Q4 2024 Earnings Summary
- Franklin Covey's significant growth investments of approximately $16 million are expected to accelerate revenue growth from mid-to-high single digits to consistent double-digit growth, starting in the back half of fiscal 2025. The company forecasts revenue growth of 10% in FY '26, 12% in FY '27, and 14% in FY '28, reaching approximately $420 million in revenue by FY '28.
- The strategic restructuring of the sales force into dedicated 'Expand' and 'Land' teams is anticipated to significantly increase both penetration within existing clients and acquisition of new logos. Early pilot programs have shown that focusing client partners solely on either expanding existing accounts or hunting for new accounts leads to accelerated growth.
- Investments in technology, including the integration of AI into the Impact Platform, are enhancing client engagement and scalability, with 90% of clients now converted to the platform. The use of AI coaching and personalized learning journeys is expected to improve customer satisfaction and retention, potentially driving higher sales and expanding the customer base.
- Franklin Covey's guidance for fiscal 2025 projects revenue growth of only 4.5%, down from 8% growth in Q4, indicating a potential deceleration in revenue growth. This lower guidance suggests that the company's significant investments may not yield immediate revenue increases.
- The company plans to make $16 million in incremental growth investments in fiscal 2025, which will lead to a decrease in adjusted EBITDA to a range of $40 million to $44 million, down from $55.3 million in fiscal 2024. This significant increase in expenses may impact profitability in the short term, with benefits from these investments not expected until at least fiscal 2026.
- The end of the ESSER (Elementary and Secondary School Emergency Relief) program may negatively impact the Education division's revenues. With the ESSER funds officially ending in September, there is uncertainty about replacing this funding, despite the company's efforts to secure grants and partnerships.
-
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.
Research analysts covering FRANKLIN COVEY.