FC - Franklin Covey Co.

Operator: Thank you for standing by. Welcome to the Franklin Covey Third Quarter 26 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during this session, you will need to press star-11 on your telephone. If your question has been answered and you would like to remove yourself from the queue, simply press star-11 again. As a reminder, today's program is being recorded. And now I would like to introduce your host for today's program, Boyd Roberts, head of investor relations. Please go ahead, sir.
Boyd Roberts: Thank you, and good afternoon, everyone. Thank you for joining us today on Franklin Covey's third quarter 26 Earnings Call. We appreciate having the opportunity to connect with you. Before we begin, please remember that today's remarks contain forward looking statements as defined by the Private Securities Litigation Reform Act of 2 thousand including without limitation statements that may predict, forecast, indicate, or imply future results, performance, or achievements and may contain words such as believe, anticipate, expect, estimate, project, or words or phrases of similar meaning. These statements reflect management's current judgment and analysis, and are subject to a variety of risks, and uncertainties that could cause actual results to differ materially from current expectations. Including but not limited to risks relating to macroeconomic conditions, tariffs, and other risk factors described in our most recent Form 10-Ks. And other filings made with the SEC. We undertake no obligation to update or revise any forward looking statements. Except as required by law. Now with that out of the way, I would like to turn it over to Mr. Paul S. Walker, our Chief Executive Officer.
Paul S. Walker: Thank you, Boyd. Good afternoon, everyone, and thank you for joining us today. it is great to be with you. And to have the opportunity to share our results for the third quarter and provide an update on the business and our outlook for the remainder of the year. There are 2 themes I would like to address today. The first is that the company's strategic strength and resiliency continues to be reflected in the company's performance. Including in this year's third quarter results and in our expected results for the year. Importantly, the impact of this strategic strength and resilience is also establishing the foundation for accelerated growth in fiscal 27. The second theme is that the strategic importance of the opportunities and challenges we help our clients address, coupled with our focused investments in high impact solutions and go to market activities, are further strengthening our strategic positioning and establishing the foundation for accelerated growth. I would like to briefly touch on each of these themes. Before I do, I want to address our full year guidance. Q3 was our third consecutive quarter this year, finishing in line with our expectations. And the underlying business is performing as we expected. We are revising our revenue guidance to allow for a timing shift in $2 million of previously invoiced services for which the delivery shifted from this year to next year for a contract in Enterprise North America, a $2 million new school contract with an existing and ongoing statewide education client, that received gubernatorial budget reductions that we expect to return next year and the approximately $2 million impact of the challenging international environment due to ongoing geopolitical tensions. Our new expectation is that revenue will be between $260 million and $267 million We are maintaining our prior adjusted EBITDA guidance. Within a narrower range of $28 million to $31 million wanted to acknowledge this up front so it is not a distraction as I walk you through what is actually happening in the business. And the many areas of strength we experienced in the third quarter. So to our themes. The first theme, again, is that the company's strength and resiliency continues to be reflected in the company's performance. Including, importantly, Q3 being our third consecutive quarter where we finished in line with our expectations and in our expected results for the year and this, even in the midst of a somewhat turbulent external environment. The importance of the challenges and opportunities we help organizations address and the success of our solutions in addressing them is reflected by both first, the high levels of retention expansion, and purchases of services we are achieving with existing clients. And second, our increasing revenue from winning new clients across both our enterprise and education businesses. I would like to briefly address how this strategic strength played out in both divisions. In the enterprise division in North America, which accounts for approximately 80% of our total enterprise division revenue, Invoice amounts are up 6% year-to-date, and we are up 4% in the third quarter. Growing for a third consecutive quarter. Revenue retention is up meaningfully year-to-date and was particularly strong in Q3. Driven by both further increases in client expansion and continued strong logo retention. The percent of subscription contracts whose term is for multiyear periods continues to be high at 59%. And the percent of our subscription revenue contracted for multiyear periods was 60%. Year-to-date, services booking pace at the end of Q3 was up more than 25% Compared to the prior year. And the amount of our services already sold and contracted year to date this year which are scheduled for delivery in fiscal 27, is meaningfully higher than at this point last year. Our balance of deferred revenue at the end of third quarter was $58 million versus $49 million in the prior year. Or an increase of 18% compared to this time last year establishing a strong foundation for growth in reported sales next year. Reflecting this strong performance, our invoiced amounts and reported revenue for the third quarter in North America came in as we had expected and despite somewhat lower than expected revenue in Enterprise International, which I mentioned previously, again, primarily reflecting weakness in our direct office operations in China and some impact from the conflict in Iran, on the economies of several of our international operations. Our total enterprise reported and invoiced revenue for the quarter was in line with our expectations for the quarter, and year to date. This underlying strength and momentum of our results particularly in enterprise North America, is exactly what we designed to go to market transformation to produce. We are achieving the traction we would expected, and we results in Enterprise North America for the year to be strong. Growth in invoice amounts, coupled with significant service bookings already contracted for fiscal 27 delivery gives us high confidence in the year ahead. Turning to our education division. Our school retention rate at both the district and school levels remains very strong year to date, and our subscription revenue was up 11% in the third quarter. And is up 14% year-to-date. This, together with our significant subscription base, our pace of new school contracting, and the size of our advanced services bookings, all provide us with confidence that the education division will finish the year strong. As I indicated previously last quarter, we mentioned that we would won our third statewide commitment to Leader in Me, with a Southeastern state that has made significant Leader in Me commitments in each of the last 3 years. At the last minute, the governor held up the budget approval for health and human services and education line items. Resulting in delayed funding for this year's allotment of new schools. We believe funds will be restored in the next fiscal budget, and we are working directly with impacted schools to proceed with as many as possible in the interim. This creates up to $2 million of pressure on the education revenue this year. However, what it does not reflect is any weakness in school and district demand for Leader in Me. Our other 2 fully funded state commitments are on track for a strong year, and our education business is expected to finish the year strong. We continue to expect that our strong momentum to close the year particularly in Enterprise North America, with deferred revenue up 18% year-over-year is setting the stage for strong reported revenue growth in fiscal 27. The second theme I would like to touch on is that, the strategic importance of the opportunities and challenges we help our clients address. Coupled with our focused investments in high impact solutions, and go-to-market activities, are strengthening our strategic position and are establishing the foundation for accelerated growth. 90 days ago, I spoke about 3 dynamics positioning Franklin Covey well in an AI driven environment. First, that AI is increasing the premium on human leadership execution. Second, that our model is built around behavior change and collective action tied to measurable outcomes. Not simply content or software delivery. And third, that we have significant room to grow within our existing client base, these convictions have only strengthened. As AI creates extraordinary new possibilities, leaders are discovering that the path between AI investment and achieving meaningful results runs directly through the quality of their leaders, cultures, and execution systems. This is a behavior change and collective action challenge and we see it not only with AI, but across the full range of leadership and performance challenges organizations face every day. Our role is to help organizations strengthen the people side of execution clarifying priorities, aligning teams, building capabilities, and creating accountability systems that translate strategy into measurable results. Having completed our go to market transformation in Enterprise North America, and having already seen continued progress in achieving the kinds of results we would expected, now importing those learnings into our international business. The model is working, and we are scaling it. Fiscal 2026 is 1 of our biggest solution launch years. And we will build on that momentum in fiscal 27, launching new solutions across leadership, execution, and AI transformation. While embedding AI enabled coaching and execution tools into our platforms to even further support behavior change and collective action. With this foundation in place, we are well positioned for growth in fiscal 27 and beyond. The numbers support this confidence. Deferred revenue for the company is up 7% year-over-year to $96 million. Service is already contracted and scheduled for fiscal 27 delivery, are meaningfully ahead of where they were at this point last year, and subscription and contractually committed invoiced amounts grew 17% in the third quarter alone. The work we have done this year is translating directly into the revenue and adjusted EBITDA growth we expect to report in fiscal 2027. I would now like to turn the time to Jesse to go into a more detail on our third quarter.
Jessica G. Betjemann: Thanks, Paul, and good afternoon, everyone. Strength in Covey continued to see strong demand for our solutions in the third quarter. We are pleased with our third quarter results, particularly in Enterprise North America, and despite an unexpected state funding challenge in education that Paul discussed, we reported growth in education for the quarter. As we have stated previously, fiscal 2026 is a year of execution where growth in invoiced amounts is expected to set us up for accelerated reported growth in fiscal 27. In my remarks today, I will start by providing some details of our third quarter financial performance, then I will turn to our balance sheet and capital allocation priorities, And finally, I will provide additional context around our revised fiscal year 2020 financial guidance. Total third quarter reported revenue was $67.8 million Revenue grew 1% over the prior year with both the 2%. This was partially offset by the $500 thousand decline in corporate revenue we have reported each quarter this year so far, as we no longer recognize sublease revenue since exiting our previous headquarters campus in June of last year. Foreign exchange rates had $300 thousand favorable impact on our consolidated revenue in the quarter. Both the Enterprise and Education divisions had invoiced amounts growth this quarter of 1%, resulting in a 7% increase in consolidated deferred revenue at the end of the third quarter. Establishing the foundation for accelerated growth in reported revenue in fiscal year 27. A summary of our consolidated financial results is on slide 3 in the earnings presentation. We are especially pleased that consolidated subscription and committed invoiced amounts for the quarter was up 17% to $37 million Building upon the 12% growth we saw in the first half of the year, driven by the strong growth in Enterprise North America. Consolidated subscription and subscription services revenue recognized for the third quarter was $57.5 million was relatively even with that achieved in last year's third quarter. The foundation for increased future growth remains solid, and is evidenced by the 7% year-over-year increase in our consolidated deferred revenue balance of $96 million which will be recognized as reported revenue in the coming quarters. The amount of unbilled deferred revenue contract for the third quarter was $7.3 million, even with last year, with a total balance of $61.1 million, down 1% over the prior year. This $61.1 million will convert to invoiced amounts and deferred revenue in the future. Gross margin for the third quarter was 73.9%, compared to 76.5% in the prior year. And decreased primarily due to increased delivery costs for services a shift in mix of services delivered and products sold during the quarter, and increased capitalized curriculum amortization expense. Operating, selling, general, and administrative expenses for the third quarter was $41.8 million, a level 5% lower, than the $44 million in the prior year. Reflecting reduced associate costs and other cost reduction efforts taken this year. Adjusted EBITDA for the third quarter was $8.3 million, an increase of 14% or $1 million compared to last year's third quarter. Reflecting revenue growth and the lower SG&A expenses I just mentioned. Foreign exchange rates had an immaterial impact on our adjusted EBITDA in the quarter. During the third quarter, we continued to streamline our business in certain areas of our operations. We incurred $700 thousand of expense for this restructuring activity, which consisted primarily of severance and related costs. We recognized net income of $3.1 million compared to a net loss of $1.4 million in the prior year reflecting a $4 million decrease in restructuring costs, a $700 thousand decrease in share based compensation expense, and the lower operating SG&A expenses I previously mentioned. While we continue to execute on the long term restructuring plan initiated in the second quarter of this year, our restructuring activities were significantly less than in the third quarter of the prior year. Cash flows from operating activities for the first 3 quarters of fiscal 26 decreased 8% to $17.5 million primarily due to lower operating income and unfavorable changes in working capital compared with the first 3 quarters of fiscal 25. Free cash flow for the third quarter was a negative $1 million compared with a positive $2.8 million of cash generated last year. With higher operating income in the quarter which was more than offset by unfavorable changes in working capital largely due to a $10 million increase in deferred revenue over the prior year. I will turn now to a discussion of our business division. For the third quarter of fiscal 26, our Enterprise division generated 71% of the company's overall revenue. With the Education Division generating 28% of the company's revenue. Third quarter Enterprise Division invoiced amounts grew 1% to $46.5 million and subscription and committed services invoiced amounts grew 18% to $27.8 million Third quarter Enterprise Division reported revenue was $48.1 million, an amount 2% higher than the $47.3 million reported in the prior year. As shown on slide 4, North American segment invoiced amounts grew 4% this quarter to $36.7 million We are encouraged by the continued progress year to date and this quarter in invoiced amounts. Which reflects positive momentum coming from our investment to transform our Enterprise North America go to market organization and we expect this to translate into increased reported revenue in future quarters. In the third quarter, approximately $6.6 million in invoiced amounts was for contractually committed predefined services. And while we continue to recognize the revenue upon delivery, because these services have been contractually committed upfront, any on these days are guaranteed and would be recognized at the end of the contract term. If not delivered during the term. On slide 10 in the appendix to our earnings presentation, our roll forward analysis of deferred revenue includes both the subscription and committed services amounts. With the timing for revenue recognition for committed services depending on the delivery schedule of our clients. The North America segment's reported revenue of $38 million accounted for 79% of our Division sales in the third quarter of fiscal 26 and grew 3% over the prior year, primarily due to higher services delivered. Including those that were contractually committed in prior periods. Adjusted EBITDA for the North America segment increased $1.5 million to $7.7 million for the third quarter, compared with $6.2 million last year. Primarily due to lower SG&A costs resulting from the restructuring activities in recent quarters. Our balance of billed deferred revenue in North America was $58 million at the end of the third quarter. An increase of 18% from the prior year. And unbilled deferred revenue was $56 million, a decrease of 1% from the prior year. Importantly, the number of North America's all access passes contracted for multi year periods continue to be high at 59% in the third quarter. And the contracted amount represented by multiyear contracts was 60%. As shown on slide 5, third quarter revenue from our Enterprise International segment which is the combination of our international licensee revenue and our international direct office revenue, $10.1 million This accounts for 21% of our total Enterprise division revenue and represented a slight decline compared to the prior year's $10.2 million License fee revenue in the third quarter increased 3% over the prior year. But was offset by lower revenues in our China, Japan and United Kingdom direct offices. Our offices in France and Australia each grew compared with the third quarter of fiscal 25. Our China operations continue to be adversely by ongoing trade tensions and broader macroeconomic uncertainty. And excluding China, the International segment achieved growth compared to the prior year. Adjusted EBITDA in the third quarter of 26 for the International segment was $2.1 million, a 25% increase compared to $1.7 million in the prior year. Driven by a reduction in SG&A expenses. Turning now to our Education division. As shown on slide 6, revenue in the third quarter increased 2% to $19 million driven primarily by an 11% increase subscription revenue partially offset by lower material sales associated with the statewide initiative that did not receive funding this year for new schools. And also not holding any symposium events in the quarter compared to the prior year. In the third quarter, we had 200 training and coaching days delivered compared to last year, and 700 more year to date. As Paul described, there was a Southeastern statewide initiative to fund new schools that we anticipated launching in the quarter that did not come through because of a last minute gubernatorial budget cut targeting health and human services and education services. The financial impact of this budget cut reduced invoiced amounts approximately $2 million Net revenue approximately $1 million and adjusted EBITDA approximately $1 million from our previous expectations this quarter. This further impacts our fiscal year results by approximately $6 million in invoiced amounts dollars 2 million in net revenue, and $2 million in adjusted EBITDA. Compared to our previous expectations. However, we continue to be in active discussions with individual schools that would like to proceed with launching Leader in Me this year even without the state funding. And that opportunity is included within the high end of our of our revised guidance range. We believe that these education funds will be restored in the next state budget cycle. Which should support growth in our next fiscal year. Despite the impact of the large statewide initiative budget cut, invoiced amounts in the third quarter of $15.1 million increased 1% from the prior year. And subscription invoiced amounts grew 14% to $9.3 million Education subscription revenue increased 11% in the third quarter to $13.1 million compared with $11.8 million in the prior year. Adjusted EBITDA for the Education Division in the third quarter decreased $400 thousand to $1.7 million due to lower gross margin primarily driven by the timing of fixed costs for coaching services, and product mix. And increased SG&A expenses primarily due to increased comp commission on previously deferred revenue and increased associate expenses. Education's balance of billed deferred revenue decreased 6% to $32.2 million as a result of the strong increase in the number of days associated with Leader on Me subscriptions that were delivered in the quarter. With the unfortunate timing impact of the statewide initiative, we currently anticipate education invoiced amounts to slightly decline for the year as growth in the fourth quarter will be lower than previously expected. While net revenue should continue to grow, albeit at a lower rate than expected, due to the 13% increase in deferred revenue last year, and continued growth in subscription revenue and coaching days. I would now like to spend a few minutes discussing our balance sheet and reiterating our capital allocation priorities. We continue to pursue a balanced capital allocation strategy focused on 3 primary areas that are aligned with our strategic goals: First, maintaining adequate liquidity and flexibility. Our total liquidity remains strong at over $74 million at the end of the third quarter. With $12 million cash on hand compared with the company's $62.5 million credit facility which is fully available. Second, investing for growth. We will continue to invest in strategic opportunities to drive improved market positioning, accelerated profitable growth and financial value. Such as our continued investments in product innovation, business transformation initiatives and opportunistic acquisitions when available. And finally, continuing to return capital to shareholders as appropriate. As a reminder, year to date, the company has purchased nearly 1.6 million shares of its stock for $28.1 million During the last 12 quarters, the company has used 120% of free cash flow to buy back shares. We have a $50 million share repurchase authorization from the Board of Directors. With $20 million remaining after the 2 10b5-1 plans we had in place have been completed. In the near term, we plan to rebuild the base of our cash on hand as we generate cash and will evaluate opportunistic share buybacks in the future. We remain committed to being disciplined stewards of capital while staying focused on driving long term value creation. Now turning to our revised guidance for fiscal 26, as shown on slide 7. As Paul walked through, and I will do again now, our revised revenue projections reflect a timing shift in $2 million of previously committed invoiced services for which the delivery shifted from this year to next for a contract in Enterprise North America. We also took into account the $2 million for new school contracts with a statewide education client that received gubernatorial budget reductions that we expect to return next year and approximately $2 million and lower year to date and forecasted revenue for Enterprise International due to ongoing geopolitical challenges. These factors, combined with a disciplined view of the variability of risks that could occur as we close the year, led us to revise our revenue guidance range to $260 million to $267 million Despite the revision of our revenue projections, we have maintained our prior adjusted EBITDA guidance within a narrower range of $28 million to $31 million reflecting the effectiveness of cost reduction measures implemented throughout the year. With solid growth in invoiced amounts for Enterprise North America this year, and our transformation investments behind us, we believe the company will deliver net revenue EBITDA and free cash flow growth in fiscal 27 and thereafter. Grounded in strong client retention, continued demand for our services, and the resilience of our business model, we remain fully committed to creating long term value for our shareholders and clients. Before I pass it back to Paul, I would like to thank the entire Franklin Covey team for their hard work and dedication to our business, and for providing unparalleled service to our clients. Paul, I now turn it back to you.
Paul S. Walker: Jesse, thanks for taking us through that, and we would now like to invite the operator to open the line for questions.
Operator: Certainly. And our first question for today comes from the line of Alexander Paris from Barrington Research. Your question, please.
Paul S. Walker: Hi, Alexander.
Alex Paris: Hi. Thank you. How are you doing, Paul, and everyone else?
Paul S. Walker: Good afternoon.
Alex Paris: Got a couple of questions, starting with the macro environment. In, you know, in the first half, we noticed both positives and negatives better than a year ago. Clients have adjusted. Feels a little bit more stable. But we have had a couple of issues as the on this call. You know, the timing shift for the large enterprise contract, the education, gubernatorial, budget cutback, and the challenging international environment. If you kind of peeled away the timing shift for the large enterprise client and, the education reduction. Can you talk a little bit about the underlying strength of the various businesses?
