UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended November 30, 2022 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission File Number: 001-11107 FRANKLIN COVEY CO. (Exact name of registrant as specified in its charter) | Utah | 87-0401551 | ...

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | |-------|-------|-------|-------|-------|-------|-------|-------|-------|-------|-------|-------| | | | 53.4 | 141.7 | 177.4 | 199.7 | | | | | 93.0 | 119.7 | | 39.3 | 48.1 | | | | | | 26.0 | 33.1 | 39.6 | | | Q1 FY 21 Q1 FY 22 Q1 FY 23 LTM Q1FY21 LTM Q1FY22 LTM Q1FY23 124.4 97.7 80.0 LTM Q1FY23 LTM Q1FY21 LTM Q1FY22 © FranklinCovey Co. All rights reserved. PROPRIETARY AND CONFIDENTIAL 41 Education Division Financial Summary LTM Q1 LTM ...

Franklin Covey Co (NYSE:FC) Q1 2023 Earnings Conference Call January 5, 2023 5:00 PM ET Company Participants Derek Hatch - Corporate Controller Paul Walker - Chief Executive Officer Steve Young - Chief Financial Officer Jen Colosimo - President, Enterprise Sean Covey - President, Education Conference Call Participants Alex Paris - Barrington Research Nehal Chokshi - Northland Capital Markets Dave Storms - Stonegate Operator Good day and thank you for standing by and welcome to the First Quarter 2023 Frankli ...

Financial Performance - Consolidated net sales for the fiscal year ended August 31, 2022, totaled $262.8 million[13] - Fiscal 2022 consolidated revenue grew 17% to $262.8 million compared to $224.2 million in fiscal 2021, driven by strong subscription sales[175] - Net income for fiscal 2022 was $18.4 million, or $1.27 per diluted share, compared to $13.6 million, or $0.96 per diluted share, in fiscal 2021[182] - Adjusted EBITDA increased 51% to $42.2 million in fiscal 2022, up from $28.0 million in fiscal 2021[182] - Cash flows from operating activities increased 13% to $52.3 million in fiscal 2022 compared to $46.2 million in the prior year[184] Client and Market Growth - The number of client partners increased from 214 on August 31, 2018, to 300 on August 31, 2022, reflecting a growth of approximately 40%[27] - The U.S. training industry is expected to grow by 10% over 2021, reaching an estimated size of $101.6 billion[30] - Education Division revenues rose 26% to $61.9 million, with a record addition of 739 new Leader in Me schools in the U.S. and Canada[172] - The number of new Leader in Me schools added in the U.S. and Canada reached 739, a 29% increase over fiscal 2021[206] Subscription Services - All Access Pass subscription sales increased 28% to $144.5 million in fiscal 2022, up from $112.5 million in fiscal 2021[171] - AAP subscription and related revenues grew 28% to $144.5 million in fiscal 2022, with annual revenue retention remaining above 90%[198] - The company plans to launch the new Impact Platform in October 2022, aiming to enhance its subscription services and technology integration[174] Workforce and Culture - The company has approximately 1,150 associates worldwide, with a focus on diversity, equity, and inclusion in its workforce[29][46] - The associate turnover rate in the United States and Canada was 17% from June 1, 2021, to May 31, 2022, which is considered reasonable for the industry[49] - In the 2022 Culture Survey, 86% of associates reported having at least one meaningful conversation with their manager in the past year[50] - The Mentorship Program has grown from 30 pairs of mentors and mentees to 86 pairs of participants[52] - The company emphasizes a culture of feedback, encouraging ongoing dialogue between leaders and associates[50] Operational Challenges - The company has faced significant volatility and uncertainty due to the ongoing COVID-19 pandemic, impacting operations and financial results[70] - Economic and political conditions significantly impact client budgets for training, with a prolonged downturn potentially reducing demand for services[76] - Global economic instability, including inflation and energy shortages, may continue to pressure the company's operating results and financial condition[75] - The company operates in a highly competitive training industry, which may affect its ability to sell offerings[72] - The training and consulting services industry is highly competitive, with larger competitors having superior resources, which may adversely affect the company's ability to deliver quality services[73] Compliance and Legal Risks - Cybersecurity risks are heightened due to the internet-based nature of subscription services, with potential