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.

Thank you, Paul. Good afternoon, everyone. It's nice to be with you today. As Paul said, we're really pleased with the ongoing combined strength and growth of our revenue, adjusted EBITDA, and cash flow. And as Paul also noted, we're pleased to have achieved these extremely strong results even after absorbing COVID-related impacts in our results in China and Japan. and after absorbing a 2.6 million decrease related in unfavorable foreign currency fluctuations. To provide a deeper and more detailed understanding of the factors underlying this strong performance, I'd like to quickly report on the three key areas of our company, specifically on our enterprise business in North America, our enterprise business internationally, and our education business, almost all of which is also in North America. First, as shown in slide eight, results in our enterprise business in North America were especially strong. Revenue in North America, which accounts for 23% of total enterprise division revenue grew 19% in FY22 and 17% in the fourth quarter. Subscription and subscription services revenue grew even more rapidly increasing 26% for the year and 22% in the fourth quarter. North America enterprises balance of deferred revenue billed and unbilled, grew 20% to $110.6 million. And the percentage of North America's All Access Pass contract revenue represented by multi-year contracts increased 61% as of fiscal year end, up from 52% last year. Second, as shown in slide 9, while overall results in our international direct offices were slower than originally expected as a result of COVID-related impacts on our operations in China and Japan during much of our second and third quarters, revenue growth in our offices in UK, Ireland, Germany, Austria, Switzerland, and Australia countries which together make up approximately 48% of total international sales. And where All Access Pass makes up a substantial portion of those sales was very strong. Revenue in these offices grew 40% in FY22 and grew 23% in fourth quarter. All Access Pass subscription and subscription services sales which make up approximately 83% of total sales in these countries, grew even more rapidly, increasing 51% for the year and 7% in the quarter. Our operations in China and Japan, which account for approximately 52% of international sales, but less than 7% of total sales of the company, widespread COVID-related lockdowns in China, a very cautious and slow return to normalcy post-COVID as guided by the Japanese government, and negative effects impacted much of the year in these two countries as revenue declined 16% for both FY22 and the fourth quarter. Now, as shown in slide nine, Our international licensee partner revenue increased 17% for the year. And taken as a group, our licensee partners operations continue to strengthen coming out of COVID, despite the impact of the war in the Ukraine and related economic interruptions in Eastern Europe. Finally, as shown in slide 10, the results in our education business, which accounts for approximately 24% of total company revenue were also very strong. Education revenue grew 26% in FY22 and 17% in the fourth quarter. Education subscription and subscription services revenue grew 29% in the year and 18% in the fourth quarter. Education's year-end balance of deferred subscription revenue grew 17%, and we retained 89% of our existing schools in FY22, while adding a record 739 new schools, an increase of 157 schools, or 27%, compared to the strong 582 new schools we added in FY21. So good results from the three main areas of the company. So now back to Paul.

