Franklin Covey Reports Fiscal 2017 Fourth Quarter and Full Fiscal Year Financial Results
Transition to Subscription-as-a-Service Business Accelerates
Strong Momentum Continues to Build in the Fourth Quarter Driven By Accelerating Growth of Subscription-as-a-Service Offerings
Deferred Revenue of
Unbilled Deferred Revenue of
Revenue plus Change in Deferred Revenue (Billed and Unbilled) Up
Acquisition of Jhana Education Adds Important Content and Delivery Methodologies to AAP Offerings
Revenue Continues to Ramp for New China Offices and Education Division
For discussion purposes, the Company’s “Enterprise Business” consists of its Direct Office, Strategic Markets, and Licensee segments, plus Corporate information, and the “Education Business” consists of the Education segment. The Company provided the following information regarding its fiscal 2017 fourth quarter and full fiscal year results.
Highlights
-
Momentum of the business:
-
Deferred revenue at
August 31, 2017 totaled$41.5 million , including$0.7 million of non-current deferred revenue, an increase of$20.7 million , or 99%, compared with$20.8 million of deferred revenue atAugust 31, 2016 . Unbilled deferred revenue, representing business that is contracted but unbilled and excluded from the balance sheet, totaled$16.5 million atAugust 31, 2017 compared with$5.3 million atAugust 31, 2016 . During the fourth quarter of fiscal 2017, the Company began selling extended term and multi-year All Access Pass (AAP) contracts, which helped drive the significant increase in unbilled deferred revenue. -
Fourth quarter fiscal 2017 reported revenue of
$59.5 million , plus$12.6 million of increased deferred revenue, plus$16.5 million of unbilled deferred revenue, was$13.8 million , or 19%, higher than the sum of these items in the fourth quarter of fiscal 2016. -
Full-year fiscal 2017 reported revenue of
$185.3 million , plus a$20.7 million increase in deferred revenue, and$16.5 million of unbilled deferred revenue, represents an$8.5 million , or 4%, increase over the comparable measures in the prior year, with the significant growth of its subscription offerings being offset by declines in its traditional offerings. -
Sales through the Company’s new
China direct offices totaled$11.0 million , which was in-line with the Company’s high expectations. The Company’s previous operations inChina were handled through an independent licensee. -
The Company’s Education Business reported another year of growth,
as sales increased
$3.3 million , or 8%, to$44.1 million compared with$40.8 million the prior year. AtAugust 31, 2017 , over 3,500 schools around the world were using The Leader in Me program.
-
Deferred revenue at
-
Growth in Subscription as a Service Offerings:
-
For the fiscal year ended
August 31, 2017 , All Access Pass and All Access Pass related amounts invoiced increased$39.9 million to$63.1 million , an increase of 172%, compared with$23.2 million in the prior year. Amounts in fiscal 2017 include unbilled deferred revenue. -
All Access Pass subscribers in
the United States andCanada increased from approximately 139,000 at the end of fiscal 2016 to just over 300,000 at the end of fiscal 2017, representing a 105% increase during fiscal 2017. -
Invoiced The Leader In Me subscription and
subscription-related revenues increased
$5.5 million , or 15%, to$41.1 million during fiscal 2017 compared with$35.6 million invoiced in fiscal 2016.
-
For the fiscal year ended
During
The change to the SaaS focused business model has required a transition both operationally, as the Company’s sales force adapts its sales strategy, and from an accounting and reporting point of view. Operationally, the AAP sales cycle is typically longer than previous transactional type sales for revenues such as facilitator and onsite contracts. During the first quarter of fiscal 2017, the Company decided to allow new AAP agreements to receive updated content during the contracted period. Accordingly, the Company now defers substantially all AAP revenue at the inception of the agreement and recognizes it over the life of the corresponding contract. These changes had a significant impact on the Company’s fiscal 2017 financial results.
On
Financial Overview
The following is a summary of key financial results for the quarter
ended
-
Revenue: Consolidated revenue for the
fourth quarter of fiscal 2017 was
$59.5 million compared with$64.8 million in the fourth quarter of fiscal 2016. The Company’s newly opened sales offices inChina reported$3.3 million in sales, and the Education Business grew by$0.6 million , or 3%, compared with the fourth quarter of the prior year. These increases were offset by 1) increased AAP revenues, which are initially deferred and recognized over the lives of the underlying contracts; 2) a$5.8 million decrease in domestic sales office revenues resulting from the transition to the AAP business model and less onsite delivery revenues; 3) a$1.4 million decrease in Strategic Market segment revenues resulting from fewer new contracts in its various divisions; and 4) a$1.0 million decrease in international licensee royalty revenues which was primarily attributable to converting theChina licensee into a direct office ($0.7 million of royalty revenues in the fourth quarter of fiscal 2016). -
Deferred Revenue and Unbilled Deferred Revenue:
Deferred revenue at
August 31, 2017 totaled$41.5 million , an increase of$20.7 million , or 99%, compared with$20.8 million atAugust 31, 2016 . Unbilled deferred revenue totaled$16.5 million atAugust 31, 2017 , compared with$5.3 million at the end of fiscal 2016. -
Gross profit: Fourth quarter 2017 gross
profit was
$42.0 million compared with$45.7 million in the fourth quarter of fiscal 2016. The decrease was primarily due to the impact of increased AAP sales with the corresponding deferral of revenue, as well as other factors described above. The Company’s gross margin for the quarter endedAugust 31, 2017 was 70.5% compared with 70.4% in the corresponding quarter of fiscal 2016. -
Operating Expenses: The Company’s
operating expenses in the fourth quarter of fiscal 2017 increased by
$2.5 million compared with the fourth quarter of fiscal 2016, which was primarily due to a$1.9 million increase in selling, general, and administrative (SG&A) expenses and a$0.8 million increase in depreciation and amortization expense. Increased SG&A expenses were primarily due to opening new sales offices inChina and hiring additional sales and sales-related personnel. Increased amortization expense was due to the amortization of intangible assets from the fiscal 2017 acquisitions ofRobert Gregory Partners LLC , and Jhana. These increases were partially offset by decreased non-cash stock-based compensation expense, and decreased restructuring charges. -
Operating Income: The Company’s operating
income for the fourth quarter of fiscal 2017 reflected the factors
cited above and was
$7.5 million compared with$13.6 million in the fourth quarter of the prior year. -
Adjusted EBITDA: Adjusted EBITDA for the
fourth quarter was
$10.9 million , compared with$16.2 million in the fourth quarter of fiscal 2016. -
Net Income: Fourth quarter fiscal 2017
net income was
$4.7 million compared with$7.7 million in the fourth quarter of fiscal 2016, reflecting the above-noted factors. -
Earnings Per Share: Diluted earnings per
share for the quarter ended
August 31, 2017 was$.33 compared with$.55 per diluted share in the fourth quarter of fiscal 2016. -
Cash and Liquidity Remain Strong: The
Company’s balance sheet and liquidity position remained healthy
through
August 31, 2017 . The Company had$8.9 million of cash atAugust 31, 2017 , with$25.6 million available on its revolving credit facility, compared with$10.5 million of cash atAugust 31, 2016 . -
Common Share Buy Back Program: During the
fourth quarter of fiscal 2017, the Company purchased 177,089 shares of
its common stock on the open market for
$3.2 million as part of its previously announced share buy back program. Under the terms of its currently authorized$40.0 million buy back program, the Company has repurchased 1,539,828 shares of its common stock for$26.8 million throughAugust 31, 2017 . The Company expects further purchases of its common stock in fiscal 2018 and in future periods. -
Fiscal 2018 Guidance: Based on the
expected increases in its SaaS business, the Company currently
anticipates reported sales to increase 14% from
$185.3 million to approximately$212 million in fiscal 2018. The Company expects deferred revenue to increase by approximately$15 million , or 36%, and unbilled deferred revenue to continue to grow as the Company continues to focus on multi-year agreements. The Company also expects to continue to make investments and incur costs for further SaaS business growth in fiscal 2018, including additional implementation specialists, content development, amortization of developed or purchased content, commissions, and some additional support staff. Considering these factors, the Company anticipates Adjusted EBITDA for fiscal 2018 to be in the range of$10 million to $15 million .
Full Year Fiscal 2017 Financial Results
Consolidated revenue for fiscal 2017 was
The Company’s operating expenses during fiscal 2017 increased
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; future sales and renewals of AAP contracts and
accompanying accelerated growth; the expected sum of Adjusted EBITDA and
growth in deferred revenues in future periods; anticipated future sales,
including in the Company’s new
Non-GAAP Financial Information
Refer to the attached table for the reconciliation of a non-GAAP financial measure, “Adjusted EBITDA,” to consolidated net income (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, restructuring charges, and certain other items such as adjustments to the fair value of 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 content 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 |
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(in thousands, except per-share amounts, and unaudited) | ||||||||||||||||||||
Quarter Ended | Fiscal Year Ended | |||||||||||||||||||
August 31, | August 31, | August 31, | August 31, | |||||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||||||
Net sales | $ | 59,523 | $ | 64,831 | $ | 185,256 | $ | 200,055 | ||||||||||||
Cost of sales | 17,535 | 19,164 | 62,589 | 64,901 | ||||||||||||||||
Gross profit | 41,988 | 45,667 | 122,667 | 135,154 | ||||||||||||||||
Selling, general, and administrative | 31,970 | 30,069 | 121,148 | 113,589 | ||||||||||||||||
Restructuring costs | 147 | 400 | 1,482 | 776 | ||||||||||||||||
Contract termination costs | - | - | 1,500 | - | ||||||||||||||||
Depreciation | 1,136 | 868 | 3,879 | 3,677 | ||||||||||||||||
Amortization | 1,261 | 721 | 3,538 | 3,263 | ||||||||||||||||
Income (loss) from operations | 7,474 | 13,609 | (8,880 | ) | 13,849 | |||||||||||||||
Interest expense, net | (479 | ) | (523 | ) | (2,029 | ) | (1,938 | ) | ||||||||||||
Income (loss) before income taxes | 6,995 | 13,086 | (10,909 | ) | 11,911 | |||||||||||||||
Income tax benefit (provision) | (2,336 | ) | (5,360 | ) | 3,737 | (4,895 | ) | |||||||||||||
Net income (loss) | $ | 4,659 | $ | 7,726 | $ | (7,172 | ) | $ | 7,016 | |||||||||||
Net income (loss) per common share: | ||||||||||||||||||||
Basic | $ | 0.34 | $ | 0.55 | $ | (0.52 | ) | $ | 0.47 | |||||||||||
Diluted | 0.33 | 0.55 | (0.52 | ) | 0.47 | |||||||||||||||
Weighted average common shares: | ||||||||||||||||||||
Basic | 13,824 | 13,998 | 13,819 | 14,944 | ||||||||||||||||
Diluted | 13,983 | 14,118 | 13,819 | 15,076 | ||||||||||||||||
Other data: | ||||||||||||||||||||
Adjusted EBITDA(1) | $ | 10,905 | $ | 16,219 | $ | 7,699 | $ | 26,894 | ||||||||||||
(1) |
The term Adjusted EBITDA (earnings before interest, income taxes, depreciation, amortization, stock-based compensation, restructuring charges, 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 Income (Loss) to Adjusted EBITDA as shown below. |
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FRANKLIN COVEY CO. |
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Reconciliation of Net Income (Loss) to Adjusted EBITDA |
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(in thousands and unaudited) | |||||||||||||||||||||
Quarter Ended | Fiscal Year Ended | ||||||||||||||||||||
August 31, | August 31, | August 31, | August 31, | ||||||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||||||||
Reconciliation of net income (loss) to Adjusted EBITDA: | |||||||||||||||||||||
Net income (loss) | $ | 4,659 | $ | 7,726 | $ | (7,172 | ) | $ | 7,016 | ||||||||||||
Adjustments: | |||||||||||||||||||||
Interest expense, net | 479 | 523 | 2,029 | 1,938 | |||||||||||||||||
Income tax provision (benefit) | 2,336 | 5,360 | (3,737 | ) | 4,895 | ||||||||||||||||
Amortization | 1,261 | 721 | 3,538 | 3,263 | |||||||||||||||||
Depreciation | 1,136 | 868 | 3,879 | 3,677 | |||||||||||||||||
Stock-based compensation | (329 | ) | 199 | 3,658 | 3,121 | ||||||||||||||||
Costs to exit Japan publishing business | 315 | - | 2,107 | - | |||||||||||||||||
Restructuring costs | 147 | 400 | 1,482 | 776 | |||||||||||||||||
Contract termination costs | - | - | 1,500 | - | |||||||||||||||||
Increase (reduction) to contingent earnout liabilities | - | 82 | (1,936 | ) | 1,538 | ||||||||||||||||
ERP system implementation costs | 484 | 224 | 1,404 | 448 | |||||||||||||||||
Business acquisition costs | 417 | - | 442 | - | |||||||||||||||||
China start-up costs | - | 116 | 505 | 222 | |||||||||||||||||
Adjusted EBITDA | $ | 10,905 | $ | 16,219 | $ | 7,699 | $ | 26,894 | |||||||||||||
Adjusted EBITDA margin | 18.3 | % | 25.0 | % | 4.2 | % | 13.4 | % | |||||||||||||
FRANKLIN COVEY CO. |
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Additional Sales and Financial Information |
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(in thousands and unaudited) | |||||||||||||||||||||
Quarter Ended | Fiscal Year Ended | ||||||||||||||||||||
August 31, | August 31, | August 31, | August 31, | ||||||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||||||||
Sales Detail by Segment: | |||||||||||||||||||||
Direct offices | $ | 27,984 | $ | 31,496 | $ | 96,662 | $ | 103,605 | |||||||||||||
Strategic markets | 6,794 | 8,149 | 22,974 | 29,819 | |||||||||||||||||
Education practice | 18,935 | 18,324 | 44,122 | 40,844 | |||||||||||||||||
International licensees | 3,381 | 4,412 | 13,571 | 17,113 | |||||||||||||||||
Corporate and other | 2,429 | 2,450 | 7,927 | 8,674 | |||||||||||||||||
Total | $ | 59,523 | $ | 64,831 | $ | 185,256 | $ | 200,055 | |||||||||||||
Sales Detail by Category: | |||||||||||||||||||||
Training and consulting services | $ | 57,835 | $ | 61,915 | $ | 177,816 | $ | 189,661 | |||||||||||||
Products | 798 | 1,884 | 3,881 | 6,009 | |||||||||||||||||
Leasing | 890 | 1,032 | 3,559 | 4,385 | |||||||||||||||||
59,523 | 64,831 | 185,256 | 200,055 | ||||||||||||||||||
Cost of Goods Sold by Category: | |||||||||||||||||||||
Training and consulting services | 16,375 | 17,375 | 56,557 | 59,158 | |||||||||||||||||
Products | 658 | 1,125 | 3,990 | 3,206 | |||||||||||||||||
Leasing | 502 | 664 | 2,042 | 2,537 | |||||||||||||||||
17,535 | 19,164 | 62,589 | 64,901 | ||||||||||||||||||
Gross Profit | $ | 41,988 | $ | 45,667 | $ | 122,667 | $ | 135,154 | |||||||||||||
FRANKLIN COVEY CO. |
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Condensed Consolidated Balance Sheets |
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(in thousands and unaudited) | ||||||||||
August 31, | August 31, | |||||||||
2017 | 2016 | |||||||||
Assets |
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Current assets: | ||||||||||
Cash | $ | 8,924 | $ | 10,456 | ||||||
Accounts receivable, less allowance for doubtful accounts of $2,310 and $1,579 |
66,343 | 65,960 | ||||||||
Receivable from related party | 1,020 | 1,933 | ||||||||
Inventories | 3,353 | 5,042 | ||||||||
Income taxes receivable | 259 | - | ||||||||
Prepaid expenses and other current assets | 11,936 | 6,350 | ||||||||
Total current assets | 91,835 | 89,741 | ||||||||
Property and equipment, net | 19,730 | 16,083 | ||||||||
Intangible assets, net | 57,294 | 50,196 | ||||||||
Goodwill | 24,220 | 19,903 | ||||||||
Long-term receivable from related party | 727 | 1,235 | ||||||||
Other long-term assets | 16,925 | 13,713 | ||||||||
$ | 210,731 | $ | 190,871 | |||||||
Liabilities and Shareholders' Equity |
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Current liabilities: | ||||||||||
Current portion of financing obligation | $ | 1,868 | $ | 1,662 | ||||||
Current portion of term notes payable | 6,250 | 3,750 | ||||||||
Accounts payable | 9,119 | 10,376 | ||||||||
Deferred revenue | 40,772 | 20,847 | ||||||||
Accrued liabilities | 22,617 | 17,422 | ||||||||
Total current liabilities | 80,626 | 54,057 | ||||||||
Line of credit | 4,377 | - | ||||||||
Term notes payable, less current portion | 12,813 | 10,313 | ||||||||
Financing obligation, less current portion | 21,075 | 22,943 | ||||||||
Other liabilities | 5,742 | 3,173 | ||||||||
Deferred income tax liabilities | 1,033 | 6,670 | ||||||||
Total liabilities | 125,666 | 97,156 | ||||||||
Shareholders' equity: | ||||||||||
Common stock | 1,353 | 1,353 | ||||||||
Additional paid-in capital | 212,484 | 211,203 | ||||||||
Retained earnings | 69,456 | 76,628 | ||||||||
Accumulated other comprehensive income | 667 | 1,222 | ||||||||
Treasury stock at cost, 13,414 and 13,332 shares | (198,895 | ) | (196,691 | ) | ||||||
Total shareholders' equity | 85,065 | 93,715 | ||||||||
$ | 210,731 | $ | 190,871 | |||||||
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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