Franklin Covey Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
January 4, 2024

There are 8 speakers on the call.

Operator

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

Speaker 1

Thank you. Hello, everyone. On behalf of Franklin Covey, I would like to wish everyone a Happy New Year and hopes 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 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 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 And there can be no assurance the company's actual future performance will meet management's expectations.

Speaker 1

These forward looking statements are based on management's current 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 With that out of the way, we'd like to turn the time over to Mr. Paul Walker, our CEO and President.

Speaker 2

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.

Speaker 2

Joining me on the call are Steve Young, our CFO Jennifer Colasimo, 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 Q1 were essentially even with last year's Q1, both revenue and adjusted EBITDA came in stronger than forecasted. Even though we also expect the 2nd 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 $54,500,000 $58,000,000 We expect this growth in the back half to be driven by several key factors, Including the following. First, that 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 Q1, the sum of our billed and unbilled deferred revenue was $169,700,000 a level $18,000,000 higher than at the same time last year.

Speaker 2

A meaningful portion of this will flow through into revenue in the back half fiscal 2024 and into fiscal 2025. 2nd is that our invoice subscription revenue is increasing. After flattish All Access Pass invoice subscription growth in the 2nd and third quarters last year, which as I might 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 Q4 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 2024 and beyond.

Speaker 2

3rd is that we expect our subscription services attach rate to improve. We expect our subscription services attach rate, which declined from it From 66.5 percent to 61.5 percent in the back half of last year and through the Q1 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 Q4 and by the impact of the launch of the 3.05.0 versions of the Speed of Trust and 7 Habits, 2 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 Q1 itself. As shown on slide 4, our total revenue for the quarter came in at a higher than expected $68,400,000 Revenue for the latest 12 months grew $8,600,000 or 3 percent to $279,600,000 and our rolling 2 year growth is a very Strong $42,400,000 or 18%. Adjusted EBITDA also came in at a higher than expected $11,000,000 With this, adjusted EBITDA for the latest 12 months through this year's Q1 grew $3,800,000 or 9% to $47,600,000 And again our rolling 2 year growth in adjusted EBITDA is $13,400,000 or 39%.

Speaker 2

Our subscription and subscription services sales in the Q1 reached 54,800,000 a level 4% higher than prior year. Subscription and subscription services sales were $224,700,000 for the latest 12 months ended Q1, which is $13,600,000 or 6% higher than the same period of the prior year. And again, our rolling 2 year growth was an extraordinarily strong $56,700,000 or 34%. And finally, our balance of billed and unbilled deferred revenue increased $18,000,000 or 12% to $169,700,000 from the end of the Q1 last year and grew $48,500,000 or 40% over the last 2 year period. Stepping up a level, our results in the Q1 put an exclamation point on 3 key strengths we've been building for years.

Speaker 2

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 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.

Speaker 2

Our second key strength, 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 4 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. 1st, growth in revenue on a rolling 2 year basis, again to normalize second, growth of revenue compared to our pre pandemic high 3rd, growth of our strategically important subscription and subscription services revenue and 4th, growth in our balances of deferred subscription revenue Both billed and unbilled. The 3rd 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.

Speaker 2

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, McKinsey and others conduct surveys to identify the most important things on CEOs' minds and priority lists.

Speaker 2

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.

Speaker 2

They've done this in large part due to the impact of our powerful principal 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. A second example is where we're partnering with the Chief Human Resource 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 do's from a checklist. They want us to develop common they want to develop with our health common mindsets, Skill sets 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.

Speaker 2

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 client's 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 for new clients, achieving the 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 Q1, we're really pleased to have continued to achieve strong results on each of these key outcomes. In the sales of All Access Pass and new logos in the Enterprise division and Leader in Me subscriptions to new schools in the Education division remained strong in the Q1 for the latest 12 month period.

Speaker 2

Our revenue retention levels remained very high in the Q1 and for the latest 12 months. In the Enterprise division in North America in the Q1, 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.

Speaker 2

In the Q1, 54% of All Access Pass clients entered into multiyear contracts of at least 2 years, Up from 48% at the end of Q1 fiscal 2023. Importantly, an even higher 60% of All Access Pass This past subscription revenue is now under multiyear contracts of at least 2 years, up from 55% at the end of the Q1 last year. Our clients commit to these multi year 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.

Speaker 3

As shown

Speaker 2

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 4 key metrics, which we've summarized on slide 11. First, the tremendous growth in revenue achieved over the past 2 years. This 2 year look helps to normalize for periods which benefited from comping to pandemic impacted quarters. As shown over the past 2 years, our Latest 12 months revenue has grown a very strong $42,400,000 or 18%.

Speaker 2

2nd Is the significant growth of our revenue compared to our pre pandemic high. Our latest 12 months revenue through this year's Q1 increased $279,600,000 which represents growth of $54,200,000 or 24% compared to our pre pandemic high in fiscal 2019. 3rd 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 Q1, our subscription and subscription services revenue grew $13,600,000 or 6 percent. And importantly, our 2 year growth was $56,700,000 or 34 percent.