Thank you, Steve. Thanks for the great review of our results. I'd like to now briefly highlight five key drivers which are underlying these strong results. We focused on these last quarter, but I thought that their importance is such that it would be good to report and re-emphasize them again here today. As shown in slide 11, The first driver is that the markets we've chosen to serve are very large. They're growing significantly and they're highly fragmented. This provides us with enormous headroom for growth and the opportunity to earn a significant share in each of these markets. The second driver we'll talk about is that we're focused on the most important lucrative and durable space in each of these markets. The opportunities and challenges we help our clients address, challenges that require the collective action of large numbers of people, are must-win for organizations that are very durable. This provides us with the opportunity to partner with our organizational clients and with schools in both good times and in more challenging. The third driver is the ongoing strength of our subscription business model. It's a powerful engine that's driving accelerated and sustainable growth, a significant and increasing predictability and durability of our revenue, and a high flow through of increases in revenue to growth and profitability and cash flow. Driver number four is that we have a number of compelling opportunities to accelerate our growth. The combination of the large and growing markets we serve, the importance of the challenges we help our clients address, and the strength of our business model is creating exciting opportunities for further acceleration of growth. And the fifth driver that I'll touch on here is that we expect to invest our strong cash flow to create significant additional value for shareholders. We generate significant amounts of cash, which we have and expect to continue to invest to create additional shareholder value. I'd like to touch on each of these. First, however, I'd like to emphasize that while each of these drivers is important in any environment, we believe they're even more important in uncertain and turbulent times like at present. We are, of course, not hoping for an economic downturn. However, we believe that the strength of these drivers, individually and collectively, positions us to be able to perform well and even increase our strategic importance during times such as these. As shown in slide 12, driver one is the attractiveness of the markets we've chosen to serve. Each is large, growing, and fragmented. As you can see in slide 13, our focus is on three large and growing markets, the enterprise learning market, where our total addressable market is $99 billion and growing by approximately $3 billion a year, the education market, where our total addressable market is $59 billion and growing approximately $1 billion a year, and the market where business leaders invest dollars directly from their operating budgets in order to improve their organization's performance. Here, the total addressable market is not defined, but organizations' operating budgets are in the trillions of dollars and growing. Each of these markets is highly fragmented, with the largest players accounting for only approximately 1% to 2% of sales. It's the size of these markets and their fragmentation that provides us with tremendous headroom for growth, and our strength puts us in a position to increase our share of these markets. We think particularly in difficult times. Driver number two, as shown in slide 14, is that we're focused on the most important, lucrative, and durable space in each of these markets. As shown in slide 15, And as we've explained in prior calls, many things can add value to an organization, including things like providing people with useful information and helping them learn new skills. However, as important as sharing information and helping people learn new skills can be, the single most impactful opportunity for breakthrough performance improvement within most organizations lies in mobilizing the collective action and best efforts of large numbers of people toward the achievement of their organization's highest priorities. In other words, as illustrated in slide 16, we help organizations intentionally and systematically move the collective performance of their people and units righter and tighter toward what they already do well in disparate pockets. This does not happen by accident. Helping organizations drive this kind of collective behavioral change, change that allows them to systematically and predictably move their performance curves righter and tighter, is exactly where FranklinCovey stands out. In fact, our entire organization is focused on helping companies, schools, and teams of all sizes and across just about every industry achieve just these kinds of results. Importantly, these rider and tighter challenges and opportunities are very durable. Every organization has them in both good times and during more challenging ones. For example, as shown in slide 17, throughout the great financial crisis, we experienced exceptionally strong growth in helping clients address challenges related to significantly increasing sales performance, ensuring execution on major strategic initiatives, and driving breakthroughs in customer loyalty. More recently, in the early days of the pandemic and coming out the other side, our clients have consistently asked for help with those same challenges together with new emerging challenges, including those related to remote and hybrid work, creating winning cultures. and equipping leaders with the skills to engage, build, and retain talent in a unique and challenging labor market. Our ability to help our clients achieve measurable results in these areas has led thousands of organizations and schools to purchase, expand, and renew their All Access Pass and Leader in Me subscriptions, and purchase support services to help them achieve their righter and tighter objectives in the middle of turbulent times. This was not only true during the great financial crisis and throughout the pandemic, but continues to be true in the increasingly uncertain economic conditions we're facing today. I'd like to share three very recent examples of how we're partnering with organizations to address their critical challenges and opportunities in this very environment. First, one of our largest all-access pass contracts with a contract with a large multinational conglomerate is extending their contract for an additional five-year term. This client's choosing to extend and expand their relationship with us because of the way in which the solutions in the all-access path directly address their most pressing challenges. This client sees an opportunity to increase their usage of our solutions and at the same time reduce the number of external providers with whom they work. The result will create a more scalable and powerful solution for the client and a larger multi-year all-access path holding client for FranklinCovey. The second example is a recent new client with a significant global logistics company who's also chosen to engage in a multi-year, five-year all-access pass contract. We'll be working closely with this client to increase their global sales and sales leadership capability as they prepare to compete in a more challenging environment. This client will not only have access to our world-class sales performance content, but to all of our leadership and execution content as well. enabling them to create a powerful and comprehensive solution unmatched by other providers in the industry. Finally, one of the largest technology companies in the United States has been an All Access Pass client for several years and recently renewed their All Access Pass for an additional three years. This client is engaging with us to help them build culture and develop leaders at all levels. They utilize the seven habits to create the foundation for their culture, and every new employee goes through the seven habits as part of onboarding. Incidentally, the seven habits is their most highly rated offering. This client also uses our six critical practices to leading a team solution to equip managers with the right leadership mindsets, skill sets, and behaviors to create winning culture, high levels of engagement, and sustained results. Because of the importance organizations place on addressing these kinds of challenges, even in this year's fourth quarter, At a time when markets were in turmoil and organizations of all types were bracing for the prospect of even bigger challenges ahead, in our U.S.-Canada enterprise business, more organizations signed multi-year contracts than in any quarter ever. We sold more new logos than in any previous quarter in the last four years. And all access pass holders purchased the greatest volume of services ever to help them address their most pressing, righter, and tighter challenges. As shown in slide 18, FranklinCavi's expertise in helping clients address these kinds of challenges and opportunities combines best-in-class content, best-in-industry coaches and facilitators, who, by the way, earn an average net promoter score of a remarkable 68, and we combine technology into all of that. For those who may not be as familiar with NPS, a score of 50 is the standard to be viewed as an NPS all-star. FranklinCovey's deep capability to help organizations address their most important challenges is resulting in the lifetime value of our customers continuing to increase, as you can see shown in slide 19. The third driver I'd like to talk about as shown in slide 20 is the strength of our subscription business model. Because of the importance of the challenges we help organizations address and because organizations are typically needing to address several of these challenges simultaneously, We moved to a subscription model so that our clients could have access to the full strength and breadth of our range of powerful solutions. Our subscription model is a powerful engine that's driving strong growth, significantly increasing the predictability and durability of our revenue, and generating a high flow through of increases in revenue to increases in profitability and cash flow. As substantially all of our business becomes subscription and subscription services over the next few years, We expect our overall growth in revenue and profitability to accelerate. I'd like to briefly highlight each of these points. First, our subscription and subscription services model is driving strong overall company growth. As shown in slide 21, our subscription and subscription services revenue grew 29% in fiscal 22 and now accounts for 77% of our total business. This growth has been driven by our All Access Pass subscription in Enterprise and our Leader in Me subscription in our education business. We expected All Access Pass to drive strong overall growth in the enterprise business. It has and it is. As shown in slide 22, All Access Pass subscription and subscription services revenue has grown from $13.7 million in fiscal 2016 to $144.5 million in fiscal 22. This robust growth continued in fiscal 22 with all access pass subscription and subscription services revenue growing 28%. Similarly, the Leader and Me subscription offering is driving strong growth in the education division. The Leader and Me subscription offerings growth has been so substantial that in fiscal 22, Leader and Me accounted for 57.6 million or 93% of education's total revenue. And Leader and Me subscription revenues are continuing to grow rapidly. As shown in slide 23, LeaderME subscription and subscription services revenues grew 29% in fiscal 22. Second, our subscription model is driving significant increases in both the durability and predictability of our current and future revenue. As you can see shown in slide 24, our balance of deferred subscription revenue, billed and unbilled, continues to grow significantly, increasing 20% or $26 million to $153.4 million at the end of fiscal 22. An additional durability and predictability of our revenue is being created by the increasing percent of our All Access Pass contracts, which are multi-year. At year end, the percent of contracts which were multi-year was 46%, up from 42% a year ago. And the percent of total All Access Pass subscription revenue represented by these multi-year contracts increased to 61%, up from 52% a year ago. Third, our subscription business model has also resulted in a high percentage of revenue growth flowing through the growth in profitability and cash flow. With our subscription offerings strong growth margins and declining operating SG&A as a percent of sales, a high percentage of accelerating growth in subscription revenue flows through to increases in adjusted EBITDA and cash flow. As noted a few minutes ago, as a result, adjusted EBITDA grew 51% or 14.2 million in fiscal 22. Fourth, with substantially all of our business expected to become subscription and subscription services over the next few years, we expect FranklinCovey's overall growth in revenue and profitability to accelerate. When we began our conversion to subscription to the subscription model approximately seven years ago, in one of our quarterly earnings calls, we shared the trajectory of Adobe's results as they made their conversion to subscription. As shown in slide 25, in the initial years of their conversion to subscription, Adobe's strong growth in subscription sales was substantially offset by declines in their legacy box software business. However, as their subscription business continued to grow rapidly and the decline in their legacy business flattened out, as indicated by the green line, Adobe's overall revenue growth and market cap accelerated significantly. We said that we expected our conversion to subscription to follow a similar pattern. We began our conversion in