Franklin Covey Company

Welcome to the Q3 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-and-answer session. During the question-and-answer session, if you have a question, please press star then 1 on your touch-tone phone. Please note this conference is being recorded. I'll now turn the call over to Derek Hatch, Corporate Controller. Derek Hatch, you may begin.

Thank you, Adrienne. Good afternoon, ladies and gentlemen. On behalf of FranklinCovey, I would like to welcome you to our conference call to discuss the third quarter of fiscal 2021 financial results and hope everyone is having a great summer. Before we begin this presentation, we'd 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 of the company's product, 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 very much, Derek.

Good afternoon, everyone. We're happy to have the opportunity to talk with you today. I really appreciate you joining us. We're pleased to report, as you saw in the press release, that our third quarter results were strong and even stronger than expected. We believe this again reflects the strength, power, quality, and durability of our customer value proposition and of the high growth, durable subscription business model that we have created. Just some highlights, as shown in slide three, revenue was up 58% in the quarter, and it was also greater than in fiscal 19's strong third quarter. Gross margin percentage was up 587 basis points. Our operating SG&A as a percentage of sales improved to 63.6%. Adjusted EBITDA increased 12.2 million. in the quarter to $8.6 million. Our net cash from operating activities increased 65% to $30.9 million. And we ended the quarter with $51 million in liquidity, even after making a major investment in the acquisition of Strive. I'd just like to provide a little more detail on each of these key highlights. Revenue in the third quarter was 58.7 million, which obviously represented a big increase compared to the 37.1 million of revenue in last year's third quarter, which of course was impacted by the COVID pandemic. Importantly though, this 58.7 million in revenue was not only significantly higher than in last year's third quarter, it was also higher than the 56 million in revenue achieved in the strong third quarter of fiscal 19 pre-pandemic, which itself represented a big increase compared to the $50.5 million of revenue achieved in the third quarter of fiscal 2018. This strong growth was driven primarily by the strength and growth of All Access Pass and also of our subscription business and education. All Access Pass, we see in slide four, in the third quarter, All Access Pass subscription sales increased 17% to $19.2 million. It's growth of 2.8 million compared to the third quarter of fiscal 2020. Importantly, this represented growth of 40% compared to the 13.8 million in all excess past sales achieved in the strong third quarter of fiscal 2019. When you take subscription plus subscription services, sales grew 43% to 29.7 million in the third quarter compared to 20.8 million in the third quarter of fiscal 2020. but also grew 39% compared to the $21.4 million in All Access Pass subscription and subscription services sales in the third quarter of fiscal 2019. Our total balance of deferred subscription revenue grew 26% in the third quarter to $55.3 million, an increase of $11.4 million compared to our balance of $43.9 million at the end of last year's third quarter. This represented very strong growth of 39 percent compared to our deferred revenue balance of 39.9 million in the third quarter of fiscal 19. And then finally, our balance of unbilled deferred revenue grew 23 percent to 41.3 million in this year's third quarter and grew 74 percent compared to our 23.7 million dollar balance of unbilled deferred revenue in the third quarter of fiscal 19. And this reflects, of course, a significant ongoing increase in the percentage of our All Access Pass contracts, which are now multi-year. We've talked in the past of having roughly a third of our contracts multi-year. It's now more than 40%. And the 40% of contracts represents 52% of all of our All Access Pass subscription revenue is now in multi-year contracts in North America. And that's really encouraging and exciting that people are seeing that value and that we already have deferred revenue, not just for 2022 fiscal year, but already significant amounts for 2023. Our revenue growth was strong, as we talked about and as shown in slide five. The growth of our profitability and cash flow related to this revenue growth was even more significant. Gross margin percentage for the company increased 587 basis points to 78.2% in the third quarter. It compares with 72.3% in last year's third quarter, 70.8% in the third quarter fiscal 19, and 69.2% in the third quarter fiscal 18. Gross margins in the enterprise division itself actually grew to 81.5% in the third quarter. Operating SG&A as a percentage of sales, as I mentioned, declined to 63.6%, representing a significant improvement compared to the third quarter fiscal 2020. It was also a level lower than the 65.3% achieved in fiscal 2019 third quarter and the 68% achieved in the third quarter of fiscal 18. Noted that adjusted EBITDA increased 8.6 