Skillcast Group plc (SKL) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Skillcast Group plc Investor Presentation. [Operator Instructions] The company may not be in a position to answer every question it receives during the meeting itself. However, the company will review all questions submitted today and publish responses where it's appropriate to do so. Before we begin, I'd like to submit the following poll. I'd now like to hand you over to Vivek Dodd, CEO. Good afternoon, sir.

Thank you, Lee. Good afternoon to everybody. I'm Vivek Dodd. I'm the CEO of Skillcast. And with me today is Richard Steele, our CFO. And we'll be taking you through the highlights of our financial year 2022 and give you some insights into how we were trading post -- at the end of the year. So I'll start by giving you some of the financial highlights. Richard will go over these in greater detail in his slides in just a few minutes. But for the year, our total revenues were up 17% to GBP 9.8 million. This is the figure that we guided at the time of our January update. The entire growth of these revenues came from our subscription business, which was up 28%. Our other revenues come from professional services, which was steady at GBP 3.2 million. Our recurring revenue mix as a result of the increase of subscriptions was up to 68% from 62% in 2021. And our gross margin was 70%, which is a composite of the gross margin for our subscription business, which is rather higher than that, and margins in the professional services business that are lower. Our ARR for the month of December 2022 was GBP 6.8 million, which was 16% up on the same month in 2021. The EBITDA, we guided that at minus GBP 0.5 million in our update in January. But when the final figures were out, that was minus GBP 0.3 million. Our cash position of GBP 7.7 million was not very far off the cash that we had at the same time the previous year. During the year, we made significant progress on our investment strategy. We hired key talent in growth roles in top management, including our CFO and our Chief People Officer. Our headcount, therefore, increased from 88 to 111 at the end of 2022. This was a 26% rise. And it was mainly in the commercial, sales and marketing roles, product development and also in building out our organization. During the year, we kept our customer services levels up at a rating of 4.9 out of 5. And we retained our Platinum Service status with Feefo for the fourth year running. We also expanded our marketing activity, which was previously mainly content-led, so bringing people to the website, getting them engaged with our compliance content, with free games, courses and downloadables for compliance officers. We expanded that out to include face-to-face events, which we then formalize into our Skillcast Connect community for compliance officers, which we launched in November 2022. Very significantly, we also migrated all of our clients to the Microsoft Azure cloud hosting platform. This is something that we set out to do at the time of the IPO. It was outlined in our admission document. And we did talk about it in our meetings last year. This work was largely done in 2022 but was completed finally in 2023. And this now opens up new markets for us. Being listed on AIM, we also take our ESG obligations very seriously. We achieved carbon-neutral status last year and are continuing to make progress on this front. We've got more details on this in our annual report. Just on the next slide, confirming our strategy that remains the same as what we shared with you last year and at the time of the IPO. We stayed focused on organic growth. We see great opportunities to accelerate our revenue growth both with new clients and retention of existing clients. With new clients, we are going after higher ACV deals, that is annual contract values, higher than GBP 25,000 a year. We're also looking at providing an offering to the smaller firms to allow them to onboard more easily at a better price point with our core plan. For existing clients, our focus is on minimizing churn through excellent customer service and a good product fit, getting our clients to take up more than just our e-learning product, and through that up-sell, reduce the churn. We're also up-selling RegTech products to our clients, which helps us to again retain the clients and get a greater share of wallet. Our churn this year is lower than last year. And the combination of the outright churn of clients, the down-sells of clients that stay with us but reduced user numbers and the up-sell to the same clients is over 100%. So we are able to extract the same or more revenues from our existing clients that we've had from the previous year and add new clients on top of that. And that's our strategy, which is the classic SaaS approach. In terms of new products, we brought out our Global Compliance and Global Risk libraries. They came out in the month of March this year. Very recently, we launched a library of compliance microlearning modules that allow compliance officers to send out microlearning interventions to their staff to be able to evidence to their Boards and to regulators that they are continually engaging with their staff on compliance issues rather than doing these things only once a year. We're also utilizing artificial intelligence internally in our processes and embedding it into our products. We'll have more news on that in the coming updates. So at this point, let me hand over to Richard to take you through the financials.