our enterprise business in North America, and as shown in slide 26, We're really pleased that our conversion to All Access Pass in North America has, in fact, followed a trajectory quite similar to that experienced by Adobe. As our conversion has progressed, subscription sales, growth has continued to be very strong, while declines in legacy sales have flattened out. As a result, North America enterprises overall revenue grew a significant 19% in fiscal 22, as indicated by the green line in the right-hand chart. This accelerating revenue growth in North America has driven an increase in the company's overall growth rate from high single digits to low double digits. And we believe now to at least low teens growth, call it 12 or 13-ish percent. We believe that with the continued growth of our subscription business, substantially all of our revenues will be subscription and subscription services in the next few years. As this occurs, we expect that the company's overall revenue growth will accelerate to the mid-teens and then high teens growth in the coming years. And as this occurs, we also expect our adjusted EBITDA and cash flow to accelerate. As shown in slide 27, the fourth driver I want to touch on here is that we have compelling opportunities for growth and we're committed to taking advantage of these opportunities. To that end, we continue to make investments in technology, content, thought leadership, and in growing our sales force. I'd like to briefly highlight our efforts in two of these areas. The first being on the technology and content fronts. To enhance our existing technology, in 2021, we acquired Strive, a leadership development platform trusted by top companies around the world. Together, we designed the FranklinCovey Impact platform. And after significant testing with hundreds of our clients, we officially launched the platform on October 18th. We rolled it out to all of our clients in the US and Canada. Our strategy is to seamlessly combine our unique and powerful content, our facilitators, our coaches, and technology all into one system that will drive collective action in ways that lead to breakthrough results for our clients. The impact platform provides users easy, seamless access to FranklinCovey's trusted, powerful content across four key areas, leadership, individual effectiveness, building culture, and strategy and sales execution. And the platform meets users and learning and development professionals where they are, allowing them to develop capabilities and skills through any combination of live online, live in person, on demand, and microlearning modalities. Important metrics such as user engagement, enjoyment, and impact are tracked automatically to provide clear data to those being developed and to their learning and development professionals about both ROI and possible areas for future investment. Over the coming months, we will extend availability of the Impact Platform to all of our clients outside the US and Canada and into each of our core languages. I'm incredibly grateful to our technology and content teams and to our marketing, sales, and operations teams for getting us to this exciting point. In addition to investing in the creation and launch of new technology like the Impact Platform, we're also making important investments in content because we're focused on not merely addressing but on actually helping our clients solve their most pressing people-related challenges and opportunities, every solution in the All Access Path and in the Leader in Me must be truly best in class in its ability to shift mindsets, skill sets, and behavior. In addition to refreshing and extending our historic content franchises, like the Seven Habits of Highly Effective People, the Speed of Trust, the Four Disciplines of Execution, the Six Critical Practices to Leading a Team, and our Sales Performance Solutions, We're developing powerful new offerings that address needs that live at the intersection of what our clients are asking for and where we believe we have something truly unique to offer the world. Solutions on topics such as change management, well-being, and communications and collaboration. Solutions in these areas have either recently launched or will launch over the course of fiscal 23 and into early fiscal 24. Through our investments in technology and content, we're creating an industry-leading subscription offering and a powerful way for our clients to deploy our solutions at scale across their organization to drive measurable behavior change and collective action. The second area of investment I'd like to highlight is our continued investment and focus on growing our sales force. Last year, we said that we expected to end fiscal 22 with just over 300 client partners or salespeople. As shown in slide 28, we're pleased that we ended the year with 300 client partners. and had an additional two client partners who accepted offers by the end of the year in August, but whose start dates were in September. Our new hiring generally takes place in the back half of our fiscal year, and this did incur a gain in fiscal 22. Over the past years, we've also made investments that have established the foundation and infrastructure for being able to further accelerate our Salesforce growth, and we expect to add at least 40 net new client partners in fiscal 23. This growth in our number of new client partners not only drives accelerating growth as these new client partners ramp, but at any given point in time, the embedded future growth expected to occur from those we have already hired who are in ramp and continuing to ramp, the sum of those cohorts totals more than 50 million in latent revenue growth. Finally, as shown in slide 29, the fifth driver is that Our strong cash flow has been and we believe can continue to be invested to create significant additional value for shareholders. We've said that our objective is to be a relatively unique kind of company, a company that simultaneously generates revenue growth in at least the low teens, accelerating to the mid and then high teens, generates annual growth in adjusted EBITDA in the range of 20% per year, and reinvest its excess free cash flow into the business and at high rates of return while also returning substantial amounts of capital to shareholders. We believe that we're becoming exactly this kind of company. As noted, our revenue growth has increased to the low teens and we believe that it will increase into the mid and then high teens in the coming years. We've shared our expectation of generating adjusted EBITDA growth with a compound annual growth rate approaching 20% per year over the next three years. and we've been investing our excess cash at high rates of return both in the business and in repurchasing shares to create additional shareholder value. Having gone through those five drivers, I'd like to turn some time now to Steve to review our guidance and outlook. Thank you again, Paul.

