Franklin Covey Company

Welcome to the Q2 2022 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. I'll now turn the call over to Derek Hatch. Derek, you may begin.

Thanks, Adrienne. Hello, everyone. On behalf of FranklinCovey, I would like to welcome you to our earnings call to discuss our second quarter fiscal 2022 financial results. Before we begin, I would just 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 of 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 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. I think that gets longer every time I read it. With that out of the way, I'd like to turn the time over to Mr. Paul Walker, our Chief Executive Officer. Paul?

Thank you, Derek, and hello, everyone. We're happy to have the opportunity to talk with you today, and we thank you for joining us. I'm joined by Bob, Steve, and the team, and we also have Jen Colosimo and Sean Covey on the line as well. We're really pleased with both our second quarter and year-to-date results. As you can see in slide four, subscription and subscription services revenue grew 31% in the second quarter and 32% year-to-date. This drove overall company revenue growth of 18% in the second quarter and 22% year-to-date. Our balance of deferred revenue, billed and unbilled, grew 24%. Our gross margin percent reached 77.9 for the quarter and increased 41 basis points compared to last year's second quarter, and an increase of 140 basis points to 77.8% year-to-date. Operating SG&A as a percent of sales improved 316 basis points for the quarter, going from 66.9% to 63.7%. and improved 468 basis points year-to-date, going from 67.3% to 62.6%. This combination of strong revenue growth and increasing gross margin percentage and declining operating SG&A as a percent of sales drove a 35% flow-through of incremental revenue to adjusted EBITDA in the second quarter and a 43% flow-through year-to-date. As a result, adjusted EBITDA for the second quarter increased 57% to $8 million, and increased 103% to 18 million year-to-date. And net cash flow from operating activities year-to-date increased to 23.2 million. I'd now like to step back and provide a bit of context and insights on some of the key factors which are driving these results. Our focus and unique expertise is in helping organizations achieve results that require the collective action of large numbers of leaders and individuals. As indicated in column one of slide number five, on the left side there, there are many in our industry who provide libraries of information. These can prove to be a useful resource to a company's employees. Similarly, as indicated in that center column, many others offer libraries of content that provide a client's employees the opportunity to develop life and job skills to help them advance in their careers. At FranklinCovey, however, Our focus is not just on providing our clients with useful information or providing content to help people learn skills that can help them advance in their careers, although I think it's important to note that both are available in the All Access Pass. Rather, FranklinCovey has organized and focused our entire organization on helping clients achieve results that require large-scale change in behavior. We help our clients address challenges and successfully pursue opportunities which, as indicated in that third column on the right, require unleashing the collective power of the entire organization. These opportunities and challenges include things like moving a key metric, such as customer satisfaction or sales performance, or measurably increasing the engagement and commitment of employees, or developing leaders who can unleash the capabilities of their people to achieve extraordinary results. Said differently, we're their partner of choice for organizations when winning is a team sport. We've always been viewed as best in class at helping organizations achieve these kinds of high impact results. And when we made the decision to convert to a subscription business model just over six years ago, we already had a number of significant strengths going for us. These included things such as over the prior five years, we'd achieved significant growth in revenue and adjusted EBITDA. We'd created some of the world's most impactful and best-selling content. We'd invested significantly in technology-based delivery capabilities. We had a large and growing sales force, we had a lot of loyal customers, and we had a tremendous culture. However, despite our successes, we knew that our customers had a much broader range of important opportunities and challenges than our, at the time, one-off, solution by solution, go-to-market approach was allowing us to help them address. To become the true partner of choice for our clients and to help them address their most important opportunities and challenges, we decided we would need to change our business model and the way in which we engage with our clients, and in turn, them with us. To do this, we created our powerful All Access Pass subscription offering. We've reviewed the value prop for that on previous calls, so I won't do it here today, but for your information, slides 23 and 24 in the appendix have a detailed overview of the All Access Pass value proposition. By combining the All Access Pass's compelling value proposition and subscription business model, With the power of our best in class solutions, we expected that we could become a unique kind of company. A company that, as shown in slide six, would achieve three things. First, that we would occupy the position as most trusted in the industry. Second, that we would earn extraordinarily high levels of client loyalty and commitment, translating into high and growing client lifetime value. And third, that we would generate extremely strong and accelerating top tier financial results. Very few companies become recognized as a leader in their chosen market or earn the top tier loyalty of their customers. Fewer still achieve and maintain top tier financial results. We believe that by combining All Access Pass' compelling value proposition and subscription model with our already significant strategic strengths and our new investments in content, technology, and in our teams, we could become a unique kind of company. a company that, as indicated, could simultaneously and consistently achieve all three of these objectives. I'd like to provide a bit of commentary on each objective and how our original assumptions and expectations are playing out. First, as illustrated in slide seven, as to our progress on objective number one, that of cementing our position as the most trusted leadership company. We're pleased that over the past several years, we have expanded our solutions to include new blockbuster offerings, addressing some of the organization's most impactful challenges and opportunities. We've expanded our micro learning and reinforcement offerings through the acquisition of Jonna. Established through our acquisition of Strive, a state-of-the-art learning delivery platform to generate measurable behavior change at scale. We've published numerous new best-selling books, which expanded market awareness of our solutions and have added to our more than 50 million books sold worldwide. and we initiated a brand refresh and a new brand launch. In fact, many of you will notice our new brand reflected in our presentation here today. You'll recall that we indicated in the fourth quarter of last year that we were making significant investments into branding and positioning the company even more clearly and powerfully in the market. I'm pleased to report that these efforts are being received exceptionally well, and we are focused on getting the word out to new potential clients like never before. Second, as illustrated in slide number eight, As for our progress on objective number two, that of earning extraordinary levels of client loyalty and commitment, we're pleased that, as expected, our customer lifetime value is both high and increasing. As shown in slide nine, in our US-Canada business, which makes up 71% of total enterprise division sales, our average All Access Pass contract value has grown from $31,000 in fiscal 2016 to $46,000 at the end of this year's second quarter. Our annual revenue retention rate has exceeded 90% every quarter since the inception of All Access Pass. Our All Access Pass subscription services revenue has increased as a percent of All Access Pass subscription sales from 15% in fiscal 2016 to 57% for the latest 12 months, while also achieving year-over-year subscription service retention revenue rates of greater than 90%. This reflects the importance of the opportunities we're helping our clients address and their commitment to achieving them. And finally, our gross margin percent has increased steadily, increasing to 77.9% in this year's second quarter, reflecting our pricing power and SAS-enabled business model. Third is illustrated in slide 10 as to the progress on objective number three, that of generating extremely strong and accelerating top-tier financial results. We expected that our combination of best-in-class solutions and extremely high customer loyalty and commitment would establish a powerful flywheel of factors that would drive strong and accelerating increases in financial performance. A flywheel that is shown in slide 11 would do the following, would drive very strong growth in subscription and subscription services, which in turn would also increase sales growth across the company overall. Second, generate large amounts of durable recurring revenue, which would establish high levels of revenue predictability and visibility. Third, this flywheel would establish a compelling business model, a model that would generate significant revenue growth while at the same time driving both increases in gross margin percentage and reductions in SG&A as a percent of sales, with the result that a significant percentage of incremental revenue would flow through to increases in adjusted EBITDA and cash flow, and that this would, fourth, achieve accelerated growth and adjusted EBITDA on cash flow, which would in turn allow us to, point number five, make ongoing investments in the business, which will allow us to further accelerate the velocity of this virtuous cycle while also returning capital to shareholders. We're really pleased that each of these expected results is becoming a reality and that the power of our flywheel of performance and results is accelerating more and more quickly. For a minute here, I'd like to provide additional detail on each of these. We expected to achieve strong growth in All Access Pass subscriptions and subscription services, and we're pleased that we have. We expected that this would in turn drive substantial increases in overall company revenue growth, and this is happening. As shown in slide 12, from inception of the All Access Pass in 2016, fiscal 2016, total All Access Pass subscription and subscription services revenue has grown from $13.7 million to $126.9 million for the latest 12 months ended this year's second quarter. This strong growth continued in this year's Q2 and year-to-date periods with All Access Pass subscription and subscription services revenue growing 29% to $32 million in the second quarter and 28% to $65.2 million year-to-date. As expected, this strong growth in All Access Pass subscription and subscription services revenue has also driven strong increases in total overall company revenue. While we've said that we expect to achieve overall revenue growth in the low double digits, total company revenue grew 18% in the second quarter and 22% year-to-date. This was driven by stronger-than-expected All Access Pass subscription and subscription services revenue growth. And we also benefited from comparison to last year's second quarter and year-to-date periods that were still somewhat affected by COVID. Second, we also expected that our strong subscription sales to generate large amounts of durable recurring revenue, creating significant predictability and visibility into the future, and we're pleased that it is. As shown in slide 13, As noted, our subscription revenue retention has remained above 90% in every year and in every quarter since the introduction of All Access Pass. Our subscription revenue retention rate remained above 90% again for the second quarter and latest 12-month periods. And our multi-year contract value as a percent of total All Access Pass contract value has continued to increase, growing from 37% in fiscal 2019 to 57% at the end of this year's second quarter. The significantly increasing visibility into and predictability of our future revenue is further indicated in slide 14. Our balance of deferred revenue, billed and unbilled, has grown from only 17.8 million in fiscal 2016 to 119.3 million at the end of this year's second quarter. In the second quarter, our balance of deferred revenue grew to 70.4 million, an increase of 20% compared to the same period last year, and our balance of unbilled deferred revenue grew 31% to $49 million. Our balance of billed and unbilled deferred revenue as a percent of prior 12-month sales has also increased steadily and significantly, increasing from 39% in fiscal 2019 to 49% for the latest 12 months ended in this year's second quarter. The increasing percentage of revenue represented by our deferred revenue balance provides significantly increasing predictability of and visibility into future revenue growth. Third, the third element of the flywheel. We expected the economics of our subscription model to create a compelling business model, and we're pleased that this is occurring. As shown in slide 15, we've achieved strong and increasing gross margins. In the second quarter, our gross margin percent increased to 77.9%. an increase of 41 basis points compared to last year's second quarter, and our gross margin increased 194 basis points to 77.7 for the latest 12-month period. At the same time that our gross margin percentage increased, our operating SG&A sales percentage has also improved, with a 316 basis point improvement in Q2 to 63.7% compared to last year's second quarter, and a 544 basis point improvement to 62.6 million for the latest 12-month period. This is reflective of the fact that our lifetime customer value far exceeds our cost of acquiring a new customer, and this has resulted in a high flow through of incremental revenue to incremental adjusted EBITDA. In the second quarter, the flow through of incremental revenue to incremental adjusted EBITDA was 35%, and for the latest 12 months, this flow through was 37%. We expect the continued strong growth in subscription revenue together with a continued high flow through of that revenue to adjusted EBITDA, will result in our adjusted EBITDA to sales margin increasing from 15% for the latest 12-month period to approximately 20% over the next couple of years or so. The fourth element of the flywheel is that we expected this to drive accelerated growth in adjusted EBITDA and cash flow, and we're pleased with this achievement. As shown in slide 16, in this year's second quarter, adjusted EBITDA increased 57% to $8 million, compared to 5.1 million in adjusted EBITDA in last year's second quarter. Year to date through the second quarter, adjusted EBITDA increased 103% to 18 million, compared to adjusted EBITDA of 8.8 million for the same period last year. And for the latest 12 months, adjusted EBITDA increased 23 million, or 163% to 37.1 million, compared to 14.1 million for the same period last year. And as shown in slide 17, our net cash flows provided by operating activities increased to $23.2 million at the end of this year's second quarter. We ended the second quarter with $76.1 million in liquidity, comprised of $61.1 million in cash, and with our $15 million revolving credit line fully undrawn and available. We have no net debt. Fifth and finally, as it relates to the flywheel, as illustrated in slide 18, We've consistently invested a portion of our cash flow in strong liquidity to make a series of tuck-in acquisitions. Acquisitions like Strive and Jonna that have established a strong technology-based delivery platform and increased our micro-learning capabilities. We've also utilized our excess liquidity to return capital to shareholders by repurchasing and retiring more than 6 million shares net over the years. We expect to continue to utilize our excess liquidity to create value in these same ways. We're thrilled that our education division with its strong Leader and Me subscription offering in more than 3,100 schools in the US and Canada and more than 5,000 schools now worldwide is also achieving greater than 90% Leader and Me subscription revenue retention while at the same time benefiting from a flywheel of factors very similar to those we've just outlined, which is driving strong increases in its financial performance. In conclusion, In the years since our introduction of All Access Pass, our position of leadership in the market has strengthened even further, and our subscription flywheel has proven to be increasingly strong and powerful. And as exciting as the past six years have been since we began All Access Pass, we're even more excited about what lies ahead. As we continue to invest in world-class solutions, technology, and the teams to help our clients win, we expect virtually all of our sales to become subscription and subscription services within the next three years or so. And as we previously noted, we expect to be a unique company, a company which, as a reminder, as shown in slide 19, will achieve three really important objectives. First, that we'll further strengthen and expand our position of leadership as the most trusted leadership company. Second, that we'll earn extraordinary levels of client loyalty and commitment. And third, that we'll generate extremely strong and accelerating financial results driven by the powerful flywheel of factors we've just discussed. And I think it's important to note as this nearly complete transition to subscription and subscription services occurs, we expect revenue growth, which not that long ago were in the high single digits, to move into the low double digits, especially as we move out of the pandemic around the world, and then into the mid-teens, and eventually we think onwards toward 20%. We look forward to having you with us as investors and partners in this exciting next phase of our growth, and we're grateful that you're here today. And with that, I'd like to turn time over to Steve Young to provide an update on guidance and our outlook.