Skillcast Group plc (SKL) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Skillcast Group plc Investor Presentation. [Operator Instructions] 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, Lilly, and good afternoon to everybody. Thanks for joining us for yet another results update for Skillcast. I'm joined today again by Richard Steele, our CFO. We have introduced ourselves in the past, so I'll move straight to the financial highlights. Well, we've had a good year in 2023. We had subscription revenues growth of 28%. This is off the back of ARR, or annual recurring revenue, growth of 37%. So ARR is effectively our book of contracts, and that grew by 37% in the year. And the overhead growth was rather less at 18% compared to 49% the year before. This meant that the revenue -- the total revenues for the year came in at GBP 11.3 million. That was 15% rise year-on-year. Richard will take us through the details of the financials later, but we've got some of the highlights on the screen. I'll give it a minute, and then move on to the operational highlights. So the performance we had during the year, of the 37% rise in ARR, was off the back of a very high net retention rate of 105%. So that means that we -- our ARR book at the end of the year, of that, the number of clients -- or the value of the book that we started with, we were able to retain 105%. We were able to add to that book. Part of this increase was down to a price increase that we put through in 2023, an inflationary period, and part of it was due to churn, which was lower at 7% as opposed to 12% in the year before. We now serve 1,200 clients, well over that, and maintain a very high customer service, a rating of 4.9 out of 5. We also are able to maintain this high level of retention because of our product innovation, and I'll talk about that in a bit more detail on the following slides. We've added new libraries, added more innovative ways for people to consume e-learning content, and we've repositioned our offering of e-learning and compliance tools into 3 pricing plans: basic, standard and premium. We've also strengthened our offering for SMBs, and I'll speak about that on the following slide as well. I'll also be mentioning our investments in AI, how do we perceive the trends in AI in the market, how clients will consume AI from our platform on that slide. And just a few mentions of strengthening internal governance with objectives and key results and maintaining our ESG standards. So on this slide, I'll just take you through a couple of examples of e-learning innovation. This is mainly to do with the content, and on the next slide, I'll explain what we're doing with technology. So in the content arena -- these are only 2 examples. We are doing several such things. On the left, we've got these compliance microlearning bites. And we feel that this is the way a lot of the compliance training will be delivered in the future. There will still be a place for annual compliance training of the type that we and other providers do in the market today. But we feel that there's a growing need in the market to initially supplement that annual compliance training need with microlearning bites on the same topics, such as data processing, money laundering, market abuse, cybersecurity and whistleblowing. And over time, that would be the predominant way that training will be delivered in organizations. The microlearning bites bring the topics to life within a few minutes, giving practical advice on how to spot issues, the steps to take to avoid them or remediate and how to report them internally. They're followed by scenarios where users get to practice what they've learned in the videos. On the right then, I've got another example of innovation, which is FastTrack, something we have been doing with our bespoke clients for many years, and we brought it in our SaaS, off-the-shelf SaaS offering in 2023. And this enables more experience, knowledgeable clients, people who've done the training on, say, topics like money laundering and market abuse again, to use that knowledge to attempt or preassessment. If they pass that preassessment, they only need to complete a shorter, refresher, module rather than the full course. Not only does this help them to save some time, but also gives them credit for the knowledge that they have and, hence, engages them better with the corporate compliance program. On the next slide here then, I'll talk a bit about our technology, which we've always delivered on a features basis. So it's the Standard Plan that you see here in the middle. That's our business as usual. The majority of our clients come to us for e-learning first. So they implement our learning management system. And once they're happy with that and that's settled in, they may take other features, such as the policy hub, surveys, declarations and registers, which all work on the same platform effectively. So they just need to be switched on. They add these over time. Now we've got a new plan called Premium for companies that want to go the next step in terms of learning innovation,or in terms of digitization or automation of compliance. And in this plan, we bundle together all those features that you find in Standard at a better price point and also includes some additional features, innovative features like Question of the Day or our coming AI feature. And those are only available at the Premium level. On the left here, we have what we call the Basic Plan, which is suitable for really the smaller companies with up to 50 users and teams within larger companies who might otherwise have a separate learning management system, but they want to use us for certain training that's only available with Skillcast. This is a self-service e-commerce plan, where we try to keep the cost of acquisitions down to be able to provide a very keen price point to our clients. And on the next slide here, I'll just talk a little bit about AI, which is all rage. All e-learning companies, RegTech companies are talking about AI in the market. And yet there are some challenges in this area, which all vendors will face, starting with the fact that there are Microsoft and Google already established as good, big players. We are not seeking to reinvent the wheel. We're expecting to leverage on the tools that these big players will provide. The second big challenge is in terms of monetizing AI, delivering to our clients something that they would pay for. And the third challenge is the risk of misinformation and disinformation. We see this very -- at separate levels, at the international levels, this is being talked about. Our own surveys that's showing that compliance leaders are quite wary of using AI, especially in the area of self-awareness and training. And therefore, we are trying out ideas with our clients, which effectively ring-fence the knowledge that the AI will use to only credible sources and curated material, including materials provided by our clients. And we expect to use these to provide our clients, end users with an enhanced experience, something which they're already used to from Skillcast, but enhancing that with the help of AI to address people's questions and deal with issues as they come up. At this point, I'll hand over to Richard.

Good afternoon, everybody, and thanks, Vivek. I'm now just going to run through some of the financials in a bit more detail. Firstly, our total revenue for the 12 months, the 31st December 2023, was GBP 11.3 million and 15% up on the previous year. This was all driven by growth in our subscriptions revenue business that grew to GBP 8.5 million, up 28% in the previous year. Our nonstrategic professional services revenue fell 12% to GBP 2.8 million on the year. This was really due to the fact that we found that big clients, typically with large budgets, were more hesitant to spend and commit to large projects or large bespoke projects in the current economic climate. The impact on our gross profit was that we actually got to 69.7%, which is 0.4 percentage points lower than the previous year. However, this is really impacted by the gross margin in H1 of 67%, caused by the transitional costs of migrating all our clients to more robust, resilient Azure cloud platform provided by Microsoft. Our gross profit in H2 was actually 72%. Our overhead growth in -- our overheads increased to GBP 8.8 million, GBP 1.3 million up on the previous year, but in percentage terms, only 18% up compared with 49% up in the previous year. We feel that we've -- coming to the end of our sort of post-IPO investment phase. Most of that investment has been in headcount, and our average head count increased by 15% to 115% (sic) [ 115 ] in 2023 compared to 100 in 2022. As you can see on the graph on the bottom left, our core strategic revenue -- subscription revenue continues to increase as a percentage of total revenues, increasing 47% of revenues in 2018 to 76% in 2023. And the graph on the bottom right shows our annual recurring revenue increasing to GBP 9.3 million at the end of December '23. As Vivek mentioned, this is our key lead indicator and gives a good indicator of what future subscription revenues will be. Moving on to a slide that helps illustrate a return to profitability to everybody in 2024. So what this chart is effectively showing is that our overheads as a percentage of ARR has -- is beginning to decline by half. And in the second half of 2023, it reached 46%, which is similar to the overheads as a percentage of ARR in 2021 in both halves before we IPO-ed. So we believe and are confident that we will be -- we are on track to return to profitability in the second half of 2024. The only caveat to this is the noncore professional services revenues that continue to have poor visibility. Moving on to our cash flow. Just to remind everybody, we are a very cash-secure business. We have no debt. So at the end of December, we had GBP 7.2 million in the bank. Despite a loss of GBP 648,000, we had a free cash flow of minus GBP 100,000, and we received GBP 300,000 worth of interest from utilization, putting the cash on deposits that we had during the year. Our subscription clients all typically contract with us for 12 months. We invoice them upfront, and then they typically pay 30 days after that period. So what we're finding is that our growth is being funded through the cash generated on that -- the upfront payment of those contracts. Naturally, you'll see an increase in debtors and deferred income that impact that as well. And just to remind everybody that we continue to maintain our dividend policy of paying GBP 400,000 per annum or GBP 0.447 per share on an annual basis. This is effectively a legacy policy that we've maintained since IPO and set out as per IPO. Our balance sheet is incredibly clean. We do not capitalize any software or intellectual property. Our noncurrent assets primarily consist of the office leases in both London and Malta and any fixtures, fittings and IT equipment that associated with those offices. The other items we perceive is -- we see is our debtors increasing slightly higher than the revenue increase and our deferred income increasing to the same degree. So -- and there's no real other significant item on the balance sheet. We have received GBP 200,000 in the year from withholding tax credit from our Maltese subsidiary, and we have a debt of GBP 600,000 as of the 31st December 2023 and expect that to be paid within the next 12 months. That's really all I was going to say on the financials for now. So I'll hand back to Vivek now to talk a little bit about our strategy and our current trading.

