Franklin Covey Reports Strong Third Quarter 2022 Financial Results
Third Quarter Sales Increase 13% to a Record
All Access Pass Subscription and Subscription Services Sales Grow 32% to
Sum of Billed and Unbilled Deferred Subscription Revenue Increases 21% to
Operating Income and Adjusted EBITDA Exceed Expectations, Operating Income Increases to
Liquidity Remains Strong, Cash Flows from Operating Activities Increase 28% to
Company Increases Earnings Guidance for Fiscal 2022
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, 2022 continued the trend of strong growth across fiscal 2021. Consolidated sales for the third quarter increased 13% to$66.2 million compared with$58.7 million in fiscal 2021. Rolling four quarter sales throughMay 31, 2022 increased 24% to$253.0 million . The Company’s sales increased during the third quarter of fiscal 2022, primarily due to strong subscription and subscription services sales, including the following:-
All Access Pass subscription and subscription services sales grew 32% to
$39.1 million in the third quarter compared with the same quarter of fiscal 2021. - Education Division revenues grew 21% on the strength of increased consulting, coaching, and training days delivered during the quarter, increased recognition of previously deferred revenue related to Leader in Me subscriptions, and increased training and classroom material sales.
-
The sum of billed and unbilled deferred revenue at
May 31, 2022 grew 21% to$116.5 million , compared withMay 31, 2021 . Approximately 42% of the Company’s All Access Pass subscriptions are multi-year contracts.
-
All Access Pass subscription and subscription services sales grew 32% to
The Company was pleased with its overall sales growth during the quarter despite some international headwinds, including a 66% decrease in
-
On the strength of increased sales and continued strong gross margins, gross profit for the third quarter increased 11% to
$51.1 million compared with$45.9 million in 2021. -
Operating income increased 91%, or
$2.8 million , to$5.9 million in the third quarter compared with$3.1 million in fiscal 2021. -
Adjusted EBITDA increased 27% to
$10.9 million for the quarter endedMay 31, 2022 compared with$8.6 million in fiscal 2021. Rolling four-quarter Adjusted EBITDA increased 50% to$39.4 million compared with$26.3 million for the corresponding period in fiscal 2021. -
Cash flows provided by operating activities for the three quarters ended
May 31, 2022 increased 28% to$39.5 million compared with$30.9 million in fiscal 2021. -
With
$52.1 million of cash and$15 million available on its revolving line of credit, the Company’s liquidity totaled more than$67 million atMay 31, 2022 despite using$20.3 million of cash to repurchase over 499,000 shares of its common stock on the open market during the third quarter.
Walker continued, “Our strong results in fiscal 2022 have been driven by five key factors. First, the markets we have chosen to serve are large and growing. These market conditions provide us with significant opportunities for growth and to increase our share of these markets. Second, our focus is on the most important and durable space within these markets. The opportunities and challenges we help our clients address are very durable and provide us with the opportunity to partner with them in both favorable and more challenging times. Third, our subscription model is a powerful engine that drives growth, recurring revenue, improved predictability of future revenues, and a high flow through of revenue to profitability and cash flow. Fourth, we have compelling opportunities for growth. The combination of the large and growing markets we serve, the importance of the challenges we help our clients address, and the strength of our subscription business model create a number of exciting global growth opportunities. And fifth, our strong cash flow has and can be invested to create additional value for shareholders. We believe these factors will combine to produce continued growth in revenues, Adjusted EBITDA, and cash flows both in the remainder of fiscal 2022 and in future periods.”
Financial Overview
The following is a summary of financial results for the third quarter of fiscal 2022:
-
Net Sales : Consolidated sales for the quarter endedMay 31, 2022 increased 13% to$66.2 million , compared with$58.7 million in the third quarter of fiscal 2021. The Company was pleased with the continued strength of the All Access Pass and Leader in Me subscription-based services and believes its electronic delivery capabilities (including the delivery of subscription services live-online) of these offerings have allowed its business performance to remain strong even during the pandemic and ongoing recovery. For the third quarter of fiscal 2022, Enterprise Division sales grew 11%, or$4.9 million , to$50.0 million compared with$45.1 million in fiscal 2021, despite significantly decreased sales inChina andJapan during the quarter, primarily as a result of the ongoing pandemic and its impact on those economies. AAP subscription and subscription services sales increased 32% to$39.1 million , and annual revenue retention remained strong at well above 90%. Increased subscription sales are initially deferred and recorded on the Company’s balance sheet, and provide a solid base for growth in future periods. Decreased sales inChina andJapan were partially offset by increased sales in the Company’s other international direct offices as the economies in those countries improved during the quarter. International licensee revenues continue to improve and increased 9% compared with the prior year, despite the resurgence of COVID-19 and new lockdowns, especially inAsia and certain other countries. Education Division sales grew 21%, or$2.5 million , to$14.4 million compared with$11.9 million in the third quarter of fiscal 2021. Education Division sales grew on the strength of increased consulting, coaching, and training days delivered during the quarter, increased recognition of previously deferred revenue related to Leader in Me subscriptions, and increased training and classroom material sales. -
Deferred Subscription Revenue and Unbilled Deferred Revenue: At
May 31, 2022 , the Company had$116.5 million of billed and unbilled deferred subscription revenue, a 21%, or$19.9 million increase over the balance atMay 31, 2021 . This total includes$68.5 million of deferred subscription revenue which was on its balance sheet, a 24%, or$13.2 million increase compared with deferred subscription revenue atMay 31, 2021 . AtMay 31, 2022 , the Company had$48.0 million of unbilled deferred revenue, a 16%, or$6.7 million increase compared with$41.3 million of unbilled deferred revenue atMay 31, 2021 . 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 increased to
$55.1 million in the third quarter compared with$45.9 million in fiscal 2021. The Company’s gross margin for the quarter endedMay 31, 2022 remained strong and was 77.3 percent of sales compared with 78.2 percent in the prior year. -
Operating Expenses: The Company’s operating expenses for the quarter ended
May 31, 2022 increased$2.4 million compared with the third quarter of fiscal 2021, which was primarily due to a$2.5 million increase in selling, general, and administrative (SG&A) expenses. Despite the increase in SG&A expenses, as a percent of sales, SG&A expenses decreased to 64.4 percent in fiscal 2022 compared with 68.3 percent in the prior year. The Company’s SG&A expenses increased primarily due to increased associate costs, resulting from new personnel and increased salaries; increased commissions on higher sales; increased travel expense; and increased marketing and advertising expenses. -
Operating Income: As a result of increased sales and a continued strong gross margin, the Company’s income from operations for the third quarter of fiscal 2022 improved 91%, or
$2.8 million , to$5.9 million compared with$3.1 million in the third quarter of fiscal 2021. -
Pre-Tax Income: The Company’s pre-tax income for the quarter increased 114%, or
$3.0 million , to$5.6 million , compared with$2.6 million in the third quarter of the prior year.
-
Income Taxes: The Company recognized an income tax benefit for the quarter ended
May 31, 2022 of$1.6 million on pre-tax income of$5.6 million , for an effective income tax benefit rate of approximately 29 percent, compared with an effective tax benefit rate of approximately 390 percent in the third quarter of the prior year. The income tax benefit in fiscal 2022 resulted primarily from the utilization of$3.0 million of foreign tax credits which were not expected to be used and had a valuation allowance against them, as well as a$0.5 million tax benefit from the federal tax deduction for Foreign-Derived Intangibles Income (FDII), which were partially offset by disallowed deductions for executive compensation. The Company’s unusual income tax benefit in fiscal 2021 was primarily the result of a$10.9 million reduction in the valuation allowance against certain deferred tax assets, based on a return to a three-year cumulative pre-tax income measurement during the third quarter of fiscal 2021 and the outlook for continued strong financial performance. -
Net Income: As a result of the factors described above, the Company’s third quarter net income was
$7.2 million , or$0.51 per diluted share, compared with$12.8 million , or$0.90 per diluted share, in the prior year. -
Adjusted EBITDA: Adjusted EBITDA for the quarter ended
May 31, 2022 improved 27%, or$2.3 million , to$10.9 million compared with$8.6 million in the third quarter of the prior year, reflecting increased sales and strong gross margin. -
Cash Flows, Liquidity, and Financial Position Remain Strong: The Company’s balance sheet and liquidity position remained strong with
$52.1 million of cash atMay 31, 2022 , and no borrowings on its$15.0 million line of credit, compared with$47.4 million of cash with no borrowings on its line of credit atAugust 31, 2021 . Cash flows from operating activities for the first three quarters of fiscal 2022 were strong and increased 28% to$39.5 million , compared with$30.9 million in the first three quarters of fiscal 2021. -
Common Shares Repurchased: During the third quarter of fiscal 2022, the Company repurchased 499,411 shares of its common stock for
$20.3 million in cash on the open market. The Company may repurchase shares of its common stock at its sole discretion under the terms of a Board approved repurchase plan. AtMay 31, 2022 the Company had$19.5 million of remaining availability on its current Board approved repurchase plan.
Fiscal 2022 Year-to-Date Financial Results
Consolidated revenue for the first three quarters of fiscal 2022 increased 19%, or
Operating expenses for the three quarters ended
Fiscal 2022 Outlook
Based on the Company’s strong performance in the first three quarters of fiscal 2022, and anticipated results for the fourth quarter, the Company is pleased to increase its guidance for fiscal 2022 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; impacts from global economic and supply chain disruptions resulting from international conflicts; 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; inflation; 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 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 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, 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 Income Statements |
|||||||||||||||||
|
(in thousands, except per-share amounts, and unaudited) |
|||||||||||||||||
| Quarter Ended | Three Quarters Ended | ||||||||||||||||
|
|
2022 |
|
|
|
2021 |
|
|
2022 |
|
|
|
2021 |
|
||||
| Net sales |
$ |
66,176 |
|
$ |
58,736 |
|
$ |
184,035 |
|
$ |
155,223 |
|
|||||
| Cost of sales |
|
15,044 |
|
|
12,829 |
|
|
41,190 |
|
|
35,589 |
|
|||||
| Gross profit |
|
51,132 |
|
|
45,907 |
|
|
142,845 |
|
|
119,634 |
|
|||||
| Selling, general, and administrative |
|
42,637 |
|
|
40,132 |
|
|
120,042 |
|
|
107,439 |
|
|||||
| Depreciation |
|
1,217 |
|
|
1,423 |
|
|
3,686 |
|
|
4,904 |
|
|||||
| Amortization |
|
1,329 |
|
|
1,238 |
|
|
4,106 |
|
|
3,503 |
|
|||||
| Income from operations |
|
5,949 |
|
|
3,114 |
|
|
15,011 |
|
|
3,788 |
|
|||||
| Interest expense, net |
|
(384 |
) |
|
(509 |
) |
|
(1,226 |
) |
|
(1,577 |
) |
|||||
| Income before income taxes |
|
5,565 |
|
|
2,605 |
|
|
13,785 |
|
|
2,211 |
|
|||||
| Income tax benefit (provision) |
|
1,597 |
|
|
10,149 |
|
|
(933 |
) |
|
9,605 |
|
|||||
| Net income |
$ |
7,162 |
|
$ |
12,754 |
|
$ |
12,852 |
|
$ |
11,816 |
|
|||||
| Net income per common share: | |||||||||||||||||
| Basic and diluted |
$ |
0.51 |
|
$ |
0.90 |
|
$ |
0.90 |
|
$ |
0.84 |
|
|||||
| Weighted average common shares: | |||||||||||||||||
| Basic |
|
14,173 |
|
|
14,145 |
|
|
14,244 |
|
|
14,068 |
|
|||||
| Diluted |
|
14,175 |
|
|
14,156 |
|
|
14,273 |
|
|
14,133 |
|
|||||
| Other data: | |||||||||||||||||
| Adjusted EBITDA(1) |
$ |
10,876 |
|
$ |
8,563 |
|
$ |
28,850 |
|
$ |
17,402 |
|
|||||
|
(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 GAAP measure, | |||||||||||||||||
| refer to the Reconciliation of Net Income to Adjusted EBITDA as shown below. | |||||||||||||||||
| Reconciliation of Net Income to Adjusted EBITDA | ||||||||||||||||||
| (in thousands and unaudited) | ||||||||||||||||||
