Q4 2024 Franklin Covey Co Earnings Call
Okay.
Speaker Change: Good day and thank you for standing by welcome to the Q4 Franklin Covey earnings Conference call.
Speaker Change: At this time, all participants are in listen only mode.
Speaker Change: After the Speakers' presentation there'll be a question and answer session to ask a question. During the session you will need to press star one one on your telephone you will then hear an automated message advising your hand is right.
To withdraw your question. Please press star one one again.
Speaker Change: Be advised that today's conference is being recorded.
Speaker Change: I would now like to hand, the conference over to your first speaker today, Derek Hatch corporate controller go ahead there.
Derek Hatch: Thanks, Mark Hello, everyone and thanks for joining us today, we're glad to have the opportunity to talk with you today about our fourth quarter and fiscal year ended August 31, 2020 for participating on our call. This afternoon are Paul Walker, our CEO, Steve Young our CFO, Jennifer Coliseum or President of our Enterprise Division, Sean Covey, President of our Education Division.
Derek Hatch: And other members of the executive team as we get started I would like to remind everyone that this presentation contains forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995 forward looking statements are based upon management's current expectations and are subject to various risks and uncertainties, including but not limited to the.
Derek Hatch: We are the company to grow revenues, the acceptance of and renewal rates of our subscription offerings, including the all access pass and leader in me memberships.
Derek Hatch: The ability of the company to hire 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 overall size of the market for the Companys products changes in the training and spending policies of the <unk>.
Derek Hatch: These 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: Any of these conditions are beyond our control or influence any one of which may cause future 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.
Derek Hatch: 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'd like to turn the time over to Mr. Paul Walker, our sheet, our Chief Executive Officer, Paul takeaway. Thank you Derek and welcome everyone. It's great to be with you today.
Derek Hatch: There are two things that I am excited to share during our time together.
Derek Hatch: First is the strength of the results we achieved in the fourth quarter and for the year, where fourth quarter revenue grew 8% and full year revenue was $287 2 million compared to the 284 million we'd expected.
Derek Hatch: Fourth quarter, adjusted EBITDA grew 39% and for the year adjusted EBITDA was $55 3 million versus the $48 $1 million that we achieved in fiscal 'twenty three.
Derek Hatch: Cash flows from operating activities grew 69% for the year.
Derek Hatch: And free cash flow grew 100, 121% in the year.
Derek Hatch: These results are a continued reflection of what we anticipated when we converted to a subscription business model nine years ago.
Derek Hatch: As shown on slide four since our conversion.
Derek Hatch: We've achieved significant growth in revenue adjusted EBITDA and cash flow.
Derek Hatch: The second thing I want to talk about today and this is something I've been looking forward to talking with you about for some time now.
Derek Hatch: Is it having substantially completed our transition to subscription and.
Derek Hatch: And having made major investments in technology and content to solidify our position of leadership.
Derek Hatch: We're now ready to make the necessary growth investments to shift our ongoing revenue growth from the mid to high single digits to consistent double digit growth.
Derek Hatch: This increased growth will be driven by investments in two key areas.
Derek Hatch: First further expansion of our penetration within existing clients.
Derek Hatch: Even though we've already expanded our average revenue per client from $39000 to $85000 since our conversion to subscription.
Derek Hatch: Within the vast majority of our clients, we remain only about 10% penetrated with lots of headroom for further expansion and growth.
Derek Hatch: The second area of investment is in winning significantly increased numbers of new logos.
Derek Hatch: Even though we have one thousands of logos, we're only scratching the surface of the potential within the large markets we serve.
Derek Hatch: Accordingly, I am pleased to tell you that we're making approximately $16 million of incremental net growth investments into the following areas, which you can also see reflected on slide five.
Derek Hatch: The first of these areas is that we're adding client facing sales and support roles to increase the penetration bandwidth of those client partners, who will now be responsible solely for client expansion.
Derek Hatch: The second area of investment is that we're providing significant additional marketing and closing resources to help those client partners, who will now be focused solely on winning new logos.
Derek Hatch: And the third area is that we're making investments into central sales leadership and sales operations functions.
Derek Hatch: Including having hired a new chief revenue officer her name is Holly Procter.
Derek Hatch: And establishing an expanded revenue operations function, that's going to allow us to scale, our sales force even more rapidly in the future.
Derek Hatch: We expect these investments to show impact in the back half of fiscal 'twenty, five and then to fundamentally shift our growth curve thereafter.
Derek Hatch: As shown in slide six we expect reported revenue to grow approximately four 5% or $13 million in fiscal 'twenty five.
Derek Hatch: You should note that this will be an investment year.
Derek Hatch: And where we expect a lot of the new Invoiced revenue to end up on the balance sheet.
Derek Hatch: We then expect to begin a pattern of double digit revenue growth is the impact of these growth investments accelerate our growth.
Derek Hatch: The 10% or around $30 million in fiscal 'twenty six we then model accelerating growth to 12% or approximately $40 million in fiscal 'twenty seven and then the 14% growth of approximately $50 million in fiscal 'twenty eight.
Derek Hatch: As also shown on slide six we expect the impact of these investments to decrease adjusted EBITDA in fiscal 'twenty five to a range of approximately 40% to $44 million, which will then grow to $48 million in fiscal 'twenty six.
Derek Hatch: To approximately $60 million of fiscal 'twenty, seven and then to approximately 75 million in fiscal 'twenty eight.
Derek Hatch: This is an exciting time for us.
Derek Hatch: Having successfully converted to our technology enabled subscription model and having made significant investments in content and technology, which have further enhanced our strategic position while at the same time continuing to grow adjusted EBITDA and cash flow.
Derek Hatch: We're now ready to make the next jump forward that of accelerating our growth.
Speaker Change: I'd like to now turn some time over to Steve to talk about our Q4 and fiscal year results in a little bit more detail and also get into guidance. Okay.
Speaker Change: Thank you very much Paul.
Steve Young: I'm very excited about the results for our quarter and for the year that we just ended.
Speaker Change: As you can see on slide seven.
Speaker Change: In Q4 revenue came in at.
Derek Hatch: $84 1 million up 8% and a stronger than expected.
