Franklin Covey Q2 2025 Earnings Call Transcript

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Provided by Quartr
April 2, 2025

Key Takeaways

  • Despite solid operational gains, Franklin Covey revised full-year guidance downward to $275 M–$285 M in revenue and $30 M–$33 M in adjusted EBITDA, reflecting a 5% shortfall vs. prior guidance.
  • Direct government contract cancellations and funding uncertainties are expected to reduce revenue by about $5 M federally, up to $4 M internationally, plus potential $6 M in education and commercial headwinds this year.
  • The North America enterprise go-to-market transformation is exceeding early targets, with new logo sales up ~50% vs. plan, pipeline ahead by 30%, and new sellers ramping faster than historical norms.
  • Education revenue grew 3% in Q2 (7% YTD) with invoiced amounts up 13% YTD, driven by strong demand for Leader in Me and expanding district/state-level contracts across 7,800 schools.
  • Subscription health remains robust: 61% of subscription revenue is under multiyear contracts, renewal rates are strong, and average All Access Pass deal size has more than doubled from $39 K to $85 K.
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Earnings Conference Call
Franklin Covey Q2 2025
00:00 / 00:00

Transcript Sections

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Operator

Good day, and thank you for standing by. Welcome to the Franklin Covey Second Quarter Earnings Conference Call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there'll be a question-and-answer session. To ask a question during the session, you'll need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To start your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to turn the conference over to Derek Hatch, Corporate Controller. Please go ahead.

Derek Hatch
Derek Hatch
Corporate Controller at Franklin Covey

Thank you. Hello, everyone, and thanks so much for joining us today. We appreciate having the opportunity to connect with you. As we get started, please remember that this presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Derek Hatch
Derek Hatch
Corporate Controller at Franklin Covey

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 revenue, 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 such as governmental contracting actions that are 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.

Derek Hatch
Derek Hatch
Corporate Controller at Franklin Covey

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. 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 Chief Executive Officer.

Paul Walker
CEO at FranklinCovey

Thank you, Derek. Good afternoon, everyone. We're happy to have the opportunity to speak with you today and to share an update on the continued progress of the business. The current external economic environment is turbulent and uncertain. We're not entirely immune to what's going on in the broader economic and political environment. However, we are pleased, first, that the importance of the opportunities and challenges we help organizations achieve are mission-critical to them, and our business and business model are strong. Second, we're pleased that the traction we're already achieving in the implementation of our go-to-market transformation in our enterprise North America business is significant. Third, we're pleased that our education business continues to be strong. As a result, we continue to be confident in the actions we've undertaken to accelerate future revenue growth.

Paul Walker
CEO at FranklinCovey

With this growth in revenue, we also expect to achieve significant growth in adjusted EBITDA and cash flow. Over the next few minutes, I'd like to briefly address the following questions you can see shown on slide four. The first question is, what are the areas in which we have been seeing some impact from the external environment? I want to lay those out. Second, what are the key metrics that reflect both the continued underlying strength and durability of our business model and the significant traction we're already achieving in the implementation of our new go-to-market acceleration actions in our North America enterprise business? The third question I want to lay out and answer is, what are the key factors that are driving the continued strength and growth in our education business? Let's get into each of these.

Paul Walker
CEO at FranklinCovey

First, what are the areas in which we've been seeing some impact from the external environment? While we feel good about progress across the vast majority of our business, we are experiencing direct and indirect impact from the actions being taken by the federal government and by the resultant economic uncertainty. While this impact is on the margin for our overall business, nevertheless, it is impacting our revenue growth in the year and is the primary reason why our results will be down this year compared to expectations. We're seeing the effect primarily in the areas you can see shown on slide five. The first is in our government business. Roughly 6% or $17 million of our total business is in some way tied to governmental entities such as the Department of Defense, Veterans Affairs, and state and local entities.

Paul Walker
CEO at FranklinCovey

Approximately $5 million in government revenue has already been canceled or postponed as the federal government looks to cut spending in nearly every category. We expect government revenues to be down by at least $5 million this year compared to the low end of our original guidance. The second area in which we're seeing some impact from these same government actions and trade tensions is in our international direct and licensee operations. A significant portion of this impact is being felt in China, where the threat of escalating tariffs and other potential political factors is causing a sensitivity by national and even local companies in China to being viewed as doing business with U.S. firms.

Paul Walker
CEO at FranklinCovey

In a small number of cases, we've also had clients in Europe and Canada postpone or cancel engagements either as a defensive or nationalistic response to the threat or the reality of tariff actions or as a response to the uncertainty of the economic conditions in their own country. While these pressures have not been widespread, they are having an impact on the margin. We expect that they could result in our international revenues being down by as much as $4 million compared to the low end of our guidance this year. Third, we see the potential for some impact in our education business. To date, we've seen little measurable impact from concerns about the potential disruption of the Department of Education. I think it's important to note that almost all of our education revenue comes from state-level funding.

Paul Walker
CEO at FranklinCovey

We sell to schools and districts and not to the Department of Education. However, because the Department of Ed has historically provided approximately 14% of state-level education funding, we're mindful that uncertainty about potential federal-level changes within the Department of Ed could cause some uncertainty at the state level, which could slow down schools' speed of decision-making this spring. We think this could have as much as a $3 million impact to education revenue. While we haven't yet experienced any real negative impact here, we are monitoring the situation closely. Looking out a little bit into the future, ultimately, it appears that any funding changes at the federal level are likely to be reallocated to the state level and from there to the local schools and districts to which we sell, but short-term disruption is a possibility.