breaches leading to significant legal and financial exposure[94] - Compliance with evolving data protection laws, such as GDPR, is essential, as non-compliance could result in substantial fines[99] - The PRC Personal Information Protection Law (PIPL) imposes fines up to RMB 50,000,000 or 5% of global annual turnover for noncompliance, which could significantly impact the company's operations in China[102] - The California Consumer Privacy Act (CCPA) and its amendments require companies to disclose data practices and allow consumers to opt out of data sales, with enforcement beginning on July 1, 2023[103] Financial Strategy and Capital - The company may need to raise additional capital through debt or equity offerings to support growth initiatives and respond to competitive pressures[115] - The company did not pay or declare dividends during the fiscal years ended August 31, 2022, or 2021, and anticipates retaining all available funds for liabilities and growth[150] - The company has repurchased 504,411 shares of its common stock for $20.5 million under a Board-approved repurchase plan[154] Global Operations - The company operates globally with sales and support associates in various locations, including wholly owned subsidiaries in multiple countries[21] - The company operates in 150 countries and territories, with a wide range of content delivery options including digital online learning and on-site training[168] - Global operations expose the company to complex risks, including currency exchange fluctuations and political instability, which may affect financial performance[127] - The uncertainty surrounding Brexit may lead to economic and legal challenges, impacting the company's operations and financial condition in the UK and EU markets[128]

Greatness Starts Here © FranklinCovey Co. All rights reserved. PROPRIETARY AND CONFIDENTIAL We transform organizations by building exceptional leaders, teams, and cultures that get results. FranklinCovey* Investor Update Fiscal Year & Q4 2022 Janita Anderson Strategic Partnerships, Education Division © FranklinCovey Co. All rights reserved. PROPRIETARY AND CONFIDENTIAL Forward-Looking Statements/Non-GAAP This presentation contains forward-looking statements within the meaning of the Private Securities Litig ...

Financial Data and Key Metrics - Revenue for fiscal 2022 increased by 17% to $262.8 million, with a 21% growth excluding the impact of China and Japan [7] - Subscription and subscription services revenue grew 29% in fiscal 2022, with All Access Pass revenue growing 28% and Leader in Me revenue growing 29% [8] - Gross margin for fiscal 2022 remained strong at 76.8%, with a gross margin of 75% in Q4 [11] - Adjusted EBITDA increased by 51% to $42.2 million in fiscal 2022, with a 26% increase in Q4 to $13.3 million [13] - Net cash provided by operating activities increased by 13% to $52.3 million for the year [13] Business Line Performance - North America Enterprise revenue grew 19% in fiscal 2022, with subscription revenue increasing 26% [22] - International direct offices in the UK, Ireland, Germany, Austria, Switzerland, and Australia saw revenue growth of 40% in fiscal 2022 [23] - Education division revenue grew 26% in fiscal 2022, with subscription revenue increasing 29% [26] Market Performance - Revenue in China and Japan declined by 16% in fiscal 2022 due to COVID-related lockdowns and restrictions [24] - International licensee partner revenue increased by 17% for the year, despite challenges in Eastern Europe [25] Company Strategy and Industry Competition - The company is focused on large, growing, and fragmented markets, with a total addressable market of $99 billion in Enterprise learning and $59 billion in Education [35] - The subscription business model is driving strong growth, with 77% of total business now coming from subscription and subscription services [48] - The company expects to accelerate revenue growth to mid-teens and high-teens in the coming years, driven by subscription revenue [55] Management Commentary on Operating Environment and Future Outlook - Management highlighted the importance of the subscription model in uncertain economic times, as it provides predictable and durable revenue [34] - The company expects adjusted EBITDA to grow to between $47 million and $49 million in fiscal 2023, with further growth to $57 million in fiscal 2024 and $67 million in fiscal 2025 [16][69] Other Important Information - The company repurchased 585,000 shares for $23.9 million in fiscal 