Skillsoft Corp. (SKIL) Q2 FY2026 Earnings Call Transcript & Summary

Thank you for standing by, and welcome to Skillsoft's Second Quarter Fiscal 2026 Results Conference Call. [Operator Instructions] Please note that today's call is being recorded, and a replay of the call and webcast will be available shortly after the call concludes for a period of 12 months. I would now like to hand the conference over to your first speaker today, Stephen Poe, Investor Relations. Thank you. Please go ahead.

Thank you, operator. Good day, and thank you for joining us to discuss our results for the second quarter ended July 31, 2025. Before we jump in, I want to remind you that today's call will contain forward-looking statements about the company's business outlook and our expectations that constitute forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, including statements concerning financial and business trends, our expected future business and financial performance, financial condition and market outlook. These forward-looking statements and all statements that are not historical facts reflect management's current beliefs, expectations and assumptions and therefore, are subject to risks and uncertainties that could cause actual results to differ materially from the conclusions, forecasts, estimates or projections in the forward-looking statements made today. For a discussion of the material risks and other important factors that could affect our actual results, we refer you to our most recent Form 10-K and other documents that we file with the Securities and Exchange Commission. We assume no obligation to update any forward-looking statements or information, which speak as of their respective dates. During the call, unless otherwise noted, all financial metrics we discuss will be non-GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles. For example, listeners should be cautioned that references to phrases such as adjusted EBITDA and free cash flow denote non-GAAP financial measures. Non-GAAP financial measures should not be considered in isolation or as a substitute for GAAP financial measures. A presentation of the most directly comparable financial measures determined in accordance with GAAP as well as the definitions, uses and reconciliations of non-GAAP financial measures included in today's commentary to the most directly comparable GAAP financial measures is included in our earnings press release, which has been furnished to the SEC on Form 8-K and is available at www.sec.gov and is also available on our website at www.skillsoft.com. Following today's prepared remarks, Ron Hovsepian, Skillsoft's Executive Chair and Chief Executive Officer; and John Frederick, Skillsoft's Chief Financial Officer, will be available for Q&A. With that, it's my pleasure to turn the call over to Ron.

Thanks, Stephen. Good afternoon, and thank you for joining us. Economic uncertainty extended Q1 headwinds into Q2 and weighed on revenue primarily through lower customer discretionary training spending. The impact was most pronounced on our live learning offers, which include nearly all of global knowledge products while affecting only one product, coaching and TDS. With clearer visibility and established buying patterns and given Q1 and Q2 contribute 30% to 40% of our annual bookings, we are updating our full year revenue guidance. Despite a lower revenue base, we delivered consistent profitability and improved adjusted EBITDA margins, which reflects the success of our expense reduction, operational improvement and resource allocation initiatives executed to date. As a result, we are maintaining our full year expectations for adjusted EBITDA and free cash flow, which John will cover in more detail. Ahead of our results, we want to update you on our transformation. We're about 1 year into our execution plan, which is producing encouraging proof points, most notably, a fourth consecutive quarter of revenue growth in our TDS Enterprise Solution, which represents more than 90% of the TDS segment. The people transformation and new roles are foundational to the next phase of our transformation, which are driving the new AI innovation-based product road map and our new positioning that will focus on intelligent learning design, skills intelligence and immersive learning experiences. To summarize our key transformation actions since launch last August, we have created and implemented a dual business unit structure, improved our operational execution, conducted a significant shift in critical resources and recently finished building out our talented bench of leaders to drive our strategy forward. In total, these actions helped deliver $45 million in expense reductions, contributed significantly to profitability and margin expansion, and we have begun to stabilize our core TDS enterprise segment. Turning to the second quarter. Broad macro and geopolitical headwinds weighed heavily on GK during the first quarter and continued into the second quarter, with the largest impact coming from slower demand in North America and in the Middle East. These were driven by external factors. As a result, we are updating the revenue guidance. John will provide the specifics. Our teams continue to deliver on our strategic priorities. First, we have focused on leveraging the existing scale of our platform and our relationship management teams that already serve nearly 3,000 customers. I'd like to share 3 examples of customer wins from Q2, all more than $1 million of total contract value, which validate our strength in providing value to enterprise organizations. A global athletic apparel brand partnered with us to enhance leadership capabilities and drive cultural transformation. Our unified learning solution integrated risk-based compliance, inclusive leadership development and innovation training. Our personalized learning pathways and analytical tools help the organization to track progress and elevate engagement while streamlining global compliance. A global semiconductor manufacturer engaged our team to enhance their learning ecosystem for 43,000 employees with a focused AI-powered content and personalized learning paths. The program includes certifications in cloud, cybersecurity and agile methodologies. Our ability to deliver high-impact learning at scale is helping the customer meet aggressive innovation time lines and improve cross-functional collaboration. A leading European provider of digital services partnered with us to launch a large-scale workforce transformation initiative. We were selected for our ability to deliver strategic learning at scale, which we accomplished with them. In just 18 months, the company's global workforce earned over 20,000 certifications in cybersecurity, cloud, data and AI and service management. These wins reflect the growing demand for scalable, high-impact learning solutions as organizations adapt to rapid shifts in workforce and AI technology. To meet this need, we are evolving our product strategy to focus on AI native design, skills intelligence and enterprise-grade flexibility. This shift is not limited to an enterprise HR team. It is increasingly relevant to the executives across the organization who are focused on building workforce capabilities that directly link to measurable outcomes. Later this month, we will share details about a new AI authoring experience designed to change the way organizations create and deliver learning. This innovation is part of a broader road map focused on personalized skills development, scalable certification and advanced analytics. These capabilities will enable enterprises to produce high-quality content faster at a lower cost, localize and govern it at scale, shorten time to competency and quantify the ROI through deeper skills and compliance insights. As part of our road map, we advanced CAISY by adding full voice mode, 5-level proficiency scoring and improved feedback rubric and a new behavior trait for more dynamic conversations. For enterprises, this scales realistic role play, delivers consistent and audible proficiency signals, speeds time to competency, lowers coaching costs and links skills progress to faster sales ramp, higher customer satisfaction and stronger compliance. We expanded global learner support with unified language experience in over 50 languages. We launched an intuitive page builder for custom enterprise landing pages and broadened HR and technology certifications with comparative dashboards by department, geography, each having custom attributes as desired. For enterprises, this delivers faster global rollouts, higher adoption and completion, consistent governance and clearer ROI from skills and compliance gains. Skillsoft Percipio platform momentum continues with technology learners up 50% year-over-year, AI learners up 74% and AI learning hours up 158%. Enterprises are scaling with Skillsoft to close the skill gaps, reach competency faster, adopt AI more broadly, cut training and onboarding costs and improve their KPIs. Bringing it all together, we're confident in our core business' durability and in the strategic investments in our go-to-market and product portfolio, all of which will enable us to return to market growth rates. With that, now let me hand the call over to John to cover our financial results in more detail. John?

Thank you, Ron, and good afternoon, everyone. As a reminder, and as noted at the opening of the call, consistent with prior quarters, this section covers non-GAAP measures unless otherwise stated. As Ron noted, we continue to advance our transformation and are seeing encouraging signs even amid persistent macroeconomic and geopolitical challenges, particularly in public sector spending within our Global Knowledge segment. We have made considerable investments in our go-to-market enterprise customer resources and products. And while it's too early to conclude on the efficacy of these investments, I wanted to share some initial insights. With respect to enterprise customers, we invested in specialized subject matter experts, SMEs, to help our customers make the most of their talent development journey. These SMEs improved dollar retention rates by more than 10 percentage points better than the average. The investments made in Q2 will need time in market for us to see the effects. Aiding this rollout of key investments, we now have a new marketing leader and expect to make some exciting product announcements in the upcoming weeks, as Ron referenced earlier. Now turning to the results. Revenue for Talent Development Solutions, or TDS, was $101.2 million in the second quarter, slightly down year-over-year. Our TDS performance continues to benefit from our efforts to capitalize on the evolving market shift from traditional learning and skills development towards more comprehensive talent development solutions. However, during the quarter, growth in our TDS enterprise solutions was masked by declines in our learner product line, reflecting fundamental changes in the B2C market over time. Global Knowledge revenue of $27.6 million in the quarter was down approximately $2.9 million or 9.6% year-over-year. We continue to see softening demand, reflecting lower discretionary spending, particularly in North America and from geopolitical instability in the Middle East, which impacted GK during the quarter. These market conditions are central to our view on full year guidance, which we'll cover shortly. Total revenue of $128.8 million in the second quarter was down $3.4 million or 2.6% year-over-year. Our TDS LTM dollar retention rate, or DRR, as of the second quarter was 99%. This compares to 99% last quarter and 98.4% 1 year ago. Churn and erosion in our federal business had a material effect on DRR in the quarter, reducing our performance within the quarter by approximately 4 percentage points, putting the materiality of this in the proper context. Now I'll walk through expense measures, which again saw a year-over-year improvement as a result of the cost reduction initiatives we executed in the back half of last year. Cost of revenue of $32.7 million in the second quarter or 25% of revenue was up 1.6% year-over-year, reflecting higher utilization of certain platform features by our customers. Content and software development expenses of $13.2 million in the quarter or 10% of revenue were down approximately 5.9% year-over-year. These improvements largely reflected productivity gains from leveraging AI and a sharper focus. Selling and marketing expenses of $38.5 million in the second quarter or 30% of revenue were down approximately 3% year-over-year. General and administrative expenses were $16.1 million in the second quarter or 12% of revenue, down approximately 10.5% year-over-year. Total operating expenses were $100.5 million in the second quarter or 78% of revenue, down $3.4 million or 3.2% year-over-year. Despite the lower revenue base compared to the prior year period, we once again delivered strong profitability with adjusted EBITDA of $28.3 million, flat compared to last year. Adjusted EBITDA margin as a percentage of revenue for the quarter was 22% compared to 21.4% last year. GAAP net loss was $23.8 million in the second quarter compared to a GAAP net loss of $39.6 million in the prior year period. GAAP net loss per share was $2.78 compared to $4.84 per share in the prior year period. Adjusted net income of $7.9 million in the second quarter compared to adjusted net income of $7.1 million in the prior year. Adjusted net income per share of $0.92 in the second quarter compared to adjusted net income per share of $0.87 in the prior year. Moving to cash flow and balance sheet highlights. Free cash flow for the quarter was negative $22.6 million compared to negative $16.1 million in the prior year period. As we anticipated and as we alluded to in the last quarter's call, most of the positive free cash flow we generated in the first quarter reversed in Q2. However, year-to-date free cash flow remains positive and was approximately $3.5 million as compared to a cash usage in the prior year of $5.7 million. Again, this was driven largely by normal seasonality as Q2 is typically our weakest cash flow quarter as well as timing of collections and certain disbursements in the quarter. Looking to the balance of the year, improving free cash flow and generating consistent positive free cash flow continues to be a top priority. And accordingly, we're reiterating our expectation of $13 million to $18 million for the full year. GAAP cash, cash equivalents and restricted cash was $103.4 million at quarter end. Total gross debt on a GAAP basis, which includes borrowings on our term loan and accounts receivables facility was $579 million at the end of Q2, down slightly from approximately $581 million at the end of fiscal '25, reflecting normal amortization. Total net debt, which includes borrowings on our term loan and accounts receivable facility, net of cash, cash equivalents and restricted cash was approximately $475 million, down from approximately $477 million at the end of fiscal '25. Turning to the outlook for the full year. As Ron already mentioned, we are adjusting our previously communicated revenue range outlook for fiscal '26 to account for the now anticipated continued softness in federal spending. We now expect revenue of $510 million to $530 million for the full year. However, because of continued operational execution and cost optimization, we're reiterating our expectations for adjusted EBITDA of $112 million to $118 million. We also remain confident in our ability to drive positive free cash flow in fiscal '26 and are reiterating our expectation of $13 million to $18 million for the full year. We're continuing to monitor external market conditions and impacts to our business and are diligently focused on continuing to accelerate our transformation and optimizing our performance, including examining all areas of the business for profitability improvements. With that, operator, please open the call up to questions.

Thank you. [Operator Instructions] And our first question comes from Ken Wong with Oppenheimer.

Ron, I wanted to touch on your comments about the softer live learning environment. Appreciate the color in North America and Middle East. Are you able to give any additional color on if any particular sector stood out in terms of kind of material softening? I know last quarter, we saw some softer government discretionary, but I'd love a sense of kind of what end markets might be impacted.

Yes. No, thank you, Ken. The answer is, yes, it's kind of an interesting story. It's a tale of 2 cities here. What I see in North America specifically, I did see public sector get affected in North America and the Middle East in terms of live learning, right? That was a direct hit there. When I look at what's happening in our live learning, in particular, in Europe, we're actually showing good progress there, I think, as John referenced in his comments. So it's interesting. We've been -- and that's a booking statement is what you're hearing from me. We're seeing that progress. So it gives me confidence we see a clear path on how to fix that business and get that business to growth again and proof points that we can do it. And we'll give more color in the near term on what we'll see there, and we'll have some things to share. The interesting part though is where we got really, really hit in the quarter was really public sector. The uncertainty in the Middle East was a big one on that piece of it. And then in North America, the uncertainty that we're all familiar with in the expense guide.

Got it. And any -- I'm sure the natural question from some investors might be kind of why you're confident that this might be more of a macro dynamic versus potentially a competitive situation here. Any color you're seeing in the pipeline or just your deal commentary with customers that suggest that it's more the former rather than the latter?

Yes. When I look down into the bookings and what I'm seeing happen specifically in Europe, which is probably 6 to 9 months ahead of its recovery compared to like the U.S. what I see there is actually really nice large dedicated public sector deals being signed by the team. And that will become revenue and convert over time. And those are nice numbers. We haven't shared those numbers publicly, and we'll figure out when and where if any of that gets shared. But I can tell you that part, I know is working. So that's where I'm getting the confidence from when you hear me say that, and that is where we're really seeing good progress. I would share with you that the rest of the market, when I look inside the sector of virtual instructor-led training and physical instructor-led training, those 2 pieces of it, it's the people who deliver it are also seeing, I looked at about 6 companies that delivered portions of it. And I saw a range of negatives from those companies reporting in that one specific live learning bucket is what I'm referring to. So I saw 4 out of the 6 not have growth. One of them have growth at 1%. So I didn't feel like we were out of -- way out of line with what's the market -- occurring across the market, again, in that narrow sector. There's another 4 or 5 companies I track, but they don't publish numbers. So that's a very important piece, Ken, of what I saw happening inside the market as well as I think about it.

Yes. And I think -- Ken, this is John. A couple of things. So first, from a confidence perspective, we did see some green shoots, as Ron alluded to, in Europe with respect to GK. So we're starting to see some improvement from a bookings perspective such that -- that business is largely -- that piece of the business is largely inflected in that quarter. So that's a 1 quarter inflection point. I wouldn't call it a full inflection, but it certainly gives us a reason to feel a little bit more confident with some of the transformation activities that we're conducting in that region. The second piece really is around confidence. When we adjusted our guidance down, almost all of that guidance adjustment pertained to GK specifically. So we're really trying to do our best to be careful and thoughtful about taking that piece of the risk profile of the forecasting out of the mix, if you will.

Got it. Okay. Perfect. And that somewhat segues into my next question, John. And just you feel that, that $17 million, that 3-point cut to revenue, that feels appropriately fenced off. I mean, would you characterize that as being based on what you saw in your bookings in the quarter? Or did you guys embed some further erosion as a potential safeguard?

Yes. So it's a great question. Thank you. So first half revenue for the company was down about $7 million. When you think about this business from a normal seasonality perspective, from a bookings perspective, about 35% of our business is in the first half, about 65% is in the second half. So we have a bunch of commercial activity happening in the back half of the year. So we took that into consideration when we set the low end of our guidance range. So said differently and more directly, first half down $7 million. That implies the back half being down $13 million to get to the low end of our guidance. So we tried to take that heavier seasonality in the back half of the year into consideration, if you will.

Perfect. Okay. Really appreciate the color there. I think that makes a lot of sense. And then I guess this could go for either you, Ron or John. But with you guys were projecting to a little bit of growth previously. Now the new guide, a bit of a decline from fiscal '24. And I know the aim with all the moving pieces, the first part of the year was to get back to growth, Ron. Do you think that, that time line is now hugely dependent on macro? Or do you feel there's still elements that are within your control to potentially get this business back on track?

Ken, this is John. So great question. Why don't we start with what our strategic aim was last year. So we started with the transformation. We reduced some costs. We made a bunch of investments in the first half of the year, predominantly in the second quarter. So we haven't had quite enough time in market to see with how those investments were really going to pay off. We certainly expect that they will. And when you kind of play this out, I'd say that we've tried to do our very best to -- I actually really want to shift to a different topic here, but to give you a little bit more context. But I think what we really want to do is make the investments. We have confidence in the investments that we've made. We've seen some green shoots in the business. We've also seen in the TDS enterprise product line that, that business has continued to grow over the last 4 quarters. And that gives us a lot of confidence. And given that, that's 90% of the TDS segment, when you kind of break the 2 pieces out, we derisked the forecast on the GK side. We've got the transformation seeming to work on the TDS enterprise product side. Our strategic target was that enterprise customer, if you go back to that beginning last August. So to kind of just summarize, target was the enterprise customer. That segment of the customer is growing. We've derisked the GK side. So I think we're feeling pretty good about what the outlook is.

Yes. And just to finish answering your question on the macro uncertainty and the impact on the long-term or near-term plan. From my perspective, this macro uncertainty has hit us for about 3 to 6 months on timing roughly as I look out into it. We were a little slow in some of the hiring, the macro uncertainty piece hit. So that piece of it is what I would contextualize it. I feel very comfortable over the next 12 months to 18 months, we can make up at least 1/4 of that. So I'm not -- I'm going to let the economy do its thing. And as I shared with you and the rest of the group at the beginning of the year, we did not account for macro uncertainty because it was too difficult to predict at the beginning of the year. As we got through the first half here, we had a lot more facts in our patterns. We could see things and everything John said then kicked in, in his prepared comments and just now. But when I look at it, I'm just looking at the time window of it. I see it hitting us for about 6 months right now, and I believe we can easily make up one of those quarters over the next 12 to 18 months, right? I don't want to act like we can get back time, but some of that we can make up. And that's a financial statement in terms of getting back to the growth plans that we have. That's not -- that's -- I don't see it making a big shift or a tectonic plate shift, which is what you were, I think, really asking.

Perfect. Okay. Fantastic. And then maybe shifting to, again, a more positive note. It does sound like TDS, especially the enterprise customers, was tracking to plan. Any update or any incremental color on maybe how the dollar retention rate looked for that business? And then to the extent that there's any color on maybe the 10% that's not the enterprise mix, any color on how that performed?

Yes. Great question. So our year-to-date DRR was around 99%, as you probably heard. And within the quarter, we had a fairly significant impact from our North American federal business. I think in terms of the prepared remarks, we were -- that had about a 4 percentage point impact negative in the quarter. So obviously, we're -- absent that effect, we would have had a bit better DRR. When I think about it relative to the competitive set in the marketplace, I think we're really holding our own nicely from a DRR perspective, it's setting the table for future growth for sure. I think when you look at the smaller piece of the business that remaining less than 10% of the TDS business, which is really the B2C business, if you just kind of run the math, that business is down double digits on a year-over-year basis. So that was putting some fairly intense pressure on the TDS segment. Having said that, our real focus is on the enterprise customer. Keep going.

