Kooth plc (KOO) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to the Kooth plc Interim Results Investor Presentation. [Operator Instructions] The company may not be in a position to answer every question received during the meeting itself. However the company can review all questions submitted today and will publish responses where it's appropriate to do so on the Investor Meet Company platform. Before we begin, we would like to submit the following poll. I would now like to hand over to the team from Kooth plc. Kate, good morning.

Good morning. Good morning, everyone, and welcome to Kooth 2026 Half one results. And I'd like to introduce myself. I'm Kate Newhouse, Chief Executive Officer, and joining me today is our CFO, Sanjay Jawa. So before we kick off and present our H1 2026 performance, I'd also like just to mark a momentous milestone for our company. So it's our 25th birthday year and it's 25 years of pioneering accessible early intervention mental health support, really shaping the digital infrastructure that a mentally healthier population can rely on. We're really excited that in line with this milestone, but post the period that we'll be discussing, and we have actually successfully launched Soluna that we built for the California contract in the U.K. So following 2025, which was a pivotal year in delivering successfully in our 4-year California contract statewide delivering to all 13- to 25-year-olds across the state of California, the first half of 2026 clearly demonstrates the underlying power and operating leverage of our business model. We have expanded our gross margin to over 74% and strengthened our debt-free balance sheet to GBP 23.1 million in net cash. Today, we will share highlights of our successful operational execution across the U.S. and in the U.K. Critically, we'll examine the powerful policy and financial tailwinds that are shaping our market, including the landmark $18 billion Meta settlement over in the U.S. and show how these sector tailwinds, both policy and funding, are inviting a model of care that Kooth has advocated and delivered for 25 years. And given our expertise and experience, positions us at this key inflection point for long-term high-margin growth. So the headline story of the first half of 2026 is achieving the scale and integration of our digital infrastructure as part of the California behavioral health care landscape. We've also added another state win in Michigan and made a significant movement towards a single global product with the successful launch of Soluna in the U.K. We have continued to differentiate in the market by our clinical quality and high trust position, which, together with our extensive experience and scale enables us to be extremely favorably positioned for the policy and funding tailwinds that I've mentioned already that we see coming into fruition after much signaling in both the U.K. and the U.S. But before I do that, I'm going to hand over to Sanjay, who's going to talk through the key financial mechanics over the last 6 months.

Great. Thanks, Kate. So it was a strong first half of the year for us, particularly in the context of the first half of last year when our focus was very much on accelerating investments in California in terms of generating users and registrations across the platform. And we're starting to see the benefit of that as we see more and more organic registrations in California, friends telling each other that service, for example. And that strong sort of focus has really sort of helped push up our margins, profitability and cash across the course of the first 6 months of this year. Revenue fell back about GBP 1.3 million to GBP 30.8 million of revenue. And that was predominantly down to 2 factors. One is FX, which impacted revenue by about GBP 700,000 across the course of the year versus last year. Sterling has continued in the first half of the year and strengthened against the dollar. Around 75% of our revenues are dollar denominated. And so we see those reported dollars in sterling decrease. And then about GBP 800,000 of revenue was impacted by our expected reduction in product development revenue from our California contract. We're now moving into year 4 of the contract and the product development revenues that were used to fund the development of Soluna were very much front-loaded in that contract. So we're starting to see those start to tail off a little bit. That was offset by the Michigan contract win. We announced that in January. We went live around about March, April time, and that contributed to revenues in the first half of the year. Reported ARR increased to GBP 62.9 million. And again, there's an FX element involved there. This time, it was actually a tailwind. We measure ARR at the period end. So at the end of June '26 versus June '25, and that's based on the period end FX rate and those rates actually flipped, which gave us a little bit of a benefit to ARR. But again, ARR was, on the one hand, impacted by the reduction in California product development revenues. On the other hand, predominantly, we had the Michigan contracts win coming, and that was around $2.6 million. Gross profit has returned to sort of what we'd expect to be more normalized levels around -- a margin of around about 74%, 75%. Gross profit itself was GBP 23 million. And what was encouraging is that we've been able to increase gross profit within the business yet keep our underlying operating expenses broadly unchanged. And that's given us quite a significant benefit to the bottom line, where you'll see the profit after tax for the first 6 months was GBP 2 million compared to a loss last year of GBP 1.3 million. That's also helped us generate pretty strong cash balances and cash finished at the end of June at GBP 23 million versus GBP 15 million at the end of June of last year. We spent around GBP 2.6 million on the platform during the first 6 months of the year, and that was predominantly the migration of the Soluna platform to the U.K. And we'll talk a little bit more about how that soft launch has gone in a few minutes.

Thank you, Sanjay. Before examining our strategic progress in the first half of the year, I'd like to just ground ourselves in the societal need that drives our mission. So we can see clearly, and this has particularly come across the period that there is a significantly increased use of AI LLMs and particularly for emotional and well-being support. So the stark reality of the current market need is not being met, and it's something that we've been highlighting for years. I've said again and again that traditional health care systems were built for acute crisis management, not early prevention and not for the need that we see today. Because of clinical gatekeeping and those diagnostic thresholds, you can see as stated here, over 500,000 young people in the U.K. remain trapped on U.K. waiting lists. And you may have heard earlier in the week, Professor Peter Fonagy, was on the BBC and he's on Radio 4, and he's leading what's being termed the prevalence review. So one of the key policy initiatives that's happening over in the U.K. And he was trailing his final report that is due out at the end of this week. And he states very simply that support being provided to young people needed to be improved. The NHS, he said is simply not fit for purpose. He said that there are too many people being left on waiting lists, pointing to figures that show 1 in 3 people referred to mental health services were still waiting for help after a year. And I've talked about this before, but we know that in the U.K., there's nearly 1 million 16- to 24-year-olds that are classified as NEET, they're Not in Education, Employment or Training. And 40% of those cite mental ill health as the primary driver for them not being in work, education or training. And Peter Fonagy earlier in the week highlighted that for all 16- to 24-year olds, 1 in 4 are now struggling with their mental health. And faced with these barriers in the provision that is predominantly being offered to them, young people are taking matters into their own hands. Data shows that 1 in 4 young people are actively using AI chatbots and large language models for emotional and well-being support. They turn to these digital tools because they offer immediate availability, confidentiality, no judgment and support when they are dealing with isolation. Again, we've talked a lot about the importance of recognizing these attributes for young people accessing support. However, unmonitored general purpose AI and social media platforms do post severe safeguarding risks. So whilst they show the need for the support and the type of support required, it really underscores the urgent need for clinically governed, safe digital solutions. And this is underlined again, another sort of sobering stat that across both the U.K. and the U.S., 50% of older teens and young adults have used AI instead of a human to talk about their mental health. But the risks of unguided digital exposure are high. So if we look over in England, 1 in 3 secondary school students reported encountering self-harm content online in the past month, most without ever even searching for it. So this creates an unequivocal imperative. Digital support cannot simply be accessible. It must be safe, universal and clinically effective. Again, some of you will have heard us talk about our Northwestern University evaluation of Soluna in California and looking at the significantly statistical sustainable improvement over 3 months by using Soluna. And so this requirement really calls for specific designs in the digital support and what that must look like to deliver to that need in the right way. Safe, accessible, personalized, reaching young people where they are, obviously needs to be effective and available early so you avoid that move into deterioration or crisis point. And these 6 pillars are what Soluna was built on, and they've already been proven effective and safe across both California and now as we bring Soluna to the U.K. in the U.K. And I know that I sound a little bit like a broken record, but as I said, the traditional provision doesn't meet the need. But in order to meet that need, there are both specific product and system design requirements, which I've just mentioned on the previous slide. To be able to deliver that safe, effective and universal support, but also funding needs to meet that mismatch of supply and demand. However, in the U.S., this has been met in the transformative macro sort of catalyst for our business in this landmark $18 billion Meta multistate settlement. Now we are in the early stages of this settlement. So this was announced over the summer. And so we can start to see these incoming funds reach state accounts. They are coming in and you are seeing state legislators, attorney generals and education departments in different ways across -- from a state-by-state basis, but they're actively seeking evidence-based population scale digital behavioral health services. Now as I mentioned, the funding distribution will vary state by state. So some it will be funneled through the school district mandates, some through county health budgets or state agencies all through that attorney general funding line. But Kooth 2 years of building that state-by-state legislative and system relationships and partnerships, together with our flexible alliance model approach does mean that we are perfectly structured and placed to capture these dedicated settlement dollars and convert them into long-term multi-payer contracts. The growth opportunity is significant, where the scale of the problem to solve is finally being fully recognized, the social media impact, the Not in Education, Employment and Training so NEET and the system structure set up to fail, the policy work is being -- is calling for a new model of care and the social media settlement funding in the U.S. has immediately expanded our market opportunity. Our existing experience and expertise are perfectly placed to capture that growth opportunity. So as we dive into a bit of the strategic progress over the last 6 months, let's have a look at our core geographic markets in both the U.S. and the U.K. And these are clear proof points that will enable us to take advantage of that inflection point for growth that we can see in front of us. We can see here that there are clear indicators, and we've reported back on these sort of month -- every sort of 6 months, and they continue to come down the line in terms of these clear indicators that Soluna has become established as the official digital infrastructure for California's behavioral health system. Institutional embedding, we reached a new benchmark just last month with Soluna being the only mental health service specifically highlighted by the governor's office in its official New Year guidance letter to all state school districts. So a page and half letter and Soluna has been specifically highlighted in the welcome back to school to all school districts from Governor Newsom. Now whilst Newsom is moving on and a new governor is coming into post, key state department heads are already fully bought into the sustainable digital infrastructure that Soluna provides. You may be aware if you keep abreast of the news that the predicted successor in California is Xavier Becerra, and he is a prominent advocate of preventative mental health support for youth. He had a tenure as the U.S. Secretary of Health and Human Services federally, and he's repeatedly emphasized that waiting to treat individuals until they reach a breaking point is unsustainable, costly and dangerous. He's also championed several prevention and early intervention initiatives specifically targeted at children and young adults. In terms of -- as we are going into year 4 of the California contract, we are fully on track. We're in advanced contractual discussions, which again are on track to be closed out by the end of the year. So this progress from a contractual perspective, coupled with the fact that we are seen as the embedded digital infrastructure of California's behavioral health provision alongside the backdrop of a healthy state budget, the fact that our funding line has moved from the general fund into a dedicated behavioral health funding pot as well as the support of California Meta settlement, all of this comes together to support contractual stability over the long term. We continue to show real-world data that demonstrates that profound clinical and operational value that Soluna delivers in both California and New Jersey. And we've reported back on some of these before some of these you'll see as new, showing that we are sustainably still delivering against those significant imperatives of the state-funded contract, which is to deliver that provision outside of traditional hours. So when young people are Not at Work, Not in Education so that they can receive that in the moment support. We are seeing that it is having an impact more widely on their sort of functional outcomes. So looking here, over half of all users report that Soluna help them remain in education, training and employment. And we can see the significant trust differential between us and the other digital accessible sort of response in social media or unguided AI. We are on track for usage in California. We're ahead in New Jersey. And since launch in early summer in Michigan, we've made great inroads into system and education partnerships, which we know and I've talked about before, form that critical foundation for trust, system integration and then that flywheel effect for user acquisition. And we have continued to build our independent clinical accreditation moat. This really sets Kooth apart from an unvalidated digital recent sort of entrant and this has been strengthened in the period with the American Psychological Association's Digital Labs Gold badge. We achieved a top gold status, and this really confirms an independent evidence-based evaluation of our digital technology. So jumping over the pond back to the U.K. So as I mentioned at the top of the session, H1 2026 marked a historical operational milestone for our U.K. business, and we have successfully soft launched Soluna in the U.K. This was timed specifically for the start of the new school year, and we have safely migrated all existing U.K. service users to the unified Soluna platform. And we have seen significant immediate increased traction. And this is without a larger marketing launch. So we have deliberately pushed back the wider marketing launch to October to ensure that we had safely migrated all of our users from the Kooth platform into the Soluna platform in September, in line with the school year. And so we can see that we've recorded over 7,000 new registered users in the first 2 weeks post launch, which is nearly double the level of registrations in the same period of last year. So this is the unification of the U.K. and the U.S. technology into that single global stack really does significantly scale internal engineering efficiency, our marketing velocity and our product development. And then in terms of its configurability, its enhanced usability and design, that enables us to be well positioned for some of the policy tailwinds that are coming down the line in the U.K. to be able to meet increased growth and new opportunities. So what does that mean in detail? And I have flagged some of these before. But I think one of the changes since we last met is around, obviously, the change in Prime Minister in the U.K. And this really reflects both our founding story and our growth story in the U.K. in that we were founded in Greater Manchester -- in Manchester, sorry. And we have -- we deliver both