Franklin Covey Company

Good day and thank you for standing by. Welcome to the third quarter 2025 FranklinCovey earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, we'll open up for questions. To ask a question during a 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 call is being recorded. I will not attend the call. Over to your speaker today. Boyd Roberts, Head of Investor Relations. Please go ahead.

Thank you, Victor, and hello, everyone, and thank you for joining us today. We appreciate having the opportunity to connect with you. Before we begin, please remember that today's remarks contain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995, including, without limitation, statements that may predict forecast, indicate, or imply future results, performance, or achievements, and may contain words such as believe, anticipate, expect, estimate, project, or words or phrases of similar meaning. These statements reflect management's current judgment and analysis and are subject to a variety of risks and uncertainties that could cause actual results to differ materially from current expectations. including but not limited to risk relating to macroeconomic conditions, tariffs, and other risk factors described in our most recent Form 10-K and other filings made with the SEC. We undertake no obligation to update or revise any forward-looking statements except as required by law. Now, with that out of the way, I'd like to turn it over to Mr. Paul Walker

our Chief Executive Officer and President. Thank you, Boyd. Good afternoon, everyone. We're happy to have the opportunity to speak with you today and to share an update on the continued performance and progress of the business. I'm pleased to be joined not only by Boyd here today, but also by our new CFO, Jesse Betjeman, from whom we'll hear from in a few minutes. Despite an external environment that continues to be uncertain and where, as a result of this uncertainty, organizations are scrutinizing costs at a greater level, and delaying many investment decisions, I'm pleased that in our third quarter, revenue was in line with our expectations and that third quarter adjusted EBITDA was better than expected. Specifically, revenue in the quarter was $67.1 million and adjusted EBITDA was $7.3 million, which was higher than the top end of our expected range of between $4 million and $6.5 million. Last quarter, I shared that there were a few areas of the business in which we had experienced and expected to experience direct and indirect impact from the actions being taken by the federal government and by the associated economic uncertainty. I expressed that in order to offset the impact of these factors on our profitability, we were undertaking a series of cost reductions in areas not impacting our main strategic thrust. We've now completed the implementation of these cost reductions and we expect that these actions will help offset declines in revenue related to government actions and to the general uncertainty in the economy. Additionally, these cost savings, when annualized, will flow through and result in meaningful year-over-year increases in adjusted EBITDA next year as well. In a minute, Jesse will share more detail about the initiatives we executed in the third quarter to reduce costs and how we've approached this in a way that eliminated non-essential costs while maintaining our investment in our growth initiatives. The effect of government actions and their impact on our direct government business and our international business has been approximately what we thought and consistent with what we laid out last quarter. We're pleased that in the middle of an uncertain environment, we've continued to win and expect to win many large deals in our enterprise and education businesses. However, the uncertainty in the environment pushed some of these wins late enough into our year to create a timing risk that we'll be able to get all the services delivered by year end. To provide for the potential that the same uncertainty may impact some of the deals we're working to close and deliver in the fourth quarter, we're making a revision to our guidance and now expect revenue in the range of $265 to $275 million. You can see shown on slide four. With the revision to the low end of our revenue guidance, we've widened the adjusted EBITDA guidance to be in the range of $28 to $33 million in constant currency. The series of cost reduction actions we took in the third quarter create additional cushion and put the midpoint and the top end of our widened adjusted EBITDA range consistent with our previous guidance. Importantly, we continue to feel good about the fundamental strengths of our progress in the vast majority of our business and are confident the investments we've made and the actions we're undertaking will significantly accelerate our future growth. I'd like to now talk for a couple of minutes about three key factors that continue to drive this confidence, which you can see reflected on slide five. The first of these factors is the fact that the opportunities and challenges we help organizations address are mission critical for them. The second factor is that we're achieving strong traction in the implementation of our go-to-market transformation in our enterprise North America business. And the third factor that I'll talk about today is that our education business continues to be strong and to exhibit significant growth potential. So getting into these in a