Paul Walker
CEO at FranklinCovey

Finally, these same government-related actions also have the potential to create some headwinds for some of our clients in the United States, and we think that this could create an approximately $3 million of additional impact here. Let me now speak to how this translates into our revised guidance for the year. First, I would just say that the objectives of our go-to-market transformation that we've talked about in the last few calls remain unchanged. Despite the on-the-margin interruptions in revenue in our government and international operations that I just described, the engines in our enterprise division in North America and in our education business remain strong and durable. Our go-to-market transformation is tracking a bit ahead of expectation, and I want to talk about that here in a minute.

Paul Walker
CEO at FranklinCovey

Our go-to-market transformation is expected to drive significant acceleration of our overall company revenue growth, moving us from single-digit to double-digit revenue growth in the coming years, and with a significant flow through of this incremental revenue to increases in adjusted EBITDA and cash flow. With that said, due to the impacts of the government actions just outlined, we are adjusting our guidance for this fiscal year. As shown on slide six, last year, we achieved revenue of $287.2 million, generating adjusted EBITDA of $55.3 million. Our original guidance for fiscal 2025 provided that at the low end, we would grow revenue by approximately $8 million and generate adjusted EBITDA of $40 million, with the reduction from the prior year reflecting the $16 million of incremental growth investments being made this year.

Paul Walker
CEO at FranklinCovey

Due to the impact of government actions we just discussed, we now expect revenue will come in between $275 million and $285 million, or $7 million or 2.5% lower than last year, and $15 million or 5% lower than the low end of our original guidance in constant currency. With this, we expect adjusted EBITDA to be between $30 million and $33 million, primarily reflecting the gross profit we expect to be lost related to the decline in revenue, again, related to the government actions previously discussed. While the $16 million of incremental growth investments were always going to have a direct impact on this year's adjusted EBITDA, we expected they would establish a solid foundation for accelerated future growth, and we still do.

Paul Walker
CEO at FranklinCovey

As noted, we're pleased with the traction we're getting and both fully committed to these investments and confident they will do exactly what they were expected to do, which is to accelerate our growth. We, of course, did not anticipate the impact of the government actions but are taking quick action to reduce our cost structure in government, in our international operations, and other areas of our business. We expect these actions will partially offset some of the government-related impact and result in an even higher percentage of incremental revenue flowing through to adjusted EBITDA next year. Therefore, we expect this will be an approximate one-year step back and that next year, adjusted EBITDA will be back to approaching where we thought it would be this year. We'll provide specific fiscal 2026 revenue and adjusted EBITDA guidance in November, which has been our pattern.

Paul Walker
CEO at FranklinCovey

Having talked about the external environment and our updated guidance for the year, I'd now like to turn to a different topic, which is to address the strength we're seeing across the majority of our business right now. Despite the potential near-term impact in the areas just discussed, the strategic strength of our overall business and our business model continues to be evident. We're also pleased with the significant early traction, as I mentioned, that we're achieving in our new go-to-market in our enterprise North America. I'd like to first address the strength of our strategic position and business model. Our strategic strength derives from the importance of the opportunities and challenges we help organizations address. Opportunities and challenges which are very durable for clients in good times and in more challenging times.

Paul Walker
CEO at FranklinCovey

This strategic strength and the strength of our business model continue to be reflected in the following metrics in our North America enterprise business, as you can see shown on slide seven. First, our revenue continues to renew at high rates. Apart from the government action-related headwinds we've addressed, a majority of our clients continue to expand and renew even amid a more uncertain environment. This strong retention is driven in part by our clients' continued interest in expanding the duration of their contracts with us to ensure the ongoing achievement of their critical objectives. At the end of the second quarter, 61% of our subscription revenue is under a multi-year contract, equaling the high percentage we'd achieved at this same point last year. Second, our clients continue to expand with us.

Paul Walker
CEO at FranklinCovey

Over time, the average revenue per All-Access Pass client has expanded significantly from $39,000 to more than $85,000, reflecting both the growth of the populations being served within our clients and the expansion of incremental offerings that they purchase. The third area of strength is that our clients are continuing to purchase significant amounts of services to help them achieve their mission-critical objectives. Despite the uncertainty, it is significant that excluding our government business, in our business in the U.S. and Canada, our advanced bookings for new services have increased 5% year-to-date over the same period last year. This reflects our clients' commitments to achieving a performance outcome. Importantly, this momentum in bookings will translate into increases in services revenue in the coming quarters.

Paul Walker
CEO at FranklinCovey

Fourth, we're pleased with the indicators of significant traction we're already achieving in the implementation of our new go-to-market acceleration in our enterprise business in North America. I'd like to talk about this here just for a couple of minutes. This is an initiative into which, as previously discussed, we've invested an incremental $16 million this year. It's been just 90 days since we launched our transition, and the traction and early results we're seeing are very encouraging. The focus of our go-to-market transition is on achieving significant increases in two key outcomes which will drive our accelerated growth. The first objective is to significantly increase our new logo sales, and this is off to a very good start.

Paul Walker
CEO at FranklinCovey

We won more new logos in the second quarter, both in terms of dollars generated and number of clients than in any of the last five quarters, and we expect another strong quarter ahead in Q3. We exceeded our new logo plan by more than 50% in the second quarter. While we did not start the transition until the second quarter, we're pacing to achieve approximately 40% growth in new logo sales for the year. Importantly, we've also had a higher purchase of services by new All-Access Pass clients this past quarter than we've seen in previous quarters. I'm going to come back and touch on that in just a second. Our second objective is to increase our expansion within existing client organizations. This is also off to a strong start.

