Earnings Call: H1 2024

Sep 20, 2024

Summary

H1 ARR rose 27% to £10.3m, with subscriptions driving 24% total revenue growth and EBITDA returning to a small profit. Cash reached £8.3m; variable professional services revenue remains the key H2 profitability uncertainty.

Good afternoon, and welcome to the Skillcast Group PLC investor presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged and can be submitted at any time by the Q&A tab situated in the right corner of your screen. Just simply type in your questions and press send. The company may not be in a position to answer every question received during the meeting itself. However, the company can review all the questions submitted today and publish responses where it is appropriate to do so. Before we begin, I'd like to submit the following poll. I'd now like to hand you over to Vivek Dodd, CEO. Good afternoon to you, sir. Thank you, Alejandro. Let me just introduce myself. I'm the CEO of the company, I was one of the co-founders many years ago. And with me today is Richard Steele, who's our CFO. I'll just take a few minutes to cover the financial and operational highlights, and then I'll hand over to Richard to go in deeper into the details. Here you see that we've had a very good first half of the year with ARR growing, getting back into profitability, and generating very strong cash flow. We had 100% retention rate during this half, and the ARR growth came entirely from adding new subscription clients. The subscription revenues grew by 35% year-on-year. The total revenues grew a bit less at 24%. That's due to the performance of our non-core professional services. Richard will talk a bit more about that in his part. The recurring subscription revenue, therefore, are now accounting for over 80% of our revenues. Also, notably in this half, we managed to limit the overhead growth to 9% and got back into profitability. And that difference between the revenue and the cost growth that you see there, demonstrates our operational gearing, and that will drive our profitability very strongly in the future periods. Also for this half, we've declared a dividend, that is unchanged from the same period last year. Just some operational highlights here. We launched two new initiatives at the start of this year. The first was called Premium, that bundles together many of our add-on features for our standard clients. This gives us an annual contract value uplift of up to 100% and also leads to better client retention. That initiative got off to a really good start in the first half and already accounts for over 3% of our ARR. The second initiative is called CoreCompliance. This provides a cost-effective self-service compliance portal for smaller businesses of up to 50 employees. This did also get some traction, but not as much as we expected. However, we see this as a huge potential market, and we are in the process of repositioning this product. We have a lot of hope in this product as well. We also made progress on the marketing front, generally, and the results of that will show in the second half of the year and particularly next year when we bring out our new website. We received our certifications for Cyber Essentials Plus and SOC 2 and set up a trust center that really elevates us as a SaaS vendor of choice for the larger, more security-conscious buyers, the larger firms. We also started rolling out our new standardized auto-renewal terms of service earlier this year, and they've been well received. As we've got here up on the screen, 95% of our clients renewing have renewed on those terms. We've also enhanced our customer services experience, which is something that we're well-known in the market for, because we offer not just a platform, but a managed platform, for those companies that don't have the in-house expertise. We do really rely on that, and we've enhanced that this year, by adding a new platform, which gives faster first response times to our customers and also gives us insights for making further improvements and driving efficiency. On the product front, we're most excited about AI. This is much hyped, and some of you may be getting a bit cynical about it, but we do see a huge opportunity here to drive learner experience, reduce compliance overheads, and really help companies to build a culture of compliance with the use of AI, which can combine a more engaging experience with a more informative one, whereby we don't overload the employees in the first instance, but we stand ready to answer questions. There are several hurdles to be overcome in this respect, but we believe we've done that. We want to be able to satisfy our very demanding clients, who are typically compliance officers. Currently, we are testing an AI tutor for our courses, for example, and moving into client acceptance testing in Q4 this year. Hopefully, this is a feature that will come up in our 2025 performance. I've got a few other points here on infrastructure and people that I won't go over individually. I'd like to add that we're looking constantly at ways to improve our employee as well as customer experience. At this point, I'll hand over to Richard to share with you more details on the financial performance. Thanks, Vivek. Good afternoon, everybody, and thanks for joining our update today. ARR, or annual recurring revenue, is one of our lead performance indicators, which we track rigorously. As you see, we've reported a milestone for us getting through the GBP 10 million barrier to report GBP 10.3 million of ARR at the end of June this year, which is 27% up on the same time last year and 11% up on the beginning of the year. Our average ARR per account also increased by 14% on the previous year. As Vivek alluded to, our net retention in the first half of this year was exactly 100%. That is actually down on 105% last year, and that's really due to two factors. First of all, is we've seen a higher churn this year from customers leaving us, than we did last year. This is nothing that we see as a particular issue or challenge. It is a bit lumpy. It goes up and down from one year to the next. There are several different reasons, and probably the main reason for this churn is we have seen change in sort of reorganization and corporate M&A from our clients, which affects buyer decisions at their end. We have also noted that we are putting prices up this year by 7% compared with 10% last year. That is another reason why the net retention is quite as high. All of our ARR, effectively, our net ARR growth in the first six months of the year came from new customers. On average, we are gaining about 20 a month. Subscription revenues overall now are over 80%, 81% of revenues. Our predictable revenues continue to grow as a percentage of total revenues. Looking at our P&L in more detail, you can see that all of our revenue growth was driven by a growth in the subscription revenues, lifting 35% in the year to GBP 5.2 million, up from GBP 3.8 million last year. Our professional services revenues, which we have been saying ever since the IPO in December 2021, are our sort of non-strategic, variable, and hard to see and predict revenues, fell 9% to GBP 1.2 million on the year. We have probably seen. This is again, something we are not too worried about. We have seen some of our bigger clients, some of the big major banks, sort of delaying spending and putting projects on hold around this area. We have actually taken steps in the second half of this year to reduce our cost base in the professional services team to reflect that reduced revenue. We will see the impact of that reduced headcount in the next financial year. Our gross profit increased significantly from 66.5% last year to 71.7% this year, 5.2 percentage points up. Part of that was due to sort of a hit we had last year on the one-off transitional costs of migrating all our clients into a much more robust, secure Azure-hosted environment. Also, it really started to see the benefits of operational gearing in our service team and our content team that are supporting our revenues. In terms of overheads, we have really continued to slow our growth of overheads, increasing by only 9% on the year compared to 26% last year. That has led us to come back to EBITDA at a small profitable position for the first six months of the year, but a significant increase on the GBP 750,000 loss we made for the same period last year. We are really pleased that we have continued to sort of show that return to profitability, and underlying business improvement. Most of that overhead growth has come from our headcount increase, which again has slowed. Headcount has increased 5% on the year in terms of average number of heads, and our total people costs have increased by 5%. We have seen significant interest receivable from the large cash deposits we have in the business. As Vivek said, we have declared an interim dividend in line with last year of GBP 150,000 or GBP 0.168 pence per share. After a small tax charge related to prior years and the dividend, we are reporting a small loss after tax. This chart really just sort of emphasizes the ongoing trend towards the reduction in overheads as a percentage of ARR, which gives a good indication that we remain on track to grow profits more in H2 and for the full year for 2024 and beyond. In terms of cash flow, we are highly cash generative as a business. Just to remind everybody, our subscription customers typically sign up for a 12-month contract, and we invoice them upfront. As we are growing our sales and growing our ARR, it is a highly cash-generative process. Despite a PBT of GBP 41,000 in the year, we actually generated GBP 1.1 million of cash, and that all came from or mainly came from the increase in trade and other payables from the increase in deferred revenue. In terms of our balance sheet, it remains very healthy and very strong. As you can see, GBP 8.3 million worth of cash compared to GBP 7.6 million last year. The only other real items to note are trade receivables and our deferred income, which have grown in line with revenue growth on the previous year. As a reminder, we keep our balance sheet very clean. We have no intangible fixed assets on our balance sheet, and we expense all our R&D as incurred. To remind everybody of our key strategic points, we remain focused on organic growth. We believe it is a large, fragmented market, and there is still plenty of opportunity ahead for us in our core area. It remains a resilient and growing compliance market. We remain focused on the mid-size regulated clients. We do need to focus on the churn, and our excellent customer service is a great help to that, and we often see, for example, that we are winning clients back from competition because of the strength of our customer service. We continue to develop and upsell our Regtech tools such as Policy Hub and strategy registers and declarations that are a good add-on and help our compliance officers and learning and development managers manage their compliance. We are excited by the launch in beginning of this year, the soft launch, should I say, of our first foray into sort of a self-service e-commerce module. We targeted this at very small customers, clients with 50 users or less, potentially IFAs and other people like that, where they can get an indication, or they can effectively try a complete self-service learning and management module where they can buy straight from our website with the use of a credit card. There is no added service to that they get from this, and if they want that, they have to upgrade to our standard product. As Vivek mentioned earlier, we continue to be excited about the AI opportunities and developments with our products, and looking at an AI in-course tutor that we have built in the first half and we are currently testing and hope to relaunch next year. As well as organic growth from the core compliance market, we are excited about two other potential areas of building our revenue streams. The first one is through partnerships. It's an area that we've never really focused on as a business, but in June of this year, we recruited our first-ever partnerships manager. We're busy exploring the opportunities in all sorts of areas of partnerships, whether that's referral partnerships, white label technology partners, or even looking at marketplaces like the Microsoft Azure Marketplace to put our products on for availability. We also spoke about at the year-end about opportunities around mergers and acquisitions. We've got, obviously, as you've seen, a significant amount of cash. We have certainly started looking at opportunities in that area. In the first half of this year, we got very close on a couple of opportunities that didn't come off, but it hasn't made us undeterred. It's something that we remain focused on, and we'll keep you updated with progress in that area. In terms of current trading, we are very confident of continuing to trade in line with expectations. Our ARR is a very strong indicator of our future subscription revenues. Our non-strategic professional revenues still remain slightly slower than last year. We feel we're helping to de-risk any risk there anyway by making the changes we've, and the actions we've done on the headcount reductions and redeployment. We remain focused on our cost control to ensure that we remain focused on returning to profitability. We're also very excited about our marketing initiatives. Vivek mentioned at the beginning of the presentation where we're at on that, and we're currently redeveloping our website, and expect to launch that at the beginning of next year. As I said, we remain excited about the opportunities around our partnership hire and what additional revenues that can do to support our core revenue growth next year, as well as everything we're doing on the product side around AI. At the moment, that's everything I've got to update on, but very willing to look at all the questions that have been posted, and we'll have a look at that now and respond in a minute. Thank you. That's great, Vivek, Richard. Thank you very much for your presentation. Ladies and gentlemen, please do continue to submit your questions. You can do that just by using the Q&A tab, which is situated on the top right-hand corner of your screen. But just while the company take a few moments to view the questions that are being submitted today, I'd like to remind you the recording of this presentation, along with a copy of the slides and the published Q&A, can be accessed via your investor dashboard. As you can see, we have received questions throughout today's presentation, and if I could hand back to you guys just to read out those questions and give responses where it's appropriate to do so. I'll come to you both at the end. Thanks, Vivek. Shall I take the first one? The first question is: With net retention at 100% and rising churn, what steps are you taking to improve customer retention? Thanks for that question. First of all, I think our churn is quite cyclical, so we don't see that as an ongoing trend. Secondly, we are reducing the level of price rise that we're going to put into our products next year to a more reasonable 3% inflation level. Secondly, we've employed what we call a solutions architect this year, who is someone that's a real specialist in our product that's helping us work with clients and give them a much more detailed demonstration of our products. We're continuing to work and develop the content and refresh the quality of the courses and engage people and remind them of that as we continue to grow. The second question is, "What challenges do you foresee in achieving profitability in the second half, and how will you address them?" The main variable in terms of H2 profitability is the level of our professional services revenues. We had a relatively slow July and August, as I believe everybody else did, but so far we've had a stronger September in that area. But it does remain quite hard to see. We've done what we can in terms of cost to sort of reflect that. But ultimately, we've got our internal team of people that develop and manage the work that the professional services revenue stream brings in. So there's a fairly fixed cost in the short term to the resource. The biggest variable is around the professional services revenue. But we don't think that the range of variability is that great to have a material impact on our profit levels compared to what the market is currently forecasting. Richard, I'll take the next one. This is about how we plan to sustain the impressive 24% revenue growth moving forward. Are there new sectors or geographies that Skillcast is looking to expand into to drive further growth? Well, on this one, I'd say that some of this growth is the natural outcome of our SaaS model, whereby we have very high net retention. As you can see, at 100%, even with a slightly elevated churn for this half. We see the churn coming back down to normal levels and keep the net retention rate, that is NRR over 100%. So all the new client wins simply add to that. So there is an inbuilt growth engine over there. Second point I'll point out over here is that our current ARR is only around 2% of the serviceable obtainable market as we have ascertained. This is a huge pool that we're fishing in, if you will. Of the new clients that we win, only around an eighth of them come from our competitors. Seven-eighths of them come from the pool of companies that have really not put together a compliance portal in place. There's a huge potential, yet unmet demand in this market for a company like us. As for new sectors and geographies, well, at the moment, we are focused very much on the U.K. We do have clients in the EU, and we value their custom. However, we are sticking very much to the U.K. at the moment. In terms of sectors, we have bias towards financial services, which is where our legacy lies. But beyond that, we're quite secular. With an acquisitions opportunity, we may get a significant weighting in another sector. At the moment, when you sit outside financial services, we are looking for all the opportunities we can get in every sector without any bias. The next question says, "Also, with an increase in cash reserves to GBP 8.3 million, will this be reinvested into the business for growth initiatives or used for M&A activities?" I think we've said that we really see we've come to the end of the sort of significant internal investment phase. We are now looking at supplementing our organic growth with M&A offers and opportunities. Just to elaborate on that, what we are not looking for is any sort of tech players in the marketplace. We're very keen and believe that we've got a very strong platform and technological offer. What we're looking for potentially is digital compliance content learning in similar or adjacent verticals that would naturally bolt on to our platform and our infrastructure. The next question here is related to a previous one that I answered. I'll just take this one quickly. This is about Skillcast originally targeting financial services sector, but 40% of our revenues now come from other sectors. How are we prioritizing our efforts across different industries, and are there any sectors we see are particularly promising for future growth? To answer this question, well, I've part answered it already. Yes, it's true that 40% or even more than 40% of our revenues now come outside the financial services sector. We think there's a huge potential out there. Financial services only accounts for 10%-15% of the U.K. economy. But it is a sector where we find rich pickings because there is a regulator there which drives compliance training. There's a high level of maturity within the financial service sector, and hence it's just easier to get the client wins there. However, we are increasingly focused outside financial services. What I'd say is that rather than prioritizing individual industries or sectors, we're prioritizing legislations as they come in. For instance, next month, companies across all sectors will be obligated to take steps to prevent sexual harassment in the workplace. We have a great suite of courses to help companies to raise awareness and understanding of this issue in their firms. Indeed, we also have technology features to run surveys, declarations, registers for this purpose as well. It's those kind of regulations that will drive our growth rather than the focus on particular industry sectors. Notwithstanding that, of course, if we do acquire a company, then of course, we will make an entry into other non-financial service sectors. Thank you. The next question, six. Any progress with looking into acquisitions? Is it something you are very keen on at this stage? Just to reiterate, yes, we are looking at acquisitions, and it is something we are keen on, but we don't want it to distract materially from the core organic growth of the business. The next question is, what is the ideal fit in terms of acquisition, e.g. end sector and also rough size? Again, we're looking for content players of digital compliance training, either in our sector or subsector. So whether it could be cyber training, health and safety training, or other areas similar to that. Probably, we're looking at something in the region of GBP 1 million in terms of revenue ARR at the current size, and we would finance it from our cash reserves. This would be our starting place. I'm not saying we wouldn't have larger acquisitions later down the road, but for the first acquisition of the business, we want to make it of a size that's not going to detract or derail the core organic business. So the next question here is asking, should we model consistent ARR growth with roughly 60% drop down to the EBITDA? This is hard for us to comment on in that exact nature. We did allude, or I did allude earlier to the operational gearing, whereby our cost growth will be much lower than revenue growth. But we don't want to speculate on any exact number there. There are market expectations out there that you can access. The one from Allenby is something you could possibly look at. But just the general trend is, yes, our ARR growth is driven by our SaaS model, whereby we expect to achieve a net retention of over 100%, and any new clients out on top of that. Our operational gearing is something that you've seen demonstrated in the first half. We expect to repeat that in the second half and in the coming periods. I think at this moment, I think that's all the questions we can answer at this point in time. Thank you very much. Thank you very much for answering those questions from investors. Of course, the company can review all the questions submitted today, and we will publish those responses on the Investor Meet Company platform. Just before redirecting investors to provide their feedback, which is particularly important to you both at the company, Yvette, could I just ask you for a few closing comments? Well, thank you all for joining us today for these interim results. In wrapping up, I will say that we are very pleased with our results for the first half and really excited about the developments we have for the rest of this year and next year. Thank you again. Yvette, Richard, thank you once again for updating investors today. Could I please ask investors now to close the session, as you will now be automatically redirected to provide your feedback in order the management team can better understand your views and expectations. This will only take a few moments to complete, but I am sure will be greatly valued by the company. On behalf of the management team of Skillcast Group PLC, we would like to thank you for attending today's presentation, and good afternoon to you all. Thank you. Thank you.