Franklin Covey And TechTarget: More Similar Than You’d Think

Franklin Covey (NYSE:FC) and TechTarget (NASDAQ:TTGT) at first blush seem to be very different businesses. Franklin Covey is one of the largest leadership companies in the world, specializing in helping organizations achieve results that require lasting changes in human behavior. TechTarget, on the other hand, is a global data and analytics leader and software provider for purchase-intent marketing and sales data which delivers business impact for business-to-business companies. Where is the connection between these two?

My argument is that while the underlying businesses differ, the models are similar and one can serve as a template for the other. In 2016 TechTarget did $107 million in revenue with a 72% gross margin and a 17.4% EBITDA margin. It was reliant on its 10 biggest customer, who were tech heavyweights such as Dell (DELL) and Cisco (CSCO). If technology spending fell off for a year, TechTarget’s revenue would decline as well, as it did in 2016, shrinking 4.7%. Behind the scenes, however, TechTarget management was intent on shifting the revenue stream to a more recurring basis. It did this with the introduction of Priority Engine, a SaaS package that was sold in annual subscriptions and integrated TechTarget’s purchase-intent data into customers’ CRM systems such as Salesforce (CRM) and Marketo. The goal was to build a more recurring business with a broader customer base.

After marginal growth in 2017, TechTarget revenue began to grow at a 10-12% clip through 2020 at which point it was doing $148 million in revenue and had a greatly expanded 34.3% EBITDA margin. In 2021 the company purchased BrightTALK, a complementary product and combined sales grew to $275 million with a 38.3% EBITDA margin. Sales are expected to grow greater than 15% in 2022 with an EBITDA margin above 40%. 30% of sales now are on annual contracts and the customer base is much broader, with the top 10 customers accounting for less than 25% of sales. Many of TechTarget’s customers now are themselves SaaS businesses, meaning they will be more stable in rougher economic waters.

While TTGT margins are now terrific, there is no gating factor for them, and I think they will rise to 50% by 2025 on a 17% revenue CAGR to get there. This is driven by trends including the digitalization of corporate sales and marketing spend and the move towards first-party intent data, which TechTarget has and few others do. I think EBITDA can get to $250m in 2025 and putting a 20x multiple on that gives you a $160 stock price or 163% upside from here.

So far, maybe I have convinced you that TechTarget is a good business and perhaps a great investment. What does any of this have to do with Franklin Covey? I think both business models share a lot of similar positive features. Franklin Covey also has 77% gross margins, so a lot of incremental revenue drops to the EBITDA line. 5 years ago Franklin Covey sold its products and training on an a la cart basis and was susceptible to economic downturns. At that point in time, the company began to sell its products on a subscription basis called the All Access Pass (AAP). The transition to a full subscription model was difficult (like Adobe’s) with immediately recognized revenue being shunned for subscription revenue recognized monthly over the length of the contract. Today we are 80% through this transition and revenue is beginning to accelerate. The company also made a strategic technology acquisition last year, buying Strive to modernize its tech platform. Now Franklin Covey has not only the best content but also the best tech stack in the industry.

While being somewhat more sales intensive than TechTarget, accelerating revenue growth combined with 77% gross margins will lead to big EBITDA increases in a hurry. Management is guiding to 15.8% EBITDA margins this year and then steady $10m per year incremental EBITDA for the following two years. Management has been very conservative in the past, and I think they are being that way here as well. I see revenue growth accelerating from 16% this year to 19% by 2025. I see revenue of $422m in 2025 with $124m of EBITDA at a 29% EBITDA margin. Putting at 20x multiple on this plus the accumulated cash in the interim gives you a $190 stock price or 300% upside from here.

Where could I be wrong in this dual thesis? First, the economic outlook is uncertain and that could affect both companies. I think TechTarget will be resilient as its products help companies grow revenue, which is needed in all economic environments. I also think Franklin Covey will be resilient as companies need to double down on execution in tough economic times. This is not to say that my growth outlook will not be hurt, but I think these businesses can hold up well. Specifically, on the Franklin Covey side, I am going out way ahead of management in my forecasts, which I have done with other stocks as well. The numbers make sense to me, so hopefully, management will put their own forecasts to shame as the years go by.