Derek Hatch: With that FY 'twenty for revenue for the year came in at $287 2 million compared to the $284 million.
Derek Hatch: Again that we had expected.
Derek Hatch: In Q4, adjusted EBITDA was $22 9 million.
Derek Hatch: Reflecting growth of 39% compared to the $16 5 million last year.
Derek Hatch: For the full year FY 'twenty for adjusted EBITDA came in at $55 3 million.
Derek Hatch: Which was $55 $8 million in constant currency.
Derek Hatch: And it was an increase of 15% or $7 2 million compared to $48 1 million and adjusted EBITDA achieved last year, which itself was up from the $42 2 million in FY 'twenty two.
Derek Hatch: Cash flows from operating activities grew 72% or $25 6 million during Q4 to $60 3 million.
Derek Hatch: Free cash flow was $48 9 million.
Derek Hatch: Reflecting growth of 121%.
Derek Hatch: $26 8 million.
Derek Hatch: In addition to the foundation for <unk> further growth is being established by by the increase in our balance of deferred revenue.
Derek Hatch: Which increased 9% to $107 9 million and will be recognized as revenue in the coming quarters.
Derek Hatch: We're really encouraged by the double digit increase in our services booking rate.
Derek Hatch: The fourth quarter in North in our North America business, and importantly that the strong momentum.
Derek Hatch: Has continued in this year's first quarter in both September and October.
Derek Hatch: Importantly, these increases and booking pace will translate to year over year increases in recognized services revenue in the coming quarters.
Derek Hatch: I'd like to now briefly provide some more detail on the factors underlying our performance in three key areas of the company.
Derek Hatch: Specifically, our enterprise business in North America.
Derek Hatch: The enterprise business internationally, both in our direct offices in our international licensee operations.
Derek Hatch: And our education business.
Derek Hatch: I'll start with the Enterprise Division results.
Derek Hatch: In FY 'twenty for our enterprise division generated $208 8 million or 73% of the company's overall revenue.
Derek Hatch: With the education division generating $73 5 million or 26% of the company's revenue.
Derek Hatch: The enterprise division's revenue grew 2%.
Derek Hatch: For the year and 8% for the quarter.
Derek Hatch: Whereas education Division grew 5% for the year and was flat for the fourth quarter.
Derek Hatch: Slide eight shows our results in the enterprise business in North America.
Derek Hatch: Which represents 75% of our enterprise Division revenue.
Derek Hatch: Revenue in North America for FY, 'twenty, four grew $6 2 million or 4%.
Derek Hatch: $156 5 million due to a very strong fourth quarter, and which saw revenues increased 17% to $45 1 million.
Derek Hatch: Subscription revenue in North America for FY, 'twenty, four was $89 1 million.
Derek Hatch: Reflecting 4% growth over the prior year.
Derek Hatch: And it was $22 6 million in the fourth quarter, representing 3% growth.
Derek Hatch: The combination of subscription and subscription services revenue in.
Derek Hatch: In North America was $138 9 million for FY, 'twenty, four reflecting 3% growth over the prior year.
Derek Hatch: It was $36 7 million for the fourth quarter, representing 4% growth.
Derek Hatch: Our balance and billed deferred revenue was $49 2 million.
Derek Hatch: Which is down 1%.
Derek Hatch: And our balances Unbilled deferred revenue is $68 4 million, which is down 15% based upon the timing and signing of certain contracts that particularly impacted our balance of unbilled.
Derek Hatch: Deferred revenue.
Derek Hatch: The percentage of North America's all access pass contracted for a multi year period increased to $6, 56% from 54%.
Derek Hatch: And the percentage of our Invoiced revenue represented by multiyear contracts.
Derek Hatch: <unk> consistent with last year at 59%.
Derek Hatch: As shown on slide nine.
Derek Hatch: Revenue from our international direct operations, which account for approximately 16% of our total enterprise Division revenue was $33 1 million.
Derek Hatch: A decrease of $2 1 million.
Derek Hatch: As a result of China's revenues decreasing $2 5 million for the year due to challenging business conditions in China.
Derek Hatch: As shown on slide nine also our international licensee revenue was $11 2 million a decrease of 400000 or 4% from the $11 6 million last year.
Derek Hatch: This decrease was primarily also due to economic challenges in certain countries.
Derek Hatch: Finally, as shown on slide 10.
Derek Hatch: Revenue in our education business grew 5% to $73 5 million for the year.
Derek Hatch: On top of the 13% growth in FY2023.
Derek Hatch: And 26% growth in FY 'twenty two.
Derek Hatch: Revenues for the fourth quarter were flat at $24 1 million after being up 18% in the third quarter.
Derek Hatch: Education Invoiced amounts grew to $81 4 million in FY, 'twenty, four which represents 5% growth over the prior year.
Derek Hatch: Invoiced amounts in Q4 decreased 2% or 800000 to $44 4 million.
Derek Hatch: Education subscription and subscription services revenue grew 3% to $67 million during the year on top of the 13% growth rate.
Derek Hatch: Growth generated in FY2023.
Derek Hatch: And the 29% growth generated in FY 'twenty two.
Derek Hatch: Education subscription and subscription and services revenue for the quarter was $22 6 million and flat to the prior year.
Derek Hatch: Education's balance of deferred subscription revenue increased 19%.
Derek Hatch: Our seven 9 million to $48 5 million again, establishing a strong foundation for continued growth in future years.
Derek Hatch: Hello about cash cash flows and the balance sheet as shown on slide 11, our cash flows from operating activities for FY 'twenty for increased 69.
Derek Hatch: Percent or $24 5 million to $60 3 million.
Derek Hatch: Our free cash flow as I mentioned increased 121% or $26 8 million in FY 'twenty four to $48 9 million.
Derek Hatch: Particularly reflecting an increase in earnings and positive changes in working capital.
Derek Hatch: In FY 'twenty, four we invested $37 million to purchase 776000 shares.
Derek Hatch: Over the last three years, we have purchased $2 million 247000 shares.
Derek Hatch: At a cost of over $90 million.
Derek Hatch: We still have over $111 million in total liquidity at the end of FY, 'twenty, four including $48 $7 million in cash.
