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 by 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.

Thank you, Tom. Hi, everybody. I'm Jason Starr, CEO. As Tom alluded, I'm joined by my colleague today, Ian, and I'll introduce Ian momentarily. First things first, the standard disclaimer. Don't believe a word we're saying to you. What we're going to do today is I'll give you a very brief headline, Ian will then take you through the detail of the numbers and then I'll talk a bit more about the market and how we're reacting to it. And of course, we'll be happy to take any questions you have at the end. I know we've had one or two submitted early, so we do appreciate that. It's been a really difficult period. The last 18 months-or-so have been very difficult for recruitment market. As I'll explain in a moment, we serve the recruitment market. So when they're struggling, we're struggling. But we've delivered a fairly decent sort of results, I think. Revenue is challenging, and I'll talk about that momentarily. But aside from revenue, which obviously is a fairly big statement to make, the headline financial data is all pretty decent. First half 1 adjusted profit before tax since 2018, significant improvement in EBITDA margin. You can see the stats on the screen. And as the chart shows, things are going in the right direction. In terms of what we do and what our business is all about, I suspect most of the people on the call are existing investors. So I won't go into too much detail on this, but for anyone who isn't, we basically provide technology into the recruitment sector. So our clients can basically be split into 2 groups; [indiscernible] agencies, we call them contingency recruiters. So people like Manpower, the types of firms you find on every corner placing people in relatively junior, permanent or temporary positions; and executive search firms. And these are global organizations that people use to recruit a new CEO or new CFO or a new Board member or whatever it might be. We work with both of these types of organization. We have a very small number of corporate recruiting teams at places like the NHS, but that's very much the exception. In terms of what we provide to these firms, technology. So on the contingency side, we have a CRM called Voyager Infinity, there's an associated product mid office, which does what the name suggests. We have ISV, which is a skill testing platform. And on the executive search side, we have Talentis, GatedTalent, FileFinder, which are essentially sourcing in CRM-type products used by executive recruiters. So that's what we do. I'll ask Ian to talk you through the numbers in a bit more detail, and then I'll come back to talk on the operations around the business.

Thank you, Jason. I thought I'd start by putting some context behind these interim results we've just announced for 2024. We have some seasonality between the half years. Hence, the chart on screen shows the results for H1 for the last 7 years. The underlying EBITDA is the blue bar with the adjusted operating profit, the yellow bar, which is adjusted for acquisition costs, one-offs and support received from the government relating to COVID. As we can see, EBITDA was dropping in '20 and '21, and this was mirrored by a drop in adjusted operating profit, which reached a low of GBP 168,000 in 2021. What is steady during this time is the EBITDA margin, which is the red line. It fluctuated in a fairly narrow range between 17% and 21% in each of these years. However, in 2024, this margins accelerated to 25.8%. The effect of this is we turn that H1 2021 operating loss of GBP 168,000 to an operating profit in H1 '24 of GBP 133,000. So this positive move in operating profit over these years at circa GBP 300,000 occurred on GBP 280,000 less revenue. So the margin improvement has had an impact. So that's a quick history of where we were. Now to the half year just reported. As alluded to on the previous slide, EBITDA has increased due to the margin improvement to stand 12% above the H1 2023 level at GBP 0.65 million. Adjusted operating profit increased by just under GBP 100,000 to stand at GBP 0.133 million. Consequently, the adjusted EPS is up to 0.23p from 0.02p in H1 '23. In a weak market, which Jason will explain more about, both total and recurring revenue are down by about 11%. Operating cash before working capital, however, increased by 7% to GBP 0.653 million. On to a broadly improved set of financial results. Although as mentioned, revenue was 11% down, which flowed through into the gross profit, which was also 11% down. EBITDA has improved 12% to GBP 0.65 million with the underlying EBITDA margin changing from 20.6% to 25.8%. Adjusted operating profit, which refers to the figures before acquisition reorg and one-off costs moved to its highest level since 2017 at GBP 133,000 and a similarly adjusted profit before tax of GBP 53,000 from a loss of GBP 37,000 in the prior year. It's interesting to note that the movement between years at EBITDA has flowed all the way through to the adjusted profit level before tax. The effect of this is we recorded a marginally positive adjusted EPS of 0.23p. The operating cash, as said, before working capital was up 7% at GBP 0.653 million. During FY '23 H1, we received GBP 0.046 million of U.S. government support related to COVID times, which, for obvious reasons, has not been repeated this year. The working capital move is mainly due to the decrease in revenue, decrease in the deferred income going forward. Investing activities and financing activities are down by GBP 28,000 and GBP 26,000, respectively. The financing activities are mainly the repayment of the principal and the interest on the CBIL loan. That CBIL loan has a repayment date of June '26. Taking the investing and financing activities into account, the overall net change in cash and cash equivalents decreased to GBP 153,000 outflow from GBP 171,000 outflow in H1 '23. We ended the half year by utilizing GBP 172,000 of our bank facility. However, post year-end, we've secured investment, which Jason will touch on later. Now let me hand you back to Jason for the rest of the presentation.