Paul Walker
CEO at FranklinCovey

The second quarter was a strong quarter in terms of client expansions, and we beat our planned expansion target by 8%. Underpinning the strength of this early traction are two important factors. First, that our new go-to-market organizational structure is fully aligned, fully staffed, and working. Every role is filled, and we've added top-tier talent and critical roles to go along with the already tremendous talent we had in place. All 44 of our new logo salespeople are in place today. Forty-two of the 44 were in place by December 1, and the other two, so all 44, were in place by February 1, which is a full month ahead of what our planned staffing plan indicated. Twenty-one of the 24 brand-new new logo hunting salespeople closed business in the second quarter. Twenty-one of 24 closed business in the second quarter, which is their first quarter.

Paul Walker
CEO at FranklinCovey

That's an unprecedented ramp speed for us. Our new logo pipeline exceeded plan by 30%, and our conversion rates were 300 basis points above our targeted conversion rates in the second quarter. The second factor underpinning our traction and momentum is that the important investments we've been making into content, technology, and delivery capabilities over the past years are enabling us to serve even more clients more broadly and more effectively than ever before. As I mentioned a minute ago, we're also seeing a strong attachment rate of services to new logo wins, and this is a bit of a shift for us. We're intentionally driving this with these new logo sellers. This is not only increasing deal size, but we anticipate it'll also boost client retention as our clients who buy services renew at higher rates.

Paul Walker
CEO at FranklinCovey

I'd like to share a quick win story from the second quarter that highlights the win of a new logo that also had more of these services attached. We closed a large hospital system in the Midwest for $253,000 in annual contract value. That's a very nice new logo win for us. This contract had a $144,000 All-Access Pass subscription with $109,000 in services attached to that subscription. This is interesting. The deal began with interest from the hospital system CEO, and he'd asked for a single keynote on the Speed of Trust. We quickly expanded that initial interest into a rollout that covered a few hundred of their leaders to instill trust across teams and within patients in each of their hospitals. This deal was closed in just 44 days by one of our new logo sellers who was new in role.

Paul Walker
CEO at FranklinCovey

It was her third month in seat. Finally, I'd like to, as I touched briefly on a minute ago, just discuss for a second the ongoing strength we're seeing in our education business. As shown on slide eight, education revenue grew 3% in the second quarter and is up 7% year-to-date. Importantly, year-to-date invoiced amounts in education are up 13%, positioning us well for the seasonally stronger second half. We're seeing strong demand for Leader in Me driven by success in delivering the outcomes that educators, parents, and communities care about, such as leadership development, student engagement, and character building. This strong demand is fueling our transition from selling initially to individual schools to selling to entire districts, and we now, in a handful of cases, are serving statewide contracts.

Paul Walker
CEO at FranklinCovey

We're pleased there are now 7,800 Leader in Me schools around the world, and we're just getting started in growing that number to even larger heights. We feel quite good about the progress that's being made with the transformation of our North America operation. We feel good about the continued momentum in education. With that, I'd like to turn the time over to Steve and ask Steve to share a little bit more detail on our financial results, also share a little bit of specific Q3 guidance.

Steve Young
CFO at FranklinCovey

Thank you, Paul. Good afternoon, everyone. It's a pleasure to be with you today. You'll find on slides 9 through 12 and in the appendix the second quarter financial details I've typically shared verbally on these calls. Today, I'll take the time to highlight a few encouraging trends we're seeing in the business that continue to spur our confidence moving forward. First, a few high-level financial results. The second quarter revenue was $59.6 million or $60.1 million in constant currency, slightly below the $61.3 million we achieved in Q2 last year, with more than all of the difference reflecting the impact of the government-related cancellations in the last 60 days. Adjusted EBITDA for the quarter was $2.1 million or $2.6 million in constant currency, landing at the top end of our expectations despite the government disruptions.

Steve Young
CFO at FranklinCovey

Gross margin and SG&A were in line with projections, including the second quarter share of our $16 million in incremental growth investments in North America. We feel good about the results given the canceled government revenue and the related shortfall in international sales, and it being the first quarter of our go-to-market transformation Paul just described. Second, I'd like to highlight that we're seeing continued strength in the number and value of multi-year contracts being signed. In fact, additions to unbilled deferred revenue, which reflects multi-year contracts secured but not yet invoiced, was up 10% in the second quarter and is also up 10% for the first half of this year compared to the first half last year. This momentum is also evident in our All-Access Pass contracts in North America. As of the end of Q2, the percentage of All-Access Pass contracts that are multi-year was a strong 55%.

Steve Young
CFO at FranklinCovey

As Paul mentioned, the percentage of our subscription revenue associated with these multi-year agreements was also a strong 61%. These results reflect our clients' long-term commitment and belief in the value and strategic impact of our solutions. In the midst of a more challenging macroeconomic environment, we are also pleased that the vast majority of our clients are renewing their contracts, expanding their usage, and expressing confidence in the work we are doing together. This gives us continued confidence in both the future trajectory of the business and the early returns we are seeing from our go-to-market transformation. Third, as Paul mentioned, our services booking rate in the United States and Canada, excluding government, is up 5% year-over-year. This is a strong indicator that we are not only landing new clients, but that we are a trusted partner in delivering solutions that drive real outcomes and lasting value.

Steve Young
CFO at FranklinCovey

Fourth, we're seeing good momentum in our education business, particularly in the number of large state and district-level opportunities we're actively pursuing. This pipeline strength, together with the base of 7,800 schools, gives us confidence in the demand for the kind of outcomes our Leader in Me solution delivers and provides confidence in continued growth as we move through the second half of the year, which is historically education's strongest period. Finally, our business continues to produce strong, reliable cash flow, and today, we still have more than $100 million in liquidity. We've continued to use this strength to return value to shareholders. From 2022 to today, we have invested approximately $105 million or 83% of free cash flow to purchase 2.6 million shares. In the first half of this year, we've invested $14.7 million to purchase 397,000 shares.