Derek Hatch: And $62 5 million available under the revolving credit facility. So the company remains in a strong position to continue to execute on our key objectives and return value to shareholders.
Derek Hatch: So after the after that financial information.
Derek Hatch: Now turning to guidance.
Derek Hatch: For FY 'twenty five.
Derek Hatch: We expect revenue in the range of $295 million to $305 million.
Derek Hatch: Reflecting that our sales growth accelerates in the back half of the year a portion of that growth will go on the balance sheet as deferred revenue.
Derek Hatch: Reflecting on our significant growth investments.
Derek Hatch: Why 25, we expect adjusted EBITDA in the range of $40 million to $44 million.
Derek Hatch: For the first quarter of FY 'twenty five we expect revenue to be just over $70 million.
Derek Hatch: And adjusted EBITDA to be approximately seven five to $8 5 million.
Derek Hatch: Reflecting the Q1 impact of the $16 million and an.
Derek Hatch: Incremental growth investments that we've talked about.
Derek Hatch: No well it is of course challenging to forecast long term results.
Derek Hatch: Want to make sure that our investors in house.
Derek Hatch: I understand our expectations and have the information you need to model, our business and benchmark our progress going forward.
Derek Hatch: As such we are providing revenue and adjusted EBITDA targets as we view them today for FY 'twenty six 'twenty FY 'twenty seven in FY 'twenty eight.
Speaker Change: As Paul said earlier, our revenue targets or that revenue will increase 10% or 30 million to $330 million in FY 'twenty six.
Derek Hatch: And we will and will increase approximately 12% or $40 million.
Derek Hatch: $370 million in FY 'twenty.
Derek Hatch: And as we model out further to FY 'twenty eight our target is revenue growth of almost 14% or approximately $50 million to $420 million.
Derek Hatch: Our adjusted EBITDA targets are that adjusted EBITDA will increase 14% to $48 million in FY 'twenty six.
Derek Hatch: And then increased 25% or 12 million to $60 million in FY 'twenty seven.
Derek Hatch: And again as we model out the future we target adjusted EBITA growth of 25% again.
Derek Hatch: $2 million to $15 million or $75 million of adjusted EBITDA in FY 'twenty eight.
Derek Hatch: So we're very excited about the steps.
Derek Hatch: I have taken and will be taken in FY 'twenty five to position. This great company for the next chapter of growth and returns. So I'll now turn it back over to Paul Great. Thank you Steve.
Paul Walker: As we prepare to open the lines for your questions I thought I'd begin maybe jump in the queue first year and asking to answer one question.
Paul Walker: And then we will open to your questions and the question is really about the nature.
Derek Hatch: The growth investments, we're making particularly those that will allow us to significantly expand our revenue within current clients as well as the investments that are key to our winning even more new logos.
Derek Hatch: I thought I'd, just provide just a little bit of additional color and context here that might be helpful.
Derek Hatch: Over the past 18 months in our North America Enterprise business, we've been piloting efforts focused both on significantly increasing our penetration within existing accounts, while also winning a significantly greater number of new logos and these efforts have confirmed two important things.
Derek Hatch: First as it relates to increasing expansion within existing clients. We have a large number of client partners, who are already very good at expanding existing clients, but we've been asking them to both expand existing accounts, while also hunting for new accounts.
Derek Hatch: We've learned that if we put therefore focus on expanding existing accounts and provide them with some additional implementation strategist and senior consultant resources.
Derek Hatch: These client partners already significant penetration of accounts can increase significantly and quite rapidly.
Derek Hatch: While as noted our average annual revenue per account has grown to more than $85000. Many accounts have grown to be much much larger.
Derek Hatch: The results of our pilot efforts on client expansion have been so encourage them at nine months ago. We formalized this pilot is project expand.
Derek Hatch: Second as it relates to accelerating winning new accounts, we've learned that by having a separate group of client partners, whose entire focus is on winning new accounts or hunting rather than having these these client partners switch back and forth between hunting new accounts, and then penetrating existing accounts and if we provide these client.
Derek Hatch: Partners with increased lead generation and closing support we can significantly increase the number of new logos, a hunting client partner can win.
Derek Hatch: These new logos of course can then be assigned to the expand group of client partners, who can then work to expand these new accounts to $85000 per year and then eventually beyond.
Derek Hatch: Having seen the potential of this focused approach nine months ago, we focused we organized and formalize. This effort as project planned so project expand and project land.
Derek Hatch: Over the past nine months, while still bringing in a strong fourth quarter.
Derek Hatch: We have already organized our existing sales force of client partners into Expanders and hunters.
Derek Hatch: We've added a significant number of sales leadership sales operations and client facing support resources needed for both the expand and land efforts and we've added a number of dedicated new Hunter client partners.
Derek Hatch: The transition of our sales force into a dedicated expand team and a dedicated land team is the next piece of a puzzle we've been putting into place on our journey to become an even more rapidly growing organization.
Derek Hatch: If we step back in time piece, one was to convert to a subscription and subscription services business model. This has driven tremendous growth in revenue adjusted EBITDA and cash flow.
Derek Hatch: Piece, two was to significantly expand our content and technology capability to help us drive impact at scale and to help us scale much more effectively within clients and has expanded our lifetime customer value and puzzle piece three is what we're putting in place right. Now is the transformation of the way our direct Salesforce goes.
Derek Hatch: The market to drive accelerated revenue growth and adjusted EBITDA and cash flow growth.
Speaker Change: Thanks for letting me jump in line first and ask and answer a question and with that we'd now like to ask Mark the operator, if you'd open the line for your questions.
Mark: Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one one again.
Speaker Change: Please standby, while we create the Q&A roster.
Mark: Yes.
Speaker Change: And our first question will come from Jeff Martin with Roth Capital Partners go ahead yet.
Jeff Martin: Thanks, Jonathan.
Jeff Martin: I apologize I missed the majority of the prepared remarks asbestos in the bundle question. Please forgive me but.
Jeff Martin: Just curious on the timing.
Mark: The hiring.
Mark: You announced and contractual relations got a couple of them.
Mark: Executive hires.
Speaker Change: In process, our plans for fiscal 'twenty five and then at what point will the these new teams in this new sales strategy be fully in place.