Thank, Ian. So I would suggest for those in the context of our recent history and the context of the market, decent set of numbers. But obviously, the revenue is a bit, but it's challenging and that we do need to spend a bit more time talking about. The recruitment market is horrible at the moment. These headlines, I believe, were all about Q2. So yes, they've come out across the summer. But the recruitment market's been in a bit of a mess for over a year now, but it unquestionably deteriorated in sort of April time of this year. If you look, most of the public companies that have reported over this period have reported between 10% and 20% drops in revenue. Obviously, most of our clients are not publicly traded, most of them are private and they're suffering in exactly the same way and in some cases, potentially worse. This is focused on the U.K., but we work globally. We have clients all over the world, particularly on our executive search products. And whilst I would suggest the U.K. probably has it slightly worse, this issue with the recruitment market is global in nature. So this very challenging environment is not just a domestic one, it's not just contingency, it's not just executive search, it is everywhere. So that has obviously had a significant impact on us because these are the people that, in an ideal world, would be buying our software. So to give you a flavor of the impact on that. Firstly, the obvious point is that our commercial model is a subscription-based model where typically -- and this is a bit simplistic, but typically, customers have a number of licenses based on how many people they have in their team, simplistically. So if they reduce the headcount, that means they reduce the number of licenses they have. In some cases, it will be a 12-month lead time on that; in some cases, it will be a 2-month lead time based on the nature of the contract and the products and so on and so forth. In the first half alone, 10% of our customers worldwide reduced headcount. Now given that most of our customers have 5 or 6 people working for them, and obviously, will have much larger exceptions. But given most of our customers have 5 or 6 people working for them, that is obviously a significant hit. We saw an increase in firms closing down, entering misleadership or other types of scenarios. We've also lost customers as well. So throughout the period, that's been the sort of underlying pull on our numbers. In addition, we're seeing very, very few recruitment firms of any size going into the market to spend money on new systems. We have sold new systems over the course of the year. The vast majority of our sales have been very small, one, two, three user type systems. Historically, we would have expected to have a number of significantly larger systems, and they just don't seem to be in the market to any real extent at the moment. So reality is very few customers buying new stuff at the moment and customers that we've already got spending less and less with us as they have less and less people to spend to use our licenses. So what have we done? We've been proactive, firstly. So a lot of steps we took we took before Q2 because we could see what was coming. For a number of years, we've been investing in improving our technology to reduce our hosting costs. Year-on-year, the cost of hosting our platforms is down by about 10%. We're still working on further improvements on that, and our expectation is the hosting costs will fall further during the remainder of the year. But that's a fairly substantial slice of costs taken out. Late last year, we pulled the business into U.K. and Australia. So historically, we have an office in the States and one in Germany. That's all gone now. So we have extended ours out to the U.K. topped up by support from Australia, servicing our customers worldwide. And we've also been -- as a result of that, been able to reduce our office space as well. What matters, though, this hasn't just been slashing and burning at what we need to do our job. Whilst doing this, we've maintained our development, and we have maintained what we believe is the best quality of customer