Northcoders Group PLC (CODE) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, welcome to the Northcoders Group plc investor presentation. [Operator Instructions]. Before we begin, we would just like to submit the following poll. And if you could give that your kind attention, I'm sure the company would be most grateful. And I would now like to hand you over to CEO, Chris Hill. Chris. Good afternoon, sir.

Good afternoon, and thank you, everyone, for joining me for this presentation. I'll move straight on to the -- displaying the numbers for the results announced today. So GBP 1.4 million of revenue in the first half of the year with a GBP 0.5 million EBITDA loss. Obviously, it was a difficult first half of the year. We've been over a significant restructuring period. And of course, it probably goes without saying that the business is smaller than we would have wanted, and we understand that the losses sustained over the restructuring period have been fairly significant, and we would like to have gone faster. But what the good news is, is that we do now have a clear near-term route to -- well, firstly, to breakeven, which is now and then through to profitability. In terms of things like that, our revenue for the second half of the year is substantially had that recognized in the first half and the overheads were around GBP 1.25 million for the first half, but around about GBP 1 million for the second half. The one thing as well to sort of -- I'm keen to point out on here is in terms of the gross margin. The gross margin is obviously lower than previously, and that is more to do with -- we now have a business model where we directly link revenue to the cost of sales. We don't have a lot of sunk costs that sits in the gross profit line. So whilst the margins are lower, the overhead cost is lower also. Let's go over for anyone who is new to the presentation. I thank you for joining us. I'll go briefly over like the history and the evolution of the business, really. We pioneered the U.K. coding bootcamp model with an employer-led approach to solving the tech skills gap. We trained over 4,000 people, work to the rate in the hiring partners and we've been going now for 10 years, and we've been well accredited along the way. I'm sure it's kind of the news now is that we went through a period where we were doing significant training numbers through a government framework, which came to an immediate halt. And since then, yes, we've restructured the business completely. Removed a lot of cost, and we're now very, very focused on B2B services. And going to the revenue mix later, we picked up some small amounts of government-funded work and still some B2C as well. So what's changed over that time? We have had a substantial restructure, which has not only been expensive, but has also been taking a lot of management's time and focus, but we are now through doing all of that restructuring, our capability has completely changed. And we now have a very, very, very small amount of kind of discretionary spending. We have really got the overheads as low as we possibly can. And again, directly linked the actual cost of sales, which is mostly people to the revenue. So we recruit people directly when we win a new contract as opposed to having a bank of people ready to capitalize on opportunities. But within that, we do still have flexibility and the ability to act fast through a network of sub contracts, especially in the trading space where opportunities come along that we want to be able to deliver quickly. So the main focus now of the business is we do training for -- mostly for B2B. We are still working with Greater London Authority on some skills bootcamps, but we haven't been doing any major bidding through some of the other combined authorities. It just wasn't really a very high amount of revenue that was available through chasing that route, but with still against the operating principles, there's still quite a lot of permanent overhead required to operate in that way. And then our main route to market for B2B is through Counter which is -- we'll talk more about the revenue and what that's shaping up by embedding engineering teams into organizations, and it works on a kind of a Hire-Train-Deploy model. And also based on fully scoped projects, but the difference for the client is that the individuals who come through the Hire-Train-Deploy model if they're able to become a long-term employee at the end of the contract. So we'll talk about the revenue mix. Now obviously, this isn't comparing apples with apples. We know that the amount of like the level of revenue has come down a lot over this time, but we are now pleased to say that the revenue is back to growing from this point forward. But way back in 2024, 9% of our business was B2B clients and almost all of it was government funded. So we were aware of this at the time before the contract was almost sort of taken away from us and the pivot towards growing Counter was something that we were already working on and had launched and growing the B2B side of it. Obviously, in an ideal world, we'd have kept the training underpinned by the government contracts, so we were able to grow Counter on top of that. Whereas instead, with the change in government and the framework almost disappearing overnight, you can see that change flow through from 2025 and then into the kind of expected outturn for 2026. And the total cost savings at the full year results was around about GBP 2 million, but there has been further annualized savings made within the business, and that has now all come to an end in terms of one-off costs, restructuring and things like that. And we now have a core team that work across multiple areas. And I'm happy to say that all of that type of -- those type matters are now behind us. So in April, we had 1.5 -- the full year is also had GBP 1.5 million. In terms of the -- one of the benefits of the Counter model is that our contracts are often relatively lengthen around about 12 months. There are some organizations when it comes to kind of sort of public sector and critical infrastructure, which is one of the areas that we are really strong in. We only get purchase orders for a short amount of time due to the nature of the security clearance acquired for those type of contracts. So they are kind of renewed quarterly rather than being, but they are really sticky. They're really good clients we're working with and they're certainly growing. So we've got GBP 2.4 million through Counter for the full year, of which GBP 0.9 million of that was for the first half of the year, but up to GBP 1.5 million in the second half, which is fully contracted and obviously, cash generative month-to-month. Furthermore, we