Northcoders Group PLC (GB00BL97B942.SG) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Northcoders Group plc Investor 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, Chris Hill. Good afternoon to you.

Good afternoon. Thank you. Hi, everyone. Thank you for joining this presentation. My name is Chris Hill. I'm the Founder and the CEO of Northcoders Group and...

Hi, everyone. I'm Charlotte Prior, CFO of Northcoders Group.

So I'm going to hand over to Charlotte now because we're going to cover the H1 financials first in this presentation, and then we're going to have a look at some operational matters and highlights from the period. And then I'm going to go on to talk a bit more about the direction in which we're taking the business forward from this point.

Thank you. Pleased to report today revenue of GBP 3.7 million. We have maintained a gross profit margin of 67%, showing that direct costs can be controlled in line with revenue. We've reduced group overheads by 20%, enabling us to have a more lean operating model going forward. Underlying adjusted EBITDA was reported at GBP 0.4 million with net cash of GBP 0.9 million and a cash balance of GBP 2.3 million. Really comfortable position cash-wise that will enable us to continue doing what we need to do over the next 12 to 24 months with no need to raise at this stage.

Okay, on to operational highlights. The main highlights from the period have been from the progress we've made within our consulting division, challenger consulting division, Counter, which we'll talk more about later in the presentation. We have been incredibly successful within our client engagements, which -- the main big names are Skipton Building Society and Manchester Airport Group. And we're also embedded in a major government department where we continue to be successful, deliver great value on those assignments and expand those -- the value of those contracts and we'll announce new larger revenue as and when they come into the business. Outside of Counter within the training, the government funding remains as unpredictable as it has been all year, much less predictable than we thought it would be going into the year with the changes that the new government have made. However, in terms of the strength of the company, we have been awarded outstanding by OFSTED, which puts us in the top 6% of providers. So when a time comes where the funding landscape is a bit more stable, we're very well positioned to win in that area. However, we have made decisive decisions to take back control of the direction of the business, which we'll talk about later as well. We have got some Skills Bootcamp, have been coming through with 24 seats for Lancashire, and we're currently awaiting the outcome of the Greater London bid, which we are in communication with them and should hear about that shortly.

Just to kind of run through the financials, I went over quite a lot of the highlights from the income statement in the financial highlights. Overall profitable for the period with an EPS of GBP 0.88 -- adjusted and an adjusted EPS of GBP 1.28. EBITDA has been adjusted in the period for [ GBP 447,000 ] worth of redundancy costs. On the statement of cash flows, cash inflow from operating activities stood at GBP 383,000. We had a cash outflow from investing activities of GBP 70,000. This is mostly intangible asset spend of around GBP 86,000 as we finalize our data and AI costs and then around GBP 15,000 of interest received on cash balances. We had just under GBP 1.5 million of borrowings in the period with NatWest. And this was a GBP 1 million loan at 2.5% above base, that's paid back over 4 years and then just under GBP 0.5 million at 3.5% above base paid back over 3 years. The GBP 0.5 million was used to refinance an existing loan that we had at 11%. We paid lease liabilities of GBP 59,000. As you can see, that's quite dramatically down from previous periods due to us downsizing our Manchester office. And we also plan to downsize our Leeds office as well as we're seeing a more online version of delivering our costs. This leaves us with a cash balance at the end of the period of GBP 2.3 million. Moving on to the balance sheet. We currently have intangible assets of just under GBP 2 million. We have tangible assets of GBP 250,000 and goodwill valued at GBP 1.3 million with a deferred tax asset of GBP 91,000. That's what makes up the noncurrent assets. We have current assets of GBP 4.2 million. There's GBP 2.3 million of cash in there and then the rest is contract assets and trade receivables. We have current liabilities of GBP 1.3 million, and our borrowings at the end of the period stand at GBP 1.4 million, bringing us to a net asset value of GBP 5.4 million.

