Skillsoft Corp. (SKIL) Earnings Call Transcript & Summary

Welcome to our next session. I'm on the wrong -- Jeff, just to kind of up to speed, like let's start maybe first with like more like an introduction to Skillsoft. In terms of like the problem you're trying to solve, and then I kind of take it bit from here as a company.

Terrific. Thank you, Raimo. It's great to be here. We are -- Skillsoft is the leader in delivering online learning solutions to the enterprise. And we operate in a very interesting place at the intersection of the enterprise and the learner, both of whom are all about growth. The enterprise wants to grow its business, the learner wants to grow their careers and their earning power and their capabilities. And we're right there in the middle. And we do that, we deliver that solution with -- through transformational learning experiences. Learning experiences that weren't possible a few years ago, but now are possible. And they're possible because there's a lot of capability online. And secondly, with COVID, the world moved from a classroom-first approach to learning to an online-first approach to learning.

Yes, yes. Okay. And then so talk a little bit about that product portfolio that you're kind of having. Like there is the online part and there's the like an off-line part as well. Let's maybe talk a little bit about like the assets that are part of Skillsoft.

Well, the vast majority of the business is online. SkillSoft -- the core Skillsoft business is a subscription business, growing high-margin business that delivers learning experiences. We have 140,000 micro videos. We have assessments. We have blockchain-enabled badges, and they're all delivered on a platform called Percipio, which is a modern AI-driven learning experience platform. So we started with that. And we added to that platform, online coaching and mentoring, through an acquisition. We added hands-on programming through the acquisition of Codecademy, which is one of the leading brands in tech and dev training online. And we also added Global Knowledge, which is instructor-led training. So we brought all these capabilities together so that we could deliver a truly absorbing experience to the learner and align that experience with the needs of the enterprise, the strategy of the enterprise.

Yes. And then like -- I mean, you've been in several companies before, also in part of the other sectors. Like if you think about the opportunities that you saw when you join like what kind of excited you to kind of be the CEO here?

Yes. Thank you. This is a CEO job #5, public company CEO job #3, and what really excited me about this one and prompted me to jump back in is a few things. First of all, a large and growing market, a $28 billion market opportunity when we started out on this journey, 1.5 years ago, growing at roughly 10%. So it's the kind of market that you can grow a really big business. Secondly, a business that I was confident we could build into an unrivaled industry leader. We were starting from a position of scale with terrific partners and terrific backers. And that gave me the confidence that we could take these businesses, these assets and turn them into an incredible industry leader. I'm not in this to be #2 or #3. It's all about being #1. And then thirdly, it's about purpose. I have found that businesses that have a big purpose businesses, that as they get better, the world becomes a better place. Those are truly motivating, not just for me, but also for team members, for customers, for investors. It can get a really powerful flywheel going with purpose-built businesses, and this sure is one of those.

From us, from the public side of the market, like we have -- in the olden days, like you had cornerstones, which kind of is like LMS. Maybe kind of help us, Skillsoft in terms of learning experience versus like the LMSes of this world, like -- how -- what's the -- what function are you kind of solving that kind of people need to be aware of, like to be able to differentiate?

And so if you're talking about the tech stack for HR and learning, in particular, the LMS is an important part of that tech stack. It's about documentation. It's about tracking courses and tying those back into the employee record in the human capital management system. We exist 1 step closer to the learner with a learning experience platform that delivers that experience to the learner and then connects back to the LMS. And we're a content creator. And that's actually quite unique to have both to be a platform and to also be a content creator. We also bring in third-party content and partner with others. So it's a powerful place to be in that tech stack, and it's really the tip of the spear in delivering the value to the learner and the enterprise.

I mean, in a way the big value add is coming from you, because like you're the one that, as you said, creates a platform, but also kind of cultivates the content from the other guys and brings it in, where the LMS in a way, like it's just like a system of record or like or a slightly less value add in that perspective. I guess, what do you see in terms of when you talk with customers like the relative importance of like what you are doing?

Well, I think it's all important, right? We partner with LMS providers, Workday, SAP, Oracle, Cornerstone and many others are really terrific partners of ours and delivering value to the enterprise. Now small businesses can operate without that, and we can actually deliver the administrative tools as well through our Percipio learning experience platform. But more than half of our revenue comes from customers that do integrate us into their LMS. And the importance of the platform is that's where we curate and deliver the learning journeys. They can almost think about Netflix platform -- similar to that Netflix platform, AI-driven and delivers the experience helps the learner figure out what course to take next. And then we layer the content on top of that.

