Yahoo Finance Franklin Covey Co. (NYSE:FC) Q3 2024 Earnings Call Transcript
Franklin Covey Co. (NYSE:FC) Q3 2024 Earnings Call Transcript June 26, 2024
Franklin Covey Co. beats earnings expectations. Reported EPS is $0.43, expectations were $0.39.
Operator: Good day and thank you for standing by. Welcome to the Q3 2024 Franklin Covey Earnings Conference Call. At this time, all participants are in a listen-only mode. Please be advised that today's conference is being recorded. After the speaker's presentation, there'll be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today, Derek Hatch, Corporate Controller.
Derek Hatch: Hello, everyone and thanks so much for joining us. We're glad to have the opportunity to talk with you today. Participating on our call this afternoon are Paul Walker, our Chief Executive Officer; Steve Young, our Chief Financial Officer; Jennifer Colosimo, President of our Enterprise Division; and Sean Covey, President of our Education Division. Before we get started, I would like to remind everybody that this presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based upon management's current expectations and are subject to various risks and uncertainties including, but not limited to the ability of the company to grow revenue, the acceptance of and renewal rates of our subscription offerings including the All Access Pass and Leader in Me memberships, the ability of the company to hire productive sales and other client-facing professionals, general economic conditions, competition in the company's targeted marketplace, market acceptance of new offerings or services and marketing strategies, changes in the company's market share, changes in the size of the overall market for the company's products, changes in the training and spending policies of the company's clients, and other factors identified and discussed in the company's most recent annual report on Form 10-K and other periodic reports filed with the Securities and Exchange Commission.
Many of these conditions are beyond our control or influence, any one of which may cause future results to differ materially from the company's current expectations. And there can be no assurance that the company's actual future performance will meet management's expectations. These forward-looking statements are based on management's current expectations and we undertake no obligation to update or revise these forward-looking statements to reflect events or circumstances after the date of today's presentation except as required by law. With that out of the way we'd like to turn the time over to Mr. Paul Walker, our Chief Executive Officer.
Paul Walker: Thank you, Derek. Welcome, everyone. It's great to be with you today. We're pleased with our results for the third quarter, where revenue, adjusted EBITDA, and free cash flow were all stronger-than-expected, and where, importantly, several of our key leading growth indicators strengthened. Specifically, I'd like to point out as shown in slide four, revenue came in at $73.4 million versus the $72.2 million we'd expected. Adjusted EBITDA came in at $13.9 million versus the expected range of between $12 million and $13 million and free cash flow was $30.6 million through the third quarter versus $15.6 million through the third quarter of last year. This strength was broad-based across both the enterprise and education divisions.
Additionally, the foundation for accelerated future growth is being established by our 9% increase in our balance of billed and unbilled deferred revenue, which increased to $153.2 million, and which will be recognized in the coming quarters, as well as buyer increased services booking rate, which will flow through to revenue in the coming quarters. In addressing our performance for the quarter and our outlook for the future, I'd like to address four key drivers that continue to accelerate the growth and value of Franklin Covey's business. Each of these drivers were particularly evident in the third quarter's performance. As you can see shown on slide five, the first driver of growth and value is the mission-critical nature of the opportunities and challenges we help organizations and schools address and the strength of our solutions in addressing them, both of which are reflected in the continued resiliency in our business.
A recent June 11 Bloomberg article reported that “businesses are holding off on capital expenditures and reducing costs”. Despite an uncertain and challenging environment, Franklin Covey's business continues to be strong and highly resilient. In the Enterprise Division in North America, as we'll describe in more detail in a moment, we achieved our highest ever All Access Pass logo retention percentage for a third quarter, our highest ever absolute revenue retention, and one of our highest revenue retention percentages for any third quarter. And in the Education Division, the number of new and retained schools is pacing well ahead of last year through the third quarter. This continued strength and resiliency reflects two things. First, the importance of the opportunities and challenges we're helping organizations and schools address.
And second, the broadly recognized strength and efficacy of our solutions in addressing them. I'd like to just say a couple of additional points about each of these. First, as to the importance of what we're doing to help our clients. The types of challenges and opportunities we help organizations achieve are not just nice to have. They're truly mission critical. For organizations, achieving extraordinary strategic or business outcomes almost always requires building winning cultures, achieving extraordinary execution, earning the highest levels of customer loyalty, and building leaders who can unleash the collective power of their people. Underpinning each of these outcomes is the need for the most impactful behaviors and actions of people at scale throughout an organization.