Speaker Change: Great Great great great to talk to you today, Jeff. So so first of all one of the hires that we announced today actually but her name is Holly Proctor. She is our new Chief revenue officer, and we actually hired Holly first part of June So she's been on board now through the fourth quarter and into the first couple of months of Q1.
Mark: And then to your second question.
Mark: As I, just kind of just referred to a minute ago. This new organizational structure, we've stood it up and so we're we're off and running with our client partners either as expanders or those client partners that are hunting now for new logos we've hired.
Jeff Martin: Substantially all of the.
Jeff Martin: The surround sound support roles.
Jeff Martin: Sales leadership roles et cetera are now in place. We once we got conviction that this was the right direction to go we got after it and where we're often running.
Speaker Change: Great and then how would you characterize the current environment in terms of decision making.
Jeff Martin: Clients expanding passes maybe taken it into other areas of the organization.
Speaker Change: Great I would say that as far as that starting with kind of the macro environment I would say the macro environment has been pretty pretty steady now for the last since the change.
Speaker Change: Okay.
Speaker Change: Sorry, Jeff.
Jeff Martin: I'd say that the starting with the macro environment.
Jeff Martin: It's been pretty steady now for felt pretty steady for 18 months or so.
Jeff Martin: It's not what it was back in the zero interest rate days coming out of Covid, but it's been pretty consistent pretty steady and we've had success selling into that environment, maybe just a slight bit of additional uncertainty of the last few months as we've been running up to the election.
Jeff Martin: Now that's.
Jeff Martin: That's happened I think that will decrease I suspect that will decrease some of the uncertainty there.
Jeff Martin: And as far as that translating that into clients, making decisions.
Jeff Martin: Yes.
Jeff Martin: What we continue to finding what I continue to find more and more as I'm out talking to other Ceos. In fact I was in New York last week met with a number of Ceos.
Jeff Martin: Topics, we're focused on leadership culture execution sales performance. These are the topics that are on People's minds.
Jeff Martin: Attended the World business Forum, a couple of weeks ago and most every spa.
Jeff Martin: Speech. It was given there was on on on how to organizations create high performance cultures cultures that are going to be a resilient, they're going to be adaptable change ready to meet the demands of the day and that's exactly where we're playing those are the solutions that we're building and so expect that that will continue to.
Jeff Martin: To bode well for us as we land new clients and seek to expand those clients that we have.
Jeff Martin: Thank you.
Speaker Change: Thanks, Jeff.
Jeff Martin: Thank you.
Speaker Change: And our next question will come from Steven with Northland Capital Markets go ahead Stephen.
Steven: Hey, guys.
Steven: I was wondering if you could.
Speaker Change: Give us the narrative on the 2% decline in subscription invoiced for the quarter.
Speaker Change: You bet.
Jeff Martin: Uh huh.
Jeff Martin: The 2% is in.
Jeff Martin: Overall subscription yes.
Jeff Martin: Yes.
Jeff Martin: So.
Jeff Martin: Steve.
Speaker Change: Question, so as far as the in the quarter invoice subscription growth.
Steve Young: We had a good quarter it was.
Steve Young: Down the invoice growth was.
Steve Young: Down slightly is that 2%.
Steve Young: Company.
Speaker Change: Yeah. So we mentioned that education had a had a flattish quarter minute ago, they were up 18%.
Steve Young: In Q3 reported was up 18% in Q3 little flattish in Q4, and so a lot of our growth came in the fourth quarter from the rebound in services, we had a good services quarter and some growth in some non subscription areas and it was that it was a good quarter on the invoice subscription side, but not a not a big growth quarter nothing.
Steve Young: Extremely noteworthy to report other than.
Steve Young: Yeah, we were up 5% for the year end.
Steve Young: And Ed Ed pulled forward a lot of there is into Q3 as I mentioned.
Steve Young: Yeah.
Steve Young: Okay.
Steve Young: Okay.
Steve Young: That's helpful. Steve.
Jeff Martin: Yes.
Jeff Martin: Very helpful. Thank you.
Jeff Martin: Hey, Thank you Steven.
Speaker Change: As we wait for our next question and our next question will come from Samir Patel go ahead Samir.
Samir Patel: Hey, guys. Thanks to be speaking with you.
Speaker Change: Hi, Sameer.
Sameer: Hey, Yeah, I'll start with kind of just a high level observation, which is I think it's interesting that we're making these investments to accelerate growth.
Sameer: If youre talking about getting to kind of teens growth in the out years and you put that together with your EBITDA margin do you think about kind of the traditional rule of 40 in SaaS.
Speaker Change: Yes, those types of company is being valued at say five times revenues.
Speaker Change: On average and you look at where obviously your stocks trading I mean, I think I think turning this into a consistent high growth subscription business is absolutely the right thing to do so excited about that.
Speaker Change: Two questions that I have are as follows the first is.
Speaker Change: Sort of why now and why sort of the big bullet as opposed to your traditional strategy kind of growing growing your sales force every year, adding heads.
Speaker Change: Kind of why why the big bullet approach and then the second is maybe you could compare and contrast, so that we can get an idea as shareholders.
Speaker Change: Kind of the ROIC you expect on this investment right.
Speaker Change: Do you think your revenue growth rate would have been in the absence of these investments right like where do you think your EBITDA and your long term growth rate what kind of ended up.
Speaker Change: Without these and obviously you've kind of articulated where they are with the as to how you think about kind of return on that investment youre choosing to make in the sales force. So.
Speaker Change: Great great.
Speaker Change: Those are some of those wonderful questions and so I'll answer some and I'll have Steve help me with a couple of them as well as far as why now.
Speaker Change: Mentioned, just a minute ago on the prepared remarks that.
Speaker Change: We've foreseen this day actually for maybe a couple of years now.
Speaker Change: If you rewind the clock nine years ago, we fundamentally changed the business model the company turned it to a subscription business.
Speaker Change: You were you were there for that.
Speaker Change: The inception of that and that was that was the absolute right thing to do for our customers and it turned out to be a great thing to do then we think for the company for our shareholders.
Speaker Change: And it created a recurring revenue model.
Speaker Change: And at the time.
