Earnings Call: H2 2023

Apr 29, 2024

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 on the right-hand corner of your screen. Simply type in your questions and press send. The company may not be in a position to answer every question it receives during the meeting itself. However, the company can review all 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 like to hand you over to Vivek Dodd, CEO. Good afternoon, sir. Thank you, Lily, and good afternoon to everybody. Thanks for joining us for yet another results update for Skillcast. I am joined today again by Richard Steele, our CFO. We have introduced ourselves in the past, so I will move straight to the financial highlights. We have had a good year in 2023. We had subscription revenues growth of 28%. This is off the back of ARR or annual recurring revenue growth of 37%. So ARR is effectively our book of contracts and that grew by 37% in the year. The overheads growth was rather less at 18% compared to 49% the year before. This meant that the total revenues for the year came in at GBP 11.3 million. That was 15% rise year-on-year. Richard will take us through the details of the financials later. But we have got some of the highlights on this screen. I will give it a minute and then move on to the operational highlights. So the performance we had during the year of the 37% rise in ARR was off the back of a very high net retention rate of 105%. So that means that our ARR book at the end of the year of the number of clients or the value, the book that we started with, we were able to retain 105%. We were able to add to that book. Part of this increase was down to a price increase that we put through in 2023, an inflationary period. Part of it was due to churn, which was lower at 7% as opposed to 12% in the year before. We now serve 1,200 clients, well over that, and maintain a very high customer service rating of 4.9 out of five. We also are able to maintain this high level of retention because of our product innovation. I will talk about that in a bit more detail on the following slides. We have added new libraries, added more innovative ways for people to consume e-learning content, and we have repositioned our offering of e-learning and compliance tools into three pricing plans: basic, Standard, and Premium. We have also strengthened our offering for SMBs, and I will speak about that on the following slide as well. I will also be mentioning our investments in AI, how do we perceive the trends in AI in the market, how clients will consume AI from our platform, on that slide. Just a few mentions of strengthening internal governance with OKRs, and maintaining our ESG standards. On this slide, I will just take you through a couple of examples of e-learning innovation. This is mainly to do with our content. On the next slide, I'll explain what we're doing with technology. In the content arena, these are only two examples. We're doing several such things. On the left, we've got these Compliance Bites. We feel that this is the way a lot of the e-compliance training will be delivered in the future. There will still be a place for annual compliance training of the type that we and other providers do in the market today. But we feel that there's a growing need in the market to initially supplement that annual compliance training need with micro-learning bites on the same topics, such as data processing, money laundering, market abuse, cybersecurity, and whistleblowing. Over time, that will be the predominant way that training will be delivered in organizations. The micro-learning bites bring the topics to life within a few minutes, giving practical advice on how to spot issues, the steps to take to avoid them or remediate, and how to report them internally. They're followed by scenarios where users get to practice what they've learned in the videos. On the right then, I've got another example of innovation, which is FastTrack, something we had been doing with our bespoke clients for many years, and we've brought it in our off-the-shelf SaaS offering in 2023. This enables more experienced, knowledgeable clients, people who've done the training on, say, topics like money laundering and market abuse again, to use that knowledge, to attempt a pre-assessment. If they pass that pre-assessment, they only need to complete a shorter refresher module rather than the full course. Not only does this help them to save some time, but also gives them credit for the knowledge that they have and hence, engages them better with the corporate compliance program. On the next slide here then, I'll talk a bit about our technology, which we've always delivered on a features basis. It's the Standard Plan that you see here in the middle. That's our business as usual. The majority of our clients come to us for e-learning first, so they implement our Learning Management System. Once they're happy with that and that's settled in, they may take other features, such as the Policy Hub, surveys, declarations, and registers which all work on the same platform effectively, so they just need to be switched on. They add these over time. Now we've got a new plan called Premium, for companies that want to go the next step, in terms of learning innovation or in terms of digitization or automation of compliance. In this plan, we bundle together all those features that you find in Standard, at a better price point, and also include some additional features, innovative features like Question of the Day or upcoming AI feature, and those are only available at the Premium level. On the left here, we have what we call the Basic plan, which is suitable for really the smaller companies with up to 50 users and teams within larger companies, who might otherwise have a separate Learning Management System, but they want to use us for certain training that's only available with Skillcast. This is a self-service e-commerce plan, where we try to keep the cost of acquisitions down to be able to provide a very keen price point to our clients. On the next slide here, I will just talk a little bit about AI, which is all rage. All e-learning companies, RegTech companies, are talking about AI in the market. Yet there are some challenges in this area which all vendors will face, starting with the fact that there are Microsoft and Google already established as big players. We are not seeking to reinvent the wheel. We are expecting to leverage on the tools that these big players will provide. The second big challenge is in terms of monetizing AI, delivering to our clients something that they would pay for. The third challenge is the risk of misinformation and disinformation. We see this at several levels. At the international levels, it is being talked about. Our own surveys are showing that compliance leaders are quite wary of using AI, especially in the area of staff awareness and training. Therefore, we are trying out ideas with our clients, which effectively ring-fence the knowledge that the AI will use, to only credible sources and curated material, including materials provided by our clients. We expect to use these, to provide our clients, end users with an enhanced experience. Something which they are already used to from Skillcast, but enhancing that with the help of AI to address people's questions and deal with issues as they come up. At this point, I will hand over to Richard. Good afternoon, everybody, and thanks, Vivek. I am now just going to run through some of the financials in a bit more detail. Firstly, our total revenue for the 12 months for the 31st of December 2023 was GBP 11.3 million and 15% up on the previous year. This was all driven by growth in our subscriptions revenue business that grew to GBP 8.5 million, up 28% on the previous year. Our non-strategic professional services revenue fell 12% to GBP 2.8 million on the year. This was really due to the fact that we found that big clients, typically with large budgets, were more hesitant to spend and commit to large projects or large bespoke projects in the current economic climate. The impact on our gross profit was that we actually got to 69.7%, which is 0.4 percentage points lower than the previous year. However, this was really impacted by a gross margin in H1 of 67% caused by the transitional costs of migrating all our clients to the more robust, resilient Azure cloud platform provided by Microsoft. Our gross profit in H2 was actually 72%. Our overhead has increased to GBP 8.8 million, GBP 1.3 million up on the previous year, but in percentage terms, only 18% up compared with 49% up in the previous year. We feel that we are coming to the end of our post-IPO investment phase. Most of that investment has been in headcount, and our average headcount increased by 15% to 115% in 2023, compared to 100 in 2022. As you can see on the graph in the bottom left, our core strategic revenues, subscription revenues, continue to increase as a percentage of total revenues, increasing from 47% of revenues in 2018 to 76% in 2023. The graph on the bottom right shows our annual recurring revenue increasing to GBP 9.3 million at the end of December 2023. As Vivek mentioned, this is our key lead indicator and gives a good indicator of what future subscription revenues will be. Moving on to a slide that hopes to illustrate a return to profitability to everybody in 2024. What this chart is effectively showing is that our overheads as a percentage of ARR is beginning to decline by half, and in the second half of 2023, it reached 46%, which is similar to the overheads as a percentage of ARR in 2021 in both halves before we IPO'd. We believe and are confident that we are on track to return to profitability in the second half of 2024. The only caveat to this is the non-core professional services revenues that continue to have poor visibility. Moving on to our cash flow. Just to remind everybody, we are a very cash secure business. We have no debt, so at the end of December, we had GBP 7.2 million in the bank. Despite a loss of GBP 648,000, we had a free cash flow of minus GBP 100,000. We received GBP 300,000 worth of interest from utilisation, putting the cash on deposits that we had during the year. Our subscription clients all typically contract with us for 12 months. We invoice them upfront, and then they typically pay 30 days after that period. What we're finding is that our growth is being funded through the cash generated on the upfront payment of those contracts. Naturally, you'll see an increase in debtors and deferred income that impact that as well. Just to remind everybody that we continue to maintain our dividend policy of paying GBP 400,000 per annum or 0.447 pence per share on an annual basis. This is effectively a legacy policy that we've maintained since IPO and set out as per IPO. Our balance sheet is incredibly clean. We do not capitalize any software or intellectual property. Our non-current assets primarily consist of the office leases in both London and Malta, and any fixtures, fittings, and IT equipment that are associated with those offices. The other items we see is our debt is increasing slightly higher than the revenue increase and our deferred income increasing to the same degree. There's no real other significant item on the balance sheet. We have received GBP 200,000 in the year from a withholding tax credit from our Maltese subsidiary, and we have a debt of GBP 600,000 as of the 31st of December 2023 and expect that to be paid within the next 12 months. That's really all I was going to say on the financials for now. I'll hand back to Vivek now to talk a little bit about our strategy and our current trading. Thanks, Richard. Oops. I jumped ahead a slide there. Great. Firstly, regarding our strategy, that remains very firmly driven by organic growth. We feel that we have a very positive external environment, a resilient market with inelastic demand for staff compliance. We provide very good e-learning and very sticky RegTech tools. Our focus remains on new business sales in the midsize segment, regulated markets such as financial services and adjacent verticals. As I showed earlier, with the help of our excellent customer service and product innovations, we maintain excellent client retention rates. We help manage to minimize churn so that new sales that we add on top of what we've retained from past years. We are opening up a new front with our basic technology plan of e-commerce self-serve model. With that, we have a vast and potentially underserved market to go for. In addition to that, we're looking afresh at partnerships and mergers, acquisitions opportunities. In previous years, we've guided that we would not be looking at any acquisitions, and we stuck to that discipline. From this year, we are scanning opportunities for rather small content providers, who can help us get stronger in adjacent verticals to the ones where we're already pretty strong in. Finally, just a quick update on the current trading, that continues to be in line with expectations. We've started the year well, and are delighted to hit the landmark ARR of GBP 10 million. You heard from us that at the end of last year, this was GBP 9.3 million. That's grown to GBP 10 million, and that's 36% up year-on-year. That is in March 2023. We've pushed through a 7% price rise this year, and we have implemented standard SaaS terms of service, which include auto renewals for clients. Both of these measures have been well accepted by our clients. They see the value in the service that Skillcast provides. They appreciate that our price rises are reasonable, in line with increase in costs, and are matched by improvements in quality. They also appreciate having standardized terms, on which they don't have to spend too much time and effort on doing renewals. Richard has already mentioned the point about professional services being slow and suffering from poor visibility. That continues to be the case. The situation in there does vary from month to month and quarter to quarter. They have started to a slower start this year, although we feel that we will be recovering as the year grows. The next point here is about the head of marketing. The reason for mentioning that is, this is potentially one of our last key growth roles, and we're very excited about rejuvenating our marketing program there. Also, this heralds a new phase where our overheads will grow largely in line with our ARR. We spoke about product enhancements. I won't go through them again. Some of the ones that we presented today were Compliance Bites, Question of the Day, AI-powered services, and embedded compliance. This is one that we didn't touch upon earlier. This is really about taking our content off the portal and into business processes, including chats, emails, policy documents, and intranet and other such places where staff may find that learning to be useful. Richard demonstrated how we see our path back to profitability later on this year. At this point, I will stop and we will take any questions. Vivek, Richard, thank you very much for your presentation this afternoon. Ladies and gentlemen, please do continue to submit your questions just by the Q&A tab situated on the top right-hand corner of your screen. Just while the company take a few moments to review those questions submitted today, I would like to remind you that a recording of this presentation, along with a copy of the slides and the public Q&A, can be accessed via Investor Dashboard. As you can see, we have received a number of questions throughout today's presentation. Can I please ask you to read out the questions and give responses where appropriate to do so, and I will pick up from you at the end. Okay. I think I can take the first question here, which is about our subscription growth, which was very good at 28%. How are we looking to sustain this, and what has been the catalyst driving this? Well, there are several factors behind this strong performance. The first one, as I mentioned earlier, is a very positive external market environment, with very resilient, inelastic demands. The nature of the SaaS business, where we can effectively compound our growth by retaining our ARR from previous years and building upon that. What has also been a driver there, of course, is our customer service and our product innovation. The final point I would mention there is the new measures, the OKRs or the objectives and key results I mentioned earlier. So structures that we put in place internally to improve our governance and predictability of performance. Those are some of the factors. The same factors, I dare say, will contribute towards sustaining this into the near future. There is another question here about how fragmented/competitive is the market that we operate in, and who are we competing with? Is it many small players or much larger incumbents? Well, I will say firstly that we are one of the larger incumbents. This happens to be a very fragmented market with GBP 10 million in ARR. We are in amongst the larger incumbents. There are several others and a few that are larger than us now in private equity. Firms like Marlowe that went partly private very recently. In terms of the fragmentation, we do compete with vendors on a variety of different fronts because we provide e-learning as well as many other compliance tools such as registers, declarations, and for some of these products, there are niche providers. You've got providers just providing, say, gifts and hospitality register. We are competing with a lot of firms out there. E-learning reputedly has something like corporate e-learning has around 400 vendors in the U.K. Now, the majority of those are very small, and perhaps serving just a few customers with a very bespoke offering. Not really competing head-on with us. Of the competitors that we come up against often, there is less than a dozen. Vivek, maybe I could take the next question. Could you discuss the anticipated operational gearing moving forward? As you have seen, our rate of overhead growth has started as slowed in 2023 compared to 2022. We believe that we filled with the head of marketing that Vivek mentioned joining us in January this year, we filled all our key roles. What we now see is we expect our headcount will still increase, but it will increase really in the lower paid more and in response to volume increases, particularly in the account management area and the customer service area. We would see a continuous slow rate of overhead growth and where most of those overheads are people related, the average salaries of those people will be lower than the increases we have added to date. I hope that goes some way into answering that question. Okay. I can take the next one here, which is saying, "It seems a tough ask to get profitability at the pre-tax level into the second half. What steps are management taking to ensure they can achieve the results, at least up to the market expectations?" Indeed, it is a tough ask in the current environment where the economy is not growing at all. However, we are trying and feel confident enough that at least we are talking to you about it. Our path to profitability, I want to be clear, is based on revenue growth. It is based on ARR growth and revenue growth. It is not based on cost cutting. Having said that, as Richard showed very clearly in one of the slides, our overheads are as a percentage of ARR, and ultimately of revenue are falling. You saw there that we are already at pre-IPO levels or thereabout, on an ARR basis, but ARR being a lead indicator, results in revenue growth in the following period. Therefore, profitability should follow. The big question mark there will be professional services revenues, which are volatile, and which may come in the way of achieving that profitability. Having said that, again, we are taking steps to ensure that we can cement our performance, as I spoke earlier about OKRs, to ensure the repeatability of performance, the sustainability of performance. We do feel that we should be getting close to or at profitability in the second half of the year. I think the next question is, "Are management expecting the professional services side of the business to slowly wind down revenues as time progresses?" I think the view is we've always said that the professional services revenues are non-strategic, and they are typically less profitable than our subscription revenues. We always said that we weren't planning to grow them, and our intention was to keep them level. As subscription revenues grow, they'll continue to become a smaller and smaller part and of less importance to the business. That said, we do need to understand whether the short-term reduction that we've been seeing in revenues is something that's going to be a permanent or just a short-term blip in revenues. Our intention is still to maintain some level of professional services revenues as we see them to be complementary to our subscription revenues. Great. I see one more question here about our financial criteria for bolt-on M&A opportunities. Is that going to be payback period, IRR or ROCE, et cetera? We've not reached the stage where we have to run the rule on opportunities. We're still scanning the market. As I said earlier, the most important thing for us is firstly, the business synergy. We're really looking at M&A not as a financial play, but more as a business play to get our technology, and our content out into more verticals, build a stronger presence in adjacent verticals. For that reason, we're looking mainly at content providers. There could be a technology element to it, but that's not what would be driving our strategy there. In terms of the financial analysis, certainly, we would look at NPV and IRR. That's really what we would be looking at. However, being a SaaS company, we think that really the key measure of our value is the ARR book. We have a certain multiple that we're trading at ourselves, and we're unlikely to pay a higher multiple than that. Vivek, Richard, thank you for answering all those questions you can from investors. Of course, the company can review all questions submitted today, and we'll publish those responses on the Investor Meet Company platform. Just before redirecting investors to provide you with their feedback, which I know is particularly important to the company, Vivek, could I please just ask you for a few closing comments? Thanks, Lady. We are grateful for those who joined today, the call, and we are delighted about the results that we presented to you. I hope you feel the same way. We have met the promises that we made at the time of the IPO. We have carried through those in a methodical way. We see a huge opportunity ahead of us, in the market to continue doing so. Vivek, Richard, thank you for updating investors today. Could I please ask investors not to close the session as you will now be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations. This will only take a few moments to complete, and 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. For attending today's presentation, and good afternoon to you all. For attending today's presentation, and good afternoon to you all.