Earnings Call Transcript - FC Q1 2026

Operator, Operator

Hello, and thank you for joining us. Welcome to Franklin Covey's Earnings Conference Call for the first quarter of Fiscal Year 2026. I will now hand the call over to Boyd Roberts, Head of Investor Relations. You can proceed.

Boyd Roberts, Head of Investor Relations

Thank you, Towanda. 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 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 similar phrases of similar meanings. 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 related 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 CEO and President.

Paul Walker, CEO

Thank you, Boyd. Good afternoon, everyone, and thank you for joining us. It's great to be with you to have an opportunity to share our results for the first quarter and an update on the business and our outlook for the year. As we noted in our November earnings call, after a year of transition last year in fiscal '25, we expect this year, fiscal '26 to be a year of execution and a return to growth. After a transition year last year in which both invoice and reported sales declined, we expect strong growth in invoiced amounts in fiscal '26 led by Enterprise North America but also for the company overall. Importantly, because much of our growth in invoiced amounts goes on the books and is recognized over time, a portion of this growth in invoiced amounts will be recognized in the back half of the year, resulting in modest growth in reported revenue for the year but positioning the company for accelerated growth in both invoiced amounts and reported revenue, along with adjusted EBITDA and cash flow in fiscal '27. As we'll address in more detail in a moment, consistent with these expectations, we're pleased with the strong growth in invoiced amounts we achieved in Enterprise North America in Q1, where invoiced amounts grew 7%. And importantly, excluding our government business, where this year's first quarter is the last quarter where results are still being compared to pre-DOGE sales levels, invoiced amounts in the rest of Enterprise North America grew an even more significant 13%. This growth was driven by significant increases in new logo subscription sales and also the sales of subscription services to our new logo and our existing All Access Pass clients. We anticipate that the strong growth in North America invoiced amounts will continue in the second quarter. We have a strong pipeline and have had a significant year-over-year increase in advanced bookings of services that we will deliver in the second quarter and throughout the remainder of the year. This expected strong growth in invoice sales is important, both strategically and financially. Strategically, it reflects the traction we're achieving in our go-to-market transformation. And financially, while much of this revenue will go on the books and be recognized over time, the actual economics of these increases in invoiced amounts are being realized well ahead of when we actually report them because we received the proceeds from these invoiced amounts. In addition to this strength in Enterprise North America, we expect operations in Education and international enterprise to be on track with expectations for the year and that invoiced amounts for the company overall will grow meaningfully for the full fiscal year. Just a comment or two about Education. As you know, the Education Division has achieved significant growth and strong results over a number of years, and we're pleased that the Education Division achieved growth last year in fiscal '25, even in the context of the uncertainties faced by almost every school district last spring about the potential impact on school funding from the proposed elimination of the Department of Ed. Absent this uncertainty this year, we expect Education to achieve strong growth in both invoiced and reported sales in fiscal '26. While we have a lot of subscription revenue and education is recognized throughout the year, because schools and districts run on an education year, which begins in September, our first fiscal quarter, which is our first fiscal quarter, a lot of materials and services are purchased and recognized in our fourth fiscal quarter when schools train their teachers and staff in preparation for their school year. As a result, we have a disproportionate amount of our revenue in the Education business, which is recognized in our third and especially our fourth quarter. This has been the normal seasonality for this division over time. Over the past years, in addition to continuing to win a large number of individual schools, we focused on winning districts and now even entire state contracts. This has been important for the business, both strategically and financially. However, because the timing of winning these larger state contracts can occur at different times throughout the year, occasionally, a contract entered into in one quarter is then booked and recognized in other quarters or even into the next fiscal year. This occurred in last year's first quarter, which we comped against in this year's first quarter. In last year's first quarter, we entered into and invoiced for a large number of schools that began implementation as part of a significant multiyear contract with the state. This quarter, we had fewer school start