million in the third quarter. That's an increase of 12.2 million. compared to adjusted EBITDA loss of $3.6 million last year, but it also represents a significant increase compared to the $3.1 million in adjusted EBITDA achieved in the third quarter of fiscal 19 and compared to the $600,000 of adjusted EBITDA achieved in fiscal 18. Looking at year to date, adjusted EBITDA increased to $17.4 million which is a big increase compared to the $5.4 million in year-to-date adjusted EBITDA through last year's third quarter. It's also big compared to the $7.2 million in year-to-date adjusted EBITDA achieved in the very strong first three quarters of fiscal 19 and the half a million of year-to-date adjusted EBITDA achieved in fiscal 18. Importantly, adjusted EBITDA for the latest 12 months through the end of this year's third quarter totals 26.3 million, a level which not only substantially exceeds the 18.8 million achieved for the same latest 12-month period last year, but also the 18.6 million in latest 12 months adjusted EBITDA achieved for the same period in fiscal 19. You'll note that this 26.3 million In the latest 12 months, adjusted EBITDA is also well ahead of our existing full year guidance of 20 to 22 million of adjusted EBITDA for fiscal 2021 as a whole. So more on that in a moment. Our cash flow is also strong with net cash generated through the third quarter increasing to 11 million. That's an increase of 23.2 million compared to negative 12.2 in net cash generated during the same year-to-date period last year. It was also well ahead of the negative 4.8 net cash generated for the same year-to-date period in fiscal 18 and the 7.2 for the same period in 18. And then finally, our net cash provided by operating activities increased 65% to $30.9 million through the third quarter. That compared to $18.7 million for that same period last year, $18.6 in 19 through the same period in 8.6, 8.6 million in 18. So we ended the quarter with strong liquidity, approximately 51 million, even after investing 10.6 million for the acquisition of Strive, which Paul will talk about later in this call. And this liquidity level is up from the 37 million in liquidity we had at the start of the pandemic a year ago, even after the investment in Strive. So we're grateful to be in a strong balance sheet position. We'll discuss these results in more detail in just a moment, but I wanted to give you the same context we've provided in the past three quarters so that you can say what's behind the, make sure you understand each of the components behind this performance. As you can see in slide six, the four trends are as follows. First, as we talked about, all excess past sales have continued to achieve strong growth. Second, that all access pass subscription services sales have continued to grow and are now significantly higher than even their pre-pandemic levels a year ago. Third, our international operations have continued to strengthen. And fourth, the performance and trends in our education business have also strengthened substantially, both in terms of retention, revenue, number of new leader in these schools, and outlook. Now just a little more detail on each of these key trends. First, As expected, all excess pass and subscription sales, which now account for 82% of enterprise sales in North America, continued strong. As you can see in chart one on slide seven, total company all excess pass subscription sales grew 17% in the third quarter to 19.2 million. Year-to-date growth was 15%, and latest 12-month growth was 14%. The 19.2 million in All Access Pass subscription sales in the third quarter compares to 16.4 in All Access Pass subscription sales in the third quarter of 20, 13.8 million in the third quarter of 19, and 11.1 in the third quarter of 18. In addition, as shown in chart two on slide seven, our All Access Pass deferred revenue balance grew an even more rapid 25.9 percent in the third quarter to 44.2 million. which represents an increase of 36.8% compared to last year's balance and at the end of the 32.3 balance of deferred revenue at the end of the third quarter of even fiscal 19. And that's been broad-based across all the key elements. The number of OLEX's past new logos increased 93% in the third quarter of this year compared to last year. Annual revenue retention continued to exceed 90% as shown in chart three on the same slide. And the sale of multi-year contracts is also strong with our balance of unbilled deferred revenue increasing 25% to $40.5 million compared to $32.4 million in the third quarter of 20. It's been up 74% compared to the $23 million balance of unbilled deferred revenue we had at the end of the third quarter of fiscal 19, as you can see in chart 4. The second trend relates to these subscription services. Sales of All Access Pass subscription service increased to $10.5 million in the third quarter, making it our highest subscription services quarter ever. This compared to All Access Pass subscription services sales of $4.4 million in the third quarter of fiscal 20, $7.6 million in the third quarter of 19, and $5 million in 18, which is shown also in slide 8. Also shown, for the first time, our All Access Pass subscription and subscription services sales