Good afternoon, and thank you all for joining us for our next Southwest Ideas Conference presentation. Our next presenter is Franklin Covey, which trades on the New York Stock Exchange under the ticker symbol FC. Representing the company today is their CEO, Paul Walker. Paul?
Thank you so much. Great to be with you today. Just really quickly, how many of you know the company? Anybody know Franklin Covey? You got one? Nobody else? Okay. Let me just, I'll give you just a quick, brief orientation here, and then we'll get into it. Franklin Covey, we are, you may be familiar if you go back in time, we're the combination of two companies that merged together about 27 years ago. One was the Franklin Quest Company. You remember the leather day planners, time management companies, stores in the malls? That was our business. The other business, there was a gentleman by the name of Dr. Stephen Covey who wrote a book called The 7 Habits of Highly Effective People. It was one of the best-selling business books of all time. That was the Covey side.
The businesses merged together many, many years ago, like I said, 27 or so years ago to create Franklin Covey. Of course, paper planners were not going to be the future of the business. We sold that a long time ago. What the company is today, we are the partner to leaders inside all different size organizations, helping them deliver and achieve some type of a breakthrough in performance. What we find inside most organizations is that what stands between a leader and his or her strategic ambition or aspirations for their business or for their team is the ability to get the people in the organization aligned, working well together, able to execute, to be well led, to create a high-performing culture. That is the business that we are in, to bring that part of the equation to the ultimate outcome and delivery of the strategy of that organization.
What we do is we build products. We have content, solutions, technologies, frameworks, tools that we package together into a subscription. Those content offerings fall into one of the four buckets you see on the screen here. A core part of our business is developing leaders and being a leader performance partner. Leadership at all levels of a company, from how do you learn how to be a leader to you have been leading for a long time and you have got to get better results. We are leader development. We are individual interpersonal effectiveness. Helping people on teams learn how to communicate, collaborate more effectively, manage their time, hold themselves accountable. The third area would be around culture and trust. We do a lot of work with organizations to improve the level of trust and to help the culture become a higher-performing culture.
The final area is strategy execution. We actually have a practice that helps organizations. We do not do strategy work per se, but once you know what your strategy is, how do you get everybody aligned to it and executing against it down through the organization? In these four areas, we are building, we spend about 9% or 10% of prior year's revenue every year building products and solutions in each of these areas. We package that all up into a subscription. We call the subscription the All Access Pass. That subscription then is sold on a per-head basis to a portion or the entire organization. We collect all the, we bill for that upfront at the beginning of the subscription period. It is a one-year minimum subscription. We collect all the cash upfront.
Inside that subscription are all of the tools and content methodologies that I've been talking about. In addition, on top of the subscription, we sell professional services. We call them Subscription Services. In the company, for every dollar of subscription revenue we generate, we do about $0.50 in Subscription Services. Those services are professional services. It's delivery, it's training, it's consulting, it's coaching. I'll give you an example in just a second here of how this kind of all comes together. The subscription is a content and technology-based subscription. We add services to that, and that is the business. Over time, we've grown that subscription business from nothing to about 85% of what the company's revenues are today. This last year, we reported we did $267 million of revenue.
As you can see there, about $230 million of that was this subscription and Subscription Services revenue. It blends together. It's got a high margin. We're near 100% margin on the subscription portion. We're about 65% on the services portion. We've got about an 82% or 83% gross margin on that business. That's a little bit how the business model works. Let me just step back for a second and give you just to kind of bring this to life. What we find inside most organizations, and one I can talk about is Marriott. Marriott Hotels became a client of ours about 15 years ago. The circumstance at Marriott at the time was that there had just been an article written in LODGING Magazine comparing Marriott, Hilton, and Starwood. This is before Marriott owned Starwood.
The article was titled The Sea of Sameness, the SEA of Sameness. The point of the article was, "Hey, as a consumer, it no longer matters where you stay because there's no brand differentiation and no quality differentiation between Marriott, Hilton, and Starwood." Drove Marriott crazy. They said, "That cannot be the case for Marriott." They set out and established a strategy and a set of goals around improving guest SAT. They attempted to pursue that for a couple of years. Didn't make a lot of progress because of what you see right here. Most performance inside organizations falls across a predictable curve with some pockets of high performance, some pockets of low performance, and the average bunched up in the middle. That was true across all the Marriott properties as well.