Good afternoon, everybody, and thank you, Vivek, for the introduction. Just going over the financials for 2022 in a bit more detail. So just to summarize, total revenues for the year ending the 31st of December 2022 were GBP 9.8 million, which is a 17% increase on the previous year. We have two main revenue streams, subscription revenue and professional services. What we saw in the year was all our growth in revenue at a total level was derived from subscription revenue. And therefore, it grew from 62% of total revenue to 68%. The subscription revenue really is very well diversified. The business started 20 years ago, selling e-learning specifically to the financial services industry. We now have over 1,000 clients. And 45% of the revenues come from nonfinancial services sectors. We also continue to up-sell to existing clients to help our ARR and our net retention by selling what we loosely call RegTech products. These are any sort of products that might be a subscription sale that are not e-learning, for example, SMCR 360 and Policy Hub. Our internal target is to increase this to at least 10% of subscription revenues as we believe this adds value to our overall offer, helps reduce churn, increase retention and increase ARR overall. On that subject, ARR increased as a significant lead indicator for the business by 16% to GBP 6.8 million at the end of December 2022, which is up from GBP 5.8 million a year previously. Churn in the year was at 12%, which is higher than the 7% in the previous year. Underlying churn, as we'd like to call it, did remain in single figures. There were three clients in the EU, one sort of very much a legacy client that had been with the business for many years and is something that we're not particularly worried about and don't see as a sort of an underlying sort of trend in our churn rates. And indeed, so far this year, our churn rates are trending below the prior year. The remaining sort of revenue stream is from professional services. This has remained very consistent at GBP 3.1 million for many years, as you can see on the graph. And it's in line with our strategy to maintain this. As Vivek said earlier, it's a key revenue stream for us but is a less profitable revenue stream for us as we need to use our internal staff to help customize the learning requirements that this revenue stream requires. It's still very important for us to continue though. It's -- a lot of it comes from significantly large clients and is of great value to us to actually understand what the key trends in their compliance learning are, which we can then use and accommodate to adapt and develop our own SaaS generic products. In terms of the P&L, you can see that our gross profit was at 70% for the year, which is slightly down on the previous year by 0.4 percentage points. And this is really due to the transitional costs we incurred on migrating over 1,000 instances of hosted clients from our sort of server farm environment to Microsoft Azure hosting. We've also seen that our EBITDA went from GBP 1.1 million in 2021 to a loss of GBP 300,000 in 2022 as we invested in the cost base as intended. Overheads increased to GBP 7.4 million in the year, which is a GBP 2.4 million or 48% increase on the prior year. This is predominantly through headcount, which increased 28% on average from 78 in 2021 to 100 in 2022. The largest increase was in the commercial teams to help drive the revenues going forward. In terms of our cash flow, as Vivek said, we ended the year with GBP 7.7 million worth of cash, which is only GBP 200,000 less than the GBP 7.9 million that we started the year with. And despite a loss before tax of GBP 0.6 million, we actually generated free cash of GBP 0.3 million in the year and the offset of the loss coming from a significant improvement in debtors, circa GBP 0.5 million reduction in debtors despite the 17% increase in revenue. This mainly came from sort of acceleration in management of overdue debts, which fell as a percentage of total debt as overdue of more than 60 days from 41% in 2021 to 20% in 2022. Just to remind everybody, we continue to pay our -- as per our dividend policy of GBP 400,000 of dividends per year. Moving on to the balance sheet. In terms of items to note on the balance sheet, there's -- it's a very simple, clean balance sheet. We -- just to remind everybody, we don't capitalize any of our tech development or R&D spend at all. It's expensed as it's incurred within the year. Our trade debtors has reduced, as you can see, from GBP 3.8 million in December '21 to GBP 3.3 million despite the 17% increase in revenue. We also have a GBP 0.9 million of non-trade debtor from the Maltese tax authorities. We have some subsidiaries in Malta and some employees in Malta. And we are due GBP 0.9 million back from the Maltese authorities. It's a little bit bureaucratic. But both ourselves and our auditors are confident of the recovery of this debt. The only other items to note on the balance sheet really is the deferred income, which reflects the element of the subscription revenues and the professional services that have yet to be recognized in the P&L., and as you can see, are up on the year. So I'm now going to hand back to Vivek to give you an update on our current trading and our outlook.

Thanks, Richard. So post the year-end, we are starting to see the fruits of our post-IPO investments. Those investments are mainly in headcount and technology, as we mentioned. Our ARR growth rate has edged up from 16% in 2022 to 22%. That's year-on-year, which is an annual growth rate from March 2021 to March 2022. So that's edged up from 16% to 22%. This is helped in part by higher ACV deals. And we have a lot more of those in our pipeline, which is stronger than the same time last year. We've got other products coming up in our pipeline. I mentioned the Global Compliance library and the Global Risk library, which were launched earlier this year, Compliance Bites, which were launched very recently. And we're getting ready a few assessment products to help our clients to assess their staff outside the formal learning programs so that they can -- well, evidence, firstly, to the regulators but also assign training appropriately based on people's competencies. Another point we made throughout this presentation is that we've filled out our key growth roles. That means is that our overheads will not be rising as fast as they rose in 2022. Instead, we should start seeing the benefits of those people who've now been in their positions for some time. And that's what -- the first signs of that, we're seeing with that ARR edging up to 22%. Our trading in Q1 is consistent with achieving market expectations, which require us to accelerate that ARR further from the 22% figure. So just to summarize our investment case. We are operating in the corporate compliance market. So we're helping companies to build more ethical and resilient workplaces and comply with the relevant laws and regulations. This is often a nondiscretionary spend for companies, especially in the regulated sectors like financial services. We've got the breadth and depth of offering by which we mean that we've got a more comprehensive course libraries, which provide us with the depth of offering, allowing our customers to select from our off-the-shelf courses to meet their compliance needs. And we've got the breadth of offering in terms of products that sit outside corporate e-learning, things like policy attestation, staff disclosures and declarations, recording offline training activities, maintaining compliance registers, such as breach registers and gift and hospitality registers. So we are in a position to serve our clients better than our competitors in that way. Our growth rates are faster than the industry growth rates, which are depending on the -- on companies coming out with results, and the analysts forecast anywhere between 15% and -- 5% and 15%. We're growing much faster than that. We've got the product as well as the team to take this growth even to a higher level. So at this point, I'll stop and take questions that you may have. We've got some questions that have been coming in.

Vivek, Richard, thank you very much for your presentation this afternoon.

[Operator Instructions] Just while the company take a few moments to review those questions submitted today, I'd like to remind you that a recording of this presentation, along with a copy of the slides and the published Q&A, can be accessed via our Investor dashboard. [Operator Instructions]

Thanks. And so I'll start with the first question that came in here. Can you expand on the pending launch of your new multilingual product? What are your expectations here in adoption by clients and possible revenue to the group? Well, this launch actually happened earlier on this year. So we launched our multilingual Global Compliance and Global Risk libraries, the two libraries, distinct libraries. We launched them in March this year. Our sales cycles being what they are, we'll start to see the impact that they generate on sales by June and July this year. It does enable us to serve our clients in the EU much better. But there are U.K. clients as well that have a global presence. And these libraries do appeal to them as well.