Franklin Covey Reports Fiscal 2019 Second Quarter Financial Results
Sales Increase
All Access Pass and Related Sales Increase 33% Year-Over-Year
Results of Operations Improve by
Adjusted EBITDA Improves
Operating Cash Flows Increase 43% to
Introduction
Following the launch of the All Access Pass (AAP) in fiscal 2016, the
Company began a major transition in its business model and in its
interaction with clients. Previously,
- All Access Pass and related sales grew 33% year-over-year
- All Access Pass subscribers increased 29% year-over-year
-
Deferred Revenue (billed and unbilled) grew 36%, or
$17.0 million , compared with the second quarter of fiscal 2018 - Contracted Subscription and Related Revenue grew 23% compared with the second quarter of last year
Whitman added, “There are three key takeaways for the quarter: First, our
strong results for the second quarter and first half of fiscal 2019
confirm our expectation of achieving a 50% - 80% increase in Adjusted
EBITDA for the full fiscal year. During the second quarter, revenue
grew 8%, or
“Second, our subscription-based model is driving our overall growth, attractive subscription metrics, and compelling economics. In the second quarter of fiscal 2019, All Access Pass and related sales, and the number of paying subscribers grew rapidly. For the first two quarters of fiscal 2019, our All Access Pass and related sales grew 42% over the same period last year.”
“Third, 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 creates compelling unit expansion economics, and we have significant headroom for sales force growth. 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, including 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 fourth quarter of fiscal 2019, we believe we will be positioned to accelerate our revenue, Adjusted EBITDA, and cash flow growth during fiscal 2019 and in future periods.”
During the second quarter of fiscal 2019, the Company’s transition to a subscription-based model continued the strong momentum generated in fiscal 2018 and the first quarter of fiscal 2019 with the following results:
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 2019 increased 8% to
$50.4 million , an increase of$3.8 million , compared with net sales of$46.5 million in the second quarter of fiscal 2018. Excluding the impact of foreign exchange, the Company’s consolidated sales grew 10% compared with the prior year. Enterprise Division sales increased 8% to$39.3 million , a$3.0 million increase compared with$36.3 million in last year’s second quarter. Excluding the impact of foreign exchange, Enterprise Division sales grew 10% compared with the prior year. Enterprise Division sales were favorably impacted by increased direct office revenues, both domestically and internationally, as well as by growth in its government services revenues. The second quarter acquisition of the licensee that servedGermany ,Switzerland , andAustria (GSA) added$0.5 million of new international direct offices revenues and is expected to provide significant future growth opportunities. Education Division revenues also increased 8% to$9.7 million , an increase of$0.7 million , compared with$9.0 million in the second quarter of fiscal 2018. -
Adoption of ASC 606: On
September 1, 2018 , the Company adopted the new revenue recognition rules found in Accounting Standards Codification (ASC) Topic 606. The adoption of this standard increased reported sales by$0.5 million , primarily in the Education Division, and decreased the loss from operations by$0.4 million during the quarter endedFebruary 28, 2019 . The financial statement results referenced in this press release include the impact of the adoption of ASC Topic 606. -
Deferred Subscription Revenue and Unbilled
Deferred Revenue: During the second quarter of fiscal 2019, the
Company’s subscription and subscription-related revenue grew 16% to
$23.4 million compared with$20.2 million in the second quarter of the prior year. AtFebruary 28, 2019 , the Company had$64.5 million of billed and unbilled deferred subscription revenue, a 36% increase, or$17.0 million , over$47.5 million at the end of last year’s second quarter. The Company’s balance of deferred subscription revenue (billed) grew 23% in the second quarter to$39.6 million , an increase of$7.5 million compared with the end of last year’s second quarter. The Company’s balance of unbilled deferred subscription revenue increased to$25.0 million atFebruary 28, 2019 , which represents a 61%, or$9.5 million increase over unbilled deferred revenue at the end of last year’s second quarter. Unbilled deferred revenue represents business that is contracted but unbilled and excluded from the Company’s balance sheet. -
Gross profit: Second quarter 2019 gross
profit increased 8% to
$35.4 million compared with$32.7 million in the prior year. The increase in gross profit was primarily due to increased sales as described above. The Company’s gross margin for the quarter endedFebruary 28, 2019 remained strong at 70.2 percent of sales compared with 70.3 percent in the second quarter of fiscal 2018. -
Operating Expenses: Although the
Company’s selling, general, and administrative (SG&A) expenses for the
quarter increased by
$0.8 million compared with the prior year, as a percentage of revenue, SG&A expenses improved to 71.3% compared with 75.4% in the second quarter of fiscal 2018. The increase in SG&A expense was primarily related to increased associate costs resulting from increased commissions on higher sales and the addition of GSA personnel, who were formerly employed by a licensee. -
Operating Income (Loss): The Company
reported a loss from operations for the second quarter, but its loss
improved by
$1.6 million to $(3.6) million compared with$(5.1) million in the second quarter of the prior year. Excluding the impact of foreign exchange, the Company’s operating loss improved by$2.0 million compared with the prior year. -
Adjusted EBITDA: Adjusted EBITDA for the
second quarter improved
$1.6 million to $1.0 million , compared with a loss of$(0.7) million in the second quarter of fiscal 2018. In constant currency, Adjusted EBITDA in the second quarter improved$2.1 million compared to the second quarter of fiscal 2018. -
Income Taxes: The lower tax benefit rate
in the second quarter of fiscal 2019 was primarily due to changes
resulting from the 2017 Tax Act, and included a reduced U.S. statutory
rate, tax expense from Global Intangible Low-taxed Income,
nondeductible expenses, 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
$1.2 million during the second quarter of fiscal 2018 as a provisional estimate of the effects of the 2017 Tax Act. -
Net Income (Loss): The Company reported a
second quarter 2019 net loss of
$(3.5) million compared with a net loss of$(2.7) million in the second quarter of fiscal 2018, reflecting the sharply reduced income tax benefit described above. -
Cash Flows from Operating Activities: The
Company’s cash flows from operating activities increased 43%, or
$4.0 million , to$13.4 million through the first two quarters of fiscal 2019, compared with$9.4 million through the first two quarters of fiscal 2018. -
Cash and Liquidity Remain Strong: The
Company’s balance sheet and liquidity position remained strong with
$13.1 million of cash atFebruary 28, 2019 , compared with$10.2 million atAugust 31, 2018 . AtFebruary 28, 2019 , the Company had$21.6 million of available borrowing on its revolving line of credit facility. -
Fiscal 2019 Outlook: The Company
reaffirms its previously announced Adjusted EBITDA guidance for fiscal
2019, which is expected to be in the range of
$18 million to $22 million , excluding the impact of foreign exchange, compared with$11.9 million in fiscal 2018.
Fiscal 2019 Year-to-Date Financial Results
Consolidated revenue for the first two quarters of fiscal 2019 increased
10% to
Selling, general, and administrative 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 2019; expected growth and profitability of the
subscription-based business model; expected growth and profitability of
the Education Division; 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 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
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) | ||||||||||||||||
Quarter Ended | Two Quarters Ended | |||||||||||||||
February 28, | February 28, | February 28, | February 28, | |||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Net sales | $ | 50,356 | $ | 46,547 | $ | 104,185 | $ | 94,479 | ||||||||
Cost of sales | 14,990 | 13,803 | 32,037 | 28,867 | ||||||||||||
Gross profit | 35,366 | 32,744 | 72,148 | 65,612 | ||||||||||||
Selling, general, and administrative | 35,925 | 35,097 | 70,568 | 68,921 | ||||||||||||
Depreciation | 1,697 | 1,379 | 3,251 | 2,280 | ||||||||||||
Amortization | 1,300 | 1,395 | 2,538 | 2,791 | ||||||||||||
Loss from operations | (3,556 | ) | (5,127 | ) | (4,209 | ) | (8,380 | ) | ||||||||
Interest expense, net | (371 | ) | (638 | ) | (975 | ) | (1,125 | ) | ||||||||
Loss before income taxes | (3,927 | ) | (5,765 | ) | (5,184 | ) | (9,505 | ) | ||||||||
Income tax benefit | 410 | 3,025 | 310 | 4,373 | ||||||||||||
Net loss | $ | (3,517 | ) | $ | (2,740 | ) | $ | (4,874 | ) | $ | (5,132 | ) | ||||
Net loss per common share: | ||||||||||||||||
Basic and diluted | $ | (0.25 | ) | $ | (0.20 | ) | $ | (0.35 | ) | $ | (0.37 | ) | ||||
Weighted average common shares: | ||||||||||||||||
Basic and diluted | 13,937 | 13,867 | 13,927 | 13,796 | ||||||||||||
Other data: | ||||||||||||||||
Adjusted EBITDA(1) | $ | 964 | $ | (668 | ) | $ | 4,133 | $ | (66 | ) |
(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 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 |
||||||||||||||||||
(in thousands and unaudited) |
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Quarter Ended | Two Quarters Ended | |||||||||||||||||
February 28, | February 28, | February 28, | February 28, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||||
Reconciliation of net loss to Adjusted EBITDA: | ||||||||||||||||||
Net loss | $ | (3,517 | ) | $ | (2,740 | ) | $ | (4,874 | ) | $ | (5,132 | ) | ||||||
Adjustments: | ||||||||||||||||||
Interest expense, net | 371 | 638 | 975 | 1,125 | ||||||||||||||
Income tax benefit | (410 | ) | (3,025 | ) | (310 | ) | (4,373 | ) | ||||||||||
Amortization | 1,300 | 1,395 | 2,538 | 2,791 | ||||||||||||||
Depreciation | 1,697 | 1,379 | 3,251 | 2,280 | ||||||||||||||
Stock-based compensation | 1,043 | 779 | 1,989 | 1,736 | ||||||||||||||
Increase in contingent consideration liabilities | 52 | 477 | 76 | 652 | ||||||||||||||
Licensee transition costs | 428 | - | 488 | - | ||||||||||||||
ERP implementation costs | - | 429 | - | 855 | ||||||||||||||
Adjusted EBITDA | $ | 964 | $ | (668 | ) | $ | 4,133 | $ | (66 | ) | ||||||||
Adjusted EBITDA margin | 1.9 | % | -1.4 | % | 4.0 | % | -0.1 | % | ||||||||||
FRANKLIN COVEY CO. |
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Additional Financial Information |
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(in thousands and unaudited) | ||||||||||||||||||
Quarter Ended | Two Quarters Ended | |||||||||||||||||
February 28, | February 28, | February 28, | February 28, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||||
Sales by Division/Segment: | ||||||||||||||||||
Enterprise Division: | ||||||||||||||||||
Direct offices | $ | 36,414 | $ | 33,275 | $ | 74,885 | $ | 67,471 | ||||||||||
International licensees | 2,906 | 3,046 | 6,583 | 6,366 | ||||||||||||||
39,320 | 36,321 | 81,468 | 73,837 | |||||||||||||||
Education Division | 9,698 | 9,007 | 20,044 | 18,183 | ||||||||||||||
Corporate and other | 1,338 | 1,219 | 2,673 | 2,459 | ||||||||||||||
Consolidated | $ | 50,356 | $ | 46,547 | $ | 104,185 | $ | 94,479 | ||||||||||
Gross Profit by Division/Segment: | ||||||||||||||||||
Enterprise Division: | ||||||||||||||||||
Direct offices | $ | 27,294 | $ | 24,881 | $ | 54,364 | $ | 49,442 | ||||||||||
International licensees | 2,221 | 2,364 | 5,084 | 4,866 | ||||||||||||||
29,515 | 27,245 | 59,448 | 54,308 | |||||||||||||||
Education Division | 5,429 | 5,163 | 11,822 | 10,593 | ||||||||||||||
Corporate and other | 422 | 336 | 878 | 711 | ||||||||||||||
Consolidated | $ | 35,366 | $ | 32,744 | $ | 72,148 | $ | 65,612 | ||||||||||
Adjusted EBITDA by Division/Segment: | ||||||||||||||||||
Enterprise Division: | ||||||||||||||||||
Direct offices | $ | 2,543 | $ | 1,331 | $ | 6,183 | $ | 3,723 | ||||||||||
International licensees | 1,218 | 1,162 | 2,846 | 2,572 | ||||||||||||||
3,761 | 2,493 | 9,029 | 6,295 | |||||||||||||||
Education Division | (909 | ) | (1,151 | ) | (1,174 | ) | (1,993 | ) | ||||||||||
Corporate and other | (1,888 | ) | (2,010 | ) | (3,722 | ) | (4,368 | ) | ||||||||||
Consolidated | $ | 964 | $ | (668 | ) | $ | 4,133 | $ | (66 | ) | ||||||||
FRANKLIN COVEY CO. |
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Condensed Consolidated Balance Sheets |
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(in thousands and unaudited) | |||||||||
February 28, | August 31, | ||||||||
2019 | 2018 | ||||||||
Assets |
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Current assets: | |||||||||
Cash | $ | 13,108 | $ | 10,153 | |||||
Accounts receivable, less allowance for | |||||||||
doubtful accounts of $4,185 and $3,555 | 50,591 | 71,914 | |||||||
Inventories | 2,840 | 3,160 | |||||||
Income taxes receivable | - | 179 | |||||||
Prepaid expenses and other current assets | 12,879 | 14,757 | |||||||
Total current assets | 79,418 | 100,163 | |||||||
Property and equipment, net | 19,725 | 21,401 | |||||||
Intangible assets, net | 50,146 | 51,934 | |||||||
Goodwill | 24,220 | 24,220 | |||||||
Deferred income tax assets | 5,652 | 3,222 | |||||||
Other long-term assets | 11,015 | 12,935 | |||||||
$ | 190,176 | $ | 213,875 | ||||||
Liabilities and Shareholders' Equity |
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Current liabilities: | |||||||||
Current portion of term notes payable | $ | 7,813 | $ | 10,313 | |||||
Current portion of financing obligation | 2,211 | 2,092 | |||||||
Accounts payable | 7,933 | 9,790 | |||||||
Income taxes payable | 107 | - | |||||||
Deferred revenue | 45,209 | 51,888 | |||||||
Accrued liabilities | 16,074 | 20,761 | |||||||
Total current liabilities | 79,347 | 94,844 | |||||||
Line of credit | 8,376 | 11,337 | |||||||
Term notes payable, less current portion | 1,875 | 2,500 | |||||||
Financing obligation, less current portion | 17,844 | 18,983 | |||||||
Other liabilities | 7,490 | 5,501 | |||||||
Deferred income tax liabilities | 210 | 210 | |||||||
Total liabilities | 115,142 | 133,375 | |||||||
Shareholders' equity: | |||||||||
Common stock | 1,353 | 1,353 | |||||||
Additional paid-in capital | 212,960 | 211,280 | |||||||
Retained earnings | 55,552 | 63,569 | |||||||
Accumulated other comprehensive income | 470 | 341 | |||||||
Treasury stock at cost, 13,109 and 13,159 shares | (195,301 | ) | (196,043 | ) | |||||
Total shareholders' equity | 75,034 | 80,500 | |||||||
$ | 190,176 | $ | 213,875 |
View source version on businesswire.com: https://www.businesswire.com/news/home/20190404005731/en/
Source:
Investor Contact:
Franklin Covey
Steve Young
801-817-1776
investor.relations@franklincovey.com
Media Contact:
Franklin Covey
Debra Lund
801-817-6440
Debra.Lund@franklincovey.com