So, guidance and outlook. As shown in slide 30, our initial guidance provided last fall was that in FY22 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 FY21. As discussed, we are pleased to have exceeded both that initial guidance and our interim updated guidance ending the year with 42.2 million of adjusted EBITDA representing growth of 51% compared to the 28 million of adjusted EBITDA achieved in FY21. Our guidance for FY23 is that in constant currency, our adjusted EBITDA will increase from 42.2 million in FY22 to between 47 and 49 million in FY23. Even after making accelerated investments in sales force growth and in content and technology. And in the context of current macroeconomic environment and the continued COVID impact in China. Underpinning this guidance are the following expectations. First, that a significant amount of the deferred revenue currently on our balance sheet will be recognized. This deferred subscription revenue is secure, it has already been billed, and a majority of it has already been collected. In addition, a significant portion of our more than $65 million of unbilled deferred revenue will be billed this year, and a portion of that will also be recognized. This provides tremendous visibility into our revenue for FY23 and beyond. Second, that in addition to the recognition of our deferred revenue, our All Access Pass and Leader in Me subscription and subscription services sales will continue to achieve strong growth, driven by high revenue retention, sales to new logos, and an expanding lifetime customer value. These are all assumptions in which we have high confidence. Third, in addition to the strength of our subscription business model, the increased level of investments we are making in sales for growth and content and technology this year gives us confidence in our ability to accelerate our growth in years to come. We view this as an important time to make these investments because it gives us the opportunity to increase our share of market in this environment. Fourth, we're expecting sales in China and Japan to be relatively flat in the year, reflecting the impact of COVID-related restrictions implemented in FY22 that are continuing in FY23. Consistent with our overall guidance of adjusted EBITDA increasing from 42.2 million in FY22 to 47 to 49 million in FY23, we expect adjusted EBITDA in the first quarter to increase from 9.9 million in last year's first quarter. And please remember, in looking at this 9.9 million last year, that was up from 3.2 million in 2019, the pre-pandemic. So to go from 9.9 to our guidance of 10.5 million to 11 million in constant currency in this year's first quarter. Even after absorbing the expenses associated with our hiring 30 new client partners during the back half of 22 and our rollout of our new impact platform, we believe is a good first quarter result. This guidance reflects our expectation of achieving strong growth in the first quarter in North America, in our English-speaking direct offices in the UK and Australia, and in education, partially offset by year-over-year declines in our operations in China and Japan, where their rebound from COVID restriction-related declines in the back half of FY22 will still leave them a bit behind in their performance in last year's first quarter, prior to the implementation of their new COVID-related restrictions. We expect revenue growth in the first quarter of approximately 12 to 13%. And while some quarters revenue growth will be higher than others, we expect revenue growth for a year, possibly approximately 12 to 13%, as Paul said, ish. So that's our guidance. Now, our targets for FY23 through FY25. A little over a year ago, we set targets for our adjusted EBITDA to increase to $40 million in FY23 and to $50 million in FY24. A year ago, we increased those targets to $45 million and $55 million, respectively. As shown in slide 30, At the end of the third quarter FY22, we increased those targets further to $57 million in FY24 and gave a new target of $67 million of adjusted EBITDA for FY25. Despite the current environment, we still expect to achieve those targets. Obviously, while dramatic changes in the world geopolitical environment, the economy and other factors could impact our expectations. We wanted to share that those are our current estimates. So, Paul, back to you.

