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Operator: Good afternoon, and welcome to Applied Digital's Fiscal Second Quarter 2026 Conference Call. My name is Konstantin, and I will be your operator for today. Before this call, Applied Digital issued its financial results for the fiscal second quarter ended November 30, 2025, in a press release, a copy of which has been furnished in a report on a Form 8-K filed with the Securities and Exchange Commission, or SEC, and will be available in the Investor Relations section of the company's website. Joining us on today's call are Applied Digital's Chairman and CEO, Wes Cummins, and CFO, Saidal Mohmand. Following the remarks, we will open the call for questions. Before we begin, Matt Glover from Gateway Group will make a brief introductory statement. Mr. Glover, you may begin. Matt Glover: Thank you, operator. Hello, everyone, and welcome to Applied Digital's Fiscal Second Quarter 2026 Conference Call. Before management begins formal remarks, we'd like to remind everyone that some statements we're making today may be considered forward-looking statements under securities laws and involve a number of risks and uncertainties. As a result, we caution you that there are a number of factors, many of which are beyond our control, which could cause actual results and events to differ materially from those described in the forward-looking statements. More detailed risks, uncertainties and assumptions relating to our forward-looking statements, please see the disclosures in our earnings release and public filings made with the SEC. We disclaim any obligation or undertaking to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made, except as required by law. We also discuss non-GAAP financial metrics and encourage you to read our disclosures and the reconciliation tables to the applicable GAAP measures in our earnings release carefully as you consider these metrics. We refer you to our filings with the SEC for detailed disclosures and descriptions of our business as well as uncertainties and other variable circumstances, including, but not limited to, risks and uncertainties identified under the caption, Risk Factors in our annual report on Form 10-K and our quarterly reports on Form 10-Q. You may access Applied Digital's SEC filings for free by visiting the SEC website at www.sec.gov. I'd like to remind everyone that this call is being recorded and will be made available for replay via a link available in the Investor Relations section of Applied Digital's website. Now I'd like to turn the call over to Applied Digital's Chairman and CEO, Wes Cummins. Wes? Wesley Cummins: Thanks, Matt, and good afternoon, everyone. Thank you for joining our Fiscal Second Quarter 2026 Conference Call. I'd like to begin by thanking our employees for their dedication to delivering high-performance, sustainably engineered infrastructure for AI, cloud and blockchain workloads. Their execution and commitment continue to be foundational to our success. This quarter marked several important milestones across our HPC data center and hosting business. Polaris Forge 1 reached ready-for-service, energizing 100 megawatts on schedule and completing the first of 3 contracted buildings. The remainder of this AI factory campus is expected to be completed by the end of 2027, and will host 400 megawatts for CoreWeave, representing approximately $11 billion in prospective lease revenue over approximately 15 years. We also announced a roughly $5 billion 15-year lease with a U.S.-based investment-grade hyperscaler for 200 megawatts at Polaris Forge 2. This is a $3 billion project near Harwood, North Dakota that is advancing on schedule with initial capacity expected in 2026 and full build-out in 2027. Together, these agreements represent 600 megawatts of lease capacity and approximately $16 billion in prospective lease revenue across our North Dakota campuses. Having secured two hyperscale leases in the region, inbound demand has increased meaningfully. As a result, we are in advanced discussions with another investment-grade hyperscaler across multiple regions, including additional locations in the Dakotas and select Southern U.S. markets. While there can be no assurance of future contracts, we believe we are well positioned to begin construction of additional campuses in the near term. Hyperscalers are competing aggressively to secure sites that can support massive AI demand, responding to data highlighting significant shortfalls in global power capacity. Many are being asked to commit capital to 30-year power plant developments, meaning energy may take years to come online, it could cost more than anticipated. Beyond the immediate rush, AI infrastructure is ultimately a cost of capital business where every input matters. In this context, we chose the Dakotas because we believe they provide a durable competitive advantage with low cost of abundant energy, [ new ] climate, ample land for expansion of existing sites and potential for future large-scale super sites that could align with regional energy developments, making Applied Digital sites not only immediately valuable, but we believe also more efficient and cost-effective over the long term compared with other regions in the U.S. and globally. Building on this advantage, we have significantly evolved our construction and design capabilities. Our current data center designs are modular and highly efficient, allowing us to run numerous concrete plants simultaneously and leverage prefabricated components delivered by 18-wheelers. The approach reduces construction timelines and lowers overall cost. We've expanded the footprint and flexibility of our buildings designed to allow for different GPU and ASIC chip architectures and networking infrastructure to support multipurpose AI use cases and traditional cloud workloads. While AI is driving significant demand, cloud computing continues to grow and increasingly competes for data center capacity. Our facilities are purpose-built to support training, inference and traditional cloud workloads intended to give hyperscalers maximum flexibility over the life of the asset. Looking ahead, we expect to maintain a meaningful competitive advantage in the Dakotas and intend to announce additional locations in other advantaged regions. With that, I'll turn the call over to our CFO, Saidal Mohmand, for a detailed review of our financials. Saidal? Mohammad Saidal Mohmand: Thanks, Wes, and good afternoon, everyone. This quarter represents a major inflection point for Applied Digital. After two years of construction and over $1 billion invested in our first 100-megawatt data center, we have now begun to generate lease revenues. We expect lease revenues to ramp over the next quarter, and it's important to note that we currently have two different campuses under construction simultaneously representing 600 megawatts. These buildings are expected to come online over the course of calendar 2026 and 2027, where we anticipate meaningful revenue growth over the coming 18 to 24 months. This does not include any additional campuses currently under advanced discussions with customers, which would be layered into these numbers according to their respective design and build time lines. From a high-level finance perspective, we have agreements in place with top-tier financial institutions that allow us to execute this repeatable and capital-efficient framework. The first step of this process is to draw on our development loan facility with Macquarie Equipment Capital, which allows us to fund pre-leased construction for new sites. Subsequent to the second, first quarter end, we made our first draw under this $100 million facility. The second step, following a mutually agreed upon executed lease with an investment-grade hyperscaler is to access the Macquarie Asset Management's $5 billion preferred equity facility. To date, we have drawn $900 million from this facility to support our Polaris Forge 1 and 2 campuses. We expect a similar financial structure will be used going forward for future development projects. This multilayered financing framework allows Applied Digital to leverage third-party capital for a majority of the upfront investment, while retaining majority ownership of each site, providing financial flexibility and reducing reliance on public capital markets. On the debt front this quarter, we completed a $2.35 billion private offering of our 9.25% senior secured notes due 2030 to finance the first 2 -- 2 of the 3 buildings at our Polaris Forge 1 site, supporting the core releases, allowing us to refinance existing debt. Note, project-level debt typically carries higher interest rates initially as it finances the riskier portion of development. But once the buildings are operational, our goal is to refinance at lower rates. Additionally, our team is actively exploring and working on options to reduce the cost of debt for the third building, ensuring we continue to optimize our capital structure. Now let's turn to the quarter. Revenues for the fiscal second quarter of fiscal '26 were $126.6 million, up 250% from $36.2 million in the prior year. The increase is primarily due to a $73 million of revenue generated from tenant fit-out services associated with our HPC Hosting Business, along with $12 million of recognized revenue in connection with the commencement of the first CoreWeave lease at Polaris Forge 1, reflecting partial quarter lease revenue. On a cash basis for the leases, revenues were approximately $8 million. The difference between cash received and the revenue recognized reflects ASC 842 lease accounting, which requires lease revenue to be recognized on a straight-line basis over 15 years. We will aim to provide clarity on this difference on an annual basis going forward. Applied Digital's Data Center Hosting segment, which operates 286 megawatts of customer ASICs across two North Dakota facilities had an exceptionally strong quarter, contributing $41.6 million of revenue, up 15% compared to the prior year. This growth was primarily driven by increased capacity online across the company's hosting facilities. We are very pleased with this business, which generated roughly $16 million in segment operating profit in just one quarter on a $131 million asset base. Cost of revenues in total were $100.6 million compared to $22.7 million in the prior quarter. Approximately $69.5 million of the increase in the cost of revenue was associated with the tenant fit-out services for our HPC Hosting Business, while the remaining increase was associated with our Data Center Hosting business and other expenses directly attributable to generating revenue. SG&A was $57 million compared to $26 million. This increase was due to an increase of $23.8 million in stock-based comp due to accelerated vesting of certain employee stock awards, $4.7 million in professional service expenses primarily related to an increase in legal services and $1.2 million in personnel expense for employee costs and other costs attributable to supporting the growth of the business. Interest expenses is $11.5 million compared to $2.9 million, while net loss was $31.2 million or $0.11 per share. On an adjusted basis, adjusted