Franklin Covey(FC) - 2024 Q2 - Quarterly Results

Executive Summary Franklin Covey reported a slight revenue decrease in Q2 FY24, but achieved record rolling four-quarter subscription sales, strong cash flow, and robust liquidity, while revising FY24 Adjusted EBITDA guidance to the lower end of the range Q2 Fiscal 2024 Performance Highlights Franklin Covey reported second-quarter fiscal 2024 consolidated revenue of $61.3 million, a slight decrease from the prior year, with subscription and subscription services sales reaching a record $227.3 million for the rolling four quarters, demonstrating strong cash flow and robust liquidity | Metric | Q2 FY24 | Q2 FY23 | Change | Rolling 4 Qtrs FY24 | Rolling 4 Qtrs FY23 | Change | | :-------------------------------- | :------ | :------ | :------ | :------------------ | :------------------ | :------ | | Consolidated Revenue | $61.3M | $61.8M | -0.8% | $279.1M | $276.1M | +1.1% | | Subscription & Services Sales | $50.3M | - | - | $227.3M | - | - | | Cash Flows From Operating Activities (YTD) | $30.2M | $11.2M | +169.6% | - | - | - | | Free Cash Flow (YTD) | $24.7M | $3.3M | +648.5% | - | - | - | | Adjusted EBITDA (Q2) | $7.4M | $8.2M | -9.7% | $46.8M | $43.9M | +6.6% | - Liquidity remains strong at over $103 million, comprising $40.9 million in cash and an undrawn $62.5 million credit facility[2][11] CEO Commentary and Strategic Outlook The CEO noted that Q2 results met expectations despite slower-than-expected subscription services sales and a difficult selling environment due to economic concerns, revising FY24 Adjusted EBITDA guidance to the lower end but anticipating record sales, Adjusted EBITDA, and free cash flow in the second half - Revised fiscal 2024 Adjusted EBITDA expectation to approximately $54.5 million (constant currency), at the low end of the previously announced guidance range[3][6] - Anticipates third and fourth quarters to achieve all-time highs in sales, Adjusted EBITDA, and free cash flow in fiscal 2024[6] - Business resilience highlighted by strong client retention, over 90% revenue retention in the US and Canada, and growth in deferred subscription revenue[6] - Multi-year contracts continue to grow, with 62% of All Access Pass (AAP) contracted revenue now for 2 years or more[6] Second Quarter Fiscal 2024 Financial Review This section provides a detailed analysis of Franklin Covey's financial performance for the second quarter of fiscal 2024, covering consolidated and segmental revenues, profitability, cash flow, and deferred revenue trends Consolidated Revenue and Sales Performance Consolidated sales for the second quarter slightly decreased year-over-year, primarily due to a decline in Direct Office sales and international licensee revenues, partially offset by growth in subscription and subscription services | Metric | Q2 FY24 | Q2 FY23 | Change | | :-------------------------------- | :------ | :------ | :------ | | Consolidated Sales | $61.3M | $61.8M | -0.8% | | Direct Office Sales | $43.0M | $43.6M | -1.4% | | Total Subscription & Subscription Services Sales | $50.3M | - | +5% | - Foreign exchange rates had an unfavorable impact of $0.3 million on sales during the second quarter[9] Segmental Revenue Performance The Enterprise Division experienced a slight revenue decline, with increased AAP subscription sales offset by decreases in legacy training and international licensee revenues, while the Education Division achieved revenue growth driven by increased membership subscriptions and training days Enterprise Division Enterprise Division revenues decreased slightly, as strong growth in AAP subscription sales was counteracted by reduced legacy training, subscription services, and international licensee revenues, though revenue retention for AAP subscriptions in the US and Canada remained robust | Metric | Q2 FY24 | Q2 FY23 | Change | | :-------------------------------- | :------ | :------ | :------ | | Enterprise Division Revenues | $45.7M | $46.6M | -1.9% | | AAP Subscription Sales Growth | - | - | +9% | | AAP Subscription & Services Sales Growth | - | - | +6% | | Rolling 4 Qtrs AAP Subscription & Services Sales | $162.1M | $154.4M | +5% | | International Licensee Revenues | - | - | -6% | - AAP subscription revenue retention levels in the United States and Canada remained strong, greater than 90%[4] Education Division The Education Division saw a 3% increase in revenues, primarily fueled by higher membership subscription