RM plc (RM) Earnings Call Transcript & Summary

Welcome to RM's half year results for 2026, and thank you for joining us. I'm Mark Cook, Chief Executive, and I'm joined by Simon Goodwin, our Chief Financial Officer. In today's update, I'll provide a summary of our results for the period. Simon will go into a more detailed review of our financial performance, and I will then update on the progress we're making on our strategy. This has been a productive period as we execute our strategy. We are a business with a clear vision to improve education outcomes for learners around the world and with an exciting ambition to be the world-class platform for assessment. Last year, we set out 4 strategic initiatives to give us the focus we need to achieve that ambition. These were, firstly, separating the businesses, which is complete for our Assessment division, who now have a separate legal entity and have gone live with a stand-alone ERP system. Secondly, strengthening RM Ava, our adaptive virtual accreditation platform, investing a further GBP 6 million in its development this year. Thirdly, investing in sales and marketing to meet our new business goals; and finally, improving working capital flexibility. I'm pleased to say that we have made a tangible progress on all of the above. More and more of these things are pointing in the right direction, and we are successfully transforming the business. I'll update you on each of these initiatives later in the presentation. Before that, I want to talk about our trading performance. Our continued profit growth is something I'm very proud of. It is a result of targeting growth areas, improving margins and successfully lowering our costs. Adjusted operating profit was up 200% and EBITDA improved by around 49% on the same period last year. In terms of revenue, we are navigating pressures on the U.K. education budgets and the economic impact of the conflict in the Middle East. This has led to softer trading on our Technology and Resources divisions. As a result, overall revenue was lower by 4%. Recurring revenue in our Assessment division grew by 7%, and we are confident that executing our strategy will secure a focus growing RM for the future. We do remain committed to reducing net debt, and I will provide updates on any significant progress when we are in a position to do so. Our lenders remain highly supportive of our strategy, and we have extended the bank facility to January 2028. Looking at the highlights from our 3 divisions. Our Assessment division continues to deliver an encouraging performance, and we are confident we can significantly scale the business. Revenues matched last year's levels at GBP 20.5 million, whilst last year's revenues reflected a high level of one-off projects. We are pleased that the core recurring revenue is up 7% and now makes up 93% of our overall assessment revenue. Assessment pipeline is more than doubled year-on-year as we look to expand into new markets, including government-regulated assessments. New contract wins in the period include 3-year contracts with 2 new customers in the professional qualification space, which is a key area of further expansion for us. We are currently in the busiest time in the assessment delivery and marking cycle. This summer, we have a record of 900,000 papers digitally marked on our platform in a single day demonstrating the enterprise-grade reliability needed for high-stakes testing. Strong performance is fueled by our continued investment in RM Ava, a single platform spanning the full assessment life cycle which will provide both a brilliant candidate experience and reliable operational delivery for enterprise and smaller customers alike, driving future growth. Moving on to our Technology division, a business that has been part of the fabric of U.K. education for more than 50 years, supporting schools with core IT and IT services. The division's revenue continued to face pressures from tight school budgets. As a result, revenue is down 9%. However, we have seen a positive uptick in contract wins towards the end of this period, securing both renewals and new logo business across connectivity, managed services and hardware. To prepare to capitalize on emerging opportunities in this space, we've invested in a new IT service management tool, embedded a new sales structure, and we are preparing exciting new releases for our RM Unify and RM SafetyNet products later this year. Our Learning Resources division, TTS, saw a smaller decline in revenue due to the conflict in the Middle East, which impacted orders in the region as well as creating temporary inflationary pressures across our production and shipping costs. While margins increased by around 3% and divisional contribution improve, thanks to the decision not to initiate a site-wide discount, overall revenue slightly decreased by 3.6%. TTS continues to develop and deliver our own learning products. During the half, we introduced 67 new IP products, including our glow sequencing cubes, which have already received a great reception, generating a steady stream of orders in its launch month. Creating our own unique products rather than simply reselling is one of the key things that continues to set us apart in this highly transactional market. The key takeaway is that we are successfully transforming the company and delivering on the strategic initiatives we communicated as part of the equity raise last year. We are confident that by continuing to drive progress against these initiatives, we will build a focused, resilient and growing business. I'll now hand over to Simon, who will take you through more detail on our financial performance.

Thank you, Mark. The first half of FY '26 has again been a period of significant change in progress within our RM plc. As Mark has already said, we ended the period with all 3 of our operating divisions plus our central corporate functions, each separated into individual legal entities. Our Assessment division and corporate functions have gone live on the new Sage X3 ERP, and as a result, are now largely separated from RM's complex legacy systems. Financially, the period saw continued significant progress across core metrics. Building on the first reported H1 adjusted operating profit for a number of years last year, H1 '26 has seen profitability increase by a further 200% to an adjusted operating profit of GBP 2.7 million, equating to an EBITDA of GBP 5.2 million, a 48.6% increase on last year. EBITDA in H1 was 7.4% of revenue compared to 4.7% in H1 '25. This significant increase in profitability has again come on the back of a slight fall in revenue from continuing operations. Headline revenue reduced by 4.2% to GBP 70.1 million in H1, with both TTS and Technology divisions declining on the back of continued tough U.K. education market conditions as well as exceptional international headwinds. Total revenue in RM Assessment was flat in the first half year, with underlying recurring contracted revenue continuing to grow strongly, up 7.3% to GBP 19.0 million. This continued strong growth in our highest-margin core assessment revenues, combined with the ongoing impact of efficiency improvements and cost savings from corporate overheads is what has contributed to the strong improvement in profitability in H1 '26. Adjusted net debt at the end of H1 '26 of GBP 59.3 million was 0.5% lower than at the same point last year, with the movement in debt across H1 '26 also being broadly in line with the movement seen during H1 '25, reflecting the continued heavy H2 weighting of each of our M3 divisions. Whilst closing net debt remained broadly level with last year, the business continues to see significant improvements in key leverage ratios. At the end of HY '26, this leverage metric has improved by 19.4% to end with net debt being 3.25x the last 12 months adjusted EBITDA, down from a multiple of over 4x EBITDA at the end of HY '25. Other key areas of progress in H1 with the movement of our 3 defined benefit pension schemes away from the trading entities of RM Group and a further extension of our banking agreement out to January 2028. We remain incredibly well supported by our lenders, Barclays and HSBC and are working very constructively with both lenders as well as the trustees of the pension schemes in the delivery of the transformation and ongoing strategy of RM. On this next slide, we show a summary income statement for the first half year 2026. Divisional contribution from the 3 operating divisions reduced roughly in line with total revenue to remain at 16.3% of revenue and 0.2% reduction from last year. As we will see on the later slide, this reduction is entirely accounted for by the Technology division. The GBP 1.8 million increase in operating profit, therefore, has come principally from a further significant reduction in corporate overheads which reduced by 21.6% in H1 '26 versus H1 '25. This reduction has come from all central functions but most significantly in central IT and finance overheads. Net finance costs of GBP 2.7 million reduced by 18% compared to the same period last year. The biggest component of which is a reduction in debt facility interest charges on the back of lower average net debt across the period. Net finance income from our DB pension schemes is broadly in line with last year. Adjustments after tax are 25% higher than last year at GBP 2.0 million, with the biggest contribution to the increase being costs incurred on the legal entity and IT separation projects as well as on professional fees linked to other strategic initiatives. There is no repeat of the GBP 0.7 million tax credit in H1 '25 from the recognition of deferred tax assets, meaning that the group delivered a statutory loss after tax in the period of GBP 2.0 million compared to the equivalent GBP 3.3 million loss last year. I'd now like to take a few minutes going into more detail on the performance of each of our 3 divisions in turn, starting with RM Assessment. Although RM Assessment revenues remained flat at GBP 20.5 million, the division saw continued strong revenue growth in recurring contracted revenues, up 7.3% in the period to GBP 19 million. H1 recurring revenue is now an impressive 33% higher than it was 2 years ago. Recurring revenue accounted for a very healthy 93% of total revenue in the first half of FY '26, up from 86% last year. Although the fluctuating nature of the nonrecurring project revenue streams mean that this KPI is likely to move up and down over time. Recurring revenue in RM Assessment is mainly from customers using RM's platforms to build, set, deliver, manage and mark high stake assessments. Recurring revenue also includes revenue from the third-party scanning of paper assessments onto the RM digital platforms. Growth in contracted revenue, therefore, comes from increased volume of assessments being processed on our platform by existing customers from additional platform functionality being utilized by customers as well as the onboarding of new customers onto the platform. Each of these factors has contributed to the significant growth that has been delivered over the last few periods. The continued investment in RM Ava is critical to continuing this growth. Ava will enable customers to transition from paper to digital assessments at scale, taking advantage of additional functionality within the platform and the new features continually added. Ava will also enable RM to target and win contracts with customers outside of its traditional high-stakes general qualification core market, opening up both the professional qualification and central government markets. On the back of the growth in higher margin recurring revenue, contribution from RM Assessment increased by 11.9% to GBP 7.5 million. Adjusted operating profit, which is the profit made by the division after the allocation of central corporate overheads increased even further by 47.2% to GBP 5.3 million. The allocation of central overhead to Assessment division reduced significantly, both due to the lower total corporate overhead of the group, but also because significant operational efficiencies within the division meant that assessment accounted for a lower percentage of group head count across the period. As a result, Assessment division generated adjusted operating profit at 25.9% of revenue compared to 17.6% in H1 last year. Moving on to Technology division. H1 '26 is the first full half year reporting period since the division renewed multiple key customer contracts including its largest single managed service customer for a further 7-year term. To secure these critical customers for the long-term and in the face of significant competition, price and scope reductions were agreed impacting total divisional revenue and margins. These renewals have contributed to a 19% reduction in recurring contracted revenue leading to a 9% reduction in total revenue and a GBP 1.7 million reduction in divisional contribution in the period. Over 55% of the division's revenue in the period still came from recurring long-term contracted revenue. These long-term customer contracts also provide the opportunity for the division to upsell other products and services. That strategy has started to pay off with an encouraging 7.2% increase in transactional revenue over the same period. However, that growth was impacted by continued pressure on the budgets of U.K. schools, significant global cost inflation in the supply of computer hardware and a much slower deployment of critical central government funding to schools to improve classroom connectivity. The division has also won an encouraging number of smaller new long-term contracts towards the end of H1. These will start to have a positive impact on the results of the division from later in FY '26 and into FY '27. As a result and after the allocation of corporate overheads, the division broke even in H1, but is expected to return to profitability in H2. RM Resources division now entirely made up of the TTS business has had a strong H1 period despite facing into some significant external headwinds. Total TTS revenues decreased by 3.6% to GBP 29.6 million. However, U.K. revenue declined by 3.1% against the comparative period that included significant price discounting by both TTS and its competitors, not repeated this year. While international revenue declined by 4.9%, with continuing geopolitical uncertainty impacting sales in the key target markets of the Middle East and North America. Total material margin, however, increased in H1 '25 versus H1 '26, both as a percentage of revenue and in absolute terms from GBP 13.7 million to GBP 13.9 million. This increase reflects both the decision not to repeat the heavy discounting of the prior year, but also the resilience and attractiveness of TTS's core product range. On the back of this small improvement to material margin, divisional contribution improved impressively by plus 16.7 percentage points on last year through ongoing cost control and operational efficiency improvements. TTS adjusted operating profit also increased significantly to GBP 0.8 million compared to a near breakeven H1 '25 with adjusted operating margin as a percentage of revenue increasing to 2.4 percentage points to 2.7%. Like the Technology division, TTS traditionally sees the strongest period of its trading year during the key back-to-school period. We are optimistic that this improvement in profitability will continue through the critical second half of the year. On this slide, I will take you through the key drivers of our H1 cash flow, and ultimately, the movements in net debt across the H1 period. As I've mentioned, net debt ended H1 '26 at GBP 59.3 million broadly in line with the end of H1 '25. Cash flow in the first half year was an GBP 8.7 million outflow. RM remains a significantly H2 weighted business in terms of profit and cash generation. As you can see from the chart at the top of this slide, which bridges from the GBP 50.6 million net debt at the end of last financial year to the GBP 59.3 million reported at the end of H1, GBP 4.6 million of operating cash inflows in the period were more than offset by GBP 4.2 million of total capital expenditure, primarily on the continued development of RM Ava, GBP 2.6 million of debt interest payments and GBP 1.4 million of lease payments. In addition, during H1, the business incurred GBP 2.8 million of exceptional cash costs before tax on separation and other strategic projects and saw a working capital outflow of GBP 2.3 million due to the unwind of some one-off contractual arrangements. When comparing the cash flow in H1 '26 to H1 '25, using a table at the bottom of this slide, you can see the benefits of the improvements that have been made in underlying profitability and where RM is choosing to continue to invest in the future of the business. Operating cash flows in H1 improved by GBP 1.4 million, up 44% compared to last year. RM made no cash contributions to any of its defined benefit pension schemes in H1 '26 due to the renegotiation with trustees concluded last year. This compares to GBP 1.2 million contributed in H1 last year. Interest and lease payments were also in line with last year. As emphasized during the equity raise at the end of last year, the group saw a one-off GBP 2.6 million increase in working capital outflow compared to last year. Spent an additional GBP 1 million on exceptional costs, primarily linked to separation and other strategic projects and has continued to invest in the Ava platform incurring GBP 3.7 million of total intangible CapEx this half year very similar to the amount incurred in H1 last year. This brings the total spend on Ava so far to GBP 13.5 million of the approximately GBP 20 million total investment identified. The total net cash flow in H1 '26 was therefore GBP 0.8 million higher than the first half of FY '25. Materially reducing the total net debt of the company remains our single biggest priority. Whilst it is encouraging that debt as a multiple of EBITDA has reduced consistently and significantly, bringing the absolute level of debt down is also critical. Balanced against that objective is the need to also invest in exciting future of RM Assessment via the Ava platform as well as in the separation of the 3 divisions from the legacy corporate IT systems, which itself will enable significant further cost savings and strategic optionality. Moving on to the financial outlook to the end of FY '26. Second half revenue and profitability is expected to significantly outperform H1 in line with historical seasonality linked to the timing of global exam sessions and U.K. back-to-school trading. We do, however, expect the external headwinds and challenging U.K. education market to continue to have a negative impact on TTS and Technology. Assessment will continue to show growth in underlying recurring revenue, although some major one-off project revenue in H2 FY '25 will not repeat, resulting in total assessment revenues temporarily declining year-on-year. Corporate cost savings will continue to positively impact profitability in H2, although the annualized impact of previous savings has peaked during H1. The work to separate all 3 divisions away from complex legacy IT systems will progress at pace and we anticipate that exercise will deliver in excess of GBP 3 million of further annualized cost savings by the end of FY '27. CapEx investment in RM Ava will continue in H2 at the same rate as the last 18 months. We remain on track to complete the main Ava build on time and on budget by the end of FY '27, after which spend will reduce to levels more normal for a software platform business like RM Assessment. Our full year outlook remains in line with market expectations for adjusted operating profit, although we anticipate total group revenue to be slightly down on FY '25, mostly due to the challenging headwinds impacting technology in TTS. We fully expect to operate within the agreed banking covenants, which remain broadly unchanged within our newly extended banking facility and revert to more standard leverage and interest cover covenants from the start of FY '27. Now I'd like to pass you back to Mark.

We have a clear plan for the business that was socialized during our equity raise last year. At that time, we set out 4 strategic initiatives to give us the focus we need to grow. These are separating the business, strengthening RM Ava and speeding up its development, investing in Assessment sales and marketing to meet our new business goals and improving working capital flexibility. Today, we wanted to share with you how we are doing against each of these. Starting with simplification. We have progressed with the legal and operational separation of our divisions. RM Assessment has moved to their own dedicated entity with customers and colleagues transferring over. Each division now has its own legal entity so they can run in a way that best supports their own growth plans. Assessment has also moved to a stand-alone enterprise resource planning system. We are replacing our legacy ERP giving each division their own system. This will provide them with the tools to better manage their own data and workflows, enabling each division to act more independently, supporting their long-term growth plans while remaining aligned to enterprise standards. The second initiative is accelerating the development of RM Ava. For more than 20 years, we have helped customers globally use technology to complete their exam marking and delivery. This is an attractive market. Demand is continuous, whether for school qualifications, professional certifications or government-regulated assessments, driving predictability and recurring revenue streams. The cost of change is high, with an assessment platform being used by high volumes of exam, authors, markers and learners, it takes time to embed, which naturally drives long-term contracts. For RM, this is our most attractive growth opportunity. Our core offering here is RM Ava. It supports the full assessment life cycle from building exam content and e-testing through to marking and feedback. Accelerating the development of RM Ava is a key priority, enabling us to capitalize on the growing e-assessment market. Building Ava involves bringing our existing best tools alongside new capabilities into a single cloud-based platform. RM Ava is a GBP 20 million investment and a 4-year project which will complete in 2027. By then, all customers and our current and upgraded tools will be using Ava, giving customers an end-to-end assessment solution with a host of new features. We are delivering the build in phases with exciting new functionality scheduled for this autumn, including one click access to all the modules customers use in one place, the first rollout of our new reporting and analytics module and RM Echo integration into our marking module, which will enable markers to complete malpractice checks on exam content. RM's unique selling point, though, is about more than just Ava. We are a trusted, consultative partner and the safe path to digital assessment. We don't just sell a platform. We provide the road map, industrial scale, technology and expertise required to move to a multimillion candidate credentialing body from paper to hybrid or fully digital. We are already a leader in this space, holding long-term partnerships, including with the New Zealand Qualifications Authority. Since 2019, we have supported New Zealand's transition to digital secondary school exams, where students have given the choice between paper or computer, we've seen a surge in preference for digital. To put that in perspective, in 2019, 14,000 students from 200 schools took digital exams. This year, Term 2 alone saw 180,000 students from 1,000 schools sit exams online with a single day peak of 30,000 students using the platform. This half year also marks an important milestone with another one of our major customers, delivering its first set of global digital exams using our Ava platform. The next initiative is investing in Assessment sales and marketing to retain and capture more of the global opportunities we are seeing. As part of this investment, we recently appointed Dawn Pollard as Growth Business Director for Assessment. Dawn and her team will focus on scaling the business and accelerating growth both from nurturing existing relationships and attracting new ones. Delivering a brilliant experience for our current customers and their learners remains a top priority, which will help us maintain a high contract renewal rate. In 2025, 99% of the revenue up for renewal successfully renewed. We fully expect to maintain this market share in FY '26 with 100% renewal rate in the first half. We see growth opportunities in deepening these current customer partnerships, introducing new features and functionality from the RM Ava platform that align with their needs. Then in terms of attracting new customers, the scalability of RM allows us to increase volumes and onboard a wider range of customers. As I shared earlier, our pipeline has doubled since half year '25. This reflects opportunities not only within our traditional education sector, but also through further expansion into professional qualifications and government-regulated testing where there is a consistent ongoing need for large-scale secure assessment. These sectors require the same reliability and high volume capacity that RM Orderry delivers, giving us a path to sustainable growth. Our investment in sales and marketing will help us capitalize on these opportunities, and we are pleased to confirm that new contract wins in the professional qualification space during the half. Finally, proceeds from the equity raise are providing liquidity while we work to reduce net debt, ensuring we can continue to invest in the 3 growth initiatives I just outlined. Today's results demonstrate that we are successfully transforming the company and making significant progress on our strategic initiatives, including the separation of our divisions and the investment in RM Ava. Our transformation journey continues, and the full results will take time to show, especially as we navigate temporary external headwinds for technology in TTS, which we expect to slightly impact FY '26 revenue. We remain on course to meet full year market expectations for adjusted operating profit and EBITDA with a greater proportion of adjusted operating profit coming from Assessment. By staying focused and delivering on our strategic initiatives, we will build a resilient and growing business, and we are excited by the growth potential for RM Ava as we expand into new sectors. I would like to thank my colleagues for everything they continue to do for RM, for our customers and for making a real difference to the learners we serve. Thank you.