Northcoders Group PLC (CODE) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Northcoders Group plc investor presentation. [Operator Instructions]. I'd like to submit the following poll. I'd now like to hand you over to CEO, Chris Hill. Good afternoon to you, sir.

Okay. Hi, everyone. Yes, my name is Chris Hill. I'm the Founder and CEO of Northcoders. I started the business almost 10 years ago now. And we've been with the company since the early days of training around 10 software engineers a quarter all the way to around 100 people a month, which we trained last year.

Hi, everyone. My name is Charlotte Prior. I am the CFO at Northcoders. I've been with the company for around 7 years now, and I am a fellow of the Chartered Institute of Management Accountants.

We also have 3 other Board members, Amul Batra, who was a very early stage investor in the company and is still with business today, concentrates on partnerships, both with government funding authorities and with businesses more directly. And we have 2 nonexecutive directors, Nick Parker and Angela Williams, who is our Chairperson.

Results out this morning. We are pleased to report revenue growth of 24% to GBP 8.8 million. Gross profit has grown to GBP 5.9 million at a margin of 67%. Our adjusted EBITDA adjusted only for share-based payment expense is at GBP 1 million, which is back to expected levels after a drop in 2023. 2023, we invested -- we continue to invest into our platform and into our courses at a time when the tech industry was quite unstable and there was a couple of economic difficulties for us as a business. We continue to invest anyway so that we're now seeing the fruits of that labor. We ended the period with cash of GBP 1.2 million and net assets of GBP 5.3 million. Some operational highlights. We grew our hiring partner network to 510, and we also grew student numbers to just under 4,000 at the top. We taught around 1,100 in the period. And although on par with 2023, we really increased that revenue per seat and increased that value per student, which has enabled us to grow revenue overall as a company. Business overview. So we founded in 2015, our vision is to deliver life-changing opportunities for people from all walks of life. That has always been our mission, and that is what we continue to do whilst also providing the U.K. tech industry with the skills that it needs. We work with a lot of corporate partners. We work with big corporations and also small companies. There's kind of no such company that can take on an Northcoders, we even place the students into an [indiscernible]. We have 7 different courses. We have full-time software development in JavaScripts, part-time software development in JavaScripts, full-time in Java, full-time C-Sharp, full-time data engineering, full-time cloud engineering and our newest course, which is our full-time data engineering with AI and machine learning, which we'll go on to explain further in the presentation. Demand is higher than ever. We had application numbers in 2024 of just over 17,000. That is continuing to grow. We have a rigorous kind of entry challenge and entry process into our course to ensure that quality is kept high, and that's still very important to us today as it has ever been. We're managing to retain our reputation in the industry as being a quality boot camp, and that is the strategy that we want to continue with.

Okay. I'll just talk to the business model. So we have 2 divisions within the company. We have our training boot camps and then we have our consulting division, which is branded as COUNTER. So the -- our heritage is training and our reputation is built on the excellence of the technical training that we've done and the impact the individuals that have been through our frameworks have made on the organizations that they've gone on to thrive in. So the training boot camps are relatively simple. We have marketing and customer attraction efforts to build pools of people who are interested in joining one of our frameworks, a lot of recommendations because of the quality, which our #1 emphasis is always to be the top quality provider and have the best outcomes for the individuals. So we have a significant pool of around about, let's say, 1,000 learners for each cohort in our pool who would join the framework. And we then give people some pre-assessment. So we make sure that everyone is going to be able to keep up with the pace of the course and that they're going to get themselves -- they've got a good chance of getting themselves to the level they need to be to secure a great outcome both for themselves and for us as an organization. So we do that basically through -- we call it an entry challenge, but ultimately, it's an exam, which is also -- has a one-to-one with one of our tutors to make sure that the people do really understand the basics of what they're doing while we'll go on to talking about how we can empower ourselves in technology by using AI at the very beginning of our courses. It really is about understanding how everything works under the hood. So we need people to make sure that they can explain that to us and that they are going to be able to grasp the concepts required to build upon the foundations. You then go into one of the boot camps that Charlotte has mentioned on the previous slide. So we have now both full-time and part-time options for these courses, but we'll talk a little bit more about diversification efforts in a couple of slides' time. You complete your boot camp in your chosen subject at the end of the boot camp, you will put together a portfolio piece projects that you'll be able to go on to showcase your skills to either your current or you're looking for your new employer. And at that point, once you graduate the boot camp, you will join our career and recruitment pool where we support you for a number of months to get a great outcome based on the training you've received. Within our consultancy division within COUNTER, which we'll talk more about in much more detail in a couple of slides' time as well. We also have an organization called Tech Returners, which is all about getting people who have had career breaks in technology back upskilling to the current trends and back into businesses. So we, through COUNTER offer blended teams to organizations where we're tech-led at all times by a tech leader as part of the team. Then you can have some of the graduates from the Northcoders programs and also from Tech Returners and we'll talk again more about exactly how that works soon. I think one of the areas of business is our training is significantly underpinned by government funding. And obviously, there's been a change in the U.K. government. So on the page in front of you, there are some of the initiatives and the areas that we are working within to secure and keep working with the government to fund these much really in-demand skills. So one of the things that is apparent is that through the labor government, they're preferring to go quite regionalized on these skills funding. So they're actually giving like evolved authorities more power to allocate their own skills budget. And I'd say I kind of agree with that because I do think that the skills, London just announced a GBP 27 million boot camp fund. Greater Manchester surely is not far behind it as well. But I do think that each authority being able to pinpoint exactly what type of training, what type of skills they need in their region because it is different between Manchester, Greater Manchester, probably slightly more kind of creative and agency -- app agency development, for example, whereas yes, London is more your kind of your high tech, your AI and so on. So I do think that in the longer term, it will lead to better outcomes for individuals and the size of the funding that we're seeing come through for the bids, there's 29 current live opportunities where you literally just heard good news on the first one yesterday because the new funding app has now been allocated within the new budget post April. So we got our first bit of good news on that one yesterday. So plenty more to come in that area. And there is also the opportunity of Skills England. It's a big initiative from the government where they're looking to reform the apprenticeship levy to allow businesses to use it for more like shorter, sharper training courses. And I'm sure we'll have more news on the opportunities that presents later in the year. So we've now introduced our AI engineering boot camp. Now this boot camp is for private paying customers only at this point. In the future, there will be opportunities for us to modularize our training to apply like different modules and different courses to the various needs of those local authorities through the government funding. But on this initial course that we've launched, we are just -- this is for individuals who want to privately pay for their training. It's our flagship course. And this is all about like the engineering behind AI, not kind of using AI to do your job as a software developer or anything like that. This is about actually implementing what is behind the large language models that people have really started to use and how to actually engineer those things from the ground up. So that's what we've introduced, and that's going live in June. So further kind of the revenue diversification within the training division is that we have also introduced part-time methods for our courses where people can obviously still continue in their job or whatever else they do with their busy lives as well as learning, taking part in one of the Northcoders courses on a