Skillsoft Corp. (SKIL) Earnings Call Transcript & Summary

Good afternoon, and welcome to our next session. My name is Sheldon McMeans, and I help support Raimo covering the U.S. enterprise software space. I'm really pleased to be here with Skillsoft CEO, Jeff Tarr; and CFO, Rich Walker. Jeff, Rich. Thanks for coming.

Thanks for [indiscernible] Sheldon.

To get everyone on the same page, it would be great to get a high-level overview of what Skillsoft does and the challenge that you help your customers solve.

Sure. So thanks, Sheldon. Skillsoft is the largest provider of enterprise learning solutions. Business was founded 25 years ago, we've taken the business and we've M&A an organic investment turned it into a provider of multi-modal working solutions, All that sit on an AI-driven learning experience platform, primarily recurring revenue business, about $550 million of revenue. The last 12 months, the most recent quarter, we delivered a 20% EBITDA margin. So the kind of business that as a growth should create meaningful shareholder value. The problem that we solve for our customers is we work with the largest customers on the planet. The Fortune 1000, we serve 70% of them. And what we do is we help them with the toughest reskilling, upskilling and workforce transformation challenges, helping them train their employees helping them ensure their employees have a compliance -- have good compliance training, but also good technology, training, leadership and business skills, coaching a full suite of offerings.

Great. And Jeff, Rich, when you started with Skillsoft and you on the SumTotal side, to be candid, there was a lot of moving parts with the transaction, right? If you look at your resume, Jeff, you've been CEO of DigitalGlobe for a while, IHS, and you could argue that there was less of kind of hair and things that were going on regarding the transaction, the restructuring. So what opportunity did you see with Skillsoft and what made you join there because probably it was the -- probably your biggest challenge.

Well, look, what we did with Skillsoft is we returned the business to public markets. Changed out the CEO and half the management team and executed a merger, all on the same day. So all things that I have done multiple times in my career. I've just never done all three of them on the same day. And that certainly created some challenges early on because simultaneity creates challenge. But it also creates opportunity. We moved very swiftly to sell off SumTotal, which was a noncore part of the business. Rich led that. He managed that business and got it to a good solid exit. We acquired Codecademy to bring hands on learning into the suite. We acquired Pluma to give us coaching, and then we blended all of this together to create transformative learning experiences, which really creating a new way for people to learn online, a way that technology enables but hadn't been done before.

Got it. And Skillsoft like you mentioned, has been around for 25 years, and you kind of think about maybe there was a legacy aspect before which you changed with the repositioning of the portfolio. Where is customer reception on kind of the new skill soft and where you are? And I think Percipio and the new platform there is probably a big part of that compared to skill port that you had in the past?

Where the value proposition is really resonating most strongly is with our largest customers, who are the largest companies on the planet. And they're in like, customers who have truly complex workforce transformation needs and reskilling challenges for whom this is a strategic imperative. I'd contrast that to a segment of the market that we're learning this just to check the box, SMB and certain customers where they're just looking to toss a benefit to their employees, that's not the sweet spot for us. The sweet spot is where there are really acute -- there's as an acute need. And therein, we're the one with the solution for that problem.

Great. And you recently reported Q3 results on Tuesday to maybe level set the crowd here. What were the highlights for you?

Yes. Reported on Tuesday, in fact, Tuesday afternoon, as you said, Sheldon, I think kind of three groupings. The first is a real organizational focus on profitable growth. And in an environment where profitability progression is being recognized as opposed to simply top line growth. So we expanded our margins again in this quarter. We've expanded the almost 500 basis points since the beginning of the year. the business content and platform business. We do have two segments, 75% to 80% of the business is a recurring subscription-based software business. The remainder is more of a transactional instructor-led training business. And our content and platform business, best to look at us on an LTM basis. A few quarters are more choppy in a pronounced fourth quarter for us. So on an LTM basis, the content business grew at 4% and which is up from 1% in Q1 and up from 2% in Q2, some accelerating growth in that business. DRR is over 101% for the third quarter in a row. That metric is also up 300 basis points on a year-over-year. And we have some of the larger companies Jeff was referring to, but actually have 110-plus percent DRR. The instructor-led training business is pretty consistent sequentially, both on bookings and revenue, but we had expected that it would grow and we didn't see that growth materialize. We think it performed in line with the market. A lot of our large tech partners are experiencing similar slowdown in virtual and instructor-led training. And it was more acute and perhaps pronounced in Europe, where we saw pronounced slowdown. But we continue to execute, execute in the ILT business.

