Good day, and thank you for joining us. Welcome to the Third Quarter 2025 Franklin Covey Earnings Conference Call. Please note that today's call is being recorded. I will now turn the call over to Boyd Roberts, Head of Investor Relations. Please proceed.

Thank you, Victor, and hello, everyone, and thank you for joining us today. 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 1995, including, without limitations, 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-K 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'd like to turn it over to Mr. Paul Walker, our Chief Executive Officer and President.

Thank you, Boyd. Good afternoon, everyone. We're happy to have the opportunity to speak with you today and to share an update on the continued performance and progress of the business. I'm pleased to be joined not only by Boyd here today, but also by our new CFO, Jessi Betjemann, from whom we'll hear in a few minutes. Despite an external environment that continues to be uncertain and where, as a result of this uncertainty, organizations are scrutinizing costs at a greater level and delaying many investment decisions. I'm pleased that in our third quarter, revenue was in line with our expectations and that third quarter adjusted EBITDA was better than expected. Specifically, revenue in the quarter was $67.1 million and adjusted EBITDA was $7.3 million, which was higher than the top end of our expected range of between $4 million and $6.5 million. Last quarter, I shared that there were a few areas of the business in which we had experienced and expected to experience direct and indirect impact from the actions being taken by the federal government and the associated economic uncertainty. I expressed that in order to offset the impact of these factors on our profitability, we were undertaking a series of cost reductions in areas not impacting our main strategic thrust. We've now completed the implementation of these cost reductions, and we expect that these actions will help offset declines in revenue related to government actions and the general uncertainty in the economy. Additionally, these cost savings, when annualized, will flow through and result in meaningful year-over-year increases in adjusted EBITDA next year as well. In a minute, Jessi will share more detail about the initiatives we executed in the third quarter to reduce costs and how we've approached this in a way that eliminated nonessential costs while maintaining our investment in our growth initiatives. The effect of government actions and their impact on our direct government business and our international business has been approximately what we thought and consistent with what we laid out last quarter. We're pleased that in the middle of an uncertain environment, we've continued to win and expect to win many large deals in our Enterprise and Education businesses. However, the uncertainty in the environment pushed some of these wins late enough into our year to create a timing risk that we'll be able to get all the services delivered by year-end. To provide for the potential that the same uncertainty may impact some of the deals we're working to close and deliver in the fourth quarter, we're making a revision to our guidance and now expect revenue in the range of $265 million to $275 million, as you can see shown on Slide 4. With the revision to the low end of our revenue guidance, we've widened the adjusted EBITDA guidance to be in the range of $28 million to $33 million in constant currency. The series of cost reduction actions we took in the third quarter create additional cushion and put the midpoint and the top end of our widened adjusted EBITDA range consistent with our previous guidance. Importantly, we continue to feel good about the fundamental strengths of our progress in the vast majority of our business and are confident the investments we've made and the actions we're undertaking will significantly accelerate our future growth. I'd like to now talk for a couple of minutes about three key factors that continue to drive this confidence, as you can see reflected on Slide 5. The first of these factors is the fact that the opportunities and challenges we help organizations address are mission-critical for them. The second factor is that we're achieving strong traction in the implementation of our go-to-market transformation in our Enterprise North America business. And the third factor that I'll talk about today is that our Education business continues to be strong and to exhibit significant growth potential. So getting into these in a little bit more detail, first, the opportunities and challenges we help organizations address are mission-critical for them. Our solutions help clients meet the moment as they double-down on working to achieve their mission-critical objectives. For thousands of client organizations and schools around the world, Franklin Covey is a trusted partner to leaders whose critical strategic priorities and organizational performance require a dedicated collective action of large numbers of people. Our strategic strength derives from both the importance of the opportunities and challenges that we help organizations address and the strength of our solutions in addressing these opportunities and challenges. The second key factor to talk about today is that we're already achieving strong traction in the implementation of our new go-to-market acceleration in our Enterprise North America business. The focus of our go-to-market transition and the associated growth investments is on achieving significant increases in two key outcomes, which we expect will accelerate growth. The first of these outcomes is to significantly increase our number of new client wins and our revenue per win, revenue that comes from the combination of All Access Pass subscriptions and from strategically important subscription services. The second key outcome is to increase our expansion within existing client organizations. It's been just 180 days since we went live with this transition, and we're really encouraged by the traction and the early results we're achieving. We've successfully separated our sales force into two teams: one dedicated exclusively to landing new clients and the other dedicated to expanding business within existing clients. All new salespeople, sales management, and client support roles have been filled per our plan, and the associated restructuring is complete. I feel great about the team we have in place in North America, and I'm pleased with the traction we're gaining in the midst of an environment of tremendous uncertainty for our clients. I'd like to double-click on the second point a bit and share five indicators of progress and strength that I believe underscore the strength of our business, the importance of the outcomes we help clients achieve, and the traction we're achieving in our new sales transformation. The first of these five indicators of progress and strength is our new logo performance. In this year's third quarter, we sold more new logos than we did in the third quarter last year. Importantly, for many of these new logo clients, we also attached more subscription services, services such as training delivery, implementation support, and coaching, which, for these clients, led to an increase in total contract value or revenue per win. We expect this same trend will continue to extend the future new logo wins. Maybe I'll just briefly share an example of one of these new logo wins from the third quarter, a win that we feel is emblematic of several deals beginning to enter our pipeline and which illustrates the performance of the outcomes we're