Franklin Covey Co. (FC) on Q1 2021 Results - Earnings Call Transcript
Derek Hatch: Thank you. Good afternoon ladies and gentlemen. On behalf of Franklin Covey, I would like to welcome you to our quarter financial results call this afternoon, and welcome, everyone, to 2021. We hope everybody had a safe and healthy beginning to the new year, and hopefully, you'll enjoy today's presentation. Before we begin today's presentation, we want to remind everybody that this presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based upon management's current expectations and are subject to various risks and uncertainties, including, but not limited to, the ability of the company to stabilize and grow revenues; the acceptance of and renewal rates for our subscription offerings, including the All Access Pass and Leader in Me memberships; the duration and recovery from the -- the duration of, and recovery from, the COVID-19 pandemic; the ability of the company to hire productive sales professionals; general economic conditions; competition in the company's targeted marketplace; market acceptance of new offerings or services and marketing strategies; changes in the company's market share; changes in the size of the overall market for the company's products; changes in the training and spending policies of the company's clients; and other factors identified and discussed in the company's most recent annual report on Form 10-K and other periodic reports filed with the Securities and Exchange Commission. Robert Whitman: Thanks. Thanks, Derek. Good afternoon, everyone. We're happy to have the opportunity to talk with you today. We're pleased that in the first quarter of fiscal 2021, our operations continue to demonstrate their strength, agility, and ability to progress even during the continuing pandemic. Specifically, as you can see on Slide 3, in the first quarter, revenue was strong driven particularly by the strength in growth of All Access Pass and related sales. Gross margins increased by 359 basis points compared to those in last year's strong first quarter. Operating SG&A declined by $4.4 million. Adjusted EBITDA was $3.7 million versus an expectation of between $2 million and $2.5 million. Our net cash provided by operating activities increased 60% or $4.1 million to $10.9 million, substantially exceeding even the $6.8 million of net cash provided by operating activities in last year's first quarter, and we ended the quarter with approximately $49 million of liquidity, up from $42 million at the end of the fiscal year in August and up from $39 million at the start of the pandemic. So we're pleased with the continued progress in the first quarter, and I'd like to discuss those results in more detail in just a moment. But first, just thought we'd provide a little context. In our year-end conference call a little over 2 months ago, we reported that in our enterprise division in North America, which accounts for approximately 70% of total enterprise sales and where All Access Pass and related sales account for 84% of total sales on the way to 90%, we reported first, as you can see on Slide 4, Chart 1A on Slide 4 in the far left hand corner, we expect All Access Pass subscription sale as expected, reported All Access Pass subscription sales had remained strong throughout the pandemic to date, growing 18% in North America for the period of March through August. And as indicated, we said that we expected All Access Pass subscription sales to continue to be strong through this year's fiscal first quarter and on an ongoing basis thereafter. Paul Walker: Sure. Thanks, Bob, and good afternoon, everyone. As you look there on slide -- if we go to Slide 33, in addition to a growing number of client partners who are -- continue to ramp at or above our expectations, which they and of themselves represent a great revenue driver for us as a company. But on Slide 33, we've also built a network of approximately 80 international licensee partner offices, which cover most of the countries in the world. These partner offices generate gross revenues of approximately $50 million and may pay Franklin Covey a royalty that's equal to about 15% of these revenues. These licensee partner offices are strategically very important to us. Not only do they work to penetrate their local markets, but they also provide services to global clients with local offices. And so this allows, for example, a global client in Germany who buys an All Access Pass to roll out that solution in many countries around the world that have access to All Access support resources in just about any country that they might be operating in. And then, as shown in Slide 34, the fourth strategic moat is the power, reach and influence of Franklin Covey's industry-leading thought leadership. Our years of investment in research and development and our thought leadership partnerships not only result in solutions that provide enormous value for clients, but they create a large treasure trove of research and case studies that we use to broaden our thought leadership. As shown in Slide 35, Franklin Covey and its key thought leaders published would often become best sellers, which present the principles and solutions to help our clients. Our key thought leaders in each solution area also write white papers and articles. They contribute to publications. They deliver podcasts and webinars and they speak at some of the world's most influential events. Franklin Covey's industry-leading thought leadership includes best-selling books as well. And to date, we've sold more than 50 million copies of books worldwide in more than 50 -- in over 50 languages. And to put that $50 million number in perspective, the number of books that we've sold as part of our thought leadership strategy is greater than the amount sold by a large number of our top competitors combined. To achieve best-seller status, a book typically needs to sell a little over 250,000 copies. And so to reach 50 million copies sold and still counting is unprecedented in the industry. These books typically achieve best-seller status, not only in the U.S. and Canada, but also in other countries throughout the world. And in addition, our practice and thought leaders regularly published articles and podcasts in a variety of publications and outlets and speak at client events and on the World Business Forum stage. This strong thought leadership helps to establish our position as a partner of choice for organizations that are truly seeking best-in-class solutions around the world and at scale. And so Bob, I'll turn it back to you to talk about growth driver number three. Robert Whitman: I'll maybe -- okay. In fact, Paul, why don't you just go ahead and talk about the strength of our organization with these people get through you. So... Paul Walker: Okay. Great. You see the navigation slide there, 36. So speaking about the strength of our organization, this is really kind of our third growth driver. And ours is a culture where our leaders are experienced and trusted. Our processes are disciplined and strong, and our team members are really highly engaged. Most organizations correctly attribute their success to the strength of their people, and they're correct in doing so. However, with the opportunity of having a front row seat deep inside the operations of thousands of organizations with whom we work, we know that Franklin Covey's organization, our leaders and processes and our culture are extremely strong. In fact, they're among the strongest that we see. As to our leaders being highly trusted, in our recent annual employee engagement and culture survey, all of Franklin Covey associates were asked to rate on a 0 to 10 scale with 10 being the highest, how likely they would be to recommend their leader or manager as someone to work for. And you can see on Slide 37, 94% rated their leader at 7 or above, and 83% rated their leader at 9 or a 10 on that question. And this, even in the middle of the pandemic when leaders were being stretched and required to deal with a number of additional challenges. As to our processes being strong, we do a lot of work with organizations, as I mentioned earlier, helping them institutionalize their ability to execute on their key priorities. We know that every organization has pockets of great performance. And we know that every organization has variability in that performance. What differentiates the great performers from lesser performers is the extent of that variability. You can see a little diagram of this in Slide 38. Top performers' performance distribution curve is simply righter and tighter than that of their lesser performing counterparts. In other words, on average, their performance is better and there's less variability among their units. This institutionalization of great results requires strong and consistent processes. We've implemented these same strong execution processes throughout our own operations. We use the 4 disciplines of execution as an example. And we're pleased that as a result of our strong leaders and strong processes, our leaders' performance distribution curve is very right and tight. Illustrative of their strong execution is that as shown you'll see on Slide 39, in the first quarter, 12 of our 15 managing directors, so each country has a managing director. And in the United States, we have 10 -- in United States and Canada, we have 10, and they lead our great sales teams. But each -- 12 of our 15 managing directors met or exceeded their quarterly revenue objective in Q1, and the other 3 leaders who missed their goal missed by an aggregate of only 1.3% of the total direct office sales goal. And collectively, the group, all 15, exceeded their revenue goal. In addition, as you can see there on the right of this slide, 14 of the 15 managing directors met their EBITDA goal with the one who missed missing by only $50,000. And collectively, of course, this group exceeded, they actually exceeded EBITDA by about $1 million collectively. And finally, to the engagement of our associates around the world, as shown on Slide 40, again on the same recent culture survey that we conducted. We -- Franklin Covey associates were asked to rate on a 0 to 10 with 10 being the highest again, how likely they would be to recommend Franklin Covey as a great place to work, somebody that they would want to invite their friends and people that they know to come in and join, and we're pleased that 92% of employees gave a rating of 7 or higher, and 69% gave a rating of a 9 or a 10. We have just a phenomenal group of associates around the world. We're so grateful for their efforts. They are tireless workers. And not only do they bring a tremendous amount of energy and passion, this is a group that executes very, very well. And I think you see that in the results that we've talked about today. And so Bob, I'll turn to you for any comments, and I think you want to move on to guidance probably. Robert Whitman: Yes. Thanks, Paul. Yes. So stepping back from it, we feel very -- we all wish we were in the pandemic, but we're grateful pandemic has proven that the solutions that we have are really valued by our clients. The business model and the subscription version of this has been extremely strong and positive. Our teams, who could have just hunkered down in the tents with avalanches coming down on them, didn't. They got out of their tents and started climbing back up and regained traction very quickly. And so we're really pleased and grateful to be where we are with strong people, strong teams, strong offerings, the financial resources to continue to make good investments and significant liquidity to cushion us. And with that, I'd like to ask Steve Young to review our outlook and guidance. Steve? Stephen Young: Thank you, Bob and Paul. I enjoyed hearing about the business. And I'm also very excited about where we are in the direction that we're going. Pleased to talk a little bit about guidance and targets. So our guidance for FY '21, as discussed last quarter, is that we expect to generate adjusted EBITDA of between $20 million and $22 million. This result would be an approximately 50% increase in adjusted EBITDA compared to the $14.3 million of adjusted EBITDA achieved last year. This expected growth reflects everything that Bob and Paul have talked about, including the continued strong performance of our North America operations, our All Access Pass and other things. Underpinning this guidance for the year are the following expectations that we talked about last quarter and are consistent with our first quarter results: First, the recognition to sales during FY '21 of more than $60.6 million of deferred revenue already on the balance sheet at the end of last year and the recognition of a portion of the $39.6 million of unbilled deferred revenue, which we had contracted. These balances provided and provide significant visibility into our revenue and gross margin for FY '21. Second, in addition to the recognition of deferred revenue, the factor which is expected to have the greatest impact on our FY '21 result is also a factor in which we have high confidence, that is the strength of All Access Pass and related sales. We expect that All Access Pass will continue to achieve strong growth in both sales and invoiced amounts. We'll achieve high revenue retention rates, strong sales of new logos and continued growth in pass expansion and multiyear contracts. We also expect that All Access Pass add-on sales will continue to be strong. Driven by this, in FY '21, we expect our operations in the U.S. and Canada, including government, to achieve an adjusted EBITDA contribution level higher than in FY '19 and even somewhat higher than we had originally expected to achieve in FY '20. So the third underpinning of our guidance, we expect that our revenue in Japan, China and among our licensees will continue to strengthen. The increase in All Access Pass, which we expect to achieve in these countries will, of course, result in a portion of the new sales being added to the balance sheet as deferred revenue. And the fourth underpinning of guidance is in education. We expect to continue to achieve strong retention of both schools and revenue among existing Leader in Me schools. In addition, despite the fact that we could continue to be in a challenging and budget-constrained environment for education in the remainder of FY '21, we still expect to achieve growth in the number of new Leader in school -- Leader in Me schools that we add this year compared to the number we added last year. So affirming our annual guidance and feel comfortable with that. For our second quarter of this year, we expect that adjusted EBITDA will be between $1 million and $1.5 million, compared to $4.1 million in adjusted EBITDA in last year's very strong second quarter and still reflecting the expected strong performance of All Access Pass in the U.S./Canada and government and the same general expectations just outlined for international operations and education. Please remember that last quarter, we did say we expected Q2 this year to be less than the very strong Q2 last year. Please also remember that our second quarter has typically been the lowest adjusted EBITDA quarter of the year due primarily to the holiday season. And please also remember that even $1 million of adjusted EBITDA in Q2 would be more than the second quarter result in FY '18 or the second quarter result in FY '19. Our second quarter result last year was just a very strong second quarter, representing the momentum that we had and talked about at the time and are beginning to see again. So that's guidance. Now just a couple of thoughts related to general targets for the coming years and repeating a lot of what Bob said. Building on our $20 million to $22 million of adjusted EBITDA we expect to achieve this year and driven substantially by the expected continued growth in All Access Pass, our target is to have adjusted EBITDA increase by around $10 million per year to around $30 million in FY '22 and around $40 million in FY '23. These targets reflect our expectation of being able to achieve, as Bob talked about, high single-digit revenue growth of around $20 million, 50% full of that revenue to adjusted EBITDA. So those are our targets. While changes in the world business outcome and many other factors could impact our expectation, we want to share these as our current internal targets and our assumptions and expectations. We also wanted to share, again, like we did last quarter than order for the executive team to receive full long-term incentive pay, we need to achieve those targets. So that's our guidance and a few thoughts about coming years. So thank you, Bob. Robert Whitman: Thanks, Steve. And with that, we just thank each of you and open this to questions. Operator: . And our first question comes from Andrew Nicholas from William Blair. Andrew Nicholas: Just wanted to start with the sequential strength in international sales this quarter. You talked a little bit about it in your prepared remarks, but I'm just curious if you could maybe flush out the key drivers of the improvement versus last quarter a little bit further. And then maybe more specifically, I want to understand how much of that rebound is a function of continuation of -- or a rebound in traditional product sales versus maybe some success expanding the reach of the All Access Pass product in those regions. Robert Whitman: Great. Thanks. Paul, would you like to address that? Paul, perhaps you can hear me, or I'll start out. Paul Walker: I'm sorry, I was talking into my mute button. Thanks, Andrew, for the question. To the first part about just maybe adding a bit more color to the sequential growth from Q4 to Q1, the drivers of that, frankly, the main driver of that is just the increased stability in China and Japan. They were hit particularly hard earliest at the beginning of the pandemic, and so things on the ground there have improved in those countries. People have gotten back to work, and our teams have done a nice job of filling the pipelines back up again. And so, they were working on that in earnest back in our late Q2, Q3, Q4, and they are just kind of seeing the momentum build back into the business there. We expect to continue to see the business there build. Q2 is our smallest quarter in that part of the world because of the holidays and because of the Chinese New Year. And so, revenues may not be exactly at the levels. They will be a little less than what they were this quarter, but on a percentage basis, I think you'll still continue to see the same sequential improvements certainly year-over-year as we move into Q2 here and into Q3. As far as to how much of that is coming from traditional business versus All Access Pass, they are -- All Access Pass is coming online, and Japan had a nice quarter with All Access Pass. China is just getting started. We're deep into that with them right now. That actually isn't driving yet the performance you're seeing because those sales, of course, are going on the balance sheet, and we'll recognize -- we'll begin recognizing those over the next 9 to 12 months. And so, a lot of that is traditional products that you're seeing reflected in the Q1 numbers, but I think it is important to note that we are feeling quite good about the momentum around All Access Pass in those countries. And then, of course, we haven't mentioned much on this call, but in the U.K. and in Australia, we've been selling All Access Pass for years, and their results look much more like what we talk about in the U.S. and Canada in terms of subscription growth, add-on services growth, et cetera. I don't know, Andrew, if that's helpful or if you have any other questions there. Andrew Nicholas: That's helpful. And then for my follow-up, I just wanted to ask about education and weakness in revenue this quarter. Any more color you can provide there on the drivers of the decline? What, if anything, is timing-related there? And then maybe any color on how the sales conversations have evolved over the past couple of months. I know it's a very fluid environment. So any more color on that business would be helpful. Robert Whitman: Sure. Sean -- thanks so much. Sean, would you like to address education? Sean Covey: Yes. Thank you, Andrew. Sure. The sales in the quarter were down quite a bit, primarily for one reason. It's because a lot of our delivery days, coaching and delivery that we typically do a lot of in the first quarter, we just didn't do it. It was down about over 50% delivery days. Coaching and consulting because what happened in September, October, November, you've got schools coming on with the pandemic. We’ve got a lot of school saying we just don't have time right now. Please call us back in 2 or 3 months. We're trying to figure out our busing schedules and lunches and going online and then they kept changing. And so, we found it very difficult to get to school with our training and consulting. And so, that's the -- that was the biggest hit for the first quarter. So, we couldn't recognize any revenue for those consulting and coaching days. Encouraging thing is that -- is rebounding. We were down over 50% in the first quarter. Right now, we're tracking at about 17% down for the second, and it looks like it just keeps improving all the time. So we're pleased with that. And then I think, in general, regarding sales and how that's going, what we're pleased with is our retention is really good. We're way ahead of last year. We have over 615 schools that have committed to come on to renew their memberships compared to 450 last year. And even though we had a really good first quarter last year in getting new schools up and going this year, we're a little over last year after the first quarter in terms of the number of new schools that have committed to come on. So we're