Steve Young
CFO at FranklinCovey

We expect to continue allocating excess cash toward accelerating growth, M&A activities, and share purchases. We remain committed to being disciplined steward of capital while staying focused on driving long-term value creation. Now, just a little bit more on guidance. As Paul shared earlier, our revenue guidance for the year is to be between $275 million and $285 million, with adjusted EBITDA between $30 million and $33 million, both in constant currency. Our guidance for the third quarter is that revenue will be between $67 million and $71 million, and adjusted EBITDA will be between $4 million and $6.5 million, reflecting both the expected continued revenue disruption from government-related activities impacting our direct government, international, education, and other revenues, as well as the third quarter's portion of our growth investments. Paul, back to you.

Paul Walker
CEO at FranklinCovey

Thanks, Steve. Thanks for taking us through that. We will now invite the operator to open the line for questions. As we do, just to again thank everybody for being here today and look forward to answering your questions.

Operator

Thank you. As a reminder, if you would like to ask a question, please press star one one on your telephone. We also ask that you wait for your name and company to be announced before you proceed with your question. One moment for the first question. Our first question will come from the line of Alex Paris of Barrington Research. Your line is open.

Alex Paris
Alex Paris
Analyst at Barrington Research

Hi guys. Thanks for taking my questions.

Paul Walker
CEO at FranklinCovey

Good to talk to you today.

Alex Paris
Alex Paris
Analyst at Barrington Research

Yep, same here. I guess we'll start with the external impacts, DOD and tariff-related and so on. I think I understand it. There's direct federal government agencies in law business. There's impact on your international business because of the response to the increased tariff talk from this end. There's an expected impact on your education business as well. Focusing first on the federal government, I think you said in your prepared comments that it's 6% or $17 million is government revenue on a full-year basis, DOD, VA, and then state and local. Is that correct?

Paul Walker
CEO at FranklinCovey

Yeah, with the majority of it being federal. Yeah.

Alex Paris
Alex Paris
Analyst at Barrington Research

Okay. That's what I was going to ask. The majority is federal. And you called out DOD and VA. Are there any other agencies that we should be aware of?

Paul Walker
CEO at FranklinCovey

Yeah. We do work with USAID, has been an agency we've had a long, long relationship with in the past. We've done stuff with Health and Human Services. We've had a nice government business for a long time doing work across a number. We do work with the Treasury, then work with Congress in the past. It's been fairly broad over the years, Alex.

Alex Paris
Alex Paris
Analyst at Barrington Research

Gotcha. You said, I think Steve said that the entire year-over-year decline in revenue was due to canceled government contracts and then the related impact on your other businesses.

Paul Walker
CEO at FranklinCovey

Yes.

Steve Young
CFO at FranklinCovey

Yes.

Alex Paris
Alex Paris
Analyst at Barrington Research

Yes, that's right.

Steve Young
CFO at FranklinCovey

Particularly the impact reflected in Q2 of the cancellations just in the last 60 days.

Paul Walker
CEO at FranklinCovey

That's right.

Alex Paris
Alex Paris
Analyst at Barrington Research

Gotcha. All right. On the education, and obviously, there's nothing you can do about that. Are there hopes to win the business back in the future? Certainly, your guidance assumes that you do not win it back this year.

Paul Walker
CEO at FranklinCovey

Yeah. Yeah. Staying on government for a second, our guidance and the view right now is that we don't win that back this year. I don't see a scenario where that happens. What we're doing, one of the things we're doing is we're just taking a look at that government business and saying, "Okay, over the next bit of time here, assuming the trajectory of what's happening within the government doesn't change, how do we structure that business so that we can be as profitable there as possible on less revenue?" That's an action we're taking immediately. Longer term, as things settle down, I mean, a big part of what we do as a company is we help organizations become more efficient, get more out of their people, do more with less. We have a whole set of offerings, as you know, around execution.

Paul Walker
CEO at FranklinCovey

There could be an opportunity to get back in and help on some of those things. Right now, the environment is such that there's not a lot of appetite to buy anything new in the government. I think that we'll see as we go into next year whether that looks different. At the moment, that's how we see it.

Alex Paris
Alex Paris
Analyst at Barrington Research

Gotcha. Thank you. On the education side, 86% of funding comes from state and local governments. Only a small component, 14%, comes from the federal government overall. I'm not saying your revenue. That would be things like Title I and individuals with disability. What percentage of your education division revenue comes from the Department of Education?

Paul Walker
CEO at FranklinCovey

The Department of Education for us is not actually a client. They dole out 14% of a state's budget comes through them. Like you said, it is directed towards Title I, towards some of those programs that you mentioned. We are not selling to them. We do not have a relationship with the Department of Education, never had. The fact that that agency is being cut, cut in half, however far it gets cut back, that itself does not have any impact on us. We do not actually think, Alex, over time, from everything that we can see right now, the dollars that have been flowing from the Department of Education to the states, we expect those dollars are still going to flow. They might come from a different agency than the Department of Ed.

Paul Walker
CEO at FranklinCovey

It might be as the administration is trying to actually shut down the Department of Ed. And so long term, we do not actually see that creating a funding challenge for us. What we are trying to highlight here in this call is it just so happens that it might throw just a bit of sand in the gears in our third and fourth quarter, which is the time of the year when schools are making decisions to start Leader in Me. All right? The second half has always been our biggest half of the year. It is just the thought that there might be just enough uncertainty during our third and fourth quarter as the dollars are being shifted from the federal government to states that it might cause some slippage in the timing of decisions. Decisions in that business are usually made in school board meetings.

Paul Walker
CEO at FranklinCovey

If you miss a school board meeting, you're up for the next one. There could just be enough of that. Right now, we're not seeing it really widespread at all at the moment. We're just trying to highlight that there's a possibility there could be a few million dollars of impact there. Generally speaking, it's really on the margin. That business is doing quite well. We expect that it will continue to be. Highlighting, there is that risk, that potential.

Alex Paris
Alex Paris
Analyst at Barrington Research

Just a couple more. If I understand it correctly, some of these internal impacts are kind of masking the success and the traction and the trajectory resulting from your North American Enterprise Salesforce restructuring. Just to be clear, I think in Q1, that $16 million incremental investment, I think you spent a little bit less than $3 million in the first quarter. I think you were expecting to spend a little bit more than $4 million in the second quarter. Then $4.5 million in each Q3 and Q4 to get us to $16 million. Are we still pretty much on that schedule in terms of incremental spending?

Paul Walker
CEO at FranklinCovey

We are really right on that schedule. I'm looking at Steve here. He's nodding. Yeah. That set of bets, those investments are right on track. We've made those investments. It's primarily people. The people are here. They're in role. That penciling out you just did of around three going to four and then four going to four and a half and four and a half, those are with us now. That's a conscious decision we're making here. We're saying we like the early momentum that we're seeing, the traction that we're beginning to see. We're only 90 days in, but we like what we're seeing. That's not an area where we want to cut back. That's the area we believe. That's the engine that pulls the company's overall growth rate higher and higher that we've talked about and that we're excited about.

Paul Walker
CEO at FranklinCovey

We see making some doing some trimming in some other places, but we do not want to trim there. We are quite pleased with what we are seeing in the early days here.

Alex Paris
Alex Paris
Analyst at Barrington Research

Great. The last couple would be regarding guidance. You kind of spelled out the guidance there and the delta from previous guidance and year-over-year. You gave third quarter guidance, so we have implied guidance for the fourth quarter. In the text of the press release, you said that the company expects this to be a one-year step back, and the company's adjusted EBITDA will approach original 2025 expectations in 2026. That suggests there's been a reduction in expectations in 2026 given these external factors. What does that do to 2027 and 2028? You had given long-term guidance through 2028 previously.

Paul Walker
CEO at FranklinCovey

Yeah. Yeah. It's a great question. I would say we will, as has been our pattern, we're going to go ahead and update that in November as we kind of see how the next couple of quarters play out. I will say that just two more comments on your question there.

Paul Walker
CEO at FranklinCovey

One, as we expect to accelerate some of our invoicing growth and whatnot in the back half of this year, and we take some of the costs, we take a look at some of the costs that aren't related to our growth, we do see ourselves next year, even on modest revenue growth, getting pretty good flow through on that, having had a big investment year this year and not needing to make anywhere near the same level of incremental investments next year, plus the flow through on some of the things we would do on the cost side in the back half of this year, setting ourselves up for a good flow through year next year. Flow through like we used to have, like you've been accustomed to us having.

Paul Walker
CEO at FranklinCovey

That is the comment about setting up next year to approaching getting back to where we would have been this year on the adjusted EBITDA side. As far as the longer-term outlook on revenue and adjusted EBITDA, we will give a good update on what we think in November. I will say that fundamentally, as we think about just the underlying thesis here, we still do very much believe that this is a business that there is great demand for what we are selling. Our clients need what we have. We have good strength in this business. The transformation we are making in our North America enterprise operation, coupled with the good momentum we have had for a long time in education, means that over time, the revenue growth accelerates. With that, we drop through revenue to increases in adjusted EBITDA and cash flow. That underlying thesis remains intact.

Paul Walker
CEO at FranklinCovey

As we get a little more visibility, we'll share more about what that when and by how much. That is the trajectory where we still think we're on.

Alex Paris
Alex Paris
Analyst at Barrington Research

Okay. Gotcha. Lastly, I guess, again, the positive effects are somewhat masked by the external impacts. I think you said on the last conference call the things we should look for in terms of milestones would be size of pipeline. That's where it would show up first. Growth in invoice sales, that's where we'd see it second. I think it was down still in Q2. I realize we're only 90 days in. Ultimately, reported revenues. I wonder if you could just give comment on those three milestones or a little additional color.

Paul Walker
CEO at FranklinCovey

You bet. Yes, growth in pipelines. Just a couple of comments there. As we mentioned, in our North American business, we exceeded our pipeline target by about 30% in the second quarter. We had a better close rate than we thought. I think if you think about the new logo side for a minute, the factors that drive new logo are, can our marketing organization generate more leads, more pipeline, more opportunity? Can our sales organization qualify that, advance, and close it? We saw that in the second quarter at rates that were above what our plan suggested would have been great success. We were ahead on those. On the other side, can we take the client on the expand side, can we take those clients who've now landed at greater rates, and can we expand them and retain them? We had good.

Paul Walker
CEO at FranklinCovey

We beat our expansion plan by 8% in the quarter as well. Those happened even with the noise we saw with some of our contracts and some of the government as part of North America. Despite some of the headwinds we saw in the quarter, began to see in the second quarter, our second quarter happened to be December, January, February, the leading indicators were positive. As you mentioned, we're only 90 days in. We look forward to reporting on that. Again, as we get to Q3, Q4, we'll just keep reporting on those as we go along here.

Alex Paris
Alex Paris
Analyst at Barrington Research

Has there been any impact on the commercial side of the business within enterprise, like extended sales cycles due to uncertainty, tariffs, recession worries, things like that?

Alex Paris
Alex Paris
Analyst at Barrington Research

I think that's what so certainly, as we alluded to, we're seeing that internationally. In fact, in three of the countries in which we operate in our international direct offices, they've had snap elections in the last 90 days. There is some uncertainty there. We see some of the prolonged decision-making happening in international. That is why we've tried to reflect that in our updated guidance. We've provided a little bit of in the U.S., expecting a little bit of headwind there as well, which is where we've also accounted for about $3 million of potential headwind there in the U.S. as well. Have not seen a lot of it yet, but expecting that we might see a little bit of that.