Speaker 2

And subscription and subscription services growth remarkably is more than $100,000,000 or 81% compared to our pre pandemic high. And 4th is the tremendous Growth in our balances of deferred subscription revenue both billed and unbilled. In this year's Q1, our balance of deferred subscription revenue billed and unbilled increased to 100 $9,700,000 reflecting year over year growth of $18,000,000 or 12%. Our 2 year growth of $48,500,000 was 40% and our balance of deferred subscription revenue build and unbilled has grown by 81,500,000 or 92.5 percent 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 years.

Speaker 2

And finally, the 3rd point, you can see as shown on slide 12, the 3rd 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 the increases in adjusted EBITDA and free cash flow. I'd like to briefly review the key elements of our business model that 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.

Speaker 2

First, as it relates to increasing revenue per client. As shown on slide 14, our revenue per All Access Pass client has grown from $54,000 in fiscal 2018 to more than $83,000 in fiscal 2023, compounded growth of 9%. This strong increase in average revenue per client results from a combination Of continuing to increase the percent of total populations through which we serve inside a typical client And the pricing power we gain as a result of the impact our solutions provide to our clients. The second point is our high revenue retention and client In the Enterprise division in North America, in Q1 All Access Pass subscription revenues I mentioned exceeded 90%. And the Education division as we reported at the end of Q4 fiscal 2023 Leader in Me retention remains at a remarkably high level of greater than 85%.

Speaker 2

The 3rd key element of our business model is our increasing adjusted EBITDA margins. As shown in slide Team, the combination of strong gross margins and declining operating SG and A as a percent of sales has resulted in steadily increasing adjusted EBITDA margins, reaching 17% for the latest 12 month period. 4th is our upfront invoicing. With upfront invoicing, working capital is actually a source of cash for us. Subscription contracts are billed at the start of the contract term And cash is collected long before the subscription contracts full revenue is realized.

Speaker 2

Multi year contracts are generally billed 1 year in advance and are non cancelable. And the timing of collections and cash outflows is a durable aspect of our business model. 5th Is our low capital intensity. Historically, as you know, our CapEx spending is a small percentage of our overall revenue and is primarily related to technology infrastructure And a small amount for real estate improvements. And finally, the 6th key element of our business model is disciplined reinvestment for growth.

Speaker 2

Our largest growth investments are in our sales force in order to capture our vast underpenetrated addressable market, All of which by the way is fully funded through our P and L and investments in content and innovations, which is amortized and flows through the P and L in the form of cost of goods sold. We managed sales costs to grow about in line with revenue over time offsetting wage inflation with pricing. As a result of this business model, we've generated significant growth in adjusted EBITDA and free cash flow. In fact, as shown on slide 16, in the 8 years since the beginning of our conversion to subscription in fiscal 2016 through this year's Q1, We've generated cumulative adjusted EBITDA of $210,600,000 and cumulative free cash flow of $204,300,000 As also shown on slide 16, we've invested approximately $32,700,000 of this free cash flow for tuck in acquisitions, Such as Jhana and Strive, which have broadened our ability to deliver our solutions flexibly and at scale and have returned a substantial amount of the remaining free cash to shareholders, specifically during this 8 year period, we've returned more than $143,500,000 or just over 70% of the free cash flow we generated.

Speaker 2

We've returned this to shareholders in the form through the repurchase of more than 5,300,000 shares of common stock, including more than $51,000,000 over the past 12 months $72,000,000 over the past 24 months. Importantly, this is on top of the $102,900,000 we utilized to purchase shares prior to fiscal 2016. In total, since 2002, we've invested more than $246,000,000 in purchasing shares and reduced the company's net share count shares is more than the number of shares we currently have outstanding today. These shares have been purchased at a weighted average price per share of $17.43 We're really pleased that so many of you have been purchasing shares right along with the company and have achieved similarly attractive returns. As we noted in last quarter's report, we expect to achieve continued growth in adjusted EBITDA and free cash flow in the years to come.

Speaker 2

In fact, in the coming years alone, we expect to generate in the neighborhood of approximately an additional $150,000,000 of free cash flow. After making our normal ongoing growth investments in the business and we would expect to be able to return substantial portions of this cash flow in continued stock repurchases. Why do we have such high conviction in repurchasing our stock? Something we know is shared by many of you as well. Two simple reasons.

Speaker 2

1st, because we have high confidence in the market opportunity before us and our ability to execute it. And second, because we believe repurchasing our stock even at significantly higher than current prices has a very compelling investment thesis. That being first that we believe that we are and would be purchasing shares at a significant discount relative to the net present value of our expected cash flows. As just noted, we believe that both our recent purchases and our purchases over the years reflect this. And because we believe That a much smaller than typical percent of the net present value of our company's cash flows is attributable to reliance on the residual exit value of these Cash flows.

Speaker 2

Because 1, purchasing shares at or near our current market cap provides high free cash flow yields And we expect free cash flow to grow substantially in the coming years. The combination of these factors gives us confidence that investing excess Cash flow in the business and in share repurchases can generate significant additional value for shareholders in the coming years. In conclusion, I would just say that we expect the combined power of these three key strengths: the strength of our strategic position, The strength of our revenue generating engine and the strength of our business model to continue to generate strong and accelerating growth in revenue, Adjusted EBITDA and free cash flow. And specifically, as noted previously, we believe that the combination of having a lot more billed and unbilled revenue on our balance than ever before, achieving accelerated growth in our subscription revenue and returning our subscription services attach rate to its Historic average results in adjusted EBITDA increasing to between $54,500,000 $58,000,000 In fiscal 2024. I'd now like to turn some time over to Steve to discuss our results for the Q1 and the latest 12 months in a bit more detail and Steve will I'll review our guidance.

Speaker 2

Steve?

Speaker 4

Thank you, Paul. Good afternoon, everyone. It's a pleasure to be with you today. I would like to briefly provide more detail on the factors underlying this performance focusing on the results in 3 Key areas of the company, specifically our enterprise business in North America, the enterprise business internationally In both our direct offices and licensees and our education business, which is also primarily in North America. As shown on slide 17, results in our Enterprise business in North America Continued to be strong in the Q1 and the latest 12 month periods.

Speaker 4

Reported sales in North America, which account for 43% of total enterprise division sales, We're $38,400,000 in the Q1, a level almost equal to the prior year and this on top of the strong 16% growth achieved in the Q1 of FY2023. For the latest 12 months, Revenue grew 2% on top of 17% growth in the prior year and we are Pleased with the result we have achieved in the enterprise business in North America over the past 2 years. We expect the beginning In Q3 of FY 2024, our year over year comparisons will normalize. Subscription and subscription services sales in North America were even with prior year in the quarter On top of the 20% growth achieved in last year's Q1. For the latest 12 month, Growth was 4% on top of 24% in the prior year and we're pleased with these growth rates.

Speaker 4

Our balance of deferred revenue billed and unbilled in North America continued to be strong growing 7% in the quarter On top of 25% in last year's Q1 establishing as Paul said a strong Foundation for next year's growth. And the percentage of North America's All Access past clients that were for multi year periods increased to 54% from 48% in the Q1 last year and the percentage of invoice sales Represented by multiyear contracts increased to 60% from 55% in the Q1 last year. As shown in slide 18, revenue from our international operations, which account for approximately 17% of our total enterprise division revenue decreased by $600,000 or 7% In the quarter, primarily due to declining legacy, which is non All Access Pass related sales, Sales in these offices have grown 4% or $1,300,000 in the latest 12 months. Also on slide 18, our international licensee partner sales increased 3% in the quarter On top of 9% in last year's Q1 and for the latest 12 months sales were up 8% on top of the 15% in the prior year. Finally, as shown on slide 19, the results in our Education business, which accounts for approximately 25% of the total company sales grew 3% for the quarter On top of the 23% growth achieved in the 4th quarter Q1 last year, Sales grew 9% for the latest 12 months on top of 21% latest 12 month growth in the previous year.

Speaker 4

Education subscription and subscription services sales were flat in the quarter, But strong in the latest 12 months, growing $4,600,000 or 8 percent on top of $11,800,000 or 25% last year. Education's balance of deferred subscription revenue billed and unbilled increased 29% in the quarter. Now just a little bit more about education. As you'll the Education Division. As you'll recall, not many years ago, the Education Division We're small and had a traditional service and materials business model.

Speaker 4

We are pleased that as shown on slide 20, Since the launch of the Leader in May subscription and education division, revenue has grown substantially from just over 3,000,000 in its 1st year to more than $70,000,000 over the latest 12 months. And the business model has transformed To closely mirror that of enterprise, with approximately 90% of Education's revenue now represented by subscription and subscription services revenue, a level that is very similar to that of Enterprise division. We also expect that after years of accelerated investment, the Education Division's Adjusted EBITDA margins will also expand in FY 2024 and beyond. Now a little bit about cash flows and more about cash flows and balance sheet. As shown on slide 21, Our cash flows from operating activities was $17,400,000 at the end of the Q1 compared to $3,000,000 in Q1 last year.

Speaker 4

Our free cash flow in the Q1 increased to $13,700,000 compared with $800,000 For the prior year, reflecting the changes in the elements of working capital were very favorable in Q1 this year Compared to Q1 last year, particularly referring to accounts receivable, accounts payable, accrued liabilities and deferred revenue. In Q1, we invested $16,300,000 to purchase 409,000 shares. Over the past 4 quarters, as Paul said, we've invested $51,000,000 to purchase shares. We ended the quarter still with $96,500,000 of total liquidity including $34,000,000 in cash And $62,500,000 available under the revolving credit facility even after investing this $16,300,000 in stock purchases this quarter. Compared to Q1 of FY 'twenty three, The sum of billed and unbilled deferred subscription revenue increased 12% to almost 170,000,000 Giving us increased visibility into future sales results.

Speaker 4

The deferred subscription revenue increased 14% to $87,000,000 while the unbilled deferred revenue increased 10% to 82,500,000 Adjusted EBITDA in the quarter as we said was a strong $11,000,000 Now guidance. As you know Franklin Covey's financial strategy is to consistently grow revenue and at the same time Experience a high flow through of that increased revenue to increase adjusted EBITDA and free cash flow. Consistent with that strategy, we affirm our previously issued guidance for FY 2024 that adjusted EBITDA We'll increase by approximately 17% at the midpoint of the range to between $54,500,000 $58,000,000 In constant currency compared to the $48,100,000 achieved in FY 2023. This guidance reflects our expectation of achieving low double digit net sales growth in the back half of the year, Stable or improving world economic conditions, strengthening results in our international operations, Particularly strong financial results in Q4 in our Education division and increased Subscription Add on Services. This FY2024 guidance reflects our expectation that we will Achieved particularly strong results in Q3 and Q4 of FY 'twenty four.

Speaker 4

Our 2nd quarter guidance Is that adjusted EBITDA will be between $6,200,000 $7,200,000 Strong, but lower than last year's very strong adjusted EBITDA of $8,200,000 Particularly reflecting a lower services attach rate during the second quarter that is expected to increase during the 3rd and 4th quarters. In as much as we expect to achieve strong revenue and gross margin, The expectation that the second quarter's adjusted EBITDA performance will be slightly lower than last year Is due primarily to our investment in growth this year and benefits in certain accruals last year, Like accounts receivable provision? We expect our 2nd quarter revenue To be at least even with or to increase slightly over the prior year and could be our highest second quarter revenue ever achieved. As discussed, this guidance obviously reflects the fact that we expect net sales growth rate to accelerate significantly In Q3 and Q4 as I mentioned. While many economic and other factors could impact these expectations, We're excited about our future financial position.

Speaker 4

So back to Paul.

Speaker 2

Thank you, Steve. Thanks for going through that. And again, we feel quite good about the Q1 and about what we see out ahead. And with that, I would I'd like to open the ask the operator to open up the line for your questions.

Operator

Thank you. Please stand by while we compile the Q and A roster. Our first question comes from the line of Dave Stoms with Stonegate. Your line is open.

Speaker 5

Good afternoon. Happy New Year everyone.

Speaker 2

Yeah, you too. Thanks Dave. Appreciate

Speaker 5

it. So, it looked like calendar year 2023 turned out to be the year without a recession. But just curious how you see clients reacting after A lot of aggressive belt tightening in the majority of 2023. And if you see any additional bump in demand during calendar 24?

Speaker 2

Yes. It's a great question. I would say it did turn out to be the year without a Good afternoon. It's interesting times for sure. I would say that what we're seeing right now has been pretty consistent for the last number of months and that Our clients they their budget they have their budgets.

Speaker 2

They know their budgets. They're moving forward. They've got their plans. And we feel relatively good about the environment that we're selling into right now. I think there's a feels like there's More certainty in the fact that clients do have budgets and are and do have plans they're moving forward with, which you recall We reported in Q2 last year, there was some of our clients that were a little bit more uncertain at that time and that seems to have subsided for the most part.

Speaker 2

And I think behind all of that though is the driver that in all times, particularly times that are Maybe uncertain or where there's where growth is more difficult for companies, they're looking for solutions like those that we provide, Right now people are very focused on do I have the leadership capability inside my organization to execute what it is we're trying to execute? Is our culture such that we can attract and retain in a tighter labor market the kind of talent we're going to need? Do we know how to engage people? And can we as our organization adaptable and change ready and can it thrive? And so those types of challenges that are on the minds of CEOs And leaders inside our clients.

Speaker 2

And so we're fortunate to have the kinds of solutions to those problems. I think that gives us Confidence as we move forward here.

Speaker 5

Understood. Very helpful. And then just one more and this might be more for Sean. If I remember correctly, there was some funding that need to be renewed at the end of 2023 for the education business. Just wondering if we could get a quick status update On how that all shook out?

Speaker 5

Yes. Can you I'm not exactly sure what funding you're referring to? I believe it was the ESSER funding that you mentioned. ESSER funding. Sure.

Speaker 5

Okay. Sure. Yes. Well, the ESSER funding, which is the emergency relief funding the government gave out during COVID, that is that's been out since COVID Began and it's been out and it goes until the end of this year. And about 2 thirds of it has been spent.

Speaker 5

About a third is remaining. So still a lot of spending going on right now, will be for this year. We have a lot Of our schools and districts that have signed up with multiyear contracts using some of this funding. But as we look to next year and when this funding runs out, we fall back on Title I and Title II grants, which have been there for Decades and will remain. And we also as I shared before, we have a large Foundation is dedicated to starting up leader in the districts and schools.

Speaker 5

That's actually funding and helping schools get started with 1,000,000 of dollars and there will be 100 of schools that will be funded through them. So, yes, so that's where that stands. Is that Any response to your question? Absolutely. No, that's very helpful.

Speaker 5

I appreciate you shedding some light on that. Okay. Thank you very much. Good luck in the next quarter.

Speaker 2

Thanks, Dave.

Speaker 5

Thank you.

Operator

Thank you. Please standby for our next question. Our next question comes from the line of Nehal Chokshi with Northland Capital Markets. Your line is open.

Speaker 5

Yes. Thank you for the question. Hi, Nehal. Hey. And good to hear that you're seeing an inflection, I believe you talked about in what was it, subscription And invoice bookings I think.

Speaker 5

But look the key thing that I want to key on here is free cash flow. So In the quarter, you had a looks like a pretty strong cash from operations. But I just want to make sure that how did that actually perform Relative to the expectations at the prior earnings call that you had for this Q2 here for the November quarter, I'm sorry.