Speaker Change: The next the next piece, we needed to put in place there was that as a subscription company to double down and increase the investments, which we did we at that shortly after we converted the subscription we started to invest.
Speaker Change: Annually at two times the rate.
Speaker Change: Into content and technology that we had invested in the old model.
Speaker Change: And that was important as a subscription business both to make sure that we had enough content to subscription, but also to create the technology to help the scale and while those while the conversion to subscription was occurring and the increases into content and technology were occurring.
Speaker Change: We watch for a while we recognize that we were going to reach a point, where we would probably need to transform the way our sales force went to market in the early days it wasn't a major challenge because the business was smaller and we could ask the same salesperson to both spend a good portion of their time landing new business and the other portion of their time.
Speaker Change: Expanding the existing business kind of as a consequence of having done relatively well in growing this business to the size that it is now.
Speaker Change: That's a lot to put on a salesperson, we end up with kind of sub optimized results on both the land side and the expand side because of the size of business now that we're asking people to look after and also to try to penetrate and so we've foreseen this coming now.
Speaker Change: We wanted to wait until we were kind of all the way through the transition and conversion to subscription where now there. So that speaks a little bit to the timing of why now as far as life Wi Fi or the the big bullet instead of a small bullet.
Speaker Change: We've been firing a series of small bullets. We started I mentioned 18 months ago, we started to poke around here and have run a series of pilots and internal tests with different teams.
Speaker Change: And watching and studying and refining the approach.
Speaker Change: And we feel quite good that you know of course, we could choose to take our time, but really what we need to do to make this thing fully happen is to split the organization into two parts dispose to expand existing relationships, where we think that average revenue per customer is $85000 today could actually grow to be two times that amount in the future.
Speaker Change: And then an organization thats focused on hunting and and really put the resources in place to make both of those organizations. The expanders and the hunters that are lenders give them everything they need to just to get after this and really change the growth trajectory and growth curve of the company. So were we feel high conviction, we're ready to go we've assembled a great team.
Speaker Change: Here are some existing incumbents, who have been on the journey and some new faces that have been on this journey before and have scaled even more quickly than we have and we brought them into the organization. We're very excited about that and we're ready to go in terms of.
Speaker Change: How this compares to what the growth rate might have otherwise been I would just say looking back.
Speaker Change: Our growth rate since the conversion to subscription we've had some years, where we've grown faster than others. The compounded growth rate over the last eight or nine years has been around 5%.
Speaker Change: Steve if I have that number right.
Speaker Change: Of course, we we would hope to inch that up and maybe that would move into the.
Speaker Change: Higher single digits, but we as we modeled out here. We think this is moving to 10% and then to 12% and then 14% in fairly quick time period here and I think what we end up with is what you alluded to which is a company that that not only is also growing adjusted EBITDA and cash, but those adjusted EBITDA amounts and cash flow amounts are attached to a much faster growing revenue.
Speaker Change: That ought to end up is something thats valued even more significantly than this great organization is today, so Steve I don't know if you would.
Speaker Change: And any additional thoughts to that Paul just thinking the same thing as you mentioned we ended up with.
Speaker Change: With two groups with leaders and organizations that support that.
Speaker Change: New logo group and expand group, our total organizations and just kind of like being straddle defense. If the individual salespeople then have not made the full transition.
Speaker Change: It's a big transition that's really messy if youre in the middle of it so we decided to get on with it and get it done even though even though some are as you noted.
Speaker Change: And in the past these are the kind of things we would we would do over time.
Speaker Change: Circumstance, just didn't fit and ability.
Speaker Change: The ability to do that and then and then we looked at the growth rate that we've been.
Speaker Change: Achieving versus the size of the opportunity.
Speaker Change: <unk> anticipated that that would change and it would be good.
Speaker Change: We're just not comfortable.
Speaker Change: There is a match there.
Speaker Change: Should it be a way to grow faster and this is a big part of that movement.
Speaker Change: Okay.
Speaker Change: That makes a lot of sense to me.
Speaker Change: As a follow up if I can sneak in one more you had talked a couple of calls ago, maybe it was last call actually about.
Speaker Change: The technology side right, the <unk> platform and using things like AI.
Speaker Change: To help.
Speaker Change: Help customers kind of get more customized cocaine learning journeys things.
Speaker Change: Things like that maybe you can also describe as youre trying to increase the growth rate here. Some of the technological side initiatives, you have and maybe whether it's got to make onboarding easier whether it's to make it easier for clients to get.
Speaker Change: More out of the platform, but I see them I think that's also going to be in inputs into achieving that higher growth rate.
Speaker Change: And again kind of a historical perspective of having come from 10 years ago. Like you talked about where you were literally physical printed booklet sprite, which is which is how youre going to market in many cases selling these physical.
Speaker Change: Materials so.
Speaker Change: Yeah, It actually is kind of the.
Speaker Change: A remarkable to think back where the business was pre conversion to subscription and really when we converted to subscription Sameer. We didn't have much of a technology orientation, either and so what's happened in the last nine years or so is not only subscription but at this.
Speaker Change: Really significant increase in our technology capabilities. So to answer your question, specifically just a couple of thoughts.
Speaker Change: 90% of our clients have now successfully converted over to the impact platform.
Speaker Change: And.
Speaker Change: In fact, we just did a buyer NPS survey, which we do routinely in.
Speaker Change: We have very very high NPS.
Speaker Change: And that transition.
Speaker Change: Transitioning to impact platform has been very good for our clients, it's allowing them to deploy our solutions at greater scale without having to sacrifice.
Speaker Change: The impact and the quality in terms of being able to change behavior typically in the industry. If you want to go for scale, you've got to switch all the way to kind of an asynchronous on demand self paced learning type solution.
Speaker Change: Which inherently there's nothing wrong with that but we're trying to be the partner to drive kind of collective action collective language getting everybody in the organization thinking and behaving in common ways with each other and as they approach work and so the nature of what we're doing is.
Speaker Change: It is not done by you're sitting at your computer by yourself, but that's how most are trying to achieve scale the impact platform for us allows us to leverage all of the delivery modalities from instructor Lad live online blended learning self paced learning.
