Good day, and thank you for standing by. Welcome to the Second Quarter 2024 Franklin Covey Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to turn the conference over to your speaker for today, Derek Hatch. Please go ahead..

Thank you. Hello, everyone. On behalf of Franklin Covey it’s my pleasure to welcome you to our conference call to discuss our second quarter fiscal 2024 financial results. We hope that you're enjoying good weather wherever you are in the world this spring or fall if you're in the Southern Hemisphere.

Before we begin this presentation, we’d like to remind everybody that the 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 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 President and Chief Executive Officer.

Paul?.

Project Penetrate, Project Speed to Ramp and Project Impact, and we have high expectations that they'll drive increased growth in the coming quarters and years and would now like to turn some time to Steve to talk about some of our results in the quarter more specifically..

Thank you very much, Paul. Good afternoon, everyone. It's a pleasure to be with you today. I'd like to briefly provide more detail on the factors underlying our performance, focusing on the overall company results for the quarter.

And then on the results in three key areas of our company, specifically, our Enterprise business in North America, our Enterprise business internationally and our Education business.

Since I'm focusing just on these three areas, I'd like to point out to everyone as you probably already know that in our slide deck appendix, we include the current balance sheets, income statements. And other financial information will allow you to see our complete results for the quarter and year-to-date. So for the company.

As shown on Slide 11, second quarter sales were $61.3 million, which, as we expected, was roughly even with the record $61.8 million we achieved in the second quarter of last year. Year-to-date sales were $130 million compared to $131 million in the prior year.

And for the latest 12 months, sales were $279 million compared to $276 million in the prior year. These results are essentially even with the record levels achieved last year with year-to-date sales down about 1% and the latest 12-month sales up about 1%. Second quarter adjusted EBITDA was $7.4 million this year compared to $8.2 million last year.

Year-to-date adjusted EBITDA was $18.4 million compared to $19.7 million in the prior year. And the latest 12 months adjusted EBITDA was about $47 million compared to about $44 million in the prior year. Now as shown on Slide 12, results in our Enterprise business in North America continued to be strong in the second quarter in the latest 12 months.

Sales in North America, which accounts for about 73% of total Enterprise Division sales was $34.1 million in the second quarter, $72.5 million year-to-date and $150 million in the latest 12 months.

Revenue achieved in this period, you can see is essentially even with prior years, which were themselves up 8% in the quarter, 12% year-to-date and 15% for the latest 12 months. So even compared to last year, but last year was up seemly compared to the prior year.

Subscription sales in North America were $22 million, growing 5% in the quarter or $44.5 million year-to-date, which is up 6% and $87.8 million latest 12 months, which is also up 6%.

The combination of subscription and subscription services sales in North America was $31.5 million in the second quarter, representing 4% growth on top of the 7% achieved in last year's second quarter. These sales were $66.3 million year-to-date, which is up 2%, and they are $136.4 million in the latest 12 months, which is up 4%.

Our balance of deferred subscription revenue build and unbilled in North America continued to be strong, growing to $117 million in the quarter, which is up 3% on top of the 22% growth achieved in last year's second quarter, establishing, as Paul talked about, the strong foundation for next year's growth.

The percent of North Americas All Access Pass' for multiyear periods increased to 56% from 50% last year, and the percentage of invoice sales represented by multiyear contracts increased to 62% from 57% last year.

Now, as shown on Slide 13, revenue from our international operations, which accounts for approximately 17% of our total Enterprise Division revenue was $7.2 million in the second quarter, which is even with last year and was $16 million year-to-date, which is down about 4% and $34.5 million in the latest 12 months, which is up about 5%.

As also shown on Slide 13, our international licensee partner sales were $2.7 million in the second quarter, a decrease of 6%. There were $6.1 million year-to-date, which is even with last year and $11.6 million in the latest 12 months, which is up 3%.

So if you kind of cut through all of these numbers, you can see that in the Enterprise division, our subscription business is generally up, while our other revenue is generally down, making the overall result essentially flat.