| Quarter Ended | Three Quarters Ended | |||||||||||||||||
|
|
2022 |
|
|
|
2021 |
|
|
|
2022 |
|
|
|
2021 |
|
||||
| Reconciliation of net income to Adjusted EBITDA: | ||||||||||||||||||
| Net income |
$ |
7,162 |
|
$ |
12,754 |
|
$ |
12,852 |
|
$ |
11,816 |
|
||||||
| Adjustments: | ||||||||||||||||||
| Interest expense, net |
|
384 |
|
|
509 |
|
|
1,226 |
|
|
1,577 |
|
||||||
| Income tax provision (benefit) |
|
(1,597 |
) |
|
(10,149 |
) |
|
933 |
|
|
(9,605 |
) |
||||||
| Amortization |
|
1,329 |
|
|
1,238 |
|
|
4,106 |
|
|
3,503 |
|
||||||
| Depreciation |
|
1,217 |
|
|
1,423 |
|
|
3,686 |
|
|
4,904 |
|
||||||
| Stock-based compensation |
|
2,369 |
|
|
2,370 |
|
|
5,987 |
|
|
5,127 |
|
||||||
| Increase in the fair value of contingent | ||||||||||||||||||
| consideration liabilities |
|
12 |
|
|
118 |
|
|
60 |
|
|
164 |
|
||||||
| Business acquisition costs |
|
- |
|
|
300 |
|
|
- |
|
|
300 |
|
||||||
| Government COVID assistance |
|
- |
|
|
- |
|
|
- |
|
|
(234 |
) |
||||||
| Gain from insurance settlement |
|
- |
|
|
- |
|
|
- |
|
|
(150 |
) |
||||||
| Adjusted EBITDA |
$ |
10,876 |
|
$ |
8,563 |
|
$ |
28,850 |
|
$ |
17,402 |
|
||||||
| Adjusted EBITDA margin |
|
16.4 |
% |
|
14.6 |
% |
|
15.7 |
% |
|
11.2 |
% |
||||||
| Additional Financial Information | ||||||||||||||||||
| (in thousands and unaudited) | ||||||||||||||||||
| Quarter Ended | Three Quarters Ended | |||||||||||||||||
|
|
2022 |
|
|
|
2021 |
|
|
|
2022 |
|
|
|
2021 |
|
||||
| Sales by Division/Segment: | ||||||||||||||||||
| Enterprise Division: | ||||||||||||||||||
| Direct offices |
$ |
47,416 |
|
$ |
42,704 |
|
$ |
134,037 |
|
$ |
115,185 |
|
||||||
| International licensees |
|
2,610 |
|
|
2,395 |
|
|
8,196 |
|
|
7,421 |
|
||||||
|
|
50,026 |
|
|
45,099 |
|
|
142,233 |
|
|
122,606 |
|
|||||||
| Education Division |
|
14,439 |
|
|
11,899 |
|
|
37,202 |
|
|
27,874 |
|
||||||
| Corporate and other |
|
1,711 |
|
|
1,738 |
|
|
4,600 |
|
|
4,743 |
|
||||||
| Consolidated |
$ |
66,176 |
|
$ |
58,736 |
|
$ |
184,035 |
|
$ |
155,223 |
|
||||||
| Gross Profit by Division/Segment: | ||||||||||||||||||
| Enterprise Division: | ||||||||||||||||||
| Direct offices |
$ |
38,144 |
|
$ |
34,678 |
|
$ |
108,294 |
|
$ |
93,201 |
|
||||||
| International licensees |
|
2,340 |
|
|
2,069 |
|
|
7,344 |
|
|
6,454 |
|
||||||
|
|
40,484 |
|
|
36,747 |
|
|
115,638 |
|
|
99,655 |
|
|||||||
| Education Division |
|
9,790 |
|
|
8,179 |
|
|
24,749 |
|
|
17,510 |
|
||||||
| Corporate and other |
|
858 |
|
|
981 |
|
|
2,458 |
|
|
2,469 |
|
||||||
| Consolidated |
$ |
51,132 |
|
$ |
45,907 |
|
$ |
142,845 |
|
$ |
119,634 |
|
||||||
| Adjusted EBITDA by Division/Segment: | ||||||||||||||||||
| Enterprise Division: | ||||||||||||||||||
| Direct offices |
$ |
9,978 |
|
$ |
8,894 |
|
$ |
28,664 |
|
$ |
21,729 |
|
||||||
| International licensees |
|
1,303 |
|
|
821 |
|
|
4,418 |
|
|
3,608 |
|
||||||
|
|
11,281 |
|
|
9,715 |
|
|
33,082 |
|
|
25,337 |
|
|||||||
| Education Division |
|
1,887 |
|
|
1,132 |
|
|
1,798 |
|
|
(2,010 |
) |
||||||
| Corporate and other |
|
(2,292 |
) |
|
(2,284 |
) |
|
(6,030 |
) |
|
(5,925 |
) |
||||||
| Consolidated |
$ |
10,876 |
|
$ |
8,563 |
|
$ |
28,850 |
|
$ |
17,402 |
|
||||||
| Condensed Consolidated Balance Sheets | ||||||||
| (in thousands and unaudited) | ||||||||
|
|
2022 |
|
|
2021 |
|
|||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents |
$ |
52,068 |
|
$ |
47,417 |
|
||
| Accounts receivable, less allowance for | ||||||||
| doubtful accounts of |
|
50,430 |
|
|
70,680 |
|
||
| Inventories |
|
3,356 |
|
|
2,496 |
|
||
| Prepaid expenses and other current assets |
|
16,233 |
|
|
16,115 |
|
||
| Total current assets |
|
122,087 |
|
|
136,708 |
|
||
| Property and equipment, net |
|
9,591 |
|
|
11,525 |
|
||
| Intangible assets, net |
|
45,993 |
|
|
50,097 |
|
||
|
|
31,220 |
|
|
31,220 |
|
|||
| Deferred income tax assets |
|
6,269 |
|
|
4,951 |
|
||
| Other long-term assets |
|
13,236 |
|
|
15,153 |
|
||
|
$ |
228,396 |
|
$ |
249,654 |
|
|||
| Liabilities and Shareholders' Equity | ||||||||
| Current liabilities: | ||||||||
| Current portion of notes payable |
$ |
5,835 |
|
$ |
5,835 |
|
||
| Current portion of financing obligation |
|
3,119 |
|
|
2,887 |
|
||
| Accounts payable |
|
8,067 |
|
|
6,948 |
|
||
| Deferred subscription revenue |
|
66,646 |
|
|
74,772 |
|
||
| Other deferred revenue |
|
16,646 |
|
|
11,117 |
|
||
| Accrued liabilities |
|
28,570 |
|
|
34,980 |
|
||
| Total current liabilities |
|
128,883 |
|
|
136,539 |
|
||
| Notes payable, less current portion |
|
8,490 |
|
|
12,975 |
|
||
| Financing obligation, less current portion |
|
8,794 |
|
|
11,161 |
|
||
| Other liabilities |
|
6,908 |
|
|
8,741 |
|
||
| Deferred income tax liabilities |
|
375 |
|
|
375 |
|
||
| Total liabilities |
|
153,450 |
|
|
169,791 |
|
||
| Shareholders' equity: | ||||||||
| Common stock |
|
1,353 |
|
|
1,353 |
|
||
| Additional paid-in capital |
|
217,862 |
|
|
214,888 |
|
||
| Retained earnings |
|
76,443 |
|
|
63,591 |
|
||
| Accumulated other comprehensive income (loss) |
|
(203 |
) |
|
709 |
|
||
|
|
(220,509 |
) |
|
(200,678 |
) |
|||
| Total shareholders' equity |
|
74,946 |
|
|
79,863 |
|
||
|
$ |
228,396 |
|
$ |
249,654 |
|
|||
View source version on businesswire.com: https://www.businesswire.com/news/home/20220629005863/en/
Investor Contact:
801-817-1776
investor.relations@franklincovey.com
Media Contact:
801-817-6440
Debra.Lund@franklincovey.com
Source: