Q1 2024 Franklin Covey Co. Earnings Call
Hello and thank you for standing by. Welcome to Franklin Colby Q1 2024 Ernest Conference call.
Hello, and thank you for standing by walking through Franklin Covey, Q1, 'twenty 'twenty four earnings conference call.
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Thank you.
Derek Hatch: Hello, everyone. On behalf of Franklin Covey, I would like to wish everyone a happy new year in hopes for a peaceful and prosperous 2024.
Hello, everyone on behalf of Franklin Covey, I would like to wish everyone, a happy new year and hopes for a peaceful and prosperous 2024 before we begin todays call festivities I would like to remind everybody that this presentation contains forward looking statements within the meaning of the private Securities Litigation Reform Act of $19 95.
Derek Hatch: Before we begin today's call festivities, I would like to remind everybody that this presentation contains forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
Derek Hatch: Forward-looking statements are based upon management's current expectations and are subject to various risks and uncertainties, including but not limited to, the ability of the company to grow revenues, the acceptance of and renewal rates for our subscription offerings, including the all-access pass and leader in the membership.
Forward looking statements are based upon management's current expectations and are subject to various risks and uncertainties, including but not limited to the ability of the company to grow revenues the acceptance of and renewal rates for our subscription offerings include.
The all access pass and leader in me memberships the ability of the company at a higher <unk>.
Derek Hatch: the ability of the company to hire productive sales and other client-facing professionals, general economic conditions, competition in the company's targeted marketplace, market acceptance of new offerings or services and marketing strategies, changes in the company's market share, changes in the size of the overall market for the company's products, changes in the training and spending policies of the company's clients, and other factors identified and discussed in the company's most recent annual report on Form 10-K and other periodic reports filed with the Securities and Exchange Commission.
Your productive sales and other client facing professionals general economic conditions competition in the Companys targeted marketplace market acceptance of new offerings or services and marketing strategies changes in the companys market share changes in the size of the overall market for the Companys products changes in the training and spending policies of the Companys 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.
Derek Hatch: Many of these conditions are beyond our control or influence, any one of which may cause future results to differ materially from the company's current expectations. And there can be no assurance the company's actual future performance will meet management's expectations.
Many of these conditions are beyond our control or influence any one of which may cause future results to differ materially from the company's current expectations and there can be no assurance the company's actual future performance will meet management's expectations. These forward looking statements are based on management's current expectations and we undertake no obligation to update or revise these forward looking statements.
Derek Hatch: These four looking statements are based on management's current expectations and we undertake no obligation to update or revise these four looking statements to reflect events or circumstances after the date of today's presentation, except as required.
To reflect events or circumstances. After the date of todays presentation, except as required by law with out of the way we would like to turn the time over to Mr. Paul Walker, our CEO and president Thank you Derrick.
Paul: With that out of the way, we'd like to turn the time over to Mr. Paul Walker or CEO of the President. Thank you, Derek. Hello, everyone. Happy New Year. Thanks for joining us today. We're glad to have the opportunity to talk to you, and we just want to start out by expressing our appreciation to you, and we're grateful to be with you today. Joining me on the call are Steve Young, our CFO , Jennifer Colisemo, President of the Enterprise Division, Sean Covey, President of the Education Division, as well as other members of our executive team.
Hello, everyone happy new year, Thanks for joining us today, we're glad to have the opportunity to talk to you and we just want to start out by expressing our appreciation to you and.
We're grateful to be with you today joining me on the call are Steve Young our CFO, Jennifer <unk> female president of the Enterprise Division and Sean Covey, President of the Education Division as well as other.
Other members of our executive team.
Paul: We're pleased that though the results in the first quarter were essentially even with last year's first quarter, both revenue and adjusted EBITDA came in stronger than forecast.
We're pleased that.
Though the results in the first quarter were essentially even with last year's first quarter, both revenue and adjusted EBITDA came in stronger than forecasted.
Paul: Even though we also expect the second quarter revenue to, again, be about even with or slightly above prior year, we expect to achieve a significant growth in revenue in the back half of the year with a high flow through of this revenue driving growth in adjusted EBITDA to our target of between $54.5 and $58 million.
Even though we also expect second quarter revenue to again be about even with our slightly above prior year, we expect to achieve a significant growth in revenue in the back half of the year with a high flow through of this revenue driving growth in adjusted EBITDA to our target of between $54 $5 and $58 million.
Paul: We expect this growth in the back half to be driven by several key factors, including the following.
We expect this growth in the back half to be driven by several key factors, including the following.
First there were entering the back half of the year with a lot more billed and unbilled deferred revenue on our balance sheet than a year before.
Paul: First, we're entering the back half of the year with a lot more build and unbuild the Ferd Revenue on our balance sheet than a year before.
Paul: At the end of the first quarter, the sum of our build and unbilled deferred revenue was $169.7 million, a level $18 million higher than at the same time last year.
At the end of the first quarter, the sum of our billed and Unbilled deferred revenue was $169 7 million a level $18 million higher than at the same time last year.
Paul: A meaningful portion of this will flow through into revenue in the back half of fiscal 24 and into fiscal 25.
A meaningful portion of this will flow through into revenue in the back half of fiscal 'twenty four and into fiscal 'twenty five.
Paul: Second is that our invoice subscription revenue is increasing.
Second is that our invoice subscription revenue is increasing.
Paul: After Flattish, All Access passed invoice subscription growth in the second and third quarters last year, which as I might remind you was Flattish on top of significant double digit growth the prior year.
After flattish all access pass Invoiced subscription growth in the second and third quarters last year, which is.
I'd remind you was flattish on top of significant double digit growth the prior year.
Paul: Our invoiced All Access Pass subscription revenue grew significantly in the fourth quarter and again in Q1 this year. We expect this growth will continue in Q2 and for the remainder of this year and beyond, resulting in additional amounts of deferred revenue going onto the balance sheet and flowing through to revenue in fiscal 24 and beyond.
Our invoiced all access pass subscription revenue grew significantly in the fourth quarter and again in Q1 this year.
We expect this growth will continue in Q2 and for the remainder of this year and beyond resulting in additional amounts of deferred revenue going onto the balance sheet and flowing through to revenue in fiscal 'twenty four and beyond.
Paul: Third is that we expect our subscription service to the tax rate to improve.
Third is that we expect our subscription services attach rate to improve.
We expect our subscription services attach rate, which declined from it from 66, 5% to 61, 5% in the back half of last year and through the first quarter of this year.
Paul: We expect our subscription services attach rate, which declined from it from 66.5% to 61.5% in the back half of last year and through the first quarter of this year, we expect that it will return to its historic rate of around 66.5% in Q3 and Q4 of this year.
We expect that it will return to its historic rate of around 66, 5% in Q3 and Q4 of this year driven by a combination of.
Paul: driven by a combination of services delivered to new schools that were brought on late in last year's fourth quarter, and by the impact of the launch of the 3.0 and 5.0 versions of the Speed of Trust and 7 Habits, two of our historic blockbuster solutions.
Service is delivered to new schools that were brought on late in last year's fourth quarter and by the impact of the launch of the three <unk> and five <unk> versions of the speed of trust and seven habits two of our historic blockbuster solutions as well as the launch of our new solution on difficult conversations.
Paul: as well as the launch of our new Solution on Difficult Conversations.
Paul: I'd like to now provide a little bit of additional context about the first quarter itself.
I'd like to now provide a little bit of additional context about the first quarter itself.
Paul: As shown on slide four, our total revenue for the quarter came in at a higher than expected $68.4 million.
As shown on slide four our total revenue for the quarter came in at a higher than expected $68 4 million.
Paul: Revenue for the latest 12 months grew 8.6 million or 3% to 279.6 million.
Revenue for the latest 12 months grew $8 6 million or 3% to $279 6 million.
Paul: And our rolling two-year growth is a very strong $42.4 million, or 18%.
And our rolling two year growth is a very strong $42 4 million or 18%.
Paul: Adjusted EBITDA also came in at a higher than expected $11 million, with this adjusted EBITDA for the latest 12 months through this year's first quarter grew $3.8 million or 9% to 47.6 million.
Adjusted EBITDA also came in at a higher than expected $11 million with this adjusted EBITDA for the latest 12 months through this year's first quarter grew $3 8 million or 9% to $47 6 million.
Paul: And again, our rolling two-year growth in adjusted EBITDA is $13.4 million, or 39%.
And again, our rolling two year growth in adjusted EBITDA is $13 4 million or 39%.
Paul: Our subscription and subscription services sales in the first quarter.
Our subscription and subscription services sales in the first quarter reached <unk>.
Paul: $54.8 million, a level 4% higher than prior year.
$54 8 million a level, 4% higher than prior year.
Paul: Subscription and subscription services sales were $224.7 million for the latest 12 months ended Q1, which is $13.6 million, or 6% higher than the same period of the prior year. And again, our rolling two-year growth was an extraordinarily strong $56.7 million, or 34%.
Subscription and subscription services sales were $224 7 million for the latest 12 months ended Q1, which is $13 6 million or 6% higher than the same period of the prior year and again, a rolling two year growth was an extraordinarily strong $56 7 million or 34%.
Paul: And finally, our balance of billed and unbilled deferred revenue increased $18 million, or 12%, to $169.7 million from the end of the first quarter last year.
And finally, our balance of billed and Unbilled deferred revenue increased $18 million or 12% to $169 7 million from the end of the first quarter last year.
Paul: and grew 48.5 million or 40% over the last two year period.
And grew $48 5 million or 40% over the last two year period.
Paul: Stepping up a level, our results in the first quarter put an exclamation point on three key strengths we've been building for years.
Stepping up a level our results in the first quarter put an exclamation point on three key strengths we've been building for years.
Paul: As you can see shown on slide five, the first of these is the strength of our unique strategic position in the market.
As you can see as shown on slide five the first of these is the strength of our unique strategic position in the marketplace.
Paul: We focus on the most important strategic and durable position in our space.
We focus on the most important strategic and durable position in our space.
Paul: specifically that of helping organizations achieve results that require the collective action of their people.
Specifically that are helping organizations achieve results that require the collective action of their people.
Paul: And we help organizations achieve these results with a combination of best-in-class content delivered through a broad range of delivery modalities and world-class coaching and facilitation that's very difficult to replicate.
And we help organizations achieve these results with a combination of best in class content delivered through a broad range of delivery modalities and world class coaching and facilitation, that's very difficult to replicate.
Paul: The most important thing on the minds and priority lists of CEOs is achieving the type of results that require the collective action of their entire organization. The point I'd like to come back to in just a minute.
The most important thing on the minds and priority lists of Ceos is achieving the type of results that require the collective action of their entire organization.
A point I'd like to come back to in just a minute.
Paul: Our second key strength, as you can see shown there on the slide, is the power of our revenue generating engine.
Our second key strength as you can see shown there on the slide is the power of our revenue generating engine.
Paul: As previously noted, despite being up against some extremely strong post-pandemic accelerated comps over the past four quarters, which have impacted our reported year-over-year percentage growth in those quarters, the continued strength of our underlying revenue generating engine is reflected in the following four key metrics.
As previously noted despite being up against some extremely strong post pandemic accelerated comps over the past four quarters, which have impacted our reported year over year percentage growth in those quarters. The continued strength of our underlying revenue generating engine is reflected in the following four key metrics.
Paul: First, growth in revenue on a rolling two-year basis, again, to normalize. Second, growth of revenue compared to our pre-pandemic high.
<unk> growth in revenue on a rolling two year basis again to normalize.
Second growth of revenue compared to our pre pandemic high <unk>.
Paul: Third, growth of our strategically important subscription and subscription services.
Third growth of our strategically important subscription and subscription services revenue.
Paul: And fourth, growth in our balances of deferred subscription revenue, both billed and unbilled.
And fourth growth in our balances of deferred subscription revenue, both billed and unbilled.
Paul: The third key strength is that of our powerful business model, a model where a combination of increasing revenue per client, high revenue and client retention, high contribution margins.
The third key strengths is that of our powerful business model.
Model, where a combination of increasing revenue per client.
High revenue and client retention.
High contribution margins.
Upfront invoicing.
Low capital intensity.
Paul: and discipline reinvestment for growth all combined to drive significant growth in both adjusted EBITDA and free cash.
And disciplined reinvestment for growth all combined to drive significant growth in both to both adjusted EBITDA and cash and free cash.
Paul: I'd like to address each of these three key strengths in just a bit more detail and wisdom data.
I'd like to address each of these three key strengths in just a bit more detail and with some data.
Paul: First is shown on slide six, the strength of our strategic position, as I just noted, the most important strategic and durable position in our space is that of helping organizations achieve the kind of seismic results that can result from mobilizing the large scale collective action of their people. Why is this.
First as shown on slide six the strength of our strategic position in that.
Just noted the most important strategic and durable position in our space that are helping organizations achieve the kind of seismic results that can result from mobilizing the large scale of collective action of their people.
Why is this so strategically powerful.
Paul: Because almost all of the key strategic and operational results on which CEOs are focused required just that kind of collective action.
Because almost all of the key strategic and operational results on which Ceos are focused required just that kind of collective action.
Paul: As shown on slide 7, each year the Conference Board, the Advisory Board, McKinsey and others conduct surveys to identify the most important things on CEOs' minds and priority list.
As shown on slide seven each year the conference Board the Advisory Board Mckinsey and others conduct surveys to identify the most important things on Ceos minds and priority lists.
Paul: Excluding macroeconomic and geopolitical issues, the vast majority of CEOs top priorities are those areas that require the collective action of the entire organization. I'd like to give you just three examples of this where we're working with clients to support them today.
Excluding macro macroeconomic and geopolitical issues. The vast majority of CEO of top priorities are those areas that required the collective action of the entire organization I would like to give you just three examples of this where we're working with clients to support them today.
Paul: The first is we're working with the CEO of a large and rapidly growing manufacturing company to develop their top 500 global leaders. They're partnering with us to help them build a high-trust and agile culture that can support the rapid growth they've achieved and which they expect to continue to achieve in the
The first is we're working with the CEO of a large and rapidly growing manufacturing company to develop their top 500 global leaders, they're partnering with us to help them build a high trust an agile culture that can support the rapid growth <unk> achieved in which they expect to continue to achieve in the future.
Paul: They recognize that culture is established by the collective behavior of leaders and they've chosen Franklin Covey as their sole leadership development partner.
They recognize that culture is established by the collective behavior of leaders and they've chosen Franklin caveat, there sole leadership development partner.
Paul: They've done this in large part due to the impact of our powerful principle-based content.
They've done this in large part due to the impact of a powerful principle based content.
Paul: it's direct relevance to building the type of winning culture they desire, and our ability to scale our solutions across their global population.
It's direct relevance to building the type of winning culture, they desire and our ability to scale our solutions across their global population.
A second example is where we're partnering with the chief Human Resource officer of a large 100000 person firm to deploy multiple Franklin covey solutions across the entire organization.
Paul: Our second example is where we're partnering with the Chief Human Resource Officer of a large 100,000 person firm to deploy multiple FranklinCovey solutions across the entire organization.
Paul: They've chosen us as their partner because of the powerful way in which our content shifts mindset and behavior.
They've chosen us as their partner because of the powerful way in which our content shifts mindsets and behaviors.
Paul: versus simply teaching people to check off to do's from a checklist.
Versus simply teaching people to check off to do from a checklist.
Paul: They want us to develop common mindsets, skill sets, and a consistent language across the entire organization, or what we refer to as collective action and where they're partnering doing this.
