Welcome to the Q2 2022 Franklin Covey Earnings Conference Call. My name is Adrianne, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we’ll conduct a question-and-answer session. [Operator Instructions] I'll now turn the call over to Derek Hatch. Derek, you may begin.

Thanks, Adrianne. Hello, everyone. On behalf of Franklin Covey, I would like to welcome you to our earnings call to discuss our second quarter fiscal 2022 financial results. Before we begin, I would just like to remind everyone that, this presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based upon management's current expectations and are subject to various risks and uncertainties, including but not limited to, the ability of the company to stabilize and grow revenues, the acceptance of and renewal rates of our subscription offerings, including the All Access Pass and Leader in Me memberships; the duration and recovery from the COVID-19 pandemic; the ability of the company to hire sales professionals; general economic conditions; competition in the company's targeted marketplace; market acceptance of new offerings or services and marketing strategies; changes in the company's market share; changes in the size of the overall market for the company's products; changes in the training and spending policies of the company's clients and other factors identified and discussed in the company's most recent annual report on Form 10-K and other periodic reports filed with the Securities and Exchange Commission. Many of these conditions are beyond our control or influence, any one of which may cause future results to differ materially from the company's current expectations. 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. I think that gets longer every time I read it. With that out of the way, I'd like to turn the time over to Mr. Paul Walker, our Chief Executive Officer. Paul?

Thank you, Derek, and hello, everyone. We're happy to have the opportunity to talk with you today, and we thank you for joining us. I'm joined by Bob, Steve and the team, and we also have Jen Colosimo and Sean Covey on the line as well. We're really pleased with our – both our second quarter and year-to-date results. As you can see on slide 4, subscription and subscription services revenue grew 31% in the second quarter and 32% year-to-date. This drove overall company revenue growth of 18% in the second quarter and 22% year-to-date. Our balance of deferred revenue, billed and unbilled, grew 24%. Our gross margin percent reached 77.9% for the quarter and increased 41 basis points compared to last year's second quarter and an increase of 140 basis points to 77.8% year-to-date. Operating SG&A as a percent of sales improved 316 basis points for the quarter, going from 66.9% to 63.7%, and improved 468 basis points year-to-date, going from 67.3% to 62.6%. This combination of strong revenue growth and increasing gross margin percentage and declining operating SG&A as a percent of sales drove a 35% flow-through of incremental revenue to adjusted EBITDA in the second quarter, and a 43% flow-through year-to-date. As a result, adjusted EBITDA for the second quarter increased 57% to $8 million and increased 103% to $18 million year-to-date, and net cash flow from operating activities year-to-date increased $23.2 million – increased to $23.2 million. I'd now like to step back and provide – a few – the context and insights on some of the key factors which are driving these results. Our focus and unique expertise is in helping organizations achieve results that require the collective action of large numbers of leaders and individuals. As indicated in Column 1 of Slide number 5,…

Thank you, Paul, and good afternoon, everyone. I'm pleased to be with you today, talk a little bit about our guidance and our targets. So in our initial guidance for FY 2022 in November, we said that we expected to generate adjusted EBITDA for the year of between $34 million and $36 million. With our strong year-to-date performance through the first half of this year, we're pleased that our adjusted EBITDA of $37.1 million for the last 12-month period is already above the high end of that original guidance range. As a result, we are raising our full year guidance range, our new guidance, which you can see on Slide 20, is that we expect adjusted EBITDA for FY 2022 to be between $38 million and $39 million. The midpoint of this new range will reflect an approximately 38% increase in adjusted EBITDA in FY 2022, compared to the $28 million of adjusted EBITDA achieved last year. For factors that underpin our guidance are: first, the expected recognition during the balance of FY 2022 of a meaningful portion of the $70.4 million of deferred revenue currently on the balance sheet and the billing of a significant portion of the $39 million of unbilled deferred revenue, which is primarily related to multi-year contracts. This deferred revenue provides significant visibility into our revenue for the balance of this year and beyond. Second, in addition to the recognition of our deferred revenue, the factor which is expected to have the greatest impact on our FY 2022 results is also the one in which we have high confidence, that is the continued strength of the All Access Pass subscription and subscription services sales. Third, over the past year, we achieved growth in the contracted All Access Pass subscription and subscription services sales in both…

Thank you, Steve. Again, we are grateful you're here today. We feel great about our momentum, and we look forward to accelerating growth. And with that, Adrianne, we'd like to turn to you and to open up the line for questions.

We will now begin with question-and-answer session [Operator Instructions]. And our first question comes from Alex Paris from Barrington Research. Your line is open.

Hi, everybody. Thanks for taking my questions and congratulations on the [indiscernible] raise.

Thanks, Alex. How you doing?

Good, good, good. Thanks. So I'll start first with guidance. Nice increase to the guidance. No surprise, given where you stood at the end of the first quarter, but great to see anyway. And just to kind of go over the moving parts. The comps are tough in the third and fourth quarters, obviously, as COVID begin to wane and those quarters a year ago were less impacted. But you have planned investments also in the second half, including hiring new CPs. So that's where I wanted to start. Where do we stand with CP hiring year-to-date and what are your plans for the third and fourth quarters in that regard?

Yes. Great question. And you're right, in terms of increased growth investments for us, they are around client partner hiring, some things we can do to get marketing going even greater to help drive more -- even more new logos and then in content. But specifically, as it relates to client partners, as you know, this is a very important metric for us and a key driver of growth. And so we're -- we do the bulk of our hiring in the second quarter. We are geared up and ramped up to do that. For a bit of context in the year prior to the pandemic, we added 31 new client partners that year. That was a new kind of high watermark for us. And our plan has been to continue with that. When the pandemic hit, we hired nine in the first couple of months of that next year, and then we were -- the pandemic was upon us, and we paused that. And then we came out last year and said we would hire 20. We actually hired 19 in the year. One came in right after we hired the 20 there. And we've said we're back on our plan now to hire 30. Year-to-date, we're down -- I think we're down just a few, eight, which isn't uncommon for us in the first part of the year. And recognizing the environment we're in, we've more than doubled the size of our recruiting team in the last couple of months. We've added a whole new -- so in addition to more than twice the number of recruiters, we've also added a sourcing team to help us source great candidates out there. And the team is now full tilt to bring in as many as we can and to get to that target of hiring 30 new client partners this year.

Would you think it would be 15 and 15 or would it be a fewer number in Q3 and a greater number in Q4?

I mean, roughly that, but probably the way it ends up working out is probably like 10 and 20. It probably skews a little bit to Q4. Not quite evenly split.

Okay. Good. And then you also mentioned other growth investments, including sales support personnel. How should we think about sales support personnel? What's the ratio of incremental sales support personnel to CPs?

If I said that, I misspoke. But I -- the other two areas of investment would be in marketing to get our message out further to go and land more new logos with even more new clients, that would be one area. And then the third area would be investments – continued investments in content and technology as we bring Strive to market. So, if you think about our investments, it's really those 3 areas. It's client partner growth and -- hiring and growth. It's getting the word out even more than we have in the past because we see such a compelling opportunity to -- for growth. We're still very underpenetrated in this massive market and then to make sure the solution is as amazing as possible for our clients.

Got you. Thank you. And then Steve, with regard to the outlook in the out years, fiscal '23 and fiscal '24, I appreciate that you raised those targets earlier this year to $45 million and $55 million, respectively. But I wonder if those targets are still conservative given your expectations for -- your increased expectations for fiscal '22?

Well, I think achieving $45 million and then $55 million, I think that would be a really good result, Alex. I think going up $10 million between '23 and '24, I think those would be good results. We're still very bullish on those years. We just want to see how this -- as you know, our fourth quarter is always a big quarter. I want to see how the rest of this year comes out. And every year, update our targets at the beginning of the year based upon the best information we have at that time. So as we said, we're still excited about being able to hit those numbers, but I wouldn't want to increase them or change them until we see how this year turns out, see how our new logos are coming in, in our investments and all of those things that we'll know in November after we have our fourth quarter results.

