Franklin Covey Reports Fiscal 2018 Second Quarter Financial Results
Sales Increase
Gross Profit of
Operating Cash Flows Increase to
Paying Subscribers Grow 39% Year-Over-Year in Second Quarter to 510,000
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 that it could better serve its clients, and substantially expand the breadth and depth of its client impact by offering its world-class content and offerings through subscription-based services, featuring the All Access Pass in the Enterprise Division and The Leader in Me membership in the Education Division. These new offerings are changing the way in which clients engage with the Company; the extent of both the impact and reach they can have within their organizations; and the flexibility and agility with which they can develop leaders and teams to improve their organization’s results. For example, the All Access Pass subscription provides the Company’s clients with a compelling value proposition in which they receive: (1) unlimited access to the Company’s current and continually-updated and expanding assemblage of some of the world’s most impactful content and solutions; (2) the ability to assemble, integrate, and deliver these solutions through an almost limitless combination of delivery modalities, in 16 languages worldwide; (3) the services of an implementation specialist to help them curate and organize the content and solutions in the AAP into “impact journeys” that exactly meet their needs; (4) at 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 with (5) an array of affordable add-on implementation services to help clients accomplish their key “jobs-to-be-done.” In the Education Division, The Leader In Me membership provides the Company’s educational institution clients with a portal to access content and tools as well as a coach to help schools successfully develop, implement, and utilize The Leader In Me program.
While the transition to this new, flexible subscription model has
impacted the portion of the Company’s contracted revenue which is
recognized in a given period (since subscription revenue is generally
deferred and recognized over the corresponding contract period), its
progress is increasingly evident both with clients, and in the Company’s
reported financial results. Subscription clients are generally making
larger initial purchases than they did traditionally, then further
expanding the populations covered by their subscription, and are
purchasing significant amounts of additional services to help them
increase the impact within their organizations. With retention of these
customers’ subscription revenue at more than 90%, combined with a
significant increase in the sales of add-on services, the benefits of
this business model became evident in the first two quarters of fiscal
2018 as sales increased 15% 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
second quarter of fiscal 2018 increased 10% and totaled
$46.5 million , compared with$42.2 million in the second quarter of fiscal 2017. In addition to the recognition of previously deferred high-margin subscription revenues, the Company’s sales were also favorably impacted by increased Education Division revenues, increased international direct office sales (each of which posted year-over-year growth in the quarter), the impact of businesses acquired in the second half of fiscal 2017, increased book and audio sales, and increased government office sales. These increases were partially offset by decreased legacy facilitator and onsite training revenues. -
Deferred Subscription Revenue and Unbilled
Deferred Revenue: During the quarter ended
February 28, 2018 , the Company invoiced$14.4 million of new subscription contracts and recognized$13.7 million of previously deferred revenue. AtFebruary 28, 2018 , the Company had$32.1 million of deferred subscription revenue on its balance sheet, a$16.0 million , or 99%, increase over deferred subscription revenues on its balance sheet atFebruary 28, 2017 . AtFebruary 28, 2018 , the Company had$15.1 million of unbilled deferred revenue, compared with$1.7 million of unbilled revenue atFebruary 28, 2017 . Unbilled deferred revenue represents business that is contracted but unbilled, and excluded from the Company’s balance sheet. -
Gross profit: Second quarter 2018 gross
profit was
$32.7 million , an increase of$4.7 million , or 17%, compared with$28.0 million in the prior year. The Company’s gross margin for the quarter endedFebruary 28, 2018 increased to 70.3% of sales compared with 66.4% in the second quarter of fiscal 2017. The increase in gross profit and improved gross margin was primarily due to a change in the mix of revenues, as subscription revenues, including the All Access Pass, continue to grow. -
Operating Expenses: The Company’s
operating expenses in the second quarter of fiscal 2018 increased by
$5.4 million compared with the prior year, which was primarily due to a$5.7 million increase in selling, general, and administrative (SG&A) expenses primarily related to investments to support the growth of the All Access Pass, a$0.7 million increase in amortization expense, and a$0.5 million increase in depreciation expense. These increases were partially offset by$1.5 million of contract termination costs that did not repeat in fiscal 2018. Increased SG&A expenses were primarily due to increased associate costs resulting from investments in new implementation specialists, additional sales and sales related personnel, especially in the Education Division, and increased commission expense related to increased sales;$1.4 million of increased expense from the change in the fair value of contingent liabilities from previous business acquisitions; SG&A expense from businesses acquired in the second half of fiscal 2017; increased advertising expense to promote the All Access Pass; and increased computer expenses primarily related to the implementation of a new Enterprise Resource Planning (ERP) system, which successfully launched inDecember 2017 . -
Operating Income (Loss): The Company
reported a loss from operations for the second quarter of
$(5.1) million compared with a loss from operations of$(4.5) million in the second quarter of the prior year. -
Adjusted EBITDA: Adjusted EBITDA for the
second quarter was a loss of
$(0.7) million , compared with a loss of$(0.4) million in the second quarter of fiscal 2017. -
Net Income (Loss): The Company reported a
net loss of
$(2.7) million , or$(.20) per share, for the quarter endedFebruary 28, 2018 , compared with a net loss of$(3.3) million , or$(.24) per share, in the second quarter of fiscal 2017, reflecting the above-noted factors. The Company’s income tax benefit was larger than the prior year primarily due to a$1.2 million one-time benefit from the recently enacted Tax Cut and Jobs Act. -
Cash and Liquidity Remain Strong: The
Company’s balance sheet and liquidity position remained healthy
through the second quarter of fiscal 2018. The Company had
$10.8 million of cash atFebruary 28, 2018 , compared with$8.9 million atAugust 31, 2017 . Cash flows from operating activities increased to$9.4 million compared with$6.8 million in the prior year. AtFebruary 28, 2018 , the Company had$20.1 million of available borrowing capacity on its revolving line of credit facility. -
Fiscal 2018 Outlook: Based on anticipated
increases in its subscription 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 .