Thank you, Steve. We feel great about our continued momentum and look forward to accelerating growth in the future. With that, Darrell, why don't we turn it back to you to open the line for some questions.

If anyone has a question, you can press 01 on your touchtone phone. Once again, if you have a question, it's 01 on your touchtone phone. And I'm standing by for questions. Our first question comes from Jerry Martin from Roth Capital Partners. Go ahead, Jerry.

Thanks.

Or Jeff. Jeff, excuse me.

No worries. Hi, Paul. Hi, Steve. How are you doing? Good. Good. I hopped on the call about halfway through, so I apologize if you've already addressed this. I was just curious where you are with the impact platform in terms of its rollout and what kind of initial uptake you're seeing out of the client base.

Great. Yes, we did address that. We launched it. So you'll recall we acquired Strive in 2021. We did some initial work to do some beta testing with clients. We didn't need to beta test the platform. It was already a going concern, but we needed to put our content on it. And then earlier, midway through fiscal 22, we did a limited launch, spring and summer, with clients in one part of the country. That went very well. And then we are really excited. We launched on October 18th to all of our clients in the U.S. and Canada. and our English-speaking clients really everywhere, but U.S. and Canada focus primarily. So it's been out there since the 18th, going very well, receiving great feedback. And then we will be localizing the platform into our core languages and throughout this year, you know, as we approach the winter and into the winter months, rolling it out into the other languages. So feedback's been great at every stage, the initial kind of pilot phase, the limited launch phase in the last couple of weeks here since it's been out in the wild. We've had great feedback from clients.

Okay, great. And then I assume with the rollout of that, you have some pricing power within the all-access subscription. I'm curious what your plan is in terms of the pricing environment going forward.

Yeah, so we just – having just completed our fiscal year, we always do our – we do price increases annually, so those went into effect September 1st, and it built into those price increases that we did, it was the presumption that they now have access to the impact, our clients have access to the impact platform, plus a whole slew of additional content and solutions still to come this year. I think maybe just stepping back for a second, where do we see the impact platform driving increased revenue? One, it does support the case for continued price increases, but I think even more significant than that will be that The thesis for the Impact Platform is that it seamlessly combines these really important elements that are necessary to drive measurable, sustained behavior change. Here to four, those pieces are a bit disparate, not just for us, but anywhere in the industry. They're difficult for a client to pull together into an elegant, seamless way that you can deploy en masse across an entire organization. the impact platform providing a much more elegant and easy way for learning and development professionals to deploy content and a much more elegant experience for the end user, we think that there ought to be three outcomes here. One, the attractiveness of the all-access path value proposition, which was already attractive, will even be more attractive. That ought to help us on the new logo front as we showcase that and talk about how this really gets the job done for clients. So it'll help on the new logo front. it's built really to help us expand to larger populations, right? So it's this idea of being able to scale our content even deeper and further into and across organizations. So we ought to be able to see more path expansion. And then because it allows us to so easily, it's not just a on-demand like self-study asynchronous learning platform. It brings together the ability for us to do cohort learning with FranklinCovey facilitators and for us to provide live human-being-based coaching all within the platform as well. And so it ought to continue to drive the services growth we've seen over the last many quarters. So I think those are probably the most important drivers of where the growth would come from, but it also does, to your point, support the case for continually taking a look at pricing.

Okay. And then I was curious if you could give us an update on the education division. I know there's a substantial amount of stimulus dollars for schools to help get their kids caught up based on the growth that you're posting and the number of schools added. I was just curious if there's any additional commentary you could provide around specifically what you're seeing in terms of the flow-through of those stimulus funds.

Yeah, thank you. I'm going to turn it to Sean Covey to answer that. But as I do, I just want to, you know, applaud Sean and the team. They had a great year. Just fantastic number of new schools and great school retention in the current environment. So, Sean, do you want to take on that question? Sure. Yeah. Hi, Jeff.

Hi, Sean. Yeah, so the ESSER dollars are out there, you know, $200 billion over the three different packages that came out. It's interesting that less than 20% of that money has been spent so far. So that's definitely helping the market and helping us. And there's a lot more to come over the next couple of years. I think that's a factor for our success. I think more important, I think why we're having success, probably the number one and two reasons would be, number one would just be Our solution is just perfectly designed to meet the needs and the challenges in the marketplace right now. What you have right now is a lot of turnover of teachers and principals, mental wellness issues, inequity. You've got a lot of underperforming minority groups, learning loss because of COVID, and the need suddenly for the market recognizing that social-emotional learning, these life skills, And people skills are so important to employers and to college and career. All that is just right down our lane. That's what we're best at. And so when we started this 12 years ago, we were already in a good spot. The event for the last few years has made us even more needed. So that's helping us tremendously. Then the one other thing I'd point to is just that we've really turned our focus from selling to schools to selling to districts and districts are bigger and They're stickier. Our retention rate with districts is 95%, while our retention rate overall is 89% for single schools. And we've earned the right because of our performance and the kind of results we're getting to work with districts. And so I think the district focus, our solution being perfectly in line with the challenges of today, combined with you know, a good funding environment has helped us.

Great. Very helpful. Appreciate it. Thanks, Jeff.

And once again, if you have a question, it's zero one on your touchstone phone. And our next question comes from Dave storms from Stonegate capital partners. Go ahead, Dave.

Thank you. And appreciate you all taking my call. Um, just a quick one for me. When, How's it going? Looking at your release, you mentioned that approximately 46% of your all access subscriptions are now multi-year contracts. I was wondering if you just shed a little more light on the length of those contracts. If you're happy with that number at 46% or you're looking to drive that higher, what are your thoughts around contract lines?

Yeah. Thanks so much. That's a great question. We're very happy with that number. To provide a little context, When we converted to a subscription model just about seven years ago, we hadn't conceived of the idea that we ought to try to sell multi-year contracts. That sounds a little silly and, well, it sounds a little silly now, but we hadn't. And really, throughout the first couple of years of All Access Pass, that was not a focus of ours. So it became a focus. And over the past handful of years, that number has continued to steadily increase. from nothing to now approaching half of the contracts. And I think maybe even more importantly, significantly more than half of the revenue. So while it's 46% of contracts, it's 61% of the revenue of our subscription, of our All Access Pass subscription revenue is in a multi-year contract. And for us, multi-year, to answer the other part of your question, these are two-year or longer contracts. So all of our All Access Pass contracts are a minimum one year. and we bill up front. So everybody signs at least a one-year contract. We bill and collect all the cash up front. Almost half of the contracts, though, are two years or longer. And I would say, Steve, that that probably is like two point something years.

Two and three years.

Yeah, two and three years is kind of the most common. And there's 61% of the revenue wrapped up in those contracts. So we're We're happy about that. I think, you know, maybe the other question that would be, or the other point here that might be helpful is what's driving that is the nature of the challenges we're helping clients solve. We're not really in the thick of thin things, the things that a client's going to get solved because they come in and work with us for a quarter, right? The journey that they're on with us is a larger journey of transformation. It's across the entire organization equipping people with the skills and capabilities. And that's just not something that happens overnight. And our clients recognize that. And so out of the gate, they're thinking in terms of multi-year. We're thinking in terms of multi-year. We're on a journey together. We have a mantra we throw around internally. It's clients for life. And we kind of wring our hands every time one of those clients that we have doesn't end up being a client for life. And so I think, you know, I believe this number will continue to grow. It's grown. quarter over quarter. I don't know that we'll ever be at 100% multi-year contracts. There'll always be a CFO or two like Steve out there that says, hey, no, we're not going to sign a multi-year contract. Just kidding. Steve signs those too. But I do think there's continued growth opportunity here both on the number of contracts and on the amount of revenue.

That's perfect. It makes a lot of sense. Long-term solutions require long-term contracts. If I could ask one more, just Going back to your client partners, just any more color on the current hiring environment, are you starting to see that swing back in the favor of you, the employer, or is it still challenging out there?

