Franklin Covey Co. (NYSE: FC),Reports Fiscal 2k19 2nd Quarter Financial Results

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Sales Raise $3.8M, or 8 percent, Over the Prior Year 2nd Quarter, and Raise 10 percent in Constant Currency, with Development in Both the Enterprise and Education Divisions

All Access Pass and Related Sales Raise 33 Percent Year-Over-Year

Results of Operations Improve by $1.6M Difference with the Prior Year 2nd Quarter

Adjusted EBITDA Improves $1.6M ($2.1M in Constant Currency) Difference with the 2nd Quarter of Fiscal 2k18

Operating Cash Flows Raise 43 percent to $13.4M in Fiscal 2k19 Difference with $9.4M for the 1st Two-Quarters of Fiscal 2k18

Franklin Covey Co. (NYSE: FC), a global performance improvement company that creates and distributes world-class content, training, processes, and tools that organizations and individuals use to transform their results, recently declared financial results for its 2nd quarter of fiscal 2k19, which ended on February 28, 2k19.

Introduction

Following the launch of the All Access Pass (AAP) in fiscal 2k16, the Company began a major transition in its business model and in its interaction with clients. Formerly, Franklin Covey sold content and solutions one course, or one solution at a time, and often to only one team at a time.

However, three years ago the Company determined that it could better serve its clients, and substantially expand the breadth and depth of its client impact by providing its world-class content and offerings through subscription-based offerings and services, featuring the All Access Pass in the Enterprise Division and The Leader in Membership service 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. Reflecting this strong client impact:

  1. All Access Pass and related sales grew 33 percent year-over-year
  2. All Access Pass subscribers raised 29 percent year-over-year
  3. Deferred Revenue (billed and unbilled) grew 36 percent, or $17.0M, difference with the 2nd quarter of fiscal 2k18
  4. Contracted Subscription and Related Revenue grew 23 percent difference with the 2nd quarter of last year

Bob Whitman, Chairman and Chief Executive Officer, commented, “We are very happy with the trajectory of our results for the 2nd quarter and 1st half of fiscal 2k19, which exceeded our expectations, and produced raised sales, raised gross profit, improved operating results, and a remarkable raise in Adjusted EBITDA in the quarter, fiscal year, and for the most recent 12 months. These financial results reflect the development and impact of our high recurring revenue, high-margin, high flow-through, low capital intensity subscription business model.”

Whitman added, “There are three key takeaways for the quarter: 1st, our strong results for the 2nd quarter and 1st half of fiscal 2k19 confirm our expectation of achieving a 50 percent – 80 percent raise in Adjusted EBITDA for the full fiscal year. Throughout the 2nd quarter, revenue grew 8 percent, or $3.8M, to $50.4M, with development occurring in both our Enterprise and Education Divisions, and our Adjusted EBITDA improved $1.6M over last year.

On a constant currency basis, our revenues grew 10 percent and Adjusted EBITDA improved $2.1M difference with the prior year. For the 1st two-quarters of fiscal 2k19 revenues grew 10 percent, or $9.7M, to $104.2M and Adjusted EBITDA improved $4.2M difference with the prior year. On a constant currency basis, our fiscal 2k19 year-to-date revenue grew 11 percent and Adjusted EBITDA raised $4.8M.”

“2nd, our subscription-based model is driving our overall development, attractive subscription metrics, and compelling economics. In the 2nd quarter of fiscal 2k19, All Access Pass and related sales, and the number of paying subscribers grew rapidly. For the 1st two-quarters of fiscal 2k19, our All Access Pass and related sales grew 42 percent over the similar period last year.”

“3rd, we are continuing to aggressively expand our sales force to take advantage of what we believe is an extraordinary sales force expansion opportunity. Our subscription model’s compelling economics and resultant one-year payback period for a new sales hire create compelling unit expansion economics, and we have remarkable headroom for sales force development. We are executing on this opportunity. Over the next three years, we expect to add at least 75 new client partners to our existing base of 230, counting at least 20 this year.”

Whitman concluded, “With continued strong Enterprise Division results combined with a planned aggressive expansion of the sales force, and expected ongoing improvements in Education Division operations, especially in the 4th quarter of fiscal 2k19, we believe we will be positioned to accelerate our revenue, Adjusted EBITDA, and cash flow development throughout fiscal 2k19 and in future periods.”

Throughout the 2nd quarter of fiscal 2k19, the Company’s transition to a subscription-based model continued the strong momentum generated in fiscal 2k18 and the 1st quarter of fiscal 2k19 with the following results:

Financial Overview

The following is a summary of key financial results for the quarter ended February 28, 2k19:

  1. Net Sales: Merged revenue for the 2nd quarter of fiscal 2k19 raised 8 percent to $50.4M, a raise of $3.8M, difference with net sales of $46.5M in the 2nd quarter of fiscal 2k18. Apart From the impact of foreign exchange, the Company’s merged sales grew 10 percent difference with the prior year. Enterprise Division sales raised 8 percent to $39.3M, a $3.0M raise difference with $36.3M in last year’s 2nd quarter. Apart From the impact of foreign exchange, Enterprise Division sales grew 10 percent difference with the prior year. Enterprise Division sales were favorably influenced by raised direct office revenues, both domestically and internationally, in addition to by development in its government services revenues. The 2nd quarter acquisition of the licensee that served Germany, Switzerland, and Austria (GSA) added $0.5M of new international direct offices revenues and is expected to provide remarkable future development opportunities. Education Division revenues also raised 8 percent to $9.7M, a boost of $0.7M, difference with $9.0M in the 2nd quarter of fiscal 2k18.
  2. Adoption of ASC 606: On September 1, 2k18, the Company adopted the new revenue recognition rules found in Accounting Standards Codification (ASC) Topic 606. The adoption of this standard raised stated sales by $0.5M, mainly in the Education Division, and reduced the loss from operations by $0.4M throughout the quarter ended February 28, 2k19. The financial statement results referenced in this press release include the impact of the adoption of ASC Topic 606.
  3. Deferred Subscription Revenue and Unbilled Deferred Revenue: Throughout the 2nd quarter of fiscal 2k19, the Company’s subscription and subscription-related revenue grew 16 percent to $23.4M difference with $20.2M in the 2nd quarter of the prior year. At February 28, 2k19, the Company had $64.5M of billed and unbilled deferred subscription revenue, a 36 percent raise, or $17.0M, over $47.5M at the end of last year’s 2nd quarter. The Company’s balance of deferred subscription revenue (billed) grew 23 percent in the 2nd quarter to $39.6M, a boost of $7.5M difference with the end of last year’s 2nd quarter. The Company’s balance of unbilled deferred subscription revenue raised to $25.0M at February 28, 2k19, which represents a 61 percent, or $9.5M raise over unbilled deferred revenue at the end of last year’s 2nd quarter. Unbilled deferred revenue represents a business that is contracted but unbilled and excluded from the Company’s balance sheet.
  4. Gross profit:2nd quarter 2k19 gross profit raised 8 percent to $35.4M difference with $32.7M in the prior year. The raise in gross profit was mainly because of raised sales as described above. The Company’s gross margin for the quarter ended February 28, 2k19 remained strong at 70.2 percent of sales difference with 70.3 percent in the 2nd quarter of fiscal 2k18.
  5. Operating Costs: Although the Company’s selling, general, and administrative (SG&A) costs for the quarter raised by $0.8M difference with the prior year, as a percentage of revenue, SG&A costs improved to 71.3 percent difference with 75.4 percent in the 2nd quarter of fiscal 2k18. The raise in SG&A expense was mainly related to raised associate costs resulting from raised commissions on higher sales and the addition of GSA personnel, who were formerly employed by a licensee.
  6. Operating Income (Loss): The Company stated a loss from operations for the 2nd quarter, but its loss improved by $1.6M to $(3.6)M difference with $(5.1)M in the 2nd quarter of the prior year. Apart From the impact of foreign exchange, the Company’s operating loss improved by $2.0M difference with the prior year.
  7. Adjusted EBITDA: Adjusted EBITDA for the 2nd quarter improved $1.6M to $1.0M, difference with a loss of $(0.7)M in the 2nd quarter of fiscal 2k18. In constant currency, Adjusted EBITDA in the 2nd quarter improved $2.1M difference to the 2nd quarter of fiscal 2k18.
  8. Income Taxes:The lower tax benefit rate in the 2nd quarter of fiscal 2k19 was mainly because of changes resulting from the 2k17 Tax Act, and included a reduced U.S. statutory rate, tax expense from Global Intangible Low-taxed Income, nondeductible costs, and effective foreign tax rates which were significantly higher than the U.S. federal statutory rate. In addition, the Company recorded a one-time income tax benefit of $1.2M throughout the 2nd quarter of fiscal 2k18 as a provisional estimate of the effects of the 2k17 Tax Act.
  9. Net Income (Loss): The Company stated a 2nd quarter 2k19 net loss of $(3.5)M difference with a net loss of $(2.7)M in the 2nd quarter of fiscal 2k18, reflecting the sharply reduced income tax benefit described above.
  10. Cash Flows from Operating Activities: The Company’s cash flows from operating activities raised 43 percent, or $4.0M, to $13.4M through the 1st two-quarters of fiscal 2k19, difference with $9.4M through the 1st two-quarters of fiscal 2k18.
  11. Cash and Liquidity Remain Strong: The Company’s balance sheet and liquidity position remained strong with $13.1M of cash at February 28, 2k19, difference with $10.2M at August 31, 2k18. At February 28, 2k19, the Company had $21.6M of available borrowing on its revolving line of credit facility.
  12. Fiscal 2k19 Outlook: The Company reaffirms its formerly declared Adjusted EBITDA guidance for fiscal 2k19, which is expected to be in the range of $18M to $22M, apart from the impact of foreign exchange, difference with $11.9M in fiscal 2k18.

Fiscal 2k19 Year-to-Date Financial Results

Merged revenue for the 1st two-quarters of fiscal 2k19 raised 10 percent to $104.2M difference with $94.5M in the 1st half of fiscal 2k18. Apart From the impact of foreign exchange, the Company’s sales grew 11 percent over the 1st two quarters of the prior year. Enterprise Division sales raised 10 percent to $81.5M difference with $73.8M for the 1st two-quarters of fiscal 2k18. Apart From the impact of foreign exchange, Enterprise Division sales raised 12 percent over the 1st half of fiscal 2k18.

Enterprise Division sales were favorably influenced by raised direct office revenues, both domestically and internationally, raised government services sales, and raised international licensee revenues. Education Division revenues also raised 10 percent to $20.0M difference with $18.2M in the 1st two quarters of the prior year.

Merged gross profit for the 1st two-quarters of fiscal 2k19 was $72.1M difference with $65.6M in the 1st two quarters of the prior year. Gross margin for the 1st half of fiscal 2k19 was consistent with the prior year at 69.2 percent difference with 69.4 percent in the 1st half of fiscal 2k18.

Selling, general, and administrative costs for the 1st two-quarters of fiscal 2k18 raised $1.6M difference with the 1st half of fiscal 2k18, but reduced as a percent of revenue to 67.7 percent difference with 72.9 percent in the 1st two-quarters of fiscal 2k18. The raise was mainly because of raised commissions on higher sales, new sales and sales related personnel, and personnel at the Company’s new GSA direct office. Depreciation expense raised $1.0M mainly from remarkable information systems investments in fiscal 2k18.

The Company’s loss from operations through February 28, 2k19 improved to $(4.2)M difference with a loss of $(8.4)M in the 1st half of fiscal 2k18. Adjusted EBITDA for the two quarters ended February 28, 2k19 improved $4.2M to $4.1M difference with a $(0.1)M loss through the 1st two-quarters of fiscal 2k18. Apart From the impact of foreign currency, Adjusted EBITDA for the 1st half of fiscal 2k19 raised $4.8M difference with the prior year. Net loss for the 1st two-quarters of fiscal 2k18 was $(4.9)M, or $(.35) per share, difference with a $(5.1)M loss, or $(.37) per share, in the 1st half of fiscal 2k18.

The Company’s net loss throughout fiscal 2k19 was influenced by the remarkable reduction in its effective tax benefit rate as formerly described.

Earnings Conference Call

On Thursday, April 4, 2k19, at 5:00 p.m. Eastern time (3:00 p.m. Mountain time) Franklin Covey will host a conference call to review its financial results for the fiscal quarter ended February 28, 2k19.

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