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Franklin Covey Co. (FC) Q1 2024 Earnings Call Transcript

Franklin Covey Co. (FC)

Q1 2024 Earnings Conference Call

Company Participants

Derek Hatch - Corporate Controller

Paul Walker - President and Chief Executive Officer

Steve Young - Chief Financial Officer

Sean Covey - President, Education Division

Jennifer Colosimo - President, Enterprise Division

Conference Call Participants

Dave Storms - Stonegate

Nehal Chokshi - Northland Capital Markets

Jeff Martin - ROTH MKM

Alex Paris - Barrington Research

Presentation

Operator

Hello, and thank you for standing by. Welcome to Franklin Covey Q1 2024 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]

I would now like to hand the conference over to Derek Hatch. Sir, you may begin.

Derek Hatch

Thank you. Hello everyone. On behalf of Franklin Covey, I would like to wish everyone a Happy New Year and hope for a peaceful and prosperous 2024.

Before we begin today's call festivities, I would like to remind everybody 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 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 CEO and President.

Paul Walker

Thank you, Derek. Hello, everyone. Happy New Year. Thanks for joining us today. We're glad to have the opportunity to talk to you and we just want to start out by expressing our appreciation to you and we're grateful to be with you today.

Joining me on the call are Steve Young, our CFO; Jennifer Colosimo, President of the Enterprise Division; Sean Covey, President of the Education Division; as well as other members of our executive team.

We're pleased that though the results in the first quarter were essentially even with last year's first quarter, both revenue and adjusted EBITDA came in stronger than forecasted. Even though we also expect the second quarter revenue to again be about even with or slightly above prior year, we expect to achieve a significant growth in revenue in the back half of the year with a high flow-through of this revenue driving growth in adjusted EBITDA to our target of between $54.5 million and $58 million. We expect this growth in the back half to be driven by several key factors including the following:

First, we're entering the back half of the year with a lot more billed and unbilled deferred revenue on our balance sheet than a year before. At the end of the first quarter, the sum of our billed and unbilled deferred revenue was $169.7 million, a level $18 million higher than at the same time last year. A meaningful portion of this will flow through into revenue in the back half of fiscal '24 and into fiscal '25.

Second is that our invoice subscription revenue is increasing. After flattish All Access Pass invoiced subscription growth in the second and third quarters last year, which is I remind you was flattish on top of significant double-digit growth the prior year, our invoiced All Access Pass subscription revenue grew significantly in the fourth quarter and again in Q1 this year. We expect this growth will continue in Q2 and for the remainder of this year and beyond, resulting in additional amounts of deferred revenue going on to the balance sheet and flowing through to revenue in fiscal '24 and beyond.

Third is that we expect our subscription services attach rate to improve. We expect our subscription services attach rate, which declined from 66.5% to 61.5% in the back half of last year and through the first quarter of this year, we expect that it will return to its historic rate of around 66.5% in Q3 and Q4 of this year, driven by a combination of services delivered to new schools that were brought on late in last year's fourth quarter and by the impact of the launch of the 3.0 and 5.0 versions of the Speed of Trust and 7 Habits, two of our historic blockbuster solutions, as well as the launch of our new solution on Difficult Conversations.

I'd like to now provide a little bit of additional context about the first quarter itself. As shown on Slide 4, our total revenue for the quarter came in at a higher-than-expected $68.4 million. Revenue for the latest 12 months grew $8.6 million or 3% to $279.6 million, and our rolling two-year growth is a very strong $42.4 million or 18%.

Adjusted EBITDA also came in at a higher-than-expected $11 million. With this, adjusted EBITDA for the latest 12 months through this year's first quarter grew $3.8 million or 9% to $47.6 million. And again our rolling two-year growth in adjusted EBITDA is $13.4 million or 39%.

Our subscription and subscription services sales in the first quarter reached $54.8 million, a level 4% higher than prior year. Subscription and subscription services sales were $224.7 million for the latest 12 months ended Q1, which is $13.6 million or 6% higher than the same period of the prior year. And again, our rolling two-year growth was an extraordinarily strong $56.7 million or 34%.

And finally, our balance of billed and unbilled deferred revenue increased $18 million or 12% to $169.7 million from the end of the first quarter last year, and grew $48.5 million or 40% over the last two-year period.

Stepping up a level, our results in the first quarter put an exclamation point on three key strengths we've been building for years. As you can see shown on Slide 5, the first of these is the strength of our unique strategic position in the marketplace. We focus on the most important strategic and durable position in our space, specifically that of helping organizations achieve results that require the collective action of their people. And we help organizations achieve these results with a combination of best-in-class content delivered through a broad range of delivery modalities and world-class coaching and facilitation that's very difficult to replicate. The most important thing on the minds and priority list of CEOs is achieving the type of results that require the collective action of their entire organization. It's a point I'd like to come back to in just a minute.

Our second key strength [Technical Difficulty] as you can see shown there on the slide is the power of our revenue-generating engine. As previously noted, despite being up against some extremely strong post-pandemic accelerated comps over the past four quarters, which have impacted our reported year-over-year percentage growth in those quarters, the continued strength of our underlying revenue-generating engine is reflected in the following four key metrics: first, growth in revenue on a rolling two-year basis, again to normalize; second, growth of revenue compared to our pre-pandemic high; third, growth of our strategically important subscription and subscription services revenue; and fourth, growth in our balances of deferred subscription revenue both billed and unbilled.

The third key strength is that of our powerful business model, a model where a combination of increasing revenue per client, high revenue and client retention, high contribution margins, upfront invoicing, low capital intensity, and disciplined reinvestment for growth, all combined to drive significant growth in both adjusted EBITDA and free cash. I'd like to address each of these three key strengths in just a bit more detail and with some data.