Speaker 4

Steve, do you want to? Yes. So Nehal, as you know, our free cash flow in the Q1 last year was a lot lower than it was this year. When during the first part, we did talk in prior quarters about the fact that we expected Our free cash flow to rebound significantly and it did. And the areas where Free cash flow improved was not only related to operations, but also in the working capital balances, Accounts receivable, accounts payable, accrued liabilities and deferred revenue had a very positive change In this year's Q1 compared to last year's Q1.

Speaker 4

So we were very pleased with our free cash flow in the Q1 And it was good and it was even more than we expected because all of those working capital elements That impact cash flow at the end of Q1 were positive in our direction and all went Positive quite a bit. So we thought it was a very good free cash flow quarter.

Speaker 5

Okay. Great. That's helpful. And then fiscal 4Q was a poor free cash flow quarter And so I believe that benefited your fiscal 1Q, but do you expect these working capital accounts to continue to So back favorably as we work through the remainder of fiscal year 2024 and therefore help us think about Modeling free cash flow relative to your EBITDA guidance for fiscal year 2024?

Speaker 4

Yes. So we haven't really as you know Given free cash flow guidance, the changes in the elements of working capital that were significant In Q1, we expect those changes to remain, but not necessarily change again at those Same rates each quarter. We do expect to have a significant amount of additional key Free cash flow this year compared to last year based upon the operations of the business, The cash that comes in from our subscription business and these elements of working capital behaving Meaningfully, we expect to have a good Free cash flow for the year. Now, Nehal, I'm sure you remember that last year our second half of the year as we predicted After Q2 was significantly more than Qs 12. And we wouldn't expect that amount of increase in the second half this year compared to the first half, because the first half It's going to be a good free cash flow half, but overall it will be significantly safe in saying without Given an actual forecast, it will be significantly higher than last year.

Speaker 5

Okay. I mean, when I look at fiscal year 2019 and fiscal year 2022, your free cash flow has been above your adjusted EBITDA. I think what you're trying to signal here while fiscal year 2020 3 was a clear deviation from that fiscal year 2019 fiscal year 2022 Sure. And you expect an improvement from that fiscal year 2023 level, but perhaps not quite to the free cash flow to EBITDA ratios that you're achieving In fiscal year 2019 to fiscal year 2022. Is that correct?

Speaker 4

Yes. I think in our future years, we will reestablish A clear relationship between adjusted EBITDA and free cash flow that will generally be maintained. But yes, We would model out free cash flow to be a bit lower than adjusted EBITDA.

Speaker 5

For fiscal year 2024 Yes. Yes. And then how would you think about beyond fiscal year 2024 then?

Speaker 4

Again, I think if you look at the elements of adjusted EBITDA versus the elements of free cash flow, we'll always be well, not always Because of the elements of working capital move around. But the relationship between adjusted EBITDA and key Free cash flow will be the free cash flow will be modeled at a lower level than adjusted EBITDA.

Speaker 5

Is that largely because you expect to be saturating on the percent of customers that are going to be paying upfront?

Speaker 4

No, I think the percentage paying upfront will be maintained. It's more like If you just model it out, if you look at adjusted EBITDA And compared to adjusted compared to the amounts that are included in adjusted EBITDA Compared to free cash flow, you have investment in CapEx and Cat D Spending as an example. So while the expense for CAPD Our CapEx is in depreciation. The expense for Cap D is in cost of sales, It has a delay to it. So an increase in our spending and the amount we're spending in CapEx and CAPD are amounts that are on the income statement are below adjusted EBITDA.

Speaker 4

So those are the kind of things that just create the theoretical or mathematical difference between them.

Speaker 5

Yes, yes, understood. Moving to a different topic and then I'll get I'll let someone else speak. But why are you expecting the services attached to remain depressed in Q2? And then what will drive that improvement in Q3 and Q4?

Speaker 2

Yes. Great question. So as far as what will drive the improvement in Q3 and Q4, as I mentioned earlier, Primarily a couple of factors. 1, the delivery of services of coaching and delivery days to Schools that signed up late in Q4. Last year we talked about that last quarter as those roll through and we're able to get those scheduled and delivered.

Speaker 2

Much of that delivery happens later in the year with the timing of schools and when they're out for the summer etcetera. So that's why it would shift into the back half of the year. And then second, we're bringing we're excited about 3 new solutions that are coming out. We typically see bumps in services delivery Four new solutions and we've launched Leading and Working at the Speed of Trust that launched last month end of November. And then 7 Habits 5.0 is coming out late Q3 and early Q4 and Difficult conversations, which we think is one that our clients will want to utilize a lot of services for that will be coming out here in the next month or so.

Speaker 2

So we think that's what helped shift it in the back half. As related to the first half, why have they been down? Why were they down a little bit towards the end of last year and Q1 this year?

Speaker 5

One is that

Speaker 2

We launched a solution a couple of years ago called Unconscious Bias. It's a great solution. We launched it actually prior to some of the events that unfolded in the U. S. That drove a lot of Big DEI initiatives.

Speaker 2

And we rode a wave for a while there and had a bit of a tailwind because our solution was really good. It was And high demand by our clients and it was a solution that our clients didn't feel comfortable delivering on that topic themselves. They wanted the So Franklin Covey somebody coming in from the outside to facilitate that inside their organization for them. The solution is still great today, but the environment has changed quite substantially in the country around that topic. And that has happened late started to happen kind of late last year for us and into the 1st part of this year.

Speaker 2

And so as we talked about service attach rate going down a portion of that is related to the demand for that particular solution which we still love the solution. It's just not quite as in demand. So that's driven a bit of that and we kind of anniversary against that here coming out of Q2, which is why Q1 and Q2 were depressed a bit. Fortunately, because we look at the rest of our portfolio, we don't really have any other solutions like that. That was something we built.

Speaker 2

We weren't thinking actually we were building it For we thought we just have it as a general offering. We didn't think it would perform like it performed. And like I said, unfortunately, there were some circumstances that happened That caused that solution to be in quite high demand and now that demand has come back down. The rest of our solutions around leadership development and trust strategy execution, we think there's a lot of durability there and great demand for those. So that may hold a little bit about why we're positive About Q3, Q4 and a little bit of an explanation for why Q1, Q2 have been a bit soft and Q4 was a bit soft as well.

Speaker 2

Okay.

Operator

Our next question comes from the line of Jeff Martin with ROTH MKM. Your line is open.

Speaker 3

Thanks. Good evening, everyone. How are you doing, Paul?

Speaker 2

Great. Good to hear from you.

Speaker 3

Yes. Likewise.

Speaker 4

So Paul, I wanted

Speaker 3

to drill down a little bit. There's on slide 28 of your presentation, there's a total contract signed figure $51,600,000 I was curious if you could give a little bit of insight there. Looks like it was 23.6 percent year over year. Looking back over time, it looks like that's the first time it's really declined. So trying to dig in a little bit and understand What's going on there?

Speaker 3

Do you think it's more macro environment? Is it something else? Is it that the DEI related headwind? Maybe just help shed some light there.

Speaker 2

Yes. Thanks. Great question. So not macro Related not related to the DEI thing I just talked about. It's related to a contract.

Speaker 2

So as you know contract address so we signed a contract in the Q1 of last year that was it was fantastic contract. It was a large contract for multiple years. It was a 5 year contract for around $10,000,000 They had a lot of services embedded in it as well. And of course, it's contracted, so we only get to count that one time in the contracted number. And then we'll of course that will flow into our invoiced and our reported revenue annually over the next 5 years.

Speaker 2

So we're thrilled to have gotten the contract. This quarter we didn't sign another $10,000,000 contract. However, the base of contracts that we did sign this quarter was right what we would have expected and very consistent with what a normal quarter a normal Q1 would look like. The base if you don't think of it that way was very stable and just like what we would have always expected. And last year we're just comping against this Large contract that was contracted in the Q1 last year.

Speaker 2

We don't have anything like that that we're up against in Q2, Q3 or Q4 That I can think of. And so I think it is kind of a one time thing that therefore shows up as a decline here.

Speaker 5

Okay.

Speaker 3

And then I was just curious if you characterize kind of the sales environment in terms of lead flow, pipeline, conversion, etcetera?

Speaker 2

Yes. Dave asked a similar question a minute ago. I would say the environment is The environment is pretty good. I mean, it's our clients are Our solutions are in demand. They're looking to address and wanting to address the types of challenges we're focused on.

Speaker 2

We're seeing as we do during these times where our execution business clients CEOs and C level leaders are looking to figure out how to Execute their strategies as effectively as they can. We're seeing good demand there. We've just launched a new sales performance solution this fiscal year and upgraded the one we had. We have. We're Excited about that and the initial interest there.

Speaker 2

We just, as I mentioned, launched the 3.0 version of Leading at the Speed of Trust and we created a companion version of that called Working at the Speed of Trust. We never had a solution a trust solution that was Geared to the non management population and yet trust is one of these topics that you need to run through the entire organization. There's been really good demand for that new solution. And so I would say we're having great attendance at our marketing events. You'll recall that we were all live in person marketing event pre pandemic.

Speaker 2

We Shifted all the way to live online and now we're enjoying kind of a dual marketing event structure where we do live We do online ones and we do in person events. They're very well attended. People love people that are working at home love to get out of their office come to these live in person events. There's been great interest there. So pipeline conversion continues to be strong.

Speaker 2

I think what's Supporting that point is what we've seen here in Q4 and then in Q1 is this growing invoice subscription amounts. I talked to you a few minutes ago that we're seeing that pick back up after Q2 and Q3 were a bit flattish, again on top of big comps the year before. But even Q4 and Q1 Q4 of this last year and Q1 of this year are also on top of pretty good comps as well and we've seen nice growth in that invoice subscription business. So we feel good about the general environment and what we're seeing out there and what we're hearing from our clients.

Speaker 3

Great. And then just one to something that I discussed with your team earlier in December was penetration into lower areas of an organization and How that might affect future subscription services related services attach rates? And maybe you could just give us your view there. It seems like you are seeing demand there from clients at levels Lowering the organization.

Speaker 2

Yes. It's a great question. So we Couple of thoughts I would just say. 1, we do talk about the attach rate as a percentage. I think that percentage It could go up or down a little bit over time.

