Prepared remarks
Thank you for standing by. Welcome to the Franklin Covey Third Quarter 26 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. To ask a question during this session, you will need to press star-11 on your telephone. If your question has been answered and you would like to remove yourself from the queue, simply press star-11 again. As a reminder, today's program is being recorded. And now I would like to introduce your host for today's program, Boyd Roberts, head of investor relations. Please go ahead, sir.
Thank you, and good afternoon, everyone. Thank you for joining us today on Franklin Covey's third quarter 26 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-Ks 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 would like to turn it over to Mr. Paul S. Walker, our Chief Executive Officer.
Thank you, Boyd. Good afternoon, everyone, and thank you for joining us today. It is great to be with you and to have the opportunity to share our results for the third quarter and provide an update on the business and our outlook for the remainder of the year. There are two themes I would like to address today. The first is that the company's strategic strength and resiliency continues to be reflected in the company's performance, including in this year's third quarter results and in our expected results for the year. Importantly, the impact of this strategic strength and resilience is also establishing the foundation for accelerated growth in fiscal 27. The second theme is that the strategic importance of the opportunities and challenges we help our clients address, coupled with our focused investments in high-impact solutions and go-to-market activities, are further strengthening our strategic positioning and establishing the foundation for accelerated growth. I would like to briefly touch on each of these themes. Before I do, I want to address our full-year guidance. Q3 was our third consecutive quarter this year finishing in line with our expectations, and the underlying business is performing as we expected. We are revising our revenue guidance to allow for a timing shift in $2 million of previously invoiced services for which the delivery shifted from this year to next year for a contract in Enterprise North America, a $2 million new school contract with an existing and ongoing statewide education client that received gubernatorial budget reductions that we expect to return next year, and the approximately $2 million impact of the challenging international environment due to ongoing geopolitical tensions. Our new expectation is that revenue will be between $260 million and $267 million. We are maintaining our prior adjusted EBITDA guidance within a narrower range of $28 million to $31 million. I wanted to acknowledge this up front so it is not a distraction as I walk you through what is actually happening in the business and the many areas of strength we experienced in the third quarter. So to our themes. The first theme, again, is that the company's strength and resiliency continues to be reflected in the company's performance, including, importantly, Q3 being our third consecutive quarter where we finished in line with our expectations and in our expected results for the year, and this even in the midst of a somewhat turbulent external environment. The importance of the challenges and opportunities we help organizations address and the success of our solutions in addressing them is reflected by both, first, the high levels of retention, expansion, and purchases of services we are achieving with existing clients, and second, our increasing revenue from winning new clients across both our enterprise and education businesses. I would like to briefly address how this strategic strength played out in both divisions. In the enterprise division in North America, which accounts for approximately 80% of our total enterprise division revenue, invoiced amounts are up 6% year-to-date, and we are up 4% in the third quarter, growing for a third consecutive quarter. Revenue retention is up meaningfully year-to-date and was particularly strong in Q3, driven by both further increases in client expansion and continued strong logo retention. The percent of subscription contracts whose term is for multiyear periods continues to be high at 59%, and the percent of our subscription revenue contracted for multiyear periods was 60% year-to-date. Services booking pace at the end of Q3 was up more than 25% compared to the prior year, and the amount of our services already sold and contracted year to date this year which are scheduled for delivery in fiscal 27 is meaningfully higher than at this point last year. Our balance of deferred revenue at the end of the third quarter was $58 million versus $49 million in the prior year, an increase of 18% compared to this time last year, establishing a strong foundation for growth in reported sales next year. Reflecting this strong performance, our invoiced amounts and reported revenue for the third quarter in North America came in as we had expected, and despite