Franklin Covey Company

Welcome to the Q4 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 a listen-only mode. Later, we will conduct a question and answer session. During the question and answer session, if you have a question, press 01 on your touchtone phone. I will now turn the call over to Derek Hatch. Derek, you may begin.

Thanks, Darrell. Hello, everyone. On behalf of Franklin Tubby Company, it's my opportunity to welcome you to our earnings call for the fiscal year ended August 31st, 2022 and our fourth quarter results as well. We're excited to report these results to you and we'll begin in just a moment. However, we'd like to remind you that as we are going through this presentation that the 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 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 our 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, I would really like to turn the time over this afternoon to Mr. Paul Walker, our President and Chief Executive Officer. Paul?

Thank you, Derek. Hello, everyone. Thanks so much for joining us today. I'm here with Steve Young, our CFO, with Jen Colosimo, president of our enterprise division, Sean Covey, who's the president of our education division, and several members of the executive team. We're also pleased to have Bob, our executive chairman, Bob Whitman, our executive chairman, with us as well. We're very pleased that our results for fiscal 2022 were strong and even stronger for the fiscal fourth quarter than expected. I'd like to start with a few headlines, beginning with those about our revenue growth, as you can see shown in slide four. Our revenue growth for fiscal 22 was especially strong, increasing 17% to $262.8 million, and this 17% growth benefited somewhat by comping against COVID-related quarters in the first and second quarters, but also reflected the impact of COVID-related lockdowns and restrictions in China and Japan. both of which extended over the fiscal second and third quarters, and even into a portion of the fourth quarter, and also by the impact of foreign exchange. Excluding China and Japan, revenue for the full fiscal year 2022 grew 21%, even after the impact of FX. Our fourth quarter revenue growth was also exceptionally strong, with revenue growing 14%, and which would have grown 17%, excluding China and Japan. As significant as was our overall growth for the year and the quarter, our subscription and subscription services revenue growth was even stronger. Also, as you can see shown in slide four, total subscription and subscription services revenue grew 29% in fiscal 22 and increased 23% in the fourth quarter. With All Access Pass subscription and subscription services revenue growing 28% for the year and 26% in the fourth quarter, and LeaderME subscription and subscription services revenue growing 29% for the full fiscal year and 18% in the fourth quarter. The durability of our revenue also continues to increase, and our visibility into future revenue growth also continues to expand. As you can see shown in slide four, our year-end balance of deferred subscription revenue, billed and unbilled, increased 20% over last year's fourth quarter, or $26 million to $153.4 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, increased to 46% at year end, up from 41% at the end of fiscal 21. And the percent of our All Access Pass subscription revenue represented by these multi-year contracts of at least two years increased to 61% of total contracted revenue at year end, up from 57% at the end of fiscal 21. The average lifetime value of our All Access Pass customers also continued to increase. Our average subscription revenue per client increased from $42,000 to $47,000 for the year. All Access Pass revenue retention also continued to be well above 90%. And our services attach rate, the subscription services that attach to the All Access Pass increased to 61% for the year compared to 52% for fiscal 2021, reflecting the importance our clients place on the challenges they engage us to help them achieve. The combination of these factors resulted in our growth margin percent remaining at a very strong 85%. I'd like to now discuss some profitability metrics, some of the headline metrics, as you can see shown in slide six. For the fiscal year, our growth margin grew 17 percent, or $29 million, to $201.9 million, and our growth margin percent for the fiscal year remained a very strong 76.8 percent, a level almost equal to that achieved in fiscal 21, even after considering the significant growth in subscription services just noted. Growth margin percent for the fourth quarter was very strong at 75%. This was slightly lower than in the fourth quarter of fiscal 21, reflecting both the accelerated 26% growth in education sales during the quarter, which have a somewhat lower margin than do all-access pass sales, and the strong growth in subscription services. Operating SG&A as a percent of sales improved another 389 basis points for the year, ending up at 60.8%. compared to 64.7% in fiscal 21, which itself is 139 basis points better than fiscal 2020. Operating SG&As, the percent of sales also improved, 394 basis points for the fourth quarter to 58%. The flow through of our growth in revenue to growth in adjusted EBITDA for fiscal 22 was 37%. reflecting the impact of strong growth margins and declining operating SG&A as a percent of sales and the flow through of growth and revenue to growth in adjusted EBITDA was 28% in the fourth quarter. As a result of this strong revenue growth and high flow through, adjusted EBITDA increased 51% or 14.2 million for fiscal 22 to 42.2 million and grew 26% or 2.8 million to 13.3 million in the fourth quarter. Net cash provided by operating activities increased 13% to 52.3 million for the year, compared to 46.2 million for fiscal 21. During fiscal 22, we also returned a significant amount of capital to shareholders, investing $23.9 million to repurchase 585,000 shares. And even after investing this $23.9 million, for share repurchases, we ended the year with $75.5 million of liquidity, comprised of $60.5 million in cash, and with our full $15 million revolving credit line undrawn. We'll discuss our guidance for fiscal 23 and our outlook for fiscal 24 and 25 in a moment. But as shown in slide seven, as a result of our strong top and bottom line growth in fiscal 23, the strength of factors driving it, we're pleased that the 42.2 million of adjusted EBITDA achieved for fiscal 22 exceeds both our most recent adjusted EBITDA guidance range of between 40 million and 41.5 million and our original adjusted EBITDA guidance range of between 34 and 36 million. As a result of the strength of these drivers underlying this performance, Our revenue for fiscal 23, our revenue guidance for fiscal, or our guidance for fiscal 23 is that adjusted EBITDA will increase from 42.2 million in fiscal 22 to between 47 and 49 million in fiscal 23. As also shown in slide seven, 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 that our rolling 12 months revenue will grow in the low double digits to our current expectation that our rolling 12 months revenue growth will now be in the low teens, call it 12 or 13-ish percent, and will move toward the mid and then high teens in the years to come. We expect this accelerating revenue growth to be driven by and reflect the ongoing growth in our high margin, high recurring subscription and subscription services revenue, and expect a significant percentage of this revenue growth to flow through to increases in adjusted EBITDA and cash flow. As a result, Building on our adjusted EBITDA guidance range of between $47 and $49 million for fiscal 23, we expect that adjusted EBITDA will then increase to approximately $57 million in fiscal 24 and to approximately $67 million in fiscal 25. With this strong expected growth in revenue and adjusted EBITDA, we also expect to generate significant amounts of free cash flow, which, as we'll discuss in more detail in a moment, we expect to reinvest in the business at high rates of returns. while potentially also returning substantial amounts to shareholders through ongoing share repurchases. We're extremely pleased by our accelerating revenue and adjusted EBITDA growth and the business's momentum. Prior to the pandemic, we talked about our ability to predictably generate high single-digit revenue growth, while at the same time achieving even more rapid growth and adjusted EBITDA. We're really pleased to now be talking about our expectation of consistently achieving low-teens revenue growth with the expectation that this revenue growth will increase to the mid-teens and then high-teens growth, and with an expected high flow through of incremental revenue to increases in adjusted EBITDA and cash flow. I'd now like to turn some time to Steve to dig a little bit deeper into some of these results.