Franklin Covey Reports Strong Third Quarter Fiscal 2021 Results
Sales Increase to Record Third Quarter Level of
All Access Pass Subscription and Subscription Services Sales Grow 43% to
Deferred Subscription Revenue Increases 26% Over the Prior Year
Operating Income and Adjusted EBITDA Exceed Expectations as Adjusted EBITDA Increases
Cash Flows from Operating Activities Increases 65% to
Company Increases Guidance for Fiscal 2021
Introduction
The Company’s strong third quarter performance was highlighted by the following key metrics:
-
The Company’s consolidated sales for the quarter ended
May 31, 2021 achieved record third quarter levels. Consolidated sales for the third quarter totaled$58.7 million compared with$37.1 million in fiscal 2020, and$56.0 million in the pre-pandemic third quarter of fiscal 2019. -
On the strength of increased sales and a gross margin percentage which improved 587 basis points, gross profit for the third quarter increased to
$45.9 million in 2021 compared with$26.8 million in 2020, and$39.7 million in fiscal 2019. - The Company’s selling, general, and administrative (SG&A) expenses (excluding stock-based compensation) as a percent of sales improved to 64.3% in 2021 compared with 78.8% in fiscal 2020, and 67.2% in the third quarter of fiscal 2019.
-
Adjusted EBITDA increased to
$8.6 million for the third quarter of fiscal 2021 compared with a loss of$(3.6) million in fiscal 2020, and Adjusted EBITDA of$3.1 million in fiscal 2019. -
These favorable operating conditions increased the Company’s pre-tax income to
$2.6 million in fiscal 2021 compared with a loss of$(0.7) million in 2020, and a loss of$(2.4) million in fiscal 2019. -
Cash flows from operating activities for the three quarters ended
May 31, 2021 increased 65% to$30.9 million compared with$18.7 million in the prior year.
Whitman continued, “In the coming quarters and years we expect three factors to continue to drive significant growth in subscription and subscription service sales and profitability. First: driven by growth in All Access Pass, we expect substantially all the Company’s sales to be subscription based within 3-4 years; second: we expect the already significant lifetime customer value of our All Access Passholders to continue to increase; and third: we expect the volume of new All Access Pass logos to grow significantly as we continue to aggressively grow our sales force and licensee network. As the almost complete conversion to subscription and subscription services revenue occurs, we expect virtually the entire Company to be able to generate the same kinds of growth in revenue, gross margins, revenue retention, and customer impact we have seen in our North American subscription business over the past five years.”
Whitman added, “Cash flow during the first three quarters of fiscal 2021 was strong, and we ended the quarter with approximately
The strong performance during the third quarter reflects the continuation of four key trends that have been evident throughout the ongoing COVID-19 pandemic. These trends include:
-
First, the strong growth of All Access Pass (AAP) subscription sales. All Access Pass subscription sales increased 17% in the third quarter of fiscal 2021, 15% fiscal year-to-date, and 14% for the twelve-month period ended
May 31, 2021 . - Second, the growth of All Access Pass subscription services, which increased 136% over the prior year’s third quarter, and substantially exceeded subscription service sales in the third quarter of fiscal 2019. Sales of All Access Pass subscription services continued to strengthen in the third quarter, reflecting the strong bookings of subscription services in prior quarters, and the Company’s capabilities to deliver subscription services live-online and digitally.
- Third, sales in the international direct offices and through many of the Company’s international licensee partners continued to strengthen in the third quarter.
- Fourth, despite the challenging environment for education, booking and delivery trends in the Education Division strengthened in the third quarter, and Education Division performance is expected to continue to improve in the fourth quarter of fiscal 2021.