So once we have the fourth quarter result, we'll expect formal adjusted EBITDA guidance for fiscal '23 and then a revision of the outlook for fiscal '24 and maybe fiscal '25 at that point? In terms of target?

A good way to say it. Real guidance for FY '23, a revised outlook for '24 and maybe some talk about '25.

Okay. Fair enough. And then, Steve, what did you say that the incremental contribution margin was on revenue to adjusted EBITDA in the second quarter and year-to-date?

We just said it was 37%. So it's about 35%, Alex. And of course, the flow-through is impacted by the gross margin, which we think will hold in there at a good gross margin. And then the SG&A, having the increases that Paul talked about, salespeople, content development, marketing, to have what we still think is a decent flow through, especially in the short-term remainder of this year and even into next year of, say, 30% to 40%, about in the middle of that right now.

Got you. Okay. Perfect. Thank you so much and again congratulations on the quarter.

Thanks, Alex.

And our next question comes from Jeff Martin from ROTH Capital Partners.

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

Great.

I was wondering if you could give us an update on the planned rollout of Strive. I know that’s an exciting proposition for you, should increase lifetime value to the customer base with the automated capabilities of it. But where are we at in terms of getting it ready to launch here?

Yeah. Great question. Thanks for asking that. We are very excited. Just as a reminder, we think -- we expect that Strive will help us expand in three ways. One, because it will allow learners to more easily access our content and for us to be able to help guide them through impact journeys that will more measurably change behavior. We think that we'll -- it will lead to All Access Pass expansion. We've talked in calls in the past about while we do a nice job landing and expanding, there's still a lot of headroom to expand just within our existing clients and Strive should help on that side of things. The second thing Strive will do is it will make it easier for our clients to deploy our content where they're using a Franklin Covey delivery consultant to deliver training and/or to provide coaching. That will all happen via this tech platform. And so that should lead to a continued expansion in services, where today, it's 57% of every dollar of subscription. We think that has room to continue to grow as well in the services side. And then third, it's just -- it's a really cool platform and technology. And so, showing that to new customers, we think, will help us on the new logo win rate as well. So, to the question you asked, where are we? We're in a great spot. We have intended to launch towards the end of this year. We actually did a pilot launch starting back in December. That went very well. We got some great feedback. We've put all of our content now onto it. So, it's all been converted for Strive to be powered by Strive, and we're doing now what we call a limited launch going out to a decent percentage of our sales force and our clients and working to move them over on to Strive. That effort is happening in May and June. And then, we're ready right as we kick off our new fiscal year to launch and turn it on for all of our clients. So, we're right where we want to be. We feel great about it. We're getting great feedback from those clients to have. I think we've -- or actually the Strive team that we brought over is still actually selling the original Strive product out there to customers, and they're winning deals like crazy that we then convert over to All Access Pass. So it's all systems go. We feel really good about it.

Great. Look forward to seeing the platform launch here. Could you go into a little bit more with respect to the investments in marketing and content development? What particular initiatives are in place under those two steps up in investment?

Yeah. Great, thanks. So, we throughout the back half of last year and heavily during our fourth quarter and into the first quarter of this year, we first worked on re-branding the company. And that would both look and feel, if you go to our website, it's different now. And so, part of it is the activation of that refresh brand. That's got to flow through all of our properties, all of our materials, all of our websites around the world, et cetera. And as exciting as that will be to get the look and feel more modern, more fresh, a little maybe more tech-focused, the real action will be in how we get our clarified messaging around who we are and our real value prop, how we help clients. We're just scratching the surface in terms of making sure that everybody who really ought to know that message does know that message. Here, we were on the call again the other day with a potential client, and they got done, and they said, oh my gosh, I had no idea this is what Franklin Covey was doing. Like, you got to help people understand this. And we said so -- that's an -- more and more effort to do that. And we think, again, we're just scratching the surface really. We saw a nice new logo growth in the second quarter, but we think there's a lot of room to expand that. And so marketing is really getting the word out, better PR. We don't do big advertising -- we don't go out and buy media and things like that, we don't need to do that. But it's making sure that people who are the movers and shakers in our particular industry, Chief Learning Officer, head of learning and…

Okay, great. One more, if I could, on the Service Attach Rate to All Access Pass, I was curious, if running in the high-50s now, I think that's higher than what most people thought what it will be. What's the sustainability of that? And what's really been driving that to the level that it is? Thanks.

