Franklin Covey Company

Good day and thank you for standing by. Welcome to the third quarter 2023 FranklinCovey 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. To ask a question during the session, you will need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to speaker today, Derek Hatch, corporate controller. Please go ahead.

Thank you, Victor. Good afternoon, everyone. On behalf of FranklinCovey, I would like to welcome you to our third quarter fiscal 2023 earnings call. Before we begin this afternoon, I would like to remind everyone that this presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Court-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 grow revenues, the acceptance of and renewal rates for our subscription offerings, including the All Access Pass and Leader in Me memberships, the ability of the company to hire productive sales and other client-facing 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 product, 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 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 upon management's first 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 for joining us. We're glad to have the chance to talk to you today. Joining me on the call are Steve Young, our CFO, Jennifer Colosimo, president of our enterprise division, Sean Covey, president of our education division, and other members of our executive team. We're also happy to have Bob Whitman, our executive chair and chairman of the board, with us today. I'd like to start out by expressing how pleased we are with the continued strength, durability, and growth of the business and of our business model. This strength and durability are evident in our third quarter, year-to-date, and latest 12-month results. And we're pleased to reaffirm our fiscal 23 guidance that we expect to achieve adjusted EBITDA between 47 and 49 million in constant currency. I'd like to begin today by briefly sharing a few headlines from the quarter. First, our revenue growth continued to be strong. As you can see shown in slide four, since the conversion of our subscription business model in fiscal 2017, our subscription and subscription services sales have grown by more than $150 million. to $222.2 million. We're pleased that, driven by the continued strength of our subscription business, both our overall revenue growth and our subscription and subscription services revenue growth continue to be strong in the third quarter and for the year-to-date and latest 12-month periods. For overall company revenue, as you can see in slide five, in the third quarter, total company revenue grew 8% or 9% in constant currency. or $5.3 million on top of the strong 13% growth achieved in last year's third quarter, a quarter which benefited from comping against a pandemic-impacted third quarter in the prior year. For the year-to-date and latest 12-month periods, revenue grew a strong 10% and 11% respectively, or 12% year-to-date and 13% for the latest 12 months in constant currency. Growth of our subscription and subscription services revenue was even stronger, particularly considering the pandemic comp-enhanced growth last year. As shown in slide five, in the third quarter, our total subscription and subscription services revenue grew 9% or $4.9 million on top of the strong 31% growth achieved in last year's third quarter. For the year-to-date and latest 12-month period, subscription and subscription services revenue grew a strong 15% and 17% respectively. I'd like to briefly provide additional context on our year-over-year revenue growth and its comparison to growth over the past several years. For total company revenue, as shown in slide six, for the latest 12-month period through fiscal 2022's third quarter, our total latest 12-month revenue growth was a very significant $48.8 million. Again, as noted, the magnitude of this growth partially reflected benefiting from comping against the pandemic-impacted periods in fiscal years 2020 and 2021. In comparison with that significant growth, our percentage revenue growth for the latest 12-month period through this year's third quarter was lower. However, as you can see, on an absolute dollar basis, the $28.4 million of revenue growth we achieved in the latest 12-month period through this year's third quarter was very strong. In fact, as you can see, the $28.4 million of growth in the latest 12-month period through this year's third quarter represents the second highest dollar amount of growth for any comparable period in any of the past six years. It was exceeded only by 2022's growth, which, as noted, benefited from a comparison against a pandemic period. And to normalize for last year's pandemic benefited comparison, as also shown in slide six, our more than $77.2 million growth on a rolling two-year basis over the last two years exceeded that of any other two-year period since our business model conversion, both in terms of absolute dollars of growth and percent of growth. Importantly, If we were to achieve the same strong $28.4 million of revenue growth in the next 12 months that we did in the last 12 months, that level of growth would itself represent approximately 10% revenue growth in the coming year. From a year-over-year comparison standpoint, by the end of the first quarter this fall, we expect to lap the COVID-influenced more difficult growth percentage comps. And beginning in the second quarter of fiscal 24, comparisons will return to a more apples-to-apples basis. This same pattern has played out in our subscription and subscription services revenue. As you can see shown in slide 7, for the latest 12-month period through fiscal 2022's third quarter, our subscription and subscription services revenue grew by an extremely strong $50.7 million, again benefiting from comping against pandemic-impacted periods in fiscal 20 and 21. Again, in comparison with that very large growth, our percentage revenue growth for the latest 12-month period was lower. However, on an absolute dollar basis, our $32 million of subscription and subscription services revenue growth for the latest 12 months through this year's third quarter was very strong, representing the second highest 12-month dollar growth amount over the past six years, exceeded only by 2022's growth, which, as we've noted, benefited from its comparison to a pandemic-impacted period. And again, to normalize for last year's pandemic-benefited comparison on a rolling two-year basis, our $82.7 million of subscription and subscription services revenue growth for the last two-year period far exceeded that of any other two-year period since our business model conversion, both in terms of absolute dollars of growth and percent of growth. The second thing I'd like to note is that the durability of our sales also continues to increase and the extent of our visibility into future sales growth continues to expand. Since our conversion to our subscription business model in fiscal 2016, our balance of deferred subscription sales, both billed and unbilled, has grown consistently and rapidly. As shown in slide eight, our balances of deferred subscription sales, billed and unbilled, have grown from $17.8 million in fiscal 2016 to $140.9 million for the latest 12 months through this year's third quarter. And this strong growth in deferred subscription sales continued to grow strongly in the third quarter, increasing $24.4 million, or 21%, to $140.9 million, up from $116.5 million in last year's third quarter. Achieving this strong growth in our balance of deferred subscription sales in the third quarter provides an extremely strong foundation for our continued ability to achieve significant future sales growth as all of this deferred sales balance is recognized in the coming quarters and years. Adding another dimension to the increasing durability of our revenue is that at the same time our deferred subscription sales balances are increasing, the average duration of our subscription contracts is also increasing. as a result of the significantly increasing percentage of our All Access Pass contract value that is represented by multi-year contracts of at least two years. As also shown in slide 8, for the latest 12 months through this year's third quarter, in our North American enterprise operations, the percent of our total All Access Pass contracts represented by multi-year contracts of at least two years increased to 52%, up from 42% at the end of the third quarter last year. And the percentage of contract amounts we have invoiced, represented by those multi-year contracts of at least two years, increased to 57%, up from 51% at the end of the third quarter fiscal 2022. The third point I'd like to make is that our gross margin and operating SG&A as a percent of sales remain extremely attractive. As shown in slide nine, our gross margin percent has increased steadily over the years, improving from 67.6% in fiscal 16 to 75.8% for the latest 12 months through this year's third quarter. As also shown in slide nine, our gross margin percent in the third quarter was a strong 75.9% and was 76.1% year to date and 75.8% for the latest 12 months. We're also pleased that operating SG&A as a percent of sales in the third quarter improved a further 157 basis points to 59.3% compared to 60.8% in last year's third quarter. And that for the year-to-date and latest 12-month periods, operating SG&A as a percent of sales improved 140 basis points to 60.5% and 211 basis points to 59.8% respectively. Fourth. Adjusted EBITDA growth continued to be strong. The combination of strong revenue growth, significant growth margins, and declining operating SGA as a percent of sales has increased, has resulted in significant increases in adjusted EBITDA. As shown in slide 10, since the beginning of the pandemic's impact in 2020, adjusted EBITDA has increased more than $30 million from $14.3 million in fiscal 2020 to $44.9 million for the latest 12-month period, reflecting a 37% flow-through of the $83 million increase in sales during that same period. We're pleased that this robust growth in adjusted EBITDA continued in the third quarter, increasing to a higher-than-expected $11.9 million compared to the $10.9 million in last year's third quarter. In constant currency, adjusted EBITDA in the third quarter was $12.3 million, Year-to-date through the third quarter, adjusted EBITDA increased $2.7 million, or 9%, to $31.6 million, or $32.9 million in constant currency. And for the latest 12-month period, adjusted EBITDA increased 14% to $44.9 million, representing flow-through of 19%. Building on this strength, and as I mentioned previously, We're pleased to reaffirm our fiscal 23 guidance that we expect to achieve adjusted EBITDA between $47 million and $49 million in constant currency. We then expect adjusted EBITDA on constant currency to increase to approximately $57 million in fiscal 24 and to approximately $67 million in fiscal 25, and then to continue to increase aggressively each year thereafter. As it relates to the purchase of stock, during the third quarter, after continuing to make growth investments in the business, we invested $25 million to purchase 664,000 shares. Over the past five quarters, we've invested $50 million to purchase a total of 1.26 million shares, or a significant 8.8% of the company's total shares that were outstanding at the beginning of the five-quarter period. We're pleased to have been able to purchase such a significant amount of stock at what we view as a compelling value. The ongoing strength of these outcomes reflects the power of our continued focus on three fundamental priorities. First, being our client's partner of choice for addressing the challenges that really matter to them. Second, accomplishing that first priority with a strong and profitable business model. And third, reinvesting these profits in cash flow at high rates of return to create even more value for shareholders. As shown in slide 11, our first priority, being our client's partner of choice for addressing the challenges that really matter to them, translates into high client and revenue retention, strong growth in revenue, and an increasingly large and growing lifetime customer value. Our second priority, Accomplishing the first priority with a strong and profitable business model results in a significant portion of our revenue growth flowing through the increases in adjusted EBITDA and cash flow. Importantly, this means that shareholders can earn significant cash on cash returns on their investment at the same time they see the value of their investment continue to grow. And our third priority, reinvesting these profits and cash flow at high rates of return to create even more value, translates into the creation of substantial additional compounding shareholder value. Shareholders benefit from both the expected continued increase in the value of the company and the prospect of owning an increasing share of it. I'd like to briefly report on our strong progress in each of these three priorities in our third quarter, year to date, and for the latest 12 months. To accomplish our first priority, that of being our client's partner of choice in addressing the challenges that really matter to them, We've organized the entire company around being the partner of choice for our clients and helping them address their mission critical opportunities and challenges. We want to be so effective at doing this that they become clients for life. This loyalty in turn translates into high durability of our revenue and significant growth in the lifetime value of our customers. This is reflected in the following outcomes as you can see shown in slide 12. Consistently winning new logos or clients, having subscription and subscription services sales continue to increase as a percent of total company sales, retaining substantially all of our subscription revenue, increasing our average subscription contract size, increasing the percent of logos and multi-year contracts, continuing to have clients purchase a considerable amount of services to help them achieve their performance breakthroughs, and achieving a high and growing lifetime customer value. We're pleased, as you can see in slide 13, that each of these key outcomes remain strong in the third quarter and has for the year to date and for the latest 12 months. In fact, slide 14, as you can see, provides additional information on some of these outcomes. As shown, subscription and subscription services sales for the latest 12 months now account for 79% of total company sales. Average subscription and subscription revenue, subscription services revenue has increased from approximately $20,000 when we launched AAP to $77,000 to the end of fiscal 22. As noted a moment ago, the percentage of clients who are now on a multi-year contract continues to increase, and the percent of the dollar amount of contracts we invoice represented by those multi-year contracts continues to increase. And finally, our clients continue to purchase considerable amounts of services, services which are an important part of our solution and a unique point of strategic differentiation. Just a brief report on our second priority, which is to accomplish priority one with a strong and profitable business model, and doing so such that a significant percent of our sales growth flows through to increases in adjusted EBITDA and cash flow. As shown in slide 15, the strength of our business model is reflected in the following outcomes. First, continuing to achieve strong growth margins. Second, having a cost of acquiring a customer that is less than the sales generated, even in the first year of a subscription contract. Third, having operating SG&A decrease as a percent of sales, even as we grow. And finally, continuing to grow our adjusted EBITDA, which has significant increases to free cash flow. As you can see on slide 16, we're pleased that these outcomes also, we made strong progress in each of these areas in the third quarter. As shown in slide 17, these specific outcomes are as follows. Growth margin remains very strong, even after absorbing education division, symposium expenses, and increased travel related to on-site delivery. Operating SG&A as a percent of revenue continues to decline, and we're achieving strong flow-through of incremental revenue to growth and adjusted EBITDA due to our relatively fixed cost structure and high growth margin and contribution levels. And finally, a brief report on our third priority, to reinvest these profits and cash flow at high rates of return to create even more value. As shown in slide 18, successfully achieving this priority is reflected in the following outcomes. Investing capital in the business at high rates of return and returning substantial amounts of excess cash to shareholders in the form of stock buybacks. As shown in slide 19, we're pleased that our investments have met each of these key outcomes over time. And as shown in slide 20 during the third quarter, as I mentioned, we returned more than $25 million to shareholders by purchasing 664,000 shares. And over the last five quarters, we've invested $50 million to repurchase approximately 1.26 million shares, or 8.8% of the company's total shares. Steadily advancing each of these priorities is placing us in a special category of companies, a company that consistently and simultaneously seeks to Strengthen and expand our strategic moat in the most important and lucrative space in our chosen markets. Generate high rates of growth and adjusted EBITDA on cash flow. And third, a company that generates outsized cash on cash and long-term returns for shareholders by investing that cash to create additional value. Consistent with this, as I said, we're pleased to reaffirm our guidance that we expect to achieve adjusted EBITDA between $47 and $49 million in constant currency for fiscal 2023. We're pleased that for the latest 12 months through the third quarter, our adjusted EBITDA is already close to the low end of that range. And as we'll discuss in a minute, we expect further growth in adjusted EBITDA in the fourth quarter. We then expect adjusted EBITDA and constant currency to increase to approximately $57 million in fiscal 24 and to approximately $67 million in fiscal 25, and then to continue to increase meaningfully each year thereafter. I'd now like to turn some time to Steve to discuss our results for the quarter and year-to-date in a little more detail. Steve.