Dillistone Group Plc (DSG) Earnings Call Transcript & Summary

Good afternoon, and welcome to Dillistone Group plc Full Year Results Investor Presentation. [Operator Instructions] Before we begin, I would like to submit the following poll. And I would now like to hand you over to CEO, Jason Starr. Good afternoon to you.

Hi, [ Alex ] thank you very much indeed for the introduction and for hosting us again today. Hey, everybody in the audience. Thank you for joining us. I'm Jason. My colleague is Ian Mackin, our Finance Director. I appreciate your time today given that I know there's a few other things going on in the world of investment at the moment where you could easily be spending your time and paying your attention. So thank you for joining us. First things first, the standard woven piece on disclaimers. So I'm going to take it as read. I'm not going to read this to you. But if you ask any difficult questions, I may circle back and read this to you in full what I think is an answer. So those of you that have been following us for some time, and I suspect most of the people on the call probably have been, will know our history, and Ian will talk you through that in a moment. But basically, last few years have been quite challenging, but we've been coming here every year and talking of, and I would say, demonstrating progress. And I think the same is true for this last year. It's been difficult. It's been challenging. We're in a fairly horrible market, which I'll explain to you in a moment, but we are making progress. We are now profitable again, which is something we've not said since the [ world war ] I may be exaggerating. We're seeing improved margins. We're seeing conversion of profits to cash and most of our business aspects are heading in the right direction. The one area that remains challenged is revenue. And the reason for that is because the market we are in is this one, the recruitment sector. Our clients are recruitment firms. They range from executive search firms to contingency recruiters. So firms that hire everybody from a CEO, an executive search firm down to a temporary shelf stack, that would be an example of a contingency firm. We provide a variety of different products into these sectors. So on the executive search side, we have FileFinder, Talentis, GatedTalent. And on the contingency side, we have Voyager, we have ISV, all delivered through our recruit people operating business. The recruitment business is really challenging at the moment. I'll talk about this in a bit more detail, but essentially, we are in what has been described by the REC, The Recruitment and Employment Confederation as the longest recruitment recession in the U.K.. So we're in a challenging market, but we think we've made a degree of progress. And what I'm going to ask is that Ian takes us through the headline numbers, and then I'll circle back to talk a bit more about the market, what we're doing and where we're going. So Ian, perhaps you could provide some context on recent history.

