Franklin Covey Reports Fiscal 2017 Second Quarter Financial Results
All Access Pass Contracts Invoiced plus Add-On Services Sold
Increases to
Renewal Rates for All Access Passes Continue to Exceed Expectations
Revenue Ramps for New China Offices and Education Division
Company Reaffirms Guidance for Fiscal 2017
Introduction
During
However, the change to the AAP business model has required a transition both operationally, as the sales force adapts its sales strategy, and from an accounting point of view. Operationally, the AAP sales cycle is typically longer than previous transactional type sales for revenues such as facilitator and onsite contracts. The Company believes this change reflects the strategic nature of the AAP sale and the need for additional executive approvals at its clients. During the first quarter of fiscal 2017, the Company decided to allow new AAP intellectual property 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. The Company expects that the transition to the AAP business model will continue to have a significant impact on its fiscal 2017 financial results as a higher percentage of the amount of AAP contracts invoiced during the year will be deferred. However, the recognition of those deferred sales is expected to benefit future periods.
The Company has traditionally recognized the majority of its earnings
during the third and fourth quarters of each fiscal year, and the first
two quarters of each fiscal year are important quarters in which to make
investments that establish the foundation for growth later in the fiscal
year and in future periods. During the first two quarters of fiscal
2017, the Company opened three new direct sales offices in
Financial Overview
The following is a summary of key financial results for the quarter
ended
-
Revenue: Consolidated revenue for the
second quarter of fiscal 2017 was
$42.2 million compared with$45.3 million in the second quarter of fiscal 2016. The Company’s newly opened sales offices inChina reported$2.1 million in sales, which was in line with expectations, and the Education practice grew by$1.0 million , or 15%, compared with the second quarter of the prior year. These increases were offset by 1) increased AAP deferred revenues, which are initially deferred and recognized over the lives of the underlying contracts; 2) a$2.3 million decrease in domestic sales office revenues resulting from the transition to the AAP-driven business model and lower onsite delivery revenue; 3) a$1.6 million decrease in Sales Performance practice revenues resulting primarily from a shift in the contracting period for several large potential contracts; and 4) a$0.9 million decrease in international licensee royalty revenues as the Company’sChina licensee was converted to a direct office ($0.6 million of royalties in the prior year) and certain other licensee partners’ sales declined compared with the prior year. -
All Access Pass Contracts: For the
quarter ended
February 28, 2017 , the Company invoiced$7.8 million of All Access Pass contracts and$3.5 million of related materials, compared with$3.1 million in the second quarter of fiscal 2016. -
Gross profit: Second quarter 2017 gross
profit was
$28.0 million compared with$29.9 million in the second quarter of fiscal 2016. The decrease was primarily due to the impact of increased AAP sales, and the corresponding deferral of revenue, and the other factors described above. Despite the deferral of revenue, the Company’s gross margin for the quarter endedFebruary 28, 2017 improved slightly to 66.4% compared with 65.9% in the second quarter of fiscal 2016. -
Operating Expenses: The Company’s
operating expenses in the second quarter of fiscal 2017 increased by
$2.4 million compared with the second quarter of fiscal 2016, which was primarily due to a$1.4 million increase in selling, general, and administrative (SG&A) expenses and$1.5 million of expense related to the termination of a profit-sharing contract with an international licensee. Increased SG&A expenses were primarily due to hiring additional sales and sales-related personnel, opening new sales offices inChina , and increased non-cash share-based compensation expense. During the quarter, the Company entered into a new 10-year license agreement with minimum required royalties payable to the Company totaling$16.3 million (at current exchange rates) over the life of the arrangement. Under a previous profit-sharing agreement, the Company was obligated to pay one-third of the royalty, or$5.4 million , to an international licensee partner. For a$1.5 million payment, the Company terminated the previously existing profit sharing arrangement and will owe no further royalty payments to the licensee. These increases were partially offset by decreased contingent earn out liability costs and decreased amortization expense. -
Operating Loss: The Company’s loss from
operations for the first quarter of fiscal 2017 reflected the factors
cited above and was
$(4.5) million compared with$(0.3) million in the second quarter of the prior year. -
Adjusted EBITDA: Adjusted EBITDA for the
second quarter was a loss of
$(0.4) million , which was within the Company’s previously provided guidance range for the quarter, compared with$4.4 million of income in the second quarter of fiscal 2016. -
Net Loss: Second quarter fiscal 2017 net
loss was
$(3.3) million compared with$(0.4) million in the second quarter of fiscal 2016, reflecting the above-noted factors. -
Net Loss Per Share: Loss per share for
the quarter ended
February 28, 2017 was$(.24) compared with$(.03) net loss per share in the second quarter of the prior year. -
Cash and Liquidity Remain Strong: The
Company’s balance sheet and liquidity position remained healthy
through the second quarter of fiscal 2017. The Company had
$10.7 million of cash atFebruary 28, 2017 , compared with$10.5 million atAugust 31, 2016 , and had no borrowings on its revolving credit facility at either date. -
Adjusted EBITDA and Growth in Deferred Revenue
Outlook: The Company affirms its previously-announced fiscal
2017 guidance range for the sum of reported Adjusted EBITDA and growth
in deferred revenue (less certain costs) of
$35 million to $38 million .