Want us to develop common they want if they want to develop with our help common mindset skill sets and a consistent language across the entire organization or what we refer to as collective action and we're their partner in doing this.
Paul: And the third example is where we're partnering with a large transportation company that has a very clear strategy for winning in their chosen market. However, like so many organizations, they've had a difficult time translating that strategy from the boardroom to the actions of those in the front line of the organization. There's clients engaging us to equip their leaders with the skills and tools to create a culture of execution, where people at the front line are engaged to execute the critical priorities that will translate strategy into results.
And the third example is where we're partnering with a large transportation company that has a very clear strategy for winning in their chosen market. However, like so many organizations they've had a difficult time translating that strategy from the boardroom to the actions of those in the frontline of the organization.
As clients engaging us to equip their leaders with the skills and tools to create a culture of execution where people at the frontline are engaged to execute the critical priorities that will translate strategy into results.
Paul: As shown on slide eight, being our clients partner of choice for addressing opportunities and challenges like those just noted translates into a number of powerful outcomes for Franklin Covey, including consistently winning new local
As shown on slide eight being our client's partner of choice for addressing opportunities and challenges like those just noted translates into a number of powerful outcomes for Franklin covey, including.
Consistently winning new logos or new clients.
Paul: achieving the strong attachment of subscription services to help clients achieve performance breakthroughs, retaining substantially all of our subscription revenue, increasing our average...
Cheating a strong attachment of subscription services to help clients achieve performance breakthroughs retaining substantially all of our subscription revenue.
Increasing our average contract size.
Paul: increasing the percentage of logos and revenue under multi-year contracts, and achieving a high and growing lifetime customer value.
Increasing the percentage of logos and revenue under multiyear contracts and achieve achieving a high and growing lifetime customer value.
Paul: For the latest 12-month period through this year's first quarter, we're really pleased to continue to achieve strong results on each of these key outcomes.
For the latest 12 month period through this year's first quarter. We're really pleased to have continued to achieve strong results on each of these key outcomes.
Paul: In the sales of all access paths to new logos in the enterprise division and leader in these subscriptions to new schools in the education division remain strong in the first quarter and for the latest 12-month period.
In the sales of all access pass to new logos in the Enterprise Division and leader in me subscriptions to new schools in the Education Division remained strong in the first quarter and for the latest 12 month period.
Paul: Our revenue retention levels remain very high in the first quarter and for the late of 12 months. In the Enterprise Division in North America in the first quarter, we achieved all access past subscription revenue retention levels greater than 90 percent, and in the education division, we continued to achieve high levels of school retention.
Our revenue retention levels remain very high in the first quarter and for the latest 12 months in the Enterprise Division in North America in the first quarter, we achieved all access pass subscription revenue retention levels greater than 90% and in the Education Division, we continued to achieve high levels of school retention.
Paul: An increasing percentage of clients are also entering into multi-year contracts. As you can see shown on slide 9, the percentage of clients, all-access pass clients, entering into multi-year contracts increased even further from its already high levels. In the first quarter, 54% of all-access pass clients entered into multi-year contracts of at least two years, up from 48% at the end of Q1 fiscal 23.
An increasing percentage of clients are also entering into multiyear contracts as you can see as shown on slide nine.
The percentage of clients all access pass clients entering into multi year contracts increased even further from its already high levels in the first quarter.
54% of all access pass clients entered into multi year contracts are at least two years up from 48% at the end of Q1 fiscal 'twenty three.
Importantly, an even higher 60% of all access pass subscription revenue is now under multiyear contracts of at least two years up from 55% at the end of the first quarter last year.
Paul: Importantly, an even higher 60% of all excess past subscription revenue is now under multi-year contracts of at least two years, up from 55% at the end of the first quarter last year.
Paul: Our clients commit to these multi-year agreements because of the importance and the ongoing nature of the opportunities and challenges they face that require the collective action of their people.
Our clients commit to these multiyear agreements because of the importance and the ongoing nature of the opportunities and challenges they face that require the collective action of their people and because of the value they're receiving from a long term partnership with Franklin Covey. These long term contracts provide a tremendous foundation for both the predictability and acceleration of <unk>.
Paul: and because of the value they're receiving from a long-term partnership with Franklin Covey. These long-term contracts provide a tremendous foundation for both the predictability and acceleration of future revenue growth.
Future revenue growth.
Paul: As shown on slide 10, the second key strength I'd like to focus on today is the power of our revenue generating
As shown on slide 10, the second key strength I'd like to focus on today is the power of our revenue generating engine.
Paul: As noted, the strength of our underlying revenue-generating engine is reflected in four key metrics, which we've summarized on slide 11.
As noted the strength of our underlying revenue generating engine is reflected in four key metrics, which we have summarized on slide 11.
Paul: First, the tremendous growth in revenue achieved over the past two years.
First the tremendous growth in revenue achieved over the past two years. This.
Paul: This two-year look helps to normalize for periods which benefited from comping to pandemic-impacted quarters.
This two year look helps to normalize for periods, which benefited from comping to pandemic impacted quarters.
Paul: As shown over the past two years, our latest 12 months revenue has grown a very strong $42.4 million, or 18%.
As shown over the past two years, our latest 12 months revenue has grown a very strong $42 4 million or 18%.
Second.
Paul: is the significant growth of our revenue compared to our pre-pandemic high. Our latest 12 months revenue through this year's first quarter increased to $279.6 million, which represents growth of $54.2 million, or 24% compared to our pre-pandemic high in fiscal 2019.
Is the significant growth of our revenue compared to our pre pandemic high.
Our latest 12 months revenue through this year's first quarter increased to $279 $6 million, which represents growth of $54 2 million or 24% compared to our pre pandemic high in fiscal 2019.
Paul: Third is the even more rapid growth of our strategically important subscription and subscription services revenue.
Third is the even more rapid growth of our strategically important subscription and subscription services revenue for.
Paul: For the latest 12-month period through this year's first quarter, our subscription and subscription services revenue grew $13.6 million, or 6%.
For the latest 12 months period through this year's first quarter, our subscription in subscription services revenue grew $13 6 million or 6% and.
Paul: And importantly, our two-year growth was 56.7 million or 34%.
And importantly, our two year growth was $56 7 million or 34% and subscription in subscription services growth remarkably has more than $100 million or 81% compared to our pre pandemic high.
Paul: and subscription and subscription services growth remarkably is more than 100 million dollars or 81% compared to our pre-pandemic high.
Paul: And fourth is the tremendous growth in our balances of deferred subscription revenue, both billed and unbilled. In this year's first quarter, our balance of deferred subscription revenue, billed and unbilled, increased to $169.7 million, reflecting year-over-year growth of $18 million, or 12%.
And fourth is the tremendous growth in our balances of deferred subscription revenue, both billed and Unbilled and this year's first quarter, our balance of deferred subscription revenue billed and unbilled increased to $169 7 million, reflecting year over year growth of $18 million or 12%.
Our two year growth of $48 5 million with 40% and our balance of deferred subscription revenue billed and Unbilled has grown by $81 5 million or <unk> 92, 5% compared to our pre pandemic level.
Paul: Our two-year growth of 48.5 million was 40% and our balance of the third subscription revenue built in a build is grown by 81.5 million or 92.5 percent compared to our pre-pandemic level.
Paul: This dramatic growth in deferred subscription revenue on both a dollar and percentage basis establishes a very strong foundation for continued strong revenue growth in the coming quarters and years.
This dramatic growth in deferred subscription revenue on both a dollar and percentage basis establishes a very strong foundation for continued strong revenue growth in the coming quarters and years.
And finally, the third point you can see as shown on slide 12, the third key strength is the strength of our business model.
Paul: As you know, our business model results in a significant portion of incremental revenue falling through to increases in adjusted EBITDA and free cash flow.
As you know our business model results in a significant portion of incremental revenue flowing through to increases in adjusted EBITDA and free cash flow.
I'd like to briefly review the key elements of our business model to drive this as shown on slide 13. These factors include.
Increasing revenue per client.
High revenue retention.
High contribution margins.
Upfront invoicing.
Low capital intensity.
And disciplined reinvestment for growth.
We touch on each of these drivers to show how their interplay drives high and increasing adjusted EBITDA and cash flow.
First as it relates to increasing revenue per client as shown on slide 14, our revenue per all access pass client has grown from $54000 in fiscal 2018 to more than $83000 in fiscal 'twenty three comp.
Compounded growth of 9%.
This strong increase in average revenue per client results from a combination of continuing.
Paul: This strong increase in average revenue per client results from a combination of continuing to increase the percent of total populations through which we serve inside a typical client and the pricing power we gain as a result of the impact our solutions provide to our clients.
Inc.
Continuing to increase the percent of total populations through which we serve inside a typical client and the pricing power we gain as a result of the impact our solutions provide to our clients.
The second point is our high revenue retention and client retention in the Enterprise Division in North America in Q1, all access pass subscription revenues I mentioned exceeded 90% in the education Division as we reported at the end of Q4 fiscal 'twenty three leader in.
Retention remains at a remarkably high level of greater than 85%.
The third key element of our business model is our increasing adjusted EBITDA margins.
Paul: As shown in slide 15, the combination of strong gross margins and declining operating SG&A as a percent of sales has resulted in steadily increasing adjusted EBITDA margins, reaching 17% for the latest 12-month period.
As shown in slide 15, the combination of strong gross margins and declining operating SG&A as a percent of sales has resulted in steadily increasing adjusted EBITDA margins, reaching 17% for the latest 12 month period.
Fourth is our upfront invoicing.
Paul: With upfront invoicing, working capital is actually a source of cash for us.
With upfront invoicing working capital is actually a source of cash for us subscription.
Paul: subscription contracts are billed at the start of the contract term and cash is collected long before the subscription contracts full revenue is realized.
Contracts are billed at the start of the contract term and cash is collected long before the subscription contracts full revenue is realized.
Paul: Multi-year contracts are generally billed one year in advance and are non-canceled.
Multi year contracts are generally billed one year in advance and are noncancelable.
Paul: And the timing of collections and cash outflows is a durable aspect of our business model.
And the timing of collections and cash outflows as a durable aspect of our business model.
Fifth is our low capital intensity.
Paul: Historically, as you know, our CAPEX spending is a small percentage of our overall revenue and is primarily related to technology infrastructure and a small amount for real estate.
Historically as you know our Capex spending is a small percentage of our overall revenue and is primarily related to technology infrastructure and a small amount for real estate improvements.
Paul: And finally, the sixth key element of our business model is discipline reinvestment for growth.
And finally, the six key element of our business model is disciplined reinvestment for growth.
Paul: Our largest growth investments are in our sales force in order to capture our vast underpenetrated addressable market, all of which, by the way, is fully funded through our P&L.
Our largest growth investments are in our sales force in order to capture our fast underpenetrated addressable market all of which by the way is fully funded through our P&L.
Paul: and investments in content and innovations, which is amortized and flows through the P&L in the form of cost of goods sold.
And investments in content and innovations, which is amortized and flows through the P&L in the form of cost of goods sold.
Paul: We manage sales costs to grow about in line with revenue over time, offsetting wage inflation with price.
We managed sales cost to grow about in line with revenue over time offsetting wage inflation with pricing.
As a result of this business model, we've generated significant growth in adjusted EBITDA and free cash flow.
Paul: As a result of this business model, we've generated significant growth in adjusted EBITDA and free cash flow. In fact, as shown on slide 16, in the eight years since the beginning of our conversion to subscription in fiscal 2016 through this year's first quarter, we've generated cumulative adjusted EBITDA of $210.6 million and cumulative free cash flow of $204.3 million.
In fact as shown on slide 16 in the eight years since the beginning of our conversion to subscription in fiscal 2016 through this year's first quarter, we have generated cumulative adjusted EBITDA of $210 $6 million and cumulative free cash flow of $204 3 million.
Paul: As also shown on slide 16, we've invested approximately $32.7 million of this free cash flow for Tuckin acquisitions, such as Jonna and Strive, which have broadened our ability to deliver our solutions flexibly and at scale, and have returned a substantial amount of the remaining free cash flow to shareholders.
As also shown on slide 16, we have invested approximately $32 $7 million of this free cash flow for tuck in acquisitions, such as Gianna and strive, which have broadened our ability to deliver our solutions flexibly and at scale and have returned a substantial amount of the remaining free cash flow to shareholders.
Paul: Specifically during the state year period, we return more than $143.5 million, or just over 70% of the free cash flow we generated.
Specifically during this eight year period, we've returned more than $143 $5 million or just over 70% of the free cash flow we generated.
Paul: We've returned this to shareholders through the repurchase of more than 5.3 million shares of common stock, including more than $51 million over the past 12 months and $72 million over the past 24 months.
We've returned to shareholders in the form.
The repurchase of more than five 3 million shares of common stock, including more than $51 million over the past 12 months and $72 million over the past 24 months.
Paul: Importantly, this is on top of the $102.9 million we utilized to purchase shares prior to fiscal 2016.
Importantly, this is on top of the $102 $9 million, we utilized to purchase shares prior to fiscal 2016.
Paul: In total, since 2002, we've invested more than $246 million in purchasing shares and reduced the company's net share count, outstanding net of stock-based compensation, by more than 14.1 million shares.
In total since 2002, we've invested more than $246 million in purchasing shares and reduced the company's net share count outstanding.
Net of stock based compensation by more than $14 1 million shares.
Paul: This reduction in shares is more than the number of shares we currently have outstanding today.
This reduction in shares is more than the number of shares we currently have outstanding today.
Paul: These shares have been purchased at a weighted average price per share of $17.43.
These shares have been purchased at a weighted average price per share of $17 43.
Paul: We're really pleased that so many of you have been purchasing shares right along with the company and have achieved similarly attractive returns.
We're really pleased that so many of you have been purchasing shares right along with the company and have achieved similarly attractive returns.
Paul: As we noted in the last quarter's report, we expect to achieve continued growth and adjusted EBITDA on free cash flow in the years to come. In fact, in the coming years alone, we expect to generate in the neighborhood of approximately an additional $150 million of free cash flow after making our normal ongoing growth investments in the business, and we would expect to be able to return substantial portions of this cash flow in continued stock repurchase.
As we noted in last quarter's report, we expect to achieve continued growth in adjusted EBITDA and free cash flow in the years to come and in fact in the coming years alone we expect to generate in the neighborhood of approximately an additional $150 million of free cash flow after.
After making our normal ongoing growth investments in the business and we would expect to be able to return substantial portions of this cash flow and continued stock repurchases.
Paul: Why do we have such high conviction and repurchasing our stock? Something we know is shared by many of you as well.
Why do we have such high conviction in repurchasing our stock something we know is shared by many of you as well two simple reasons first because we have high confidence in the market opportunity before us and our ability to execute it.
Paul: two simple reasons. First, because we have high confidence in the market opportunity before us and our ability to exit.
And second because we believe repurchasing our stock even at significantly higher than current prices has a very compelling investment thesis.
Paul: And second, because we believe repurchasing our stock, even at significantly higher than current prices, has a very compelling investment potential.
Paul: That being first that we believe that we are and would be purchasing shares at a significant discount relative to the net present value of our expected cash flow.
That being first that we believe that we are and will be purchasing shares at a significant discount relative to the net present value of our expected cash flows as just noted we believe that both our recent purchases in our purchases over the years reflect this.
Paul: As just noted, we believe that both our recent purchases and our purchases over the years reflect.
Paul: And because we believe that a much smaller than typical percent of the net present value of our company's cash flows is attributable.
And because we believe that.
That are much smaller than typical percent of the net present value of our company's cash flows is attributable to.
Paul: to reliance on the residual exit value of these cash
<unk> reliance on the residual exit value of these cash flows.
Because one purchasing shares at or near our current market cap provides high a high free cash flow yields and we expect free cash flow to grow substantially in the coming years.
Paul: Because one, purchasing shares at or near our current market cap provides high free cash flow yields, and we expect free cash flow to grow substantially in the coming years.
Paul: The combination of these factors gives us confidence in investing excess cash flow in the business and in share repurchases can generate significant additional value for shareholders in the coming years.
The combination of these factors gives us confidence in investing excess cash flow in the business and in share repurchases can generate significant additional value for shareholders in the coming years.
In conclusion, I would just say that we expect the combined power of these three key strengths the strength of our strategic position.
Paul: In conclusion, I would just say that we expect the combined power of these three key strengths, the strength of our strategic position.
Paul: strength of our revenue generating engine and the strength of our business model to continue to generate strong and accelerating growth in revenue, adjust the EBITDA and free cash flow.
The strength of our revenue generating engine.
And the strength of our business model to continue to generate strong and accelerating growth in revenue adjusted EBITDA and free cash flow.
Paul: And specifically, as noted previously, we believe that the combination of having a lot more build and unbuild revenue on our balance sheet than ever before, achieving accelerated growth in our subscription.
And specifically as noted previously we believe that the combination of having a lot more billed and unbilled revenue on our balance sheet than ever before achieving accelerated growth in our subscription revenue and returning our subscription services attach rate to its historic average well results and adjusted EBITDA, increasing to between 54 and a half.
Paul: And returning our subscription services attach rate to its historic average will result in adjusted EBITDA increasing to between $54.5 and $58 million in fiscal 24.
And $58 million.
In fiscal 'twenty four.
Speaker Change: I'd now like to turn some time over to Steve to discuss our results for the first quarter and the latest 12 months in a bit more detail, and Steve will also review our guidance. Steve, thank you, Paul. Good afternoon, everyone, it's a pleasure to be with you today.
I'd now like to turn some time over to Steve to discuss our results for the first quarter and the latest 12 months in a bit more detail and Steve will also review our guidance Steve.
Thank you Paul good afternoon, everyone, it's a pleasure to be with you today.
Steve: I would like to briefly provide more detail on the factors underlying this performance focusing on the results in three key areas of the company, specifically our enterprise business in North America.
I would like to briefly provide more detail on the factors underlying this performance focusing on our results in three key areas of the company specifically our enterprise business in North America.
The enterprise business internationally in both our direct offices and licensees and our education business, which is also primarily in North America.
As shown on slide 17 results and our enterprise business in North America continued to be strong in the first quarter and latest 12 month periods.
Reported sales in North America, which accounts for 43% of total enterprise Division sales.
Steve: were $38.4 million in the first quarter.
Were $38 4 million in the first quarter.
Level almost equal to the prior year and this on top of a strong 16% growth.
<unk> in the first quarter of FY2023.
Steve: For the latest 12 months, revenue grew 2% on top of 17% growth in the prior year. And we are pleased with the result we have achieved in the enterprise business in North America over the past two years.
For the latest 12 months revenue grew 2% on top of 17 growth percent growth in the prior year and we are pleased with the result, we have achieved in the enterprise business in North America over the past two years.
We expect to beginning in Q3 of <unk>.
Steve: We expect the beginning in Q3 of FY24, our year-over-year comparisons will normalize.
FY 'twenty four or year over year comparisons will normalize.
Steve: Subscription and subscription services sales in North America, or even with prior year in the quarter, on top of the 20% growth achieved in last year's first quarter.
Subscription and subscription services sales in North America, or even with prior year in the quarter.
On top of the 20% growth achieved in last year's first quarter.
Steve: For the latest 12 months, growth was 4% on top of 24% in the prior year. And we're pleased with that.
For the latest 12 month growth was 4%.
On top of 24% in the prior year.
And we are pleased with these growth rates.
Steve: Our balance of deferred revenue, build and unbilled, in North America continued to be strong, growing 7% in the quarter, on top of 25% in last year's first quarter, establishing, as Paul said, a strong foundation for next year's growth.
Our balance of deferred revenue billed and Unbilled in North America continued to be strong growing 7% in the quarter on top of 25% in last year's first quarter, establishing as Paul said, a strong foundation for next year's growth.
Steve: And the percentage of North America's all excess past clients that were for multi-year periods increased to 54% from 48% in the first quarter last year.
And the percentage of North American is all access pass clients that were for multiyear periods.
Increased.
$2, 54%.
48% in the first quarter last year.
Steve: And the percentage of invoice sales represented my multi-year contracts increased to 60% from 55% in the first quarter last year.
And the percentage of invoice sales represented my multiyear contracts increased to 60% from 55% in the first quarter last year.
As shown on slide 18.
Steve: revenue from our international operations, which account for approximately 17% of our total enterprise division revenue.
Revenue from our international operations, which account for approximately 17% of our total enterprise Division revenue.
Steve: decreased by 0.6 million or 7 percent in the quarter, primarily due to declining legacy, which is non-all-access pass-related sales. Sales in these offices have grown 4 percent or 1.3 million in the latest 12 months.
Decreased by <unk> 6 million or 7% in the quarter, primarily due to declining legacy which is non all access pass related sales sales in these offices have grown 4% or $1 3 million in the latest 12 months.
Also on slide 18.
Steve: Our international licensee partner sales increased 3% in the quarter on top of 9% in last year's first quarter and for the latest 12 months sales were up 8% on top of the 15% in the prior year.
Our international licensee partner sales increased 3% in the quarter on top of 9% in last year's first quarter and for the latest 12 months sales were up 8% on top of the 15% in the prior year.
Steve: Finally, as shown on slide 19, the results in our education business, which accounts for approximately 25% of the total company sales.
Finally, as shown on slide 19, the results in our education business, which accounts for approximately 25% of the total company sales.
Steve: grew 3% for the quarter on top of the 23% growth achieved in the first quarter last year.
Grew 3% for the quarter on top of the 23% growth achieved in the fourth quarter first quarter last year.
Steve: Sales grew 9% for the latest 12 months, on top of 21% later latest 12-month growth in the previous year.
Sales grew 9% for the latest 12 months.
On top of 21% later latest 12 month growth in the previous year.
Steve: Education subscription and subscription services sales were flat in the quarter, but strong in the latest 12 months, growing 4.6 million or 8%.
Education subscription and subscription services sales were flat in the quarter, but strong in the latest 12 months.
$4 6 million or 8%.
Steve: on top of 11.8 million or 25% last year.
On top of $11 8 million or 25% last year.
Steve: Education's balance of deferred subscription revenue, billed and unbilled, increased 29% in the quarter.
Education's balance of deferred subscription revenue billed and unbilled increased 29% in the quarter.
Steve: Now, just a little bit more about education. The education division. As you recall, not many years ago, the education division was small and had a traditional service and materials business model.
Now just a little bit more about education as Youll recall, the education Division as you recall not many years ago, The education Division, where small and had a traditional service and materials business model.
Steve: We're pleased that it's shown on slide 20 since the launch of the Leader of May subscription and education division.
We are pleased that as shown on slide 20.
Since the launch of the leader in me subscription in Education Division.
Steve: revenue has grown substantially from just over 3 million in its first year to more than 70 million over the latest 12 months.
Revenue has grown substantially from just over $3 million in its first year to more than $70 million over the latest 12 months.
Steve: And the business model has transformed to closely mirror that of enterprise.
And the business model has transformed to closely mirror that of enterprise.
Steve: with approximately 90% of education revenue now represented by subscription and subscription services revenue.
With approximately 90% of education revenue now.
Represented by subscription and subscription services revenue.
Steve: A level that is very similar to that of enterprise division.
A level that is very similar to that of the enterprise Division.
Steve: We also expect that after years of accelerated investment, the education divisions adjusted EBITDA margins will also expand NFY24 and beyond.
We also expect that after years of accelerated investment the education division's adjusted EBITDA margins will also expand in FY 'twenty four and beyond.
Steve: Now a little bit about cash flows and more about cash flows and balance sheets.
Now a little bit about cash flows and battle and more about cash flows and balance sheet.
Steve: As shown on slide 21, our cash flows from operating activities was $17.4 million at the end of the first quarter compared to $3 million in Q1 last year.
As shown on slide 21, our cash flows from operating activities was $17 four.
$4 million at the end of the first quarter compared to $3 million in Q1 last year.
Steve: Our free cash flow in the first quarter increased to $13.7 million, compared with $0.8 million for the prior year, reflecting that changes in the elements of working capital were very favorable in Q1 this year.
Our free cash flow in the first quarter increased to $13 7 million compared with <unk> 8 million for the prior year.
Reflecting the changes in the elements of working capital were very favorable in Q1 this year.
Compared to Q1 last year.
Steve: particularly referring to accounts receivable, accounts payable crude liabilities and deferred revenue.
Particularly referring to accounts receivable accounts payable accrued liabilities and deferred revenue.
Steve: In Q1, we invested $16.3 million to purchase 409,000 shares.
In Q1, we invested $16 3 million to purchase 409000 shares.
Steve: Over the past four quarters, as Paul said, we've invested $51 million to purchase shares.
Over the past four quarters as Paul said, we've invested $51 million to purchase shares.
Steve: We ended the quarter still with 96.5 of total liquidity, including $34 million in cash.
We ended the quarter still with <unk>.
96, five of total liquidity.
Including $34 million in cash.
Steve: and $62.5 million available under the revolving credit facility, even after investing this $16.3 million in stock purchases this quarter.
And $62 $5 million available under the revolving credit facility, even after investing is $16 3 million in stock purchases this quarter.
Steve: Compared to Q1 of FY23, the sum of billed and unbilled deferred subscription revenue increased 12% to almost $170 million.
Compared to Q1 of FY2023.
Billed and Unbilled deferred subscription revenue increased 12% to almost $170 million.
Steve: giving us increased visibility into future sales results.
Giving us increased visibility into future sales results.
Steve: The deferred subscription revenue increased 14% to $87 million.
The deferred subscription revenue increased 14% to $87 million.
Steve: while the unbilled deferred revenue increased 10% to $82.5 million.
While the Unbilled deferred revenue increased 10% to $82 5 million.
Steve: I just had you be dying the quarter, as I said, was a strong 11 million.
Adjusted EBITDA in the quarter as you said was a strong $11 million.
Now guidance.
Steve: As you know, Franklin Covey's financial strategy is to consistently grow revenue and at the same time, experience a high flow through of that increased revenue to increase the adjusted EBITDA and free cash flow.
As you know Franklin Covey, its financial strategy is to consistently grow revenue and at the same time experienced a high flow through of that increased revenue to increase to adjusted EBITDA and free cash flow.
Steve: Consistent with that strategy, we affirm our previously issued guidance for FY24 that adjusted EBITDA will increase by approximately 17% at the midpoint of the range to between 54.5 and 58 million.
Consistent with that strategy, we affirm our previously issued guidance for FY 'twenty for that adjusted EBITDA will increase by approximately 17% at the midpoint of the range to.
To between 54, five and $58 million.
Steve: in constant currency compared to the 48.1 million achieved in FY23.
In constant currency.
<unk> to the $48 1 million achieved in FY2023.
This guidance reflects our expectation of achieving low double digit net sales growth in the back half of the year.
Steve: This guidance reflects our expectation of achieving low double digit net sales growth in the back half of the year.
Steve: stable or improving world economic conditions, strengthen and result in our international operation.
Stable or improving world economic conditions.
Strengthened and results in our international operations.
Steve: particularly strong financial results in Q4 in our education division.
Particularly strong financial results in Q4, and our Education Division.
Steve: and increased subscription add-on services.
<unk> increased subscription add on services.
Steve: This FY 24 guidance reflects our expectation that we will achieve particularly strong results in Q3 and Q4 of FY 24.
This FY 'twenty forward guidance reflects our expectation that we will achieve particularly strong results in Q3 and Q.
Q4 of FY 'twenty four.
Steve: Our second quarter guidance is that adjusted EBITDA will be between 6.2 and 7.2 million.
Our second quarter guidance is that adjusted EBITDA will be between six to 7.2.
$2 million.
Steve: strong but lower than last year's very strong adjusted EBITDA of $8.2 million.
Strong, but lower than last year's very strong.
Adjusted EBITDA of $8 2 million.
Steve: particularly reflecting a lower services attach rate during the second quarter that is expected to increase during the third and fourth quarter.
Particularly reflecting a lower services attach rate during the second quarter that is expected to increase during the third and fourth quarters.
Steve: In as much as we expect to achieve strong revenue and gross margin, the expectation that the second quarter's adjusted EBITDA performance will be slightly lower than last year is due primarily to our investment in growth this year and benefits in certain accruals last year, like accounts.
And as much as we expect to achieve strong revenue and gross margin.
Expectation second quarters adjusted <unk>.
EBITDA performance will be slightly lower than last year.
Is due primarily to our investment in growth this year and benefits and certain accruals last year.
Like accounts receivable provision.
Steve: We expect our second quarter revenue to be at least even with or to increase slightly over the prior year and could be our highest second quarter revenue ever achieved.
We expect our second quarter revenue to be at least even with or to increase slightly over the prior year and could be our highest second quarter revenue ever achieved.
Steve: As discussed, this guidance obviously reflects the fact that we expect next sales growth rate to accelerate significantly in Q3 and Q4, as I mentioned.
As discussed this guidance, obviously reflects the fact that we expect net sales growth rate to accelerate significantly in Q3 and Q4 as I mentioned.
Speaker Change: While many economic and other factors could impact these expectations, we're we're excited about our future financial position. So, Dr. Ball. Thank you, Steve. Thanks for going through that. And again, we feel quite good about the first quarter and about what we see out ahead. And with that, would like to open the ask the operator to open up the line for questions.
The economic and other factors could impact these expectations, where we are.
Cited about our future financial.
Position so basketball.
Thank you, Steve Thanks for going through that and.
Again, we feel quite good about the first quarter and about what we see out ahead and with that would like to open and ask the operator to open up the line for questions.
Thank you.
Speaker Change: Ladies and gentlemen, as a reminder to ask the question, please press star 1-1 on your telephone and then wait to hear your name announced.
Ladies and gentlemen, as a reminder to ask a question. Please press star one on your telephone and then wait to hear your name announced.
Speaker Change: To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster.
Withdraw your question. Please press star one again.
Please stand by while we compile the Q&A roster.
Our first question comes from the line of Dave Stones with Stonegate. Your line is open.
Good afternoon happy new year, everyone.
You too thanks.
Thanks, Dave.
Speaker Change: Appreciate it. So it looked like calendar year 2023 turned out to be the year without a recession, but just curious how you see clients reacting after, you know, a lot of aggressive belt tightening in, you know, the majority of 2023, and if you see any additional bump in demand during calendar 24.
I appreciate it so it looked like calendar year 2023 turned out to be the year without a recession.
But just curious how you see clients reacting after you know a lot of aggressive belt tightening.
The majority of 2023, and if you see any additional bump in demand during calendar 'twenty four.
Yes, it's a great question.
Speaker Change: I would say it did turn out to be the year without a recession. It's interesting times for sure. I would say that what we're seeing right now has been pretty consistent for the last number of months in that our clients, they they their budget, they have their budgets, they know their budgets, they're moving forward, they've got their plans. And and we we feel relatively.
I would say it did turn out to be the year without a recession, it's interesting times for sure.
I would say that what we're seeing right now has been pretty consistent for the last number of months in that.
Our clients they they their budget they have their budgets they know their budgets, they're moving forward they've got their plans.
And and we feel relatively.
Speaker Change: good about the environment that we're selling into right now. I think there's a feel like there's more certainty in the fact that clients do have budgets and do have plans they're moving forward with.
Good about the environment that we're selling into right now I think there's it.
It feels like there is.
More certainty in the fact that clients do have budgets and our plans are moving forward with which you'll recall we reported in Q2 last year. There was some of our clients that were a little bit more uncertain at that time and that seems to have subsided for the most part.
Speaker Change: Which you recall, we reported in Q2 last year, there was some of our clients that were a little bit more uncertain at that time. And that seems to have subsided for the most part. And I think, you know, behind all of that, though, is the driver that in all times, particularly times that are
And I think.
Behind all of that though is the driver of that in <unk>.
All times, particularly at times that are.
Speaker Change: may be uncertain or where there's where growth is more difficult for companies, they're looking for solutions like those that we provide, right? Right now, people are very focused on do I have the leadership capability inside my organization to execute what it is we're trying to execute?
It may be uncertain, or where there's where growth is more difficult for companies Theyre looking for solutions like those that we provide right right. Now people are very focused on do I have the leadership capability inside my organization to execute what it is we're trying to execute is our culture such that we can attract and retain an a and a tighter les.
Speaker Change: Is our culture such that we can attract and retain in a in a tighter labor market, the kind of talent we're going to need? Do we know how to engage people? And, and, and can we as our organization adaptable and change ready? And can it thrive? And so those types of challenges that are on the minds of CEOs, and and leaders inside, you know, our clients. And so we're fortunate to have the kinds of solutions to those problems. And I think that that gives us, you know, confidence as we move forward here.
Market, the kind of talent, we're going to need.
Do we know how to engage people and and can we as our organization adaptable and changed ready and cannot thrive and so those types of challenges that are on the minds of Ceos and leaders inside.
Our clients and so we're fortunate to have the kinds of solutions to those problems, but I think that that gives us confidence as we move forward here.
Understood very helpful. And then just one more and this might be more for Sean.
Speaker Change: understood very helpful and then just one more and this might be more for Sean. If I remember correctly, there was some funding that need to be renewed at the end of 2023 for the education business. Just wondering if we could get a quick status update on how that all shows.
I remember correctly, there was some funding that.
That needs to be renewed at the end of 2023 for the education business.
Wondering if we could get a quick status update on how that all shook out.
Sean: Yeah. Can you, I'm not exactly sure what funding you're referring to.
Yeah can you.
Exactly sure what youre, referring to.
Sean: I believe it was the ESSER funding. I mentioned the ESSER funding. Okay, sure. Yeah, we'll be the ESSER funding, which is the emergency relief funding the government gave out during COVID. That is, that's been out for, you know, since COVID began and it's been out and it goes until the end of this year.
I believe it was the USS ER funding.
Alright, you mentioned you're absolutely.
Sure.
Okay sure.
Yes.
The <unk> funding, which is the emergency relief funding the government gave out during COVID-19.
That is that's been out since Covid began and it's been out and it goes until the end of this year.
And then about.
Sean: Two thirds of it has been spent. So, you know, about a third is remaining. So still a lot of spending going on right now will be for this year. We have a lot of.
Two thirds of it has been spent.
No.
About a third of the remaining so still a lot of spending going on right now will be for this year.
We have a lot of that.
Sean: of our schools and districts that have signed up with multi-year contracts using some of this funding.
Schools and districts that have signed up with multiyear contracts using some of this funding.
Sean: Um, but, you know, as we look to next year, and when this funding runs out, we, you know, fall back on title 1 and title 2 grants, which had been there for.
<unk>.
But as we look to next year and when this funding runs out we.
Fallback on title one entitled to Grant, which had been there for.
Decades, and will remain and we also as I shared before we have a.
A large foundation thats dedicated to starting up later in the districts and schools.
It's actually funding, helping schools get started with.
A dollar then there'll be one hundreds of schools.
<unk> will be funded through them so.
Yes, so that's where that stand to that.
Responsive to your question.
Absolutely that's very helpful. I appreciate you.
Shedding some light on that okay. Thank you very much.
Good luck in the next quarter.
Thanks, Dave.
Thank you.
Please standby for our next question.
Okay.
Our next question comes from the line of Neil Doshi with Northland Capital markets. Your line is open.
Yes. Thank you for the question.
Hi, Neil.
Hey.
And good to hear that you're seeing an inflection I believe you've talked about.
What was it subscription.
And.
Invoiced bookings I think but look the key thing I want to key on here is free cash flow in the quarter you had it looks like a pretty strong cash from operations, but I just wanted to make sure that how did that perform relative to expectations.
At the prior earnings call that you had this quarter here for the year.
November quarter I'm sorry.
Steve do you want to.
Yes.
Yes.
Thanks <unk>.
Free cash flow in the first quarter.
Last year was a lot lower than it was this year.
During the first part we did talk in prior quarters about the fact that we expected.
Our free cash flow to rebound significantly and it did.
And the areas where.
Free cash flow improved not only related to operations, but also in the working capital balances accounts receivable accounts payable accrued liabilities and deferred revenue.
At a very positive change in this year's first quarter compared to last year's first quarter.
So we were very pleased with our free cash flow in the first quarter and it was good and it was even more than we expected because of all of those working capital elements that impact cash flow at the end of Q1.
Or what are positive in our direction and all went positive quite a bit.
We thought it was.
Very good free cash flow quarter.
Okay, Great that's helpful.
And then.
Fiscal <unk> was a poor free cash flow quarter.
I believe that your fiscal <unk>, but do you expect these working capital accounts continue to tilt back favorably as we work through the remainder of fiscal year 'twenty four and therefore.
Help us think about.
Modeling free cash flow relative to your guidance for fiscal year 'twenty four.
Yeah. So we haven't really as you know given free cash flow guidance. The changes in the elements of working capital that were significant.
In Q1, we expect those changes to remain but not necessarily change again at those same rates each quarter. We do expect to have a significant a significant amount of additional key free cash flow this year compared to last year.
Based upon.
Based upon the.
The operations of the business the cash that comes in.
From our subscription business and these elements of working capital behaving.
We expect to have.
We expect to have.
Hi, good free cash flow for the year now.
I'm sure you remember that last year, our second half of the here.
It predicted through after Q2 was significantly more than Q.
One and two.
And we wouldn't expect that amount of increase in the second half of this year compared to the first half because the first half.
Going to be a good free cash flow half, but but overall it will be significantly.
Safe in saying without giving an actual forecast, but it will be significantly higher than last year.
Okay.
I look at fiscal year 19 in fiscal year 'twenty to your free cash flow.
<unk> been above your adjusted.
I think what youre trying to signal here, while fiscal year 'twenty three was acquired deviation from that fiscal year 19 in fiscal year 'twenty. Two trend do you expect an improvement from the fiscal year 'twenty three level, but perhaps not quite to the free cash flow to the ratios that you're achieving on facility.
Is that correct.
Yes.
I think in our future years, we will reestablish a clear relationship between adjusted EBITDA and free cash flow will generally be maintained but yes, we would model out free cash flow to be a bit lower than adjusted EBITDA.
For fiscal year 'twenty four.
Yes.
Yes, and then how would you think about beyond fiscal year 'twenty for them.
Again I think.
I think if you look at the elements of adjusted EBITDA versus the element and free cash flow will always be.
Not always because of the elements of working capital move around but the relationship between adjusted EBITDA and free.
Free cash flow will be that free cash flow will be modeled at a lower level.
Yeah.
And adjusted EBITDA.
Is that largely because you expect to be.
Saturating under percentage of customers that are going to be paying upfront.
No I think that percentage paying upfront will be maintained its more or less.
It's more like.
<unk>.
If you just model it out if you look at adjusted EBITA.
Compared to adjusted compared to the amounts that are included in adjusted and adjusted EBITDA.
Compared to.
Free cash flow you have.
Our investment.
Capex and cap D spending as an example.
So while yes.
The expense for cap D.
Our capex is in depreciation.
The expense for cap D is in cost of sales.
But it has a delay to it so an increase in our spending the amount we're spending in.
Capex and cap D.
Our amounts that are on the income statement are below adjusted EBITDA.
Those are the kind of things that just create the theoretical our mathematical difference between them.
Yep Yep understood.
Moving to a different topic and then I'll go.
All right.
I'll, let someone else speak.
But what are you expecting the services attached to remain depressed in Q2, and then what will drive that improvement in Q3 and Q4.
Yes, great great questions. So.
As far as what will drive the improvement in Q3, and Q4 as I mentioned earlier.
Primarily.
A couple of factors one the delivery of services of coaching and delivery days to schools that signed up late in Q4.
Last year, we talked about that last quarter as those roll through and we're able to get those scheduled and delivered.
Much of that delivery happens later in the year with the timing of schools and when Theyre out for the summer et cetera. So that's why it would shift into the back half of the year.
And then second we're bringing we're excited about three.
Three new solutions that are coming out we typically see bumps and services delivery for new solutions, and we've launched leading and working at the speed of trust that launched last month.
In the end of November and then seven habits 5.0 is coming out.
Late Q3.
In early Q4, and then difficult conversations, which we think is one that our clients will want to utilize a lot of services for.
That will be coming out here in the next month or so so I think thats what helps shifted in the back half is related to the first half why why why have they been down why were they down a little bit towards the end of last year in the first quarter of this year.
One.
Yeah.
One.
Is that.
We launched a solution a couple of years ago called.
Unconscious bias.
It's a great solution.
We launched it.
Actually prior to some of the events have unfolded in the U S that drove a lot of.
Big <unk> initiatives.
And we rode a wave.
For a while there and had a bit of a tailwind because our solution was really good.
In high demand by our clients and it was a solution that our clients.
It didn't feel comfortable delivering on that topic themselves. They wanted the expertise of Franklin Covey somebody coming in from the outside that facilitate that inside their organization for them.
The solution is still great today, but the environment has changed.
Quite substantially in the country around that topic and that has happened late started to happen kind of late last year for us and into the first part of this year and so as we talked about that service attach rate going down a portion of that is related to the demand for that particular solution, which we still love the solution. It's just not quite as in <unk>.
<unk> and so that's just that's driven a bit of that and we kind of anniversary against that here coming out of Q2, which is why Q1 and Q2 are depressed a bit.
Fortunately because we look at the rest of our portfolio. We don't we don't really have any other solutions like that that was something we built we werent thinking actually we were building it.
Four.
We thought we'd just have it as a general offering we didn't think it would perform like it performed and like I said. Unfortunately, there were some circumstances that happened that caused that solution to be in quite quite high demand now that demand has come back down.
The rest of our solutions around leadership development and trial.
Aston strategy execution, we think theres a lot of durability, there and great demand for those.
So that's a little bit about why we're positive about Q3, Q4, and a little bit of an explanation for why Q1 Q2 have been a bit soft in Q4 was a bit soft as well.
Okay, great. Thanks, I'll get back in queue.
Neil.
Thank you.
Please standby for our next question.
Our next question comes from the line of Jeff Martin with Roth.
Your line is open.
Thanks, Jeff Good evening, everyone. How are you doing Paul.
Great good to hear from you.
Likewise.
So Paul I wanted to drill down a little bit.
On slide 28 of your presentation. There is total contract signed figure.
$51 6 million was curious if you could give a little bit of insight there looks like it was down.
23, 6% year over year looking back over time it looks like that's the first time it is related to clients I'm trying to dig in a little bit and understand.
What's going on there do you think it's more macro environment is it something else is it that the <unk> related.
Related headwind maybe.
Maybe just help shed some light there yes.
Yes, Thanks, Great question.
So not macro related not related to the <unk> I think I just talked about it's related to a contract.
As you know contracted reps. So we signed the contract in the first quarter of last year that was fantastic contract. It was a large contract for multiple years.
It was a five year contract for around $10 million.
They've had a lot of services embedded in it as well and of course, it's contracted so we only get to count that one time in the contracted number and then we will of course that will flow into our Invoiced and our reported revenue annually over the next five years. So we're thrilled to have gotten the contract this quarter, we didn't sign another $10 million contract.
However, the base of contracts that we did sign this quarter was what we would've expected and very consistent with what a normal quarter and normal Q1 would look like so.
The base. If you will think of it that way was very stable and just like what we would have always expected and lastly, we're just comping against this one large contract that was contracted in the first quarter last year, we don't have anything like that that we're up against in Q2 Q3 or Q4.
That I can think of and so I think it is a kind of a one time one time thing that therefore shows up as a as a decline here.
Okay, and then I was just curious if you can characterize kind of the sales environment in terms of.
Lead flow pipeline conversion et cetera.
Yes.
Dave asked a similar question a minute ago I would say the environment.
As is.
The environment is pretty good I mean, it's.
Our clients are.
Our solutions are in demand, they're there, they're looking to address and wanting to address the types of challenges. We're focused on we're seeing as we do during these times, where our execution business clients Ceos and cc level leaders are looking to figure out how to execute their strategies as effectively as they can we are seeing good demand there.
We've just launched a new sales performance solution this fiscal year and upgraded the one we had we have we're excited about that and the initial interest there.
We just as I mentioned launching launched the 3.0 version of leading at the speed of Trust and we created a companion version of that called working at the speed of Trust. We never had a solution a trust solution that was geared to the non management population and yet trust is one of these topics that you need to run through the entire organization. There's been really good demand for that new <unk>.
<unk>.
And so I would say, we're having great attendance at our marketing events.
You'll recall that we were all live in person marketing events pre pandemic, we shifted all the way to live online and now we know we're enjoying kind of a dual marketing event structure, where we do live we do online ones and we do in person events, there very well attended.
People loved people that are working at home love to get out of their office come to these live in person events Theres been great interest there. So pipeline pipeline conversion continues to be strong I think.
Supporting that point is what we've seen here in Q4 and then in Q1 is this growing invoice subscription amounts I talked to a few minutes ago that we're seeing that pick back up after Q2, and Q3 were a bit flattish again on top of big comps of the year before but even Q4 and Q1 Q4. This last year in Q1 of this year also on <unk>.
Top of pretty good comps as well and we've seen nice growth in that invoice subscription business. So so we feel we feel good about the general environment and what we're seeing out there and what we're hearing from our clients.
Great and then just one.
Discussed with.
With your team earlier in December was penetration into lower areas of an organization and how that might attack affect future subscription services related services attach rates.
If you could just give us your view there. It seems like you are seeing demand there from clients at levels lower in the organization.
Yes, it's a great question so.
<unk>.
But.
Couple of thoughts I would just say one we do talk about the attach rate as a percentage I think that percentage.
Could could go up or down a little bit over time.
What might cause but the dollars themselves will continue to go up the percentage could go down if we as we expand to larger and larger populations and they choose to at the frontline deploy some of our solutions.
And asynchronous modality ways at the same time that percentage could go up as we do a better job of addressing the leader populations again, we've talked before about our penetration rates inside the average customer were still 10 15, 20% of the way penetrated even within the leadership population inside the organizations that we face.