Speaker 2

And what might cause but the dollars themselves Will continue to go up, right? The percentage could go down if we as we expand to larger and larger populations and they choose to at the frontline Deploy some of our solutions in asynchronous modality ways. At the same time, the percentage could go up As we do a better job of addressing the leader populations, again, we've talked before about our penetration rates inside the average customer. We're still 10%, 15%, 20% of the way penetrated even within the leadership population inside the organizations that we face. And so I think the attach rate will continue to be Strong.

Speaker 2

I think whether the attach rate the percentage goes up or not the dollars will continue to go up because I suspect we'll continue to attach at about the same rate. And I think the rate will be higher in the back half of this year, but that rate will be on an increasing base of subscription. And we are excited about some of these solutions that we're bringing to market that are built to scale even more broadly across organizations. Again, We're the collective action company trying to create common language, introduce common ways of thinking and behaving and leaders need that. They need to drive that down through the organization.

Speaker 2

So as we develop these solutions, we want to make sure that we have solutions that are built to do that. But I think services will continue to be an important And the dollars will continue to increase. I imagine the rates probably stay about where it has been, but That could go up too. I continue to be pleasantly surprised at the way multiyear contracts and that rate continues to increase year after year.

Speaker 3

Great. Appreciate the insights.

Speaker 4

Thanks, Jeff.

Operator

Thank you. Please stand by for our next question. Our next question comes from the line of Alex Paris with Barrington Research. Your line is open.

Speaker 3

Hi, guys. Can you hear me?

Speaker 2

Yes. Hi, Alex. How are you doing?

Speaker 6

Good. I'm doing well. Thanks for asking. Congrats on the strong quarter. I'll be quick relating the call here and I just have a few cats and dogs to follow-up on.

Speaker 6

First of all, in your prepared comments, you didn't speak to China and Japan. That's been a topic of conversation. It's roughly 50% as I recall of international sales. There have been an improving trend in China coming out of COVID for the 3rd time, I suppose, I just wanted for a little update there.

Speaker 2

Yes, great question. So in things continue to improve there. In Japan, Japan had a relatively nice quarter. As you first of all, talking back, as you know, both These areas as they come back out of COVID, we're putting a big focus on making sure that what they're selling is subscription. So these are kind of the last two parts of the world convert their businesses from the legacy model to the subscription model.

Speaker 2

And so and that's going well in both of those countries. As that occurs, of course, That depresses reported revenue slightly as more of that revenue goes out on the balance sheet in the form of subscription. We are intently working on that with them as they return. Japan almost got back last year to its pre pandemic high and we expect It will get back above that this year. So that's been a long time coming.

Speaker 2

China has been up and down when they've been in and out of COVID And that business is coming back as well. I think we feel relatively generally good about what's happening in both those countries.

Speaker 6

Great. Thanks. And then looking back at Q2 of 2023, deep No. Renewals were not quite what you I guess the renewal rate was good. The retention rate Was consistent with prior quarters, but you did not sign a couple of large clients.

Speaker 6

I'm wondering about those large Clients that didn't renew on a timely basis. And I know it's your expectation that they come back at some point. Have they come back yet? And What are you doing to increase the odds that they will come back?

Speaker 2

Good question. Good memory. Yes.

Speaker 5

So we have

Speaker 2

to that point, one of them has, one of them hasn't Come back. And there were a handful. I don't know if I can give you an exact answer on the full handful. We do have we have a category of clients we call win backs. And so when a client doesn't renew On time, they go into a category of win backs.

Speaker 2

We have a special effort that we put in place on those clients. And so We're fortunately, we don't have a lot of those, but when we do we have a process we run because our mantra around here we throw around Clients for life. We don't ever want to lose a client. And so we take the approach that well, if we lost them, it's a temporary thing we're going to get them back. And so we're doing that on those clients from Q2 and we'll continue to do so.

Speaker 6

Great. That's helpful. And then this was probably for Sean. You had a record year in signing new Schools of fiscal 2023. One of the issues in the Q4 that contributed to the revenue shortfall was the inability to deliver the services, the onboarding services Associated with it.

Speaker 6

And then when you miss it in the summer, when do you get it back? Based on earlier questions, it sounds like you don't get it back till next summer. Is that right?

Speaker 5

Yes. Uh-huh. Yes, that's typically what happens because professional development usually takes place most of it takes place During the summer. So a new school comes on and there's usually 2 or 3 days of professional development per school, right? And if it's too late in the year, then they say, well, we'll do coaching throughout the year as we start the school year.

Speaker 5

But the professional development that goes deeper With everyone in the same room at the same time, we'll have to delay till next summer. So that will it hurt us last year, it will help us this year. And the momentum across the board is really good. We've got lots of large new contracts In the pipeline, we've got 3 states talking to us right now about some big bills. So we expect that services will have a nice second half of the year For the reason of last year coming in late as well as a really nice building pipeline for this year.

Speaker 6

Excellent. Thank you. Yes, so not only was there a shortfall because of that last year, there'll be a little bit of a doubling up on some of those onboarding activities this coming summer?

Speaker 5

Yes, I think so. And we're also pushing everyone hard to get in early this year. Nice to get on as many schools as we can. It's always better to bring them on sooner than later.

Speaker 6

For sure. Okay, great. And then Two last ones. I think the target for this year, Paul, is 40 new client partners in other support roles. How many did you hire in the Q1?

Speaker 6

And is it going to be level loaded? Or is it more back half loaded?