Marriott knew what it took to deliver high guest SAT, but institutionalizing those behaviors and getting them to happen consistently was the problem. It happens to be the problem inside most organizations. This is the problem we're helping our clients try to solve, is to shift that performance curve right and tighter. What that looks like at Marriott today and has for the last number of years is they buy access to our subscription, All Access Pass subscription. In there, there are a couple of products predominantly that they use. One is called the 4 Disciplines of Execution, and one is our set of leadership offerings. What we do is our 4 Disciplines process is designed. We come in on top of that subscription with our professional services people. Every year, we help Marriott get clear on, "You're going for improved guest SAT.
What are the specific focus areas you want to focus on across all of your hotels to drive that? We help them cascade that all the way down to the front line of the organization". Today, everybody who works at Marriott comes in, and on a daily or a shift-by-shift or a week-by-week basis, depending on your role, you're making commitments against the very things that will move guest satisfaction. That's all tracked in a proprietary software tool that we have. Marriott, 15 years later, can see how all of those commitments are driving leading indicators or driving lagging indicators. We bring that approach to a variety of different client problems and challenges. Some sales performance challenge, some cultural challenge, some trying to get more margin out of your deals.
When I talk about being the partner to leaders who try to drive some breakthrough in performance through their people, that's what I'm talking about. That is Franklin Covey in a quick nutshell, or at least 75% of the business. 75% of our revenues and our profit is all in the enterprise space, being that kind of a partner to clients and to organizations. The other part of the business is our education division. 25% of our revenues are taking that same intellectual property, packaging it into a subscription, but this time the market is K-12 education. That product is called The Leader in Me. The Leader in Me is now utilized by about 8,000 schools. These are mostly public schools. I mentioned K-12. The circumstance here is very similar. Schools are trying to improve performance. For them, performance is academic outcomes.
It's parental involvement. It's declining discipline problems. It's improving graduation rates. Increasingly, the outcome that not only schools care about, but business leaders care about, is they're not all that satisfied with the graduates they're getting. Not that they don't have the technical competence. They don't have the interpersonal competence. These graduates don't communicate well. They don't come in and thrive in a new organization. They don't exactly know how to collaborate. They don't know how to present their ideas very well. Those things haven't been taught as much, and they're not taught in schools today. The Leader in Me is teaching personal leadership skills to students as young as kindergarten. The Leader in Me Curriculum, it gets embedded into the curriculum of the school.
While a student is there learning reading and how to write and how to do math, they're also learning how to collaborate, how to synergize, how to set and achieve goals, how to manage their time, how to communicate. That business functions a lot like the enterprise business I talked about. It is also a subscription business. We attach services to it. It has very high retention rates. As I mentioned, it's in around 8,000 schools now around the world, about 3,800 of them in North America. Just as a point of reference, there are about 130,000 schools in North America. There's a bit of room to grow there. That at a high level is Franklin Covey, what we do. Let me talk a little bit about then where we are today in that. We converted to that model 10 years ago.
We grew the business from no recurring revenue, no subscription, to, as I mentioned, about 85% of the revenue is recurring and subscription-based. In fiscal 2024, coming out of fiscal 2024, was a high point for us revenue in EBITDA. We did $287 million in revenue. We did $56 million in adjusted EBITDA. I think our free cash flow generated that year was somewhere around $45 million or so. By the way, this business has always been a good incremental revenue flows through nicely. There's good operating leverage in the business, and it's always been a good cash-flowing business. We made the decision at the beginning of fiscal 2025, this last year for us, run out of September to October fiscal year, for this reason right here, to reimagine and disrupt our go-to-market model.
We had noticed that our invoice subscription amounts were beginning to flatten out, and we recognized that that was going to ultimately lead to a flattening of our reported revenue. We did not believe that was a product problem. We did not believe that that was a market receptivity problem. We quantified that problem and still do today as our old selling model was hamstringing us. We went to market with a salesforce that both hunted and farmed. As we had grown the size of each salesperson's book of business, we were increasingly asking them to both manage and try to expand existing accounts and also hunt for new accounts. We were beginning to get suboptimal results on both sides, which was leading to flattening invoice growth after a great period of a lot of growth there.
We decided to invest about $16 million into reformatting and transforming that sale, the go-to-market motion. Some of that investment went into marketing. Some went into we segmented the salesforce into hunters and farmers. We segmented them by account size and by vertical. We brought in a differential level of support around them with the expectation that while that would be a maybe one-ish year step back in profitability, that what we would come out with on the other side as a company that instead of growing historically kind of mid-single digits, that we would be able to grow top line closer to double- digits or even be a little bit ahead of that, and we would get great compounding of EBITDA and cash flow on the back end of that. We undertook that. We did. We spent the money.