our youth and adult whole population product across the whole of Greater Manchester and built that over the last decade. So we deliver our services to everybody in the area across -- over the age of 10. And this was a core priority for Andy Burnham in his mayoral position. He knows Kooth well, and he has youth mental health as a core priority for his government. He also recognizes the need for that open access, nondiagnostic support. So in the work that we do at a policy level, we can draw on our deep roots that we have in the region, the fact that we were founded there, the fact that we have delivered the proven population model for over a decade and that we are very well established and integrated into the system across health, education and community across the whole of Greater Manchester. That then coupled with 3 of the key kind of -- there's been a number of consultations in government in the first half of 2026, but 3 really important ones are coming to fruition over the next few couple of months, culminating in the sort of budget outlay at the end of October. That is digital by default. So this is leaning on those original priorities set by Starmer a couple of years back in terms of really prioritizing in health prevention, out-of-hospital care and digital. This is coming into fruition from a digital perspective, expected this autumn to mandate digital as a primary delivery channel across public services. This is then coupled with the prevalence review that I mentioned earlier. So this is Professor Peter Fonagy's led consultation, where in his interim review and as he set out at the beginning of this week, as he trailed it in the media, the importance that the traditional provision is falling short and is not meeting the need of young people. And then in addition to that, we have Alan Milburn's Not in Education, Employment and Training. So those NEET recommendations, so the Get Britain Working review, where there in the interim report, again, there was a call for easy access mental health support at scale, which reaches young people where they are. And this is a line -- threaded line through those 3 key policy initiatives that are coming to fruition over the next 6 to 8 weeks and then culminating in sort of budget allocation towards the end of this year. So we've looked at the execution in the U.S. and in the U.K. And then if we look forward, I've started to indicate what that might look like from a policy perspective in the U.K. as well as a funding settlement perspective over in the U.S. And so what does that mean in terms of what we do. So as we look ahead to the end of the year and into 2027, our strategic priorities focus on 2 primary growth engines. obviously, securing this California renewal, as I said, we're fully on track for that and ensuring that we accelerate our pipeline conversion. This is not only a couple of opportunities that have not gone away still to work on in our 2025 pipeline, starting to go into the procurement stage for our 2026 pipeline. Some of you remember that we track the state budgeting calendar. And so funding ring-fencing budget and legislative action happened in that kind of July end of year budget for the following year. And then procurement on the back of that will kick off in kind of October to May the following year. So really full focus on making sure that we can accelerate and convert that pipeline. Specifically and very targeted leaning into the Meta opportunity as well as moving from activation to execution of the alliance model that we have also previously mentioned, which is expanding our payer contribution. So those who fund our contracts in the U.S. outside of that direct state department funding line, but including school districts, county health departments as well as Medicaid payers and providers in each of those states where we're working and building those relationships. Over in the U.K., having delivered that successful transition of Soluna, we need to turn our attention to meeting those policy recommendations as they come down the line and in parallel, executing the AI road map to continually enhance our product, deliver more across the care continuum. And we'll do this through both selective partnerships and building that in-house capability, which leverage our key data assets that I have referred to before. So to summarize and conclude, we look at 5 key pillars of the Kooth investment thesis. So I hope, again, today, I've illustrated that there is significant unserviced demand that traditional care models cannot scale and in the way that they're set up are not effective to meet the population demand as it is evident that we have that clear growth potential, so over a $1 billion addressable market in the U.S. Again, it's early days as we look through the Meta settlement opportunity, but we think that, that has doubled our addressable market over in the U.S. And then that equally significant opportunity in the U.K. We do have a leading market position. We're the largest digital mental health provider in the U.K. We've got proven population scale in the U.S., which is really important and helpful as we move into that Meta settlement opportunity. And we have that trust, credibility and experience in both markets. We've got a differentiated clinical base, 25 years of safety experience and then more recently, the accreditation with the APA Gold certification and that proprietary ethical AI underpinning our capability to evolve our platform. And this is all underpinned with that strong financial base that Sanjay took us through. So 74-plus percent gross margins, 100% recurring revenue and a very strong, solid net cash and 0 debt base. Thank you. So that concludes our presentation for the H1 2026, and we're now open to questions. I'll pass you over to Sanjay, who is going to chair us on the questions.