do have a near-term opportunity pipeline with both new clients and current clients around about GBP 3 million, and that is kind of the pipeline. We obviously have further business development and activity outside of this, but that is what we're considering of the real near-term opportunities that could turn into contracted revenue very, very soon. We have the same actually in training also. We do have some graduate academies running again this year, which is good to see that come back and hopefully there will be more of a trend for all sorts of reasons. But just specifically for us to your kind of KPMGs and so on are getting back to doing more graduate recruitment and working with Northcoders to do that and give them the skills that they need for their roles. So one of the new things that we have launched is Northcoders, Northcoders AI. So we call this the Northcoders AI foundry. And this is bringing together a lot more of the kind of technical aspects required while everyone's heard a lot about AI within engineering. There's certainly been a lot of movement towards rather than having teams made up of individual engineers with different skill sets, such as testing, coding, data engineering and so on. Deploying agents to kind of write that code for you has been something that's been significant growth in that area and the main driver for businesses is being able to shift things faster. But obviously, it hasn't come without its problems. There's definitely been cultural change problems for organizations, and there has definitely been a lot more quality assurance issues uncertain than -- one thing that we're very considerate of is the cybersecurity elements and that -- being breaches have become more common. There's certainly big news stories about breaches of the system directly linked to AI-generated code because it's not been quality controlled properly, it's not been tested properly. So what Northcoders AI does is it aims to work across that model with a shorter skills and training framework and also it opens up the opportunity for Counter, which has always been all about pod models where we've had a tech leader and some individuals recruited either through tech returners or ideally through the Northcoders training or through other kind of sort of junior engineers. But with the movement from what they call forward-deployed engineering, which Northcoders AI is at the heart of, we now have the ability for people who are more experienced and are able to go in as a single person or a pair into an organization. So it's just kind of bringing down that sort of barrier to the large contract size required to grow Counter and we've had some really great short-term traction. We have -- it's well known that we have a case study and we've been growing the amount of people who we have within HMRC through Counter. It's well into double figures. Now we've actually just through Northcoders AI initiative, we've actually signed up another major central government organization. We're in a very early stage of that. It's the discovery phase. And obviously, we have to be running the AI foundry to build those teams out, but we think it's certainly got -- a very special opportunity to the great work we've done, a testament to the case studies in HMRC and the ability to be able to compete for that type of business through the frameworks and the certifications that we've got ourselves on to which for the size of this business is relatively unheard of. So we're able to be agile and people love the brand the life-saving opportunities for individuals. And so it's been really good to get through that, and we are starting to actively see our pipeline building through those certifications and frameworks. Okay. I'll go through the finances. I think yes, the -- obviously, I'm not going to just read to the numbers on the income statement. This presentation is certainly publicly available. But yes, just the key takeaways is that the contracted revenue for the full year is much higher than H1 and also the costs are reduced, and we're not carrying any of those extra costs in the gross profit line where literally, so the gross profit margin, there's no risk to that at this point. Move on to the cash. So in terms of at the period end, obviously, a lot of cash has been utilized through the restructuring. And obviously, through the losses sustained as we've transitioned the business, but that has now come to an end. The company is in Q4 this year is EBITDA positive, and we don't expect that to change either going forward. So cash is relatively quickly collected from corporate clients. So we've got a similar amount of cash today as we had at the end of this period. And so obviously, we're generating the cash from operating activities, and we do, of course, have our monthly contracted repayments to NatWest, which we're fully up to date with, with all of our creditors and repayments as well. So there's nothing in the cash balance that I don't know is owed to -- for income tax or anything around that. So -- but obviously, the cash discipline remains super important. So yes, there's other areas where we would like to go faster. We'd like more discretionary we're spending on marketing activity, sales activity, but we're doing everything that we can to protect that while sort of sustainably growing the pipeline and launching new products, there are still remaining exciting, but being really conscious about the cash. I think, again, the balance sheet remains relatively unchanged. We haven't been investing capital into engineering or fixed assets. So that's just there for people who are interested. There's not been any new fundraisers or shares issued in the period, so everything does remain unchanged. Of course, so I'll just wrap up before I go into the questions. Obviously, we now certainly run rate breakeven and going into profitability with our contracted revenue for Q4, the monthly kind of overhead costs outside of below the gross profit. We're coming into the year, we're over GBP 230,000 and they're now around GBP 170,000. And that is where we can still grow while keeping the cost base around that area for certainly until we reach a good percentage of profitability. We -- yes, we have a near-term pipeline, which is very confident in conversion for Counter contracts, which does include new clients as well as I mentioned before, we have just started to work with a second major government department. So we're going to do everything that we can to bring that into being like a large contracted contract as quickly as we can. There's more kind of near-term training -- corporate training opportunities to Northcoders AI foundry having some interesting conversations around that as well.

