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 screen. [Operator Instructions] The company may not be in a position to answer every question it receives today. However, the company will review all questions submitted 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. Gentlemen?

Tom, thank you very much indeed. Appreciate it. Ladies and gentlemen, thank you very much indeed for joining us today. My name is Jason. I'm the CEO. And in a moment, I'll be passing over to Ian, who will take you through the numbers. Ian is our Finance Director. Obviously, tradition is to begin these with a lengthy reading of disclaimer, but I'm guessing the fact that you've all got the wisdom to attend this session means that you've done this plenty of times before, so I'll skip past that. What we're going to share with you is our -- in our view, the final stages of a turnaround story. For anyone who knows our business, who has followed us for a few years will know we had a number of issues, some of them caused by ourselves, some of them caused by extraneous factors, COVID, but you'll see, pretty much since 2021 and the COVID period, we've seen consistent improvement in our results. We've seen a step change this year, though. We've moved into profitability, but as Ian will show in a moment, some of our underlying metrics have improved considerably despite the fact that our market, which is the recruitment software market, is one that is very, very challenging at the moment. And we'll talk a bit about that and the impact that has on our business both last year and going forward. For those who don't know us too well. I'm not going to spend too much time talking about what we do upfront, but I will circle back to this. But essentially we provide a number of products to recruiters. Our clients range from high street temping agencies that you might see on every -- in every town center, through to executive search firms. We work with a handful of corporate clients. We work with some very big firms, some very small firms. We have clients in the U.K., in the States, in Asia, in Africa and Australia and all points in-between. I'll talk a bit more about the dynamics with the products and what they do momentarily, but before we get into that, allow me to introduce Ian to talk you through the numbers. Ian?

Thank you, Jason. I thought I'd start by putting some context behind the results we've just announced for 2023. The chart on screen. The underlying EBITDA is the blue bar, and adjusted operating profit the yellow bar. Adjusted means before acquisition costs, one-offs and support received from various governments relating to COVID. What we can see from the chart is the EBITDA gradually reducing from 2017 to 2019 before dropping dramatically in '20 and '21. This was mirrored somewhat in the adjusted operating profit, and it reached a low of 465,000 in 2020 before recovering slightly. What is steady during this time is the underlying EBITDA margin percentage, which is the red line. It fluctuated in a narrow range between 13% and 16% in these years. In 2022, we began to break out of that range, with the margin close to 17%. This accelerated in '23 to a breakout margin of 23.5%. The effect of that is, essentially on same revenue as 2021, the EBITDA increased 77% between '21 and '23, to stand at GBP 1.341 million (sic) [ GBP 1.314 million ]. We turned the 2021 operating loss of GBP 381,000 into an operating profit in 2023 of GBP 220,000 on the same revenue. So that's a quick history of where we were. Now on to the year we've just reported. As alluded to on the previous slide, EBITDA has increased due to the margin improvement, to stand 38% above the 2022 level, at GBP 1.314 million. Loss before tax reduced greatly by 77% to stand at GBP 0.104 million. Revenue held up relatively well despite the weak market, with total and recurring revenue down 2% each. The TACV, which is a forward-looking measure we use, includes no cancellations but none of the potential good news that we may have in the next 12 months. The market conditions are due to impact us in 2024, with TACV down from '22 forecast. However, this is not unexpected given the market conditions in the recruitment space. And adjustments to the cost base have already been made with this in mind. Operating cash reduced by 11% to GBP 1.063 million, the majority of the decrease being associated with reorganization costs ensuring the business has the right footprint for the forthcoming year. So on to a broadly positive set of results. Although, as mentioned, revenue was 2% down, the improvement in cost of sales meant gross profit was actually 2% up. EBITDA dropped 38% to GBP 1.314 million, with the margin having a step change from 16.7% to 23.5%. Adjusted operating profit, which refers to figures before acquisition, reorganization and one-off costs, moved to its positive territory for the first time since 2018 at GBP 220,000. And similarly, adjusted profit before tax showed a profit of GBP 65,000 from a loss of GBP 290,000 in the prior year. It's interesting to note that the movement between years at EBITDA level has flowed all the way through [ to the accounting of adjusted ] profit before tax level. And we have eliminated the loss after tax. The net effect of this is we recorded a marginally positive EPS of GBP 0.74, GBP 1 better than the negative EPS of GBP 0.26 in 2022. The operating cash before working capital movement was up significantly at GBP 1.206 million. The working capital move is mainly due to the decrease in deferred income from the annual billing cycle for reductions received throughout 2023. We do not expect such a quantum move to be repeated in 2024. We received a slightly reduced tax refund at GBP 201,000, leaving net cash 11% down at GBP 1.063 million. With investing activities slightly down GBP 50,000, the financing activity is broadly in line with 2022. The financing activities are mainly the repayment of the principal interest on CBIL loan. At December 2023, we were halfway paying -- through paying the GBP 1.5 million loan. And it has a repayment date of June '26. Taking investing and financing activities into account, the overall net change in cash and cash equivalents increased to GBP 441,000 of outflow from GBP 362,000 of outflow in 2022. We ended the year by utilizing GBP 19,000 of our bank facility. Post year-end, we successfully extended this facility with our bank in March '24. We believe that gives us enough operational stability as we continue to pay down the CBIL loan through to repayment in June '26. Now let me hand you back to Jason for the rest of the presentation.

Thank you, Ian. So the way we would explain the last year's results is we -- I think we've done a decent job in maintaining the costs in restructuring the business to make us a lot more agile, a lot more lean and a lot more able to deliver at a lower level of revenue, but obviously the thing that stands out is the lower level of revenue, so it's worth talking a bit about that. As I've touched on, our clients are recruiters. Recruiters are having a tough time a bit at the moment. And what that means is, although we're not recruiters -- we don't hire people per se. Our clients do. And when they're having a tough time, what tends to happen? They reduce the number of licenses they use from companies like ours. They don't buy additional licenses for new team members. They tend not to buy new software. They tend not to go into the market. And obviously some companies disappear entirely, so what that tends to mean is that, when the recruitment sector has a tough time, as it is now, that has a direct and pretty much immediate impact on us, so I think it's worth thinking about that in the context of the revenue line. And then if I dive a bit deeper into the 2 parts of our business. So we basically sell to recruitment companies, as I mentioned. We split them into 2 groups, so we've got contingency and executive search. Contingency, broadly speaking, will typically be a U.K.-based recruitment agency, possibly a temping agency, something of that sort. It's a bit simplistic, but that's typically who our contingency clients are. That is a market that we serve through 3 products. We have a product called Voyager Infinity, which is a CRM. We have a product called Mid-Office, which is a tool designed to help facilitate the payment of temps. And we have a platform known as ISV, which is a skills testing platform used to assess candidates as they go through the recruitment process. Now the contingent market has had a tough time. Most of the headlines I shared with you a moment ago related to contingency recruiters, but despite that, we've basically been able to maintain our revenue. And if you look at the recent history of our contingency division, you can see it did have a tough time up until 2020. We turned it around. We repositioned it to focus on terms; and in 2021, 2022, it grew. It grew marginally this year, but our view is that the slowdown, the significant slowdown, in revenue growth on this side of the business was a reflection of the market: no big companies in the market; existing companies getting smaller, therefore spending less money with us. So our view that -- pretty much as soon as the contingency market comes back, as soon as the recruitment market comes back, our standard products, assuming they maintain their market share and performance they've done in the past, will go back to the levels of growth that we've seen previously. So we feel that, when the economy recovers, we're already in a decent place for our contingency software. During the last period, we continued to develop. And we've updated all of our products over the last 12 months -- at least all of our contingency products. And we have a number of significant enhancements coming in H2. The exec search side of the business, though, is slightly different. Historically, we had a product called FileFinder, which drove our group. It delivered the majority of our [ revenues ]. It was our [ big-based ]. And it was what -- essentially was our own product when we floated the business. We then added GatedTalent and more recently Talentis. Those are the 3 products that make up the executive search suite now. Now clearly, as you can see from the chart, our executive search revenues have dropped pretty consistently for the last few years. What you will see is, although they're still dropping, they -- the rate of fall is unquestionably slowing down. The market for executive search software is, again, very challenging. We are selling pretty much every week, multiple times a week often, to small single-user executive search firms. These are typically new start-ups, firms that may not last long, frankly, with very little budgets, but we're selling to those firms because there are very few larger firms in the market. Our view is that our Talentis product, our key executive search product, is now primed for the big time [indiscernible] big time in terms of the economy hasn't arrived yet, so our expectation for our executive search platforms is they will return to growth, but they will not return to growth until the market improves. And we actually expect that, for this year, executive search revenue stream will reduce somewhat again, but we do remain absolutely confident that we will grow this half of the business as soon as the market recovers. But one of the points we wanted to emphasize from our report was the phrase, "We expect to make further progress." I've just talked about a very gloomy market in which we're in. Well, we've been in a gloomy market last year. And we knew we were going to be in a gloomy market this year, so when we say in our outlook statement that we expect to make further progress, we mean we expect to make further progress despite all of the above. We have assumed in our cost base and our planning for this year that revenue will fall in 2024 from 2023. That's not going to be a surprise for us. And as we said in our [ annual report ], we're in line with where we expected to be at the end of Q1. We've actually budgeted for virtually no new business sales this year. 95% of our revenue that we expect to realize in 2024 is coming from customers that were contracted or are contracted already. That's an extremely safe position to be in, an extremely conservative position to be in. We expect that, by the end of the year, in fact, our recurring revenue will be at a level which, given our cost base, will be some 124% of our cost base, [ through EBITDA level ], so again giving us huge confidence in our ability to see the future and be confident in our ability to build in the future. But what really matters, I think, is that the business is much more lean now. We've developed an engine that can allow us to grow, when the market recovers, without significant additional investments in people or resources. We will show better results this year despite the market, but for the next few years, as the market recovers, we fully expect to deliver growth. And when we deliver growth, it will scale. The margins we've built into the business now are unlike anything we've had previously. And a much, much higher percentage of revenue that comes in at the top will drop down to the bottom, so we're really excited about the opportunity for the business. We think this will be another year of progress despite everything we're having to deal with, but we think the long-term opportunity for the group, when the economy recovers, is a really a positive one. I think that's all in terms of our questions, Tom -- or our presentation. Thank you very much for your time. But Tom, if you have any questions, feel free to [ pose them at us ].

