Pass subscription and related revenue would continue to be strong and durable, and that this would continue to drive strong performance in our core North American operations, which accounted for 70% of our total enterprise sales, and in which All Access Pass and related sales account for approximately 80% of the total revenue in North America. As indicated in the chart 1A on slide three, we believe that All Access Pass subscription sales would not only be very strong and durable, it would continue to grow throughout the pandemic. That is indicated in 1B, that as for All Access Pass add-on services, after the initial disruption of the delivery of live on-site services, we believe that our pivot to delivering add-on coaching and training services live online would allow this revenue to rebound relatively quickly. Second, as indicated in chart 1C, we believe that in our international direct and licensee operations, which collectively account for approximately 25% of our total enterprise division revenues, despite having only nation all access pass subscription businesses and thus only a small base of All Access Pass subscription revenue to cushion them, our international enterprise teams, we believe, would begin to improve due to the strength of our offerings in those countries and the quality of our teams and their ability also to pivot to live online delivery. We expected that their growth would strengthen further as they accelerate their conversion to selling All Access Pass. And then finally, in the education division, we believe which accounts for approximately 22% of total sales. We expect that we'd achieve strong retention of existing leader in these schools and that even the middle of the storm, the existing schools would be committed and retain their subscriptions. And hopefully we would find a way to add several hundred new leader in these schools, despite the huge disruption of the school environment. So while the external environment has continued to be challenging, we're pleased that, as indicated in slide four, our results have turned out to be as strong or stronger than expected in each of these areas, and that this strength is continuing and even accelerating through the first two months of our first quarter, which ends November 30th. Some additional detail first on our enterprise business in North America. As you can see in slide five, All Access Pass subscription sales have been strong and resilient throughout the pandemic, growing 11% in the fourth quarter and 17% for the full fiscal year. In addition, amounts invoiced, new pass sales, and multi-year contracts have all continued to grow, and our All Access Pass revenue retention rate again exceeded 90% for the year. Second, in the upper right-hand corner, with our almost immediate pivot to booking coaching and training engagements live online, we were able to continue to meet the needs of our customers remotely. And as a result, bookings and sales of All Access Pass add-on services also rebounded quickly. As you can see in slide six, after approximately the first six weeks of the pandemic, new bookings of services in our North American operations turned positive. By mid-July, our booking pace was equal to that achieved at the same time last year, and then strengthened even further, exceeding last year's pace by the end of August, the end of our fiscal year. Pleased to say that these strong bookings have continued through October. With bookings increasing, which is what we'd call a lead or predictive measure, the lag measure, which is actual invoice sales of services, also rebounded significantly. As you can see in the lower right-hand corner of slide six, initially in the third quarter as the pandemic started, bookings were reduced and the year-over-year dollar volume of services followed because everything needed to be canceled and then tried to reschedule. And delivered engagements were down 6.9 million in North America in the third quarter. However, in the fourth quarter, new bookings increased to the point They were nearly equal to those we achieved in the fourth quarter of 2019, as you can see from the line graph. And that drove in actual invoice sales, and this in turn drove in an increase in the volume of services delivered. As a result, instead of being off $6.9 million as in the third quarter, the dollar volume of services delivered in the fourth quarter was off only $1.1 million, and bookings were actually up. As a consequence, the same positive trends continued into our first quarter date with bookings continuing to be up and with invoice sales of services following and increasing now to essentially the same level as in last year's first quarter. Importantly, you can see in the upper right-hand corner, 87% of our clients have now shifted to live online delivery of services. This is important. is really important. With 87% of our clients now having shifted to live online delivery, any susceptibility to future cancellations has been reduced substantially. And so now we have a model which, you know, really can, we think, plow through good times and bad as it relates to being able to deliver everything subscription. As you can also see in slide seven, which looks a lot like slide five, This combination of strong All Access Pass subscription sales and the strong rebound in All Access Pass add-on services has kept the performance of our core North American business strong, with essentially all of the relatively small decline in revenue in the fourth quarter being attributable to declines in our legacy facilitator materials order business. So otherwise, with the All Access Pass, the services coming back almost to where they were the last year, bookings ahead, that's given us a really strong run to start the new year. We now expect that we will actually exceed in the first quarter the levels of profitability that we achieved in the first quarter of fiscal 2020 in North America, which is an even stronger than expected rebound in those operations. As recently as last quarter, we said that we thought that might take us an extra year to get to that point, and we're very grateful and pleased that we're at that point now. Second, as always, as also shown in slide seven, international operations, which are sales in China, Japan, Germany, and among other direct offices and licensees, sales in these operations also improved substantially in the fourth quarter compared to the third quarter. As noted, as you'll recall, the need to reschedule substantially all training engagements in these countries and these countries' lack of a strong base of durable subscription revenue to cushion them, unlike in North America, resulted in sales in these countries declining to only 4.1 million in the third quarter compared to approximately 12.7 million in the third quarter fiscal 19. However, in the fourth quarter, while still operating well below the levels achieved in last year's fourth quarter, sequential sales in these countries increased 70% to $7 million, up from $4.1 million in the third quarter, and are expected to increase further to approximately $9 million in the first quarter. And then we expect to continue to build back through the year, back toward this $10 to $11 million a quarter pace. Finally, as you can see in slide eight, in the education division, despite the extreme difficulty of their environment, approximately 2,200 existing leader in these schools renewed their subscriptions in fiscal 2020. We said again, over 2,000 schools renewed and almost 1,500 of these schools renewed after the pandemic started when schools day-to-day turmoil was at a peak. It was very difficult to even talk to these schools as they were scrambling to still deliver lunches, figure out how to teach live online, deal with all the problems they had. And it's a tremendous credit to our team and to our clients and to the quality offering that almost 1,500 of these schools renewed after the pandemic started. In addition, during the same time period, we'd hope that we'd be able to have new schools join, and in fact, 320 new schools became Leader in Me schools, most again during this period. It's a number lower than last year, which we expected, which was 500 last year, but it's still, in our view, remarkable. Despite an environment which continues to be very challenging for schools, as you know, During the first quarter to date, we are seeing improvements in a number of key lead measures, including that of the number of new schools contracted or ready to contract being 50 schools versus 28 at the same time last year. Second, the number of Leader in Me memberships renewed or ready to sign contracts at 583 versus 422 at the same time last year. And third, the number of coaching days booked being 1,284 versus 1,149 at the same time last year. So again, we were glad that the things that we hoped at the start of this period have turned out to be stronger, stronger than expected in almost every case. And the combination of these positive trends drove our better than expected performance in the fourth quarter. I'd like to now dive a little deeper into our fourth quarter and full year fiscal 20 performance. As you can see in slide nine, our fourth quarter performance was stronger than expected and showed positive momentum as we've said at almost every front. Our adjusted EBITDA going down to the bottom first was 8.9 million, more than doubling our expectation of four million for the quarter. This brought adjusted EBITDA for the full year to 14.3 million, higher than our expectation of 9.4. And while lower than last year's adjusted EBITDA of 13.4 million for the reasons just discussed, we were really pleased with this result and the strength of the recovery in the fourth quarter. In addition, our cash flow and liquidity position remained very strong. As shown in slide 10, our net cash generated for the quarter, though less than in last year's fourth quarter, was a strong 21.4 million. And as shown in slide 11, our cash flow from operating activities for the year came in at 27.6 million, just 2.9 million lower than last year's 30.5 million. As you may recall, actually it was only two years ago in fiscal 2018 that our cash flow from operating activities was 16.9 million during a strong economic year generally. So we feel very good about the $27.6 million in cash flow from operating activities given this year's challenges. We ended our fiscal year with $42 million in total liquidity comprised of $27 million in cash, which means we have no net debt, and with an additional $15 million undrawn and available under our revolving credit facility. This strong performance was driven first by stronger revenue, as you can see. In slide 12, our fourth quarter revenue of $49.9 million was stronger than expected, despite the fact that a lot of what we sold in the quarter and a lot of what we invoiced, of course, went on the balance sheet. The higher revenues, though, were driven by the continued strength of our North American operations, which in turn were driven by All Access Pass, whereas just discussed, in the fourth quarter, subscription sales grew 11%. And in addition to the revenue, actually, as I mentioned, recognizing the quarter, we also achieved high levels of invoiced All Access Pass sales, most of which were added to the balance sheet as deferred revenue. These new invoice sales included growth in new logo sales, sales of new logos, a continued revenue retention rate of greater than 90%, a large volume of All Access Pass expansions, and an even larger volume of multi-year passes than in the prior year. And that, with all of that, All Access Pass add-on bookings, which we just talked about, of services also rebounded strongly, as we showed, coming almost up to where we were in the prior year's fourth quarter, despite the lag in booking due to the early days of the pandemic. You can also see in slide 12 We had strong gross margins again in the fourth quarter. Our gross margin percentage came in at 77.3%. That's up 437 basis points from the 72.9% achieved in the fourth quarter of fiscal 19. And that's up again 256 basis points for the year. Third, our SG&A was lower. SG&A for the fourth quarter came in at 28.9 million, which is 5.2 million lower. than this 34.1 in last year's fourth quarter, and an improvement of 70.6. And while some of that is variable SG&A costs related to reduced sales volume, a lot of it also reflected cost initiatives that we had been taking, that we'd been implementing throughout the year, not specifically related to COVID, but just had been implemented in the spring as part of our annual planning, and that's starting to flow through in the fourth quarter. Finally, the combination of these factors resulted in adjusted EBITDA coming in, as we said, at 8.9 for the quarter and 14.3 million for the full year. We mentioned that we had very strong invoice and multi-year sales in the fourth quarter, all excess past, and the renewals of subscriptions of the Leader in Me membership. because most of these new invoice sales were subscription sales. As you know, these amounts were not recognized in the quarter, but went onto our balance sheet and will add to and be recognized this year and in future periods. As a result, however, as shown in slide 13, our total balance of billed and unbilled deferred revenue increased to more than $100 million, barely, but a big landmark. This 100 million mark is a mark that a lot of subscription companies talk about and think about. It reflected growth of 12.1 million or 13.7% compared to our balance of 88.1 at the end of last year's fourth quarter. So that growth of 13.7 shows the strength of our invoicing despite the environment. This large balance of build and unbuild deferred also provides significant stability of and visibility into our future performance. As we'll discuss in more detail when we offer guidance for fiscal 21 in a moment and our outlook targets, in short, we expect to be, again, be a very high adjusted EBITDA growth, high cash flow growth company in fiscal 2021 and in the coming years. Specifically, in fiscal 2021, as we'll discuss in more detail, we expect to generate adjusted EBITDA between 20 and 22 million. This reflects an approximately 50% increase in adjusted EBITDA compared to the 14.4 million of adjusted EBITDA achieved in fiscal 2020. Thereafter, our target is to see adjusted EBITDA increase by around 10 million per year each year thereafter to around 30 million in fiscal 2022. into around $40 million in fiscal 2023, as there's an illustration of that in slide 14. These targets reflect our expectation that we will achieve high single-digit revenue growth, which is growth of approximately $20 million a year, and that on average, approximately 50% of that growth in revenue will flow through to increases in adjusted EBITDA and cash flow, and so therefore the growth of $10 million a year or so EBITDA. With this high flow through, we also expect to be moving toward and ultimately achieve an adjusted EBITDA to sales margin, percentage margin of 20% in the coming years. So with that report on our results, I'd like to now address three key questions outlined or identified in slide 15. First, address the question, And we may have, maybe somebody might need to mute. I hear some noise, I'm not sure, in the background. But first question is, what is the most important driver of this high expected growth in EBITDA and cash flow going forward? Second question, what is making all access paths and related revenues so strong, resilient, and durable? What's behind that? And third, what's the expected trajectory and speed of our climb up the mountain? And that's really more our guidance section. So really just to address those two questions and then turn the time to Steve for guidance. Question one, what is the most important driver of our expected high EBITDA, high cash flow growth? Simply put, the single most important driver is the strength of our subscription business generally. and particularly the strength of our All Access Pass subscription and related revenue engine in the enterprise division. The importance of All Access Pass is best demonstrated by the strength and resilience of our core North American operations, which account for 70% total enterprise division sales, and where All Access Pass and related sales account for approximately 80% of that. So why is All Access Pass the most important driver of growth and adjusted EBITDA and cash flow going forward? Three reasons. The first reason is that it's the engine that has driven the vast majority of our growth in revenue and adjusted EBITDA over the past several years. As you can see in slide 16 on the left side, All Access Pass and related sales have grown from zero to $90 million since 2016, a huge compound average growth rate, obviously, and absolute revenue growth of between $10 and $20 million of growth each year. This growth in all excess passive-related revenue has generated the vast majority of our net revenue growth for the company overall in almost every year. It's more than offset the runoff of our legacy facilitator and onsite business, replacing that business with higher revenue per client, much higher revenue per client, much more resilient and retained revenue, as you know. OLX's past and later revenue has also been the primary driver of the significant increase in our gross margin from 67.4% in 2017 to overall 73.3% in fiscal 2020. And it's also accounted for substantially all of our growth and growth margin dollars during these years. So the first reason is it's been the growth engine. The second reason we think All Access Pass is expected to be our most important driver of growth is that All Access Pass has continued to be strong in good times and bad throughout this pandemic, as we mentioned. As you can see in slide 17, in the fourth quarter, All Access Pass subscription sales grew 1.6 million or 11% compared to the same period last year. And for the six months from March 1st through August 31st has grown 15% compared to the same six month period a year ago, which has really been actually right in the heart of the pandemic. As previously noted, again, just shown to remind us in slide 18, as a result of the rapid rebound of all excess past add-on sales, these bookings and sales of services, which actually over the years, although not contractual, have repeated on a same client basis at greater than 90%, similar to the subscription revenue, are now back and running at the same level as last year. The third final reason why we think All Access Pass is such an important growth driver is that All Access Pass and related sales are expected also to account for an ever-increasing percentage of our business. And therefore, the positive impact of this subscription model will become increasingly pervasive. As you can see in slide 19, all access pass related sales already account for 80% of the enterprise division sales in North America. All access pass have increased from 0%, as we said, to approximately 80%. of sales in fiscal 2020. And we expect this share to continue to grow. Similarly, leader in me membership and related coaching subscription accounts for approximately 80% of revenue in the education division. So it's already substantial, but it'll continue to increase in those operations, which have already made the conversion. The other reason why we believe a pay is the most important driver is because in the parts of the world that aren't yet primarily subscription, all access pass for leader me we expect that they will become so we expect that the approximately 36 million of annual revenue that's done in our international direct offices and among our international licensee partners for today all access pass is just nation and is just beginning will now accelerate quite rapidly and over the next years we'll see the majority of that 36 million add To the growth of our subscription revenue and then and it'll then we expect have the same durable and resilient properties that we have elsewhere. In terms of the second question, then, if you look at the slide 20 may ask Paul Walker to address this is what's behind this resiliency in both all access pass and leader in me. Paul, let me just turn the time to you. Paul, as you know, is our President and Chief Operating Officer. You may call on Sean Covey and Jen Colosimo also to weigh in.