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FC

FRANKLIN COVEY CO (FC)·Q3 2020 Earnings Summary

Executive Summary

  • Q3 FY2020 revenue fell to $37.1M as on‑site training/coaching was largely postponed; gross margin expanded to 72.3% (+146 bps YoY), Adjusted EBITDA was $(3.6)M, and diluted EPS was $(0.79), driven in part by a $10.2M tax valuation allowance .
  • Management emphasized that “more than 100%” of the decline was from rescheduling on‑site engagements; booking pace has recovered with ~80% of new deliveries live‑online and U.S./Canada bookings near prior‑year levels .
  • Subscription metrics remained durable: reported subscription revenue grew ~18% YoY; deferred subscription revenue $42.8M (balance sheet) and unbilled deferred revenue $33.4M; All Access Pass retention >80% in Q3 and >90% LTM .
  • CFO outlined a directional outlook (not formal guidance): Q4 Adjusted EBITDA ~ $4M; FY2021 Adjusted EBITDA directionally similar to FY2019 ($20.6M); FY2022 directionally similar to ~$30M Adjusted EBITDA expected pre‑COVID .

What Went Well and What Went Wrong

What Went Well

  • Subscription resilience: reported subscription revenue +18% YoY; AAP renewals >80% in Q3 and LTM retention >90% (10th straight quarter) .
  • Rapid pivot to live‑online: ~80% of new bookings delivered live‑online; NPS scores comparable/slightly higher than on‑site; booking pace regained prior‑year levels in U.S./Canada .
  • Strategic pipeline holds up: advanced‑stage pipeline additions began pacing ahead of prior‑year in mid‑May and continued through July, supporting forward revenue visibility .

Management quotes:

  • “More than 100% of the decline… resulted from the need to reschedule… on‑site” engagements; “we expect… a significant majority… will be rescheduled and not lost” .
  • “Our subscription business has been strong and durable even in the middle of the pandemic” .
  • “We expect to emerge… and resume our aggressive march… high rates of growth in adjusted EBITDA and cash flow” .

What Went Wrong

  • On‑site delivery halted: ~$20M of >$30M of scheduled on‑site revenue moved out of the quarter; management estimates ~70% will still be executed over coming quarters .
  • International weakness: China/Japan and licensees closed for long periods; international accounted for ~$5.3M lost contribution in Q3 .
  • Adjusted EBITDA and EPS pressure: Q3 Adjusted EBITDA $(3.6)M vs $3.1M in prior‑year; net loss $(11.0)M driven by a $10.2M valuation allowance on deferred tax assets amid pandemic uncertainty .

Financial Results

Consolidated P&L (USD Millions except EPS)

MetricQ1 2020Q2 2020Q3 2020
Revenue$58.613 $53.745 $37.105
Gross Profit$42.029 $38.666 $26.821
Gross Margin %71.7% 71.9% 72.3%
Loss from Operations$(0.159) $(0.378) $(0.145)
Adjusted EBITDA$4.961 $4.056 $(3.642)
Net Income (Loss)$(0.544) $1.097 $(10.968)
Diluted EPS$(0.04) $0.08 $(0.79)

Comparison highlights:

  • QoQ revenue: $37.1M vs $53.7M (Q2) as on‑site work was postponed; YoY Q3 revenue down from $56.0M (Q3 FY2019) while gross margin improved +146 bps to 72.3% .
  • Adjusted EBITDA: $(3.6)M vs $4.1M in Q2; net loss reflects $10.2M tax valuation allowance amid three‑year cumulative losses and COVID uncertainties .
  • Estimates vs actuals: Wall Street consensus from S&P Global was unavailable at time of writing due to access limits; beats/misses could not be assessed.

Segment Sales (USD Millions)

SegmentQ1 2020Q2 2020Q3 2020
Enterprise – Direct Offices$42.111 $37.973 $26.760
Enterprise – International Licensees$3.721 $2.691 $0.708
Education Division$11.082 $10.893 $8.216
Corporate & Other$1.699 $2.188 $1.421
Total$58.613 $53.745 $37.105

KPIs and Operational Metrics

KPIQ3 2020
Deferred subscription revenue (balance sheet)$42.794M
Unbilled deferred revenue$33.4M
Reported subscription revenue growth YoY+18%
Client partners252 (vs 227 LY)
AAP revenue retention>80% (Q3); >90% LTM
AAP new logo sales (US/Canada)92% of prior‑year Q3; March–June equal to prior year (100%)
New LiM schools contracted through Jul 8280 (~65% of LY at that date); targeting ~400 by Q4 (~75% of LY)

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Adjusted EBITDAFY2020$27–$32M (affirmed in Q1) Guidance withdrawn due to COVID; no formal FY2020 guidance Withdrawn
Adjusted EBITDAQ4 FY2020N/ADirectional: ~$4M (not formal guidance) New directional outlook
Adjusted EBITDAFY2021N/ADirectional: similar to FY2019 ($20.6M) New directional outlook
Adjusted EBITDAFY2022N/ADirectional: similar to pre‑COVID FY2020 expectation (~$30M) New directional outlook

Note: Management stated these are directional views and “not guidance per se,” given ongoing pandemic uncertainties .