There was a little bit of, you can kind of look at the performance of the stock. That was at first, initially, a little bit of a shock to our investors that we were going to do that. We undertook that in November. We announced that in November right on the eve of a number of other changes in the administration and some of the impacts that happened as a result. At the time, about $16 million, $17 million of our revenue was federal government contracts. We lost about half that due to DOGE. We had revenue decline last year for the first time in a long time, which I attribute primarily to DOGE and to just some of the external factors at the time and then some of our own internal transition. That weighed heavily on the reported EBITDA.
Revenue last year was $267 million, down $20 million from the year before. Adjusted EBITDA was $29 million, less than the $40 million we thought we would do after making the investments, which was less than the $56 million that had been the previous year. Therefore, if you look up our ticker, you can get a sense, I think, for why we're trading where we are right now. We're now through that transition. The salesforce has come through it well. We have been seeing the last couple of quarters. We'll report again Q1 here in January.
We have been seeing the leading indicators that we really hoped we would see from the sales transformation as measured by unbilled deferred, which is our multi-year contracts, leading to increased deferred, leading to increased amounts in invoiced, which eventually will drag the reported revenue growth back up to the growth rates we used to enjoy or higher. The leading indicators of that around what we are seeing in our pipeline, what we are seeing in our conversion rates of new logos, what is happening in the retention expansion of our clients are all beginning to behave like we hoped and expected. Candidly, it was a couple of quarters longer than I thought it was going to be, painfully. That is where the business is today as we start this new fiscal year.
Last point I would mention, then I'd be just happy to actually open it up to questions and not just talk at you. Over time, over the last 10 years, we've generated about $250 million of free cash flow. We've invested about $185 million of that into share buybacks. So about 80%- 83% or so of free cash flow has gone into shrinking the share count of the company. The other $35 million or so has gone into some selective M&A. For us, it's been more tuck-in M&A to bring capability to the business that we didn't have. We haven't done a lot of M&A that would bring inorganic revenue or EBITDA. That's how we've used our free cash flow. We just announced on Monday, actually, we announced two weeks ago when we reported that we'd exhausted a $10 million 10b5-1.
Then we announced on Monday that we were entering into a new $20 million 10b5-1 that we expect to fully utilize by the end of January, just given where we think it's a good use of cash right now, given where things are. That's a little bit about Franklin Covey, what we're doing, kind of the way the business works. Maybe anybody have any questions that would be helpful in our remaining few minutes? Please.
See that.
[audio distortion] big change. The question is, is that a good thing?
Yeah. I believe the change is absolutely a good thing, and it was a necessary thing. Yes on that. I have high conviction on that. As far as what to look for, we disclose and report unbilled deferred, deferred invoiced amounts. I think that would be the thing that I would be tracking. In our November full fiscal year 2025 call, we guided to revenue and EBITDA for the year. We did not guide specifically to invoiced growth amounts, but we did indicate that we expected to see a meaningful increase in invoiced amounts this year, which is the leading indicator. What we said in our prepared remarks and in the Q&A after, so I feel fine saying it again here, is that we expect the noise of the transitions behind us.
We expect this year to be a year of execution and that what will happen is that we expect the invoiced amounts to grow meaningfully. The majority of that invoice growth will not translate into reported growth this year by nature of the way the subscription business works. A lot of that will be deferred. You should see growth in the deferred and growth in invoiced. As we move into fiscal 2027, that should then flip over and show much more meaningful growth in reported revenue and the EBITDA that's associated with that as we move into fiscal 2027.
[audio distortion]
That's right.
That's right. Yeah. In fact, there's not really a metric called economic EBITDA. If there was kind of a notion of economic EBITDA, it would be captured in the fact that the actual EBITDA that's being generated from these subscriptions now, because we are getting the cash and therefore the reported EBITDA is guaranteed, is kind of growing far ahead of the low 30s EBITDA that we expect to report this year.
Would you do anything differently on how you run about with this strategy change that this does with marketing?
Yeah. That's a good question. I've been asked that a lot. Believe me, I have thought a lot about that this year. If I'd have known that DOGE and then kind of the related—I mean, just stepping back for a second, this is a good business. It's a high-impact business. It's got a good brand. It is not like a SaaS business where the rip and replace costs are really high. You can delay what we do for a quarter or two, and your business is going to be okay, right? There is a big need. There is a big market.
