Franklin Covey Reports Fiscal 2018 First Quarter Financial Results
Year-Over-Year Sales Increase 20% to
Gross Margin for the First Quarter Increases to 68.6% from 63.6% in Prior Year First Quarter
Strong Growth and Momentum of Subscription Business Expected to
Company Reaffirms Guidance for Fiscal 2018
Introduction
With the fiscal 2016 launch of the All Access Pass (AAP), the Company began a major transition in its business model. Previously, the Company sold content and solutions one course, or one solution at a time, and often to only one team at a time. However, two years ago the Company determined the it could substantially expand the breadth and depth of its client impact, and the lifetime value of its clients, by offering its world-class content and offerings through a Subscription as a Service (SaaS) model featuring the All Access Pass in its Enterprise Division and The Leader in Me subscription service in its Education Division. The SaaS model provides the Company’s clients with a compelling value proposition in which they receive: (1) unlimited access to the Company’s content and solutions; (2) the ability to assemble, integrate and deliver this content through an almost limitless combination of delivery modalities, and soon in 16 languages worldwide; (3) the services of an implementation specialist to help curate and organize the content and solutions in the AAP to exactly meet their needs; (4) a cost per population trained which is less than or equal to that offered by other providers for just a single course through a single delivery modality; and (5) an array of affordable add-on implementation services to help them accomplish their key “jobs-to-be-done.”
As expected, the transition to the SaaS business model has been
disruptive, especially to the Company’s reported financial results,
since subscription revenues are generally deferred and recognized over
the contract period. But the Company believes that the transition to a
SaaS business model is working and some of the benefits of this business
model became evident in the first quarter of fiscal 2018 as sales
increased 20% over the prior year to
Financial Overview
The following is a summary of key financial results for the quarter
ended
-
Revenue: Consolidated revenue for the
first quarter of fiscal 2018 increased 20% and totaled
$47.9 million compared with$39.8 million in the first quarter of fiscal 2017. As mentioned above, the improvement in sales was primarily driven by the recognition of previously deferred high-margin subscription revenues. In addition, the Company’s sales were also favorably impacted by the acquisition of businesses in the second half of fiscal 2017, a large intellectual property contract that was obtained in the first quarter of fiscal 2018, increased onsite presentation revenue, and increased Education Division revenues. -
All Access Pass Contracts and Unbilled Deferred
Revenue: For the quarter ended
November 30, 2017 , the Company invoiced$12.3 million of All Access Pass contracts and$5.1 million of related materials, compared with$7.1 million of AAP contracts and$6.4 million of related products in the first quarter of fiscal 2017. AtNovember 30, 2017 , the Company had$15.9 million of unbilled deferred revenue, which represents business that is contracted but unbilled, and excluded from its balance sheet. -
Gross profit: First quarter 2018 gross
profit was
$32.9 million compared with$25.3 million in the prior year. The Company’s gross margin for the quarter endedNovember 30, 2017 increased to 68.6 percent of sales compared with 63.6 percent in the first quarter of fiscal 2017. The increase in gross profit and gross margin was primarily due to the recognition of previously deferred revenue and the other factors described above. -
Operating Expenses: The Company’s
operating expenses in the first quarter of fiscal 2018 increased by
$5.4 million compared with the prior year, which was primarily due to a$4.7 million increase in selling, general, and administrative (SG&A) expenses, and a$0.7 million increase in amortization expense. Increased SG&A expenses were primarily due to increased associate costs resulting from new sales and sales related personnel, especially in the Education Division, and increased commission expense on higher sales; and$1.2 million of increased expense associated with the change in fair value of contingent consideration liabilities from previous business acquisitions. Increased amortization expense was due to the amortization of intangible assets acquired in business combinations which occurred in the second half of fiscal 2017. -
Operating Income (Loss): The Company
reported a loss from operations for the first quarter of
$(3.3) million compared with a loss from operations of$(5.4) million in the first quarter of the prior year. -
Adjusted EBITDA: Adjusted EBITDA for the
first quarter was
$0.6 million , compared with a loss of$(2.8) million in the first quarter of fiscal 2017. -
Net Income (Loss): The Company reported a
first quarter 2018 net loss of
$(2.4) million compared with a net loss of$(4.0) million in the first quarter of fiscal 2017, reflecting the above-noted factors. -
Cash and Liquidity Remain Strong: The
Company’s balance sheet and liquidity position remained healthy
through the first quarter of fiscal 2018. The Company had
$8.1 million of cash atNovember 30, 2017 , compared with$8.9 million atAugust 31, 2017 . AtNovember 30, 2017 , the Company had$21.0 million of available borrowing on its revolving line of credit facility. -
Fiscal 2018 Outlook: Based on anticipated
increases in its SaaS business, the Company reaffirms its previously
announced Adjusted EBITDA guidance for fiscal 2018, which is expected
to be in the range of
$10 million to $15 million .
