Franklin Covey Co. — Form 10-Q Summary
Reporting period: Fiscal third quarter and first three quarters ended May 31, 2018; filed July 10, 2018. The company provides organizational performance training, consulting, content, and subscription offerings, notably All Access Pass (AAP) and The Leader in Me. Financial amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2018 | Q3 2017 | First 3 quarters 2018 | First 3 quarters 2017 |
|---|---|---|---|---|
| Net sales | $50.5m | $43.8m | $144.9m | $125.7m |
| Gross profit / margin | $34.9m / 69.2% | $27.3m / 62.5% | $100.5m / 69.4% | $80.7m / 64.2% |
| Operating loss | $(2.6)m | $(6.5)m | $(11.0)m | $(16.4)m |
| Net loss / diluted loss per share | $(2.5)m / $(0.18) | $(4.5)m / $(0.33) | $(7.7)m / $(0.55) | $(11.8)m / $(0.86) |
| Operating cash flow | Not separately presented | Not separately presented | $8.6m | $11.7m |
- Q3 sales increased 15%; training and consulting revenue rose 17%. Direct Offices grew 21%, Education Practice 7%, while International Licensees declined 7%.
- Management attributed higher gross margin mainly to the growing mix of higher-margin subscription revenue and the prior-year exit from Japan publishing. Q3 operating expenses rose $3.7m, reflecting investment in sales staff, implementation specialists, the AAP portal, ERP, and development work.
- Q3 consolidated Adjusted EBITDA, a non-GAAP measure, was $0.6m versus a loss of $0.02m. For the first three quarters it was $0.5m versus a loss of $3.2m.
- At May 31, cash was $11.8m, substantially held by foreign subsidiaries; net working capital was $6.3m. Cash increased $2.9m from August 31, 2017. Operating cash flow fell year over year, which the company attributed primarily to working-capital changes, including subscription revenue deferrals.
- Debt and financing obligations included $15.9m drawn on the revolving credit line, $14.4m of term notes, and $21.6m of campus financing obligations. Total current liabilities were $73.3m and total liabilities $121.3m. The company reported compliance with credit covenants and $14.1m available under its revolver.
Material changes, outlook, and risks
- Subscription and subscription-related revenue grew 43% year over year in Q3. Deferred subscription revenue was $34.5m, up 46% from a year earlier; an additional $15.1m of contracted but unbilled deferred revenue was off balance sheet.
- Management said the subscription transition is progressing, while noting that recognized revenue is deferred over contract lives and the model requires investment. The company expected Education Practice growth to be weighted toward fiscal Q4. No consolidated full-year sales or earnings guidance was provided.
- Management expected fiscal 2018 property and equipment purchases of approximately $7.5m, curriculum development spending of $3.5m, depreciation of $5.2m, and amortization of $5.4m. It considered available resources adequate for at least the next 12 months, subject to business and financing risks.
- The company recorded a provisional $1.2m tax benefit from the 2017 Tax Act; tax accounting remained subject to adjustment. It planned to adopt ASC 606 on September 1, 2018 using the modified retrospective method and had not completed its assessment of AAP and The Leader in Me performance obligations. Adoption of the new lease standard was expected to increase reported assets and liabilities; the full impact was undetermined.
- Contingent consideration liabilities from 2017 acquisitions totaled $5.5m at May 31; updated fair-value estimates increased expense by $0.8m over the first three quarters. Prior-year comparisons also included Japan publishing exit and restructuring costs, a $1.8m Japan inventory write-off, and $1.5m in contract termination costs.
- Risks highlighted include subscription adoption and renewal, competition and economic conditions, foreign exchange, data security and privacy compliance (including GDPR), variable-rate borrowing costs, and uncertainty around future financing availability. A 1 percentage-point increase in borrowing rates was estimated to add about $0.2m of interest expense over 12 months.
Important facts for investors to verify
- Whether subscription growth, deferred revenue, and unbilled contracted revenue convert into recognized revenue and cash as expected.
- Whether sales growth and improved gross margins can offset higher operating expenses and produce sustained operating profitability and cash flow.
- Available revolver capacity, debt covenant headroom, scheduled obligations, and the location and accessibility of cash held by foreign subsidiaries.
- The eventual ASC 606 accounting impact on AAP and The Leader in Me, and any final adjustments to provisional tax accounting.
- Actual fiscal Q4 results and spending compared with management’s stated expectations for Education growth, capital expenditures, curriculum development, depreciation, and amortization.