Okay. So there's a lot of this. It's a fair amount of technology investment in there to be like if you think about AI, et cetera.

It's a lot of technology, for sure. And it's very advanced technology. We've re-platformed the entire company over the last few years. So Percipio is new, and it's using the most advanced technology out there in our industry. It's AI-enabled and...

On that note, like, so talk a little bit. That was my next question. So Percipio is kind of the future for the company, like compare like what Percipio does with kind of the old platform that you have. And then how big of the step-up. Is it and how big of a migration is it also?

Huge step-up. Skillport, which was the old platform was built in the year 2000. So we still actually have customers on that platform, not many but a few. And that's more than 20-year-old code. The fact that we have any customers on it is a testament to how sticky this business is. But over the last few years, we've migrated more than 90% of our revenue base on to Percipio, and it's a vastly better experience. What that means for learners is -- well, it's a modern experience, right? And for the employer, it means that there's more engagement in the learning, more development. For our share owners, what it means is higher retention rates and faster growth.

Yes, yes, yes. So if I think about it, like if you talk with your customers, the value -- like the value that you bring in a way and that they kind of want to measure is like, okay, how engaged are my employees with this platform, et cetera? Because like I remember like I used to have a Cornerstone and I was really more I need to do my compliance training and you need to capture that, I did my compliance training. This looks a lot more kind of engage employees to do learning and do more learnings for the benefit of...

It sure does. I mean, it's designed to drive those metrics, to drive learner engagement, repeat usage, completion of courses. And that's critically important now because our customers, the enterprise writes the checks for the solution. They're facing acute skills gaps. There just aren't enough programmers in the world. Everybody is struggling with retention and attracting employees, retaining those employees, developing those employees, filling skills gaps, making do in a world where fewer people are graduating from college. And there's a huge push and opportunity to remove the college degree as a requirement. These are all trends that are driving the importance of what we do. And we address that issue head on. And we address it not by giving people just a long list of random courses that we've gathered. We sit down with the customer, we understand what the customer's workforce transformation needs are and we deliver learning journeys. So perhaps as a professional services firm, that's trying to reduce the time from hire to when that employee is billable. We solve that problem. We're starting a new project or a new product and meeting to train a cohort of employees, to take new roles to deliver on that. That's where we step in and we deliver those types of solutions.

And have you seen -- I don't know if it's -- you talked about that skill shortage. We have the great resignation or the great reshuffle. Have you seen trends just from -- coming more from the employee angle, in terms of like they view learning differently and it becomes more important? There's more like incentive to learn. I know it from the IT world that learning new coding skills and stuff like that, it becomes almost like a -- it's not forced on you anymore, like you want to do that in that.

So true. In fact, we do one of the largest surveys of IT professionals in the world. We do a lot of technology training. And what that survey has pointed out year-over-year over the last few years is people are leaving their jobs, not so much because of compensation, but because of the desire for learning and development and career advancement, and that's where we play.

Okay. Perfect. And then like in that respect, like so you mentioned earlier, you bought Codecademy, which I know is -- my daughter was learning to code, and she was using Codecademy. I think I'm supposed paying per subscription for her going.

I love it. Keep going.

Yes, yes, I know. How does that fit into the broader set? Because it does feel more like a kind of almost like a consumer, but like and end user kind of platform?

So Codecademy has, we believe, has taught more people to code than any company in the world, right? So it is the company that does that. And that same need exists inside the enterprise for several reasons. One, people need to constantly refresh their coding skills. They need to learn how to take -- they may know how to program in Python, but in certain set of applications and adapting to a new set of applications or learning new languages. And so that's an acute need inside of many of our customers. And so we acquired Codecademy, not so much for the consumer business, although that's important to us and we continue to invest there. But because of the opportunity to bring that capability into the enterprise where those programming skills gaps are truly acute. And in fact, I've got a son in his first job, and he's not a programmer by training. He studied business and data analytics, and now he's in a job where his employer has expected him to have coding skills. So this is a really important need in the world today, and we're excited about it. In our first 2 quarters of ownership, we've been able to build a really nice pipeline of enterprise customers. And we've sold Codecademy to some of the most important brands in the world, Fortune 50 retailers, technology providers, professional services providers, and we're still early.

