Franklin Covey Co. — Q1 FY2024 10-Q
Reporting period: Quarter ended November 30, 2023; comparative period is the quarter ended November 30, 2022. Franklin Covey provides organizational-performance content, training, consulting, and subscriptions, including All Access Pass (AAP) and Leader in Me. Its segments are Direct Offices, International Licensees, and Education.
Financial highlights
| Metric | Q1 FY2024 | Q1 FY2023 |
|---|---|---|
| Net sales | $68.4 million | $69.4 million |
| Gross profit / margin | $52.3 million / 76.4% | $52.7 million / 76.0% |
| Operating income | $5.3 million | $6.4 million |
| Net income | $4.9 million | $4.7 million |
| Diluted EPS | $0.36 | $0.32 |
| Adjusted EBITDA (non-GAAP) | $11.0 million | $11.5 million |
| Cash from operating activities | $17.4 million | $3.0 million |
Cash and cash equivalents were $34.0 million at November 30, 2023, down from $38.2 million at August 31, 2023. The company reported nearly $100 million of available liquidity, comprising cash and an undrawn $62.5 million revolving credit facility. Notes payable totaled $6.1 million and financing obligations totaled $7.1 million, including current and long-term amounts. The company said it was in compliance with its credit agreement covenants. The agreement requires a leverage ratio below 3.00:1.00 and fixed-charge coverage above 1.15:1.00.
Operating cash flow rose mainly because of strong receivables collections and favorable working-capital changes. Investing cash outflow was $3.7 million, including $2.7 million for curriculum development. Financing cash outflow was $18.1 million, including $16.3 million of share purchases and $2.1 million of principal payments. Deferred revenue was $103.3 million, including $87.2 million from subscriptions; remaining performance obligations were $169.7 million.
Changes and operating trends
- Sales were down about 1% year over year. Subscription and subscription-service sales increased 4% to $54.8 million; AAP subscription sales grew 13% for the quarter. AAP subscription revenue retention in the U.S. and Canada exceeded 90%.
- Direct Office sales declined to $49.2 million from $50.2 million, as subscription growth was offset by lower add-on services and legacy onsite programs. International Licensee revenue increased 3% to $3.4 million.
- Education revenue increased 3% to $14.7 million, reflecting higher international royalties and membership subscriptions. Education Adjusted EBITDA decreased to $0.04 million from $0.28 million, with increased associate expenses.
- Subscription and subscription-service sales over the rolling four quarters reached a record $224.7 million, up 6%. Deferred subscription revenue plus unbilled contracted subscription amounts totaled $169.7 million, up 12% year over year.
- Operating income declined, while net income and diluted EPS increased. The lower effective tax rate—8.1% versus 23.0%—was primarily attributable to a net $1.1 million tax benefit related to stock-based compensation.
Outlook, risks, and unusual items
- Management expects fiscal 2024 effective tax rate of approximately 30%, including an expected 2% net benefit from stock-based compensation for the full year. The first-quarter tax benefit was unusually large relative to that outlook.
- Management expects fiscal 2024 curriculum-development spending of approximately $7.1 million and property-and-equipment purchases of up to $8.0 million. Depreciation is estimated at approximately $5.8 million and intangible amortization at $4.2 million; campus leasehold improvements could change capital spending and depreciation estimates.
- Management expects operating cash flows to remain strong and believes available liquidity will support operations for at least the next 12 months. It cited macroeconomic conditions, sales trends, cost control, capital spending, and collections as factors that could affect liquidity.
- Q1 SG&A included $0.6 million of severance related to restructuring. The company also repurchased 156,910 shares on the open market for $6.0 million and withheld 251,686 shares for taxes on equity awards, for total share purchases/withholding of $16.3 million. $9.8 million remained under the $50 million authorization at quarter-end.
- Risks identified include macroeconomic weakness and regional conflicts affecting licensees, competition and customer acceptance of offerings, cybersecurity, foreign exchange, and uncertainty in customer demand and training orders. Management reported no significant changes to previously disclosed risk factors and no material changes to internal control over financial reporting.
Important facts for investors to verify
- Whether subscription growth and retention continue to offset weaker add-on services and onsite-program revenue.
- Conversion and timing of the $169.7 million in remaining performance obligations, including unbilled multi-year contracts.
- Cash-flow sustainability after the favorable receivables and working-capital effects in Q1, and the impact of continued repurchases and planned investment.
- How the full-year tax rate compares with the Q1 result and management’s approximately 30% estimate.
- Any changes in credit-facility covenant headroom, borrowing costs, and campus-related capital requirements as the master lease approaches expiration in fiscal 2025.