Dillistone Group Plc (DSG) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to the Dillistone Group results presentation. To start with, if we could cover a couple of housekeeping items. Before we begin, we would like to submit the following poll, which you will see on your screens. [Operator Instructions] 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 appropriate. These will be available via your Investor Meet Company dashboard. Finally, we would like to remind you that this presentation is being recorded. I would now like to hand you over to Chief Executive, Jason Starr; and Finance Director, Ian Mackin.

It's Jason. Thank you very much. Hello, everybody. Appreciate your time today. Thank you very much for joining us this afternoon. We do appreciate your participation. So what we're going to do today, I'm going to talk to you a bit about who we are, what we do. Ian is going to take you into the numbers and I will then talk a bit about the future and what we expect to see going forward. The way we would position this, I think, is as recovery delivered an opportunity to follow. For the last few years, we've been talking about various problems that we've had and how for the last couple of reporting periods, at least we thought we could see a way out of them, and we were making good progress. And I think this is the first year where we can really say, yes, we've restarted to deliver. If you look at our headline figures, we include our first H1 operating profit since 2018. Our rolling 12-month adjusted profit has improved by GBP 350,000. We've reported our first recurring revenue growth since 2017 for [indiscernible] period. Our recurring revenues are now worth more than 90% of our total revenue. And despite a challenging economic climate, which I'll touch on in a few moments, we do fully expect to deliver end of year profit in line with market expectations. So we are in a much better place than we've been for a long, long time, and we're optimistic about the future. That would essentially be the headline that we're sharing with you. I suspect most of the people on the call probably know us. I'm not going to spend too much time taking you through my 537-page PowerPoint presentation of the organization, but I will share a bit about what we do. We are a recruitment technology company. We are not recruiters. We provide technology solutions to recruiters. We typically split our client base into 2 groups: contingency firms and executive search firms. Contingency firms are the high street agencies that you see on every town center in the U.K. Typically, perm or temp agencies, small businesses, placing everything from temporary drivers to office administrators to nurses to railway construction engineers and so on and so forth. The contingency market, we deliver various products to a CRM, a skills testing platform, a pay and bill platform. The other side of our business is executive search. So our executive search clients are head hunters, they are global, you'll find them virtually all over the world. And to that audience, we deliver CRM functionality, candidate sourcing functionality, compliancy functionality as well. We have a small number of corporate clients, but that's really around the edges of our business. All of our products are now delivered through a single trading entity, which is known as Ikiru People. And that is widely regarded as offering the best service in our sector. And you can see from the [ snippet ] on the screen, we have lots and lots of very positive reviews from clients all over the world reflecting that. So that's essentially what we do. I'll ask Ian to talk you through the financial ramifications of doing that. Ian?

Thank you, Jason. And so to start, within recent presentations, we've been showing adjusted figures for items of government support related to the COVID period to present the underlying performance of the business. Just to note, during H1 2023, we benefited from a small amount of support for a U.S. employee retention grant that covered the time period encompassing the COVID period. Going forward, however, the COVID's now largely behind us, will concentrate purely on the reported numbers going forward. So on that basis, this slide contains the figures published this morning in the interim document. It shows the results of the continuing steps being made towards the financial turnaround in the business despite the challenging economic backdrop for our primary markets. With total revenue, which is a historic measure and TACV, which is forward-looking, both broadly leveled despite the economic conditions. Recurring revenue, however, is up 4% to stand over 90% of our total revenue. Operating cash is also broadly leveled up 1% to GBP 565,000. However, the real story of these results is the move towards the elimination of losses. EBITDA is of 47% and the adjusted loss before tax is reduced by 83% to GBP 46,000. All this gives us confidence towards year-end, we're on track to hit the market profit projections. Running through the income statement. As I said, the headline is the elimination of losses. The result from operating activities before acquisition, government support and one-off costs has turned to a small positive of GBP 36,000. This continues the trend we've seen recently. We've moved from GBP 129,000 loss in H1 2022 to GBP 27,000 loss for the H2, now to a profit of GBP 36,000 in the current year. The trend is definitely moving in the right direction. As mentioned previously, revenue is broadly leveled in the uncertain economy. EBITDA adjusted to the U.S. grant is 34% up to GBP 581,000. However, it's worth noting on this figure, the margin has risen from 16.7% in H1 2022 to 20.6% currently. Depreciation and amortization is slightly down with the interest paid that did not go up due to the rising interest rate being paid on the Civil loan. All of this means that the reported losses greatly decreased stand at GBP 46,000 for the half year. So the underlying cash position is broadly in line with 2022. Once government support is stripped out, adjusted net cash from operating activities is down slightly at GBP 519,000, investing activities, which is mostly our spend on software development is broadly similar at GBP 469,000. All this leads to an adjusted net change in cash being down at GBP 217,000; adding the government support back in, the overall net change in cash is actually slightly better at GBP 171,000. It's worth noting, we're 2 years into the 5-year repayment of the civil loan having already paid off GBP 600,000 of the initial GBP 1.5 million loan, leaving us with GBP 900,000 left to pay on it at a rate of GBP 300,000 annually. In summary, we believe all the above is evidence that we've continued to make progress on the financial turnaround of the business. We made our first half year adjusted profit in 5 years. Recurring revenue has grown. So we've now got 90 -- over 90% of our revenue stream on a recurring basis. The adjusted EBITDA has grown by over 1/3 on the back of operational efficiency, and we returned to a positive EPS. With a continuing focus on the bottom line, we believe we have the foundations to take advantage when the economy turns. Now let me hand you back to Jason to take you through the rest of the presentation.