helping organizations achieve and demonstrates how our new logo sales force is organized to sell highly strategic engagements. This recent new logo win is with a large $6 billion information management company. The client is working through a large global sales transformation to increase win rates, decrease time to close and increase cross-selling of additional products. They're leveraging our sales performance solution, which includes the All Access Pass, in-person delivery, and our new AI sales coach functionality. This win resulted in a $2.3 million contract with about $1.7 million scheduled to deliver in the coming quarters. This win is a strong example of our new sales model in action. We had the right rep focused on the right account, supported by subject matter experts and several new support teams who moved quickly, and thus, we were able to win this deal in just under 50 days. We're now in the midst of scheduling and completing the delivery of a significant portion of the services attached to this particular sale, some of which may drift into the next quarter due to timing reasons, which is one of the reasons, as I mentioned earlier, we revised our annual revenue guidance range. So that's the first indicator of progress and strength. The second that I'd like to talk about is our client retention. The vast majority of our clients renew year after year. Despite the current more uncertain environment where nearly every company is scrutinizing every dollar of investment and spend and has the choice to renew or not to renew, we're pleased that the vast majority of our clients are continuing to choose to renew. While the size of some of the populations covered have flexed down in the current environment, and we've had a couple of larger clients who were unable to renew this quarter, our overall client retention or our client count remains strong and very consistent in the third quarter relative to previous quarters and has continued to be very consistent year-over-year and also when compared with historical results. Just as we saw during COVID, the power of our content, our solutions, and our subscription model is compelling clients to stay with us. Additionally, and importantly, we're winning back clients whose circumstances had previously caused them to leave. I'm happy to report that in the third quarter, we won back one of our larger All Access Pass clients that I had reported had churned in the second quarter of fiscal year '23. The third indicator of progress and strength is the percentage of our clients who are choosing to expand the size of their All Access Pass. In this year's third quarter, we achieved robust expansion across our client base, including a 15-point increase in the number of clients who expanded outside of their renewal period compared to the third quarter last year. We achieved a similar increase in the second quarter and are encouraged that our new expand sales force is driving more activity across our existing client base, whether they're in a quarter where they're up for renewal or not. I'll briefly share an example of the expansion within a good portion of our client base. In the third quarter, we expanded our work with a large global packaging leader. After landing the account in fiscal '24, the client completed a complex acquisition, which often results in the need to stabilize their culture and unite two organizations to become one. Our team steered the client through a number of proof of concept launches of Franklin Covey solutions. Our disciplined land-and-expand approach grew the subscription from an initial population of 200 people to 1,000 people on the All Access Pass for fiscal '25. This added $136,000 in new annual subscription revenue and has positioned us well for substantial multiyear upside across the organization's 50,000-person workforce. This win underscores our ability to navigate a complex M&A circumstance with the client, stay aligned with shifting decision-makers, and convert early traction into meaningful growth. The fourth area of progress and strength I'll just briefly touch on is our growing percentage of multiyear All Access Pass contracts. At the end of the third quarter, the percentage of clients in a multiyear contract increased from 55% to 58%, and the associated revenue now under multiyear contracts increased from 61% to 62%. For these multiyear clients, Franklin Covey is seen as a partner in driving sustained people and organizational performance. The fifth and final area of progress and strength is our high attachment rate of strategically important subscription services. In the Enterprise division in the third quarter, our attachment rate of services continued to be a very high 60%. In an environment where companies are cutting back on a significant portion of their spend on outside advisors and consultants, our clients continue to understand the value and impact of our consultants and coaches in helping them achieve their mission-critical objectives. In addition to our progress in these areas, we're also accelerating our marketing efforts to ensure that we're set up to fully penetrate our very large total addressable market in both our Enterprise and Education divisions. To lead and accelerate our expanded marketing efforts, I'm pleased to report that Dariusz Paczuski joined the organization as our new Chief Marketing Officer on June 1, and we look forward to him bringing his many years of experience as a marketing leader across several well-known and respected brands to Franklin Covey. I'd just say that we feel confident that the actions we're taking to accelerate our marketing efforts, land new clients, and expand and retain existing clients will allow us to accelerate growth in the future. The third key overall factor that I'd like to touch on before I turn some time over to Jessi is the ongoing strength that we're seeing in our Education business. We're pleased that despite the uncertainty introduced by the federal government with the proposed closing of the Department of Education and the final expiration of ESSER funds, we still expect to grow our Education business year-over-year on both the top and bottom lines and expect our addition of new schools and our school retention results to be as good, if not better this year than they were last year. The overall third quarter performance in Education was solid, with subscription revenue growing 13% and the balance of deferred revenue increasing 21%. Due to the timing of a couple of large contracts that came in during the third quarter last year and which we expect to come in during the fourth quarter this year, revenue in the third quarter was down slightly, but again, this was due to timing. Looking forward, we expect another strong fourth quarter of subscription services and material sales in Education. Due to the volume of business, we expect to close between now and the end of August, there is the potential that some of that delivery could push into next fiscal year, which, again, we reflected in the updated revenue guidance I shared previously. We continue to see strong demand for Leader in Me driven by success in delivering the outcomes that educators, parents, and communities care about, such as leadership development, student engagement, and character building. The strong demand is fueling our transition from selling initially to individual schools to now selling to entire districts. And in a handful of cases, we're now serving statewide contracts. We're pleased that there are now nearly 8,000 Leader in Me schools around the world. I'd now like to turn some time over to Jessi to provide some more detail on our financial results.

