Franklin Covey Reports Strong Second Quarter of Fiscal 2020
All Access Pass and Pass-Related Sales Increase 28% Over Prior Year Second Quarter
Gross Profit Increases 9%, or
Results of Operations Improve
Cash Flows from Operations Increase 30% to
Company’s On-Demand, Live-Online, and Microlearning Modalities Assist Clients Through Uncertainty and Change
Company Addresses Guidance for Fiscal 2020
Introduction
Whitman continued, “Following a strong start to fiscal 2020 in our first quarter, we were very pleased with our second quarter results, which reflected continued growth in our subscription-based business model and high levels of flow-through from incremental sales to Adjusted EBITDA. In the second quarter of fiscal 2020, we generated strong growth in sales and gross profit, improved operating results, and achieved a 321% increase in Adjusted EBITDA over the second quarter of the prior year. Our revenue increased 7%, or
Whitman added, “Our second quarter results were driven by continued strong growth in our subscription-based offerings. Sales of Franklin Covey’s All Access Pass (AAP) and related services grew 28% over the prior year and the Education Division’s 12% sales growth in the quarter was primarily driven by increased Leader in Me subscription revenues. Our second quarter results reflect a significant number of big client wins and many contract expansions. Domestic direct office revenues grew by 9% over the prior year and our direct office segment managed to grow 4% despite significant business disruptions from the COVID-19 outbreak in
Whitman concluded, “In our experience, during times of uncertainty and fear, it is natural for there to be a period of time when people and organizations are busy adapting to change. During such times, normal business and decision-making processes are often interrupted. The past weeks have been just such a time. However, once organizations gain their bearings they confront the new reality, and seek to sharpen the focus and execution of their organization, build trust with all stakeholders in a time of uncertainty, and transform fear and uncertainty into high levels of engagement. Helping organizations achieve results that require behavioral change, at scale, is what
Financial Overview
The following is a summary of key financial results for the quarter ended
-
Net Sales : Consolidated revenue for the second quarter of fiscal 2020 increased 7% to$53.7 million , an increase of$3.4 million , compared with net sales of$50.4 million in the second quarter of fiscal 2019. Sales growth during the quarter was broad-based across the Company’s Divisions. Enterprise Division sales during the second quarter of fiscal 2020 increased 3% to$40.7 million , compared with$39.3 million in fiscal 2019 despite significant decreases in the Company’sChina andJapan direct offices and certain international licensees related to business disruption from the COVID-19 pandemic. Education Division revenues increased 12% to$10.9 million , compared with$9.7 million in the second quarter of fiscal 2019. The Company’s sales growth during the quarter was primarily driven by increased sales of subscription services in both the Enterprise and Education Divisions, and sales of All Access Pass and related services in the Enterprise Division increased 28% in the quarter. For the last 12 months, net sales grew 6% to$233.5 million , an increase of$14.1 million , compared with$219.5 million for the 12 months endedFebruary 28, 2019 . -
Deferred Subscription Revenue and Unbilled Deferred Revenue: For the quarter ended
February 29, 2020 , the Company’s reported subscription and subscription-related revenue grew 24% compared with the second quarter of fiscal 2019. AtFebruary 29, 2020 , the Company had$48.0 million of deferred subscription revenue on its balance sheet, a 21%, or$8.4 million , increase compared with deferred subscription revenue on the balance sheet atFebruary 28, 2019 . AtFebruary 29, 2020 , the Company also had$34.8 million of unbilled deferred revenue, a 39%, or$9.8 million , increase compared with$25.0 million of unbilled deferred revenue atFebruary 28, 2019 . Unbilled deferred revenue represents business that is contracted but unbilled, and excluded from the Company’s balance sheet. -
Gross profit: Second quarter 2020 gross profit increased 9%, or
$3.3 million , to$38.7 million compared with$35.4 million in fiscal 2019. The Company’s gross margin for the quarter endedFebruary 29, 2020 improved 171 basis points to 71.9% of sales compared with 70.2% in the second quarter of the prior year, reflecting increased subscription revenues. -
Operating Expenses: The Company’s operating expenses for the quarter ended
February 29, 2020 increased$0.1 million compared with the prior year, which was due to increased selling, general, and administrative (SG&A) expenses. However, SG&A expenses as a percent of sales decreased to 67.4% compared with 71.3% in the second quarter of the prior year. Increases in SG&A expense were primarily related to increased commissions and bonuses on higher sales, increased investments in new sales and sales-related personnel, and a$0.8 million increase in non-cash stock-based compensation. These increases were partially offset by$0.4 million of decreased licensee transition costs related to the fiscal 2019 acquisition of the Company’s licensee inGermany ,Switzerland , andAustria (GSA); a$0.4 million decrease inChina office expenses resulting from suspended business operations due to the COVID-19 outbreak; and cost savings in various other areas of the Company’s operations. AtFebruary 29, 2020 , the Company had 255 client partners compared with 230 client partners atFebruary 28, 2019 . -
Operating Loss: The Company reported a loss from operations for the second quarter of fiscal 2020, but its loss improved to
$(0.4) million compared with$(3.6) million in the same quarter of fiscal 2019. -
Adjusted EBITDA: Adjusted EBITDA for the second quarter increased 321%, or
$3.1 million , to$4.1 million , compared with$1.0 million in the second quarter of the prior year. -
Income Taxes: The Company’s effective income tax benefit rate for the quarter ended
February 29, 2020 was approximately 219% of the loss before income taxes compared with an effective benefit rate of approximately 10% of the loss before income taxes in the second quarter of fiscal 2019. The higher tax benefit rate in fiscal 2020 was primarily due to the exercise of stock options, which produced a$1.8 million tax benefit in the quarter. The tax benefit rate in the second quarter of fiscal 2019 was decreased significantly by Global Intangible Low-Taxed Income (GILTI), nondeductible expenses, and effective foreign tax rates which were considerably higher than theU.S. federal statutory rate. -
Net Income: The Company reported net income of
$1.1 million , or$0.08 per diluted share, for the second quarter 2020, compared with a net loss of$(3.5) million , or ($0.25 ) per share, in the second quarter of fiscal 2019, reflecting the above-noted factors. -
Cash and Liquidity Remain Strong: The Company’s balance sheet and liquidity position remained strong with
$24.8 million of cash atFebruary 29, 2020 , compared with$27.7 million atAugust 31, 2019 . Subsequent toFebruary 29, 2020 , the Company drew down the$14.9 million of available borrowing on its revolving line of credit facility to maximize its flexibility during this period of uncertainty. Cash flows from operating activities for the first two quarters of fiscal 2020 increased 30% to$17.4 million , compared with$13.4 million in the first half of fiscal 2019.
Fiscal 2020 Year-to-Date Financial Results
Consolidated revenue for the first half of fiscal 2020 increased 8% to
Selling, general, and administrative expenses for the first two quarters of fiscal 2019 increased
Fiscal 2020 Outlook
Despite the Company’s strong results for the second quarter, and first half of fiscal 2020, given the meaningful COVID-19 impact experienced to date and the uncertainty and fluidity of the ongoing business and educational institution disruptions resulting from the current situation, investors should no longer rely on the Company’s previously released guidance and assumptions for fiscal 2020. The Company remains confident, however, that once the global economy begins to return to normalcy, the same factors that have driven its growth trajectory this year-to-date, and in recent years, will help the Company to begin to resume accelerated growth.
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 and other goals relating to the growth and operations 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; the severity and duration of global business disruptions from the COVID-19 outbreak; the ability of the Company to operate effectively during and in the aftermath of the COVID-19 pandemic; 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 new AAP portal upgrades; 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
This earnings release includes the concepts of adjusted earnings before interest, income taxes, depreciation, and amortization (Adjusted EBITDA) and “constant currency,” which are non-GAAP measures. The Company defines Adjusted EBITDA as net income or loss excluding the impact of interest expense, income taxes, intangible asset 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. Constant currency is a non-GAAP financial measure that removes the impact of fluctuations in foreign currency exchange rates and is calculated by translating the current period’s financial results at the same average exchange rates in effect during the prior year and then comparing this amount to the prior year.
The Company references these non-GAAP financial measures in its decision making because they provide supplemental information that facilitates consistent internal comparisons to the historical operating performance of prior periods and the Company believes they provide investors with greater transparency to evaluate operational activities and financial results. Refer to the attached table for the reconciliation of a non-GAAP financial measure, “Adjusted EBITDA,” to consolidated net income or loss, a comparable GAAP financial measure.
About
Condensed Consolidated Statements of Operations | ||||||||||||||||
(in thousands, except per-share amounts, and unaudited) | ||||||||||||||||
Quarter Ended |
|
Two Quarters Ended |
||||||||||||||
|
|
|
|
|
|
|
||||||||||
2020 |
|
2019 |
|
2020 |
|
2019 |
||||||||||
Net sales |
$ |
53,745 |
|
$ |
50,356 |
|
$ |
112,357 |
|
$ |
104,185 |
|
||||
Cost of sales |
|
15,079 |
|
|
14,990 |
|
|
31,662 |
|
|
32,037 |
|
||||
Gross profit |
|
38,666 |
|
|
35,366 |
|
|
80,695 |
|
|
72,148 |
|
||||
Selling, general, and administrative |
|
36,221 |
|
|
35,925 |
|
|
75,620 |
|
|
70,568 |
|
||||
Depreciation |
|
1,653 |
|
|
1,697 |
|
|
3,273 |
|
|
3,251 |
|
||||
Amortization |
|
1,170 |
|
|
1,300 |
|
|
2,340 |
|
|
2,538 |
|
||||
Loss from operations |
|
(378 |
) |
|
(3,556 |
) |
|
(538 |
) |
|
(4,209 |
) |
||||
Interest expense, net |
|
(544 |
) |
|
(371 |
) |
|
(1,144 |
) |
|
(975 |
) |
||||
Loss before income taxes |
|
(922 |
) |
|
(3,927 |
) |
|
(1,682 |
) |
|
(5,184 |
) |
||||
Income tax benefit |
|
2,019 |
|
|
410 |
|
|
2,235 |
|
|
310 |
|
||||
Net income (loss) |
$ |
1,097 |
|
$ |
(3,517 |
) |
$ |
553 |
|
$ |
(4,874 |
) |
||||
Net income (loss) per common share: | ||||||||||||||||
Basic and diluted |
$ |
0.08 |
|
$ |
(0.25 |
) |
$ |
0.04 |
|
$ |
(0.35 |
) |
||||
Weighted average common shares: | ||||||||||||||||
Basic |
|
13,841 |
|
|
13,937 |
|
|
13,911 |
|
|
13,927 |
|
||||
Diluted |
|
13,990 |
|
|
13,937 |
|
|
14,118 |
|
|
13,927 |
|
||||
Other data: | ||||||||||||||||
Adjusted EBITDA(1) |
$ |
4,056 |
|
$ |
964 |
|
$ |
9,017 |
|
$ |
4,133 |
|
(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 a comparable GAAP equivalent, refer to the Reconciliation of Net Income (Loss) to Adjusted EBITDA as shown below. |
Reconciliation of Net Income (Loss) to Adjusted EBITDA | ||||||||||||||||
(in thousands and unaudited) | ||||||||||||||||
Quarter Ended |
|
Two Quarters Ended |
||||||||||||||
|
|
|
|
|
|
|
||||||||||
2020 |
|
2019 |
|
2020 |
|
2019 |
||||||||||
Reconciliation of net income (loss) to Adjusted EBITDA: | ||||||||||||||||
Net income (loss) |
$ |
1,097 |
|
$ |
(3,517 |
) |
$ |
553 |
|
$ |
(4,874 |
) |
||||
Adjustments: | ||||||||||||||||
Interest expense, net |
|
544 |
|
|
371 |
|
|
1,144 |
|
|
975 |
|
||||
Income tax benefit |
|
(2,019 |
) |
|
(410 |
) |
|
(2,235 |
) |
|
(310 |
) |
||||
Amortization |
|
1,170 |
|
|
1,300 |
|
|
2,340 |
|
|
2,538 |
|
||||
Depreciation |
|
1,653 |
|
|
1,697 |
|
|
3,273 |
|
|
3,251 |
|
||||
Stock-based compensation |
|
1,793 |
|
|
1,043 |
|
|
3,644 |
|
|
1,989 |
|
||||
Increase (decrease) in the fair value of contingent consideration liabilities |
|
(182 |
) |
|
52 |
|
|
(91 |
) |
|
76 |
|
||||
|
- |
|
|
- |
|
|
389 |
|
|
- |
|
|||||
Licensee transition costs |
|
- |
|
|
428 |
|
|
- |
|
|
488 |
|
||||
Adjusted EBITDA |
$ |
4,056 |
|
$ |
964 |
|
$ |
9,017 |
|
$ |
4,133 |
|
||||
Adjusted EBITDA margin |
|
7.5 |
% |
|
1.9 |
% |
|
8.0 |
% |
|
4.0 |
% |
Additional Financial Information | ||||||||||||||||
(in thousands and unaudited) | ||||||||||||||||
Quarter Ended |
|
Two Quarters Ended |
||||||||||||||
|
|
|
|
|
|
|
||||||||||
2020 |
|
2019 |
|
2020 |
|
2019 |
||||||||||
Sales by Division/Segment: | ||||||||||||||||
Enterprise Division: | ||||||||||||||||
Direct offices |
$ |
37,973 |
|
$ |
36,414 |
|
$ |
80,085 |
|
$ |
74,885 |
|
||||
International licensees |
|
2,691 |
|
|
2,906 |
|
|
6,411 |
|
|
6,583 |
|
||||
|
40,664 |
|
|
39,320 |
|
|
86,496 |
|
|
81,468 |
|
|||||
Education Division |
|
10,893 |
|
|
9,698 |
|
|
21,974 |
|
|
20,044 |
|
||||
Corporate and other |
|
2,188 |
|
|
1,338 |
|
|
3,887 |
|
|
2,673 |
|
||||
Consolidated |
$ |
53,745 |
|
$ |
50,356 |
|
$ |
112,357 |
|
$ |
104,185 |
|
||||
Gross Profit by Division/Segment: | ||||||||||||||||
Enterprise Division: | ||||||||||||||||
Direct offices |
$ |
28,702 |
|
$ |
27,294 |
|
$ |
60,113 |
|
$ |
54,364 |
|
||||
International licensees |
|
2,237 |
|
|
2,221 |
|
|
5,357 |
|
|
5,084 |
|
||||
|
30,939 |
|
|
29,515 |
|
|
65,470 |
|
|
59,448 |
|
|||||
Education Division |
|
6,460 |
|
|
5,429 |
|
|
13,117 |
|
|
11,822 |
|
||||
Corporate and other |
|
1,267 |
|
|
422 |
|
|
2,108 |
|
|
878 |
|
||||
Consolidated |
$ |
38,666 |
|
$ |
35,366 |
|
$ |
80,695 |
|
$ |
72,148 |
|
||||
Adjusted EBITDA by Division/Segment: | ||||||||||||||||
Enterprise Division: | ||||||||||||||||
Direct offices |
$ |
4,734 |
|
$ |
2,543 |
|
$ |
10,444 |
|
$ |
6,183 |
|
||||
International licensees |
|
1,384 |
|
|
1,218 |
|
|
3,419 |
|
|
2,846 |
|
||||
|
6,118 |
|
|
3,761 |
|
|
13,863 |
|
|
9,029 |
|
|||||
Education Division |
|
(1,068 |
) |
|
(909 |
) |
|
(2,171 |
) |
|
(1,174 |
) |
||||
Corporate and other |
|
(994 |
) |
|
(1,888 |
) |
|
(2,675 |
) |
|
(3,722 |
) |
||||
Consolidated |
$ |
4,056 |
|
$ |
964 |
|
$ |
9,017 |
|
$ |
4,133 |
|
Condensed Consolidated Balance Sheets | |||||||||
(in thousands and unaudited) | |||||||||
|
|
|
|||||||
2020 |
|
2019 |
|||||||
Assets | |||||||||
Current assets: | |||||||||
Cash and cash equivalents |
$ |
24,810 |
|
$ |
27,699 |
|
|||
Accounts receivable, less allowance for doubtful accounts of |
|
48,722 |
|
|
73,227 |
|
|||
Inventories |
|
2,795 |
|
|
3,481 |
|
|||
Prepaid expenses and other current assets |
|
15,531 |
|
|
14,933 |
|
|||
Total current assets |
|
91,858 |
|
|
119,340 |
|
|||
Property and equipment, net |
|
18,368 |
|
|
18,579 |
|
|||
Intangible assets, net |
|
45,350 |
|
|
47,690 |
|
|||
|
24,220 |
|
|
24,220 |
|
||||
Deferred income tax assets |
|
7,066 |
|
|
5,045 |
|
|||
Other long-term assets |
|
14,923 |
|
|
10,039 |
|
|||
$ |
201,785 |
|
$ |
224,913 |
|
||||
Liabilities and Shareholders' Equity | |||||||||
Current liabilities: | |||||||||
Current portion of term notes payable |
$ |
5,000 |
|
$ |
5,000 |
|
|||
Current portion of financing obligation |
|
2,465 |
|
|
2,335 |
|
|||
Accounts payable |
|
8,735 |
|
|
9,668 |
|
|||
Deferred subscription revenue |
|
46,746 |
|
|
56,250 |
|
|||
Other deferred revenue |
|
7,561 |
|
|
5,972 |
|
|||
Accrued liabilities |
|
18,717 |
|
|
24,319 |
|
|||
Total current liabilities |
|
89,224 |
|
|
103,544 |
|
|||
Term notes payable, less current portion |
|
17,500 |
|
|
15,000 |
|
|||
Financing obligation, less current portion |
|
15,379 |
|
|
16,648 |
|
|||
Other liabilities |
|
6,587 |
|
|
7,527 |
|
|||
Deferred income tax liabilities |
|
180 |
|
|
180 |
|
|||
Total liabilities |
|
128,870 |
|
|
142,899 |
|
|||
Shareholders' equity: | |||||||||
Common stock |
|
1,353 |
|
|
1,353 |
|
|||
Additional paid-in capital |
|
216,045 |
|
|
215,964 |
|
|||
Retained earnings |
|
59,956 |
|
|
59,403 |
|
|||
Accumulated other comprehensive income |
|
322 |
|
|
269 |
|
|||
|
(204,761 |
) |
|
(194,975 |
) |
||||
Total shareholders' equity |
|
72,915 |
|
|
82,014 |
|
|||
$ |
201,785 |
|
$ |
224,913 |
|
View source version on businesswire.com: https://www.businesswire.com/news/home/20200402005798/en/
Investor Contact:
801-817-1776
investor.relations@franklincovey.com
Media Contact:
801-817-6440
Debra.Lund@franklincovey.com
Source: