Franklin Covey Company

Welcome to the Q3 2022 FranklinCovey Earnings Conference Call. My name is Darrell and I'll be your operator for today's call. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session. During the question and answer session, if you have a question, please press 01 on your touchtone phone. Please note this conference is being recorded. I will now turn the call over to Derek Hatch. Derek, you may begin.

Thanks, Darrell. Good afternoon, everyone. On behalf of FranklinCovey, it's my pleasure to welcome you to our earnings call for the third quarter of fiscal 2022. Before we get to the good stuff, I 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 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 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 that 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. Paul Walker, our Chief Executive Officer. Paul?

Thank you, Derek. Hi, everyone. We're grateful that you're with us today and we hope your summers are off to a very good start. I'm joined today by Steve, Jen, Sean, and The rest of our executive team, we're also happy to have Bob on the line with us today as well. We are happy to be able to talk to you today and report our strong Q3 results and are really pleased that, again, the results were strong for not only the quarter but year-to-date and for the latest 12 months, even stronger than expected. I'd like to start with a few revenue headlines, as you can see in slide four. Revenue growth for the quarter was strong, increasing 13%. And importantly, this 13% growth was after factoring in the impact of COVID-related lockdowns in China and other COVID-related impacts in Japan. Excluding China and Japan, revenue grew 19% in the third quarter, and our year-to-date and latest 12-months revenue growth has also been very strong, where, again, even after factoring in the recent impacts in China and Japan, revenue has grown 19% year-to-date and 24% for the latest 12 months. Our subscription and subscription services revenue growth was even stronger for the quarter, year-to-date, and also for the latest 12 months. Total subscription and subscription services revenue grew 31% in the third quarter and has grown 31% year-to-date and 36% for the latest 12 months, with All Access Pass subscription and subscription services revenue growing 32% in the third quarter, 29% year-to-date, and 32% for the latest 12 months. to $136.2 million, and Leader & Me subscription and subscription services revenue growing 28% in the third quarter, 38% year-to-date, and 49% for the latest 12 months to $54 million. The durability and visibility into our future revenue growth also continues to expand. Our balance of deferred revenue, both billed and unbilled, increased 21% over last year's third quarter, to $116.5 million. And as shown in slide five, in our North America enterprise operations, the percent of our All Access Pass contracts, which are multi-year, was 42%, and the percent of our total All Access Pass subscription revenue represented by these multi-year contracts increased to 58%. It has also shown the average lifetime value of our All Access Pass customers continue to increase in the third quarter, year to date, and for the latest 12 months. Our average revenue per client increased to $47,000. Revenue retention continued to be well above 90%, and our services attach rate increased to 66% for the latest 12 months. I'd like to point out a few profitability metrics, and these are reflected in slide six. Our gross margin percentage for the quarter remained very strong at 77.3% and has increased 55 basis points to 77.6% year-to-date, and 40 basis points to 77.5% for the latest 12 months. Operating SG&A as a percent of sales for the quarter improved 275 basis points from 63.6% to 60.8%. It's also improved 392 basis points year to date, moving from 65.9% to 61.9%, and 229 basis points for the latest 12 months. from 64.2% to 61.9%. The flow-through of incremental revenue to increases in adjusted EBITDA for the quarter was 31% and has been 40% year-to-date and 27% for the latest 12 months. As a result of strong revenue growth and high flow-through, adjusted EBITDA increased 27% or $2.3 million in the quarter to $10.9 million, 66% or $11.4 million year-to-date to $28.9 million, and 50% or $13.1 million for the latest 12 months to $39.4 million. Net cash provided by operating activities was $39.5 million, an increase of $8.7 million or 28% compared to the same nine-month period last year. During the third quarter, we returned a significant amount of capital to shareholders, investing $20.3 million to repurchase approximately 500,000 shares. And even after investing $20.3 million in share repurchases, we ended the quarter with $67.1 million of liquidity comprised of $52.1 million in cash and with our full $15 million revolving credit line undrawn. As we'll discuss in a few minutes, as a result of these continued strong results, and the strength of the key factors driving and underlying this growth, we're confident in increasing our guidance and outlook. As shown in slide seven, first, while of course some quarters revenue growth will be higher than others, we're increasing our revenue outlook for fiscal 23 and beyond from the expectation of growing our rolling 12 months revenue from low double digits to expecting that rolling 12 months revenue growth now that it will be at least in the low teens, call it 12 or 13-ish percent, and moving toward the mid and then high teens in the quarters and years to come. We expect this accelerating revenue to be driven by and reflect the ongoing growth in our high margin, high recurring subscription and subscription services revenue. Second, we're increasing our adjusted EBITDA guidance again for fiscal 22. As you know, our initial guidance was that for fiscal 22, adjusted EBITDA would increase to a midpoint of $35 million, an increase of $7 million, or 25% compared to adjusted EBITDA of $28 million in fiscal 21. Our most recent guidance was for fiscal 2022's adjusted EBITDA to increase to a midpoint of $38.5 million, representing year-over-year growth of 38%. We now expect adjusted EBITDA for fiscal 2022 to increase to between 40 million and 41.5 million. The middle of this range reflects more than 45% growth in adjusted EBITDA compared with the 28 million achieved in fiscal 2021. We'll discuss this guidance in a bit more detail in a few minutes. Third, we're increasing our outlook for adjusted EBITDA growth for fiscal 23, fiscal 24, and fiscal 25. We now expect that adjusted EBITDA will grow from between 40 to 41.5 million in fiscal 22 and between 47 to 48.5 million in fiscal 23. This compares to our previous adjusted EBITDA outlook of approximately 45 million for fiscal 23. We then expect that adjusted EBITDA will increase to approximately 57 million in fiscal 24 versus what we said previously, 55 million. and then to increase to approximately $67 million in fiscal 24, a level at which we would expect adjusted EBITDA as a percentage of sales to be approaching 20%. With this impressive and strong expected growth in revenue and adjusted EBITDA, we also should generate significant amounts of cash flow, which, as we'll discuss in more detail in a few minutes, we plan to reinvest in the business at high rates of return and also return substantial amounts to shareholders through ongoing share repurchases. I'd now like to turn some time to Steve to dig a little deeper into our results.