Franklin Covey Reports Fiscal 2020 Third Quarter Results
COVID-19 Pandemic Restrictions Challenged Third Quarter Onsite Training and Coaching Delivery
Subscription Business Continues to Increase, Remains Strong and Durable with Deep Strategic and Operational Roots as Clients Increasingly Turn to Digital Delivery Systems, Including the All Access Pass and the Leader in Me Subscriptions
Company Continues to Build Momentum, Adds 25 Client Partners Bringing Total to 252 at
Cash Flows From Operating Activities Remains Strong at
Introduction
The Company’s third quarter results were significantly impacted by the spread of the COVID-19 pandemic and the resulting closure of offices and educational institutions throughout
Whitman continued, “While we know that the future is clouded by the COVID-19 pandemic and will present additional financial challenges, we believe our ongoing investments in offerings and electronic delivery capabilities uniquely position us to grow in the future. We believe now is the time to build on Franklin Covey’s strengths and distinct capabilities to help our clients solve problems and achieve greatness at both the individual and organizational level. We are continuing to invest in our biggest opportunities, including new and relevant content, and improved digital delivery of content to our clients. We believe these unique offerings and capabilities will enable
Financial Overview
The following is a summary of key financial results for the quarter ended
-
Net Sales : Consolidated sales for the third quarter of fiscal 2020 were$37.5 million , compared with sales of$56.0 million in the third quarter of the prior year. All of the Company’s business units were adversely impacted by the closure of offices, schools, and other gathering places inthe United States and in other countries throughout the world as governments, organizations, and individuals sought to slow the spread of COVID-19. The inability to deliver previously scheduled training, coaching days, and consulting resulted in reduced sales for both the Enterprise and Education Divisions. Enterprise Division sales for the third quarter of fiscal 2020 were$27.5 million compared with$43.4 million in the third quarter of fiscal 2020. Sales declined through both direct office and licensee operations. Education Division sales were$8.2 million in the third quarter of fiscal 2020, compared with$11.1 million in the third quarter of fiscal 2019, and decreased primarily due to reduced material sales and decreased coaching days delivered as educators transitioned to virtual classrooms and remote teaching. However, a significant number of the previously postponed or canceled training, coaching, and consulting days have been rescheduled and are now being delivered live on-line. -
Deferred Subscription Revenue and Unbilled Deferred Revenue: For the quarter ended
May 31, 2020 , the Company’s reported subscription revenue increased$3.4 million , or 18% compared with the third quarter of fiscal 2019. AtMay 31, 2020 , the Company had$43.9 million of deferred subscription revenue on its balance sheet, a 10%, or$4.0 million , increase compared with deferred subscription revenue on the balance sheet atMay 31, 2019 . AtMay 31, 2020 , the Company also had$33.4 million of unbilled deferred revenue, a 41%, or$9.7 million , increase compared with$23.7 million of unbilled deferred revenue atMay 31, 2019 . Unbilled deferred revenue represents business that is contracted but unbilled, and excluded from the Company’s balance sheet. -
Gross profit: Third quarter 2020 gross profit was
$26.8 million compared with$39.7 million in fiscal 2019 and declined due to decreased sales compared with the prior year. The Company’s gross margin for the quarter endedMay 31, 2020 improved 146 basis points to 72.3% of sales compared with 70.8% in the third quarter of the prior year, reflecting increased subscription revenues in the overall mix of sales. -
Operating Expenses: The Company’s operating expenses for the quarter ended
May 31, 2020 decreased$14.6 million compared with the prior year, which was primarily due to decreased selling, general, and administrative (SG&A) expenses and reduced stock-based compensation expense. Decreased SG&A expense was primarily related to decreased variable compensation such as commissions, bonuses, and incentives; decreased travel and entertainment; decreased contingent consideration liability expense; and cost savings from various other areas of the Company’s operations. The Company reevaluates its stock-based compensation instruments at each reporting date. Due to the adverse impact of COVID-19 and uncertainties related to the expected recovery, the Company determined that certain tranches of previously granted performance awards would not vest prior to their expiration. The Company reversed the previously recognized stock-based compensation expense for these tranches, which resulted in a net credit to stock-based compensation of$5.1 million in the third quarter of fiscal 2020. Partially offsetting these decreased costs were additional sales personnel that have been hired over previous quarters. AtMay 31, 2020 , the Company had 252 client partners compared with 227 client partners atMay 31, 2019 . -
Operating Loss: The Company reported a loss from operations for the third quarter of fiscal 2020, but its loss improved to
$(0.1) million compared with$(1.9) million in the third quarter of fiscal 2019. -
Adjusted EBITDA: Adjusted EBITDA for the third quarter was a loss of
$(3.6) million compared with earnings of$3.1 million in the third quarter of the prior year, reflecting the significant decrease in sales resulting from the COVID-19 pandemic. -
Income Taxes: The Company’s income tax provision for the quarter ended
May 31, 2020 was$10.2 million on a pre-tax loss of$0.7 million , compared with an income tax benefit of$0.4 million on a pre-tax loss of$2.4 million in the third quarter of fiscal 2019. The significant increase in income tax expense for the third quarter of fiscal 2020 was primarily due to a$10.2 million increase in the valuation allowance on the Company’s deferred tax assets. Because of cumulative pre-tax losses over the past three fiscal years, combined with the expected continued disruptions and negative impact to the Company’s business resulting from uncertainties related to the recovery from the pandemic, the Company determined that it is more-likely-than-not that insufficient taxable income will be available to realize all of the deferred tax assets, primarily foreign tax credit carryforwards and a portion of its net operating loss carryforwards, before they expire. -
Net Loss: The Company reported a net loss of
$(11.0) million , or$(.79) per share, for the third quarter of fiscal 2020, compared with a net loss of$(2.0) million , or ($0.14 ) per share, in the third 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
$37.0 million of cash atMay 31, 2020 , compared with$27.7 million atAugust 31, 2019 . Cash flows from operating activities for the first three quarters of fiscal 2020 increased to$18.7 million , compared with$18.6 million in the first three quarters of fiscal 2019, despite the challenging economic environment in the third quarter of fiscal 2020.
Fiscal 2020 Year-to-Date Financial Results
After a strong start in the first half of fiscal 2020, which saw consolidated sales increase 8% over the first two quarters of fiscal 2019, the Company’s year-to-date results through
Operating expenses for the first three quarters of fiscal 2020 decreased
Fiscal 2020 Outlook
Despite the Company’s strong results for the first half of fiscal 2020, the Company previously withdrew its guidance and assumptions for fiscal 2020 due to the adverse impacts of the COVID-19 pandemic and the ongoing uncertainties related to business, governmental, and educational institution disruptions. The Company remains confident, however, that once national and local economies begin to return to normalcy, the same factors that have driven Franklin Covey’s growth trajectory across recent years, will help the Company 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 loss, a related GAAP financial measure.
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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|||||
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2020 |
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|
2019 |
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2020 |
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2019 |
|
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| Net sales |
|
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|
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|
|
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|||||
| Cost of sales |
10,284 |
|
16,342 |
|
41,946 |
|
48,379 |
|
|||||
| Gross profit |
26,821 |
|
39,664 |
|
107,517 |
|
111,812 |
|
|||||
| Selling, general, and administrative |
29,254 |
|
37,662 |
|
101,231 |
|
106,242 |
|
|||||
| Stock-based compensation |
(5,104 |
) |
1,051 |
|
(1,460 |
) |
3,040 |
|
|||||
| Depreciation |
1,652 |
|
1,556 |
|
4,925 |
|
4,806 |
|
|||||
| Amortization |
1,164 |
|
1,259 |
|
3,504 |
|
3,797 |
|
|||||
| Loss from operations |
(145 |
) |
(1,864 |
) |
(683 |
) |
(6,073 |
) |
|||||
| Interest expense, net |
(603 |
) |
(554 |
) |
(1,747 |
) |
(1,529 |
) |
|||||
| Loss before income taxes |
(748 |
) |
(2,418 |
) |
(2,430 |
) |
(7,602 |
) |
|||||
| Income tax benefit (provision) |
(10,220 |
) |
394 |
|
(7,985 |
) |
704 |
|
|||||
| Net loss |
$ (10,968 |
) |
$ (2,024 |
) |
$ (10,415 |
) |
$ (6,898 |
) |
|||||
| Net loss per common share: | |||||||||||||
| Basic and diluted |
$ (0.79 |
) |
$ (0.14 |
) |
$ (0.75 |
) |
$ (0.49 |
) |
|||||
| Weighted average common shares: | |||||||||||||
| Basic and diluted |
13,869 |
|
13,963 |
|
13,897 |
|
13,939 |
|
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| Other data: | |||||||||||||
| Adjusted EBITDA(1) |
$ (3,642 |
) |
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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 Loss to Adjusted EBITDA as shown below. |
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Reconciliation of Net 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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2020 |
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|
2019 |
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|
2020 |
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|
2019 |
|
| Reconciliation of net loss to Adjusted EBITDA: | ||||||||||||||
| Net loss |
$ (10,968 |
) |
$ (2,024 |
) |
$ (10,415 |
) |
$ (6,898 |
) |
||||||
| Adjustments: | ||||||||||||||
| Interest expense, net |
603 |
|
554 |
|
1,747 |
|
1,529 |
|
||||||
| Income tax provision (benefit) |
10,220 |
|
(394 |
) |
7,985 |
|
(704 |
) |
||||||
| Amortization |
1,164 |
|
1,259 |
|
3,504 |
|
3,797 |
|
||||||
| Depreciation |
1,652 |
|
1,556 |
|
4,925 |
|
4,806 |
|
||||||
| Stock-based compensation |
(5,104 |
) |
1,051 |
|
(1,460 |
) |
3,040 |
|
||||||
| Increase (decrease) in the fair value of contingent | ||||||||||||||
| consideration liabilities |
(276 |
) |
1,069 |
|
(367 |
) |
1,145 |
|
||||||
| Gain from insurance settlement |
(933 |
) |
- |
|
(933 |
) |
- |
|
||||||
|
- |
|
- |
|
389 |
|
- |
|
|||||||
| Licensee transition costs |
- |
|
- |
|
- |
|
488 |
|
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| Adjusted EBITDA |
$ (3,642 |
) |
|
|
|
|
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|
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| Adjusted EBITDA margin |
-9.8 |
% |
5.5 |
% |
3.6 |
% |
4.5 |
% |
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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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2020 |
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2019 |
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2020 |
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2019 |
|
| Sales by Division/Segment: | ||||||||||||||
| Enterprise Division: | ||||||||||||||
| Direct offices |
|
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|
|
|
|
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|
||||||
| International licensees |
708 |
|
3,014 |
|
7,120 |
|
9,598 |
|
||||||
|
27,468 |
|
43,401 |
|
113,964 |
|
124,869 |
|
|||||||
| Education Division |
8,216 |
|
11,088 |
|
30,190 |
|
31,132 |
|
||||||
| Corporate and other |
1,421 |
|
1,517 |
|
5,309 |
|
4,190 |
|
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| Consolidated |
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| Gross Profit by Division/Segment: | ||||||||||||||
| Enterprise Division: | ||||||||||||||
| Direct offices |
|
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| International licensees |
339 |
|
2,432 |
|
5,696 |
|
7,515 |
|
||||||
|
21,447 |
|
32,268 |
|
86,917 |
|
91,715 |
|
|||||||
| Education Division |
4,711 |
|
6,846 |
|
17,828 |
|
18,668 |
|
||||||
| Corporate and other |
663 |
|
550 |
|
2,772 |
|
1,429 |
|
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| Consolidated |
|
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| Adjusted EBITDA by Division/Segment: | ||||||||||||||
| Enterprise Division: | ||||||||||||||
| Direct offices |
|
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| International licensees |
(724 |
) |
1,281 |
|
2,696 |
|
4,127 |
|
||||||
|
(372 |
) |
5,801 |
|
13,492 |
|
14,830 |
|
|||||||
| Education Division |
(1,536 |
) |
(181 |
) |
(3,707 |
) |
(1,355 |
) |
||||||
| Corporate and other |
(1,734 |
) |
(2,549 |
) |
(4,410 |
) |
(6,272 |
) |
||||||
| Consolidated |
$ (3,642 |
) |
|
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Condensed Consolidated Balance Sheets |
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(in thousands and unaudited) |
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2020 |
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2019 |
|
| Assets | ||||||
| Current assets: | ||||||
| Cash and cash equivalents |
|
|
|
|
||
| Accounts receivable, less allowance for | ||||||
| doubtful accounts of |
38,612 |
|
73,227 |
|
||
| Inventories |
3,106 |
|
3,481 |
|
||
| Prepaid expenses and other current assets |
13,295 |
|
14,933 |
|
||
| Total current assets |
92,019 |
|
119,340 |
|
||
| Property and equipment, net |
16,894 |
|
18,579 |
|
||
| Intangible assets, net |
44,189 |
|
47,690 |
|
||
|
24,220 |
|
24,220 |
|
|||
| Deferred income tax assets |
1,388 |
|
5,045 |
|
||
| Other long-term assets |
14,894 |
|
10,039 |
|
||
|
|
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|
|||
| Liabilities and Shareholders' Equity | ||||||
| Current liabilities: | ||||||
| Current portion of term notes payable |
|
|
|
|
||
| Current portion of financing obligation |
2,532 |
|
2,335 |
|
||
| Accounts payable |
3,922 |
|
9,668 |
|
||
| Deferred subscription revenue |
42,794 |
|
56,250 |
|
||
| Other deferred revenue |
7,915 |
|
5,972 |
|
||
| Accrued liabilities |
18,212 |
|
24,319 |
|
||
| Total current liabilities |
80,375 |
|
103,544 |
|
||
| Line of credit |
14,870 |
|
- |
|
||
| Term notes payable, less current portion |
16,250 |
|
15,000 |
|
||
| Financing obligation, less current portion |
14,726 |
|
16,648 |
|
||
| Other liabilities |
6,061 |
|
7,527 |
|
||
| Deferred income tax liabilities |
4,274 |
|
180 |
|
||
| Total liabilities |
136,556 |
|
142,899 |
|
||
| Shareholders' equity: | ||||||
| Common stock |
1,353 |
|
1,353 |
|
||
| Additional paid-in capital |
211,067 |
|
215,964 |
|
||
| Retained earnings |
48,988 |
|
59,403 |
|
||
| Accumulated other comprehensive income |
231 |
|
269 |
|
||
|
(204,591 |
) |
(194,975 |
) |
|||
| Total shareholders' equity |
57,048 |
|
82,014 |
|
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View source version on businesswire.com: https://www.businesswire.com/news/home/20200709005914/en/
Investor Contact:
801-817-1776
investor.relations@franklincovey.com
Media Contact:
801-817-6440
Debra.Lund@franklincovey.com
Source: