Franklin Covey Co. (NYSE: FC) is a global leadership company dedicated to improving individual and organizational performance through behavior change. The company provides world-class content, tools, and services designed to help clients achieve sustained superior results. Its offerings include subscription-based services, training programs, and educational solutions, delivered through scalable and flexible platforms to clients in over 160 countries.
- Direct Offices - Provides sales and services to clients in the United States and Canada, international direct sales offices, government services, and book and audio sales.
- Education Practice - Focuses on improving performance and culture in educational institutions, including elementary schools, high schools, and colleges.
- International Licensees - Generates royalty revenues from independently owned international licensees operating in approximately 150 countries and territories.
- Corporate and Other - Includes leasing operations, shipping and handling revenues, royalty revenues from Franklin Planner Corp., and administrative functions.
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What went well
- Franklin Covey is making approximately $16 million in incremental growth investments to shift its revenue growth from mid-to-high single digits to consistent double-digit growth, aiming for 10% growth in FY '26, 12% in FY '27, and 14% in FY '28.
- The company is reorganizing its sales force into dedicated "Expand" teams focusing on existing clients and "Land" teams targeting new customers, which is expected to significantly increase penetration within clients and the acquisition of new logos.
- Adjusted EBITDA increased 15% to $55.3 million in FY '24, and free cash flow grew 121% to $48.9 million, indicating strong financial performance and providing a solid foundation for the planned growth investments.
What went wrong
- Adjusted EBITDA is expected to decrease significantly in fiscal 2025 to a range of $40 million to $44 million due to $16 million in incremental growth investments, with benefits not realized until fiscal 2026 and beyond. This could impact profitability in the near term. , ,
- Revenue growth guidance for fiscal 2025 is modest at approximately 4.5%, only slightly higher than the previous year's growth, despite the significant investments. This raises concerns about the effectiveness of the investments and the company's ability to accelerate growth. ,
- The Education division's revenue was flat in Q4 after being up 18% in Q3 due to pull-forward of revenues, and the expiration of ESSER funds could negatively impact future revenues, posing risks to one of the company's key divisions. ,
Q&A Summary
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Accelerated Growth Investments
Q: Why make big investments now to accelerate growth?
A: The company is investing $16 million this year to accelerate growth by restructuring the sales force into specialized teams focused on expanding existing clients and acquiring new ones. This aims to increase revenue growth from the historical 5% CAGR to 10%, then 12%, and eventually 14%. They've assembled a strong team, including hiring a new Chief Revenue Officer, Holly Procter, in June , and are ready to change the growth trajectory significantly. -
Return on Investment and Expected Growth Rates
Q: What returns do you expect from these investments?
A: Without the investments, revenue growth would have remained in the higher single digits. With the investments, they expect revenue growth to move to 10%, 12%, and then 14% in a fairly quick period. The adjusted EBITDA will grow along with revenue, leading to higher valuations for the company. -
Impact of $16M Investment on Margins and EBITDA
Q: How will the $16 million investment affect margins and EBITDA?
A: The $16 million incremental investment will reduce margins in fiscal 2025 as the benefits will start kicking in during FY '26. The extra revenue generated is skewed towards subscription revenue, which is recognized over 12 months. Adjusted EBITDA is expected to be lower in fiscal 2025 due to these investments, but without them, EBITDA would align with analyst expectations. -
Expected Revenue Growth Rate Guidance and Factors
Q: Why is revenue growth guidance only 4.5% despite investments?
A: Despite the investments, fiscal 2025 revenue growth guidance is 4.5%. This is because the increased subscription sales will build deferred revenue on the balance sheet and won't be fully recognized in reported revenue during the year. Also, there's some expected disruption during the transition to the new sales structure. -
New Sales Strategy Timing and Implementation
Q: When will the new sales strategy be fully in place?
A: The new organizational structure has been established, with client partners focused on either expanding existing clients or acquiring new ones. Substantially all support roles and sales leadership positions are filled, and they are off and running. -
Technology Initiatives and Impact Platform
Q: How are technology initiatives contributing to growth?
A: Over 90% of clients have converted to the Impact Platform. The platform allows scalable deployment of solutions without sacrificing impact. They have incorporated AI, including an AI coach, to personalize learning journeys and improve execution. -
Lifecycle of Client Partners Post-Transition
Q: Will the client partner ramp time improve after the transition?
A: The ramp time for client partners is expected to decrease significantly. By specializing roles into either expanding existing accounts or acquiring new ones, salespeople can become proficient faster. -
Update on Product Launches
Q: Have recent product launches been on schedule and successful?
A: Yes, the 7 Habits 5.0 refresh launched last week after 9 years. New solutions like Leading at the Speed of Trust and Navigating Difficult Conversations have resulted in higher Net Promoter Scores and increased bookings. Significant marketing events have increased attendee numbers over the prior year. -
Education Division Revenue Pull Forward and ESSER Impact
Q: What's the impact of revenue pull forward and ESSER funds ending?
