Franklin Covey Reports Fiscal 2018 Third Quarter Financial Results
Sales Increase 15%, or
Gross Profit Increases 28% to
Subscription Services Momentum Further Strengthens with Paying Subscribers Up 37% to 540,000 Compared with the Third Quarter of the Prior Year
Deferred Subscription Revenue Increases 46% to
Additional Investments Expected to Add Growth in Fiscal 2019 and Beyond
Introduction
With the fiscal 2016 launch of the All Access Pass (AAP), the Company
began a major transition in its business model. Previously,
While the transition to this new, flexible subscription model has
impacted the portion of the Company’s contracted revenue which is
recognized in a given period (since under current accounting rules,
subscription revenue is generally deferred and recognized over the
corresponding contract period), its progress is increasingly evident
both with clients, and in the Company’s reported financial results.
Subscription clients are often making larger initial purchases than they
did traditionally, then further expanding the populations covered by
their subscription, and are purchasing significant amounts of additional
services to help them increase the impact within their organizations.
With retention of these customers’ subscription revenue at more than
90%, combined with a significant increase in the sales of add-on
services, the benefits of this business model have become evident during
the first three quarters of fiscal 2018 as sales increased 15%, or
Financial Overview
The following is a summary of key financial results for the quarter
ended
-
Revenue: Consolidated revenue for the
third quarter of fiscal 2018 increased 15% to
$50.5 million , compared with$43.8 million in the third quarter of fiscal 2017. In addition to the recognition of previously deferred high-margin subscription revenues, the Company’s sales were also favorably impacted by increased international direct office sales, increased U.S. regional office sales, increased revenues from businesses acquired in the third and fourth quarters of fiscal 2017, and increased Education segment revenues. These increases were partially offset by decreased legacy facilitator and onsite revenues during the quarter. -
Deferred Subscription Revenue and Unbilled
Deferred Revenue: During the quarter ended
May 31, 2018 , the Company’s subscription and subscription-related revenue grew 43%. AtMay 31, 2018 , the Company had$34.5 million of deferred subscription revenue on its balance sheet, a 46%, or$10.9 million , increase over deferred subscription revenues on its balance sheet atMay 31, 2017 . AtMay 31, 2018 , the Company had$15.1 million of unbilled deferred revenue compared with$2.5 million of unbilled deferred revenue atMay 31, 2017 . Unbilled deferred revenue represents business that is contracted but unbilled, and excluded from the Company’s balance sheet. -
Gross profit: Third quarter 2018 gross
profit was
$34.9 million , a 28%, or$7.6 million increase, compared with$27.3 million in the prior year. The Company’s gross margin for the quarter endedMay 31, 2018 increased to 69.2% of sales compared with 62.5% in the third quarter of fiscal 2017. The increase in gross profit and improved gross margin was primarily due to a change in the mix of revenues, as subscription revenues, including the All Access Pass, continue to grow as a percentage of recognized sales. In addition, the Company exited the publishing business inJapan during the third quarter of fiscal 2017 and recorded a$1.8 million charge to write off the majority of its book inventory located inJapan . -
Operating Expenses: The Company’s
operating expenses for the quarter ended
May 31, 2018 increased by$3.7 million compared with the prior year, which was due to a$4.2 million increase in selling, general, and administrative (SG&A) expenses, a$0.5 million increase in amortization expense, and a$0.3 million increase in depreciation expense. These increases were partially offset by$1.3 million of restructuring costs in fiscal 2017 that did not repeat in the third quarter of fiscal 2018. Increased SG&A expenses were primarily related to increased associate costs resulting from investments in new sales and sales related personnel, new implementation specialists, and increased commission expense resulting from higher sales; increased computer hardware and software expenses related to the Company’s new AAP portal and new Enterprise Resource Planning (ERP) system; and increased consulting and development costs for various projects and growth initiatives. Increased amortization expense was due to business acquisitions which were completed in the third and fourth quarters of fiscal 2017. -
Operating Income (Loss): The Company’s
loss from operations for the third quarter of fiscal 2018 improved to
$(2.6) million compared with a loss from operations of$(6.5) million in the third quarter of fiscal 2017. -
Adjusted EBITDA: Adjusted EBITDA for the
third quarter improved to
$0.6 million , compared with a loss of approximately$(18,000) in the third quarter of fiscal 2017. -
Net Loss: The Company reported a net loss
of
$(2.5) million , or$(.18) per share, for the quarter endedMay 31, 2018 , compared with a net loss of$(4.5) million , or$(.33) per share, in the third quarter of fiscal 2017, reflecting the above-noted factors. -
Cash and Liquidity Remain Strong: The
Company’s balance sheet and liquidity position remained healthy
through the third quarter of fiscal 2018. The Company had
$11.8 million of cash atMay 31, 2018 , compared with$8.9 million atAugust 31, 2017 . AtMay 31, 2018 , the Company had$14.1 million of available borrowing capacity on its revolving line of credit facility. -
Fiscal 2018 Outlook: Based on anticipated
increases in its subscription business, the Company reaffirms its
previously announced Adjusted EBITDA guidance for fiscal 2018, which
is expected to be in the range of
$10 million to $15 million .
Fiscal 2018 Year-to-Date Financial Results
Consolidated revenue for the first three quarters of fiscal 2018
increased 15%, or
Operating expenses for the first three 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 2018; expected growth and improved profitability of the
subscription-based business model; 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 the new AAP
portal; 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 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 the Company’s 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 | Three Quarters Ended | |||||||||||||||||||
May 31, | May 31, | May 31, | May 31, | |||||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||||||
Net sales | $ | 50,461 | $ | 43,751 | $ | 144,939 | $ | 125,734 | ||||||||||||
Cost of sales | 15,545 | 16,410 | 44,411 | 45,054 | ||||||||||||||||
Gross profit | 34,916 | 27,341 | 100,528 | 80,680 | ||||||||||||||||
Selling, general, and administrative | 34,910 | 30,713 | 103,830 | 89,177 | ||||||||||||||||
Restructuring costs | - | 1,335 | - | 1,335 | ||||||||||||||||
Contract termination costs | - | - | - | 1,500 | ||||||||||||||||
Depreciation | 1,267 | 949 | 3,547 | 2,743 | ||||||||||||||||
Amortization | 1,326 | 835 | 4,117 | 2,278 | ||||||||||||||||
Loss from operations | (2,587 | ) | (6,491 | ) | (10,966 | ) | (16,353 | ) | ||||||||||||
Interest expense, net | (501 | ) | (532 | ) | (1,627 | ) | (1,551 | ) | ||||||||||||
Loss before income taxes | (3,088 | ) | (7,023 | ) | (12,593 | ) | (17,904 | ) | ||||||||||||
Income tax benefit | 554 | 2,482 | 4,927 | 6,073 | ||||||||||||||||
Net loss | $ | (2,534 | ) | $ | (4,541 | ) | $ | (7,666 | ) | $ | (11,831 | ) | ||||||||
Net loss per common share: | ||||||||||||||||||||
Basic and diluted | $ | (0.18 | ) | $ | (0.33 | ) | $ | (0.55 | ) | $ | (0.86 | ) | ||||||||
Weighted average common shares: | ||||||||||||||||||||
Basic and diluted | 13,896 | 13,834 | 13,829 | 13,817 | ||||||||||||||||
Other data: | ||||||||||||||||||||
Adjusted EBITDA(1) | $ | 588 | $ | (18 | ) | $ | 524 | $ | (3,204 | ) | ||||||||||
(1) |
The term Adjusted EBITDA (earnings before interest, income taxes, depreciation, amortization, share-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 |
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(in thousands and unaudited) | |||||||||||||||||||||
Quarter Ended | Three Quarters Ended | ||||||||||||||||||||
May 31, | May 31, | May 31, | May 31, | ||||||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||||||||
Reconciliation of net loss to Adjusted EBITDA: | |||||||||||||||||||||
Net loss | $ | (2,534 | ) | $ | (4,541 | ) | $ | (7,666 | ) | $ | (11,831 | ) | |||||||||
Adjustments: | |||||||||||||||||||||
Interest expense, net | 501 | 532 | 1,627 | 1,551 | |||||||||||||||||
Income tax benefit | (554 | ) | (2,482 | ) | (4,927 | ) | (6,073 | ) | |||||||||||||
Amortization | 1,326 | 835 | 4,117 | 2,278 | |||||||||||||||||
Depreciation | 1,267 | 949 | 3,547 | 2,743 | |||||||||||||||||
Stock-based compensation | 446 | 1,210 | 2,182 | 3,987 | |||||||||||||||||
Costs to exit Japan publishing business | - | 1,792 | - | 1,792 | |||||||||||||||||
Restructuring costs | - | 1,335 | - | 1,335 | |||||||||||||||||
Contract termination costs | - | - | - | 1,500 | |||||||||||||||||
Increase (reduction) to contingent earnout liability | 136 | - | 789 | (1,936 | ) | ||||||||||||||||
ERP implementation costs | - | 327 | 855 | 920 | |||||||||||||||||
China start-up costs | - | - |
- |
505 | |||||||||||||||||
Other | - | 25 | - | 25 | |||||||||||||||||
Adjusted EBITDA | $ | 588 | $ | (18 | ) | $ | 524 | $ | (3,204 | ) | |||||||||||
Adjusted EBITDA margin | 1.2 | % | 0.0 | % | 0.4 | % | -2.5 | % | |||||||||||||
FRANKLIN COVEY CO. |
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Additional Sales Information |
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(in thousands and unaudited) | |||||||||||||||||||||
Quarter Ended | Three Quarters Ended | ||||||||||||||||||||
May 31, | May 31, | May 31, | May 31, | ||||||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||||||||
Sales Detail by Segment: | |||||||||||||||||||||
Direct offices | $ | 36,331 | $ | 30,075 | $ | 103,802 | $ | 86,595 | |||||||||||||
Education | 9,235 | 8,596 | 27,418 | 25,187 | |||||||||||||||||
International licensees | 3,543 | 3,822 | 9,909 | 10,191 | |||||||||||||||||
Corporate and other | 1,352 | 1,258 | 3,810 | 3,761 | |||||||||||||||||
Total | $ | 50,461 | $ | 43,751 | $ | 144,939 | $ | 125,734 | |||||||||||||
FRANKLIN COVEY CO. |
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Condensed Consolidated Balance Sheets |
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(in thousands and unaudited) | ||||||||||
May 31, | August 31, | |||||||||
2018 | 2017 | |||||||||
Assets |
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Current assets: | ||||||||||
Cash | $ | 11,774 | $ | 8,924 | ||||||
Accounts receivable, less allowance for doubtful accounts of $2,975 and $2,310 |
51,035 | 66,343 | ||||||||
Receivable from related party | 955 | 1,020 | ||||||||
Inventories | 3,747 | 3,353 | ||||||||
Income taxes receivable | 816 | 259 | ||||||||
Prepaid expenses and other current assets | 11,265 | 11,936 | ||||||||
Total current assets | 79,592 | 91,835 | ||||||||
Property and equipment, net | 21,750 | 19,730 | ||||||||
Intangible assets, net | 53,185 | 57,294 | ||||||||
Goodwill | 24,220 | 24,220 | ||||||||
Long-term receivable from related party | 251 | 727 | ||||||||
Deferred income tax assets | 7,207 | 1,647 | ||||||||
Other long-term assets | 13,429 | 15,278 | ||||||||
$ | 199,634 | $ | 210,731 | |||||||
Liabilities and Shareholders' Equity |
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Current liabilities: | ||||||||||
Current portion of financing obligation | $ | 2,034 | $ | 1,868 | ||||||
Current portion of term notes payable | 6,250 | 6,250 | ||||||||
Accounts payable | 8,652 | 9,119 | ||||||||
Deferred revenue | 39,190 | 40,772 | ||||||||
Accrued liabilities | 17,130 | 22,617 | ||||||||
Total current liabilities | 73,256 | 80,626 | ||||||||
Line of credit | 15,866 | 4,377 | ||||||||
Term notes payable, less current portion | 8,125 | 12,813 | ||||||||
Financing obligation, less current portion | 19,530 | 21,075 | ||||||||
Other liabilities | 4,519 | 5,742 | ||||||||
Deferred income tax liabilities | 39 | 1,033 | ||||||||
Total liabilities | 121,335 | 125,666 | ||||||||
Shareholders' equity: | ||||||||||
Common stock | 1,353 | 1,353 | ||||||||
Additional paid-in capital | 210,521 | 212,484 | ||||||||
Retained earnings | 61,790 | 69,456 | ||||||||
Accumulated other comprehensive income | 832 | 667 | ||||||||
Treasury stock at cost, 13,169 and 13,414 shares | (196,197 | ) | (198,895 | ) | ||||||
Total shareholders' equity | 78,299 | 85,065 | ||||||||
$ | 199,634 | $ | 210,731 | |||||||
View source version on businesswire.com: https://www.businesswire.com/news/home/20180627006264/en/
Source:
Franklin Covey
Investor Contact:
Steve Young, 801-817-1776
investor.relations@franklincovey.com
or
Media
Contact:
Debra Lund, 801-817-6440
Debra.Lund@franklincovey.com