07/08/2025 | Press release | Distributed by Public on 07/08/2025 14:28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results of operations (Management's Discussion and Analysis) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based upon management's current expectations and are subject to various uncertainties and changes in circumstances. Important factors that could cause actual results to differ materially from those described in forward-looking statements are set forth below under the heading "Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995."
We suggest that the following discussion and analysis be read in conjunction with the Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended August 31, 2024, as filed with the SEC on November 12, 2024.
Non-GAAP Measures
This Management's Discussion and Analysis includes the concept of Adjusted EBITDA, which is a non-GAAP financial measure. We define Adjusted EBITDA as net income or loss excluding the impact of interest, income taxes, intangible asset amortization, depreciation, stock-based compensation expense, and certain other items such as restructuring and headquarters moving costs. We reference this non-GAAP measure in our decision making because it provides supplemental information that facilitates consistent internal comparisons to the operating performance of prior periods and we believe it provides investors with greater transparency to evaluate our operational activities and financial results. For a reconciliation of our reporting segment Adjusted EBITDA to net income (loss), a related GAAP measure, refer to Note 7, Segment Information,to our unaudited condensed consolidated financial statements.
RESULTS OF OPERATIONS
Overview
Franklin Covey Co. is a global company focused on individual and organizational performance improvement. Our mission is to "enable greatness in people and organizations everywhere," and our worldwide resources are organized to help individuals and organizations achieve sustained superior performance at scale through changes in human behavior. We believe that our content and services create the connection between capabilities and results. Our business is currently structured around two divisions, the Enterprise Division and the Education Division. The Enterprise Division consists of our North America, International Direct Office, and International Licensee segments and is focused on selling our offerings to corporations, governments, not-for-profits, and other related organizations. Our offerings delivered through the Enterprise Division are designed to help organizations and individuals achieve their own great results. Our Education Division is centered around the principles found in The Leader in Meand is dedicated to helping educational institutions build cultures that will produce great results, including increased student performance, improved school culture, and increased parental and teacher involvement.
During the quarter ended May 31, 2025, our operations were heavily impacted by various macroeconomic factors, including specific actions to reduce U.S. federal government spending, threatened or enacted tariffs that have created significant business environment uncertainty, and ongoing geopolitical tensions which continue to produce instability in certain areas of the world. While threatened or enacted tariffs have not directly impacted our operations, the uncertainty created by the threatened tariffs have adversely impacted our clients both domestically and internationally. In response to the economic uncertainty, many of our clients and prospective clients have sought to reduce their spending to maintain profitability. Despite these macroeconomic issues, we are pleased that the majority of our clients are renewing their All Access Pass subscriptions and Leader in Mememberships. Our solutions are designed to help clients achieve their own great purposes and manage difficult and uncertain times. The Company's recently implemented new go-to-market strategy entered its second quarter of operations and these initiatives are designed to enable us to systematically drive growth in both the breadth and depth of our client relationships at scale.
Our consolidated revenue for the third quarter ended May 31, 2025, was $67.1 million, compared with $73.4 million in the third quarter of fiscal 2024 and reflected the impact of conditions previously described. Foreign exchange rates did not have a material impact on our consolidated revenue during the third quarter. The Company's revenue performance during the third quarter of fiscal 2025 included the following key metrics:
oEnterprise Division revenues for the third quarter of fiscal 2025 totaled $47.3 million compared with $51.9 million in fiscal 2024. Enterprise Division revenue performance was impacted by a $3.5 million decrease in North America segment revenues and a $1.0 million decrease in International Direct Office revenues, which were both affected by macroeconomic uncertainties and canceled government contracts. These challenging economic and business conditions adversely impacted new logo sales and expansion activity in the third quarter.
oEducation Division revenues in the third quarter of fiscal 2025 were $18.6 million compared with $20.2 million in the prior year. The decrease was primarily due to reduced classroom materials sales. In the third quarter of fiscal 2024, we entered into a new state-wide initiative and other new district-wide initiatives that included large materials orders during the first year of the contracts. Materials orders from these contracts did not repeat at the same level in fiscal 2025. However, decreased materials revenue was partially offset by increased training and coaching revenue and membership subscription revenues.Delivery of training and coaching days remained strong in the third quarter of fiscal 2025 and benefited from higher revenue per day than in same period of the prior year. Education deferred subscription revenue at May 31, 2025, increased 21% over the balance at May 31, 2024.
oConsolidated subscription and subscription services revenues for the third quarter of fiscal 2025 were $57.7 million compared with $60.8 million in the third quarter of fiscal 2024. For the quarter ended May 31, 2025, subscription revenue invoiced was $31.7 million compared with $34.5 million in fiscal 2024.
oConsolidated deferred subscription revenue on May 31, 2025, increased 7% to $89.3 million compared with $83.8 million on May 31, 2024.
oAs of May 31, 2025, 58% of our AAP contracts are for at least two years, compared with 55% at May 31, 2024, and the percentage of contracted amounts represented by multi-year contracts was 62% compared with 60% as of May 31, 2024.
oUnbilled deferred subscription revenue on May 31, 2025, was $62.0 million compared with $69.4 million on May 31, 2024. Unbilled deferred revenue represents business that is contracted, but unbilled and therefore excluded from our balance sheet.
The following is a summary of other unaudited consolidated financial information from the third quarter of fiscal 2025, which ended on May 31, 2025:
Cost of Revenue/Gross Profit- For the quarter ended May 31, 2025, our cost of revenue totaled $15.8 million compared with $17.2 million in the prior year. Gross profit for the third quarter of fiscal 2025 was $51.3 million compared with $56.2 million in the prior year. The decrease in gross profit was primarily due to decreased revenue as described above. Gross margin for the third quarter of fiscal 2025 remained strong and was 76.5% of revenue compared with 76.6% in the third quarter of fiscal 2024.
Operating Expenses- Our operating expenses for the third quarter of fiscal 2025 totaled $53.5 million and increased $5.7 million compared with the prior year, which was primarily due to a $4.0 million increase in restructuring charges and a $1.6 million increase in selling, general, and administrative (SG&A) expenses. During the third quarter of fiscal 2025, we continued to restructure our sales force in the Enterprise Division and to reduce costs in certain areas of our operations. We incurred $4.7 million of expenses for these restructuring activities primarily for severance and related costs. The increase in SG&A expenses was primarily due to increased associate costs related to new personnel, including new sales and sales support personnel hired in connection with the implementation of our new go-to-market strategy and the restructuring of our North America sales force.
Income Taxes- Our income tax benefit for the quarter ended May 31, 2025, was $0.7 million on a pre-tax loss of $(2.1) million, for an effective benefit rate of 33.8%. In the third quarter of the prior year, our income tax provision was $2.6 million on pre-tax income of $8.4 million, reflecting an effective income tax rate of 31.6%. The slightly higher benefit rate in the current quarter is primarily attributable to our expectation that withholding taxes on foreign-source income will remain consistent year-over-year, while pre-tax income is expected to be lower, thus increasing the impact on our effective rate.
Net Income (Loss) and Adjusted EBITDA - For the third quarter of fiscal 2025, we realized a net loss of $(1.4) million, or $(0.11) per share, compared with net income of $5.7 million, or $0.43 per diluted share, in the third quarter of the prior year, reflecting the factors previously discussed. Our Adjusted EBITDA for the quarter ended May 31, 2025, exceeded our previously announced expectations and totaled $7.3 million compared with $13.9 million in the third quarter of fiscal 2024. Foreign exchange rates had a $0.5 million favorable impact on our Adjusted EBITDA for the quarter ended May 31, 2025.
Liquidity and Financial Position - Our liquidity and financial position remained strong throughout the third quarter of fiscal 2025. At May 31, 2025, we had over $95 million of available liquidity which consisted of $33.7 million of cash and our full undrawn $62.5 million line of credit even after purchasing $23.0 million of our common stock during the first three quarters of fiscal 2025.
Further details regarding our results for the quarter ended May 31, 2025, are provided throughout the following Management's Discussion and Analysis.
Quarter Ended May 31, 2025 Compared with the Quarter Ended May 31, 2024
Enterprise Division
North America Segment
The North America segment includes our personnel that serve clients in the United States and Canada. The following comparative information is for our North America segment in the periods indicated (in thousands):
Quarter Ended |
Quarter Ended |
|||||||||
May 31, |
% of |
May 31, |
% of |
|||||||
2025 |
Sales |
2024 |
Sales |
Change |
||||||
Revenue |
$ |
37,054 |
100.0 |
$ |
40,592 |
100.0 |
$ |
(3,538) |
||
Cost of revenue |
6,346 |
17.1 |
7,167 |
17.7 |
(821) |
|||||
Gross profit |
30,708 |
82.9 |
33,425 |
82.3 |
(2,717) |
|||||
SG&A expenses |
24,507 |
66.1 |
22,603 |
55.7 |
1,904 |
|||||
Adjusted EBITDA |
$ |
6,201 |
16.7 |
$ |
10,822 |
26.7 |
$ |
(4,621) |
Revenue.For the quarter ended May 31, 2025, North America segment revenue was $37.1 million compared with $40.6 million in the prior year. North America segment revenues for the quarter were adversely impacted by the uncertain macroeconomic environment and by canceled or postponed government contracting. During the third quarter of fiscal 2025, total Enterprise Division AAP subscription plus subscription services revenues were $39.9 million compared with $42.6 million in the prior year. Rolling four quarter AAP subscription and subscription service revenues were $160.2 million compared with $163.3 million for the corresponding period ended May 31, 2024. We remain optimistic about the expected results of our new North America go-to-market strategy and sales force restructuring as our new North America sales force structure is in place and began executing on their directives earlier in fiscal 2025. However, continued economic uncertainty, including threatened or enacted tariffs, may prevent us from achieving expected sales goals in the near term. Foreign exchange rates had an insignificant impact on North America revenues and operating results during the third quarter of fiscal 2025.
Gross Profit.Gross profit was impacted by lower revenue as described above. North America gross margin remained strong during the quarter ended May 31, 2025, and increased to 82.9% of revenue compared with 82.3% in the third quarter of fiscal 2024.
SG&A Expense.North America SG&A expenses increased primarily due to associate costs resulting from new sales and sales support personnel primarily related to our new go-to-market strategy and the restructuring of our North America sales force.
International Direct Offices
Our directly owned international offices serve clients in Australia, Austria, China, France, Germany, Ireland, Japan, New Zealand, Switzerland, and the United Kingdom. The following comparative information is for our International Direct Office segment in the periods indicated (in thousands):
Quarter Ended |
Quarter Ended |
|||||||||
May 31, |
% of |
May 31, |
% of |
|||||||
2025 |
Sales |
2024 |
Sales |
Change |
||||||
Revenue |
$ |
7,496 |
100.0 |
$ |
8,540 |
100.0 |
$ |
(1,044) |
||
Cost of revenue |
2,006 |
26.8 |
1,911 |
22.4 |
95 |
|||||
Gross profit |
5,490 |
73.2 |
6,629 |
77.6 |
(1,139) |
|||||
SG&A expenses |
5,177 |
69.1 |
5,361 |
62.8 |
(184) |
|||||
Adjusted EBITDA |
$ |
313 |
4.2 |
$ |
1,268 |
14.8 |
$ |
(955) |
Revenue. International Direct Office revenues for the quarter ended May 31, 2025, were adversely affected by ongoing economic uncertainty and geopolitical tensions as previously discussed. Third quarter revenues decreased in Japan by 22%, in the United Kingdom by 21%, and in China by 15% and were reflective of the macroeconomic conditions and their impact on existing and potential clients. Decreases in these offices were partially offset by increased revenue recognized through our new France office. The fluctuation of foreign exchange rates had a $0.1 million favorable impact on our International Direct Office revenue and an insignificant impact on operating results in the third quarter of fiscal 2025. We believe the resolution of multiple international trade issues and improving economic conditions will lead to improved sales performance in future periods. However, the successful resolution of these macroeconomic issues is not within our control and may not generate expected revenue growth at our International Direct Offices in future periods.
Gross Profit. Gross profit in the International Direct Office segment decreased primarily due to reduced revenue as described above. Gross margin for the third quarter of fiscal 2025 was 73.2% of sales compared with 77.6% in the prior year and decreased primarily due to a shift in the mix of services delivered and products sold during the third quarter of fiscal 2025 when compared with fiscal 2024.
SG&A Expenses.International Direct Office SG&A expenses decreased $0.2 million primarily due to cost reduction initiatives enacted to offset the impact of decreased revenue.
International Licensees Segment
In foreign locations where we do not have a directly owned office, our training and consulting services are delivered through independent licensees. The following comparative information is for our International Licensee operations in the periods indicated (in thousands):
Quarter Ended |
Quarter Ended |
|||||||||
May 31, |
% of |
May 31, |
% of |
|||||||
2025 |
Sales |
2024 |
Sales |
Change |
||||||
Revenue |
$ |
2,716 |
100.0 |
$ |
2,747 |
100.0 |
$ |
(31) |
||
Cost of revenue |
337 |
12.4 |
284 |
10.3 |
53 |
|||||
Gross profit |
2,379 |
87.6 |
2,463 |
89.7 |
(84) |
|||||
SG&A expenses |
1,030 |
37.9 |
1,111 |
40.4 |
(81) |
|||||
Adjusted EBITDA |
$ |
1,349 |
49.7 |
$ |
1,352 |
49.2 |
$ |
(3) |
Revenue. International licensee revenue is primarily comprised of royalties on sales of our content by the licensees. For the quarter ended May 31, 2025, our International Licensees' revenue was essentially flat when compared with the prior year at $2.7 million as licensee royalty revenues were relatively flat for the quarter. Our International Licensees' operations continue to be unfavorably impacted by difficult macroeconomic conditions, such as geopolitical trade tensions and economic uncertainty, which have negatively impacted the industries that some of our licensees serve. While we remain optimistic about future growth in our International Licensee operations, ongoing economic uncertainty and geopolitical instability may impair or reduce their growth compared with our expectations. Foreign exchange rates had an immaterial impact on International Licensee revenues and operating results for the quarter ended May 31, 2025.
Gross Profit. Despite consistent revenue performance when compared with the prior year, gross profit for the quarter ended May 31, 2025 decreased compared to fiscal 2024 primarily due to changes in the mix of services and products sold.
These changes in product mix reduced International Licensee gross margin from 89.7% in fiscal 2024 to 87.6% in the current year.
SG&A Expenses.International licensee SG&A expenses decreased $0.1 million primarily due to cost-cutting initiatives implemented during fiscal 2025.
Education Division
Our Education Division is comprised of our domestic and international Education practice operations (focused on sales to educational institutions) and includes our widely acclaimed The Leader in Meprogram. The following comparative information is for our Education Division in the periods indicated (in thousands):
Quarter Ended |
Quarter Ended |
|||||||||
May 31, |
% of |
May 31, |
% of |
|||||||
2025 |
Sales |
2024 |
Sales |
Change |
||||||
Revenue |
$ |
18,640 |
100.0 |
$ |
20,235 |
100.0 |
$ |
(1,595) |
||
Cost of revenue |
6,413 |
34.4 |
6,965 |
34.4 |
(552) |
|||||
Gross profit |
12,227 |
65.6 |
13,270 |
65.6 |
(1,043) |
|||||
SG&A expenses |
10,174 |
54.6 |
10,128 |
50.1 |
46 |
|||||
Adjusted EBITDA |
$ |
2,053 |
11.0 |
$ |
3,142 |
15.5 |
$ |
(1,089) |
Revenue.For the third quarter of fiscal 2025, Education Division revenue was $18.6 million compared with $20.2 million in the third quarter of fiscal 2024. The decrease in Education Division revenue during the quarter was primarily due to a $2.2 million decrease in training materials revenue, which was partially offset by increased coaching and consulting revenue and increased membership subscription revenues resulting primarily from new schools which started The Leader in Meduring fiscal 2024. During the third quarter of fiscal 2024 a new state-wide initiative began that included $1.4 million of classroom materials sales and we also recognized significant materials sales from other new district-wide initiatives. These contracts included large materials orders in the first year and did not repeat at the same level in fiscal 2025. The delivery of training and coaching services remained strong during the third quarter of fiscal 2025 and benefited from higher revenue per day than the prior year. Training and coaching days are recognized as revenue when they are delivered. Education subscription and subscription services revenues in the third quarter of fiscal 2025 decreased 2% compared with the same period of the prior year due to decreased materials revenue. Foreign exchange rates had an immaterial impact on Education Division revenue and operating results for the third quarter of fiscal 2025.
Gross Profit.Education Division gross profit in the third quarter of fiscal 2025 decreased primarily due to revenue performance as previously described. Education Division gross margin remained strong and was consistent with the prior year at 65.6% of sales.
SG&A Expenses. Education SG&A expenses were relatively flat compared with the prior year and increased slightly due to the impact of new personnel, recognition of previously deferred commissions, and increased salaries compared with the prior year. These increases were mostly offset by decreased variable pay and marketing expenses.
Other Operating Expense Items
Interest Expense- Our interest expense of $0.1 million decreased by $0.1 million compared with the third quarter of fiscal 2024 due to decreased term loan and financing obligation liabilities as payments have been made in the normal course of business.
Income Taxes
Our income tax benefit for the quarter ended May 31, 2025, was $0.7 million on a pre-tax loss of $(2.1) million, for an effective benefit rate of 33.8%. In the third quarter of the prior year, our income tax provision was $2.6 million on pre-tax income of $8.4 million, reflecting an effective income tax rate of 31.6%. The slightly higher benefit rate in the current quarter is primarily attributable to our expectation that withholding taxes on foreign-source income will remain consistent year-over-year, while pre-tax income is expected to be lower, thus increasing the impact on our effective rate.
Three Quarters Ended May 31, 2025 Compared with the Three Quarters Ended May 31, 2024
Enterprise Division
North America Segment
The following comparative information is for our North America segment in the periods indicated (in thousands):
Three Quarters |
Three Quarters |
|||||||||
Ended |
Ended |
|||||||||
May 31, |
% of |
May 31, |
% of |
|||||||
2025 |
Sales |
2024 |
Sales |
Change |
||||||
Revenue |
$ |
111,711 |
100.0 |
$ |
116,439 |
100.0 |
$ |
(4,728) |
||
Cost of revenue |
19,208 |
17.2 |
20,338 |
17.5 |
(1,130) |
|||||
Gross profit |
92,503 |
82.8 |
96,101 |
82.5 |
(3,598) |
|||||
SG&A expenses |
72,715 |
65.1 |
65,680 |
56.4 |
7,035 |
|||||
Adjusted EBITDA |
$ |
19,788 |
17.7 |
$ |
30,421 |
26.1 |
$ |
(10,633) |
Revenue.North America segment revenue for the first three quarters of fiscal 2025 totaled $111.7 million compared with $116.4 million in fiscal 2024. North America segment revenues were adversely impacted by continued business environment uncertainties and by canceled government contracts resulting from efficiency initiatives, which began in the second quarter of fiscal 2025. Our results for the first three quarters of fiscal 2025 were also somewhat lower than our expectations as we implemented a new go-to-market strategy and transitioned our sales force in North America to a more focused structure. For the first three quarters of fiscal 2025, total Enterprise AAP subscription plus subscription services revenues were $117.0 million compared with $121.6 million in fiscal 2024. While we remain optimistic about the expected results of our North America sales force restructuring and associated growth initiatives, other factors such as further reductions in government spending and continued uncertainty in the business environment in North America may delay or lower expected revenue growth from these initiatives. Foreign exchange rates had an insignificant impact on North America revenues and operating results for the three quarters ended May 31, 2025.
Gross Profit.Gross profit decreased due to revenue performance as discussed above. North America gross margin remained strong during the first three quarters of fiscal 2025 and increased to 82.8% compared with 82.5% in fiscal 2024.
SG&A Expense.North America SG&A expenses increased primarily due to associate costs resulting from new sales and sales support personnel (primarily related to our new go-to-market strategy and the restructuring of our North America sales force), compensation increases, and benefit costs, as well as increased advertising and promotional costs from the launch of our refreshed The 7 Habits of Highly Effective Peopleoffering in the first quarter of fiscal 2025.
International Direct Offices
The following comparative information is for our International Direct Office segment in the periods indicated (in thousands):
Three Quarters |
Three Quarters |
|||||||||
Ended |
Ended |
|||||||||
May 31, |
% of |
May 31, |
% of |
|||||||
2025 |
Sales |
2024 |
Sales |
Change |
||||||
Revenue |
$ |
21,936 |
100.0 |
$ |
24,533 |
100.0 |
$ |
(2,597) |
||
Cost of revenue |
5,773 |
26.3 |
5,789 |
23.6 |
(16) |
|||||
Gross profit |
16,163 |
73.7 |
18,744 |
76.4 |
(2,581) |
|||||
SG&A expenses |
17,047 |
77.7 |
16,426 |
67.0 |
621 |
|||||
Adjusted EBITDA |
$ |
(884) |
(4.0) |
$ |
2,318 |
9.4 |
$ |
(3,202) |
Revenue. International Direct Office revenues for the first three quarters of fiscal 2025 were adversely affected by ongoing economic uncertainty and geopolitical tensions as previously discussed. Fiscal 2025 year-to-date revenues decreased in China by 22%, in Japan by 19%, in the United Kingdom by 15%, and in our Germany, Switzerland, and Austria operations by 3% compared with fiscal 2024. These decreases were partially offset by increased sales through our Australia office and by revenue from our new France office. The fluctuation of foreign exchange rates for the first three quarters of fiscal 2025 had a $0.1 million impact on International Direct Office revenue and an insignificant impact on operating results.
Gross Profit. Gross profit in the International Direct Office segment decreased primarily due to reduced revenue as previously described. Gross margin for the first three quarters of fiscal 2025 remained strong and was 73.7% of sales
compared with 76.4% in fiscal 2024. The fluctuation in gross margin was primarily due to changes in the mix of services delivered and products sold compared with the prior year.
SG&A Expenses.International Direct Office SG&A expenses increased primarily due to increased bad debt expense and increased advertising and marketing expense related to the launch of the new The 7 Habits of Highly Effective Peopleoffering, which occurred in the first quarter of fiscal 2025.
International Licensees Segment
The following comparative information is for our international licensee operations in the periods indicated (in thousands):
Three Quarters |
Three Quarters |
|||||||||
Ended |
Ended |
|||||||||
May 31, |
% of |
May 31, |
% of |
|||||||
2025 |
Sales |
2024 |
Sales |
Change |
||||||
Revenue |
$ |
8,749 |
100.0 |
$ |
8,951 |
100.0 |
$ |
(202) |
||
Cost of revenue |
1,007 |
11.5 |
1,010 |
11.3 |
(3) |
|||||
Gross profit |
7,742 |
88.5 |
7,941 |
88.7 |
(199) |
|||||
SG&A expenses |
3,293 |
37.6 |
3,315 |
37.0 |
(22) |
|||||
Adjusted EBITDA |
$ |
4,449 |
50.9 |
$ |
4,626 |
51.7 |
$ |
(177) |
Revenue. For the first three quarters of fiscal 2025, our International Licensees' revenue decreased primarily due to decreases in services revenue and in our share of AAP revenue. Licensee royalty revenues were essentially flat compared with fiscal 2024. During fiscal 2025, our foreign licensees have encountered ongoing macroeconomic uncertainty and geopolitical instability in the regions where they operate, which have adversely impacted their operations. Foreign exchange rates had an immaterial impact on International Licensee revenues and operating results for the first three quarters of fiscal 2025.
Gross Profit. Gross profit decreased due to lower licensee revenue compared with the prior year. However, International Licensee gross margin remained strong and was 88.5% in the first three quarters of fiscal 2025 compared with 88.7% in the first three quarters of the prior year.
SG&A Expense.International Licensee SG&A expenses for the first three quarters of fiscal 2025 decreased primarily due to cost cutting efforts implemented during fiscal 2025 in response to decreased revenue.
Education Division
The following comparative information is for our Education Division in the periods indicated (in thousands):
Three Quarters |
Three Quarters |
|||||||||
Ended |
Ended |
|||||||||
May 31, |
% of |
May 31, |
% of |
|||||||
2025 |
Sales |
2024 |
Sales |
Change |
||||||
Revenue |
$ |
50,169 |
100.0 |
$ |
49,815 |
100.0 |
$ |
354 |
||
Cost of revenue |
18,201 |
36.3 |
18,395 |
36.9 |
(194) |
|||||
Gross profit |
31,968 |
63.7 |
31,420 |
63.1 |
548 |
|||||
SG&A expenses |
29,962 |
59.7 |
28,642 |
57.5 |
1,320 |
|||||
Adjusted EBITDA |
$ |
2,006 |
4.0 |
$ |
2,778 |
5.6 |
$ |
(772) |
Revenue. Education Division revenue for the first three quarters of fiscal 2025 increased 1%, or $0.4 million, compared with the first three quarters of fiscal 2024. Fiscal 2025 revenue growth was primarily attributable to increased coaching and consulting revenue and increased membership subscription revenue, which were partially offset by decreased sales of classroom and training materials, primarily due to a new state-wide initiative and district contracts that included large training materials orders in the third quarter of fiscal 2024. These materials orders did not repeat at the same levels in the third quarter of fiscal 2025. Delivery of training and coaching days remained strong during the first three quarters of fiscal 2025 as the Education Division delivered approximately 70 more training and coaching days than in fiscal 2024. Education subscription and subscription services revenues in the first three quarters of fiscal 2025 increased 4% compared with the prior year and Education deferred subscription revenue at May 31, 2025, increased 21% over the balance at May 31, 2024. Education Division growth during the first three quarters of fiscal 2025 was partially offset by changes in foreign exchange rates, which adversely impacted revenue by $0.2 million and operating results by $0.4 million. We continue to be pleased with the strength and momentum of our Education Division, which added 728 new The Leader in Meschools during fiscal 2024. We believe the momentum generated in fiscal 2024 and over the first three quarters of
fiscal 2025 will continue through the remainder of fiscal 2025 as we continue to add new schools. At May 31, 2025, nearly 8,000 schools around the world were using The Leader in Me program.