net income was a positive $100,000 or $0.00 per share. Adjusted EBITDA for the quarter totaled $20.2 million. From a balance sheet perspective, Applied Digital is exceptionally well positioned. We ended with the second fiscal quarter with $2.3 billion in cash, cash equivalents and restricted cash versus $2.6 billion in debt, most of which does not mature until 2030, and approximately $2.1 billion in total equity. Note, these figures do not include the $382.5 million in proceeds from financings completed subsequent to the quarter end. Our goal is to maintain one of the strongest balance sheets in the industry throughout the majority of the construction phases, intentionally holding a robust liquidity position to preserve a strong credit profile while enabling additional investments in equipment and new sites, then reassessing as buildings come online as our cash flow increases. With that, I'll turn over the call to Wes for closing remarks. Thank you. Wesley Cummins: Thank you, Saidal. Applied Digital is executing in a market defined by extraordinary hyperscaler investment now exceeding $400 billion annually. With our first two hyperscalers under contract for 600 megawatts in additional sites in advanced discussions, we are well positioned to scale rapidly. We now expect to surpass our long-term goal of $1 billion in NOI within 5 years. The Dakota campuses are expected to provide a durable strategic advantage through low-cost energy, natural cooling and a supportive regulatory environment. We remain committed to responsible development, strong community partnerships and environmental stewardship. We continue to invest ahead of the curve. This quarter, we led and invested $15 million in a $25 million funding round for Corintis, supporting advanced liquid cooling solutions for high-density AI workloads. We are also working with utilities and strategic partners, including Babcock & Wilcox Enterprises to explore ways to add power to the grid without increasing costs to our customers. These initiatives reinforce our leadership in next-generation data center design, responsible grid management and a long-term shareholder value creation. We plan to continue advancing our thought leadership at the forefront of data center technology and deepening our influence across the broader ecosystem. I'm also proud to announce the launch of Applied Digital Cares, a community initiative funding brands that support education, health, innovation and local development in the regions where we operate. Through this initiative, we aim to improve the standard of living in these focused communities because of our success -- because our success depends on theirs. Finally, as noted earlier, I want to expand on the Board's decision to spin out Applied Digital Cloud. We've entered a non-binding Letter of Intent to combine Applied Digital Cloud with EKSO Bionics to form ChronoScale, a dedicated GPU accelerated-compute platform for demanding AI workloads. This transition separates our cloud platform from our data center business intended to allow each to scale independently with greater strategic and capital flexibility. ChronoScale is set up to leverage [ the proven ] Applied Digital Cloud platform among the first to deploy NVIDIA H100 GPUs at scale. On an anticipated closing in the first half of 2026, Applied Digital is expected to own over 80% of ChronoScale. Today, the cloud business generates roughly -- generates over $60 million in trailing 12-month revenue with $313 million in assets. We believe spinning off our cloud business best positions us to serve the accelerated AI -- accelerating AI market while enhancing long-term shareholder value. With that, operator, we'll open the call for questions. Operator: [Operator Instructions] Your first question comes from the line of Nick Giles from B. Riley Securities. Nick Giles: My first question was just -- I was hoping to get a sense for your growth appetite in the cloud business. Good to see the announcement there for ChronoScale. Should we expect the Applied platform to be a host for any future GPU purchases? Or how could Applied ultimately help attract incremental customers in -- for ChronoScale? Wesley Cummins: Thanks, Nick. We've had a lot of discussions around that. So I think one of the key advantages that ChronoScale will have is the relationship with Applied Digital and access to large-scale data center facilities, deploying the accelerated compute, whether it be GPUs or TPUs or LPUs is part of the equation, but having access to large-scale data center facilities to actually make those deployments is a bigger part of the equation right now. And I think that's going to give that platform an advantage having the relationship with Applied Digital. We've had some of those discussions. We don't really want to get into how that will work in the future, but I do think that's a big advantage for the cloud business as it spins out. Nick Giles: Got it. I appreciate that, Wes. My second one was just you signed an agreement for a limited notice to proceed with Babcock & Wilcox, and I was just wondering if you could touch on the opportunity there. What kind of optionality does this really give you going forward? And what should we be looking for in the upcoming contract release? Wesley Cummins: The -- so for us, with the BW solution is a very unique solution and an exciting solution in the market because it uses older technology or an older process, which has been proven out for 100-plus years. It's using steam turbines, think of coal plant boilers, but we're using natural gas. That company has actually made a lot of coal and natural gas conversions over the past decade plus, and what it allows us to do is go to market earlier. If you get in line for natural gas -- traditional natural gas turbine right now, if we put an order in today, we're probably not getting delivery until 2031, 2032. For that equipment, we need power earlier than that. We are working with our utility partners, specifically now in the Dakotas, but expect to in other states as well, the initial reaction from those utilities has been overwhelmingly positive and really interested in the solution that the utilities -- any utility in the country knows who BW is. The company has been around for a long time, very good reputation. And for us to be able to bring a product forward 3, 4-plus years to be able to generate power in the near term is the big advantage for those utilities and for us. And I think you should expect to see more information about that in the first quarter as we proceed with a site and an actual schedule for build on that equipment. But it provides a really good option for Applied Digital to expand its current campuses and future campuses faster than we would be able to otherwise. Operator: Next question comes from the line of Darren Aftahi from ROTH Capital. Darren Aftahi: Congrats on the progress. Two, if I may. Wes, can you just talk generally about the landscape for leases and how pricing may have changed over the last 6 months? Like is it improving, staying the same, going down? And then second question, can you just talk a little bit about the pre-lease financing? I appreciate what it's actually doing. But like what does that say about your confidence when you're progressing on sites where you don't have signed leases? Just any kind of commentary and context would be great. Wesley Cummins: Sure. So I'll start with pricing and Darren, I'll keep it specifically to us. I don't want to speak for the market at large. But I would say, generally, pricing has been stable to slightly better over the past 6 months. The demand profile for the past 6 months has been extraordinarily robust. There's -- I always want to expand a little bit on this with contracting. There's the headline price that you'll see in contracts and a calculated yield, which is using an estimated cost to build. That's one aspect of it. What I would say, though, that's as important or even more important is we're getting more favorable terms in other aspects of the contract that we focus on very acutely for things like cancellation of transferability, a lot of the things that make these contracts for us, much more rock solid over that 15-year time frame. And we're getting a lot more favorable treatment in those aspects as an example, our current contracts are really noncancelable for 15 years. The customer can cancel for convenience. However, they owe us the 15 years of payments if they do, so that's typically referred to as a make-whole or a cancellation in the contract. So we've been able to get that 100% make whole transferability that doesn't allow them to transfer to a credit rating. It's either equal or higher. There's a lot of things that go into the contracting. So I would just say, in general, the contracting environment has gotten more favorable over the past 6 months. And then on the Macquarie equipment facility and us announcing that, I think you should think back to what we did for our facility in Harwood, North Dakota. We did something very similar. And at the time, I spoke about that as well as -- we will go forward with groundwork, breaking ground, getting the project moving when we have a high degree of confidence that we're going to find a lease at a new campus or new campuses and that facility. We use that same style of facility. Now we've made that facility effectively at Evergreen so that we can continue to draw and pay it back. But we use that in Harwood. We paid that back with the draw on Macquarie Asset Management. We've now drawn down again. We purchased some land and some other equipment. We'll start construction on at least one new campus by the end of January. And that's because we have a high degree of confidence that we're going to sign a lease with a new customer that is different. And we've set investment-grade hyperscaler, it's different than the original one we signed in Harwood. And that's the goal for us. Darren, we have a lot of momentum. So we've talked a lot about this before where we're qualified with most of the investment-grade hyperscalers are really focused on fixed companies total here. And so we want to add new locations, and we want to add new customers. So we diversify both in location and by customer and we expect to have a lot of success on that in 2026, and with what we're doing and what you're seeing the actions are now, you should expect that we think it's going to be in very early '26. Operator: Your next question comes from the line of Rob Brown from Lake Street Capital Markets. Robert Brown: Congratulations as well on all the progress. Just back to the ChronoScale spinout, I think you said midyear for kind of closing. What's the -- give us a sense of what steps have to happen between now and then in terms of getting finalized agreement and a closing step? What sort of has to happen here? Wesley Cummins: Sure. So it technically will be a merger, Rob. And so we'll get to a definitive -- hopefully later this month or early in February. And then there would just be a process for a shareholder vote to complete the merger. I think in the first half of '26 is the expectation. I think if I were handicapping it, on the very, very early side in March, but I would expect kind of the April-May time frame as we go forward with that. Robert Brown: Okay. Great. And then as you kind of think about that business and the growth possibly there, I think you said $60 million trailing or $75 million, I think, [ you said ] sort of perspective. What's sort of the growth opportunity? Is there additional capacity that can get leased out as a stand-alone business? Or do you expect -- I assume you expect some growth in capacity as well, but just a sense of the growth opportunity there? Wesley Cummins: Yes. So just for context on this, Rob, when we announced back in April, we were -- we put that into discontinued ops. We are seeking strategic alternatives. We evaluated a lot of alternatives. But while we were evaluating those alternatives, I think that market changed pretty significantly. And what we're seeing is a big opportunity in the compute side of the market, obviously, the data center side as well, but the compute side of the market, you're seeing a lot of deals happen over the past 3 or 4 months in that part of the market. We're involved in -- with a lot of those counterparties and discussions that have been, and we think there's a really large opportunity for our cloud business as we spin it out into ChronoScale to get some of those types of contracts. And we're working with us. We think there's a really unique relationship there where we can get data center capacity to be able to deploy significant scale for those style of contracts with those customers. And so we think this is the absolute best path for value creation for our shareholders to let this company spin out and capture that opportunity and raise its own capital and get on its own growth trajectory, which we just haven't focused on for the past 8 months. So we think there's a huge opportunity there, and you can see the stuff that's going on in the market, and we're really well positioned to capture some of those opportunities. Operator: Next question comes from the line of Mike Grondahl from Northland Securities. Mike Grondahl: You've mentioned a couple of times advanced discussions. Can you talk a little bit about how many sites you're having advanced discussions about like how many megawatts just so we can get a feel kind of a sense of the breadth that you're talking about? Wesley Cummins: Sure. I think we've talked about 2 or 3 sites. So I'll tell you, it's -- we're in advanced discussion on 3 sites in 900 megawatts. Mike Grondahl: Great. 3 sites in 900 megawatts. And then, Wes, how are you thinking about the pipeline today? How would you characterize that pipeline? Wesley Cummins: The pipeline remains robust. I will say, Mike, when I think about the business, and it's been like this for the past few months, I'm thinking less about the demand side of the equation, and I talked about this a lot on the last call, which is our ability to scale, our ability to scale across multiple sites then do construction across multiple sites and how many sites can we do construction across and the team spent a lot of time in 2025, and we'll continue in '26, working on our ability to scale and execute these projects at the size that we're doing across multiple sites. So it's less on the demand side because that's not been really the issue for us or really, I think the issue for the industry. We'll focus more on how much can we do and how much can we build from a supply chain perspective, from a personnel perspective, on an annualized basis. And so I don't think demand is going to be the limiter for us, but I want to make sure -- we always want to make sure that we're delivering on time and on budget for our customers. And I don't want to go too far out. We haven't hit that limit yet but it's the piece that I think about a lot, and we internally think about a lot is what is the limit for us on an annual basis. It's a large number but that's really more of the limiting factor for us and not what the demand picture looks like. Operator: Next question comes from the line of George Sutton from Craig-Hallum. George Sutton: Wes, you mentioned having been qualified by a few of the investment-grade hyperscalers, can you just talk about what that means when we talk about being in advanced discussions, I mean, how much more simplicity of getting something across the finish line is there once you've gone through that process versus hypothetically someone new in the market? Wesley Cummins: So what I would say generally and I'm going to only be able to reference our experience. So getting onboarded, getting to the point where you signed a master agreement that governs typically work orders or service orders you'll sign underneath of that can be anywhere from -- on the low end, 3 months to -- on the high end 9 months to a year, and so we've been through the process there for most of these hyperscalers. So there's the 6 that we target, which are the 5 investment-grade hyperscalers and then CoreWeave. So we're through -- out of those 6, we're through that process with 5 of those. And so I think we're in a really good position. And so if we've already been through that process, doing a new building even if -- a new building on the same campus or expansion in the current building or doing even a new campus if you're through that with one of those hyperscalers is a much shortened time frame, abbreviated time frame to get to that actual contract versus starting from scratch. George Sutton: Got you. So I want to put a couple of things together, and if you can help me. You were on CNBC the other day, mentioned, by the way, movie star quality experience, frankly. But you mentioned you had done $16 billion of deals in '25, and that you would anticipate doing that or potentially better in '26. And I want to dovetail that with what you just said on we're late stage with 3 sites in 900 megawatts. Am I kind of putting these things all together correctly? Wesley Cummins: Yes, I think that's correct. What I would just add to that on the -- George, on the 900 megawatts, I don't want to set the expectation that all of that is done at the same time. That could be one at a time. It could be none. We've been through enough of this. George, you've been through this with us as we've gone through the last few years. Nothing is done until it's done. That's just what we're working through right now. But that's -- those two going together, I think, you're reading that correctly. Operator: Next question comes from the line of John Todaro from Needham & Company. John Todaro: Wes, you spent a good amount of time talking about how, I guess, supply and execution is a little bit more of the difficulty part than demand. I think you ultimately ended ahead of schedule in that first build for CoreWeave. Can you just walk us through maybe what you learned from that execution and give us confidence in how you'd be able to continue to execute on those builds on the development side? And then I have a follow-up. Wesley Cummins: Yes. So we learned a lot going through that process on that first building, and we've made a lot of refinements -- typically, John, I think you've probably heard me talk about this before. So for us, one of the things I think differentiates us in the market is we started on this path back in 2022. We've stubbed our toe in a lot of different ways through the years. Luckily, we did most of that at a very small scale, but we had a lot of lessons on that first building, and you can see that reflected in design change, and then construction change and how we operate all the way through our supply chain and standardizing a lower amount of SKUs, lower amount of suppliers, all of these things that streamline the process that we do to build these facilities. And so we feel like we have a really good handle on our construction time lines. There's always things that can cause a problem that are out of our control on construction. One of the things I always worry about is weather, but we've built -- I think this is our fourth year in a row building in North Dakota in the wintertime. So we're pretty accustomed to that as well. But we have -- we went back securing supply chain well over a year ago, 18 months plus ago, and we thought we were really forward thinking on locking in 600, 700 megawatts of MEP per year that we have for us. Now we're working to expand that. That fits what we're doing right now, but I think that needs to go larger for us. So -- but we feel good about our processes we have in place and kind of the maturation of the construction and development group versus what we did on building 1. I'm proud of -- I'm really proud for the entire team that we delivered that on time and on budget for our customer. But we have to continue to do that. We feel really good about where we are for the CoreWeave building that we're expecting to deliver in the middle part of this year and the building in Harwood we're expecting to deliver shortly after that. And then the next two buildings after that, both in Ellendale and then in Harwood. So we're feeling really good about where we are on schedule. But it's about the fact that we have streamlined this and we're on, what I call our fourth generation design has really helped us in simplifying the process and streamlining the process and being one of the companies that does deliver on time. John Todaro: That's great. And then just a quick follow-up. I think you've mentioned in the past getting calls from entities with sort of stranded power. And it sounded like there might be a little bit more pockets of available power out there than some of us in the industry had initially thought. Could you just maybe frame that up? Is there still additional kind of pockets to acquire more fairly near-term power? And maybe talk to your color on that? Wesley Cummins: Yes. We keep finding more opportunities, more and more opportunities. Everything we're in process with right now is organic. So we have a large amount in-flight that is organic. But we continue to see opportunities, third-party opportunities. We continue to evaluate those opportunities. And some of those, really, for us, it could be in a different geographic market for us, that is a really attractive market. But we continue to look at that. But everything we're doing right now is organic, but we see those, I would say, daily -- weekly at least, but typically multiple times in a week. Operator: Your last question comes from the line of Michael Donovan from Compass Point. Michael Donovan: Congrats on the quarter. Following up on Mike's pipeline question, can you touch upon expansion opportunities at PF-1 and PF-2? Do you still have confidence in those reaching 1.4 gigawatts and 1 gigawatt, respectively? And I have a follow-up. Wesley Cummins: Yes. So every one of our campuses, I think this is an important point. Every one of our campuses has the potential to go to at least a gigawatt. And some significantly beyond a gigawatt. But when we think about our goals inside the company, we have two campuses now that can each go to 2 gigawatt or more. So we have that pipeline in the future for ourselves, we're working on three additional campuses. We're working on a lot more than that. But think of -- things we're in advanced stage on three more