FC earnings call transcript, November 4, 2026

Good day and thank you for standing by. Welcome to the Franklin Covey Third Quarter 2026 earnings conference call. At this time, all participants are listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please advise us. Today's conference is being recorded. I would like to hand the conference over to your first speaker today, Boyd Roberts, Head of Investor Relations. Please go ahead.

Thank you.

Great.

Thanks, Paul, and good afternoon.

Everyone. Fiscal 2026 was a year in which the investments we made in our people, solutions, and go-to-market models gained traction and produced measurable commercial progress that will shape our fiscal 2027 outlook. As shown in slide eight, revenue for the year finished within the revised guidance range we provided last quarter, and adjusted EBITDA was within both our original and narrowed guidance ranges. I would like to highlight three points at the outset. First, our key leading indicators strengthened. For the full year, consolidated subscription and contractually committed services invoiced amounts grew 9%, and consolidated deferred revenue increased 4%. Importantly, within enterprise, those subscription and committed services invoiced amounts grew 18%, and deferred revenue in North America grew 17%. Second, we improved our cost structure while continuing to invest in growth. Operating SG&A declined $7.7 million, helping us achieve a slight increase in full year adjusted EBITDA, even though reported revenue declined 2%. Third, this progress, coupled with improving revenue retention in both enterprise and education divisions, will provide the bridge to revenue adjusted EBITDA and cash flow improvement we expect in fiscal 2027. In my remarks today, I'll walk through our fiscal year and fourth quarter consolidated and division results, capital allocation priorities, and finish with our fiscal 27 outlook. Slide 9 summarizes our consolidated results for the year. Fiscal 26 reported revenue was $261.5 million, or two

$263.4 million in constant currency. Within the revised guidance range, we provided on our third quarter earnings call. Reported revenue declined 2% year over year. Enterprise division revenue decreased 3%, partially offset by 2% growth in education. Corporate revenue declined $1.8 million following the loss of sublease income from other tenants, only exited our former headquarters campus in June 2025. For the fourth quarter, reported revenue was $70 million, compared with $71.2 million a year ago, representing a decline of 2% and within our guidance. Foreign exchange effects on fourth quarter revenue were immaterial. Now let me separate the reported revenue picture from the commercial activity feeding future period. Importantly consolidated subscription and contractually committed services invoiced amounts increased 9% to $165.1 million, led by an 18% increase in the enterprise division to $117.7 million. Our consolidated deferred revenue balance increased 4% to $116.1 million, with a 17% increase in Enterprise North America. These are important measures because under our subscription and services model, some revenue recognized in Fiscal 26 arose from invoicing in prior periods, while a significant part of what we invoiced this year will become reported revenue in Fiscal 27, as the applicable performance obligations are satisfied. Gross margin was 75% for Fiscal 26, compared with...

76.2% last year, and 74.7% in the fourth quarter, compared with 75.5% a year ago. These changes primarily reflect a change in the mix of products sold, increased training and coaching delivery costs, and increased amortization of capitalized curriculum costs. We are pleased that our cross-discipline resulted in a 4% or $7.7 million full-year decline in operating... SG&A to $167.1 million, reflecting efficiency and restructuring actions taken throughout the year. Fourth quarter operating SG&A decreased 6% to $39.5 million. Those savings more than offset the decline in gross profit, allowing us to increase adjusted EBITDA modestly despite lower revenue. That cross-discipline positions us to deliver operating leverage... as revenue returns to growth. Full-year adjusted EBITDA was $28.9 million, or $28.6 million in constant currency, compared with $28.8 million last year. That result was within both our original and narrowed guidance ranges. Adjusted EBITDA margin increased to 11% from 10.8% in fiscal 2025. In the fourth quarter, adjusted EBITDA grew 9%, or $1.1 million, to $12.8 million, and margin expanded to 18.3% from 16.4%. Foreign exchange effects on fourth quarter adjusted EBITDA were immaterial. During the fourth quarter, we incurred $1.1 million of restructuring expense, principally severance and related costs under the long-term restructuring plan. Initiated in our second quarter, bringing full-year restructuring expense to $6.7 million. Fiscal 26 net income was $4.9 million, or $0.42 per diluted share, compared with $3.1 million, or $0.24 per diluted share, in fiscal 25. Fourth quarter net income was $7.1 million, or $0.62 per diluted share.