Yes. Thanks, Jason. So I'll put some context behind the results we've just announced for '24. On screen, the underlying EBITDA is the blue bar with the adjusted operating profit being the yellow bar. Adjusted means when adjusted for acquisition costs, one-offs and support received from various governments through COVID times. We can see on screen the EBITDA drops in 2020 and '21 with the adjusted operating profit also dropping through this time. It reached a low of GBP 465,000 loss in 2020. What is steady, however, through this time is the underlying EBITDA margin, which is the red line you can see. It fluctuates through this time in a narrow range between about 13% and 16% in each of these years. However, we can see from that red line improvements from 2022 onwards with 2024 accelerating to a margin of over 26%, over double the 2021 margin of 13.2%. The effect of this is we turned the 2020 operating loss of the GBP 465,000 I mentioned before to an operating profit in 2024 of GBP 269,000. So that's a positive move in adjusted operating profit of over GBP 700,000, which occurred on just over GBP 1.4 million less revenue. So that's a quick history of where we've been. Now to the year we've just reported this morning. As alluded to on the previous slide, operating profit increased and it increased by 22% to stand at GBP 0.269 million. Although the EBITDA margin did increase because of the revenue drop, EBITDA itself decreased slightly to be 2% below the '23 level at GBP 1.285 million. The EPS is, however, up to 0.2p from 0.1p in 2023. In a weak market, which Jason will explain more about soon, both the total and recurring revenues were down 12%. Operating cash before working capital, however, did increase by 9% to GBP 1.312 million. So we see these as a broadly encouraging set of profit results. As we've mentioned, revenue was down 12%, and that flowed through to gross profit being down 10%. Also, the EBITDA did decrease to the GBP 1.286 million, but that's with the adjusted EBITDA margin changing up from 24.5% to 26.5%. However, below this is where we can see the real improvements. Adjusted operating profit, which refers to the figures before acquisition, reorg and one-off costs, again improved 22% to GBP 269,000. And similarly, adjusted profit before tax showed a profit of GBP 117,000, an 80% improvement from GBP 64,000 in '23. And as importantly, the reported profit was a positive profit before tax, the first one since 2016. The effect of that was recorded a positive EPS of 0.2p. And on to cash, the operating cash before working capital was up 9% at GBP 1.312 million. The working capital move that is broadly level year-on-year. It's mainly due to the decrease in deferred income we expect to be received. The investing and operating finance activities are down by GBP 84,000 and GBP 64,000, respectively. The operating financing activities is mainly to do with the repayment of the principal and interest on the CBIL loan we took out. That civil loan has got a repayment date of June '26. So we're only 15 months away from repaying that now. Taking the investing and operating, financing activities into account, this led to a like-for-like adjusted net change in cash and cash equivalents of a decrease to GBP 397,000 from GBP 441,000 in '23. It should be noted, though, last year, we did raise funds. We raised GBP 360,000 through a combination of convertible loan notes and a new share issue, which meant that the overall net change in cash and cash equivalents for the year was only GBP 37,000. And we ended the year by utilizing GBP 74,000 of our bank facility. Now I'll hand you back to Jason for the rest of the presentation.

Thanks, Ian. So yes, as we touched on, we believe that we've delivered improvements in terms of our overall performance. But obviously, the big question mark over our performance relates to revenue and revenue has again gone down. As I touched on earlier, we sell to recruitment firms. They range from executive search firms to permanent placement firms to tendering agencies. And pretty much all of those are struggling at the moment. I'm sure many of you would have seen some of the headlines here, all of the large public companies in our sector regularly reporting cuts and falls and drops. And that's pretty much a tick and has been for a number of years. As I alluded to earlier, this has been described as the longest, not the deepest, but the longest recession that recruitment industry has ever faced. So it's a challenging time. So what have we done to try to improve things? Well, if we start by just looking back slightly. But I saw there was a question from [ John ] that's come in, and I'll answer that now with this slide. So as we alluded to in our annual report, we -- our client base going into this year is smaller, less firms, less users than it was a year ago. Our client base shrunk by 13% last year, partly through customers closing down, partly through customers stopping using systems or whatever -- stop using our system, whatever else it might be. In addition, the average client size shrunk by 11%. Now what we mean by that is the number of employees. Generally speaking, our revenue model is based on the number of employees in the firm that use our platform. The more bigger the team, the more users they have, the more money we make. So when our customers reduce their employee base by 10%, that hurts us as well. So those 2 things combined hurt our revenue side, revenue that we could take from existing customers. And that plays into this year because that's how the recurring revenue model works. But in terms of new business, that was also challenging. It varied, but certainly, some of our markets, we saw opportunities to make sales falling by as much as 50%. And certainly, the vast majority of our opportunities were small businesses, often new start-up businesses, businesses that don't spend a lot of money, don't have a lot of people and aren't particularly lucrative. So that really is the context of our revenue. Companies in our sector not wanting to spend money, shrinking down, therefore, that having an impact on us. So our response to that, we've -- over the last couple of years, we've been investing in reducing our cost base in terms of the technology we use and the cost of delivering that technology. Our hosting fee, our cloud costs fell by 18% last year. And that is -- you may assume that's down to reduction in usage. It wasn't -- it was primarily down to the improvements we've made in our technology, and that was the biggest part of the 21% reduction in cost of goods sold. We also reduced our admin expenses by 11% and that was partly based on reducing our office space. We also, unfortunately, released a number of our colleagues. Most of that was actually done or kicked off very late the year before last. So they rolled through last year, but we actually get more benefit from it this year than we got last year. More strategically, what we also did was we looked at the recruitment market. And our sense is that there are basically 3 areas. You've got the exec search side. You've got, want of a better word, perm placement, and you've got temps. Without getting too technical, I would say that the executive search industry is knacked. The temps industry is knacked and the permanent sector is completely knacked. So the 2 more optimistic extremes are Exec Search and Temps, and that's where we're focusing our efforts. So that's where most of our expenditure has gone over the last few years. But I'm happy to say that, that is beginning to show signs of success. So late last year, Talentis, which is our Exec Search product, we saw a significant increase in Q4, the demand for that product. We've been adding to that product for some time. We've been building it up. And only late last year did we feel proactively that we could proactively position it as a replacement for our own legacy products and other people's platforms as well. So we basically relaunched it in November, and we ended the year with contracts for customers looking to switch to Talentis from another product, be it ours or someone else's from the Americas, from Europe, from Asia Pac, from Africa. So that was a big turnaround in terms of the pipeline for that product, and we saw -- we've seen more orders come in since the start of the new year as well. So we're hopeful that Talentis is now beginning to move towards delivering on the promise it's had for frankly, too long. The other side of our business, though, the contingency side of the business, we also announced in our pre-close trading, but we'll be doing a lot of work to improve the temping side of the platform, the functionality used by our temping recruitment agencies. We put work in to make it easier and cheaper for them to use the platform by making it easier for them to onboard candidates, validate, right to work, that type of thing. So we launched a [ swave ] of functionality in that area late last year and early this year, and that has had a very notable impacts on sales of our Infinity and contingency products. That's both in terms of new business opportunities, but also sales to our existing customers. So partly as a result of that, our first quarter of this year has actually been our best quarter for new business sales for 2 years. Now that's not because the market has improved because I can assure you, it hasn't because we're doing better. So we're optimistic about that. We think that's a very positive sign. So yes, to sort of summarize where we are before we dip into the questions. We are in a challenging market. I may have mentioned that, but we go into it with a decent level of recurring revenue. We have good visibility. And what we're seeing more and more is our ability to convert revenue that does come in into profitability and into cash. And I think that's the -- that's what gives us most optimism as either the market recovers or we continue to improve our performance, that will hopefully pay through the P&L.

