Franklin Covey(FC) - 2024 Q3 - Quarterly Results

Press Release Overview Third Quarter Performance Highlights Franklin Covey reported strong Q3 FY2024 results with consolidated revenue increasing 3% to $73.4 million, net income rising 25% to $5.7 million, and Adjusted EBITDA increasing 17% to $13.9 million, alongside significant increases in cash flows and strong liquidity Third Quarter Performance Highlights | Metric | Q3 FY24 (in thousands) | Q3 FY23 (in thousands) | Change (%) | | :----------------------------------- | :--------------------- | :--------------------- | :--------- | | Revenue | $73,400 | $71,400 | +3% | | Net Income | $5,700 | $4,600 | +25% | | Diluted EPS | $0.43 | $0.32 | - | | Adjusted EBITDA | $13,900 | $11,900 | +17% | Metric (First Three Quarters) | Metric (First Three Quarters) | FY24 (in thousands) | FY23 (in thousands) | | :------------------------------ | :------------------ | :------------------ | | Cash Flows From Operating Activities | $38,400 | $25,900 | | Free Cash Flow | $30,600 | $15,600 | - Liquidity remains strong at nearly $100 million, with $36.6 million of cash and no drawdowns on the company's $62.5 million credit facility[3] - The company purchased $25.8 million of its common stock through May 31, 2024[3] CEO Commentary and Strategic Drivers CEO Paul Walker expressed satisfaction with Q3 results, highlighting stronger-than-expected revenue, Adjusted EBITDA, and cash flows, noting strengthening key indicators and broad-based growth across Enterprise and Education Divisions, expecting record highs for fiscal 2024, driven by mission-critical solutions, strong leading indicators, a robust subscription model, and effective Free Cash Flow investment - CEO Paul Walker is pleased with Q3 results, which exceeded expectations for revenue, Adjusted EBITDA, and cash flows[6] - The company expects to achieve all-time highs in revenue, Adjusted EBITDA, and Free Cash Flow in fiscal 2024[6] - Four key growth drivers include: mission-critical solutions, strong leading indicators (deferred and unbilled deferred revenue, add-on services), a robust subscription business model, and the ability to invest Free Cash Flow and excess cash at a high rate of return[6][15][16] Detailed Financial Performance Consolidated Financial Results For Q3 FY2024, consolidated revenue increased 3% to $73.4 million, net income grew 25% to $5.7 million, and diluted EPS increased to $0.43, with Adjusted EBITDA improving by 17% to $13.9 million; for the first three quarters, revenue was $203.1 million, net income was $11.4 million, and Adjusted EBITDA was $32.3 million Consolidated Income Statement Highlights | Metric | Quarter May 31, 2024 (in thousands) | Quarter May 31, 2023 (in thousands) | Three Quarters May 31, 2024 (in thousands) | Three Quarters May 31, 2023 (in thousands) | | :--------------------------------- | :------------------- | :------------------- | :-------------------------- | :-------------------------- | | Revenue | $73,373 | $71,441 | $203,109 | $202,565 | | Gross profit | $56,206 | $54,233 | $155,336 | $154,185 | | Income from operations | $8,343 | $6,572 | $15,114 | $15,793 | | Net income | $5,721 | $4,563 | $11,446 | $10,969 | | Diluted EPS | $0.43 | $0.32 | $0.85 | $0.76 | | Adjusted EBITDA | $13,924 | $11,899 | $32,340 | $31,558 | Segment Performance The company's performance is driven by its Enterprise and Education divisions, with Enterprise Division revenues slightly decreasing due to lower legacy training and international direct office/licensee revenues, largely offset by growth in All Access Pass (AAP) revenues, while the Education Division showed strong growth, primarily from increased classroom materials revenue - Overall segment performance showed mixed results, with Enterprise Division revenues slightly down but offset by AAP growth, and strong growth in the Education Division[13][5] Enterprise Division Performance Enterprise Division revenues for Q3 FY2024 totaled $52.0 million, a slight decrease from $53.2 million in FY2023, attributed to decreased legacy training and international direct office/licensee revenues, partially offset by 4% growth in AAP subscription revenue and 3% growth in AAP subscription plus services revenue, with strong AAP retention levels exceeding 90% in the US and Canada Enterprise Division Revenue | Metric | Quarter May 31, 2024 (in thousands) | Quarter May 31, 2023 (in thousands) | Three Quarters May 31, 2024 (in thousands) | Three Quarters May 31, 2023 (in thousands) | | :-------------------------- | :------------------- | :------------------- | :-------------------------- | :-------------------------- | | Direct offices | $49,334 | $50,382 | $141,509 | $144,194 | | International licensees | $2,701 | $2,835 | $8,826 | $9,048 | | Total Enterprise | $52,035 | $53,217 | $150,335 | $153,242 | - AAP subscription revenue grew 4% compared with Q3 FY23, and AAP subscription plus subscription services revenue grew 3%[13] - AAP subscription revenue retention levels in the United States and Canada remained strong, greater than 90% during the first three quarters of fiscal 2024[13] Education Division Performance The Education Division experienced significant growth, with revenues increasing 18% to $20.1 million in Q3 FY2024, primarily driven by increased classroom materials revenue, partly due to a new state initiative, and delivered nearly 100 more training and coaching days than the prior year Education Division Revenue | Metric | Quarter May 31, 2024 (in thousands) | Quarter May 31, 2023 (in thousands) | Three Quarters May 31, 2024 (in thousands) | Three Quarters May 31, 2023 (in thousands) | | :----------------- | :------------------- | :------------------- | :-------------------------- | :-------------------------- | | Education Division | $20,079 | $17,082 | $49,402 | $45,631 | - Education Division revenues grew 18% in Q3 FY24, primarily due to increased classroom materials revenue, partly from a new state initiative[13][14] - The Education Division delivered nearly 100 more training and coaching days in Q3 FY24 than the prior year[5] Subscription and Deferred Revenue Total company subscription and subscription services revenues increased 6% to $60.8 million in Q3 FY2024, with consolidated deferred subscription revenue growing 15% to $83.8 million and unbilled deferred subscription revenue increasing to $69.4 million, while multi-year AAP contracts now represent 55% of contracts and 60% of contracted amounts - Total Company subscription and subscription services revenues reached $60.8 million in Q3 FY24, a 6% increase over Q3 FY23[5] - Consolidated deferred subscription revenue at May 31, 2024, increased 15% to $83.8 million compared with $72.7 million at May 31, 2023[5] - Unbilled deferred subscription revenue at May 31, 2024, grew to $69.4 million compared with $68.2 million at May 31, 2023[5] - 55% of the Company's AAP contracts are for at least two years (up from 50% in FY23), and the percentage of contracted amounts represented by multi-year contracts increased to 60% (up from 57% in FY23)[5] Cash Flow and Liquidity Cash flows from operating activities for the first three quarters of fiscal 2024 increased 48% to $38.4 million, and Free Cash Flow increased to $30.6 million, with the company maintaining strong liquidity at nearly $100 million, including $36.6 million in cash and no drawdowns on its $62.5 million credit facility Cash Flow Highlights (First Three Quarters) | Metric | 3 Quarters FY24 (in thousands) | 3 Quarters FY23 (in thousands) | | :------------------------------ | :---------------------------- | :---------------------------- | | Cash flows from operating activities | $38,400 | $25,900 | | Free Cash Flow | $30,600 | $15,600 | - Liquidity remains strong at nearly $100 million, with $36.6 million of cash and no drawdowns on the company's $62.5 million credit facility[3] Share Repurchase Program The company purchased 188,373 shares for $7.4 million during Q3 FY2024, bringing the total for the first three quarters to approximately 649,000 shares for $25.8 million, and approved a new plan to purchase up to $50.0 million of common stock on April 18, 2024 - The company purchased 188,373 shares of its common stock for $7.4 million during Q3 FY24[5] - For the first three quarters of fiscal 2024, the company purchased approximately 649,000 shares for $25.8 million[5] - A new plan to purchase up to $50.0 million of outstanding common stock was approved on April 18, 2024, replacing the previously existing plan[16] Outlook and Corporate Information Fiscal 2024 Guidance Despite challenges in the first half, Franklin Covey reaffirms its fiscal 2024 Adjusted EBITDA guidance at the low end of $54.5 million to $58.0 million (constant currency), representing 13% growth over FY2023, and expects to achieve record highs in revenue, Adjusted EBITDA, and Free Cash Flow for fiscal 2024, driven by its subscription offerings - The company expects its Adjusted EBITDA for fiscal 2024 to be at the low end of its previously announced guidance range of $54.5 million to $58.0 million in constant currency, excluding approximately $0.5 million of negative foreign exchange impact[7] - This guidance represents 13% growth over the $48.1 million of Adjusted EBITDA achieved in fiscal 2023[7] - The company expects to deliver the highest levels of revenue, Adjusted EBITDA, and Free Cash Flow in fiscal 2024 since the sale of its consumer products division, driven by its subscription offerings[7] Non-GAAP Financial Measures The company uses non-GAAP measures, Adjusted EBITDA and Free Cash Flow, to provide supplemental information for internal comparisons and investor transparency, with Adjusted EBITDA defined as net income excluding specific non-cash and infrequent items, and Free Cash Flow as operating cash flow less capital expenditures, while a forward-looking reconciliation for Adjusted EBITDA is not provided due to inherent uncertainties - Adjusted EBITDA is defined as net income excluding interest, income taxes, intangible asset amortization, depreciation, stock-based compensation expense, and certain other infrequently occurring items such as restructuring costs and impaired assets[18] - Free Cash Flow is defined as GAAP calculated cash flows from operating activities less capitalized expenditures for purchases of property and equipment and curriculum development[18] - A reconciliation of forward-looking Adjusted EBITDA to GAAP measures is not provided due to the difficulty in obtaining certain information dependent on future events[19] About Franklin Covey Co. Franklin Covey Co. is a global leadership company offering organizational performance improvement through world-class content, training, processes, and tools, operating in over 160 countries, partnering with clients to build leaders, teams, and cultures, delivering solutions via its All Access Pass in multiple languages and modalities, aiming for lasting behavioral change - Franklin Covey Co. is a global leadership company providing professional services in over 160 countries and territories[20] - The company transforms organizations by partnering with clients to build leaders, teams, and cultures that achieve breakthrough results through collective action[20] - Its best-in-class content and solutions are available through the Franklin Covey All Access Pass, integrating experts, technology, and metrics to ensure lasting behavioral change at scale[20] Forward-Looking Statements & Contacts The press release contains forward-looking statements subject to various risks and uncertainties, including macroeconomic conditions, subscription renewals, market acceptance of new products, and inflation, with the company disclaiming any obligation to update these statements, and contact information for investor relations and media provided - This press release contains forward-looking statements subject to various risks and uncertainties, including general macroeconomic conditions, renewals of subscription contracts, growth in client demand for add-on services, and market acceptance of new products[17][30] - The company undertakes no obligation to update or revise these forward-looking statements to reflect events or circumstances subsequent to this press release[30] - Investor and Media contact information is provided for inquiries[31] Financial Statements and Reconciliations Condensed Consolidated Income Statements The condensed consolidated income statements show Q3 FY2024 revenue of $73.4 million, gross profit of $56.2 million, and net income of $5.7 million, with revenue for the first three quarters at $203.1 million and net income at $11.4 million Condensed Consolidated Income Statements (Q3 and 3 Quarters Ended May 31, 2024 vs 2023) | Metric | Quarter May 31, 2024 (in thousands) | Quarter May 31, 2023 (in thousands) | Three Quarters May 31, 2024 (in thousands) | Three Quarters May 31, 2023 (in thousands) | | :--------------------------------- | :------------------- | :------------------- | :-------------------------- | :-------------------------- | | Revenue | $73,373 | $71,441 | $203,109 | $202,565 | | Cost of revenue | $17,167 | $17,208 | $47,773 | $48,380 | | Gross profit | $56,206 | $54,233 | $155,336 | $154,185 | | Selling, general, and administrative | $45,110 | $45,641 | $130,088 | $131,991 | | Restructuring costs | $701 | - | $3,008 | - | | Impaired asset | - | - | $928 | - | | Depreciation | $990 | $934 | $2,994 | $3,131 | | Amortization | $1,062 | $1,086 | $3,204 | $3,270 | | Income from operations | $8,343 | $6,572 | $15,114 | $15,793 | | Interest income (expense), net | $21 | $8 | $(59) | $(369) | | Income before income taxes | $8,364 | $6,580 | $15,055 | $15,424 | | Income tax provision | $(2,643) | $(2,017) | $(3,609) | $(4,455) | | Net income | $5,721 | $4,563 | $11,446 | $10,969 | | Net income per common share: Basic | $0.43 | $0.33 | $0.87 | $0.79 | | Diluted | $0.43 | $0.32 | $0.85 | $0.76 | | Weighted average common shares: Basic | $13,160 | $13,621 | $13,222 | $13,799 | | Diluted | $13,378 | $14,273 | $13,499 | $14,437 | | Other data: (1) Adjusted EBITDA | $13,924 | $11,899 | $32,340 | $31,558 | Reconciliation of Net Income to Adjusted EBITDA The reconciliation details the adjustments made to net income to arrive at Adjusted EBITDA, which was $13.9 million for Q3 FY2024 with a 19.0% margin, and $32.3 million for the first three quarters with a 15.9% margin Reconciliation of Net Income to Adjusted EBITDA (Q3 and 3 Quarters Ended May 31, 2024 vs 2023) | Metric | Quarter May 31, 2024 (in thousands) | Quarter May 31, 2023 (in thousands) | Three Quarters May 31, 2024 (in thousands) | Three Quarters May 31, 2023 (in thousands) | | :------------------------------------------------------------- | :------------------- | :------------------- | :-------------------------- | :-------------------------- | | Net income | $5,721 | $4,563 | $11,446 | $10,969 | | Adjustments: | | | | | | Interest expense (income), net | $(21) | $(8) | $59 | $369 | | Income tax provision | $2,643 | $2,017 | $3,609 | $4,455 | | Amortization | $1,062 | $1,086 | $3,204 | $3,270 | | Depreciation | $990 | $934 | $2,994 | $3,131 | | Stock-based compensation | $2,828 | $3,307 | $7,092 | $9,357 | | Restructuring costs | $701 | - | $3,008 | - | | Impaired asset | - | - | $928 | - | | Increase in the fair value of contingent consideration liabilities | - | - | - | $7 | | Adjusted EBITDA | $13,924 | $11,899 | $32,340 | $31,558 | | Adjusted EBITDA margin | 19.0% | 16.7% | 15.9% | 15.6% | Additional Financial Information by Segment This section provides a breakdown of revenue, gross profit, and Adjusted EBITDA by the Enterprise and Education divisions, showing that the Enterprise Division (Direct offices and International licensees) generated the majority of revenue and gross profit, while the Education Division demonstrated strong growth in revenue and Adjusted EBITDA Revenue by Division/Segment (Q3 and 3 Quarters Ended May 31, 2024 vs 2023) | Metric | Quarter May 31, 2024 (in thousands) | Quarter May 31, 2023 (in thousands) | Three Quarters May 31, 2024 (in thousands) | Three Quarters May 31, 2023 (in thousands) | | :-------------------------- | :------------------- | :------------------- | :-------------------------- | :-------------------------- | | Enterprise Division: Direct offices | $49,334 | $50,382 | $141,509 | $144,194 | | Enterprise Division: International licensees | $2,701 | $2,835 | $8,826 | $9,048 | | Education Division | $20,079 | $17,082 | $49,402 | $45,631 | | Corporate and other | $1,259 | $1,142 | $3,372 | $3,692 | | Consolidated Revenue | $73,373 | $71,441 | $203,109 | $202,565 | Gross Profit by Division/Segment (Q3 and 3 Quarters Ended May 31, 2024 vs 2023) | Metric | Quarter May 31, 2024 (in thousands) | Quarter May 31, 2023 (in thousands) | Three Quarters May 31, 2024 (in thousands) | Three Quarters May 31, 2023 (in thousands) | | :-------------------------- | :------------------- | :------------------- | :-------------------------- | :-------------------------- | | Enterprise Division: Direct offices | $40,172 | $40,425 | $115,186 | $116,199 | | Enterprise Division: International licensees | $2,435 | $2,549 | $7,861 | $8,184 | | Education Division | $13,179 | $10,929 | $31,157 | $28,497 | | Corporate and other | $420 | $330 | $1,132 | $1,305 | | Consolidated Gross Profit | $56,206 | $54,233 | $155,336 | $154,185 | Adjusted EBITDA by Division/Segment (Q3 and 3 Quarters Ended May 31, 2024 vs 2023) | Metric | Quarter May 31, 2024 (in thousands) | Quarter May 31, 2023 (in thousands) | Three Quarters May 31, 2024 (in thousands) | Three Quarters May 31, 2023 (in thousands) | | :-------------------------- | :------------------- | :------------------- | :-------------------------- | :-------------------------- | | Enterprise Division: Direct offices | $12,170 | $11,322 | $32,978 | $32,212 | | Enterprise Division: International licensees | $1,334 | $1,415 | $4,571 | $4,787 | | Education Division | $3,080 | $1,649 | $2,593 | $1,309 | | Corporate and other | $(2,660) | $(2,487) | $(7,802) | $(6,750) | | Consolidated Adjusted EBITDA | $13,924 | $11,899 | $32,340 | $31,558 | Condensed Consolidated Balance Sheets As of May 31, 2024, total assets were $221.0 million, a decrease from $245.9 million at August 31, 2023, with total liabilities decreasing to $148.8 million from $167.3 million, while total shareholders' equity was $72.2 million and cash and cash equivalents stood at $36.6 million Condensed Consolidated Balance Sheets (May 31, 2024 vs August 31, 2023) | Metric | May 31, 2024 (in thousands) | August 31, 2023 (in thousands) | | :---------------------------------------------------------------- | :-------------------------- | :----------------------------- | | Assets | | | | Cash and cash equivalents | $36,574 | $38,230 | | Accounts receivable, net | $60,424 | $81,935 | | Inventories | $4,644 | $4,213 | | Prepaid expenses and other current assets | $18,389 | $20,639 | | Total current assets | $120,031 | $145,017 | | Property and equipment, net | $8,631 | $10,039 | | Intangible assets, net | $38,808 | $40,511 | | Goodwill | $31,220 | $31,220 | | Deferred income tax assets | $1,636 | $1,661 | | Other long-term assets | $20,645 | $17,471 | | Total Assets | $220,971 | $245,919 | | Liabilities and Shareholders' Equity | | | | Current portion of notes payable | $2,085 | $5,835 | | Current portion of financing obligation | $3,810 | $3,538 | | Accounts payable | $6,185 | $6,501 | | Deferred subscription revenue | $80,092 | $95,386 | | Customer deposits | $22,204 | $12,137 | | Accrued liabilities | $22,215 | $28,252 | | Total current liabilities | $136,591 | $151,649 | | Notes payable, less current portion | $761 | $1,535 | | Financing obligation, less current portion | $1,533 | $4,424 | | Other liabilities | $8,076 | $7,617 | | Deferred income tax liabilities | $1,847 | $2,040 | | Total Liabilities | $148,808 | $167,265 | | Shareholders' equity | | | | Common stock | $1,353 | $1,353 | | Additional paid-in capital | $228,612 | $232,373 | | Retained earnings | $111,248 | $99,802 | | Accumulated other comprehensive loss | $(1,250) | $(987) | | Treasury stock at cost | $(267,800) | $(253,887) | | Total Shareholders' equity | $72,163 | $78,654 | | Total Liabilities and Shareholders' Equity | $220,971 | $245,919 | Condensed Consolidated Free Cash Flow For the first three quarters of fiscal 2024, net cash provided by operating activities was $38.4 million, a significant increase from $25.9 million in the prior year, with Free Cash Flow also substantially increasing to $30.6 million from $15.6 million in the same period Condensed Consolidated Free Cash Flow (3 Quarters Ended May 31, 2024 vs 2023) | Metric | Three Quarters May 31, 2024 (in thousands) | Three Quarters May 31, 2023 (in thousands) | | :------------------------------------------------------------------------------------ | :----------------------------------------- | :----------------------------------------- | | Net income | $11,446 | $10,969 | | Depreciation and amortization | $6,198 | $6,401 | | Amortization of capitalized curriculum costs | $2,340 | $2,385 | | Impairment of asset | $928 | - | | Stock-based compensation | $7,092 | $9,357 | | Deferred income taxes | $(169) | $2,399 | | Change in fair value of contingent consideration liabilities | - | $7 | | Amortization of right-of-use operating lease assets | $596 | $633 | | Changes in working capital | $9,954 | $(6,204) | | Net cash provided by operating activities | $38,385 | $25,947 | | Purchases of property and equipment | $(2,618) | $(3,545) | | Curriculum development costs | $(5,195) | $(6,841) | | Net cash used for investing activities | $(7,813) | $(10,386) | | Free Cash Flow | $30,572 | $15,561 |