part-time mechanism. And again, that is just for people or businesses to pay for privately. We're not -- we don't have funding or seeking any funding for those courses. So it's just bringing in more diversification of revenue, feels much more accessible that people should be able to continue to do their jobs while learning to code and as well as that for some of our courses like the AI, which we service for private payers only. We have lots of different funding mechanisms and even like where people can come on to our course and they don't have student loan style where they don't have to pay North coders back until they have to get to a job. And we have raised some extra finance to make sure that we've got plenty of capital to support that at the beginning of the year, which we'll come on to again later. Okay. So I'll talk a bit more about COUNTER now. I also want to talk about the business model. We were talking about that. So COUNTER is a challenger brand to the kind of consultancy and the higher trained deploy market. We have a great network of individuals that we are training and a fantastic network of people who want to return to tech through Tech Returners. So rather than having like a pool of people that we recruit to train directly and then we ultimately deploy on contracts with businesses, we're actually much more tailored and much more working with organizations to build them successful teams of people that want to be with them for the long term, really well supported throughout the initial engagement. And we're also able to operate very, very quickly and turn new contracts and opportunities around in short spaces of time with businesses rather than having to pre-hire people and train them. And one of the best things about COUNTER is that because of none of the sunken costs that you often have within consultancy or hire trained employee, we're able to price this at like nearshore pricing, and there is a huge emphasis on businesses to bring like services and engineering, especially with like the reforms to R&D tax credits back to being onshore in the U.K., and that's where we operate. So that's a big opportunity for us and something that people really like about the business. So in terms of the progress we've made so far with COUNTER, if you're following our news feed through the London Stock Exchange, we did announce on the 1st of April some new contracts, Skipton Building Society are super happy with all the work we've done with them, and so we have started a new contract with them. Since then, we have also won more business. We've expanded some of our current clients as well as winning new ones, which gives us now over GBP 1 million of revenue contracted for this year, and we currently have a pipeline of potential contracts that we're valuing around about GBP 2 million. So we should be able to see those numbers increase significantly. It's a big drive from us as a business to really give COUNTER what it needs to go to market and win the business. Which brings me on to the strategy. We really have built this up from our reputation like our heritage as a training provider, which most of that's been within the North, although now we actually, for the first time ever do have more students on our training frameworks in London than we do in the North, which obviously presents itself with some great future opportunities for COUNTER. And we will -- now we have a product that's ready to go to market. We've got -- we're building out testimonials and case studies for public sector frameworks with the organizations that we've worked with. We have recently just expanded the business development efforts by hiring a couple of new people, and we look to continue the investment into that now that we know we've got a fantastic proposition that's ready to go to market and the clients are actively choosing to grow the representation of an organization in COUNTER and taking out some of the other more traditional providers. So yes, there's some companies there that we've worked with. Obviously, things are going great with Skipton Building Society, Manchester Airport Group. We've also expanded that client base there as well. And we are looking in the future to do more larger public sector contracts. So they're probably likely to be partnerships with other consulting organizations that can do much more sort of like the high-level strategy and security and all of those kind of infrastructure projects for large public sector clients, whereas actually delivering the engineering and doing the work that's required, COUNTER is a far better value and better long-term proposition for organizations. So through the frameworks that we are currently on and that we're also joining should open up some significant opportunities for COUNTER and partnerships with some of the companies that we partner with. In terms of competitive landscape, there's obviously been quite a lot more through like -- especially like the funding and other training providers going into running boot camps. But the way that we feel about [indiscernible] is it really is quality of the account. So we're always looking to keep ourselves at the very forefront of technological advances, making sure that we're keeping up with the demand from our hiring partners and listening to that feedback and making sure that we just keep striving every day to deliver those outcomes for individuals so that we remain top of the market for our training within our training boot camps. Then within COUNTER Business Solutions, we do have a much more refreshing, challenging proposal, which we are beginning to see within some of the clients that we work with that we're -- they're actively growing the COUNTER teams that we have engaged, and they're actually taking out more traditional consultancy work because it just doesn't offer the same long-term value as COUNTER where we can deliver -- we can go in and look after the projects we need to look after, but then there's that real long-term longevity of those individuals being part of the business for the long term. We're able to be much more agile on contract length as well as rates because we don't have sunk costs unlike many of our competitors in the higher train deploy or consulting business.

So on this slide, we just have some recent articles regarding market conditions. New still states that we do have a wide skills gap, technical skills gap in the U.K. There's no surprise there, but we are increasingly seeing the need for skills in data and AI. And we will always track what is -- we will always track market conditions. We will always look out for what is needed at the bleeding edge of tech skills, and we are able to be agile. We're able to spin up courses and react to the market. So we'll dive through financials. The 2 graphs on the page just show kind of how revenue has grown over the years and also how EBITDA has grown this year, it took a dip in 2023. Again, that was an investment year on the back of some unfavorable market conditions. We chose to continue to invest, and we now forecast that EBITDA to keep increasing. P&L-wise, we -- GBP 8.8 million revenue, 5.9 million gross profit, which is a 67% margin. As I said before, adjusted EBITDA is only adjusted for share-based payments this year, and that came in at just under GBP 1 million. Within that kind of EBITDA to operating profit, we have depreciation of around GBP 130,000, amortization of GBP 265,000 and share-based payment expense below that of GBP 138,000. We had a tax liability of GBP 9 for the year, which is obviously reduced because of carried forward losses and R&D tax credits, which gives a profit after tax of GBP 388,000, basic EPS of GBP 4.58 and adjusted EPS of GBP 6.58. Moving on to cash flow. So we had cash flow from operating activities of GBP 978,000. We had a decrease in trade receivables, largely down to payables being -- money being significantly on more favorable payment terms, mostly within the DfE. We may see a change to that. We will see obviously a much more diverse revenue mix with more diverse payment terms, but we are well placed with cash for that looking forward. We have 819,000 net cash used in investing activities that is made off of 571,000 of intangible assets spent in the year. We continue to invest into our own NCore platform. There was add-ons that we needed to do for that platform, which will further push efficiencies in the future. And so we chose to do that. That will decrease significantly in 2025. There was GBP 38,000 of tangible assets and GBP 240,000 of deferred consideration in there from the Tech Returners acquisition that we obviously won't see this year. We also had no proceeds from issues of shares, no new bank loans and borrowings. We repaid our bank loan borrowings to the tune of GBP 292,000. We continue to pay our lease obligations. We had a 10,000 square foot office in Manchester, which we're now out of the lease for that. We signed that lease just before COVID around 5 years ago, and it's now way too big for our current model. So we're pleased that we're now out of that lease, and we're not going to be carrying that cost forward and that cash outlay forward as well. And then we've got interest paid from the bank loans, which brings us to a cash balance of just under GBP 1.2 million at the end of the year. Balance sheet-wise, we've got noncurrent assets of just over GBP 3.7 million. This is made up of GBP 1.3 million of goodwill, GBP 2 million of intangible assets, GBP 0.2 million of tangible assets and GBP 0.1 million of deferred tax assets. Current assets include the GBP 1.2 million of cash and our borrowings at the end of the period were GBP 474,000. Next slide. Yes. So just some nonfinancial results as well. It took, on average, 72 days for our students to find work. We have trained around 30% of women into tech during the year, which is something that we focus on. We are passionate about bringing diversity to the tech industry. Our drop-off rate was 8%. Really pleased with the drop-off rate of 8%. Obviously, people not paying for the course and not as motivated to stick to the course as people that are paying. And as a large proportion of our students were government funded, it just kind of shows the quality of the course to have such a low drop-off rate. Average starting salary was just over 28,000, 39% non-university educated students and 67% of our students went into jobs within 6 months after the course. This is a drop on previous years, and it's not something that we are used to, but we -- when we've analyzed this, there are people going -- there are a higher percentage of people going into work with the 6 months. And it's largely a result of people not paying for the course, having other intentions after the course. So we do expect to increase that number in 2025 as the revenue mix changes. Outlook. So coming into 2025, we have seen a positive shift in the tech jobs market. The first quarter of the year has been really successful for people moving into work. We've got over GBP 1 million of COUNTER revenue already secured and a really healthy looking pipeline. We took a GBP 1.5 million loan from NatWest in March this year. So NatWest brought out a new loan where basically you can borrow money against your internally generated IP. So as we -- as I spoke about before, the IP on our balance sheet is valued at around GBP 2 million. It was valued by an external company at around GBP 5 million. And so NatWest have borrowed us GBP 1.5 million on much lower interest rates than we had our existing loans. So GBP 0.5 million was to refinance those, and then we are going to use the other GBP 1 million to allow us to expand our payment mechanisms onto the course. It will allow us to offer more student loans and income sharing agreements, and it will also allow us to comfortably continue to invest in COUNTER. Just a couple of more things on there. The GBP 4.1 million of contracted revenue as at April. So although we do have lower contracted revenue than we've seen in previous years, it is a timing issue of the Department for Education contract. In the past, we've received the Department for Education contract around this time and have been able to come out and say that we have, for example, 97% contracted revenue. Because it wasn't a yearly contract, it was an 18-month contract that the timing has changed, and we're not in that position this year. But we're still very pleased with GBP 4.1 million, and we expect that to obviously grow in the near future. And then as Chris said before, contracts for regional funding are being released. We've received the good news on one yesterday, and we expect to continue -- for that to continue over the next couple of months.

Sorry for skipping in front. Okay, cool. So we've got some questions here, which we'll read out and then answer.

Are there any plans to expand into other emerging tech areas like cyber or cloud infrastructure? So we are currently with COUNTER working with Amazon Web Services on being able to partner with them to go into organizations and have teams that work directly on cloud infrastructure. So cloud is something we do have a cloud engineering course. And we mentioned earlier that we're starting to look at chopping our courses up into being more modular offerings where we can, for example, if there was demand from a certain combined authority or certain business for cloud skills, whether that's for their employees or for learners, then we would be able to offer that and be a bit more agile with the different courses that we offer rather than being just a kind of long sort of 3 months boot camps at the moment. So yes is the answer to that question. Next question is how scalable is your current delivery model with NCore? What's maximum student tutor ratio you're comfortable with while maintaining quality. So yes, NCore has improved the student to tutor ratio significantly. So the way the cohorts work, just to answer this is let's use a cohort of 60 would then be broken further down into seminar groups so that you obviously have your kind of cohort leader who runs the lectures does the live content and that's sort of delivered to everybody. Then within your seminars, you break out into smaller groups where you can ask more direct questions and about 30 people is about a perfect number for that seminar group. And then within there, we also have mentors, so the people can be assigned to their seminar lead or to their mentor. And yes, if we were to have around 10 students to each like active delivery staff member, that's a really highly profitable ratio as well as one that we're certainly comfortable with the quality of the course now that it's backed up by all the systems and all of the things we have in play. We are also starting to feed our own sort of AI data lake models to see about the questions that we can like -- things that we can bring -- help us learn what we can bring into our kind of preplanned content for the bits where people always get stuck on the courses and so on. But for now, yes, we're pretty comfortable with that level. So what are your key priorities for growth, geographic expansion, new course development or consultancy services?

Yes, of course. So our key priority for growth right now is the consultancy services. We know that, that's the best way to kind of scale the business. And obviously, a consultancy contract is worth, say, GBP 300,000, whereas a student is a lot lower revenue. But we recognize that, obviously, the teaching is quality revenue. It's at a higher gross profit margin. And so the strategy is to grow consultancy services whilst really keeping the quality and the profit margins high with training. We know that you kind of -- you have kind of answered the question with all 3. We know that the best way to keep quality within the training division is to diversify the outcomes for the students, and that involves diversifying the jobs that the students go into and also diversifying the geographic regions that they come from just to ensure that the jobs are there even in a tough jobs market. And so all 3 are important, but consultancy is, for us, is the main growth area of revenue. Yes. So the next question is, with gross margin expanding to 67%, how sustainable are these margin levels given the investment into new courses? So the investment into new courses doesn't affect gross profit margin straight away really anymore. There's kind of a stepped approach to gross profit margin within the courses. So a new course at a low level is actually really profitable because, obviously, we don't need as many tutors to run the course a seminar group of, say, 30, if that was just -- if we only took 30 onto the course at first, whilst it was at a low level, we would only need one seminar group, et cetera. So it's not the courses that are going to shift the gross profit margin. COUNTER, as the consultancy area of the business does become a more prominent revenue stream within the mix, that is done at around a 50% gross profit margin. So the strategy is to increase the profit margin on training up to around 72%, but then that will be pulled back down by COUNTER. So around 65% is -- should be where it ends up.

Okay. Thanks. I'll take this one here. I know that there's an increase in hiring partners. What's the retention rate among these partners? And how do you measure the lifetime value [indiscernible] repeat business from the relationships you've gained by our partners. So hiring partners is hiring from Northcoders is a free service that we offer. And we do see partners coming back time and time again. Of course, it's been due to size, we have had a 2-person start-up who's been a hiring partner, but then we've also had Barclays Bank, for example, as one of our hiring partners. And there's no kind of -- just like with there's no such thing as a typical North Code, people come from all walks of life, it's the same with hiring partners. We've had really high tech kind of businesses and then we have your financial services and then we had an egg farm once, which was a bit of an outlier example. The biggest opportunity with hiring partners is to offer further training to people who they have hired or obviously for them to have a look at what Northcoders does and get. It's a relatively easy way to start to work with us, into some of our graduates, see the quality and then what we can offer to really help you with that kind of framework of bringing in entry-level technologists and returners, there's always an opportunity for COUNTER once people know that the heritage of our training can really kind of power our consulting offering. Are you looking to expand internationally? So we're taking in terms of like marketing for the Northcoders brand. So people have heard of us. We are making efforts and we do our budgets in place to sort of get our brand out there before we try and directly sort of like sell consumer courses and so on. And we are building a genuinely scalable model within COUNTER so that in terms of the attraction of people who become COUNTER consultants or returning COUNTER consultants, we are thinking of ways that we would be able to do that internationally without necessarily having such a training presence as well. So it's not a focus. Right now, we definitely are -- we've really grown our kind of model from being based solely in the north to being here in London. And I think we said before, there's now more people on the training frameworks in London than there is in the north. And that is a huge opportunity for COUNTER, but we're just really putting together the case studies and really seeing we need to deliver excellence and just be a little bit different to competitors are just sell, sell, sell, grab a contract and then deploy whoever you've got on the bench, whereas we are looking to keep COUNTER something that people always say it's different and we can route those consultancies because people are looking for a fresher approach. It's getting rather stale, the offering.

