Welcome to the Q3 2022 Franklin Covey Earnings Conference Call. My name is Darryl, and I will be your operator for today's call. [Operator Instructions]. Please note, this conference is being recorded. I will now turn the call over to Derek Hatch. Derek, you may begin.

Thanks, Darryl. Good afternoon, everyone. On behalf of FranklinCovey, it's my pleasure to welcome you to our earnings call for the third quarter of fiscal 2022. Before we get to the good stuff, I 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 renewal rates of our subscription offerings, including the All Access Pass and Leader in Me memberships; the duration and recovery from the COVID-19 pandemic; the ability of the company to hire 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. 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 upon 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?

Thank you, Derek. Hi, everyone. We're grateful that you're with us today, and we hope your summers are off to a very good start. I'm joined today by Steve, Jen, Sean and the rest of our executive team. We're also happy to have Bob on the line with us today as well. We are happy to be able to talk to you today and report our strong Q3 results and are really pleased that, again, the results were strong for not only the quarter, but year-to-date and for the latest 12 months, even stronger than expected. I'd like to start with a few revenue headlines, as you can see on Slide 4. Revenue growth for the quarter was strong, increasing 13%. And importantly, this 13% growth was after factoring in the impact of COVID-related lockdowns in China and other COVID-related impacts in Japan. Excluding China and Japan, revenue grew 19% in the third quarter. And our year-to-date and latest 12 months revenue growth has also been very strong where, again, even after factoring in the recent impact in China and Japan, revenue has grown 19% year-to-date and 24% for the latest 12 months. Our subscription and subscription services revenue growth was even stronger for the quarter, year-to-date and also for the latest 12 months. Total subscription and subscription services revenue grew 31% in the third quarter and has grown 31% year-to-date and 36% for the latest 12 months, with All Access Pass subscription and subscription services revenue growing 32% in the third quarter, 29% year-to-date and 32% for the latest 12 months to $136.2 million; and Leader in Me subscription and subscription services revenue growing 28% in the third quarter, 38% year-to-date and 49% for the latest 12 months to $54 million. The durability and visibility into our future revenue…

Thank you very much, Paul. Good afternoon, everyone. It's nice to be with you today to talk about what we believe are good results. So as Paul expressed, we are really pleased with the ongoing combined strength and growth of our revenue, our adjusted EBITDA and our cash flow. And as Paul mentioned, as strong as our overall results were, our results were even stronger, excluding Enterprise's international operations, where as noted, COVID-related impacts in China and Japan impacted our results. Specifically, excluding Enterprise's international operations, revenue growth, which was already a strong 13%, was 19%. To provide you with a deeper understanding of the factors driving this performance, I'd like to quickly report on 3 key areas of the company. Our Enterprise business in North America, our Education business, which is almost all in North America and our Enterprise business internationally. As shown in Slide 8, results in our Enterprise business in North America, which accounts for approximately 53% of total revenue, were strong. Revenue grew 20% in the third quarter. and has grown 19% year-to-date and 22% for the latest 12 months. Subscription and subscription services revenue grew an even higher 27% in the third quarter, 25% year-to-date and 27% in the latest 12 months. Our balance of deferred revenue, billed and unbilled, grew 16% for the quarter over the prior year. And the percentage of All Access Pass contract revenue represented by multiyear contracts, increased to 58% during the quarter, up from 52% in the third quarter of last year. Shown in Slide 9, the results in our Education business, which account for approximately 22% of total revenue, were also very strong. Education revenue grew 21% for the third quarter and has grown 33% year-to-date and 42% for the latest 12 months. And Education, subscription and subscription…

