Franklin Covey Co. — Q2 FY2022 Form 10-Q
Reporting period: Quarter and six months ended February 28, 2022. Comparisons are with the corresponding prior-year periods unless noted. Amounts are in U.S. dollars.
Financial performance
| Metric | Q2 FY2022 | Q2 FY2021 | Six months FY2022 | Six months FY2021 |
|---|---|---|---|---|
| Revenue | $56.6m | $48.2m | $117.9m | $96.5m |
| Gross profit / margin | $44.1m / 77.9% | $37.3m / 77.5% | $91.7m / 77.8% | $73.7m / 76.4% |
| Operating income | $3.5m | $0.8m | $9.1m | $0.7m |
| Net income (loss) | $1.9m | $(0.05)m | $5.7m | $(0.9)m |
| Diluted EPS | $0.13 | $(0.00) | $0.40 | $(0.07) |
| Adjusted EBITDA (non-GAAP) | $8.0m | $5.1m | $18.0m | $8.8m |
Q2 revenue increased 18%; gross margin improved 0.4 percentage points. SG&A rose $4.4m to $38.1m, mainly from higher staffing and salaries, commissions, content development, Strive acquisition costs, and stock-based compensation. SG&A declined as a share of revenue, to 67.2% from 69.8%. Q2 interest expense was $0.4m; the income tax provision was $1.2m, an approximately 40% effective rate. Six-month tax expense was $2.5m on $8.2m of pretax income.
Business and segment trends
- Direct Offices: Q2 revenue rose 16% to $41.5m; six-month revenue rose 20% to $86.6m. U.S./Canada and international direct-office revenue each grew 11% or more in Q2, while China declined.
- International Licensees: Q2 revenue increased 7% to $2.6m; six-month revenue increased 11% to $5.6m, supported by royalty growth.
- Education: Q2 revenue rose 31% to $11.1m; six-month revenue rose 42% to $22.8m. Education Adjusted EBITDA remained slightly negative for the first half, at $(0.1)m, but improved from $(3.1)m.
- All Access Pass and related sales grew 29% in Q2 and 28% in the first half; annual AAP revenue retention was above 90%. Leader in Me subscription recognition, increased training and consulting activity, and materials sales supported Education growth.
Cash, debt, and liquidity
- Cash was $61.1m at February 28, 2022, versus $47.4m at August 31, 2021; $16.9m was held by foreign subsidiaries. Current assets were $127.4m and current liabilities $119.8m.
- Six-month operating cash flow was $23.2m, versus $21.9m. Investing cash outflow was $2.0m; financing cash outflow was $7.4m. Cash increased $13.6m over the six months.
- Notes payable totaled $16.4m, and the corporate-campus financing obligation totaled $12.6m. No borrowings were outstanding on the $15.0m revolving credit facility. The company said it was compliant with credit covenants and expected available cash and operating cash flow to meet needs for at least 12 months.
- Deferred revenue was $83.0m, including $70.4m of subscription deferred revenue. Remaining performance obligations were $119.3m, including subscription deferred revenue.
Outlook, risks, and notable items
- Management was optimistic that sales, earnings, and cash flow would improve during FY2022, but said recovery and results depend on pandemic conditions and international economic and geopolitical stability. It expected prior-year comparisons to become less favorable as pandemic-affected comparison periods passed.
- Management anticipated COVID-related restrictions would weigh on China and Japan in Q3 and Q4. The Russia licensee relationship was suspended; Ukraine operations were limited. The company reported approximately $0.1m of combined Russia and Ukraine royalty revenue in FY2021.
- FY2022 estimates: depreciation expense of approximately $5.3m; definite-lived intangible amortization of approximately $5.3m; property and equipment purchases of approximately $5.5m; and curriculum development spending of approximately $5.0m.
- Risks highlighted include continuing COVID effects, supply-chain disruption, inflation and inability to pass through higher costs, geopolitical conflict, foreign exchange, and uncertain international recovery. Management noted inflation could raise product, benefit, travel, and compensation costs.
- The prior-year Q2 tax rate was unusually high because of a deferred-tax valuation allowance and the small pretax-income base. No public-plan share repurchases occurred in the quarter; first-half treasury-stock purchases primarily reflected shares withheld for employee award taxes.
Most important facts to verify
- Whether AAP growth and retention above 90% continue, and whether subscription billings convert into recognized revenue and cash.
- Whether China, Japan, and licensee markets recover despite restrictions and geopolitical disruption.
- Whether Education’s revenue growth translates into sustained positive segment profitability.
- Whether inflation, hiring, commissions, and content investment constrain margins, and whether management’s FY2022 spending estimates hold.
- Debt repayment, covenant compliance, and liquidity assumptions, including cash held overseas and the company’s ability to renew its credit facility before its August 2024 expiry.