So I think the attach rate will continue to be strong I think whether the attach rate the percentage goes up or not the dollars will continue to go up because I suspect will continue to attach at about the same rate and I think the rate will be higher in the back half of this year, but that rate will be on an increasing base of subscription.
And.
And we are excited about some of these solutions that we're bringing to market that are built to scale, even more broadly across organizations again, where the where the collective action company trying to create common language introduce common ways of thinking and behaving.
And leaders need that they need to drive that down through the organization and so as we develop these solutions we want to make sure that we have solutions that are built to do that but I think I think services will continue to be an important part and we will keep the dollars will continue to increase I imagine the rate.
Stay about where we're at.
Where it has been but.
That could go up to continue to be pleasantly surprised at the multi year contracts and that rate continues to increase year after year.
Great I appreciate the insights.
Thanks, Jeff.
Thank you.
Please standby for our next question.
Yes.
Our next question comes from the line of Alex Paris with Barrington Research. Your line is open.
Hi, guys can you hear me yes.
Hi, Alex how are you doing.
Good I'm doing well thanks for asking.
Congrats on the strong quarter.
I'll be quick relating to call here and I just have a few cats and dogs to follow up on.
First of all in your prepared comments, you didn't speak to China, and Japan, Thats been a topic of conversation, it's roughly 50% as I recall of international sales.
They've been an improving trend in China coming out of Covid for the third time.
Suppose I just wondering for a little update there.
Yes, great Great question.
So in.
Things can things continue to improve there.
Japan.
Japan had had had a relatively nice quarter as you know first of all stepping back as you know both of these areas as they come back out of Covid.
We're putting a big focus on making sure that what they're selling is subscription. So these are kind of the last two parts of the world to convert their businesses from the legacy model to the subscription model and so and that's going well and both of those countries as that as that occurs of course that.
Depresses reported revenue slightly as more of that revenue goes out on the balance sheet in the form of subscription, but we are intently working on that with them as they as they return Japan almost got back last year to its pre pandemic high and we expect that it will get back above that this year. So that's been a longtime coming China has been up and down.
When they've been in and out of Covid and that business is coming is coming back as well.
We feel we feel relatively generally good about what's happening in both those countries.
Great. Thanks, and then.
Looking back at Q2 of 2023.
Deep snow renewals were not quite what I guess the renewal rate was good.
The retention rate was consistent with prior quarters, but you did not sign a couple of large clients.
I am wondering about those large clients that didn't renew on a timely basis.
And I know, it's your expectation that they come back at some point they come back yet.
What are you doing to increase the odds that they will come back.
Good.
Good question good memory, yes.
Yeah.
So we have to that to that point.
One of them has one of them Hasnt come.
Come back.
And there were there were a handful of I don't know if I can give you an exact answer on.
On the hand, the full handful.
We do have we have a category of clients we call win backs.
And so when a client doesn't renew on time they go into a category of win backs. We have a special effort that we put in place on those clients and so were we.
We're <unk>.
Fortunately, we don't have a lot of those but when we do we have a process we run because our mantra around here, we throw around as clients for life. We don't we don't ever want to lose a client and so we take the approach that well if we lost them. It's a temporary thing we're going to get them back in and so we're.
We're doing that on those clients from Q2, and we will continue to do so.
Great that's helpful.
And then.
Hi.
This was probably for Sean you had a record year in signing new schools in fiscal 2023, one of the issues in the fourth quarter that contributed to the revenue shortfall was the.
Inability to deliver the services the Onboarding services associated with it and then when you when you Miss it in the summer when do you get it back based on earlier questions. It sounds like you don't get it back until next summer that right.
Yeah.
Yes, that's typically what happens because.
Professional development, usually takes place most of it takes place during the summer.
So a new school comes on and there is usually two or three days of professional development per school right.
And if it's too late in the year, then they say well we.
We'll give coaching throughout the year as we start the school year, but the professional development that goes deeper with everyone.
In the same room at the same time, we'll have to delay until next summer so that that will hurt us last year. It will help us this year.
And the momentum across the board is really good and we've got lots and.
Lots of large new contracts in the pipeline.
Got three state state is talking to US right now about some big deals.
So we expect that services will we will have a nice second half of the year or the reason last year coming in later as well as well.
A really nice building pipeline for this year.
Excellent. Thank you yes.
So not only was there a shortfall because of that last year there'll be a little bit of a doubling up on some of those onboarding activities this coming summer.
Yes, I think so.
We're also pushing everyone hard to get an early this year.
Okay.
Makes sense.
We can it's always it's always better to bring him on sooner than later.
For sure Okay, Great and then.
Two last ones.
I think the target for this year.
<unk> is 40, new client partners and other support roles.
How many did you hire in the first quarter and is it going to be level loaded or is it more back half loaded.
Yes, it'll be it'll be a bit back half loaded so.
We ended the first quarter with 300 client partners and then roughly 150 or so of the other client facing roles. So about the same $4 50 that we reported on at the end of Q4.
Well, we are still committed to adding the number for the year and those will be.
Backloaded, but not not all at the very end they'll come back more towards back half of the year.
Okay.
And then.
Maybe this one's for John.
The impact platform.
At the end of.
Think it was the end of Q4, you said the vast majority of English speaking.
The answer on the platform, but you are in the process of rolling out additional languages, where are we in that process and how.
How penetrated are you at with clients now.
Lisa.
We are well.
We have launched in all of our what we call core ROE, which is about 25 languages have launched the whole.
It was a really effective long hole is seeing more and more of our clients' global local impact.
Obviously, it makes a big difference for our client base.
Well they can deploy <unk>.
So why now.
Well, there's a couple of.
Are more or less new languages.
The majority of what we're targeting that happened in October.
Great and what can we hope for or expect from the rollout of impact platform as it is at a higher initial selling prices at higher retention rates.
Both.
Primary benefit I think is the value proposition that.
We are.
We're driving collective behavior change so in terms of <unk>.
We've had great Hong Kong, we always had the modality.
But having the Cumulus Nick will be able to bring the enterprise oil, particularly at many of our buyers don't have a lot of people in that department.
And this makes it much more scalable what were still positive.
Those that are deployed is we're better able to track that behavior change with <unk>.
<unk> three.
So the little growth on one of our latest.
<unk>.
The primary thing that the buyers.
Electric mobility.
With lower spot.
Excellent very helpful. Thank you very much and that's all I have for now.
Thanks, Alex.
Thank you.
Please standby for our next question.
We have a follow up question from the line of Knowhow with Northland Capital markets. Your line is open.
Yes. Thank you.
Paul at the beginning.
The prepared remarks, you talked about how invoice subscription value was splashed in fiscal <unk> and <unk> looked it up in fiscal <unk>.
What was actually the precise level in fiscal <unk> and do you expect that to continue and flex up in fiscal <unk>.
So your question just to make sure you've got your question Ive got your question Erik that cut out just a second on R&D can you just repeat it one more time I think it's about invoice subscription levels Q2, Q3 versus Q4 Q1.
Okay.
Is that your question.
Yes, well and into Q2 of this fiscal year 'twenty four.
Yeah, great. Okay. So so invoice subscription levels U S. Canada AAP were flattish in Q2 and Q3 memory serves they were up.
About 8% in Q4, and then around <unk> 13.
<unk>, 13% in Q1.
And then we.
We expect that they'll continue to be good and Q2.
Okay, Great and then Steve real quickly do you have thoughts on it.
But for the February quarter.
EBITDA I'm, sorry, again EBITDA for this quarter.
For Q, which.
Yes, so we talked about adjusted EBITDA being between 6.2 and $7 2 million.
Okay I missed that.
<unk>.
And what about the currency headwind for the full year on EBITDA.
Hello.
Sure.
Our constant or impact of.
Of currency was insignificant in Q1, if we stay to exact if the rates stayed exactly what they are now.
Would have some impact through the remainder of the year.
Don't know, what's going to happen with exchange rate. So we don't know what that would be that that might impact revenue like $1 million.
If rates stay exactly as they are now.
But there was there was no there was an insignificant impact on adjusted EBITDA.
And an insignificant impact on sales in Q1.
Awesome, great. Thank you very much.
Thanks Neil.
Thank you.
I'm showing no further questions in the queue I would now like to turn the call back over to Paul for closing remarks.
Okay, well. Thank you everyone for joining thanks for your great questions. Thanks for your time that you take to understand the business and.
For the thoughts to share with US. We appreciate you and hope you have a wonderful evening and a great start to 2024.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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Hello, and thank you for standing by welcome to Franklin Covey, Q1, 2024 earnings Conference call.
At this time all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session to ask a question. During this session you will need to press star one on your telephone you within your automated message advising Johan.
So withdraw your question. Please press star one again I would now like to hand, the conference over to Derek Hatch you may begin.
Thank you.
Hello, everyone on behalf of Franklin Covey, I would like to wish everyone, a happy new year and hopes for a peaceful and prosperous 2024 before we begin todays call festivities I would like to remind everybody that this presentation contains forward looking statements within the meaning of the private Securities Litigation Reform Act of 1095.
Forward looking statements are based upon management's current expectations and are subject to various risks and uncertainties, including but not limited to the ability of the company to grow revenues the acceptance of and renewal rates for our subscription offerings, including the all access pass and leader in me memberships the ability of the company at a higher <unk>.
Your productive sales and other client facing professionals general economic conditions competition in the Companys targeted marketplace market acceptance of new offerings or services and marketing strategies changes in the companys market share changes in the size of the overall market for the Companys products changes in the training and spending policies of the Companys clients and other factors identified.
<unk> 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 companys current expectations and there can be no assurance the company's actual future performance will meet management's expectations. These forward looking statements are based on management's current expectations and we undertake no obligation to update or revise these forward looking statements.
To reflect events or circumstances. After the date of todays presentation, except as required by law with that out of the way we would like to turn the time over to Mr. Paul Walker CEO and president Thank you Derrick.
Hello, everyone happy new year, Thanks for joining us today, we're glad to have the opportunity to talk to you and we just want to start out by expressing our appreciation to you and.
We're grateful to be with you today joining me on the call are Steve Young our CFO Jennifer call a female president of the Enterprise Division, Sean Covey, President of the Education Division as well as other members of our executive team.
We're pleased that.
Though the results in the first quarter were essentially even with last year's first quarter, both revenue and adjusted EBITDA came in stronger than forecasted.
Even though we also expect the second quarter revenue to again be about even with our slightly above prior year, we expect to achieve a significant growth in revenue in the back half of the year with a high flow through of this revenue driving growth in adjusted EBITDA to our target of between $54 $5 and $58 million.
We expect this growth in the back half to be driven by several key factors, including the following.
First that we're entering the back half of the year with a lot more billed and unbilled deferred revenue on our balance sheet than a year before.
At the end of the first quarter, the sum of our billed and Unbilled deferred revenue was $169 7 million a level $18 million higher than at the same time last year.
A meaningful portion of this will flow through into revenue in the back half of fiscal 'twenty four and into fiscal 'twenty five.
Second is that our invoice subscription revenue is increasing.
After flattish all access pass Invoiced subscription growth in the second and third quarters last year, which is.
Remind you was flattish on top of significant double digit growth the prior year.
Our invoiced all access pass subscription revenue grew significantly in the fourth quarter and again in Q1 this year.
We expect this growth will continue in Q2 and for the remainder of this year and beyond resulting in additional amounts of deferred revenue going onto the balance sheet and flowing through to revenue in fiscal 'twenty four and beyond.
Third is that we expect our subscription services attach rate to improve.
We expect our subscription services attach rate, which declined from it from 66, 5% to 61, 5% in the back half of last year and through the first quarter of this year.
We expect that it will return to its historic rate of around 66, 5% in Q3 and Q4 of this year driven by a combination of services delivered to new schools that were brought on late in last year's fourth quarter and by the impact of the launch of the three <unk> and five <unk> versions of the speed of trust and seven have.
Two of our historic blockbuster solutions.
As well as the launch of our new solution on difficult conversations.
I'd like to now provide a little bit of additional context about the first quarter itself.
As shown on slide four our total revenue for the quarter came in at a higher than expected $68 4 million.
Revenue for the latest 12 months grew $8 6 million or 3% to $279 6 million.
And our rolling two year growth is a very strong $42 4 million or 18%.
Adjusted EBITDA also came in at a higher than expected $11 million with this adjusted EBITDA for the latest 12 months through this year's first quarter grew $3 8 million or 9% to $47 6 million.
And again, our rolling two year growth in adjusted EBITDA is $13 4 million or 39%.
Our subscription and subscription services sales in the first quarter reached <unk>.
$54 8 million a level, 4% higher than prior year.
Subscription and subscription services sales were $224 7 million for the latest 12 months ended Q1, which is $13 6 million or 6% higher than the same period of the prior year and again, a rolling two year growth was an extraordinarily strong $56 7 million or 34%.
And finally, our balance of billed and Unbilled deferred revenue increased $18 million or 12% to $169 7 million from the end of the first quarter last year.
And grew $48 5 million or 40% over the last two year period.
Stepping up a level our results in the first quarter put an exclamation point on three key strengths we've been building for years.
As you can see as shown on slide five the first of these is the strength of our unique strategic position in the marketplace.
We focus on the most important strategic and durable position in our space.
Specifically that are helping organizations achieve results that require the collective action of their people.
And we help organizations achieve these results with a combination of best in class content delivered through a broad range of delivery modalities and world class coaching and facilitation, that's very difficult to replicate.
The most important thing on the minds and priority lists of Ceos is achieving the type of results that require the collective action of their entire organization.
A point I'd like to come back to in just a minute.
Our second key strength as you can see shown there on the slide is the power of our revenue generating engine.
As previously noted despite being up against some extremely strong post pandemic accelerated comps over the past four quarters, which have impacted our reported year over year percentage growth in those quarters. The continued strength of our underlying revenue generating engine is reflected in the following four key metrics.
First growth in revenue on a rolling two year basis again to normalize.
Growth of revenue compared to our pre pandemic high.
Third growth of our strategically important subscription and subscription services revenue.
And fourth growth in our balances of deferred subscription revenue, both billed and unbilled.
The third key strengths is that of our powerful business model.
Model, where a combination of increasing revenue per client.
High revenue and client retention.
High contribution margins.
Up front invoicing.
Low capital intensity.
And disciplined reinvestment for growth all combined to drive significant growth and boasted both adjusted EBITDA and cash and free cash.
I'd like to address each of these three key strengths in just a bit more detail and with some data.
First as shown on slide six the strength of our strategic position in that.
Just noted the most important strategic and durable position in our space that are helping organizations achieve the kind of seismic results that can result from mobilizing the large scale of collective action of their people.
Why is this so strategically powerful.
Because almost all of the key strategic and operational results on which Ceos are focused required just that kind of collective action.
As shown on slide seven each year the conference Board the Advisory Board Mckinsey and others conduct surveys to identify the most important things on Ceos minds and priority lists.
Excluding macro.
Ill make and geopolitical issues. The vast majority of CEO of top priorities are those areas that required the collective action of the entire organization I would like to give you just three examples of this where we're working with clients to support them today.
The first is we're working with the CEO of a large and rapidly growing manufacturing company to develop their top 500 global leaders, they're partnering with us to help them build a high trust an agile culture that can support the rapid growth <unk> achieved in which they expect to continue to achieve in the future there.
They recognize that culture is established by the collective behavior of leaders and they've chosen Franklin caveat, there sole leadership development partner.