Speaker Change: <unk> pushed content, so that we can actually not the clients not to sacrifice the impact that thereafter, but we can help them achieve a lot more scale. So that's really working well we have added a significant amount of AI. So we know AI is in there in terms of its ability to recommend and begin to tailor. What these implementation journey look like for.
Speaker Change: And for individual users.
Speaker Change: Also being used we've deployed the Franklin Covey AI coach and so if somebody is we have professional coaching that we offer our clients executive coaching team based coaching but we also now have an AI coach. That's your companion as Youre working in there too to master our content, but also on a daily basis as you're uncovering challenges in situations, where you would like to know the best.
Speaker Change: What Franklin Covey, we'd recommend on that particular topic, where right now we have a cool.
Speaker Change: Islet project going on in our execution business.
Speaker Change: As you know organizations, we teach in our four disciplines of execution methodology, we teach to as part of the process that individuals make either daily or weekly commitments around activities that they can do that will drive leading indicators that will ladder up to the lagging indicators and wildly important golden and organization is trying to achieve we now have.
Speaker Change: Millions and millions of millions of commitments that have been made and capped and we know in our four disciplines software system, whether those commitments actually impacted the lagging results or not and so AI now is being used to help people determine what would be the highest leveraged commitment our activity I could make or take this week it would be most.
Speaker Change: <unk>. So we're excited about that and just generally what's happening across the technology front Youll note there that on that slide I think it was slide five or so that when we outlined the investments even though we've doubled the annual amount we're spending on content technology. We've even added just a little bit more to that in this set of investments to help us scale, even more quickly.
Speaker Change: Okay.
Speaker Change: Understood I'll pass the line. Thank you very much.
Speaker Change: Thanks, Mary Thank you Samir.
Speaker Change: And our next question will come from Dave storms with Stonegate go ahead, Dave.
Dave Storms: Hey, good afternoon, everyone.
Speaker Change: Hi, Dave.
Speaker Change: Just.
Speaker Change: Wanted to kind of start with maybe more of a short term question.
Speaker Change: I'm just trying to think about the cadence of the margin outlook for 2025, Steve guidance fair points to a pretty significant step back in margins as you.
Speaker Change: Ramp this program should we be thinking about the J curve for this to maybe extend throughout all of 2025 or do you anticipate Q1 being maybe a low watermark.
Speaker Change: For the year.
Speaker Change: Yes, so the steps.
Speaker Change: Yes.
Speaker Change: Yes.
Speaker Change:
Speaker Change: Thank you Dave So the step down does relate to the incremental investment and then the incremental investment a lot of that has been made but it wasn't all that.
Speaker Change: It isn't all included totally in the first quarter. So it isn't exactly a J curve this year.
Speaker Change: It's a J curve, if I understand that correctly that the benefit will really start kicking in in FY 'twenty six and even in the latter part of FY 'twenty six as the investments we make now are annualized so it isn't like a one time.
Speaker Change: This isn't like an investment that we make light and content and we don't do it. The next quarter. These are hiring people to be in a position.
Speaker Change: Long term and so the incremental.
Speaker Change: Incremental EBITDA that comes from that is from the extra revenue thats being generated.
Speaker Change: That extra revenue being generated is significantly slanted towards subscription revenue. So its first going on the balance sheet and then we'll be really core will be recorded to income over the following 12 months.
Speaker Change: So as the hiring.
Speaker Change: Yes.
Speaker Change: We've made now and that we're making now in the ramping up that we're doing now the sales for that will ramp up the invoices that we generate will ramp up through this year and go on the balance sheet and then be recognized next year and then we will really get into accelerated earnings.
Speaker Change: Understood. That's helpful. Thank you yeah, that's great. Thank you.
Speaker Change: My second question is just maybe could you help us understand what maybe the new lifecycle of a client partner may be after this transaction or through this transition I know before there was talk around it took five years for a client partner to really be fully ramped.
Speaker Change: You see a difference between the expanders versus hunters and how quickly they get up to speed.
Speaker Change: Anything of that nature would be very helpful.
Speaker Change: Yeah Super insightful question so.
Speaker Change: We think we're going to bend, we expect we're going to bend the ramp curve down significantly with this transition and then ill give a little bit of context for why we believe that so.
Speaker Change: Not only have we been asking the same people to both.
Speaker Change: Land, new clients and expand existing clients, but if you think about the motion and the set of responsibilities somebody has to not only be responsible for but become very good at for the same person. It's gone from identifying potential target prospects to creating interest with those prospects to closing business with those prospects to success.
Speaker Change: Fully launching new logo customers into the all access pass and into managing the ongoing relationship the renewal and the expansion of those contracts and so.
Speaker Change: That's quite a bit too to become expert at.
Speaker Change: And probably not.
Speaker Change: Probably not best in class today in terms of how it how it organization the sales organization and be set up and so that has contributed to longer ramp just the time it takes to become proficient in that.
Speaker Change: In the future Youll.
Speaker Change: Futures today.
Speaker Change: Now you are either responsible for existing accounts, where youre attached to we have more even more resource attached to you to help you manage and engage with those existing accounts to get at that to not only to.
Speaker Change: Not only helped successfully implement the initial solution they purchased and are implementing but to free you up as a sales person on that expand side to spend more time prospecting into those existing accounts to move us from our average 10% penetration today to something much much greater than that.
Speaker Change: And so that job by nature through focusing that group just on that set of actions and getting people to be specialize on that set of actions the job.
Speaker Change: Widely important but it becomes a narrower job.
Speaker Change: And now everybody in the stack as Steve mentioned your boss is only thinking about to set that set of actions and their boss is only think about that set of actions and everything Thats. Your whole team is just thinking about how do we expand these client relationships and retain them. The same thing's true on the new logo side, where everybody in that organization is only thinking about how do we take all this lead flow convert.
Speaker Change: More quickly convert it more effectively increase the average first year size of a new client because we are giving these people even more reps and so that's a long answer to your short question that the ramp of client partners ought to go down.
Speaker Change: And.
Speaker Change: And where we've seen that in our in our in our testing as well. So we're excited for that to start to play out fully here in fiscal 'twenty five.
Speaker Change: Understood. Thank you for the color and taking my questions and good luck.
Speaker Change: Fiscal 2025.
Speaker Change: Thanks, Dave.