service in the industry. If you go on to Trustpilot and search recruit people, which is our operating brand name, you'll see that we've consistently received excellent from a couple of our customers in terms of feedback on their experience of us. So although we have taken a lot of cost out of the business is through increased efficiencies and it's had very little impact on our customer experience. So we're positive at when the market does return, we'll be in a position to take advantage of it. And as Ian alluded to, we were proactive in terms of taking some cost out of the business and improving our efficiency, but we also wanted to be proactive about strengthening the balance sheet. So after the period in discussion ended, we did some fundraising. Our entire Board of Directors, Non-Executive and Executive along with our former Chairman, Dr. Mike Love, all got involved and participated in the form of convertible loan notes, the details of which are on the screen here. We were also delighted to bring on board a new shareholder, entirely new independent shareholder who obviously found value in our business. And so he came on board as well and new shares were issued. So as a result of that, we strengthened the cash situation of the balance sheet significantly post year-end, which we felt was the right thing to do. As I say, the market will recover, and we want to make sure we're still in a position to take advantage of it when it does. So in terms of going forward, the market is awful. It is awful, I'm not going to put any of it away, but we fully expect to deliver our expectations for the year. We factored in that our revenue is going to be lower in H2 than it is in H1. That's built into our expectation. We're in the fortunate position that we have recurring revenues at about 90% of our total revenue. So we have a degree of predictability in terms of the forward look. So yes, we're saying with a fair amount of confidence that we'll be delivering adjusted pretax profit in line with market expectations for 2024. Looking beyond that, obviously, it's a bit difficult to tell when the market is going to improve. We obviously have views, but so does everybody. Our expectation is the market is going to be very tough for the remainder of 2024. As I say, we expect to hit our numbers, but it's going to be done in a tough market. We do expect to see a degree of improvement in 2025. But as I say, our model is a subscription model. It's not like recruitment where you eat what you kill. You pay someone today, you get some money tomorrow as a subscription model. So what that means is that if we do see an uptick in 2025, that will be great, and it will help the cash situation, but it won't necessarily help the revenue system immediately, it will take time to pick up. So we're not really expecting to see a significant uptick in our revenue line much before 2026, which, of course, is also when we finish paying off a CBIL loan, which would be a thing to look forward to. So we're working on the basis that we're going to be maintaining costs and focusing on what needs to be done. And what needs to be done is we're continuing to invest. On both sides of our product, we have new revenue streams, which will be coming on board over the course of the 6 months-or-so. On the contingent side, we have products that are designed to help customers deliver at reduced cost, which makes it a very easy return on investment sell for them. And on the executive search side, we're using -- we've got some ideas around using AI to help on the candidate side of the process. And that is something that, again, we do expect to see start to generate revenue before the end of the year. So we are in a difficult market. We're managing our cost base. We're looking at how we can eke out more revenue from the customers we've already got, and we're continuing to invest such that when the market does come back, we're poised to take advantage of our situation. So that's the -- those are the prepared notes. Thanks, Ian, for your numbers. But Tom, if we have any questions, I'll certainly very happy to pass them to Ian if they're in any way difficult.

Thank you, Jason. Thank you, Ian. I have a number of questions. [Operator Instructions]. The first question we have here, Jason. It says, a combination of geopolitical uncertainty, the direction of U.K. legislation and regulation and the upcoming impact of AI on the workplace is likely to make the recruitment sector highly uncertain for the foreseeable future. However, this backdrop means that companies need to identify and attract talent -- that companies will need to identify and attract talent will grow. Does Dillistone see the landscape similarly? If so, how does it intend to turn the landscape to its advantage using its world-leading tools?

Thank you. Great question. It wasn't posed by me, but the phrase, world leading, is going on our website. So thank you to you have submitted that. I do appreciate it. And I agree with all of that statement. We're in a time of huge change and that is having an impact directly on the recruitment market. I think the -- when we come out the other side, the world will be different, whether it's because of AI, because of geopolitical challenges or whatever. And that will require different leadership, different managers, different skills. And so when -- it's always the case when the recruitment -- when the economy goes down, recruitment is one of the first areas to go. But when the economy recovers, recruitment tends to be one of the first areas to come back because as companies get more confident, they get more optimistic about the future, they feel that actually the world has changed and we need a new set of skills to take advantage of that. So what will typically happen when the market improves is that temporary staff will start to be hired first because they're lower risk. We have products on the contingent side for exactly that. And then new leadership starts to come in because companies want to take advantage of the new world they're living in. And that's where products like Talentis take advantage of. So yes, we think we will be in a much better position than a lot of our competitors when the market does recover. And as I say, we're doing things in the shorter term to increase our performance in a market that is struggling from a new business perspective. Thank you for the question.

Which leads actually quite maybe on to the next question, which says, given new business sales are harder to come by, do you have any additional products that you can cross-sell into the existing customer base?

Yes. So thank you for the question. I don't want to say too much because I'll get shouted at by our product team, our sales team and our marketing team. But yes, we have products coming out that are designed specifically to allow us to go to a customer and say we can give you a return on investment quickly and easily. So there is a lot of -- particularly in the contingent market, there's a lot of work that is done by human beings that can be done using automation, using AI. And we have been putting some investment into that type of area, and we expect to see that hit the benefit or hit our client base later in the year. So in these cases, it should be a scenario where we go to them and say, "Look, spend this amount with us and you can save this amount internally, cause and effect." So that's what's happening on the contingent side. I can tell you a bit more on the exec search side. So our Executive Search product is -- well, we have a couple of exec search products. But fundamentally, our headline product is a product called Talentis, which now has a B2B side, which is what we sell to the search firms and also a B2C side, which is where candidates can get involved. We've been doing some work with AI, which, we believe and based on our internal testing, will have a significant impact on candidates' ability to prepare for a hiring process and that's something that we're going to be hopefully pushing out before the end of the year as well. And this will be something that will be sold to executive job seekers. So it's something that is potentially a large and impactful market for us. So both of those things are revenue streams that potentially can be delivered without us having to wait for companies to start going out and spending big on new systems.

Super. So [ Christopher ] asks, given the increasing regulatory focus on data security, especially in HR and recruitment, how are you ensuring that Dillistone's platforms remain compliant with global regulations? What investments are being made to improve data security across your products?

Yes. Thank you, [ Christopher ]. It's a really good question. So our Chief Operating Officer takes significant responsibility on that. We also have an external consultant we work with. Our COO was one of the first people [indiscernible] to get the GDPR -- European GDPR qualification. We have the U.K. government, what is it, Internet Essentials [indiscernible] whatever it might be. We store a lot of data for a lot of people. So we have to be very, very careful. And we make sure everything we do is GDPR compliant. And yes, we obviously invest heavily on the security side of the platform as well, making sure that we do all the testing you would expect to get an organization of our sort to do to ensure that our data is protected and our client's investment in us is protected.

Super. [ Karl ] asks, if there was a significant recovery in headcount of recruitment firms and you saw a substantial increase in subscription sales, what would the working capital impact be? If there was a strong cash inflow, what would your priorities be for deploying that cash? That's probably one for you, Ian.

I will let Ian answer that because it's got numbers involved. But if I can sort of answer from a headline level, but I will then pass over the floor to Ian. One of the great things about the products we're selling now is they are far higher margin. Talentis in particular, which has been our best-performing new business product in the first half of this year, it is extremely high margin. If somebody wants to buy a license, they'll have it in 30 seconds, as long as it takes them to click a couple of buttons. We bill the credit card. There's no human involvement whatsoever. The impact on our cost base is negligible. When somebody buys Talentis, they can go live without ever speaking to any of our team, with any of our humans getting involved, again, just putting the credit card in. Compared to the old days where systems in the recruitment space were managed and have human involvement at every point of the process and then had ongoing training and support requirements, there is none of that required for products like Talentis. So they are extremely high margin. Talentis is the product that we expect will grow most rapidly when things do improve, and it's a market that -- it's a product that as it does improve, yes, significant as part of that will flow through to the bottom line. And I'm sure Ian could give you a much more rational and scientific answer to that one.

To be fair, I've drilled this into Jason's brain for the last couple of years and he's pretty much there. As demonstrated previously, most of that revenue will drop through mostly to the bottom line. And as you quite rightly made the connection, it will drop through to the cash situation. As far as what our priorities would be, we would look at what was the best way to invest that cash to create better returns for the shareholders going forward, whether that be more investment in product or whatever we think at that point in time. But yes, every -- when the market does turn, we are positioned quite nicely with the product suites that we've got at the moment. And as Jason said, most of that we have built to flow straight through to the bottom line. So thanks for your question. And unfortunately can't quite answer the second part because we don't know what the market will look like at that point in time for deploying the cash, but the working capital would be impacted and it would only be impacted in a positive way.

Super. [ Glen ] asks, it sounds very gloomy, what competition do you have? And are other companies in your sector taking market share from you?

Yes. Thank you, [ Glen ]. So apologies if we've depressed anyone. We always thought it was better to give you the stories we see it. And frankly, I'm sure most of you see the headlines from the press around the recruitment sector. So it is what it is. In terms of competition, so as I say, we have a number of products, and obviously, they all have different competitors. On the executive search side, we have relatively few competitors, they're global competitors, and there's only, let's say, half a dozen that have any real international standing, yes, you get certain vendors in certain markets Brazil or whatever it might be, but strong in that country. But generally speaking, there's only really half a dozen competitors in the exec search space of any real size and value. The contingent space, however, is much, much, much more competitive. There are huge numbers of firms in the contingent space, which is why our contingent products are increasingly focused on the temp sector. The temp sector is much more tied up in litigation; therefore, it's much more of a local champion market. So our contingent products, the Voyager Mid-Office type products are primarily sold in the U.K. and primarily have U.K. competitors. And the U.K. competitors really tend to be a bit weaker than the international ones. So yes, we do have competitors, but I think the biggest issue at the moment isn't necessarily that we're gaining or losing market share, it's that the market has shrunk compared to where it has been.

Great. Okay. Which takes us on actually to a very apt question from [ Nicolas ]. What's the catalyst to boost the recruitment market? Lower interest rates and?

It's a good question. If I could answer that, I probably [indiscernible], but I think confidence is the biggest one. Confidence. I think you would always say that because companies need confidence to hire. But I think the other issue we have at the moment is that I saw some data the other day, but actually, there is a -- yes, the number of jobs that are open hasn't fallen by any much -- anything like as much as a percentage of jobs that successfully closed. What that means is candidates, in many cases, don't want to change jobs. And the reason why candidates don't want to change jobs is because of confidence. If I join a new company and the new company is not there, what happens to their income? So I think there's a real issue at the moment that everybody is scared. I think that will change at some point. It just will. But the question is when that will be? But as I say, if I could do anything, it would be based on confidence. I suspect that we out years, there will be a -- assuming everything is resolved peacefully into States after the -- I was going to say the civil war, after the election, I would hope that'll give everyone a bit of a boost and it might just be back leads to a change of environment. But as I said, I think the single biggest factor is corporate confidence, candidate confidence, and they're related.

Yes. Super. Understood. [ Alex ] asks, is there a focus on acquiring larger clients to offset the losses from smaller clients due to market downturns? If so, what strategies are in place to attract and retain these larger clients?

Thanks for the question, [ Alex ]. Can I just say we've done these presentations 3 or 4 years now and we've never had anything like as many questions it's been. So unless its my mom who's joined us and put all of these questions in to make me feel important, I really do appreciate your attention. Thank you for coming. So the question from [ Alex ] was about focus on acquiring larger customers. Obviously, we would love to acquire larger customers. The challenge at the moment is that larger customers are really not spending. We have a -- we had a significant customer who had a contract in their hand in Q1, which would have not being significant in the financial sense, but would have been very much well worth us having and they just put it on hold. It literally it was with our lawyers, it was all set to go, everything was agreed and it was put on hold for financial reasons. And the next thing we heard, they were reducing the staff significantly in the division that we're supposed to implement the platform. So bigger companies are sitting on budgets, they're not spending money. So at the moment, reality is, yes, we would love to sign bigger companies, but the vast majority of recruitment agencies that are in the market are new start-ups and their people that have left a bigger company, they've got a few quite a few dollars in their back pocket, and they want to set themselves up in business. Recruitment is a market with very low barriers to entry, particularly if you've got technology -- particularly if you've got a decent technology platform and we can help you with that. So when you go out and, yes, you leave your recruitment business, the first thing you think is, well, can I do it myself? Can I go and do it myself? And those at the moment are the people that are buying from us. So yes, hopefully, when the market has improved, we will very much be focusing on the larger firms. Thank you for your question.

Super. Good answer. And so a question for [ Matthew ]. From a route-to-market perspective, are there ways to increase the global opportunity, especially Talentis whether through marketing, language versions or something else?

So Talentis is our executive search products, and it's being used literally as we speak, in South America, North America, Africa, Asia, Europe and Australia. We don't have salespeople in any of those countries, apart from the U.K. Virtually all of our selling of that product is done through online marketing, various flavors of online marketing, but online marketing. Many of those customers buy without actually engaging with the salesperson. In some cases, they come to webinars; in some cases, they do demonstration. So the reality is we are spending very little on marketing that product globally, and we are winning business globally. The reason why that was our best-performing new business product in the first half of the year was because we were selling it outside of the U.K. as well as inside of U.K. So that's, again, to go back to the question that somebody asked earlier, and I apologize for forgetting the name, that's one of the reasons why we're so excited by the opportunity for Talentis when the market has improved because we can set it quickly, we can set it cheaply, we don't need to ramp and the margin is very, very high. So hopefully, that answers your question. We are already selling Talentis globally, and that is something that will only improve as the market picks up.

Super. All right. So we'll move to the last question. But before we do that, just to acknowledge [ Glen's ] comment. He says, this is one of your best reviews to date. A question from [ Brandon ] says, are there any M&A opportunities is diversification a possibility?

Thanks, [ Glen ]. So [ Brandon ], thanks for your question. So I don't know how long you've been in an investor but back in the glory days, we made a number of acquisitions. So we started off as Dillistone Systems that was in the exec search space. We acquired Voyager Software to go into contingency. We then acquired a couple of other businesses. ISV took us into skills testing and so on. And I think all of those acquisitions were successful. They were all earnings-enhancing. They all performed well for us. I think the issue right now is cash. We are in a situation where we have to pay off the CBIL loan. That's going to take us until another 18 months-or-so. And the share price is such that issuing shares beyond what we did a couple of months ago strengthen the balance sheet isn't something that we can really do to go out and make acquisitions. So we're not in any way against making acquisitions. But I think the reality is our focus in the short term is managing the environment and organic growth when we come out the other side where pay off the CBIL debt.

That's very comprehensive. Thank you very much, Jason. Thank you, Ian. Could I ask investors not to close the session, you'll now be automatically redirected for the opportunity to provide your feedback. If anyone has any further questions or would like additional information on Dillistone, please do get in touch via [email protected]. Many thanks for attending today's presentation. We look forward to updating you again soon.

Thanks, all. Bye-bye

Bye.