3P Learning Limited (3PL) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the 3P Learning's 2025 Half Year Results Investor and Analyst Briefing. Today, you will hear from Mr. Matthew Sandblom, Executive Chairman; Mr. Jose Palmero, CEO; and Mr. Adam McArthur, CFO, as they present to you 3P Learning's 2025 Half Year Financial Results. [Operator Instructions] I will now hand the presentation over to Matthew, Jose and Adam from 3P Learning.

Welcome to the 3P Learning First Half of the Financial Year 2024-2025 Results Presentation. My name is Matthew Sandblom, Executive Chair of 3P Learning. And joining me today are CEO, Jose Palmero; and CFO, Adam McArthur. The overall story of the first half has been about keeping profitably up and sales steady while we undertake a significant business transformation that we believe will set us up well for future consistent top and bottom line growth. 3PL has made good progress in transitioning to the new 3 Essentials business model that we flagged in our last investor update. This is where we integrate all of our key learning programs in reading, writing and math into a unified teacher and student interfaces. The first real test has been rolling over several million student and teacher accounts to the new system in the last few weeks as schools in the APAC region return for the new academic year. This has been an all-hands-on-deck effort as we clean up large volumes of duplicate and obsolete account data. Now that we have mostly completed this task, we can now expose teachers and students to all of our programs from the one single home page. For the next 6 months and beyond, we will continue to release more 3 Essentials functionality to teachers and students. The aim is to make it easy for teachers to assign tasks and track student progress across the key learning areas. We want to become an indispensable aid for teachers where they teach the skills and our programs provide the practice at homework task to ensure a long-term retention of key skills. During this time, we have also restructured our sales team in APAC and EMEA to strengthen the size and selling ability of our frontline sales force. We have seen some early successes in selling the 3 Essentials to APAC schools even though we did not have a working integrated 3 Essentials program to demonstrate to schools until now. Even so, over 200 schools have so far signed up with an average increase in school revenue of 47%. We expect a number of schools adopting the 3 Essentials to grow more significantly over the course of this calendar year. This will not greatly increase revenue in the '24-'25 financial year due to delayed revenue recognition. We closed on the purchase of LiteracyPlanet at the beginning of January. This was a small acquisition that complements our product suite for less than 1x revenue. We plan on incorporating LiteracyPlanet into our 3 Essentials offer to strengthening our literacy offering in the higher primary school grades. In the direct-to-consumer market, we have maintained our year-on-year sales levels, which is a reasonable result given the economic headwinds parents are facing in all of our key markets. We think the best way to grow this market is to create a more complete offering for the large home school market in the U.S.A. We have started work on this project and expect to start releasing key elements in the second half of the 2025 calendar year. We also believe that we have passed the peak of our large investment in new products, such as Writing Legends and product renewals such as Mathletics and that this shift from the investment phase will result in continued EBITDA margin improvement in the second half of this financial year and onwards from there. I will now hand you over to Jose for a CEO update.

Thank you, Matthew, and good morning, everyone. I'll start with the key results and segment performance for the first half and then provide an update on our main growth initiatives, including the launch of the 3 Essentials in APAC and EMEA and sales in the U.S. market, where we have been distributing Reading Eggs directly to the U.S. schools for 12 months now since reacquiring the rights form Edmentum. I'll also cover in more detail our rationale for the recent acquisition of LiteracyPlanet before passing on to our new CFO, Adam McArthur, for the financials and cash flow section. We have worked with Adam before, but it's his first results presentation as CFO of 3P Learning. So welcome, Adam. Looking at the first half results. Just as a reminder, 3P generates about half of its revenue from APAC. Billings and cash receipts are therefore, stronger in the second half of the financial year. This has a corresponding effect on revenue because most calls in APAC are invoiced in February and March each year. On the expenditure side, we expensed most of our product development costs and only capitalize new product development. Revenue for the first half was $52.7 million or 2% lower than in the prior corresponding period, mainly due to the initial transition of Reading Eggs school customers from Edmentum in the U.S. being lower than expected. This also affected annual recurring revenue for B2B but the acquisition of LiteracyPlanet contributed $2.2 million to bring ARR in line with last year at $64.4 million. B2C billings increased 1% to $22 million which was a reasonable result given the tougher economic environment in the consumer market. The bigger positive this half was underlying EBITDA which was $6.8 million or 98% higher than in the prior corresponding period. This reflected the $5 million in cost reductions we implemented in May last year, as we transition from product investment phase to marketing and sales. Cash generation was also good at $1.4 million for the first half, an improvement of $3.8 million over pcp, and as I mentioned before, still expecting a stronger second half for both cash generation and underlying EBITDA. Looking at segment performance in more detail. B2C billings improved 1% overall, with Google Play and the App Store as the main contributors for mobile, up 6% and 2%, respectively, on pcp. Direct website sales were steady at $10.1 million, bringing total billings for B2C to $22 million. In the regions, we saw marginal increases in APAC and AMER and a small decrease in EMEA, but we continue actively managing our marketing spend and improved our contribution margin to 52%, which was 2 percentage points higher than this time last year. In the schools market, revenue was $30.9 million, which was $1.3 million lower than pcp, mainly due to the transition from Edmentum in the U.S., which I will explain on the subsequent slide. In general, the schools market has been affected by budget cuts in the 3 regions with some uncertainty of U.S. schools funding for this calendar year following the U.S. federal election result. In that context, overall in the past 6 months, we have seen steady sales results from our products compared to June 2024. Annual recurring revenue was therefore in line with June 2024 at $62.2 million but has increased $2.2 million with the acquisition of LiteracyPlanet to $64.4 million. We started marketing and selling our combined product offering, the 3 Essentials in APAC in July 2024 and in October 2024 in EMEA, and have just released the integrated product landing page, class management and single sign-on features in APAC. Sales in the first half were $1.5 million from 214 schools in APAC, representing an increase of 47% in subscription fees from those calls upgrading to the 3 Essentials from either 1 or 2 products, typically Reading Eggs and Mathletics. EMEA has also started off well with $100,000 in sales from 30 schools as the package price represents best value for schools. It's early days, but initial results are encouraging. We will continue developing features to make navigation and class management easier and to provide consolidated reporting for the 3 Essentials and expect a greater impact in financial year '26. Looking at the U.S. now, we reacquired the Reading Eggs U.S. schools distribution rights from Edmentum in April last year, but started the transition in February 2024, so we have now been selling directly for 12 months. The main renewal period was between April and June 2024, and we retained 74% of billings, which was a bit lower than the expected 80%, as we unbundle the customer relationships with Edmentum. Offsetting that, we achieved a 135% increase in new business and cross-sell billings of Reading Eggs and Mathseeds with our expanded sales teams in the U.S. We have also built a stronger new business pipeline than last year. So we believe that our overall position and prospects in AMER are positive. In terms of the addition of LiteracyPlanet, this is a small acquisition that at the product level, brings more spelling, grammar and comprehension content and features for all the students, which complements the early readers focus and strength of Reading Eggs. Strategically, we see LiteracyPlanet as a good fit for 3P in the schools market as part of the 3 Essentials. It also has a small presence in the home market, which could be an opportunity for B2C. LiteracyPlanet has similar attributes to Reading Eggs in terms of student engagement, look and feel and making it simple for teachers to use when tracking student progress or assigning class tasks and homework. The investment in LiteracyPlanet was $1.4 million, which is less than 1x the expected sales of $2 million in financial year '25. It brings annual recurring revenue of $2.2 million that is incremental to our business, and we expect it to be profitable and cash flow positive in the first year. LiteracyPlanet also operates in APAC and EMEA and has a strong crossover with schools already using Reading Eggs. So we will start integrating it with the 3 Essentials as soon as possible during financial year '26. In terms of our product road map, as Matthew mentioned earlier, we have passed the peak of our large investment in new products and upgrades. Our product road map will therefore now concentrate on smaller incremental investments that are aligned with the product and markets with the best growth potential and opportunities. This includes more focus on making the 3 essentials compelling and easy to use for teachers in APAC and EMEA and delivering the integration and reporting features that are required to make us more competitive in the U.S. and AMER markets. That concludes the CEO section of today's presentation. I will now pass on to Adam for an update on the financial results and cash flow. Thank you.

Thanks, Jose. I'm pleased to be here to present our first half results for FY '25. I'll present our P&L B2C and B2B segment performance and cash position. On Slide 18, our P&L is presented. The key financial highlights are that total revenue was $52.7 million, which is down 2% on prior comparative period. The B2B segment generated revenue of $30.9 million, down 4% on pcp, primarily impacted by declining license numbers during the transition from our distributor Edmentum in the U.S. to our own sales team. However, the B2C segment showed stability with revenue of $21.8 million, achieving modest growth through increased billings for Reading Eggs and Mathseeds. Through this period, we were able to maintain our gross margin at 95%. Expenses were managed carefully as we saw the impact of the May 2024 $5 million cost-out initiative and the cost efficiencies gained from direct selling to schools. This delivered an underlying EBITDA result of $6.8 million, up 98% on pcp and an underlying net profit after tax result of $3.6 million. Our statutory net loss after tax was $0.7 million, and this was an improvement from the $12 million loss in pcp. The half year results include several one-off items, including $0.7 million from the unwinding of the legacy Edmentum distributor costs. The $2.9 million of purchase price allocation of depreciation and amortization related to Blake & Brightpath acquisitions and associated pro forma expenses. On Slide 19, we can see the operational performance of our B2C segment. The B2C segment demonstrated resilient performance in the first half of '25 with several key metrics showing improvement. Gross billings increased 1% to $22 million, driven by growth across Apple and Google platforms. The average revenue per user grew 5% to $78.6 per user, up from $74.9 in the pcp. Net billings contribution margin improved to 52%, up from 50% in the prior period. This contribution margin reflects the effective management of direct sales and marketing costs, platform commissions and the infrastructure expenses. Commission costs increased by $0.5 million to $2.6 million reflecting the growing proportion of business through our Apple and Google platforms. Despite this increase, the business demonstrated improved operational leverage with sales and marketing costs, excluding commissions, decreasing by $0.6 million to $9.3 million. On Slide 20 are the B2B performance metrics. The B2B segment demonstrated improving fundamentals despite revenue declining 4% to $30.9 million. This was primarily impacted by the Edmentum transition in the U.S.A. Annual recurring revenue increased to $64.4 million as of the 31st of December '24, up $2.3 million from the 30th of June, the increase included $2.2 million in ARR contribution from the LiteracyPlanet acquisition completed on the 3rd of January 2025. New business contributed $3.1 million to ARR, while net upsells added $1 million. Other operational metrics for our B2B segment showed exit ARPU increased 7% to $13.30, up from $12.40 in the prior comparative period, driven by the inclusion of LiteracyPlanet and the strategic renewal pricing management. Total licenses for B2B were $4.9 million. This reflects a 6% decrease from $5.2 million in the first half of '24. Contribution margin strengthened to 51%, which was up from 47%, primarily reflecting cost efficiencies gained through direct selling to U.S. schools. Also early indicators from our introduction of the 3 Essentials are positive with the benefits expected to materialize in FY '26 and beyond. On Slide 21, the cash bridge shows that the company's cash flow position strengthened during the first half, with underlying cash flow from operations before tax improving to $1.4 million. This represents a $3.8 million improvement from the prior comparative periods outflow of $2.4 million. The net cash position was $1.9 million at the 31st of December. And at this time, we had $9 million of borrowings. With our strong cash flows in the second half, we will repay these borrowings in full by the end of March and will end the financial year with a healthy cash balance. Now I'll hand over to Matthew to provide the outlook and concluding comments.

Thank you, Adam. Before we invite questions, I will provide our outlook for the medium term. As I mentioned earlier, we believe that we have passed the peak of our large investment in new and updated product development. Our focus now is on improving our EBITDA margin and cash generation in the '25 to '26 financial year, even if revenue growth is only in the low single digits. We do want to grow revenue at a higher rate than this regardless, we want a healthy level of EBITDA and cash so that we can either fund acquisitions or return funds to shareholders in the form of buybacks or dividends. This concludes our presentation today, and we now invite questions. Thank you.

[Operator Instructions] As there are no further questions at this time, we have reached the end of 3P Learning's 2025 Half Year Results Briefing. We now conclude this event, and thank you for your attendance. Have a wonderful day.