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FC

FRANKLIN COVEY CO (FC)·Q4 2020 Earnings Summary

Executive Summary

  • Q4 revenue fell to $49.0M as onsite services remained disrupted, but subscription strength and a rapid pivot to live‑online delivery drove gross margin expansion to 77.3% (+437 bps YoY) and positive EPS of $0.07 .
  • All Access Pass (AAP) remained resilient: subscription revenue rose 11% YoY in Q4, AAP revenue retention exceeded 90% for FY20, and deferred + unbilled deferred reached >$100M, enhancing visibility .
  • Education durability persisted: ~2,200 Leader in Me membership renewals and 320 new schools despite budget headwinds; subscription revenue for Leader in Me grew 11% for FY20 .
  • FY21 Adjusted EBITDA guidance reinstated at $20–$22M (non‑GAAP); management also outlined internal targets of ~$30M in FY22 and ~$40M in FY23 (non‑GAAP) .
  • Potential catalysts: reinstated FY21 EBITDA guidance, improving live‑online bookings back to pre‑pandemic pace, and strong subscription retention underpinning multi‑year visibility .

What Went Well and What Went Wrong

  • What Went Well

    • Mix shift to subscriptions lifted gross margin to 77.3% in Q4 (vs. 72.9% LY); management cited “strength and resilience” of AAP and digital modalities as key drivers .
    • Bookings for add‑on coaching and services rebounded to pre‑pandemic levels by July and exceeded last year by August as clients shifted to live‑online; 87% of clients had transitioned to live‑online delivery, reducing cancellation risk .
    • Education resilience: ~2,200 renewals and 320 new schools added to Leader in Me in FY20 despite school disruptions; Leader in Me subscription revenue grew 11% YoY .

  • What Went Wrong

    • Q4 revenue down 25% YoY to $49.0M as international direct offices/licensees and education onsite services remained pressured; Enterprise international licensee revenue fell to $1.33M vs. $3.30M LY .
    • Net income and Adjusted EBITDA declined YoY: Q4 net income $1.0M ($0.07) vs. $5.9M ($0.41) LY; Adjusted EBITDA $8.9M vs. $13.4M LY, reflecting lower services revenue .
    • Effective tax rate headwind: $1.1M additional tax expense in Q4 from increased valuation allowance on deferred tax assets due to multi‑year cumulative losses and pandemic uncertainty .

Financial Results

Consolidated P&L snapshot (oldest → newest):

MetricQ4 2019Q2 2020Q3 2020Q4 2020
Revenue ($M)65.165 53.745 37.105 48.994
Gross Margin %72.9% 71.9% 72.3% 77.3%
Operating Income (Loss) ($M)8.728 (0.378) (0.145) 3.741
Net Income ($M)5.875 1.097 (10.968) 0.980
Diluted EPS ($)0.41 0.08 (0.79) 0.07
Adjusted EBITDA ($M, non‑GAAP)13.403 4.056 (3.642) 8.909

Segment sales ($M):

SegmentQ4 2019Q2 2020Q3 2020Q4 2020
Enterprise – Direct Offices42.482 37.973 26.760 32.936
Enterprise – International Licensees3.298 2.691 0.708 1.332
Education Division17.748 10.893 8.216 13.215
Corporate & Other1.637 2.188 1.421 1.511
Total65.165 53.745 37.105 48.994

KPIs and balance sheet highlights:

KPIQ4 2019Q2 2020Q3 2020Q4 2020
Deferred Subscription Revenue ($M)58.2 46.746 43.9 60.6
Unbilled Deferred Revenue ($M)29.9 34.8 33.4 39.6
Subscription Revenue Growth YoYn/a+24% +18% +11%
AAP Revenue Retentionn/an/an/a>90% FY20
Leader in Me – FY20 Renewals / New Schoolsn/an/an/a~2,200 / 320
Client Partners (period end)245 255 252 254
Cash & Equivalents ($M)27.699 24.810 37.006 27.137
Operating Cash Flow ($M, FY)30.5 FY19 n/an/a27.6 FY20

Notes:

  • Management stated Q4 net income and Adjusted EBITDA “exceeded expectations” (management’s internal expectations) .
  • Non‑GAAP measures defined and reconciled in company materials .

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Adjusted EBITDA (non‑GAAP)FY2021Guidance withdrawn earlier in FY20 $20–$22M Guidance reinstated
Adjusted EBITDA (non‑GAAP)Q1 FY2021n/a$2.0–$2.5M New quarterly outlook
Adjusted EBITDA (non‑GAAP) – Internal TargetsFY2022 / FY2023n/a~$30M / ~$40M targets New multi‑year targets

Earnings Call Themes & Trends

TopicQ2 FY20 (Feb)Q3 FY20 (May)Current Q4 FY20 (Aug)Trend
Digital/live‑online deliveryEmphasized on‑demand, live‑online, microlearning; rapid client pivot underway Onsite cancellations; acceleration to live‑online delivery 87% of clients now live‑online; bookings back to/exceeding prior year Strengthening adoption
AAP subscription strengthAAP +28% YoY; subscription +24% YoY Subscription +18% YoY; deferred metrics up Subscription +11% YoY; AAP retention >90% Durable growth/retention
InternationalEarly COVID impact in Asia Sharp declines in China/Japan/licensees Sequential rebound; aiming to rebuild with AAP focus Recovering; subscription mix rising
Education (Leader in Me)Division growth; subscription momentum Delivery disruption; schools pivot to virtual ~2,200 renewals; 320 new schools; +11% FY subscription revenue Durable subscriptions; cautious adds
Cost structure/SG&AInvestments offset by some savings SG&A and stock comp reduced; reversal in SB comp SG&A down $4.7M YoY in Q4; partial permanence expected Leaner cost base

Management Commentary

  • “All Access Pass sales have increased on all fronts… a revenue retention rate that exceeded 90% during fiscal 2020” (Bob Whitman, CEO) .
  • “Bookings… returned to pre‑pandemic levels… and exceeded last year’s pace by the end of August” .
  • “We ended our fiscal year with $42 million in total liquidity, comprised of $27 million in cash and $15 million undrawn revolver” (CFO context) .
  • “We expect Adjusted EBITDA to total between $20 million to $22 million in fiscal 2021” .
  • “International… increased 70% sequentially in Q4 and are expected to increase further in Q1” .

Q&A Highlights

  • Services rescheduling: Management still expects about 70% of previously postponed engagements attached to AAP to be realized over time, though tracking exact reschedules is difficult as clients book new initiatives .
  • Cost structure: Majority of Q4 cost reductions expected to be permanent; ~10% of commissions are variable and will rise with revenue; travel likely to remain lower than pre‑COVID .
  • Live‑online permanence: Client NPS remains high; flexibility and reduced cancellations suggest a lasting mix shift to live‑online delivery, potentially increasing service days vs. the old model .
  • International trajectory: Expect return toward $10–$11M quarterly run‑rate with higher AAP mix; Europe less susceptible to renewed lockdowns due to live‑online readiness; licensees to recover later .
  • Salesforce: Client partners at 254 at year‑end; recruiting resuming with January sales academy; target ~+30 net per year longer‑term .

Estimates Context

  • Attempts to retrieve S&P Global consensus for Q4 2020 EPS and revenue were unsuccessful at this time (data access limit). As a result, formal beat/miss vs. Wall Street consensus is not presented. Management stated Q4 net income and Adjusted EBITDA “exceeded expectations” (internal) .

Key Takeaways for Investors

  • Subscription durability is the core story: >90% AAP revenue retention, growing multi‑year contracts, and rising deferred/unbilled deferred revenue (> $100M combined) support FY21 visibility .
  • Mix shift drives margins and cash: 437 bps YoY gross margin expansion in Q4; FY20 operating cash flow remained strong at $27.6M despite pandemic headwinds .
  • Execution in Education matters: ~2,200 renewals and 320 adds in FY20 validate Leader in Me; continued district‑level focus and coaching bookings should underpin FY21 .
  • International is a 2021 rebuild lever: sequential momentum with intent to rebuild on AAP basis, improving future resilience even if near‑term revenue recognition lags due to deferrals .
  • FY21 setup: Reinstated Adjusted EBITDA guidance of $20–$22M and early‑year cadence (lighter H1 vs stronger H2) offer a roadmap; watch live‑online bookings, international ramp, and education adds for upside/downside signals .

Sources: Q4 FY20 8‑K earnings release and exhibits –; Q4 FY20 earnings call transcript –; Q3 FY20 8‑K earnings release –; Q2 FY20 8‑K earnings release –.