Thank you, Steve. Thanks for that great review. I'd now like to touch briefly on 5 key drivers behind these strong results. These are illustrated on Slide #12. The first driver is that the markets we've chosen to serve are very large. They're growing significantly, and they're highly fragmented. This provides us with enormous headroom for growth and the opportunity to own a significant share of each of the markets in which we serve. The second driver is that we're focused on the most important, lucrative and durable spaces in each of these markets. The opportunities and challenges we help our clients address are very durable providing us the opportunity to partner with them, both in good and more challenging times. Driver number 3 is the strength of our subscription model. It's a powerful engine that's driving strong growth, significant and increasing predictability and durability of revenue and the high flow-through of revenue to profitability and cash flow. The fourth driver is that we have compelling opportunities for growth. The combination of our large and growing markets that we serve, the importance of the challenges we help our clients address and the strength of our business model, create a number of exciting opportunities for growth. And the fifth driver is that our strong cash flow has and can be invested to create significant additional value for shareholders. I'll briefly touch on each of these in a little bit more detail. First, the first driver, the attractiveness of the markets we've chosen to serve, each is large and growing and fragmented. As you can see on Slide 14, our focus is on 3 large and growing markets. Our Enterprise learning market, where the total addressable market is approximately $99 billion and growing by about $3 billion per year. The Education market…

Thank you again, Paul. So we've reviewed a little bit of this guidance before, but we'll go over again and expand a bit. As you know, as shown in Slide 29, our initial guidance provided last fall was that in FY '22 adjusted EBITDA would increase to a mid-point of $35 million, which was an increase of $7 million or 25% compared to the adjusted EBITDA of $28 million in FY '21. Our most recent guidance was for FY '22 adjusted EBITDA to increase to a mid-point of $38.5 million, representing year-over-year growth of 38%. We are now increasing our adjusted EBITDA guidance again for FY '22 to between $40 million and $41.5 million. The middle of this range represents more than 45% growth in adjusted EBITDA compared with the $28 million achieved last year. Underpinning this guidance are the following expectations. First, that we will recognize the deferred revenue currently on the balance sheet. This deferred revenue is secure and provides significant visibility into our revenue for the fourth quarter next year and beyond. Second, in addition to the recognition of our deferred revenue, our All Access Pass and Leader in Me subscription and subscription services sale will continue to achieve strong growth, an assumption which -- in which we have high confidence. Third, while we are expecting recovery next year from the recent pandemic lockdowns in China, which normally accounts for approximately 5% of sales. And restrictions in Japan, which normally accounts for approximately 4% of sales. Our guidance assumes very little improvement in their operations in the fourth quarter compared to this year's third quarter. Fourth is that in our Education business, we'll continue to achieve strong retention of both schools and revenue among existing Leader in Me schools. And also grow our number of new Leader…

Thank you, Steve. We feel great about our momentum, and I look forward to continued accelerating growth. And with that, Darryl, we'd like to open the line for questions, if you would.

[Operator Instructions]. And our first question comes from Marco Rodriguez.

I was wondering if you could talk a little bit more about the client partner hirings. If I heard you correctly, you're targeting 40 new net CP hires in fiscal '23, but I missed some of the commentary surrounding that. So if you can maybe talk about the main drivers that are moving you from a net 30 to a net 40? And should we basically sort of assume that this 40 level per year is a new run rate level going forward?

Yes, great question. So you'll recall, you've been with us for a long time, you'll recall back when you first stepped out and said, "hey, we recognize growing the sales force is key to growing the overall company and growing revenue". And we stepped down and started hiring net 10 a year and then we moved that up to net 20. And right now, we're at net 30, we're going to net 40. And I don't -- I think 40 is next year. We have ambitions to go beyond that in the 2 years. So you might see us come and talk about a net 50 and a net 60 number in the next couple of years here. And so the commentary I think you're looking for is the -- what we need to have in place to be able to support those is, one, the recruiting -- the size of the recruiting team, the ability to attract those kinds of numbers. And so we've been hard at work this year to do that, and we feel great about that. And then once we found the people, just our own onboarding ramp sales enablement and sales management infrastructure, needs to be there to support them. We are fortunate that we enjoy long 10-year, very little turnover. And it's because we do, I think, a great job of ramping people and they recognize they can be successful here. And so we want to -- we've been laying the foundation for the next big jump here to net 40 and doing it in a way that will allow us to go even beyond that in the years beyond next.