Yes, indeed, yes. Thank you, Jason. Thank you, Ian. We have a number of questions actually. [Operator Instructions]

Maybe we can start with you, Ian. There's a question which relates to your key topic here, which is the EBITDA margin. And do you expect the EBITDA margin to stay at this level? Or do you expect it to regress back to its former average?

Well, we certainly don't expect it to regress. As I think Jason alluded to right at the end there, the margins that are now built into the business should mean that we at least stay where we are [ here ]. We hope to progress as revenue increases. When the economy comes back, we expect it, the margin, to improve. However, we don't expect to regress. And it will at least -- should at least stay where it is at the moment.

It's probably worth -- me just adding that a lot of our legacy products involved huge amounts of engineers' time to implement them. So if we take FileFinder for example: When a client bought that, an invoice would be sent. An engineer would set it up. A trainer would do the training. That whole process might take a month and so the client wouldn't start paying for it for another month. And we needed people to do that work. Now as firms are switching to Talentis rather than FileFinder, they're typically having an online demo then taking a trial then putting their credit card in and going live. There's virtually no human involvement in the vast majority of Talentis implementations, and so as that becomes a bigger part of our revenue share, the impact on the margins will be very obvious.

Great, okay. Just on the product theme, [ Ben ] asks, with the launch of the Mid-Office cloud offering, what are your expectations for adoption? And I think it's probably 2 questions here because it says, "What are the USP for clients?"

Thank you. That's a good question. Thank you, [ Ben ]. So essentially the -- what the Mid-Office product does is -- you have a CRM platform which is managing your candidates, managing your jobs, putting candidates into jobs. And somehow when -- particular for temps. I'm talking primarily about temps here. When you have a temporary employee, somehow they need to get paid. And that goes then through the payroll. What Mid-Office does is it sits between the two, so it sits between Infinity typically but not always and a payroll package in the middle and transfers the data backwards and forwards. It's a bit simplistic, but that's basically what it does. Now this is a product we've had for some time, but it wasn't cloud-based, so our clients have to physically install it on a box in the corner of their office, which is obviously not the ideal model. We launched Mid-Office cloud late last year. And I think it's fair to say early adoption amongst our existing clients has been very positive and probably slightly more positive than we would have anticipated, but typically, as I say, it is in the new market there are very few large companies buying anything at the moment. And so we're not seeing dramatic sales of it in the new market as we're not for Infinity or FileFinder or Talentis or anything else, but certainly the adoption from the -- our existing clients who've moved from our traditional product to this, paid a premium to do so has been very positive. The feedback has been very positive, and we think we've got a very good product there.

Super. And I guess, just looking a little bit at markets and growth and rebound, a quick one here: When do you expect the recruitment market to recover? [ And I don't know ]. Can you add a little bit of color to that on what drives the recovery in that market too?

Yes, the answer to that question would be no. We have worked on the assumption that there is no noticeable improvement in the market until Q4. And because of the nature of our model, which is recurring revenue subscription-based, that means there will be very little impact on this year's results. We're working on the assumption that it will start to recover in Q4 and we'll be in a better place next year and beyond. And that's where the revenue growth will come from, but the recruitment market is buoyant when people are hiring. People are hiring when the economy is going well. We all know the situation that a number of regions are in at the moment. If the economy recovers in Q4 as we hope, that will drive our revenue next year. If it doesn't, if it takes longer, we'll still be profitable next year. That would be our expectation because of the costs we've made. It will just take longer for the revenue to come, but as I say, we're not expecting any real impact from growth this year. We hope to make some sales in the back end of the year that will help next year.

Great, okay, super. And [ Matthew asks ]: And this is sort of [ slightly tangential ], but how do you see prospects for international growth? And this -- and is this an opportunity to scale up?

Yes, absolutely. Thank you, [ Matthew ]. So again if we talk about our products. Historically, FileFinder has been sold internationally, but the -- and ISV as well, to an extent. The other products are primarily U.K. or [ plus U.K. and ] Australia. Talentis is a truly global product. Because of the nature of it, the [ light-touch ] aspects of it, we essentially have people using it on every continent of the planet, with the exception of Antarctica, right now already. The biggest market for that platform is likely to be the United States. I think we have more users in the U.K. than the U.S. at the moment, but I don't see that being a long-term reality. It's a product that we can sell pretty much anywhere globally, so -- and as I say, it is a transformational product for us. Once it starts going, it will be something we're selling all over the world, to companies small, medium and large. And it will be delivering very, very high margins.

Great, super, very positive. And a quick question from [ Glenn ]. Some of the directors have purchased very few shares. Since releasing the results, they're able to do so, but it's surprising that -- if you're so confident going forward, that these directors have not purchased more shares. Why not?

Thanks, [ Glenn ], for the question. I'm not quite sure how to answer that. I mean I'm speaking for myself. Obviously I'm a very large shareholder in the business. I can't speak for all of the other directors, but I think I can't remember the last time that one of our directors sold shares. I know Ian bought some shares. Was it last year, Ian, or the year before? I forget.

End of the year before, I think.

End of the year before. And I -- it's -- it wouldn't be for me to go into too much detail or my thoughts on that, but from my perspective, I am a big shareholder. I'm not looking to get out. And I think it's a -- I'm not really sure how to answer your question, [ Glenn ]. I can't speak to my colleagues, but yes, I'm a big shareholder. I certainly won't be selling, but given the lack of shares in the market, I'm not sure anyone would be thanking me if I was buying them all up either.

All right, okay. Fair enough, great, all right. Well, that's very helpful. And maybe, Jason, could you give us the 30-second summary of the investment case right now? And then we'll go to wrap.

Yes, of course. Well, firstly, again thank you, everybody, for joining us. We appreciate your time and your -- potentially your support in the business. Thank you very much indeed. As I say, just to summarize, we have had a very tough few years. There is no question. Those of you that have been with us throughout the period, we appreciate your support. We thank you for it. I apologize that it has taken us so long to come out the other side, but we have now come out the other side. The business is in a much more stable position. It will improve further this year regardless of the market, but we are very, very optimistic that, when the economy kicks on, we will benefit. So yes, thank you again for joining us. And thanks, Tom, for hosting.

Yes, [ not at all ]. Great, super. Could I ask investors not to close this session? You will now automatically be redirected for the opportunity to provide your feedback. If anyone has further questions or would like additional information on Dillistone, please do get in contact via [email protected]. Many thanks for attending today's presentation.

Thanks, everybody. Bye-bye.

Thank you.