Alex Paris
Alex Paris
Analyst at Barrington Research

That is in guidance.

Paul Walker
CEO at FranklinCovey

That's in guidance, yes.

Alex Paris
Alex Paris
Analyst at Barrington Research

Okay. Great. Thank you. I'll get back into the queue. Appreciate your answering my questions.

Paul Walker
CEO at FranklinCovey

Thanks, Alex.

Operator

Thank you. One moment for the next question, please. Our next question will be coming from the line of Jeff Martin of Roth Capital Markets. Your line is open.

Paul Walker
CEO at FranklinCovey

Hi, Jeff.

Jeff Martin
Jeff Martin
Analyst at ROTH Capital Partners

Thanks. Good afternoon, Paul and Steve. Hope you're well.

Paul Walker
CEO at FranklinCovey

You too.

Steve Young
CFO at FranklinCovey

Thank you.

Paul Walker
CEO at FranklinCovey

Good to talk to you.

Jeff Martin
Jeff Martin
Analyst at ROTH Capital Partners

Paul, I was just curious if you could clarify the $17 million in government-related revenue, 6% of revenue. Does that include nongovernmental organizations that are influenced by government agencies, or is that incremental to that? Are you seeing any impact there?

Paul Walker
CEO at FranklinCovey

Yeah. The $17 million is governmental agency direct. The $17 million is direct. The broader, as far as government representing a good share of the GDP and how that spills over to companies who do a lot of work with the government, etc., etc., that's what we're trying to point to in the $3 million or so of impact we might see in the U.S. and Canada. Not yet seeing a lot. I think we're not seeing a lot of that yet. We're obviously directing our salesforce towards those organizations, trying to assign them to highest and best use to the types of accounts that we think will do well in these times. Haven't seen a lot of that yet, Jeff.

Jeff Martin
Analyst Roth at Capital Partners

Yeah. Okay. I was curious if you could characterize the project starts among your clients who are subscription purchasers. Are those largely starting on time? Are they starting to infuse some delays related to uncertainties, need to focus on other areas of the business, the impact of tariffs, etc.?

Paul Walker
CEO at FranklinCovey

As we mentioned, in the second quarter, we actually had a better new logo quarter. For us, when we sell, when we bring on a new client, we sell a new logo, we're starting right away with them. Their subscription starts, the clock is running on that first-year subscription. We are seeing we have not seen any slowdown in terms of project starts, Jeff, at this point.

Jeff Martin
Analyst Roth at Capital Partners

Okay. That's encouraging. If the economy does roll into a recession here, I know in the past you've spoken about the durability of the subscription model. Obviously, moving to multi-year contracts helps. How do you see that in terms of potential impact on new logos? I know you just had a really strong first 90 days under a new go-to-market strategy, but just was curious if you have the same level of conviction if the economy does do roll into a recession here.

Paul Walker
CEO at FranklinCovey

Yeah. You highlighted two important things. First, I would say the subscription business helps us in a situation like that where we need to roll into a recession in that we have all the clients that we have that portion of clients that are on a multi-year contract. About 55% of our contracts are multi-year, meaning two years or longer. 61% of the subscription revenue is under a multi-year contract, again, two years or longer. You get a nice, there is a bridging effect there. A lot of the base is bridged and in place in that experience. In the past, when we have seen a downturn like that, usually there are a couple of quarters where there is a lot of uncertainty. We have some good built-in durability there just in those multi-year contracts.

Paul Walker
CEO at FranklinCovey

We also, for all those clients that are on a multi-year, they're on a one-year contract. And so you've got a good percentage of clients that are in their first quarter, second quarter. They're only a portion of the way into even the single year. So there's some increased strength and durability built into just the way that All-Access Pass and Leader in Me are contracted in the form of minimum one-year contracts. To your second question around new logo, I think so again, I was pleased in the second quarter. It wasn't like the second quarter didn't have some external noise in it, and we had a good quarter. Right now, our pipelines and the early indicators for Q3, even in this environment, suggest that Q3 is going to be another good, strong new logo quarter for us. And we feel good about that right now.

Paul Walker
CEO at FranklinCovey

We are, of course, as we've done in the past, we direct our salesforce even a little bit more to the solutions like the Four Disciplines of Execution, our Sales Performance Solutions, those topics that we fortunately cover that really become even more critical and important to clients and to organizations when they're trying to grow their own businesses. We will direct our salesforces there. It remains to be seen. Right now, we're encouraged by what we saw in Q2 and the early indicators for Q3 on new logo.

Jeff Martin
Analyst Roth at Capital Partners

Okay. Last for me is your guidance implies roughly, this is roughly speaking, $14 million-$16 million of adjusted EBITDA on Q4. I'm just curious your level of conviction. What could happen to exceed that number? What could you foresee that might pressure that number?

Paul Walker
CEO at FranklinCovey

Steve, do you want to make any comments on that?

Steve Young
CFO at FranklinCovey

Hi, Jeff. Since any subscription sale, only a portion of that is recorded to actual revenue, the fourth quarter especially is impacted a lot by the amount of services that we deliver and the amount of coaching days that we deliver, especially in education. One of the important areas that Paul talked about related to the fourth quarter is that there is not something that we cannot imagine that would significantly impact the education days. We do not see that, and we do not anticipate it. That is the kind of thing that could be a disruption. The improvement could be simply that, again, in education and in everywhere else, some of the disruption that we are anticipating might happen just does not.

Steve Young
CFO at FranklinCovey

There is a need for those delivered days and the services and the content and that companies just go ahead with what they need would be an improvement to what we're projecting.