And that support staff. Is that fully in place now for -- to hit that 40 in fiscal '23?

Yes. Yes, it is. Yes. So the support staff are -- it's the Managing Directors who lead the sales force, it's the sales enablement people scaling up the sales enablement tools. So you can model 40 going forward, and we might come back and take it up higher a year from now as we talk about fiscal '24 and '25.

Got it. Very helpful. Then, in terms of the international licensees, outside of China and Japan, it obviously sounds like results are pretty strong, and it sounds like it's partly being driven by All Access Pass adoption. And while I understand the headwinds that are present in China and Japan, can you maybe talk a little bit about where they are, China and Japan, that is in regards to them implementing all Access Pass?

Yes. Jennifer Colosimo is the President of our Enterprise division. Jen, do you want to talk about the progress in Japan and then also China on AAP?

Yes, of course. So thanks, Marco. We have had significant progress in Japan in terms of AAP and AAP services. As of the end of this last quarter, Japan is 45% of their business that's AAP and AAP services, which will, as we expect, lead to significant returns and that same sort of flywheel we talk about all the time, those same economics apply in Japan. And again, they were restricted by the government requirements in Japan. We're seeing a real turn. And China's percentages are significantly growing. We probably would be seeing a higher percentage if we just hadn't seen such a downturn in their business and their ability to conduct business with the COVID restrictions in their environment. We'll be able to talk more about that as we end up the fiscal year.

Got it. Very helpful. And then shifting here to balance sheet. On the last call, we talked about your cash balance, and it's nice to see a large stock buyback you guys did in the quarter. But the conversation also sort of revolved around potential uses of that cash via acquisitions, small tuck-ins like kind of your historical bread and butter. Can you maybe update us on that acquisition landscape and perhaps your level activity -- your level of activity in that area?

Absolutely. So Marco, we think of -- when we think of potential acquisitions, we think of -- we could acquire capability we don't have. Those -- examples of that were the acquisition a few years ago of Robert Gregory Partners which brought coaching capability and executive coaching to us. Jhana, the micro push content capability. Strive, of course, the platform to power what we're doing for clients. So capability acquisitions, we think of -- we look at content -- potential content fits where -- I mean we don't have to acquire content, we can oftentimes license it. But if there was an organization out there that had good content and brought with it then one of these other two, which could be a number of customers where the value proposition, they're happy with their current provider. But boy, if they had access to the content they currently have plus everything that's in the All Access Pass, we could convert them over at a high conversion rate and grow our customer counts even more rapidly or they might bring more client partners, salespeople with them. So we kind of think of the 4 Cs of potential acquisition targets. And Boyd Roberts who is in the room here, heads that up for us, and we're having conversations all the time across those 4 and looking at different things that we might do in the future. Right now, we've been very focused on getting Strive completely integrated and getting that out the door, but there are -- we see the potential to be more active there as one of the uses of cash in our balance sheet.

And our next question comes from Alex Paris.

So congrats on the beat and raise, congrats on the raised guidance and outlook. And with regard to guidance and the outlook, I was wondering if we can talk macro for a bit, maybe a little additional color. Typical questions that we're asking on these conference calls is the impact of inflation and how you're dealing with it as well as the specter of recession and how the industry behaves in that sort of environment. So a little more color there on those macro issues, please?