somewhat lower than expected revenue in Enterprise International, which I mentioned previously—again, primarily reflecting weakness in our direct office operations in China and some impact from the conflict in Iran on the economies of several of our international operations—our total enterprise reported and invoiced revenue for the quarter was in line with our expectations for the quarter and year-to-date. This underlying strength and momentum of our results, particularly in Enterprise North America, is exactly what we designed our go-to-market transformation to produce. We are achieving the traction we would expect, and we expect results in Enterprise North America for the year to be strong. Growth in invoice amounts, coupled with significant service bookings already contracted for fiscal 27 delivery, gives us high confidence in the year ahead. Turning to our education division: our school retention rate at both the district and school levels remains very strong year-to-date, and our subscription revenue was up 11% in the third quarter and is up 14% year-to-date. This, together with our significant subscription base, our pace of new school contracting, and the size of our advanced services bookings, all provide us with confidence that the education division will finish the year strong. As I indicated previously last quarter, we mentioned that we had won our third statewide commitment to Leader in Me with a Southeastern state that has made significant Leader in Me commitments in each of the last three years. At the last minute, the governor held up the budget approval for health and human services and education line items, resulting in delayed funding for this year's allotment of new schools. We believe funds will be restored in the next fiscal budget, and we are working directly with impacted schools to proceed with as many as possible in the interim. This creates up to $2 million of pressure on the education revenue this year. However, what it does not reflect is any weakness in school and district demand for Leader in Me. Our other two fully funded state commitments are on track for a strong year, and our education business is expected to finish the year strong. We continue to expect that our strong momentum to close the year, particularly in Enterprise North America with deferred revenue up 18% year-over-year, is setting the stage for strong reported revenue growth in fiscal 27. The second theme I would like to touch on is that the strategic importance of the opportunities and challenges we help our clients address, coupled with our focused investments in high-impact solutions and go-to-market activities, are strengthening our strategic position and are establishing the foundation for accelerated growth. Ninety days ago, I spoke about three dynamics positioning FranklinCovey well in an AI-driven environment. First, that AI is increasing the premium on human leadership execution. Second, that our model is built around behavior change and collective action tied to measurable outcomes, not simply content or software delivery. And third, that we have significant room to grow within our existing client base. These convictions have only strengthened. As AI creates extraordinary new possibilities, leaders are discovering that the path between AI investment and achieving meaningful results runs directly through the quality of their leaders, cultures, and execution systems. This is a behavior change and collective action challenge and we see it not only with AI, but across the full range of leadership and performance challenges organizations face every day. Our role is to help organizations strengthen the people side of execution—clarifying priorities, aligning teams, building capabilities, and creating accountability systems that translate strategy into measurable results. Having completed our go-to-market transformation in Enterprise North America, and having already seen continued progress in achieving the kinds of results we would expect, we are now importing those learnings into our international business. The model is working, and we are scaling it. Fiscal 2026 is one of our biggest solution launch years, and we will build on that momentum in fiscal 27, launching new solutions across leadership, execution, and AI transformation while embedding AI-enabled coaching and execution tools into our platforms to further support behavior change and collective action. With this foundation in place, we are well positioned for growth in fiscal 27 and beyond. The numbers support this confidence. Deferred revenue for the company is up 7% year-over-year to $96 million. Services already contracted and scheduled for fiscal 27 delivery are meaningfully ahead of where they were at this point last year, and subscription and contractually committed invoiced amounts grew 17% in the third quarter alone. The work we have done this year is translating directly into the revenue and adjusted EBITDA growth we expect to report in fiscal 2027. I would now like to turn the time to Jesse to go into more detail on our third quarter.
