Franklin Covey Company

Welcome to the Q1 2021 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-answer session. During the question-answer session, if you have a question, please press star, then 1 on your touch-tone phone. I'll now turn the call over to Derek Hatch, corporate controller. Derek, you may begin.

Thank you. Good afternoon, ladies and gentlemen. On behalf of FranklinCovey, I would like to welcome you to our first quarter financial results call this afternoon and welcome everyone to 2021. We hope everybody had a safe and healthy beginning to the new year and hopefully you will enjoy today's presentation. Before we begin today's presentation, we want 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 and renewal rates for our subscription offerings, including the All Access Pass and Leader in Me memberships, the duration of 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 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 this afternoon to Mr. Bob Whitman, our Chairman and Chief Executive Officer. Bob? Thanks, Derek.

Good afternoon, everyone. We're happy to have the opportunity to talk with you today. We're pleased that in the first quarter of fiscal 2021, our operations continue to demonstrate their strength, agility, and ability to progress even during the continuing pandemic. Specifically, As you can see in slide three, in the first quarter, revenue was strong, driven particularly by the strength and growth of all access paths and related sales. Gross margins increased by 359 basis points compared to those in last year's strong first quarter. Operating SG&A declined by 4.4 million. Adjusted EBITDA was 3.7 million versus an expectation of between 2 and 2.5 million. Our net cash provided by operating activities increased 60% or 4.1 million to 10.9 million, substantially exceeding even the 6.8 million of net cash provided by operating activities in last year's first quarter. And we ended the quarter with approximately 49 million of liquidity, up from 42 million at the end of the fiscal year in August and up from 39 million at the start of the pandemic. So we're pleased with the continued progress in the first quarter, and I'd like to discuss those results in more detail in just a moment. But first, just thought we'd provide a little context. In our year-end conference call a little over two months ago, we reported that in our enterprise division in North America, which accounts for approximately 70% of total enterprise sales, and where all access paths and related sales account for 84% of total sales on the way to 90%, We reported first, as you can see on slide four, chart 1A on slide four in the upper left-hand corner, we expect all excess past subscription sale that we, as expected, reported all excess past subscription sales had remained strong throughout the pandemic to date, growing 18% in North America for the period March through August, and as indicated, We said that we expected all access pass subscription sales to continue to be strong through this year's fiscal first quarter and on an ongoing basis thereafter. Second, as shown in chart 1B on slide four, we said that after the initial disruption of live onsite coaching and training services during the first six weeks of the pandemic, our quick pivot to delivering training and coaching services live online the capability we've had for more than a decade, allowed our add-on services to rebound quickly. We reported that as a result, by July, our new bookings of services had returned to essentially the same levels we had achieved in the prior year. We said that we expected this booking trend to continue in Q1 and beyond. Third, in chart 1C, in our international operations, we reported that despite having had only nation's All Access Pass subscription businesses in most of our international operations, and thus a relatively small base of All Access Pass subscription revenue to cushion them, they had begun to recover. As we said, we expected these operations to strengthen further as the year progressed, and that the accelerated focus on All Access Pass in these offices would, over the next few years, allow them to achieve a strong base of subscription and related revenue. achieve revenue retention rates and build up a deferred revenue similar to that currently being achieved in our North American operations. And finally, as I indicated in 1D, we said that in our education division, which accounts for just under 20% of total sales, we had achieved very high leader in the subscription school retention last fiscal year, and that remarkably in the middle of the pandemic, we had also added 300 plus new schools, almost all of which came on during the pandemic. We said that notwithstanding a continued difficult school environment, we expect their subscription retention to remain high and even increase in fiscal 2021, and that we expected to add even more new leader in these schools in fiscal 2021 than in fiscal 20. While the environment has continued to be challenging, We're happy to report that as indicated in slide five, these positive trends have continued and even accelerated through the first quarter and are continuing to continue to accelerate in the second quarter. As shown, 1A All Access Pass subscription sales continued to be very strong in the first quarter and invoiced amounts accelerated even faster, building the foundation for future acceleration of actual subscription sales. All excess past related sales rebounded quickly and are now exceeding the levels achieved last year, even pre-pandemic. One C, sales in China, Japan, and among our other international offices have continued their strong recovery. And finally, Leader in Me membership retention from existing Leader in Me schools has been very strong in the first quarter, as we'll talk about, and sales to new schools are off to a very encouraging