Great question. We were expecting that, that question might come up on this call. Of course, we can't predict will there or won't there be a recession, how severe, how deep, et cetera. But what we can do is look at where we sit relative to that potential and assess how prepared are we, how confident are we? And we feel quite good about the level of preparation and our confidence, should there be a downturn. And I would maybe point to five reasons for confidence. First -- and we talked about this a little bit in a few minutes ago. But for us, it starts with the nature of the problems that we're helping our clients solve. And you could argue actually the things we're helping them with might be even more important to them in the difficult times than in the "easier times". Executing strategy, the need for that becomes even more paramount when things are difficult. Sales capability, production, our sales practice. The culture of the organization and making sure that every leader and individual has the skills necessary to come together and deliver on the strategy the company has. In tough times they company can't -- they just can't afford to miss or to be sloppy. And so we're on the problems that are very enduring and durable, particularly in a challenging time. I'd say it would be point one. We're not caught up in the thick of thin things, so to speak. Second, we're laser-focused on making sure the solutions that we create and we bring to market, we bring to our clients actually do measurably move the needle in those areas that when you engage with us, performance does improve and it improves at scale across the organization. So I think the combination of…

Great I appreciate that thorough answer, and I agree with those points. So you could argue that, particularly with the percentage of subscription and subscription-related services that the company should grow right through a downturn? Obviously, depending on the length and severity of the downturn. But the problems that your customers have will only increase in tough economic times, and you got the increasing component of recurring revenues.

Yes. So that's great.

Yes. And then the Q4 challenges, I think Steve did a good job outlining those. China and Japan, you're not expecting significant recovery in the fourth quarter versus the third quarter experience, but you do expect as the COVID lockdowns diminish and COVID continues to improve, hopefully, that you expect a return to growth for both of those countries in fiscal '23? Just wanted to clarify.

We do. In fact, just maybe an extra couple of fences on the response here. We've been through this before, particularly in China. So China got hit very hard in round 1 of the pandemic. But then that business came back a little over a year ago and was back to levels pre-pandemic. So we saw it go down, we saw it come back up. Unfortunately, it went back down again what's happened in China the last 1.5 quarters or so. But we expect the same conditions that caused it to go back up to pre-pandemic levels will be there again. We just don't foresee that happening in the next -- in this fourth quarter, but we do expect it will happen as we get into next fiscal year. And then Japan has been -- it will be -- it's just kind of -- it's already on kind of a slow return to growth. It's a little bit of a different environment there, but we do expect that both those countries will contribute to our growth next year.

And our next question comes from Samir Patel.

Congrats on a great quarter, and thanks for finally repurchasing shares. Look, I got two questions. The first one extends on, I think it was Alex a few minutes ago. Could you maybe, as a retrospective, talk a little more in depth about your experience during COVID with those customers who were affected, right? And like you mentioned, the hotels and airlines, I mean I'm looking at your press release from December 2020, when you were selected by Best Western to provide services to more than 2,000 properties in North America, right? And that was during -- I forget which variant it was one of those spikes and that's when they decided to actually sign a big new contract with you. So I mean, just to the point that I'm sure a lot of people have questions about the resilience of the business model. But like you mentioned, subscription revenues kept growing through COVID and you, in fact, were signing big deals with customers in the hospitality industry. So first question is maybe could you just go a little bit more in depth there as a retrospective kind of to the most recent crisis that you guys went through?

Yes. And thank you for the prompt. The -- just to point -- not only did subscription revenue grow during the pandemic. But apart from the very early two quarters of the pandemic where we needed to go through the conversion of the subscription services portion of our revenue, which was all booked as live in-person sessions at client locations that, of course, got canceled, and our clients weren't yet ready to move to live online. It took a couple of quarters for us to work with them and convince them that, that experience could be just as powerful as live in-person. But once we got them over that bridge, our subscription services revenue took back off again. And it's now at levels that it's never been before. In fact, as you note here in this call, we reported as a percentage of All Access Pass subscription revenue, services make up 66% now. It wasn't that many quarters ago that, that was down in the -- well I remember when it started at 12%, right? It has been slowly growing up to 66%. So I think the point you're highlighting here is a good one, which is both the subscription revenue and the services revenue did grow quite rapidly through the pandemic once we got through those first 2 quarters on the services side. And it is because -- as we both pointed out here, the nature of the problems we're solving. So we had a client in the early days of the pandemic that -- it was one of the largest airlines in the world. There was no airline traffic or travel happening. And they came to us and said, we want to double down with you right now because this is a chance we to reboot our culture…

