Franklin Covey Co. — Form 10-Q Summary
Business context and reporting period
Global provider of performance-improvement content and services, including training, consulting and subscription offerings such as the All Access Pass (AAP). This report covers fiscal Q1 2018, the three months ended November 30, 2017; comparisons are with the quarter ended November 26, 2016. Amounts below are in U.S. dollars.
Financial results and liquidity
| Metric | Q1 2018 | Prior-year quarter |
|---|---|---|
| Net sales | $47.9 million | $39.8 million |
| Gross profit / margin | $32.9 million / 68.6% | $25.3 million / 63.6% |
| Operating loss | $3.3 million | $5.4 million |
| Net loss / diluted loss per share | $2.4 million / $0.17 | $4.0 million / $0.29 |
| Adjusted EBITDA | $0.6 million | $(2.8) million |
| Operating cash flow | $2.3 million provided | $2.9 million used |
Sales rose 20%, led primarily by recognition of previously deferred, higher-margin subscription revenue. Training and consulting services generated $46.5 million, up 22%; product sales were $0.5 million, down 41%, following the exit from Japanese publishing. SG&A, depreciation and amortization totaled $36.1 million, up 18%. The company reported an income tax benefit of $1.3 million.
Cash was $8.1 million at November 30, 2017, substantially held at foreign subsidiaries; $21.0 million remained available under the revolving credit facility. Net working capital was $9.4 million, versus $11.2 million at August 31, 2017. The balance sheet included $9.1 million drawn on the line of credit, $17.8 million of term notes and $22.5 million of financing obligation, including current portions. Total liabilities were $113.1 million. Management said it was in compliance with credit covenants and expected existing resources to support operations for at least 12 months.
Investing activities used $4.2 million, including $2.4 million for property and equipment, $0.7 million for curriculum development and a $1.1 million Jhana contingent-consideration payment. Financing activities provided $1.2 million; cash declined by $0.8 million during the quarter.
Material changes versus the prior period
- Consolidated sales increased $8.1 million, with Direct Offices up 30% to $34.2 million, Education Practice up 5% to $9.2 million, and International Licensees down 3% to $3.3 million.
- Management attributed the improved gross margin chiefly to deferred AAP and other subscription revenue recognized in the quarter. AAP and related services invoiced totaled $9.2 million, versus $7.1 million; total SaaS invoicing, including Education membership, was $14.3 million versus $13.5 million. The company also cited acquisitions, a $0.9 million intellectual-property contract, higher onsite presentation revenue and Education growth.
- Operating loss narrowed by $2.1 million, although operating expenses rose $5.4 million. The prior-year period included a $1.0 million credit from reducing estimated acquisition-related contingent consideration; the current period recorded a $0.2 million increase. Amortization rose $0.7 million, primarily due to fiscal 2017 acquisitions.
- Accounts receivable declined $16.1 million during the quarter, contributing to the operating cash-flow improvement. Deferred revenue declined to $35.3 million from $40.8 million at August 31, 2017; a further $15.9 million of contracted but unbilled deferred revenue was not on the balance sheet.
Outlook, commentary and risks
Management described Q1 as a potential inflection point and expects improved financial performance compared with prior periods, while cautioning that the SaaS transition may continue to make quarterly comparisons uneven. It expects AAP availability in 15 additional languages later in fiscal 2018 and anticipates continued Education growth, with most Education sales growth typically occurring in Q4.
Fiscal 2018 estimates include approximately $5.5 million of property-and-equipment purchases and $6.5 million of curriculum-development spending. Management estimated depreciation of approximately $5.5 million and amortization of $5.4 million for the year; AAP portal upgrades could increase capital spending. The new ERP system launched in early December 2017.
The company expected a $1.2–$1.5 million tax benefit from the Tax Cuts and Jobs Act, primarily from remeasuring deferred tax balances; it cited a 26% U.S. federal statutory rate for fiscal 2018 and 21% for later years. Adoption of the new revenue standard was required beginning September 1, 2018; the full impact and transition method were undetermined, with possible effects on AAP and other license-related revenue. The company expected no operating-cash-flow impact. The new lease standard was expected to increase reported assets and liabilities, but its full impact was not yet determined.
Key risks include continued subscription-model transition and revenue timing, competition and customer acceptance of AAP, sales and renewal trends, cost control, receivable collections, foreign-exchange exposure, capital needs and availability of financing. A 1 percentage-point increase in the effective interest rate on debt outstanding at quarter-end was estimated to add about $0.2 million of interest expense over 12 months. The company also had contingent consideration obligations, including $6.0 million of recorded acquisition-related liabilities.
Important facts for investors to verify
- Whether subscription billings, renewals and recognized revenue continue to grow, and how the $15.9 million of unbilled contracted revenue converts to reported revenue and cash.
- Whether higher sales and gross margin translate into sustained operating profitability after elevated sales, acquisition and technology costs.
- Liquidity, covenant headroom and debt service, particularly given cash largely held overseas, the $9.1 million revolver balance and planned capital spending.
- The eventual financial-statement effects and adoption approach for revenue and lease accounting standards, and the realization of the expected tax benefit.
- Management’s forward-looking expectations are subject to material uncertainties; the filing does not provide firm earnings or revenue guidance.