Franklin Covey Co. — Q3 FY2024 10-Q
Reporting period: Third quarter and first three quarters of fiscal 2024, ended May 31, 2024; comparisons are with the corresponding fiscal 2023 periods. Franklin Covey sells organizational training, consulting, content and subscriptions, including All Access Pass (AAP) and the Leader in Me education program.
Financial results
| Metric | Q3 FY2024 | Q3 FY2023 | First 3 quarters FY2024 | First 3 quarters FY2023 |
|---|---|---|---|---|
| Revenue | $73.4m | $71.4m | $203.1m | $202.6m |
| Gross profit / margin | $56.2m / 76.6% | $54.2m / 75.9% | $155.3m | $154.2m |
| Operating income | $8.3m | $6.6m | $15.1m | $15.8m |
| Net income | $5.7m | $4.6m | $11.4m | $11.0m |
| Diluted EPS | $0.43 | $0.32 | $0.85 | $0.76 |
| Adjusted EBITDA (non-GAAP) | $13.9m | $11.9m | $32.3m | $31.6m |
Q3 revenue rose 3%, while gross margin improved 0.7 percentage point. Operating income increased 27% and net income increased 25%; restructuring costs of $0.7m were included in Q3 results. For the first three quarters, revenue was nearly flat and operating income declined 4%; net income rose 4%.
Cash flow and liquidity: Operating cash flow for the first three quarters was $38.4m, versus $25.9m a year earlier. Investing cash outflow was $7.8m, including $5.2m in curriculum development; financing cash outflow was $32.0m, including $25.8m of treasury-share purchases and $7.2m of principal payments on notes and the financing obligation. Cash was $36.6m at May 31, 2024, and the company reported no borrowings on its $62.5m revolving facility, for nearly $100m of available liquidity. Cash included $12.7m held by foreign subsidiaries.
Debt and balance sheet: Notes payable totaled $2.8m ($2.1m current); the campus financing obligation totaled $5.3m ($3.8m current). Total liabilities were $148.8m and shareholders’ equity was $72.2m. The credit agreement matures March 2028 and requires leverage and fixed-charge coverage covenant compliance; the company reported compliance at May 31. Deferred subscription revenue was $83.8m, and remaining performance obligations were $153.2m.
Performance changes and management commentary
- Enterprise: Q3 revenue declined to $52.0m from $53.2m. Direct Offices revenue fell 2%, as AAP growth was offset by lower legacy training and international business. AAP subscription revenue grew 4% in Q3; retention in the U.S. and Canada remained above 90%. China revenue fell 39% in Q3, which management attributed in part to Chinese government actions and initiatives.
- Education: Q3 revenue rose 18% to $20.1m, helped by classroom and training materials, subscriptions, and a new state initiative. The company invoiced $4.9m for that initiative, including $1.4m of materials. Education delivered nearly 100 more training and coaching days than a year earlier and reported more than 3,800 Leader in Me schools in the U.S. and Canada.
- Consolidated subscription and subscription-services revenue reached $60.8m in Q3, up 6%. Deferred subscription revenue was up 15% year over year to $83.8m. Management cited a higher share of multi-year AAP contracts and views deferred revenue growth as support for future revenue.
- Q3 gross margin improvement reflected service and product mix. For the nine-month period, Direct Office revenue declined while Education revenue increased 8%; segment Adjusted EBITDA rose in both Direct Offices and Education, but declined slightly in International Licensees.
Outlook, risks and unusual items
- Management expects strong operating cash flow for the remainder of FY2024 and believes cash, operating cash generation and available external funding will support operations for at least the next 12 months. It expects Education momentum to continue and subscription-services bookings to improve in Q4 and into FY2025; these are forward-looking expectations, not guarantees.
- FY2024 estimates include approximately $4.4m depreciation and $4.3m intangible amortization. Management expects about $7.1m in curriculum-development spending and $4.0m in property and equipment purchases, though campus leasehold needs as the June 2025 lease end approaches could change capital spending. It expects a full-year effective tax rate of about 30%, versus 24% for the first three quarters, and significantly lower cash taxes in Q4.
- The company reduced its workforce by approximately 50 associates under a restructuring plan and recorded $3.0m of restructuring expense in the first three quarters. It also recorded a $0.9m impairment after suspending development of a student leadership assessment amid concerns about student-information collection and potential legal challenges.
- Risks highlighted include macroeconomic weakness, regional conflicts affecting licensees, China-related business pressure, foreign-exchange movements, competition, subscription renewal and acceptance, cybersecurity, and uncertainty in sales mix and order timing. Management said there were no significant changes to the risk factors in its FY2023 10-K.
- The board authorized a new share-repurchase plan of up to $50m on April 18, 2024, with no expiration date. The company had made no purchases under the new plan by May 31; it is not obligated to repurchase shares. First-three-quarter treasury purchases were $25.8m.
Important facts for investors to verify
- Whether subscription growth, retention, deferred revenue and remaining performance obligations translate into recognized revenue and cash flow.
- Whether Education growth—including the new state initiative—is repeatable, and whether Enterprise performance stabilizes amid China and legacy-training weakness.
- Progress against FY2024 spending and tax expectations, and potential campus-related capital needs before the June 2025 lease end.
- Cash deployment, including any repurchases under the new $50m authorization, while maintaining credit-agreement covenant compliance.
- How restructuring, the student-assessment impairment, foreign exchange and macroeconomic conditions affect future margins and results.