They've done this in large part due to the impact of a powerful principle based content.
It's direct relevance to building the type of winning culture, they desire and our ability to scale our solutions across their global population.
A second example is where we're partnering with the chief Human Resource officer of a large 100000 person firm to deploy multiple Franklin covey solutions across the entire organization.
They've chosen us as their partner because of the powerful way in which our content shifts mindsets and behaviors.
Versus simply teaching people to check off to do from a checklist.
They want us to develop common they want if they want to develop with our help common mindset skill sets and a consistent language across the entire organization or what we refer to as collective action and we're their partner in doing this.
And the third example is where we're partnering with a large transportation company that has a very clear strategy for winning in their chosen market. However, like so many organizations they've had a difficult time translating that strategy from the boardroom to the actions of those in the frontline of the organization.
This clients engaging us to equip their leaders with the skills and tools to create a culture of execution where people at the frontline are engaged to execute the critical priorities that will translate strategy into results.
As shown on slide eight being our client's partner of choice for addressing opportunities and challenges like those just noted translates into a number of powerful outcomes for Franklin covey, including.
Consistently winning new logos or new clients.
Cheating the strong attachment of subscription services to help clients achieve performance breakthroughs retaining substantially all of our subscription revenue.
Increasing our average contract size.
Increasing the percentage of logos and revenue under multiyear contracts and achieve achieving a high and growing lifetime customer value.
For the latest 12 month period through this year's first quarter. We're really pleased to have continued to achieve strong results on each of these key outcomes.
In the sales of all access pass to new logos in the Enterprise Division and leader in me subscriptions to new schools in the Education Division remained strong in the first quarter and for the latest 12 month period.
Our revenue retention levels remain very high in the first quarter and for the latest 12 months in the Enterprise Division in North America in the first quarter, we achieved all access pass subscription revenue retention levels greater than 90% and in the Education Division, we continued to achieve high levels of school retention.
An increasing percentage of clients are also entering into multiyear contracts as you can see as shown on slide nine.
The percentage of clients all access pass clients entering into multi year contracts increased even further from its already high levels in the first quarter, 54% of all access pass clients entered into multi year contracts are at least two years up from 40% at the end of Q1 fiscal 'twenty three.
Importantly, an even higher 60% of all access pass subscription revenue is now under multi year contracts are at least two years up from 55% at the end of the first quarter last year.
Our clients commit to these multiyear agreements because of the importance and the ongoing nature of the opportunities and challenges they face that require the collective action of their people and because of the value they're receiving from a long term partnership with Franklin Covey. These long term contracts provide a tremendous foundation for both the predictability and acceleration of <unk>.
<unk> revenue growth.
As shown on slide 10, the second key strength I'd like to focus on today is the power of our revenue generating engine.
As noted the strength of our underlying revenue generating engine is reflected in four key metrics, which we have summarized on slide 11.
First the tremendous growth in revenue achieved over the past two years.
This two year look helps to normalize for periods, which benefited from comping to pandemic impacted quarters.
As shown over the past two years, our latest 12 months revenue has grown a very strong $42 4 million or 18%.
Second.
Is the significant growth of our revenue compared to our pre pandemic high our latest 12 months revenue through this year's first quarter increased to $279 $6 million, which.
<unk> growth of $54 2 million or 24% compared to our pre pandemic high in fiscal 2019.
Third is the even more rapid growth of our strategically important subscription and subscription services revenue for.
For the latest 12 months period through this year's first quarter, our subscription in subscription services revenue grew $13 6 million or 6%.
And importantly, our two year growth was $56 7 million or 34% and subscription in subscription services growth remarkably has more than $100 million or 81% compared to our pre pandemic high.
And fourth is the tremendous growth in our balances of deferred subscription revenue, both billed and Unbilled and this year's first quarter, our balance of deferred subscription revenue billed and unbilled increased to $169 7 million, reflecting year over year growth of $18 million or 12%.
Our two year growth of $48 5 million was 40% and our balance of deferred subscription revenue billed and Unbilled has grown by $81 5 million or <unk> 92, 5% compared to our pre pandemic level.
This dramatic growth in deferred subscription revenue on both a dollar and percentage basis establishes a very strong foundation for continued strong revenue growth in the coming quarters and years.
And finally, the third point you can see as shown on slide 12, the third key strength is the strength of our business model.
As you know our business model results in a significant portion of incremental revenue flowing through to increases in adjusted EBITDA and free cash flow.
I'd like to briefly review the key elements of our business model to drive this as shown on slide 13. These factors include.
Increasing revenue per client.
High revenue retention.
High contribution margins.
Upfront invoicing.
Low capital intensity.
And disciplined reinvestment for growth.
We touch on each of these drivers to show how their interplay drives high and increasing adjusted EBITDA and cash flow.
First as it relates to increasing revenue per client as shown on slide 14, our revenue per all access pass client has grown from $54000 in fiscal 2018 to more than $83000 in fiscal 'twenty three comp.
Compounded growth of 9%.
This strong increase in average revenue per client results from a combination of continuing.
Inc.
Continuing to increase the percent of total populations through which we serve inside a typical client and the pricing power we gain as a result of the impact our solutions provide to our clients.
The second point is our high revenue retention and client retention in the Enterprise Division in North America in Q1, all access pass subscription revenues I mentioned exceeded 90% in the education Division as we reported at the end of Q4 fiscal 'twenty three leader in me retention.
At a remarkably high level of greater than 85%.
The third key element of our business model is our increasing adjusted EBITDA margins.
As shown in slide 15, the combination of strong gross margins and declining operating SG&A as a percent of sales has resulted in steadily increasing adjusted EBITDA margins, reaching 17% for the latest 12 month period.
Fourth is our upfront invoicing.
With upfront invoicing working capital is actually a source of cash for us.
Subscription contracts are billed at the start of the contract term and cash is collected long before the subscription contracts full revenue is realized.
Multi year contracts are generally billed one year in advance and are noncancelable.
And the timing of collections and cash outflows as a durable aspect of our business model.
Fifth is our low capital intensity.
Historically as you know our Capex spending is a small percentage of our overall revenue and is primarily related to technology infrastructure and a small amount for real estate improvements.
And finally, the six key element of our business model is disciplined reinvestment for growth.
Our largest growth investments are in our sales force in order to capture our fast underpenetrated addressable market all of which by the way is fully funded through our P&L.
And investments in content and innovations, which is amortized and flows through the P&L in the form of cost of goods sold.
We managed sales cost to grow about in line with revenue over time offsetting wage inflation with pricing.
As a result of this business model, we've generated significant growth in adjusted EBITDA and free cash flow in.
In fact as shown on slide 16 in the eight years since the beginning of our conversion to subscription in fiscal 2016 through this year's first quarter, we have generated cumulative adjusted EBITDA of $210 $6 million and cumulative free cash flow of $204 $3 million.
As also shown on slide 16, we have invested approximately $32 $7 million of this free cash flow for tuck in acquisitions, such as Gianna and strive, which have broadened our ability to deliver our solutions flexibly and at scale and have returned a substantial amount of the remaining free cash flow to shareholders.
Specifically during this eight year period, we've returned more than $143 $5 million or just over 70% of the free cash flow we generated.
We've returned to shareholders in the form.
Through the repurchase of more than five 3 million shares of common stock, including more than $51 million over the past 12 months and $72 million over the past 24 months.
Importantly, this is on top of the $102 $9 million, we utilized to purchase shares prior to fiscal 2016.
In total since 2002, we've invested more than $246 million in purchasing shares and reduced the company's net share count outstanding.
Net of stock based compensation by more than $14 1 million shares.
This reduction in shares is more than the number of shares we currently have outstanding today.
These shares have been purchased at a weighted average price per share of $17 43.
We're really pleased that so many of you have been purchasing shares right along with the company and have achieved similarly attractive returns.
As we noted in last quarter's report, we expect to achieve continued growth in adjusted EBITDA and free cash flow in the years to come and in fact in the coming years alone we expect to generate in the neighborhood of approximately an additional $150 million of free cash flow.
After making our normal ongoing growth investments in the business and we would expect to be able to return substantial portions of this cash flow and continued stock repurchases.
Why do we have such high conviction in repurchasing our stock something we know is shared by many of you as well two simple reasons first because we have high confidence in the market opportunity before us and our ability to execute it.
Second because we believe repurchasing our stock even at significantly higher than current prices has a very compelling investment thesis.
That being first that we believe that we are and will be purchasing shares at a significant discount relative to the net present value of our expected cash flows as just noted we believe that both our recent purchases in our purchases over the years reflect this.
And because we believe that.
That are much smaller than typical percent of the net present value of our company's cash flows is attributable to.
<unk> reliance on the residual exit value of these cash flows.
Because one purchasing shares at or near our current market cap provides high a high free cash flow yields and we expect free cash flow to grow substantially in the coming years.
The combination of these factors gives us confidence in investing excess cash flow in the business and in share repurchases can generate significant additional value for shareholders in the coming years.
In conclusion, I would just say that we expect the combined power of these three key strengths the strength of our strategic position.
The strength of our revenue generating engine and the strength of our business model to continue to generate strong and accelerating growth in revenue adjusted EBITDA and free cash flow and specifically as noted previously we believe that the combination of having a lot more billed and unbilled revenue on our balance sheet than ever before achieving accelerated.
Both in our subscription revenue and returning our subscription services attach rate to its historic average well results and adjusted EBITDA, increasing to between 54, five and $58 million in in fiscal 'twenty four.
I'd now like to turn some time over to Steve to discuss our results for the first quarter and the latest 12 months in a bit more detail and Steve will also review our guidance Steve.
Thank you Paul good afternoon, everyone, it's a pleasure to be with you today.
I would like to briefly provide more detail on the factors underlying this performance focusing on our results in three key areas of the company specifically our enterprise business in North America.
The enterprise business internationally in both our direct offices and licensees and our education business, which is also primarily in North America.
As shown on slide 17 results and our enterprise business in North America continued to be strong in the first quarter and latest 12 month periods.
Reported sales in North America, which accounts for 43% of total enterprise Division sales.
Were $38 4 million in the first quarter.
Ah level almost equal to the prior year and this on top of a strong 16% growth achieved in the first quarter of FY2023.
For the latest 12 months revenue grew 2% on top of 17 growth percent growth in the prior year and we are pleased with the result, we have achieved in the enterprise business in North America over the past two years.
We expect to beginning in Q3.
FY 'twenty four.
Our year over year comparisons will normalize.
Subscription and subscription services sales in North America, or even with prior year in the quarter.
On top of the 20% growth achieved in last year's first quarter.
For the latest 12 month growth was 4%.
On top of 24% in the prior year.
And we are pleased with these growth rates.
Our balance of deferred revenue billed and Unbilled in North America continued to be strong growing 7% in the quarter on top of 25% in last year's first quarter, establishing as Paul said, a strong foundation for next year's growth.
And the percentage of North America as all access pass clients that were for multiyear periods.
Increased.
$2, 54%.
48% in the first quarter last year.
And the percentage of invoice sales represented my multiyear contracts increased to 60% from 55% in the first quarter last year.
As shown on slide 18.
Revenue from our international operations, which account for approximately 17% of our total enterprise Division revenue.
Decreased by <unk> 6 million or 7% in the quarter, primarily due to declining legacy which is non all access pass related sales sales in these offices have grown 4% or $1 3 million in the latest 12 months.
Also on slide 18.
Our international licensee partner sales increased 3% in the quarter on top of 9% in last year's first quarter and for the latest 12 months sales were up 8% on top of the 15% in the prior year.
Finally, as shown on slide 19, the results in our education business, which accounts for approximately 25% over the total company sales.
Grew 3% for the quarter on top of the 23% growth achieved in the fourth quarter first quarter last year.
Sales grew 9% for the latest 12 months.
On top of 21% later latest 12 month growth in the previous year.
Education subscription and subscription services sales were flat in the quarter, but strong in the latest 12 months.
$4 6 million or 8%.
On top of $11 8 million or 25% last year.
Education.
<unk> balance of deferred subscription revenue billed and unbilled increased 29% in the quarter.
Now just a little bit more about education as Youll recall, the education Division as you recall not many years ago, The education Division, where small and had a traditional service and materials business model.
We are pleased that as shown on slide 20.
Since the launch of the leader in me subscription in Education Division Rev.
Revenue has grown substantially from just over $3 million in its first year to more than $70 million over the latest 12 months.
And the business model has transformed to closely mirror that of enterprise.
With approximately 90% of education revenue now.
Represented by subscription and subscription services revenue.
A level that is very similar to that of the enterprise Division.
We also expect that after years of accelerated investment the education division's adjusted EBITDA margins will also expand in FY 'twenty four and beyond now.
Now a little bit about cash flows and battle and more about cash flows and balance sheet.
As shown on slide 21, our cash flows from operating activities was $17 four.
$4 million at the end of the first quarter compared to $3 million in Q1 last year.
Our free cash flow in the first quarter increased to $13 7 million compared with <unk> 8 million for the prior year.
Reflecting the changes in the elements of working capital were very favorable in Q1 this year.
Compared to Q1 last year.
Particularly referring to accounts receivable accounts payable accrued liabilities and deferred revenue.
In Q1, we invested $16 3 million to purchase 409000 shares.
Over the past four quarters as Paul said, we've invested $51 million to purchase shares.
We ended the quarter still with $96 five of total liquidity.
Including $34 million in cash.
And $62 $5 million available under the revolving credit facility, even after investing is $16 3 million in stock purchases this quarter.
Compared to Q1 of FY2023.
Of billed and Unbilled deferred subscription revenue increased 12% to almost $170 million.
Giving us increased visibility into future sales results.
The deferred subscription revenue increased 14% to $87 million while.
While the Unbilled deferred revenue increased 10% to $82 5 million.
Adjusted EBITDA in the quarter as you said was a strong $11 million.
Now guidance.
As you know Franklin Covey, its financial strategy is to consistently grow revenue and at the same time experienced a high flow through of that increased revenue to increase to adjusted EBITDA and free cash flow.
Consistent with that strategy, we affirm our previously issued guidance for FY 'twenty for that adjusted EBITDA will increase by approximately 17% at the midpoint of the range.
To between 54, five and $58 million.
In constant currency compared to the $48 1 million achieved in FY2023.
This guidance reflects our expectation of achieving low double digit net sales growth in the back half of the year.
Stable or improving world economic conditions.
Strengthening results in our international operations.
Particularly strong financial results in Q4, and our Education Division.
<unk> increased subscription add on services.
This FY 'twenty forward guidance reflects our expectation that we will achieve particularly strong results in Q3 and Q.
Q4 of FY 'twenty four.
Our second quarter guidance is that adjusted EBITDA will be between six to 7.2.
$2 million.
Strong, but lower than last year's very strong.
Adjusted EBITDA of $8 2 million.
Particularly reflecting a lower services attach rate during the second quarter that is expected to increase during the third and fourth quarters.
And as much as we expect to achieve strong revenue and gross margin the expectation that the second quarter's adjusted EBITDA performance will be slightly lower than last year.
Is due primarily to our investment in growth this year and benefits and certain accruals last year.
Like accounts receivable provision.
We expect our second quarter revenue to be at least even with or to increase slightly over the prior year and could be our highest second quarter revenue ever achieved.
As discussed this guidance, obviously reflects the fact that we expect net sales growth rate to accelerate significantly in Q3 and Q4 as I mentioned.
The economic and other factors could impact these expectations, where we are.