encouraged with the retention numbers that the new schools – it has been the delivered days, coaching and consulting days that it serves in the first quarter. A lot of these days are already contracted, and so they will be recognized before the end of the year. They have to be because it's just part of their contract, and we'll recognize the revenue for them. So, some of it is -- a lot of it is timing, and we're also -- anyway, Bob, anything else you'd add? Robert Whitman: No, no. I think that last point is worth emphasizing that with the revenue -- the decline in revenue being primarily related to the delivery of services, the vast majority of those services are under contract already, and they -- you mentioned that, Sean. But therefore, it's not lost revenue for the year, it will, in fact, come in. It just isn't recognized until either it's delivered or until the contract year ends, and so we will get that revenue. Is that helpful? Andrew Nicholas: No, that makes sense. Yes, that's part of why I asked is I assume that was a good chunk of it. Operator: And the next question comes from Jeff Martin from ROTH Capital Partners. Jeffrey Martin: First question is with All Access Pass remaining, if you include the unbilled long-term deferred, you're growing in the upper teens in terms of the growth rate. With the legacy business, I assume it's relatively stable at this point with a new level of a portion of the business. Just wondering to get your view on whether a high single-digit growth rate for the overall business, if All Access Pass continues to grow at high teens rate, shouldn't we see the overall business grow a little bit faster than the upper single digits? Robert Whitman: Yes. Thanks, Jeff. We should. And I think what you've seen in North America, if you look at the booking pace for invoice sales over the last 6 quarters, it -- pre-pandemic, it was higher than 10%, and it has been in recent quarters as well. So I think ultimately, that drives that top line growth in the All Access Pass and related being high will ultimately should ultimately, of course, could pull the overall average up. For some years, as you noted, we've had offsetting that growth with some decline in the historic legacy business. That's now, as you pointed out, on the flatter part of that curve. And so as All Access Pass and related continues, well, I think our point is that we think we can achieve $10 million year of EBITDA growth if we only grow in the high single digits because of the 50% flow-through. But to the extent we got higher revenue growth and your point's one that we obviously believe, that could be a bit better. So... Jeffrey Martin: Okay. That's helpful. And then second question is on the content development and the thought leadership is clearly understood. Thanks for the details on that. But just curious, relative to, say, the last couple of years, what's your outlook or your level of optimism regarding your new content opportunities over the next couple of years? Robert Whitman: We've seen there's some really big ones. We -- because we're focusing on the challenges our -- the organizations that our clients are facing, and because we're always talking to them, we have more than 100,000 hours of sales conversations last year with clients and more than 40,000 conversations from our implementation specialists. That really helps us hone in on exactly what they're looking for. So we're very excited about two new offerings that we have coming out this year that we believe will hit things that our clients have needed. They've -- if they don't get it from us, they need to get it from somebody else. And given that they have an All Access Pass, they would love to just increase their spend with us and have those issues solved. So we think actually that if you look back with all the things we've had historically, two of the biggest offerings in terms of usage are ones that have been introduced in the last couple of years. One, 6 critical practices for leading a team is around frontline leaders, and it really gives a set of very practical useful skills and tools and mindsets around leaders being a frontline leader, and we're making another big investment in that content this year, but that's been a big one. The other one is Unconscious Bias, which we've been developing for years. It turned out, of course, this year, there's a particular emphasis on that, and that's been a good -- I mean, it's been a good thing for the offering. It's been, I think, a good thing for our clients, and for us, to really deepen the understanding of how you can systematically identify biases of all kinds and how you can unleash people's potential better. And so those are 2 examples of ones that have come out in the recent years that are actually some of the strongest offerings that we have, and we believe these 2 new ones will be the same. So we have a map, a multiyear map of the things that we know our clients need. And staying on those things, we're pretty confident that we're scratching a big itch, so to speak, of something that really is important and being responsive to their needs and their desire to do more with us within All Access Pass. Operator: And our next question comes from Marco Rodriguez from Stonegate Capital. Marco Rodriguez: Wondering if maybe you can talk from a bit of a high level. Just aside from any sort of coronavirus impacts that you might need to adjust to in the next few months or 12 months, can you maybe just talk about