Paul S. Walker: Yeah. Yeah. You bet. May maybe just as I as I peel those 2 away for a second, maybe just to comment on those 2 really quickly. So the large the large contract is a contract we actually won in Q1 of this year, and it is a combination of a very nice all access pass contract with a large number of services. And this is a actually, a 3-year contract for us. And the client has paid for all of your 1 in the majority of year 2 already. We have invoiced for that. And along with that is the scheduling of a number of contracted committed services. And as the years move forward, they have delivered quite a few services against that contract and what we thought would be delivered but there is the balance of what we thought would be delivered here towards the end of this year. Some of those are shifting into early next year and throughout next year. And so that is this is business we have won, business that is contracted, largely business we have already invoiced for. And then paid for, and it is just the timing of when the client will deliver. And so that is that piece in enterprise. So now to connect that to your question, we are not seeing really enterprise North America a change right now in that the larger environment; it is just isolated to the timing of that of the delivery of that 1 contract. In education, I would say it is a very similar story It was a bit of a surprise to us in the 11th hour. That the funds which had been approved by the state legislature when the governor went to sign off, he pulled a large amount funds back, and we were wrapped up in that. We do expect that we will get those back next year, and we are working with those schools to try to even get some number of them to begin with us here in the quarter because they are ready to go. They were waiting and ready to go. As they kick off their new school year in August. And so those, I would not really connect to the environment at all, really. it is just isolated to 2 contracts. Where we are seeing a little bit of environmental impact is in our international business. Certain of our licensee partners our largest licensee partner, for example, is actually in The Middle East. it is in they are in Dubai, and so it is been a challenging situation for them there. That we expect to abate. We do not we do not we think that is more timing related to some of the geopolitical things that are going on and not necessarily a reflection of the underlying strength of that business. And then and then sorry. Yeah. Thanks, Jesse. And then China is that is that has continued to be a problem. And what we thought this year was we were kind of at the bottom. We were going to be even a little lower than that this year in China. Gotcha. But the larger and the mass environment, it really has not changed at all. Do not we are not seeing a change there from what we reported last quarter or the quarter before. Gotcha.
Alex Paris: And then, let's talk a minute about the education division. Because this fourth quarter is a big quarter for education. So, again, setting aside the large contract, the gubernatorial change. Maybe just get a little update on progress there in terms of net new schools and school retention and so on?
Paul S. Walker: I have got Sean Covey here. Sean, do you want to come in?
Michael Sean Merrill Covey: Sure. Yeah. How's it going, Alexander?
Alex Paris: Good. How are you, Sean?
Michael Sean Merrill Covey: Yeah. Yeah. Good. Thank you. Good. Yeah. So a few things about education. So as you know, we just talked about the deal that was delayed. We would won this the last 3 years. Expected it this year, and we expect it to come back. But we feel really good about the fourth quarter and about the year as a whole. Pushing that aside, As Paul shared, we are working to get back some of these schools. We will not get all of them, but we can get a few of them back. With their own funding mechanisms. A retention is, you know, is very key because we have got a lot of retention revenue. And it is running right now, 1% to 2% higher than last year. We already have, you know, really good school retention, and so that is a really good sign of strength in the business. Our new school growth we expected it to be higher than last year with the Georgia deal. Without it, it is going to be harder to get there, but it will be comparable. To last year. We are also finding great success with charter schools and afterschools. These are adjacent markets. They are large. there is a lot of money behind them. And we are able to make up some ground with our after school you know, initiatives. They are helping a lot. And then finally, I would just state that we have got you know, other state deals, 2 other state deals that are coming through. We have got large district deals. And sometimes these large district deals are as big. as state deals. And those are doing really well. And then also, what we offer is needed today more than ever before. Even in the world of AI, so much of what we do is going to be even more important teaching these leadership durable skills, initiative, collaboration, empathy, the things that we do, and we continue to get great outcomes. So we just came out with a new report that shows that a leader in me helps significantly with chronic absenteeism, which is a major issue right now in US schools. After COVID. And, compared to other non-Leader in Me schools, we do far better We do great with teacher turnover, reducing that with increased test scores. So we have got really good solid outcomes that we continue to produce. We feel really good about the business generally. And, we had this setback with the state deal. We expect to recover. But hope that gives you a little bit of color.
Alex Paris: No. that is really helpful. I appreciate it, Sean. And before I yield, before I yield, just wanted to talk a little bit about the enterprise business, new logos versus retention there. Win back rate, you know, and perhaps lost con contracts. And maybe specifically, you know, the government contracts that were lost because of DOGE last week last year.
Paul S. Walker: I will just maybe make 1 quick comment, and then we have got Holly Procter here as well. she can share a couple thoughts. So we had a we had another good quarter in terms of retention. And this is our last quarter, we commented as well that the retention driven really by a lot of clients expansion. And so maybe, Holly, you want to talk about that and just generally any thoughts about the overall enterprise business?
Holly Procter: Yeah. Sure. So a couple thoughts. As Paul referenced, both strong retention and strong expansion in the enterprise business, which was as you know, a big part of our transformation effort that we could both increase the retention effort and also drive additional and incremental expansion beyond our run rate. You specifically called out government, I will comment on that. Have not yet seen our government business have an uptick post the large impact from Doge. So for many of it, we have remained flat from the bottom out of DOGE from Q1 of last year. But we see hopeful that we can see impact on that 1 when we get to the next few years. Great.
Alex Paris: that is very helpful. I appreciate the additional color, and I will get back in the queue.
Paul S. Walker: Thanks, Alexander.
Operator: Thank you. And our next question comes from the line of David Storms from Stonegate. Your question please.
Paul S. Walker: Hi, David.
David Storms: Good afternoon, everyone. Good afternoon. Appreciate you taking my questions.
Paul S. Walker: Just wanted to maybe start international. I think Paul mentioned in your prepared remarks that you are starting to move you know, some of the go to market strategy over into international markets. Just curious as to if you have any, you know, early indications of how this is going, any expectations there? Could it maybe counteract some of the macro headwinds you are seeing? Anything like that. Yeah. Wonderful. Holly, you wanna take that?
