Franklin Covey Company

Good day, and thank you for standing by. Welcome to Q1 2025 Franklin Covey 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'll need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. To answer your question, please press star 1 1 again. Please be advised that today's conference is being recorded. I would now like to turn the conference over to Derek Hatch, Corporate Controller. Please go ahead.

Hello, everyone, and thanks so much for joining us today. We're glad to have the opportunity to talk with you today. Participating on the call this afternoon are Paul Walker, our Chief Executive Officer, Steve Young, our Chief Financial Officer, Jennifer Colosimo, President of the Enterprise Division, Sean Covey, President of the Education Division, and Holly Proctor, our Chief Revenue Officer. As we get started, I'd like to remind everyone 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 the 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 the company's actual future performance will meet management's expectations. These forward-looking statements are based upon 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. Paul?

Thank you, Derek. Welcome, everyone. It's great to be with you. Today, I'd like to provide an update on two areas. First, our Q1 performance. And second, the progress we're making on the transformation of our North American enterprise efforts, what we've been referring to as Project Expand and Project Land. And when we expect these investments, we'll begin to meaningfully accelerate our revenue growth. So first just a comment or two about the first quarter performance. Our first quarter revenue grew 1% to $69.1 million compared to 68.4 million in last year's first quarter. This reflects strong growth in education where sales grew 11% and flat sales in enterprise, which were essentially in line with what we had hoped and expected as we undertook the transitioning of our sales force to an even more powerful go-to-market model in Enterprise North America in the quarter. First quarter adjusted EBITDA was 7.7 million or 8.1 million in constant currency. This is right in line with our expectation and our guidance that adjusted EBITDA in constant currency in the first quarter would be between 7.5 and 8.5 million. This compares with adjusted EBITDA of 11 million in last year's first quarter, primarily reflecting the first quarter share of the $16 million total increase in growth investments we're making this year. As we discussed in November, and we'll address more in a moment, we've transformed our sales structure so that one large group of salespeople will focus exclusively on expanding existing business within our existing clients, while another significant group of salespeople will be hunters focused exclusively on landing new logos. You can see, as shown on slide four, the investments being made to support these two efforts. These investments include, first, our investment in client expansion, which includes additional implementation strategists, practice leaders, and consultants to help us achieve significant penetration in our existing all-access pass holding clients. The second area of investment is in our new hunting team. It's the hunter salespeople themselves, and then marketing, and lead generation and closing support for those hunting client partners. The third area is investments in sales leadership and sales operations to allow us to scale this whole new structure. And then the final area is a slight increase in content and technology. We expect these investments to accelerate our revenue growth from single digit to consistent double digit levels with a high flow through of this increased revenue to increases in adjusted EBITDA and cash flow. Our growth investments in the first quarter came in right where we expected they would. I'd also like to share just a bit more about the results in our education division. As I mentioned, revenue in the first quarter grew a significant 11%, with the number of contracted Leader and Me schools increasing 58% over last year's first quarter, from 52 schools last year to 82 schools in the first quarter this year. Importantly, we're achieving continued success in making sales to entire districts and even to some states rather than selling only to individual schools. In fact, last year, 74% of our schools that were brought on were brought on as part of a district contract. And in a few cases, we're now beginning to engage, as I said, in statewide opportunities. I just maybe share an example of this transition is what's happening with a new statewide contract in the southeastern United States. Well, for many years, we brought on numerous single schools in this state. After partnering with these schools to achieve strong results in our first quarter, we signed a contract at the state level that will include more than 100 initial schools to come on throughout this year, with many more schools to follow. The second thing I'd like to provide a deeper dive into is our progress on the investments to accelerate our go-to-market efforts. Specifically, I'll identify the key leverage points on which the realignment of our sales force is focused. In our earnings call in November, we shared that we were pleased to have substantially achieved the three big strategic initiatives we'd undertaken in the previous years. Specifically, first, that we've transitioned our entire business model to subscription. Second, we've invested heavily in the technology enablement of all of our solutions so that they can be delivered seamlessly across entire organizations in a variety of modalities and in more than 25 languages worldwide, as well as institutionalizing our significant ongoing investments in technology. The third is that we've made significant investments to ensure that our content and solutions represent the gold standard in our space and have also institutionalized our processes and ongoing investments in content so that our solutions will continue to define this gold standard. In addition, we have some exciting new additions to our content lineup, which we'll be launching in the coming periods, and which we expect will help to further penetrate existing clients and accelerate winning new clients. These include a new communications suite of offerings, which is one of our most requested new solution areas, as well as additional leadership solutions to fill out the leadership map to help support leaders on the journey from being a new leader all the way to being the leader of an enterprise. Having completed the heaviest lifting involved in each of these important strategic initiatives, we're now positioned to leverage the collective impact of these initiatives by accelerating our go-to-market efforts to capture an even greater share of our very large TAM. The two key areas of focus and investment in this go-to-market acceleration are first, to focus a large number of our client partners solely on increasing client penetration and retention and to provide them with the additional client support resources necessary to achieve this expansion within our clients. The second area is to build a large and growing specially trained team of new logo hunting client partners who will have the sole responsibility to win a significantly increasing number of new logos. As previously mentioned, we expect the combined impact of these focused initiatives to result in a significant increase in our sustainable ongoing revenue growth rate from single digits to consistently achieving double-digit growth and to also generate accelerated levels of adjusted EBITDA and cash flow. Importantly, because almost all of our investment dollars are going into client-facing people and activities, the impact of these investments can be very direct. Over the coming quarters, we'll be reporting our progress against the key leading and lagging indicators that will track our progress toward achieving consistent double-digit revenue and adjusted EBITDA growth. The path of impact from these investments will be seen first in increases in the size of our pipelines of opportunities, then in the magnitude of our growth in invoice sales, and finally in our reported revenues as the invoice sales that have gone onto our books as deferred revenue are recognized over the ensuing 12 or more months. Given this cycle, we expect that our increased investments will begin to result in an increase in our volume of invoice sales in the back half of fiscal 25, followed by the beginning of a fundamental shift in our growth curve of reported sales in the quarters thereafter. I'd like to provide some additional detail on the key points of leverage for each of these efforts. As noted, the first of our new go-to-market investments is focused on achieving even further penetration within our existing clients. We call this project EXPAND. As we've previously reported, since our conversion to subscription, our average annual revenue per client has expanded from approximately $39,000 to $85,000. This 218% increase results from the efficacy of our solutions in consistently helping clients achieve their desired results. This expansion occurs when organizations who have been utilizing one or more of our solutions for a portion of their overall population not only renews for that portion, but expands their subscription to make the same or additional solutions available to an even broader portion of their overall organization. Where in the past, several client partners may have been working with different operating units of the same company, but with none of those client partners having responsibility for achieving an overall penetration level throughout the client's entire organization. Under our new go-to-market structure, a single client partner on the expand side of our sales force is now responsible for expanding the use of our solutions across the client's entire organization. We're already experiencing the power of this new high focus penetration model. An example is our work with one of the world's largest food and beverage companies, where we've been working within one of the company's operating units over the last five years, generating around $500,000 a year annually. However, as significant as the work within this unit has been, under our prior organizational structure, the assigned client partner had little to no visibility into the broader needs of the parent company. Under our new project expand structure, A single client partner is now responsible not only for penetrating the operating unit to which they had traditionally been assigned, but for understanding and meeting the needs of the company's entire global organization. Over the past 18 months or so, as part of our project expand pilot, this client partner took on the expanded responsibility and in so doing identified a large global leadership development initiative being driven by the CEO and most of the senior leaders in the organization. Having developed broad relationships within the client's overall organization, our client partner was able to demonstrate how All Access Pass' collection of best-in-class leadership solutions offered in more than 25 languages could meet their needs globally. This resulted in our being selected as their partner of choice for their global leadership development rollout, and this is now shaping up to be a three-year, $5 million opportunity and partnership. This is a great example of the significant white space for expansion we have across the majority of our client base, where as significant as our expansion of revenue per client has been over the years, we're still reaching only approximately 10% of these clients' addressable populations. Achieving the magnitude of client penetration achieved in just this specific client is exactly the focus of Project EXPAND. By reducing the number of client accounts for which each of our expansion client partners is responsible, and providing these expansion client partners with access to a larger pool of implementation strategist, consultant, and practice leader resources, we expect to unleash the same kinds of breakthroughs in client penetration just discussed across a significant number of our clients. Our second area of focus is on winning a significantly increased number of new logos, what we're calling project land, or in other words, for landing new logos. Since our conversion to subscription, we've won thousands of new logos. However, even with this success, we're only scratching the surface of the potential that exists for winning new clients and partnering with them to address their big opportunities and challenges within the large markets we serve. As shown on slide five, we've organized the market into four segments based on organization, employee size, and have assigned our hunting client partner teams accordingly. Here you can see the number of clients in each segment that are not yet FranklinCovey clients into which we have massive headroom for growth and for hiring many, many more hunting client partners. We're significantly increasing our investment in both marketing and sales closing support resources to help our significant group of client partners whose entire focus is now solely on winning new logos. We're also making investments into central sales leadership and sales operations functions to allow us to scale our sales force even more rapidly in the future. We fully transitioned the sales force approximately five weeks ago and are really encouraged by the tremendous energy they're bringing to these focused roles. As it relates to winning new logos, we set an initial target to have 100% of our new logo hunting client partners in place by March 1st of this year. I'm pleased to report that as of today, 95% of these hunting client partners are already in place. Being months ahead in filling these key roles will help us ensure that we achieve and possibly exceed our new logo targets in fiscal 25. And we're already realizing some important new logo wins. For example, we recently won as a new logo one of the five largest banks in America. We're partnering with this bank in the development of 2,000 of their leaders. This is an initial portion of their many thousands of leaders. In our old selling model, this prospect would have been assigned to several client partners because there were multiple buyers distributed across the country. And in our old model, we would have likely won business, but initially for only a portion of the 2,000 leaders. In our new selling model, this opportunity was owned by a single account executive focused solely on winning new logos and with the skill and expertise aligned to the needs of our large enterprise segment clients. This new alignment resulted in this $350,000 new logo win, which is approximately eight or nine times the size of our historical average. We supported this sale with new closing resources who partnered with our client partners to determine the right solution to deploy to this client. This is just one of the many deals we're developing in our pipeline which are benefiting from the focused attention of our new logo hunting team and the investment in our new closing resources. In conclusion, Our target was to begin the second quarter on December 1st, fully transitioned into our new go-to-market structure. I'm pleased to report that we hit that target. Today, in Enterprise North America, every salesperson is focused 100% on expanding and retaining existing clients, or they're focused 100% on winning brand new clients. As we shared fiscal 25 will be an investment year in which we expect to generate a significant amount of new pipeline and add a lot of new invoice revenue to our balance sheet. Which will then be recognized as reported sales in subsequent periods ultimately shifting our growth from single digits to consistent double digit growth. we're really excited about our accelerated go to market focus and look forward to reporting our progress. Now, with those remarks out of the way, I'd like to turn the time over to Steve to discuss our specific results for Q1 in a bit more detail and to also share our guidance.