Yeah, great question. We have some of our locations around the world where they were heavy services -- their business model is heavy on services in the past. They actually have a one-to-one services attach rate. So for every $1 of subscription, they do $1 of services. We have one of our licensee partners that it's more than 1:1. So we think there's still room for services to grow. What drives that there is, a couple of things. One, the nature of the problems we're helping clients solve. Oftentimes, they want us, to help them solve those. So if we're coming in and engaging a group of more senior leaders, that L&D person who might be comfortable and happy to rollout to first level leaders in the organization, they want a trusted Franklin Covey consultant to come in and work at the higher levels in the company. Or if we're taking on topics around some sensitive culture issues that are important to be addressed at the executive level, they're looking for our folks to come in, who've been there done that many, many times and who can challenge and push appropriately. Another thing that's driving that is actually, I think we're benefiting from -- frankly, from the pandemic in this area, where services sales dropped off significantly in the first quarter or two of the pandemic, because they were all booked as live in person. And our clients, even though we had the capability to do live online, our clients weren't ready, and so they just kind of froze and canceled. As we've converted our clients to live online, we've seen services increase, and I think that's a function of the fact that you used to have to go away and clear your schedule for a day or two to go to training. And now you can fit 90-minute live online modules into the scenes of your workday and your work week. And organizations who are, working remote or hybrid, they need ways to convene groups of people together, to keep that team interaction high and to keep the culture of their team intact. And so as live online, I think, is here to stay, I think that has been a real boon to our services business. And of course, clients also are asking us to start coming back in, in person, and we have that as well that our whole business used to be built on that. And so we get to benefit from both sides of that as a kind of a happy -- not that anything about the pandemic was happy, I don't want to say that, but it kind of is as an outcome of what happened with the pandemic.

Thanks, Paul.

Okay. Thanks, Jeff.

And the next question comes from Marco Rodriguez from Stonegate Capital Markets.

Good afternoon everybody. Hi. Thanks for taking my questions. Just wondering if maybe you could talk a little bit about the cash build up on the balance sheet. I know you've obviously discussed some additional investments you're making during the back half of this year. Can you maybe just talk a little bit more about what you're thinking about with that cash, because it's -- that are pretty substantially high level in comparison to historically?

Steve, do you want to take that one?

Yes, it is. It's a good problem to have, Marco. So our view of using cash and our alternative uses of cash is very similar to what it's been in the past, Marco. And that is the alternatives that we have are similar to what we've talked about before. One is growing the -- having the cash to grow the business, to make the investments we need to make. And we clearly have enough cash, and we generate enough cash to do the things, Paul is talking about, develop the content, add the client partners, do all of those things that would allow us to grow. And I think that's our first priority, and we clearly have enough cash to do that and we generate enough cash to do that. So then we're looking at alternative uses of cash, and that would automatically include acquisitions and buying back shares. So as you know and as Paul mentioned, we've had a net decrease in our shares outstanding of $6 million over the years we've been here. So we've shown a willingness to buy back shares and an understanding of the value of buying back shares. We also understand in this -- we understand that acquisitions like the slide that Paul showed, those acquisitions have been very beneficial to us. And we'll keep looking for acquisitions that we -- that would either bolt in or give us a better platform or some way accelerate our revenue, bring in some revenue. So we'll continue to look at acquisitions and might well have in the future since we have that cash that we have now, a combination of where we do some acquisition work and we do some buyback, repurchasing of shares. And then we don't think it's all bad to have some cash on the balance sheet. So Marco, I think we're looking at it very similar to where we've looked at it in the past. And we're very conscientiously trying to look at what the best use of that cash would be.

Got it. Yes, very well understood. Has -- just under curiosity, do you have any like one-time distributions ever come up as far as use of that cash?

Well, we've done a couple of tender offers if that's what you are talking about, repurchases. We haven't had any dividend type of distributions, but we've done, as you know, over the years while we've been here, a couple of tender offers and then have done a lot of open market repurchases.