Thanks, Paul. It's a pleasure to be here with you all on my inaugural earnings call with Franklin Covey. I am thrilled to be part of a company that is a trusted partner of leaders of enterprises and schools around the world whose strategic priorities include building leaders, teams, and cultures that achieve improved organizational performance and breakthrough results through collective action. I look forward to partnering with Paul and the rest of the leadership team to help drive profitable growth and achieve the company's financial and strategic goals at an important time of our transition. In my remarks today, I'll start by walking through our quarter financial performance, which includes restructuring and cost savings initiatives. Then I'll turn to our balance sheet and capital allocation priorities. And finally, I will provide additional context around our revised fiscal year 2025 outlook. For the third quarter, despite the current economic uncertainty, revenue was in line with our expectations, and adjusted EBITDA beat our expectations, due in part to prudent cost reduction actions taken in the quarter. A summary of our consolidated financial results is on Slide 9 in the earnings presentation. Total revenue in the third quarter was $67.1 million and finished in line with our previously shared expectation, at the low end. Revenue was down 9% from the prior year quarter and 4% year-to-date, but a 13% increase sequentially and essentially flat from the last 12 months for Q3 fiscal year 2025. As expected, the reduction in revenue was driven by the direct and indirect impact of the actions taken by the government and the overall short-term economic uncertainty we are seeing in the marketplace that have affected both of our Enterprise and Education divisions. Gross margin for the third quarter remained strong and was approximately flat year-over-year at 76.5% of revenue. Operating expenses for the third quarter were $53.5 million and increased $5.7 million compared with the prior year, which is primarily due to a $4 million increase in restructuring charges and a $1.6 million increase in selling, general and administrative expenses associated with the rollout of our go-to-market acceleration initiative. During the third quarter, we optimized the investments we are making in our go-to-market transformation plan in the Enterprise North America segment and took disciplined cost reductions in certain areas of our operations. We incurred $4.7 million in expenses for these restructuring activities, primarily for severance and related costs. These costs were a key contributor to the net loss this quarter but were excluded from adjusted EBITDA. The increase in SG&A expenses was primarily due to increased associate costs related to new personnel, including new sales and sales support personnel hired in connection with the implementation of our new go-to-market strategy and the reorganization of our North America sales force. The cost reduction actions were focused first on rightsizing government and international operations impacted by government action; and second, on optimizing our go-to-market strategy in the expand teams and support functions to reduce our original $16 million plan to $13 million this year. However, we do not believe these actions will impact the intended results of our initial strategy. Additional cost reductions were tied to eliminating nonessential headcount additions planned for this year and other areas of the business, reducing the employee bonus expense accrual, lower marketing and travel costs, and managing discretionary spend across the board. This resulted in savings of $3 million in this quarter and results in $4 million savings in Q4 and an annualized run rate savings of $8 million in fiscal year 2026 that will be partially offset by normal investment levels next year. Adjusted EBITDA was $7.3 million and $6.8 million in constant currency, exceeding the top end of our quarterly guidance range of $4 million to $6.5 million in constant currency as the lower revenue and gross margin for the quarter was more than offset by the cost reduction efforts I previously described. Adjusted EBITDA decreased compared to the prior year quarter of $13.9 million due to the planned increase in growth investments we are making this year and lower revenue. Importantly, though, the foundation for increased future growth is evidenced by the 7% increase in our balance of deferred subscription revenue from $83.8 million in Q3 last year to $89.3 million this quarter. Year-to-date cash flow from operating activities remained stable at $19 million, but lower compared to $38.4 million last year primarily due to $12.8 million lower net income driven by lower revenue, restructuring costs and planned higher spending levels to fuel the enterprise North America transformation efforts and also an $8.3 million decrease in income tax payable as we no longer benefit from the utilization of our net operating loss position compared to last year. This resulted in year-to-date free cash flow through the third quarter of $10.6 million compared to $30.6 million generated through the first three quarters of fiscal year 2024. I'll turn now to a discussion of our business divisions. In the third quarter, our Enterprise division generated 70% of the company's overall revenue, with the Education division generating 28% of the company's revenue. As shown on Slide 10, revenue in our Enterprise division was $47.3 million compared to $51.9 million in the prior year. As expected, Enterprise revenue was heavily affected by canceled U.S. federal government contracts, geopolitical trade tensions, and ongoing macroeconomic uncertainty. The challenging business environment adversely impacted the value of new logo sales and expansion revenue, both domestically and internationally in the third quarter. The North America segment revenue was $37.1 million, a $3.5 million decrease from the prior year. The combination of subscription and subscription services revenue in North America was $33.7 million in the third quarter compared to $35.9 million in the prior year and was down 4% year-to-date and 2% for the last 12 months, with a significant portion of the decline attributable to government. Adjusted EBITDA for the North America segment decreased to $6.2 million compared to $10.8 million last year due to lower revenue and increased SG&A expenses tied to our planned go-to-market investments. Our balance of billed deferred subscription revenue in North America was $45 million at the end of the third quarter compared to $47.2 million at the end of the third quarter in the prior year. The balance of unbilled deferred revenue was $56.4 million compared to $64.4 million from last year. Importantly though, the number of North America's All Access Passes contracted for multiyear periods increased to 58% in the third quarter compared to 55% last year, and the contracted amounts representative of multiyear contracts increased to 62% compared