Earnings Call Transcript - FC Q2 2026

Operator, Operator

Good day, and thank you for standing by. Welcome to the Second Quarter 2026 Franklin Covey Earnings Conference Call. Please be advised that today's call is being recorded. I would now like to hand it over to our first speaker, Boyd Roberts, Head of Investor Relations. Please go ahead.

Boyd Roberts, Head of Investor Relations

Good afternoon, everyone, and thank you for joining us today on Franklin Covey's Second Quarter 2026 Earnings Call. We appreciate having the opportunity to connect with you. Before we begin, please remember that today's remarks contain forward-looking statements as defined by the Private Securities Litigation Reform Act of 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 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 CEO.

Paul Walker, CEO

Thanks, Boyd. Good afternoon, everyone, and thank you for joining us. It's great to be with you and to have the opportunity to share our results for the second quarter and provide an update on the business and our outlook for the remainder of the year. We're pleased with our results in Q2. Revenue and adjusted EBITDA grew year-over-year, met our expectations and were above consensus. As we've shared previously, fiscal 2026 is a year of execution and a return to growth. And we're encouraged by the continued progress and momentum we saw in the second quarter and throughout the first half of the year. Invoice amounts in the quarter grew 5%, driven by 7% growth in Enterprise North America, or 10% when excluding our government business, which was impacted by the disruption caused by a reduction in federal spending. Invoiced growth overall was also driven by a 7% growth in Enterprise International. We expect invoice growth to remain strong through the balance of the year. Because a significant portion of invoice growth is recognized over time, this positions us for accelerating reported revenue, adjusted EBITDA and cash flow in fiscal '27. In Enterprise North America, growth was broad-based. We saw strong sales of subscription and services to new logos, continued strong retention and meaningful client expansion, resulting in one of our highest revenue retention levels in recent periods. Services bookings also continue to be strong and are up 9% for the year as of this week, reinforcing the importance clients place on the business outcomes we help them achieve. In addition, deferred subscription revenue grew 16% year-over-year and the percentage of revenue under multiyear contracts increased to 62%, reflecting both client confidence and the long-term nature of our partnerships. In an environment where leaders are working to accelerate results while navigating uncertainty and disruption, Franklin Covey continues to be sought out as a key partner in addressing the human side of strategy, execution, change management including related to clients' implementation of AI and achieving measurable performance transformation. We expect the momentum we've experienced in the first half to continue to be strong through the second half of the fiscal year. Turning to our business outside of North America, our International business delivered strong performance, partially benefiting from foreign exchange with invoiced amounts growing 7% and particularly strong performance in our direct offices where invoiced amounts grew a strong 14%. And in our Education business, reported revenue grew 16% in the quarter, driven by strong demand for Leader in Me services and materials. We feel very good about the momentum in Education and the business is positioned well for a strong second half and full year performance. Overall, we remain confident in achieving our full year revenue and adjusted EBITDA guidance and in the strength of the foundation we're building for accelerated growth in fiscal '27. Jessi will provide more detail on our specific segments in her remarks in a few moments. I'm going to focus the remainder of my remarks today, first, on Enterprise North America, which makes up more than 50% of total company sales and the area in which we have invested for accelerated growth. And second, I'll talk briefly about the strategic importance of what we do and why a growing number of organizations are partnering with Franklin Covey to drive the human side of strategy and transformation, particularly as we simultaneously leverage AI to transform. So first, as it relates to Enterprise North America. Enterprise North America, which represents more than half of our total revenue, is at an important inflection point. The growth we're seeing reflects both the increasing strategic importance of what we do for our clients, and the traction from the go-to-market transformation we implemented last year. We're now seeing clear evidence that these investments are driving stronger new client acquisition, deeper client relationships, and greater expansion within key accounts. Key results embedded in the second quarter's overall 7% increase in invoiced amounts in Enterprise North America include the following: First, we had strong sales to new clients or to new logos, reflecting a combination of both subscription sales and services. Second, our balance of deferred subscription revenue grew a very strong 16% year-over-year to $59 million, building on the 8% growth in deferred subscription revenue last quarter. Third, we again had a strong logo or client retention quarter. Fourth, we achieved strong existing client expansion where expansion drove one of the highest overall revenue retention percentages we've achieved. Fifth, the percentage of our revenue, which is contracted for multiyear periods increased to 62%. With our sales engine accelerating as planned, I'd like to focus the remainder of my remarks on the strategic importance of what we do and the growing need organizations have for a partner who can help them unleash their organizations to achieve breakthrough results, and why we believe our position has strengthened in the current environment. Artificial intelligence is creating extraordinary new possibilities for organizations. But before addressing that directly, it's helpful to step back and consider a broader pattern we've seen over time. Franklin Covey has been a trusted partner to leaders and organizations through multiple periods of significant disruption, from the digitization of business processes to the global financial crisis to rapid shifts in how and where we work and where work gets done like during the pandemic. In each case, one principle has remained consistent. In times of disruption and transformation, the need for strong leadership, trust and disciplined execution increases. It doesn't decrease. We believe AI follows the same pattern. And as a result, there are three things that are important to understand about how AI interplays with our business. The first of these, as I noted, is that AI is actually increasing the premium on human leadership and execution. AI is accelerating change inside organizations. It has the potential to raise productivity, expand spans of control and increase the pace and complexity of decision-making. As routine work is automated and access to information becomes more widely distributed, the differentiators for organizations increasingly become judgment, trust, collaboration, alignment and disciplined execution. At the same time, we're seeing how AI has the potential to reduce the amount of routine and analytical work organizations do, we also see how AI is increasing opportunities that can result from strong leadership, high trust, winning cultures and great execution. The second area and the second interplay is that our model is built around behavior change and collective action tied to real measurable performance outcomes. Our model is not about just delivering content or software digitally. Our role is to help organizations strengthen the people side of execution, helping leaders clarify priorities, align teams, build capability and create accountability systems that translate strategy into measurable results. For many of our clients, Franklin Covey functions as a long-term performance partner to their leadership teams and their organizations overall. While a significant portion of our revenue is subscription-based, our model is fundamentally different from SaaS. Our subscriptions are related and related services are tied to enterprise-wide performance outcomes and long-term partnerships, not simply software usage. This positions us as a performance and advisory partner rather than a software provider. For example, this is reflected in our work with health care systems, where we partner directly with Chief Nursing Officers to strengthen leadership capability, trust and execution across care-providing teams. This drives higher employee engagement, lower nurse turnover and improved patient satisfaction and outcomes, which also directly impacts hospital reimbursement. This reflects the core of our model, the integrated combination of content, technology, services and advisory applied together to drive sustained behavior change and collective action across organizations. That capability and the measurable outcomes it produces is not something AI can replicate at scale. We also saw this in the second quarter with a large technology company that selected Franklin Covey to support the CEO's strategy to transform the organization to an AI-enabled operating model. While the strategy is technical in nature, successful execution of this transformation shift in their business will depend heavily on strong leadership, successful change management and a high-trust fast-moving culture, all areas where we're a key partner. This work that we're involved in is about changing collective behavior across teams and organizations, something fundamentally different from simply providing access to ideas or content. The significant impact our engagement and solutions have is exactly what is behind the fact that even in and perhaps especially in times of significant change, we continue to retain a high percentage of clients and they continue to extend both the duration and size of their contracts with us. The third interplay with AI is that we have significant room for growth within our existing client base. Today, our solutions typically reach only a small portion of the employee population within our client organizations, generally in the range of 5% to 10%, which provides substantial room for growth over time, even in a more efficient or AI-enabled workforce. We saw this clearly in the second quarter where we delivered one of our strongest expansion quarters in recent periods, driven by increasing demand for enterprise-wide transformation and leadership capability. Taken together, these dynamics position us well in an AI-driven environment. At the same time, we're continuing to evolve our solutions to incorporate AI in ways that increase the value we provide to our clients. We're embedding AI-enabled coaching and execution tools into our platforms and we're helping organizations lead the human side of AI adoption. We're seeing this play out directly in our business through strong client expansion, increasing multiyear commitments and growing demand for enterprise-wide transformation engagements. These trends reinforce our conviction that as organizations navigate increasing technological change and complexity, the need for strong leadership, trust-based cultures and disciplined execution will continue to grow. Stepping back from all of that, as I conclude my remarks here today, I just would say that we're pleased with the momentum we're seeing in the Enterprise North America portion of our business and across the business as a whole. Driven by this momentum and the expected strength in Education, we believe we're well positioned to deliver meaningful invoice growth this year, and to establish the foundation for significant growth in reported revenue, adjusted EBITDA and cash flow in fiscal '27 and beyond. I'd now like to turn time to Jessi to share more detail on our second quarter results.