Jeff Martin: Mark do we have any other questions. Yes. Our next question sorry will come from Alex Paris with Barrington Research go ahead <unk>.
Alex Paris: Hi, guys. Thanks for taking my question.
Alex Paris: I've got a couple of just kind of cleanup questions. After listening to the other questions that have already been asked.
Alex Paris: I'll start with this one.
Alex Paris: The new investments $16 million this year.
Speaker Change: It seems like a very attractive returns on those investments based on your long term targets.
Alex Paris: And I think Steve you just sort of said.
Speaker Change: That a lot of that investment is in Q1, but not all in Q1.
Speaker Change: Wondering how much is in Q1, and then will the rest to be spread across the balance of the year or will it be really front first half loaded.
Speaker Change: Yeah.
Speaker Change: Yes.
Speaker Change: Yeah.
Speaker Change: Hi, Alex.
Speaker Change: Yes.
Speaker Change: The investment will be more front end loaded.
Speaker Change: They are.
Speaker Change: There will be continued investments hiring people et cetera, et cetera throughout the year, but it's but it will be mostly front end loaded in there two or $3 million of the 2016.
Speaker Change: Recorded in the first quarter end and a fair portion of the total of $16 million.
Speaker Change: Started in the first quarter.
Speaker Change: So I would say it was 16.
Speaker Change: $16 million of personnel and marketing and everything else. So that's all started in the first quarter, we had incremental expenses that caused our adjusted EBITDA in the first quarter to be lower than it otherwise would have been a couple of million dollars or so.
Speaker Change: But then the full and utilization of the of the investments will go into next year.
Speaker Change: Okay, so but in terms of expense $2 million to $3 million was in Q1, and then will that entire 16 million be expended during fiscal 2025.
Speaker Change: The $16 million is the 2025 portion of the invest that's the amount recorded in the year.
Speaker Change: Okay, so $2 million to $3 million in the first quarter.
Speaker Change: I guess it would have to increase from there right in order to get to $15 million right.
Speaker Change: Then you got 13 14 more million dollars to spend over Q2, Q3 and Q4.
Speaker Change: Yes, Q2 will be Q2 will be a meaningful increase in the expense amount.
Speaker Change: As one of the biggest incremental change will take place in Q2.
Speaker Change: Okay, because we're hiring we're hiring throughout Q1 right.
Speaker Change: And so we will have.
Speaker Change: Just the fact that we have a portion of those expenses in Q1 and the full expense for some of the managers and salespeople and others that we've been talking about.
Speaker Change: The full impact in that in Q2, we will still have some some increase in Q3 and in Q4, but the largest and change.
Speaker Change: Change in the amount of expense will be in Q2.
Jeff Martin: Helpful. Thank you Steve.
Speaker Change: Second question.
Speaker Change: I wanted to get an update on new launches we've talked about it on previous calls I think earlier. This year. It was speed of trust and the companion piece working at the speed of Trust.
Speaker Change: More recently navigating difficult conversations and then I think this fall you had targeted a seven habits side Plano.
Speaker Change: Refresh it hasnt been done in nine years.
Speaker Change: Have those all been launched.
Speaker Change: <unk> on schedule and what's been the.
Speaker Change: Initial feedback or initial results.
Speaker Change: Yes, great Great question and great memory.
Alex Paris: The feedback has been great maybe maybe Jen <unk> on the line and a lot of those impact the enterprise Division Jen you want to share a little color on those three yes, hi, Alex.
Speaker Change: Hey, John.
Jen: Let's start with the seven habits, so thrilled and it launched last week.
Jen: As you mentioned, it's been nine years, we've got all new video.
Speaker Change: Applying the practices re imagines to today's workforce Paul mentioned some of those in his comments interpersonal skills being change ready agile.
Speaker Change: And then the clients talking about innovation.
Speaker Change: We're thrilled and again it launched a week ago. So in terms of results Youll have to hold that one in your memory in Africa.
Speaker Change: Hi.
Speaker Change: In terms of trust one of the things. We're most lucky about really is that we have the best trust solution in the world.
Speaker Change: And frankly it has grown every year.
Speaker Change: The new solution launched Walter you mentioned, leading speed of trust and working at the speed of Trust.
Speaker Change: And.
Speaker Change: This topic comes up in everything as a key topic for organizations building trust for so many ways and our new solution has higher net promoter scores.
Speaker Change: Superseded our previous booking pace, we've mentioned our increase in booking pace in Q3, and especially Q4, continuing right now and we.
Speaker Change: We are seeing a lot of people interested in trust.
Speaker Change: As it relates partially to what Paul said about the platform as well we have so many multiple ways to deploy our AI helps can give you trust coaching behavior as an individual and we're really driving collective behavior change. So trucks great results. We also had significantly larger attendees at <unk>.
Speaker Change: Marketing events last fiscal year, then we had the year before I attribute a lot of that to what you mentioned, both navigating difficult conversations and leading and working at the speed of trust and we had significant marketing events, leading up to and in the coming months related to the seven habits.
Speaker Change: Good I appreciate that additional color it sounds like those investments are working as well.
Speaker Change: Last question on the Education Division.
Speaker Change: As I recall, you had a large statewide implementation in the Q3, which pulled forward some revenue from Q4.
Speaker Change: Im wondering if you can quantify that that pull forward number one.
Speaker Change: Number two.
Speaker Change: Can you quantify or at least give us some additional color on the expected impact of the end of the <unk> program. I know you have a large corporate sponsored that's expected to.
Speaker Change: Offset that to some degree going forward.
Speaker Change: Yes.
Speaker Change: This is Sean.
Speaker Change: Hey, Sean Yes, Yes, let me go ahead Paul.
Speaker Change: Yes, great.
Speaker Change: Yes, great. Yes, so yes, we had a lot of fourth quarter revenue pull forward into the third quarter with a large state bill and.
Speaker Change: Yes.
Speaker Change: It was.
Speaker Change: A couple of million dollars.
Speaker Change: Expected, maybe withdrawing the fourth we'll end of the third.
Speaker Change: And then the bulk of this is going to come over the next two years.
Speaker Change: This is a multiyear deal with the state.
Speaker Change: And we got more of these coming.
Speaker Change: So we're really really excited about that.
Speaker Change: And.
Speaker Change: Yes, so the answer money.
Speaker Change: The stimulus money from Covid.
Speaker Change: Officially ended at the end of September.
Speaker Change: <unk>.
Speaker Change: Where we feel we feel fine about where we're at I think it will have some impact but not that much.
Speaker Change: Phil that way because number one we're already halfway through it at least if not more.
Speaker Change: Because people use the money a lot of our clients use the money in the first couple of years when it was first given out.
Speaker Change: And so we've phase.
Speaker Change: Faced going back to these clients, we set out we use extra money to buy in the first place. We're renewing now we're coming up with other money.
Speaker Change: So we've been able to.
Speaker Change: <unk>.
Speaker Change: Ride through the impact of a lot of it already.
Speaker Change: And then in addition, we have we're getting really good at grants.
Speaker Change: Got a million and a half and grants last year, we think we can get $3 million to $5 million in grants this year.
Speaker Change: We've got a department that's really good at it.
Speaker Change: And there's billions flooding the market right now and grant.
Speaker Change: And grants.
Speaker Change: Most of it we can connect with and have opportunities for so we help districts that are doing business with us right grants and you feel like this is going to help replace any of the Essar loss and then as you mentioned, we also have a.
Speaker Change: Great partnership with the foundation devoted to building character and students and their fund.
Speaker Change: Funding hundreds of schools every year as well and that's going to continue for a long time. So we're really bullish about the future because of the size of the deals we're getting we're moving out from single schools to districts.
Speaker Change: And now to states, who see the impact of what we're doing and our market penetration is still so low we're only at 3%.
Speaker Change: No.
Speaker Change: There is lots and lots of room for growth. We also just one more thing is we do have a new solution for secondary for high schools in particular coming out in the spring and been working on this for years.
Speaker Change: We don't do a lot with high schools, most of our businesses with elementary and middle.
Speaker Change: <unk>.
Speaker Change: There is a lot of money in high school, a lot of need and we're very excited about how this we think will feel a lot of growth for the next two or three years.
Speaker Change: Well, that's great color, Sean Thank you for that.
Speaker Change: Yes.
Speaker Change: And then I.
Speaker Change: Yes.
Speaker Change: I lied I have one one last question in terms of the guidance.
Speaker Change: Yeah.
Speaker Change: Overall company revenue in the fourth quarter was up eight.
Speaker Change: 8%.
Speaker Change: For the year.
Speaker Change: I don't have that number in front of me, but youre guiding at the midpoint to about four 5% revenue growth for fiscal 2025.
Speaker Change: And perhaps.
Speaker Change: Sure you addressed this previously but.
Speaker Change: Okay.
Speaker Change: <unk>.
Speaker Change: What do you attribute that to the deceleration does it have anything to do with the investments.
Speaker Change: The economy at the end of the funds.
Speaker Change: What can you say about that.
Speaker Change: Thank you Amit.
Speaker Change: Let me tell you yes.
Speaker Change: So yes, we are guiding to the midpoint of about four 5%, which is what you said that we grew to little over two <unk> two.
Speaker Change: 2% this year.
Speaker Change: So it's double the growth we had this year, which we don't feel good about that.
Speaker Change: The growth here. This year, we did grow a little more in the fourth quarter that was the services kind of coming back and then some of our non subscription parts of the business that grew a little bit more rapidly in the fourth quarter.
Speaker Change: I think as we look out to the future a lot of what we're going to be doing here. The hiring we've done the separation into this of this new sales force the new Salesforce deployment, we anticipate that that's going to put more subscription that's going to result in more subscription sales throughout the year with that amount ramping up as we get later in the year, which is going to put a lot of those.
Speaker Change: Sales out of the balance sheet and therefore.
Speaker Change: Therefore, they won't come in as <unk>.
Speaker Change: Reported revenue in the year.
Speaker Change: And so that's what that's primarily what's guiding to the four 5% I think the actual output of what the machine is throwing off will be greater than that but expect it to translate somewhere in that neighborhood also built in there as you know just a little bit of just the disruption.
Speaker Change: As we're transitioning over the over the last few weeks and in this first quarter here into this new structure. So.
Speaker Change: <unk>.
Speaker Change: Thats, where the four 5% comes from.
Speaker Change: Steve I don't know.
Speaker Change: Same thing that same thing Alex as we as we pointed out we did have a really good fourth quarter and a lot of that was record revenue.
Speaker Change: Recorded as delivered so as we also reported the increase of our balance sheet at year end it.
Speaker Change: Wasn't that significant so as Paul said, we are building up their balance sheet from our new sales and a lot of the sales we had in <unk>.
Speaker Change: In the fourth quarter, where the type of sales that were recorded in the fourth quarter.
Speaker Change: And so the engine really is ramping up more than the change in revenue from 2% to four 5% would suggest.
Speaker Change: And then the same thing on adjusted EBITDA, Youre talking about $16 million and incremental growth investments.
Speaker Change: Yeah.
Speaker Change: There are moving parts of course, but if I added $16 million to the top end of that range of $44 million year Youre at $60 million, which is roughly in line with expectation.
Speaker Change: The way to think about it.
Speaker Change: That is the way to think about it yes, okay.
Speaker Change: In other words without these investments adjust.
Speaker Change: Adjusted EBIT that would be pretty much in line with analysts' expectations for fiscal 2025.
Speaker Change: That is that's exactly how we see it.
Speaker Change: Great well, thanks, guys I appreciate it.
Speaker Change: Okay. Thanks, Alex Thank you Alex.
Speaker Change: This now concludes our question and answer session I would like to turn it back over to Paul Walker go ahead Paul.
Paul Walker: Thank you Mark Thanks, everybody for joining today and for your great questions.
Paul Walker: We're very excited about where we're headed and feel good about last year and just want to again, thank you for being on the journey with us.
Paul Walker: We look forward to ongoing conversations have a great evening.
Speaker Change: Thank you everyone. When your participation in today's conference call. This does conclude the program you may now disconnect.
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: Yes.
Speaker Change: Yes.
Paul Walker: [music].
Paul Walker: [music].
Paul Walker: Okay.