implementations in comparison to last year, which caused an approximate $3.5 million gap in invoiced amounts. However, we've already received and have the cash in hand for the second year of this contract, and we expect the timing of the launch of the schools for this particular state to occur in Q3 and Q4 this year where they had occurred in Q1 last year. Overall, we expect education to have a strong year in fiscal '26 with the pattern of invoiced amounts and recognized revenue being similar to prior years with the exception of the large contract that drove the one-time spike in growth in last year's invoiced amounts that I just outlined. Regarding international, we expect international invoiced amounts and reported revenue as a whole to grow modestly this year. And for the first quarter, revenue was down slightly, mainly due to China, which though now stable, is still comping against the period before the high tariffs were announced in early April last year. Overall, we expect to achieve our full year revenue and adjusted EBITDA guidance. With our full year guidance intact, we anticipate that the meaningful growth in invoiced amounts we expect to generate this year will translate into even more substantial growth in reported revenue, adjusted EBITDA and free cash flow in fiscal '27. Jessi will provide some more detail on Education and International in her segment remarks in just a minute. Before I turn the time to her, I'd like to focus my comments today primarily on Enterprise North America, which makes up more than 50% of our total company sales. It's the engine that we reorganized and invested heavily in last year in order to prepare it for accelerated growth. And it will be the key driver of invoiced growth in fiscal '26 as well as invoiced and reported growth in fiscal '27 and beyond. So a few comments about Enterprise North America. As I mentioned earlier, we're pleased with the strong 7% growth in invoiced amounts that we achieved in the first quarter and the momentum we continue to see. And when looking at the overall strength of the North American engine, we're really pleased, also, as I mentioned, that we achieved 13% growth in North America overall when excluding the government business which was impacted by DOGE last year. We also expect to achieve significant growth in invoiced amounts in the second quarter and for the full year. Key results embedded in the first quarter's overall 7% increase in these invoiced amounts include that, first, our new logo subscription invoiced amounts grew a significant 25% year-over-year. Our deferred subscription balance grew 8% year-over-year to $49.1 million, and our services booking pace was up 29% in the quarter, an important leading indicator of future services revenue that will be recognized and an indication of the importance our clients place on the outcomes we're helping them achieve. Our logo or client retention rate remained consistent with previous quarters and our percent of revenue contracted for multiyear periods increased to 61%. The momentum in return to growth in Enterprise North America, first in invoiced amounts, which will be reflected in growth in reported revenue later into the year and into next year, is being driven by two important factors. First is the strategic importance of what we're doing and the need our clients have for a partner to help them achieve breakthrough business results. And second, the traction and execution we began to see from our go-to-market investments in last year's fourth quarter, and the fact that it's really beginning to kick in. I'd like to just for a couple of minutes briefly touch on each of these two growth drivers. First, related to the strategic importance of what we're doing and the need our clients have for a partner to help them achieve breakthrough results. Strategically, we're playing for something very clear and important. That is to be the partner of choice for leaders seeking to achieve breakthrough results. Achieving and sustaining breakthrough results requires not only good strategy, it also depends on getting large groups of people throughout an organization working together to achieve better and more consistent behaviors and actions to deliver it. Our role is to help organizations achieve their most important goals by strengthening the people part of execution, raising the level and consistency of how people lead, collaborate and execute and to help organizations scale what already works well in pockets across the entire organization. AI is, of course, transforming how work gets done. And at the same time, it's making human capabilities such as judgment, trust and collaboration more critical than ever. We're incorporating AI into our solutions and with some exciting results for clients. In addition to building AI into our products, for example, the AI sales coach I referenced last quarter, as well as our AI Coach for our 4 Disciplines of Execution solution, which we'll launch this year that is going to leverage our experience and our vast amounts of data to help leaders accelerate the execution of their most important goals and objectives. We're also helping our clients on the human side of AI adoption. In the first quarter, we launched 2 new solutions, one called Leading AI Adoption and the other called Working with AI. These solutions are designed to