with 60% in the prior year. As shown on Slide 11, revenue from our international direct operations, which accounts for approximately 16% of our total Enterprise Division revenue in the third quarter, was $7.5 million, a decrease of $1 million, primarily as a result of our business in Asia and the U.K., decreasing due to the challenging business conditions and the response to government actions, as we talked about last quarter. As expected, adjusted EBITDA for the international direct operations segment decreased to $0.3 million compared to $1.3 million last year due to lower revenue and was partially offset by lower SG&A due to cost reduction actions. Our international licensee revenue, which accounts for approximately 6% of our total Enterprise Division revenue in the third quarter, was $2.7 million, which was flat with the previous year. Adjusted EBITDA for the international licensee segment was relatively flat for the quarter year-over-year at $1.3 million. Turning now to our Education division, as shown on Slide 12. The Education Division revenue in the third quarter was $18.6 million, down 8% compared with $20.2 million in the prior year, but has grown 1% both year-to-date and for the last 12 months, which, as Paul shared, is primarily due to the timing of a couple of large contracts that closed in the third quarter last year and were similarly large contracts either closed earlier this year or expected to close in the fourth quarter. The decrease is primarily due to less material revenue during the quarter as the new statewide initiative started during the third quarter of fiscal year 2024 and included a significant amount of training materials in the initial phases of the program. Decreased materials revenue was partially offset by increased training and increased coaching revenue and membership subscription revenue. Delivery of training and coaching days remained strong in the third quarter and benefited from 16% higher revenue per day than in the prior year. Education subscription revenue increased 13% in the third quarter to $11.8 million. Combined subscription and subscription services revenue was down 2% to $17.8 million in the third quarter but grew 4% year-to-date and grew 2% for the last 12 months. Adjusted EBITDA for the Education division decreased to $2.1 million compared to $3.1 million last year due to lower revenue, as SG&A remained flat because of some of the cost savings. The Education balance of billed deferred subscription revenue increased 21% or $5.9 million to $34.1 million, establishing a strong foundation for continued growth in the coming quarters. We are seeing good momentum in our Education division, particularly in the number of large state and district level opportunities as we are actively pursuing. This pipeline strength, together with a base of nearly 8,000 schools globally at the end of May, gives us confidence in the demand for the kind of outcome our Leader in Me solution delivers and provides confidence in continued growth as we close the fourth quarter, which is historically Education's strongest period. I would like to now spend a few minutes discussing our balance sheet and capital allocation priorities. We will continue to pursue a balanced capital allocation strategy focused on three primary areas that are aligned with our strategic goals: first, maintaining adequate liquidity while managing an appropriate level of leverage for the economic environment. Our business continues to produce reliable cash flow, and our liquidity remains strong at over $95 million at the end of the third quarter with $33.7 million cash on hand and no drawdowns on the company's $62.5 million credit facility; second, investing in strategic opportunities to drive improved market positioning, accelerated profitable growth and financial value, such as continued spend in product innovation, business transformation initiatives, and opportunistic acquisitions; and finally, returning capital to shareholders as appropriate. In the third quarter, we purchased approximately 372,000 shares in the open market at a cost of $8.3 million. Year-to-date, we have purchased approximately 623,000 shares in the open market at a cost of $17 million. At the end of the third quarter, we had $27.9 million remaining on the current $50 million common share purchase plan authorized by our Board of Directors in April 2024. We remain committed to being disciplined stewards of capital while staying focused on driving long-term value creation. Now turning to our financial outlook. The company updated its fiscal 2025 financial guidance to reflect current market dynamics and company cost reduction actions. We now expect revenue in the range of $265 million to $275 million. The revision of the range considers two factors. First, it reflects the continued uncertainty impacting our clients' decision-making as previously discussed on our Q2 earnings call. Second, it reflects the timing risk for the delivery of services for some contracts we have closed in the last 90 days and expect to close this quarter that could slip into the first quarter of the next fiscal year. With the revision to the low end of revenue guidance, we have widened the adjusted EBITDA guidance to be in the range of $28 million to $33 million. The midpoint and top end of this range is consistent with our previous guidance due to the cost reduction actions we took in the third quarter that will produce savings to beneficially impact this year. To emphasize again, the cost reductions we took were prudent given the decline in revenue this year, but either tied to rightsizing areas directly impacted by government actions, optimizing our go-to-market plans, or reducing other nondiscretionary spend. Thus, we do not believe these actions will impact the intended results of our initial strategy and future growth expectations over time. We plan to share updated guidance for fiscal year 2026 when we report at year-end in November. But due in part to the recent cost reduction actions, we expect to generate a meaningful increase in adjusted EBITDA and free cash flow in fiscal year 2026. Before I pass it back to Paul, I want to conclude with sharing my excitement to be a part of driving the growth trajectory for Franklin Covey during this transitory period as we make progress on our strategic initiatives and manage through the current macroeconomic headwinds. As shown on Slide 13, the fundamentals of our business model are strong, driven by six key elements. The first element is increasing revenue per client. Second, we have high revenue and customer retention. Third, we have high gross margins. Fourth, we have upfront invoicing. Fifth, our business is a low capital intensity business. And sixth, we have disciplined reinvestment for growth. Through our go-to-market transformation efforts and with the strength of our underlying business model, we are committed to creating long-term value for our shareholders and customers. Paul, I'll now turn it back to you.