Earnings Conference Call
On
Forward-Looking Statements
This press release contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995
including those statements related to the Company’s future results and
profitability; expected Adjusted EBITDA and growth in deferred revenues
in fiscal 2018; the release of a new AAP portal in additional languages
during fiscal 2018; and other goals relating to the growth of the
Company. Forward-looking statements are based upon management’s current
expectations and are subject to various risks and uncertainties
including, but not limited to: general economic conditions; renewal of
AAP contracts; the impact of new sales personnel; the impact of deferred
AAP revenues on future financial results; the expected number of booked
days to be delivered; market acceptance of new products or services,
including the new AAP portal; the ability to achieve sustainable growth
in future periods; and other factors identified and discussed in the
Company’s most recent Annual Report on Form 10-K and other periodic
reports filed with the
Non-GAAP Financial Information
Refer to the attached table for the reconciliation of a non-GAAP financial measure, “Adjusted EBITDA,” to consolidated net loss, the most comparable GAAP financial measure. The Company defines Adjusted EBITDA as net income or loss from operations excluding the impact of interest expense, income tax expense, amortization, depreciation, stock-based compensation expense, and certain other items such as adjustments to the fair value of expected contingent consideration liabilities resulting from the acquisition of businesses. The Company references this non-GAAP financial measure in its decision making because it provides supplemental information that facilitates consistent internal comparisons to the historical operating performance of prior periods and the Company believes it provides investors with greater transparency to evaluate operational activities and financial results. We are unable to provide a reconciliation of the above forward-looking estimate of non-GAAP Adjusted EBITDA to GAAP measures because certain information needed to make a reasonable forward-looking estimate is difficult to estimate and dependent on future events which may be uncertain or out of our control, including the amount of AAP contracts invoiced, the number of AAP contracts that are renewed, necessary costs to deliver our offerings such as unanticipated curriculum development costs, and other potential variables. Accordingly, a reconciliation is not available without unreasonable effort.
About
FRANKLIN COVEY CO. |
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS |
||||||||||
(in thousands, except per-share amounts, and unaudited) |
||||||||||
Quarter Ended | ||||||||||
November 30, | November 26, | |||||||||
2017 | 2016 | |||||||||
Net sales | $ | 47,932 | $ | 39,787 | ||||||
Cost of sales | 15,064 | 14,479 | ||||||||
Gross profit | 32,868 | 25,308 | ||||||||
Selling, general, and administrative | 33,824 | 29,095 | ||||||||
Depreciation | 901 | 866 | ||||||||
Amortization | 1,395 | 722 | ||||||||
Loss from operations | (3,252 | ) | (5,375 | ) | ||||||
Interest expense, net | (488 | ) | (504 | ) | ||||||
Loss before income taxes | (3,740 | ) | (5,879 | ) | ||||||
Income tax benefit | 1,348 | 1,921 | ||||||||
Net loss | $ | (2,392 | ) | $ | (3,958 | ) | ||||
Net loss per common share: | ||||||||||
Basic and diluted | $ | (0.17 | ) | $ | (0.29 | ) | ||||
Weighted average common shares: | ||||||||||
Basic and diluted | 13,725 | 13,791 | ||||||||
Other data: | ||||||||||
Adjusted EBITDA(1) | $ | 602 | $ | (2,819 | ) | |||||
(1) | The term Adjusted EBITDA (earnings before interest, income taxes, depreciation, amortization, stock-based compensation, and certain other items) is a non-GAAP financial measure that the Company believes is useful to investors in evaluating its results. For a reconciliation of this non-GAAP measure to the most comparable GAAP equivalent, refer to the Reconciliation of Net Loss to Adjusted EBITDA as shown below. | |
FRANKLIN COVEY CO. |
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Reconciliation of Net Loss to Adjusted EBITDA |
|||||||||||
(in thousands and unaudited) | |||||||||||
Quarter Ended | |||||||||||
November 30, | November 26, | ||||||||||
2017 | 2016 | ||||||||||
Reconciliation of net loss to Adjusted EBITDA: | |||||||||||
Net loss | $ | (2,392 | ) | $ | (3,958 | ) | |||||
Adjustments: | |||||||||||
Interest expense, net | 488 | 504 | |||||||||
Income tax benefit | (1,348 | ) | (1,921 | ) | |||||||
Amortization | 1,395 | 722 | |||||||||
Depreciation | 901 | 866 | |||||||||
Stock-based compensation | 956 | 1,214 | |||||||||
Increase (reduction) in contingent consideration liabilities | 176 | (1,013 | ) | ||||||||
ERP implementation costs | 426 | 288 | |||||||||
China office start-up costs | - | 479 | |||||||||
Adjusted EBITDA | $ | 602 | $ | (2,819 | ) | ||||||
Adjusted EBITDA margin | 1.3 | % | -7.1 | % | |||||||
FRANKLIN COVEY CO. |
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Additional Sales Information |
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(in thousands and unaudited) | |||||||||||
Quarter Ended | |||||||||||
November 30, | November 26, | ||||||||||
2017 | 2016 | ||||||||||
Sales by Segment: | |||||||||||
Direct offices | $ | 34,197 | $ | 26,383 | |||||||
Education | 9,176 | 8,743 | |||||||||
Licensees | 3,320 | 3,431 | |||||||||
Corporate and other | 1,239 | 1,230 | |||||||||
Total | $ | 47,932 | $ | 39,787 | |||||||
Sales by Category: | |||||||||||
Training and consulting services | $ | 46,549 | $ | 38,073 | |||||||
Products | 490 | 828 | |||||||||
Leasing | 893 | 886 | |||||||||
47,932 | 39,787 | ||||||||||
Cost of Goods Sold by Category: | |||||||||||
Training and consulting services | 14,268 | 13,558 | |||||||||
Products | 247 | 435 | |||||||||
Leasing | 549 | 486 | |||||||||
15,064 | 14,479 | ||||||||||
Gross Profit | $ | 32,868 | $ | 25,308 | |||||||
FRANKLIN COVEY CO. | ||||||||||
Condensed Consolidated Balance Sheets | ||||||||||
(in thousands and unaudited) | ||||||||||
November 30, | August 31, | |||||||||
2017 | 2017 | |||||||||
Assets |
||||||||||
Current assets: | ||||||||||
Cash | $ | 8,087 | $ | 8,924 | ||||||
Accounts receivable, less allowance for doubtful accounts of $2,738 and $2,310 | ||||||||||
50,153 | 66,343 | |||||||||
Receivable from related party | 1,182 | 1,020 | ||||||||
Inventories | 3,309 | 3,353 | ||||||||
Income taxes receivable | 329 | 259 | ||||||||
Prepaid expenses and other current assets | 12,604 | 11,936 | ||||||||
Total current assets | 75,664 | 91,835 | ||||||||
Property and equipment, net | 21,435 | 19,730 | ||||||||
Intangible assets, net | 55,899 | 57,294 | ||||||||
Goodwill | 24,220 | 24,220 | ||||||||
Long-term receivable from related party | 754 | 727 | ||||||||
Other long-term assets | 16,889 | 16,925 | ||||||||
$ | 194,861 | $ | 210,731 | |||||||
Liabilities and Shareholders' Equity |
||||||||||
Current liabilities: | ||||||||||
Current portion of financing obligation | $ | 1,922 | $ | 1,868 | ||||||
Current portion of term notes payable | 6,250 | 6,250 | ||||||||
Accounts payable | 7,068 | 9,119 | ||||||||
Deferred revenue | 35,250 | 40,772 | ||||||||
Accrued liabilities | 15,781 | 22,617 | ||||||||
Total current liabilities | 66,271 | 80,626 | ||||||||
Line of credit | 9,050 | 4,377 | ||||||||
Term notes payable, less current portion | 11,563 | 12,813 | ||||||||
Financing obligation, less current portion | 20,570 | 21,075 | ||||||||
Other liabilities | 5,626 | 5,742 | ||||||||
Deferred income tax liabilities | 39 | 1,033 | ||||||||
Total liabilities | 113,119 | 125,666 | ||||||||
Shareholders' equity: | ||||||||||
Common stock | 1,353 | 1,353 | ||||||||
Additional paid-in capital | 209,840 | 212,484 | ||||||||
Retained earnings | 67,064 | 69,456 | ||||||||
Accumulated other comprehensive income | 590 | 667 | ||||||||
Treasury stock at cost, 13,261 and 13,414 shares | (197,105 | ) | (198,895 | ) | ||||||
Total shareholders' equity | 81,742 | 85,065 | ||||||||
$ | 194,861 | $ | 210,731 | |||||||
View source version on businesswire.com: http://www.businesswire.com/news/home/20180104006305/en/
Source:
Franklin Covey
Investor Contact:
Steve Young, 801-817-1776
investor.relations@franklincovey.com
or
Media
Contact:
Debra Lund, 801-817-6440
Debra.Lund@franklincovey.com