help leaders and individuals develop the mindsets and skill sets to effectively incorporate AI into their daily work to make them and their teams more efficient. However, even with these enhanced AI capabilities, the ability of leaders to clearly determine, communicate and gain broad scale commitment to their critical priorities and then to get their entire organization to become committed to and to stay aligned and focused and accountable while working together with high trust and execution remains the ultimate differentiator in achieving breakthrough organizational performance. We're focused on further strengthening our already significant capabilities in being the partner of choice for organizations that are seeking to achieve breakthroughs in performance. This requires being a leader in combining world-class content, technology and services to deliver breakthrough impact for clients. And we have and continue to invest to expand our position of leadership here. Emphasizing the importance of the critical people side of the execution equation even in a world of increasing AI, in the first quarter, we closed a growing number of large and transformational deals that were tied to a client seeking to achieve a major breakthrough in performance. And I'd like to highlight and share just two of many with you. The first was a large new client win where we unseated the incumbent provider to be the sole leadership performance partner to a leading global agriculture company. We'll be working with this client to help them achieve their critical objective of ensuring that their 3,500 global leaders are equipped both with and able to exhibit world-class leadership capabilities as they seek to accelerate progress on their multiyear strategy and create an even higher performing culture. This win resulted in a 3-year $6 million contract with a very strong mix of services and subscription revenue. A second one I'll just briefly highlight is with a large industrial packaging company. We're partnering with the executive team of this organization to build and strengthen the capability of leaders throughout this organization to transform the culture of this company in connection with a new multiyear strategy to ignite accelerated growth. This is also a multiyear, multimillion dollar win that will draw on the solutions in the All Access Pass as well as our coaching and delivery capabilities. The second key growth driver that I'll touch on is the traction and execution we began to see throughout the back half of last year from our go-to-market investments and the fact that it's really beginning to kick in. In addition to ensuring that our solutions deliver seismically important impact on helping our clients achieve performance breakthroughs, our second priority has been to transform how we take these solutions to market so that we can win more strategic clients and further expand our impact with existing clients. Over the past 4 quarters, we completed the organizational implementation of this transformation, reorganizing sales and client success teams around 2 clear goals: first, landing new strategic clients; and second, further expanding relationships with those we already serve. I reported in November that the structure is fully in place, now with a full 4 quarters under our belt and with the organizational transformation fully behind us, the evidence that this new structure is enabling greater growth is clear. As I mentioned earlier, our new logo hunting team increased invoiced new logo amounts by 25% in the first quarter. Within these new logo wins, we're also seeing a higher attachment rate of services, which is an illustration of both the importance of the challenges we're helping clients address and their desire to engage our experts to help them achieve their most critical objectives. It's also an illustration of our strategic shift in our sales force to a dedicated hunting team with the surround sound resources that are allowing us to call even higher in organizations, focused on more strategic buyers and to solution larger deals with a strong mix of subscription and subscription services. We saw this reflected in our 29% services booking rate increase in the first quarter over what we booked in the first quarter of last year. Our services attach rate in the Enterprise division on an apples-to-apples basis was a strong 55% in the first quarter when considering that $1.6 million of the services we delivered were to a very large and strategic client who purchased intellectual property instead of All Access Pass. That places their services spend in our traditional services reporting category instead of our subscription services category. As a result of our strong growth in invoice sales in North America, our balance of deferred revenue in North America increased 8% year-over-year to $49.1 million. Stepping back, I would just say that we're pleased with the momentum we're seeing in Enterprise North America. Driven by this momentum and the expectation of a strong year for education, we expect invoiced amounts for the company to grow meaningfully this year, establishing the foundation for significant growth in reported revenue, adjusted EBITDA, and cash flow in fiscal '27 and beyond. I'd now like to turn the time over to Jessi to share some more detail on our first quarter results.

Jessica Betjemann, CFO

Thanks, Paul, and good afternoon, everyone. Franklin Covey continues to experience robust demand for our solutions and services in the first quarter. As Paul mentioned, our strategic investments to enhance the Enterprise North America go-to-market strategy are gaining momentum. We anticipate that fiscal 2026 will be a year focused on execution, leading to growth in adjusted EBITDA and free cash flow, and a significant increase in invoiced amounts that will pave the way for accelerated growth in fiscal 2027. I will start by detailing our first quarter financial performance, then discuss our balance sheet and capital allocation priorities, and finally, provide context around our reaffirmed fiscal year 2026 financial guidance. Total reported revenue for the first quarter was $64 million. This revenue was largely in line with our expectations, though it marked a 7% decline from the previous year due to an 8% drop in the Enterprise division and a 2% decrease in the Education Division. These declines mirror last year’s lower invoiced amounts, largely affected by government actions and macro environmental factors, which resulted in less deferred revenue to be recognized this quarter. A summary of our consolidated financial results can be found on Slide 3 in the earnings presentation. Consolidated subscription revenue for the first quarter held steady at $37 million. Despite the lower invoiced amounts realized in fiscal 2025, we were pleased to see overall subscription and committed services begin to grow again, increasing by 5% to $26 million, primarily driven by strong growth in the Enterprise North America segment. The foundation for future growth looks strong, illustrated by a 5% year-over-year increase in our deferred revenue balance to $100.2 million, which will translate to reported revenue in upcoming quarters. Our unbilled deferred revenue for the first quarter was also robust, growing 9% to $8.5 million, although the total balance saw a slight decline of 1% to $72.1 million, reflecting lower balances through fiscal 2025. Our gross margin for the first quarter was 75.5%, down from 76.3% in the prior year, primarily due to increased product amortization costs and slightly lower margins in the Education Division, which benefited from high material sales in the same quarter last year. Operating expenses, including selling and general and administrative expenses, were $44.7 million, slightly down from $45 million last year, reflecting our investments in go-to-market transformation balanced by cost reduction efforts. We incurred $3.4 million in restructuring expenses mainly for severance and related costs. Adjusted EBITDA was $3.7 million, down from $7.7 million last year, influenced by lower reported revenue, gross margin, and higher SG&A expenses. Cash flows from operating activities were $0.1 million, compared to $14.1 million in the same quarter last year, primarily affected by timing changes in working capital, including less cash collected from a lower beginning receivables balance and a decrease in net income. We also experienced increases in restructuring costs and capital expenditures. As a result, free cash flow for the quarter was negative $3.7 million, down from a positive $11.4 million last year. However, we anticipate that free cash flow will improve over the coming quarters and turn increasingly positive in the latter half of the year as our adjusted EBITDA rises and we lower net working capital. Now, let's discuss our business divisions. In the first quarter, our Enterprise Division accounted for 74% of the company's overall revenue, while the Education Division contributed 25%. The Enterprise Division saw invoiced amounts increase by 4% to $45.5 million, with reported revenue for the quarter at $47.5 million compared to $51.6 million last year. The North America segment's invoiced amounts increased by 7% to $34.9 million, and when excluding government contracts, it grew by 13%. We are encouraged by this progress, which reflects the positive momentum from our investments aimed at transforming our Enterprise North America go-to-market organization, and we expect it to yield increased reported revenue in future quarters. An essential aspect of the growth in our invoiced amounts relates to our strategic shift towards solution selling, where we bundle content and predefined services to deliver measurable outcomes for clients. Approximately $5.6 million was from contractually committed predefined services mainly linked to the global agriculture company deal mentioned by Paul. This indicates that clients are increasingly willing to make upfront contractual commitments for services delivered over time. Regarding our international segment, Q1 fiscal year 2026 revenue, which comprises 24% of our total Enterprise Division revenue, was $11.2 million, down slightly from $11.4 million the previous year, primarily due to declines in our China business impacted by geopolitical and trade tensions. Excluding China, the International segment's revenue increased by 4%, and our licensee revenue rose by 8% compared to the first quarter of fiscal 2025. In the Education Division, first quarter revenue was $16.1 million, a 2% decline from the previous year due to decreased material sales related to large deals and events. However, increases in coaching, consulting revenues, and membership subscriptions helped partially offset these declines. Now, regarding our balance sheet and capital allocation. We maintain a balanced capital allocation strategy focused on liquidity, investments for growth, and returning capital to shareholders. Our liquidity was robust at $80 million at the end of the first quarter, with $17.5 million in cash and no drawdowns on our credit facility. We aim to continue investing in strategic opportunities that enhance market positioning and drive profitable growth. For fiscal 2026, we reaffirm our revenue and adjusted EBITDA guidance. We project our revenue to range from $265 million to $275 million, reflecting the lower deferred revenue from fiscal 2025 and the lag in converting invoiced amounts to reported revenue. We expect adjusted EBITDA to range between $28 million and $33 million, factoring in cost reduction efforts and restructuring. We anticipate that around 45% to 50% of our fiscal year revenue will come in the first half of the year, typical for the Education Division and based on client delivery timing. With our transformation efforts behind us and expected operational leverage, we are confident that strong EBITDA and free cash flow growth, along with improved margins, will occur in fiscal 2027 and beyond. Our optimism is supported by strong client retention, increasing demand for our services across both divisions, and our resilient business model. We see fiscal 2026 as a year to execute our plans and expect fiscal 2027 to be a year of accelerated growth in revenue, adjusted EBITDA, and cash flow. We are committed to generating long-term value for our shareholders and clients. Before handing it back to Paul, I would like to express my gratitude to the entire Franklin Covey team for their hard work and dedication to delivering exceptional service to our clients. Paul, it's over to you.

Paul Walker, CEO

Thanks, Jessi. We'll now ask Towanda, she'll open up the line for your questions. Happy to take those.

Operator, Operator

Our first question comes from Alex Paris with Barrington Research.