Thank you, Jessi. We're thrilled to have you as part of the Franklin Covey team and appreciate the many contributions you've already made in a short period of time, and I personally just want to say how excited I am to work with Jessi and for our partnership going forward. In conclusion, before we open up the line to your questions, I just would end by saying that we're pleased with our third-quarter performance. We're now 180 days into the sales transformation of our Enterprise North America business. And despite an environment where uncertainty is prompting organizations to scrutinize costs, we continue to be confident in the actions that we're undertaking to accelerate future growth. In the third quarter, we landed more new clients and expanded a large number of our existing clients. These were results that we expected and expect to continue to achieve with our new sales model. Our Education business also continues to be strong with significant growth potential. And as a result, as we shared today, we expect to accelerate future revenue and achieve significant growth in adjusted EBITDA and free cash flow as we move into fiscal year '26 and beyond. And so I'd like to now ask the operator to open the line, and we'd be delighted to take your questions.

Our first question will come from Alex Paris from Barrington Research.

Just a couple of questions, starting with the Enterprise division. It's sort of hard to see the improvements given the challenges directly and indirectly related to government and the uncertainty that ensues. But it was encouraging to see that new logos are up and you're expanding within existing clients, which was the goal of this sales force transition. Are there any other milestones to share on that business, for example, size of the pipeline, growth in invoice sales, things like that?

