Franklin Covey Reports Strong Fiscal 2018 Fourth Quarter and Full Fiscal Year Financial Results

Enterprise Division Leads Outstanding Year with 17% Growth in Sales;
72% Growth in All Access Pass and Related Sales; 643 Basis Point
Increase in Gross Margin; and a 96% Increase in Adjusted EBITDA

Consolidated Fiscal 2018 Sales Increase 13%, or $24.5 Million, to
$209.8 Million; Gross Profit Increases 21%, or $25.6 Million, to $148.3
Million; and Adjusted EBITDA Increases 54% to $11.9 Million

Fourth Quarter All Access Pass and Related Revenue Increases 59%
Compared with the Fourth Quarter of Fiscal 2017, Billed and Unbilled
Deferred Revenue Grows 36% to $72.9 Million

Strong Fourth Quarter: Sales Increase 9% to $64.8 Million; Gross
Profit Increases 14% to $47.8 Million; Gross Margin Improves to 73.7%
Compared with 70.5% in the Fourth Quarter of Fiscal 2017

Company Announces Fiscal 2019 Guidance

SALT LAKE CITY–(BUSINESS WIRE)–Franklin Covey Co. (NYSE: FC), a global performance improvement company
that creates and distributes world-class content, training, processes,
and tools that organizations and individuals use to transform their
results, today announced financial results for its fourth quarter and
full fiscal year ended August 31, 2018.

Introduction

The Company’s transition to a subscription-based model in the Enterprise
Division (comprised of the Direct Office and International Licensee
segments) continued to strengthen in the fourth quarter and full fiscal
2018 year. With the fiscal 2016 launch of the All Access Pass (AAP), the
Company began a major transition in its business model. Previously,
Franklin Covey sold content and solutions one course, or one solution at
a time, and often to only one team at a time. However, three years ago
the Company determined that it could better serve its clients, and
substantially expand the breadth and depth of its client impact by
providing its world-class content and offerings through
subscription-based services, featuring the All Access Pass in the
Enterprise Division and The Leader in Me online service in the
Education Division. These new offerings are changing the way in which
clients engage with the Company; the extent of both the impact and reach
they can have within their organizations; and the flexibility and
agility with which they can develop leaders and teams to improve their
organization’s results.

Bob Whitman, Chairman and Chief Executive Officer, commented, “We were
very pleased with our strong finish to fiscal 2018, which met our key
expectations and produced increased sales, significantly improved gross
margins, and improved operating results, despite significant investments
in personnel, systems, and content.”

Whitman continued, “Three years ago we set out on a journey to transform
Franklin Covey. We changed our accounting, disrupted our prior
attractive business model, and invested millions of dollars in new
content, new personnel, new portals, and a new ERP system to handle our
expected growth. As part of our journey, we had four key expectations
for our fiscal 2018 performance in the Enterprise Division, which makes
up nearly 80% of our total revenues. We knew that meeting these
expectations would mark the crossing of the bridge on the transformation
of our Enterprise Division’s business model, and position us for strong
growth in both revenue and profitability. These expectations were that:
1) All Access Pass sales would continue to grow rapidly, with
substantial increases in paying subscribers, and high revenue retention;
2) as a result, Enterprise Division sales would grow by double-digits;
3) our gross margin would significantly increase, reflecting the
compelling economics of the All Access Pass; and 4) we would achieve
high flow through of incremental revenue, driving growth in Adjusted
EBITDA. We are very pleased that the Enterprise Division achieved all
four of these important expectations during fiscal 2018: 1) All Access
Pass and pass-related sales grew $25.3 million, or 72%, our number of
paid All Access Pass subscribers grew 37% to 435,000, and our annual
retention of All Access Pass revenue exceeded 90% for the twelfth
straight quarter; 2) net sales increased by $23.2 million, or 17%; 3)
gross margin increased by 643 basis points, and gross profit increased
28%; and 4) 44% of increased revenue flowed through to increased
Adjusted EBITDA, resulting in the Enterprise Division’s Adjusted EBITDA
increasing by $10.2 million, or 96%. The Enterprise Division’s extremely
strong performance drove improved overall Company results in fiscal
2018. We are now positioned to generate significant growth in Adjusted
EBITDA and cash flow in fiscal 2019 and beyond.”