Alexander Paris, Analyst

So I have a few follow-up questions, although your prepared comments are quite thorough as usual. Not in any order, just starting with guidance and this one is for Jessi. You reaffirmed guidance for the full year. The only real change though was that a little bit more of the adjusted EBITDA will come in the back half than you had previously thought. I was having trouble keeping up, but you said this was due to the timing of large education contracts? Or was that enterprise contracts?

Jessica Betjemann, CFO

Education. So as we had mentioned, when we were looking at that for this year, the addition of some schools for that large state by contract that we have won last year. The anticipation of that is that, that is going to be in Q3 and Q4. So that just pushed a little bit more in terms of the adjusted EBITDA. So previously, we thought 30% to 35% of our adjusted EBITDA will be in the first half and now we're saying 25% to 30%, so just a little bit lower, but overall, we are affirming the overall EBITDA guidance for the year.

Alexander Paris, Analyst

Okay. So just so I understand it, this was a large education statewide contract won in the fourth quarter of the previous year that began to be implemented in the first quarter of fiscal 2025, with school openings and so on. It's a multiyear contract. So the additional schools this year won't come in Q1 like it did last year, it's going to come in Q3 and Q4. And you didn't know that several months ago...

Jessica Betjemann, CFO

There was an anticipation. We knew that it was going to be more back-end loaded and is kind of normal for the education business. But there was a thought that there would be some schools added in the first quarter. So that just got solidified.

Alexander Paris, Analyst

Okay. Got you. I appreciate that. And that you expect strong adjusted EBITDA growth and free cash flow growth in 2026 versus 2025 with more growth in both of those metrics as well as revenue in 2027.

Jessica Betjemann, CFO

I mean revenue, adjusted EBITDA, and free cash flow growth in 2027. When you look at our EBITDA range for this year, there's growth in the midpoint and the top end as well.

Alexander Paris, Analyst

Got you. Okay. And then regarding North American enterprise sales force, an update, again, pretty thorough in the prepared comments, more new logos, All Access Pass expansion within existing clients, retention at comparable levels to last year. Do I have that right?

Paul Walker, CEO

You do have that right. Yes.

Alexander Paris, Analyst

Okay. And then invoice growth is what we're really focused on and invoiced growth in Q1 was up 7% in North America enterprise, up 13%, excluding the DOGE contract. What was it in Q4 or Q3? I just want to see if we're accelerating as we expect to.

Paul Walker, CEO

Yes. Yes. Great question. Let's just get that for you real quick here.

Alexander Paris, Analyst

Yes. It's probably in the slide deck, but I haven't gone through it yet.

Paul Walker, CEO

Oh no, we can find it.

Alexander Paris, Analyst

The North American enterprise invoiced amounts up 7% in Q1. What was it in Q4?

Jessica Betjemann, CFO

It was down in Q1...

Paul Walker, CEO

Q4.

Jessica Betjemann, CFO

Oh, in Q4...

Paul Walker, CEO

Q4, Q3. Alex, we're just getting this for you.

Alexander Paris, Analyst

Sure no problem, appreciate it. And then while you're looking for stuff. In the Enterprise Division, you've historically given direct offices and international licensees. Is that in the slight deck also, it wasn't in the press release.

Jessica Betjemann, CFO

Which one?

Paul Walker, CEO

You want to talk about the international licensee.

Jessica Betjemann, CFO

Yes, the revenue growth in the quarter was 8%. When we published the 10-Q, we consolidated our segments into one Enterprise International segment. We specifically wanted to highlight that the growth in revenue for the licensee was 8%.

Alexander Paris, Analyst

Okay. So you're not going to be giving that separately going forward? Or will it be in the...

Jessica Betjemann, CFO

We're consolidated, and we manage the business together between our direct offices and our licensees. It's combined in our 10-Q, but we wanted to highlight the difference in revenue between total international and what is included in the licensee fee.

Paul Walker, CEO

And then Alex, as Jessi mentioned, please go ahead.

Alexander Paris, Analyst

I want to clarify that segment reporting will be categorized as Enterprise, which will include North America and International. There will not be a separation between international licensee or international direct office, and then we have the Education segments. So, there are two segments, but within Enterprise, we are distinguishing between North America and international.

Paul Walker, CEO

That's right.

Jessica Betjemann, CFO

Okay. Just going back to your previous question, it took me a moment to find this information. The Enterprise North America invoiced amounts in Q4 were $37.2 million, which actually represents a decline from the same period last year.