little bit more detail first, the opportunities and challenges we help organizations address are mission critical for them. Our solutions help clients meet the moment as they double down on working to achieve their mission-critical objectives. For thousands of client organizations and schools around the world, FranklinCovey is a trusted partner to leaders whose critical strategic priorities and organizational performance require the dedicated collective action of large numbers of people. Our strategic strength derives from both the importance of the opportunities and challenges that we help organizations address, and the strength of our solutions in addressing these opportunities and challenges. The second key factor to talk about today is that we're already achieving strong traction in the implementation of our new go-to-market acceleration in our enterprise North America business. The focus of our go-to-market transition and the associated growth investments is on achieving significant increases in two key outcomes, which we expect will accelerate growth. The first of these outcomes is to significantly increase our number of new client wins and our revenue per win, revenue that comes from the combination of All Access Pass subscriptions and from strategically important subscription services. And the second key outcome is to increase our expansion within existing client organizations. It's been just 180 days since we went live with this transition, and we're really encouraged by the traction and the early results we're achieving. We've successfully separated our sales force into two teams, one dedicated exclusively to landing new clients and the other dedicated to expanding business within existing clients. All new sales people, sales management and client support roles have been filled per our plan and the associated restructuring is complete. I feel great about the team we have in place in North America and I'm pleased with the traction we're gaining in the midst of an environment of tremendous uncertainty for our clients. I'd like to double-click on this second point a bit and share five indicators of progress and strength that I believe underscore the strength of our business, the importance of the outcomes we help clients achieve, and the traction we're achieving in our new sales transformation. The first of these five indicators of progress and strength is our new logo performance. In this year's third quarter, we sold more new logos than we did in the third quarter last year. Importantly, for many of these new logo clients, we also attached more subscription services, services such as training delivery, implementation support, and coaching, which for these clients led to an increase in total contract value or revenue per win. We expect this same trend will continue to extend to future new logo wins. Maybe I'll just briefly share an example of one of these new logo wins from the third quarter. a win that we feel is emblematic of several deals beginning to enter our pipeline and which illustrates the performance of the outcomes we're helping organizations achieve and demonstrates the way in which our new logo sales force is organized to sell highly strategic engagements. This recent new logo win is with a large $6 billion information management company. The client is working through a large global sales transformation to increase win rates, decreased time to close, and increased cross-selling of additional products. They're leveraging our sales performance solution, which includes the all-access pass, in-person delivery, and our new AI sales coach functionality. This win resulted in a $2.3 million contract with about $1.7 million scheduled to deliver in the coming quarters, the couple of coming quarters. This win is a strong example of our new sales model in action. We had the right rep focused on the right account, supported by subject matter experts, and several new support teams who moved quickly, and thus we were able to win this deal in just under 50 days. We're now in the midst of scheduling and completing the delivery of a significant portion of the services attached to this particular sale, some of which may drift into the next quarter due to timing reasons, which is one of the reasons, as I mentioned earlier, we've revised our annual revenue guidance range. So that's the first indicator of progress and strength. The second that I'd like to talk about is our client retention. The vast majority of our clients renew year after year. Despite the current more uncertain environment where nearly every company is scrutinizing every dollar of investment and spend and has the choice to renew or not to renew, we're pleased that the vast majority of our clients are continuing to choose to renew. While the size of some of the populations covered have flexed down in the current environment, and we've had a couple of larger clients who were unable to renew this quarter, our overall client retention or our client count remains strong and very consistent in the third quarter relative to previous quarters and has continued to be very consistent year over year and also when compared with historical results. Just as we saw during COVID, the power of our content, our solutions, and our subscription model is compelling clients to stay with us. Additionally, and importantly, we're winning back clients whose circumstances had previously caused them to leave. I'm happy to report that in the third quarter, we won back one of our larger all-access pass clients that I had reported had churned in the second quarter of fiscal year 23. The third indicator of progress and strength is the percentage of our clients who are choosing to expand the size of their all-access pass. In this year's third quarter, we achieved robust expansion across our client base, including a 15-point increase in the number of clients who expanded outside of their renewal period compared to the third quarter last year. We achieved a similar increase in the second quarter and are encouraged that our new expand sales force is driving more activity across our existing client base, whether they're in a quarter where they're up for renewal or not. I'll briefly share an example of the expansion that's possible within a good portion of our client base. In the third quarter, we expanded our work with a large global packaging leader. After landing the account in fiscal 24, the client completed a complex acquisition. It was an acquisition that, as often occurs, resulted in them feeling the need to stabilize their culture and unite two organizations to become one. Our team steered the client through a number of proof-of-concept launches of FranklinCovey solutions. Our disciplined land and expand approach grew the subscription from an initial population of 200 people to 1,000 people on the all-access path for fiscal 25. And this added $136,000 in new annual subscription revenue and has positioned us well for substantial multi-year upside across the organization's 50,000-person workforce. This win underscores our ability to navigate a complex M&A circumstance with the client, stay aligned with shifting decision makers, and convert early traction into meaningful growth. The fourth area of progress and strength that I'll just briefly touch on is our growing percentage of multi-year all-access past contracts. At the end of the third quarter, the percentage of clients in a multi-year contract increased from 55% to 58%. And the associated revenue now under multi-year contracts increased from 61% to 62%. For these multi-year clients, FranklinCovey is seen as a partner in driving sustained people and organizational performance. The fifth and final area of progress and strength is our high attachment rate of strategically important subscription services. In the enterprise division in the third quarter, our attachment rate of services continued to be a very high 60%. In an environment where companies are cutting back on a significant portion of their spend on outside advisors and consultants, our clients continue to understand the value and the impact of our consultants and coaches in helping them achieve their mission-critical objectives. In addition to our progress in these areas, we're also accelerating our marketing efforts to ensure that we're set up to fully penetrate our very large total addressable market in both our enterprise and education divisions. To lead and accelerate our expanded marketing efforts, I'm pleased to report that Dariusz Piszewski joined the organization as our new Chief Marketing Officer on June 1st, and we look forward to him bringing his many years of experience as a marketing leader across several well-known and respected brands to FranklinCovey. I just say that we feel confident that the actions we're taking to accelerate our marketing efforts, land new clients, and expand and retain existing clients will allow us to accelerate growth in the future. The third key overall factor that I'd like to touch on before I turn some time over to Jesse is the ongoing strength that we're seeing in our education business. We're pleased that despite the uncertainty introduced by the federal government with the proposed closing of the Department of Ed and the final expiration of ESSER funds, ESSER funds, as you'll recall, are the education-focused COVID relief funds, But despite those two circumstances, we still expect to grow our education business year over year on both the top and bottom lines and expect our addition of new schools and our school retention results to be as good, if not better, this year than they were last year. The overall third quarter performance in education was solid, with subscription revenue growing 13% and the balance of deferred revenue increasing 21%. Due to the timing of a couple of large contracts that came in during the third quarter last year, and which we expect to come in during the fourth quarter this year, revenue in the third quarter was down slightly, but again, this was due to timing. Looking forward, we expect another strong fourth quarter of subscription services and material sales in education. Due to the volume of business, we expect to close between now and the end of August. There is the potential that some of that delivery could push into next fiscal year, which again we reflected in the updated revenue guidance I shared previously. We continue to see strong demand for Leader in Me, driven by success in delivering the outcomes that educators, parents, and communities care about, such as leadership development, student engagement, and character building. The strong demand is fueling our transition from selling initially to individual schools to now selling to entire districts, and in a handful of cases, we're now serving statewide contracts, We're pleased that there are now nearly 8,000 Leader & Me schools around the world. I'd now like to turn some time over to Jessie to provide some more detail on our financial results.