compared with $4.4 million, or $0.34 per diluted share, a year ago. Turning now to cash generation, cash flow from operating activities was $21.6 million in fiscal 26, compared with $29 million last year. The decline reflected an approximately $8 million swing in working capital. The accounts receivable were essentially unchanged this year against a large receivable decrease in fiscal 25, as we collected prior year balances. Free cash flow was $9.2 million versus $12.1 million in fiscal 25. Reduced capital spending on our new headquarters partly offset the working capital impact. We expect increased free cash flow conversion in fiscal 27, as operating performance continues to improve. Looking now to the divisions, enterprise generated approximately 70% of fiscal 26 revenue, while education contributed approximately 29%. Enterprise division reported revenue was $182.7 million for fiscal 26, compared with $188.1 million a year ago. At the same time, total enterprise invoiced amounts grew 3% to $190.6 million. And subscription and contractually committed services invoiced amounts grew 18% to $117.7 million. The enterprise division's overall deferred revenue balance increased 14% to $64.9 million. Fourth quarter enterprise revenue was $45.5 million, essentially unchanged year over year. Full-year enterprise adjusted EBITDABRA's 20% at $33.4 million, and margin improved 100 basis points to 18.3%, supported by lower SG&A. Fourth quarter enterprise adjusted EBITDABRA was $8.9 million, compared with $9.1 million a year ago. As shown on slide 10, in North America, the contrast between this year's reported revenue and this year's commercial activity is most pronounced.

Thank you very much.

In fiscal 26, invoiced amounts increased 4% to $151.4 million, driven primarily by growth in contractually committed services as more clients committed upfront to the solutions that will help them achieve their important outcomes. In the fourth quarter, approximately $6.4 million in invoiced amounts was for contractually committed predefined services, bringing the full year total to approximately $22.1 million. While we continue to recognize the revenue upon delivery, because these services have been contractually committed upfront, any unused days are guaranteed and will be recognized at the end of the contract term, if not delivered during the term. Excluding federal government business, which was affected by doge-related actions in Fiscal 25, North America invoiced amounts grew approximately 6%. North America... Reported revenue was $142.6 million, or 78% of enterprise division revenue, 3% lower year-over-year. Fourth quarter revenue was $35.8 million, essentially flat with the prior year. The full-year decline primarily reflects lower subscription invoicing in Fiscal 25 that flowed through to this year's revenue, as well as services contracted and invoiced in Fiscal 26 that will not be delivered until Fiscal 27. That timing also explains why the growth in deferred revenue was so meaningful. North America's deferred revenue balance rose 17% to $59.2 million at year-end, adding to our visibility as we enter Fiscal 27. The underlying client metrics are encouraging, as well. Revenue retention increased and the average size of retained

rate. All Access Pass client relationships increased meaningfully. Multi-year agreements continue to represent 60% of contracted amounts, and clients are expanding both the scope and the duration of their relationships with us. Behind those leading indicators and metrics is the more productive sales force. We are winning new client relationships at a higher average initial commitment than we were two years ago, and we are expanding the relationships we retain. That is the operating reason why we expect this year's invoiced and deferred revenue growth to convert into reported revenue and operating leverage in Fiscal 27. North America adjusted EBITDA was $25.5 million for Fiscal 26, compared with $27.4 million last year, and $6.6 million in the fourth quarter, compared with $7.6 million a year earlier. The decrease... reflected in lower reported revenue, partially offset by approximately $5 million in lower SG&A. As shown in Slide 11, enterprise international revenue, including both international licensees and direct offices, was $40.1 million for Fiscal 26, compared with $40.5 million last year. Fourth quarter revenue was $9.7 million versus $9.8 million a year ago. China's operations continued to be adversely impacted by trade tensions and macroeconomic conditions. Excluding China, international segment revenue grew approximately 2% for the year, supported by strong growth in Europe and Australia.

International adjusted EBITDA for Fiscal 26 increased to $7.9 million from $5.1 million in Fiscal 25, aided by approximately $3.3 million. in SG&A savings. Fourth quarter adjusted EBITDA increased to $2.3 million from $1.5 million. That improvement reflects the expense discipline that we've applied across the business. On Monday, we issued a press release announcing that we have signed an agreement to transition our China business operations from a direct office to a locally owned licensee arrangement. And currently, we expect to close that transaction by the end of the second quarter of fiscal 27. We believe local ownership will provide greater flexibility to serve the Chinese market and allow us to direct more of our own investment towards markets with stronger growth prospects. Following the transition, our China revenue will be recognized as licensee royalties rather than as direct office revenue. We therefore expect reported fiscal 27 revenue to be approximately $2 million or lower in the next quarter. than it otherwise would have been without a material effect on adjusted EBITDA. We expect the transition to improve the growth profile of our international segment. Turning to the education division now, as shown in slide 12, fiscal 26 education revenue increased 2% to $76.2 million, supported by 10% growth in subscription revenue to $50.6 million, and the delivery of approximately 900 more coaching and consulting days than in the prior year. Those gains were partially offset by lower material sales, primarily tied to reductions in budgets for the statewide initiative Paul had mentioned. Fourth quarter revenue was $23.6 million versus $24.4 million last year, primarily reflecting those lower material sales. Education invoiced amounts declined 10%

to $72.8 million for the year, and 5% to $42.6 million in the fourth quarter. Three factors contributed to this decline. The statewide budget delays that impacted the timing of our contracting, large multi-year prepayments last year that did not recur at the same level, and an approximately $3 million district renewal that shifted from our fourth quarter into fiscal 27. Education invoiced amounts to $2 million in the fourth quarter. Education's deferred revenue balance was $51.2 million at year-end, 6% lower than last year, reflecting both the lower invoicing and the delivery of coaching days during the year, which drew down deferred balance. Full-year education adjusted EBITDA was $8 million, compared with $8.2 million last year. In the fourth quarter, its adjusted EBITDA grew 11% to $6.9 million from 6.9 million. With margin expanding to 29.1% from 25.3%, reflecting stronger membership growth margins and lower SG&A. Our installed base of schools remains an important strategic asset. School retention improved to its highest level since 2022, and Leader & Me now serves more than 4,500 schools in North America and 8,000 schools worldwide. We believe stronger execution on school retention and on new school and district relationships will reignite more consistent growth. Let me now move to our balance sheet and capital allocation. Our approach remains balanced across three priorities. First, preserving financial flexibility. Second, investing for growth. And third, returning capital to shareholders where appropriate.

On the second, we will continue to invest in products. innovation including AI-enabled solutions in our business transformation initiatives and in opportunistic acquisitions when they become available. We ended fiscal 26 with more than $75 million of total liquidity, comprising $13.3 million of cash and a fully available $62.5 million credit facility. That liquidity provides flexibility to continue executing our plan. At the same time, capital discipline remains important. We returned $28.1 million to shareholders through the repurchase of approximately 1.6 million shares in fiscal 26, ending the year with approximately 11.3 million shares outstanding. We had approximately $20 million remaining under our repurchase authorization at fiscal year end. Our near-term priority is to rebuild cash through internal generation. while continuing to evaluate opportunistic repurchases as conditions warrant. Slide 13 summarizes our fiscal 2027 guidance. The outlook reflects the impact of stronger invoiced amounts and deferred revenue, the cost actions we have taken, and a disciplined assessment of execution and external risks that influence the low end of the guidance range. We expect fiscal 27 revenue of the in the range of $253 to $273 million in constant currency, after including the approximately $2 million reduction in revenue from converting China to a licensee model, which is currently expected to close by the end of the second quarter. Normalizing for the China transition in our revenue presentation, the range implies approximately 1.5% to 5% growth over fiscal 26, or about 3%

