Franklin Covey Co. — Q1 FY2023 Form 10-Q
Reporting period: Fiscal quarter ended November 30, 2022; comparisons are with the quarter ended November 30, 2021 unless stated otherwise. Franklin Covey provides organizational performance-improvement content and services, including All Access Pass (AAP) subscriptions and the Leader in Me education program. Financial statements are unaudited.
Key financial results
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Net sales | $69.4 million | $61.3 million | Up 13%; up 17% at constant currency |
| Gross profit / margin | $52.7 million / 76.0% | $47.6 million / 77.7% | Gross profit up 11%; margin down 1.7 percentage points |
| Income from operations | $6.4 million | $5.5 million | Up 15% |
| Net income | $4.7 million | $3.8 million | Up 22% |
| Diluted EPS | $0.32 | $0.27 | Up $0.05 |
| Adjusted EBITDA (non-GAAP) | $11.5 million | $9.9 million | Up 16% |
| Operating cash flow | $3.0 million | $10.2 million | Down $7.1 million |
SG&A expense was $44.0 million, up from $39.3 million; it declined as a share of sales to 63.4% from 64.2%. Management attributed the increase mainly to staffing and salary costs, sales commissions, and travel. The effective tax rate was 23.0%, compared with 25.5%.
Business trends and period-over-period changes
- Enterprise Division sales rose 11% to $53.4 million; Education sales rose 23% to $14.4 million. International licensee sales increased 9% to $3.3 million.
- AAP subscription and related-services sales increased 20% to $39.6 million; annual AAP revenue retention remained well above 90%. Education subscription and related-service sales increased 17%.
- Revenue growth reflected higher U.S. and Canada sales, education consulting and training activity, Leader in Me subscriptions, and licensee royalties. Foreign exchange reduced reported sales by $2.0 million.
- Gross margin declined, which management attributed to changes in the mix of services and products sold. Education margin was also affected by delivery costs and sales mix.
- Cash and cash equivalents were $58.2 million at November 30, versus $60.5 million at August 31, 2022. Working-capital movements, including decreases in deferred revenue and accrued liabilities, contributed to lower operating cash flow.
Liquidity, debt, and capital allocation
The company reported no borrowings on its $15.0 million revolving credit facility. Notes payable totaled $11.9 million, and the campus financing obligation totaled $10.4 million at November 30, 2022. The company made $2.0 million of principal payments on notes and the financing obligation during the quarter. It reported compliance with its credit agreement covenants and believes existing cash, future operating cash flows, and available financing will be sufficient for at least the next 12 months.
Investing cash outflow was $2.2 million, including $1.2 million for property and equipment and $1.0 million for curriculum development. Management estimated FY2023 property-and-equipment spending of $7.6 million and curriculum-development spending of $9.5 million. Financing cash outflow was $2.9 million. The $0.8 million of treasury-stock purchases during the quarter consisted of shares withheld for employee tax obligations; no shares were purchased under the public repurchase plan. $19.5 million remained under the plan authorization.
Outlook, risks, and notable items
- Management expressed confidence in continued sales momentum and expects AAP and Leader in Me subscriptions to support future growth. It expected education momentum to continue through the remainder of FY2023; the filing does not provide a specific consolidated revenue or earnings forecast.
- Management expects approximately $5.7 million of FY2023 depreciation and $4.3 million of definite-lived intangible amortization.
- International conditions remain a headwind: China office sales fell 10% and Japan office sales fell 6% year over year, amid pandemic measures and economic conditions. Management noted that foreign exchange, inflation, macroeconomic conditions, and social or geopolitical developments could weigh on results.
- Other identified risks include competition, cybersecurity, customer demand and order timing, execution of strategic plans, cost inflation, and the continuing effects of the pandemic. The company cautioned that actual results may differ from forward-looking statements.
- Variable-rate term loans and the revolver had an effective rate of 5.7%. Management expected rate increases could raise interest expense; a one-percentage-point increase on unpaid term loans was estimated to add $0.1 million of interest expense over the following 12 months.
- The Jhana acquisition contingent-consideration liability was $0.3 million at quarter-end after $0.4 million of payments. Management reported no material changes to previously disclosed risk factors or critical accounting estimates.
Most important facts for investors to verify
- Whether AAP subscription growth and retention remain strong, and whether deferred and contracted revenue convert into recognized sales.
- Whether the gross-margin decline and higher staffing, travel, and delivery costs persist as revenue grows.
- Whether operating cash flow recovers, given the quarter’s working-capital outflows and declining deferred revenue.
- Whether China and Japan sales, foreign exchange, inflation, and broader macroeconomic conditions continue to affect reported growth.
- Progress against management’s FY2023 capital-spending estimates, debt obligations, and the $15.0 million unused revolver capacity.