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FC

FRANKLIN COVEY CO (FC)·Q2 2020 Earnings Summary

Executive Summary

  • Q2 FY2020 delivered resilient growth despite COVID disruptions: revenue rose 7% to $53.7M, gross margin expanded 171 bps to 71.9%, and Adjusted EBITDA climbed 321% to $4.1M; diluted EPS improved to $0.08 vs $(0.25) YoY .
  • Subscription engine drove performance: All Access Pass (AAP) and related sales increased 28% YoY; billed deferred subscription revenue reached $48.0M and unbilled deferred revenue $34.8M, supporting visibility into future periods .
  • Management withdrew FY2020 guidance given COVID timing uncertainty, with quarterly guidance suspended until Q3 update in 60–90 days; prior Adjusted EBITDA guidance ($27–$32M) should no longer be relied upon .
  • Liquidity remains solid: $24.8M cash at quarter-end and full $14.9M revolver drawn post-quarter to maximize flexibility; operating cash flow for H1 rose 30% to $17.4M .

What Went Well and What Went Wrong

What Went Well

  • Subscription momentum and mix shift: AAP and related services +28% YoY; total subscription and related revenue +24% YoY, driving margin expansion and EBITDA flow‑through .
  • High retention and multi‑year structure: Historical AAP annual revenue retention >90% for nine straight quarters; multi‑year AAP contracts rose to 34%, reinforcing predictability and lifetime value .
  • Strategic digital delivery: Rapid pivot to live‑online and on‑demand modalities kept client engagements on track; NPS for online delivery comparable to in‑person per management .
    “Our net promoter scores when we deliver [live online] are really every bit as high as they are when we deliver live in person.” – Paul Walker, President, Enterprise .

What Went Wrong

  • Asia impact and delivery timing gaps: China revenue nearly halted; Japan slowed in late quarter, with rebuilding pipelines ahead; many onsite days rescheduled to later quarters, creating revenue timing gaps .
  • Guidance visibility impaired: Education renewals (May–Aug) and client decision‑making delays under remote operations reduced near‑term forecasting confidence; quarterly and annual guidance suspended .
  • SG&A percent discrepancy: Management cited operating SG&A at 64.4% of revenue (392 bps YoY improvement), while the press release reported SG&A at 67.4% (down from 71.3%), likely reflecting different classification (operating vs total SG&A) .

Financial Results

Headline Financials vs prior quarter and prior year

MetricQ4 2019 (oldest)Q1 2020Q2 2020 (newest)
Revenue ($USD Millions)$65.2 $58.6 $53.7
Diluted EPS ($USD)$0.41 $(0.04) $0.08
Gross Margin %72.9% 71.7% 71.9%
Operating Income (Loss) ($USD Millions)$8.7 $(0.16) $(0.38)
Adjusted EBITDA ($USD Millions)$13.4 $5.0 $4.1

Segment Sales (Q2 YoY)

SegmentQ2 2019 (oldest)Q2 2020 (newest)
Enterprise – Direct Offices ($M)$36.4 $38.0
Enterprise – International Licensees ($M)$2.9 $2.7
Education ($M)$9.7 $10.9
Corporate & Other ($M)$1.3 $2.2
Consolidated ($M)$50.4 $53.7

Segment Adjusted EBITDA (Q2 YoY)

SegmentQ2 2019 (oldest)Q2 2020 (newest)
Enterprise – Direct Offices ($M)$2.54 $4.73
Enterprise – International Licensees ($M)$1.22 $1.38
Enterprise – Total ($M)$3.76 $6.12
Education ($M)$(0.91) $(1.07)
Corporate & Other ($M)$(1.89) $(0.99)
Consolidated ($M)$0.96 $4.06

KPIs and Operating Metrics

KPIQ1 2020Q2 2020
Deferred Subscription Revenue ($M)$48.7 $48.0
Unbilled Deferred Revenue ($M)$34.0 $34.8
Subscription & Related Revenue Growth YoY (%)21% 24%
AAP & Related Sales Growth YoY (%)22% 28%
AAP & Related Quarterly Revenue ($M)—$23.4
AAP Multi‑Year Share (%)32% 34%
Cash Balance ($M)$32.8 $24.8 (post quarter drew $14.9M revolver)
Client Partners (count)—255
Operating Cash Flow (H1, $M)—$17.4 (+30% YoY)

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Adjusted EBITDAFY2020$27M–$32M (reaffirmed Jan 9, 2020) Withdrawn; “investors should no longer rely” given COVID uncertainty Lowered/Withdrawn
Quarterly GuidanceQ3/Q4 2020Historically provided quarterly targetsSuspended; update expected with Q3 results in 60–90 days Suspended

Earnings Call Themes & Trends

TopicPrevious Mentions (Q4’19, Q1’20)Current Period (Q2’20)Trend
Subscription growth & visibilitySubscriptions +23% FY19; billed+unbilled deferred $88.1M; FY20 EBITDA guide $27–$32M Subscriptions +24% YoY; AAP +28% YoY; billed $48.0M, unbilled $34.8M; AAP multi‑year 34% Strengthening mix; higher visibility
Retention & lifetime valueRetention >90%; multi‑year AAP 32% (Q1) AAP retention >90% historically; multi‑year AAP 34% Stable‑to‑improving
Digital delivery capabilityEmphasis on portal, microlearning Full pivot to live‑online/on‑demand; NPS equal to in‑person Accelerated adoption
COVID operational impactNot applicableChina near‑halt; Japan slowed; onsite delivery rescheduled, causing timing gaps Near‑term headwind
Education renewals cadenceFY19 Education deferred +22% Renewals cluster May–Aug; many schools requesting brief delays; 248 renewals and 38 new in March Watch timing, not demand
Cost structure flexibilitySG&A % down FY19; EBITDA flow‑through >50% Compensation & delivery costs flex; exec comp heavily variable Supports resilience
Sales force expansionUnit economics drive hiring Hiring classes delayed by a couple months; CPs now 255 Temporarily paused

Management Commentary

  • “Our results for the second quarter were very strong and even better than we expected… revenue grew $3.4 million or 6.7%… Adjusted EBITDA increased $3.1 million, 321% in the second quarter.” – Bob Whitman, CEO .
  • “We are in deep snow right now, but we are moving forward… the power of our subscription model, high lifetime customer value, and high flow‑through will be very powerful assets.” – Bob Whitman .
  • “Our All Access Pass revenue… grew over March of last year in the U.S. and Canada.” – Paul Walker, President, Enterprise .
  • “We can deliver all of the normal training… live online… net promoter scores… are every bit as high as live in person.” – Paul Walker .
  • “We can’t be confident in our guidance. So we are not providing any at this time… expect to be in a better position in 60–90 days.” – Bob Whitman .

Q&A Highlights

  • Sales cycles and renewals: New AAP logo sales average ~100–120 days; renewals engineered throughout the year; ~$13M of passes up for renewal in Q3 with ~$7M already completed .
  • Industry exposure and terms: Broad industry mix without heavy concentration; for challenged sectors (e.g., airlines/hospitality), FC is offering flexible payment timing or brief contract extensions to preserve renewals .
  • Live‑online conversion: ~20–25% of delayed onsite days rebooked live‑online in late March/early April; rescheduling continues as clients accept online delivery .
  • Asia cadence: China nearly halted in Q2; conversations resumed under split shifts; Japan slowed late in the quarter but maintained revenue better than China .
  • Cost structure: Compensation and delivery costs flex naturally; exec base salaries ~27% of target comp, supporting variable cost base .

Estimates Context

  • Wall Street consensus (S&P Global) for Q2 FY2020 EPS, revenue, and EBITDA was unavailable at the time of analysis due to data access limits; therefore, estimate vs. actual comparisons are not provided [SPGI request limit error].

Key Takeaways for Investors

  • Subscription growth and contract structure (multi‑year AAP, >90% historical retention) underpin revenue visibility and margin mix even in a disrupted environment .
  • Near‑term reported revenue may reflect delivery timing shifts (onsite → live‑online or rescheduled), but backlog/contracted revenue remains robust (billed $48.0M, unbilled $34.8M) .
  • Guidance withdrawal reduces near‑term visibility; watch Q3 update (60–90 days) for renewal cadence in Education (May–Aug) and enterprise conversion to online delivery .
  • Liquidity and cash generation are supportive: $24.8M cash at Q2 and full revolver drawn post‑quarter; H1 operating cash flow +30% to $17.4M .
  • Monitor Asia normalization (China/Japan) and U.S. client decision‑making pace; both are key to re‑accelerating onsite services and pipeline rebuild .
  • Execution focus: Continued digital delivery strength with comparable NPS supports revenue continuity; sales force ramp temporarily delayed but remains a medium‑term growth lever .
  • Watch SG&A optics: Differences in reported SG&A % vs “operating SG&A” in call commentary suggest classification nuance; underlying leverage trend remains favorable .