I mean the key is the portion of our business is the bulk of our revenue and the vast majority of our EBITDA, again, recurring and growing very nicely. And we believe there's upside from there because that 110% dollar retention rate at the upper end of our market, we're still just scratching the surface of the share of wallet opportunity in front of us.

Great. And I wanted to touch a little further on that EBITDA margin progression, 500 bps since Q1. I'm sure you wouldn't want us extrapolating 500 bps every three quarters going forward. But what were the main drivers of that? And then when you think about kind of this baseline around 20%, is that something that's sustainable going forward? Or is there any kind of onetime considerations to think about here?

So I think it's a culture of kind of continuous great article in the Wall Street Journal about micro-cutting. And it's 20 people here, it's people there. And I think when the organization starts to think there's an unrelenting cadence to look at our -- how we're organized, where we're investing and deploying resources. And we just keep grinding that expense wheel and driving more and more efficiencies. Some of it is naturally coming to us as we deeper and further integrate the acquired businesses and realizing the synergies that we had expected at the time we acquired them. And a lot of it is just stop start. Direct resources to those areas of the business that are growing and deemphasize and deprioritize. There's a combination of force reduction, force tuning as well as program spend. And really beating up on vendors that like to beat up on us at times as well. So I think that cadence -- we made an important comment, Sheldon, in the earnings call about our confidence in that continued progression. And while we've not given guidance, we do believe that we'll be at 4x or less gross leverage within the next 3 years. And that's really a demonstration of our confidence that we'll continue to expand both margins and absolute EBITDA.

One asset that the company has -- is quite valuable. Our single largest location is in India. And we have been systematically offshoring as much activity as we can to that location, and that's also helped with margin.

Got it. And then is there anything -- it's pretty interesting, especially when you think about content creation and some of the efforts that you're doing such as localizing different content assets to different regions. Is there potential to leverage GenAI in either that way to create efficiency and that maybe could help on the cost side as well.

Well, let me just say, GenAI is transformative for us. It is changing what we teach, how we teach and how we work. And the point that you raised is in terms of changing how we work, absolutely allows us to drive efficiency into our marketing, into our content creation and into the localization of our content into additional markets and languages. So there's lots that we are doing. AI is part of the DNA of the company. Percipio was built with AI at the center of the platform. And from a GenAI perspective, it's -- we've been evolving our curriculum. We've been developing new products. We launched CAISY in the quarter. CAISY is our -- is a very powerful simulator, which allows learners to learn by doing, by engaging in difficult business simulations, getting real-time feedback. And there's a lot more to come.

Great. And so you've been in the seat for about 2.5 years now, and we already talked about a number of transactions, global knowledge at the beginning there, Codecademy and Pluma. When you think about where the portfolio is now, do you feel like you have the assets that you need and now it's more about execution or are you kind of continually thinking about different potential assets in the market that you could enhance your portfolio with?

We believe we've built the most complete solution in the industry. And our -- at this point, we're not focused on M&A. We are intensely focused on continued organic development, especially in the area of GenAI and to continue to blend our capabilities into increasingly immersive absorbing and transformative learning experiences.

Great. And along with the portfolio changes and you've talked about some personnel changes that you've made. So you've done a lot on the go-to-market side. And I was just thinking, what are some of the challenges that you might have faced and any learnings there? And kind of where are we in this process of changing the go-to-market?

Yes. Certainly, with go-to-market, it's our single biggest opportunity in front of us is to continue to strengthen our go-to-market. I think the single biggest, I guess, learning is as we've advanced our portfolio and developed more complex products, more complete solutions, embedded professional services into the offering, what we found is our best customers demand a level of consultative selling. That's different than the old Skillsoft that primarily was selling linear e-learning content. That has taken longer to find those kinds of salespeople, to get them up to speed, to enable them for them to build their pipelines of activity. And I believe there's still a whole lot more opportunity in front of us to unlock. The other place where we've made some progress, but there's more progress to be made is on the lower end of the market where it's more of an inside sales motion, and we see more opportunity to digitally enable that sales motion, taking some of the capability we acquired with Codecademy and leveraging that to serve our enterprise customers. We believe that has opportunity in front of us, too.

Great. And so level setting again a little bit here. So Skillsoft is not a HCM suite vendor but a corporate e-learning platform. And with the sale of SumTotal, you did have some HCM assets that you divested there. And I think that has helped on the competitive front, right? Because when you think about the Workdays of the world, those Ceridians of the world, they're not creating their own content. However, they have massive installed bases that could serve as an opportunity with you. I believe your Workday Connector went live in Q1 or around that point. I maybe a little wrong there. But what are you kind of seeing on the partnership side with the HCM suite vendors and the opportunity there?