Could we, in a way, see that a little bit like because there were kind of tech industry-focused learning vendors out there, like also public, I think no longer public now. But if you look, you always had like a level of -- kind of technical learning within the organization, but like maybe not quite as much as those specialized guys. This Codecademy in way also need to be seen as like you close that gap and go even beyond?

Well, the real big change is there's been always been enterprise learning, right? Professional learning is part of a critical function within the enterprise. But it used to be a classroom-first model. It start with the classroom and maybe supplement that with online. And now that's completely flipped. And because it's completely flipped, there's an openness and actually a need for robust engaging solutions inside the enterprise. But you can't just take a bunch of videos and say, here's your training. You actually need to have a pedagogy. You have to develop the learning in a way that works online. And by the way, it has to work on mobile, too, because the vast majority of the workforce doesn't have laptops or desktops or even tablets, they're working on smartphones. And you can't consume a 45-minute lecture on a smartphone. You can consume a 1, 2, 3, 4, 5 minute snack almost of learning, and then you need a way to move from that one to the next one to the next one and then an assessment and then being able to hit a button and get coaching, whether it's by chat or live, and then occasionally, instructor-led training has its place.

Okay. Perfect. And then like if you think about like your business, like you add a Codecademy like you kind of some total kind of left you, like talk a little bit about the evolution of that portfolio when you started and to where it is now and where you want to bring it.

We've completely transformed the portfolio through about $1 billion of M&A and divestiture. So we started by adding a structure-led training with Global Knowledge, which was all about getting scale and adding capability in tech and dev where the skills gaps are most acute. Then we added a Pluma, which is an online coaching business. It's been a terrific acquisition. And that allows us to deliver coaching and mentoring to the enterprise. And integrating that with our content is a really powerful solution. And we do that with a highly disruptive pricing model. We then added Codecademy for the hands-on learning, and then we divested some total, some total is an LMS. And the reason we divested it is we wanted to be able to partner with all the LMS providers in the world and do it on a level playing field. And so that was a big part of that decision.

Do you notice the benefits already that it freed you up to kind of been open with some -- the fact that you own some total seen as like holding back some of the other LMS there?

It certainly was holding back, and we're finding much more engagement out there from the other LMS providers. We had relationships before, but it was -- it's hard when you're also competing and we're able to advance those relationships in a different way and still have a terrific relationship with SumTotal and Cornerstone, its parent company and really pleased with how that partnership continues to develop.

Perfect. Okay. Sounds good. And then maybe like more to the current environment, like you just reported like very solid numbers in my view, like this week. So like can you talk a little bit about like what would the highlights from your perspective? And then the -- like we talk a little bit about [ Endemol ].

Terrific. So some of the highlights from this quarter is, first of all, our subscription business on -- and we measure that on a -- the key leading indicator is last 12 months bookings is growing nicely, and so we're -- we feel good about that. That's an important part of our business. Secondly, that we stabilized our instructor-led training business, which is transactional and experienced a disruption earlier in the year when one of the large technology providers for whom we do training changed their business model, and that contributed to a step down in revenue in that part of our business. But we reported sequential growth in that part of our business, and believe we're on a trajectory next year to get back to year-over-year growth in that business. So we felt good about that. Codecademy is growing faster than its B2C competitors, on the B2C side of things. And on the B2B side, good progress cross-selling Codecademy to our first cohort of large enterprise customers.

Yes. So have you seen an impact from macro yet in terms of like -- or how does it manifest itself?

Well, macro manifests itself in the numbers that we are reporting and in the guidance that we've given. In a different environment, we'd probably growing faster. If there was less inflation, we'd have more margin expansion. If interest rates were lower, we'd have better free cash. If foreign exchange rates were better, we have 5 points more revenue. But that aside, we're pleased with our progress, some of which can be seen and some of which can't, because we obviously see things like pipeline and linearity and start to get a feel for next year, because it's a subscription business. And I believe, ultimately, we're going to create a lot of value for shareowners. Because at its core, this is a great business model. It's a recurring business, it's profitable. It is a business that once we get through this first year of putting these assets together should have a really strong conversion of EBITDA to free cash flow. That's the kind of business that has a growth should create a lot of value.

Yes. Like how do you see this? Well, like in theory, like learning is one of those core skills at the moment, like so I'm a little bit surprised as well in terms of like where you shares could have be, like it's actually you're growing and it's one of these kind of future kind of investment areas for every customer. Like if you talk with the management teams out there, like how do they see like their learning journey?

Well, here's what I -- so I attend a number of CEO conferences out there, Fortune CEO initiative, World Economic Forum. I often find myself in rooms where there's other CEOs, usually CEOs of much larger companies than mine. And learning is a really important topic. It comes up all the time. And that's different than it was a few years ago. I recall a few years ago, maybe 5 or 10 years ago, but my Head of HR coming into my office talking to me, might have been about Skillsoft, and my interest level was relatively low. And now the interest level in the C-suite is incredibly high because you can't deal with skills gaps and reskilling and upskilling, and the great resignation without a powerful solution like the one that we deliver.

Yes. No, fair enough. And then last few minutes, I wanted to spend on profitability. Like so give me -- talk a little bit about your philosophy of how you run the company from a profit margin perspective.

Our philosophy this past year when we entered -- in the past year was to look at it through the lens of growth with an EBITDA floor. How fast can we grow without taking EBITDA backwards? And that's been our approach because we see a big growth opportunity. And we do have competitors that are operating at negative EBITDA. We're a profitable business. And our margins are about 20%. So near term, that's how we've been operating the business. Longer term, this is a business that should deliver EBITDA margin expansion with growth. But the key on when we pivot from an EBITDA floor to margin expansion that we haven't done that yet, but that's in our future.

And how do you think about that balance of growth versus margins? Like where do you see like industry growth versus where your growth could be and then the margins to kind of get there? Like how do you kind of come up with that?

Well, if I look forward over the long term, this is a market that we believe is growing at roughly 10%, high single digits to low double digits. And we've put some assets together, some of which, by their nature, should grow faster than markets, some of which by their nature grow more slowly than market. But our aspiration is to get our growth in line with market growth rates, to grow at a little faster than the market. And as we do that, I also would expect us to, over time, deliver margin expansion at a point of arrival that should have margins that are similar to information services companies that have a SaaS, software platform and a content component, and that'll make want so many times.

Okay. Yes, makes sense. And then talk a little bit about M&A as part of that. Like you've been it's a portfolio that you have and you kind of -- you saw some total divestments, like how do you think about M&A and the role of M&A for future growth?

Right now, I believe we've acquired the assets we need in the near term to deliver that transformational learning experience that I talked about. Longer term, I could see us getting back to bolt-on M&A, but in other sorts of M&A, but not in the near term. In the near term, our focus is on integrating the assets we've got, operating the company more effectively, driving growth and margin expansion, paying down debt. Those are some of the things that I'm looking -- we're looking at and focused on for the near term.

Yes. No, fair enough, like maybe remind us like, what's the situation on cash debt position, et cetera?

Order of magnitude, rough numbers, that's about $600 million gross, a little over $400 million net. We have about $175 million of cash on the balance sheet. And we're entering the quarters where we generate most of our cash. It's a seasonal business the way our cash flows, because of the timing of bookings. Q4 is about half of our subscription bookings. So we generate cash in Q4, Q1 typically and then Q2 and Q3, we burn cash. And net-net, this is a business that should be nicely cash generative.

And how do you think about leverage and leverage multiples? And is that changing with the current environment?

Yes, it is changing. I think as interest rates come up for all of us, it's important to keep an eye on that. We're not uncomfortable where we are, but we also believe that for the benefit of shareowners in the long term, we should delever the business. Also, if we can get the leverage down over time, that creates more flexibility down the road perhaps to get back to M&A.

And do you have like it before that, do you have like a target leverage kind of multiple in minds like on net debt-to-EBITDA or something is there, like what's your North Star there?

Order of magnitude, I'd love to see, has get down to 3x. Net, we're currently at about 4x net. So that's a good sense of where I think our shareowners would probably be more comfortable, and take that off the table as something that people are even asking about.

Yes, exactly. And like what's the structure like in terms of like on the debt side, like what's your interest exposure to rising interest rates, like are you kind of...

About half of the debt is -- we have a swap on about half of the debt. So half of it's been essentially fixed, not get flows.

Okay. Perfect. Jeff, I mean, I really enjoyed our conversations and I'm looking forward to the platform evolving and the business kind of evolving.

Thank you so much.

Thank you.

Thank you. Appreciate it.