Thanks, Kate. Okay. We've got a few questions in. There's a couple of questions around the Meta settlement funds. The Meta litigation could potentially lead to substantial additional funding for youth mental health programs at state level in the U.S. How material can this be for Kooth in terms of the potential increase in government spending and contract opportunities?

So as I said, I think it's early days for specifics in terms of exactly how that might change our medium-term outlook. It is a significant opportunity for us, both within our existing pipeline where we are looking to convert, but also in new states. We are leaning into that opportunity, and we can come back with more specifics in due course.

Great. And sort of follow-up question, which I think you partly answered. Are you having any discussions with existing states or other states about proceeds being used to fund Kooth services?

Both.

Okay. One question, which I think is for me, a slightly technical question. It's a question about the EBITDA margins for the U.K. versus the U.S. And are they a fair comparison of the geographies? I think what the question asked is looking at here is one of the notes in our financial statements, which provides a segmental analysis of the EBITDA between the U.S. and the U.K. Those numbers are provided on a statutory basis. And so just the U.K. effectively owns the intellectual property of the group and therefore, receives from the U.S. an underlying royalty transfer pricing royalty. So probably not reasonable to look at those numbers as reflect -- purely reflective of the sort of trading position of the businesses, which I think are broadly similar.

I can offer -- I can answer the NEETs one while you look at it. And so there's a question that says, how do you see the NEETs DWP opportunity developing scale and differences to existing Soluna offering? Really good question. So I talked about the policy due, so the kind of recommendations due from the Alan Milburn over the next 6 to 8 weeks. We strongly believe that, that will come with a funding settlement for opportunity to deliver more support for that cohort. There are existing funding lines that go to support that cohort down into the local level, but we feel that the Alan Milburn work will refresh, renew and uplift those opportunities. So we already have 3 contracts in the employability space with our existing product. So one most notably co-funded between NHS and DWP in the West Midlands and that went -- we secured that early in H1 and went live late in H1. So that will provide a key kind of foundational model for further growth because we're also delivering some employability support in addition to your -- into our core behavioral health or mental health support. And so then that leans into your sort of second part of your question around is this different to the existing Soluna offering. So it will be built off the Soluna offering. And as I said, the configurability in the way in which Soluna has been designed is much more flexible as a product to be able to enable us to deliver that. But it will be a kind of enhanced product specifically for that cohort. But as I said, not a significant heavy lift from a product perspective because of the way that we built Soluna to better meet the needs of that specific population.

Thanks, Kate. One for me. You have indicated that you're broadly in line with expectations. What has caused this? And that's predominantly down to the impact of FX, particularly on revenue, but also impacting EBITDA as well. Okay. One to you, Kate. What is international expansion plans beyond the U.K. and U.S.? What is the barrier to entry to other territories?

So we are kind of well networked from an international perspective. So as a kind of market leader and sector leader, we are often involved at that kind of policy and kind of government level in international conversations. We do have good connectivity into a number of markets. I would say that our focus for growth in the immediate term is definitely in the U.S. and in the U.K., capitalizing on bringing Soluna back to the U.K. and the significant kind of growth tailwinds in the U.S. We continue to look at international opportunities on an opportunistic basis given that we do have those good connections and kind of influence as a sector leader. So no immediate expansion plans, but certainly, it is in our purview. In terms of barrier to entry, which is the second part of your question, for other territories, again, I think our experience and expertise of going from one territory to another and then back again with Soluna back to the U.K., I think we're pretty well versed in some of the core kind of barriers to entry, which are regulation, technical kind of replacing as well as recognizing what the differences are from a kind of clinical quality, safety expectations. So those tend to be the barriers to entry and then being able to be part of the policy conversation as they're looking to meet the needs that are emerging from traditional mental health provision not meeting the kind of current population needs as they stand.

Two, 3 questions about cash and use of cash. As I indicated earlier on, we have a cash balance at the end of June of around GBP 23 million. We also have an undrawn working capital facility of just under $10 million. We remain predominantly a growth company. And so we still see very significant opportunities in the U.S. in terms of thinking about investing significantly in our business development efforts there, the Meta settlement has effectively doubled our total addressable market, which we've talked about over the last few years as being up to $1 billion and with $18 billion coming into those states over 10 years, that does increase quite substantially. So we continue to look at the opportunities to accelerate business development. We're also seeing a bit of sort of M&A come across our desk, well-funded -- sorry, companies that have got very strong products that were perhaps well funded from VCs and private equity but haven't quite reached sort of revenue traction yet. And those are in sort of perhaps a slightly distressed way. So we continue to look at those opportunities. And equally, capital allocation in the form of perhaps some sort of share buyback would be something else that is what we're currently assessing. Clearly, it's important for us to continue our contractual discussions in California to try and see a resolution through to that and potentially an extension to our California contract. Okay. One for you. Please discuss the incremental functionality that Soluna provides over the prior U.K. solution?

Yes. So I think this falls into kind of 3 buckets. One is specifically around the usability and design. So it is much more intuitive. It is more engaging in terms of how you navigate from one part of the service provision to another. It is definitely not clunky. It is very -- and it's specifically designed with the kind of modern expectations of a digital solution. So that is one where it's an absolute step change from our legacy Kooth product. The second part of it is around the kind of way in which you navigate through the service. So it is more personalized in terms of recognizing what the need is as you're coming into the platform. And together when you have an interaction with one of our coaches, ensuring that the follow-up to support or the integrated support that happens is much more comprehensive and consistent. The level and sophistication of some of the self-help tools and activities are again a step up in terms of -- and we can see how relevant that is from the effectiveness work that has been done over in California with the evaluation from Northwestern University and how significant that has been. So really thinking and thoughtfully about sort of clinical and design effectiveness of how you deliver some of the nonpractitioner-led parts of the platform are significant. And then from the practitioner side, the way in which it's designed so that the coaches and the counselors delivering the service have a much more, again, simplified and effective way to support users on the platform in terms of how information is served up to them in a very kind of easy and effective fashion, the way in which they can then move on to if there's need for safety escalations, all of those operational ways of working for our practitioners have been significantly enhanced with the move to Soluna.

And just a quick follow-up question. What does the launch in the U.K., how do you think that will impact U.K. revenue?