The fact that it's our subscription business that's up, like Paul talked about encourages us as we look forward to future quarters and years.

Finally, as shown on Slide 14, sales in our education business, which generally accounts for about 25% of total company sales, grew to $14.6 million in the second quarter, up 3% on top of the 28% growth achieved in the second quarter of FY '23.

Year-to-date sales grew to $29.3 million, up 3%, and sales for the latest 12-month period were $70.5 million, up 4% on top of the 22% growth in the previous year. Education subscription and subscription services sales grew to $12.9 million in the second quarter, up 4% on top of the 30% growth in last year's second quarter.

Year-to-date, sales grew to $26.1 million, up 2% on top of the 27% in year-to-date growth achieved last year's second quarter. In the latest 12-month, Education sales were $65.2 million, which is up 4% on top of the 23% growth achieved in the same latest 12-month period last year.

Education's balance of deferred subscription revenue billed and unbilled, increased by $10 million to $30 million versus last year's balance. As you recall, not many years ago, the Education business was small and had a traditional services and materials business model.

We are pleased that since the launch of the Leader in Me subscription in the Education division, revenue has grown substantially from just over $3 million in the first year to more than $70 million in the latest 12-month.

And Education's business model has transformed to closely mirror that of Enterprise with approximately 90% of Education's revenue now represented by subscription, subscription services revenue. We also expect that after years of accelerated investment, the Education division's adjusted EBITDA margins will also expand this year and beyond.

Now, cash flows and the balance sheet. As shown on Slide 15, our year-to-date cash flows from operating activities was $30 million this year versus $11 million last year.

Our free cash flow for the first two quarters increased to $24.7 million compared with $3.3 million for the prior year, reflecting the changes in the elements of working capital were very favorable in the first and second quarters of this year compared with last year, particularly reflecting changes in accounts receivable, accounts payable, accrued liabilities, and deferred revenue.

In Q1 and Q2, we invested $18.4 million to purchase 461,000 shares and over the past four quarters, we've invested more than $49 million to purchase shares.

We ended the quarter with over $103 million in total liquidity, including $40.9 million in cash and $62.5 million available under the revolving credit facility, even after investing the $8.4 million investment in stock -- $18.4 million to repurchase stock.

Compared to Q2 of FY 2023, the sum of billed and unbilled deferred subscription revenue increased 9% to $158.5 million, giving us a substantial and increased visibility into future sales results. The deferred subscription revenue increased 13% to $86 million, while the unbilled deferred revenue increased 4% to $73 million.

We continue to report a very strong balance sheet. Now, guidance.

In our first quarter earnings call, we communicated that we expected revenue in the back half of this fiscal year to be higher than in the first half and that we expected to finish the year with adjusted EBITDA at the bottom of our range of between $54.5 million and $58 million in constant currency.

While we expect our back half revenue growth to exceed that which we achieved in the first six months, we expect the absolute amount of that growth to be lower than the low double-digit growth that we had expected for the back half.

This is in large part due to the fact that though our expected rebound in services is occurring, it began a bit later than we had anticipated. As a result, we now expect total sales for the year to be lower than previously expected, with growth of approximately 1% in the third quarter, increasing to approximately 6% in the fourth quarter.

Despite this lower revenue, we still expect adjusted EBITDA to come in at the bottom end of our previously announced guidance range of $54.5 million to $58 million in constant currency.

This result reflects, one, expected high flow-through of incremental revenue to adjusted EBITDA driven primarily by our high gross margin and declining SG&A as a percentage of sales.

two, the restructuring event that Paul talked about; and three, the fact that a significant portion of our compensation throughout the company is tied to growth in sales and overall financial performance.

For Q3, we expect net sales to grow approximately 1% as said to approximately $72 million and adjusted EBITDA to be between $12 million and $13 million, reflecting a midpoint increase of approximately $600,000 over the prior year. Our back half projections are consistent with our current expectation that add-on sales will continue to strengthen.