what are your strategic priorities that you're going to be focusing on here for the next 12 to 24 months? Robert Whitman: You bet. Now for us -- and maybe I'll start out and then ask Paul to -- or Sean to add to it a bit. Priority number one for us is making sure that -- just exactly the question Jeff just asked, that our offerings are really both hitting the topics most important to our clients and that the flexibility and ability to access those offerings across the world easily, technologically and every other way, are really simple. And so we are making big ongoing investments in portal technologies and user experience, in add-on services, in various format, doing new formats of that, providing coaching through Jana just on a weekly basis to follow things up. We've got new micro learning investments that we're making. So I think that's number one is making sure that our map is really lined up with the needs of our clients, number one. Number two is building the sales force to support that because the needs are as large as our sales force has become, 250 up from 120 not very many years ago, we have a real opportunity to more than double that. At 30 new net new client partners per year, it would be adding 150 new client partners to that existing count of 250 just over the next 5 years. So there's a lot of focus on that and making sure that our -- we're building the infrastructure, mentoring, infrastructure, et cetera, to do that. And then I think the third is that we are looking to expand into some new content areas that aren't just the ones that our clients are looking for now or capabilities they may not have picked out on their own, but that we see being utilized in certain areas that we think will be good. So I think 2 of them are product development, one is expansion. Paul, what would you add to that? Paul Walker: The only -- I think those are exactly right, Bob. I would say maybe less strategic, but as kind of an operational big focus, and we've talked about this a lot. But you can imagine a day when our international direct operations, when the percentage of their business that's All Access Pass and related is like it is in North America, what the growth rates could look like. And so that continues to be a very big focus of ours, helping them. And it won't all happen this year, but in the coming 2 or 3 years having their All Access Pass business look like North America is a big, big, big focus. Marco Rodriguez: Got it. Understood. And then lastly, just kind of given your guys' expectations, it sounds like things are starting to turn around as they have been since last quarter. Your expectations for positive cash flows, you guys have a good-sized amount of cash on the balance sheet. Just kind of how are you guys thinking about that cash there and allocating? Robert Whitman: I think we're thinking about it in two ways, Marco. First is that in that third priority that I discussed, we think there are some opportunities for some bolt-on small acquisitions that we'll use some of that cash for that will enhance our abilities to serve clients and really extend our lead versus anyone else who's playing in our space in certain key areas. And so I think that will be a use of some of the cash and it won't be large amounts. And then -- but we expect to continue to generate cash flow that's really equivalent more or less to the EBITDA. So on top of what we have, if we had $20 million and $30 million and $40 million, we think that because most of what we're doing is developing in-house or acquiring through license, the capital intensity of our business just isn't very high. It isn't capital-intensive to add salespeople or to add new content or really even the technology investments are not that capital intensive. And so as a result, we expect it will have -- as we have in the past, where we've used $170 million of cash in the past years to repurchase shares that we believe that with this kind of growth rate in EBITDA, that there'll be opportunities to -- for us to see the value perhaps before certain other investors do and to add a lot of additional value through the continued repurchase of shares. Operator: And this concludes the question-and-answer session. I'll now turn the call back over to Bob Whitman for final remarks. Robert Whitman: With that again, we just thank each of you for making the time to join us today and also for your -- the depth of your analysis and understanding, and we hope that this is helpful in terms of responding to questions, but we really appreciate the focus you have on the business and the support over the years. And we feel good about where we're headed, and I appreciate you being with us on this client. Thanks very much. Operator: Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect. Robert Whitman: Thank you.FC Ratings Summary
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What to Expect From Franklin Covey’s Q1 Results?
Analysts at Barrington Research provided their outlook on Franklin Covey Co. (NYSE:FC) ahead of the company’s Q1 results, expected to be reported on January 6. The analysts anticipate the quarterly revenue to grow 11.7% and come in at $54 million, with adjusted EBITDA of $6.2 million (up 67.8% year-over-year) and diluted EPS of $0.03.
The analysts provided their outlook for the full 2022-year also, expecting revenue of $250 million (up 11.5% year-over-year), adjusted EBITDA of $35 million (up 25.2% year-over-year), and diluted EPS of $0.62.
