Earnings Call: H1 2023

Sep 27, 2023

Good morning, 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 via the Q&A tab situated in the right-hand 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 it receives during the meeting itself. However, the company will 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 now like to hand you over to Richard Steele, CEO. Good morning to you, sir. Good morning, and thank you Alessandro for the introduction and welcome everybody to our interim update for the six months to the end of June 2023. My name is Richard Steele, CFO, and I joined in May 2022. Vivek is on the call as well, and will be here to answer questions at the end, and is the CFO, clearly. In a nutshell, just to remind everybody, we are a B2B software as a service business that's been around for 20 years. We specialize in compliance e-learning and associated RegTech. We believe we're very much a non-discretionary demand offer, and we've seen that with our growing recurring revenues. We've just growing our employee base. We've now got over 120 employees with offices both in London and Malta, and we've got over 1,000 clients buying our software and services. We did raise GBP 3.5 million at an IPO in December 2021 at a GBP 30 million valuation to help us accelerate our growth. In the six-month period that ended, our total revenues were GBP 5.2 million, up from GBP 4.4 million or 15% from the previous year. We have made a small loss in terms of EBITDA, as expected because of the increased investments we're planning to make. Despite that, our cash remains very resilient at net GBP 7.6 million in the bank with no debt, and our key lead indicator, ARR, is up at GBP 8.1 million. Clearly, we want to keep growing our subscription revenues, and we've seen that increase to 75% of total revenues. We also plan to, as announced this morning, pay an interim dividend of 0.16 pence per share in line with previous years and our dividend policy that we outlined at IPO. In terms of operating highlights, we are supporting the growth in our ARR by we launched three new products in the first half of the year. We increased our commercial activity, we've invested in our technology environment, and we've started to see evidence that all these investments we're making is starting to help a return to profitability. At the same time, we've managed to maintain our very high award-winning customer service to all our clients. Just talking about our operating highlights in a bit more detail. We've had a very busy first half. We've launched three new products. The first one was in February, a product called FastTrack. This is effectively a facility where learners that can undertake a pre-assessment, and if they pass that, it reduces their learning time. For the regulatory course that they need to do every year, this just reduces the amount of time they need to spend on them, which has been very well received. We've also launched in March 2023, some global compliance and risk libraries. A lot of the products we have is very U.K. specific legislation, but these global libraries aren't restricted by that. The aim is to help boost our upsells by selling non-U.K. specific libraries to some of our multinational clients. In April 2023, we launched a new format microlearning called Compliance Bites, which are short animated videos designed to improve employee retention. We've also continued to see more activity on the commercial side. We've increased our marketing activity by having large stands at two major trade events, one in the U.K., one in Europe, in the first half of the year. We've continued to hold face-to-face events, breakfast seminars, dinner seminars, which we've found hugely successful and popular with our compliance officer client forum. We've continued our heavy launch of blogs and webinars, that really has a positive impact on driving inbound leads to increase our funnel. We've invested in technology. One of the things we mentioned when we were at IPO was to invest and migrate all our 1,000 clients from our server-based system to the Microsoft Azure cloud, which all completed without a hitch in March this year. We've also really invested in cyber prevention. We've got two dedicated employees internally, plus we've brought in extra software tools around endpoint detection and secure access this year. We've started to really leverage AI in both our product development and tools in the wider business to improve productivity. We put in a tool recently to help forecast our pipeline growth. We've put in a tools to help reduce our language conversion costs, and other tools that we're using in product development too. We really feel, halfway through the year, that we're really poised for growth now. We've filled most of the main growth roles that we identified. We've really started to embed governance reporting frameworks with the non-execs and other key hires in the business. Despite doing all that, we've managed to maintain our excellent Feefo Platinum Trusted Service award of 4.9 out of 5. ARR, Annualised Recurring Revenue, is our key measure as it is for many SaaS businesses. As you can see from the graph on the top left of the screen, this has increased to GBP 8.1 million or 27% up from where it was at 30th of June 2022, and GBP 1.3 million or 20% up on where it was at December 2022. Most of this, unsurprisingly, this growth has come from new customers, and we've really seen that go over the 1,000 customer mark, which is a real landmark for us. Despite that, we've also seen net retention hold up at 104%. Admittedly, there is an element of price rises in that. We put our prices up at beginning of the year to renewals, and at May last year to new customers. We're seeing some of that impact come through in our ARR. Despite that, we've still also seen a reduction in our churn on the year from 7% last year to 3% this year. You can also see that one of our strategies was to increase our portion of subscription sales that are coming from RegTech, which are the stickier add-on tools that we have more than just e-learning. We've seen that increase from 10% last year to 11% this year, and actually grow by 34% from its slightly lower base. All that is really helping, as you see on the bottom left, to continue the very strong trend of increasing our amount of recurring subscription revenues as total revenue, which is now up to 75% of our total revenue stream. What you can see on the top right is that lead indicator of growing ARR feeding into growing subscription revenue, with subscription revenues going up from GBP 3.1 million in H1 2022 to GBP 3.9 million this year or 23%. Looking at the P&L, as you can see, as I've just said, subscription revenue is driving all the growth up 23% on the year. Professional services staying pretty much flat. As we said at IPO, it is a lower margin revenue stream and a harder revenue stream to manage and to forecast. Total revenues overall are up 15% to GBP 5.15 million. Our gross profit did drop from 69.8% last year to 66.5% this year. The main reason for that drop is due to the fact that while we were transitioning from our servers to Azure, we had some higher transitional costs with Azure. We've recently entered into a semi-fixed term contract with Azure so we can cap an element of those costs. We do expect that gross profit margin to rebound and increase again in the second half of this year and next year. Our overheads have increased by 26% on the year to GBP 4.3 million. Importantly, we're seeing that rate of overhead growth decrease from 50% this time last year to 26% as the level of investment is slowing and as we fill all our growth roles. On that basis, our EBITDA has increased from minus GBP 0.2 million to minus GBP 0.7 million this year, but very much in line with our plan. Because of our cash reserves and our dividend policy, we're going to maintain our dividend payment of GBP 150,000 cash or 0.168 pence per share. Just at the bottom, I've highlighted our headcount statistics. The vast majority of our overheads are in people, and that's both in the overhead line and the gross profit line, in the cost of sales line, sorry. We've seen our average headcount increase by 20% this year to 114, again, down on the 32% increase last year. Our total people costs have increased by 29%, again, down from the 41% last year. In terms of the balance sheet, we have a very healthy and clean balance sheet. We don't capitalize any of our R&D. We expense it as it's incurred. Our receivables have reduced from GBP 4 million at June last year to GBP 3.7 million this year, despite the increase in sales and revenue. Our cash has remained pretty much constant despite the loss at GBP 7.6 million. Our deferred income on the other side of the balance sheet has increased 24% from GBP 3.4 million to GBP 4.2 million, which is a reflection of the growth in ARR and all the revenue that we have not yet recognized but we have invoiced to clients. In terms of cash, I am pleased that we only burnt just about GBP 100,000 worth of cash in the six-month period, despite a loss of GBP 800,000. The main reasons for that is we have improved our working capital and our debtor days, reduced our debtor days on the year. Plus, as I mentioned, most of our subscription clients we invoice annually up front, and they pay within 30 days. By growing the ARR really helps accelerate the cash that comes through. Moving on to our strategy, just to remind everybody where we are at. We are focused on growing organically, focusing on building what we already got. As we have proven that since the IPO, despite the market turbulence we have seen, especially in the tech sector, we have continued to grow and deliver on the guidance that was given at the time in what we believe is a very resilient and growing market. We are still focused on subscription growth. As you have seen, that is continuing to grow as a percentage of total revenue. It is now at 75% of total revenues. We are still planning to keep and maintain some level of professional services. We have some great logos out there that helps improve brand awareness and also gives us great insights on the key trends with the big logos that we can potentially use and adopt into our core products. In terms of new clients, that is still the main area of growth. We are still focused on the mid-size regulated market, which is where we are seeing a lot of our growth. But we are targeting, and we believe there is a big opportunity at the smaller end of the market, and we are about to start targeting smaller clients with an e-commerce self-serve offering that we are looking at launching later this year. In terms of supporting our ARR net retention with existing clients, we are continuing and obsessed with our level of customer service, and that really is helping to minimize churn. We also continue to sell and upsell what we call our sticky, more RegTech products like Policy Hub. We continue to maximize upsells with new products like the three products we launched earlier this year. However, we are still continuing to look at selling more new products, and developing the whole, and supporting and getting behind the whole microlearning trend and AI inside our products to remain competitive, relevant, and efficient. Since the end of June, we have continued to trade very well, and we are pleased with how we are progressing, and that our rate of year-on-year ARR growth is accelerating since the end of June. That bodes very well for full year subscription revenues for this year and into 2024. We expect our overhead growth rate to continue to slow now that we have filled the key senior roles, but we do still expect to hire new people, but very much on a volume basis. We do plan to increase our prices again around the end of the year to offset the continuing inflationary pressure. Our product pipeline remains strong. As I said, we are very excited about launching this sort of low-cost, self-serve e-commerce solution in the second half of the year. Just to reiterate, despite the whole technology crash situation that happened just after we floated in December 2021, we are proving that we are resilient and continue to trade in line with our long-term plans that we set out at IPO. As a summary, Skillcast is a business that operates in a growing fragmented market of corporate compliance learning. We target non-discretionary spending, which offers resilience as we have proven in challenging times. Our product portfolio is deep and getting deeper and broader. We are increasing the level of revenue coming from subscription, which gives us more resilience and more forecastability, high forecastability. We have got an experienced management team. We have got a great non-exec board that is supporting us. We have got a proven track record of growth, profit, and cash generation with a strong balance sheet. We will continue to, unusually for a sort of small growing SaaS business, we plan to continue paying a dividend which is yielding currently 2.2%. Thank you very much. Just handing now back to Alessandro. Perfect. Richard, thank you very much for your presentation. Ladies and gentlemen, please do continue to submit your questions just by using the Q&A tab, which is situated on the top right-hand corner of your screen. Just while the company take a few moments to read 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 published Q&A, can be accessed via Investor Meet Company dashboard. As you can see, we have received a number of questions throughout today's presentation. Vivek, if I could just hand over to you just to read out the questions and give responses where it is appropriate to do so. I will pick up from you at the end. Alessandro. The first question we have here is about the management confirming if we are on track to meet the market expectations for the full year 2023. This is not clearly mentioned in the results that we released this morning. There is a reason for that. We are confident we are broadly in line with market expectations on our cost fronts and the subscriptions that are growing very strongly. They have continued to grow as Richard mentioned earlier. The bit that is not certain is the professional services. We are quietly confident about that as well, but that can introduce a bit of variability towards the year-end. That is the only variable thing. We are certainly in line with market expectations on the growth of our ARR. That is the main component. The next question here is asking whether the ARR at GBP 8.1 million will deliver profits through for the full year and beyond, based on the small loss on GBP 5.2 million in revenues in the first half and no increase in costs. Just want to correct that impression. We have never said that our costs will not increase. It is just that, we feel that we are at the inflection point where our revenue curve is growing faster than our costs. Our costs have slowed down, certainly. Richard mentioned the point that we have hired in our key growth roles, which are always more expensive. And the overheads will grow mainly in line with the revenues in the delivery roles. We do expect the costs to slow down. We do expect the second half of the year to be profitable. That is in line with market expectations. But for the full year, the market expectations remain for a small loss. We should start to claw some profit back in the second half of the year. But overall, for the year, we should still be in a loss, according to market expectations. The third question we have here is about the sales process. How has this changed, to see the increases that we have in sales and are recurring? Well, we have tweaked the sales process somewhat. Richard, again, mentioned how we are changing the mix, drawing more traffic through blogs, doing more outbound calling, for certain products that are right, appropriate for outbounding. There are some changes there. But the increase in revenue really comes from the fundamental economics of our SaaS sales model. Because if we can retain our existing sales from the previous year, and we are running at about 105% retention rate, which means that we are drawing 5% more revenues from the client that we had in the past year. And we continue to add clients on top of that, so that compounding effect just gives us that steady growth in ARR. That process is what is delivering the growth, and strong growth, this year. Vivek, maybe I could add to that as well. I think one of the key investments we made, since IPO is invest in revenue operations. So we have got a key person that has really helped drive measurement of the whole sales funnel and pipeline, and the metrics that we have engaged in within the whole commercial team has really helped focus on conversion of the pipeline and generation of the pipeline into higher sales as well. Indeed. Yes. Those are the kind of improvements that we're making to the sales process. The next question is, what is the ongoing maintenance investment to keep the content relevant, and is this all internally generated? Firstly, we do outsource quite a bit of the content expertise or rather insource it from experts out there. We don't hold these experts on payroll because they are some of the leading names in the various areas of expertise, lawyers, trainers, compliance consultants, for instance. Yes, there's certainly an ongoing maintenance to keep that content relevant, updated, and indeed, grow that over time, fill out the areas which we're missing. We're largely driven by client comments, feedback, for doing that. We also, of course, have ongoing investment in maintaining our technology. Similarly, adding to it with new features, again, based on client requests. The technology work is all done in-house. That bit is not outsourced at all. That investment is something that's pretty steady. It's not growing over time, so it's not growing in line with the revenues. Therefore, the revenue curve should get ahead of the cost curve sometime in the second half. Perfect. Vivek, Richard, thank you very much. I think you've addressed all those questions from investors. Of course, the company will review all the questions submitted today, and will publish those responses on the Investor Meet Company platform. Just before redirecting investors right with their feedback, which I know is particularly important to the company, Vivek, could I just ask you for a few closing comments? Thanks, Alessandro. I just want to highlight once again, our ARR growth, which was 20% in the first half of this year. Alone, that's all organic, and that was achieved with pretty minimal cash burn. We have a lot more firepower. We're delighted with how the second half of the year has started. We've got some really good growth plans, both with products and entering into areas of the market as Richard earlier alluded with our low-cost solutions. Thank you very much, everybody, for joining us today, taking the time to hear us out. Perfect. Vivek, Richard, thank you once again for updating investors today. Could I please ask investors now to close this session as you now be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations. This will then take a few moments to complete, but I'm sure will be greatly valued by the company. On behalf of the management team of Skillcast Group PLC, we'd like to thank you for attending today's presentation, and good morning to you all