Paul Walker
CEO at FranklinCovey

Just on that, I think that's a great point, Steve. So far, of the factors that I walked through that kind of give the basis for the new guidance, the government piece, there is lost business we've already incurred there. The others are just as we look out in the future and try to think about what we think might happen. We're working every day to figure out how to do better than what that might be. International, where we think we might be down as much as $4 million compared to plan this year, no one's going to be happy that we hit the number we just gave out today. We're trying to do everything we can to do better than that. Hopefully, it'll be able to beat what we shared here today. That's certainly our expectation.

Jeff Martin
Analyst Roth at Capital Partners

That's helpful. Thank you for taking the time.

Paul Walker
CEO at FranklinCovey

Thanks, Jeff.

Operator

Thank you. One moment for the next question. Our next question will be coming from the line of Dave Storms of Stonegate. Your line is open.

Paul Walker
CEO at FranklinCovey

Hi, Dave.

Dave Storms
Director of Research at Stonegate

Good afternoon. Appreciate you taking my questions. Just wanted to start, while we're looking at the external environment, is there any ability or appetite to maybe batten down the hatches a little bit and shift focus a little more internally towards more focus on product development, more focus on enhancing AI capabilities, any internal projects like that?

Paul Walker
CEO at FranklinCovey

We have a great product development roadmap. On that product development roadmap includes how we're going to incorporate AI into our products. And we're already doing that. We've talked about that in the past. Internally, there's also an opportunity to just continue to make our own internal operations more efficient, more streamlined. I think there's obviously the ability for AI to help with that. One of the things I mentioned in my remarks was just that we recognize that we're taking our EBITDA guidance down as well, primarily as a function of the revenue going down and then not wanting to cut the $16 million of growth investments. We will look for other places that aren't tied to the things that are going to grow the business in the future and try to look for ways to become as efficient as we can. We've done that for years.

Paul Walker
CEO at FranklinCovey

We will continue to certainly do that and look inward on those things, Dave.

Dave Storms
Director of Research at Stonegate

Understood. Very helpful. Thank you. Just looking at some of your go-to-market strategy, kind of outpacing goals, it does look like, as you mentioned, the new logo is up 150% over goals, where the expanders is up, call it, 108%. Looking past the market uncertainty, do you see a point where you will need to hire more expanders faster than landers? I guess kind of how are you thinking about the balance between those two roles?

Paul Walker
CEO at FranklinCovey

Yeah. It's a great question. First of all, stepping back for a second, long-term, as we zoom out for a second and think about what happens over the long period of time, we've done a nice job of expanding. Once we land a new client, expanding that client, and we take them on a journey. The journey to date has been to move from an average of $39,000 over time to an average a little over $85,000. We expect that to continue. Even if that did not grow by a lot more and they just went from $39,000 to $85,000, the fact that we could be landing a lot more new clients in the future, that's going to generate a lot of growth.

Paul Walker
CEO at FranklinCovey

We do expect in the coming years, next year and going into years after that, to grow the landing side of the organization and continue to grow that. There are about 16 million potential clients we could sell to. That includes SMB, but there's a huge market of clients out there to which we should be selling to who could be users of our content and our solutions. We see a lot of headroom to keep growing on the land side. Those account executives who are out hunting for new business, and we expect to do that. We also will, as we're successful, need to grow the expand side, but not at the same rate.

Paul Walker
CEO at FranklinCovey

Those expanders, the way we've got capacity there, in fact, we don't think we need to actually add very many, if any, expanders this next year because of the capacity that's there to receive the accounts we're throwing over to them. Yes, over time, we'll need to, but I think the expand side will be able to grow at a slower rate than the land side. We also have on the expand side, the customer success organization, the implementation strategists we've talked about in the past that help provide some of those account management duties so that those expanders can focus on looking for new opportunities to expand the average, the usage of our solutions inside our existing accounts. Both will grow, but I think we'll be growing the land side even ahead of the expand side.

Paul Walker
CEO at FranklinCovey

Therefore, we ought to get even better flow-through on those existing clients because our cost structure does not have to change, will not have to change as much on that side. You remember that those, one more point here, sorry, that those expanders used to have the responsibility to also land new business. Now their full job is to take care of the existing clients and try to expand them. We can increase the number of accounts per expander without disrupting that expansion play.

Jeff Martin
Jeff Martin
Analyst at ROTH Capital Partners

That's all very helpful. Thank you.

Paul Walker
CEO at FranklinCovey

Thanks, Dave.

Operator

Thank you. One moment for the next question. Our next question will be coming from the line of Nehal Chokshi of Northland Capital Markets. Your line is open.

Paul Walker
CEO at FranklinCovey

Hello, Nihal.

Nehal Chokshi
Nehal Chokshi
Analyst at Northland Capital Markets

Yeah. Hello. Hey. Thank you for the questions. Congrats on the strong land and expand metrics within the quarter. Clearly, the big topic, though, is the fiscal year revenue reduction. On slide five, you did have a line item here of $3 million additional impact in the year. I did not hear any color on what that additional impact is. Could you repeat it if you already did talk about it?

Paul Walker
CEO at FranklinCovey

Oh, sorry. Yeah. It's just the spillover of the government actions, tariff-related news, things like that that will create, we expect, some headwinds for our clients here in the U.S. and just the presumption and expectation that there'll be some of that this year that will be up against the back half of the year.

Nehal Chokshi
Nehal Chokshi
Analyst at Northland Capital Markets

Okay. The way I kind of understand this guidance, Todd, is that $9 million has been realized already and $6 million is being anticipated.

Paul Walker
CEO at FranklinCovey

Yeah. The $5 million's been realized. The $4 million isn't fully realized yet. It's the expectation of what we think happens across the year in international and then add in the additional headwinds. Yeah, it's laying out the $15 million, but the $5 million is lost business already in the federal government. The others are just kind of our view into what we think could happen here in the future. Again, we'll try to do better than that, certainly.