revenues and increased sales of classroom and training materials, delivering significantly more training and coaching days compared to the prior year | Metric | Q2 FY24 | Q2 FY23 | Change | | :-------------------------------- | :------ | :------ | :------ | | Education Division Revenues | $14.6M | $14.2M | +3% | | Education Membership Subscription & Services Revenue Growth | - | - | +4% | - The Education Division delivered nearly 100 more training and coaching days than the prior year[5][10] Profitability and Operating Expenses Second-quarter net income and Adjusted EBITDA decreased year-over-year, primarily due to increased operating expenses from restructuring costs and an impaired asset charge, partially offset by lower stock-based compensation, while gross margin remained strong and consistent | Metric | Q2 FY24 | Q2 FY23 | Change | | :-------------------------------- | :------ | :------ | :------ | | Gross Profit | $46.9M | $47.2M | -0.6% | | Gross Margin | 76.4% | 76.4% | 0.0% | | Operating Income | $1.4M | $2.8M | -50.0% | | Net Income | $0.9M | $1.7M | -47.1% | | Diluted EPS | $0.06 | $0.12 | -50.0% | | Adjusted EBITDA | $7.4M | $8.2M | -9.7% | - Operating expenses increased by $1.0 million, primarily due to $1.7 million in restructuring expenses and a $0.9 million impaired asset charge[11] - The increase in operating expenses was partially offset by a $1.6 million decrease in stock-based compensation expense[11] Cash Flow, Liquidity, and Capital Allocation The company significantly improved its cash flows from operating activities and free cash flow in the first half of fiscal 2024, driven by favorable working capital changes, maintaining strong liquidity even after substantial common stock repurchases | Metric | H1 FY24 | H1 FY23 | Change | | :-------------------------------- | :------ | :------ | :------ | | Cash Flows From Operating Activities | $30.2M | $11.2M | +169.6% | | Free Cash Flow | $24.7M | $3.3M | +648.5% | - The increase in cash flows was primarily due to favorable changes in working capital and strong collections of accounts receivable[8] - The company purchased 460,609 shares of common stock for $18.4 million during the first two quarters of fiscal 2024[11] - Available liquidity stood at over $103 million, including $40.9 million in cash and an undrawn $62.5 million line of credit[11] Deferred Revenue and Contract Trends Franklin Covey continued to see strong growth in its deferred subscription revenue, both billed and unbilled, indicating a solid foundation for future sales, with the proportion of multi-year contracts for its All Access Pass also increasing significantly | Metric | Feb 29, 2024 | Feb 28, 2023 | Change | | :-------------------------------- | :----------- | :----------- | :------ | | Consolidated Deferred Subscription Revenue | $86.1M | $76.1M | +13.1% | | Billed and Unbilled Deferred Subscription Revenue | $158.8M | $145.8M | +8.9% | - The percentage of AAP contracts for at least two years increased to 56% from 50% in the prior year[8] - The percentage of contracted amounts represented by multi-year contracts increased to 62% from 57% at the end of the second quarter of fiscal 2023[8] Year-to-Date Fiscal 2024 Financial Review This section reviews Franklin Covey's year-to-date financial performance for the first two quarters of fiscal 2024, including consolidated and segmental revenue, and profitability metrics Consolidated Revenue and Sales Performance For the first two quarters of fiscal 2024, consolidated revenue slightly decreased compared to the prior year, primarily due to a decline in Enterprise Division sales, partially offset by growth in the Education Division | Metric | H1 FY24 | H1 FY23 | Change | | :-------------------------------- | :------ | :------ | :------ | | Consolidated Revenue | $129.7M | $131.1M | -1.1% | Segmental Revenue Performance Year-to-date, the Enterprise Division experienced a slight revenue decrease, despite growth in AAP subscription and services sales, mainly due to weaker foreign direct office sales, while the Education Division continued its positive trend with a 3% increase in sales | Metric | H1 FY24 | H1 FY23 | Change | | :-------------------------------- | :------ | :------ | :------ | | Enterprise Division Sales | $98.3M | $100.0M | -1.7% | | AAP Subscription & Services Sales | $79.1M | $75.0M | +5.5% | | Foreign Direct Office Sales | - | - | -$0.6M | | International Licensee Revenues | $6.1M | $6.2M | -1.6% | | Education Division Sales | $29.3M | $28.5M | +2.8% | - Education Division sales growth was primarily due to increased consulting, coaching, and training days delivered, increased international education royalties, and increased recognition of previously deferred revenue related to Leader in Me subscriptions[13] Profitability and Operating Expenses Year-to-date gross profit remained strong, but operating income, net income, and Adjusted EBITDA decreased compared to the prior year, primarily due to higher restructuring expenses and an impaired asset charge, partially offset by reduced stock-based compensation | Metric | H1 FY24 | H1 FY23 | Change | | :-------------------------------- | :------ | :------ | :------ | | Consolidated Gross Profit | $99.1M | $100.0M | -0.9% | | Gross Margin | 76.4% | 76.2% | +0.2% | | Income from Operations | $6.8M | $9.2M | -26.1% | | Adjusted EBITDA | $18.4M | $19.7M | -6.6% | | Net Income | $5.7M | $6.4M | -10.9% | | Diluted EPS | $0.42 | $0.44 | -4.5% | - Operating expenses increased by $1.6 million, primarily due to $2.3 million of restructuring expenses and a $0.9 million impaired asset charge, partially offset by a $1.6 million reduction in stock-based compensation expense[14] Fiscal 2024 Guidance and Outlook Despite first-half challenges, Franklin Covey anticipates a strong second half of fiscal 2024, expecting to achieve Adjusted EBITDA at the lower end of its guidance range, representing 13% growth over fiscal 2023, and remains confident in its subscription offerings to drive record revenue, Adjusted EBITDA, and Free Cash Flow - Expected Adjusted EBITDA for fiscal 2024 is at the lower end of the $54.5 million to $58.0 million guidance range (constant currency), representing 13% growth over fiscal 2023's $48.1 million[15] - The company expects to achieve the highest levels of revenue, Adjusted EBITDA, and Free Cash Flow since the sale of its consumer products division in fiscal 2024[15] - Confidence is driven by the strength of its business model, high recurring revenue, high gross margins, low capital intensity, and the strategic durability of All Access Pass and Leader in Me membership subscriptions[15] Supplemental Information This section provides essential background on Franklin Covey Co., clarifies non-GAAP financial measures, outlines forward-looking statement disclaimers, and lists investor relations contacts About Franklin Covey Co. Franklin Covey Co. is a global leadership company operating in over 160 countries, focused on transforming organizations by building leaders, teams, and cultures through its All Access Pass content and solutions, with an approach emphasizing lasting behavioral change refined over 30 years with diverse clients - Franklin Covey (NYSE: FC) is a global leadership company providing professional services in over 160 countries and territories[22] - The company's core offering is the All Access Pass, which integrates content, solutions, experts, technology, and metrics to drive behavioral change[22] - Clients include Fortune 100, Fortune 500 companies, small- and mid-sized businesses, governmental entities, and educational institutions[23] Non-GAAP Financial Measures The report includes non-GAAP financial measures, Adjusted EBITDA and Free Cash Flow, used by management for internal comparisons and to provide investors with greater transparency into operational activities and financial results, with a reconciliation to GAAP measures provided for historical data but not for forward-looking Adjusted EBITDA estimates 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 infrequent items like restructuring costs and impaired assets[20] - Free Cash Flow is defined as cash flows from operating activities less capitalized expenditures for purchases of property and equipment and curriculum development[20] - A forward-looking reconciliation of Adjusted EBITDA to GAAP measures is not provided due to the difficulty in obtaining certain information dependent on future uncertain events[21] Forward-Looking Statements This press release contains forward-looking statements regarding future results and growth, which are based on management's current expectations but are subject to various risks and uncertainties, including macroeconomic conditions, subscription renewals, market acceptance of new products, inflation, and geopolitical conflicts, which could cause actual results to differ materially - Forward-looking statements are subject to various risks and uncertainties, including general macroeconomic conditions, renewals of subscription contracts, client demand for add-on services, and impacts from geopolitical conflicts[17] - Other factors include market acceptance of new products, inflation, and the ability to achieve sustainable growth, as detailed in the Company's Form 10-K[17] - The company undertakes no obligation to update or revise these statements to reflect events or circumstances subsequent to the press release[19] Investor Relations Contact Contact information for investor and media inquiries is provided for Franklin Covey Co - Investor Contact: Boyd Roberts, 801-817-5127, investor.relations@franklincovey.com[24] - Media Contact: Debra Lund, 801-817-6440, Debra.Lund@franklincovey.com[24] Condensed Consolidated Financial Statements This section presents Franklin Covey's detailed financial statements, including income statements, balance sheets, and reconciliations of non-GAAP measures for the reported periods Income Statements The condensed consolidated income statements provide a detailed breakdown of revenues, costs, and profitability for the second quarter and first two quarters of fiscal 2024 and 2023 | | Quarter Ended Feb 29, 2024 ($ thousands) | Quarter Ended Feb 28, 2023 ($ thousands) | Two Quarters Ended Feb 29, 2024 ($ thousands) | Two Quarters Ended Feb 28, 2023 ($ thousands) | | :-------------------------------- | :------------------------- | :------------------------- | :------------------------------ | :------------------------------ | | Net sales | $61,336 | $61,756 | $129,736 | $131,125 | | Cost of sales | 14,485 | 14,546 | 30,607 | 31,173 | | Gross profit | 46,851 | 47,210 | 99,129 | 99,952 | | Selling, general, and administrative | 40,771 | 42,338 | 84,976 | 86,350 | | Restructuring costs | 1,726 | - | 2,307 | - | | Impaired asset | 928 | - | 928 | - | | Depreciation | 913 | 951 | 2,005 | 2,196 | | Amortization | 1,071 | 1,093 | 2,142 | 2,185 | | Income from operations | 1,442 | 2,828 | 6,771 | 9,221 | | Interest expense, net | (27) | (47) | (80) | (377) | | Income before income taxes | 1,415 | 2,781 | 6,691 | 8,844 | | Income tax provision | (541) | (1,042) | (966) | (2,438) | | Net income | $874 | $1,739 | $5,725 | $6,406 | | Diluted EPS ($) | $0.06 | $0.12 | $0.42 | $0.44 | | Adjusted EBITDA ($ thousands) | $7,448 | $8,187 | $18,418 | $19,659 | Reconciliation of Net Income to Adjusted EBITDA This section provides a reconciliation of net income (GAAP) to Adjusted EBITDA (non-GAAP), detailing the adjustments made for interest, income taxes, amortization, depreciation, stock-based compensation, restructuring costs, and impaired assets | | Quarter Ended Feb 29, 2024 ($ thousands) | Quarter Ended Feb 28, 2023 ($ thousands) | Two Quarters Ended Feb 29, 2024 ($ thousands) | Two Quarters Ended Feb 28, 2023 ($ thousands) | | :-------------------------------- | :------------------------- | :------------------------- | :------------------------------ | :------------------------------ | | Net income | $874 | $1,739 | $5,725 | $6,406 | | Adjustments: | | | | | | Interest expense, net | 27 | 47 | 80 | 377 | | Income tax provision | 541 | 1,042 | 966 | 2,438 | | Amortization | 1,071 | 1,093 | 2,142 | 2,185 | | Depreciation | 913 | 951 | 2,005 | 2,196 | | Stock-based compensation | 1,368 | 3,315 | 4,265 | 6,050 | | Restructuring costs | 1,726 | - | 2,307 | - | | Impaired asset | 928 | - | 928 | - | | Increase in the fair value of contingent consideration liabilities | - | - | - | 7 | | Adjusted EBITDA ($ thousands) | $7,448 | $8,187 | $18,418 | $19,659 | | Adjusted EBITDA margin (%) | 12.1% | 13.3% | 14.2% | 15.0% | Sales, Gross Profit, and Adjusted EBITDA by Division/Segment This table provides a breakdown of sales, gross profit, and Adjusted EBITDA across the Enterprise Division (Direct Offices and International Licensees), Education Division, and Corporate and other segments for the second quarter and first two quarters of fiscal 2024 and 2023 | Sales by Division/Segment ($ thousands): | Quarter Ended Feb 29, 2024 | Quarter Ended Feb 28, 2023 | Two Quarters Ended Feb 29, 2024 | Two Quarters Ended Feb 28, 2023 | | :-------------------------------- | :------------------------- | :------------------------- | :------------------------------ | :------------------------------ | | Enterprise Division: | | | | | | Direct offices | $42,960 | $43,646 | $92,175 | $93,812 | | International licensees | 2,748 | 2,935 | 6,126 | 6,213 | | Total Enterprise Division | 45,708 | 46,581 | 98,301 | 100,025 | | Education Division | 14,579 | 14,198 | 29,323 | 28,549 | | Corporate and other | 1,049 | 977 | 2,112 | 2,551 | | Consolidated Sales | $61,336 | $61,756 | $129,736 | $131,125 | | Gross Profit by Division/Segment ($ thousands): | | | | | | Enterprise Division: | | | | | | Direct offices | $35,514 | $35,854 | $75,015 | $75,775 | | International licensees | 2,374 | 2,659 | 5,426 | 5,635 | | Total Enterprise Division | 37,888 | 38,513 | 80,441 | 81,410 | | Education Division | 8,597 | 8,392 | 17,977 | 17,568 | | Corporate and other | 366 | 305 | 711 | 974 | | Consolidated Gross Profit | $46,851 | $47,210 | $99,129 | $99,952 | | Adjusted EBITDA by Division/Segment ($ thousands): | | | | | | Enterprise Division: | | | | | | Direct offices | $9,122 | $9,641 | $20,809 | $20,890 | | International licensees | 1,342 | 1,541 | 3,238 | 3,372 | | Total Enterprise Division | 10,464 | 11,182 | 24,047 | 24,262 | | Education Division | (529) | (622) | (487) | (341) | | Corporate and other | (2,487) | (2,373) | (5,142) | (4,262) | | Consolidated Adjusted EBITDA | $7,448 | $8,187 | $18,418 | $19,659 | Balance Sheets The condensed consolidated balance sheets present the company's financial position as of February 29, 2024, and August 31, 2023, detailing assets, liabilities, and shareholders' equity | Assets ($ thousands) | Feb 29, 2024 | Aug 31, 2023 | | :-------------------------------- | :----------- | :----------- | | Current assets: | | | | Cash and cash equivalents | $40,904 | $38,230 | | Accounts receivable, net | 57,153 | 81,935 | | Inventories | 4,196 | 4,213 | | Prepaid expenses and other current assets | 20,182 | 20,639 | | Total current assets | 122,435 | 145,017 | | Property and equipment, net | 8,708 | 10,039 | | Intangible assets, net | 38,371 | 40,511 | | Goodwill | 31,220 | 31,220 | | Deferred income tax assets | 1,655 | 1,661 | | Other long-term assets | 19,544 | 17,471 | | Total Assets | $221,933 | $245,919 | | Liabilities and Shareholders' Equity ($ thousands) | | | | Current liabilities: | | | | Current portion of notes payable | $3,335 | $5,835 | | Current portion of financing obligation | 3,718 | 3,538 | | Accounts payable | 7,734 | 6,501 | | Deferred subscription revenue | 82,365 | 95,386 | | Other deferred revenue | 22,012 | 12,137 | | Accrued liabilities | 19,301 | 28,252 | | Total current liabilities | 138,465 | 151,649 | | Notes payable, less current portion | 1,577 | 1,535 | | Financing obligation, less current portion | 2,515 | 4,424 | | Other liabilities | 7,492 | 7,617 | | Deferred income tax liabilities | 1,057 | 2,040 | | Total liabilities | 151,106 | 167,265 | | Shareholders' equity: | | | | Common stock | 1,353 | 1,353 | | Additional paid-in capital | 225,776 | 232,373 | | Retained earnings | 105,527 | 99,802 | | Accumulated other comprehensive loss | (1,075) | (987) | | Treasury stock at cost | (260,754) | (253,887) | | Total shareholders' equity | 70,827 | 78,654 | | Total Liabilities and Shareholders' Equity | $221,933 | $245,919 | Free Cash Flow This section details the calculation of Free Cash Flow for the first two quarters of fiscal 2024 and 2023, starting from net income and adjusting for non-cash items and changes in working capital, then subtracting capital expenditures | CASH FLOWS FROM OPERATING ACTIVITIES ($ thousands) | Two Quarters Ended Feb 29, 2024 | Two Quarters Ended Feb 28, 2023 | | :-------------------------------- | :------------------------------ | :------------------------------ | | Net income | $5,725 | $6,406 | | Adjustments to reconcile net income to net cash provided by operating activities: | | | | Depreciation and amortization | 4,146 | 4,381 | | Amortization of capitalized curriculum costs | 1,501 | 1,648 | | Impairment of assets | 928 | - | | Stock-based compensation | 4,265 | 6,050 | | Deferred income taxes | (978) | 1,130 | | Change in fair value of contingent consideration liabilities | - | 7 | | Amortization of right-of-use operating lease assets | 403 | 411 | | Changes in working capital | 14,222 | (8,825) | | Net cash provided by operating activities | 30,212 | 11,208 | | CASH FLOWS FROM INVESTING ACTIVITIES ($ thousands) | | | | Purchases of property and equipment | (1,716) | (2,644) | | Curriculum development costs | (3,770) | (5,277) | | Net cash used for investing activities | (5,486) | (7,921) | | Free Cash Flow ($ thousands) | $24,726 | $3,287 |