That's great. Very helpful color. Second question is for Steve. And Steve, I know we bud heads on this, it seems, like every quarter. But I think with your guidance, right? So if I look at the Slide 30, it is here. Paul, in the past 2 quarters, you've raised your revenue outlook from high single digits to low teens growth. This year's EBITDA guidance midpoint has gone up by about $6 million and Steve, somehow your out-year targets have gone up by $2 million. So -- and that's with hopefully, next year kind of China recovering from levels that are actually depressed during this fiscal year as you're -- has nothing to do with your core business. It's just no one's allowed to do business there right now, right? So maybe, again, is it just conservatism? And -- or is there something structural I'm missing as to why you've increased your EBITDA this year by $6 million versus prior target. And then next year, you're looking for -- out years you're looking for like $2 million?

Yes. So. Samir, one of the things that you'll notice is that we're still looking in those out years at about a $10 million increase from one year to the next. And so we think that, that's a fairly -- that's a good amount of flow-through year-to-year is about $10 million. Now we had really an increased amount of increase in adjusted EBITDA this year from the pandemic-impacted $28 million to where we're going to end up. But we think that $10 million a year is a good target. And what we should be able to achieve. And in our guidance for FY '23 is reflected some of the things that we've talked about, meaning hiring more salespeople that aren't quite as -- aren't as productive in their first year. So there are some additional costs there, additional cost in sales and marketing. Continuing to implement the Strive acquisition and doing some of the content and platform development at a level higher next year than we did this year and some of the travel continuing to come back. So Samir, yes there's a little bit of conservatism.

Those are front-loaded growth investments, right? But if Paul's talking about going from high single-digit growth to low teens in the near future and then onwards to 15%, 17%, 19%, I mean those out-year targets, if you start achieving that, are going to be looking higher than that, right? Would you agree with that statement?

Yes.

Paul?

Yes.

And our next question comes from Jeff Martin.

I was just wondering if you could put into context. You had -- for North America Enterprise, you had revenue growth of 27%, while growth in billed and unbilled deferred revenue was 16% relative to the expectation of growth acceleration over the coming years and potentially reaching the mid and upper teens. Help put some context around the deferred revenue growth below the realized revenue growth for Enterprise. It would be helpful to have some insight for me there.

Great. Steve, do you want to talk about the walk from...

Yes. Jeff. So yes, I'll just kind of remind everybody on the phone, which I'm sure most know, but a reminder how this works. So when we deliver days, et cetera, ship materials or to deliver days, we record that revenue as the transaction takes place. And then, as you know, the next level up from that is that when we invoice for a contract we normally invoice 1 year in advance, we put that 1 year on the balance sheet as deferred revenue, and that revenue comes off evenly for the coming 12 months. And then if it's a multiyear contract that we enter into, we normally -- let's say, it's a 3-year contract. We bill for the first year, and then we do -- and we put that on the balance sheet. But the second and third years are in the unbilled deferred that is off balance sheet. So we always have those 3 levels. The deferred revenue on the balance sheet comes off evenly every month. But the unbilled deferred -- the unbilled deferred that's off balance sheet comes on in annual chunks because we bill a year in advance. And so those contracts are coming off a full year at a time being added to the balance sheet and then coming off the balance sheet evenly. That's all just to say, it's a little bit complicated. And in this third quarter, we put -- $28.8 million we added to deferred revenue, whereas last year, it was $22.7 million. So that was more. We added $8 million to unbilled deferred where it was $9 million the year before. That's $1 million less, but you notice quickly that last quarter, we added $4 million more to unbilled deferred. And in the first quarter, we added $3 million more. So that's just kind of a reflection of how the multiyear contracts were sold in these 3 quarters. So the year-to-date number looks really good for the contracted amount. And for the invoiced amount, it was just this quarter that was a little bit impacted on the amount of multiyear sales, even though the percentage of multiyear related to those particular sales went up. Was that too many words?

