Franklin Covey Co. — Q3 FY2021 Form 10-Q
Reporting period: Quarter and three quarters ended May 31, 2021; fiscal year ends August 31. Unless noted, dollar figures below are in millions. The company provides organizational performance training, consulting, education programs, and subscription-based learning services.
Financial performance
- Q3 revenue: $58.7, up 58% from $37.1 a year earlier. Gross profit was $45.9, with a 78.2% gross margin versus 72.3%.
- Q3 operating results: Operating income was $3.1, compared with a $0.1 operating loss. Pretax income was $2.6, versus a $0.7 loss. Net income was $12.8, or $0.90 per diluted share, versus a $11.0 loss, or $0.79 per share.
- Q3 taxes: The $10.1 income tax benefit substantially contributed to net income; it primarily reflected a $10.9 reduction in the valuation allowance on deferred tax assets. Pretax results therefore give a different view of operating performance.
- First three quarters: Revenue was $155.2, up 4% from $149.5. Gross profit was $119.6 versus $107.5; operating income was $3.8 versus an operating loss of $0.7; net income was $11.8 versus a net loss of $10.4. The period included a $9.6 income tax benefit.
- Adjusted EBITDA (non-GAAP): Q3 was $8.6 versus negative $3.6; nine-month results were $17.4 versus $5.4.
- Revenue mix and segments: Q3 subscription revenue was $25.9 versus $22.3. Direct Offices revenue increased to $42.7 from $26.8; International Licensees to $2.4 from $0.7; and Education to $11.9 from $8.2. For the nine months, Education revenue declined to $27.9 from $30.2, while Enterprise Division revenue increased.
- Cash flow: Operating cash flow for the first three quarters was $30.9 versus $18.7. Investing used $13.6, including $10.6 cash paid for Strive; financing used $8.8. Cash increased $8.6 to $35.8.
- Liquidity and obligations: Current assets were $98.2 and current liabilities $104.6 at May 31. Notes payable totaled $20.0, including $5.8 current; the financing obligation totaled $14.7. The company reported no borrowings on its $15.0 revolving credit facility and said it was compliant with its credit covenants.
Material changes and notable items
- Management described Q3 as its best third-quarter results since the 2008 sale of its consumer solutions business. Comparisons with Q3 FY2020 are affected by the pandemic’s onset and unusually weak prior-year results.
- All Access Pass (AAP) sales grew 17% in Q3 and 15% for the nine-month period; annual revenue retention remained above 90%. At May 31, deferred subscription revenue was $55.3, up 26% from a year earlier, and unbilled deferred revenue was $41.3.
- On April 26, 2021, the company acquired learning-platform provider Strive Talent. Initial purchase price was $14.3, including $10.6 cash and $3.8 in notes payable; total consideration may reach $20.0, including contingent and employment-related payments. The acquisition had an immaterial effect on reported Q3 results.
- Q3 stock-based compensation was $2.4, compared with a $5.1 credit in the prior-year quarter, reflecting modification of performance-based awards and a change in expected vesting.
Outlook, commentary, and risks
- Management expected improving trends to continue in Q4 FY2021, including recovery in Education, international markets, and subscription services, and anticipated improved earnings and cash flows versus the prior year. This is directional commentary, not quantified earnings or revenue guidance.
- Management estimated FY2021 depreciation of approximately $6.4, amortization of $4.9, curriculum-development spending of $3.5, and property and equipment purchases of $2.2. It said available cash, operating cash flow, and credit availability should support operations for at least 12 months.
- COVID-19 recovery remained uneven and uncertain. Results depend on economic reopening, school and workplace conditions, client demand and payment, travel and in-person training, and the company’s ability to maintain liquidity and control costs. Management said the pandemic’s future impact could not be fully determined.
- Credit covenants include leverage below 3.00x and fixed-charge coverage of at least 1.15x; noncompliance could permit acceleration of debt. Variable-rate term loans and the revolver had a 2.4% effective rate; the filing estimates a 1 percentage-point increase would add about $0.1 of interest expense over 12 months.
Important facts for investors to verify
- How much reported net income depends on the deferred-tax valuation-allowance release, and whether operating profitability persists without that benefit.
- Whether AAP growth, retention, deferred revenue, and unbilled contracted revenue convert into recognized revenue and cash flow.
- The pace and durability of Education and international recovery, given pandemic-related disruption and the nine-month Education revenue decline.
- Strive’s integration, contribution to AAP growth, and potential contingent or employment-related acquisition payments.
- Ongoing cash generation, debt and financing-obligation repayments, and compliance with reinstated credit covenants.