Got it. And then I was wondering, if you could then also circle back around just on the client partners, I believe it was in the last call or maybe it was the prior call. We were talking about there's a potential or you're thinking about different ways in which you can maybe accelerate the amount of client partners that you can bring in per year. I'm wondering, if there's been any updates in regard to that, if there's been any other thought processes around that, that we can maybe see a spike in the client partner hiring after this fiscal year and beyond?

Yeah. That's a great question. You can imagine that topic is an important topic, and we talk about a lot. How do we ramp the existing ones more quickly and how do we create a system where we can bring people on more effectively. And so I think the short answer is yes. I think over time, you could expect to see that what used to be, hey, let's organize at 10 a year and we kind of got to where we were able to add 20. We added 31 right before the pandemic hit. We were fortunate to add 20 last year. We're working at 30 this year. That's kind of the new floor and then we build from there. To answer your question about what does it take. So for us, it's finding the talent. It's making sure we have the management and coaching infrastructure internally to support increasing new hires and kind of a sales enablement function. So that's what we're working to build out. We know what we have is – we have the right product and we have the right market, and it's a really exciting market. And so I think we're – our plans are consistent with kind of what your ask is there and we'll be prepared to talk more about that as we get into the beginning of next year when Steve updates targets.

Understood. Well, thanks, guys. I really appreciate your time.

Thank you.

And our next question comes from Samir Patel, Askeladden Capital. Your line is open.

Hi, Samir.

Hey, guys. Congrats on a great quarter. So the first thing I wanted to talk about was, you mentioned, Paul, almost offhand. I'm surprised it hasn't gotten any attention yet. But you mentioned that, your long-term revenue growth targets are increasing from that kind of high single-digit level towards, you said, teens in the near term and then towards 15% or 20% in the longer term. I mean, obviously, you have that momentum in your business now. I know something we've talked about, why not grow faster? Maybe you could spend a little time, just open ended question, maybe you could flesh out why you aren't being more, I guess, aggressive sort of about making that a public target of – company 15% to 20% a year?

Yeah. Great. It's a great question. So…

You're already doing that, right? I mean, I recognize that there – I recognize there's some benefit right now because you're kind of rebounding from COVID and Leader in Me and all that, but…

Yeah. Yeah, I think that's – maybe two things I would respond to there. First, is kind of just – and you know this, but I'll just to say it again, what's happening in the business is Franklin Covey is this $250 million, $260 million company that prior to – part of the invention of the All Access Pass was kind of a mid to high single-digit grower. And what's been happening over the last six years is there's this powerful SaaS-like business that's exploding inside the company. And that's both All Access Pass and our Leader in Me subscription business. And those are growing very, very rapidly. And as they grow to become eventually substantially all of our revenues, that just naturally should drag the growth rate of the company higher. In the short run -- and so we believe that will happen, we see that happening, you see that happening. In the short run, there are some things that are still holding that growth down just a little bit. One, Steve talked about is just we have some parts of the world that haven't yet fully converted to subscription. And as they do, those sales go out on the balance sheet. And so that mutes the growth for a period of time until they're all the way over like we are in North America. Second, we still are feeling some pandemic-related impacts in China and in Japan. China is dealing with the pandemic right now. Japan is kind of still dealing with the aftermath of the pandemic, a little bit slow to come around. And so we've got a couple of those things that are just holding it down a bit, which is where you're seeing big year-over-year comps in the first half of the year and then not quite as much growth in the second half of the year, although we feel great about the growth rates we are putting out. But I think, generally speaking, what you're alluding to is what we see will happen over time. And as we move through this year and think about how we want to position and what we want to say publicly about that next year, well, we're talking about the very same thing you're asking.