Achieving such large-scale collective action is not just nice to have, it's mission critical. Second, as to the tremendous strength and efficacy of Franklin Covey's solutions in helping organizations successfully address these opportunities and challenges, Franklin Covey's solutions combine best-in-class content with high-leverage tools and coaching and measurement, all of which is available across any delivery modality. The power of our solutions helps Franklin Covey earn the right to be partners for life with our clients. The second driver I'd like to talk briefly about is the strength of our leading indicators of future growth, which were also strong in the third quarter. Three key leading indicators of our future growth include growth in the amount of our deferred revenue, which directly reflects growth in our contracted and invoiced revenue that will be recognized over the next 12 months; growth in the amount of unbilled deferred revenue, which represents increases in the dollar volume of multi-year contracts, which establishes a strong foundation for growth even beyond 12 months, and growth in the amount of services booked in the quarter for future delivery.
Each of these key lead indicators of future growth was strong in the third quarter. As you can see shown in slide six, our balance of deferred revenue increased 15% to $83.8 million in the quarter, reflecting growth in revenue amounts contracted and invoiced in the quarter. Our balance of unbilled deferred revenue increased 2% to $69.4 million during the third quarter, reflecting an increase in the dollar volume of multiyear contracts, which typically flows into revenue over the ensuing 18 to 30 months. Additionally, I would also add that as we expected in the third quarter, our services booking pace accelerated meaningfully and the accelerated pace has continued through the month of June. The third driver of growth and value is the strength of our business model.
Our business model is designed to achieve high levels of recurring revenue with strong gross margins, with operating SG&A as a percent of revenue that declines with scale, and with very little working capital required since the invoice revenue is billed and collected before the revenue is recognized. The combination of these factors results in a high flow through of increases in revenue to increases in both adjusted EBITDA and free cash flow. For example, for the latest 12-month period ended May of fiscal 2020, revenue at the time was $214.6 million, and adjusted EBITDA was $18.8 million. This compares with revenue and adjusted EBITDA through the latest 12 months through this year's third quarter, where revenue had grown during that period to $281 million and adjusted EBITDA to $48.8 million.
With revenue growth of 31% during that period, adjusted EBITDA grew an even more rapid 160%. This pattern of strong flow through continued in this year's third quarter, where revenue grew $1.9 million or 3% and adjusted EBITDA grew $2 million or 17%. The final of these four drivers I'd like to talk about today is that we've been able to invest our free cash flow and excess cash in the business at high rates of return, with the balance being returned to shareholders in the form of significant stock repurchases. In fiscal 2024, our return on net tangible assets from investments in the business continued to be remarkably high. As shown on slide seven, year-to-date, we've returned $25.8 million to shareholders through purchasing 649,000 shares, including returning $7.4 million through purchases of 188,000 shares in the third quarter.
And we've invested $61.4 million to repurchase shares over the last two years. Our board also approved the new $50 million stock repurchase authorization to put ourselves in a position to continue to opportunistically return capital to shareholders through continued stock repurchases. Additionally, we continued to make significant progress in each of the three growth projects I described in detail last quarter. Project Penetrate, Project Speed to Ramp, and Project Impact. And we're encouraged with what we see in terms of these projects driving future accelerated growth. I'm pleased with the progress we're making. I'm pleased about our outlook for growth and what we're doing to become even more important to our clients. I'd like to now turn time to Steve to share details about our specific Q3 results and discuss guidance.
After Steve concludes, we'll open the line and look forward to answering your questions. Steve?
Steve Young: Thank you, Paul. I would like to briefly provide a little more detail on the factors underlying our performance, focusing on the overall company result, and then on the results in three key areas of our company. Specifically our enterprise division in North America; the enterprise business internationally; and our education business. As shown on slide eight, third quarter revenue was $73.4 million, 3% higher than the $71.4 million generated in last year's third quarter. Year-to-date revenue was $203.1 million were slightly higher than the $202.6 million in the prior year. And for the latest 12 months, revenue was $281.1 million, compared to the $281.4 million in the prior year. Third quarter adjusted EBITDA was $13.9 million, compared to $11.9 million achieved last year.
Year-to-date adjusted EBITDA was $32.3 million, compared to $31.6 million last year. And for the latest 12 months, adjusted EBITDA was $48.8 million, compared to $44.9 million last year. As shown on slide nine, results in our enterprise business in North America continued to be strong in the third quarter. Revenue in North America, which accounts for about 73% of total enterprise division revenue, was $39 million in the third quarter, which is flat with the $39.1 million recorded in the prior year. Year-to-date revenue and the latest 12-month revenues were also essentially flat versus last year after FY ‘23 recorded large increases over the same period in FY ‘22. Subscription revenue in North America was $22 million, reflecting growth of 3% in the quarter was $66.5 million year-to-date, which is up 5% and $88.5 million in the latest 12 months, which is also up 5%.