Gross Profit.Education Division gross profit increased primarily due to revenue growth as previously discussed. Education Division gross margin remained strong and increased to 63.7% compared with 63.1% in the same period of the prior year.
SG&A Expenses. Education SG&A expenses increased primarily due to new personnel and increased commissions on higher sales when compared with the prior year.
Other Operating Expense Items
Depreciation- Through May 31, 2025, our depreciation expense was consistent with the prior year at $3.0 million in each period. We currently expect depreciation expense to total approximately $4 million in fiscal 2025.
Amortization- Amortization expense for the first three quarters of fiscal 2025 was $3.3 million compared with $3.2 million in the prior year. The slight increase was primarily due to the reacquisition of license rights for our France operations, which occurred in the first quarter of fiscal 2025. We currently expect definite-lived intangible asset amortization expense will total approximately $4.5 million during fiscal 2025.
Interest Expense- Our interest expense of $0.5 million decreased by $0.4 million compared with the first three quarters of fiscal 2024 primarily due to decreased term loan and financing obligation liabilities as payments have been made in the normal course of business.
Income Taxes
For the first three quarters of fiscal 2025, we recognized an income tax benefit of $0.6 million on a pre-tax loss of $(1.9) million, resulting in an effective tax benefit rate of 30.9%. For the corresponding period of the prior year, we recognized income tax expense of $3.6 million on pre-tax income of $15.1 million for an effective tax rate of 24.0%.
The year-to-date effective tax rate reflects the impact of permanent differences, including non-deductible expenses and foreign withholding taxes not eligible for U.S. foreign tax credits. We currently expect our annual effective tax rate for fiscal 2025 to be approximately 39%, which exceeds the combined U.S. federal and average state statutory rate, primarily due to non-deductible executive compensation under Internal Revenue Code Section 162(m).
During the first three quarters of fiscal 2025 we paid $7.1 million of cash for income taxes, most of which related to our fiscal 2024 income tax liability. Over the long term, we expect annual cash tax payments to approximate our annual income tax provision.
LIQUIDITY AND CAPITAL RESOURCES
Introduction
At May 31, 2025 we had over $95 million of available liquidity, which consisted of $33.7 million in cash combined with our undrawn $62.5 million revolving credit facility. Of our $33.7 million of cash on May 31, 2025, $13.4 million was held outside the U.S. by our foreign subsidiaries. We routinely repatriate cash from our foreign subsidiaries and consider cash generated from foreign activities a key component of our overall liquidity position. Our primary sources of liquidity are cash flows from the sale of services and products in the normal course of business and available proceeds from our credit facility. Our primary uses of liquidity include payments for operating activities, opportunistic purchases of our common stock, working capital expansion, capital expenditures (including curriculum development), and debt and lease payments.
In fiscal 2023, we entered into a credit agreement (the 2023 Credit Agreement) with KeyBank National Association leading a group of financial institutions. The 2023 Credit Agreement provides up to $70.0 million in total credit, of which $7.5 million was used to replace the outstanding term loan balance from the previous credit agreement. The remaining
$62.5 million is available as a revolving line of credit or for future term loans. The 2023 Credit Agreement matures on March 27, 2028.
As defined in the 2023 Credit Agreement, we are (i) required to maintain a Leverage Ratio of less than 3.00 to 1.00 and a Fixed Charge Coverage Ratio greater than 1.15 to 1.00; and (ii) we are restricted from making certain distributions to stockholders, including repurchases of common stock. However, we are permitted to make distributions, including through purchases of outstanding common stock, provided that we are in compliance with the Leverage Ratio and Fixed Charge Coverage Ratio financial covenants before and after such distribution. At May 31, 2025, we believe that we were in compliance with the terms and covenants contained in the 2023 Credit Agreement.
The following discussion is a description of the primary factors affecting our cash flows and their effects upon our liquidity and capital resources during the three quarters ended May 31, 2025.
Cash Flows Provided By Operating Activities
Our primary source of cash from operating activities was the sale of services to our customers in the normal course of business. Our primary uses of cash for operating activities were payments for SG&A expenses, direct costs necessary to conduct training programs, to fund working capital changes, and to suppliers for materials used in training manuals sold. Our cash provided by operating activities during the first three quarters of fiscal 2025 was $19.0 million compared with $38.4 million in the first three quarters of fiscal 2024. The decrease in cash flows from operating activities was primarily attributable to lower operating income in the first three quarters of fiscal 2025 as previously discussed, and an $8.3 million decrease in taxes payable as we no longer benefit from the utilization of our net operating loss position compared with the prior year. While we expect our cash flows from operating activities to improve in future periods, certain conditions are beyond our control or influence such as general macroeconomic conditions, further reductions in government spending, and business conditions in international locations which impact our financial results at our international direct offices and international licensees.
Cash Flows Used For Investing Activities and Capital Expenditures
Through May 31, 2025, our cash used for investing activities totaled $8.5 million. Our primary uses of cash for investing activities consisted of additional investments in the development of our offerings and purchases of property and equipment in the normal course of business.
In the first three quarters of fiscal 2025, we spent $4.1 million on the development of our various offerings and related content. During the first half of fiscal 2025, we launched a significantly refurbished The 7 Habits of Highly Effective Peopleoffering and expect to release additional/refurbished content in the remainder of fiscal 2025 and in future years. We believe continued investment in our offerings and content is key to future growth and the development of our business. We currently expect that our capital spending for curriculum development will total between approximately $7 million and $9 million in fiscal 2025.
Our purchases of property and equipment during the first three quarters of fiscal 2025 totaled $4.1 million and consisted primarily of computer software, hardware, and leasehold improvements at our new headquarters office. We are currently in the process of moving our corporate offices to a new location and will continue to use cash for leasehold improvements to build out and furnish the new office space through the remainder of fiscal 2025. Including the spending for these leasehold improvements, we currently anticipate that our purchases of property and equipment will total between approximately $10 million and $12 million in fiscal 2025.
In the first quarter of fiscal 2025, we reacquired the license rights to sell our content in France for $0.3 million in cash and $0.2 million of forgiven receivables from the former licensee. The operations of the newly opened direct office in France are included in the International Direct Office segment. We look forward to expanding our business and operations in France over the coming years.
Cash Flows Used For Financing Activities
For the first three quarters of fiscal 2025, our net cash used for financing activities totaled $25.6 million. Our primary uses of financing cash were $23.0 million used to purchase shares of our common stock, which consisted of shares
purchased on the open market and shares withheld for income taxes on stock-based compensation awards (Note 2), and $3.7 million used for principal payments on our financing obligation and notes payable. Partially offsetting these uses of cash for financing activities were $1.1 million of proceeds received from our ESPP participants to purchase shares of common stock during the first three quarters of fiscal 2025.
On April 18, 2024,our Board of Directors approved a plan to purchase up to $50.0 million of our outstanding common stock. The previously existing common stock purchase plan was canceled, and the new common share purchase plan does not have an expiration date. At May 31, 2025, we had $27.9 million remaining on the current common share purchase authorization.
Our uses of financing cash during the remainder of fiscal 2025 are expected to include required payments on our financing obligation and may include purchases of our common stock. However, the timing and amount of common stock purchases is dependent on a number of factors, including available resources, and we are not obligated to make purchases of our common stock during any future period.
Sources of Liquidity
We expect to pay the liabilities from our leases, financing obligation, and notes payable; pay for projected capital expenditures; and meet other obligations in fiscal 2025 and beyond from current cash balances and future cash flows from operating activities. Going forward, we will continue to incur costs necessary for the day-to-day operation of the business and may use additional credit and other financing alternatives, if necessary, for these expenditures. During fiscal 2023, we entered into the 2023 Credit Agreement which we expect to renew and amend on a regular basis to maintain the long-term borrowing capacity of this credit facility. Additional potential sources of liquidity available to us include factoring receivables, issuance of additional equity, or issuance of debt to public or private sources. If necessary, we will evaluate all of these options and select one or more of them depending on overall capital needs and the associated cost of capital.
We believe that our existing cash and cash equivalents, cash generated by operating activities, and the availability of external funds as described above, will be sufficient for us to maintain our operations for at least the upcoming 12 months. However, our ability to maintain adequate capital for our operations in the future is dependent upon a number of factors, including sales trends, macroeconomic activity, our ability to contain costs, levels of capital expenditures, collection of accounts receivable, and other factors. Some of the factors that influence our operations are not within our control, such as general economic conditions, business conditions in international locations, geopolitical tensions in various locations, and the introduction of new offerings or technology by our competitors. We will continue to monitor our liquidity position and may pursue additional financing alternatives, as described above, to maintain sufficient resources for future growth and capital requirements. However, there can be no assurance such financing alternatives will be available to us on acceptable terms, or at all.
Material Uses of Cash and Contractual Obligations
We do not operate any manufacturing, mining, or other capital-intensive facilities, and we have not structured any special purpose entities, or participated in any commodity trading activities, which would expose us to potential undisclosed liabilities or create adverse consequences to our liquidity. However, we have normal ongoing cash expenditures and are subject to various contractual obligations that are required to run our business. Our material cash requirements include the following:
Associate and Consultant Compensation
Information Technology Expenditures
Content Development Costs
Income Taxes
Other Contractual Obligations
These material cash requirements are discussed in more detail in Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operationsin our Annual Report on Form 10-K for the fiscal year ended August 31, 2024, which was filed with the SEC on November 12, 2024 (our Annual Report). During the quarter and three quarters ended May 31, 2025, there have been no material changes to our expected uses of cash and contractual
obligations from those discussed in our Annual Report except for the addition of a leasing arrangement on our new corporate headquarters location as discussed in Note 8 to the financial statements contained herein. However, current economic conditions and other forecasts may change and could alter our expected material uses of cash in future periods. For further information on our material uses of cash and contractual obligations, refer to the information included in our Annual Report.
CRITICAL ACCOUNTING ESTIMATES
Our consolidated financial statements were prepared in accordance with GAAP. For information on our critical accounting policies, see "Critical Accounting Estimates" in the Management's Discussion and Analysis of Financial Condition and Results of Operationsincluded in Part II, Item 7 of our Annual Report. Refer to those disclosures for further information regarding our uses of estimates and critical accounting policies. There have been no significant changes to our previously disclosed estimates or critical accounting policies.
Estimates
Some of the accounting guidance we use requires us to make estimates and assumptions that affect the amounts reported in our consolidated financial statements. We regularly evaluate our estimates and assumptions and base those estimates and assumptions on historical experience, factors that are believed to be reasonable under the circumstances, and requirements under GAAP. Actual results may differ from these estimates under different assumptions or conditions, including changes in economic conditions and other circumstances that are not within our control, but which may have an impact on these estimates and our actual financial results.
NEW ACCOUNTING PRONOUNCEMENTS
Refer to Note 1 to our unaudited condensed consolidated financial statements for a description of new accounting pronouncements that may impact us.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements made by the Company in this report are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934 as amended (the Exchange Act). Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate, or imply future results, performance, or achievements, and may contain words such as "believe," "anticipate," "expect," "estimate," "project," or words or phrases of similar meaning. In our reports and filings we may make forward-looking statements regarding, among other things, our expectations about future revenue levels and financial results, our financial performance during fiscal 2025, our expectations regarding a new go-to-market strategy and sales force restructuring, future training and consulting revenue, expected increases in add-on subscription services revenue and delivered training and coaching days, anticipated renewals of subscription offerings, our ability to hire sales professionals, the amount and timing of capital expenditures, anticipated expenses, including SG&A expenses, depreciation, and amortization, future gross margins, the release of new services or products, the adequacy of existing capital resources, our ability to renew or extend our line of credit facility, expected effective income tax rates, the amount of cash expected to be paid for income taxes, our ability to maintain adequate capital for our operations for at least the upcoming 12 months, the expected impact of the resolution of significant macroeconomic issues and geopolitical tensions, the seasonality of future revenues, future compliance with the terms and conditions of our line of credit, the ability to borrow on our line of credit, expected collection of accounts receivable, estimated capital expenditures, and cash flow estimates used to determine the fair value of long-lived assets. These, and other forward-looking statements, are subject to certain risks and uncertainties that may cause actual results to differ materially from the forward-looking statements. These risks and uncertainties are disclosed from time to time in reports filed by us with the SEC, including reports on Forms 8-K, 10-Q, and 10-K. Such risks and uncertainties include, but are not limited to, the matters discussed in Item 1A of our Annual Report on Form 10-K for the fiscal year ended August 31, 2024, entitled "Risk Factors." In addition, such risks and uncertainties may include unanticipated developments in any one or more of the following areas: cybersecurity risks; inflation and other macroeconomic risks; litigation; unanticipated costs or capital expenditures; delays or unanticipated outcomes relating to our strategic plans; dependence on existing products or services; the rate and consumer acceptance of new product introductions, including the All Access Pass; competition; the impact of foreign exchange rates; the number and nature of customers and their product orders, including changes in the timing or mix of product or training orders; pricing of our
products and services and those of competitors; adverse publicity; and other factors which may adversely affect our business.
The risks included here are not exhaustive. Other sections of this report may include additional factors that could adversely affect our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors may emerge and it is not possible for our management to predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any single factor, or combination of factors, may cause actual results to differ materially from those contained in forward-looking statements. Given these risks and uncertainties, investors should not rely on forward-looking statements as a prediction of actual results.
The market price of our common stock has been and may remain volatile. In addition, stock markets in general have experienced significant volatility. Factors such as quarter-to-quarter variations in revenues and earnings or losses and our failure to meet expectations could have a significant impact on the market price of our common stock. In addition, the price of our common stock can change for reasons unrelated to our performance, such as government actions on spending and trade. Due to our low market capitalization, the price of our common stock may also be affected by conditions such as a lack of analyst coverage, and fewer potential investors.
Forward-looking statements are based on management's expectations as of the date made, and we do not undertake any responsibility to update any of these statements in the future except as required by law. Actual future performance and results will differ and may differ materially from that contained in or suggested by forward-looking statements as a result of the factors set forth in this Management's Discussion and Analysis and elsewhere in our filings with the SEC.