Cited about our future financial.
Position so Dr. Paul.
Thank you, Steve Thanks for going through that and.
Again, we feel quite good about the first quarter and about what we see out ahead and with that would like to open and ask the operator to open up the line for questions.
Thank you.
Ladies and gentlemen, as a reminder to ask a question. Please press star one on your telephone and then wait to hear your name announced.
Withdraw your question. Please press star one again.
Please standby, while we compile the Q&A roster.
Okay.
Our first question comes from the line of Dave Stones with Stonegate. Your line is open.
Good afternoon happy new year, everyone.
Yeah, you too thanks, Dave.
Appreciate it.
Looked like calendar year, 2023 turned out to be the year without a recession.
But just curious how you see clients reacting after you know a lot of aggressive belt tightening.
The majority of 2023, and if you see any additional bump in demand during calendar 'twenty four.
Yes, it's a great question.
I would say it did turn out to be the year without a recession, it's interesting times for sure.
I would say that what we're seeing right now has been pretty consistent for the last number of months in that.
Our clients they they their budget they have their budgets they know their budgets, they're moving forward they've got their plans.
And and we feel relatively.
Good about the environment that we're selling into right now I think there's it feels like there is more.
More certainty in the fact that clients do have budgets and our plans are moving forward with which you'll recall we reported in Q2 last year. There was some of our clients that were a little bit more uncertain at that time and that seems to have subsided for the most part.
And I think.
Behind all of that though is the driver of that that is.
All times, particularly at times that are.
May be uncertain, or whether where growth is more difficult for companies Theyre looking for solutions like those that we provide right right. Now people are very focused on do I have the leadership capability inside my organization to execute what it is we're trying to execute is our culture such that we can attract and retain an a and a tighter.
Labor market, the kind of talent, we're going to need.
Do we know how to engage people.
And can we as our organization adaptable and change ready and cannot thrive and so those types of challenges that are on the minds of Ceos and leaders inside our.
Our clients and so we're fortunate to have the kinds of solutions to those problems, but I think that that gives us confidence as we move forward here.
Understood very helpful. And then just one more and this might be more for Sean if I remember correctly, there was some funding that.
That needs to be renewed at the end of 2023 for the education business.
Wondering if we could get a quick status update on how that all shook out.
Yeah can you.
Exactly sure what youre, referring to.
I believe it was the USS ER funding.
You mentioned the asset.
Sure.
Sure, Yes, it will be the.
The <unk> funding, which is the emergency relief funding the government gave out during COVID-19.
That is that's been out since Covid began and it's been out and it goes until the end of this year.
And then about.
Two thirds of it has been spent.
No.
About a third of the remaining so still a lot of spending going on right now will be for this year.
We have a lot of that.
All of our schools and districts that have signed up with multiyear contracts using some of this funding.
But as we look to next year and when this funding runs out we.
Fallback on title one entitled to Grant, which had been there for.
Decades, and will remain and we also as I shared before we have.
Large foundation is dedicated is starting up later in the districts and schools.
This actually funding and helping US we will get started with.
A dollar then there'll be one hundreds of schools.
<unk> will be funded through them so.
Yes, so that's where that stand to that.
And responsive to your question.
Absolutely that's very helpful. I appreciate you're shedding some light on that okay. Thank you very much.
Good luck in the next quarter.
Thanks, Dave.
Thank you.
Please standby for our next question.
Our next question comes from the line of Neil Doshi with Northland Capital markets. Your line is open.
Yes. Thank you for the question.
Hi, Neil.
Hey.
Good to hear that you're seeing an inflection I believe you talked about.
What was it the subscription.
And.
Invoiced bookings I think but look the key thing that I want to key on here is free cash flow in the quarter you had it looks like a pretty strong cash from operations, but I just wanted to make sure that.
How did that Ashford performed relative to expectations.
At the prior earnings call that you had this quarter here for the year.
November quarter I'm sorry.
Steve do you want to yes. So.
Yes.
Holly as you know our free cash flow in the first quarter.
Last year was a lot lower than it was this year.
During the first part we did talk in prior quarters about the fact that we expected.
Our free cash flow to rebound significantly and it did.
And the areas, where free cash flow improved was not only related to operations, but also in the working capital balances accounts receivable accounts payable accrued liabilities and deferred revenue.
Had a very positive change in this year's first quarter compared to last year's first quarter.
So we were very pleased with our free cash flow in the first quarter and it was good and it was even more than we expected because all of those working capital elements that impact cash flow at the end of Q1.
We're positive in our direction and all went positive quite a bit.
We thought it was a very good free cash flow quarter.
Okay.
Okay, Great that's helpful.
And then.
Yes.
<unk> was a poor free cash flow quarter.
I believe that your fiscal <unk>, but do you expect these working capital accounts continue to tilt back favorably as we work through the remainder of fiscal year 'twenty four and therefore.
Help us think about.
Modeling free cash flow relative to your guidance for fiscal year 'twenty four.
Yeah. So we haven't really as you know given free cash flow guidance.
The changes in the elements of working capital that were significant.
In Q1, we expect those changes to remain but not necessarily change again at those same rates each quarter. We do expect to have a significant a significant amount of additional key free cash flow this year compared to last year.
Based upon.
Based upon the operations of the business the cash that comes in.
From our subscription business and these elements of working capital behaving.
We expect to have.
We expect to have.
Hi, good free cash flow for the year now.
I'm sure you remember that last year, our second half of the here.
It predicted.
After Q2 was significantly more than Q.
One and two.
And we wouldn't expect that amount of increase in the second half of this year compared to the first half because the first half.
Going to be a good free cash flow half, but but overall it will be significantly.
Safe in saying without giving an actual forecast, but it will be significantly higher than last year.
Okay.
I look at fiscal year 19 in fiscal year 'twenty to your free cash flow.
<unk> been above your adjusted EBITDA.
I think what youre trying to signal here, while fiscal year 'twenty three was acquired deviation from that fiscal year 19 in fiscal year 'twenty. Two trend do you expect an improvement from the fiscal year 'twenty three level, but perhaps not quite to the free cash flow to EBITDA ratios that you're achieving in fiscal year 19.
Is that correct.
Yes.
I think in our future years, we will reestablish a clear relationship between adjusted EBITDA and free cash flow that will generally be maintained but yes.
Would model out free cash flow to be a bit lower than adjusted EBITDA.
For fiscal year 'twenty four.
Yes.
And then how would you think about beyond fiscal year 'twenty for them.
Again I think.
I think if you look at the elements of adjusted EBITDA versus the element and free cash flow.
<unk> B.
Well not always.
Those are the elements of working capital move around but the relationship between adjusted EBITDA and.
Free cash flow will be that free cash flow will be modeled at a lower level.
Yeah.
And adjusted EBITDA.
Is that largely because you expect to be.
Saturating on the percent of customers that are going to be paying upfront.
No I think that percentage paying upfront will be maintained its more like.
It's more like.
<unk>.
If you just model it out if you look at adjusted EBITA.
Compared to adjusted compared to the amounts that are included in adjusted and adjusted EBITDA.
Compared to.
Free cash flow you have.
Our investment.
Capex and cap D spending as an example.
So while yes.
The expense for cap D.
Our capex is in depreciation.
The expense for cap D is in cost of sales.
But it has a delay to it so an increase in our spending the amount we're spending in.
Capex and cap D.
Our amounts that are on the income statement are below adjusted EBITDA.
Those are the kind of things that just create the the theoretical our mathematical difference between them.
Yep Yep understood.
Moving to a different topic and then I'll go.
I'll.
I'll, let someone else speak.
But what are you expecting the services attached to remain depressed in Q2, and then what will drive that improvement in Q3 and Q4.
Yes, great great questions. So.
As far as what will drive the improvement in Q3, and Q4 as I mentioned earlier.
Primarily.
A couple of factors one the delivery of services of coaching and delivery days to schools that signed up late in Q4.
Last year, we talked about that last quarter as those roll through and we're able to get those scheduled and delivered.
Much of that delivery happens later in the year with the timing of schools and when Theyre out for the summer et cetera. So that's why it would shift into the back half of the year and then second we're bringing we're excited about.
Three new solutions that are coming out we typically see bumps and services delivery for new solutions, and we've launched a leading and working at the speed of trust that launched last month.
In the end of November and then seven habits 5.0 is coming out.
Late Q3.
In early Q4, and then difficult conversations, which we think is one that our clients will want to utilize a lot of services for.
That will be coming out here in the next month or so so I think thats what helps shifted in the back half is related to the first half why why why have they been down why were they down a little bit towards the end of last year in the first quarter of this year.
One.
Yeah.
One.
Is that.
We launched a solution a couple of years ago called.
Unconscious bias.
It's a great solution.
We launched it.
Actually prior to some of the events that unfolded in the U S that drove a lot of.
Big <unk> initiatives.
And we rode a wave.
For a while there and had a bit of a tailwind because our solution was really good. It was it was in high demand by our clients and it was a solution that our clients didn't feel comfortable delivering on that topic themselves. They wanted the expertise of Franklin covey somebody coming in from the outside that facilitate that inside their organization for them.
The solution is still great today, but the environment has changed.
Quite substantially in the country around that topic.
And that has happened late started to happen kind of late last year for us and into the first part of this year and so as we talked about that service attach rate going down a portion of that is related to the demand for that particular solution, which we still love. The solution. It's just not quite as in demand and so that's just that's driven a bit of that and we kind of anniversary against that here.
They're coming out of Q2, which is why Q1 and Q2 are depressed a bit.
Fortunately because we look at the rest of our portfolio. We don't we don't really have any other solutions like that that was something we built we werent thinking actually we were building it to.
Four.
We thought we'd just have it as a general offering we didn't think it would perform like it performed and like I said. Unfortunately, there were some circumstances that happened that caused that solution to be in quite quite high demand now that demand has come back down.
The rest of our solutions around leadership development and trust and strategy execution, we think theres a lot of durability, there and great demand for those.
So that's a little bit about why we're positive about Q3, Q4, and a little bit of an explanation for why Q1 Q2 have been a bit soft in Q4 was a bit soft as well.
Okay, great. Thanks, I'll get back in queue.
Neil.
Thank you.
Please standby for our next question.
Our next question comes from the line of Jeff Martin with Roth.
Your line is open.
Thanks, Jeff Good evening, everyone. How are you doing Paul.
Good to hear from you.
Yes.
Yes.
So Paul I wanted to drill down a little bit.
On slide 28 of your presentation. There is a total contract signed figure.
$51 6 million.
Was curious if you could give a little bit of insight there looks like it was down.
23, 6% year over year looking back over time, it looks like that's the first time its related declines I'm trying to dig in a little bit and understand.
What's going on there do you think it's more macro environment is it something else is it that the <unk> related.
Related headwind maybe.
Maybe just help shed some light there yes.
Yes, Thanks, Great question.
So not macro related not related to the <unk> I think I just talked about it's related to a contract.
As you know a contracted reps. So we signed the contract in the first quarter of last year that was fantastic contract. It was a large contract for multiple years.
It was a five year contract for around $10 million.
They've had a lot of services embedded in it as well and of course, it's contracted so we only get to count that one time in the contracted number and then we'll of course that will flow into our Invoiced and our reported revenue annually over the next five years. So we're thrilled to have gotten a contract this quarter, we didn't sign another $10 million contract.
However, the base of contracts that we did sign this quarter was what we would've expected and very consistent with what a normal quarter and normal Q1 would look like so.
The base. If you will think of it that way was very stable and just like what we would have always expected and lastly, we're just comping against this one large contract that was contracted in the first quarter last year, we don't have anything like that that we're up against in Q2 Q3 or Q4.
That I can think of and so I think it is a kind of a onetime one type thing that therefore shows up as a.
As a decline here.
Okay, and then I was just curious.
Characterize kind of the sales environment in terms of.
Lead flow pipeline conversion et cetera.
Yes.
Dave asked a similar question a minute ago I would say the environment is.
Is.
Yeah.
The environment is pretty good I mean, it's.
Our clients are.
Our solutions are in demand, they're there, they're looking to address and wanting to address the types of challenges. We're focused on we're seeing as we do during these times, where our execution business clients Ceos and cc level leaders are looking to figure out how to execute their strategies as effectively as they can we are seeing good demand there.
Just launched a new sales performance solution this fiscal year and upgrade to the one we had we have we're excited about that and the initial interest there.
We just as I mentioned launching launched the three <unk> version of leading at the speed of Trust and we created a companion version of that called working at the speed of Trust. We never had a solution a trust solution that was geared to the non management population and yet trust is one of these topics that you need to run through the entire organization. There's been really good demand for that new <unk>.
<unk> and.
And so I would say, we're having great attendance at our marketing events.
You'll recall that we were all live in person marketing events pre pandemic, we shifted all the way to live online and now we know we're enjoying kind of a dual marketing event structure, where we do live we do online ones and we do in person events, there very well attended.
People Love people that are working at home love to get out of their office come to these live in person events Theres been great interest there. So pipeline pipeline conversion continues to be strong I think.
Supporting that point is what we've seen here in Q4 and then in Q1 is this growing invoice subscription amounts I talked to a few minutes ago that we're seeing that pick back up after Q2, and Q3 were a bit flattish again on top of big comps of the year before but even in Q4 and Q1 Q4. This last year in Q1 of this year also on <unk>.
A pretty good comps as well and we've seen nice growth in that invoice subscription business. So so we feel we feel good about the general environment and what we're seeing out there and what we're hearing from our clients.
Great and then just wanted to.
Discussed with.
With your team earlier in December was penetration and to lower areas of an organization and how that might attack affect future subscription services related services attach rates.
If you could just give us your view there. It seems like you are seeing demand there from clients at levels lower in the organization.
Yes, it's a great question so.
<unk>.
But.
A couple of thoughts I would just say one we do talk about the attach rate as a percentage I think that percentage.
Could could go up or down a little bit over time.
What might cause but the dollars themselves will continue to go up the percentage could go down if we as we expand to larger and larger populations and they choose to at the frontline deploy some of our solutions.
And asynchronous modality ways at the same time the percentage could go up as we do a better job of addressing the leader populations again, we've talked before about our penetration rates inside the average customer were still 10 15, 20% of the way penetrated even within the leadership population inside the organizations that we face.
I think the attach rate will continue to be strong I.
Sean: You know, I think whether the attached rate, the percentage goes up or not, the dollars will continue to go up because I suspect we'll continue to attach at about the same rate.
I think whether the attach rate the percentage goes up or not the dollars will continue to go up because I suspect will continue to attach at about the same rate and I think the rate will be higher in the back half of this year, but that rate will be on an increasing base of subscription.
Sean: And I think the rate will be higher in the back half of this year, but that rate will be on an increasing base of subscription.
Sean: And we are excited about some of these solutions that we're bringing to market that are built to scale even more broadly across organizations. Again, we're the collective action company trying to create common language, introduce common ways of thinking and behaving.
And.
And we are excited about some of these solutions that we're bringing to market that are built to scale, even more broadly across organizations again, where the where the collective action company trying to create common language introduce common ways of thinking and behaving.
Sean: And leaders need that. They need to drive that down through the organizations. And so as we develop these solutions, we want to make sure that we have solutions that are built to do that. But I think services will continue to be an important part, and dollars will continue to increase, I imagine, the rate.
And leaders need that they need to drive that down through the organization and so as we develop these solutions we want to make sure that we have solutions that are built to do that but I think I think services will continue to be an important part and we will keep the dollars will continue to increase I imagine the rate probably stay about where we're at.