Yes, I was going to ask -- and I know this is always -- it's always tricky, but I mean, given the cuts that you guys have laid out there, obviously, embedding some incremental weakness to account for the seasonality in the second half. I mean, would it be fair to call Q2 a trough? Or I guess it would be more -- I guess, it could be maybe 3Q depending on how we weight the guidance. But how would you help us kind of frame kind of where we are in terms of the magnitude of headwinds that you're facing?

Yes. I think we've programmed in a bit of reduction in the back half of the year for sure. So if we were to kind of separate the 2 segments, we don't -- obviously, we don't give segment guidance -- but we're certainly more negative in our outlook on the GK piece in terms of the guidance adjustment that we made. I think in the end, we can certainly expect that the TDS business should continue to perform at or about the level it's been from a revenue perspective. It's -- the seasonality is relatively modest in that business. It's basically a 50-50 business. We can -- it has some predictability to it. So I don't see a lot of negativity coming the way of TDS. With respect to a trough, we programmed in more of a trough on the GK side in the back half of the year. So I think the way to think about it is kind of the tale of 2 cities again, with TDS performing reasonable to expectations. In fact, I'll say it more directly. Had we not had some of the headwinds on GK, we probably wouldn't be having the conversation about reducing guidance.

And I think on the guidance, Ken, I think John answered that perfectly, so I don't want to have anything to add there. But just -- I just want to remind everybody, we're balancing in this conversation, your trough question, when I look at it at the top level, we're balancing macro uncertainty, right, that we talked about, which your question was built on, but I'm also balancing a transformation at the same time. So your question about is it the trough. We're right in the middle of that transformation as well, right? As I indicated in my comments, you'll see a product set of announcements shortly, very shortly. You will -- we are hiring, as John pointed out in his things, very quickly, right, in this past quarter, in particular, right? So as you look at it, I see the transformation also happening. That will add to a little bit of the trough here that we're in. And so there's a financial part you were asking and then there's the transformational part. And I think we just got to remember, we're doing both at once, which adds a little extra degree of difficulty to what we're getting done from an overall business perspective. So in terms of the transformation layer of it, I believe we're hitting -- as we enter next year, I feel very good about the overall strategy in the execution of the go-to-market changes, the product changes and the overall business changes that we're making. And those things will start to then be -- they'll be fully instantiated as we hit next year, and we will begin to see those things start to pay off. So I'll let you design the timing on the trough on that one.

Understood. I appreciate the comments, Ron. And then maybe the last question for me. Just, while little disappointing on the revenue side, you guys were able to maintain EBITDA, and it sounds like cash flow will still be on the positive end. How should we think about kind of the levers that were pulled to the extent that there's further softening? I mean, do you feel there's still some capacity to kind of sustain the kind of profitability that you guys have been pushing for since the start of the year?

Yes. So Ken, we're certainly always cognizant of how we can become more efficient during the course of the year. So we're almost in a constant mode of assessing, particularly as part of this transformation as we make these investments, trying to become -- continuing to be more efficient. And so you can reasonably expect that we'll have a business model that comports with the current trajectory of the business.

Understood. And I guess maybe a follow-up to that. I guess, how much of the cost management, incremental productivity is just simply like there's a variable component to your cost structure if -- obviously, if your bookings and the revenue do not align with a certain compensation level for sales and marketing, you can dial that back versus what might have been more deliberately cut, whether it's on G&A or product to, again, align with kind of the current conditions?

Actually very little bit was pure variable cost changes as a result of revenue. It was mostly the effects of fixed costs that we've taken out previously.

And there are no further questions at this time. I'll hand the floor back to Ron Hovsepian for closing remarks. Thank you.

Thank you, Diego. I'm as excited as ever about the opportunities in front of us at Skillsoft. While the challenging macroeconomic headwinds in some markets have caused choppiness in our revenues over the short term, the disciplined execution of our transformation, key investments and the up-and-coming product announcements put us on sound footing to participate in the AI-fueled opportunities emerging in this market, allowing us to really return the company to market growth in line with our long-range plan. So I'm confident where we're heading, and I look forward to seeing where and when and how fast we can get ourselves there. With that, thank you all for participating on the call today. Talk soon.

Thank you. This concludes today's call. All parties may disconnect. Have a good day.