Okay. And then I flip to some questions that I'll go to questions first that were submitted before the presentation. Question one, there are rumors that Northcoders might go private. Is that true? So possibly there's a speculation. I don't really think it's appropriate for me to comment on individual or like rumors found on kind of stock and share forums. But we remain in AIM listed business. And we do believe that AIM offers us valuable strategic options, which we are looking at. I know that one example I use for this with people is people say that's very expensive for a company of your size, being on AIM and, yes, while that's true, some of like the ISO certifications and the frameworks that we're now getting opportunities to -- from public sector is unusual for a company of our size and what -- the reason why it's been easier for us is all of the kind of the compliance and all the regulatory matters that you need in place to trade on AIM and to keep the authorities of AIM happy that you're doing everything you need to do. So obviously, the share -- change in the share price have been slow, and I do think that we do have good news coming down the line, though. And once we get back to profitability, that will be the time where it might be more exciting in terms of investors and shareholder value, which is moving me on to the second question of how I propose to bring shareholder value given the share price. Well, now that all the restructuring is done, we can really focus on the business. That's a bit that we can control. I can't control much sometimes about the share price about the sentiment. But what we can do is focus on the underlying business and deliver. And obviously, immediate priority is protecting cash balance through generating operating cash, growing Counter and the corporate revenues and doing that in a way that we're not rebuilding a big cost base. We remain very careful over where we spend money and constantly ask ourselves do we need to spend money on this. Is there a way of doing it where we're not risking the growth trajectory of the business by keeping the costs as low as we can? Can we have a 12-month broker forecast to improve -- question 3, can we have a 12-month broker forecast to improve sentiment? So I can't talk about broker forecasts. However, yes, the brokers put forecasts out this morning. So that's ZUS Capital. And that's forecast for the remainder of this year, which we've talked about, and we can -- they're available through ZUS Capital's website directly or they're also available on Research Tree. So yes, I'm not allowed to go into them, but they are available and it's been good to have now that we've sort of the point where we know what the visibility looks like and that we've done with the restructuring, so on, it's been good. It shouldn't be a sentiment having those back in the market. How is the training market -- question 4, how is the training market change? And how is the transition progressing? Obviously the government funded training market has changed substantially. Obviously, we all know the new Prime Minister, one of -- coming out of Manchester may or may not do something different with that. But I think it's not only the government framework that's changed that. There has also been -- there has been a downturn in graduate recruitment that we do see changing, which is obviously just good for the world for many, many reasons. What happened with the government frameworks as it went to a regional authorities, but it was incredibly fragmented and everything was different, all the time frames were different, and it was really difficult to juggle them all. And ultimately, we're working with Greater London. We are training people now. They're super happy. We're hitting our KPIs, and we're looking to continue doing that with those. But the price paid per individual simply wasn't enough to -- for us to -- we've always given the tech industry the skills it needs and create life-change opportunities for individuals. And there just wasn't the size of funding they wanted to allocate per head basis on the Skills Bootcamps just wasn't worth it. So hopefully that answers that question. I'll go and see what questions have been submitted while we have been doing the presentation. As the mix move towards corporate contracts, should we expect working capital to become structurally less demanding? Yes, yes. Obviously, sometimes it happens with the corporate contracts is when you first get them and you get a new client, it can be quite difficult can be quite difficult to get the payroll set -- to get the pay set up, the purchase orders and we have had a few delays, but cash collections have significantly improved. But once you're working regularly with the client, and our clients are super sticky, then yes, the cash collections do go in monthly, and that does obviously it's a little in arrears. Northcoders cost comes out. The working capital is around about 60 to 90-day change between the individuals that are on our payroll and the receivable from the contract. What are the customers buying from Northcoders AI today? And how much of the emerging pipeline is genuinely new business versus cross-selling to existing customers. So we have a lot of partners. We -- the new businesses directly through marketing, of course, we do get new clients all the time, but the business has obviously fundamentally changed. And now Northcoders AI is selling the ability to adopt AI in a much better way for your organization is focused on more senior people. So of course, we are seeing people now working with Northcoders AI who have done Northcoders 6, 7 years ago, also got a decade of building this community. So that's been super strong. Yes, there are some new clients in the Counter pipeline. Sometimes in new clients will be people who have worked on a hiring basis with Northcoders over the years because there's been literally hundreds of those. But the -- just -- since we've got a bit of time, a bit more detail on the question. Northcoders AI is a 4-week framework based on content and simulations. It's quite -- well, simulations if you're an individual, individuals don't pay for Northcoders AI, the revenue model is the forward deployed engineered Counter. And also, we will be returning to the -- because now the training numbers are small within Northcoders, we are planning to bring back the recruitment fee model also because we still got a lot of demand to hire people from Northcoders due to our reputation, but recruitment fees were the historic part of the business, but they were replaced by the government framework because it was always a tri-party employer training partner and individual. So the hiring fee basically came from the milestone through the contract. And then also businesses are able to put pods through Northcoders AI. So we say 3 or 4 people in a pod usually that do different things within the technology organization because the whole point of AI is being able to do things that you're not necessarily been in your swim lane. We're able to bring agents together to work across lots of different areas because you don't know so much about, for example, quality assurance, there where the risks lie, and that's what Northcoders AI also looks at the cloud utilization costs and also the kind of tokens and the tooling costs and how we can best manage that and do it effectively. So that's a model for Northcoders AI for businesses, and we -- it's obviously in the off the state now. So it's just a full-time 4-week framework for businesses. We do have the option to do that 2 days per week. We do also do training consulting, so we can deliver on -- in an individual kind of contracted day rate over a period where we can deliver the content and the simulations directly at the flexible timing for the business. So yes, thank you. That's all the questions.

Perfect, Chris. That's great. And thank you very much indeed for addressing all of those that came in this afternoon. Of course, if there are any further questions that do come through, we'll make these available to you after the presentation just for you to review. Chris, perhaps before really just looking to redirect those on the call to provide you their feedback, which I know is particularly important to yourself and to the company. If I could please just ask you for a few closing comments just to wrap up with, that would be great.

Yes. I think that the I had really good support from the shareholders I've spoken to during the course of today. And the main message is that we have finished our restructuring. Yes, we wanted to go faster on the revenue, but we are seeing those sales growing. We're not making growth to the below-the-line costs and the gross profit is -- the cost of sale are directly linked to the revenue, not there causing sort of sell overhead. And yes, all of our contracts being cash generative, we are being super cautious on discretionary spending. Of course, we'd like to spend more on sales and marketing, but we will soon be EBITDA positive again, and that's when we can start to see how the sales accelerate and then make decisions on being more aggressive to grow further. But yes, thank you, shareholders, for the support, understanding that it's been sort of -- taken us 12 to 15 months where we sustained not only EBITDA losses, but obviously a significant amount of restructuring costs, which has hit the cash balance. But we are through that now. And obviously, I hope to -- hope to be able to release more news to the market now that we have some research and some sort of numbers that we mentioned earlier, you can get them to. So I look forward to keeping people updated.

Thank you again. Perfect. Chris. That's great. And thank you once again for updating investors this afternoon. Could I please ask investors not to close this session as you'll now be automatically redirected for the opportunity to provide your feedback. On behalf of the management team of Northcoders Group plc, we would like to thank you for attending today's presentation. That now concludes today's session. So good afternoon to you all.