at the midpoint. We expect growth across all of our segments on a comparable basis. We expect fiscal 27 adjusted EBITDA in the range of $29 to $34 million in constant currency. At the midpoint, that implies approximately 9% growth and about 80 basis points of margin expansion, reflecting our expectation that adjusted EBITDA will grow faster than revenue. As Salesforce productivity and cost disciplines translate into operating leverage. As in prior years, results should be weighted towards the second half of the fiscal year. We expect 45% to 50% of annual revenue in the first half, roughly evenly split between the first two quarters, and 30% to 35% of annual adjusted EBITDA in the first half of fiscal 27. Margins should benefit as client deliverance savings and operating leverage billed later in the year. As we think about the cadence for fiscal 27, I'd like to note that we expect first quarter North America invoiced amounts to be lower than the prior year. As we discussed on our first quarter call, Q1 of fiscal 26 included $5.6 million of contractually committed services invoiced up front, primarily tied to a three-year contract with a leading global agricultural company. Our partnership with that client continues with those services being delivered over the contract term, but the upfront invoicing creates a difficult first quarter comparison. This is reflected in our outlook, and we expect North America invoiced amounts to grow for the full year. With our initial transformation investments behind us, and our phase two growth investments funded within our operating budget, we expect adjusted EBITDA growth within

improved margin and improved free cash flow conversion in Fiscal 27 and beyond. While we are not providing specific multiyear guidance at this time, we've used Fiscal 27 as a year of growth as the momentum built in Fiscal 26 converts, and Fiscal 28 as a year of continued growth and increasing operating leverage. I want to thank the Franklin Covey team for the outstanding results they help our clients achieve every day. Paul, I'll now turn it back to you.

Thanks, Jesse.

Great job taking us through all that. And with that, we'll now ask the operator to open the line with your questions. Thank you. At this time, we'll conduct the question and answer session. As a reminder to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster.

Thank you. One moment for our next question.

Hi, Neha.

Hello. Thank you.

Hi, Neha.

Hello. Great to see the evidence that the Hunter transition is working with the double in productivities. That's awesome. Help frame, though, however, that the North America invoice was flat year to year for the August quarter. Why was that? Yeah, so a couple of things. I mean, one I want to highlight, we were focused on the full year in terms of the invoice amounts growing. And so we, if you recall, in Q1, we had a very large of course, of course, of course. contract that was committed up front. It was part of the contractually committed services where we disclosed $5.6 million. A large portion of that 5.6 was that one contract. And that, by the way, that is going to be comparable from Q1 of fiscal year 26 going into Q1 of fiscal year 27. So I do want that people to make sure that you keep that in mind because we are expecting North America invoiced amounts will decline because of the positive impact that we had in Q1 of 26. But anyway, so because of that, you know, we had the growth in Q1, the very high growth in Q1, that sustained in Q2. We were not necessarily expecting to have the same levels of high growth every single quarter. We were, you know, trying to target, you know, what are we going to expect for the full year? So that's, you know, one thing to kind of keep in mind. The core business, I mean, there is a, the core business actually did increase about 1%. There's, you know, some allocations of royalties that, you know, get put in there that kind of made it more neutral and flat.

But, I mean, I think that what you really want to central, you know, focus on is the deferred revenue. What we've built in deferred revenue for North America was 17%. And if you look at that number, we have not had growth at that level. I mean, the last time in 2022 was around 10%. So, we have not had, you know, very high double-digit growth rates of deferred revenue for North America in many years. We're really excited about the momentum that we're seeing and expect that to continue and to grow in this year. But keep in mind, Q1 will be down, but we expect then after Q1 to have growth. Just a point on Q1 as well. At the high level, it'll be down. If you isolate that one contract and you look at all the underlying metrics of the productivity per hunter, so everybody else is growing, will generate, apart from that one large deal, we would have had, again, good invoice growth in Q1. And those same metrics that we just reported out on the productivity per hunter and revenue per client, those are all intact as we move into Q1, apart from just the... timing, the seasonality timing of this one big deal. Okay, got it. And then you also said that you do expect North American invoice amounts to grow for full year, fiscal year 27. Just want to verify, does that include subscription invoice growing also for fiscal year 27? Yes. Yep. Okay, great. And in order for fiscal year 20... ...revenue to accelerate, that would imply that you would expect invoice amounts overall to do better than the 4% for the full year. Is that correct as well? Yes. Yes. Yes, both for North America and then for the broader company to have accelerated reported growth in 28 as well. Areas like education would also return to invoice growth this year.