Yes. The answer is yes, it has swung back a bit. It was challenging throughout the first part of last year, frankly, even into the later part of our fiscal year. We have an amazing recruiting team. And they did a great job. We set the goal at the beginning of the year to say we were going to add net 30, which for us was, again, if you go back in time, this has been a, hiring client partners has been a part of our growth strategy, an important part for many, many years. And early on, we built the infrastructure to step out and say, okay, we're going to hire five a year new, and then let's move that to 10. And then we bumped that to 15. And then we said, hey, what if we could hire 20 new in a year? And we did. And then this last year we said, you know, we're going to go for 30. And we felt great about achieving that. It was both a difficult environment, but also I think partly because of what's happening inside our company and how well things are going, we're attracting amazing people who want to come be a part of what's going on. They're attracted to our mission. and what we're doing, and so we were pleased to hire 30 and build the infrastructure at the same time to step across again and move that number to 40 in this current year.

That's perfect. Thank you, and congrats on the strong year.

Thanks, Dave. And once again, if you have a question, it's 01, and our next question is from Alex Paris from Barrington Research. Go ahead, Alex.

Thank you, and thank you for taking my question. Congratulations on the strong finish to the fiscal year. I wanted to dive a little deeper into capital allocation. I think you talked about it a little bit earlier. I had a technology glitch here, but I think I got it. You did share repurchases of close to $24 million this year. Didn't look like you repurchased any shares during the fourth quarter. I think that was the nine-month total as well, so congratulations. How do you decide when to repurchase shares? Is it a market price versus your calculation of intrinsic value, that sort of thing? And what sort of share repurchases should we be assuming going forward? I realize they're opportunistic to some extent, but cash is building.

Steve, you want to comment on that?

We like being in a position of opportunistically buying shares in the open market. And then we also, for the next few years, we'll have an accelerating, significantly accelerating number of shares granted under our LTIP programs or extended two years due to COVID. So we have a lot of buybacks related to those grants also. But yes, Alex, when we're in a position to buy opportunistically, it means we're looking at a lot of things. We're looking at alternative uses of cash, of course. We're looking at our net present value of cash flows calculations compared to the stock price, looking at the direction that the stock price is going, and then also we're considering you know, things going on internally that might preclude us from buying shares at any point in time. So I believe what we're doing is what you might expect. We're considering all of those factors all of the time and deciding when it would be prudent for us to be in the market and at what price, and then we buy shares. And as you know, we don't make any commitments as to how much we're going to buy, but I think you can expect us to be buying shares in FY23.

Gotcha. That's helpful. And then other priorities, obviously, are organic. organic investments, which you've given a lot of detail on, hiring of the client partners, content, technology, and so on, repurchases we just spoke about. What about M&A? You've been reasonably acquisitive over the years. What's your expectations for M&A going forward? Are there any areas that you need to add, and there's a build versus buy decision, things like that?

Yeah, Alex, this is Paul. So I would say that is another area where, as we think about capital allocation, we're thinking about quite a bit right now. There's a lot going on in the industry, which presents a lot of interesting opportunities. And I think for us it comes down to one of the deciding factors is that build versus buy, right? So the last couple of deals that we've done, Strive and Jonna, were very much that. We were clear we needed the capabilities that each of those companies brought to us, and we thought, gosh, this should be a buy versus build. We'll get there more quickly, et cetera. We could envision adding additional capability to the all-access path and making a potential buy versus build decision. There could also be expanded content areas where, again, we would ask the question, do we have the wherewithal to build or should we go buy? I think increasingly there might be opportunities to add more customers more quickly. That could be a buy versus build. Of course, we're going to build our own customers. I mean, we have a great return on hiring client partners, as you know, from over the years of of hiring and growing our own sales force. But if there was an opportunity to accelerate growth even more quickly than that singular play would provide, that would be another opportunity. So we're thinking about those maybe even at greater rates right now than we have in the past. And I expect we'd continue to do so as we go throughout fiscal 23.

Great. Thank you very much. That's helpful.

Thanks, Alex.

And we have no more questions at this time. I'll turn it back to Paul Walker for closing comments.

Thank you, Darrell. Well, again, thanks, everybody, for joining today. And I just want to thank our entire team for their great work throughout fiscal 22. We're pleased that you're on this journey with us as well. And thanks again for joining us. Have a great rest of your evening.

And thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.