start. Diving a little deeper, I'd like to address each of these points so that you have some background and transparency on them. First, as shown in chart 1A and slide 6, total company All Access Pass subscription sales grew 16% in the first quarter to 17 million and grew 17% to 65 million for the latest 12 months. In addition, as also shown in chart 1B and slide 6, total company All Access Pass amounts invoiced, which are added to the balance sheet and which form the basis for accelerated future growth and sales. Oops, we got some paper shuffling in the back here. Sorry, somewhere. Increased, you're saying our invoice amounts increased an extremely strong 55% in the first quarter, and even excluding a large government All Access Pass contract, growth and invoice sales was still a very strong 32%. This establishes a strong foundation for accelerating future growth. Importantly, All Access Pass performance is strong across all of the key elements that we look at for All Access Pass, including sales to new logos, which increased substantially both in the first quarter and for the latest 12 months. Nine of those 12 months, of course, took place during the pandemic and still had new logos increase every quarter. Annual revenue retention, which continued to exceed 90% both for the quarter and for the latest 12 months, as you can see in 1C. And the sale of multi-year contracts, which is shown in 1D, where unbilled deferred revenue related to multi-year contracts grew 19% in Q1 compared to Q1-20 to $40.5 million. So we're really pleased that all of the key underlying metrics and drivers were strong. As shown in chart 1A then on slide 7, in addition, in North America, as previously noted, our almost immediate pivot to booking and delivering coaching and training engagements live online allowed us to continue to meet the needs of our customers remotely. And interestingly, the flexibility which live online delivery provides has in many cases also resulted in clients expanding the extent of their use of add-on services because they see it's so simple to get people together and do it. As shown, the strong booking trend for add-on services, almost all of which are now being delivered online, which by July had resulted in our booking pace equaling that achieved at the same time in the prior year and then to exceeding it by the end of August, has continued strong through December. The increase in bookings, which is a lead measure, a predictive measure, because it's booked but not yet recognized, drove an increase in the lag measure, which is the actual invoice sale of services having been delivered. And both bookings and sales of services have continued to strengthen. As you can see in chart one of slide seven, with the beginning of the pandemic in March, bookings of live on-site services were necessarily canceled. the stay-at-home restrictions, and the year-over-year volume of services followed down, with delivered engagements down $6.9 million in North America in the third quarter. However, in the fourth quarter of fiscal 2020, new bookings increased to the level nearly equal to that we'd achieved in the fourth quarter of fiscal 2019, and this in turn drove an increase in the dollar volume of services actually delivered. As a result, instead of being off $6.9 million in the third quarter, The dollar volume of services delivered in the fourth quarter was off only $1.1 million. This same positive trend continued the first quarter. The total bookings were up year over year, and the invoice of sales which followed were only off $200,000, compared even to last year's very strong first quarter. And when you add in December's results, for the first four months of fiscal 2021, September through December, Actual sales of services delivered exceeded those achieved for the same four-month period last year, which is a very strong period for us last year pre-pandemic. As shown in chart 1B in slide 7, it's important that 87% of our clients have now shifted to live online delivery of services. This is important. With 87% of our clients now having shifted to live online, our susceptibility to future cancellations has been reduced substantially. So we're very pleased with the trends continuing here. Maybe just turn to our international operations. Second, as you can see in slide A, sales in China, Japan, Germany, and among our other direct offices and licensee partners in the first quarter improved substantially compared to both the third and fourth quarters. At the start of the pandemic, we had to reschedule substantially all live on-site training engagements in these countries. And since these countries were just starting to sell all excess pass and therefore did not have a strong base of durable subscription revenue to cushion them, sales in these countries declined to only 4.1 million in the third quarter compared to 12.7 million in the third quarter of fiscal 19. However, in the last year's 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, from the $4.1 million in sales in last year's third quarter. And we had said we'd expected that our international operations would continue to strengthen in the first quarter, and we were pleased that they did. As shown in the first quarter, international sales were $9.9 million, ahead of our expectation of $9 million. And while still below the level achieved last year, this represented an increase of $2.9 million, or 41%, compared to the $7 million achieved in the fourth quarter, and was 2.4 times the amount, the $4.1 million amount achieved in the third quarter. Importantly, in addition to the significant recovery in reported sales, our international operations have also seen strong increases in all access pass amounts invoiced, which are starting to build the balance of deferred revenue on the balance sheet that will drive sales in these countries in the future. So we feel good