Franklin Covey Reports Fourth Quarter and Fiscal Year 2020 Results
Net Income and Adjusted EBITDA for the Fourth Quarter Exceed Expectations
Company’s Powerful Subscription Business Growth Engine, Including the All Access Pass and Leader in Me Membership, Show Continued Strong Growth, High Revenue Retention, and Durability with Clients
Liquidity, Financial Position, and Cash Flows From Operating Activities Remain Strong at
Introduction
While the Company’s fourth quarter 2020 results were impacted by the COVID-19 pandemic, the Company was pleased that due to the continued strength of its subscription business and its quick pivot to delivering content live-online and through other digital modalities, its fourth quarter financial results were better-than-expected. The Company’s revenues were favorably impacted by the continued strength of its subscription business, driven by the All Access Pass (AAP) in the Enterprise Division and the Leader in Me membership in the Education Division. Throughout the pandemic, the Company’s AAP sales have been strong and resilient. During the third and fourth quarters of fiscal 2020, All Access Pass sales grew 15% compared with the prior year, and both Pass sales to new logos and multi-year contract sales increased over the prior year. Fiscal 2020 AAP revenue retention also remained strong at over 90% for the year. Following the initial impact of the pandemic, the Company’s U.S.\Canada and governmental clients quickly transitioned to the Company’s live-online and digital delivery options, and by July the Company’s booking pace for add-on coaching and services was equal to that achieved in prior year and then exceeded last year’s pace through August. The Company remains optimistic that sales and revenue retention for All Access Pass subscription sales, and the booking pace for All Access Pass-related add-on services will continue to be strong in both the current and future periods. The Company’s
Through continued subscription business strength, recovering services revenue, improved margins, and lower costs, the Company was able to exceed expectations for net income and adjusted earnings before interest, income taxes, depreciation, and amortization (Adjusted EBITDA). In addition, the Company’s liquidity, financial position, and cash flows from operating activities remained strong at
Whitman continued, “Organizations of all kinds face what can seem like intractable challenges relating to getting the most from their people and organizations, executing with excellence, etc., and the current environment only adds to the difficulty of successfully addressing these challenges. However, these are exactly the challenges which Franklin Covey’s ongoing significant investments in best-in-class content and solutions are focused on addressing. Further, our ongoing investments in technology have provided customers with the ability to access the full collection of our solutions, through almost any modality, in any segment of time, on nearly any device, and in more than 20 languages worldwide through our All Access Pass and Leader in Me subscription offerings. Customers have found this value proposition to be very compelling both before and during these unusual times. We are confident that, driven by its All Access Pass and Leader in Me subscription businesses,
Financial Overview
The following is a summary of key financial results for the quarter ended
-
Net Sales : Consolidated sales for the fourth quarter of fiscal 2020 were$49.0 million , compared with sales of$65.2 million in the fourth quarter of fiscal 2019, reflecting that while sales of the Company’s All Access Pass subscription service remained strong, the need to reschedule training, coaching, and consulting days, which had previously been scheduled live onsite at client locations resulted in reduced sales in certain of the Company’s international direct offices, international licensees, in the Education Division, and in theU.S. andCanada . Enterprise Division sales for the fourth quarter of fiscal 2020 were$34.3 million compared with$45.8 million in the fourth quarter of fiscal 2019, with the Enterprise Division’s international direct and licensee operations accounting for the majority of the decline in revenue, reflecting that these operations had only a very small base of subscription and subscription-related revenue entering this period. The Company is encouraged by strong subscription renewals and improving trends in new training and coaching events as it begins fiscal 2021. Education Division sales were$13.2 million in the fourth quarter of fiscal 2020, compared with$17.7 million in the fourth quarter of the prior year, reflecting primarily that while the Education Division was able to add 320 new Leader in Me schools, primarily during the pandemic, this number was lower than in last year’s fourth quarter due to the tremendous disruption and uncertainties that schools have faced. On the other hand, the Leader in Me membership subscription business remained strong, with nearly 2,200 schools renewing their Leader in Me subscriptions (a higher number than in fiscal 2019). As a result, total subscription revenue from Leader in Me memberships increased 11% for the year endedAugust 31, 2020 , compared with fiscal 2019. The Company continues to be encouraged by the acceptance and resilience of its subscription and subscription-related services during the pandemic and believes this strength sets a solid foundation for fiscal 2021. -
