Dillistone Group Plc (GB00B13QQB40.SG) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Dillistone Group Plc Interim 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.

Thank you very much indeed, Alex. Hello, everybody. Welcome. My name is Jason Starr. I'm the CEO. And joining me on my right, as I look at the screen, it might be on the left on your screen, I don't know, is my colleague, CFO, Finance Director, Ian Mackin. Thank you all for joining us. Obviously, we need to begin with the standard disclaimer. I'm sure you've read that before. So I suspect that the vast majority of people on the call today are existing investors. So I'm not going to spend too much time saying what we do. But very briefly, we provide technology to recruitment companies, which is an interesting market to be in at the moment. We do it basically through 2 groups of products. One targets Executive Search, one targets Contingency. Our typical client is a high street agency or an international search consulting firm. We have clients all over the world. Our products vary from CRM to candidate sourcing to skills testing-type technologies. Now we've changed how we do our presentation this year. Those of you who have come before, you probably won't remember, but we've had a fairly standardized series of slides that we go through related with the latest set of numbers in. But we're changing it this time, because we think that we are at a turning point. And we wanted to give you a bit more context around why we think that and share some numbers that we haven't necessarily shared historically to help you better understand our confidence though. To begin with, though, I want to just help you understand the reality of the market we're dealing with. The U.K. recruitment sector has been in an extremely difficult place. You'll see from the slide there that over the last, what, 1, 2, 3, 4 years, the number of vacancies in the U.K. has dropped by 45%. It's quite remarkable, generally felt to be the longest recruitment recession in the U.K. history. We are not a recruitment company. But when recruiters are recruiting, they tend not to be hiring their own staff, so they tend not to be buying licenses from us. Recruitment companies are closing down. Clearly, they're canceling subscriptions and so on. So we've had to deal with an extremely difficult few years of trade. But we try to improve things. And basically, our performance is based on 2 elements, how much revenue we get in and how efficient we are converting that to profit. So let's break that down a bit. Firstly, our EBITDA margin. We have improved that quite significantly over recent years, getting on for doubling since 2021. It's up again this year, as you can see from the slide, we're up to, what, 26%, 27% now, which is a sign that the business is getting more efficient. The problem we've had for a number of years is obviously revenue. So let's talk about that a bit more. As I touched on, we basically have 2 groups of clientele, Contingency Recruitment Agencies, which are temp agencies, typically in the U.K., but not exclusively, and Executive Search. And broadly speaking, our contingency revenue is close to being the same as it was back in 2020. It's gone up a bit, it's gone down a bit, but it's fundamentally where it was. The issue has been our Executive Search revenue as this slide shows quite clearly. Our Executive Search revenue has, to all intents and purposes, fallen off a cliff over this period. So although contingency has done sort of okay, and we've improved our margins significantly, we've constantly been fighting against a drop-off in Executive Search revenue. And that's continued. And so if you look at the headline figures for H1, you'll see more of that. But we're confident, and we're going to share some data that makes -- we are confident and we believe and the data we're about to share give support to our view that we've hit the bottom on this, and we're about to see a change. So let me talk a bit more about our Executive Search revenue. Most of it, the vast majority of it historically comes from our FileFinder products. FileFinder was, back in the day, the global market-leading Executive Search software. It was used by some of the biggest firms in the world all over the world. Basically, it was the product that people typically bought. But it's an older product, and it's still being used. We have customers that love it, but it's an older product. It's not one that's particularly sophisticated now. So we tend not to sell a lot of it. And customers that have been using it for a long time tend to fall off. So we've seen revenue dropping on the FileFinder product for a number of years because of high levels of cancellation and low levels of new sales. But let's dive a bit deeper and talk about the cancellation aspect of that. So our FileFinder customers, broadly speaking, if we look at their revenues, the vast majority of it is recurring. 95% of our FileFinder revenue is recurring. Of that, the vast majority of our clients, the vast, vast majority of our clients renew either on January 1 or July 1. The majority next year, almost 2/3, will renew on January 1 of next year. Now the vast majority of these firms have a notice period of 3 months prior to renewal. That means that if they're going to renew on January 1, if they plan to cancel, they need to tell us by the end of September. If they're going to renew -- due to renew in July, they need to tell us by the end of March. So you'll note that we are now in October. So we're not 100% sure on what our January renewals will be, but we have a pretty good understanding of the type of ballpark we're in. And the first thing we can say is that FileFinder renewals for next year are likely to be an awful lot. So January of next year, likely to see a lot less churn than we've seen historically. The numbers based on where we are at the moment are considerably better than they were this time last year. So we've got historically this problem with lack of new revenue coming in with revenue leaking out the bottom. The amount leaking out the bottom next year is going to be substantially less, we believe, than it has been in previous years. But it's not just about leakage, it's also about bringing new revenue in. And I'm not sure what's happened here, our strategy for Executive S, our strategy for Executive Search, which obviously that's an abbreviation of, is that our FileFinder product will, over time, be replaced by our Talentis product. And many of you that have attended these sessions before will have heard me whittling on about Talentis for a number of years. Talentis is our flagship product, and it was designed to be a combination of a CRM and a candidate sourcing tool. So essentially a product that a user could use to find candidates and then place them all in one go. It was a bit of a change to FileFinder, much bigger idea, much more sophisticated approach. And when we first launched it, the