As we've talked about and that our education division will have a very strong Q3 and Q4. So I'd now like to turn time back to Paul..

Steve, thanks so much for that. Thanks for going through the quarter. And why don't we now invite Lisa to open the call up to the questions as she does that. I'll just say we feel very good about the building momentum we're seeing in the business and are looking forward to a good back half and a good fiscal 2025. So Lisa, let's take some questions..

Thank you. [Operator Instructions] Our first question will be coming from Dave Storms with Stonegate. Your line is open..

Good evening. Appreciate you taking my question..

You bet. Hi, Dave..

How is it going? Just want to kind of start around the slower-than-expected rebound. It sounds like that's just a timing issue.

Can we kind of expect that to hopefully restart back in the early parts of 2025? Or is there anything that you would expect to maybe bring that back into play for the second half of this year?.

Yeah.

Are you referring specifically to the services rebound?.

Yes. Yes..

Yeah. Okay, great. Yeah, we're -- so yes, the rebound, the leading indicators and the services booking pace suggests that the rebound has begun, and it is slower -- a quarter or so slower than we thought it was going to be. So we're beginning to see the rebound.

We expect that rebound will accelerate through the back half of the year, and we'll certainly be -- so we'll see a part of what's driving growth in the back half of this year overall versus being flattish in the first half of the year, and then we expect that to continue.

And as I mentioned, what that looks like is having reached a high level -- high watermark of 60%, at least a high watermark for now, 60% service attach rate, it's regressing back to what was already a high rate of about 55%. And we expect it will stay there, and we'll try to improve that over time..

Understood. Very helpful. Thank you. And then just, it sounds like you had a really strong quarter for logo retention, any thoughts around that going forward? It sounds like there might be less bell timing going on among clients.

Is that expected to be the trend going forward?.

Yeah. Great question. So we were pleased with the logo retention in the quarter. As I mentioned, it was one of our best quarters we've had in logo retention. And I think it's due to -- there's a couple of things driving that.

One is, and as I mentioned a few minutes ago, I don't know that I understood the degree as we were in the fall this year, executing the degree to which clients were pausing, thinking about their budgets, maybe creating new budgets, pulling back a little bit on their budget at the same time that interest rates were spiking and we're kind of moving out of the zero interest rate world.

And I think that has had -- it created some headwinds for us in the first part of this year. I think now clients have their budgets. They know what those budgets look like.

They're -- things are -- there's still some uncertainty out there, but more certain, I think, now in the economy that I think will shift from a headwind to not a tailwind at least less wind. And then I think the second thing that was driving that logo retention rate is that we've learned a lot over eight years that we've been a subscription company.

We converted the subscription eight years ago, we've never been a subscription business before.

I didn't even have a post-sale motion, and so over time, we've created and we've talked the last year or so about these field-facing teams of implementation strategists that come alongside client partners, and we continue to refine those processes as we mature and understand what does it look like to support our clients post sale.

I think we're also getting better execution. Our processes are getting better, and we're getting better execution on those processes as well.

And as I mentioned, this project penetration, the real goal of project penetration is actually to increase the retention of clients, both logo and revenue, and we're starting to see the fruits of that as well, which is why we're excited to begin to extend that more broadly in the company..

That's very helpful. Thank you for taking my questions..

Thanks, Dave..

Thank you. One moment for the next question. And our next question will be coming from Jeff Martin of ROTH. Your line is open..

Thanks. Paul, can you hear me, okay? I'm in the car..

Yeah. Hi, Jeff..

Okay. Great. So Paul, could you touch on the client partner changes? I mean, you ended Q1 at about 300 client partners. The goal is to add 40 net new this year, it looks like we took a step back down to 265.

Maybe touch on, what the plan is for this year? And did I hear correctly, you're taking a pause at hiring client partners until next year?.

Yeah, you heard that correctly. So what's underlying that is -- so as we've been working on, as I mentioned, Project Speed To Ramp, part of that, as we built this more than 400 person, 430-or-so person, field-facing organization. We're focused right now on understanding exactly how to configure those groups.

And we feel like we have a really good configuration map. Historically, we've gone to market without a lot of segmentation. We haven't segmented historically around client-size or around vertical. And as we -- around verticals, as we look into the future, we see an opportunity to increase the level of segmentation of that field force.

And so while we're -- we want to put the right amount of resources into business development to help generate more opportunities for our salespeople. Also have that sales force configured, against the biggest opportunities on the map. And I think there's a natural segmentation that occurs around large enterprise organizations versus mid-market.

And then the team that supports post-sales implementation strategies, we're getting more strategic and more refined in how we want to deploy. And so in that set of discussions and strategic planning, we recognized there were about 24 -- well, there were 24, that didn't fit within the structure we're going to build towards.

And so we're pausing just briefly here to then come out and accelerate, with more hiring into an even more strategic segmented approach, both, pre-sales -- sales and post-sales, but also in how we divide up the market. I'm actually quite encouraged about this. I think this is the next big step for us as a sales organization.

And I think it will unlock a tremendous amount of growth, because we see so much potential in the existing accounts we already have. And then, of course, there's a significant amount of white space out in the market that we're not even touching today.

And so this segmentation of these two Project Penetration -- Project Penetration and Project Speed To Ramp are really about getting at that in a much bigger way than we even have in the past. So it will be based on the hiring in fiscal 2025, Jeff. And we'll….

Okay..

…I'm sure we'll add a few, I'm sure, in the back half of this year as we have -- as this -- as we move forward, but the bulk of the hiring will be in fiscal 2025..

Yeah. That's a natural segue. And my other question here is, the executable opportunities that you went into quite a bit of detail on.

Where are you in terms of implementation of those? When do you expect to see traction in those efforts? And when should we expect a material reacceleration of revenue growth?.

Great question, couple of thoughts. One, we're in the middle of implementing that wide scale now, and that will be the effort over the back half of this year. So we'll be fully configured September 1 as we start the New Year or at least moving people into that configuration between now and then.

Second, as far as the acceleration of revenue growth, we're already pleased -- I mean the reason we have the confidence to step into those projects is we've been executing against those in kind of a test way, over the past couple of quarters, and we're encouraged by the results. So we're already seeing the results show up.

That gives us the confidence that a step across and really do this at a bigger scale. As far as its ability to accelerate revenue growth, as I mentioned, there's two things that are happening that are accelerating revenue growth.

Even if we didn't make the step across and fully execute project penetration and project speed to ramp, we're seeing natural acceleration in revenue growth, as I mentioned, because our subscription business is growing faster right now than the overall company is growing, and that's going to pull with it increases in reported growth as we go into next year.

That fact plus, what I think is going to be impact in -- as we go into next fiscal year and throughout next fiscal year of these two key growth initiatives, I think we'll all point towards more accelerated growth in the coming quarters year quarters and years..

Great. Thanks for taking my question..

Thanks, Jeff..

Thank you. One moment for the next question. Our next question will be coming from Samir Patel of Askeladden Capital. Your line is open..

Hey, guys. Congratulations for executing so all on a tough environment. I'd like to start with a comment. So I followed you guys for almost a decade. I've been a continuous shareholder for eight years now. The biggest pushback I always got from other investors is, oh, FD is cyclical. They'll be killed in a recession.

So when I look at consulting companies, professional services companies today, many of them are actually seeing double-digit organic declines over the past few quarters.

So the fact that your subscription invoices are growing in this type of environment, you're throwing off prodigious free cash flow, I think that really demonstrates the power of your business model and suggest that your stock should be trading at a much higher multiple. And I think if the market is too shortsighted to see it.

Should you guys should take advantage of it and consider doing a tender? So that's my comment. I don't know if you have any observations there before I get to my question..

Thanks for your comment. We -- of course, I would -- I want to grow faster, and we will. But I will say, as we mentioned, we are pleased with the fact that we are growing in a tougher environment. And so I want to thank all the people on our teams around the world for the great work they're doing and our ambition is to do even more..

Great. So, my question is sort of related. You talked a couple of quarters ago about the potential for M&A.

And it seems like in this environment, you might have competitors that are over reliant on a single type of content, single modality that don't have your subscription model that might be facing a tough time, but have great customers or content set that might be out of it to yours.

Do you think you're any closer to being able to close on one or two of those types of opportunities?.

Yeah, it's a great question, Samir. So maybe just let me -- we were spending a fair bit of time thinking about how to utilize our excess cash and what role M&A might play in our utilization of that cash.

I'll tell you what's -- so the short answer to your question is I think that there will -- that it's likely that M&A will play a bigger role in the future than it has in the past. And I think we have some opportunities there.

We've been a little bit careful over the past year or year and half or so because many of the companies in our space fared far worse than we did in the pandemic and coming out of the pandemic for a couple of years there, started to put up pretty significant growth numbers on a percentage basis, but that growth was just getting them back to their pre-pandemic highs, not above.

At the same time, we were also hit a little bit in the first couple of quarters, but our business did quite well during the pandemic and then has grown substantially since our -- over our pre-pandemic highs.

And recognizing that companies you might want to look at acquiring out there are -- they'd like to sell based on the growth rate they've achieved getting back to where they were, we wouldn't want to probably pay based on that.

And so we've been just kind of watching and waiting and we're starting to see what you alluded to in your opening comment there that those growth rates are kind of coming back down to where we thought they might.

And so there's -- I think there are opportunities as we talk as a team here, and we're investigating those and looking at those as you would imagine..

Okay. And then on the other uses of cash, I mean any reason it slowed down in the quarter, I mean, kind of the outlook for -- I'm sorry, when I say use the cash, I mean on repurchases and the outlook for that. I think your stock is down double-digits after hours, you have $40 million in cash.

You implied you're going to have record free cash flow this year, which suggests another $20 million free cash flow generation in the back half plus the revolver, I mean, that’s a lot of liquidity.

So any thoughts on further share repurchases? And like I said, maybe considering a tender or something more aggressive to retire a much larger percentage of the market cap?.

Thanks.

Steve, do you want to take that?.

Yes, Samir, nice to be talking with you. So yes, we see the situation the same as you do. Look at this the same as you do. As you know, we generally don't commit to what we're going to do, but we do see it the same as you know..

Okay. Thanks, guys. Appreciate it..

Thanks, Samir..

Thank you. One moment for the next question. Our next question will be coming from Nehal Chokshi of Northern -- excuse me, of Northland Capital. Your line is open..

Yes. Thank you....

Hi, Nehal..

Hey, Steve.

What at this point in time more currency rates are, as your expectation on currency headwind on both top-line and EBITDA at this point for the full year?.

The FX impact. So we've had an impact of just about $200,000 on revenue and about $200,000 on adjusted EBITDA so far this year..

And what is your expectation as far as how much were currency rates right now? How much would that impact for the next two quarters here now?.

Based upon the current rates, we'd have about 200 adjusted EBITDA, about $200,000 adjusted EBITDA in Q3 and $200,000, again in Q4 at the current rates compared to last year..

Great. Okay. Thanks.

Paul, what's the time to deliver the value on the three projects that you have discussed?.

The time to deliver value. I think there's actually -- so because we're already -- so take each -- each of the three, starting with the third one I talked about project impact. We're -- we've been in the middle and are in the middle of that. We have a multiyear road map.

Our product and technology team has been doing a fantastic job delivering against that. So we're right in the middle, and that will be something we continue to do, and we're seeing the impact of that every day. The other two projects, project penetration projects, speed to ramp.

Again, as I mentioned, we've already been testing those were ready to move to more wide scale. We'll do that over the coming couple of quarters. And I think we will see the impact in -- later this year and into next year on both of those projects.

As far as getting them completed and kind of stood up and the configuration changes and all that, that will happen in the coming couple of quarters..

Okay.

And I think you did get some penetration numbers of both the Impact Pod penetration rate as well as the penetration of the improved selling structure here?.

Yes. Let me just go back and -- so the penetration rates for the Impact Pod, first of all, there's service attach rate, you didn't ask about that, but the service attach rate is 67% versus 50% for the others. Their average revenue per client is $132,000 versus $63,000, and logo retention is about 500 basis points higher.

And as it relates to penetration, the average subscription size is $80,000 versus $45,000 for everybody else. So they're penetrating their clients further is what we're seeing right now..

I'm sorry. I meant like what percent of your subscription revenue is being addressed with the Impact Pod versus the Standard Pod? That's what I meant..

What percent of the overall revenue? I would -- hang on. About 20% of the overall subscription, subscription services revenue is represented by the Impact pod -- the test of the Impact Pods..

Great.

And then as far as the improved selling structure for ramping client partners, what percent of client partners already have this improved selling structure?.

Yes, that's the other kind of end of the continuum. I'd say it's about the same. It's a different set of client partners, but I'd say it's maybe in that group, it's maybe, let's see, probably 10% or so today, 10% or 15% are benefiting from that, which will roll out to the rest in the coming quarter or two..

Okay.

And I'm sorry, functionally, what is the difference between an Impact Pod and Traditional Pod? I get that you get all these different results, great results, but functionally, what is the difference between an Impact Pod and a Traditional Pod?.

Yes. So the difference is the amount of support provided to that client partner, the infrastructure around them to help them better engage those clients post sale to uncover and lead to expanded subscription and services sales. So, it's more intensity of implementation strategist support and more intensity of consultant support per client partner..

Okay. Great.

And can you share the consumption characteristic to the new and refreshed pipeline at this point in time?.

Explain that the consumption characteristics of the new and refreshed pipeline.

I'm sorry, product pipeline?.

Let me rephrase it, stated it incorrectly.

What are the consumption characteristics for a new and refreshed content pipeline?.

And by consumption characteristics, do you mean by modality?.

I mean like number of hours that are being consumed of the new content relative to the last time when they were refreshed..

Okay. Okay. I got you. Yes. So as I mentioned -- sorry, sorry for not understand the question fully. As I mentioned, so just take a couple of examples.

So we launched our new Leading at the Speed of Trust and Work -- and a brand-new companion module we've never had before, which is Working at the Speed of Trust as mentioned to scale to individual contributors. And that's now on our Impact Platform as well.

And in the first three months, we've had 10 times more usage of the on-demand module of our Impact Platform than we had in total from the previous version, so significant increase in consumption around that new solution.

And we're just in the early, early days of narrating difficult conversations, but the client interest has been very, very high, and so we expect to see significant increased consumption of that solution as well.

And then overall, what we hoped would happen and expected would happen when we acquired Strive, and we eventually got all of our content on to Strive, and we created the ability for Strive to integrate into clients, LXPs and LMSs and their technology infrastructure.

We're seeing significant increases in usage across the board of our content by clients, which we believe is -- that's part of what's driving higher logo retention, although also, by the way, back to Dave's earlier question is that our solutions are becoming more sticky because utilization is becoming much higher by clients across the organization..

Okay. Great. Thank you very much..

Thanks, Nehal..

Thank you. And that does conclude the Q&A session for today. I would now like to turn the call back over to Paul for closing remarks. Please go ahead..

Lisa, thanks so much for turning back over. Thanks, everyone, for joining us today. I really appreciate your questions, and thanks, as always, for your interest. And we appreciate you and hope you have a great rest of your day and week..

Thank you all for joining today's conference call. This does conclude today's meeting. You can have a great evening. Please disconnect..