Deferred Subscription Revenue and Unbilled Deferred Revenue: For the quarter ended
August 31, 2020 , the Company’s reported subscription revenue increased$2.2 million , or 11% compared with the fourth quarter of fiscal 2019. AtAugust 31, 2020 , the Company had$60.6 million of deferred subscription revenue on its balance sheet compared with$58.2 million of deferred subscription revenue atAugust 31, 2019 . AtAugust 31, 2020 , the Company had$39.6 million of unbilled deferred revenue, a 32%, or$9.7 million , increase compared with$29.9 million of unbilled deferred revenue atAugust 31, 2019 . Unbilled deferred revenue represents business that is contracted but unbilled, and excluded from the Company’s balance sheet. -
Gross profit: Fourth quarter 2020 gross profit totaled
$37.9 million compared with$47.5 million in the prior year and declined primarily due to a decrease in services sales compared with fiscal 2019. The Company’s gross margin for the quarter endedAugust 31, 2020 improved 437 basis points to 77.3% of sales compared with 72.9% in the fourth quarter of fiscal 2019, reflecting increased subscription and decreased onsite and facilitator revenues in the overall mix of sales. -
Operating Expenses: The Company’s operating expenses for the quarter ended
August 31, 2020 decreased$4.7 million compared with fiscal 2019, 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; 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 timing of the expected recovery, the Company determined that certain tranches of previously granted performance awards would not vest prior to their expiration. No stock-based compensation expense was recorded for these tranches during the fourth quarter of fiscal 2020. Partially offsetting these decreased costs were$1.6 million of costs to restructure certain information technology and central operational functions, marketing functions, and the investment in additional sales personnel that have been hired over previous quarters. AtAugust 31, 2020 , the Company had 254 client partners compared with 245 client partners atAugust 31, 2019 . -
Operating Income: The Company reported
$3.7 million of income from operations for the fourth quarter of fiscal 2020, compared with operating income of$8.7 million in the fourth quarter of the prior year. -
Income Taxes: The Company’s income tax provision for the quarter ended
August 31, 2020 was$2.2 million , compared with$2.3 million in the fourth quarter of fiscal 2019. The increase in the effective income tax rate in the fourth quarter of fiscal 2020 was primarily due to$1.1 million of additional income tax expense from an increase in the valuation allowance against the Company’s deferred income tax assets. In consideration of the relevant accounting literature, we reevaluated our valuation allowances in fiscal 2020. As a result 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 was unable to overcome accounting guidance indicating that it is more-likely-than-not that insufficient taxable income will be available to realize all of its deferred tax assets before they expire. These deferred tax assets consist primarily of foreign tax credit carryforwards and a portion of its net operating loss carryforwards. -
Net Income: The Company reported net income of
$1.0 million , or$.07 per diluted share, for the fourth quarter of fiscal 2020, compared with$5.9 million , or$0.41 per diluted share, in the fourth quarter of the prior year, reflecting the above-noted factors. -
Adjusted EBITDA: Adjusted EBITDA for the fourth quarter was
$8.9 million compared with$13.4 million in the fourth quarter of the prior year, reflecting the decrease in sales resulting from the COVID-19 pandemic. -
Cash and Liquidity Remain Strong: The Company’s balance sheet and liquidity position remained strong with
$27.1 million of cash atAugust 31, 2020 , and no borrowings on its$15.0 million line of credit, compared with$27.7 million atAugust 31, 2019 . Cash flows from operating activities for fiscal 2020 remained solid at$27.6 million , compared with$30.5 million in fiscal 2019, despite the challenging economic environment in the second half of fiscal 2020.
Full Year Fiscal 2020 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 fiscal 2020 results were adversely affected by the impact of the COVID-19 pandemic on third and fourth quarter results. Consolidated sales for the fiscal year ended
Operating expenses in fiscal 2020 decreased
Fiscal 2021 Outlook
Based on current expectations, including the duration and anticipated economic recovery from the COVID-19 pandemic, the Company 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; 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.
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
Condensed Consolidated Statements of Operations | ||||||||||||
(in thousands, except per-share amounts, and unaudited) | ||||||||||||
Quarter Ended |
|
Fiscal Year Ended |
||||||||||
|
|
|
|
|
|
|
||||||
2020 |
|
2019 |
|
2020 |
|
2019 |
||||||
Net sales |
|
|
|
|
|
|
|
|
||||
Cost of sales |
11,140 |
|
17,663 |
|
53,086 |
|
66,042 |
|
||||
Gross profit |
37,854 |
|
47,502 |
|
145,370 |
|
159,314 |
|
||||
Selling, general, and administrative |
28,749 |
|
34,288 |
|
129,979 |
|
140,530 |
|
||||
Stock-based compensation |
887 |
|
1,749 |
|
(573 |
) |
4,789 |
|
||||
Restructuring costs |
1,636 |
|
- |
|
1,636 |
|
- |
|
||||
Depreciation |
1,739 |
|
1,558 |
|
6,664 |
|
6,364 |
|
||||
Amortization |
1,102 |
|
1,179 |
|
4,606 |
|
4,976 |
|
||||
Income from operations |
3,741 |
|
8,728 |
|
3,058 |
|
2,655 |
|
||||
Interest expense, net |
(515 |
) |
(534 |
) |
(2,262 |
) |
(2,063 |
) |
||||
Income before income taxes |
3,226 |
|
8,194 |
|
796 |
|
592 |
|
||||
Income tax provision |
(2,246 |
) |
(2,319 |
) |
(10,231 |
) |
(1,615 |
) |
||||
Net income (loss) |
|
|
|
|
$ (9,435 |
) |
$ (1,023 |
) |
||||
Net income (loss) per common share: | ||||||||||||
Basic |
|
|
|
|
$ (0.68 |
) |
$ (0.07 |
) |
||||
Diluted |
0.07 |
|
0.41 |
|
(0.68 |
) |
(0.07 |
) |
||||
Weighted average common shares: | ||||||||||||
Basic |
13,876 |
|
13,974 |
|
13,892 |
|
13,948 |
|
||||
Diluted |
13,941 |
|
14,227 |
|
13,892 |
|
13,948 |
|
||||
Other data: | ||||||||||||
Adjusted EBITDA(1) |
|
|
|
|
|
|
|
|
(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 |
|
Fiscal Year Ended |
||||||||||||
|
|
|
|
|
|
|
||||||||
2020 |
|
2019 |
|
2020 |
|
2019 |
||||||||
Reconciliation of net income (loss) to Adjusted EBITDA: | ||||||||||||||
Net income (loss) |
|
|
|
|
$ (9,435 |
) |
$ (1,023 |
) |
||||||
Adjustments: | ||||||||||||||
Interest expense, net |
515 |
|
534 |
|
2,262 |
|
2,063 |
|
||||||
Income tax provision |
2,246 |
|
2,319 |
|
10,231 |
|
1,615 |
|
||||||
Amortization |
1,102 |
|
1,179 |
|
4,606 |
|
4,976 |
|
||||||
Depreciation |
1,739 |
|
1,558 |
|
6,664 |
|
6,364 |
|
||||||
Stock-based compensation |
887 |
|
1,749 |
|
(573 |
) |
4,789 |
|
||||||
Increase in the fair value of contingent | ||||||||||||||
consideration liabilities |
318 |
|
189 |
|
(49 |
) |
1,334 |
|
||||||
Restructuring costs |
1,636 |
|
- |
|
1,636 |
|
- |
|
||||||
Government COVID-19 assistance proceeds |
(514 |
) |
- |
|
(514 |
) |
- |
|
||||||
Gain from insurance settlement |
- |
|
- |
|
(933 |
) |
- |
|
||||||
- |
|
- |
|
389 |
|
- |
|
|||||||
Licensee transition costs |
- |
|
- |
|
- |
|
488 |
|
||||||
Adjusted EBITDA |
|
|
|
|
|
|
|
|
||||||
Adjusted EBITDA margin |
18.2 |
% |
20.6 |
% |
7.2 |
% |
9.1 |
% |
Additional Financial Information | ||||||||||||||
(in thousands and unaudited) | ||||||||||||||
Quarter Ended |
|
Fiscal Year Ended |
||||||||||||
|
|
|
|
|
|
|
||||||||
2020 |
|
2019 |
|
2020 |
|
2019 |
||||||||
Sales by Division/Segment: | ||||||||||||||
Enterprise Division: | ||||||||||||||
Direct offices |
|
|
|
|
|
|
|
|
||||||
International licensees |
1,332 |
|
3,298 |
|
8,451 |
|
12,896 |
|
||||||
34,268 |
|
45,780 |
|
148,231 |
|
170,650 |
|
|||||||
Education Division |
13,215 |
|
17,748 |
|
43,405 |
|
48,880 |
|
||||||
Corporate and other |
1,511 |
|
1,637 |
|
6,820 |
|
5,826 |
|
||||||
Consolidated |
|
|
|
|
|
|
|
|
||||||
Gross Profit by Division/Segment: | ||||||||||||||
Enterprise Division: | ||||||||||||||
Direct offices |
|
|
|
|
|
|
|
|
||||||
International licensees |
983 |
|
2,716 |
|
6,679 |
|
10,231 |
|
||||||
27,907 |
|
35,270 |
|
114,823 |
|
126,986 |
|
|||||||
Education Division |
9,271 |
|
11,705 |
|
27,099 |
|
30,373 |
|
||||||
Corporate and other |
676 |
|
527 |
|
3,448 |
|
1,955 |
|
||||||
Consolidated |
|
|
|
|
|
|
|
|
||||||
Adjusted EBITDA by Division/Segment: | ||||||||||||||
Enterprise Division: | ||||||||||||||
Direct offices |
|
|
|
|
|
|
|
|
||||||
International licensees |
(290 |
) |
1,945 |
|
2,406 |
|
6,072 |
|
||||||
6,609 |
|
10,698 |
|
20,100 |
|
25,527 |
|
|||||||
Education Division |
3,617 |
|
4,909 |
|
(90 |
) |
3,553 |
|
||||||
Corporate and other |
(1,317 |
) |
(2,204 |
) |
(5,726 |
) |
(8,474 |
) |
||||||
Consolidated |
|
|
|
|
|
|
|
|
||||||
Condensed Consolidated Balance Sheets | ||||||
(in thousands and unaudited) | ||||||
|
|
|
||||
2020 |
|
2019 |
||||
Assets | ||||||
Current assets: | ||||||
Cash and cash equivalents |
|
|
|
|
||
Accounts receivable, less allowance for | ||||||
doubtful accounts of |
56,407 |
|
73,227 |
|
||
Inventories |
2,974 |
|
3,481 |
|
||
Prepaid expenses and other current assets |
15,146 |
|
14,933 |
|
||
Total current assets |
101,664 |
|
119,340 |
|
||
Property and equipment, net |
15,723 |
|
18,579 |
|
||
Intangible assets, net |
47,125 |
|
47,690 |
|
||
24,220 |
|
24,220 |
|
|||
Deferred income tax assets |
1,094 |
|
5,045 |
|
||
Other long-term assets |
15,611 |
|
10,039 |
|
||
|
|
|
|
|||
Liabilities and Shareholders' Equity | ||||||
Current liabilities: | ||||||
Current portion of term notes payable |
|
|
|
|
||
Current portion of financing obligation |
2,600 |
|
2,335 |
|
||
Accounts payable |
5,622 |
|
9,668 |
|
||
Deferred subscription revenue |
59,289 |
|
56,250 |
|
||
Other deferred revenue |
7,389 |
|
5,972 |
|
||
Accrued liabilities |
22,628 |
|
24,319 |
|
||
Total current liabilities |
102,528 |
|
103,544 |
|
||
Term notes payable, less current portion |
15,000 |
|
15,000 |
|
||
Financing obligation, less current portion |
14,048 |
|
16,648 |
|
||
Other liabilities |
9,110 |
|
7,527 |
|
||
Deferred income tax liabilities |
5,298 |
|
180 |
|
||
Total liabilities |
145,984 |
|
142,899 |
|
||
Shareholders' equity: | ||||||
Common stock |
1,353 |
|
1,353 |
|
||
Additional paid-in capital |
211,920 |
|
215,964 |
|
||
Retained earnings |
49,968 |
|
59,403 |
|
||
Accumulated other comprehensive income |
641 |
|
269 |
|
||
(204,429 |
) |
(194,975 |
) |
|||
Total shareholders' equity |
59,453 |
|
82,014 |
|
||
|
|
|
|
View source version on businesswire.com: https://www.businesswire.com/news/home/20201105006106/en/
Investor Contact:
801-817-1776
investor.relations@franklincovey.com
Media Contact:
801-817-6440
Debra.Lund@franklincovey.com
Source: