The downside of the share appreciation that Franklin Covey (NYSE:FC) has recently enjoyed -- company stock is up 42% year to date -- is that shareholders feel increasing trepidation with each approaching earnings report. Will errant results stymie the progress of the leadership consulting organization, or will the "FC" symbol continue its near-linear rise this year?
Franklin Covey reports fiscal third-quarter 2019 results on June 27 after the markets close for trading. Below, let's look at three keys to the company's earnings report that will have a direct bearing on share price movement following the release.
1. Strength of enterprise sales
As I discussed earlier this year, Franklin Covey's shift to a subscription business model has revitalized its top line and future growth prospects. But perhaps the underappreciated storyline in the company's resurgence is its double-digit expansion in enterprise sales.
Enterprise sales rose 10% in the first two quarters of the year against the comparable prior-year period, to $81.5 million. This revenue stream comprised nearly 80% of Franklin Covey's revenue in the first half of fiscal 2019. The segment's momentum has been paced by sales of the "All Access Pass," which gives corporations the ability to provide access to Franklin Covey's complete online content offerings (including live, interactive content) to employee groups at a cost-effective price.
Sales of All Access Pass jumped by 33% last quarter against the prior-year quarter. Shareholders will expect similar progress in the fiscal third quarter, because for now, this popular package option for leadership, organizational improvement, and sales effectiveness tools is fueling the success of the enterprise segment and of Franklin Covey by extension.
2. Back-half earnings acceleration
Franklin Covey doesn't issue quarterly guidance. Thus, as the fiscal year advances, its ability to meet its own full-year outlook rises in importance. As I discussed last quarter, the company has booked $4.1 million in adjusted EBITDA in the first two quarters of the fiscal year, and it's reaffirmed a full-year earnings target of $18 million to $22 million. At the midpoint of the range, this represents an increase of nearly 70% over fiscal 2018's adjusted EBITDA total of $11.9 million.
In the third quarter of fiscal 2018, Franklin Covey recorded just $588,000 in adjusted earnings, and it should exceed this benchmark with ease given its growing recurring revenue base. The company will likely need to also surpass the $2 million in adjusted EBITDA that it's averaged in the first two quarters of the current year. While the organization typically enjoys a big fourth quarter (it booked roughly $11 million in adjusted earnings in the final quarter of both fiscal 2017 and 2018), a third-quarter adjusted earnings punch on the order of $3 million to $4 million will ease some pressure on the last quarter to deliver most of the year's bottom-line gains.
3. Direct office and sales force expansion
Franklin Covey's belief that it can grab a much larger share of the business improvement market is one of the primary factors behind shareholders' recent enthusiasm. Last quarter, the company acquired one of its direct office licensees serving the Germany, Switzerland, and Austria (GSA) region. The acquisition added $0.5 million to enterprise revenue last quarter and is expected to have a greater quarterly impact going forward.
Beyond office expansion, however, the company has embarked on an ambitious plan to increase its current sales force of 230 professionals by 75, or one-third, in the coming three years, with 20 hires slated for the current year. Last quarter, the company cited this "planned aggressive expansion of the sales force" as a key driver behind management's expectation of imminent revenue and earnings improvement.
If Franklin Covey tops its current-year top-line growth rate of 10% in the final two quarters, management will almost certainly attribute part of the advance to a fast pace of hiring new sales force employees. Shareholders should focus on both the third-quarter tally of sales force additions and any expected hiring projections for the fourth quarter and fiscal 2020. For the time being, Franklin Covey appears to be in the enviable position of needing to bulk up selling resources to meet demand.