That's helpful. I was just -- the reason for the question is that I wanted to get some perspective that deferred revenue growth isn't on a decline, all eventually that catches up to the reported revenue growth. And it sounds like third quarter was somewhat of an anomaly with respect to the addition of multiyear contracts?

Yes. The multiyear, it was -- it was a good quarter for what we invoiced.

Got it. Okay. And then Paul, I wanted to get a sense in terms of revenue growth acceleration. Key drivers obviously continuing to expand the mix of subscription and related services is probably the biggest. But maybe help give us kind of a pecking order of where you expect the other most meaningful contributions will be? Obviously, client partner growth is going to be a big part of that and then rebound in Asia is going to help. But maybe just kind of help us prioritize, which are the most impactful beyond the increasing concentration of subscription?

Yes. I think you actually pecked through the pecking order there. By far, the biggest one is we now have a model, we're 6 years into this that is built to grow. It retains -- we retain substantially all revenue. We add services. So the model is growing. And as that -- and that All Access Pass and related -- and the Leader in Me-related businesses are growing far and above the mid-teens we talk about -- the low teens we talk about. And so as that continues to become a greater and greater percentage of the business, of course, the whole business growth rate increases, which you've said there. And so I think the drivers of that are, as you mentioned, it's, frankly, more salespeople. It's more time with existing customers. We still have a tremendous amount of headroom to expand inside each of our All Access Pass subscribing clients. We mentioned on previous calls, very few of them are -- we Enterprise with. We're just in there with initial populations that are -- while nice-sized, there was a lot of headroom to grow inside the existing All Access Pass clients in addition to adding new clients in the future. And so I think it's the salespeople to do that. It's continuing to be smart about how we market and position the company. It's making sure that we have a growing powerful subscription offering that our clients will find appealing. Really, the point to be made here is that I think the model is built to grow, and we're doing the things that cause us to grow, and it's the execution and the perfecting of the things we're doing and doing them at even a higher level of velocity causes subscription to keep growing. And if subscription keeps growing, the whole company growth rate tilts higher and higher.

Great. And then I wanted to get a sense with the impact platform, what are some of the opportunities to do things maybe a little different, enhance the value proposition once that's fully rolled out versus what you've been doing in the last 6, 7 years with the subscription model?

Thanks for calling it the impact platform. We want to be the impact at scale company, and we thought that's the right -- this is the right thing to call that. And so again, as a reminder, what this platform does is it is a technology platform kind of a lowercase P, if you will, platform. But it's also an uppercase P Platform, where we're doing something unique in the industry. We're platforming, if you will, what historically were or kind of 3 or 4 fairly disparate things that companies have tried to pull together. Really good content, delivered in cohort experiences. Everybody kind of knows that and the industry knows that to sit at your computer and watch something by yourself, you might have your own individual aha, but it's kind of a lousy way to drive collective ahas and behavior change that an organization really needs. So what you need is you need a place to convene where people can come together in an easy way with other people in their organization and have these facilitated experiences where together, you're wrestling through things, you're learning things and you're talking about how to apply them. And that there can be coaching for those organizations that want to support that experience with one-on-one or team-based coaching. So it's this capital P Platform takes great content, marries it up with our instructors, our consultants and/or client facilitated, if the client wants to do that. And then all the in between in the seams of your workday and workweek self follow up and reinforcement that you need to make to sustain behavior change. And it integrates that all onto one capital P Platform that's elegant and easy for our buyers to deploy. Prior to the Impact platform prior to Strive, clients want…

And we have no more questions at this time. I'll turn it back to Paul Walker for final comments.

Thank you, Darryl. Thank you, everyone, for being with us today. Thanks for just continuing to be with us on this journey. We are grateful to you, and we're grateful to have been able to visit with you for a commit today, and we're grateful for a good third quarter. And we hope you have a great rest of your day and a great upcoming 4th.

And thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.