campuses. Each one of them can scale to 2 gigawatt capacity. So for us, if we put those in place, those contracts in place, we have different customers on those campuses. We have a view and a pretty clear path to whether it's by 2030 or 2031 or 2032 to growing our capacity to 5 gigawatts, if we don't add another campus after that. We would expect that we would, but it puts a really good growth path out for the company just having these campuses in place, just getting the 2 gigawatts, if we were talking about this a year ago, would be monumental for us. But if we can expand to 5 campuses and have a clear path to 5 gigawatts plus of capacity over the next 5 years. That's a really great position for [ us ]. But all of those campuses have that expansion potential. Michael Donovan: Great. I appreciate that. And with the discussions around NVIDIA this week with liquid-cooling [ via ] Rubins, can you discuss a bit on what makes Corintis a competitive solution? Wesley Cummins: So Corintis is really interesting. You could go and look at their technology. They had a very nice announcement with Microsoft, I think, a couple of months ago. What we like about it is Corintis has a cold plate technology that I liken to semiconductor and then module. A lot of semiconductors are built into modules. So they have the technology that I would classify in this case, a semiconductor, which is a specially designed patterned cold plate that is dependent on each chip individually. So whether it's B200, B300, Rubin, whatever it might be, they map that chip. They make the heat points of that chip. They design the cold plate with a lot of micro channels through it. And then it goes into a full cold plate and it sits on top right now. But this technology is designed to go inside the semiconductor packaging in the future and then actually inside the manufacturing process in the [ epi ] for semiconductors. And the goal for this technology and a lot of this has proven out for them is that you can use -- if a chip goes, let's say, it's using 1 kilowatt down, but the next-generation chip uses 3 kilowatts or 5 kilowatts, this technology can use the same amount of liquid to chill chips as they go up. Now there's a point where that breaks and there's a change where we need more liquid. But from a data center operator perspective, when having that efficiency inside is always great for our customers, but to be able to deliver the same amount of liquid on the data center side for a chip that's 3x the power density of what we're currently running really helps us future-proof our infrastructure. And so we're really excited about that technology. Operator: There are no further questions at this time. I'd like to turn the call back to Wes Cummins for closing comments. Sir, please go ahead. Wesley Cummins: Thanks, everyone, for joining us for our Q2 earnings call. I appreciate all of the support and look forward to speaking to you in April. Thanks. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you very much for your participation. You may now disconnect.
Operator: Hello, and thank you for standing by. Welcome to Franklin Covey First Quarter Fiscal Year 2026 Earnings Conference Call. [Operator Instructions] I'd now like to turn the conference over to Boyd Roberts, Head of Investor Relations. You may begin. Boyd Roberts: Thank you, Towanda. Hello, everyone, and thank you for joining us today. 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 similar phrases of similar meetings. 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 related 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 and President. Paul Walker: Thank you, Boyd. Good afternoon, everyone, and thank you for joining us. It's great to be with you to have an opportunity to share our results for the first quarter and an update on the business and our outlook for the year. As we noted in our November earnings call, after a year of transition last year in fiscal '25, we expect this year, fiscal '26 to be a year of execution and a return to growth. After a transition year last year in which both invoice and reported sales declined, we expect strong growth in invoiced amounts in fiscal '26 led by Enterprise North America but also for the company overall. Importantly, because much of our growth in invoiced amounts goes on the books and is recognized over time, a portion of this growth in invoiced amounts will be recognized in the back half of the year, resulting in modest growth in reported revenue for the year but positioning the company for accelerated growth in both invoiced amounts and reported revenue, along with adjusted EBITDA and cash flow in fiscal '27. As we'll address in more detail in a moment, consistent with these expectations, we're pleased with the strong growth in invoiced amounts we achieved in enterprise in the enterprise -- North America Enterprise portion of the business in Q1, where invoiced amounts grew 7%. And importantly, excluding our government business, where this year's first quarter is the last quarter where results are still being compared to pre-DOGE sales levels, invoiced amounts in the rest of Enterprise North America grew an even more significant 13%. This growth was driven by significant increases in new logo subscription sales, and also the sales of subscription services to our new logo and our existing All Access Pass clients. We anticipate that the strong growth in North America invoiced amounts will continue in the second quarter. We have a strong pipeline and have had a significant year-over-year increase in advanced bookings of services that will deliver in the second quarter and throughout the remainder of the year. This expected strong growth in invoice sales is important, both strategically and financially. Strategically, it reflects the traction we're achieving in our go-to-market transformation. And financially, while much of this revenue will go on the books and be recognized over time, the actual economics of these increases in invoiced amounts are being realized well ahead of when we actually report them because we received the proceeds from these invoiced amounts. In addition to this strength in Enterprise North America, we expect operations in Education and international enterprise to be on track with expectations for the year and that invoiced amounts for the company overall will grow meaningfully for the full fiscal year. Just a comment or two about Education. As you know, the Education Division has achieved significant growth and strong results over a number of years, and we're pleased that the Education Division achieved growth last year in fiscal '25, even in the context of the uncertainties faced by almost every school district last spring about the potential impact on school funding from the proposed elimination of the Department of Ed. Absent this uncertainty this year, we expect Education to achieve strong growth in both invoiced and reported sales in fiscal '26. While we have a lot of subscription revenue and education is recognized throughout the year, because schools and districts run on an education year, which begins in September, our first fiscal quarter, which is our first fiscal quarter, a lot of materials and services are purchased and recognized in our fourth fiscal quarter when schools train their teachers and staff in preparation for their school year. As a result, we have a disproportionate amount of our revenue in the Education business, which is recognized in our third and especially our fourth quarter. This has been the normal seasonality for this division over time. Over the past years, in addition to continuing to win a large number of individual schools, we focused on winning districts and now even entire state contracts. This has been important for the business, both strategically and financially. However, because the timing of winning these larger state contracts can occur at different times throughout the year, occasionally, a contract entered into in one quarter is then booked and recognized in other quarters or even into the next fiscal year. This occurred in last year's first quarter, which we comped against in this year's first quarter. In last year's first quarter, we won entered into and invoice for a large number of schools that began implementation as part of a significant multiyear contract with the state. This quarter, we had fewer school start implementation in comparison to last year, which caused an approximate $3.5 million gap in invoiced amounts. However, we've already received and have the cash in hand for the second year of this contract, and we expect the timing of the launch of the schools for this particular state to occur in Q3 and Q4 this year where they had occurred in Q1 last year. Overall, we expect education to have a strong year in fiscal '26 with the pattern of invoiced amounts and recognized revenue being similar to prior years with the exception of the large contract that drove the onetime spike in growth in last year's invoiced amounts that I just outlined. Regarding international, we expect international invoiced amounts and reported revenue as a whole to grow modestly this year. And for the first quarter, revenue was down slightly, mainly due to China, which though now stable, is still comping against the period before the high tariffs -- or before tariffs were announced in early April last year. Overall, we expect to achieve our full year revenue and adjusted EBITDA guidance. With our full year guidance intact, we anticipate that the meaningful growth in invoiced amounts we expect to generate this year will translate into even more substantial growth in reported revenue, adjusted EBITDA and free cash flow in fiscal '27. Jessi will provide some more detail on Education and International in her segment remarks in just a minute. Before I turn the time to her, I'd like to focus my comments today primarily on Enterprise North America, which makes up more than 50% of our total company sales. It's the engine that we reorganized and invested heavily in last year in order to prepare it for accelerated growth. And it will be the key driver of invoiced growth in fiscal '26 as well as invoiced and reported growth in fiscal '27 and beyond. So a few comments about Enterprise North America. As I mentioned earlier, we're pleased with the strong 7% growth in invoiced amounts that we achieved in the first quarter and the momentum we continue to see. And when looking at the overall strength of the North American engine, we're really pleased, also, as I mentioned, that we achieved 13% growth in North America overall, when excluding the government business which was impacted by DOGE last year. We also expect to achieve significant growth in invoiced amounts in the second quarter and for the full year. Key results embedded in the first quarter's overall 7% increase in these invoiced amounts include that, first, our new logo subscription invoiced amounts grew a significant 25% year-over-year. Our deferred subscription balance grew 8% year-over-year to $49.1 million, and our services booking pace was up 29% in the quarter, an important leading indicator of future services revenue that will be recognized and an indication of the importance our clients place on the outcomes we're helping them achieve. Our logo or client retention rate remained consistent with previous quarters and our percent of revenue contracted for multiyear periods increased to 61%. The momentum in return to growth in Enterprise North America, first in invoiced amounts, which will be reflected in growth in reported revenue later into the year and into next year is being driven by two important factors. First is the strategic importance of what we're doing and the need our clients have for a partner to help them achieve breakthrough business results. And second, the traction and execution we began to see from our go-to-market investments in last year's fourth quarter, and the fact that it's really beginning to kick in. I'd like to just for a couple of minutes briefly touch on each of these two growth drivers. First, related to the strategic importance of what we're doing and the need our clients have for a partner to help them achieve breakthrough results. Strategically, we're playing for something very clear and important. That is to be the partner of choice for leaders seeking to achieve breakthrough results. Achieving and sustaining breakthrough results requires not only good strategy, it also depends on getting large groups of people throughout an organization working together to achieve better and more consistent behaviors and actions to deliver it. Our role is to help organizations achieve their most important goals by strengthening the people part of execution, raising the level and consistency of how people lead, collaborate and execute and to help organizations scale what already works well in pockets across the entire organization. AI is, of course, transforming how work gets done. And at the same time, it's making human capabilities such as judgment, trust and collaboration more critical than ever. We're incorporating AI into our solutions and with some exciting results for clients. In addition to building AI into our products, for example, the AI sales coach I referenced last quarter, as well as our AI Coach for our 4 Disciplines of Execution solution, which we'll launch this year that is going to leverage our experience and our vast amounts of data to help leaders accelerate the execution of their most important goals and objectives. We're also helping our clients on the human side of AI adoption. In the first quarter, we launched 2 new solutions, one called Leading AI Adoption and the other called Working with AI. These solutions are designed to help leaders and individuals develop the mindsets and skill sets to effectively incorporate AI into their daily work to make them and their teams more efficient. However, even with these enhanced AI capabilities, the ability of leaders to clearly determine, communicate and gain broad scale commitment to their critical priorities and then to get their entire organization to become committed to and to stay aligned and focused and accountable while working together with high trust and execution remains the ultimate differentiator in achieving breakthrough organizational performance. We're focused on further strengthening our already significant capabilities in being the partner of choice for organizations that are seeking to achieve breakthroughs in performance. This requires being a leader in combining world-class content, technology and services to deliver breakthrough impact for clients. And we have and continue to invest to expand our position of leadership here. Emphasizing the importance of the critical people side of the execution equation even in a world of increasing AI, in the first quarter, we closed a growing number of large and transformational deals that were tied to a client seeking to achieve a major breakthrough in performance. And I'd like to highlight and share just two of many with you. The first was a large new client win where we unseated the incumbent provider to be the sole leadership performance partner to a leading global agriculture company. We'll be working with this client to help them achieve their critical objective of ensuring that their 3,500 global leaders are equipped both with and able to exhibit world-class leadership capabilities as they seek to accelerate progress on their multiyear strategy and create an even higher performing culture. This win resulted in a 3-year $6 million contract with a very strong mix of services and subscription revenue. A second one I'll just briefly highlight is with a large industrial packaging company. We're partnering with the executive team of this organization to build and strengthen the capability of leaders throughout this organization to transform the culture of this company in connection with a new multiyear strategy to ignite accelerated growth. This is also a multiyear, multimillion dollar win that will draw on the solutions in the All Access Pass as well as our coaching and delivery capabilities. The second key growth driver that I'll touch on is the traction and execution we began to see throughout the back half of last year from our go-to-market investments and the fact that it's really beginning to kick in. In addition to ensuring that our solutions deliver seismically important impact on helping our clients achieve performance breakthroughs, our second priority has been to transform how we take these solutions to market so that we can win more strategic clients and further expand our impact with existing clients. Over the past 4 quarters, we completed the organizational implementation of this transformation, reorganizing sales and client success teams around 2 clear goals: first, landing new strategic clients; and second, further expanding relationships with those we already serve. I reported in November that the structure is fully in place, now with a full 4 quarters under our belt and with the organizational transformation fully behind us, the evidence that this new structure is enabling greater growth is clear. As I mentioned earlier, our new logo hunting team increased invoiced new logo amounts by 25% in the first quarter. Within these new logo wins, we're also seeing a higher attachment rate of services, which is an illustration of both the importance of the challenges we're helping clients address and their desire to engage our experts to help them achieve their most critical objectives. It's also an illustration of our strategic shift in our sales force to a dedicated hunting team with the surround sound resources that are allowing us to call even higher in organizations, focused on more strategic buyers and to solution larger deals with a strong mix of subscription and subscription services. We saw this reflected in our 29% services booking rate increase in the first quarter over what we booked in the first quarter of last year. Our services attach rate in the Enterprise division on an apples-to-apples basis was a strong 55% in the first quarter when considering that 1.6 million of the services we delivered were to a very large and strategic client who purchased intellectual property instead of All Access Pass. That places their services spend in our traditional services reporting category instead of our subscription services category. As a result of our strong growth in invoice sales in North America, our balance of deferred revenue in North America increased 8% year-over-year to $49.1 million. Stepping back, I would just say that we're pleased with the momentum we're seeing in Enterprise North America. Driven by this momentum and the expectation of a strong year for education, we expect invoiced amounts for the company to grow meaningfully this year, establishing the foundation for significant growth in reported EBITDA adjusted -- reported revenue -- sorry, adjusted EBITDA and cash flow in fiscal '27 and beyond. I'd now like to turn the time over to Jessi to share some more detail on our first quarter results. Jessica Betjemann: Thanks, Paul, and good afternoon, everyone. Franklin Covey continue to see healthy demand for our solutions and services in the first quarter. And as Paul discussed, the strategic investments we've undertaken to transform our Enterprise North America go-to-market strategy are gaining traction. We expect fiscal 2026 to be a year of execution where our adjusted EBITDA and free cash flow will return to growth this year 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 on our first 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 2026 financial guidance. Total first quarter reported revenue was $64 million. Revenue, which was essentially in line with our expectations for the quarter, was down 7% from the prior year, driven by an 8% decline in the Enterprise division and a 2% decrease in the Education Division, reflecting the decline in invoiced amounts we generated last year due in large part to the impact of government actions and macro environmental factors, which provided a smaller amount of deferred revenue to be recognized in this year's first quarter. A summary of our consolidated financial results is on Slide 3 in the earnings presentation. Consolidated subscription revenue recognized for the first quarter was even with last year at $37 million. And as a result of the realization of lower invoiced amounts in fiscal 2025, however, we were pleased that overall subscription and committed services and invoiced amounts for the quarter began to grow again, growing 5% to $26 million, led by the strong growth achieved in Enterprise North America. Importantly, the foundation for increased future growth remains solid and as evidenced by the 5% year-over-year increase in our consolidated deferred revenue balance to $100.2 million, which will be recognized as reported revenue in the coming quarters. Unbilled deferred revenue contracted for the first quarter was also strong increasing 9% to $8.5 million, with a total balance slightly declining 1% to $72.1 million, reflecting the lower balance through fiscal 2025. Gross margin for the first quarter was 75.5% compared to 76.3% in the prior year due primarily to increased product amortization costs and slightly lower margins in our Education Division, reflecting, as Paul noted, last year's first quarter results in Education, which benefited from high material sales for the large state contract we won in that quarter. Operating, selling and general and administrative expenses for the first quarter of fiscal 2026 were $44.7 million, which was slightly lower than $45 million in the prior year reflecting the increased amounts we have made in our go-to-market transformation, offset by our cost reduction efforts. During the first quarter, we continued to restructure and refine our business model to reduce costs and streamline certain areas of our operations. We incurred $3.4 million in expense for this restructuring activity, which consisted primarily of severance and related costs. Adjusted EBITDA was $3.7 million compared to $7.7 million in the previous year, reflecting the lower reported revenue, gross margin and higher SG&A expenses I previously mentioned. Cash flows from operating activities in the first quarter were $0.1 million compared to $14.1 million in the previous year. The decrease was driven primarily by $10.1 million in timing-related changes in working capital, including less cash collected from a lower beginning receivables balance and a $4.5 million decrease in net income, stemming from lower revenues, a $1.5 million increase in restructuring and a $0.7 million increase in headquarters moving costs. We also had a $0.7 million increase in CapEx for building construction costs, and $0.7 million increase in capitalized development costs. All of these factors resulted in free cash flow for the quarter of negative $3.7 million compared to $11.4 million generated in the first quarter last year. We expect, however, free cash flow to improve in the future quarters and become increasingly positive in the back half of the year as our adjusted EBITDA grows and we decrease net working capital. I'll turn now to a discussion of our business divisions. For the first quarter, our Enterprise Division generated 74% of the company's overall revenue with Education Division generating 25% of the company's revenue. First quarter Enterprise Division invoiced amounts grew 4% to $45.5 million. First quarter Enterprise Division reported revenue was $47.5 million compared to $51.6 million in the prior year. The North America segment invoiced amounts grew 7% to $34.9 million, and excluding government contracts, it grew 13%. We are encouraged by the progress this quarter in invoiced amounts, which reflects the positive momentum coming from our investment to transform our Enterprise North America go-to-market organization and will translate to increased reported revenue in future quarters. I do want to highlight an important element tied to the growth in our invoiced amounts that is aligned to our strategic focus on solution selling, whereby we are bundling the content and predefined services to be able to deliver measurable outcomes for our clients. Approximately $5.6 million was for contractually committed predefined services primarily associated with the global agriculture company deal that Paul referenced in his remarks. This reflects that clients are increasingly willing to contractually commit upfront for services which will be delivered over time. And while we continue to recognize the revenue upon delivery, because these services have been contractually committed upfront, any unused days are guaranteed and will be recognized at the end of the contract term. Historically, our contract terms didn't include a contractually committed clause for service days and therefore, were an option and they were not fully known or locked in until scheduled and delivered. On the appendix slide in our -- Slide 10 in our earnings presentation, our roll-forward analysis of deferred revenue will include both subscription and committed services amounts and the timing for revenue recognition for committed services will depend on the delivery schedule of our clients. Therefore, some of this $5.6 million could be pushed out to fiscal 2027 as reported revenue. As shown on Slide 4 in the earnings presentation, the North America segment reported revenue of $36.3 million accounted for 76% of our Enterprise Division sales in the first quarter, and was 10% or $3.9 million lower than prior year due to $2.5 million of lower services revenue and $1.3 million of lower subscription revenue recognized as a result of lower amounts invoiced amounts and deferred revenue last fiscal year driven by the various macroeconomic factors impacting the business, which included cancelable government contracts that we have previously discussed. Adjusted EBITDA for the North America segment decreased to $5.3 million for the first quarter of fiscal 2026 compared to $8.7 million last year, primarily due to lower revenue and resulting lower gross margin. Our balance of billed deferred subscription revenue in North America was $49.1 million at the end of the first quarter, which is an increase of 8% from the prior year, and unbilled deferred revenue was $66.6 million, which is consistent with the prior year. Importantly, the number of the North America's All Access Passes contracted for multiyear periods increased to 58% in the first quarter and the contracted amounts represented by multiyear contracts remained strong at 61%. Now as shown on Slide 5, for the Enterprise International segment, Q1 fiscal year 2026 revenue, which accounts for 24% of our total Enterprise Division revenue was $11.2 million, and this was down slightly from $11.4 million in the prior year, primarily as a result of our business in China decreasing due to challenging business conditions as a result of geopolitical and trade tensions. Excluding China, our revenue from the International segment increased 4%, and our licensee revenue increased 8% compared with the first quarter of fiscal 2025. Q1 fiscal year '26 adjusted EBITDA for the International Direct Operations segment was $2.4 million compared to $1.4 million in Q1 2025, driven by cost reduction initiatives enacted to offset the impact of decreased revenue and lower bad debt expense compared with the prior year. Now turning to our Education Division, as shown on Slide 6, revenue in the first quarter was $16.1 million, which was 2% lower than the prior year, primarily due to decreased material sales due in part to the large statewide deal that's been referenced and a symposium event that was held in the first quarter of last year. As Paul discussed, the Education Division invoiced amounts in last year's first quarter included a very large statewide deal that began in the first quarter of fiscal 2025, but will expand this year in the third and fourth quarters, largely due to this contract and also some other smaller multiyear prepaid deals that did not repeat this quarter, invoiced amounts in the first quarter of fiscal '26 of $6.6 million declined $5.6 million from the prior year. Materials revenue declined $0.7 million over the prior year, which included $0.4 million of classroom and training materials from the large statewide initiative in fiscal 2025. These declines were partially offset by increased coaching and consulting revenue and increased membership subscription revenues resulting from schools which started the Leader in Me during fiscal 2025. Education subscription revenue increased 12% in the first quarter to $11.8 million compared to $10.5 million in the prior year. The delivery of training and coaching days remained very strong during the first quarter of fiscal '26 as the Education Division delivered over 100 more training and coaching days than in the prior year. Adjusted EBITDA for the Education Division in the first quarter was a loss of $0.9 million compared to a gain of $0.3 million in the prior year due to lower revenue and higher SG&A driven by increased associated expenses and increases to the allowance for doubtful accounts. Education's balance of billed deferred subscription revenue increased 2% to $45.1 million, establishing a strong foundation for continued growth in fiscal '26. We expect Education to have a strong year in fiscal '26 with the pattern of large invoiced amounts and recognized revenue to come in the back half of the year. I would like to spend a few minutes now discussing our balance sheet and capital allocation priorities. We continue to pursue a balanced capital allocation strategy based on 3 primary areas that are aligned with our strategic goals. First, maintaining adequate liquidity and flexibility. Our liquidity remains strong at $80 million at the end of the first quarter, with a $17.5 million cash on hand and no drawdowns on the company's $62.5 million credit facility. 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. And finally, returning capital to shareholders as appropriate. In the first quarter, we purchased approximately 582,000 shares in the open market at a cost of $10.4 million. On August 14, we initiated a 10b5-1 plan to purchase $10 million of our common stock. This 10b5-1 plan was completed in the first quarter of fiscal 2026 as we purchased $6.7 million of our common stock against this plan. On November 17, 2025, we initiated a new 10b5-1 plan to purchase up to $20 million of our common stock, of which we spent $3.7 million in the quarter. And we anticipate that this repurchase plan will be completed by the end of January. The company also acquired 42,000 shares which were withheld for statutory taxes on stock-based compensation awards issued during the quarter. These shares had a value of $0.7 million. We remain committed to being disciplined stewards of capital while staying focused on driving long-term value creation. Now turning to our guidance for fiscal 2026. We are affirming the revenue and adjusted EBITDA guidance provided at year-end, 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 specifically in Enterprise North America this quarter. Our revenue guidance of $265 million to $275 million reflects the lower deferred revenue generated in fiscal '25 and the conversion lag of invoiced to reported revenue in the year as a portion of this invoice growth will go onto the balance sheet as deferred revenue. We continue to expect fiscal 2026 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 continue to anticipate approximately 45% to 50% of our fiscal year revenue will be recognized in the first half of this year, reflecting normal seasonality, especially in the Education Division and the timing of client delivery. For adjusted EBITDA, we now expect approximately 25% to 30% to be generated in the first half due to the timing of large education contracts that have pushed out a bit more compared to our previous expectations, along with expected 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 will deliver strong EBITDA and free cash flow growth with improved margins and free cash flow conversion in fiscal 2027 and thereafter. We have strong conviction in our strategy and long-term plans, and we're confident in the company's ability to deliver sustainable growth. Our optimism is grounded in strong client retention, expanding demand for leadership development and breakthrough organizational performance services across both enterprise and education divisions and the continued strength and resiliency of our business model. As mentioned at the start of my remarks, we view fiscal 2026 as a year of execution and the return to growth and fiscal 2027 as a year of acceleration and compounding growth in revenue, adjusted EBITDA and cash flow. We remain fully committed to and confident about creating long-term value for our shareholders and clients. Before I pass it back to Paul now, I would like to thank the entire Franklin Covey team for the ingenuity, hard work and dedication to our business, and providing unparalleled service to our clients. Paul I now, turn it back to you. Paul Walker: Thanks, Jessi. We'll now ask Towanda, she'll open up the line for your questions. Happy to take those. Operator: [Operator Instructions] Our first question comes from the line of Alex Paris with Barrington Research. Alexander Paris: So I have a few follow-up questions, although your prepared comments are quite thorough as usual. Not in any order, just starting with guidance and this one is for Jessi. You reaffirmed guidance for the full year. The only real change though was the -- a little bit more of the adjusted EBITDA will come in the back half than you had previously thought. I was having trouble keeping up, but you said this was due to the timing of large education contracts? Or was that enterprise contracts? Jessica Betjemann: Education. So as we had mentioned, when we were looking at that for this year, the addition of some schools for that large state by contract that we have won last year. The anticipation of that is that, that is going to be in Q3 and Q4. So that just pushed a little bit more in terms of the adjusted EBITDA. So previously, we thought 30% to 35% of our adjusted EBITDA will be in the first half and now we're saying 25% to 30%, so just a little bit lower, but overall, we are affirming the overall EBITDA guidance for the year. Alexander Paris: Okay. So just so I understand it, this was a large education statewide contract won in the fourth quarter of the previous year that began to be implemented in the first quarter of fiscal 2025, with school openings and so on. It's a multiyear contract. So the additional schools this year won't come in Q1 like it did last year, it's going to come in Q3 and Q4. And you didn't know that several months ago... Jessica Betjemann: There was an anticipation. We knew that it was going to be more back-end loaded and is kind of normal for the education business. But there was a thought that there would be some schools added in the first quarter. So that just got solidified. Alexander Paris: Okay. Got you. I appreciate that. And that you expect strong adjusted EBITDA growth and free cash flow growth in 2026 versus 2025 with more growth in both of those metrics as well as revenue in 2027. Jessica Betjemann: I mean revenue, adjusted EBITDA and free cash flow growth in 2027, I mean, obviously -- when you look at our EBITDA range for this year, there's growth on the -- in the midpoint and the top end as well. Alexander Paris: Got you. Okay. And then regarding North American enterprise sales force, an update, again, pretty thorough in the prepared comments, more new logos, All Access Pass expansion within resisting -- within existing clients, retention at comparable levels to last year. Do I have that right? Paul Walker: You do have that right. Yes. Alexander Paris: Okay. And then invoice growth is what we're really focused on and invoiced growth in Q1 was up 7% in North America enterprise, up 13%, excluding the DOGE contract. What was it in Q4 or Q3? I just want to see if we're accelerating as we expect to. Paul Walker: Yes. Yes. Great question. Let's just get that for you real quick here. Alexander Paris: Yes. It's probably in the slide deck, but I haven't gone through it yet. Paul Walker: Oh no, we can find it. Alexander Paris: The North American enterprise invoiced amounts up 7% in Q1. What was it in Q4? Jessica Betjemann: It was down in Q1... Paul Walker: Q4. Jessica Betjemann: Oh, in Q4... Paul Walker: Q4, Q3. Alex, we're just getting this for you. Alexander Paris: Sure no problem, appreciate it. And then while you're looking for stuff. In the Enterprise Division, you've historically given direct offices and international licensees. Is that in the slight deck also, it wasn't in the press release. Jessica Betjemann: Which one? Paul Walker: You want to talk about the international licensee. Jessica Betjemann: Yes, the revenue growth in the quarter. Yes, the revenue growth in the quarter was 8%. So if you noticed in our -- well when we published the 10-Q, so we have consolidated our segment to an Enterprise International segment combined. But specifically, we did want to call out the growth in the revenue, and it was 8% for the licensee. Alexander Paris: Okay. So you're not going to be giving that separately going forward? Or will it be in the... Jessica Betjemann: We're not. So we're consolidated -- we really manage the business together between our direct offices and our licensees. So it's collapsed in our 10-Q, but we did want to call out on the revenue side the difference between total international and then how much is in the licensee fee. Paul Walker: And then Alex, as Jessi mentioned -- go ahead... Alexander Paris: I was just going to say -- so just to be clear, the segment reporting will be Enterprise, and then within enterprise, there will be North America and International. No distinction on what's international licensee or international direct office and then Education segments. So 2 segments, but within Enterprise, we're getting in North America and international. Paul Walker: That's right. Jessica Betjemann: Okay. And then for -- just going back to your previous question, sorry, it took me a while to dig it out here. So the Enterprise North America invoiced amounts in Q4 was [ $37.2 million ]. It was actually a decline from the prior year period. Alexander Paris: Do you know how much down or is it in the... Jessica Betjemann: It was down 26%. Alexander Paris: Okay. Yes. I kind of remember that. So a big inflection point here in Q1. Jessica Betjemann: And then Q3 was also down 11%. So when you go -- I mean, this is a great quarter for us for Enterprise North America invoiced amounts. I think Q1 was -- last year, Q1 was down 8%. And it grew 2% in Q2 and then it declined 11% and 26%. So this is a great quarter for us. Paul Walker: And the best growth quarter we had in a while. Jessica Betjemann: Yes. I mean actually, when you go back -- I mean it wasn't -- we didn't have kind of growth like this. We had growth like this in Q4 2024. But even the previous quarters, like first quarter of 2024, it was a decline of 2%. Alexander Paris: Got you. So pretty easy comps in the back half of the year for invoiced amount, so it's reasonable to expect those invoiced amounts are going to continue to increase on a year-over-year basis. Jessica Betjemann: Yes. That's our expectation is for North America invoiced amounts to continue to grow. Operator: Our next question comes from the line of Nehal Chokshi with Northland Capital Markets. . Nehal Chokshi: That's great to hear on the significant upward trajectory on North America Enterprise invoice. To be clear, is this largely now being driven by a higher attach rate of services on the invoiced amounts? Or are you also seeing also a positive inflection with the subscription portion. Paul Walker: It's a combination of both. The -- as I mentioned in my remarks, our attach rate for Enterprise in the first quarter was roughly the same as it was in Q1 last year, mid-50s percent. And so it's not a crazy increase in services attach rate there. We did -- we are pleased and encouraged and this is something that Holly and the team have been working on strategically is, as we're selling to higher -- even higher level buyers inside organizations attaching to even bigger opportunities and challenges that they're facing, there's a powerful combination of our great content along with our expertise and the ability to come in and to facilitate that content to get cohorts of people together to work on behavior change, to work on performance to work on culture. And so the coaching and delivery that goes along with that, we think, is a is a very compelling thing for our clients is needed by our clients. We did book a lot of additional services in the first quarter. I mentioned that services booking rate was up 29%, but the attach rate was pretty consistent year-over-year. . Jessica Betjemann: Yes. And as I mentioned as well, we had $5.6 million of contractually committed services that was invoiced in the quarter as well. And just to highlight that point again, I mean this is a good thing for us for a while. It's upfront and some of those services -- because it was tied to that large agriculture deal where -- and it's multiyear, so some of those services the recognition of that revenue from a reported standpoint may not -- may or may not happen until 2027. The good thing about that is that it really does derisk the services for us there because they're all guaranteed. Nehal Chokshi: Yes. Understood. And then I believe you -- Paul, you talked about 25% growth in new logo invoice amount. Is that correct? Did I hear that correct? Paul Walker: That's right. Yes. Nehal Chokshi: Okay. And is that 25% in new logo and voice amount even across, again, subscription and then service attached subscription? Or is it more weighted towards service attach subscription? Paul Walker: That's a good question. In that case, that metric is subscription only. There's no services in that. So the team -- this was -- it was a great new logo quarter again. So the 7%, we haven't seen that kind of overall invoice growth in a while and 25% growth in the subscription portion. And then those had services attached to them, which will deliver that revenue throughout the year this year. But that's just a subscription-only metric. Nehal Chokshi: Got it. Well, that's amazing. Is it Safe to say that you don't expect that momentum to that level of new logo subscription invoice amount to sustain into the future quarters? I mean that would be pretty amazing if it did... Jessica Betjemann: I would say we expect to have the growth, but not at that percentage. Paul Walker: I'd say we're certainly going to try. It may not always come in at 25%, but we're expecting growth. . Nehal Chokshi: Got it. And so what was the driver of this unusual growth? Was it basically these two large deals that you called out? Paul Walker: It was more than that, Holly Procter is here, who leads Enterprise. Do you want to share or give a little color there? . Holly Procter: Yes, for sure. A couple of comments. I mean, we're pleased, of course, because of the results, but also because the effort we put into this go-to-market transformation is finally bearing fruit. In our last earnings, we talked about examples of wins, and that came at the deal level. So we would see a deal that we likely wouldn't have won in our former model that we now won. And now we're seeing not just in the deal level, but in the compounding result of lots of deals compounded to deliver what we delivered instead of Q1. The primary wins are showing up in several fashions. We're seeing, one, larger deals. So when you look at the average sales price, the size of the deal that we're winning is larger. I'm talking about not just the number of seats sold, but the total dollars that we're able to extract from that win. We're seeing more strategic deals, meaning it's sold into a higher level, and we're attached to a really powerful use case, meaning an initiative that an executive can't quite figure out how to proceed with or without us. And then the services that Paul referenced, the reason why the services are so critical, they're strategic in a couple of ways. Yes, of course, we're grateful for the revenue, but also the services are the same that ensures we can drive the impact that we're looking for. If you think about an example, let's say, an executive team is integrating a merger or an acquisition into their company, they're now looking to check a box. They're looking to successfully integrate and they're doing that in partnership with us and the expertise that we bring to that. So the services are critical for us being able to make the impact that we want to make. We know that services