Ian, thank you. And obviously, I'll be very happy to take any questions you might have around the numbers. So what we've been talking about, what we've been focusing on, I think, is recovery. And I think if we are talking about recovery, we have to talk about where we came from, because obviously, it's a directional path. So I wanted to provide a bit of context. Our numbers have been fairly coarse since 2019, essentially and arguably longer. We basically have had what looks like a single problem, it's taken us a very long time to fix. That's not quite true. If you look at the history, the not so recent history of the business, essentially everything started to go south in 2018 when we had a very large client -- our largest client by far [ went ], leave us and we launched a new product that failed significantly to deliver on our internal expectations for it. The business had a bad period. And as a result, we took steps to reorganize, to restructure, and we completed that largely by the end of 2019. Coming into 2020, we expected that we turn the corner. We expected to return to profitability in that year. But unfortunately, COVID then came on. As we touched on at the top, our clients are recruiters. During COVID, recruiters were decimated. We saw clients disappearing, we saw clients downsizing. Nobody was buying new kit. And as a result of that, again, we had another challenge. So essentially, it's been a period of what, 4 years, depending on how you define it, where we've had to deal with 2 ongoing -- essentially big set of problems, and we've had to fix ourselves twice. Why I'm explaining this now because I think it's relevant to the current environment we're in. In Q2 of this year, the recruitment sector, the audience we sell to suffered a significant downturn in terms of demand for their product. This is general data on vacancies in the U.K. You can look in most markets. You can look at public company statements in the recruiting sector. Q2 was really difficult for recruiter sector. Why am I highlighting this? I'm highlighting this because our business now is much more lean, it is much more flexible than it's ever been before. So what this actually means is that despite the fact that the economy has taken a significant downturn in our sector, we feel we'll still deliver on our profit expectations. We'll do it on a lower revenue line where, unfortunately, growth has been tougher than we would have expected, but we still expect to deliver profits despite this turnaround. And I think that's a major change in our business now. We used to be historical -- historically a fairly large business, but -- large in the grand scheme of things, but a heavy cost base was difficult to change when the economy change. Now we're very lean. We have higher margins. We can move things around much more efficiently than we ever did before. And that gives us confidence going into the remainder of this year and beyond. On the contingency side, one of the big announcements we made at the beginning of the year was that we won a contract for our Infinity product, which was one of the biggest in our history. We expect to deliver that later in H2. We put in our announcement this morning that while the final value of that contract is to be confirmed, it's likely to be marginally higher than we'd originally anticipated. That contract is going well as expected to go live this year. It gives us very good confidence on the contingency side of the business for the first half. The exec search side, our executive search product lines have been in decline for years and years and years. They grew year-on-year revenue in the first part of this year. So again, that's positive and not something I've been able to say for a very, very long time. The real opportunity for the group, though, stems from our Talentis product. Now I'll be candid with you. I would have expected Talentis to be at a higher level than it's at now, given its history and where we would have liked it to have been. But as I say, Q2 hit us in a way that we weren't expecting and so all of our products, including Talentis take a bit of a pitch. Talentis has already recovered. The revenue it lost in Q2, it's won back again, but it is still in a market where there are a lot of executive search firms buying our technology than we would have liked. But the opportunity for this product is huge. And I'm going to spend a very quick 30 second showing you something in the product for those of you who haven't seen it. Talentis is a cross between LinkedIn Recruiter, which is the Microsoft LinkedIn product that makes all the money for the LinkedIn product range and a CRM, so an executive search CRM. The difference is the 2 products were essentially integrated. So our product doesn't just allow you to manage your business, it allows you to do your searching as well without having to pay huge amounts of money to LinkedIn Recruiter. Over the course of the first half of this year, we've implemented a host of -- exaggeration, a number of improvements, some of which relate to AI and specifically open AI, which is the technology that underpins chatGPT. We were one of the first in our sector to deliver any integrations with chatGPT. And I just wanted to show you a couple of examples about just to whet your appetite to the type of thing the clients want and clients will be buying from us when the economy recovers. So this is Talentis. I'm going to do a quick search by clicking on the search button, this takes me to a search screen. And I'm going to use chatGPT, open AI to do a search for me. And what I'm going to do is tell it what I'm looking for. So I'm going to pretend my client is Whirlpool and they are looking for a CTO. So I just type in CTO, Whirlpool. Talentis passes that information to chatGPT and chatGPT has now built a search. If we're not happy with it because obviously ChatGPT can be a bit random in its search criteria as we told chatGPT to run the search again. That's better. So you can see it said, okay, if you're looking for a CTO, you're likely to have these job titles, and we know Whirlpool sells home appliances, so you're looking to someone who has this type of background. So once I've built a search screen, I can click on Talentis search button. Talentis searches across 559 million public profiles to find candidates that potentially meet our criteria. But what we can then do is say to the system, okay, well, let's use chatGPT again to find similar candidates. So if I choose one of these candidates around them, let's say, June Jav, if I click on to find similar people button here, again, we are using chatGPT to search our person data and our company data and use ChatGPT's own understanding of the world to build a very detailed template of what that candidate looks like, and we can then use that in a few seconds to search across 559 million public profile. So this is a product that is at the cutting edge, with those things its competitors do not do. And when the economy recovers, we're extremely confident it's going to deliver for all our stakeholders. We're extremely excited about this product, even if we're yet to see the revenue growth that we would have liked from it. So in terms of where that product is, though, we do have clients using it pretty much all over the world now. I think our biggest market is in the U.K., but then it's probably the U.S. We have clients in Australia. We have clients in Africa. We have clients in Europe, in Asia using it as well. And as I've touched on, we really do believe this is going to cause the business to have a very bright future when the recruitment industry recovers. So there you go. In short, that is essentially what's my prepared presentation. We believe we've delivered a recovery. We believe that the future of the business is not going to swing around anything like as much as it did now. We are expecting to deliver our numbers this year despite the economy. And we're very confident at this stage of doing a similar situation next year. All of our budgets assume that we're not going to see a massive recovery in the recruitment sector. Obviously, if that does happen quicker, then we expect to benefit sooner to a greater extent. But that's my comments, Ian's comments. Thank you very much for your time and very happy to take any questions that people might have for us. Thank you.

Super. Thank you, Jason. Thank you, Ian. We have a number of questions. However, please do continue to submit your questions using the Q&A tab situation on the top right hand corner of your screen. I would like to remind you that a recording of this presentation can be accessed via your Investor Meet company dashboard post the presentation itself. And additionally, your feedback is important to the company. So immediately after the presentation has ended, you will be redirected for the opportunity to provide feedback. So just following on from that latter upon closing statement you made around chatGPT, Christopher has asked, how accurate do you find the results of chatGPT? And how do you look for the integration internally?

That's a million-dollar question. ChatGPT is unbelievably accurate, and then you use it again, 20 minutes later and it's a bit random. So what we've had to do, the actual integration is very simple. And yes, we have built it internally. But essentially, we've had to put as much time into validating it and checking, but it's not misleading in its feedback as we have to actually do the integration itself. So the first iteration of chatGPT was used to build a search screen. It worked really well for a couple of weeks, and then we had to change the query entirely because it just started to deteriorate. We're doing it in a different way now and it's more consistently accurate. We are using the chatGPT for the search screen that builds template candidates. And that seems to work much better. But to be honest with you, unlike the first chatGPT project we did, the second chatGPT project we did is using a lot more of our own knowledge than chatGPT to bring it together. So when we do a similar people search, we look at essentially the public profile of the person, we look at the organizations they've worked for and what our platform knows about those organizations. And then we give all of the intelligence to chatGPT and say, "using this, give us what the customer should be searching for?" So we do a lot more of a legwork now for chatGPT than we were doing when we first launched this. And as a result, it seems to be fairly consistent. Certainly, the new search for similar people search we launched a couple of weeks ago, seems to be very consistent. Next month, I anticipate we'll launch our next chatGPT integration or open AI integration, which is essentially allowing our users to rewrite our candidate profiles. So for example, let's say, you are a recruiter, you found 10 candidates and you want to send them over to your clients. You've got their LinkedIn bios, some of which were in English, some of which were in French, some of which are in the first person, some of which are in the third person. With Talentis, you would say, rewrite this in 150 words in U.S. English, click a button and Talentis would do it for you. And again, that's using chatGPT. We always caution our users to read what's being presented to them before we send it off, but it's doing a pretty good job, but it's not perfect. Thank you for the question, I appreciate it.

Right. Okay. And Chris has got one more question actually, which we might go straight to, which is what does the preferred provider agreement with the major recruitment business that you referred to bring to the company? Are there minimum revenues, et cetera?

Thank you. So someone's has read our annual report. That's good. So this is on the executive search side of our business, and it is for Talentis, the product we've just been talking about. The business or the client is how to describe them, they're a global but U.S.-centric franchise recruitment business. They are very well known in the sector. All of our offices are franchisees. The deal we've done is essentially or the agreement that's been reached, was reached with head office, they were recommended to our product by an existing office that was using it. As a result of our head office reviewed product, put some technical tests on it, a number of their offices trialed the product. And as a result of that, the head office basically signed off and said, yes, this is a good product and one that we are comfortable to recommend to our users. So it is -- we've gone through a process of evaluation. There's no guaranteed revenues as a result of it. But they have helped us with marketing it to their members. And over this one, we have signed up a couple of our offices, and we would hope to sign up more in the fullness of time. So it's not something that's necessarily going to cause us to be inundated with revenue on day 1. It's a very significant morale boost. It's a tick in the box. It's third-party accreditation. It's a marketing opportunity. It's already generated revenue, but it's not we guarantee to roll it out for the next 150 -- to 150 offices over the course of the next 20 minutes. It's not quite that, unfortunately. That's different, obviously, to the contingency contract that we announced earlier this year that's going in later this year, which is an Infinity implementation where various businesses are involved, but it's all contracted centrally and they will get it because of the nature of the contract we've signed. Thank you, Chris.

Great. Super. All right. I have a question for you, Ian. What are the main contributors to the improved EBITDA margin?

I mean, really, it's a consequence of the work we've done over the last couple of years, really taken a hard look at our cost base and all the work we've done within our own software to enable the hosting costs to be a reduced level from the levels they were 1, 2 years ago. So it's really the efficiency that you've been building through the business that has now come to fruition within the cost base.

Right. Super. Okay. Jason, a last question for you and then I guess maybe we could just sort of move to tie up the presentation. But the question is, how do you view the recruitment sector right now?

Your guess is as good as mine. So the summer is always slow for recruitment. Even in the best of times, it's always slow for recruitment. So Q2 was fairly difficult. July and August is always quiet. I don't think I would be suggesting it's got any worse. I would just say it's pretty much the same as it always is. It tends to pick up again around this time. So if you were to ask me in a month or so, I'd probably be in a better position to answer that. I don't think it's deteriorated but equally I'm not so here thinking that it's something recovered either. We have built all of our look forwards. All of our planning is based on a sustained period of challenge. So I think it would be, we're certainly not banking on an immediate uptick, we obviously hope to get them.

A quick question from Richard, actually, which is on how you -- how fees are charged. It would help if you could outline how fees are charged, e.g., per seat, per search per month, et cetera.

Yes. Thank you, Richard. So obviously, we have a variety of products, but the vast majority of our products are delivered on a per user per month, per user per annum type subscription model, so a SaaS type model, Software as a Service. The pricing is typically again, depending on the product you go for, it might be between GBP 50 and GBP 100 a month; might be a bit more per user, so if you have 10 users, you time that figure by 10. As I say, it does vary by product. So some products are at the lower end of that, some people -- some of our products are slightly higher, but that's broadly how it works. We also, for some of our products, will provide professional service fees alongside it. But the majority of our new clients that signed up now will pay primarily a recurring revenue fee based around a certain number of users paying GBP 50 to 100 per user per month.

Yes, very helpful. Great. Okay. Super. Well, that's the end of the questions. Would you like to just give us a 30-second sort of elevation, Jason?

Well, I think I'll just reiterate what I said a moment ago. I think the -- yes, we have had a difficult few years, no question. And some of that was extraneous events. Some of it was our own mistakes, my mistakes. But I think now we've had a tough time of it, but I think the -- we have come out at the other side. We're on the road show down, I think it's the first time for a few years that no one has asked us if we need to raise money. And for record, no, we don't need to raise money. And we actually haven't needed to raise money throughout this period or certainly since COVID life. So yes, it's -- we're far -- we believe now that the results are beginning to reflect that we have turned a corner. And as soon as the economy recovers and we start to see sales get back to where we'd like them to be. We're really quite confident.

All right. Well, thank you both. Could I ask investors not to close this session as you will now be automatically redirected for the opportunity to provide feedback. If anyone has further questions or would like additional information on Dillistone, please do get in touch via dillistone@ Walbrookpr.com. Many thanks for attending this presentation, and we look forward to updating you again soon.