Franklin Covey Company

Good day and thank you for standing by. Welcome to the Q4 2023 FranklinCovey Earnings Conference Call. At this time, all participants are in a 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 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Derek Hatch. Please go ahead.

Thank you. Good afternoon, everyone. On behalf of FranklinCovey, it's my pleasure to welcome you to our earnings call for the fourth quarter and full fiscal year of 2023. Before we begin today's presentation, we'd like to remind everyone about forward-looking statements and 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 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 products, changes in the training and spending policies of the company's clients and other factors identified and discussed in the company's most recent annual report on Form 10-K, and other periodic reports filed with the Securities and Exchange Commission. Many of these conditions are beyond our control or influence, any one of which may cause future results to differ materially from the company's current expectations, and there can be no assurance that the company's actual future performance will meet management's expectations. These forward-looking statements are based on management's current expectations, and we undertake no obligation to update We'll 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 President and Chief Executive Officer. Paul?

Thank you, Derek. Hello, everyone. Thanks so much for joining us today. We're glad to have the chance to talk with you, and we want to let you know how much we appreciate each of you. Joining me on the call today are Steve Young, our CFO, Jennifer Colosimo, President of our Enterprise Division, Sean Covey, president of our education division, and other members of the executive team. We're also happy to have our chairman, Bob Whitman, on with us today as well. I'd like to start out by saying how pleased we are with our results for the fourth quarter and the full fiscal year 2023. As shown on slide four, some highlights include the following. Revenue grew to $280.5 million. a level 55 million or 25% higher than our pre-pandemic revenue high of 225.4 million in fiscal 2019. Adjusted EBITDA increased significantly to 48.1 million or 49.5 million in constant currency. This exceeded the high end of our guidance range of between 47 and 49 million in constant currency and represented a 27.5 million or 133% growth in adjusted EBITDA over our pre-pandemic high of 20.6 million in fiscal 19. Our subscription and subscription services sales reached 222.8 million, growth of almost 100 million or 80% compared to our pre-pandemic high of 124.1 million in fiscal 19. And our balance of billed and unbilled deferred revenue 22% or $33 million to $186.4 million. Our balance of bill deferred revenue increased 13% to $99 million in fiscal 23. This significant growth in deferred revenue further elevates the trajectory, predictability, and visibility into future revenue growth. As shown on slide five in our education business, an all-time high of 791 new schools in the US and Canada became Leader and Me schools, bringing the total number of Leader and Me schools in the US and Canada to more than 3,500 and the total worldwide to more than 6,000 schools. And finally, after making significant growth investments in the business, we used a portion of our excess liquidity to return $35.6 million to shareholders by repurchasing 885,000 shares during the year. In addition, over the past eight quarters, we've returned $59.4 million to shareholders in the form of share repurchases. Moving up a level, these results reflect the tremendous power of our continued focus on three fundamental priorities that have continued to drive our efforts and our results over the years. You can see these reflected in slide six. The first of these priorities is strategic. It's to be the partner of choice for our clients in addressing the challenges that really matter to them. The second is to be able to accomplish that first priority while also having a strong and profitable business model. And the third is to reinvest our profits and cash flow at high rates of return to create additional value. We're really pleased to have achieved strong progress on each of these fundamental priorities in the fourth quarter and throughout fiscal 2023 as a whole. To accomplish our first priority of being the partner of choice for our clients and addressing the challenges that really matter to them, we've organized the entire company around helping clients successfully address those mission-critical opportunities and challenges, challenges that require the collective action of their people. Our first priority is to be so effective at accomplishing this that our clients become clients for life, as many of them already have. Having highly committed and loyal clients translates into a number of powerful outcomes, including those shown on slide seven. These include outcomes such as consistently winning new logos or clients, having subscription and subscription services revenue continue to increase as a percent of total company revenue, retaining substantially all of our subscription revenue, increasing our average subscription contract size, increasing the percent of logos under multi-year contracts, continuing to have clients purchase a considerable number of services to help them achieve their performance breakthroughs, and achieving a high and growing lifetime customer value. As you can see in slide eight, we're pleased to have achieved strong results in each of these key outcomes, and I'd like to share a few points of detail related to a few of these. First, as to winning new logos. In fiscal 23, our sales to new logos were the highest in company history. Sales of all access passes to new logos in the enterprise division grew 9% to the highest amount in any year since the conversion to all access pass eight years ago. And as I mentioned previously, a record 791 new schools became Leader and Me schools in our education division. Second, we're achieving elevated levels of revenue retention. Our revenue retention levels were high in the fourth quarter and for the year. In the enterprise division in North America, in the fourth quarter, our All Access Pass subscription revenue retention levels returned to their high historic levels of greater than 90%. In the education division, we continued to achieve high levels of school retention. Third, an increasing percent of clients entered into multi-year contracts. As shown on slide nine, the percentage of our All Access Pass clients entering into multi-year contracts increased further from its already high levels. In fiscal 23, 54% of All Access Pass clients entered into multi-year contracts of at least two years, up from 45% at the end of fiscal 22. Importantly, an even higher 58% of All Access Pass subscription revenue is now under multi-year contracts of at least two years. up from 53% at the end of fiscal 22. And why is this? It's because of the value these clients are receiving from a long-term partnership with FranklinCovey. These long-term contracts provide a tremendous foundation for both the predictability and acceleration of future revenue growth. The fourth thing I'd point to is that our deferred revenue build and unbuild grew very rapidly. Our balance of billed and unbilled deferred revenue increased 22% or $33 million to $186.4 million, and our balance of billed deferred revenue increased 13% to $99 million in the year. It's quite remarkable to think back a few years ago when we had virtually no deferred revenue and when the total revenues of the company were less than the deferred revenue we have today. This significant growth in deferred revenue further elevates the trajectory, predictability, and visibility into future revenue growth. Fifth, we're achieving strong growth in our average client spend. Our average All Access Pass subscription and subscription services revenue per client has also increased significantly over the years, growing from an average of approximately $20,000 per client when we launched All Access Pass eight years ago to $77,000 at the end of fiscal 22. This average spend increased further to $83,000 or by 8% per client in fiscal 23. The sixth point I would make is that we're achieving strong overall revenue growth. In fiscal 23, our total revenue grew 17.7 million to 280.5 million. Establishing this record revenue level was noteworthy for several reasons. First, it represented growth of more than 55.2 million or 25% compared to our pre-pandemic high mark revenue high mark of $225.4 million in fiscal 19. This growth was on top of a record high $38.7 million of revenue growth achieved in fiscal 22, the magnitude of which benefited from comping to a pandemic impacted period in fiscal 21. Importantly, as shown in the bottom row of slide 10, on a rolling two-year basis to normalize for fiscal 22's pandemic benefited comparison, Our revenue grew 56.4 million, or 25%, which is compounded at about 12% per year. This 56.4 million of growth exceeded that of all but one other two-year period since our business model conversion, which was that of 21 to 22, another pandemic period. And we're pleased to have achieved this strong revenue growth in both the enterprise and education divisions. As shown on slide 11, the enterprise division's full year revenue of $205.7 million was its highest ever, representing growth of 69.8 million, or 51%, since our conversion to a subscription model in 2017. And with the exception of additional $1 million in FX impact in the back half of the year, enterprise revenue came in essentially as we expected. This result represented growth of 11.3 million, or 5.8% for the year. Importantly, this was on top of an extremely strong $25.8 million, or 15% pandemic-compared growth in fiscal 22. The enterprise division's two-year growth of 37 million, or 22%, represented a strong annual compound growth rate of 10.4%. The Education Division also achieved its highest revenue year ever, with revenue increasing $7.9 million, or 13%, to $69.7 million, representing growth of 25.6 million, or 58%, since 2017. I'd like to just maybe pause and step back for a second and thank our wonderful associates in our Education Division. You know, it wasn't that long ago when they first launched Leader in Me that the entire revenue in the division was just over $3 million. As expected, education also had its best year ever in terms of winning new schools, with 791 new schools becoming Leader in Me schools. The only factor not meeting expectations was that because of the extremely high number of new schools added in the year, a portion of these new schools signed up a month or so later than normal. As a result, the services and materials that would normally have been delivered in the fourth quarter relating to these new schools were not able to be fully delivered in the fourth quarter. Largely as a result of this, and also reflecting the approximately $1 million of FX impact in the last two quarters in the enterprise division, our total company revenue of 280.5 million, though a record high, came in 1.2% or $3.5 million lower than the $284 million we had expected when we updated our forecast in our second quarter report. We expect to shift the Education Division materials and deliver the onboarding services for these new schools during fiscal 24. And finally, we achieved even stronger growth in subscription and subscription services revenue. As shown in slide 12, subscription and subscription services revenue grew $20.7 million in fiscal 23. Importantly, on a two-year basis to normalize for last year's pandemic-benefited comp, subscription and subscription services revenue growth was $65.6 million, representing annual compounded growth of 19%. We're pleased to have achieved these strong results in each of these key outcomes. As I mentioned earlier, our second priority is to be able to accomplish our first priority while also having a strong and profitable business model. a business model that results in a significant percentage of our growth in revenue flowing through to increases in adjusted EBITDA and cash flow. As shown on slide 13, the continued strength of our business model is reflected in the following general outcomes. First, achieving strong gross margins. Second, having a cost of acquiring a customer that is less than the revenue generated even in the first year of a subscription contract. Third, having operating SG&A decrease as a percent of sales. And fourth, continuing to grow our adjusted EBITDA, which significantly increases free cash flow. As shown on slide 14, we're pleased that each of these key outcomes again remain strong in the fourth quarter and for fiscal 23. Specifically, as shown in slide 15, gross margin percent remained a strong 76.1% even after absorbing increased client-reimbursed travel related to increases in on-site delivery. which flows into revenue, but without any profit attached. Operating SG&A as a percent of revenue improved a further 179 basis points to 59% in fiscal 23, even as our revenue increased. We're achieving strong growth in adjusted EBITDA, with adjusted EBITDA increasing to 48.1 million, or 49.5 million in constant currency, a level above the highest end of our guidance range, and adjusted EBITDA margin continued to increase, reaching 17.1% for the year, an improvement of 100 basis points. As to our third priority, we want to reinvest our profits and cash flow at high rates of return to create even more value. As indicated on slide 16, successfully achieving this priority is reflected by the following outcomes. First, investing capital in the business at high rates of return, and second, returning substantial amounts of excess cash to shareholders in the form of stock buybacks. As shown in slide 17, as I mentioned a minute ago, we're pleased to have met each of these key outcomes again in fiscal 23. In fiscal 23, our return on net tangible assets from investments in the business continued to be high. And as you can see on slide 18, we returned $35.6 million to shareholders through purchasing 885,000 shares, including returning $5.9 million through the purchase of 125,000 shares in the fourth quarter. and we've invested $59.4 million to repurchase shares over the last two years. We're pleased to see the continued progress on these three priorities in fiscal 23 and how the combination of these has really become a powerful flywheel. I'd like to briefly share how we see this powerful flywheel accelerating in the coming quarters and years. First, we want to become even more important and trusted to a growing number of clients and schools. To accomplish this, we've accelerated our focus in three key areas. First, ensuring that we maintain and expand our position of leadership in having what is truly the best in class content and solutions to help our clients and schools address their biggest challenges and opportunities. Second, we want to utilize technology, including AI, to expand our reach and impact. And third, we want to significantly expand the number and capabilities of our client partners and client engagement teams. By focusing our efforts on these three areas, we expect, as illustrated on slide 19, to be able to do the following, to accelerate the number of new logos and schools that we acquire, further increase both our already very high levels of revenue retention and client retention, and expand both the size of our average subscription contract and its average duration, thereby significantly growing our already large and expanding lifetime customer value. I'd like to spend just a minute or two on each of these and give a little bit more context for what we're doing to advance in each of these three areas. First, to be our client's partner of choice for addressing the challenges that really matter to them, our content and technology are and must continue to be world class in delivering collective behavior change and measurable outcomes. Over the past two years, we've made significant investments in content and technology and are pleased that fiscal 24 will be one of our biggest launch years ever. Two of our biggest blockbuster solutions, the Speed of Trust and the Seven Habits of Highly Effective People, have been completely reimagined and refreshed, and both have been designed intentionally to better help our clients scale these solutions throughout their organizations, leading to even more widespread collective behavior change and the opportunity for increased all-access path penetration and expansion. Additionally, we're launching Our first ever solution to help leaders and individual contributors have difficult high-value conversations, a solution to which our clients have been asking us for quite some time. We've also completely revamped our sales performance solutions, and we'll launch that a little bit later this fall. We continue to build powerful new technology capabilities into our platform, including enabling the future use of AI to make it easy for our clients to launch, manage, and measure FranklinCovey solutions at scale across their organizations. A similar set of product and technology additions to our Leader in Me solutions are also being incorporated and launched this year to help schools and districts address the needs of pre-K students, and K-12 students, as well as faculty and staff development. We could not be more pleased with the quality and expected impact these new and reimagined solutions will have on our clients. And we're just getting started. Over the next couple of years, we'll continue to make very meaningful and strategic additions to the All Access Path and Leader in Me solutions. Second, since the launch of our subscription business in fiscal 16, we've significantly grown three important client-facing roles. We've increased the net number of client partners or salespeople by approximately 70% from 180 to 303. And at the same time, we've launched and grown two new roles, implementation strategists and leader in me coaches, which over time we've increased from essentially zero to 150. Having significantly grown the number of client partners over the past few years, in fiscal 23, we chose to prioritize their ramp and development while accelerating the growth of the newer roles of implementation strategist and leader in the coach. As a result, today, we have a client-facing field organization that is not only the largest in our company's history, but one that is among the largest in our industry. Each of these roles is critical to driving new client subscriptions, retention, expansion, and the sale of subscription services. As we move into fiscal 24, consistent with what we said at the end of our third quarter, we'll not only continue to focus on the development of our existing people, but we will also grow the net new number of professionals in these important roles by adding approximately 40 new people by fiscal year end. The combination of these factors, our investment in building best-in-class solutions to must-win games, and the development and growth of our sales and client-facing roles gives us tremendous confidence in our ability to generate significant future revenue growth. Our second area of increased focus is to even further strengthen our business model. As just noted, our focus on becoming an even more important partner to our clients and schools is expected to drive accelerated revenue growth. Our business model focuses on ensuring that a sizable portion of these expected increases in revenues flow through to increases in adjusted EBITDA and cash flow. As shown in slide 20, key areas of our business model focus are First, on ensuring that the tremendous impact our solutions deliver for clients earns us the kind of pricing power that allows us to maintain and even expand our strong gross margins. Second, that the expanding lifetime value of our customers allows us to continue to maintain or reduce our SG&A as a percent of sales. And third, that the resulting high flow through of revenue to adjusted EBITDA will increase our adjusted EBITDA margin to 20% in the coming years. And finally, our third area of increased focus is to reinvest the significant amount of cash flow we expect to generate to create even more value for shareholders. We expect that the successful execution of our business plan will generate significant amounts of free cash flow over the next few years. This free cash flow, together with nearly $40 million of cash we have on our balance sheet, should in the coming years enable us to generate more than $150 million, or around $11 per share, to invest to drive organic and inorganic growth or to return to shareholders. This provides the prospect of shareholders earning a tremendous cash-on-cash return on their investment. At the same time, the value of that investment continues to accelerate. Advancing these priorities places us in a special category of companies. As shown in slide 21, we're becoming a company that is consistently and simultaneously strengthening and expanding our strategic moat in the most important and lucrative space in our chosen markets, generating high rates of growth and adjusted EBITDA and free cash flow, and generating outsized cash-on-cash and long-term returns for our shareholders by investing that cash to create additional value. I'd like to now turn some time over to Steve to discuss our results for the fourth quarter and the year in a little bit more detail and also to review our guidance. Steve.