Executive Summary / Key Takeaways

• Franklin Covey is executing a strategic transformation, shifting its sales force to dedicated "Land" (new client acquisition) and "Expand" (existing client penetration) teams, aiming to accelerate revenue growth from single digits to consistent double digits in the coming years.
• Despite facing macroeconomic uncertainty, U.S. federal government spending cuts, and geopolitical tensions that impacted recent results, the company's core business model remains resilient, demonstrated by strong client retention and a high service attachment rate.
• The Education division, centered on The Leader in Me, continues to show momentum, successfully transitioning to larger district and statewide contracts and building a strong base of nearly 8,000 schools globally.
• Recent financial performance reflects the impact of external headwinds and planned growth investments, resulting in lower revenue and Adjusted EBITDA in Q3 FY25 compared to the prior year, though Q3 Adjusted EBITDA exceeded internal expectations due to proactive cost reductions.
• Management has revised FY25 guidance to reflect ongoing uncertainty and timing risks but projects a meaningful increase in Adjusted EBITDA and free cash flow in FY26, anticipating accelerated growth as strategic investments and cost savings take full effect.

Setting the Stage: A Transformation Story

Franklin Covey Co. (NYSE: FC), incorporated in 1983, has evolved into a global leader focused on organizational performance improvement through behavioral change. The company operates primarily through its Enterprise Division, serving corporations and governments, and its Education Division, focused on K-12 institutions with its flagship Leader in Me program. A pivotal moment in FC's history was its transition to a subscription-based model around 2015, a strategic shift that fundamentally altered its revenue profile, fostering recurring revenue streams and driving growth in key financial metrics.

This foundational shift was complemented by significant investments in technology and content. The acquisition of Strive Talent, rebranded as the Impact Platform, provided a crucial technological backbone, enabling scalable delivery of content across various modalities and languages. This platform is central to FC's ability to serve clients effectively, whether remotely or in person, and supports a wide range of offerings from digital learning to consulting and coaching. The company has also consistently refreshed and developed new content, including updated versions of iconic programs like The 7 Habits of Highly Effective People and The Speed of Trust, alongside new solutions addressing areas like communication and leadership development.

Building on these pillars – a robust subscription model, enhanced technology, and compelling content – Franklin Covey is now undertaking its next major strategic initiative: a transformation of its direct sales force. This involves creating specialized teams dedicated solely to either acquiring new clients ("Project Land") or deepening relationships and expanding penetration within the existing client base ("Project Expand"). This initiative, which saw its full transition completed in December 2024, is designed to leverage the prior investments and accelerate revenue growth to consistent double-digit levels in the coming years.

In the competitive landscape, Franklin Covey operates alongside larger consulting firms like Accenture (ACN) and Korn Ferry (KFY), as well as specialized human capital and training providers such as Willis Towers Watson (WTW) and various online learning platforms. While larger players like ACN and KFY often possess greater scale and integrate advanced data analytics and AI more deeply into their broader consulting services, FC differentiates itself through its specialized content focused on principle-based behavioral change and its subscription model, which fosters strong customer loyalty and predictable revenue streams. The company's global network also provides a competitive advantage in reaching diverse markets. However, FC faces vulnerabilities, including potential technological gaps compared to larger, more tech-focused competitors and a degree of market concentration, particularly within the education sector. Indirect competitors offering lower-cost, scalable online learning solutions also present a challenge, potentially impacting market share in certain digital segments.

FC's core technology, the Impact Platform, facilitates delivery across digital, in-person, and blended formats. This platform is being enhanced with AI capabilities, including an AI sales coach and features for content customization and personalization, aiming to democratize coaching and improve the efficiency of program implementation. While specific quantifiable benefits like percentage improvements in efficiency or cost reduction targets for these AI initiatives are not detailed, the strategic intent is to enhance scalability, personalize learning journeys, and provide more leveraged support to clients. Ongoing R&D focuses on integrating AI further and developing new solutions designed for broader organizational scale, reflecting a commitment to enhancing its technological moat and supporting the "Expand" strategy.

Recent Performance Amidst External Pressures

Franklin Covey's recent financial performance, particularly in the third quarter of fiscal year 2025 (ended May 31, 2025), reflects the impact of both its strategic investments and challenging external conditions. Consolidated revenue for Q3 FY25 was $67.1 million, a decrease from $73.4 million in the prior year period. Year-to-date revenue through Q3 FY25 totaled $195.8 million, down from $203.1 million in the same period of FY24. This decline was attributed by management primarily to macroeconomic uncertainty, U.S. federal government spending cuts, threatened tariffs, and geopolitical tensions, which affected client decision-making and led to canceled or postponed contracts, particularly within the Enterprise Division's North America and International Direct Office segments.

Despite the revenue headwinds, gross margin remained strong at 76.5% in Q3 FY25, consistent with 76.6% in Q3 FY24, indicating the underlying profitability of the company's service delivery. Operating expenses increased to $53.5 million in Q3 FY25 from $47.8 million in Q3 FY24, driven by a $4.7 million increase in restructuring costs (primarily severance related to sales force restructuring and cost reduction initiatives) and a $1.6 million increase in SGA expenses (linked to hiring new personnel for the go-to-market transformation).

Adjusted EBITDA for Q3 FY25 was $7.3 million, down from $13.9 million in Q3 FY24, reflecting the lower revenue and the planned growth investments. However, this figure exceeded the company's previously announced expectations for the quarter ($4 million to $6.5 million range), partly due to proactive cost reduction actions implemented in areas not impacting the core strategic initiatives. These actions resulted in $3 million of savings in Q3 FY25 and are expected to yield $4 million in Q4 FY25, contributing to an annualized run rate savings of $8 million in FY26.

Segment performance mirrored the consolidated trends. North America Enterprise revenue decreased to $37.1 million in Q3 FY25 from $40.6 million, impacted by government contract issues and macroeconomic uncertainty. International Direct Office revenue fell to $7.5 million from $8.5 million due to challenging conditions in markets like Japan, the UK, and China. The International Licensees segment saw relatively flat revenue at $2.7 million but was also affected by macro and geopolitical factors. The Education Division's revenue decreased slightly to $18.6 million in Q3 FY25 from $20.2 million, primarily due to a tough comparison against large materials orders in Q3 FY24, though this was partially offset by growth in coaching, consulting, and subscription revenue. Education deferred subscription revenue grew 21% year-over-year as of May 31, 2025, indicating continued underlying momentum.

Liquidity remains a strength, with over $95 million available at the end of Q3 FY25, comprising $33.7 million in cash and a full $62.5 million undrawn credit line. Operating cash flow for the first three quarters of FY25 was $19.0 million, down from $38.4 million in the prior year, primarily due to lower operating income and changes in taxes payable.

The company utilized $25.6 million in financing activities year-to-date, largely for common stock repurchases ($23.0 million), demonstrating a commitment to returning value to shareholders while maintaining a strong balance sheet position.

Outlook and Strategic Trajectory

Looking ahead, Franklin Covey's outlook is shaped by the interplay of its strategic transformation and the persistence of external headwinds. Management revised its full-year fiscal 2025 guidance, now expecting revenue in the range of $265 million to $275 million and Adjusted EBITDA between $28 million and $33 million. This revision reflects the continued uncertainty impacting client decision-making and potential timing risks for service delivery on deals expected to close late in the fiscal year, which could push revenue recognition into FY26.

Despite the near-term adjustments, management expressed confidence in the long-term trajectory, emphasizing that the strategic investments in the go-to-market transformation are on track and beginning to show early signs of traction. Indicators such as an increase in new logo wins and expansion activity within existing clients in Q3 FY25, along with growth in multiyear contracts, support the potential for accelerated growth once the external environment stabilizes and the transformation fully matures. The cost reduction actions implemented in Q3 are expected to provide a beneficial impact on profitability in the remainder of FY25 and contribute to a meaningful increase in Adjusted EBITDA and free cash flow in FY26.

The company has outlined ambitious long-term targets, aiming for double-digit revenue growth of 10% in FY26, accelerating to 12% in FY27 and 14% in FY28. Correspondingly, Adjusted EBITDA is targeted to grow to $48 million in FY26, $60 million in FY27, and $75 million in FY28. These targets are predicated on the successful execution of the "Land" and "Expand" strategies, leveraging the company's subscription model, technological capabilities, and content library to capture a greater share of its large addressable market.

Key risks to achieving this outlook include the potential for prolonged macroeconomic uncertainty, further government spending cuts, and geopolitical instability impacting client budgets and decision cycles. The Education division also faces potential risks related to the expiration of ESSER funds and uncertainty surrounding federal education policy, although management is actively mitigating this through grant programs and partnerships. Competition remains a factor, with larger firms potentially leveraging scale and technology more effectively, while lower-cost online alternatives could pressure pricing in certain segments. Additionally, the ongoing litigation related to the former corporate headquarters lease presents a potential financial and operational risk.

Conclusion

Franklin Covey is in a period of strategic transformation, consciously investing to accelerate its growth trajectory by refining its go-to-market approach. While the current macroeconomic environment and specific governmental actions have created headwinds, impacting recent financial performance and leading to a revised near-term outlook, the underlying investment thesis remains centered on the company's ability to leverage its established subscription model, enhanced technology platform, and compelling content to drive increased penetration in existing accounts and acquire new clients more effectively.

The strength of the Education division and early indicators of traction in the new sales force structure provide support for the long-term growth potential. Investors should monitor the execution of the "Land" and "Expand" strategies, the company's ability to navigate external economic pressures, and the realization of the projected acceleration in revenue and Adjusted EBITDA growth in fiscal year 2026 and beyond. The successful integration of technology, particularly AI, and the ability to maintain a competitive edge in content and service delivery will be critical factors in achieving these targets and delivering long-term shareholder value.