Okay. That makes sense. I mean it's just -- I know you guys always stand that guidance, but it's starting to get a little sort of ridiculous at this point with the momentum you have in your business. And I'm not talking about -- I'm not even talking about 22%, because I understand the pandemic impacts. I'm just saying like $45 million of EBITDA for next year seems like a pretty easy hurdle unless you guys are planning to invest substantially in ramping up growth and you're kind of not targeting either anyway. So that was question one. Question two, to go back to, I think Marco asked you about the cash and it'll be a little more explicit. I mean you guys are going to be at negative three times net debt to EBITDA by the end of this year, which is not anywhere close to an optimized balance sheet for a business with highly recurring revenue, very predictable. Why -- and I'm all four -- as a big shareholder, I'm all for having cash on the balance sheet, but it does seem like a lot. I mean, I guess, Paul, why not commit to something more like a programmatic return of capital, right? Like as opposed to just letting cash. Historically, you've kind of done a lot of tenders. Why not be just more of like, hey, we're going to devote 20%, 30% of annual free cash flow to share repurchases. We're going to have a dividend of 15%, 20% of free cash flow and then the remaining 50% we're going to keep for funding potential M&A. Like why not -- and those are numbers, but why not commit to that sort of programmatic approach that I think a lot of companies have?

I'll give a short answer, then Steve. I think that's a great recommendation and this is this -- what to do with cash because we know we are generating, and we expect to generate a lot of cash in the future and how quickly do we think the growth rate will continue to tick up or are two important topics. And I think your recommendation there is fine recommendations. It's good. Steve, what would you add on cash?

Agreed, Samir, to have a more formalized and discussed plan that we could let the street know what we're thinking on those specific targets. When we get conclusions drawn, just exactly what you're saying, how much of free cash flow are we going to spend on this and on that, I think, is a really good recommendation and something that we're looking at and that we will do.

Okay. That makes sense. And then I guess the final question, going a little bit deeper on the client partners. Obviously, a very tough environment for talent right now. Maybe could you just talk in a little bit more depth about various -- you mentioned hiring a couple of additional recruiters. Maybe you could just go in a little bit more depth about, why you think Franklin Covey can attract talent. I mean, I know we've talked about the sales compensation model being very attractive. But I guess, I'm a little -- I know it's not atypical, but I guess I'm a little surprised that you're kind of down eight CPs at this point?

Yes. Yes. To put that in context, at the same point last year, we were down, I think, five and so that's not uncommon, just the seasonality of it. But to your larger question, we've actually more than doubled the size of the recruiting team. So it's a pretty meaningful add in terms of number of recruiters that are out there. I think the reason we believe that we can win in that space is, one, we're doing something that we think is quite unique in the industry. And we're -- what we're building and what we're assembling is working. It's very attractive for our clients. And if you're a salesperson, that's the kind of thing you want to go and sell, something that -- we have the sterling brand and reputation. We have -- we enjoy very, very high levels of client loyalty and retention. And the way we've set up our sales structure is that our salespeople, they win when they sell new logos and they win as they retain those logos. And so from a compensation standpoint, that's attractive. But I think we're putting a lot into making the overall offering as great as it can be and as indispensable as it can be for clients. And so many of those that we're winning are coming from -- actually in recent times here coming from other Ed SaaS -- EdTech companies, who haven't been able to grow revenue and EBITDA at the same time and are having to cut back on things like customer acquisition cost, expenses and things like that, and they're coming and saying, hey, wow, Franklin Covey looks, this is where I want to come work. Our culture is fantastic as well. And so, we think we have a very compelling kind of total rewards plus culture value prop for new salespeople and are really focused on that.

Thanks. No, I appreciate that. Okay. Yes, I mean my final comment is just like, look, operationally, you guys are doing absolutely phenomenally, right? I don't think that anyone could criticize what you're doing. But from a stock valuation perspective, obviously, when -- just on an intrinsic DCF basis, it's worth $70, $80, $90 a share. And forget about comps, right, where EdTech comps trade. So just keep working on taking care of that part of it, too, and I think everything will be great. So, thanks, Paul. Appreciate it.

Thank you, Samir. That’s great.

And this concludes the question-and-answer session. I'll now turn the call back over to Paul Walker for final remarks.

Well, thanks, everyone, for joining today. Thanks for your great questions, and thanks for your continued interest and support. We really appreciate you and hope you have a wonderful rest of your day and your week.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.