about the direction in these countries and strategically also the acceleration of their shift to all access paths. Finally, as shown in slide nine, in the education division, despite an environment that continues to be very challenging, as we all know, we've seen some strengthening in trends in the first quarter, including one, that the number of LeaderME schools which have renewed or are ready to renew their LeaderME membership contracts has increased to 615 compared to 450 schools at the same time last year. Second thing is that the number of new leader in these schools contracting or in the process of contracting after being down in the fourth quarter is equal to that achieved in last year's first quarter, which was, of course, pre-pandemic. And so considering the current education environment, we feel very good and encouraged about these trends in education. Let me now dive a little deeper into our first quarter performance. Looking at slide 10, as you can see, our first quarter performance was stronger than expected and showed, thankfully, and we're grateful, showed positive momentum on almost every front. Our adjusted EBITDA for the first quarter was 3.7 million, exceeding our expectation of achieving adjusted EBITDA between 2 and 2.5 million. These results are even more notable in light of the fact that last year's first quarter was itself very strong. Next, as shown in slide 11, our cash flow and liquidity position were also very strong. As shown in slide 11, our net cash generated for the quarter of $532,000 in one of our lowest quarters was $4.9 million higher than in last year's first quarter. This reflects almost entirely that our significant growth in new all-access pass contracts invoice, resulting in our net deferred revenue position not going down as much. Pulling stuff off the balance sheet versus what you added on actually improved by $6 million versus the prior year. As you can see in slide 12, also our cash flow from operating activities for the first quarter was $10.9 million, which was $4.1 million or 60% higher than last year's $6.8 million. This strong cash flow reflects that an additional benefit of our subscription business model is that we invoice up front and collect all of the cash faster than we recognize all of the income. And so it actually generates cash faster than it generates income. As a result, we ended our fiscal year in August with more than $40 million in total liquidity comprised of $27 million of cash and our $15 million revolving credit facility undrawn, an amount that was even higher than we had at the start of the pandemic. And we're pleased that we added further to this liquidity during the first quarter, ending the first quarter with $49 million of total liquidity comprised of $34 million of cash, which means no net debt, and with our $15 million revolving credit facility still undrawn and available. So we're pleased with the financial position. This strong performance was driven by, as you can see on slide 13, strong growth. Our revenue is $48.3 million. It was strong and a little bit stronger than we would have thought, driven particularly by our North American operations, which in turn was driven by the performance of all access paths. As you can see in slide 1A of slide 14, companywide All Access Pass subscription sales grew 16% in the first quarter. And in addition to the All Access Pass subscription revenue actually recognized in the quarter, as we've talked about and as shown in chart 1B of slide 14, we also achieved an extremely strong 55% growth in All Access Pass amounts invoiced. And as I mentioned, even excluding a large government contract, growth in all access pass amounts invoiced was still a very strong 32%. As you know, most of the significant growth in all access pass amounts invoiced was not recognized in the quarter, but was added to the balance sheet as deferred revenue that will be recognized in future quarters, accelerating our results in those quarters. And as noted previously, also these new invoice amounts included strong sales to new logos, A continued quarterly and latest 12-month revenue retention rate of greater than 90%, as you can see in 1C. A large number of all-access pass expansions. And shown in 1D, a large volume of multi-year all-access passes, which increased our unbilled deferred revenue, which, of course, will flow into sales in future quarters. All-access pass add-on sales were also very strong in the first quarter, as we mentioned previously. Our add-on services booking momentum, which is a lead indicator to actual add-on sales, returned to levels equal to the prior year as early as July, and our booking pace accelerated beyond that in August and through the first quarter and through December. This is resulting in a strong booking pace that's resulted also then in strong actual delivered revenue, where worldwide these services increased to $9 million, which was a bit above actually even that achieved, pre-pandemic in last year's very strong first quarter, where we actually saw very significant growth of add-on sales compared to the prior year. Second, as you can see in slide 15, All Access Pass drove also strong gross margin growth again in the first quarter. The gross margin percent was 75.3%. It's up 359 basis points from the 71.7% achieved in the first quarter of fiscal 2020. and up 275 basis for the latest 12 months. As a result, our gross margin percentage for the enterprise division in the first quarter increased to 80.6% compared to 75.3% in last year's first quarter, an increase of 530 basis points. You can see our SG&A was lower than last year. It came in at 32.7 million, which was 4.4 million lower than last year's first quarter. And finally, the combination of these factors resulted in adjusted EBITDA, as we mentioned before, coming in at 3.7 million in the first quarter, compared to an