Skillcast Group plc (SKL) Earnings Call Transcript & Summary

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

Good morning, and thank you, Alessandro, for the introduction, and welcome, everybody, to our interim update for the 6 months to the end of June 2023. My name is Richard Steele, CFO, and I joined in May 2022, and Vivek is on the call as well and we're here to answer questions at the end, and is the CFO, clearly. So in a nutshell, just to remind everybody, we are a B2B software as a service business that's been around for 20 years. We specialize in compliance e-learning and associated regulatory tech. We believe we are very much a nondiscretionary demand offer. And we've seen that with our growing recurring revenues. We've just grown our employee base. We've now got over 120 employees with offices both in London, Malta, and we've got over 1,000 clients buying our software and services. We did raise GBP 3.5 million at an IPO in December '21 at a GBP 30 million valuation to help us accelerate our growth. So in the 6-month period that ended, total revenues were GBP 5.2 million, up from GBP 4.4 million or 15% from the previous year. We have made a small loss in terms of EBITDA as expected because of the increased investments we're planning to make. Despite that, our cash remains very resilient at GBP 7.6 million in the bank with no debt. And our key lead indicator ARR is up at GBP 8.1 million. Clearly, we want to keep growing our subscription revenues, and we've seen that increase to 75% of total revenues. We also plan to, as announced this morning, pay an interim dividend of 0.168 pence per share, in line with previous years and our dividend policy that we have under IPO. In terms of operating highlights, we are supporting the growth in our ARR by we launched 3 new products in the first half of the year. We increased our commercial activity. We've invested in our technology environment. And we've started to see evidence that all these investments we're making is starting to help a return to profitability. At the same time, we've managed to maintain our very high award-winning customer service to all our clients. So just talking about our operating highlights in a bit more detail. So we've had a very busy first half. We've launched 3 new products. The first one was in February, a product called FastTrack. This is effectively a facility where learners that can undertake a preassessment. And if they pass that, it reduces their learning time. So for the regulatory quarter, they need to do every year. This reduces the amount of time they need to spend on them, which has been very well received. We've also launched in March 2023, some Global Compliance and Risk libraries, which is a lot of the products we have is very U.K.-specific legislation, but these Global Libraries they aren't restricted by that. And the aim is to help boost our upsells by selling sort of non-U.K. specific libraries to some of our multinational clients. In April 2023, we launched a new sort of format micro learning called Compliance Bites, which are sort of short, animated videos designed to improve employee retention. We've also continued to see more activity on the commercial side. We've increased our marketing activity by having large stands at 2 major trade events, one in the U.K., one in Europe in the first half of the year. We've continued to hold face-to-face events, breakfast seminars, dinner seminars, which we've found a hugely successful and popular with our compliance officer client forum. And we've continued our heavy sort of launch of blogs and webinars that really has a positive impact on driving inbound leads to increase our funnel. We've invested in technology. One of the things we mentioned when we were at IPO was to invest to migrate all our 1,000 clients from our server-based system to the Microsoft Azure Cloud, which all completed without a hitch in March this year. We've also really invested in cyber prevention. We've got 2 dedicated employees internally, plus we've bought in extra software tools around endpoint detection and secure access this year. And we've started to really leverage AI in both our product development and tools in the wider business to improve productivity. We put in a tool recently to sort of help forecast our pipeline growth. We put in a tools to help reduce our language conversion costs and other tools that we're using in product development, too. So we really feel halfway through the year that we are really poised for growth now. We filled most of the main growth roles that we identified. We've really started to embed sort of governance reporting frameworks with the non-execs and other key hires in the business. And despite doing all that, we've managed to maintain our excellent Platinum Service Award of 4.9/5. So ARR, annualized recurring revenue is our key measure as it is for many SaaS businesses. And as you can see from the graph on the top left of the screen, this has increased to GBP 8.1 million or 27%, up from where it was at 30th of June 2022 and GBP 1.3 million or 20% up on where it was at December 2022. Most of this, unsurprisingly, this growth has come from new customers, and we've really seen that go over the 1,000 customer mark, which is a real landmark for us. But despite that, we've also seen net retention hold up at 104%. Admittedly, there is an element of price rises. In that, we put our prices up at the beginning of the year to renewals and May last year to new customers. So we're seeing some of that impact come through in our ARR. But despite that, we've still also seen a reduction in our churn on the year from 7% last year to 3% this year. You can also see that one of our sort of strategies was to increase our portion of subscription sales that are coming from Regtech, which is sort of the stickiest sort of add-on tools. We have more than just e-learning. And we've seen that increase from 10% last year to 11% this year and actually grow by 34% from a slightly lower base. All that is really helping, as you see on the bottom left to continue the very strong trend of increasing our amount of recurring subscription revenues as total revenue, which is now up to 75% of our total revenue stream. And what you can see on the top right is that lead indicator of outgrowing ARR feeding into growing subscription revenue with subscription revenues going up from GBP 3.1 million in H1 '22 to GBP 3.9 million this year or 23%. So looking at the P&L. As you can see, as I've just said, subscription revenue is driving all the growth up 23% on the year. Professional services staying pretty much flat. As we said at IPO, it's a lower-margin revenue stream and a harder revenue stream to manage and to forecast. So total revenues overall are up 15% to GBP 5.15 million. Our gross profit did drop from 69.8% last year to 66.5% this year. The main reason for that drop is due to the fact that while we were transitioning from our servers to Azure, we had some sort of higher transitional cost for this year. We've recently entered into sort of a semi fixed term contract with Azure so we can cap an element of those costs. So we do expect that gross profit margin to rebound and increase again in the second half of this year and next year. Our overheads have increased by 26% from the year to GBP 4.3 million. But importantly is we're seeing that rate of overhead growth. It decreased from 50% this time last year to 26% as the level of investment is slowing and as we fill all our growth roles. So on that basis, our EBITDA has increased from minus GBP 0.2 million to minus GBP 0.7 million this year, but very much in line with our plan. And because of our cash reserves and our dividend policy, we're going to maintain our -- maintain our dividend payment of GBP 150,000 cash or 0.168 pence per share. Just at the bottom, I've highlighted our head count statistics. The vast majority of our overheads are in people, and that's both in the overhead line and the gross profit line -- in the cost of sales line, sorry. And we've seen our average head count increase by 20% this year to 114, again, down on the 32% increase last year. And our total people costs have increased by 29%, again, down from the 41% last year. In terms of the balance sheet, we have a very sort of healthy and clean balance sheet. We don't capitalize any of our R&D. We expense it as it's incurred. Our receivables have reduced from GBP 4 million June last year to GBP 3.7 million this year despite the increase in sales and revenue. Our cash has remained pretty much constant despite the loss of GBP 7.6 million. And our deferred income on the other side of the balance sheet has increased 24% from GBP 3.4 million to GBP 4.2 million, which is really a reflection of all the -- of the growth in ARR and all the revenue that we've not yet recognized, but we've invoiced to clients. So in terms of cash, I'm really pleased that we only burnt just about GBP 100,000 worth of cash in the 6-month period despite a loss of GBP 800,000. And the main reasons for that is we have improved our working capital and our debtor days, reduced our debtor days on the year. Plus, as I mentioned, we -- most of our subscription clients invoice, we invoice annually upfront, and they pay within 30 days. So by growing the ARR really helps accelerate the cash that become -- that comes through. Moving on to our strategy, just to remind everybody, we are very much focused on growing organically. Focusing on building what we've already got. And as we've proven that since the IPO despite the market turbulence we've seen, especially in the tech sector, we are continuing to sort of grow and deliver very much on the guidance that was given at the time and a very -- what we believe is a very resilient and growing market. We are still very much focused on subscription growth, as you've seen, that's continuing to grow as a percentage of total revenue and it's now at 75% of total revenues. We are still planning to keep and maintain some level of professional services. We have some great logos out there that helps sort of improve brand awareness and also gives us great insights on the key trends with the big logos that we can potentially use and adopt into our core products. We are -- in terms of new clients, that is still the main area of growth. We are still very much focused on the mid-sized regulated market, which is where we're seeing a lot of our growth. What we are targeting, and we believe there's a big opportunity on the -- at the smaller end of the market, and we are about to start targeting smaller clients with our e-commerce self-serve offering that we are looking at launching later this year. In terms of supporting our ARR and net retention with existing clients, we are continuing and obsessed with our level of customer service, and that really is helping to minimize churn. We also continue to sort of sell and upsell our what we call our sticky more Regtech products like Policy Hub. And we continue to maximize upsells with new products like the 3 products we launched earlier this year. However, we're still continuing to look at selling more new products and developing the whole and supporting and getting behind the whole micro learning trend and AI inside our products to remain competitive, relevant and efficient. So since the end of June, we've continued to trade very well. And we're really pleased with how we're progressing. And as our rate of year-on-year ARR growth is -- has started -- is accelerating since the end of June. So that bodes very well for full year subscription revenues for this year and into 2024. We expect our overhead growth rate to continue to slow now that we filled the key senior roles, but we do still expect to hire new people, but very much on a volume basis reason. And we do plan to increase our prices again around the end of the year to offset the continuing inflationary pressure. Our product pipeline remains strong, and we as I said, we are very excited about launching this sort of low-cost self-serve e-commerce solution in the second half of the year. And just to reiterate, despite the whole technology crash situation that happened just after we floated in December '21, we're proving that we're resilient and continue to trade in line with our long-term plans that we set out at IPO. As a summary, Skillcast is a business that operates in a very -- in a growing pragmatic market of corporate compliance learning. We target nondiscretionary spending, which offers resilience as we've proven in challenging times. Our product portfolio is deep and getting deeper and broader. We are increasing the level of revenue coming from subscription, which gives us more resilience and more forecast stability, higher forecast stability. We've got an experienced management team. We've got a great nonexec Board that's supporting us. And we've got a proven track record of growth, profit and cash generation with a strong balance sheet. And we will continue to, unusually for a sort of small growing SaaS business. We plan to continue paying a dividend, which is yielding currently 2.2%. So thank you very much, and just handing now back to Alessandro.

Perfect, Richard, thank you very much for your presentation. [Operator Instructions] 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. As you can see, we've received a number of questions after today's presentation. And Vivek, if I could just hand over to you just to read out the questions and response that it's appropriate to do so. I'll pick up from you at the end.

So the first question we have here is about the management confirming if we're on track to meet the market expectations for the full year 2023. This is not clearly mentioned in the results that we released this morning. And there is a reason for that. We are confident. We're broadly in line with market expectations on our cost front and the subscriptions that are growing very strongly. They have continued to grow as Richard mentioned earlier. The bit that is not certain is the professional services. We're quietly confident about that as well, but that can introduce a bit of variability towards the year-end. So that's the only variable thing. We are certainly in line with market expectations on the growth of our ARR. That's the main component. So the next question here is asking whether the ARR at GBP 8.1 million will deliver profits through for the full year and beyond based on the small loss on GBP 5.2 million in revenues in the first half and no increase in costs. Just want to correct that impression. We've never said that our costs will not increase. It's just that we feel that we're at the inflection point where our revenue curve is growing faster than our costs. So our cost has slowed down, certainly, Richard mentioned the point that we've hired in our key growth roles, which are always more expensive. And the overheads will grow mainly in line with the revenues in the delivery roles. So we do expect the cost to slow down. We do expect the second half of the year to be profitable, that is in line with market expectations. But for the full year, the market expectations remain for a small loss. So we should start to close some profit back in the second half of the year. But overall for the year, we should still be in a loss according to market expectations. So the third question we have here is about the sales process. How has this changed to see the increases that we have in sales and our recurring. Well, we have tweaked the sales process somewhat, Richard, again mentioned how we are changing the mix, drawing more traffic through blogs, doing more outbound calling for certain products that are right, appropriate for outbounding. So there are some changes there. But the increase in revenue really comes from the fundamental economics of our SaaS sales model, right? Because if we can retain our existing sales from the previous year, and we're running at about 105% retention rate, which means that we're drawing 5% more revenues from the clients that we had in the past year. And we continue to add clients on top of that, so that compounding effect just gives us that steady growth in ARR. So that process is what is delivering the growth and strong growth this year.

Vivek, maybe I could add to that as well. I think one of the key investments we made since IPO is invest in revenue operations. So we've got a key person that has really helped drive measurement of the whole sales funnel and pipeline and the metrics that we've engaged within the whole commercial team has really helped focus on conversion of the pipeline, the generation of the pipeline into higher sales as well.