Jessica Betjemann, CFO

Thanks, Paul, and good afternoon, everyone. Franklin Covey continued to see strong demand for our solutions in the second quarter, and as Paul discussed, the strategic investments we've undertaken to transform our Enterprise North America go-to-market strategy are continuing to gain traction. We expect fiscal 2026 to be a year of execution where our adjusted EBITDA and free cash flow will return to growth and where our meaningful growth in invoiced amounts will set us up for accelerated growth in fiscal 2027. In my remarks today, I'll start by providing some details of our second quarter financial performance, then I'll turn to our balance sheet and capital allocation priorities. And finally, I will provide additional context around our reaffirmed fiscal year '26 financial guidance. Total second quarter reported revenue was $59.6 million. Revenue, which was in line with our expectations for the quarter, was flat to the prior year as a 4% decline in reported revenue in the Enterprise division was offset by a 16% improvement in the Education division. Foreign exchange rates had a $0.7 million favorable impact on our consolidated revenue in the quarter. Importantly, our consolidated invoiced amounts grew by 5%, resulting in a 7% increase in deferred revenue at the end of the second quarter, establishing the foundation for accelerated growth in reported revenue in fiscal 2027. A summary of our consolidated financial results is on Slide 3 in the earnings presentation. Consolidated subscription and subscription services revenue recognized for the second quarter increased 3% to $50.9 million. We are especially pleased that consolidated subscription and committed services invoiced amounts for the quarter were up 16% to $39.3 million, continuing the growth we saw in the first quarter for the Enterprise North America and now including growth in Enterprise International. The total value of contracts signed in the second quarter grew 8% to $53.7 million, and was led by the Enterprise division, which raised the value of contracts signed by 12%. The foundation for increased future growth remains solid and is evidenced by the 7% year-over-year increase in our consolidated deferred revenue balance to $101.5 million, which will be recognized as reported revenue in the coming quarters. The total amount of unbilled deferred revenue contracted for the second quarter was also strong, increasing 9% to $10.6 million, with the total balance increasing 1% over the prior year to $64.9 million, which will convert to invoiced amounts and deferred revenue in the future. Gross margin for the second quarter was 75.9% compared to 76.7% in the prior year due to increased amortization of capitalized curriculum expenses and a shift in mix of services delivered and products sold during the quarter. Operating selling, general and administrative expenses for the second quarter were $41.2 million, which was 6% lower than the $43.7 million in the prior year, reflecting reduced associate costs and other cost reduction efforts taken in fiscal 2025 and in the first quarter of this year. Adjusted EBITDA for the second quarter was $4.1 million, an increase of 99% or $2 million compared to last year's second quarter, reflecting the stable revenue, gross margin and lower SG&A expenses I just mentioned. Foreign exchange rates had a $0.2 million favorable impact on our adjusted EBITDA in the quarter. During the second quarter, we continued to streamline our business in certain areas of our operations. We incurred $1.5 million in expense for this restructuring activity, which consisted of severance and related costs. We realized a net loss of $2 million compared to a net loss of $1.1 million in the prior year, reflecting the $1.5 million increase in restructuring costs, a $1.3 million increase in share-based compensation expense and $0.5 million increase in building exit costs, which primarily consists of legal expenses. These increases were partially offset by decreased SG&A expenses. Cash flow from operating activities for the first 2 quarters of fiscal '26 increased 28% to $16.4 million, reflecting the strength of second quarter operating cash flows of $16.3 million versus a negative $1.4 million of cash used in the second quarter last year. This was driven by improved receivables collections and higher invoiced amounts. These improvements offset lower operating income and increased capitalized development costs in the second quarter of fiscal '26 compared with the prior year. Free cash flow for the second quarter was $13.2 million compared to a negative $3.6 million of cash used last year. I'll turn now to a discussion of our business divisions. For the second quarter of fiscal '26, our Enterprise division generated 70% of the company's overall revenue, with the Education division generating 29% of the company's revenue. Second quarter Enterprise division invoiced amounts grew 7% to $52 million. Second quarter Enterprise Division's reported revenue was $41.6 million or 4% lower when compared to $43.6 million in the prior year. As shown on Slide 4, the North America segment invoiced amounts grew a consecutive 7% this quarter to $42.7 million, and excluding government contracts, it grew 10%. We are encouraged by the continued progress this quarter in invoiced amounts, which reflects the positive momentum coming from our investments to transform our Enterprise North America go-to-market organization, and we expect this to translate into increased reported revenue in future quarters. Last quarter, I highlighted an important change aligned with our strategic focus on solution selling, whereby clients now may contractually commit upfront for services, which will be delivered over time as we bundle content and predefined services together. In the second quarter, approximately $3.5 million in invoiced amounts was for such contractually committed predefined services. And while we continue to recognize the revenue upon delivery, because these services have been contractually committed upfront, any unused fees are guaranteed and will be recognized at the end of the contract term. On Slide 10 in the appendix to our earnings presentation, our roll-forward analysis of deferred revenue includes both subscription and committed services amounts and the timing for revenue recognition for committed services will depend on the delivery schedule of our clients. The North America segment's reported revenue of $32.5 million accounted for 78% of our Enterprise division sales in the second quarter of fiscal '26, and was 6% or $2 million lower than prior year, primarily due to lower subscription revenue recognized as a result of a lower invoiced amount and deferred revenues last fiscal year. Adjusted EBITDA for the North America segment increased $1.1 million to $5.9 million for the second quarter of fiscal '26 compared to $4.8 million last year, primarily due to lower SG&A costs resulting from the restructuring activities in recent quarters. Our balance of billed deferred revenue in North America was $59.3 million at the end of the second quarter, an increase of 16% from the prior year and unbilled deferred revenue was $61.1 million, an increase of 3% from the prior year. Importantly, the number of North America's All Access Passes contracted for multiyear periods increased to 59% in the second quarter compared to 55% last year, and the contracted amounts represented by multiyear contracts increased to 62% compared to 61% in the prior year. As shown on Slide 5, second quarter revenue from our Enterprise International segment, which is the combination of our International Licensee revenue and our International Direct Office revenue was $9.2 million. This accounts for 22% of our total Enterprise Division revenue and represented a 1% increase over the prior year of $9 million. International Direct Office revenue, which accounts for approximately 70% of total international revenue increased 7%, driven primarily by improved year-over-year revenues in France and China due to a foreign exchange currency benefit, while International Licensee revenue, which accounts for approximately 30% of total international revenue decreased 10% from the prior year. Invoiced amounts for our International Direct Offices grew 14% year-over-year. And while 6 points of this growth is due to foreign exchange, we are encouraged by the overall growth trend this quarter. Adjusted EBITDA in the second quarter of fiscal '26 for the International segment was $1 million compared with $0.5 million in the prior year, driven by increased revenue and lower operating costs, including lower bad debt expense compared with the prior year. Now turning to our Education division. As shown on Slide 6, revenue in the second quarter increased 16% to $17.5 million. This primarily reflects increased training and switching revenue from the delivery of more than 300 additional training and coaching days compared to last year as well as an additional symposium event and increased purchases of classroom and training materials by schools. Invoiced amounts in the second quarter of fiscal '26 of $8.5 million decreased slightly from the $8.6 million generated in the prior year, partially due to the timing of a large statewide deal, whose revenue began in the first quarter of fiscal 2025, but which is expected to fall into this year's third and fourth quarters. Education subscription-related revenue increased 19% in the second quarter to $12 million compared to $10.1 million in the prior year. Adjusted EBITDA for the Education division in the second quarter was $0.4 million compared to a loss of $0.3 million in the prior year due to increased revenue. Education's balance of billed deferred revenue decreased 4% to $36.1 million as a result of the strong increase in the number of days associated with the Leader in Me subscriptions that were delivered in the quarter. We currently expect Education to have a strong year in fiscal 2026, with the pattern of large, invoiced amounts and recognized revenue to come in the back half of the year and especially in the fourth quarter. I would now like to spend a few minutes discussing our balance sheet and capital allocation priorities. We continue to pursue a balanced capital allocation strategy focused on three primary areas that are aligned with our strategic goals. First, maintaining adequate liquidity and flexibility. Our total liquidity remains strong at over $76 million at the end of the second quarter, with $13.7 million of cash on hand, even after having repurchased $17 million of our stock, combined with the company's $62.5 million credit facility, which is fully available. Second, investing for growth. We will continue to invest in strategic opportunities to drive improved market positioning, accelerated profitable growth and financial value, such as our continued investments in product innovation, business transformation initiatives and opportunistic acquisitions when available. And finally, continuing to return capital to shareholders as appropriate. In the second quarter, we purchased approximately 922,000 shares in the open market at a cost of $16.5 million. And in January '26, completed the $20 million 10b5-1 purchase plan we initiated in November of 2025. The company also acquired approximately 25,000 shares to cover income taxes on stock-based compensation awards issued during the second quarter for a value of $0.4 million. Year-to-date, the company has purchased nearly 1.6 million shares of its stock for $28.1 million. During the last 12 quarters, the company has used 130% of free cash flow to buy back shares. We have a $50 million share repurchase authorization from the Board of Directors with $20 million remaining after the two 10b5-1 plans we had in place have now been completed. We remain committed to being disciplined stewards of capital while being focused on driving long-term value creation. Now turning to our guidance for fiscal 2026. We continue to affirm the revenue and adjusted EBITDA guidance for the year, as shown on Slide 7. Our projections reflect the positive momentum we are seeing and expecting in both the Enterprise and Education divisions, balanced with a disciplined view of the risks and opportunities ahead as we continue to execute in an uncertain macro environment. We continue to expect to achieve solid growth in invoiced amounts this year as demonstrated by the progress in Enterprise North America and the International segments this quarter. Our revenue guidance of $265 million to $275 million is after reflecting the lower deferred revenue generated in fiscal 2025 and the conversion lag of invoiced to reported revenue in the year, as a portion of the invoiced growth will go onto the balance sheet as deferred revenue. We continue to expect fiscal '26 adjusted EBITDA in the range of $28 million to $33 million, capturing the benefit of our cost reduction efforts including additional restructuring actions taken this quarter while maintaining flexibility to manage through continued macro uncertainty. We expect revenue to be slightly higher in Q4 compared to Q3, with approximately 50% to 55% of back half revenue in Q4, reflecting normal seasonality, especially in the Education division and the timing of delivery of client services. For adjusted EBITDA, we expect approximately 60% to 65% to be generated in the fourth quarter, driven by the strong contributions from the Education division along with expected overall margin expansion as cost savings and operating leverage build through the back half of the year. With our transformation investments behind us and the expected increase in operating leverage, we believe the company would deliver EBITDA and free cash flow growth, with improved margins and free cash flow conversion in fiscal 2027 and thereafter. Grounded in strong client retention, expanding demand for our services and the resilience of our business model, we remain fully committed to creating long-term value for our shareholders and clients. Before I pass it back to Paul, I would like to thank the entire Franklin Covey team for their hard work and dedication to our business and for providing the unparalleled service to our clients. With that, Paul, I now turn it back to you.