Fiscal 2017 Year-To-Date Financial Results
Consolidated revenue for the first two quarters of fiscal 2017 was
The Company’s operating expenses 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 fiscal 2017; 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, and certain other items such as adjustments to the fair value of expected earn out 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 |
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(in thousands, except per-share amounts, and unaudited) |
|||||||||||||||||
Quarter Ended | Two Quarters Ended | ||||||||||||||||
February 28, | February 27, | February 28, | February 27, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||||
Net sales | $ | 42,196 | $ | 45,269 | $ | 81,983 | $ | 90,486 | |||||||||
Cost of sales | 14,165 | 15,415 | 28,643 | 30,561 | |||||||||||||
Gross profit | 28,031 | 29,854 | 53,340 | 59,925 | |||||||||||||
Selling, general, and administrative | 29,370 | 27,936 | 58,465 | 54,426 | |||||||||||||
Contract termination costs | 1,500 | - | 1,500 | - | |||||||||||||
Restructuring costs |
- |
376 | - | 376 | |||||||||||||
Depreciation | 928 | 894 | 1,794 | 1,806 | |||||||||||||
Amortization | 721 | 909 | 1,443 | 1,819 | |||||||||||||
Income (loss) from operations | (4,488 | ) | (261 | ) | (9,862 | ) | 1,498 | ||||||||||
Interest expense, net | (514 | ) | (469 | ) | (1,019 | ) | (932 | ) | |||||||||
Income (loss) before income taxes | (5,002 | ) | (730 | ) | (10,881 | ) | 566 | ||||||||||
Income tax benefit (provision) | 1,669 | 282 | 3,590 | (224 | ) | ||||||||||||
Net income (loss) | $ | (3,333 | ) | $ | (448 | ) | $ | (7,291 | ) | $ | 342 | ||||||
Net income (loss) per common share: | |||||||||||||||||
Basic and diluted | $ | (0.24 | ) | $ | (0.03 | ) | $ | (0.53 | ) | $ | 0.02 | ||||||
Weighted average common shares: | |||||||||||||||||
Basic | 13,825 | 15,299 | 13,808 | 15,758 | |||||||||||||
Diluted | 13,825 | 15,299 | 13,808 | 15,903 | |||||||||||||
Other data: | |||||||||||||||||
Adjusted EBITDA(1) | $ | (367 | ) | $ | 4,406 | $ | (3,186 | ) | $ | 8,880 |
(1) | The term Adjusted EBITDA (earnings before interest, income taxes, depreciation, amortization, share-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 Income to Adjusted EBITDA as shown below. | |
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 | Two Quarters Ended | |||||||||||||||||
February 28, | February 27, | February 28, | February 27, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||||
Reconciliation of net income (loss) to Adjusted EBITDA: | ||||||||||||||||||
Net income (loss) | $ | (3,333 | ) | $ | (448 | ) | $ | (7,291 | ) | $ | 342 | |||||||
Adjustments: | ||||||||||||||||||
Interest expense, net | 514 | 469 | 1,019 | 932 | ||||||||||||||
Income tax provision (benefit) | (1,669 | ) | (282 | ) | (3,590 | ) | 224 | |||||||||||
Amortization | 721 | 909 | 1,443 | 1,819 | ||||||||||||||
Depreciation | 928 | 894 | 1,794 | 1,806 | ||||||||||||||
Stock-based compensation | 1,564 | 1,111 | 2,777 | 1,874 | ||||||||||||||
Contract termination costs | 1,500 | - | 1,500 | - | ||||||||||||||
Restructuring costs | - | 376 | - | 376 | ||||||||||||||
Increase (reduction) to contingent earnout liability | (924 | ) | 1,238 | (1,936 | ) | 1,368 | ||||||||||||
China start-up costs | 26 | - | 505 | - | ||||||||||||||
Other expense | 306 | 139 | 593 | 139 | ||||||||||||||
Adjusted EBITDA | $ | (367 | ) | $ | 4,406 | $ | (3,186 | ) | $ | 8,880 | ||||||||
Adjusted EBITDA margin | -0.9 | % | 9.7 | % | -3.9 | % | 9.8 | % | ||||||||||
FRANKLIN COVEY CO. |
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Additional Sales and Financial Information |
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(in thousands and unaudited) | ||||||||||||||
Quarter Ended | Two Quarters Ended | |||||||||||||
February 28, | February 27, | February 28, | February 27, | |||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||
Sales Detail by Segment: | ||||||||||||||
Direct offices | $ | 23,412 | $ | 24,564 | $ | 44,659 | $ | 48,214 | ||||||
Strategic markets | 6,002 | 7,551 | 10,762 | 14,747 | ||||||||||
Education practice | 7,848 | 6,835 | 16,591 | 15,004 | ||||||||||
International licensees | 2,937 | 3,850 | 6,370 | 8,369 | ||||||||||
Corporate and other | 1,997 | 2,469 | 3,601 | 4,152 | ||||||||||
Total | $ | 42,196 | $ | 45,269 | $ | 81,983 | $ | 90,486 | ||||||
Sales Detail by Category: | ||||||||||||||
Training and consulting services | $ | 40,087 | $ | 42,277 | $ | 78,160 | $ | 85,471 | ||||||
Products | 1,220 | 1,873 | 2,048 | 2,785 | ||||||||||
Leasing | 889 | 1,119 | 1,775 | 2,230 | ||||||||||
42,196 | 45,269 | 81,983 | 90,486 | |||||||||||
Cost of Goods Sold by Category: | ||||||||||||||
Training and consulting services | 13,103 | 13,797 | 26,661 | 27,855 | ||||||||||
Products | 527 | 938 | 962 | 1,460 | ||||||||||
Leasing | 535 | 680 | 1,020 | 1,246 | ||||||||||
14,165 | 15,415 | 28,643 | 30,561 | |||||||||||
Gross Profit | $ | 28,031 | $ | 29,854 | $ | 53,340 | $ | 59,925 | ||||||
FRANKLIN COVEY CO. |
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Condensed Consolidated Balance Sheets |
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(in thousands and unaudited) | |||||||||
February 28, | August 31, | ||||||||
2017 | 2016 | ||||||||
Assets |
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Current assets: | |||||||||
Cash | $ | 10,686 | $ | 10,456 | |||||
Accounts receivable, less allowance for doubtful accounts of $2,117 and $1,579 |
46,504 | 65,960 | |||||||
Receivable from related party | 1,682 | 1,933 | |||||||
Inventories | 4,778 | 5,042 | |||||||
Income taxes receivable | 310 | - | |||||||
Prepaid expenses and other current assets | 8,288 | 6,350 | |||||||
Total current assets | 72,248 | 89,741 | |||||||
Property and equipment, net | 18,051 | 16,083 | |||||||
Intangible assets, net | 48,752 | 50,196 | |||||||
Goodwill | 19,903 | 19,903 | |||||||
Long-term receivable from related party | 1,329 | 1,235 | |||||||
Other assets | 13,601 | 13,713 | |||||||
$ | 173,884 | $ | 190,871 | ||||||
Liabilities and Shareholders' Equity |
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Current liabilities: | |||||||||
Current portion of financing obligation | $ | 1,763 | $ | 1,662 | |||||
Current portion of term notes payable | 5,000 | 3,750 | |||||||
Accounts payable | 7,691 | 10,376 | |||||||
Income taxes payable | - | 4 | |||||||
Deferred revenue | 21,118 | 20,847 | |||||||
Accrued liabilities | 14,293 | 17,418 | |||||||
Total current liabilities | 49,865 | 54,057 | |||||||
Financing obligation, less current portion | 22,033 | 22,943 | |||||||
Term notes payable, less current portion | 11,563 | 10,313 | |||||||
Other liabilities | 1,247 | 3,173 | |||||||
Deferred income tax liabilities | 2,081 | 6,670 | |||||||
Total liabilities | 86,789 | 97,156 | |||||||
Shareholders' equity: | |||||||||
Common stock | 1,353 | 1,353 | |||||||
Additional paid-in capital | 212,225 | 211,203 | |||||||
Retained earnings | 69,337 | 76,628 | |||||||
Accumulated other comprehensive income | 603 | 1,222 | |||||||
Treasury stock at cost, 13,295 and 13,332 shares | (196,423 | ) | (196,691 | ) | |||||
Total shareholders' equity | 87,095 | 93,715 | |||||||
$ | 173,884 | $ | 190,871 | ||||||
View source version on businesswire.com: http://www.businesswire.com/news/home/20170330006207/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