The first is shown on Slide 6, the strength of our strategic position. As I just noted, the most important strategic and durable position in our space is that of helping organizations achieve the kind of seismic results, that can result from mobilizing the large-scale collective action of their people. Why is this so strategically powerful? Because almost all of the key strategic and operational results on which CEOs are focused require just that kind of collective action.

As shown on Slide 7, each year the Conference Board, the Advisory Board McKenzie and others conduct surveys to identify the most important things on CEOs' minds and priority lists. Excluding macroeconomic and geopolitical issues, the vast majority of CEOs' top priorities are those areas that require the collective action of the entire organization. I'd like to give you just three examples of this where we're working with clients to support them today.

The first is we're working with the CEO of a large and rapidly growing manufacturing company to develop their top 500 global leaders. They're partnering with us to help them build a high trust and agile culture that can support the rapid growth they've achieved in which they expect to continue to achieve in the future. They recognize that culture is established by the collective behavior of leaders and they've chosen Franklin Covey as their sole leadership development partner. They've done this in large part due to the impact of our powerful principle-based content, its direct relevance to building the type of winning culture they desire, and our ability to scale our solutions across their global population.

The second example is where we're partnering with the Chief Human Resource Officer of a large 100,000-person firm to deploy multiple Franklin Covey solutions across the entire organization. They've chosen us as their partner because of the powerful way in which our content shifts mindsets and behaviors versus simply teaching people to check off to-dos from a checklist. They want us to develop common -- they want to develop with our help common mindset, skillsets, and a consistent language across the entire organization or what we refer to as "collective action" and we're their partner in doing this.

And the third example is where we're partnering with a large transportation company that has a very clear strategy for winning in their chosen market. However, like so many organizations, they've had a difficult time translating that strategy from the boardroom to the actions of those in the front line of the organization. This client is engaging us to equip their leaders with the skills and tools to create a culture of execution where people at the front line are engaged to execute the critical priorities that will translate strategy into results.

As shown on Slide 8, being our clients' partner of choice for addressing opportunities and challenges like those just noted, translates into a number of powerful outcomes for Franklin Covey, including consistently winning new logos or new clients, achieving a strong attachment of subscription services to help clients achieve performance breakthroughs, retaining substantially all of our subscription revenue, increasing our average contract size, increasing the percentage of logos and revenue under multiyear contracts, and achieving a high and growing lifetime customer value.

For the latest 12-month period through this year's first quarter, we're really pleased to have continued to achieve strong results on each of these key outcomes. In the sales of All Access Pass to new logos in the Enterprise Division and Leader in Me subscriptions to new schools in the Education Division remained strong in the first quarter and for the latest 12-month period. Our revenue retention levels remained very high in the first quarter and for the latest 12 months. In the Enterprise Division in North America in the first quarter, we achieved All Access Pass subscription revenue retention levels greater than 90%. And in the Education Division, we continue to achieve high levels of school retention.

An increasing percentage of clients are also entering into multiyear contracts. As you can see shown on Slide 9, the percentage of clients -- All Access Pass clients entering into multiyear contracts increased even further from its already high levels. In the first quarter, 54% of All Access Pass clients entered into multiyear contracts of at least two years, up from 48% at the end of Q1 fiscal '23. Importantly, an even higher 60% of All Access Pass subscription revenue is now under multiyear contracts of at least two years, up from 55% at the end of the first quarter last year.

Our clients commit to these multiyear agreements because of the importance and the ongoing nature of the opportunities and challenges they face that require the collective action of their people, and because of the value they're receiving from a long-term partnership with Franklin Covey. These long-term contracts provide a tremendous foundation for both the predictability and acceleration of future revenue growth.

As shown on Slide 10, the second key strength I'd like to focus on today is the power of our revenue-generating engine. As noted, the strength of our underlying revenue-generating engine is reflected in four key metrics, which we've summarized on Slide 11.

First, the tremendous growth in revenue achieved over the past two years. This two-year look helps to normalize for periods which benefited from comping to pandemic-impacted quarters. As shown over the past two years, our latest 12 months revenue has grown a very strong $42.4 million or 18%.

Second is the significant growth of our revenue compared to our pre-pandemic high. Our latest 12-months revenue through this year's first quarter increased to $279.6 million, which represents growth of $54.2 million or 24% compared to our pre-pandemic high in fiscal 2019.

Third is the even more rapid growth of our strategically important subscription and subscription services revenue. For the latest 12-month period through this year's first quarter, our subscription and subscription services revenue grew $13.6 million or 6%, and importantly, our two-year growth was $56.7 million or 34%. And subscription and subscription services growth remarkably is more than $100 million or 81% compared to our pre-pandemic high.

And fourth is the tremendous growth in our balances of deferred subscription revenue both billed and unbilled. In this year's first quarter, our balance of deferred subscription revenue billed and unbilled increased to $169.7 million, reflecting year-over-year growth of $18 million or 12%. Our two-year growth of $48.5 million was 40% and our balance of deferred subscription revenue billed and unbilled has grown by $81.5 million or 92.5% compared to our pre-pandemic level. This dramatic growth in deferred subscription revenue on both a dollar and percentage basis establishes a very strong foundation for continued strong revenue growth in the coming quarters and years.

And finally, the third point, you can see as shown on Slide 12, the third key strength is the strength of our business model. As you know, our business model results in a significant portion of incremental revenue flowing through to increases in adjusted EBITDA and free cash flow. I'd like to briefly review the key elements of our business model to drive this.

As shown on Slide 13, these factors include increasing revenue per client, high revenue retention, high contribution margins, upfront invoicing, low capital intensity, and disciplined reinvestment for growth. I'll briefly touch on each of these drivers to show how their interplay drives high and increasing adjusted EBITDA and cash flow....

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