So as it's been quite widely reported, the Skills Bootcamp landscape has significantly changed, and it's been very tough for us to navigate these changes. A lot of the regional authority bids are incredibly low value, and we just had to walk away from attempting to deliver on many of those because we just can't deliver those types of courses at the really low price that they're wanting to pay for them. There has been some outlying sort of more forward-thinking authorities where we've been able to bid for much higher skill level courses and are awaiting London to come through on that one. But there has just been further change recently in government as well over the past year, we've heard a lot about Skills England as like the new government initiative to kind of give rebirth to skills and reforms to the apprenticeship levy and so on, but that's just been subject to multiple delays and silence in a lot of cases. And then more recently, the government also have made a decision to move the skills agenda out of the Department for Education and they're putting that into the Department for Work and Pensions, which when we looked at this as a Board, we thought that's going to be probably yet another 12 months of complete uncertainty. So we have made a decision to, given the landscape, take back control of our revenue, and we are focusing more now on driving the business growth through Counter, which we'll look at the strategy and the positioning of Counter and the competitive landscape in just a moment. One of the most appealing things for the business about Counter was that it's much more predictable sort of cost base as with the boot camps there's multiple different departments required internally to run these boot camps at scale. And without the funding coming through, we just found that the consumer income was going to be too unpredictable and thought it best to focus on larger sort of higher-value contracts within consulting and Counter, but still underpinned by the amazing training engines that we have. So we're still able to produce and still have graduate pools to recruit from to place onto those contracts. And our focus for this year has been restructuring and reorganizing the company to make sure that our balance sheet is ready to grow Counter within 2026 and doing that in a way that -- in a comfortable position that we ensure that the next phase of business that we don't need to raise any money and dilute shareholders for capital at this time. So in terms of like the momentum pipeline of Counter, which has given us the confidence to go into this. As we discussed before, our current client contracts, once we win a client, they're proving to be very sticky due to the excellence of our delivery and we have invested in that by bringing in specialist engagement leads from the sector with expertise to make sure that everything that we do within Counter adds great value. And not only to continue to give longer term to the contracts that we have, but also get support from our clients to tell the story so that we can build case studies up with the likes of Skipton Building Society who have been very fond of the work we've done with Northcoders who've actually uprooted a larger consultancy from taking over the work that they're doing, and we're able to now tell that story to win more clients in the future. We do have a healthy pipeline of future businesses and engagements that we're taking. We recently won a contract within a Software-as-a Service sector, which is new to us outside of finance and government. And we do believe that the success that we can deliver value to clients means that when we do win new contracts, we'll always see those growing over the years ahead. We reported last year that we have bid and want to go on to some frameworks, G-Cloud was the one, and we are now using those frameworks to discover new opportunities and also grow the current contracts that we've got. So in terms of the changes to the business model, we still have our training engines through Northcoders and Tech Returners and we run this in a very similar way where we have an attraction pool of people looking to break into technology or return to technology, and we've kept a real high-quality bar of the pre-assessment training and our selection pool. But then the main reason for us delivering the training and we'll be strategically using any Skills Bootcamp contracts that we win to put growth initiatives into Counter. We also have an incredibly strong alumni network across the people that we've trained over the years that we're able to bring in tech leads from, which is -- our consultancy model is sort of a zero-bench. So we don't actually have like some costs of having like consultants that we've pretrained who are waiting to go into engagement, one of the -- our competitive advantages of Counter is that we work closely with our clients to handpick and hand select people directly for each contract, which is obviously also better for the cost base because we don't have people on the books, who are not generating revenue. Just going to go over Counter and our sort of USPs and how we compete. So we still have large pools of both alumni and newly-trained Northcoders and Tech Returners graduates. So we're able to select the very best people, working closely with our clients to make sure that they get people that are not only sort of there to be delivered on a project, but going to become a part of our organization for the long term is a value that we add. We are able to turn these engagements around very quickly. So when we do win a new contract, it can take us as little as 6 weeks to get that from winning to starting to deliver and start to generate revenue. And because of the training engines and the way that we have done this on a zero bench lean cost basis, our pricing is competitive with some of the offshoring and sending work abroad Counter is able to compete with that on price, but also deliver here on site and give much more value for the future. In terms of our strategy for clients -- for Counter, we've been building a compelling brand in the north and creating those stories and those case studies. We have developed a go-to-market strategy, and we now have a product that's ready to bring in people who are able to find new engagement, salespeople, business development. And in terms of the wider strategy for Counter utilizing frameworks like G-Cloud and partnerships, we are looking to grow out some of the contracts to being part of much larger bids, looking at central government organizations and bringing in those bigger contracts supporting partners for that. And then in the future, rolling Counter can easily move to being national or even international. We have all processes and brand in place to recruit tech leads, to recruit our coaches. And we're not only able to bring in our account consultants from Northcoders training engines, but able to bring them in from multiple other sources as well in terms of sort of credentials and with larger companies who we've been working with in Counter. So it's obviously impressive to organizations that are looking to make a change and see the success that we've had so far, plenty of household names and incredibly good feedback and the ability to spread that story and grow Counter. And the frameworks that were listed on Crown Commercial Service, the one we've been utilizing most recently is G-Cloud, which we're putting together some proposal and final stages of some contracts using that at the moment. So in terms of the competitive landscape, obviously, the consulting sector is rather large and mostly is divided up into like the big consulting firms that we've all heard of like Deloittes and Accentures and so on. And then there is also higher trained deploy providers, which are probably more of the specific competitor of Counter where you've got organizations like FDM and Sparta who will recruit large pools of trainees, put them through training and then they have this deploy mentality where a client signs up with them and then they directly deploy from the pool of people into these contracts. But we see our model as being very much more of a partnership with the client from the very beginning that we're able to work with them to select as opposed to deploying kind of pretrained people. So we're sort of Counter deployment is one of the ways that we are attractive to clients and also embedding value for the long term in terms of, our account consultants are able to transition over to working with those clients permanently, moving over at the end of the assignments. But often, we're finding new areas and businesses where we can put new teams in as opposed to losing the contract. And this is all powered by the reputation that we've built up for training excellence over the past 10 years within Northcoders and like the quality and the diversity of the people that we're able to train. And we're moving away from a model whereby we'd work with businesses to place trainees from boot camps free of charge to winning significant contracts with the same engine.