expectation of between 2 and 2.5 million, and just 1.3 million lower than in last year's very strong quarter, despite the slower recovery in our international operations. We mentioned again that we had strong invoice and multi-year sales in the first quarter, And because most of these sales were not recognized, it built up our balance of deferred revenue, which, as you can see in slide 16, our total balance of build and unbuild deferred revenue increased to $97.4 million, reflecting growth of $14.7 million, or 18%, compared to our balance of $82.7 million at the end of last year's first quarter. As noted last quarter, I'll just note again, approaching $100 million of deferred revenue, billed and unbilled deferred revenue, is a big landmark for subscription businesses. This provides significant stability of and visibility into our future performance. And this strong combination of factors, both reported sales, new bookings, balance sheet improvement, and increases in balance of deferred revenue, continues to drive our expectations. that we will generate very high rates of growth into adjusted EBITDA and cash flow in 2021 and on an ongoing basis. As you can see in slide 17, we've seen this before, we expect to generate adjusted EBITDA between 20 and 22 million in fiscal 2021. And we're pleased to be off to a strong start toward this objective. Achieving 20 to 22 million in adjusted EBITDA would represent approximately 50% increase in adjusted EBITDA compared to the $14.4 million we achieved in 2020. Our target is to see adjusted EBITDA then increase by approximately $10 million per year each year thereafter to approximately $30 million in 2022 to approximately $40 million in 2023. These targets reflect our expectation that we will achieve at least high single-digit revenue growth each year. That's approximately $20 million per year revenue growth. Then on average, approximately 50% of that amount of growth in revenue will flow through to increases in adjusted EBITDA and cash flow, reflecting our high gross margins, strong gross margins, and variable selling costs. We fully expect to achieve an adjusted EBITDA to sales margin of 20% in the coming years, and really to become a billion-dollar market cap company in the coming years, even at an adjusted EBITDA multiple that's conservative relative to our adjusted EBITDA growth rate and without relying on multiples of revenue, which we should increasingly be able to garner. Looking forward, I'd now like to address three factors that we expect to drive us toward the achievement of these strong objectives and of our being a consistently, we hope and expect, high adjusted EBITDA growth, high cash flow growth company. On the navigation slide in 18, those three points are the three drivers. Growth driver number one is the strength of the All Access Pass economic engine, which we've talked about. Growth driver number two is that we're making significant ongoing investments in areas that our customers value most and in which we already have significant competitive advantages. And third is actually the strength of our organization and leadership and our teams throughout the world. Shown in slide 19, growth driver number one is the strength of the All Access Pass economic engine. In slide 20, you see the All Access Pass and related sales have driven the vast majority of our growth in revenue and adjusted EBITDA over the past five years. As you can see, since 2015, annual All Access Pass and related sales have grown from really nothing to more than $90 million through fiscal year 2020, reflecting a huge compounded average growth rate and average absolute all-access pass and related revenue growth of between $10 and $20 million each year. This growth in all-access pass and related sales has generated the vast majority of the total revenue growth for the company overall during these years and in almost every individual year, more than offsetting the early runoff of our legacy facilitator and on-site businesses, which are now largely behind us with 84% of our revenue now in enterprise division in North America coming from All Access Pass and related. Second, as you can see in slide 21, in the first quarter, company-wide All Access Pass subscription sales grew 2.3 million or 16% compared to the same period. And for the latest 12 months, including nine months of the pandemic from March to November, All Access Pass subscription sales still grew 17% compared to the same nine-month period a year ago, or the latest 12 months a year ago. Again, as shown in chart 1A of slide 22, we've noted this, that All Access Pass sales grew, the add-on services grew, and that, importantly, our amounts invoice of new sales that are put on the books grew 55%, including a large government All Access Pass contract, but even excluding that still grew 32%, or 3.4 million. The other thing about All Access Pass that's really driving it, as shown in slide 23, that's compelling business model economics. As you can see, it's driving strong gross margins. Its high revenue retention is allowing us to reduce our operating SG&A as a percentage of revenues, so it's reducing operating costs. That's giving us a high flow-through with a combination of strong gross margins and declining operating costs. That is a percentage of sales. It's expected to allow approximately 50% of incremental revenue growth to flow through the increases in adjusted cash flow. And then in terms of the visibility and predictability, the large and growing balance of build and unbuild deferred revenue, which is approaching $100 million, as we talked about. And then also the predictability of the All Access Passes key operating metrics, including annual revenue retention of more than 90%, the fact that more than a third of All Access Passes holders are entering into multi-year contracts, and that our add-on services, which have now proven to be extremely durable, average 45%. All of this, we believe, gives us significant durability visibility and predictability. Growth driver number two is the ongoing investments we're making in areas we're already strong. We're making significant investments behind the things that are our actually distinct and competitive advantages and these are the things our customers value most. I just say that all access paths is not just another typical as we say all you can eat subscription service providing unlimited access to large amounts of undifferentiated skills content. Rather, All Access Pass is a subscription service, I'd say, with a punch. Or as illustrated in 25, really, four powerful strategic punches. FranklinCovey has purposely and systematically built its strategic map to establish best-in-class competitive modes in each of the following four areas that are important to our customers. As you can see in slide 26, moat number one is having the best-in-class solutions to our clients' highest-impact, must-win opportunities and challenges. At any given time, most organizations have several high-impact opportunities which have achieved or challenges which overcome would have a significantly disproportionate positive impact on their organization's results. These opportunities and challenges include things like successfully and systematically implementing a new or refined strategy. Number two, getting an entire organization to nimbly adjust to necessary changes we've all had this past year. Third, achieving a major nonlinear operational breakthrough, such as increasing sales performance or improving customer experience. Four, establishing the foundation for a winning and engaging culture. Five, developing leaders at all levels, leaders who as Eisenhower suggested, get people to want to do the things that must be done. And so while the rewards for achieving organizational breakthroughs in these areas can be truly significant, even great organizations often struggle to consistently address and achieve them. These are challenges which can't be solved just by letting people search through a content library and pick topics interesting to them. Rather, achieving breakthroughs in these areas requires collective organizational and behavioral change, at scale. When you step back from this, you recognize that there are certain things like strategic consulting that can have a big impact. They're just not very scalable. It doesn't get behavioral change. You've got other things that are really scalable where you can have lots of people take courses, but it doesn't have much impact. Where we're playing is at the intersection of those two is high impact with high scalability. And these are exactly the kinds of high impact challenges on which FranklinCovey has focused its solution development efforts and budgets for more than a decade. And as a result, we now have the acknowledged best-in-class blockbuster solutions for addressing exactly these kinds of blockbuster challenges. As you can see in slide 25, some of those solutions. As you can see in slide 27, Slide 27, our best-in-class solutions include a bunch of great solutions, including four disciplines of execution, the speed of trust, four essential roles of leaders, multipliers, and a wide variety of other offerings, including our two most recent best-selling solutions, six critical practices for leading a team, and overcoming unconscious bias to unleash potential. And, of course, these are in addition to our historical strong things, solutions like LeaderNB and education and seven habits of highly effective people, both of which continue to set all-time usage records, even though they're now a minority of our offerings. But even with this very strong collection of best-in-class solutions, we're making ongoing investments in new content and solutions, including a new change management solution, new leadership offerings. Let me just refer to in slide 27, it looks like we've got a numbering problem on one of these slides, but we're also, the flexibility, as you can see in slide 27, is also a big competitive moat for us because having best-in-class solutions for our clients' biggest opportunities and toughest problems is critical. However, they've also got to be able to build to deliver that and access it flexibly. So we've made significant ongoing investments in technology, portals, digital learning, assessments, micro-learning, coaching, and the latest instructional design investments. We've now got flexibility across a wide variety of modalities, including digital, microlearning, live online, live on-site coaching, or any combination of thereof, in almost any segment of time, as you can see on slide 27, on any device, in more than 20 languages worldwide, with digital, live online, or live coaching and other services available to support them. And as a result, again, as shown on slide 30, Slide 30. All access pass related sales have jumped as a result. They've increased from zero to more than 90 million. Latest 12 months for revenue retention has been high at more than 90%. More than 35% of pass holding clients are signing multi-year contracts. Our average pass size has grown from 29,800 to 40,000. in the latest 12 months. And again, our balance of bill deferred revenue is really significant. Maybe looking at slide 31, which is the third puzzle piece, you can see in slide 32, FranklinCovey has built a direct sales force of 247 client partners or sales associates in the US and Canada, and in China, Japan, Australia, and in the UK, Ireland, Germany, Austria, and Switzerland. In addition, we expect to add 20 net new client partners this fiscal year to the 247 client partners we had at the end of Q1. And, you know, Paul, let me turn the time to you to maybe talk about also the licensee network that we've built and the other strategic modes that we have.