Speaker 2

Yes. It will be a bit back half loaded. So we ended the 1st quarter With 300 client partners and then roughly 150 or so of the other client facing roles, so about same $450,000,000 that we reported on at the end of Q4. And we'll we are still committed to adding the number for the year. And those will be Backloaded, but not all at the very end.

Speaker 2

They'll come back more towards back half of the year.

Speaker 6

Okay. And then maybe this one's for Jen. The Impakt platform At the end of I think it was end of Q4, you said the vast majority of English speaking clients are on the platform, But you're in the process of rolling out additional languages. Where are we in that process? And How penetrated are you with clients now?

Speaker 7

Thanks for asking, Alex. We are thrilled that as of October, We have launched in all of our what we call core languages and about 25 languages have launched the Impacx platform. It was a really effective launch and we're seeing more and more of our clients globally move to the Impak platform. Obviously, it makes A big difference for our clients based in the U. S.

Speaker 7

As well that they can deploy scalably in multiple languages. So Deployment went extremely well. There's a couple of our more our less used languages that haven't yet

Speaker 6

Fact from the rollout of Impact Platform, is it a higher initial selling price? Is it higher retention rates?

Speaker 7

The primary benefit I think is the value proposition that we are We're driving collective behavior change. So in terms of the impact platform, we always have great content. We always have the modality. But having the seamlessness to be able to bring this to an enterprise at scale, particularly as many of our buyers Don't have a lot of people in the department and this makes it much more scalable. What we're seeing with those that have deployed If we're better able to track that behavior change, we can track pre and post the skills, the movement.

Speaker 7

One of our latest case studies, the primary thing that the buyers love is the metrics and the ability to scale with lower staff.

Speaker 6

Excellent. Very helpful. Thank you very much. And that's all I have for now.

Speaker 2

Thanks, Alex.

Operator

Thank you. Please standby for our next question. We have a follow-up question from the line of Nehal with Northland Capital Markets. Your line is open.

Speaker 5

Yes. Thank you. Paul, at the beginning of your prepared remarks, you talked about how invoice subscription value was slashed In fiscal 3Q and 4Q, but it didn't fucks it up in fiscal 1Q. What was actually the precise level in fiscal 1Q? And do you expect that to continue and fucks up in fiscal Q2?

Speaker 4

So your question

Speaker 2

Just to make sure you got your question I've got your question there. It cut out just a second on our end.

Speaker 5

Can we just repeat it

Speaker 2

one more time? I think it's about invoice subscription levels Q2, Q3 versus Q4, Q1. Is that your question?

Speaker 5

Yes. Well, and into Q2 of this fiscal year 2024.

Speaker 2

Yes, great. Okay. So invoice subscription levels U. S, Canada AAP were flattish in Q2 and Q3. Memory serves they were up about 8% in Q4 and then up around 13% in Q1.

Speaker 2

And then we expect that they'll continue to be good in Q2.

Speaker 5

Okay. Great. And then Steve real quickly, do you have thoughts on EBITDA for the February quarter?

Speaker 4

EBITDA, I'm sorry, again. EBITDA for this quarter. Thank you. Yes. So we talked about adjusted EBITDA being between $6,200,000 $7,200,000

Speaker 5

Okay. I missed that.

Speaker 3

And what about the currency headwind for

Speaker 5

the full year on EBITDA?

Speaker 4

Well, our impact of currency was Insignificant in Q1. If we stayed exact if the rates stayed exactly what they are now, We would have some impact through the remainder of the year, but we don't know what's going to happen with the exchange rate. We don't know what that would be. That might impact revenue like $1,000,000 if rates stayed exactly as they are now. But there was no there was an insignificant impact on adjusted EBITDA and And an insignificant back on sales in Q1.

Speaker 5

Awesome. Great. Thank you very much.

Speaker 2

Thanks, Nehal.

Operator

Thank you. I'm showing no further questions in the queue. I would now like to turn the call back over to Paul for closing remarks.

Speaker 2

Okay. Well, thank you everyone for joining. Thanks for your great questions. Thanks for your the time that you take to understand the business and For the thoughts you share with us, we appreciate you and hope you have a wonderful evening and a great start to 2024.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.

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Key Takeaways

  • Franklin Covey reported Q1 FY24 revenue of $68.4M and adjusted EBITDA of $11.0M, both above forecasts, and reaffirmed full-year adjusted EBITDA guidance of $54.5–58.0M.
  • The company’s billed and unbilled deferred revenue reached $169.7M (+12% YoY), while invoice subscription revenue grew significantly in Q4 and Q1, establishing a strong base for back-half growth.
  • With subscription retention exceeding 90% in Enterprise and >85% in Education, plus upfront invoicing and low capex, Franklin Covey generated $17.4M in operating cash flow and $13.7M in free cash flow in Q1.
  • In Q1, the company repurchased 409K shares for $16.3M (totaling $51M over the past 12 months) and expects to generate ~$150M in free cash flow in coming years to support further buybacks.
  • Looking ahead, management expects its subscription-services attach rate to rebound to ~66.5% in Q3/Q4, driven by launches of new solutions including Speed of Trust 3.0, 7 Habits 5.0 and Difficult Conversations.
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Earnings Conference Call
Franklin Covey Q1 2024
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