So that's the end of our planned questions. I can see we've got a number of questions. So I'm going to move over to those. But if you do have questions, feel free to pop them in the box, and we'll try to answer them. First question is from [ Colin ] I'm going to throw this one at you, Ian. So Colin, very kindly, congratulations on returning to profitability. Thank you, Colin. It's taken a long, long time, but we appreciate your kind words. He goes on to ask, with recurring revenues covering admin costs, how sustainable is this in more adverse market conditions? So Ian, do you just want to touch on that?

Yes. I mean we've built all our models on the market conditions as they are now. We're very comfortable with our cost base as it is in these market conditions. As Jason has alluded to, Q1 was positive, but we're not basing our forecast on that continuing. So we're very confident and I would say, comfortable with the market conditions as they are now. And we've proven over the last few years that in a market such as this, we've been delivering improved results year-on-year, and we think we should be able to at least stay at the levels we are.

The next question is from [ Sam ] It's a very timely question asking about the impact of tariffs on us. So obviously, it goes without saying, like I suspect most people, we'd rather there were no tariffs. But in terms of direct impact on us, well, we do sell into the States, but there are no tariffs charged on digital products certainly at the moment. So that shouldn't have an impact on us. In terms of our clients, they don't sell into the States. They're either U.S. companies or their European companies or Asian companies or whatever it might be, primarily selling for their domestic market. So again, they don't sell into the States. So we are at least 2 steps removed. Obviously, recruitment is what drives our customers. Jobs drives recruitment. So if this has an impact on jobs, then it's not going to help us. But actually, there are an awful lot of companies that are in a much worse position than us. I was speaking to a recruiter, was it yesterday, who was talking about how their experience in times of upheaval, people tend to need to hire different types of skills and experience because you need to do business in a different way. So while the net impact on these things can be bad for jobs, what it often means is recruiters need to be hired because there is suddenly demand for a particular type of job, and there's not enough of that talent out there, so recruiters get brought in to fill the gap. So obviously, as I say, tariffs are not going to help us. I suspect that I think we are nowhere near as badly affected as some of the other organizations out there. Next question is from John. I think I touched on this. We talked about client attrition and so on and so forth. But last year, we saw clients shrinking. We lost some clients. And obviously, as I say, that does feed into this year. That's going to have an impact on this year's revenue. But what we are seeing is, although we haven't necessarily got more opportunities to sell our products, we're doing a better job of converting them, reflecting the progress we've made in terms of developing the products, I would argue. [ Marcus ] thank you. Marcus talked about international expansion, particularly Talentis or ISV. Talentis, I would say, is the big one for international opportunities. I was up at 6:30 this morning doing a presentation to a client in Australia. We have clients in Australia. We have clients in Africa. We have clients in the Americas and so on. As I mentioned, after the relaunch in November -- November of last year, by the end of the year, we signed new contracts to move to Talentis from customers on every continent other than Antarctica. So yes, Talentis is very much an international product. It can be sold globally. It can be delivered globally very quickly, very, very easily. A question from [ Peter ] I'll ask you to answer this one, Ian. So this relates to restructuring benefits. Are there any residual restructuring or reorganization costs expected in 2025?

Yes. I mean, to focus on the cost side, yes, there is a very, very small level of cost that is hitting 2025, but that's dwarfed by the benefits that we're bringing forward year-on-year and benefits that have just occurred at the beginning of 2025. So there are small costs, but the benefits to those costs will be much greater in 2025.

Thanks, Ian. So a question from Peter asking if you're seeing large firms consolidating vendors or moving towards all-in-one platforms. How does this affect your multiproduct strategy? Good question, Peter. Yes and no. So the vast, vast, vast majority of executive search firms don't do temporary staffing. The vast majority of temporary staffing firms don't do executive search. So to a certain extent, there's very little in the way of consolidation at that level. Most firms are specialists in what they do. They are boutique firms. Obviously, there are some very large firms in our industry, and we have relationships with some of them, but they would typically be on niche parts of their business. So no, we're not necessarily seeing that as a problem. But again, the truest statement, again, Peter's question was, are you seeing larger firms consolidating vendors. We're not really seeing larger firms doing anything at the moment. Larger firms are just sitting on their hands and trying to save money wherever they can. So large firms are not really participating in the market at the moment. That's a general trend. We're not too concerned about that, excuse me. I'm sorry. It's excitement of making a profit, I do apologize. I'll try not to do it again. That's a joke. Okay. So a question from Colin. Actually, it is one I can ask you while I can drink some water. A question from John. Are you confident that the gross product margins will remain at 90%? If you could answer that and then maybe tell some jokes.

Yes. Our cost base shouldn't move that much. We -- the vast majority of our cost of sales is the hosting costs, which have come down greatly over the last 2 years, as Jason said, because of the tech stack and the changes that we've made there. So Am I confident that we'll remain at those sorts of margins? Yes.

Thank you. Colin asks what proportion of our sales is direct versus through referrals or partnerships? We get a lot of referrals, but all of our sales are direct or at least the vast, vast, vast, vast, vast, vast majority. So yes, everything comes directly through to us. So we're not sharing with anyone else, which is good. A question from [ Matt ] Has the competitive landscape changed in the last 6 to 12 months? And is this presenting new opportunities with respect to client acquisition? There are lots and lots of rumors. I don't think anyone has dropped out of the market yet, which is I'm guessing where you're asking, what you're asking. There are rumors. And I don't know if I was buying product, I would be looking at companies that have been around for some time and are established. I think it's a really difficult market to launch a new product in. But I think there will be a shakeout. But as of now, I would say not really, but I think it will come. So -- but thanks for your question, Matt. I've got a question on the impact of AI. So this is from [ Terry ] Thank you, Terry. So obviously, there's various levels of questioning. Are we talking about the impact on our customers? Or are we talking about the impact on their customers? In terms of our customers, AI is potentially a good thing from our perspective because our products use AI. Legacy products don't necessarily use AI, and that, therefore, is the reason why a company should switch from an older product to one of ours. So yes, we think AI is a good thing from that perspective. Obviously, the bigger question is what impact will AI have on the jobs market, the number of people in the recruitment industry and then the wider recruitment market. I saw a survey that said that by 2030, the recruitment industry would essentially have lost a lot of people, but actually will have been replaced by people with different skill sets. The view is that it's going to be pretty much netting out over the course of the next 7 or 8 years. So recruiters that are primarily involved in online sourcing will see that they're less required because of platforms like Talentis that can make that process faster, whereas other parts of the search industry will require more people because of the nature of how things are changing. In terms of the wider market, so obviously, the number of jobs being created for our clients to fill, again, I think the general view is that clearly, some industries are going to be decimated, but that's going to create new opportunities in new industries. And that means that there will be new skills required, and that means that the companies will have to recruit to fill those positions. So I think most people view that if you are a specialist recruiter working in a certain niche, and that's a niche that's not a good one, you might want to move your goalpost. But generally speaking, at an aggregate level, I think most people have a view that recruitment, particularly at the executive search end and particularly at the temporary end are like to carry on differently, but to a similar scale. And Ian, it looks like we had one more question in, which I'll let you talk about on the basis of what analysts have said about us. A question from [ Nitin ] asking about revenue outlook for the year.

Yes. Thanks for that. Yes. I mean we've just had a new analyst note put out this morning. Revenue, as Jason has alluded to, what happened last year feed into this year's revenue. So revenue is expected to drop. I think the analysts got us around GBP 4.5 million for this year, but we're still expected to break even at those revenue levels.

I think it's worth reiterating again, we've had a good start to Q1. Obviously, there's a huge amount of background noise. There's an awful lot going on. But in terms of our numbers for the first 3 months, they're where we expect them to be and our new business sales are decent. So a long way to go yet. And who knows what's around the corner. But we feel bullish. But what we can't do is go back and make the customers that disappeared, reappear and therefore, take out contracts with us. So we know that whatever happens this year, we are going to have to carry that. But we do feel that we're getting in a much better place for the medium term. Okay. I think that was my -- our apologies, our final question. So thank you very much, Ian, for asking the difficult ones. Alex, any -- I think you've got some paperwork type questions you want to do?

No that you've answered every question there, Jason. if I may, just before we redirect investors to provide you with their feedback, if I may, Jason, just ask you for a few closing comments if you had any.

Yes. Absolutely. Thank you again, Alex, for hosting this. Thank you. Obviously, I'm guessing that virtually everyone on this call is a current investor in the firm. So if that is the case, we appreciate you sticking with us. I know it's not necessarily been the most lucrative investment you could have made depending on when you made it. Obviously, if you made it in December, you're probably okay. But broadly speaking, it's been a challenging few years. So thank you for your support. We do appreciate it. I can assure you, we're doing everything we can to ensure that we keep going in the direction. I believe we're currently going in, which is onwards and upwards. But thank you for your support and feel free to contact us if you've got any more questions. But thanks for your time, and thank you, Alex, for hosting us.

That's great. It's my pleasure. Jason, Ian, thank you once again for updating investors today. Could I please ask investors not to close this session as you will now be automatically redirected to provide your feedback in order that the Board can better understand your views and expectations. This will only take a few moments to complete, and I'm sure will be greatly valued by the company. On behalf of the management team of Dillistone Group plc, we'd like to thank you for attending today's presentation, and good afternoon to you all.

Thank you. Bye.