Franklin Covey Company

Good day, and thank you for standing by. Welcome to the first quarter 2023 Friendship Company Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. During the session, you need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Derek Hatch, Corporate Controller. Please go ahead.

Thank you. Hello, everyone. On behalf of FranklinCovey, I would like to wish everyone a Happy New Year and welcome everyone to our first quarter earnings call for fiscal 2023. Before we get to the good stuff, I'd like 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 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 management's expectations. These forward-looking statements are based on management's current expectations, and we undertake no obligation to update or revise these forward-looking statements to reflect events or circumstances after the date of today's presentation, except as required by law. With that out of the way, we'd like to turn the time over to Mr. Paul Walker, our Chief Executive Officer. Paul? Thank you, Derek.

Hello, everyone. Thanks so much for joining us today. And as Derek said, we want to wish you all a very happy new year. I'm joined by Steve Young, our CFO, by Jen Colosimo, the president of our enterprise division, Sean Covey, president of our education division, and several other members of our executive team. And we're also happy to have Bob Whitman, our executive chairman, with us today as well. We're really pleased that our results for the first quarter of fiscal 23 were strong, and even stronger than expected. As you know, the ongoing strength of FranklinCovey's performance is driven by five key factors, and I thought I would just briefly highlight these and then dive into our results. First, we help organizations address mission-critical challenges and opportunities. These challenges and opportunities require collective action of large numbers of people. The second strength is we've organized our entire company around helping clients address these challenges. And our solutions, which combine best-in-class content, technology, coaching, and measurement work. They really do work. And as a result, our lifetime customer value is significant and increasing, and the duration of our subscription contracts continues to extend, increasing both the durability and predictability of our revenue. The third strength is the strength of our subscription business, which is growing at more than 20% per year. and is driving an overall increase in growth for the entire company. Overall revenue growth has increased from the high single digits to the low double digits and now into the low teens, and we expect this growth to continue into the mid-teens and then high teens in the coming years. Fourth, the strength of our subscription business model with its high growth margins and declining SG&A as a percent of sales is resulting in a significant flow through of incremental growth in revenue to increases in adjusted EBITDA. And finally, the fifth strength is that we have significant headroom for growth, and we're investing to take advantage of it. These investments include growing our sales force by more than net 30 last year, which will grow by more than net 40 this year. And in addition, we're making investments in content, technology, and in marketing. So thinking about those five strengths and how they're playing out, let's talk for a minute here. I'd like to share with you how they did play out in the first quarter. I'd like to start with headlines. beginning with those regarding our double-digit revenue growth in the quarter. As you can see shown in slide five, revenue growth for the first quarter of fiscal 23 was strong, increasing 13.2% to 69.4 million. In constant currency, our revenues grew an even more rapid 16.6%, even after absorbing the impact of ongoing COVID-related lockdowns in China in the quarter and a slow return to post-COVID normalcy in Japan. Our revenue growth for the latest 12 months through this year's first quarter was also exceptionally strong, with revenue growing 14.3% and growing 16.2% in constant currency. As significant as was our overall growth for the quarter and for the latest 12 months, our subscription and subscription services revenue growth was even stronger. As also shown in slide five, total subscription and subscription services revenue grew 21% in the first quarter, and grew 26% in the latest 12-month period, with the All Access Pass subscription and subscription services revenue growing 20% in the first quarter and 26% for the latest 12 months, and the Leader in Me subscription and subscription services revenue growing 24% in the first quarter and 25% in the latest 12-month period. The durability of our revenue also continues to increase, and our visibility into future revenue growth continues to extend and expand. As also shown in slide five, our balance of deferred subscription revenue, billed and unbilled, increased 25% or $30.5 million in the first quarter compared to last year's first quarter to $151.6 million. And finally, as shown in slide five, for the latest 12 months in our North American enterprise operations, the percent of our total All Access Pass invoice revenue, represented by multi-year contracts of at least two years, increased to 62% at the end of the first quarter, up from 55% at the end of fiscal 22's first quarter. Now to some headline profitability metrics. As shown in slide six, our growth margin percent in the first quarter remained very strong at 76%, an increase of 100 basis points compared to the 75% in last year's first quarter. and close to the 77.7% gross margin achieved in the first quarter of fiscal 2022. This reflects strong growth in education revenues and 25% growth in subscription services, both of which carry a somewhat lower gross margin percentage. Our latest 12 months gross margins were also very strong at 76.4%, reflecting the same strong growth in education and subscription services revenue. Operating SG&As of percent of sales improved another 199 basis points to 59.5% in the first quarter, compared to 61.5% in the first quarter of fiscal 22, and improved 296 basis points for the latest 12-month period to 60.3%, compared to 63.2% in the same latest 12-month period last year. The incremental flow-through of our growth and revenue to growth and adjusted EBITDA in the first quarter was 19%. just as a point, it was 22% in constant currency, reflecting the combined impact of strong gross 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% for the latest 12-month period and would have been 30% in constant currency. As a result of this strong revenue growth, adjusted EBITDA grew 16%, or $1.5 million in the quarter, to 11.5 million and grew 28% or 9.6 million to 43.7 million in the latest 12-month period. In constant currency adjusted EBITDA grew 2.3 million or 23% to 12.2 million in the first quarter and 34% or 11.6 million to 45.7 million for the latest 12 months. Our net cash provided by operating activities was 3 million in the first quarter compared to $10.2 million in the first quarter of fiscal 22, reflecting changes in net working capital. We expect our cash flows from operating activities to be strong in fiscal 23. We ended the first quarter with $73.2 million of liquidity, comprised of $58.2 million in cash, and with our full $15 million revolving credit line undrawn. Our strong and increasing liquidity This adds optionality to us as we continue to invest in our business, evaluate potential acquisition opportunities, and continue to look for ways to further enhance shareholder value. We're pleased by our accelerating revenue growth and our growth in adjusted EBITDA and by the business's continued momentum. We're pleased that with our first quarter revenue growth of 13.2% or 16.6% in constant currency and our latest 12-month revenue growth of 14.3% or 16.2% in constant currency gets us off to a very strong start for the year. And now with that, I'd like to turn some time over to Steve to dig a little bit deeper into these results.