Franklin Covey Co. — Q2 FY2023 Form 10-Q
Business and period: Franklin Covey provides organizational performance-improvement content and services, including All Access Pass (AAP) subscriptions and Leader in Me education programs. This report covers the quarter and six months ended February 28, 2023; comparisons are with the corresponding FY2022 periods. Dollar amounts below are in millions unless noted.
Financial results
| Metric | Q2 FY2023 | Q2 FY2022 | First half FY2023 | First half FY2022 |
|---|---|---|---|---|
| Revenue | $61.8 | $56.6 | $131.1 | $117.9 |
| Gross profit | $47.2 | $44.1 | $100.0 | $91.7 |
| Gross margin | 76.4% | 77.9% | 76.2% | 77.8% |
| Operating income | $2.8 | $3.5 | $9.2 | $9.1 |
| Net income | $1.7 | $1.9 | $6.4 | $5.7 |
| Diluted EPS | $0.12 | $0.13 | $0.44 | $0.40 |
| Adjusted EBITDA (non-GAAP) | $8.2 | $8.0 | $19.7 | $18.0 |
Revenue rose 9% for the quarter and 11% for the first half; management reported constant-currency growth of 11% and 14%, respectively. Q2 sales growth was led by Education (+28%) and AAP and related services (+11%). First-half subscription revenue was $65.9 million, versus $56.6 million. Higher SG&A, including personnel, commissions, travel, and stock compensation, more than offset gross-profit growth in Q2, reducing operating income and net income year over year.
Cash flow and liquidity: First-half operating cash flow was $11.2 million, down from $23.2 million, primarily reflecting working-capital movements, including payments of accounts payable and accrued liabilities and lower deferred revenue. Investing cash use was $7.9 million, including $5.3 million of curriculum development; financing cash use was $8.7 million, including $4.7 million of share repurchases and $4.1 million of principal payments on notes and the financing obligation. Cash fell to $55.1 million from $60.5 million at August 31, 2022. At February 28, the company had no borrowings on its $15 million revolving facility. Balance-sheet notes payable totaled $10.7 million and financing obligations totaled $9.6 million. Current assets were $130.9 million and current liabilities $125.1 million.
Changes, outlook, and risks
- Segment and geographic trends: First-half Direct Office revenue increased 8%, International Licensee revenue 11%, and Education revenue 25%. Americas revenue rose to $108.4 million for the half, while Asia Pacific declined to $13.4 million. Q2 sales in China and Japan fell 30% and 3%, respectively; management cited pandemic-related disruption, economic conditions, and social unrest.
- Subscriptions and contracted revenue: At February 28, deferred subscription revenue was $76.1 million, and remaining performance obligations were $145.8 million, including deferred subscription revenue. Unbilled deferred revenue was $69.7 million. Management cited subscription growth and client relationships as sources of resilience, but future revenue depends on renewals, contract timing, and fulfillment.
- Management outlook: Management said it expects positive Education momentum and subscription-led growth to continue, while acknowledging macroeconomic, geopolitical, foreign-exchange, and regional risks. It expects FY2023 curriculum-development spending of approximately $9.5 million, property and equipment purchases of approximately $7.6 million, depreciation of approximately $5.6 million, and intangible amortization of approximately $4.3 million. The company stated it expects available cash, operating cash flow, and financing availability to cover operations for at least 12 months.
- Financing subsequent event: On March 27, 2023, the company entered a five-year credit agreement providing up to $70 million, including $7.5 million to replace the prior term loan and up to $62.5 million for revolving credit or future term loans. Borrowings bear SOFR plus 1.50%–2.75%, depending on leverage. The facility is secured by substantially all company assets and includes leverage and fixed-charge-coverage covenants, as well as restrictions on distributions and repurchases subject to covenant compliance.
- Other notable items and risks: The board authorized a new $50 million share-repurchase plan in February; $46.6 million remained available at quarter-end. The company noted that cash deposits exceeded applicable FDIC insurance limits and that it was taking steps to protect cash amid banking-sector instability; it reported no deposits at Silicon Valley Bank. Other cited risks include inflation, foreign-exchange movements, competition, cybersecurity, pandemic-related disruption, client demand, and cost pressures. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether subscription renewals, AAP growth, deferred revenue, and unbilled contracted revenue convert into recognized sales and cash flow as expected.
- Whether Education revenue growth can improve segment profitability, given lower gross margins and negative Adjusted EBITDA in the first half.
- Whether higher personnel, stock-based compensation, and other SG&A costs continue to outpace gross-profit growth.
- Cash-flow and liquidity trends, including working-capital requirements, cash concentration and deposit protections, and compliance with the new credit agreement’s covenants.
- The extent of continued disruption in China and Japan, foreign-exchange effects, and macroeconomic or banking-sector impacts on customers and financing.
- The pace and funding of share repurchases relative to investment needs, debt service, and covenant limits.