Franklin Covey - How Can A Very Profitable SaaS Business Trade At 2.5x Sales?

Summary

• Franklin Covey grew subscription revenue 31% last quarter.
• EBITDA beat by a significant amount.
• EBITDA guidance was raised to $38-39 million from $34-36 million.
• Management said on the call that overall revenue growth should ramp to 20% over the next few years.

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Franklin Covey (NYSE:FC) reported another terrific quarter with 31% subscription growth and $8 million of EBITDA, far ahead of expectations. The company also raised EBITDA guidance for the year to $38-$39 million from $34-$36 million previously. Even this guidance looks conservative given the $37 million of EBITDA LTM. Over the past few years management has guided mid-term revenue growth to a high single digit number. Last quarter they were forced to acknowledge the faster growth of the business and raised this target to low double-digit growth. Last night on the call, management finally came out and said that the mid-term revenue growth target was now 20%.

How can a SaaS business with growth accelerating to 20% trade at 2.5x sales? Comps trade at 8x sales and above and do not have nearly the EBITDA growth and operating leverage of the Franklin Covey model. I think the reason is that Franklin Covey is a unique business with no exact comps and few analysts covering it. The business model reminds me of TechTarget (TTGT) a few years ago with high gross margins and excellent EBITDA drop through. TTGT now trades at 8x sales and 25x EBITDA, which would be a more fitting multiple for FC. FC also reminds me of Digital Turbine (APPS) as it was a unique one of a kind business model that was ignored for a long time until its results began to take off. While I do not think that FC can grow as fast as APPS did, 31% subscription growth is not bad and certainly warrants a higher multiple than 2.5x.

If you placed a 8x multiple on the business akin to TTGT the stock would trade up to $150 or basically a triple from here. Also akin to TechTarget, management is very savvy with its cash flow and has been buying back stock regularly and has even done a couple of self tenders to reduce the share count by six million over the years.

Disclosure: I/we have a beneficial long position in the shares of FC either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.