Franklin Covey Co. — Q1 FY2020 Form 10-Q
Reporting period: Quarter ended November 30, 2019; comparison is with the quarter ended November 30, 2018. Franklin Covey provides organizational performance-improvement content and services through Enterprise and Education divisions, including subscription offerings such as All Access Pass and Leader in Me.
Financial performance
| Metric | Q1 FY2020 | Q1 FY2019 |
|---|---|---|
| Net sales | $58.6 million | $53.8 million |
| Gross profit / gross margin | $42.0 million / 71.7% | $36.8 million / 68.3% |
| Operating loss | $(0.2) million | $(0.7) million |
| Net loss / loss per share | $(0.5) million / $(0.04) | $(1.4) million / $(0.10) |
| Operating cash flow | $6.8 million | $8.1 million |
| Adjusted EBITDA (non-GAAP) | $5.0 million | $3.2 million |
Sales rose 9%, with reported subscription and subscription-related revenue up 21%. Gross margin improved, mainly from a higher mix of subscription revenue. SG&A increased $4.8 million, reflecting investments in sales personnel, commissions and bonuses, marketing, stock-based compensation, GSA operations, and Knowledge Capital wind-down costs. The company reported $0.4 million of those wind-down costs in its Adjusted EBITDA reconciliation.
Financial position and liquidity
- At November 30, 2019, cash and cash equivalents were $32.8 million, versus $27.7 million at August 31, 2019. Current assets were $103.2 million and current liabilities were $84.0 million.
- Term notes totaled $23.75 million, including $5.0 million due within one year. The company also reported a $18.4 million financing obligation associated with its corporate campus. It drew the remaining $5.0 million available under its term-loan facility during the quarter.
- Available revolving-credit capacity was $14.9 million. Management said it was in compliance with credit-agreement covenants at quarter-end. The agreement includes leverage and fixed-charge coverage tests, among other requirements.
- Operating cash flow was $6.8 million; investing cash outflow was $4.5 million, including a $2.6 million note purchase related to the FCOP license transaction; financing cash inflow was $2.7 million. Operating cash flow declined from the prior year, primarily due to working-capital changes.
- Deferred revenue was $56.9 million, including $48.7 million from subscriptions. Remaining performance obligations were $82.7 million, approximately 75% expected to be recognized within 12 months.
Material changes and operating trends
- Enterprise sales increased 9%; Education sales increased 7%. Direct Offices sales rose to $42.1 million, and Education Practice sales to $11.1 million.
- Education Practice Adjusted EBITDA was a loss of $1.1 million, compared with a $0.3 million loss a year earlier, as SG&A and delivery-related costs increased.
- GSA operations, acquired in the prior fiscal year, contributed $0.7 million of quarterly sales. The company cited growth in subscription and facilitator sales and increased Education revenues.
- The company adopted the new lease standard on September 1, 2019, recognizing $1.5 million of operating-lease right-of-use assets and liabilities.
Outlook, risks, and unusual items
No specific full-year revenue or earnings guidance is provided. Management expected fiscal 2020 operating cash flow to exceed fiscal 2019 and estimated fiscal 2020 property-and-equipment purchases of about $6.0 million, curriculum development spending of $5.0 million, and depreciation expense of approximately $6.7 million. Management stated that cash, operating cash flows, and available borrowing capacity should fund expected needs, while noting outcomes depend on sales, economic conditions, cost control, collections, and capital spending.
The board authorized a new $40.0 million share-repurchase plan in November; no shares were purchased under it during the quarter. Separately, in December, the company bought 284,608 shares from Knowledge Capital for approximately $10 million. The CEO and a director each held a partnership interest in Knowledge Capital. Other disclosed risks include competition, customer acceptance and renewal of subscriptions, foreign exchange, cybersecurity, and variable-rate debt exposure. A one-percentage-point increase in the effective borrowing rate was estimated to add approximately $0.2 million of interest expense over the next 12 months.
Important facts for investors to verify
- Whether subscription growth and contracted performance obligations convert into recognized revenue and cash as expected.
- Education Practice’s expense trajectory and path toward improved segment profitability.
- Liquidity and covenant headroom after the term-loan draw and subsequent $10 million share purchase.
- The terms, oversight, and rationale for the Knowledge Capital share transaction, including the disclosed relationships.
- How management’s non-GAAP Adjusted EBITDA reconciles to GAAP results and includes identified unusual costs.