Organizational performance improvement specialist Franklin Covey's (NYSE:FC) fiscal first quarter of 2019 was notable for the balance in growth between its enterprise and education operating segments. Shareholders were also likely pleased by an appreciable leap in the company's subscription revenue streams. Below, let's take a bird's-eye view of Franklin Covey's earnings results, which were released on Wednesday, and dive into salient details from the last three months. Note that all comparative numbers in the discussion that follows are presented against the prior-year quarter.
Franklin Covey: The raw numbers
|Metric||Q1 2019||Q1 2018||Change (YOY)|
|Revenue||$53.8 million||$47.9 million||12.3%|
|Net income||($1.36 million)||($2.39 million)||N/A|
|Diluted earnings per share||($0.10)||($0.17)||N/A|
What happened this quarter?
- Franklin Covey's enterprise division, which is made up of direct offices and international licensees, improved revenue by 12.3% to $42.1 million.
- The company's education division achieved similar results, growing its top line by 12.7% to $10.3 million.
- Subscription and subscription-related revenue climbed 36% to $27.8 million. Subscription revenue accounted for over 51% of the company's total top line during the quarter.
- Management observed that the organization has successfully transitioned from selling piecemeal products to clients to offering subscription-based training and services. Franklin Covey's new model is exemplified by its "All Access Pass" for enterprise clients, and its "Leader in Me" online service sold within the education division.
- The gradual improvement in Franklin Covey's operations due to its switch to a recurring revenue model was manifest in the quarter's gross profit. This number expanded by $4 million to $36.8 million due to higher sales, even as gross margin remained essentially flat at 68.3%.
- Cash flow was another beneficiary of the business model transition, as cash from operations in the first quarter nearly quadrupled against the prior-year quarter, to $8.1 million.
- Franklin Covey's operating loss decreased from $3.3 million in the first quarter of 2018 to $0.7 million in the current quarter. Some of the operating leverage provided by higher sales was absorbed by an increase in selling, general, and administrative expenses (SG&A), which rose due to higher sales commissions and increased sales personnel expense. Depreciation expense also rose against the prior year, a result of investments in new technology, including an upgraded enterprise resource planning (ERP) system.
- Deferred revenue, an important indicator of future revenue, decreased 11.1% to $46.2 million. However, the company reported that unbilled deferred revenue (revenue contracted but not yet billed, and thus excluded from the balance sheet) jumped 50% over the last three months to $24.4 million.
What management had to say
In Franklin Covey's earnings press release, CEO Bob Whitman focused his attention on the potential for accelerated earnings and cash flow in the quarters ahead resulting from the company's more stable revenue framework:
The Enterprise Division's fiscal 2018 results marked "the crossing of the bridge" on the transformation of our Enterprise Division's business model, and our strong first quarter fiscal 2019 results position us for accelerated growth in both revenue and profitability during the year. With continued strong Enterprise Division results and expected ongoing improvements in Education Division operations, especially in the fourth quarter of fiscal 2019, we are now positioned to generate significant growth in Adjusted EBITDA and cash flow during fiscal 2019 and in future periods.
Alongside earnings, Franklin Covey reaffirmed previously released financial guidance for fiscal 2019. Excluding foreign exchange impacts, the company expects adjusted EBITDA of between $18 million and $22 million during the current fiscal year. At the midpoint of this range, Franklin Covey will far exceed last year's adjusted earnings of $11.9 million if projections pan out. Achieving this target will also bring the organization several steps closer to reporting positive GAAP net income this time next year.