Franklin Covey Co. — Q1 FY2021 10-Q
Reporting period: Quarter ended November 30, 2020. Franklin Covey provides organizational performance and education services, including All Access Pass (AAP) and Leader in Me subscriptions, digital learning, training, and consulting. Results were significantly affected by COVID-19 disruptions to workplaces and schools.
Financial performance
| Metric | Q1 FY2021 | Q1 FY2020 |
|---|---|---|
| Net sales | $48.3 million | $58.6 million |
| Gross profit / margin | $36.4 million / 75.3% | $42.0 million / 71.7% |
| Operating loss | $0.2 million | $0.2 million |
| Net loss | $0.9 million; $0.06 per share | $0.5 million; $0.04 per share |
| Adjusted EBITDA | $3.7 million | $5.0 million |
| Operating cash flow | $10.9 million | $6.8 million |
Cash and cash equivalents were $34.3 million at November 30, 2020, including $11.0 million held by foreign subsidiaries. Term notes totaled $18.8 million, and the campus financing obligation was $16.0 million. The company had no borrowings on its $15.0 million revolving credit facility. Current liabilities exceeded current assets by approximately $1.2 million.
Changes and business drivers
- Sales declined 17.6% year over year. Management attributed the decrease mainly to COVID-related reductions in foreign direct-office sales, facilitator materials, education coaching and consulting, and licensee revenue.
- Subscription trends were comparatively resilient: AAP sales rose 16%, Leader in Me membership revenue rose 14%, and AAP annual revenue retention was above 90%. Deferred subscription revenue was $56.9 million, up 17% from November 2019.
- Gross margin improved 3.6 percentage points, reflecting a higher subscription mix. SG&A fell $5.7 million, including lower travel, marketing, associate costs, and stock-based compensation.
- Direct-office revenue was $36.7 million, down from $42.1 million; international licensee revenue was $2.6 million, down from $3.7 million; Education revenue was $7.5 million, down from $11.1 million. Licensee revenue increased 95% sequentially versus Q4 FY2020.
- Operating cash flow increased, primarily due to strong receivables collections and working-capital movements. Cash used in investing was $0.4 million; financing activities used $3.5 million, including debt and financing-obligation payments.
Outlook, risks, and notable items
Management expressed optimism about recovery during FY2021, citing subscription strength, digital delivery, improving renewals, and rescheduled training. It did not provide a specific sales or earnings forecast and said the pandemic’s future impact could not be determined. Recovery depends on reopening, client demand and ability to pay, and broader economic conditions.
The company expected FY2021 depreciation of approximately $6.5 million, amortization of $4.5 million, curriculum-development spending of $4.5 million, and property-and-equipment purchases of approximately $2.8 million. It said available cash, operating cash flows, and external funding sources should be sufficient for at least 12 months, subject to business and pandemic-related uncertainties.
Temporary credit-agreement covenants applied through May 2021, including minimum liquidity and rolling Adjusted EBITDA requirements. The company reported compliance at November 30, 2020. It also disclosed a modification of performance-based long-term incentive awards, extending vesting service periods by two years and increasing EBITDA targets by $2.0 million. COVID-19, economic recovery, liquidity, client collections, competition, and variable-rate borrowing costs remain key risks. A 1 percentage-point increase in borrowing rates was estimated to add about $0.2 million of interest expense over the next 12 months.
Important facts for investors to verify
- Whether subscription growth and retention can offset continued weakness in in-person training, education services, and international markets.
- Progress in revenue recovery, including the timing of postponed or canceled client programs and the sequential rebound in licensee revenue.
- Compliance with temporary lender covenants and maintenance of liquidity as operating conditions evolve.
- Whether receivables collections and deferred subscription balances remain supportive of cash flow.
- Actual FY2021 capital spending, operating results, and pandemic-related impacts versus management’s stated expectations.