Fiscal 2018 Year-to-Date Financial Results
Consolidated revenue for the first two quarters of fiscal 2018 increased
15% to
Operating expenses for the first two quarters of fiscal 2018 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; expected Adjusted EBITDA and growth in deferred revenues
in fiscal 2018; expected growth and improved profitability of the
subscription-based business model; 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; renewals of subscription contracts; the impact of new sales
personnel; the impact of deferred revenues on future financial results;
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 taxes, amortization, depreciation, stock-based compensation expense, and certain other items such as adjustments to the fair value of expected contingent consideration liabilities arising from business acquisitions. 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. The Company is 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 the Company’s 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) |
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Quarter Ended | Two Quarters Ended | |||||||||||||||||||
February 28, | February 28, | February 28, | February 28, | |||||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||||||
Net sales | $ | 46,547 | $ | 42,196 | $ | 94,479 | $ | 81,983 | ||||||||||||
Cost of sales | 13,803 | 14,165 | 28,867 | 28,643 | ||||||||||||||||
Gross profit | 32,744 | 28,031 | 65,612 | 53,340 | ||||||||||||||||
Selling, general, and administrative | 35,097 | 29,370 | 68,921 | 58,465 | ||||||||||||||||
Contract termination costs | - | 1,500 | - | 1,500 | ||||||||||||||||
Depreciation | 1,379 | 928 | 2,280 | 1,794 | ||||||||||||||||
Amortization | 1,395 | 721 | 2,791 | 1,443 | ||||||||||||||||
Loss from operations | (5,127 | ) | (4,488 | ) | (8,380 | ) | (9,862 | ) | ||||||||||||
Interest expense, net | (638 | ) | (514 | ) | (1,125 | ) | (1,019 | ) | ||||||||||||
Loss before income taxes | (5,765 | ) | (5,002 | ) | (9,505 | ) | (10,881 | ) | ||||||||||||
Income tax benefit | 3,025 | 1,669 | 4,373 | 3,590 | ||||||||||||||||
Net loss | $ | (2,740 | ) | $ | (3,333 | ) | $ | (5,132 | ) | $ | (7,291 | ) | ||||||||
Net loss per common share: | ||||||||||||||||||||
Basic and diluted | $ | (0.20 | ) | $ | (0.24 | ) | $ | (0.37 | ) | $ | (0.53 | ) | ||||||||
Weighted average common shares: | ||||||||||||||||||||
Basic and diluted | 13,867 | 13,825 | 13,796 | 13,808 | ||||||||||||||||
Other data: | ||||||||||||||||||||
Adjusted EBITDA(1) | $ | (668 | ) | $ | (367 | ) | $ | (66 | ) | $ | (3,186 | ) | ||||||||
(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 Loss to Adjusted EBITDA as shown below. | |
FRANKLIN COVEY CO. |
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Reconciliation of Net Loss to Adjusted EBITDA |
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(in thousands and unaudited) | |||||||||||||||||||||
Quarter Ended | Two Quarters Ended | ||||||||||||||||||||
February 28, | February 28, | February 28, | February 28, | ||||||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||||||||
Reconciliation of net loss to Adjusted EBITDA: | |||||||||||||||||||||
Net loss | $ | (2,740 | ) | $ | (3,333 | ) | $ | (5,132 | ) | $ | (7,291 | ) | |||||||||
Adjustments: | |||||||||||||||||||||
Interest expense, net | 638 | 514 | 1,125 | 1,019 | |||||||||||||||||
Income tax benefit | (3,025 | ) | (1,669 | ) | (4,373 | ) | (3,590 | ) | |||||||||||||
Amortization | 1,395 | 721 | 2,791 | 1,443 | |||||||||||||||||
Depreciation | 1,379 | 928 | 2,280 | 1,794 | |||||||||||||||||
Stock-based compensation | 779 | 1,564 | 1,736 | 2,777 | |||||||||||||||||
Contract termination costs | - | 1,500 | - | 1,500 | |||||||||||||||||
Increase (reduction) to contingent earnout liability | 477 | (924 | ) | 652 | (1,936 | ) | |||||||||||||||
ERP implementation costs | 429 | 306 | 855 | 593 | |||||||||||||||||
China start-up costs | - | 26 | - | 505 | |||||||||||||||||
Adjusted EBITDA | $ | (668 | ) | $ | (367 | ) | $ | (66 | ) | $ | (3,186 | ) | |||||||||
Adjusted EBITDA margin | -1.4 | % | -0.9 | % | -0.1 | % | -3.9 | % | |||||||||||||
FRANKLIN COVEY CO. |
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Additional Sales Information |
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(in thousands and unaudited) | |||||||||||||||||||||
Quarter Ended | Two Quarters Ended | ||||||||||||||||||||
February 28, | February 28, | February 28, |
February 28, |
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2018 | 2017 | 2018 | 2017 | ||||||||||||||||||
Sales Detail by Segment: | |||||||||||||||||||||
Direct offices | $ | 33,275 | $ | 30,137 | $ | 67,471 | $ | 56,520 | |||||||||||||
Education | 9,007 | 7,848 | 18,183 | 16,591 | |||||||||||||||||
International licensees | 3,046 | 2,937 | 6,366 | 6,369 | |||||||||||||||||
Corporate and other | 1,219 | 1,274 | 2,459 | 2,503 | |||||||||||||||||
Total | $ | 46,547 | $ | 42,196 | $ | 94,479 | $ | 81,983 | |||||||||||||
FRANKLIN COVEY CO. |
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Condensed Consolidated Balance Sheets |
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(in thousands and unaudited) | ||||||||||
February 28, | August 31, | |||||||||
2018 | 2017 | |||||||||
Assets |
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Current assets: | ||||||||||
Cash | $ | 10,760 | $ | 8,924 | ||||||
Accounts receivable, less allowance for doubtful accounts of $2,933 and $2,310 |
48,730 | 66,343 | ||||||||
Receivable from related party | 794 | 1,020 | ||||||||
Inventories | 3,520 | 3,353 | ||||||||
Income taxes receivable | 549 | 259 | ||||||||
Prepaid expenses and other current assets | 11,997 | 11,936 | ||||||||
Total current assets | 76,350 | 91,835 | ||||||||
Property and equipment, net | 21,294 | 19,730 | ||||||||
Intangible assets, net | 54,512 | 57,294 | ||||||||
Goodwill | 24,220 | 24,220 | ||||||||
Long-term receivable from related party | 49 | 727 | ||||||||
Deferred income tax assets | 5,936 | 1,647 | ||||||||
Other long-term assets | 14,585 | 15,278 | ||||||||
$ | 196,946 | $ | 210,731 | |||||||
Liabilities and Shareholders' Equity |
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Current liabilities: | ||||||||||
Current portion of financing obligation | $ | 1,978 | $ | 1,868 | ||||||
Current portion of term notes payable | 6,250 | 6,250 | ||||||||
Accounts payable | 9,108 | 9,119 | ||||||||
Deferred revenue | 36,136 | 40,772 | ||||||||
Accrued liabilities | 18,986 | 22,617 | ||||||||
Total current liabilities | 72,458 | 80,626 | ||||||||
Line of credit | 9,919 | 4,377 | ||||||||
Term notes payable, less current portion | 9,688 | 12,813 | ||||||||
Financing obligation, less current portion | 20,055 | 21,075 | ||||||||
Other liabilities | 4,421 | 5,742 | ||||||||
Deferred income tax liabilities | 41 | 1,033 | ||||||||
Total liabilities | 116,582 | 125,666 | ||||||||
Shareholders' equity: | ||||||||||
Common stock | 1,353 | 1,353 | ||||||||
Additional paid-in capital | 210,007 | 212,484 | ||||||||
Retained earnings | 64,324 | 69,456 | ||||||||
Accumulated other comprehensive income | 1,019 | 667 | ||||||||
Treasury stock at cost, 13,179 and 13,414 shares | (196,339 | ) | (198,895 | ) | ||||||
Total shareholders' equity | 80,364 | 85,065 | ||||||||
$ | 196,946 | $ | 210,731 | |||||||
View source version on businesswire.com: https://www.businesswire.com/news/home/20180404006209/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