contribute to a couple of things for us outside of this revenue. It improves our ability to renew that customer and likely results in us having [ increased at ] multiyear deals with that customer, too. So generally up across the board. Nehal Chokshi: Okay. Great. Sorry, I do want to go back to the data points that you've -- that Alex was asking for. I got the Q4 number for North America enterprise invoice the Q3 number, I did not quite hear correctly the 1Q and 2Q numbers 1Q, 1Q '25 and Q2 '25 numbers. Could you repeat that? . Jessica Betjemann: Yes, Q1 '25 declined 8%, and Q2 grew 2%, Q3 down 11% and Q4 down 26%. This was the -- in the last 2 years, this was the second highest growth of invoiced amounts in North America, the highest one was in Q4 '24. Nehal Chokshi: Got it. Okay. Last question for me. So you mentioned your liquidity is quite strong with your -- I think it's a revolver that you have access to. Under what conditions would you be willing to draw on that revolver given the -- what I believe is a very attractive share price. Jessica Betjemann: Well, we have the $20 million plan in place. I mean if you think about it, we've spent -- we plan to be spending by the end of this month $30 million just since July. So we've been taking advantage of the opportunity that we have right now in the marketplace. And when you look at -- over the last 12 quarters, we've spent over 130% of our free cash flow to buy back shares. So I think we're taking advantage of the opportunity. Operator: Our next question comes from the line of Dave Storms with Stonegate. David Storms: I wanted to start maybe by going back to Holly's commentary around the strong growth in new logo sales and maybe just ask a little more about what you're seeing and once those -- the landers hand off to the expanders and maybe what we maybe expect the life cycle of those new logos in terms of attach rate expansion, anything like that? . Holly Procter: Mostly in your question. Is it about the life cycle of what happens with the customer after the initial sale and it passes to the expansion. Is that right, Dave? David Storms: Esseentially, yes. Holly Procter: Okay. Great. Yes. So that was in -- that was a huge part of our experiment that we could successfully land a new logo and then transition that relationship over to a client partner to manage over time. So there's two bets that you're placing. The first is that you can land a sizable new logo, right, and secure the net new customer. And the second bet is that you can increase and improve your retention and grow your expansion revenue by having just one person that owns that whole part of the life cycle. So we've seen really good success of transitioning the new logo to a client partner and having to manage it over time. It's created incredible focus for both sides of the house. So you have one team that's focused only on the hunt and the new customer, and then there's one team that's focused solely on customer success and expansion. And so we've seen great success. We have not seen any difference in our retention numbers based on deals that we had our customers we had in the prior relationships to those that we've inherited in our new structure. So we don't see any threat to churn or retention based on that transition. David Storms: That's great. I really appreciate that. Perfect. Okay. Paul, turning into maybe some of your more prepared remarks, you did spend a little bit of time talking about some of the AI initiatives that you're working on. Just curious as to how you're thinking about the balancing act between bringing on AI talent and building some of that in-house compared to stuff that might be easier, more cost-effective to purchase and customized? Paul Walker: Yes. Great question. I think we'll do a bit of both. We launched an AI lab a while back and the whole focus of that AI lab is on creatively looking at how can we embed AI across our portfolio of solutions inside the Impact Platform. I mentioned earlier on the call, one of the things we're excited about that's coming next is we're releasing a new addition of the 4 Disciplines of Execution that solution a little bit later this year, and that's going to have a pretty strong AI coaching component in it. That's something we think we can do ourselves internally. There are might be and are under consideration some other great tools that are out there that if we can license those or partner with somebody who's already built it, we're certainly not opposed to doing that. At the end of the day, we're maybe a little more agnostic on how we get there. We just know that this is an important new component of our solutions that can really help when it comes to changing behavior and generating the collective action that organizations need to drive their most important strategies and objectives. So probably do a bit of both. David Storms: That's perfect. That's great color. And then I did have maybe one more for Jessi. Jessi, I know you mentioned in your prepared remarks that you're expecting some of the margin expansion to come from maybe some cost takeout over the back half of this year into 2027. Is there any more you can give us there maybe expand on the magnitude of that? Any dollar amounts, any specific verticals that you're targeting that we should know about? Jessica Betjemann: So that commentary is really around the -- because we did take an additional Q1 restructuring. And with taking some of the costs out this quarter, you'll see then the compounding effect of that as we move greater throughout the rest of the year because it was a mid-quarter when that started to happen. And then, of course, obviously, from the restructuring that we had taken last year. So now you'll see the full annualized impact of that as we start moving later on throughout the year. David Storms: Understood. So we shouldn't expect any more restructuring of that magnitude this year? Jessica Betjemann: I mean we're always going to be looking at our cost structure. So I would -- I'm not going to say necessarily no to that, but I would say that right now it's stabilized at this point in time. David Storms: Very fair. I appreciate that. Maybe Paul, one more for you. We just got through kind of budgeting season or early in the year, maybe a high-level customer sentiment question here. As you're having conversations with current and potential customers, are there any verticals that you're specifically targeting? Any high-level thoughts there around where you see opportunity in market? Paul Walker: Maybe I'll let Holly answer that one. Holly Procter: Yes. There are several. The benefit -- one of the many benefits of this business is our large total addressable market. We have massive range across the verticals that we serve, but we see about 17% of our revenue today sitting within health care. And so we see a lot of consistent use cases and how hospitals in particular, leverage us, one of the large ones for example, on nurse retention. And so we're actively in a motion right now on building out how we support with incremental resources, both our new logo acquisition for additional hospitals and how we support the 17% of our revenue that we have today instead of health care. Operator: Our next question comes from the line of Jeff Martin with ROTH Capital Partners. Jeff Martin: Paul, could you characterize any changes in the macro environment with respect to enterprises making decisions over the course of the last 3 months or so since we last talked to you publicly? Paul Walker: Yes. Again, I think Holly since focus a lot on Enterprise North America, do you want to talk about that? . Holly Procter: Yes. Jeff, we certainly look at this a lot, hoping to see signals of improvement. We would still categorize the state of the macro environment is mostly natural. We see examples of both some positive uptick and still some downward pressure. Examples of positive uptick include things like discretionary spend. So people that have dollars that they want to devote to Franklin Covey but are not yet sure how to spend it. A year ago that was unheard of. And so we're grateful to see that but still see plenty of examples of budgetary pressures from our customers. And so I'd categorize it as mostly still neutral. Jeff Martin: Okay. Great. And then Paul, could you characterize if clients are coming to you asking for help in terms of AI-related issues that they're concerned about, changes in behavior, et cetera? Or is this more, "oh, we could utilize something like that", to add on to a totally separate journey that they're working on. Paul Walker: If I understand your question correctly, I think a little bit of both. So we've got some examples, in fact, a handful of examples right now where clients are coming to us and saying, we've been battling the integration of AI into our business. And the bigger challenge turns out is not the technical side of that. It's the human side of that. It's getting leaders throughout the organization to embrace and adopt and to be able to get over the fear their teams have. And it comes back to some of the same challenges of getting people clear, leading with clarity, creating the levels of trust that need to exist for people to adopt a new way of working. And it's interesting. We've been in the business where it's getting humans to work better with humans, but some of the same principles are actually coming to bear and are necessary for humans working with AI and becoming comfortable with that. So we are seeing more and more clients coming and saying, hey, could you help with that? Because our clients see us as a credible partner to transform. And whether that transformation is 2 companies coming together, whether it's some new strategy or in this case, whether it's transformation by bringing in a powerful new capability like AI, there are just our human barriers to get over. So we see clients coming. And in that case, that would be net new. And then we have somewhere where we're engaged in a leadership journey already, and we can bolt on to that some of our new AI -- our 2 new AI solutions to augment that. We like both those because in both cases, we're becoming strategically more important, more relevant and it gives us a platform from which to extend those relationships for more years and to more people. Jeff Martin: Great. And then last one for me is for Jessi. Was the restructuring that occurred in the first fiscal quarter contemplated in the original fiscal '26 guidance? Or was that subsequent to the establishment of that guidance? . Jessica Betjemann: No, that was factored in. We did mention that in the Q4 call, and it was a sub event that was listed in our 10-K. So this was factored in. Operator: Ladies and gentlemen, I'm showing no further questions in the queue. I would now like to turn the call back over to Paul for closing remarks. Paul Walker: Okay. Thank you so much. Again, everybody, thank you for joining today, and we appreciate the questions and how thoughtfully you think about the business, and I hope you all have a wonderful rest of your day and a great rest of the week. . Operator: Thank you ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.
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