Sean: probably stay about where, you know, where it has been.
It has been but.
Sean: that could go up too. I continue to be pleasantly surprised at the way multi-year contracts and that rate continues to increase year after year. Great, appreciate the insights.
That could go up to continue to be pleasantly surprised at the way multi year contracts and that rate continues to increase year after year.
Okay. Appreciate the insights thank.
Thanks, Jeff.
Thank you.
Please standby for our next question.
Okay.
Speaker Change: Our next question comes from the line of Alex Paris with Barrington Research. Your line is open.
Our next question comes from the line of Alex Paris with Barrington Research. Your line is open.
Alex Paris: Hi, guys. Can you hear me? Yeah. Hi, Alex. How you doing?
Hi, guys can you hear me yes.
Hi, Alex how are you doing.
Speaker Change: Good, I'm doing well. Thanks for asking. Congrats on the strong quarter.
Good I'm doing well thanks for asking.
Congrats on the strong quarter.
Speaker Change: I'll be quick. We're late in the call here, and I just have a few cats and dogs to follow up on. First of all, in your prepared comments, you didn't speak to China and Japan. That's been a topic of conversation. It's roughly 50 percent, as I recall, of international sales. There's been an improving trend in China coming out of COVID for the third time, I suppose. I just wondered for a little update there. Yeah, great. Great question.
I'll be quick relating to call here and I just have a few cats and dogs to follow up on.
First of all in your prepared comments, you didn't speak to China, and Japan, Thats been a topic of conversation, it's roughly 50% as I recall of international sales.
There'd been an improving trend in China coming out of Covid for the third time.
Suppose I was just wondering for a little update there.
Yes, great Great question.
So in.
Speaker Change: Things can things continue to improve there in Japan. Japan had a had a had a relatively nice quarter, as you first of all, talking back, as you know, both these these areas as they come back out of COVID-19 .
Things can things continue to improve there in Japan.
Japan had had had a relatively nice quarter as you know first of all stepping back as you know both of these areas as they come back out of Covid, we're putting a big focus on making sure that what they're selling is subscription. So this is the kind of the last two parts of the world to convert their businesses from the legacy model to the subscription model.
Speaker Change: we're putting a big focus on making sure that what they're selling is subscription. So these are kind of the last two parts of the world to convert their businesses from the legacy model to the subscription model. And so, uh, and, and that's going well in both of those countries as that, as that occurs, of course, that.
And so and that's going well in both of those countries as that as that occurs of course that depresses reported revenue slightly as more of that revenue goes out on the balance sheet in the form of subscription, but we are intently working on that with them as they as they return Japan almost got back last year to its pre pandemic.
Speaker Change: Depresses reported revenue slightly as more of that revenue goes out on the balance sheet in the form of subscription But we are intently working on that with them as they as they return
Speaker Change: Japan almost got back last year to its pre-pandemic high and we expect that it will get back above that this year. So that's been a long time coming. China has been up and down when they've been in and out of COVID and that business is coming back as well. I think we feel relatively, generally good about what's happening in both those countries.
<unk> high and we expect that it will get back above that this year. So that's been a longtime coming China has been up and down.
When they've been out of Covid and that business is coming is coming back as well.
I think we feel we feel relatively generally good about what's happening in both those countries.
Speaker Change: Great, thanks. And then looking back at Q2 of 2023.
Alright, Thanks, and then.
Looking back at Q2 of 2023.
Speaker Change: deep snow, you know, renewals were not quite what you, well, I guess the renewal rate was good. The retention rate was consistent with prior quarters, but you did not sign a couple of large clients. I'm wondering about those large clients that didn't renew on a timely basis, and I know it's your expectation that they come back at some point. Have they come back yet, and what are you doing to increase the odds that they will come back?
Deep snow.
Renewals were not quite what I guess the renewal rate was good.
The retention rate was consistent with prior quarters, but you did not sign a couple of large clients I'm wondering about those large clients that didn't renew on a timely basis.
And I know, it's your expectation that they come back at some point they come back yet and what are you doing to increase the asset they will come back.
Speaker Change: Good question. Good memory. Yeah. So, so, so we have to that to that point.
Good question good memory, yes.
Yeah.
So we have to that to that point.
Speaker Change: One of them has, one of them hasn't come back. And there were a handful. I don't know if I can give you an exact answer on the full handful. We do have, we have a category of clients we call win-backs.
One of them has one of them hasnt.
Come back.
And there were there were a handful I to I don't know if I can give you an exact answer on.
I'll now hand, the full handful.
We do have we have a category of clients we call win backs.
Speaker Change: And so when a client doesn't renew on time, they go into a category of win-backs. We have a special effort that we put in place on those clients. And so we're...
And so when a client doesn't renew on time they go into a category of win backs. We have a special effort that we put in place on those clients and so we're we're <unk>.
Speaker Change: Fortunately, we don't have a lot of those, but when we do, we have a process we run because our mantra around here we throw around is clients for life. We don't ever wanna lose a client. And so we take the approach that, well, if we lost them, it's a temporary thing, we're going to get them back. And so we're doing that on those clients from Q2 and we'll continue to do so.
Fortunately, we don't have a lot of those but when we do we have a process we run because our mantra around here, we throw around as clients for life. We don't we don't ever want to lose a client and so we take the approach that well if we lost them. It's a temporary thing we're going to get them back in and so we're.
We're doing that on those clients from Q2, and we'll continue to do so.
Speaker Change: Great, that's helpful. And then,
Great that's helpful.
And then.
Hi.
Speaker Change: this was probably for Sean, you had a record year in signing new schools in fiscal 2023. One of the issues in the fourth quarter that contributed to the revenue shortfall was the inability to deliver the services, the onboarding services associated with it. And then when you miss it in the summer, when do you get it back? Based on earlier questions, it sounds like you don't get it back till next summer. Is that right?
This was probably for Sean you had a record year in signing new schools in fiscal 2023, one of the issues in the fourth quarter that contributed to the revenue shortfall was the inability to deliver the services. The Onboarding services associated with it and then when you when you Miss it in the summer when do you get it back based on earlier questions at Sao.
Like you don't get it back until next summer.
Right.
Speaker Change: Yeah, uh-huh. Yeah, that's typically what happens because, uh...
Yeah.
That's typically what happens because.
Speaker Change: professional development usually takes place, most of it takes place during the summer. So a new school comes on and there's usually two or three days of professional development per school, right? If it's too late in the year, then they say, well, we'll do coaching throughout the year as we start the school year, but the professional development that goes deeper with everyone, in the same room at the same time, we'll have to delay till next summer. So that will, it hurt us last year, will help us this year.
Professional development, usually takes place most of it takes place during the summer.
On the school comes on and arguably two or three days of professional development per school right.
And if it's too late in the year, then they say well we will give coaching throughout the year as we start the school year, but the professional development that goes deeper with everyone.
In the same room at the same time, we'll have to delay until next summer so that that will hurt us last year. It will help us this year.
Speaker Change: And the momentum, you know, across the board is really good. We've got lots of.
The momentum.
The board is really good and we've got lots of <unk>.
Speaker Change: Lots of large new contracts in the pipeline. We've got three states talking to us right now about some big deals.
While some large new contracts in the pipeline. We've got three state state is talking to US right now about some big deals.
Speaker Change: Um, so, you know, we expect that services will, we'll have a nice 2nd, half of the year for the reason of last year coming in late as well as well as a really nice building pipeline for this year.
So we expect that services will we will have a nice second half of the year or the reason last year plumbing and labels as well as.
A really nice building pipeline for this year.
Speaker Change: Excellent, thank you. Yeah, so not only was there a shortfall because of that last year, there'll be a little bit of a doubling up on some of those onboarding activities this coming summer.
Excellent. Thank you yes.
So not only was there a shortfall because of that last year there'll be a little bit of a doubling up on some of those onboarding activities this coming summer.
Speaker Change: Yeah, I think so. And we're also pushing everyone hard to get in early this year.
Yes, I think so.
We're also pushing everyone hard to get an early this year.
Okay.
Speaker Change: It's nice to bring them on as many schools as we can. It's always better to bring them on sooner than later. For sure.
Makes sense.
Mccann is always it's always better to bring them home sooner than later.
For sure Okay, Great and then.
Speaker Change: two last ones. I think the target for this year, Paul, is 40 new playing partners and other support roles. How many do you hire in the first quarter, and is it going to be level loaders that more back half loaded?
Two last ones.
I think the target for this year, Paul as 40, new client partners and other support roles.
How many did you hire in the first quarter and is it going to be level loaded or is it more back half loaded.
Paul: Yeah, it'll be a bit back half loaded. So we ended the first quarter with 300 client partners and then roughly 150 or so of the other client facing roles. So about the same 450 that we reported on at the end of Q4. And we are so committed to adding the number for the year. And those will be.
Yes, it'll be it'll be a bit back half loaded so.
We ended the first quarter with 300 client partners and then roughly 150 or so of the other client facing roles. So about the same $4 50 that we reported on at the end of Q4 and will we are still committed to adding the number for the year and those will be.
Paul: back-loaded but not all at the very end. They'll come back, you know, more towards back half the year. Okay.
<unk>.
Backloaded, but not not all at the very end they'll come back more towards back half of the year.
Okay.
And then.
Paul: Maybe this one's for Jen, the impact platform.
Maybe this one's for John the impact platform.
Speaker Change: At the end of, I think it was end of Q4, you said the vast majority of English speaking clients are on the platform, but you're in the process of rolling out additional languages. Where are we in that process? And how penetrated are you with clients now?
At the end of I think it was the end of Q4, you said the vast majority of English speaking clients are on the platform, but you are in the process of rolling out additional languages, where are we in that process in and.
How.
Penetrated are you at with clients now.
Speaker Change: Thanks for asking Alex. We are thrilled that as of October .
Or.
As of October one.
Speaker Change: We have launched in all of our what we call core languages and about 25 languages have launched the impact platform.
All of our what we call core role of the JV.
About 25 languages have launched the whole platform.
Speaker Change: It was a really effective launch and we're seeing more and more of our clients globally move to the impact platform. Obviously, it makes a big difference for our clients based in the US as well, that they can deploy scalably in multiple languages. So deployment went extremely well. There's a couple of our more, our less used languages that haven't yet deployed, but the majority and what was targeted happened in October .
Really effective long haul, we're seeing more and more of our clients globally.
Obviously, it makes a big difference.
Clark.
Wow Okay.
You can deploy in.
Multiple languages, so why now.
Furthermore, while there is a couple.
Are more or less new languages.
The majority of what we're targeting that happened in October.
Speaker Change: Great. And what could we hope for or expect from the rollout of Impact Platform? Is it a higher initial selling price? Is it higher retention rates?
Great and what can we hope for or expect from the rollout of impact platform as it is at a higher initial selling price is at higher retention rates.
Speaker Change: Well, the primary benefit I think is the value proposition that we are changing, we're driving collective.
Both.
Primary benefit I think is the value proposition that.
We are.
We're done.
Having collected behavior change so in terms of <unk>.
Speaker Change: So, in terms of the impact platform, we always have great content, we always have the modality, but having the seamlessness to be able to bring this to an enterprise at scale, particularly as many of our buyers don't have a lot of people in the department.
<unk> always had great Hong Kong, we already put the modality.
But having the Cumulus Nick will be able to bring in more enterprise.
Particularly at many of our buyers don't have a lot of people in that department.
Speaker Change: and this makes it much more scalable. What we're seeing with those that have deployed is we're better able to track that behavior change. We can track pre and post the skills, the movement, one of our latest case studies. The primary thing that the buyers love is the metrics and the ability to scale with lower staff.
And this makes it much more scalable what we're seeing.
We're proud to deploy is we're better able to track that behavior change with those frac III oncology.
No no.
No.
One of our latest hold steady.
Primary buyers.
It looks like overall.
With lower spot.
Speaker Change: Excellent. Very helpful. Thank you very much. And that's all I have for now. Thanks, Alex.
Excellent very helpful. Thank you very much and that's all I have for now.
Thanks, Alex.
Thank you.
Please standby for our next question.
Speaker Change: We have a follow-up question from the line of Nehal with Northland Capital Markets. Your line is open.
We have a follow up question from the line of Knowhow with Northland Capital markets. Your line is open.
Neho: Yep, thank you. Paul, at the beginning of your prepared remarks, you talked about how invoice subscription value was splashed in fiscal 3Q and 4Q, but then fucked it up in fiscal 1Q. What was actually the precise level in fiscal 1Q, and do you expect that to continue and fucked up in fiscal 2Q?
Yes. Thank you.
Paul at the beginning.
The prepared remarks, you talked about how invoice subscription value was splashed in fiscal <unk> and <unk> looked it up in fiscal <unk>.
What was actually the precise level in fiscal <unk> and do you expect that to continue and flex up in fiscal <unk>.
Speaker Change: Just make sure I've got your question there cut out just a second on our end. Could you just repeat it one more time? I think it's about invoice subscription levels Q2, Q3 versus Q4, Q1.
So your question just to make sure you've got your question Ive got your question Erik that cut out just a second on R&D can you just repeat it one more time I think it's about invoice subscription levels Q2, Q3 versus Q4 Q1.
Okay.
Is that your question.
Yes, well and into Q2 of this fiscal year 'twenty four.
Yes, great. Okay. So so invoice subscription levels U S. Canada AAP were flattish in Q2 and Q3 memory serves they were up.
Speaker Change: Up about 8% in Q4 and then up around 13% in Q1.
About 8% in Q4, and then up around <unk> 13.
<unk>, 13% in Q1 and.
Speaker Change: And then we expect that they'll continue to be good in Q2.
And then.
We expect that they'll continue to be good and Q2.
Speaker Change: Great. And then Steve, real quickly, do you have thoughts on it, but that's for the February quarter?
Okay, Great and then Steve real quickly do you have thoughts on it.
EBITDA for the February quarter.
EBITDA I'm, sorry, again on EBITDA for this quarter.
For Q, which will be up.
So we talk about adjusted EBITDA being between 6.2 and $7 2 million.
Okay I missed that.
And what about the currency headwind for the full year on EBITDA.
Hello.
Our constant or impact of.
Of currency was insignificant in Q1 if.
If we stay at exact if the rates stayed exactly what they are now we would have some impact through the remainder of the year.
We don't know what's going to happen with exchange rate. So we don't know what that would be that that might impact revenue like $1 million.
Stayed exactly as they are now.
Steve: But there was, there was no, there was an insignificant impact on adjusted EBITDA and an insignificant impact on sales in Q1. Awesome.
But there was there was no there was an insignificant impact on adjusted EBITDA.
And an insignificant impact on sales in Q1.
Awesome, great. Thank you very much.
Thanks Neil.
Thank you.
Speaker Change: I'm showing no further questions in the queue. I would now like to turn the call back over to Paul for closing remarks.
I'm showing no further questions in the queue I would now like to turn the call back over to Paul for closing remarks.
Paul: Okay, well, thank you, everyone, for joining. Thanks for your great questions. Thanks for your the time that you take to understand the business and for the thoughts you share with us. We appreciate you and hope you have a wonderful evening and a great start to 2024. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
Okay, well. Thank you everyone for joining thanks for your great questions. Thanks for your time that you take to understand the business and.
For the thoughts to share with US. We appreciate you and hope you have a wonderful evening and a great start to 2024.
Yes.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.