Yes, I might point to just a couple. First of all, thank you for the acknowledgment there and recognize that we undertook this set of actions, which we continue to have high conviction in, at a time when the world became quite uncertain right at the same time. And so it is a little bit hard to see exactly how that's all going, but we do continue to feel encouraged. And so as I mentioned and you just called out there, in the third quarter, we sold more new logos. We saw expansion across a greater number of our clients, particularly those who were up for renewal. I'd just say a point about that. One of the things in the old model was we were asking the same sales force to try to renew clients, expand clients and go find and win new business. In this new model, those client partners that are focused on selling to existing clients, we've removed from them the new logo hunting responsibility. And therefore, the job needs to be and is more than just securing and working with those clients that are up for renewal in the current quarter. The job is really to manage a set of clients that have renewals coming all throughout the year, to try to stoke and accelerate expansion, add more services, et cetera, all the time within those clients, be looking for more opportunities to grow. And so that is a metric that we're watching as, "Hey, this off-cycle expansion," because remember, we've only been in this model now for two quarters, the second and third quarters. So we had the clients that were up for renewal in those quarters, but the other half, approximately half of our clients haven't even had a renewal event yet. And so could we start to get more action going with that other half that weren't up for renewal. So we've been watching that closely, and that turned out to be the case in the second quarter and then turned out to be the case in the third quarter. So I would say those are two really critical things we're watching, the number of logos we bring on. Because we know that when we land a new logo, we get to then expand that, we get to add services to that and grow the lifetime value of that customer, and then can we get greater velocity and greater expansion within our existing clients. Okay. You asked about a couple of other data points. So we're continuing to see our pipelines grow. We had a great quarter from marketing activities. I can't remember if we announced on the last call that we had our Impact conference. It was incredible. We had a number of prolific authors and speakers who joined us in addition to some of our own. We actually had 27,000 people registered to attend. It's driven a tremendous amount of lead flow here through the third quarter. We had 4,000 people attend a webcast that we held on the power of leadership in uncertain times. We had well over 1,000 people attend some live "driving performance in uncertain times" events. So this theme of everybody is focused on how do we continue to deliver in these uncertain times, and they're looking to Franklin Covey for the insights and thinking we have. So that's starting to work its way through our pipeline, both for new logo opportunities and for expansion opportunities. Maybe just two others quickly to just double-click on that I already mentioned, but I'll highlight again, is that we're watching the services attach rate carefully. We're watching the news every day at consulting firms and others who are having clients back away from some of those services, and we're pleased that we had another quarter where we had, in the Enterprise division, a 60% attach rate. And that number has fluctuated between as high as low 60s and kind of low 50s and somewhere in between. And this was another good attachment quarter. So that's obviously something we're also watching. And then maybe just one other thing, Alex, I'd point to, and we'll give more clarity and data on this as we get a couple of more quarters in, but not only did we increase the number of new logos that we sold in the third quarter, but for a good portion of these logos, we're attaching and contracting for more services at the point of sale out of the gates. And that's a function of our shift in our focus to selling to leaders and really making sure that we're selling solutions that deliver outcomes. And with those outcomes comes demand for more of our services. So we'll disclose some metrics on that in the future, not ready to disclose exact metrics on it today. But directionally, we're seeing more services get attached to a number of those new logo wins. So those are just a few and happy to talk about more if you'd like.

No, no, that's very helpful. I appreciate the additional color. And then moving to the Education division. This is clearly the season, Q3 and especially Q4, for that business. And I'm actually surprised at the strength and the confidence that you have in the business given all the uncertainty out there in K-12 land, the education department getting cut in half, ESSER funds sunsetting, things like that. You had 728 new schools in fiscal 2024. Is it your expectation that you'll be in line with that or better in fiscal 2025?

Yes. As I mentioned a minute ago, we do expect that the way that business is pacing is that we'll be there or potentially even a little bit better, both on the number of new schools we bring on and also the percentage of schools that we retain. And just to double-click and support something you said there, we're encouraged. I think you come to a year like this where, as you mentioned, the Department of Education has what happened to it and then ESSER funds, after the many years that those have been out there, are now sunsetted. I think that the ability to grow in that environment speaks to a couple of things: one, the need for a solution like Leader in Me; two, the quality of that solution and what it's doing and the real measurable outcomes that's producing for schools; and then third, I think Sean and team are doing a great job of navigating what has been a very unique and uncertain environment in education.

Great. And then last question for you, and I'll let somebody else get in there. When you reported second quarter results, you took down guidance from your original expectations because of government contract cancellations, etc. And you put it into four buckets: the $5 million impact from the government contract; international, $4 million; education, $3 million; and U.S. and Canada commercial, $3 million. So you just reduced the midpoint of guidance by about $10 million for similar reasons. I was wondering if you can address it by bucket. Or where is the biggest delta there in terms of expectations?

Yes, I would say it's no longer coming directly from the government. There has been some ongoing fluctuation in the international segment. However, the main factors are that while Education is performing well, the influence there is mainly due to the volume of business currently flowing through that sector. It's roughly split between subscription services and materials, and the timing of delivering those services is critical. In an uncertain environment, decisions take a bit longer to finalize. Some clients are making decisions, but they tend to accumulate towards the end of the quarter. This same situation applies to our Enterprise clients, where the uncertainty has led to delays in decision-making. We have over $1.5 million worth of services contracted and ready for delivery, but not all of them may be scheduled in the fourth quarter; some may roll into the next. Thus, the majority of the issue stems from service delivery timing and the timing of decision-making we are monitoring to close these deals, with some potentially slipping into the first quarter. In summary, it mainly relates to a bit of international influence, the timing of delivery in Education, and additional uncertainty affecting our Enterprise clients and their timelines.

Our next question will come from the line of Jeff Martin from ROTH Capital.

Paul, could you characterize the current environment with respect to how you foresee things potentially improving as we move into fiscal '26? It seems like in the face of perhaps sustained higher tariffs, budgets may continue to be scrutinized on the enterprise level. Just curious on your thoughts.

I think that's probably the case. We are currently in the middle of our fiscal '26 planning, and we are certainly considering that tariffs and other actions we are taking come with some uncertainty, which we hope will eventually resolve. However, in the short term, we are not planning for that outcome. Therefore, we intend to continue navigating through the environment as we have been.