feedback from customers was this is really quite cool as a sourcing platform, but it's not good enough as a CRM platform. It's too light. So most of our early adopters, as you'll see in a moment, were using the platform as a research tool. Things started to change late last year. So late last year, as we said in our February RNS, late last year, we positioned the product as now being ready for migrating customers. So customers that have historically used FileFinder or other products could now start to migrate across into the platform. And that was the first time. And that's really important, because the clients that we were using or the traditional client base for Talentis were typically made up of single users. So a firm that might have trouble finding a candidate would get one personal license so they could use it when they needed it. But typically, that user would turn it on and off. So if they were having a challenging search, they would turn the platform on, we get a bit of revenue for a month. They get their candidate, they then turn it off again. So we suffered from huge levels of churn, very low numbers of users, and relatively low revenue based on the traditional candidate sourcing platform. The aim was always that we would be selling a CRM platform with sourcing built in. And since November, we've been able to promote that idea a lot more. So we've increased our prices to reflect that. We've repositioned the product. So now what we're seeing, and again, I'm going to share some data momentarily, is that far more of our customers are buying the product as a CRM. And that makes a big difference, because it means that they typically have more users, they typically pay more and they typically take long-term subscriptions. So again, you'll see in a moment that our annualized subscription rates or the rate of our customers that are buying on a subscription basis has shot up over recent months. Let's move on. So before I share the numbers with you, just to prove that what I'm talking about isn't vaporware. We have customers using this product now in the way I've described. So on the slide here, we have a customer in Japan, a customer in the States, one in Ireland, one in Mexico, I believe. The 2 in the middle, both migrated from FileFinder. So these are customers that were FileFinder customers, they're now Talentis customers. And as you can see, they're saying this has had a dramatic impact on their products. The new software is simply outstanding. It's dramatically increased productivity. It's a game changer. This is real feedback from real customers who have gone live in the last few months. So that gives me a warm glow, but for investors, I know it's much more about the money. So let's talk about the money. This slide shows Talentis' exit ARR movement by period. Now the thing to note is that along the bottom, we've got H1, H2, H1, H2, H1. And then we've only got a quarter, because obviously, we've only just finished Q3. And what you'll see is that we saw a drop-off in sales of this platform, and we saw a drop off, particularly at the beginning of this year when we started losing the single-user sourcing-type candidates because of the changes we've made to the platform and our change of strategy. But since then, that dotted line, that is based on the actual delivered -- sorry, not delivered, the exited ARR at the end of Q3. So don't have the dotted line leave as a forecast or anything. That's the figure at the end of Q3 2025. So in 3 months, ARR has gone up by 40%, having previously been dropping in the last couple of periods. So you can see immediately the impact that this has started to have on our user base for this product. And why is this? Well, it's a number of reasons, most of which I've touched on. But because these are CRM clients, they are typically signing up on a longer-term basis. So again, look at the stats. You look in red late last year, you can see the vast majority of our clients, 10% or so, were on annual or longer contracts with the vast majority on month-to-month. Half 1, that started to change. And if you look at the customers that have gone live in Q3, virtually all of them, so almost a complete switch round, virtually all of the customers that went live in Q3 were on an annual or longer contract. We have -- most of these companies are on single year contracts. I think we have some on 2. I think we have 1 on 5 years. So this is a change, because what this means is that historically, we'd have a customer sign up in January and then cancel in February, come back in March, April, May, June, blah, blah, blah. These are tied in. So we're not going to suddenly see this drop off a cliff again next month because everybody is canceled. That's not the nature of the client base we have now. So we think that is suggestive that this growth is going to continue. And we thought we'd share a couple of random stats with you. So firstly, the global recruitment industry isn't in a great place, but it's in a much better place than the U.K. recruitment industry. So with the U.K. recruitment industry, I wanted to draw your attention to this slide. The U.K. is just about our largest client or region in terms of revenue for Talentis at the moment. But I suspect that will have changed by the end of the year. And certainly, it's cool for the rest of the world. Talentis is a product that we can sell literally everywhere. The users are using Talentis right now in Africa, in Asia, in Australia, in North America, in -- well, I don't know if I missed anywhere, the Middle East. So pretty much all over the world we have customers using this platform. And -- so we are far less -- we have been hit by exchange rates to an extent, but we are far less impacted by a U.K.-specific recession with this product than we are with our Contingency-type products. The other thing to note is where we started to switch customers from FileFinder, they're typically paying us a lot more than they did on the previous product. So historically, they were paying X, on average, the customer is paying us 30% more in recurring revenue than they were on the previous platform. But also, it's not just about FileFinder migrations. Talentis is now a product that we feel comfortable selling to users -- not maybe to our competitors, to users of our competitors' products. And we were very pleased to reference in our annual report that in the last quarter, Q3, we've signed our largest competitive displacement contract in the Executive Search space more than 5 years. So that hasn't gone live yet. That will go live, I would hope, before the end of the year. But all of this together puts us in a position where we feel that Talentis is really potentially changing its direction now and in a much healthier position it's been for a long, long time. But that's primarily about the future. Unfortunately, Ian has a slightly harder job of talking about the past. So Ian, do you want to talk our audience through the last 6 months?