Nehal Chokshi
Nehal Chokshi
Analyst at Northland Capital Markets

Right. Okay. All right. And then moving on to the EBITDA guidance, the EBITDA guidance has cut 70%. It's cut 70% of the low end of the revenue cut, while the high end of the EBITDA cut is only cut 50% of the revenue cut. Right? So the amount of flow-through is less as we go to the more extreme portion of the new guidance range. Why is that?

Steve Young
CFO at FranklinCovey

Nihal, yeah, so the.

Nehal Chokshi
Nehal Chokshi
Analyst at Northland Capital Markets

I'm sorry. It's the other way around. The amount of guidance cut is less as we go to the lower end of the new revenue and EBITDA ranges. That's what I meant to say. Sorry.

Steve Young
CFO at FranklinCovey

Yeah, Nihal. We see the same as you do. That is, we clearly identified that the numbers, the difference that we're talking about is related to the low end of the guidance versus the full guidance. If we did the calculation based upon the high end of the guidance, it would be a different level of thrill. We are agreeing exactly with what you said. We did the comparison to the low end of the ranges just because clearly identifying that. Anybody wanting to do the calculation based upon the high end, all the numbers are available to easily do that. We see it the same way you see it, Nihal.

Nehal Chokshi
Nehal Chokshi
Analyst at Northland Capital Markets

Okay. What I was trying to say was that the low end of the new guidance range relative to the high end of the new guidance range for the EBITDA, the EBITDA cut is not as severe as a percentage of the revenue cut as it is for the high end. You are expecting not as much of a profitability impact as you get to a more extreme revenue cut scenario here. That was the question, not which baseline to utilize.

Steve Young
CFO at FranklinCovey

Yeah, Nihal, if I'm understanding correctly, I think the thing included there is we're including an anticipation of having some reasonable controls of our SG&A. So those SG&A adjustments to adjusted EBITDA are the same, whether they're talking about the low end or the high end of the range. It's the same number rather than a proportional adjustment based upon the change in revenue. I think that's what's changing the different percentage. Does that make sense?

Nehal Chokshi
Nehal Chokshi
Analyst at Northland Capital Markets

That makes a lot of sense. Yep. That makes 100% sense. Okay. It looks like in the quarter, you did have negative free cash flow. What's the driver of that?

Steve Young
CFO at FranklinCovey

There is a couple of things going on with free cash flow. Obviously, Nihal, as you look, you will see that free cash flow is meaningfully below last year. A couple of significant things going on there. One is that we paid over $6 million in taxes this year that we normally have not paid. We have signaled that for quite some time that those tax payments were coming because we are out of net operating loss carry forwards and foreign tax credits. We had an increase in cash paid for taxes. They also, last year, had a meaningful amount of customer deposits added to our cash flows. Those are really lumpy. That is because we do not often have customers prepay for their services.

Steve Young
CFO at FranklinCovey

Sometimes in education, and especially at the state and district level, if they have cash available, then they can make a pretty significant prepayment to us. That affects our cash flow meaningfully. There is like a $7 million difference in the deposits that we received. Net income is the other part. Those are the things that are primarily the level of profitability. The sales level impacts our accounts receivable and our deferred revenue. The things that are really different are the profitability of the company, the customer deposits, and the taxes.

Nehal Chokshi
Nehal Chokshi
Analyst at Northland Capital Markets

Okay. That's really helpful. Clearly, you guys are signaling high confidence in the business fundamentals by deploying about $8 million in buybacks during the quarter. Can you give us a sense as to whether or not you will continue to do so given where the stock is indicating here?

Steve Young
CFO at FranklinCovey

Nihal, as you know, we never really say exactly what we're going to do, but we do look at the share price, and we have shown a willingness to buy back shares. I think that's an indication that our strategy going forward will be similar to the past. That is we hope in any scenario to be actually generating positive cash flow, even at these reduced levels. If we can have meaningful acquisition activity that will really increase the value of the company over a longer term, then we'll look seriously at that. Amid all of that, we'll obviously look at the share price and other factors that we can see and the cash that we have available and look at buying back shares.

Nehal Chokshi
Nehal Chokshi
Analyst at Northland Capital Markets

Okay. What's your degree of confidence that the remaining EBITDA that you expect to generate for this year will generate positive free cash flow?

Steve Young
CFO at FranklinCovey

I think it'll be for positive free cash flow. As you know, we don't give an estimate on that. We think even with these reduced forecasts, we'll have positive free cash flow for the year.

Nehal Chokshi
Nehal Chokshi
Analyst at Northland Capital Markets

For the full fiscal year, or are you talking about for fiscal 2H25?

Steve Young
CFO at FranklinCovey

For the full year and some additions to the first half in the second half. Maybe not that much, but still some free cash flow for the year and most likely a little bit in the second half.

Nehal Chokshi
Nehal Chokshi
Analyst at Northland Capital Markets

Great. Thank you very much.

Steve Young
CFO at FranklinCovey

Even given these numbers.

Nehal Chokshi
Nehal Chokshi
Analyst at Northland Capital Markets

Great. Okay. Thank you.

Paul Walker
CEO at FranklinCovey

Thanks, Nihal.

Operator

Thank you. That does conclude today's Q&A session. I would like to go ahead and turn the call back over to Paul for closing remarks. Please go ahead, Paul.

Paul Walker
CEO at FranklinCovey

Thank you. Thanks again, everyone, for joining today. It's great to be with you and to share an update on where the business is. We're pleased with what's happening in our go-to-market transformation and also what's happening in our education business. I look forward to talking to you again in the quarter. Have a great afternoon.

Operator

Thank you all for joining today's conference call. You may now disconnect.

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