2022 and ended the year with $75.5 million in liquidity [13] - The company launched the Franklin Covey Impact Platform, which combines content, coaching, and technology to drive measurable behavior change [57] Q&A Session Question: Impact Platform Rollout and Client Uptake - The Impact Platform was launched on October 18, 2022, and is receiving positive feedback from clients. It will be localized into core languages and rolled out further in the coming months [78] Question: Pricing Power with All Access Subscription - The company implemented annual price increases effective September 1, 2022, with the Impact Platform supporting the case for continued price increases [79][80] Question: Education Division and Stimulus Funds - The Education division saw strong growth, with 739 new schools added in fiscal 2022. Stimulus funds are helping the market, with less than 20% of the $200 billion allocated having been spent so far [84] Question: Multiyear Contracts for All Access Subscriptions - 46% of All Access Pass contracts are multiyear, representing 61% of subscription revenue. The company expects this trend to continue as clients recognize the long-term nature of the solutions provided [88][89] Question: Hiring Environment for Client Partners - The hiring environment has improved, with the company successfully hiring 30 new client partners in fiscal 2022 and planning to add 40 more in fiscal 2023 [94][95] Question: Capital Allocation and Share Repurchases - The company opportunistically repurchases shares based on market conditions, intrinsic value calculations, and internal factors. Share repurchases are expected to continue in fiscal 2023 [98][99] Question: M&A Strategy - The company is considering M&A opportunities to add capabilities, expand content areas, or accelerate customer growth, with a focus on buy versus build decisions [100][101]

Financial Performance - Consolidated sales for Q3 fiscal 2022 increased 13% or $7.4 million to $66.2 million compared to $58.7 million in the prior year[72] - All Access Pass (AAP) and related sales grew 32% in Q3 fiscal 2022 to $39.1 million[72] - Education Division revenues increased 21% due to higher consulting, coaching, and training days delivered[73] - International licensee revenues rose 9% over the prior year, with three of five international direct offices reporting improved sales[74] - Deferred subscription revenue increased 24% or $13.2 million to $68.5 million compared to the previous year[79] - Gross profit for Q3 fiscal 2022 increased 11% to $51.1 million, with a gross margin of 77.3%[80] - Operating income improved 91% to $5.9 million compared to $3.1 million in Q3 fiscal 2021[83] - Adjusted EBITDA for Q3 fiscal 2022 improved 27% to $10.9 million compared to $8.6 million in the prior year[83] - Cash flows from operating activities increased 28% to $39.5 million compared to $30.9 million in the first three quarters of fiscal 2021[84] Education Division Performance - Education Division sales grew by $2,540,000 (21.4%) to $14,439,000 for the quarter ended May 31, 2022, driven by increased consulting and training services[95] - Adjusted EBITDA for the Education Division increased by $755,000 (66.7%) to $1,887,000 for the quarter ended May 31, 2022[95] - Gross profit for the Education Division increased by $7,239,000 (41.3%) to $24,749,000 for the three quarters ended May 31, 2022[111] Direct Offices Segment - Direct Offices segment sales increased by $18,852,000 (16.4%) to $134,037,000 for the first three quarters of fiscal 2022, with U.S. and Canada offices growing by 19%[102] - SG&A expenses for the Direct Offices segment increased by $8,158,000 (11.4%) to $79,630,000 for the first three quarters of fiscal 2022[102] - Gross margin for the Direct Offices segment remained strong at 80.8%, slightly down from 80.9% in the prior year[104] Tax and Expenses - The effective income tax benefit rate for the quarter ended May 31, 2022, was approximately 29%, compared to 390% in the prior year[100] - Income tax provision for the three quarters ended May 31, 2022, was $0.9 million on pre-tax income of $13.8 million, resulting in an effective tax rate of approximately 7%[117] - SG&A expenses increased due to higher associate costs, additional commission expenses, and increased salaries compared to the prior year[114] - Depreciation expense is expected to total approximately $5.2 million in fiscal 2022, reflecting a decrease from the previous year[98] - Depreciation expense decreased by $1.2 million in the first three quarters of fiscal 2022 due to full depreciation of certain assets and reduced capital expenditures[115] - Amortization expense increased by $0.6 million primarily due to the acquisition of Strive Talent, Inc.