Earnings Call Themes & Trends

TopicPrevious Mentions (Q1 & Q2)Current Period (Q3)Trend
Subscription growth & retentionQ1: Subscription +21% YoY; strong retention; multi‑year mix expanded . Q2: Subscription +24%; AAP +28% in quarter .Subscription +18% YoY; AAP retention >80% in Q3; LTM >90% .Durable despite COVID; retention sustained.
Live‑online delivery pivotQ2: Emphasis on on‑demand/live‑online to assist clients amid uncertainty .~80% of new bookings live‑online; NPS equal/slightly higher vs on‑site .Structural shift to virtual delivery.
Pipeline/bookings momentumQ2: Asia disruptions; growth elsewhere .U.S./Canada bookings near prior‑year pace; advanced‑stage pipeline additions pacing ahead since mid‑May .Rebound underway since mid‑May.
International headwindsQ2: China/Japan disruptions .Prolonged closures; outsized impact; international lost contribution ~$5.3M .Improving into Q4 but below FY2019 levels .
Education (Leader in Me)Q2: Education +12% revenue; subscription growth .Renewals expected >80%; 2,700 schools renewing into Q3/Q4 amid disruptions; new schools ~400 target by Q4 .Renewals resilient; new logos slower but improving.
Tax/valuation allowanceN/A$10.2M valuation allowance on deferred tax assets due to cumulative losses and uncertainty .One‑time pressure on EPS in Q3.

Management Commentary

  • “More than 100% of the decline in revenue… resulted from the need to reschedule… on‑site… due to stay‑at‑home restrictions;… we expect… a significant majority… will be rescheduled and not lost” — Bob Whitman, CEO .
  • “Our subscription business has been strong and durable even in the middle of the pandemic… subscription revenue… increased to $84M LTM… 18% growth in the quarter itself” — CEO .
  • “We expect to emerge… and resume our aggressive march… high rates of growth in adjusted EBITDA and cash flow… Q4 adjusted EBITDA… approximately $4M… FY2021 similar to FY2019; FY2022 similar to ~$30M” — CFO Stephen Young .
  • “Clients tell us we have the most robust and effective live‑online delivery capability… enabling us to pivot overnight and reschedule a significant portion of canceled on‑site delivery days” — President/COO Paul Walker .

Q&A Highlights

  • Revenue timing: ~$20M of on‑site revenue shifted out; management expects ~70% of those engagements to still occur across Q4/Q1 (some into Q2) .
  • Economics of virtual vs on‑site: Revenue/margins essentially the same; reported margins may increase slightly due to absence of pass‑through travel with zero margin .
  • Pipeline/pricing: Advanced‑stage pipeline additions running ahead of prior‑year since mid‑May; limited discounting; flexible terms for “devastated” industries (e.g., travel) .
  • Hiring plans: Client partner hiring paused through Q4/FQ1 to give new hires best ramp; resume in earnest with January “sales school”; net adds still +25 YoY to 252 .
  • Education renewals: Many “pause” decisions driven by budget/opening uncertainty; management expects renewal rate after FQ1 to be comparable to historical ~88% .

Estimates Context

  • S&P Global consensus for Q3 FY2020 revenue and EPS was unavailable at time of writing due to access limits; therefore, beat/miss analysis versus Wall Street estimates could not be completed. We attempted to retrieve “Revenue Consensus Mean” and “Primary EPS Consensus Mean,” but the daily request limit was exceeded.

Key Takeaways for Investors

  • The quarter’s revenue decline was largely timing-driven from on‑site postponements; booking pace has recovered with ~80% delivery now live‑online, supporting near‑term revenue conversion and medium‑term margin optics (less pass‑through travel) .
  • Subscription metrics (AAP and Leader in Me) demonstrated resilience through the shock: +18% reported subscription revenue, >80% quarterly retention, and LTM >90% retention underpin cash flow and EBITDA visibility .
  • International remains a swing factor; normalization in China/Japan and licensees will dictate the speed of EBITDA recovery versus FY2019 levels; management expects improvement but still below FY2019 in Q4 .
  • Directional outlook suggests EBITDA rebuilding: Q4 around $4M; FY2021 directionally similar to FY2019; FY2022 directionally similar to ~$30M pre‑COVID plan—implying multi‑year climb back to double‑digit EBITDA margins .
  • Education trajectory: Q3/Q4 renewals stabilize (>80%) with push‑outs into FQ1; new schools slower but targeted to ~400 by Q4, indicating demand recovery in H2 seasonality .
  • Operational moat: decade‑long investment in multi‑modal delivery (live‑online, digital, microlearning) and strong implementation services is driving client consolidation and stickiness, favoring share gains versus less adaptable competitors .
  • Actionable: focus on monitoring conversion of rescheduled engagements, live‑online mix persistence post‑reopen, international licensee recovery, and subscription retention/new logo cadence through Q4/FQ1 as near‑term catalysts .

Additional notes:

  • We searched for other Q3 press releases beyond the earnings release and found none in the specified window [ListDocuments].