Franklin Covey Co. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2022, ended November 30, 2021; comparisons are with the quarter ended November 30, 2020. Franklin Covey provides organizational performance and education services through subscription offerings, training, consulting, and licensing.
Financial performance
| Metric | Q1 FY2022 | Q1 FY2021 |
|---|---|---|
| Revenue | $61.3 million | $48.3 million |
| Gross profit / margin | $47.6 million / 77.7% | $36.4 million / 75.3% |
| Operating income (loss) | $5.5 million | ($0.2) million |
| Net income (loss) | $3.8 million; $0.27 per diluted share | ($0.9) million; ($0.06) per share |
| Adjusted EBITDA | $9.9 million | $3.7 million |
| Operating cash flow | $10.2 million | $10.9 million |
Revenue rose 27%. Subscription revenue was $28.4 million, including $20.5 million in Direct Offices and $7.8 million in Education. All Access Pass and related sales increased 27%; annual revenue retention remained above 90%. Education revenue grew 56%, Direct Office revenue 23%, and International Licensee revenue 15%. Adjusted EBITDA is a non-GAAP measure.
SG&A increased to $39.3 million from $33.7 million, but declined as a share of revenue to 64.2% from 69.7%. Management attributed the increase mainly to commissions, headcount, stock compensation, and content development, partly offset by cost-saving measures. Gross-margin improvement reflected a higher subscription and royalty mix and improved absorption of fixed costs.
Cash, liquidity, and obligations
Cash and equivalents were $51.3 million at November 30, 2021, up from $47.4 million at August 31, 2021; $13.7 million was held by foreign subsidiaries. The company reported no borrowings on its $15.0 million revolving credit facility and stated it was compliant with applicable credit covenants. Current assets were $121.7 million and current liabilities $118.2 million.
Notes payable totaled $17.6 million, including $5.8 million current; the separate financing obligation totaled $13.4 million. Operating cash flow was supported by collections of receivables, while reductions in deferred revenue and accounts payable/accrued liabilities used cash. Investing cash outflow was $0.8 million; financing cash outflow was $5.5 million, including $3.5 million for shares withheld to cover taxes on stock awards and scheduled debt and financing-obligation payments. Deferred revenue was $80.2 million, including $67.8 million of subscription revenue. Remaining performance obligations were $121.1 million.
Outlook, risks, and notable items
Management was optimistic that subscription growth, improving international activity, and Education recovery would support improved earnings and cash flows during fiscal 2022, while emphasizing that results depend on continued economic recovery. The company expects fiscal 2022 property and equipment purchases of approximately $4.8 million, curriculum-development spending of $5.0 million, depreciation of $5.7 million, and definite-lived intangible amortization of $5.3 million. It believes available cash, operating cash flows, and access to external funding will meet needs for at least 12 months; this is subject to business and economic conditions.
COVID-19 and new variants remain material uncertainties, including possible restrictions on in-person programs, client demand and payment, international operations, and supply chains. Management also cited potential inflationary cost pressures. Other disclosed risks include competition, cybersecurity, foreign exchange, technology and product acceptance, and volatility in customer orders. A 1% increase in the variable rate on term loans outstanding was estimated to add about $0.1 million of interest expense over 12 months. No shares were repurchased under the board-approved repurchase plan during the quarter. The filing reported no material changes to previously disclosed accounting estimates or critical accounting policies.
Important facts for investors to verify
- Whether subscription growth and retention remain strong, and whether deferred subscription revenue and unbilled contracted business convert to recognized revenue.
- Whether international direct offices and licensees, and the Education business, continue recovering amid pandemic-related disruption.
- Whether cash generation remains adequate as deferred revenue declines, operating costs face inflationary pressure, and debt and financing-obligation payments continue.
- Whether actual fiscal 2022 capital spending, depreciation, and amortization track management’s estimates; the filing provides no full-year revenue or earnings guidance.
- Whether credit-covenant compliance and access to the revolving facility remain intact under changing operating conditions.