Thanks, Paul, and good afternoon, everyone. Strength in the business continued to show strong demand for our solutions in the third quarter. We are pleased with our third quarter results, particularly in Enterprise North America, and despite an unexpected state funding challenge in education that Paul discussed, we reported growth in education for the quarter. As we have stated previously, fiscal 2026 is a year of execution where growth in invoiced amounts is expected to set us up for accelerated reported growth in fiscal 27. In my remarks today, I will start by providing some details of our third quarter financial performance, then I will turn to our balance sheet and capital allocation priorities, and finally, I will provide additional context around our revised fiscal year 2026 financial guidance. Total third quarter reported revenue was $67.8 million. Revenue grew 1% over the prior year. This was partially offset by the $500 thousand decline in corporate revenue we have reported each quarter this year so far, as we no longer recognize sublease revenue since exiting our previous headquarters campus in June of last year. Foreign exchange rates had a $300 thousand favorable impact on our consolidated revenue in the quarter. Both the Enterprise and Education divisions had invoiced amounts growth this quarter of 1%, resulting in a 7% increase in consolidated deferred revenue at the end of the third quarter, establishing the foundation for accelerated growth in reported revenue in fiscal year 27. A summary of our consolidated financial results is on slide 3 in the earnings presentation. We are especially pleased that consolidated subscription and committed invoiced amounts for the quarter were up 17% to $37 million, building upon the 12% growth we saw in the first half of the year, driven by the strong growth in Enterprise North America. Consolidated subscription and subscription services revenue recognized for the third quarter was $57.5 million, relatively even with that achieved in last year's third quarter. 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 $96 million, which will be recognized as reported revenue in the coming quarters. The amount of unbilled deferred revenue contracted for the third quarter was $7.3 million, even with last year, with a total balance of $61.1 million, down 1% over the prior year. This $61.1 million will convert to invoiced amounts and deferred revenue in the future. Gross margin for the third quarter was 73.9%, compared to 76.5% in the prior year, and decreased primarily due to increased delivery costs for services, a shift in mix of services delivered and products sold during the quarter, and increased capitalized curriculum amortization expense. Operating, selling, general, and administrative expenses for the third quarter were $41.8 million, a level 5% lower than the $44 million in the prior year, reflecting reduced associate costs and other cost reduction efforts taken this year. Adjusted EBITDA for the third quarter was $8.3 million, an increase of 14% or $1 million compared to last year's third quarter, reflecting revenue growth and the lower SG&A expenses I just mentioned. Foreign exchange rates had an immaterial impact on our adjusted EBITDA in the quarter. During the third quarter, we continued to streamline our business in certain areas of our operations. We incurred $700 thousand of expense for this restructuring activity, which consisted primarily of severance and related costs. We recognized net income of $3.1 million compared to a net loss of $1.4 million in the prior year, reflecting a $4 million decrease in restructuring costs, a $700 thousand decrease in share-based compensation expense, and the lower operating SG&A expenses I previously mentioned. While we continue to execute on the long-term restructuring plan initiated in the second quarter of this year, our restructuring activities were significantly less than in the third quarter of the prior year. Cash flows from operating activities for the first three quarters of fiscal 26 decreased 8% to $17.5 million, primarily due to lower operating income and unfavorable changes in working capital compared with the first three quarters of fiscal 25. Free cash flow for the third quarter was a negative $1 million compared with a positive $2.8 million of cash generated last year, with higher operating income in the quarter which was more than offset by unfavorable changes in working capital largely due to a $10 million increase in deferred revenue over the prior year. I will turn now to a discussion of our business divisions. For the third quarter of fiscal 26, our Enterprise division generated 71% of the company's overall revenue, with the Education Division generating 28% of the company's revenue. Third quarter Enterprise Division invoiced amounts grew 1% to $46.5 million, and subscription and committed services invoiced amounts grew 18% to $27.8 million. Third quarter Enterprise Division reported revenue was $48.1 million, an amount 2% higher than the $47.3 million reported in the prior year. As shown on slide 4, our North America segment invoiced amounts grew 4% this quarter to $36.7 million. We are encouraged by the continued progress year-to-date and this quarter in invoiced amounts, which reflects positive momentum coming from our investment to transform our Enterprise North America go-to-market organization and we expect this to translate into increased reported revenue in future quarters. In the third quarter, approximately $6.6 million in invoiced