Franklin Covey Co. — Q2 FY2020 Form 10-Q
Reporting period: Quarter and first two fiscal quarters ended February 29, 2020. Financial amounts below are in millions unless stated otherwise. The company provides organizational performance training, consulting, subscriptions, and education services.
Financial performance
| Metric | Q2 FY2020 | Q2 FY2019 | First half FY2020 | First half FY2019 |
|---|---|---|---|---|
| Revenue | $53.7 | $50.4 | $112.4 | $104.2 |
| Gross profit / margin | $38.7 / 71.9% | $35.4 / 70.2% | $80.7 / 71.8% | $72.1 / 69.3% |
| Operating loss | $(0.4) | $(3.6) | $(0.5) | $(4.2) |
| Net income (loss) | $1.1 | $(3.5) | $0.6 | $(4.9) |
| Diluted EPS | $0.08 | $(0.25) | $0.04 | $(0.35) |
| Operating cash flow | — | — | $17.4 | $13.4 |
- Q2 revenue rose 7%; subscription and subscription-related revenue grew 24%. First-half revenue increased 8%.
- Q2 gross margin improved 171 basis points, primarily from a greater subscription mix. SG&A was $36.2 million, up modestly in dollars but down to 67.4% of revenue from 71.3%.
- First-half investing cash outflow was $7.3 million, including $2.5 million for property and equipment, $2.2 million for curriculum development, and $2.6 million to purchase a bank note connected to an amended license agreement. Financing cash outflow was $12.9 million, including $13.8 million for treasury stock purchases.
- At February 29, cash was $24.8 million, total current assets $91.9 million, and total current liabilities $89.2 million. Term notes totaled $22.5 million; the corporate-campus financing obligation totaled $17.8 million. No revolver borrowings were outstanding at quarter-end.
Changes and business developments
- Enterprise revenue increased 3% in Q2 to $40.7 million; Education revenue rose 12% to $10.9 million. Subscription growth drove performance, while China and Japan direct-office activity and some Asian licensee operations were disrupted by COVID-19.
- First-half deferred subscription revenue was $48.0 million at February 29, down from $58.2 million at August 31, 2019; management said it was 21% above the year-earlier balance. Remaining performance obligations were $82.7 million, about 75% expected to be recognized within 12 months.
- Operating cash flow increased 30% year over year, aided by improved results and working-capital changes, including receivables collections. Management warned collections could slow in the second half.
- The company completed a $10.1 million purchase of 284,608 shares from Knowledge Capital, an investor whose partnership interests were held in part by the CEO and a director. Separately, a $40 million repurchase authorization was approved; the company reported $0.2 million of purchases under that plan during the quarter.
Outlook, risks, and unusual items
- COVID-19: Management expected a significantly adverse impact on second-half FY2020 and future results, with severity dependent on the pandemic’s duration, preventative measures, client demand and ability to deliver services. The company cited remote-compatible digital and online offerings, but did not provide quantified earnings or revenue guidance.
- Subsequent to quarter-end, the company drew the remaining $14.9 million available on its revolving credit facility to preserve flexibility. Management believed cash, operating cash flows, and financing availability would support operations, while noting liquidity depends on sales, collections, pandemic disruption, cost controls, and access to financing.
- First-half net income included a $2.2 million income tax benefit on a $1.7 million pretax loss; the benefit included $1.8 million related to stock-option exercises. The unusually high tax benefit materially aided reported earnings.
- Term loans bear a variable rate (3.5% at quarter-end); a 1% rate increase on term debt and March revolver borrowings was estimated to add about $0.3 million of interest over 12 months. The company said it complied with credit covenants at February 29.
- Management forecast FY2020 depreciation of about $6.7 million, amortization of $4.6 million, property and equipment purchases of about $5.3 million, and curriculum-development spending of $5.0 million. It expected reduced international-licensee SG&A for the remainder of FY2020.
- Other notable items: operating lease accounting adoption added $1.5 million of right-of-use assets and lease liabilities; the amended consumer-products license provides minimum royalties of about $1.3 million annually, with additional variable royalties subject to performance.
Key investor verification points
- Track the scale and duration of COVID-19 impacts on bookings, delivery conversions, school and corporate demand, receivables collections, and cash flow.
- Assess subscription growth, renewals, deferred subscription revenue, unbilled contracted revenue, and conversion of remaining performance obligations into recognized revenue and cash.
- Separate underlying operating progress from the stock-option-related tax benefit when evaluating earnings and EPS.
- Monitor post-quarter revolver borrowing, covenant headroom, debt service, and liquidity under weaker revenue or slower collections.
- Review the related-party circumstances and terms of the Knowledge Capital share purchase, and subsequent use of the remaining repurchase authorization.