Okay. And then I wondered if we could just kind of walk back through time. You look at the growth in deferred revenue, and in a lot of years, that's been in the double digits, yet the follow-through the subsequent year, we see maybe 1/3 or less of that in total revenue growth. Just want to give you an opportunity to kind of help us see the bigger picture with respect to the growth in deferred revenue relative to the growth in total revenue.

Well, so the growth in the deferred revenue is driven by the invoiced amounts from the prior year. So that's going to kind of translate in terms of what we've already currently have invoiced. And then our current revenue growth is going to be a mix of the subscription revenues that have been contracted over time, but then also the specific delivery of services that get delivered in that particular quarter.

Right. I'm looking back, services attachment rate is relatively stable. The average pass size is increasing in general each year, growing new logos. And just I've made the argument in my research notes that the deferred revenue build should ultimately be caught up by the growth in the total revenue. Perhaps I'm missing something here.

Yes. We are experiencing growth in acquiring new clients. However, the current conditions have caused some valuation adjustments. Despite this, our ability to attract new customers is increasing.

I think what you said, Jeff, is correct. As the invoiced subscription amounts start to increase again, which have been relatively flat or slightly declining recently, we will see a rise in both unbilled deferred revenue and deferred revenue balance, ultimately contributing to our reported revenue. Currently, we've experienced several quarters with flat or slightly declining invoiced subscription amounts, which reduces the deferred revenue. We believe the actions we are taking will begin to reverse that trend, serving as a catalyst for increased reported revenue growth in the future.

Great. And then one more for me, if I could. Could you speak to the adoption of AI service delivery? What's the uptake rate with clients currently? And where do you think that can go to? I have to imagine there's a lot of potential leverage in the delivery of services through the use of AI.

Yes, that's a great question. In the win I mentioned earlier, one aspect they are utilizing is an AI sales coach that is part of our sales solution aimed at helping clients succeed. This AI-driven coach begins to understand your unique circumstances, industry, and selling environment, offering real-time coaching. One of the key applications we see for AI is in coaching. Our company focuses on behavior change and transforming not just individual behavior but also collective behavior across organizations. We understand that behavior change comes not just from training and exposure to new ideas but also from having a coach who can support you in maintaining that change. This principle applies equally in our industry as it does in getting in shape, where the presence of a coach is beneficial. Traditionally, coaching has been a human-to-human interaction, but we are now seeing the emergence of AI coaching. Currently, about 43% of our clients are beginning to use our AI coach, and we anticipate expanding this further. This could provide a cost-effective and scalable solution for our clients, democratizing access to coaching that was previously limited to only the highest levels of an organization. We are focused on how we can achieve this through AI. Additionally, we can offer deep content and solution customization and personalization. Many of our largest engagements have involved customizing the content to fit the client's unique industry and needs, which helps make our solutions more relevant and effective for them. AI now enables us to accomplish that much more quickly and at a lower cost.

Our next question will come from the line of Nehal Chokshi from Northland Capital Markets.

Can you hear me now?

We can now.

So listen, subscription revenue invoice, that's down 8% year-over-year. And from what I gather, the principal drivers here is it's declining because of Department of Government Efficiency plus new headwinds associated with the Department of Education funding uncertainty. Is that correct?

I would say those are two of the elements. And I would say the third is just some of the uncertainty that our Enterprise clients are experiencing as a flow-through from tariffs and other government actions that have been taken. But a good bulk of it is the first two you mentioned.

So nothing to do with Department of Education funding uncertainty with respect to subscription revenue invoice being down then?

There are two main factors to consider: the direct impact on the federal government and DOGE, along with some issues related to the Department of Education. Additionally, there is macroeconomic uncertainty that is affecting some of our Enterprise corporate clients.

Okay. Got you. All right. And so given that subscription revenue invoiced is down 8% year-over-year, which arguably is your best leading indicator at this point in time, then you reconcile that with the statement that more new clients than a year ago, robust expansion across a significant portion of your client base, and effectively, retention rates remain strong and consistent with previous quarters and historical trends. I mean, given those three positive things, that would imply that invoice subscription revenue should be up, not down 8% year-over-year, even with these headwinds being cited. So can you just help me bridge here what's going on?

Yes. There are a few key points to mention. First, client retention has remained stable, although some clients have reduced the size of their subscriptions in the current environment. While we’re not pleased about that, we appreciate that they have chosen to stay with us instead of leaving completely. However, this downsizing does affect subscription growth, as the revenue from these clients is lower this year compared to last year. Additionally, while we’re observing expansion among a greater percentage of our clients, not every client is experiencing growth. This is a positive indicator as our sales team engages more deeply with clients, leading to some expansions. However, the increase in size isn't as significant as it was previously, particularly during more stable economic times. Lastly, we had a major client last year who switched from a subscription model to an intellectual property agreement for business reasons. As a result, there won’t be any renewal this year, which has negatively impacted our numbers by a couple of hundred basis points due to that single client's change. These factors contribute to the observation that while we are gaining more new clients and seeing some expansion, there are offsets, including clients not renewing and less substantial growth in expansion revenue. Overall, we are encouraged that clients find value in their subscriptions, which gives us a solid foundation to build on for future growth as we approach next year.

