Franklin Covey (NYSE: FC), which focuses on leadership and organizational-improvement services for businesses, reports on its fiscal second quarter of 2019 on Thursday, April 4. As I discussed last quarter, the company's beginning to make progress in its attempts to diversify its revenue streams and improve profitability. Below, let's walk through four critical numbers investors should visit once the report is released in order to gain a read on the organization's relative health.
1) Subscriptions as a percentage of total revenue
Franklin Covey's business-model shift to a subscription-based revenue structure is the primary factor behind a trend of higher sales and decreasing losses. In a recent presentation, the company noted that its "All Access Pass," aimed at corporate enterprise clients, not only has the benefit of a high initial purchase price of $25,000 per subscription but also boasts an annual retention rate of over 90% and generates gross margin on services of 74%.
In the last sequential quarter, subscription revenue increased 36% year over year and equaled 51% of total company revenue. In the fiscal second quarter, investors should similarly expect a double-digit year-over-year expansion in subscription-based sales. Importantly, watch for the percentage of subscription revenue to total revenue to rise again incrementally over the 50% mark.
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2) Change in quarterly loss
In the first quarter of the fiscal year, Franklin Covey's net loss diminished by 43%, to $1.6 million. While the company's gross margin held steady at roughly 68%, management was able to keep a lid on overhead expenses and thus gained operational leverage from a 12% jump in sales.
The current quarter's results will be compared to a net loss of $2.7 million incurred in the fiscal second quarter of 2018. Shareholders can expect substantial progress against the comparable quarter as the company continues its steady march toward GAAP-based positive net income.
3) Adjusted earnings
While Franklin Covey may well cross over into positive GAAP earnings this year, for now, management is still advising investors to gauge its progress on adjusted EBITDA. The company's full-year outlook anticipates adjusted EBITDA of $18 million to $22 million, which will represent a significant improvement over the approximately $12 million in adjusted EBITDA generated during fiscal 2018.
The second quarter should show a healthy year-over-year leap in this metric, as Franklin Covey reported an adjusted EBITDA loss of $668,000 in the second quarter of 2018.
4) Deferred revenue balance
Deferred revenue is an important measure of future earnings recognition, and healthy growth in this balance-sheet account can give investors insight into ongoing demand for a company's subscription-type revenue. Deferred revenue decreased on a year-over-year basis by 11% in the first quarter of 2019, to $46.2 million. Management was quick to point out, however, that unbilled deferred revenue increased 50% year over year, to $24.4 million, during the same period.
Unbilled deferred revenue consists of sales that have been contracted but not yet been billed; therefore, unbilled deferred revenue isn't found on the balance sheet.
While a decrease in deferred revenue may be a caution flag in the larger narrative of subscription growth, the uptick in unbilled deferred revenue implies that the deferred balance is set to rise again. This logic is simple: As time passes, the contracted revenue will indeed get billed, and thus, its balance should transfer over into the deferred revenue account.
While this may be a little confusing to follow, the bottom line is that management has implied that deferred revenue will soon be on the rise. Shareholders should expect year-over-year growth in this number -- which sat at $36 million in the prior-year quarter.
We'll potentially see sequential growth, as well, when Franklin Covey reports on April 4. I'll be sure to discuss the result in my upcoming earnings recap.
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