Financial Overview

Full Year Fiscal 2018 Results

The following is a summary of key financial results for the fiscal year
ended August 31, 2018:

Consolidated revenue for the fiscal year ended August 31, 2018 increased
13%, or $24.5 million, to $209.8 million compared with $185.3 million in
fiscal 2017. In addition to the recognition of deferred subscription
revenues, the Company’s sales were also favorably impacted by increased
international direct office revenues, increased government services
revenues, sales from businesses acquired during the second half of
fiscal 2017, and increased Education segment sales. During fiscal 2018,
the Company’s subscription and subscription-related revenue grew 36%
compared with the prior year. Consolidated gross profit for fiscal 2018
increased 21%, or $25.6 million, to $148.3 million compared with $122.7
million in fiscal 2017. Gross margin for the fiscal year ended August
31, 2018 improved to 70.7% compared with 66.2% in the prior year. The
increase in gross profit and improved gross margin percentage was
primarily due to a change in the mix of revenues that featured an
increase in high-margin subscription sales.

Operating expenses for the fiscal year ended August 31, 2018 increased
$20.1 million compared with fiscal 2017. The increase was primarily due
to a $20.0 million increase in selling, general, and administrative
(SG&A) expenses; $1.8 million of increased amortization expense from
fiscal 2017 business acquisitions; and a $1.3 million increase in
depreciation expense primarily related to capital spending on a new AAP
portal and ERP system. The increase in SG&A expenses was primarily
related to investments in new personnel, including additional AAP
implementation specialists, higher commissions on increased sales, new
personnel from businesses acquired in the third and fourth quarters of
fiscal 2017, and increased computer costs primarily related to a new AAP
portal and ERP system. These increases were partially offset by a $1.5
million decrease in contract termination costs and a $1.5 million
decrease in restructuring expenses in fiscal 2018. The Company’s loss
from operations for fiscal 2018 improved to $(3.4) million compared with
$(8.9) million in fiscal 2017. Adjusted EBITDA for the year ended August
31, 2018 improved 54%, or $4.2 million, to $11.9 million compared with
$7.7 million in the prior year. The Company’s consolidated income tax
provision was unfavorably affected by a $3.0 million valuation allowance
against a foreign tax credit carryforward. Sales of the All Access Pass
and other subscription services have generated, and will likely to
continue to generate, substantial amounts of deferred revenue for both
book and tax purposes. This situation has produced taxable losses for
the past two fiscal years and a more-likely-than-not presumption that
insufficient taxable income will be available to realize the foreign tax
carryforward, which expires at the end of fiscal 2021. As a result of
these factors, net loss for the fiscal year ended August 31, 2018 was
$(5.9) million, or $(.43) per share, compared with a $(7.2) million net
loss, or $(.52) per share, for the fiscal year ended August 31, 2017.

The Company’s improved overall performance was driven by particularly
strong results in the Enterprise Division, which accounts for nearly 80%
of the Company’s total revenues. The Enterprise Division’s net sales
grew 17%, or $23.2 million. Gross profit increased 28%, or $26.0
million, driven primarily by the significant increase in All Access Pass
sales during the year. The Enterprise Division’s Adjusted EBITDA
increased to $20.9 million, compared with $10.7 million in fiscal 2017,
an increase of $10.2 million, or 96%, despite more than $10 million of
incremental growth investments during the year.

Over the past several years, the Education Division has grown rapidly,
from $8.4 million of sales in fiscal 2010 to $44.1 million in sales
during fiscal 2017. In fiscal 2018, however, the Education Division’s
revenues increased only 3% to $45.3 million. The primary reason for the
slowdown in Education Division revenues was the expiration of a large
6-year funding commitment from a charitable educational foundation
focused on funding new Leader in Me schools. This contract
expiration reduced revenues in the Education Division by $2.8 million,
and gross profit by approximately $1.6 million during fiscal 2018.
During fiscal 2018, the Education Division also made significant growth
investments in additional sales support infrastructure and new content
to set the foundation for future growth. The Company expects the
Education Division to resume its strong growth trajectory in fiscal 2019.

However, the strong performance in the Enterprise Division more than
offset the decline in the Education Division, resulting in strong
overall performance during fiscal 2018.

Fourth Quarter Fiscal 2018 Results

The following is a summary of key financial results for the quarter
ended August 31, 2018.

  • Revenue: Consolidated revenue for the
    fourth quarter of fiscal 2018 increased 9% to $64.8 million, compared
    with $59.5 million in the fourth quarter of the prior year. In
    addition to the recognition of previously deferred high-margin
    subscription revenues, the Company’s sales were also favorably
    impacted by increased international direct office sales, increased
    government services sales, and increased revenues from businesses
    acquired in the third and fourth quarters of fiscal 2017. These
    increases were partially offset by decreased Education Division
    revenues and decreased onsite revenues during the quarter.
  • Deferred Subscription Revenue and Unbilled
    Deferred Revenue:
    During the fourth quarter of fiscal 2018, the
    Company’s subscription and subscription-related revenue grew 19%
    compared with the prior year. At August 31, 2018, the Company had
    $48.5 million of deferred subscription revenue, a 33%, or $12.0
    million, increase over deferred subscription revenues at August 31,
    2017. At August 31, 2018, the Company had $24.5 million of unbilled
    deferred revenue compared with $17.5 million of unbilled deferred
    revenue at the end of fiscal 2017. Unbilled deferred revenue
    represents business that is contracted but unbilled, and excluded from
    the Company’s balance sheet.
  • Gross profit: For the fourth quarter of
    fiscal 2018, gross profit was $47.8 million, a 14%, or $5.8 million,
    increase over the fourth quarter of the prior year. The Company’s
    gross margin for the quarter ended August 31, 2018 increased to 73.7%
    of sales compared with 70.5% in the fourth quarter of fiscal 2017. The
    increase in gross profit and improved gross margin was primarily due
    to a change in the mix of revenues, as subscription revenues,
    including the All Access Pass, continue to grow as a percentage of
    recognized sales.
  • Operating Expenses: The Company’s
    operating expenses for the quarter ended August 31, 2018 increased by
    $5.6 million compared with the prior year, which was primarily due to
    a $5.3 million increase in SG&A expenses. The Company’s increased SG&A
    expenses were primarily related to increased associate costs resulting
    from investments in sales related personnel, including new
    implementation specialists, and increased commissions and bonus
    expense resulting from higher sales; increased non-cash share-based
    compensation expense; and increased consulting and development costs
    for various projects and growth initiatives.
  • Operating Income: The Company’s income
    from operations for the fourth quarter of fiscal 2018 improved
    slightly to $7.6 million compared with $7.5 million in the fourth
    quarter of fiscal 2017.
  • Adjusted EBITDA: Adjusted EBITDA for the
    fourth quarter of fiscal 2018 improved to $11.4 million, compared with
    $10.9 million in the fourth quarter of the prior year.
  • Income Taxes: The Company’s consolidated
    income tax provision was unfavorably affected by a $3.0 million
    valuation allowance against a foreign tax credit carryforward as
    previously described. Excluding the impact of this valuation
    allowance, the Company’s effective income tax rate for the quarter was
    approximately 32% compared with approximately 33% in the fourth
    quarter of fiscal 2017.
  • Net Income: The Company reported net
    income of $1.8 million, or $.13 per diluted share, for the quarter
    ended August 31, 2018, compared with $4.7 million, or $.33 per diluted
    share, in the fourth quarter of fiscal 2017, reflecting the
    above-noted factors.
  • Cash and Liquidity Remain Strong: The
    Company’s balance sheet and liquidity position remained healthy
    through the end of fiscal 2018. The Company had $10.2 million of cash
    at August 31, 2018, compared with $8.9 million at August 31, 2017. At
    August 31, 2018, the Company had $18.7 million of available borrowing
    capacity on its revolving line of credit facility.

Strong consolidated fourth quarter performance was driven by
particularly strong results in the Enterprise Division. During the
fourth quarter, the Enterprise Division’s net sales grew 16% or $6.3
million. Gross profit increased by 24%, or $6.8 million, driven
primarily by increased sales of the high-margin All Access Pass during
the quarter. The Enterprise Division’s Adjusted EBITDA increased 62%, or
$3.5 million, to $9.1 million compared with $5.6 million in the fourth
quarter of fiscal 2017.

Due primarily to the expiration of a large charitable funding contract
as previously explained, Education Division revenues were $17.9 million
in the fourth quarter of fiscal 2018, compared with $18.9 million in
fiscal 2017. Gross profit for the fourth quarter of 2018 was $12.6
million, compared with $13.3 million in the fourth quarter of fiscal
2017. Education Adjusted EBITDA for the fourth quarter was $5.9 million,
compared with $7.2 million in the fourth quarter of fiscal 2017,
reflecting ongoing growth investments and the factors described above.
The Company expects the Education Division to resume its strong growth
trajectory in fiscal 2019.

The strong performance of the Enterprise Division during the fourth
quarter more than offset the declines in the Education Division,
resulting in strong overall performance during the fourth quarter of
fiscal 2018.

Fiscal 2019 Guidance

Based on expected increases in its subscription services business, the
Company currently anticipates reported sales to increase between 7% and
9% for fiscal 2019. The Company expects deferred revenue to increase by
approximately $12 million, year-over-year, and unbilled deferred revenue
to grow as the Company continues to focus on multi-year agreements. The
Company also expects to continue to make investments and incur further
costs to support business growth during fiscal 2019, including
additional implementation specialists, content development, amortization
of developed or purchased content, and additional support staff.
However, the amount of additional investment is expected to be
significantly less than in fiscal 2018. Considering these factors, the
Company anticipates Adjusted EBITDA for fiscal 2019 to be in the range
of $18 million to $22 million. The preceding guidance does not reflect
the impact of the new revenue recognition accounting standard (ASC 606)
and is based on information currently available to the Company.

Earnings Conference Call

On Thursday, November 8, 2018, at 5:00 p.m. Eastern time (3:00 p.m.
Mountain time) Franklin Covey will host a conference call to review the
financial results for its fourth quarter and full fiscal year ended
August 31, 2018. Interested persons may participate by dialing
888-771-4371 (International participants may dial 847-585-4405), access
code: 47772252. Alternatively, a webcast will be accessible at the
following Web site: http://edge.media-server.com/m6/p/523fzeam.
A replay will be available from November 8 (7:30 p.m. ET) through
November 15, 2018 by dialing 888-843-7419 (International participants
may dial 630-652-3042), access code: 47772252#. The webcast will remain
accessible through November 15, 2018 on the Investor Relations area of
the Company’s Web site at: http://investor.franklincovey.com/phoenix.zhtml?c=102601&p=irol-IRHome.

Forward-Looking Statements

This press release contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995
including those statements related to the Company’s future results and
profitability; expected Adjusted EBITDA and growth in deferred revenues
in fiscal 2019; expected growth and profitability of the
subscription-based business model; expected growth and profitability of
the Education Division; and other goals relating to the growth of the
Company. Forward-looking statements are based upon management’s current
expectations and are subject to various risks and uncertainties
including, but not limited to: general economic conditions; renewals of
subscription contracts; the impact of new sales personnel; the impact of
deferred revenues on future financial results; market acceptance of new
products or services, including new AAP portal upgrades; the ability to
achieve sustainable growth in future periods; and other factors
identified and discussed in the Company’s most recent Annual Report on
Form 10-K and other periodic reports filed with the Securities and
Exchange Commission. Many of these conditions are beyond the Company’s
control or influence, any one of which may cause future results to
differ materially from the Company’s current expectations, and there can
be no assurance that the Company’s actual future performance will meet
management’s expectations. These forward-looking statements are based on
management’s current expectations and the Company undertakes no
obligation to update or revise these forward-looking statements to
reflect events or circumstances subsequent to this press release.

Non-GAAP Financial Information

Refer to the attached table for the reconciliation of a non-GAAP
financial measure, “Adjusted EBITDA,” to consolidated net income (loss),
the most comparable GAAP financial measure. The Company defines Adjusted
EBITDA as net income or loss excluding the impact of interest expense,
income taxes, amortization, depreciation, stock-based compensation
expense, and certain other items such as adjustments to the fair value
of expected contingent consideration liabilities arising from business
acquisitions. The Company references this non-GAAP financial measure in
its decision making because it provides supplemental information that
facilitates consistent internal comparisons to the historical operating
performance of prior periods and the Company believes it provides
investors with greater transparency to evaluate operational activities
and financial results. The Company is unable to provide a reconciliation
of the above forward-looking estimate of non-GAAP Adjusted EBITDA to
GAAP measures because certain information needed to make a reasonable
forward-looking estimate is difficult to estimate and dependent on
future events which may be uncertain or out of the Company’s control,
including the amount of AAP contracts invoiced, the number of AAP
contracts that are renewed, necessary costs to deliver the Company’s
offerings such as unanticipated curriculum development costs, and other
potential variables. Accordingly, a reconciliation is not available
without unreasonable effort.

About Franklin Covey Co.

Franklin Covey Co. (NYSE:FC) (www.franklincovey.com)
is a global, public company specializing in organizational performance
improvement. We help organizations and individuals achieve results that
require a change in human behavior. Our expertise is in seven areas:
leadership, execution, productivity, trust, sales performance, customer
loyalty and education. Over its history, Franklin Covey clients have
included 90 percent of the Fortune 100, more than 75 percent of the
Fortune 500, thousands of small and mid-sized businesses, as well as
numerous government entities and educational institutions. Franklin
Covey has more than 100 direct and partner offices providing
professional services in over 150 countries and territories.

 

FRANKLIN COVEY CO.

Condensed Consolidated Statements of
Operations

(in thousands, except per-share amounts, and unaudited)
         
 
Quarter Ended Fiscal Year Ended
August 31, August 31, August 31, August 31,
  2018     2017     2018     2017  
 
Net sales $ 64,818 $ 59,523 $ 209,758 $ 185,256
 
Cost of sales   17,057     17,535     61,469     62,589  
Gross profit 47,761 41,988 148,289 122,667
 
Selling, general, and administrative 37,294 31,970 141,126 121,148
Restructuring costs 147 1,482
Contract termination costs 1,500
Depreciation 1,615 1,136 5,161 3,879
Amortization   1,251     1,261     5,368     3,538  
Income (loss) from operations 7,601 7,474 (3,366 ) (8,880 )
 
Interest expense, net   (527 )   (479 )   (2,154 )   (2,029 )
Income (loss) before income taxes 7,074 6,995 (5,520 ) (10,909 )
 
Income tax benefit (provision)   (5,295 )   (2,336 )   (367 )   3,737  
Net Income (loss) $ 1,779   $ 4,659   $ (5,887 ) $ (7,172 )
 
Net income (loss) per common share:
Basic $ 0.13 $ 0.34 $ (0.43 ) $ (0.52 )
Diluted 0.13 0.33 (0.43 ) (0.52 )
 
Weighted average common shares:
Basic 13,906 13,824 13,849 13,819
Diluted 14,114 13,983 13,849 13,819
 
Other data:
Adjusted EBITDA(1) $ 11,356   $ 10,905   $ 11,878   $ 7,699  
 
(1)     The term Adjusted EBITDA (earnings before interest, income taxes,
depreciation, amortization, stock-based compensation, and certain
other items) is a non-GAAP financial measure that the Company
believes is useful to investors in evaluating its results. For a
reconciliation of this non-GAAP measure to the most comparable GAAP
equivalent, refer to the Reconciliation of Net Loss to Adjusted
EBITDA as shown below.
 
 

FRANKLIN COVEY CO.

Reconciliation of Net Income (Loss) to
Adjusted EBITDA

(in thousands and unaudited)
         
Quarter Ended Fiscal Year Ended
August 31, August 31, August 31, August 31,
  2018     2017     2018     2017  

Reconciliation of net income (loss) to Adjusted EBITDA:

Net income (loss) $ 1,779 $ 4,659 $ (5,887 ) $ (7,172 )
Adjustments:
Interest expense, net 527 479 2,154 2,029
Income tax expense (benefit) 5,295 2,336 367 (3,737 )
Amortization 1,251 1,261 5,368 3,538
Depreciation 1,615 1,136 5,161 3,879
Stock-based compensation 665 (329 ) 2,846 3,658
Costs to exit Japan publishing business 315 2,107
Restructuring costs 147 1,482
Contract termination costs 1,500
Increase (reduction) to contingent earnout liability 224 1,014 (1,936 )
ERP implementation costs 484 855 1,404
Business acquisition costs 417 442
China start-up costs               505  
 
Adjusted EBITDA $ 11,356   $ 10,905   $ 11,878   $ 7,699  
 
Adjusted EBITDA margin 17.5 % 18.3 % 5.7 % 4.2 %
 
 
 
 

FRANKLIN COVEY CO.

Additional Financial Information

(in thousands and unaudited)
 
Quarter Ended Fiscal Year Ended
August 31, August 31, August 31, August 31,
  2018     2017     2018     2017  
Sales by Division/Segment:
Enterprise Division:
Direct offices $ 42,088 $ 35,714 $ 145,890 $ 122,309
International licensees   3,317     3,381     13,226     13,571  
45,405 39,095 159,116 135,880
Education Division 17,854 18,935 45,272 44,122
Corporate and other   1,559     1,493     5,370     5,254  
 
Consolidated $ 64,818   $ 59,523   $ 209,758   $ 185,256  
 
Gross Profit by Division/Segment:
Enterprise Division:
Direct offices $ 32,254 $ 25,276 $ 108,140 $ 81,700
International licensees   2,430     2,604     10,031     10,483  
34,684 27,880 118,171 92,183
Education Division 12,560 13,290 28,654 27,916
Corporate and other   517     818     1,464     2,568  
 
Consolidated $ 47,761   $ 41,988   $ 148,289   $ 122,667  
 
Adjusted EBITDA by Division/Segment:
Enterprise Division:
Direct offices $ 8,308 $ 3,829 $ 15,773 $ 4,242
International licensees   835     1,808     5,087     6,415  
9,143 5,637 20,860 10,657
Education Division 5,878 7,176 3,606 7,195
Corporate and other   (3,665 )   (1,908 )   (12,588 )   (10,153 )
 
Consolidated $ 11,356   $ 10,905   $ 11,878   $ 7,699  
 

Contacts

Investor Contact:
Franklin Covey
Steve Young
801-817-1776
investor.relations@franklincovey.com
or
Media
Contact:
Franklin Covey
Debra Lund
801-817-6440
Debra.Lund@franklincovey.com

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