Franklin Covey – Well Positioned For A Recession (NYSE:FC)

Franklin Covey (NYSE:FC) is well positioned for the recession which may be underway already. The company’s products enable corporations and schools to produce better results through an overhaul of culture, focus, and execution. Its products build personal and collective leadership to catalyze positive change in its customers’ businesses and schools. These results are compelling to buyers within organizations and have led to retention rates well above 90%. Prime examples of this were companies that doubled down on Franklin Covey’s All Access Pass (AAP) product during the pandemic. These included a new large airline customer that had virtually no business at the time and said they wanted to reboot their culture with FC products. Another was Best Western, one of the largest hotel chains in the world, which doubled down on AAP with a 5-year contract during the height of the pandemic when its business was suffering.

Structurally Franklin Covey’s business is set to be resilient in all economic environments. More than 50% of revenue comes from multi-year contracts which cannot be canceled during their duration. The rest of the revenue comes from single year, non-cancelable contracts which are paid up front and come due on all different days during the year. This gives the company excellent visibility into its revenue stream.

Franklin Covey also works on companies’ most important strategic problems, which are even more pressing in times of economic distress. Culture and execution are key at these moments and Franklin Covey’s products and services make measurable differences. This importance makes AAP tough to jettison, no matter what the economic environment.

Consolidation of vendors has also benefitted Franklin Covey in tough times. During the pandemic while some of its customers cut training spend in the aggregate, Franklin Covey was giving appreciably more share so it grew regardless. The company expects this trend to continue over time as it broadens its content library.

Franklin Covey is also at the cusp of a new platform cycle which it is very excited about and has the capability to increase penetration with existing customers as well as bring on new logos. The new Impact Platform is based on the Strive acquisition it did last year which automates many of the functions that previously had to be done by hand by users and HR overseers. Franklin Covey had the best content previously, but its technology stack was not up to par. The Impact Platform now has a best-of-breed technology stack married to this great content. In its partial rollout so far, the company has seen companies increasing user penetration and an accelerated pace of new logo additions. The full rollout will occur this fall.

Finally, the company has ample net cash and is a cash flow machine, differentiated from many other unprofitable tech companies with a grow-at-all-costs mentality. Revenue growth is accelerating for Franklin Covey leading to a faster increase in EBITDA due to the inherent operating leverage in the business. The company is voting with its own cash that it is undervalued, repurchasing about 500,000 shares last quarter (3% of outstanding) for $20.3 million.

While few companies are immune to a recession I think Franklin Covey will be very resilient and will outperform on a relative and absolute basis. Trading at 2x sales and 10x EBITDA I think the stock is a bargain that will accrete value to shareholders over time.