Alexander Paris, Analyst

Do you know how much down or is it in the...

Jessica Betjemann, CFO

It was down 26%.

Alexander Paris, Analyst

Okay. Yes. I kind of remember that. So a big inflection point here in Q1.

Jessica Betjemann, CFO

Q3 was also down 11%. This is a great quarter for us in terms of Enterprise North America invoiced amounts. Last year, Q1 was down 8%, then it grew 2% in Q2, followed by a decline of 11% and 26%. So this is a great quarter for us.

Paul Walker, CEO

And the best growth quarter we had in a while.

Jessica Betjemann, CFO

Yes. When you look back, we didn't experience growth like this before. We had similar growth in Q4 2024, but in the earlier quarters, such as Q1 2024, there was a decline of 2%.

Alexander Paris, Analyst

Got you. So pretty easy comps in the back half of the year for invoiced amount, so it's reasonable to expect those invoiced amounts are going to continue to increase on a year-over-year basis.

Jessica Betjemann, CFO

Yes. That's our expectation is for North America invoiced amounts to continue to grow.

Operator, Operator

Our next question comes from the line of Nehal Chokshi with Northland Capital Markets.

Nehal Chokshi, Analyst

That's great to hear on the significant upward trajectory on North America Enterprise invoice. To be clear, is this largely now being driven by a higher attach rate of services on the invoiced amounts? Or are you also seeing also a positive inflection with the subscription portion.

Paul Walker, CEO

It's a combination of both. As I mentioned earlier, our attach rate for Enterprise in the first quarter was roughly the same as it was in Q1 last year, around the mid-50s percent. So there hasn't been a significant increase in the services attach rate. However, we are pleased and encouraged by our progress, which Holly and the team have been strategically working on. As we're selling to higher-level buyers within organizations, we are attaching to even larger opportunities and challenges they face. There's a strong synergy between our excellent content and our expertise, enabling us to facilitate that content effectively. This helps bring groups of people together to focus on behavior change, performance improvement, and culture building. The coaching and delivery associated with this are compelling and essential for our clients. In the first quarter, we booked a significant amount of additional services, with services bookings increasing by 29%, though the attach rate remained consistent year-over-year.

Jessica Betjemann, CFO

Yes. As I mentioned, we had $5.6 million of contractually committed services invoiced in the quarter. To emphasize, this is beneficial for us in the long term. It's upfront revenue from services linked to a large multiyear agriculture deal, so the recognition of that revenue might not occur until 2027. The positive aspect of this is that it significantly reduces the risk for us since all of these services are guaranteed.

Nehal Chokshi, Analyst

Yes, I understand. Paul, you mentioned a 25% growth in the invoice amount for new logos. Is that correct? Did I hear that right?

Paul Walker, CEO

That's right. Yes.

Nehal Chokshi, Analyst

Okay. And is that 25% in new logo invoice amount even across, again, subscription and then service attached subscription? Or is it more weighted towards service attach subscription?

Paul Walker, CEO

That's a good question. In that case, that metric is subscription only. There's no services included. The team did well this quarter in acquiring new logos. The 7% overall invoice growth is something we haven't seen in a while, and there's been a 25% increase in the subscription portion. Additionally, some of these included services that will contribute to revenue throughout the year. But that is strictly a subscription-only metric.

Nehal Chokshi, Analyst

Got it. Well, that's amazing. Is it safe to say that you don't expect that momentum to that level of new logo subscription invoice amount to sustain into the future quarters? I mean that would be pretty amazing if it did...

Jessica Betjemann, CFO

I would say we expect to have the growth, but not at that percentage.

Paul Walker, CEO

I'd say we're certainly going to try. It may not always come in at 25%, but we're expecting growth.

Nehal Chokshi, Analyst

Got it. And so what was the driver of this unusual growth? Was it basically these two large deals that you called out?

Paul Walker, CEO

It was more than that, Holly Procter is here, who leads Enterprise. Do you want to share or give a little color there?

Holly Procter, Enterprise Lead

Yes, for sure. A couple of comments. I mean, we're pleased, of course, because of the results, but also because the effort we put into this go-to-market transformation is finally bearing fruit. In our last earnings, we talked about examples of wins, and that came at the deal level. So we would see a deal that we likely wouldn't have won in our former model that we now won. And now we're seeing not just in the deal level, but in the compounding result of lots of deals compounded to deliver what we delivered instead of Q1. The primary wins are showing up in several fashions. We're seeing, one, larger deals. So when you look at the average sales price, the size of the deal that we're winning is larger. I'm talking about not just the number of seats sold, but the total dollars that we're able to extract from that win. We're seeing more strategic deals, meaning it's sold into a higher level, and we're attached to a really powerful use case, meaning an initiative that an executive can't quite figure out how to proceed with or without us. And then the services that Paul referenced, the reason why the services are so critical, they're strategic in a couple of ways. Yes, of course, we're grateful for the revenue, but also the services are the same that ensures we can drive the impact that we're looking for. If you think about an example, let's say, an executive team is integrating a merger or an acquisition into their company, they're now looking to check a box. They're looking to successfully integrate and they're doing that in partnership with us and the expertise that we bring to that. So the services are critical for us to be able to make the impact that we want to make. We know that services contribute to a couple of things for us outside of this revenue. It improves our ability to renew that customer and likely results in us having multiyear deals with that customer, too. So generally up across the board.

Nehal Chokshi, Analyst

Okay, great. I want to go back to the data points that Alex was asking about. I have the Q4 number for North America's enterprise invoice, but I didn't quite catch the Q1 and Q2 numbers for 2025. Could you please repeat those?

Jessica Betjemann, CFO

Yes, Q1 '25 declined 8%, Q2 grew 2%, Q3 was down 11%, and Q4 decreased 26%. This was the second highest growth of invoiced amounts in North America over the last 2 years, with the highest growth occurring in Q4 '24.

Nehal Chokshi, Analyst

Got it. Okay. Last question for me. You mentioned that your liquidity is quite strong with your revolver. Under what conditions would you be willing to draw on that revolver given what I believe is a very attractive share price?

Jessica Betjemann, CFO

We have a $20 million plan in place. By the end of this month, we expect to have spent $30 million since July. We are seizing the opportunity available in the marketplace. Over the past 12 quarters, we have utilized more than 130% of our free cash flow to buy back shares, indicating that we are capitalizing on this opportunity.

Operator, Operator

Our next question comes from the line of Dave Storms with Stonegate.

David Storms, Analyst

I wanted to start by revisiting Holly's comments about the strong growth in new logo sales and ask for more details on what you're observing, particularly about how the landers transition to the expanders and what we might expect in terms of the life cycle of those new logos regarding attach rate expansion or anything similar.

Holly Procter, Enterprise Lead

Mostly in your question. Is it about the life cycle of what happens with the customer after the initial sale and it passes to the expansion. Is that right, Dave?

David Storms, Analyst

Essentially, yes.

Holly Procter, Enterprise Lead

That was a significant part of our experiment, where we successfully acquired a new customer and then transitioned that relationship to a client partner for ongoing management. There are two key factors involved. The first is acquiring a substantial new customer and securing their business. The second is being able to enhance retention and grow expansion revenue by having a single individual oversee the entire customer lifecycle. We've had great success in transitioning new customers to a client partner who manages them over time, which has fostered incredible focus for both teams. One team concentrates solely on acquiring new customers, while the other focuses entirely on customer success and expansion. Our retention numbers have remained consistent, and we do not observe any increase in churn or retention issues stemming from this transition.

David Storms, Analyst

That's great. I really appreciate that. Perfect. Okay. Paul, turning into maybe some of your more prepared remarks, you did spend a little bit of time talking about some of the AI initiatives that you're working on. Just curious as to how you're thinking about the balancing act between bringing on AI talent and building some of that in-house compared to stuff that might be easier, more cost-effective to purchase and customize?

Paul Walker, CEO

Yes. Great question. I think we'll do a bit of both. We launched an AI lab a while back and the whole focus of that AI lab is on creatively looking at how can we embed AI across our portfolio of solutions inside the Impact Platform. I mentioned earlier on the call, one of the things we're excited about that's coming next is we're releasing a new addition of the 4 Disciplines of Execution that solution a little bit later this year, and that's going to have a pretty strong AI coaching component in it. That's something we think we can do ourselves internally. There are might be and are under consideration some other great tools that are out there that if we can license those or partner with somebody who's already built it, we're certainly not opposed to doing that. At the end of the day, we're maybe a little more agnostic on how we get there. We just know that this is an important new component of our solutions that can really help when it comes to changing behavior and generating the collective action that organizations need to drive their most important strategies and objectives. So probably do a bit of both.