Paul Walker, CEO

Thank you, Jessi. That was great. And as we prepare to open the line for questions, I'll just reiterate what Jessi said in thanking our teams for their hard work. We're pleased with the momentum that we're seeing right now across the business and look forward to a great second half of our year. And with that, we'll ask the operator to open up the line for questions.

Operator, Operator

Our first question will come from the line of Alex Paris from Barrington Research.

Alexander Paris, Analyst

Congrats on the better-than-expected results in the first quarter. Now we have two consecutive quarters of growth in invoiced amounts in North America and Enterprise. So it's not simply a data point. We have two data points we can draw a line. And I think you said that you expect that to continue to be the case through the balance of the year. Is that correct?

Paul Walker, CEO

Yes. We did. Yes.

Jessica Betjemann, CFO

Right.

Alexander Paris, Analyst

Good. And then just one quick point of clarification. Jessi, you said that revenue is slightly higher in the fourth quarter than the third quarter, 55% and 45%. Is that how we look at the second half of the year?

Jessica Betjemann, CFO

That's right.

Alexander Paris, Analyst

Yes. And then adjusted EBITDA, it will be $60 million to $65 million in the fourth quarter. So I guess what is that...

Jessica Betjemann, CFO

A little bit more on EBITDA as we talk about our restructuring and some of the cost operating leverage will increase towards the back half of the year, but more heavily weighted towards Q4, but then also because of the contributions of EBITDA coming from Education in Q4.

Alexander Paris, Analyst

Yes, makes sense. And it's a typical seasonal pattern anyway, right?

Jessica Betjemann, CFO

That's right. Very similar to what we normally have.

Alexander Paris, Analyst

Good. The next question is really a question about the macro environment, Paul. I think in response to a question last quarter, you sort of said it was neutral. There's some both positives and negatives. I wonder if you could just kind of freshen up that response for us.

Paul Walker, CEO

Yes, I'd say it's largely unchanged from what we observed a quarter ago. The current environment is neutral, which is better than it was at this time last year. I recall reporting Q2 a year ago amid significant uncertainty for various reasons. While uncertainty still exists, I believe our clients have adapted to the current conditions, and it feels more stable now than it did a year ago, remaining largely unchanged from a quarter ago.

Alexander Paris, Analyst

Great. With the increase in invoiced amounts, we anticipate growth in revenue, EBITDA, and free cash flow in fiscal 2027 and beyond. Also, the last time longer-term guidance was provided was during the Q4 '24 conference call after the announcement regarding the sales force transformation. Given the impact of tariffs, government shutdowns, and war, that has altered the situation somewhat. I would like to know when you plan to update that longer-term guidance—could that happen in the fall of 2026? Please answer that first, and I have a follow-up question.

Paul Walker, CEO

Yes. Okay.

Jessica Betjemann, CFO

Let me start by saying that in the fall, during our Q4 call, we will provide guidance for our fiscal year 2027. We will be going through our planning cycle in the summer and will update our 5-year plan at that time. We will also decide whether to provide direction on the longer term.

Alexander Paris, Analyst

So obviously, you'll do one for yourselves. The question is what will you share with us this fall, right?

Jessica Betjemann, CFO

Well, we'll work through that, Alex.

Alexander Paris, Analyst

Adjusted EBITDA margins for fiscal 2024 peaked at 19.2%, while in 2025 they are projected to be significantly lower at 10.8%. Based on your guidance, we anticipate some margin expansion in 2026 and more in 2027. Is a 20% adjusted EBITDA margin still a realistic goal? This rate is just slightly above the fiscal 2024 level for the next few years. Will you achieve this by an increase of 100 or 200 basis points each year?

Jessica Betjemann, CFO

Yes. I mean so we are planning to increase and improve our operating leverage. I think our goal is to have around 1 point improvement a year. And whether or not that can be accelerated or not, we'll determine that as we work through our long-term planning. But I think that is roughly what seems reasonable to me.

Paul Walker, CEO

We believe that the 20% we nearly achieved is still a solid target. All these investments were intended to permanently adjust the company's cost structure. Our aim was to accelerate growth and potentially return to that level. It's uncertain if we could surpass that level in the future.

Operator, Operator

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

Jeff Martin, Analyst

I was curious if you could go into a little bit more on the Education side of the business, had a very good quarter. What you're seeing as states and districts and obviously, you're having some success there. So maybe an update there would be helpful.

Paul Walker, CEO

Yes. Great question. Sean is here next to me. I'll ask him to make a comment, but it was a good quarter. And congratulations, Sean, on the great quarter. Go ahead and share a few thoughts.

Michael Covey, Education Segment

We are optimistic about the Education sector this year for several reasons. Our pipeline is robust, featuring the strongest prospects we have ever seen, particularly in large opportunities. We have three significant state-level deals that are multimillion-dollar, multiyear agreements, as well as larger district opportunities than in the past, which is encouraging. Our funding partners are providing substantial support, around $20 million annually to assist schools in getting established, and those partnerships remain solid. We feel aligned with current market needs, particularly in addressing the significant challenges following COVID, such as improving test scores, which remains a priority in the U.S. We have effective strategies to enhance math and reading results. Furthermore, with the issue of teacher retention and burnout, we have compelling data showing that Leader in Me schools are significantly more likely to retain teachers compared to non-Leader in Me schools. Mental wellness is also a critical concern, and we are well-prepared to tackle these challenges. Given our pipeline and the major opportunities we are working to secure in the latter half of the year, we are quite positive about our prospects. While there are some ongoing challenges, including uncertainties from the Department of Education and the expiration of ESSER funds, we believe that the supportive factors outweigh the obstacles, especially with our strong reputation and partnerships. This approach often leads us from a single school to district recognition and ultimately state support. Overall, we are confident about the latter part of the year and our direction moving forward.

Jeff Martin, Analyst

Thank you, Sean, that was helpful. Paul, can you provide more details regarding the invoice growth of 7%, which indicates a positive trend? How does this align with your internal expectations? Additionally, what factors do you foresee that might further accelerate this growth in the near future?

Paul Walker, CEO

Yes. Great. Yes, 7%. So 5% overall for the company invoice growth in Q2, which we felt good about that. And then as you mentioned, 7% kind of the engine pulling that, as we alluded to last quarter and as we went through the transition of our sales force was Enterprise North America. So two quarters in a row, 7%. We feel good about that and feel that that will continue to generate good invoice growth this year in the back half and for the full year at both the Enterprise division level, specifically, but also for the company. And as we mentioned, that invoice growth out ahead of our reported revenue growth will help us next year in generating more substantial reported revenue growth. So I do feel good about the continued momentum there on the invoice growth side.

Operator, Operator

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

Nehal Chokshi, Analyst

Congratulations on this really strong free cash flow. And just a comment here real quickly before I get into my question. But with more than free cash flow deployed in share buybacks and given Franklin Covey shares are trading at basically 6x free cash flow, 4x fiscal year '24 free cash flow, really happy to see the bold move to aggressively buy back shares at this incredibly attractive valuation. So just a applaud of that. Now I do have some questions. Excluding government, invoice value is up 10% year-over-year on Enterprise North America. It's a really nice core number that I'd like to focus on. Can you help break up that invoice value growth between, say, new customers and existing customers?

Jessica Betjemann, CFO

We haven't been disclosing that level of detail. However, we did experience very strong performance from new customers in North America this quarter, similar to what we saw in Q1. Unfortunately, we do not provide specific details regarding the invoiced amounts.

Paul Walker, CEO

I would like to highlight that, as Jessi mentioned, we had another strong quarter with new customers and overall invoice growth from them, which is pleasing in Q2 following a successful Q1. We also experienced significant expansion with our existing customer base. When we launched our go-to-market transformation, we focused on two key areas: attracting more strategic, larger new customers and increasing penetration within our existing customers. Currently, we are only 5% to 10% penetrated into the total addressable market within most of our existing clients. In Q2, we achieved impressive expansion on both fronts, leading to good overall growth.

Nehal Chokshi, Analyst

Okay. Great. And presumably, you're expecting both new customers and ongoing expansion of existing customers to continue to power the year-over-year growth. It's not exclusively one.

Paul Walker, CEO

Holly Procter is here by the way, too. Holly, any thoughts on that?

Holly Procter, Segment Leader

Nehal, yes, we anticipate both new customers to continue growing and expect ongoing improvements in retention and expansion. There are a couple of areas where we're seeing significant growth that will contribute to both sides of the business. The first is our focus on health care. We made a significant investment in our current health care customer base, and there are real organic use cases where we can positively impact patient, staff, and nurse retention. We've seen a notable increase there. The second area, which is new for us but gaining traction, involves assisting companies with their AI transformation. We believe both of these will drive growth for new customers as well as our existing ones.

Nehal Chokshi, Analyst

Got it. And then Paul, you mentioned that, on average, 5% to 10% penetrated of the addressable opportunity. That's on a user basis within an existing customer. Is that correct?

Paul Walker, CEO

That's correct. There is significant potential for us in adding services on top of that, which specifically relates to our user base.

Nehal Chokshi, Analyst

Okay. And then that user base that you're referencing, is that just leaders? Or is that also knowledge workers? Or is that the whole labor force as given organization?

Paul Walker, CEO

Yes, that's a great question. We have a formula that adjusts for certain parts of the population that we aren't particularly well suited to address. For instance, in factories, that's not exactly our focus. It varies by industry; for leaders and knowledge workers, it often includes almost everyone in companies like tech. However, in organizations with a large manufacturing presence, we may not engage with everyone at the front line, although we do significant work in manufacturing with our execution solutions. Overall, it is a formulaic approach, but it does not encompass the entire workforce of a company.

Nehal Chokshi, Analyst

Great. A couple more questions from me. So what was the driver of this strong free cash flow, $13 million, $9 million above your $4 million adjusted EBITDA? Can you help us understand that?

Jessica Betjemann, CFO

Yes, we saw a significant improvement in net working capital, mainly due to collections on accounts receivable. The decrease in our accounts receivable balance made a substantial impact on our free cash flow. We anticipate that our free cash flow will remain positive moving forward, especially in the fourth quarter when we expect strong net income and EBITDA.

Nehal Chokshi, Analyst

Okay. Great. So you kind of already answered my follow-on question, but just to be clear, I think historically, you guys have talked about free cash flow roughly matching EBITDA on a trailing 12-month or forward 12-month basis? Is that the way that we should continue to think about this? Or is there some deviation from that?

Jessica Betjemann, CFO

I'm not exactly sure about the specific comment. However, in 2025, we had a lower EBITDA to free cash flow conversion. We anticipate that our free cash flow conversion will improve over time since we are not a capital-intensive business. Our spending on capital expenditures and capitalized development is expected to remain relatively stable moving forward. Therefore, as our operating leverage and EBITDA grow, we expect to see stronger conversion over time.

Nehal Chokshi, Analyst

Okay. But you're not expecting to get back to close to 100% conversion that you were reflecting in fiscal year '24?

Jessica Betjemann, CFO

No. I mean definitely an improvement from the 42% level that we had in 2025, but it wouldn't be 100%. So there will be some strong.

Nehal Chokshi, Analyst

Yes. Understood. Understood. And then you talked about your fiscal year '26 guidance unchanged. And the way to think about parsing out that effective next two quarters of guidance in terms of typical seasonality. Can you just remind us what is actually typical seasonality for 2Q to 3Q and 3Q to 4Q?

Jessica Betjemann, CFO

So what we are projecting for revenue and EBITDA for Q3 and Q4 aligns with the normal seasonality we have observed. Last year, we were in a similar range as what we are expecting now.

Nehal Chokshi, Analyst

Right, right. So like last year, it was about a $7 million Q-o-Q increase from the second quarter, third quarter, and then $4 million from third quarter to fourth quarter?

Jessica Betjemann, CFO

Yes. Last year, if you were to look at Q3 revenue, for example, it was around 49% in Q3 and EBITDA was around 38%. So roughly within the same range of what we're seeing now.

Operator, Operator

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

David Storms, Analyst

Just wanted to start with maybe some commentary around the new logo sales. I know in the past, right, new logos tend to come on as either pilot based first or maybe a specific project that the company is looking to accomplish. Could you maybe spend a little time talking about what you're seeing in the current marketplace and maybe tailored to the AI trends if you're having clients come on with a specific goal in mind or if they are maybe a little more highly oriented to start?

Jessica Betjemann, CFO

Yes. And just to make sure I understood, Dave, the question is around how much of our new logos are pilots and then some examples on the use cases?

David Storms, Analyst

Exactly.

Jessica Betjemann, CFO

Perfect. Very few of our new logos are pilots. It's really hard to pilot a solution like ours. You either want to drive behavior change and make a big impact in your organization or you don't. And so we really don't see any pilots. On the AI solution, it's a great question. There's a ton of interest around this right now. There is not an organization that we're partnering with or that we're interested in partnering with that isn't trying to figure this out. And one of the unique things about an AI transformation is it's both top-down and bottoms-up. So the question earlier around who does it touch inside the organization, it touches everyone, and nobody has figured out exactly how to get this right. And there's so much around the way that you deploy your leaders to navigate this type of large-scale transformation that's critical to get right. And so we're excited to help a lot of companies with this transformation.

David Storms, Analyst

That's great commentary, and I really appreciate it. I want to spend some time discussing your strong expansion quarter. You mentioned having a neutral macro environment for about two quarters. Can we apply that same mentality to the logo recapture rate? Do you have any insights on what you're seeing in the market regarding clients returning now that things have stabilized a bit?

Paul Walker, CEO

Yes. I'll make a quick point and then ask Holly to comment on that as well. We do track that metric internally. We have a mantra here: client for life. When we lose a client, we take it seriously. While we don't disclose it, we are focused on trying to regain those clients, regardless of the reason they left. Holly, do you have any thoughts or comments on what we're observing and what you and the team are working on?

Holly Procter, Segment Leader

Yes. We absolutely see a really healthy win back rate, as Paul referenced. So as needs inside their organization shift, they go from trying to drive a high-trust workforce to trying to prepare our workforce for AI transformation, then needs evolve over time, and there might be gaps between one deployment and the next deployment. So if we do a good job on the first round, we're excited to welcome them back on the second round. And then I think just a point on the environment, one of the things I don't think we talk about enough and a structural advantage that we have is the breadth of the market that we serve. Our addressable market is enormous, not just in the company type that we pursue, but it's across segments, across buyer types, across use cases, there's virtually no company that isn't trying to solve the issues that we attach to. And so in a world where there's a sector that's down, we can quickly pivot to go after a sector that's up with enormous upside for us. So we move very fast when the market has highs and lows.

David Storms, Analyst

That's great. Thank you for the commentary and good luck on the next quarter.

Paul Walker, CEO

Yes. Thanks, Dave.

Operator, Operator

Thank you. I'm not showing any further questions at this time. I would now like to turn it back over to Paul Walker for any closing remarks.

Paul Walker, CEO

Thank you very much. Thanks, everyone, for joining us today. Thanks for your great questions, and we appreciate you and all that you do to understand our story and where we're headed as a company. We feel great about our momentum. Big thanks to the overall Franklin Covey team as well for their hard work, and we wish you a great evening. Thanks.

Operator, Operator

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