Well, what I'd say is Percipio, our learning experience platform integrates today with every major learning LMS, learning management system, or HCM. So very broad connectivity. It also integrates -- we allow -- just about every major content provider to integrate into us. So it's a very open solution for the customer, and we're seeing more and more customers turn to us as their learning experience platform because of these capabilities, the learning management system integration and the content partner integration.

Is there an opportunity to kind of expand on a potential co-sell motion with these vendors as expender goes into an account and trying to sell their HCM suite platform and can bring you along and help you with...

We do that today. We do that with SAP. SAP is a large reseller partner of ours. We have a referral program in place, relatively new one with Workday, and there are others.

Great. And I want to touch back on customer penetration. You mentioned about 70% of the Fortune 1000. When we look across the rest of the enterprise software space, that penetration is very high, right? And my question is, how should we view this penetration? Are you typically only in one or two departments. Is it enterprise-wide? And then as you think about elevating your sales motion, the C-suite and trying to -- and I bet being a little more consultative, helps in kind of that motion. Like does that vary? And then one -- does customers typically have more than one provider or...

So high penetration, typically headquarters as opposed to some local regional buy, but very low share of wallet. Because when you think about the full learning spend, the learning experience platform, the video content. Both the proprietary content and the custom content that exists inside of many of these employers adding the coaching, add on the instructor-led training and look at it across leadership business skills, technology training and compliance because we do all of it. We are really just scratching the surface of the share of wallet opportunity in front of us.

Got it. And I have to ask the macro questions, and we have a few macro crosswinds here. So we still have a relatively tight labor market when we look -- take a step back and look at it at a multiyear view. And however, companies are scrutinizing spend. We hear a lot of the companies here talking about elongated sales cycles, particularly on the new side of business. How are these kind of crosswinds playing out for you?

I would say that recurring revenue part of our business, which is our core platform and content business has been quite resilient. And as Rich pointed out, we've been gradually accelerating the bookings and revenue growth in that portion of the business. More economic sensitivity in our transaction and structure-led training business, but that's an increasingly small percentage of our revenue, even smaller percentage of EBITDA and free cash flow. And then we have a consumer business that came along with Codecademy. And while the B2B side of Codecademy is growing quite nicely, the consumer side of it has softened from the over the last year with the entirety of the consumer market. But I think what's important to note is we've managed the bottom line on those two slower-growing parts of our business. And we have a really healthy margin structure on the growth part of our business, which is platform and content. Rich, anything to add on that?

Yes, I think you're right on. I wouldn't add anything.

Great. And how should investors think about your growth in terms of new customers versus existing customers?

Our greatest opportunity, as Jeff alluded to, with existing complex companies. Deeper penetration, deeper wallet share. An equally attractive opportunity is new customer acquisition. And that may be at lower maturity part of the curve from their needs aligning with our needs. But there are many large companies that are increasingly consolidating vendors where we can provide a more comprehensive suite. So growth in both new logo acquisition is going to be important to us, key focus.

That vendor consolidation trend has been very real as of late, where we've seen a growing number of customers who may be buying one part of the portfolio, consolidate multiple vendors on to Skillsoft.

Yes. And I was at the HR Tech Conference and there was, I think, 460 different vendors there. So a lot of different players in this space. You've talked about three content SKUs. So you have tech and dev, leadership in business skills, compliance and ethics. How should we think about the penetration within those three SKUs? And then as you've kind of developed that cross-selling motion, what inning are we in? Are there areas of improvement? And...

Well, leadership and business skills is the kind of the core -- the root of Skillsoft, the 25-year-old business. So more highly penetrated there. The bigger growth opportunities are the cross-selling to our to Codecademy, our tech and dev offering, cross-selling our compliance business and then coaching, which is been performing nicely since we acquired Pluma, a couple of years ago. So lots of opportunity there as well.

What I'm reflecting on some of the earlier discussion, the company has moved from a product centricity, having conversations about only tech and dev or LNB or compliance. And moving to the point really understanding what problem the enterprise is trying to solve and then designing some configuration of our capabilities across all three of those. So the discussions are more solutions based, outcomes-based as opposed to product or SKU based.

If you look at the GenAI opportunity, it's not isolated to any one of those traditional categories. It blurs them all. If you want your workforce to be able to make good use of the technology, your employees need to know how to write prompts, but they also need to know how to apply in the customer service setting. They need to apply it in a management setting. They need to be compliant certified and using it safely inside the workplace. So it blurs the line and I think that is increasingly an opportunity for us to drive growth.

Great. And I do want to touch a little bit more on the ILT business. So certainly seeing some macro pressures there and last year had some changes in partner subsidies and once we kind of lap that, those changes, which I think is maybe like caused a little bit more of a short-term deceleration. How are you kind of viewing the business in the longer run? And how should investors think about that?

In the longer run, I believe that, that should be viewed as a relatively flat business over the long term, in part because there's a migration to the asynchronous learning, the subscription side of our business. So expect to see our subscription business continue to grow and hopefully see that growth accelerate and the ILT business to become, over time, a smaller percentage of the total mix.

Is there an aspect of kind of the economy? I remember it seemed like the global knowledge or previously global knowledge at the time was doing well, kind of post COVID, when we had a lot of digital transformation initiatives, a lot of large kind of IT projects and things like that. Would -- is there a potential to see kind of a bounce back from that perspective? Or should we kind of think...

Well, it does ebb and flow with IT spending because the ILT business is -- I mean that's what our ILT business does for the most part, is train the employees of the 50 largest hardware and software vendors in the world. It's the largest platform at what it does. It's instructor-led. So it's entirely synchronous training and there's a place for that. There will probably always be a place for that. But but there's a smaller place for that than maybe there was a few years ago.

Got it. And you did touch a little bit on CAISY, but I wanted to ask a little bit more about it. and it simulates challenges, and I think you said that, but a little more on CAISY, I think you have some initial use cases online you're going to add some more here. And what's been the early reception on that? And how does it fit into your broader strategy?

Well, the earlier reception has been fantastic from customers and from analysts. We've had numerous analysts come out and cite this as being the most sophisticated and advanced AI coach that -- in our industry. Our customers are telling us -- giving us similar messages. We've partnered with a number of customers to create scenarios. We launched with five scenarios ranging from customer negotiations and dealing with customer services challenges to dealing with difficult employees. Within each scenario, there are different personality types and styles so that you can practice with different types of variations on that situation and get really great feedback. It's also very safe. We've done tremendous testing on this. So it's really safe inside the enterprise. And we have 50 more coming this quarter, 50 more scenarios that we're developing with customers to meet our customers' needs.

Great. And how do you charge for that? Are you charging that explicitly? Or is it bundled in.

We debated that. We ended up bundling it into our mid-tier subscription. So it's an upsell opportunity from our base level subscription.

Can you talk a little bit more about pricing and packaging and kind of those tiers and how that's evolved?

Yes. What we have Skillsoft Essentials, which we recently launched, which is designed to provide an alternative at the low end of the market. We have a Skillsoft expert which includes interactivity, interactivity from Codecademy, interactivity in the form of CAISY. And then we have higher level offerings that include coaching. We are a large provider of coaching to some of the largest companies in the world and then structural led training.

Great. And a question maybe for Rich, you have a term loan maturing in 2028. How are you thinking about the current leverage position and your thinking there?

So gross leverage is about 6.3x, net leverage is low 4s. We have consciously -- one, we don't believe that we're overlevered at this point. Capital allocation, share buybacks, debt retirements or a Board-level decision. And there is a cost to the liquidity position, what we call our fortress balance sheet. We have about $130 million of cash, $7 million of restricted cash. And we're confident with the progression, the statement I had spoken about earlier in our ability to organically delever. And I -- and while we're not currently acquisitive -- there is still some uncertainty as to what opportunities may develop and what we can do but we're primarily deploying capital organically to our highest and best use growth opportunities within the business.

Great. And I know there's 1 minute left. I just wanted to see if there's any audience questions that anyone would like to ask? Great. Well, I have one more here. And so I guess when you're thinking about the -- it seems like reinvestment is kind of the biggest priority of your usage of cash flow. And then you also have share repurchase program? And then what about repurchasing debt? And where is kind of your priorities lie there, mainly with the latter two?

Yes. I think we're -- we always evaluate all of them. While we're not intending to be acquisitive, we take a very ROI-centric approach to it. and where the stock is trading, it may warrant a reasonable allocation of capital there. The Term Loan B has traded as low as [ 85 ]. It's currently at [ 95 ], mindful of where that trades every day. But you said it well, Sheldon, I think we're striking that balance, continue to advance EBITDA and margins. but make sure we're very surgically investing in organic growth and striking that balance as we go through. So our priorities are primarily internal investment now.

Great. And that was my last question. So Jeff, Rich, I really appreciate the time here, and thank you.

Thanks so much.

Sheldon, thank you.