David Storms, Analyst

That's perfect. That's great color. And then I did have maybe one more for Jessi. Jessi, I know you mentioned in your prepared remarks that you're expecting some of the margin expansion to come from maybe some cost takeout over the back half of this year into 2027. Is there any more you can give us there maybe expand on the magnitude of that? Any dollar amounts, any specific verticals that you're targeting that we should know about?

Jessica Betjemann, CFO

So that commentary is really around the additional restructuring we did in Q1. With the cost reductions this quarter, you'll notice the compounding effect as we progress through the rest of the year since it started mid-quarter. Additionally, you'll see the full annualized impact from the restructuring we implemented last year as we continue further into the year.

David Storms, Analyst

Understood. So we shouldn't expect any more restructuring of that magnitude this year?

Jessica Betjemann, CFO

We will always be reviewing our cost structure. While I’m not ready to rule that out completely, I can say that it is currently stabilized.

David Storms, Analyst

Very fair. I appreciate that. Maybe Paul, one more for you. We just got through kind of budgeting season or early in the year, maybe a high-level customer sentiment question here. As you're having conversations with current and potential customers, are there any verticals that you're specifically targeting? Any high-level thoughts there around where you see opportunity in the market?

Paul Walker, CEO

Maybe I'll let Holly answer that one.

Holly Procter, Enterprise Lead

Yes. There are several benefits to our business, one of the most significant being our large total addressable market. We have a wide range across the verticals we serve, but currently, about 17% of our revenue comes from health care. We observe many consistent use cases, especially how hospitals utilize our services, with one major example being nurse retention. We are currently focused on enhancing our support with additional resources for attracting new hospitals and for better supporting the 17% of our revenue that is derived from health care.

Operator, Operator

Our next question comes from the line of Jeff Martin with ROTH Capital Partners.

Jeff Martin, Analyst

Paul, could you characterize any changes in the macro environment with respect to enterprises making decisions over the course of the last 3 months or so since we last talked to you publicly?

Paul Walker, CEO

Yes. Again, I think Holly since focus a lot on Enterprise North America, do you want to talk about that?

Holly Procter, Enterprise Lead

Yes. Jeff, we certainly look at this a lot, hoping to see signals of improvement. We would still categorize the state of the macro environment is mostly neutral. We see examples of both some positive uptick and still some downward pressure. Examples of positive uptick include things like discretionary spend. So people that have dollars that they want to devote to Franklin Covey but are not yet sure how to spend it. A year ago that was unheard of. And so we're grateful to see that but still see plenty of examples of budgetary pressures from our customers. And so I'd categorize it as mostly still neutral.

Jeff Martin, Analyst

Okay. Great. And then Paul, could you characterize if clients are coming to you asking for help in terms of AI-related issues that they're concerned about, changes in behavior, et cetera? Or is this more, "oh, we could utilize something like that", to add on to a totally separate journey that they're working on?

Paul Walker, CEO

If I understand your question correctly, I think it's a bit of both. We have several examples where clients are approaching us, expressing that they are struggling with integrating AI into their businesses. The bigger challenge is not the technical aspects, but rather the human side. It's about getting leaders within the organization to embrace and adopt this change, and helping their teams overcome their fears. This relates to the ongoing challenges of providing clarity, building trust, and enabling people to accept new ways of working. Interestingly, our experience in helping humans work better together is relevant here, as similar principles apply to human interaction with AI and the comfort that needs to come with it. We are increasingly seeing clients asking for assistance because they view us as a reliable partner for transformation. Whether this transformation involves merging companies, developing a new strategy, or incorporating AI as a new capability, there are human barriers that must be addressed. We are engaged with some clients in leadership journeys, where we can integrate our new AI solutions to enhance those projects. We appreciate both scenarios because they position us to become more strategically important and relevant, allowing us to extend our relationships for many more years and with more individuals.

Jeff Martin, Analyst

Great. And then last one for me is for Jessi. Was the restructuring that occurred in the first fiscal quarter contemplated in the original fiscal '26 guidance? Or was that subsequent to the establishment of that guidance?

Jessica Betjemann, CFO

No, that was factored in. We did mention that in the Q4 call, and it was a sub event that was listed in our 10-K. So this was factored in.

Paul Walker, CEO

Okay. Thank you so much. Again, everybody, thank you for joining today, and we appreciate the questions and how thoughtfully you think about the business, and I hope you all have a wonderful rest of your day and a great rest of the week.

Operator, Operator

Thank you ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.