Note: EPS may not be comparable

Franklin Covey (NYSE: FC) reported Q2 EPS of ($0.20), $0.10 better than the analyst estimate of ($0.30). Revenue for the quarter came in at $46.5 million versus the consensus estimate of $46.5 million.

Financial Overview

The following is a summary of key financial results for the quarter ended February 28, 2018:

• Revenue: Consolidated revenue for the second quarter of fiscal 2018 increased 10% and totaled $46.5 million, compared with $42.2 million in the second quarter of fiscal 2017. In addition to the recognition of previously deferred high-margin subscription revenues, the Company’s sales were also favorably impacted by increased Education Division revenues, increased international direct office sales (each of which posted year-over-year growth in the quarter), the impact of businesses acquired in the second half of fiscal 2017, increased book and audio sales, and increased government office sales. These increases were partially offset by decreased legacy facilitator and onsite training revenues.
• Deferred Subscription Revenue and Unbilled Deferred Revenue: During the quarter ended February 28, 2018, the Company invoiced $14.4 million of new subscription contracts and recognized $13.7 million of previously deferred revenue. At February 28, 2018, the Company had $32.1 million of deferred subscription revenue on its balance sheet, a $16.0 million, or 99%, increase over deferred subscription revenues on its balance sheet at February 28, 2017. At February 28, 2018, the Company had $15.1 million of unbilled deferred revenue, compared with $1.7 million of unbilled revenue at February 28, 2017. Unbilled deferred revenue represents business that is contracted but unbilled, and excluded from the Company’s balance sheet.
• Gross profit: Second quarter 2018 gross profit was $32.7 million, an increase of $4.7 million, or 17%, compared with $28.0 million in the prior year. The Company’s gross margin for the quarter ended February 28, 2018 increased to 70.3% of sales compared with 66.4% in the second 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.
• Operating Expenses: The Company’s operating expenses in the second quarter of fiscal 2018 increased by $5.4 million compared with the prior year, which was primarily due to a $5.7 million increase in selling, general, and administrative (SG&A) expenses primarily related to investments to support the growth of the All Access Pass, a $0.7 million increase in amortization expense, and a $0.5 million increase in depreciation expense. These increases were partially offset by $1.5 million of contract termination costs that did not repeat in fiscal 2018. Increased SG&A expenses were primarily due to increased associate costs resulting from investments in new implementation specialists, additional sales and sales related personnel, especially in the Education Division, and increased commission expense related to increased sales; $1.4 million of increased expense from the change in the fair value of contingent liabilities from previous business acquisitions; SG&A expense from businesses acquired in the second half of fiscal 2017; increased advertising expense to promote the All Access Pass; and increased computer expenses primarily related to the implementation of a new Enterprise Resource Planning (ERP) system, which successfully launched in December 2017.
• Operating Income (Loss): The Company reported a loss from operations for the second quarter of $(5.1) million compared with a loss from operations of $(4.5) million in the second quarter of the prior year.
• Adjusted EBITDA: Adjusted EBITDA for the second quarter was a loss of $(0.7) million, compared with a loss of $(0.4) million in the second quarter of fiscal 2017.
• Net Income (Loss): The Company reported a net loss of $(2.7) million, or $(.20) per share, for the quarter ended February 28, 2018, compared with a net loss of $(3.3) million, or $(.24) per share, in the second quarter of fiscal 2017, reflecting the above-noted factors. The Company’s income tax benefit was larger than the prior year primarily due to a $1.2 million one-time benefit from the recently enacted Tax Cut and Jobs Act.
• Cash and Liquidity Remain Strong: The Company’s balance sheet and liquidity position remained healthy through the second quarter of fiscal 2018. The Company had $10.8 million of cash at February 28, 2018, compared with $8.9 million at August 31, 2017. Cash flows from operating activities increased to $9.4 million compared with $6.8 million in the prior year. At February 28, 2018, the Company had $20.1 million of available borrowing capacity on its revolving line of credit facility.
• Fiscal 2018 Outlook: Based on anticipated increases in its subscription business, the Company reaffirms its previously announced Adjusted EBITDA guidance for fiscal 2018, which is expected to be in the range of $10 million to $15 million.

For earnings history and earnings-related data on Franklin Covey (FC) click here.