exceeded 100 million for the latest 12-month period. That's a big landmark. Going to chart nine, talking about subscription services, shows the strong booking trend for All Access Pass subscription services, almost all of which have now been being delivered live online. As you can see in chart three on that slide nine, beginning of the pandemic in March of last year, bookings of services delivered live on site at client locations were necessarily canceled, and the year-over-year dollar volume of our services declined with delivered engagements down 6.9 million in North America in the third quarter. However, with our quick pivot to delivering services live online in the fourth quarter of fiscal 2020, New bookings increased to a level nearly equal to that achieved in the fourth quarter of fiscal 19, just three months into the pandemic. 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 in the third quarter, the dollar volume of services delivered in the fourth quarter was off only 1.1 million. The same positive trend continued in the first quarter, accelerated in the second quarter, and continued through the third quarter where sales of subscription services exceeded by 16 percent, the highest level ever achieved in any quarter. As shown in chart two, again, the vast majority of our subscription services are now delivered to clients live online, meaning that our momentum can continue regardless of when and whether certain organizations return to their offices. Third, as shown in slide 10, performance in our international operations has continued to strengthen throughout the third quarter. As previously reported, at the start of the pandemic, we had to reschedule substantially all live on-site training engagements in our international offices as well. Since these countries were just starting to sell all excess paths 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 of fiscal 19. However, 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 percent of the prior year in these countries improved significantly. Year-over-year sales improved further in the first and second quarters. We expected sales to continue to strengthen in the third quarter, and we're pleased that they did. In the third quarter, international sales were ahead of our expectations and just 13% lower than in the third quarter of 2019, and a portion of that 13% down is reflecting the fact that we've started to add more subscription sales in those offices as well. which are going onto the balance sheet rather than onto the income statement. While there continue to be pandemic-related challenges in Japan and in certain licensee operations, we're pleased with the strong rebound overall in our international operations. Importantly, in addition to significant recovery in reported sales shown in slide 10, our international operations have seen significant increases as I mentioned in all expenses past deferred revenues. So finally, on these trends, we've also seen real strengthening in the performance and overall market trends in our education business in the third quarter. As shown in slide 11, the strengthening of education's performance includes that the number of LeaderME schools which have renewed or are ready to renew their LeaderME membership increased to 1,921 during the third quarter compared to 1,681 at the same time last year. The number of new leader in these schools who contracted by the end of the third quarter or were in the process of contracting is 90 greater than that achieved by the end of last year's third quarter, or 305 schools versus 215. In addition to these strong booking performance, education's reported performance also increased significantly in the third quarter. Education's third quarter revenue grew 44.8% over last year's third quarter. It also grew 7.3%. compared to fiscal 19's third quarter. This reflects, among other things, the addition of some new large multi-year district contracts that were started during the third quarter, all of which are expected to bring on additional revenue over the coming quarters and years. Also, it includes a substantial increase in number of coaching days. Our gross profit and education division also improved 1,140 basis points in the quarter from a gross margin of 57.3 to 68.7%. And finally, adjusted EBITDA for the education division increased by 2.7 million over last year's third quarter and was also up 1.3 million compared to even fiscal 19's third quarter. Our education, our international licensing network also showed substantial improvements in revenue in adjusted EBITDA during the quarter. So conclusion on education, There are also trends in the overall education market, which we expect will help our education business during the remainder of this fiscal year and into the next fiscal year, including the increasing confidence in the educational community that most schools will be open and largely back to normal in the fall of this year. And the three big COVID stimulus bills passed by Congress dedicated nearly $200 billion towards stabilizing budgets in K-12 schools. So with that, Overview and detail, I'd like to now ask Steve Young to dive a bit deeper into the performance for the third quarter and go through the financials. Steve?