Okay. That's a helpful description there. And then you have one quarter left and a $10 million revenue range. So that's a really big revenue range. Do you really have that much uncertainty?

I mean I think what we're trying to capture is the fact that the delivery of services and the timing for decision-making, I mean, it is one quarter left. And so to be able to close some of the sales that we're working on and also be able to deliver within the quarter is tight. There is a possibility, though. So the top end of the range is reflecting that we were able to close and do everything in this quarter, but there's a realistic view that it may not happen and things could get pushed into next year.

I would just say that if we were wrapping up our quarter or year in the first or third quarter, the range would obviously be narrower. It's just Education. Sean and the team are doing an excellent job, and that business continues to grow larger each year. Despite significant efforts with the subscription business to smooth out some of those quarters, it still remains a major fourth quarter business and is expanding every year. This results in a slightly wider range. However, we feel confident about the range and where we may end up within it.

Okay. And then finally, the $10 million revenue reduction, but only a $2 million EBITDA reduction at the low end, implies that you had greater operational quarterly cost cuts than what you had anticipated a quarter ago. A, is that true? And b, how much is that?

Yes. So as I mentioned in my prepared remarks, we're able to kind of stay within that range, at the midpoint and at the high end, because of the cost reduction actions. So the annualized view for next year is around $8 million. For this year, we benefited from about $3 million of cost savings in Q3, and we're anticipating that to yield $4 million savings in Q4, so $7 million this year through the cost reduction actions that we took. And that's what's benefiting our EBITDA even though we have the revenue decline.

Some of it was.

A small portion of it was, but because of Q2 and seeing that revenue was coming down, we took more actions than what was originally planned.

Our next question will come from the line of Dave Storms from Stonegate.

Just wanted to go back to Education real quickly here. With it staying relatively strong year-over-year despite the mentioned materials bump received in FY '24, as you continue to make sales here, could you see that materials bump return in another wave? Or would you expect Education revenues to be pretty stable hereon out?

That's a great question. To provide some context, each school that becomes a Leader in Me school, regardless of whether they're part of an individual school, a district, or a statewide contract, subscribes to all the Leader in Me content and tools. While it's not mandatory, many educational institutions prefer physical materials and often purchase them as well. Additionally, our offering includes the implementation of the Leader in Me program with teachers and faculty, along with ongoing coaching support. Most schools do opt for these materials at both the initial start and upon renewal. Occasionally, we experience a surge in material orders, particularly when we secure large district or statewide contracts. This often leads to schools coming on board in significant numbers rather than one by one or in small groups, resulting in material orders for 50 schools simultaneously instead of just 5. This fluctuation can vary from quarter to quarter, influenced by how many schools we sign up in a specific period. For instance, last year's third quarter saw a substantial contract that resulted in a large shipment of materials. This year, we had a significant contract come in earlier, and we are hopeful for another big one in the fourth quarter, which will also contribute to material orders. Therefore, the variations in materials are closely related to these sales dynamics. We anticipate continued opportunities for sizeable material orders in the future as we secure more large districts and expand our reach with states.

Understood, which is part of the mentioned strategy. So that's perfect. I want to also circle back to you mentioned in your prepared remarks a win back that you had from a client from earlier in this year. I know you've also mentioned that there's tariff uncertainty in the near future. Can you maybe lay out the environment for more win-backs, more warm leads, that might be in your pipeline compared to new leads in the near future?

Yes, that’s a great question. As I mentioned, we have consistently seen the percentage of clients with an All Access Pass, particularly in Enterprise and also in Education for Leader in Me, maintaining steady renewal rates year after year. While the associated revenue has fluctuated somewhat due to the economic conditions, the high renewal percentage has remained stable. However, we do experience client churn. Our key focus is on retaining clients, and we embrace the idea that once a Franklin Covey client, always a Franklin Covey client. We truly dislike losing clients and actively work to re-engage them. We assign salespeople and marketing efforts to stay in touch, and we often succeed in winning clients back. Clients who leave usually still appreciate our solution and their partner. In our interviews with these former clients, they frequently express that they love our solution and support team but might not be able to renew due to specific circumstances. We put considerable effort into reconnecting with those clients. The mention of a win-back from the second quarter of fiscal '23 reflects this ongoing commitment. We had a small celebration internally when we were able to bring that client back, which was rewarding to see. This effort will remain a core part of our strategy moving forward.

At this time, I'm not showing any further questions. I would now like to turn it back over to Paul for any closing remarks.

Just thank you again, everybody, for joining today. Thanks for your continued interest, the time you spend to understand the story and to follow us. We're grateful for you. And we look forward to being back again in November to report on the fourth quarter and the full year fiscal results. I hope you have a great rest of your day. And for those that are in the U.S., we hope you have a great 4th of July.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.