and set up then the reported growth in 28. Okay. Okay. And then, Jesse, you said that you expect fiscal year 27 free cash flow performance, but the last item that you had to cut off, could you just repeat what you were saying about fiscal year 27 free cash flow performance? Yeah, we're expecting the free cash flow conversion to improve compared to this year. And, you know, that's going to be driven by operating cash flows. Our CapEx and CapD investments are going to be roughly, you know, in total, roughly be, you know, similar to this year. So, maybe a slight increase, but in terms of overall free cash flow conversion, we expect that to improve. Okay, great. And then, Paul, last thing for me in your prepared remarks. I think you mentioned that retention was lower than desired. Did I hear that correct? And if so, why is that? So, the point there, revenue retention improved meaningfully in 26 over where it was in 25. The point in the remarks there was simply, as we saw, revenue per hunter grow meaningfully and revenue per farmer and revenue per customer, new logo and revenue per customer. Existing client also grew meaningfully in 26 over what we'd experienced in our previous selling model. There was a slight offset in the logo retention. So you'll recall that that logo retention has been relatively consistent. It is still relatively consistent. It was a couple of percentage points below where it had been in the previous year. And that was what I was calling out there. We don't see any trend.

We actually expect that that will improve this coming year in fiscal 27. Just a couple of deals that we didn't renew this year that would have renewed in previous years. That's great. All right. Thank you.

Thanks, Nihal.

Thank you for our next question.

Thank you. One moment for our next question.

Good afternoon, everyone.

Hey, Paul.

I wanted to pick your brain about the client environment out there. You feel that the sales cycles are normal at this point? Are they still elongated? Are you seeing hesitation? Are people still expressing macro uncertainty concerns? You know, now that we're post-midterm elections, that things could pick up. Just curious, kind of your pulse on the general market environment for Franklin County Services. I'll give a general comment and then ask Holly to double-click on it with her specific experience. But I would say, as we think about this over time, the external environment we have seen for the last few quarters now is… Relatively stable, particularly in North America. Maybe not quite the same to the same degree internationally in some of the regions around the world. There's maybe a little more unevenness out there for various reasons. But in North America, our core markets for both education and enterprise, which makes up the vast, vast majority of our revenues, it's been pretty consistent now and stable for a while. I don't know exactly what last night's election. We'll see how that plays out in the coming days. But generally, we're not seeing that as headwind. And I think stability actually is a little bit of a potential tailwind for us. I believe that doesn't have to be an amazing environment, but a stable environment is actually a good thing. So, Holly, I don't know if you would add anything to that.

Yeah, I agree with Paul's comments on stability. I'll just add a couple more points. And I just want to remind you of the large addressable market that we serve. There's almost no industry that we don't partner with today. And so, while there might be peaks in one industry and troughs in another, we have really great diversity across the industries we serve in a really large market. The second, as we referenced to the AI solutions earlier, it is obviously a massive wave and there's not a leader out there right now that's not struggling with how to figure out how to get the most out of their AI investments. And so, while there might be. Other market conditions that are challenging. And that is such a large wave for us. And so, we're really invested there and seeing a lot of progress. And then last is one of the other market trends that's been interesting is to watch the shift of some of our services move from potentially delivered online to delivered in person. And the spirit of that is that leaders are really feeling pulled to unite their teams, especially during all this disruption, and bring them together to focus on the vision they're trying to accomplish. So, it's been interesting to watch. You know, that shift, and that's been another great opportunity for us to invest and build more meaningful relationships with clients in person. Thank you. And I appreciate the, you know, the reminder on the first quarter difficult comparison or, you know, just was curious if there are other items that are worth pointing out, you know, for other quarters in fiscal 27 that would be.

Challenging or beneficial to the year-over-year comparisons. No, no, just Q1. Just Q1. Got it. All right.

Thank you very much.

Thank you, Jeff.

I'm showing no further questions at this time. I'll now turn it back to Paul for closing remarks.

Wonderful.

Thank you again, everybody, for joining today. And we hope you have a great evening. And thanks so much for your questions.