I think if I'd have known that there was going to be the uncertainty that crept in related not just to DOGE, but some of the tariff uncertainty and how that, I mean, we've got some really, really large, our client list is marquee blue-chip clients that they themselves were trying to figure out middle of the year. Are we going to reshore all of our supply chains and spend billions of dollars doing that? Why don't we? There was a little bit of an environment there. If I'd have known that, I might have tried to do this in two stages and not one. Not being able to go back and do it different, I'm sure glad it's now all behind us. The organizational change and transformation is now done. We're now on and moving, and we have been for now three quarters.
That today feels good, apart from where the current share price and where the revenue came in last year.
How significant has the deferred? Probably since a long it needs a long-term buyback at this point, is that right? Then it'll go into the near-term as it's recognized over the year revenue? Is the cash flow, is it longer-term subscriptions that you've gone with?
Yeah. Yeah. Great question. There is a category of what we call unbilled deferred, which is long-term. Most of our clients only pay us one year at a time. I did not mention, I do not know if I mentioned this earlier. Of our subscriptions, 55% of the subscriptions representing about 62% of the subscription revenue is multi-year, meaning two years or longer. Years two and beyond show up in deferred revenue. We have not billed the client, and therefore we have not received the cash yet for those. They are contractually guaranteed. That is unbilled deferred. The near-term is the deferred. That is what is going to come in and be recognized over the next 12 months, right? If a client chose to prepay us for two years, then that would come in over the next two years. That is what deferred is.
Invoiced is obviously what we're invoicing right now.
I mean, what you're saying, what you're getting cost is it stabilized, or has it turned out material deferred and unbilled? That's giving you the confidence that, like, wow, this is where we're getting the returns coming.
Yeah. Let me not get too far out ahead of myself on just exactly pointing to that because we haven't disclosed that yet. I would say our confidence is coming from what we have shared is our confidence is coming from a couple of places. One, even in the year that we had last year, which was difficult for us. I should probably take a quick step back just for a second. Sorry to do this. When we split the salesforce apart, historically, our strength was more in the managing of existing accounts and trying to expand those than it was in hunting for brand new accounts. We separated, and we now have a team in North America of 44 people, and all they do is hunt. They're account executives. Of that 44, only 10 were incumbents. We hired the other 34 last November, December, January.
With that brand new salesforce who did not know our industry and did not know our product, we were able to actually grow the count of logos we sold last year in a more difficult environment over what we had sold the year before. They had not been here yet to fully ramp. Part of our confidence is just recognizing what that group has been doing, not yet fully ramped, not even having been here a full year yet. If we just kind of move them, the productivity assumption to what we expect to see, that is a source of confidence. A second source of confidence is on the retention side. While we had some clients that needed to downgrade the size of their subscription in a more difficult environment, the percentage of clients' logos that we retained stayed equal to what it had been in previous periods.
We still have the same base of clients against which to go now and expand in the future. The third is, as we've been moving this business to be more and more strategically positioned with buyers, we have this services component of the business. That's the coaching and the consulting and the delivery that we do. We used to attach about $0.50-ish in services to every dollar. That service attach rate is growing by virtue of the fact that clients are looking for more help to solve these problems. That is invoiced and recognized in the period. The combination of those things, as we look at that, we're saying we expect invoice growth to be meaningfully better this year than it was last year, which, by the way, last year declined.
Yeah.
Is it a set number on an annual basis, or is it percentage of revenue? What kind of things are you expanding into that might generate new revenue?
Yes. This slide doesn't really answer it. I don't know why I went there. Here's how the content works. We converted to a subscription business 10 years ago. Prior to being a subscription business, we invested 4.5% of prior year revenue every year into content. We made that decision because content's the lifeblood of this business. We said, "We don't ever want to pull the chicken switch when the revenue isn't there. We also don't want to get way out over our skis when things were even better." 4.5% was a standard. When we converted to a subscription business, both because we wanted to have more content to feed the subscription and we knew we needed to have a much better technology capability, we stepped across and started investing at an average of about 9.5% per year.
We have been doing that now for the last 10 years. We are investing today 9.5%. Some years it is 10%, but right in that zip code of prior year revenue into content and technology. Where those dollars go are into a couple of different categories. One, we are very fortunate in that in the industry that we are in, we have some of the largest, most well-known, most highest revenue grossing brands of all time. The 7 Habits of Highly Effective People has been a juggernaut for years. The Speed of Trust, The 4 Disciplines of Execution. Each of these is backed by a New York Times, Wall Street Journal bestselling book. We adapt these principles and frameworks. Some of these solutions have grossed a $1 billion dollars or more over the 40 years just on their own. It is kind of unheard of in this industry.
