Franklin Covey Co. (FC) is a global consulting and training company that has been enabling greatness in people and organizations everywhere for over three decades. The company's mission is to help clients achieve sustained superior performance through changes in human behavior. With a focus on leadership, execution, productivity, educational improvement, and sales performance, Franklin Covey has established itself as a trusted partner for organizations seeking to unlock their full potential.
Business Overview and History:
Incorporated in 1983 and headquartered in Salt Lake City, Utah, Franklin Covey's origins can be traced back to the publication of the iconic self-help book, "The 7 Habits of Highly Effective People" by Stephen R. Covey. The company initially started by selling paper-based organizational products, including the popular Franklin Planner. As the market for paper-based planning products declined in the early 2000s, Franklin Covey faced significant challenges. In response, the company shifted its focus towards training and consulting services aimed at improving individual and organizational effectiveness.
A major milestone in Franklin Covey's evolution was the launch of its All Access Pass in 2015. This subscription-based offering provided clients with unlimited access to Franklin Covey's content and solutions, driving a significant increase in recurring revenue. The company also made substantial investments in its content, technology, and delivery capabilities to meet the growing demand for flexible, technology-enabled solutions in the training and consulting industry. These strategic shifts allowed Franklin Covey to transform itself into a leading provider of organizational performance improvement solutions, better positioned to scale its offerings and meet the evolving needs of its global client base.
Franklin Covey Co. has two main business divisions that offer a variety of products and services: the Enterprise Division and the Education Division. The Enterprise Division consists of two segments: Direct Offices and International Licensees. The Direct Offices segment includes the company's sales personnel that serve the United States, Canada, and several international direct sales offices in countries such as Japan, China, the UK, Ireland, Australia, New Zealand, Germany, Switzerland, and Austria. This segment also includes the company's government services and book/audio sales channels.
The International Licensees segment generates revenue primarily from royalties on sales by the company's independently owned international licensees, which provide Franklin Covey's offerings in countries where the company does not have a directly-owned office.
The Education Division is focused on selling the company's offerings, including the Leader in Me program, to educational institutions such as elementary schools, high schools, and colleges. The Leader in Me program was used by over 3,800 schools in the United States and Canada as of May 31, 2024, up from a record 3,000 schools added in fiscal 2023.
Financials:
In fiscal year 2024, Franklin Covey reported total revenue of $287.2 million, up from $280.5 million in the prior year. Net income reached $23.4 million, compared to $17.8 million in the previous year. The company's EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) grew to $43.1 million in fiscal 2024, compared to $36.9 million in the prior year.
For the most recent quarter (Q4 2024), revenue was $84.12 million, up 8% year-over-year. Net income for the quarter was $12.00 million, up 76% year-over-year. Operating cash flow (OCF) for Q4 2024 was $60.26 million, up 69% year-over-year, while free cash flow (FCF) was $48.95 million, up 121% year-over-year.
In the first three quarters of fiscal 2024, the Direct Offices segment generated $141.51 million in revenue, a slight decrease from $144.19 million in the prior year period. The decline was driven by decreased legacy onsite presentation and add-on subscription services revenue, partially offset by 8% growth in All Access Pass (AAP) subscription revenue to $79.40 million. The AAP subscription revenue retention rate remained strong at over 90% in the United States and Canada.
International Licensees revenue decreased 3% to $8.83 million in the first three quarters of fiscal 2024, mainly due to a 3% drop in royalty revenues, partially offset by increased licensee support revenues.
The Education Division revenue grew 8% to $49.40 million in the first three quarters of fiscal 2024, driven by increased sales of classroom and training materials, a new state-wide initiative, and higher membership subscription revenues.
Across the company, subscription and subscription-based services revenue grew 6% year-over-year to $109.08 million in the first three quarters of fiscal 2024 and represented 54% of total revenue. Deferred subscription revenue increased 15% to $83.80 million at May 31, 2024 compared to the prior year period.
Financial Performance and Ratios:
Franklin Covey's profitability has been on an upward trajectory, with a net profit margin of 8.1% in fiscal year 2024, up from 6.3% in fiscal 2023. The company's balance sheet remains strong, with a current ratio of 0.99 and a debt-to-equity ratio of 0.07 as of the end of fiscal 2024.
In terms of geographic performance, revenue from the company's international direct offices was $33.1 million in fiscal 2024, a 6% decrease compared to the prior year, primarily due to a $2.5 million decline in revenue from the company's China office due to challenging business conditions. Revenue from the company's international licensees was $11.2 million, a 4% decrease compared to the prior year, also due to economic challenges in certain countries.
Liquidity:
Franklin Covey's liquidity position is robust, with $48.7 million in cash and cash equivalents as of August 31, 2024, and an undrawn $62.5 million revolving credit facility, providing ample financial flexibility to support its growth initiatives. The company's debt-to-equity ratio stands at 0.019, while its current ratio is 0.99 and quick ratio is 0.96, indicating a solid short-term financial position.
Operational Highlights and Strategies:
A key driver of Franklin Covey's success has been its focus on delivering high-quality, content-rich solutions to its clients. The company's portfolio of offerings, which includes the widely acclaimed "The 7 Habits of Highly Effective People" program, has been continuously updated and expanded to address the evolving needs of organizations.
In recent years, Franklin Covey has made significant investments in its technology capabilities, including the development of its Impact Platform. This cloud-based solution enables the company to deliver its content and services to clients in a highly scalable and efficient manner, while maintaining the quality and impact that its customers have come to expect.
To further accelerate its growth, Franklin Covey has recently announced a strategic initiative to expand its sales and marketing efforts. The company is investing in additional client-facing roles, focused on both deepening relationships with existing clients and acquiring new customers. This dual-pronged approach is expected to drive increased penetration within the company's existing client base, as well as expand its overall market reach.
The company offers a wide range of content delivery options, including the All Access Pass subscription, the Leader in Me membership, digital online learning, onsite training, training led through certified facilitators, blended learning, and organization-wide transformational processes, including consulting and coaching.
In fiscal 2025, the company plans to make approximately $16 million in incremental net growth investments to expand its sales force and support functions, with the goal of increasing its revenue growth from the mid-to-high single digits to consistent double-digit growth.
Risks and Challenges:
While Franklin Covey has demonstrated impressive resilience and adaptability, the company faces a number of risks and challenges that warrant consideration. The highly competitive nature of the corporate training and consulting industry, with the presence of both large, established players and nimble, disruptive competitors, requires Franklin Covey to continually innovate and differentiate its offerings.
Additionally, the company's international operations, particularly in markets such as China, expose it to economic and political uncertainties that can impact its financial performance. The company's reliance on a relatively small number of large clients also presents a concentration risk that must be actively managed.
Furthermore, the successful execution of Franklin Covey's growth strategy, which involves significant investments in sales and marketing, will be critical to the company's ability to achieve its long-term objectives. Any missteps or delays in the implementation of these initiatives could hinder the company's momentum and financial results.
Outlook and Conclusion:
Despite the challenges, Franklin Covey's outlook remains promising. The company's transition to a subscription-based model, coupled with its ongoing investments in technology and content, have positioned it well to capitalize on the growing demand for high-impact leadership and organizational development solutions.
In fiscal year 2025, the company is guiding for revenue in the range of $295 million to $305 million, reflecting the impact of its recent growth investments. Franklin Covey expects adjusted EBITDA in the range of $40 million to $44 million for fiscal year 2025, reflecting the impact of their $16 million in incremental growth investments.
Looking further ahead, Franklin Covey has set ambitious targets, aiming to achieve revenue of $330 million in fiscal 2026 (10% growth), $370 million in fiscal 2027 (12% growth), and $420 million in fiscal 2028 (14% growth). The company also provided long-term adjusted EBITDA targets of $48 million for fiscal 2026 (14% growth), $60 million for fiscal 2027 (25% growth), and $75 million for fiscal 2028 (25% growth).
As Franklin Covey continues to execute on its strategic priorities, the company's ability to deliver sustainable, profitable growth and consistently strong cash flows will be critical factors in determining its long-term success. Investors interested in the organizational performance improvement space would be well-advised to closely monitor the company's progress and its ability to navigate the evolving competitive landscape.