Thanks, Richard. Jump ahead a slide there. Great. So firstly, regarding our strategy. That remains very firmly driven by organic growth. We feel that we have a very positive external environment of resilient market with inelastic demand for staff compliance. We provide a very good e-learning and very sticky RegTech tools. Our focus remains on new business sales in the midsize segments, regulated markets, such as financial services and adjacent verticals. And as I showed earlier, with the help of our excellent customer service and product innovations, we maintain an excellent client retention rates. We managed to minimize churn so that new sales that we add on, add on top of the -- what we've retained from past years. We are opening up a new front with our Basic technology plan of e-commerce self-serve model. With that, we have a vast and potentially underserved market to go for. In addition to that, we're looking afresh at partnerships and mergers, acquisitions opportunities. In previous years, we've guided that we would not be looking at any acquisitions, and we stuck to that discipline. But from this year, we are scanning opportunities for rather small content providers who can help us get stronger in adjacent verticals to the ones where we are already pretty strong in. Finally, just a quick update on the current trading. That continues to be in line with expectations. We've started the year well and are delighted to hit the landmark ARR of GBP 10 million. You heard from us that at the end of last year. This was GBP 9.3 million. That's growing to GBP 10 million, and that's 36% up year-on-year, that is in March 2023. We've pushed through a 7% price rise this year, and we have implemented standard SaaS terms of service, which include auto renewals for clients. And both of these measures have been well-accepted by our clients. They see the value in the service that Skillcast provides. They appreciate that our price rises are reasonable, in line with increase in costs, and are matched by improvements in quality. And they also appreciate having standardized terms on which they don't have to spend too much time and effort on doing renewals. Richard has already mentioned the point about professional services being slow and suffering from poor visibility. That continues to be the case. The situation in there does vary from month-to-month and quarter-to-quarter. They have started to a slower start this year, although we feel that we will be recovering as the year grows. The next point here is about the Head of Marketing. The reason for mentioning that is this is potentially one of our last key growth roles, and we're very excited about rejuvenating our marketing program there. But also, this heralds a new phase where our overheads will grow largely in line with our ARR. We spoke about product enhancements. I won't go through them again. Some of the ones that we presented today were Compliance Bites, Question of the Day, AI-powered services and embedded compliance. This is one that we didn't touch upon earlier. So this is really about taking our content off the portal and into business processes, including chat, emails, policy documents and other -- and Internet and other such places where staff may find that learning to be useful. Richard demonstrated how we see our path back to profitability later on this year. And at this point, I'll stop and we'll take any questions.

[Operator Instructions]

Okay. I think I can take the first question here, which is about our subscription growth, which was very good at 28%. How are we looking to sustain this? And what has been the catalyst driving this? Well, there are several factors behind this strong performance. The first one, as I mentioned earlier, is a very positive market -- external market environment with very resilient, inelastic demand, the nature of the SaaS business where we can effectively compound our growth by retaining our ARR from previous years and building upon that. What has also been a driver there, of course, is our customer service and our product innovation. And the final point I'd mention there is the new measures, the OKRs, or the objectives and key results, I mentioned earlier, so structures that we put in place internally to improve our governance and predictability of performance. So those are some of the factors, and the same factors, I dare say, will contribute towards sustaining this into the near future. And there's another question here about how fragmented/competitive is the market that we operate in? And who are we competing with? Is it many small players or much larger incumbents? Well, I'll say firstly, that we are one of the larger incumbents. This happens to be a very fragmented market. With GBP 10 million in ARR, we are in amongst the larger incumbents. There are several others and a few that are larger than us now in private equity, firms like Marlowe that went partly private very recently. In terms of the fragmentation. Well, we do compete with vendors on a variety of different fronts because we provide e-learning as well as many other compliance tools, such as registers, declarations. And for some of these products, there are niche providers. So you've got providers just providing, say, Gifts and Hospitality Register. And so we're competing with a lot of firms out there. E-learning reputably has something like -- or corporate e-learning has around 400 vendors in the U.K. Now the majority of those are very small and perhaps serving just a few customers with a very bespoke offering, so not really competing head-on with us. Of the competitors that we come up against often, there's less than a dozen.

Vivek, maybe I could take the next question. Could you discuss the anticipated operational gearing moving forward? As you've seen, our rate of overhead growth started -- has slowed in 2023 compared to 2022. When we believe that we filled -- with the Head of Marketing that Vivek mentioned joining us in January this year, we filled all our key roles. So what we now see is we expect our headcount will still increase but it'll increase really in the lower paid more and in response to volume increases, particularly in the account management area and the customer service area. So we would see a continued slower rate of overhead growth and where most of those overheads are people-related. The average salaries of those people will be lower than the increases we've added to date. So I hope that goes some way into answering that question.