[116] Cash and Financing - Cash and cash equivalents totaled $52.1 million as of May 31, 2022, with no borrowings on the $15.0 million revolving credit facility[119] - Cash used for investing activities totaled $3.5 million, primarily for purchases of property and equipment and investments in offerings[124] - Net cash used for financing activities totaled $30.7 million, including $23.9 million for common stock purchases[127] - Anticipated capital spending for curriculum development is expected to total $4.0 million during fiscal 2022[126] - Company expects to maintain operations for at least the upcoming 12 months with existing cash and cash flows from operating activities[131] Interest Rates and Market Risk - The effective interest rate on the company's term loans payable and line of credit facility was 2.7% as of May 31, 2022[141] - A 1% increase in the effective interest rate on term loans outstanding at May 31, 2022 would result in an additional interest expense of $0.1 million over the next 12 months[141] - The financing obligation has a fixed interest rate of 7.7%[141] - The company is prepared for the eventual transition away from LIBOR pricing as outlined in the 2019 Credit Agreement[142] - There have been no material changes in market risk disclosures since the previous annual report[143]

Financial Data and Key Metrics Changes - Revenue growth for Q3 2022 was strong, increasing by 13%, and 19% when excluding the impact of COVID-related lockdowns in China and Japan [7][18] - Subscription and subscription services revenue grew 31% in Q3 2022, with All Access Pass revenue reaching $136.2 million, a growth of 32% [8][39] - Adjusted EBITDA increased by 27% to $10.9 million for the quarter, with year-to-date adjusted EBITDA growth of 66% [11][15] Business Line Data and Key Metrics Changes - North America Enterprise operations saw revenue growth of 20% in Q3, with subscription services revenue growing 27% [19][20] - Education business revenue grew 21% in Q3 and 33% year-to-date, with subscription services revenue growing 28% [21][22] - International operations were impacted by COVID, with revenue in China and Japan declining 46% in Q3, but showing signs of recovery [23][24] Market Data and Key Metrics Changes - Deferred revenue increased by 21% to $116.5 million, indicating strong future revenue visibility [9][40] - The percentage of multiyear contracts for All Access Pass increased to 42%, with 58% of total subscription revenue coming from these contracts [9][40] Company Strategy and Development Direction - The company is focused on expanding its presence in large, fragmented markets, including Enterprise learning and Education, which are expected to grow significantly [27][30] - The strength of the subscription model is a key driver for growth, providing predictability and durability in revenue [37][39] - Investments in technology and sales force are ongoing to support growth, with plans to increase client partners from 30 to 40 in fiscal 2023 [48][49] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in navigating potential economic downturns, citing the enduring nature of the problems they help clients solve [76][78] - The company expects to increase revenue growth guidance to the low teens for fiscal 2023 and beyond, driven by strong subscription growth [13][61] - Adjusted EBITDA guidance for fiscal 2022 has been raised to between $40 million and $41.5 million, reflecting strong performance [15][57] Other Important Information - The company returned $20.3 million to shareholders through share repurchases, ending the quarter with $67.1 million in liquidity [12][26] - The company is actively exploring acquisition opportunities to enhance capabilities and expand its service offerings [71][73] Q&A Session Summary Question: Can you elaborate on client partner hirings and the shift from net 30 to net 40? - Management confirmed that the support staff is in place to support the increase to net 40 client partners in fiscal 2023, with ambitions to go beyond that in the following years [64][67] Question: What is the status of All Access Pass implementation in China and Japan? - Significant progress has been made in Japan, with 45% of their business being All Access Pass related, while China is also seeing growth despite recent downturns due to COVID restrictions [68][69] Question: Can you provide an update on the acquisition landscape? - The company is focused on acquiring capabilities and content that complement their existing offerings, with ongoing discussions about potential targets [70][72] Question: How is the company preparing for potential macroeconomic challenges? - Management expressed confidence in their preparedness, highlighting the importance of their subscription model and strong cash flow as key advantages during economic uncertainty [76][80]

Financial Performance - Consolidated sales for Q2 fiscal 2022 increased 18% to $56.6 million, up from $48.2 million in Q2 fiscal 2021[66] - All Access Pass and related sales grew 29% to $32.0 million in Q2 fiscal 2022[66] - International licensee revenues increased 7% year-over-year, reflecting improved economic conditions[67] - Education Division revenues rose 31% due to increased consulting, coaching, and training days[68] - Deferred subscription revenue increased 20% to $70.4 million compared to the previous year[73] - Gross profit for Q2 fiscal 2022 increased 18% to $44.1 million, with a gross margin of 77.9%[74] - Operating income improved 317% to $3.5 million, while net income reached $1.9 million compared to a net loss in the prior year[76] - Cash flows from operating activities increased to $23.2 million for the first two quarters of fiscal 2022[77] Segment Performance - Direct Office segment revenue increased 16% to $41.5 million, driven by strong performance in the U.S. and Canada[79] - International licensee sales for the quarter ended February 28, 2022, increased to $2,588,000, a 6.6% increase from $2,429,000 in the prior year[85] - Gross profit for international licensees rose to $2,304,000, representing a gross margin of 89.0%, up from 86.5% in the previous year[85][86] - Education Division sales for the quarter ended February 28, 2022, grew to $11,066,000, a 30.5% increase from $8,478,000 in the prior year[88] - Direct Offices segment sales for the first two quarters of fiscal 2022 reached $86,621,000, a 19.5% increase from $72,481,000 in the same period last year[95] - International licensee revenues for the first half of fiscal 2022 increased to $5,586,000, a 11.1% increase from $5,026,000 in the prior year[100] - Education Division gross profit for the two quarters ended February 28, 2022, was $14,959,000, with a gross margin of 65.7%, up from 58.4% in the prior year[103] - Adjusted EBITDA for the Education Division improved to $(324,000), a significant improvement from $(858,000) in the prior year[88] - Adjusted EBITDA for the Direct Offices segment increased to $18,686,000, up from $12,827,000 in the prior year, reflecting a strong performance[95] Expenses and Taxation - SG&A expenses for the Direct Offices segment increased to $51,464,000, reflecting higher associate costs and increased commissions due to higher sales[98] - The effective income tax rate for the quarter ended February 28, 2022, was approximately 40%, a significant decrease from 114% in the prior year[93] - SG&A expenses increased due to higher associate costs, including additional commission expenses and increased salaries compared to the prior year[106] - Income tax provision for the two quarters ended February 28, 2022, was $2.5 million on pre-tax income of $8.2 million, resulting in an effective tax rate of 31%[109] Cash Flow and Capital Expenditures - Cash and cash equivalents totaled $61.1 million as of February 28, 2022, with no borrowings on the $15.0 million revolving credit facility[111] - Cash provided by operating activities increased to $23.2 million in the first half of fiscal 2022, compared to $21.9 million in the same period of fiscal 2021[115] - Cash used for investing activities totaled $2.0 million in the first half of fiscal 2022, primarily for purchases of property and equipment[116] - Capital spending for curriculum development is expected to total $5.0 million during fiscal 2022[118] - Net cash used for financing activities totaled $7.4 million, including $3.9 million for principal payments on term loans[119] Interest Rates and Financial Obligations - The effective interest rate on term loans payable and the line of credit facility was 2.4% as of February 28, 2022[134] - A 1% increase in the effective interest rate on term loans would result in an additional $0.1 million of interest expense over the next 12 months[134] - The financing obligation has a fixed interest rate of 7.7%[134] - Interest rate sensitivity is primarily influenced by amounts borrowed on term loans and the revolving line of credit facility[134] - The company has long-term obligations primarily consisting of term loans, a long-term lease agreement, and contingent consideration from acquisitions[134] Market Conditions and Future Outlook - The company anticipates ongoing governmental mandates will adversely impact operations in China and Japan in the upcoming quarters[71] - The market price of the common stock has been volatile and may continue to be affected by factors unrelated to performance[132] - The company has low market capitalization, which may impact stock price due to a lack of analyst coverage and fewer potential investors[132] - Forward-looking statements are based on management's expectations and may differ materially from actual future performance[133] - There have been no material changes from the information previously reported in the Annual Report for the fiscal year ended August 31, 2021[135]

Financial Data and Key Metrics Changes - Subscription and subscription services revenue grew 31% in Q2 and 32% year-to-date, driving overall company revenue growth of 18% in Q2 and 22% year-to-date [6][27] - Deferred revenue, both billed and unbilled, grew 24%, with gross margin reaching 77.9% for the quarter, an increase of 41 basis points year-over-year [7][30] - Adjusted EBITDA for Q2 increased 57% to $8 million and 103% to $18 million year-to-date, with net cash flow from operating activities increasing to $23.2 million [9][38] Business Line Data and Key Metrics Changes - The All Access Pass subscription and subscription services revenue grew 29% to $32 million in Q2 and 28% to $65.2 million year-to-date [26] - The average All Access Pass contract value in the US-Canada business increased from $31,000 in fiscal 2016 to $46,000 [21] - The annual revenue retention rate for All Access Pass has exceeded 90% every quarter since its inception [22] Market Data and Key Metrics Changes - The balance of deferred revenue grew to $70.4 million, a 20% increase compared to the same period last year, with unbilled deferred revenue growing 31% to $49 million [30] - The Education Division's Leader in Me subscription offering is in over 5,000 schools worldwide, achieving greater than 90% revenue retention [41] Company Strategy and Development Direction - The company aims to transition virtually all sales to subscription and subscription services within the next three years, expecting revenue growth to move from high single digits to low double digits and eventually to mid-teens and beyond [43][45] - The strategy includes significant investments in content, technology, and client partner hiring to enhance growth and client engagement [60][75] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the strength of the All Access Pass subscription and subscription services sales, which are expected to drive future revenue recognition from deferred revenue [50] - The company anticipates challenges in China and Japan due to pandemic-related issues but remains optimistic about growth in North America and the Education Division [52][56] Other Important Information - The company has raised its full-year guidance for FY 2022, expecting adjusted EBITDA to be between $38 million and $39 million, reflecting a 38% increase compared to the previous year [48] - The company has a strong liquidity position with $76.1 million in liquidity and no net debt, allowing for continued investments and potential share repurchases [38][95] Q&A Session Summary Question: Update on client partner hiring - Management indicated plans to hire 30 new client partners this year, with a focus on ramping up hiring in Q4 [62][64] Question: Outlook for fiscal years 2023 and 2024 - Management remains confident in achieving adjusted EBITDA targets of $45 million for FY 2023 and $55 million for FY 2024, with updates expected after Q4 results [57][68] Question: Update on Strive rollout - The Strive platform is on track for a full launch at the start of the new fiscal year, following successful pilot testing [73][74] Question: Cash buildup on the balance sheet - Management discussed using excess cash for business growth, acquisitions, and share repurchases, maintaining a focus on strategic investments [93][95] Question: Sustainability of service attach rate to All Access Pass - Management noted that the attach rate is currently in the high-50s and believes there is still room for growth, driven by client needs for higher-level services [84][88]