Looking at the summary and the outlook. Counter secured a new GBP 0.5 million contract, which adds another large logo to that list. That was of a leading provider of business management software solutions. The group will continue to monitor overheads to align -- ensure that we're aligning costs with revenue and ensure that we have the right overheads in place for the next stages of the business and the next stages of growth. We are always focused on quality client outcomes, and that will be always -- that will always be something that we are monitoring. We all know that AI and digital transformation are rapidly reshaping the workforce. We are currently looking into what more we can be doing around AI and what that means kind of on a leveled basis. We teach a lot -- we've taught a lot of juniors in the past. We're looking at what we can do around the more mid- to senior levels as well. It was announced today that I have notified the Board of my intention to step down as CFO and Director of the company and that will be after my 6-month notice period. I am leaving to take a bit of a career break. I want to start a family, but we'll be working with the business from now until then to ensure that the succession plans are all in place and ensure a smooth handover. We are taking decisive steps now. This will enable us to capitalize on significant long-term growth opportunities. And as Chris was saying before, really bring a bit of control back, really kind of soften our cost base at a time when there is a lot of uncertainty within government funding and we are concentrating on areas of revenue that we can really push and we can really control.

Thanks Charlotte. I'll move on to questions now.

Okay.

So I've got a question here. How will the company generate shareholder interest so that people are minded to invest in Northcoders? Trading volumes on London Stock Exchange are very low and the share is relatively illiquid. Without people buying shares, then there's unlikely to be a meaningful appreciation in the market cap and the share price. So for me, yes, we understand that the trading volumes are low. And of course, we want to be able to generate value for shareholders by making the share more liquid. But I think that starts with successfully releasing new stores of business growth, new contracts and profits and growing the business from within and getting out whatever news that we can so that people can see the progress that we're making and with it, hopefully begin to buy shares, invest in the company as they can see more opportunity in the upside. We do our best to engage with people wherever possible, wherever we're also allowed to in terms of like the rules of some of the questions that people ask that we're not able to answer, but we're very open and happy to engage with shareholders. And I just think we will release as much news as we possibly can through our advisers and within the rules and show some good progress. And hopefully, that will attract more people to invest in the business.

Next question. You've kept gross margin at 67%. How sustainable is this level if B2B Counter becomes a larger share of revenue? So yes, that gross profit margin is expected to drop slightly with the new revenue mix. We are currently working at around 50% gross profit margin on Counter contracts. That is kind of an introductory level. We are still in quite the infancy. So we should be able to push that margin in future years. And then because of the reduced number of boot camps seats that we're going to be doing, we can do that over a much -- with a much leaner cost base. So we're expecting around 75% gross profit margin on boot camp, which will obviously pick that 50% up. But no, you're correct. If the revenue mix is changing and Counter becomes a much larger proportion of revenue, then yes, we will see that 67% drop.

Okay, is that all?

Yes. How sensitive is profitability to further government funding delays in H2 2025? So we have made really good progress on reducing our cost base, which means that kind of moving into quarter 4 2025, we're in a good position with regards to costs. But yes, quarter 3 was quite sensitive to that drop in revenue.

Okay. Do you see international expansion opportunities? Or is the U.K. skills got large enough to sustain growth? So yes, we're focused on the U.K., primarily the north of the U.K. at this time. As I mentioned before, Skills Bootcamp contracts in the South will be used to strategically power the expansion of Counter. We're going to deliver those contracts as like their own projects with that in mind. And what we're doing with like the training engines and the brand that attracts the returners, as the brand that attracts the beginners and the university graduates and people for tech lead is building the business in a way so that if there are opportunities to take on a contract further field offshore, then we would have the recruitment engine and we'd have the ability to attract the people to deliver on this. It's all about positioning the operations and the brand and the prospects so that it's possible to deliver those training courses, which is also obviously being able to deliver those training courses without relying on the large numbers coming through the England-based training engine does offer that opportunity for the future. Okay. How aligned the management incentive with shareholder value creation over the next 2 to 3 years? So management incentives need to be reviewed and looked at. They are probably the ones that we have in place were incentives from where the business was before the training company, before all the government disruption. So I completely agree that senior people in the company need to be -- have their incentives linked to creating value for shareholders and increasing the -- increase the share price.

What proportion of costs are now variable versus fixed after the overhead reductions. We do still have obviously full-time employees, but the reduction in staff has been quite dramatic. We are running a really slim boot camps business with -- and the plan going forward will be that once those boot camps grow again, we will be doing that on more of a -- on a more variable basis. We will do that -- we will look at contract model rather than fixed-term employees as we kind of move through the next 12 months. The offices have basically reduced down to being really small. So there's obviously a large proportion of fixed cost there that have gone. But we do still have some fixed costs that we just can't do anything with listing costs, stuff like that, but there is a much higher proportion now of variable costs.

Okay. You mentioned FDM as a Counter competitor. They're seeing an [ 8% ] share price drop due to the difficult market. Do you believe that Counter can realistically compete, especially given the much smaller size? So I would -- yes, I think FDM have and many consulting businesses, there's been some news released by Deloitte this morning over their technology consulting arm being underperforming and their first like revenue drop within 15 years has come off the back of that. But the way that I see it with Counter is, Counter is a new approach and that's the reason why it's called Counter. Yes, it's Counter deployment. It is different. And we are also a much smaller size. So in terms of the market that we find difficult, we're able to be much more agile and some of the -- if we were to be able to win 10 contracts within Counter, that would be a huge amount of growth for us rather than large organizations that kind of -- they've lost a couple of big accounts and yes, it's going to be hugely detrimental to their revenues and probably drop straight through to their profits because there is a lot of costs. There is a lot of non-direct costs like linking the teams assigned to clients with the employment of the individuals and the recruitment is a big plus in terms of the kind of operating model for Counter and in terms of the proposition there. So I do believe that we have had -- we've competed against other organizations directly for contracts, and we have won. Of course, not every time, but -- so yes, it's -- I hope that answers that question. Following the recent question, what else is the company doing to promote its business to institutional investors? Are you looking to expose your business to other markets, i.e., Europe, U.S.A., China, India, et cetera? So we -- in terms of investors, we haven't -- we do see institutional investors. We have people that follow the story, and they're probably more looking for -- to invest in the business on like when there is a transaction, which we're not looking at anything at this time. But yes, as we grow the business and it opens up investors from further field, we'd be more than interested to have those conversations. But I think that the same as the first question, I think that focusing on taking back control of the business and winning contracts, showing that we have -- that we can do that, getting that news out there to create a bit more excitement around the story again before we do too much, it's kind of like when we go to see investors, we want to be seen from a strong position of success and we have ability to sort of predict the future growth, and that's what this year has been all about, the changes and the transitions and the restructuring to make sure that we're in a position to be able to do that in the future.

I can take this one. Is the GBP 1.3 million of intangible asset justified given the change in market you described and the low margins, will there be a write-down? So we obviously monitor impairment. We do our full impairment review at year-end. There obviously will be a different outlook at the end of this year. That will play a part in impairment of assets. It -- that may cause a temporary -- yes, a temporary write-down of assets, but the level of that will be known at year-end. And the plan is to kind of continue and pick back up on boot camps in the future. So depending on where our forecasts are at the end of the year will depend on the level of impairment of intangible assets.

Okay. Thank you. There is a question around forward-looking forecast, which we're unable to answer. So I think at this point, that's the end of the questions. And I'd just like to say thank you very much for joining us and continuing to follow the story, and we look forward to bringing news out when we win contracts and when growing the business. And it's been a year of change, and we're looking forward and excited about the future and believe we can deliver great value. Thank you.

Thanks, everyone.

Thank you, Chris and Charlotte for updating investors today. 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 Northcoders Group plc, we would like to thank you for attending today's presentation, and good afternoon to you all.