In 2024, what percentage of students were supported by government funding versus students paying directly? So 2024 was a large proportion. It was around 90% of students being funded by the government versus students paying directly. The main reason for that was the fact that we took a GBP 10 million contract from the government. Our mission has always been to increase diversity within the tech industry and the government funding provided us with the opportunity to offer our course to people from all walks of life, and we jumped at that. We recognize that it isn't ideal to have that large concentration with one organization, and that's why last year and in 2023, we have been starting efforts to diversify the funding streams, and that was the reason for taking the NatWest funding as well. Students paying directly last year was mostly people that wasn't eligible for DfE funding. So there is some eligibility criteria on that scholarship and not everyone qualifies. So obviously, those students still chose to come to us and still chose to pay.

Okay. Thanks. We've got the last question here. So thanks for the presentation. Two questions, please. You have 17,000 applicants versus 1,300 enrollments. This is a large filtering exercise? And how does this happen? Is it AI, human or a bit of both? And also love your gross margin, but is it at a premium for training and consultancy? So I think Charlotte has gone through the gross -- the question previously went through the gross profit margins. We're super confident in really keeping those, if not increasing them within training. Obviously, accounts to gross margin is lower, but each contract value is higher. In terms of the filtering process, it's kind of, yes, a bit of both. It's a nail on the head, really. So we have all our own part [indiscernible], all of our own systems for absolute beginners to start to work in the way that you would at Northcoders to consume some content, apply those skills and get ready for what we call our entry challenge. We filter out a lot of those applicants before allowing them to kind of book time on an entry challenge because, again, that is automated and done through a platform, but there is a short interview at the end to ensure that people who do the entry challenge have done it. And we have got other ways now of catching people who are just getting through all the pre-course material by just asking AI. AI is quite good at Northcoders challenge, you'll be surprised to hear. But we do just want to make sure that people understand the concept of it using AI to help you learn things and understand things is fine. But you do need to understand some of what's going on. And this is quite sort of simple basic kind of programming algorithms that we really do need people to understand to have any chance of landing a role through Northcoders. So we do make sure that we just double check that through a human. That's probably the one thing that humans are better at than AI these days. So there we go. And yes, that's it. Then look, thank you for taking the time and joining us. I think I'll just wrap up by just saying we're super happy with these results we've delivered on for last year, and we've had a great start to this year also. We're ahead of our expectations, and we're really, really happy with that. Charlotte touched on the kind of revenue visibility, but we are still confident in what we're looking to deliver this year, and we're confident in the current government supporting us possibly even making that better -- creating better opportunities than the previous contracts for both individuals and for Northcoders as a business and council is getting off to a great start, and we are really building something with amazing product market fit, doing it in the right way, not trying to run before we can walk, but that could be sort of hyperscalable when the time is right, and we know exactly what we need to do to get the right people in the right places and the right kind of marketing exercises and so on to literally win more business in a way that doesn't have a huge cost base, massive amount of investment. We can just win contracts, deliver excellence and keep focused on that and take it from there. So yes, thanks again for joining us, and that's that. Goodbye from us.

Thank you.

Perfect. Chris, Charlotte, thank you very much for updating investors today. Could I please ask investors not to close the session as you now be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations. It only take a few moments to complete, but I'm sure will be greatly valued by the company. On behalf of the management team of Northcoders Group plc, we'd like to thank you for attending today's presentation, and good afternoon to you all.