Franklin Covey Co. — Q2 FY2024 Form 10-Q
Reporting period: Quarter and two quarters ended February 29, 2024; comparisons are with the corresponding periods in FY2023. Franklin Covey provides organizational performance training and consulting through subscription offerings, services, licensing, and education programs.
Financial performance
| Metric | Q2 FY2024 | Q2 FY2023 | First half FY2024 | First half FY2023 |
|---|---|---|---|---|
| Net sales | $61.3 million | $61.8 million | $129.7 million | $131.1 million |
| Gross profit / margin | $46.9 million / 76.4% | $47.2 million / 76.4% | $99.1 million / 76.4% | $100.0 million / 76.2% |
| Operating income | $1.4 million | $2.8 million | $6.8 million | $9.2 million |
| Net income | $0.9 million | $1.7 million | $5.7 million | $6.4 million |
| Diluted EPS | $0.06 | $0.12 | $0.42 | $0.44 |
| Adjusted EBITDA (non-GAAP) | $7.4 million | $8.2 million | $18.4 million | $19.7 million |
| Operating cash flow | Not separately stated | Not separately stated | $30.2 million | $11.2 million |
Quarterly sales were broadly stable, while operating income, net income, and Adjusted EBITDA declined. First-half sales decreased 1%; lower operating income included restructuring and asset impairment charges. The first-half effective tax rate was 14.4%, versus 27.6% a year earlier, primarily reflecting a net tax benefit related to stock-based compensation. Management expects an approximately 30% effective tax rate for full-year FY2024.
Business and operating trends
- Q2 Enterprise Division revenue was $45.7 million, down from $46.6 million. Direct Offices contributed $43.0 million; International Licensees contributed $2.7 million.
- Q2 Education revenue increased 3% to $14.6 million. The division reported nearly 100 more training and coaching days delivered year over year; it remained Adjusted EBITDA-negative at $0.5 million.
- Subscription and subscription-services sales increased 5% to $50.3 million in Q2. Rolling four-quarter subscription sales reached a record $227.3 million, up 5%. AAP subscription retention in the U.S. and Canada was greater than 90% in the first half.
- Management said AAP growth was offset by weaker legacy onsite training, add-on services, and international licensee royalties. It cited economic weakness in certain markets and licensee staffing challenges.
- Deferred subscription revenue was $86.1 million at February 29, 2024. Billed deferred subscription revenue plus unbilled multi-year contracts totaled $158.8 million, up 9% from a year earlier. Remaining performance obligations were also reported at $158.8 million.
Cash, debt, and liquidity
- Cash and cash equivalents were $40.9 million, compared with $38.2 million at August 31, 2023. First-half operating cash flow was $30.2 million, helped by strong receivables collections and working-capital movements; investing cash use was $5.5 million and financing cash use was $22.0 million.
- Cash and an undrawn $62.5 million revolving credit facility provided more than $103 million of available liquidity. No revolving borrowings were outstanding. The company reported compliance with its credit agreement covenants and believes available resources will cover operations for at least 12 months.
- At February 29, 2024, notes payable totaled $4.9 million, including $3.3 million current; financing obligations totaled $6.2 million, including $3.7 million current. The credit agreement matures March 27, 2028. Variable-rate term-loan and credit-facility borrowings carried a 6.9% effective rate; management said a 1 percentage-point increase on the unpaid term loan would have an immaterial 12-month impact.
- The company spent $18.4 million on treasury shares in the first half, including open-market purchases and shares withheld for taxes. $7.7 million remained under the repurchase authorization at February 29, 2024.
Outlook, unusual items, and risks
- Management expects stronger subscription-services bookings to support improved sales later in FY2024 and said it expects Education momentum to continue. These are forward-looking statements, not guarantees.
- FY2024 expected curriculum-development spending is $7.1 million; property and equipment purchases may reach $8.0 million. The latter depends partly on potential campus leasehold improvements as the master lease approaches its FY2025 end. Expected FY2024 depreciation and amortization are approximately $5.0 million and $4.2 million, respectively.
- During Q2, the company began a restructuring that reduced the workforce by approximately 50 associates and generated $1.7 million in severance costs; a separate first-quarter restructuring cost $0.6 million. It also recorded a $0.9 million impairment for a student leadership assessment development asset, citing changing views on student information collection and potential legal challenges.
- Risks highlighted include macroeconomic weakness, competition, foreign-exchange movements, customer demand and order timing, cybersecurity, dependence on existing offerings and acceptance of new products, and uncertainty in financing and capital requirements. Management reported no significant change to the risk factors in its FY2023 Form 10-K.
Important facts for investors to verify
- Whether subscription growth and greater-than-90% retention translate into recognized revenue and sustained cash generation, particularly as legacy training and add-on services fluctuate.
- Whether the restructuring and impaired-asset charges are nonrecurring and whether the expected reinvestment improves growth and profitability.
- Whether operating cash flow remains strong after the favorable first-half working-capital contribution, and whether planned investment and share repurchases remain consistent with liquidity needs.
- Whether management’s approximately 30% FY2024 tax-rate outlook is supported by subsequent results, given the unusually low first-half rate.