Financial Overview
The following is a summary of financial results for the quarter ended
-
Net Sales : Consolidated sales for the quarter endingMay 31, 2021 totaled$58.7 million , compared with$37.1 million in the third of fiscal 2020. The Company was pleased with the continued strength of the All Access Pass and Leader in Me subscription-based services in the third quarter and believe the electronic delivery capabilities (including the delivery of subscription services live-online) of these offerings have been key to its business performance during the ongoing pandemic. During the third quarter of fiscal 2021, AAP sales increased 17% compared with the third quarter of the prior year, AAP subscription and subscription services sales increased 43%, and annual revenue retention remained strong at greater than 90%. During the third quarter of fiscal 2021 the Company was encouraged by signs of economic recovery inthe United States and many of the other countries in which it operates as companies, schools, and individuals are adapting, and the positive effect of vaccinations is enabling certain economies to open and recover. As a result of improving conditions, sales improved in each of the Company’s segments compared with the third quarter of fiscal 2020. The Company remains optimistic about the future and looks forward to continued recovery from the pandemic during the fourth quarter of fiscal 2021. -
Deferred Subscription Revenue and Unbilled Deferred Revenue: At
May 31, 2021 , the Company had$96.6 million of billed and unbilled deferred subscription revenue, an increase of 25%, or$19.3 million , compared withMay 31, 2020 . This total included$55.3 million of deferred subscription revenue which was on its balance sheet, a 26%, or$11.4 million increase compared with deferred subscription revenue atMay 31, 2020 . AtMay 31, 2021 , the Company had$41.3 million of unbilled deferred revenue, a 23%, or$7.8 million increase compared with$33.4 million of unbilled deferred revenue atMay 31, 2020 . Included in these numbers is an increasing number of multi-year AAP contracts. As ofMay 31, 2021 , 40% of North American AAP contracts are multi-year contracts, representing more than 50% of North American AAP subscription revenue. Unbilled deferred revenue represents business (typically multi-year contracts) that is contracted but unbilled, and excluded from the Company’s balance sheet. -
Gross profit: Gross profit for the third quarter of fiscal 2021 was
$45.9 million compared with$26.8 million in fiscal 2020. The Company’s gross margin for the quarter endedMay 31, 2021 improved 587 basis points to 78.2% of sales compared with 72.3% in the third quarter of fiscal 2020, reflecting the continued increase in subscription revenues in the mix of overall sales and the impact of increased sales on fixed cost of sale elements such as salaried Education coaches and capitalized curriculum amortization expense. Gross profit increased due to improved sales as described above. -
Operating Expenses: The Company’s operating expenses for the third quarter of fiscal 2021 increased
$15.8 million compared with the third quarter of fiscal 2020, which was primarily due to an$8.5 million increase in SG&A expenses and a$7.5 million increase in stock-based compensation expense. Despite the increase in SG&A expenses (excluding stock-based compensation expense), as a percent of sales, the Company’s SG&A expenses in fiscal 2021 decreased to 64.3% compared with 78.8% in fiscal 2020. The Company’s SG&A expenses increased primarily due to increased commissions on improved sales, increased associate costs resulting from bonuses and incentives from improved operations, and increased content development expense. Due to uncertainties related to the COVID-19 pandemic and recovery from the pandemic, inMay 2020 the Company determined that its stock-based compensation awards related to Adjusted EBITDA would not vest before they expired and previously recognized compensation expense from these awards was reversed. These Adjusted EBITDA based awards were modified in the first quarter of fiscal 2021 and the Company recognized stock-based compensation expense in the third quarter of fiscal 2021. Increased SG&A and stock-based compensation expenses were partially offset by cost savings from the successful implementation of expense reduction initiatives in various areas of the Company’s operations during the pandemic. -
Operating Income: As a result of increased sales, improved gross margins, and continued efforts to control SG&A expenses, the Company’s income from operations for the quarter ended
May 31, 2021 improved to$3.1 million compared with a loss of$(0.1) million in the third quarter of fiscal 2020.
-
Income Taxes: The Company’s income tax benefit for the quarter ended
May 31, 2021 was$10.1 million , compared with income tax expense of$10.2 million in the third quarter of fiscal 2020. The Company’s income tax expense in fiscal 2020 was primarily the result of increasing the valuation allowance against deferred income tax assets due to three-year cumulative pre-tax losses combined with expected disruptions and negative impacts to the business resulting from the COVID-19 pandemic and uncertainties related to recovery from the pandemic. However, during fiscal 2021 the Company’s performance exceeded expectations, which returned it to three-year cumulative pre-tax income. After consideration of these circumstances and the relevant accounting literature, the Company reduced the valuation allowance against its deferred tax assets, which primarily accounts for the income tax benefit recorded for the quarter endedMay 31, 2021 . -
Net Income (Loss): Combined with the income tax benefit described above, the Company’s third quarter fiscal 2021 net income was
$12.8 million , or$0.90 per diluted share, compared with a net loss of$(11.0) million , or$(0.79) per share, in the third quarter of the prior year, which included the adverse impact of an increased valuation allowance on deferred tax assets. -
Adjusted EBITDA: Adjusted EBITDA for the third quarter of fiscal 2021 improved
$12.2 million to$8.6 million compared with a loss of$(3.6) million in the third quarter of the prior year, reflecting increased sales and improved margins. -
Cash Flows, Liquidity, and Financial Position Remain Strong: The Company’s balance sheet and liquidity position remained strong with
$35.8 million of cash atMay 31, 2021 , and no borrowings on its$15.0 million line of credit, compared with$27.1 million of cash atAugust 31, 2020 . Cash flows from operating activities for the first three quarters of fiscal 2021 increased 65% to$30.9 million , despite the challenging global economic environment during fiscal 2021. -
Purchase of
Strive Talent, Inc .: During the third quarter of fiscal 2021, the Company purchasedStrive Talent, Inc. (Strive Talent), aSan Francisco -based technology company which has developed and markets an innovative learning deployment platform. While the purchase of Strive did not materially impact the Company’s results of operations during the third quarter, the Company is excited to add the capabilities of this platform to its All Access Pass offering. Once integrated into the AAP, the Strive platform is expected to enable the seamless integration and deployment of the Company’s content, services, technology, and metrics to deliver behavioral impact at scale to its clients. The Company believes the technology and capabilities acquired from Strive will be key elements of its future business model and strategy.
Fiscal 2021 Year-to-Date Financial Results
Consolidated revenue for the first three quarters of fiscal 2021 was
Operating expenses during the first three quarters of fiscal 2021 increased
Fiscal 2021 Outlook
Based on the Company’s strong performance in the third quarter and year-to-date in fiscal 2021, the Company is pleased to increase its guidance for fiscal 2021 and now expects Adjusted EBITDA to total between
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; expectations regarding the economic recovery from the pandemic; renewals of subscription contracts; 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; increased Education Division performance in the fourth quarter; the ability and benefits from integrating the Strive Talent platform into the AAP; 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 concept of adjusted earnings before interest, income taxes, depreciation, and amortization (Adjusted EBITDA) which is a non-GAAP measure. 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. 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. Refer to the attached table for the reconciliation of a non-GAAP financial measure, “Adjusted EBITDA,” to consolidated net income (loss), a related GAAP financial measure.
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 obtain 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 the Company’s offerings, such as unanticipated curriculum development costs, and other potential variables. Accordingly, a reconciliation is not available without unreasonable effort.
About
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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 |
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Three Quarters Ended |
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2021 |
|
2020 |
|
2021 |
|
2020 |
||||
Net sales |
|
|
|
|
|
|
|
|
||||
Cost of sales |
12,829 |
|
10,284 |
|
35,589 |
|
41,946 |
|
||||
Gross profit |
45,907 |
|
26,821 |
|
119,634 |
|
107,517 |
|
||||
Selling, general, and administrative |
37,762 |
|
29,254 |
|
102,312 |
|
101,231 |
|
||||
Stock-based compensation |
2,370 |
|
(5,104 |
) |
5,127 |
|
(1,460 |
) |
||||
Depreciation |
1,423 |
|
1,652 |
|
4,904 |
|
4,925 |
|
||||
Amortization |
1,238 |
|
1,164 |
|
3,503 |
|
3,504 |
|
||||
Income (loss) from operations |
3,114 |
|
(145 |
) |
3,788 |
|
(683 |
) |
||||
Interest expense, net |
(509 |
) |
(603 |
) |
(1,577 |
) |
(1,747 |
) |
||||
Income (loss) before income taxes |
2,605 |
|
(748 |
) |
2,211 |
|
(2,430 |
) |
||||
Income tax benefit (provision) |
10,149 |
|
(10,220 |
) |
9,605 |
|
(7,985 |
) |
||||
Net income (loss) |
|
|
$ (10,968 |
) |
|
|
$ (10,415 |
) |
||||
Net income (loss) per common share: | ||||||||||||
Basic and diluted |
|
|
$ (0.79 |
) |
|
|
$ (0.75 |
) |
||||
Weighted average common shares: | ||||||||||||
Basic |
14,145 |
|
13,869 |
|
14,068 |
|
13,897 |
|
||||
Diluted |
14,156 |
|
13,869 |
|
14,133 |
|
13,897 |
|
||||
Other data: | ||||||||||||
Adjusted EBITDA(1) |
|
|
$ (3,642 |
) |
|
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|
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||||
(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 |
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(in thousands and unaudited) |
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Quarter Ended |
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Three Quarters Ended |
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2021 |
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|
2020 |
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|
2021 |
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|
2020 |
|
Reconciliation of net income (loss) to Adjusted EBITDA: | ||||||||||||||
Net income (loss) |
|
|
$ (10,968 |
) |
|
|
$ (10,415 |
) |
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Adjustments: | ||||||||||||||
Interest expense, net |
509 |
|
603 |
|
1,577 |
|
1,747 |
|
||||||
Income tax provision (benefit) |
(10,149 |
) |
10,220 |
|
(9,605 |
) |
7,985 |
|
||||||
Amortization |
1,238 |
|
1,164 |
|
3,503 |
|
3,504 |
|
||||||
Depreciation |
1,423 |
|
1,652 |
|
4,904 |
|
4,925 |
|
||||||
Stock-based compensation |
2,370 |
|
(5,104 |
) |
5,127 |
|
(1,460 |
) |
||||||
Business acquisition costs |
300 |
|
- |
|
300 |
|
- |
|
||||||
Increase (decrease) in the fair value of contingent | ||||||||||||||
consideration liabilities |
118 |
|
(276 |
) |
164 |
|
(367 |
) |
||||||
Government COVID assistance |
- |
|
- |
|
(234 |
) |
- |
|
||||||
Gain from insurance settlement |
- |
|
(933 |
) |
(150 |
) |
(933 |
) |
||||||
- |
|
- |
|
- |
|
389 |
|
|||||||
Adjusted EBITDA |
|
|
$ (3,642 |
) |
|
|
|
|
||||||
Adjusted EBITDA margin |
14.6 |
% |
-9.8 |
% |
11.2 |
% |
3.6 |
% |
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Additional Financial Information |
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(in thousands and unaudited) |
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Quarter Ended |
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Three Quarters Ended |
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2021 |
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2020 |
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2021 |
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2020 |
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Sales by Division/Segment: | ||||||||||||||
Enterprise Division: | ||||||||||||||
Direct offices |
|
|
|
|
|
|
|
|
||||||
International licensees |
2,395 |
|
708 |
|
7,421 |
|
7,120 |
|
||||||
45,099 |
|
27,468 |
|
122,606 |
|
113,964 |
|
|||||||
Education Division |
11,899 |
|
8,216 |
|
27,874 |
|
30,190 |
|
||||||
Corporate and other |
1,738 |
|
1,421 |
|
4,743 |
|
5,309 |
|
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Consolidated |
|
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|
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Gross Profit by Division/Segment: | ||||||||||||||
Enterprise Division: | ||||||||||||||
Direct offices |
|
|
|
|
|
|
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|
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International licensees |
2,069 |
|
339 |
|
6,454 |
|
5,696 |
|
||||||
36,747 |
|
21,447 |
|
99,655 |
|
86,917 |
|
|||||||
Education Division |
8,179 |
|
4,711 |
|
17,510 |
|
17,828 |
|
||||||
Corporate and other |
981 |
|
663 |
|
2,469 |
|
2,772 |
|
||||||
Consolidated |
|
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|
|
|
|
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Adjusted EBITDA by Division/Segment: | ||||||||||||||
Enterprise Division: | ||||||||||||||
Direct offices |
|
|
|
|
|
|
|
|
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International licensees |
821 |
|
(724 |
) |
3,608 |
|
2,696 |
|
||||||
9,715 |
|
(372 |
) |
25,337 |
|
13,492 |
|
|||||||
Education Division |
1,132 |
|
(1,536 |
) |
(2,010 |
) |
(3,707 |
) |
||||||
Corporate and other |
(2,284 |
) |
(1,734 |
) |
(5,925 |
) |
(4,410 |
) |
||||||
Consolidated |
|
|
$ (3,642 |
) |
|
|
|
|
|
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Condensed Consolidated Balance Sheets |
||||||
(in thousands and unaudited) |
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|
|
2021 |
|
|
2020 |
|
Assets | ||||||
Current assets: | ||||||
Cash and cash equivalents |
|
|
|
|
||
Accounts receivable, less allowance for | ||||||
doubtful accounts of |
44,477 |
|
56,407 |
|
||
Inventories |
2,652 |
|
2,974 |
|
||
Prepaid expenses and other current assets |
15,343 |
|
15,146 |
|
||
Total current assets |
98,229 |
|
101,664 |
|
||
Property and equipment, net |
12,114 |
|
15,723 |
|
||
Intangible assets, net |
51,603 |
|
47,125 |
|
||
31,220 |
|
24,220 |
|
|||
Deferred income tax assets |
5,316 |
|
1,094 |
|
||
Other long-term assets |
14,167 |
|
15,611 |
|
||
|
|
|
|
|||
Liabilities and Shareholders' Equity | ||||||
Current liabilities: | ||||||
Current portion of notes payable |
|
|
|
|
||
Current portion of financing obligation |
2,813 |
|
2,600 |
|
||
Accounts payable |
4,655 |
|
5,622 |
|
||
Deferred subscription revenue |
54,344 |
|
59,289 |
|
||
Other deferred revenue |
8,984 |
|
7,389 |
|
||
Accrued liabilities |
28,012 |
|
22,628 |
|
||
Total current liabilities |
104,643 |
|
102,528 |
|
||
Notes payable, less current portion |
14,191 |
|
15,000 |
|
||
Financing obligation, less current portion |
11,913 |
|
14,048 |
|
||
Other liabilities |
7,570 |
|
9,110 |
|
||
Deferred income tax liabilities |
- |
|
5,298 |
|
||
Total liabilities |
138,317 |
|
145,984 |
|
||
Shareholders' equity: | ||||||
Common stock |
1,353 |
|
1,353 |
|
||
Additional paid-in capital |
211,283 |
|
211,920 |
|
||
Retained earnings |
61,784 |
|
49,968 |
|
||
Accumulated other comprehensive income |
764 |
|
641 |
|
||
(200,852 |
) |
(204,429 |
) |
|||
Total shareholders' equity |
74,332 |
|
59,453 |
|
||
|
|
|
|
View source version on businesswire.com: https://www.businesswire.com/news/home/20210630005957/en/
Investor Contact:
801-817-1776
investor.relations@franklincovey.com
Media Contact:
801-817-6440
Debra.Lund@franklincovey.com
Source: