Franklin Covey Company

Welcome to the Q2 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 be conducting 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 call is being recorded. I'll now turn the call over to Derek Hatch, Corporate Controller. Derek, you may begin.

Thank you, Adrian. Hello, everyone. On behalf of FranklinCovey, I would like to welcome you to our conference call to discuss our financial results for the second quarter of fiscal 2021. Before we begin, I'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 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 products. Changes in the training and spending policies of the company's clients and other factors identified discussed in the company's most recent annual report on Form 10-A 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, we'd like to turn the time over to Mr. Bob Whitman, our Chairman and Chief Executive Officer. Bob?

Thanks, Derek, and hello to everyone. We appreciate you joining us today. Really happy to have the opportunity to talk with you. We're really pleased that our second quarter results were strong and even stronger than expected. We believe this again emphasizes the strength, quality, and durability of FranklinCovey's value proposition and of our strong subscription business model. Specifically, in the second quarter, as you can see in slide three, revenue is strong, driven particularly by the strength and growth of all access paths and related sales. Growth margins increased 559 basis points compared to last year's already strong second quarter. Our operating SG&A declined by 2.4 million. Adjusted EBITDA increased to 5.1 million, which is a level of 1.1 million or 26% higher than the 4 million of adjusted EBITDA achieved in last year's strong pre-pandemic second quarter. And it's at a level significantly higher than our expectation of achieving between 1.5 and 2 million in adjusted EBITDA for the quarter. Our cash flow is also strong. That cash provided by operating activities year-to-date increased 26% or $4.5 million to $21.9 million ahead of the $17.4 million achieved in last year's second year-to-date second quarter. And finally, we ended the quarter with approximately $55 million in liquidity, which is up from the $39 million in liquidity we had at the start of the pandemic one year ago. We're pleased to be in this position. I'd like to discuss these results in more detail in just a moment, but first some context. This strong and stronger than expected performance reflects the continuation and acceleration of four key trends we've discussed in the past three quarters and which continued in this quarter. Specifically, as indicated in slide four, these trends are first that the growth of all access path sales has been very strong. Second, that all access pass-related services have continued to be strong and are now even higher than the very strong levels we had pre-pandemic. Third, our international operations have continued to rebound. And fourth, despite continued uncertainty during the first half of the year, trends in our education business are really encouraging. I'd like to provide a little more detail on each of these trends. First, as expected, the growth of All Access Pass and related sales, which accounts for 83% of our enterprise sales in North America, continue to be very strong. As shown in chart A in slide 5, you can see the total company All Access Pass pure subscription sales grew 13% in the second quarter to $17.5 million, have grown 14% year-to-date for the first six months, and 15% for the total 12-month period, which is the entirety of the pandemic to date, to $67 million. In addition, as shown in Chart B, total company All Access Pass amounts invoiced have been growing even faster, growing 16% in the second quarter to $22.5 million and 30% year-to-date to $38.4 million. Importantly, much of this 30% year-to-date growth in All Access Pass invoice amounts has been added to the balance sheet and will establish the foundation for accelerated sales growth in future quarters. Importantly to us, All Access Pass performance has been strong across all the key elements which we pay attention to. The number of All Access Pass sales to new logos increased meaningfully both in the second quarter and in the latest 12 months. As shown in chart C, our annual revenue retention has continued to exceed 90% and also the sale of multi-year contracts has continued to be strong with our balance of unbilled deferred revenue related to multi-year contracts increasing to 37.4 million as shown in chart D. Second, the sale of all access pass related services which is delivered primarily live online was also very strong in the second quarter. Chart A in slide 6 shows the strong booking trend for all access pass add-on services, almost all of which are now being delivered live online. As you can see in chart C, with the beginning of the pandemic in March of last year, bookings of services delivered live onsite at client locations were necessarily canceled, and the year-over-year dollar volume of services declined with the 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 levels nearly equal to those achieved in the fourth quarter of the prior year in 19. These strong bookings in turn drove an increase in the dollar volume of services actually 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. This same positive trend continued in the first quarter and accelerated in the second quarter with the result that in the second quarter, Sales were actually higher and year to date actually services revenue in North America has exceeded the levels achieved in last year's second quarter and first six months period pre-pandemic. As shown in chart B, 92% of our services are now being delivered to clients live online. This is important because with 92% of services now being delivered live online, our momentum can continue regardless of when and whether organizations return to their offices. Third, as shown in slide seven, performance in our international operations has also strengthened this second quarter. Sales in China, Japan, Germany, and among other international direct offices and licensing partners continued to improve, continuing the trends established in both the fourth and first quarters. At the start of the pandemic, we had to reschedule substantially all live onsite training engagements in these countries. 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 significantly compared to the third quarter fiscal 19. Actually, these declines started a little earlier in China in the middle of last year's second quarter with the onset of the coronavirus there. As shown in last year's fourth quarter, while still operating well below the levels achieved in the prior year's fourth quarter, Sequential sales and sales as a percentage of the prior year in these countries began to improve significantly. Year-over-year sales improved further in the first quarter. We expected sales in these operations to continue to strengthen the second quarter, and we're pleased that they did. As shown, in the second quarter, international sales were ahead of our expectations and just 14% lower than in last year's second quarter, with most of this decline, year-over-year decline, represented in Japan and UK, which have had a series of rolling shutdowns in their economy, but which we expect will strengthen. Importantly, another reason for actually a little bit of a decline is that we're having a good conversion of sales to all access pass. And that is putting, instead of putting the revenue into the quarters, putting on our balance sheet. And this is driving an increase in our balance of deferred revenue internationally that will help to drive strong sales force growth in the future. Finally, as shown in slide eight, in the education division, despite an educational environment which is contained to be very challenging, we've seen a strengthening in the trends of our education business both in the second quarter and year to date. This strengthening includes that number one, the number of Leader in Me schools which have renewed or are ready to renew their Leader in Me membership increased to 1,059 during the second quarter. compared to 725 schools at this same time last year. And second, the number of new leader in these schools who have contracted by the end of the first quarter or are in the process of contracting is almost equal to that achieved in last year's second quarter pre-pandemic. Just note that there are also some positive trends in the education market overall, despite the challenges, which we all know about. And we expect these will help our education business during the remainder of this fiscal year and into next fiscal year. These trends include one, increasing confidence among those in the educational community that most schools will be open in the fall of this year. Not certain, but more confident. Second, that is shown in slide nine, and it's shown in slide nine, the three COVID-19 stimulus bills passed by Congress in March, last year, December, and this March, dedicated nearly $200 billion towards stabilizing budgets in K-12 schools, with a disproportionate amount of that help coming to Title I schools, where Leader in Me is often the strongest. And three, the third trend is that social-emotional learning for students, called SEL, which plays to the strength of Leader in Me, continues to gain momentum. Its importance is being talked about every day in the press. It's becoming increasingly required by districts. Just one more note, to take advantage of the stimulus funding and the SEL movement or social emotional learning, our education team has added to its positioning efforts, helping schools take on the issues of learning recovery and the student and teacher mental wellness. These have become the pressing topics the education community is trying to address and that Leader in Me is really designed to deliver on. Early indicators suggest that this expanded position is working well. And so we believe these business and market trends will work in our favor. It will still be a difficult environment this year, but we're confident in the future of our education subscription business. We've been conservative about our expectations this year and feel good about our ability to meet those. With this context, I'd like to turn the time to Steve Young and ask him to dive a bit deeper into our performance for the second quarter. Steve?