Holly Procter: Yeah. I will comment on that. So, hi, David. We will start our transformation internationally in Europe. And so in Europe, our direct include The UK, Ireland, Germany, Switzerland, and Austria and France. And so our efforts will focus on those countries to begin and the primary effort there will be around dividing the Salesforce into a similar hunter farmer structure, where we focus on our new logo acquisition dedicated hunters that are focused on just acquiring net new customers. And then the same bet will play out in the wholesale effort. So we have a dedicated set of farmers that are attached to the retention effort and the expansion effort of our current customer base in Europe. So after we have successfully navigated that transition in Europe, we will evaluate other geographies. But start in Europe, given that is our largest direct office. Just to comment on timing, We will begin most of those efforts with a go live date in Q1. And begin our execution in Q1 and plan to roll that out over next year.
David Storms: Understood. that is really helpful. I appreciate that. And maybe if I could just, linger internationally. I know China has kind of been a foreigner side for a couple quarters now. Is there any thoughts around what could get that back on track? Or, you know, how many how many moves do you have left? To make over there?
Paul S. Walker: Yeah. Great question. Yeah. We are looking at some options there, David, and have been this year. Think yeah. We see China's obviously a very large market. You will recall just stepping back, we China was a licensee operation for us. 10 plus years ago. We converted it to a direct operation just recognizing the size of that economy, the size of that country. And for a few years, that looked like a really good decision. We grew it rapidly on the top line and the bottom line. Then the last really kinda coming out of COVID in the last number of years, it is been much more challenging for us and has been a drag on our overall growth. there is still a good opportunity for the business, I in China, but we are just looking at a number of different options there on how to operate China in a way that would give it the best chance to grow top line and bottom line. And we will share more as we kind of get through that process of evaluating different options.
David Storms: Sir. I appreciate answering my questions, and good luck in the next quarter.
Paul S. Walker: Thank you, David.
Operator: Thank you. Thank you. And our next question comes from the line of Nehal Chokshi from Northland. Your question please.
Paul S. Walker: Hi, Nehal.
Nehal Chokshi: Hi, Holly. Thanks for the call questions here. Hey. Speaking to the strength of the underlying metrics, is it fair to say that on Slide 10, the bottom line the total additions to balance sheet under the breakout of subscription and committed services, is the best indicator with respect to that. Underlying strength that you are talking about here?
Jessica G. Betjemann: Yeah. that is right. I mean, in always a good indicator to look at what we are adding there for subscription and contractually committed invoice amounts, and we had very strong growth with enterprise growing 18% this quarter, and our very pleased to know by that. So it is definitely a very good indicator because that is just gonna translate into the net revenue growth into next year.
Nehal Chokshi: Okay. And, yeah, I did note that is the second quarter in a row, the overall what I will call, subscription invoice is up, basically, 16 something percent year over year.
Jessica G. Betjemann: it is double digits. Yeah. Last quarter, we grew 16 percent first quarter 5. So moving in the right direction. We are pleased by that.
Nehal Chokshi: Yeah. Huge positive. And so that is what is driving the continued confidence in the ongoing healthy buyback rate. Is that fair to say?
Jessica G. Betjemann: Yes. So this quarter, 2 things. Right? Year to date, we purchased $20 million. Are you talking about the share buybacks? And so, yes, I mean, we definitely believe in the growth prospects in future for the company and the strategy that we have to be able to deliver on that. And the invoice amounts, you know, this year, the growth that we have year is gonna translate to net revenue growth next year. We you know, through restructuring we have been doing, we do believe that we will have operating leverage, and we will be able to have growth in EBITDA free cash flow as well. In 2027 and going beyond. So all underlying indicators for growth of the business. Okay.
Nehal Chokshi: And could you give us a sense as to how much of this mid teens growth that you are seeing is coming from the existing customers versus new customers?
Paul S. Walker: I would say, Nehal, it is there is a pretty good split here between the 2. If you step back, and Holly alluded to this earlier, when we undertook the go to market transformation in Enterprise North America a couple of years ago, there were a number of there were a few core bets or key bets underlying that. 1 of them was, of course, that we could have a team dedicated to selling to new customers And that there we could get not only growth in as the revenue would grow, not only come from subscription, but from services, and we have really seen that play out. And that same-- and the second bet was if we focus the team of people on our existing customer base that we could drive more expansion, better retention, and more service there as well. And that service is part of our business is an important strategic differentiator. And it is more and more of our clients are looking for that expertise. From us as they are trying to navigate these complex problems. And so stepping back, what we are seeing is not only are we now through the transition of the go to market, we are seeing that play out like we hoped it would, and we are seeing higher and higher attach rates of services. And that so the growth is really coming from both sides, the new customers and the existing customers this year. And 1 of them just to build on something Jesse said just a second ago. In addition to invoiced amounts growing this year, we are we are we I mentioned this in my prepared remarks, We have got we are starting out next year with many more of these contracted services on the books to be delivered with our clients. And so all of that with the visibility into next year, more growth and reported, revenue adjusted EBITDA, that is shaping up like we expected that it would as we move through this year. Great. that is really helpful. And just to contextualize, the potential durability of this momentum, that you are seeing in the underlying metrics here where would you say you are in terms of market share of your core markets that you are serving right now? Fortunately and unfortunately, we are we are underpenetrated. I say, fortunately and unfortunately. We would love to be more penetrated. and we are excited by the size of the markets that we serve and the opportunity that is there. And so that was 1 of the reasons, frankly, for the go to market transformation was to say, hey. We have got we believe that the market needs Our clients need what we have to offer. Course, there is more that we wanna build than we will build. And we believe that we can capture more and more of that is out there. And now these pieces are all coming together, and we are seeing that begin to play out this year. I do not wanna get out over our skis. We are just beginning to see that play out, and encouraged about what that means for the future. Great.