Part of it is keep refreshing on a regular cadence to make sure the principles in those products are relevant all the time. How you bring those to market, how you adapt them for a new generation, that requires some work. We'll go in every four or five years. We'll do an overhaul of each of those. That's where a portion of that 9.5% goes. The second portion goes into developing brand new solutions that we didn't have. For example, over the last eight months, our clients have been coming to us saying, "Do you have anything on AI?" I think if you don't say AI in at least every other sentence right now, you're not doing your job. As we listen to them, we're not AI- technology people. That's not our expertise.
What they were really asking for, and now you're starting to see this show up in all of the reporting, is that they recognize the same thing we're now all reading about, which is the lack of AI adoption is less a technical problem, and it's much more of a leadership and a human problem. There's a lot of fear around it. There's a lot of cultural upheaval around it inside organizations. Leaders don't quite know how to empower their people, how to get the tone just right. We built two solutions, and we launched them a week and a half ago. One called Leading with AI and the other called Working with AI. We're not teaching you what prompts to put into ChatGPT.
We're working on the cultural part of moving the organization and helping people navigate the change that's very real human tax around this that's holding back AI adoption. There's an example. We're bringing new things to market all the time that we think are relevant. The third area of investment is in technology, which increasingly ourselves is going into AI. How do we use AI to further enable the behavior change? We see that as a third leg of the stool. Historically, we've had great content, and we've had great professional services capability. We never actually got to stay engaged with somebody after we were done with them to kind of help coach and help them embed what they've learned. We see AI as a really great new way to do that where the AI can kind of stay behind.
It's been trained on all of our content, methodologies, etc., and can help continue to coach and be involved in that person to help them improve their performance over time. We're baking that into our solutions right now.
Can you modify retention a little bit for us? Just give us an idea of [audio distortion].
Yeah. In our education business, some retention metrics we disclose and some we do not. I will kind of talk about the ones we disclose, and I will talk directionally about the ones we do not. In our education business, we disclose that we have 85% school retention. Okay? It is actually quite high school retention in a K-12 environment with the budget pressures and everything that they are under. Leader in Me school starts up. Over time, it has been as high as 90%, and it has been as low as 84%, but it is right around 85% right now. In the enterprise space, there are two ways we look at retention. We look at the logo retention or the client retention number, and then we look kind of at the net revenue retention associated with revenue, neither of which we disclose explicitly.
Our client retention is just a little bit less there than what it is in education. Still relatively high. The revenue retention has historically been above 90%. This is not like 120% NRR business. It's not that kind of a business. It has been historically above 90%. I'll tell you, in this last year, it did dip below 90%, but historically it had been about 90%. That's net of the revenue you lose either from a client going away or a client contracting, offset by the amount you get in expansion.
Maintaining subscription if you're working with leadership companies, once you've passed two or three years of working with your content, I would assume that it's sort of like a throwaway, right? I shouldn't say it that way. It’s sort of a no-brainer. It costs me whatever it costs me. It's a tiny bit of my budget, and it's seemingly effective because I've been here for two or three years. Just keep going with it. I mean.
Yeah. Great. Let me talk about there's two types of buyers that we sell to in the enterprise space. One buyer tends to buy vertically, and one buyer buys horizontally. Let me explain what I mean. The leader buyer, so Paul as CEO or somebody who's running a division who's kind of got more of a general management function where they own both the strategy and the execution of that strategy, they buy this way. That sometimes looks a bit initiative-based. We're trying to undertake a sales transformation. We think that's going to take us a couple of years, and we'll be their partner on that. That's a situation where we'll have clients that would give us a 10/ 10 rating, but they're done with us, and now we got to kind of go win the next thing.
The horizontal buyer is human resources or L&D, where they're buying for a horizontal population. They're responsible for developing all first-level leaders in the company. Those kinds of engagements tend to go on forever. Procter & Gamble has been a client forever because the need never goes away to keep developing or the partner to develop all those new leaders. It does vary a little bit that way. The average duration of a client is multiple years. Even those that you lose, we have a category of clients we call win-back, where we will win them back. Our sales effort is set up to try to make sure that we move from being single-threaded to multi-threaded so that we avoid that risk.
That was one of the reasons for separating the salesforce is that we were asking the same salesperson to hunt for brand new, try to maintain existing relationships, and hunt for new relationships inside that existing account. It was too many things. Now that farmer salesperson, the hunting they do now is inside that existing account. We believe over the course of time that will help alleviate any of that kind of the vertical churn that you might get. Yeah. Great question. I have two minutes and 52 seconds left. It says.