The combination of subscription and subscription services revenue in North America was $35.9 million in the third quarter, representing 3% growth. This revenue was $102.2 million year-to-date, which is up 2%, and was $137.3 million latest 12 months, which is up 3%. Our balance in deferred revenue, billed and unbilled in North America continued to be strong, growing to $111.6 million in the quarter, which is up 3% on top of the 19% growth achieved in last year's third quarter, establishing, as Paul talked about, a strong foundation for next year's growth. And the percent of North America's All Access Passes contracted for multiyear periods increased to 55% from 50% in the third quarter last year. And the percentage of invoiced revenue represented by multiyear contracts increased to 60% from 57% in the third quarter last year.
As shown on slide 10, revenue from our international direct operations, which accounts for approximately 17% of total enterprise division revenue, was $8.5 million in the third quarter, which was down 7%. This decrease is more than 100% attributable to the geopolitical issues related to China, as every other international direct operation grew revenues over the prior year. Year-to-date revenue from these offices was $24.4 million, which is down 5%, and the latest 12-months revenue was $33.9 million, down 2%. As also shown on slide 10, our international licensee partner revenue was $2.7 million in the third quarter, a decrease of 5%, with year-to-date revenue of $8.8 million down 2% and the latest 12-months revenue of $11.4 million, which is flat to the prior year.
Finally as shown on slide 11, revenue in our education business, which accounts for approximately 25% of total company revenue, grew to $20.1 million in the third quarter on top of 18% growth achieved last year. Year-to-date revenue grew to $49.4 million, up 8%, and revenue for the latest 12-month period was $73.5 million, up 5% on top of the 21% growth in the previous year. Education amounts invoiced grew to $18.9 million in the third quarter, up 16% from the third quarter a year ago. Year-to-date amounts achieved were $37 million, up 16%. And for the latest 12 months, grew 13% to $82.3 million. Education subscription and subscription services revenue grew to $18.2 million in the third quarter, up 13% on top of 19% growth in last year's third quarter.
Year-to-date revenue grew to $44.3 million, up 6% on top of the 24% in year-to-date growth achieved through last year's third quarter. And for the latest 12 months, Education revenue was $67.3 million, which is up 3%, on top of the 21% growth achieved in the same latest 12 months last year. Education's balance of deferred subscription revenue, billed and unbilled increased to $28.9 million, or growth of 42% in the third quarter. Now a little bit about cash flows and balance sheet. As shown on slide 12, our cash flows from operating activities for the nine months ended May 31, 2024, was $38.4 million, an increase of $12.5 million or 48%, compared to $25.9 million for the prior year. Our free cash flow for the first three quarters increased $15 million or 96% to $30.6 million, compared to the $15.6 million for the prior year, reflecting that changes in the elements of working capital were very favorable through Q3 of this year, compared with the prior year, particularly reflected changes in accounts receivable, accounts payable, accrued liabilities, and deferred revenue.
For the third quarter, free cash flow was $5.8 million, compared to $12.3 million in the prior year, reflecting also changes in working capital this quarter. As Paul mentioned, in the first three quarters of FY ‘24, we invested $25.8 million to purchase 649,000 shares. And over the past four quarters, we invested $31.7 million to purchase 774,000 shares. We ended the quarter with nearly $100 million of total liquidity, including $36.3 million in cash and $62.5 million available under the revolving credit facility, even after investing the $25.8 million in stock repurchases year-to-date. Compared to Q3 of FY ‘23, the sum of billed and unbilled deferred subscription revenue increased to $153.2 million, giving us increased visibility into future revenue results.
The deferred subscription revenue increased 15% to $83.8 million, while the unbilled deferred revenue increased 2% to $69.4 million. Adjusted EBITDA for the third quarter, as we said, was $13.9 million, representing 17% growth over the prior year. Now a little bit about guidance. In our second quarter earnings call, we communicated that we expected full-year revenue to be approximately $284 million in constant currency after absorbing what we expected at the time to be 700,000 of unfavorable FX for the year, with Q3 revenue expected to be approximately $72 million and fourth quarter revenue to be approximately $83 million. We still expect full-year revenue to be approximately $284 million in constant currency for the year. With Q3 revenue of $73.4 million would make Q4 revenue approximately $80.5 million, primarily reflecting a modest shift forward from fourth quarter to third quarter in the education division related to the earlier than anticipated launch of a large statewide contract.
In our second quarter earnings call, we also communicated that we expected full year adjusted EBITDA to be within our original range of between $54.5 million and $58 million in constant currency and to be at the low end of that range, excluding approximately 500,000 of negative FX impact. This result would represent approximately 13% year-over-year growth, and today we are reaffirming that guidance. We feel good about the building revenue momentum and lead indicators we see and expect a continuation of these trends into FY ‘25 and beyond. So, Paul, back to you.
Paul Walker: Thanks, Steve, for taking us through that. I feel incredibly good about the renewing growth momentum in the business and the progress we're making on a number of important strategic and operational fronts. And just want to express my gratitude to each of you and also to each of our associates around the world here for the great work they're doing. And with that, we'd now like to ask the operator to open the line for your questions.
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