Nehal Chokshi: Thank you very much.
Paul S. Walker: Thanks, Nehal. Thanks, Nehal.
Operator: Thank you. And our next question comes from the line of Jeff Martin from ROTH Capital Partners. Your question please.
Paul S. Walker: Hi, Jeff. I wanted to dive in hi, Paul.
Jeff Martin: I wanted to dive into kind of what you are seeing and hearing in terms of the sales environment, You know, how do you feel that sales productivity was in the period? And is that productivity accelerating, you know, from the beginning of the year through Q3 or are we in a sales environment where it is a little choppy stuff.
Paul S. Walker: So as you know, our enterprise division makes up about 70% of our business, and enterprise North America makes up about 80% of enterprise. So maybe, since a big part of that is enterprise, I will let Holly take that 1.
Holly Procter: Yeah. Thank you, Jeff, for the question. So a couple things I just call out. I am generally pleased with the sales productivity, both the measures that we use to track our success. And then some of the signal that we have received. So some examples of that would be we have invested in several ancillary functions that support the sales team today. That allows the individual seller to carry more revenue than they have historically carried in the past. So dollars under management, so per person productivity is up greater than it used to be in our old model. We have supported the sales team with ancillary teams. So for example, we have added an SDR This is primarily a function that produces meetings for the sales team. Reason why I mentioned that is because when you think about sales productivity, without an SDR function, it is been harder for us to onboard and ramp a net new hire. So to be able to build a function where we can promote internally and, you know, build talent up through the org, that allows our ramp time to go way down. When you think about, you know, productivity of not just in year, but in years to come, The functions that we have supported the build team with have created our ability to onboard and ramp them in a much quicker timeline. For us to put more dollars under management for each seller and so we are really pleased with the progress we have seen.
Jeff Martin: Great. And then, Paul, just curious how you would characterize the add on services environment?
Paul S. Walker: We have been very pleased. This has been quite a bright spot for us. Our services booking rate so, of course, the flow of services is we find new customers or we talk to existing customers We identify new jobs we can help them with, new initiatives we can attach to. And when we attach to those, it might drive more All-Access Pass subscription seats, or it might drive more services or a combination of the 2. We then you know, close business and the part that services related, we then contract for those, and we begin to book those services. And those bookings go on the calendar for future delivery. And the year to date through the third quarter, the bookings of services.
Jessica G. Betjemann: is up more than 25%.
Paul S. Walker: And so it is been quite a quite significant growth rate for those services. As I mentioned, while we are delivering those services right now in the year for the year, we are also pleased with the amount of services that are actually being booked out ahead of next year and into next year. And that is also happening at a at a higher rate than it did at the same time last year. So the overall, we have been very pleased. I think what is what is driving that, Jeff, is back to the strategic nature of what we are trying to do. We are in there helping our clients. Trying to execute strategy right now in a very tumultuous environment for them. We are in there trying to advise clients around change and transformation related to AI. We are we are in there working with clients where there is a lot going on and the need for high levels of trust and high levels of engagement are there. And so they are we are getting invited in by our clients to work with their senior leaders and they want our experts to come in and to deliver and consult and coach with them. And those are all the services that we provide. And so the services is being really, I think, driven largely by the demand in the marketplace and then it is coupled with a more even more sophisticated Salesforce that we have been able to put together and their ability to go in and position, call hire, and position more strategic integrated solutions. Yeah.
Jessica G. Betjemann: And just some data points around that I wanna highlight, and we have this in the investor presentation. But in the enterprise division this quarter, you will see in the chart, it looks as though-- well, it shows in there that we have 59% services attached rate, and that compared to 60% a year ago. But we noted in there that you have to take into account that 1 large IP deal that does not show up as services attached to the subscription because they are no longer a subscription client. So we had $1.8 million of services for that large client. This quarter. And so when you normalize for that, we actually had a 66% service attach rate relative to that 60%. You see the growth year over year in terms of the services attach that is a great flag.
Jeff Martin: Thank you. So the way I am kind of understanding some of your messaging here is there is a lot of demand for leadership. there is a lot of demand, it sounds like, for execution. Are those gonna be your 2 largest content areas going forward, do you think?
Paul S. Walker: I would say categorically, yeah. So, yeah, I think if you think about the key we have talked in the past about our company and what we have been moving towards over many years is to not be a company who exists to impart knowledge or to just teach skills. We are we are we are a partner to organizations helping them generate the collective necessary to execute their most important strategies. We are we are we are on the human side of whatever strategic initiative they are trying to accomplish. And when you think about what it takes then to execute strategy, the human part of that requires great leadership It requires high performing cultures, high trust cultures. It requires alignment. You it is 1 thing to come up with a strategy. it is a different thing to get everybody organized around that strategy, clear on their role, able to work together in highly collaborative ways. And so yes, it is it is leadership. it is trust. it is execution. Those areas are where we tend to find the collective action needs of our clients, and that is our sweet spot as an organization. that is what we do best. And so, yeah, that has been and will continue to be we play in the future. And then we are excited about the places we can point that. We issued a press release not that long ago about the work we are doing in hospitals. And this is a quickly growing part of our business. If you think about hospitals, it is it is a very human strategy set of issues where hospitals are trying to provide a really good patient experience that drives a lot of their economics. But it turns out that patient experience is a function of what is happening with the nurses and the doctors in that hospital and how they work with patients. And that so goes so goes your culture, so goes how they are led, so goes how they are engaged. So goes nursing turnover and retention rates, some of these things that are so closely connected. Those patient outcomes. So those are the types of problems, and opportunities we help our clients with, and we have these great solutions to it to attach to those. And they do fall in some of those categories you just mentioned.
Jeff Martin: Okay. And then 1 more if I could. I know you are not establishing fiscal 27 guidance at the moment, but was just curious if there is a scenario where you could foresee growing high single digit to low double digit revenue and, you know, with operating leverage and maybe a little bit of help on the margin on the gross margin side. To, you know, adjust EBITDA growth that significantly outpaces that next year.
Jessica G. Betjemann: So you are right. We are not gonna be providing guidance right now for next year. I mean, I will say that we with the growth that we have been having this year on invoiced amounts, We believe that, that will translate to meaningful growth next year to net revenue. With the, you know, with the just in terms of, like, our the major investments behind us, that we had done last year with Evolve and some of the restructuring, you know, and cost initiatives that we taken into place, that is gonna translate not only through the revenue flow through but to EBITDA growth as well for next year. So those are some indicating points. And then, you know, for the longer term, I mean, we do believe that we will be able to you know, get to the higher level of growth amounts through the strategies that we are executing in the longer term?
Jeff Martin: Thank you very much.
Paul S. Walker: Thank you, Jeff.
Operator: Thank you. And our next question is a follow-up from the line of Alexander Paris from Barrington Research. Your question, please.
Alex Paris: Hi. Thanks. I just wanted to sneak this last 1 in. We did not really talk about it too much, AI. You had said, Paul, in your prepared comments, this is 1 of the biggest years for new products slash solutions introductions. In fiscal 27, you expect execution, and AI solution enhancement. I just thought maybe we can, get a little bit of an update on going on with AI. I know you introduced AI Sales Coach. For the 4 disciplines. You launched leading AI adoption. You launched working with AI. what is the AI roadmap, in other words?
Paul S. Walker: Yeah. Great. We have launched those solutions. Those are out in the market. We have seen a lot of interest and demand from our clients. In fact, last quarter, I shared that we would won a nice-sized deal to be the partner on AI transformation for a large technology company. That was in Q2. In Q3, we actually expanded quite significantly our work with that client. As the early work that we were doing had been quite well received. And so we are we are seeing increased demand there. On the AI front, we will be launching in the fall. In early in the fall. The next set of modules to build on our leading AI transformation and working with AI And then we are also making we are we are we are we are about to launch additional functionality within our AI coach. And so we there is a on both the tech AI technology embedded in our solution side, there is more to be done there. Simulations, role plays, how we can incorporate more of that, how our clients, how our customers are gonna be able to get access to a lot of our content even embedded in some of their own internal AI system and some of the tools they use like Slack and MS Teams and things like that. So we are embedding AI that way into our solutions, and then we are developing solutions on the AI readiness and AI change and transformation side. To be the advisory and leadership support and partner to our clients there. So like, a lot of people were deep in the middle of that 1.
Holly Procter: I can add 2 things to that, Alexander? So the largest, most pervasive question that we get right now, both from current customers and from net new clients is how do I equip my current leadership team to navigate the large scale disruption they are facing right now? It is pervasive across almost every industry. And so and after they figure out how to equip their leaders, the very next obvious question is, how do I equip our, you know, our team? And they are thinking about that through the lens of AI fluency. Right? How do I navigate and get every single member of the team ready to leverage AI at scale? And they are looking for a partner to help them navigate that amount of disruption.
Alex Paris: Super helpful. And then the very last question is to kind of pressure a little bit on fiscal 27. Again, based on the press release, based on your prepared comments, it looks like you are committed to revenue growth. And then even faster, adjusted EBITDA and free cash flow growth because of restructuring actions and so on. Is that fair to say?
Paul S. Walker: Yeah. that is what that is what we believe and expect. Relative to this year. Yep.
Alex Paris: Very good. Thank you. that is all for me.
Paul S. Walker: Thank you, Alexander.
Operator: Thank you. This does conclude the question and answer session of today's program. I would like to hand the program back to Paul S. Walker for any further remarks.
Paul S. Walker: Wonderful. Well, thank you, everyone, for tuning in today. Thanks for your great questions and we appreciate you. We hope everyone has, if you are in the US, hope you have a good Fourth this weekend, and look forward to connecting with you. Have a great day.
Operator: Thank you. Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.