Thanks, Jason. I thought I'd start, as Jason has put some context behind the results we just announced for H1 '25. For consistency, the chart on screen shows the results for each H1 since 2020. The adjusted EBITDA is the blue bar with the adjusted operating profit being the yellow bar and the adjusted means we've adjusted for things like furlough support, acquisition costs and one-off exceptionals. We can see the EBITDA drops in '21, and that's mirrored by a similar drop in the adjusted operating profit, which reached a low of GBP 260,000 in that year. The adjusted EBITDA margin percentage, which is the red line, also dipped in 2021. However, from that point, we can see an improvement each and every year since. The margin in 2025 has hit 26.8%, which is 1% higher than the previous 2024 H1. And the effect of this is we turned that H1 '21 operating loss of GBP 260,000 to an operating profit in H1 '25 of GBP 79,000. This positive move of GBP 339,000 occurred with GBP 628,000 less revenue. So we think we are unquestionably more efficient as a group now. So on to a set of results we put out a few days ago, which we think is broadly in line with the expectations of the market. Revenue was down 14%, which flowed through to a gross profit, which was 13% down also. Consequence of that is EBITDA decreased about 10% to GBP 0.538 million with the adjusted EBITDA margin, however, as we said, improving 1% up to 26.8%. The adjusted operating profit, which, as I said, refers to things before acquisition, reorg, and one-off costs decreased to GBP 79,000, and the similarly adjusted profit before tax showed a profit of GBP 7,000. Now to reiterate, this is what we expected to do this year. We expected revenue to decrease, but we expect it to still be around breakeven, and that's what we're producing. The effect of this is we've recorded a small drop in the EPS to minus GBP 0.001. Now the chart on screen now, the green bar highlights cash injections and government support during the times of COVID. The red bars are the amount being spent on debt and interest and financing payments, with the blue line then indicating the underlying operational cash flow of the group. At the beginning of the period, we can see the inflows due to COVID support with the large 2020 H1, including the GBP 1.5 million CBIL loan. It should be noted at the end of the period, we've got 2 small cash injections that have occurred over the last 12 months or so. The debt and interest payments are steady between about GBP 200,000 and GBP 250,000 each half year since 2022. Now throughout the period, the operational cash flow has undoubtedly improved since the start of the period, however. The group is now operationally cash positive since the start of 2022, with 2025 H1 being the largest total during this time frame at GBP 107,000. It should be noted that's the largest half year operational cash flow in 6 years. So if we go on to some more detail behind the interim cash flow, the operating cash before working capital move is down a bit at GBP 0.55 million, but the net cash from operating activities is broadly level at GBP 0.528 million. Investing activities and operating finance activities are down by GBP 22,000 and GBP 8,000, respectively. The operating finance 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. So we're only 9 months away from that now. Taking the investing and operating finance activities into account, this led to a like-for-like overall adjusted net change in cash and cash equivalents of GBP 124,000 outflow. This compares to GBP 153,000 outflow in 2024 H1. As mentioned, we did raise funds through the issue of a loan note of GBP 120,000, which means the overall change in cash and cash equivalents for the period is only GBP 4,000. We ended by utilizing GBP 80,000 of our bank facility. So I'll hand you back over to Jason for the rest of the presentation now.

Thank you. So yes, just to summarize with our brokers' words. We expect -- or they expect, obviously, they expect revenue to return to growth next year, which is something that hasn't happened in our firm for quite a long time. They expect to see -- well, you don't need me to read the numbers out. You can see what's on the screen there. They share our view that we are at the bottom, looking up and able to actually climb the hill that's ahead of us now. To sort of summarize the conversation we've had, yes, our EBITDA is in a really good place. Revenue -- our margin, I should say, is in a really good place, not the EBITDA itself. Our margin is in a really good place. Revenue is a problem. Most of the revenue problem relates to Executive Search. Our Executive Search losses next year will be a lot less than they were this year. And our Executive Search sales next year will be a lot more than they were this year. And by sales, to be clear, I'm talking about new business orders rather than anything else. So that essentially gives us great confidence for the future of the business. So yes, that's the end of our planned presentation. If we have any questions. Alex, do you want to say a few words or...

No, you can go straight in. Feel free.

Okay. Cheers boss. Thank you. Right. So I appreciate I can see that we have had a few questions. So I will try to go through them, asking the difficult questions to Ian and dealing any low-hanging fruit myself. My favorite color is red. Thank you for that. A couple of questions to get us started from Nicholas relating to confidence. So thank you for your thoughts, Nicholas, and for joining us. Would I say I'm more bullish than we've been for a long time? And I think, in terms of Talentis, I've always been bullish about Talentis. The problem was up until now, I had very little in the way of evidence to back it up. I've always thought that Talentis was going to deliver. I've always been very proud of it. I always thought it was a really good product, but the reality is it's always disappointed in terms of its revenues. And let's be clear, still a relatively small part of our numbers at the moment. It's nowhere close to FileFinder yet. But we've always believed in it. We've always had faith that it would come. But it was only really in the last few months that faith has started to materialize in a numeric format. So I think I've always been bullish, but I'm a lot more confident now. Yes, we are still in a difficult market, and I can see this is another question that you've touched on. We are in a difficult market still. Yes, we deliberately moved our products away from the center. So the recruitment market in the U.K. or globally, you've got executive search, you've got temps and you've got permanent contingent placement. Permanent contingent placement, so hiring new graduates, that type of role, it's really, really difficult. So we are focusing our efforts on sort of the temporary agency at one end, which is what most of our contingency clients are now, and the executive search firms at the other end, and they are a lot less -- still finding it difficult, but they are a lot less batted, I think, than some of the firms that are in the middle. Thank you, Derek. Derek has asked about EBITDA margin. Do we expect it to be maintained at the level it's at?

Yes. I mean, we've consistently, for the last few years, managed margins above 25% and I'd at least expect to stay at that level. When Talentis starts performing as we hope it is going to in the coming years, I'd expect that margin to increase north of 30%.

Okay. A question from Rob. Rob has asked how big the -- thank you, Rob, for your question. Rob has asked how big the medium-term opportunity is for Talentis ARR. Difficult to define medium term, but what I'm going to do is sort of avoid the question slightly. We have a competitor. It's a U.S. private equity-backed business that has grown quite rapidly, to be fair. And it's probably the closest competitor to Talentis in the market. It's a company called Loxo, for those of you who want to go out and do your research. In 2024, although they're privately held, it was widely reported that they did $112 million in revenue in 2024. So I think when we first launched Talentis, we talked about a long-term market value of $100 million, something of that sort. But they've just reported $100 million themselves in the year. And so we think there is a very significant market. And yes, we think that Talentis will grow rapidly. To be clear, Talentis is a very small part of our numbers at the moment. So we're nowhere near those sizes at the moment. But there's a lot of upside from where we are. But yes, we have a competitor that has broadened its market and has a bigger footprint than we do, that themselves alone is reporting $112 million in revenue. Paul is asking about high recurring revenues and what we can do to convert more pipeline into annual or multiyear. So yes, we have pricing models that are designed to allow people to buy up on a short-term basis if they want, but to encourage them to sign longer-term contracts. So we do have -- yes, we do think about that in our pricing, and that's one of the reasons why we've seen such a drop-off in our single -- in our month-to-month contracts, because they're nowhere near as steep and cheerful as they were previously. So most of our customers are buying on an annualized basis now because they get a better rate. And we have offered longer-term contracts for discounted rates where required because, again, as I said, some markets are challenged. How long does it take to onboard a new Talentis customer? Thank you, Jenny. Again, it varies on the nature of it. So if it's a completely new start-up search firm, if they want, they can just go to our website, login, create a trial account, put the credit card in the live and none of us have to do anything. When a client is migrating, there's generally some work involved and there's a lot of going backwards and forwards. So the first few took quite a long time, because we hadn't done it before, but now we're doing them every week, every couple of days. So I guess, 6 weeks is the average at the moment. It's getting faster. But as I say, if you're coming from a simple spreadsheet or something of that sort, it's really quick. And most of the time, it's backwards and forwards. It's not actually 6 weeks of work or anything of that sort. We've dealt with that one. Nick, I'm sorry to hear your daughter is having a tough time. Nick's daughter is in the recruitment sector. It's been really tough. It has been really, really tough. I have given up trying to predict when it's going to turn a corner. I do think that it's not getting any worse. I think the view, speaking to my colleagues in and around the company, is that it certainly isn't deteriorating. We don't think it's getting an awful lot better at the moment, but it's certainly not deteriorating. So yes, I'm not sure we're out of it yet, but I don't think it's getting any worse. So that would be my positive sign. It's all about confidence. I think at the moment, companies are not confident to hire new people, and candidates are not confident to change jobs in case the company we move to is less secure than the one we left from. And that's the worst-case scenario, because it means search firms, recruitment agencies get asked to do work, but they never finish it. It never gets completed because they can't get on to move. So it's challenging, but yes, I very much hope it will improve. Matthew. Are you finding there's a generic shift from companies searching for talent via external recruiters? And is this an opportunity to identify top countries to further sell into Talentis? Yes, it's a good question, Matthew. So we've always had clients, even on FileFinder, that were in-house Executive Search firms. We have 1 or 2 on Talentis, not many, but we have 1 or 2. I can think of a law firm that I know myself, but I dealt with them myself. I'm not saying I know the law firm. I dealt with them during the sales process myself. So we have at least one law firm in the U.K. using it. But historically, we've had Fortune 100 companies as clients on FileFinder. But feeling we may still have one, but we don't have many certainly on FileFinder anymore. So yes, there is a market for Talentis in the corporate setting, but it takes a lot longer to sell into a corporate than it does a search firm. Sometimes selling through a recruitment agency or a search firm is like pulling teeth. Selling to a corporate is like -- yes, it takes a lot longer, let's put it that way. MH asks what revenues could go to in the next 3 years. That's not really thing I could talk about. But if we could just flip back to our broker forecast, that's what's suggested by our analysts, our view is that 2027 will be more interesting than 2026. But I imagine the broker will put some numbers into the market at that point. Will development costs remain at the same level for the next few years? I'm conscious I've answered most of these questions. So Ian, I should never allow a bean counter to answer a question about what we're going to spend money on because he has no sense of venture. But broadly speaking, Ian?

I mean, broadly speaking, you can see the trend of our development cost has been a gentle decline. It's not significant on a year-on-year basis. But if you went back 3 or 4 years, you'd see we're at least GBP 100,000 less at the half year than we were then. So where we are now and expect to level off since we're developing Talentis and we will, that's where the majority of our development spend is now. So I wouldn't expect further decrease to a degree from where we are now.

Yes. And just to put some more color on that comment, because I can hear clients panicking when we hear that. We're developing less products now than we used to be. So although we are spending a bit less in total, it's positioned very much more strategically. So yes, certain products are getting more than we've had before. We have less products to develop. And so obviously, the numbers change. Okay. I think that was our final question, unless I can just -- yes, I think that was pretty much our final question. There's a question about -- sorry, there are a couple more questions I missed. There is one on -- we've touched on this for FileFinder. It's not really something we share on the contingency side because we have a couple of different products. So it's not really something that we can break down in this format. But generally speaking, it has been a lot better than it has been on the executive search firm, a lot, lot better. So thank you for your question, Martin. And Akash asks if we can talk a bit about employee morale given the challenging market the last few years. Well, anyone who has attended these webinars and seen how depressed I've looked for the last 3 or 4 years, will probably be able to work that one out for themselves. It's been a difficult few years. We have a terrific team. We have some terrific colleagues who have worked their socks off and have deserved a lot more success than we've been able to give them. But I think there is a view that it's beginning to change now. And I think that as -- when you tell your colleagues we just run our biggest Executive Search product from a competitor for over 5 years, you make comments like that. Churn on our Executive Search products is going to be a lot lower next year than it was this year. People actually start to see that we are coming out the other side. So hopefully, that's something that as this continues, people feel more and more positive. But thank you for your question. Okay. That, I think, was my final question. So thank you all very much indeed for your time. I know many of you have supported us for a number of years, and we really do appreciate that support. I know it's not necessarily been the most exciting or pleasurable of rides for the last few years. Those of you that were with us a bit longer, a bit earlier, may have a different perception. But certainly, the last few years have been difficult. So thank you for sticking with us. Thank you for joining us. And those of you that are here for the first time, we do appreciate your interest. And thank you all very much indeed for your time. Thank you. Bye-bye.

That's great. Jason, Ian, thank you very much indeed for addressing those questions and for updating investors today. Great to hear from you guys. Could I please ask investors not to close this session as you'll 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 would like to thank you for attending today's presentation, and good afternoon to you all.

Thank you.