amounts was for contractually committed predefined services, and while we continue to recognize the revenue upon delivery, because these services have been contractually committed upfront, any of these days are guaranteed and would be recognized at the end of the contract term if not delivered during the term. On slide 10 in the appendix to our earnings presentation, our roll forward analysis of deferred revenue includes both the subscription and committed services amounts, with the timing for revenue recognition for committed services depending on the delivery schedule of our clients. The North America segment's reported revenue of $38 million accounted for 79% of our division sales in the third quarter of fiscal 26 and grew 3% over the prior year, primarily due to higher services delivered, including those that were contractually committed in prior periods. Adjusted EBITDA for the North America segment increased $1.5 million to $7.7 million for the third quarter, compared with $6.2 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 $58 million at the end of the third quarter, an increase of 18% from the prior year, and unbilled deferred revenue was $56 million, a decrease of 1% from the prior year. Importantly, the number of North America's all-access passes contracted for multiyear periods continued to be high at 59% in the third quarter, and the contracted amount represented by multiyear contracts was 60%. As shown on slide 5, third quarter revenue from our Enterprise International segment, which is the combination of our international licensee revenue and our international direct office revenue, was $10.1 million. This accounts for 21% of our total Enterprise division revenue and represented a slight decline compared to the prior year's $10.2 million. License fee revenue in the third quarter increased 3% over the prior year, but was offset by lower revenues in our China, Japan, and United Kingdom direct offices. Our offices in France and Australia each grew compared with the third quarter of fiscal 25. Our China operations continue to be adversely impacted by ongoing trade tensions and broader macroeconomic uncertainty. Excluding China, the International segment achieved growth compared to the prior year. Adjusted EBITDA in the third quarter of 26 for the International segment was $2.1 million, a 25% increase compared to $1.7 million in the prior year, driven by a reduction in SG&A expenses. Turning now to our Education division, as shown on slide 6, revenue in the third quarter increased 2% to $19 million, driven primarily by an 11% increase in subscription revenue, partially offset by lower material sales associated with the statewide initiative that did not receive funding this year for new schools, and also not holding any symposium events in the quarter compared to the prior year. In the third quarter, we had 200 training and coaching days delivered compared to last year, and 700 more year-to-date. As Paul described, there was a Southeastern statewide initiative to fund new schools that we anticipated launching in the quarter that did not come through because of a last-minute gubernatorial budget cut targeting health and human services and education services. The financial impact of this budget cut reduced invoiced amounts approximately $2 million, net revenue approximately $1 million, and adjusted EBITDA approximately $1 million from our previous expectations this quarter. This further impacts our fiscal year results by approximately $6 million in invoiced amounts, $2 million in net revenue, and $2 million in adjusted EBITDA compared to our previous expectations. However, we continue to be in active discussions with individual schools that would like to proceed with launching Leader in Me this year even without the state funding, and that opportunity is included within the high end of our revised guidance range. We believe that these education funds will be restored in the next state budget cycle, which should support growth in our next fiscal year. Despite the impact of the large statewide initiative budget cut, invoiced amounts in the third quarter of $15.1 million increased 1% from the prior year, and subscription invoiced amounts grew 14% to $9.3 million. Education subscription revenue increased 11% in the third quarter to $13.1 million compared with $11.8 million in the prior year. Adjusted EBITDA for the Education Division in the third quarter decreased $400 thousand to $1.7 million due to lower gross margin primarily driven by the timing of fixed costs for coaching services and product mix, and increased SG&A expenses primarily due to increased comp commission on previously deferred revenue and increased associate expenses. Education's balance of billed deferred revenue decreased 6% to $32.2 million as a result of the strong increase in the number of days associated with Leader in Me subscriptions that were delivered in the quarter. With the unfortunate timing impact of the statewide initiative, we currently anticipate education invoiced amounts to slightly decline for the year as growth in the fourth quarter will be lower than previously expected, while net revenue should continue to grow, albeit at a lower rate than expected, due to the 13% increase in deferred revenue last year and continued growth in subscription revenue and coaching days. I would now like to spend a few minutes discussing our balance sheet and reiterating our 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 $74 million at the end of the third quarter, with $12 million cash on hand and 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. As a reminder, 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 120% 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 been completed. In the near term, we plan to rebuild the base of our cash on hand as we generate cash and will evaluate opportunistic share buybacks in the future. We remain committed to being disciplined stewards of capital while staying focused on driving long-term value creation. Now turning to our revised guidance for fiscal 26, as shown on slide 7. As Paul walked through, and I will do again now, our revised revenue projections reflect a timing shift in $2 million of previously committed invoiced services for which the delivery shifted from this year to next for a contract in Enterprise North America. We also took into account the $2 million for new school contracts with a statewide education client that received gubernatorial budget reductions that we expect to return next year, and approximately $2 million in lower year-to-date and forecasted revenue for Enterprise International due to ongoing geopolitical challenges. These factors, combined with a disciplined view of the variability of risks that could occur as we close the year, led us to revise our revenue guidance range to $260 million to $267 million. Despite the revision of our revenue projections, we have maintained our prior adjusted EBITDA guidance within a narrower range of $28 million to $31 million, reflecting the effectiveness of cost reduction measures implemented throughout the year. With solid growth in invoiced amounts for Enterprise North America this year, and our transformation investments behind us, we believe the company will deliver net revenue, EBITDA, and free cash flow growth in fiscal 27 and thereafter. Grounded in strong client retention, continued 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 FranklinCovey team for their hard work and dedication to our business, and for providing unparalleled service to our clients. Paul, I now turn it back to you.
Jesse, thanks for taking us through that, and we would now like to invite the operator to open the line for questions.
Certainly. And our first question for today comes from the line of Alexander Paris from Barrington Research. Your question, please.
Hi, Alexander.
Questions and answers
Hi. Thank you. How are you doing, Paul, and everyone else?
Good afternoon.
Got a couple of questions, starting with the macro environment. In the first half, we noticed both positives and negatives—better than a year ago. Clients have adjusted; it feels a little bit more stable. But we have had a couple of issues as on this call, the timing shift for the large enterprise contract, the education gubernatorial budget cutback, and the challenging international environment. If you kind of peeled away the timing shift for the large enterprise client and the education reduction, can you talk a little bit about the underlying strength of the various businesses?
Yeah. You bet. Maybe just as I peel those two away for a second, I'll comment on those two quickly. The large contract is a contract we actually won in Q1 of this year, and it is a combination of a very nice all-access pass contract with a large number of services. This is actually a three-year contract for us, and the client has paid for all of year one and the majority of year two already. We have invoiced for that, and along with that is the scheduling of a number of contracted committed services. As the years move forward, they have delivered quite a few services against that contract, and what we thought would be delivered toward the end of this year, some of those are shifting into early next year and throughout next year. So this is business we have won, business that is contracted, largely business we have already invoiced for and paid for, and it is just the timing of when the client will take delivery. So that is that piece in enterprise. To connect that to your question, we are not seeing enterprise North America change right now in the larger environment; it is just isolated to the timing of delivery of that one contract. In education, I would say it is a very similar story. It was a bit of a surprise to us at the 11th hour that the funds which had been approved by the state legislature were pulled back when the governor went to sign off, and we were wrapped up in that. We do expect that we will get those back next year, and we are working with those schools to try to get some number of them to begin with us this year because they are ready to go as they kick off their new school year in August. So I would not really connect that to the environment at all; it is just isolated to two contracts. Where we are seeing a bit of environmental impact is in our international business. Certain of our licensee partners—our largest licensee partner, for example, is actually in the Middle East; they are in Dubai—and it has been a challenging situation for them there that we expect to abate. We think that is more timing related to some of the geopolitical things that are going on and not necessarily a reflection of the underlying strength of that business. And then China has continued to be a problem. What we thought this year was we were kind of at the bottom; we were going to be even a little lower than that this year in China. The larger macro environment really has not changed at all; we are not seeing a change there from what we reported last quarter or the quarter before.
And then, let's talk a minute about the education division. Because this fourth quarter is a big quarter for education. Again, setting aside the large statewide contract and the gubernatorial change, maybe just get a little update on progress there in terms of net new schools and school retention and so on?
Sure. Yeah. How's it going, Alexander? A few things about education. As you know, we just talked about the deal that was delayed—we had won this the last three years, expected it this year, and expect it to come back. But we feel really good about the fourth quarter and about the year as a whole. Pushing that aside, as Paul shared, we are working to get back some of these schools. We will not get all of them, but we can get a few of them back with their own funding mechanisms. Retention is very key because we have a lot of retention revenue, and it is running right now 1% to 2% higher than last year. We already have really good school retention, and so that is a really good sign of strength in the business. Our new school growth we expected to be higher than last year with the Georgia deal; without it, it is going to be harder to get there, but it will be comparable to last year. We are also finding great success with charter schools and afterschools—these are adjacent markets; they are large and there is a lot of money behind them—and we are able to make up some ground with our afterschool initiatives. They are helping a lot. Finally, we have other state deals—two other state deals that are coming through—and large district deals. Sometimes these large district deals are as big as state deals, and those are doing really well. What we offer is needed today more than ever before, even in the world of AI—so much of what we do is going to be even more important, teaching durable leadership skills like initiative, collaboration, and empathy. We continue to get great outcomes. We just came out with a new report that shows that Leader in Me helps significantly with chronic absenteeism, which is a major issue right now in U.S. schools after COVID. Compared to non-Leader in Me schools, we do far better. We also do great with reducing teacher turnover and increasing test scores. So we have really good solid outcomes that we continue to produce. We feel really good about the business generally. We had this setback with the state deal, but we expect to recover. I hope that gives you a little color.
No, that is really helpful. I appreciate it, Sean. And before I yield, just wanted to talk a little bit about the enterprise business—new logos versus retention there, win-back rate, and perhaps lost contracts. Maybe specifically the government contracts that were lost because of DOGE last year.
I will maybe make one quick comment, and then we have Holly here as well who can share a couple thoughts. We had another good quarter in terms of retention. This last quarter the retention was driven really by a lot of client expansion. Holly, do you want to talk about that and any thoughts about the overall enterprise business?
Yeah. Sure. A couple of thoughts. As Paul referenced, both strong retention and strong expansion in the enterprise business, which was a big part of our transformation effort—being able to both increase the retention effort and also drive additional and incremental expansion beyond our run rate. Regarding government specifically, we have not yet seen our government business have an uptick post the large impact from DOGE. For many of our government accounts, we have remained flat from the bottom out of DOGE from Q1 of last year. But we are hopeful that we can see an impact on that when we get into the next few years.
That is very helpful. I appreciate the additional color, and I will get back in the queue.
Thank you. And our next question comes from the line of David Storms from Stonegate. Your question, please.
Hi, David.
Good afternoon, everyone. Appreciate you taking my questions. I just wanted to maybe start international. I think Paul mentioned in your prepared remarks that you are starting to move some of the go-to-market strategy over into international markets. Just curious as to if you have any early indications of how this is going, any expectations there—could it maybe counteract some of the macro headwinds you are seeing? Anything like that?
I will comment on that. We will start our transformation internationally in Europe. Our direct offices there include the U.K., Ireland, Germany, Switzerland and Austria, and France. Our efforts will focus on those countries to begin, and the primary effort there will be around dividing the sales force into a similar hunter-farmer structure, where we focus on new logo acquisition with dedicated hunters focused on acquiring net new customers, and a set of farmers attached to the retention effort and expansion of our current customer base. After we have successfully navigated that transition in Europe, we will evaluate other geographies. We are starting in Europe given that it is our largest direct office. Just to comment on timing, we will begin most of those efforts with a go-live date in Q1 and begin our execution in Q1 and plan to roll that out over next year.
Understood. That is really helpful. I appreciate that. And maybe if I could just linger on international: I know China has kind of been a headwind for a couple quarters now. Any thoughts around what could get that back on track? Or how many moves you have left to make over there?
Yeah. Great question. We are looking at some options there and have been this year. China is obviously a very large market. You will recall we converted China from a licensee operation to a direct operation recognizing the size of that economy. For a few years that looked like a good decision and we grew it rapidly. Then coming out of COVID in recent years it has been much more challenging for us and has been a drag on our overall growth. There is still a good opportunity in China, but we are looking at a number of different options on how to operate China in a way that would give it the best chance to grow top line and bottom line. We will share more as we get through that evaluation process.
I appreciate the answer and good luck in the next quarter.
Thank you. And our next question comes from the line of Nehal Chokshi from Northland. Your question, please.
Hi, Nehal.
Hi, Holly. Thanks for the call and questions here. Speaking to the strength of the underlying metrics, is it fair to say that on Slide 10, the bottom line—the total additions to balance sheet under the breakout of subscription and committed services—is the best indicator with respect to that underlying strength you are talking about here?
Yeah. That is right. It is always a good indicator to look at what we are adding there for subscription and contractually committed invoiced amounts, and we had very strong growth with enterprise growing 18% this quarter, and we are very pleased by that. So it is definitely a very good indicator because that is just going to translate into net revenue growth next year.
Okay. And I did note that this is the second quarter in a row the overall subscription invoiced amounts are up mid-teens year over year.
It is double digits. Last quarter, we grew 16% and the first quarter was 5%. So we are moving in the right direction. We are pleased by that.
Huge positive. And so that is what is driving the continued confidence in the ongoing healthy buyback rate—is that fair to say?
Yes. So year-to-date, we purchased $20 million in buybacks. We believe in the growth prospects for the company and the strategy that we have to be able to deliver on that. The invoiced amounts growth this year is going to translate to net revenue growth next year. Through restructuring we have been doing, we do believe that we will have operating leverage, and we will be able to have growth in EBITDA and free cash flow in 2027 and beyond. All underlying indicators for growth of the business.
Could you give us a sense as to how much of this mid-teens growth that you are seeing is coming from existing customers versus new customers?
I would say there is a pretty good split between the two. When we undertook the go-to-market transformation in Enterprise North America a couple of years ago, one core bet was that we could have a team dedicated to selling to new customers and drive growth in subscriptions and services. The second bet was if we focused a team on our existing customer base we could drive more expansion, better retention, and more services. We have really seen that play out: higher attach rates of services, increased bookings, and both net new and expansion growth. Additionally, we are starting next year with many more contracted services on the books to be delivered with our clients. All of that visibility into next year supports more growth in reported revenue and adjusted EBITDA as we expected.
That is really helpful. Thank you very much.
Thank you. And our next question comes from the line of Jeff Martin from ROTH Capital Partners. Your question, please.
Hi, Jeff.
I wanted to dive into what you are seeing and hearing in terms of the sales environment. How do you feel that sales productivity was in the period? Is that productivity accelerating from the beginning of the year through Q3 or are we in a sales environment where it is a little choppy?
Thank you, Jeff, for the question. I am generally pleased with sales productivity. We have invested in several ancillary functions that support the sales team, which allows the individual seller to carry more revenue than they historically have in the old model. Dollars under management per person is up. We have added an SDR function that produces meetings for the sales team. That reduces ramp time for new hires and allows us to onboard and ramp talent more quickly. Those supporting functions have improved our ability to put more dollars under management for each seller and have improved productivity over time.
Great. And then, Paul, curious how you would characterize the add-on services environment?
We have been very pleased. Services bookings are a bright spot for us. Year-to-date through the third quarter, bookings of services are up more than 25%. We are delivering services this year for this year, and we also have a significant amount of services booked out ahead into next year. Services growth is being driven by demand in the marketplace and a more sophisticated sales force that can position integrated strategic solutions. Clients invite us in to work with senior leaders on strategy execution and AI transformation, and they want our experts to consult, coach, and deliver. That is driving higher services bookings.
Just to add a data point from the investor presentation, in the enterprise division this quarter we had a 59% services attach rate compared to 60% a year ago. That chart can be skewed by one large IP deal that does not show up as services attached to subscription because they are no longer a subscription client; we had $1.8 million of services for that large client this quarter. When you normalize for that, we actually had a 66% service attach rate versus the prior year. So you see the growth year over year in services attach, and that is a great signal.
Thank you. So the way I am kind of understanding some of your messaging here is there is a lot of demand for leadership and a lot of demand for execution. Are those going to be your two largest content areas going forward?
Categorically, yes. We have been moving toward being a partner to organizations helping them generate the collective action necessary to execute their most important strategies. The human side of strategy execution requires great leadership, high-trust cultures, alignment, and collaborative work. Those are the problems we help organizations solve: leadership, trust, execution. We are also seeing opportunities in areas like hospitals, where patient experience ties directly to how clinicians work together. These are human, leadership, and culture challenges where our solutions attach well.
One more: I know you are not establishing fiscal 27 guidance, but could there be a scenario where you grow high single-digit to low double-digit revenue with operating leverage and some help on gross margin to result in adjusted EBITDA growth that significantly outpaces revenue next year?
We are not providing guidance right now for next year. I will say that with the growth we've had this year in invoiced amounts, we believe that will translate to meaningful net revenue growth next year. With major investments largely behind us and restructuring and cost initiatives in place, that should translate into EBITDA growth as well next year. Those are indicative points.
Thank you very much.
Thank you, Jeff.
Thank you. And our next question is a follow-up from the line of Alexander Paris from Barrington Research. Your question, please.
Hi. I just wanted to sneak this last one in. We did not really talk about AI too much. Paul, you said in your prepared comments this is one of the biggest years for new product and solution introductions. In fiscal 27 you expect execution and AI solution enhancement. I wanted a little update: you introduced AI Sales Coach for the Four Disciplines, you launched Leading AI Adoption, Working with AI—what is the AI roadmap?
We have launched those solutions and they are out in the market. We have seen a lot of interest and demand from our clients. Last quarter I shared that we had won a sizable deal to be the partner on AI transformation for a large technology company in Q2, and in Q3 we expanded our work with that client as the early work was well received. On the AI front, we will be launching the next set of modules in the fall to build on Leading AI Transformation and Working with AI. We are also about to launch additional functionality within our AI coach—more simulations, role plays, and ways to incorporate those capabilities. We are embedding AI into our solutions and enabling clients to access content embedded in some of their internal AI systems and collaboration tools like Slack and MS Teams. On the advisory side, we are developing solutions around AI readiness, AI change, and AI transformation to be the partner clients need. There is much more to come.
I will add two things. The largest, most pervasive question we get from current and prospective clients is how to equip leadership to navigate large-scale disruption—pervasive across industries. After they figure out their leadership approach, the next question is how to equip the broader team for AI fluency. They are looking for a partner to help them navigate that disruption at scale.
Super helpful. Last quick one: based on the press release and your comments, it looks like you are committed to revenue growth and even faster adjusted EBITDA and free cash flow growth because of restructuring actions and so on. Is that fair to say?
Yes. That is what we believe and expect relative to this year.
Very good. Thank you. That is all for me.
Thank you, Alexander.
This does conclude the question-and-answer session of today's program. I would like to hand the program back to Paul S. Walker for any further remarks.
Wonderful. Well, thank you, everyone, for tuning in today. Thanks for your great questions and we appreciate you. If you are in the U.S., hope you have a good Fourth this weekend, and we look forward to connecting with you. Have a great day.
Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.