A: A large state deal pulled a couple of million dollars from Q4 into Q3. The ESSER funds ended in September, but the impact is expected to be minimal. They've already navigated much of the ESSER impact and are offsetting it with grants, expecting $3 million to $5 million in grants this year. They also have a partnership funding hundreds of schools annually. -
Current Macro Environment and Client Decision-Making
Q: How is the current environment affecting client decisions?
A: The macro environment has been steady for the last 18 months. While it's not like the zero interest rate days post-COVID, they've had success selling in this consistent environment. Topics like leadership, culture, and execution are top of mind for CEOs, aligning with the company's solutions. -
Decline in Subscription Invoice Growth
Q: Why was there a 2% decline in subscription invoices?
A: Invoice subscription growth was down slightly, with a 2% company-wide decline. The Education division was flat in Q4 after being up 18% in Q3 due to revenue being pulled forward. Growth in Q4 came from a rebound in services and non-subscription areas.
- Considering the $16 million incremental growth investments leading to a projected decline in adjusted EBITDA for fiscal 2025, what specific risks do you foresee that could prevent these investments from yielding the anticipated double-digit revenue growth in the following years?
- With the reorganization of your sales force into "expanders" and "hunters," how will you mitigate potential disruptions during this transition, and what strategies are in place to ensure that both teams can achieve their goals without negatively impacting existing customer relationships or new client acquisitions?
- Despite increasing average revenue per client from $39,000 to $85,000, you mentioned that you're only about 10% penetrated within most clients; what challenges have hindered deeper penetration, and how will your new investments specifically address these obstacles to drive further growth?
- Given the end of ESSER funding in September and its impact on your Education division, how confident are you in replacing this funding to prevent revenue declines, and what specific initiatives beyond grants and corporate partnerships are you implementing to sustain or grow revenue in this segment?
- Despite significant investments and a strong fourth-quarter performance, your revenue guidance for fiscal 2025 is only a midpoint growth of approximately 4.5%; can you explain why growth isn't expected to be higher and what factors might affect your ability to achieve the future revenue targets of 10%, 12%, and 14% growth in subsequent years?
Q4 2024 Earnings Call
- Issued Period: Q4 2024
- Guided Period: FY 2025, Q1 2025, FY 2026, FY 2027, FY 2028
- Guidance:
- FY 2025:
- Revenue: $295 million to $305 million
- Adjusted EBITDA: $40 million to $44 million
- Q1 2025:
- Revenue: Just over $70 million
- Adjusted EBITDA: $7.5 million to $8.5 million
- FY 2026:
- Revenue: $330 million (10% growth)
- Adjusted EBITDA: $48 million (14% growth)
- FY 2027:
- Revenue: $370 million (12% growth)
- Adjusted EBITDA: $60 million (25% growth)
- FY 2028:
- Revenue: $420 million (14% growth)
- Adjusted EBITDA: $75 million (25% growth)
- FY 2025:
Q3 2024 Earnings Call
- Issued Period: Q3 2024
- Guided Period: FY 2024
- Guidance:
- FY 2024:
- Revenue: Approximately $284 million in constant currency, after absorbing $700,000 of unfavorable FX
- Adjusted EBITDA: $54.5 million to $58 million in constant currency, expected at the low end of the range, excluding $500,000 of negative FX impact
- Free Cash Flow: No specific guidance, but expected to be a very good percentage of adjusted EBITDA (historically 70%-75%)
- FY 2024:
Q2 2024 Earnings Call
- Issued Period: Q2 2024
- Guided Period: Q3 2024, Q4 2024, FY 2024
- Guidance:
- Q3 2024:
- Revenue Growth: 1%
- Q4 2024:
- Revenue Growth: 6%
- FY 2024:
- Adjusted EBITDA: Expected at the bottom of the range of $54.5 million to $58 million in constant currency
- Services Attach Rate: Expected to end the year at 55%
- Deferred Subscription Revenue: Expected to remain strong, providing visibility into future sales results
- Q3 2024:
Q1 2024 Earnings Call
- Issued Period: Q1 2024
- Guided Period: Q2 2024, FY 2024
- Guidance:
- FY 2024:
- Adjusted EBITDA: $54.5 million to $58 million (17% growth at midpoint)
- Revenue Growth: Significant acceleration in Q3 and Q4, driven by deferred revenue and subscription services
- Deferred Subscription Revenue: $169.7 million at the end of Q1 2024, up 12% year-over-year
- Subscription Services Attach Rate: Expected to return to 66.5% in Q3 and Q4
- Q2 2024:
- Adjusted EBITDA: $6.2 million to $7.2 million
- Revenue: At least even with or slightly above the prior year
- FY 2024: