Dillistone Group (LSE:DSG) — Review of Interim Results and Prospects

0:01 Good afternoon, and welcome to the DILLISTONE GROUP PLC Interim Results Investor Presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged, and they can be submitted at any time using the Q and A tab situated on the right hand corner of your screen. Simply type in your questions and press send. The company may not be in a position to answer every question it receives during the meeting itself. However, company can review all questions submitted today and publish responses, which is appropriate to do so. Before we begin, I would like to submit the following poll. And I would now like to hand you over to CEO, Jason Starr. Good afternoon to you. Thank you very much indeed, Alex. Hello, everybody. Welcome. My name is Jason, Jason Starr. I'm the CEO, and joining me on my right, as I look at the screen, it might be on the left on your screen, I don't know, is my colleague and CFO, finance director, Ian Mackin. Thank you all for joining us.

0:54 Obviously, we need to begin with the click on the right button. There you go. We need to begin with the standard disclaimer. I'm sure you've read that before. I suspect that the vast majority of people on the call today are existing investors. I'm not gonna spend too much time saying what we do. Very briefly, we provide technology to recruitment companies which is an interesting market to be in at the moment. We do it basically through two groups of products. One targets executive search, One targets contingency. Our typical client is a high street agency or an international search consultant search consulting firm. We have clients all over the world. Our products vary from CRM to candidate sourcing to skills testing type technologies. Now, we've changed how we do our presentation this year. Those of you who've come before, probably won't remember, but we've had a fairly standardized series of slides that we go through related to Earth with the latest set of numbers in, but we're changing it this time because we think that we are at a turning point. We wanted to give you a bit more context around why we think that and share some numbers that we haven't necessarily shared historically to help you better understand our confidence.

2:07 To begin with though, I want to just help you understand the reality of the market we're dealing with. The UK recruitment sector has been in an extremely difficult place. You'll see from the slide there that over the last one, two, three, four years, the number of vacancies in The UK has dropped by 45. It's quite remarkable. Generally felt to be the longest recruitment recession in The UK history. We are not a recruitment company, but when recruiters aren't recruiting, they tend not to be hiring their own staffs, they tend not to be buying licenses from us. Recruitment companies are closing down. Clearly, they're cancelling subscriptions and so on. We've had to deal with an extremely difficult few years trading. But we try to improve things.

2:54 Basically, our performance is based on two elements: how much revenue we get in and how efficient we are at converting that to profit. Let's break that down a bit. Firstly, our EBITDA margin. We have improved that quite significantly over recent years, getting on for doubling since 2021. It's up again this year. As you can see from the slide, we're up to 26%, 27% now, which is a sign that the business is getting more efficient. The problem we've had, the problem we've had for a number of years, is obviously revenue. Let's talk about that a bit more. As I've touched on, we basically have two groups of clientele. The contingency recruitment agencies, are temp agencies, typically in The UK but not exclusively, and executive search.

3:42 Broadly speaking, our contingency revenue is supposed to be the same as it was back in 2020. It's gone up a bit, it's gone down a bit, but it's fundamentally where it was. The issue has been our executive search revenue. This slide shows quite clearly. Our executive search revenue has, to all intents and purposes, fallen off a cliff over this period. Although contingency has done sort of okay and we've improved our margins significantly, we've constantly been fighting against a drop off in executive search revenue. That's continued. If you look at the headline figures of H1, you'll see more of that, but we're confident and we're going to share some data that makes We are confident and we believe the data we're about to share gives support to our view that we've hit the bottom on this and we're about to see a change.

4:36 Let me talk a bit more about our executive search revenue. Most of it, the vast majority of it historically, comes from our Filefinder product. Filefinder was, back in the day, the global market leading executive search software. It was used by some of the biggest firms in the world, all over the world. Basically, it was the product that people typically bought. It's an older product and it's still being used. We have customers that love it, but it's an older product. It's not one that's particularly sophisticated now, so we tend not to sell a lot of it. Customers that have been using it for a long time tend to fall off. We've seen revenue dropping on the Filefinder product for a number of years because of high levels of cancellation and low levels of new sales. Let's dive a bit deeper and talk about the cancellation aspect of that.

5:24 Our FileFinder customers, broadly speaking, if we look at their revenues, the vast majority of it is recurring. 95% of our FileFinder revenue is recurring. Of that, the vast majority of our clients, the vast, vast majority of our client clients renew either on January 1 or July 1. The majority next year, almost two thirds will renew on January the first of next year. Now, the vast majority of these firms have a notice period of three months prior to renewal. That means that if they're going to renew on January 1, if they plan to cancel, they need to tell us by the end of September. If they're going to renew due to renew in July, they need to tell us by the end of March. You'll note that we are now in October. We're not 100% sure on what our January renewals will be, but we have a pretty good understanding of the type of ballpark we're in. The first thing we can say is that farfinder renewals for next year are likely to be an awful lot. So it's for January of next year.

6:29 I'd like to see a lot less churn than we've seen historically. The numbers based on where we are at the moment are considerably better than they were this time last year. We've got historically this problem with lack of new revenue coming in with revenue leaking out the bottom. The amount leaking out the bottom next year is going to be substantially less, we believe, than it has been in previous years. It's not just about leakage. It's also about bringing new revenue in. I'm not sure what's happened here. Our strategy for executive s. Our strategy for executive search, is about some abbreviation of, is that our file finder product will, over time, be replaced by our Telentis products. Any of you who have attended these sessions before would have heard me whittling on about Telentis for a number of years. Telentis is our flagship product and it was designed to be a combination of a CRM and a candidate sourcing tool. So essentially, a product that a user could use to find candidates and then place them all in one go.

7:28 It was a bit of a change to Farfinder, much bigger idea, much more sophisticated approach. When we first launched it, the feedback from customers was this is really quite cool as a sourcing platform, but it's not good enough as a CRM platform. It's too light. So most of our early adopters, as you'll see in a moment, were using the platform as a research tool. Things started to change late last year. So late last year, as we said in our February RNS, late last year, we positioned the product as now being ready for migrating customers. So customers that had historically used Filefinder or other products could now start to migrate across into the platform, and that was the first time. That's really important because the clients that were using the traditional client base at Telentis were typically made up of single users, so a firm that might have trouble finding a candidate would get one person a license so they could use it when they needed it, but typically, that user would turn it on and off. So if they were having a challenging search, they would turn the platform on, we'd get a bit of revenue for a month, they'd get their candidate, they'd then turn it off again. So we suffered from huge levels of churn, very low numbers of users, and relatively low revenue based on the traditional candidate sourcing platform. The aim was always that we would be selling CRM platform with sourcing built in, And since November, we've been able to promote that idea a lot more. So we've increased our prices to reflect that. We've repositioned the product.

8:59 So now, what we're seeing, and again, I'm gonna share some data momentarily, is that far more of our customers are buying the product as a CRM and that makes a big difference because it means that they typically have more users, they typically pay more, and they typically take long term subscriptions. So again, you'll see in a moment that our annualized subscription rates or the rate of our customers that are buying on subscription basis has shot up over recent months. Let's move on. Before I share the numbers with you, just to prove that what I'm talking about isn't vaporware. We have customers using this product now in the way I've described. On the slide here, we have a customer in Japan, a customer in The States, one in Ireland, one in Mexico, I believe. The two in the middle, both migrated from Filefinder.

9:53 These are customers that were Filefinder customers. They're now Solentis customers. As you can see, they're saying this has had a dramatic impact on their products. The new software is simply outstanding. It's dramatically increased productivity. It's a game changer. This is real feedback from real customers who've gone live in the last few months. That gives me a warm glow, but for investors, know it's much more about the money. Let's talk about the money. This chart shows Telentis' exit ARR movement by period. Now the thing to note is that along the bottom, we've got h one, h two, h one, h two, h one, and then we've only got a quarter because obviously, we've only just finished q three. What you'll see is that we saw a drop off in sales of this platform. We saw a drop off particularly at the beginning of this year when we started losing the single user sourcing type candidates because of the changes we've made to the platform and our change of strategy. But since then, that dotted line, that is based on the actual delivered not delivered, well, the exited ARR at the end of q three. So don't have a dotted line leave as a forecast or anything.

11:06 That's the figure at the end of q three twenty twenty five. So in three months, ARR has gone up by 40, nearly as dammit, having previously been dropping in the last couple of periods. So You can see immediately the impact that this has started to have on our user base for this product. Why is this? Well, it's a number of reasons, most of which I've touched on, but because these are CRM clients, they are typically signing up on a longer term basis. Again, look at the stats. You look in red late last year, you can see the vast majority of our clients, 10% or so, were on annual or longer contracts with the vast majority on month to month. Half one, that started to change and if you look at the customers that have gone live in q three, virtually all of them, so almost a complete switch round, virtually all of the customers that went live in q three were on an annual or longer contract.

12:04 We have most of these companies on single year contracts. I think we have some on two. I think we have one on five years. A change because what this means is that historically, we have a customer sign up in January and then cancel in February, come back in March, April, May, June, blah blah blah blah. These are tied in, so we're not going to suddenly see this drop off a cliff again next month because everybody's cancelled. That's not the nature of the client base we have now. We think that is suggestive of this growth is going to continue. We thought we'd share a couple of other random stats with you. Firstly, the global recruitment industry isn't in a great place but it's in a much better place than The UK recruitment industry.

12:50 With The UK recruitment industry, I wanted to draw your attention to this slide. The UK is just about our largest client or region in terms of revenue for Telentis at the moment, but I suspect that would have changed by the end of the year and certainly it's flawed by the rest of the world. Telentis is a product that we can sell literally everywhere. The users using Telentis right now in Africa, in Asia, in Australia, in North America, well, I don't if I missed anywhere, The Middle East. So pretty much all over the world, we have customers using this platform. So we are far less We have been hit by exchange rates to an extent, but we are far less impacted by a UK specific recession with this product than we are with our contingency type products.

13:39 The other thing to note is where we started to switch customers from Pathfinder, they're typically paying us a lot more than they did on the previous product. So historically, they were paying x. On average, the customer is paying us 30% more in recurring revenue than they were on the previous platform. But it's also not just about far finder migrations. So Lentis is now a product that we feel comfortable selling to users, not maybe to our competitors, to users of our competitors' products. We were very pleased to reference in our annual report that in the last quarter, q three, we've signed our largest competitive displacement contract in the executive search space for more than five years.

14:25 That hasn't gone live yet. That will go live, I would hope, before the end of the year. All of this together puts us in a position where we feel that Telentis is really potentially changing its direction now and in a much healthier position than it's been for a long, long time. That's primarily about the future. Unfortunately, Ian has slightly harder job of talking about the past. So, Ian, do you want to talk our our our audience through the last six months? Thanks, Jason. I thought I'd start, as Jason, how we put some context behind the results we've just announced for h one twenty five? For consistency, the chart on screen shows the results for each h one since 2020. The adjusted EBITDA is the blue bar with the adjusted operating profit being the yellow bar, and the adjusted means we've adjusted for things like furlough support, acquisition costs, and and one off exceptionals.

15:23 We can see the EBITDA drops in '21, and that's mirrored by a similar drop in the adjusted operating profit, which reached a low 260,000 in that year. The adjusted EBITDA margin percentage, which is the red line, also dipped in 2021. However, from that point, we can see an improvement each and every year since. Margin in 2025 has hit 26.8%, which is 1% higher than the previous. 2024 h one, and the effect of this is we turn that h one twenty one operating loss of 260,000 to an operating profit in h one twenty five of 79,000. This positive move of 339,000 occurred with 628,000 less revenue.

16:14 So we think we are unquestionably more efficient as a group now. So onto a set of results we put out a few days ago, which we think is broadly in line with expectations of the market. Revenue was down 14%, which flowed through to a gross profit, which was 13% down also. Consequence of that is EBITDA decreased about 10% to 538,000 with the adjusted EBITDA margin, however, as we said, improving a percent up to 26.8. The adjusted operating profit, which, as I said, refers to things before acquisition, reorg, and one off costs decreased to 79,000, and the similarly adjusted profit before tax showed a profit of 7,000.

17:09 Now to reiterate, this is what we expected to do this year. We expected revenue to decrease, but we expected to still be around breakeven, and that's what we're producing. The effect of this is we recorded a small drop in the EPS to minus point 1p. Now the chart on screen now, the green bar highlights cash injections and government support during the times of COVID. The red bars are the amount being spent on debt and interest and financing payments, with the blue line then indicating the underlying operational cash flow of the group. At the beginning of the period, we can see the inflows due to COVID support with the large twenty twenty h one including the 1,500,000 civil loan.

18:02 It should be noted at the end of the period, we've got two small cash injections that have occurred over the last twelve months also. The debt and interest payments are steady between about 200 and 250,000 each half year since 2022. Now throughout the period, cash operational cash flow has undoubtedly improved since the start of the period, however. The group is now operationally cash positive since the start of 2022, with $20.25 h 1 being the largest total during this time frame at a 107,000. Should be noted that's the largest h half year operational cash flow in six years. So if we go on to some more detail behind the interim cash flow, the operating cash before working capital move is down a bit at point five five million, but the net cash from operating activities is broadly level at point 5 to 8,000,000.

19:05 Investing activities and operating finance activities are down by 22 and 8,000 respectively. The operating finance activities are mainly the repayment of the principal and the interest on the civil loan. That civil loan has repayment date of June 26, so we're only nine months away from that now. Taking the investing and operating finance activities into account, this led to a like for like overall adjusted net change in cash and cash equivalents of a 124,000 outflow. This compares to a 153 outflow in twenty twenty four h one. As mentioned, we did raise funds through the issue of a loan note of 120,000, which means the overall change in cash and cash equivalents for the period is only 4,000.

19:54 We ended by utilizing 80,000 of our bank facilities. So I'll hand you back over to Jason for the rest of the presentation now. Thanks, Ian. So, yeah, just to to to summarize with brokers' words, we expect or they expect, obviously, they expect revenue to return to growth next year, which is something that hasn't happened in our firm for for quite a long time. They expect to see well, you don't need me to read the numbers out. You can see what's in the screen there. They share our view that we are at the bottom looking up and able to actually climb climb the hill that's ahead of us now. To sort of summarize the conversation we've had, you know, our bit our bit is in a really good price. Revenue our margin, I should say, is in a really good place, not the bit itself. Our margin is in a really good place. Revenue is a problem.

20:47 Most of the revenue problem relates to executive search. Our executive search losses next year will be a lot less than they were this year and our executive search sales next year will be a lot more than they were this year. And by sales, to be clear, I'm talking about new business orders rather than anything else. That essentially gives us great confidence for, yeah, the the the future of of the business. So, that's the end of our canned presentation. If we have any questions, Alex, do you want to say a few words or No. You can go straight in. Feel free. Okay. Cheers, boss. Thank you. Right. So I appreciate I can see that we have had a few questions. So I will try to go through them asking the difficult questions to Ian and do any low hanging fruit myself.

21:33 My favorite color is red. Thank you for that. A couple of questions to get us started from Nicholas relating to confidence. Thank you for your thoughts, Nicholas, for joining us. Would I say I'm more bullish than we've been for a long time? I think in terms of Telentis, I've always been bullish about Telentis. The problem was up until now, I had very little in the way of evidence to back it up. I've always thought that Telentis was going deliver. I've always been very proud of it. I've always thought it a really good product, but the reality is it's always disappointed in terms of its revenues. Let's be clear, still a relatively small part of our numbers at the moment. It's nowhere close to Filefinder yet but we've always believed in it. We've always had faith that it would come. It was only really in the last few months that faith has started to materialize in a numeric format.

22:32 I think I've always been bullish, but I'm a lot more confident now. We are still in a difficult market and I can see this is another question that you've touched on. We are in a difficult market still. We've deliberately moved our products away from the center. The recruitment market in UK or globally, you've got executive search, you've got temps, and you've got permanent contingent placement. Permanent contingent placement, so hiring new graduates, that type of role, it's really, really difficult. So we are focusing our efforts on the sort of the the temporary agency at the at one end which is what most of our contingency clients are now and the executive search firms at the other end and they are a lot less, you know, still finding it difficult but they're a lot less battered, I think, than some of the the firms that are in the in the middle.

23:27 Thank you, Derek. Derek has asked about a bit of margin. Do we expect it to be maintained at the level it's at? Yeah. I mean, we consistently, for the last few years, managed margins above 25%, and I'd at least expect to stay at that level when Telentis starts performing as we hope it is going to in the coming years. I'd expect that margin to increase north of 30. Okay. A question from Rob. Rob has asked how big the medium thank you, Rob, for your question. Rob has asked how big the medium term opportunity is for Telentis ARR. It's difficult to define medium term but what I'm going do is sort of avoid the question slightly.

24:18 We have a competitor. It's a US private equity backed business that has grown quite rapidly, to be fair. It's probably the closest competitor to Sorento's risk in the market. It's a company called Blocksite for those of you who wanna go out and do your research. In 2024, although they're privately held, it was widely reported that they did a $112,000,000 in revenue in 2024. So I think when we first launched Telensis, we talked about a long term market value of a 100,000,000, something of that sort. They've just reported a $100,000,000 themselves in a year. So we think there is a very significant market and we think that torrential grow rapidly. To be clear, torrential is a very small part of our numbers at the moment. We're nowhere near those sizes at the moment but there's a lot of upside from where we are. We have a competitor that has broadened its market and has a bigger footprint than we do, but themselves alone is reporting a $112,000,000 in revenue.

25:29 Paul is asking about high recurring revenues and what we can do to convert more pipeline into annual or multi year. So, yeah, we have pricing models that are designed to allow people to buy up on a short term basis if they want, but to encourage them to sign longer term contracts. So we do have yeah, we do think about that in our pricing. That's one of the reasons why we've seen such a drop off in our single in our month to month contracts because they're nowhere near as cheap and cheerful as they were previously. So most of our customers are buying on an annualized basis now because they get a better rate and we have offered longer term contracts with discounted rates where required because again, as I said, some markets are challenged. How long does it take to onboard a new Telentis customer? Thank you, Jenny.

26:19 Again, it varies on the nature of it. If it's a completely new start up search firm, if they want, they can just go to our website, log in, create a trial account, put the credit card in, they're live and none of us have to do anything. When a client is migrating, there's generally some work involved and there's a lot of going backwards and forwards. So the first few took quite a long time because we hadn't done it before, but now, you know, we're doing them every week, every couple of days. So I guess six weeks is the average at the moment. It's getting faster. But as I say, if you're coming from a simple spreadsheet or something of that sort, it's really quick. Most of the time, it's backwards and forwards. It's not actually six weeks of work or anything of that that sort. Dealt with that one.

27:07 Nick, I'm sorry to hear your daughter's having a tough time. Nick's daughter's in the recruitment sector. It's been really tough. It has been really, really tough. I have given up trying to predict when it's going to turn a corner. I do think that it's not getting any worse. I think the view speaking to my colleagues in and around the company is that it certainly isn't deteriorated. We don't think it's getting an awful lot better at the moment, but it's certainly not deteriorated. So, yeah, it's I'm not sure we're out of it yet, but I don't think it's getting any worse. So that would be my positive sign. It's all about confidence. I I think it, at the moment, companies are not confident to hire new people and candidates are not confident to change jobs in case the company we move to is less secure than the one we're left from.

27:53 That's worst case scenario because it means search firms, recruitment agencies get asked to do work but then they never finish it. It never gets completed because they can't get anyone to move. So it's challenging but, yeah, I very much hope it will improve. Matthew, are you finding there's a generic shift in companies searching for talent via external recruiters and is this an opportunity to identify top countries to further sell into Lentis? Yes, it's a good question, Matthew. We've always had clients even on Filefinder that were in house executive search firms. We have one or two on Telentis, not many, but we have one or two. I can think of a law firm that I know myself, but I dealt with them myself. I'm not saying I know the law firm.

28:42 Dealt with them during their sales process myself. We have at least one law firm in The UK using it. Historically, we've had Fortune 100 companies as clients on Filefinder. What a feeling we may still have one, but we don't have many certainly on Filefinder anymore. So, yeah, there is a market for Telentis in the corporate setting, but it takes a lot longer to sell into a corporate than it does a search firm. Sometimes, selling through a recruitment agency or a search firm is like selling through a corporate is like Yeah, it takes a lot longer. Let's put it that way. MH asks what revenues could grow to in the next three years. That's not really something I could talk about, but if we could just flip back to our broker forecast, that's what's suggested by our analysts. Our view is that 2027 will be more interesting than 2026.

29:34 I imagine some of broker will put some numbers into the market at that point. Will development cost remain at the same level for the next few years? I'm conscious I've answered most of these questions. So, Ian, I should never allow a bean counter to answer a question about what we're going to spend money on because he has no sense of adventure. Broadly speaking, Ian? Broadly speaking, you can see the trend of our development cost has been a gentle decline. It's not significant on a year on year basis, but if you went back three or four year, you'd you'd see we're at least 100,000 less for the half year than we were then. So where we are now, I'd expect to level off since since we're developing Telensis, and we will you know, that's where the majority of development spend is now. So I wouldn't expect further decrease to a degree from where we are now.

30:32 Yeah. And just to put some more color on that comment because I can hear clients panicking when we hear that. We're developing less products now than we used to be. So although we are spending a bit less in total, it's positioned very much more strategically. So, yeah, certain products are getting more than we've had before. We have less products to develop and so obviously, numbers change. Okay. I think that was our final question. Unless I can just yeah. I think that was pretty much our final question. There's a question about oh, sorry. There are a couple more questions I missed. There is one on we touched on this for Farfinder. It's not really something we share on the contingency side because we have a couple of different products, so it's not really something that we can break down in this format.

31:24 Generally speaking, it has been a lot better than it has been on the executive search firm, a lot, lot better. Thank you for your question, Martin. Akash, can you ask us if we can talk a bit about employee morale given the challenging market the last few years? Well, anyone who's attended these webinars and seen how depressed I've looked for the last three or four years will probably be able to work that one out for themselves. It's been a difficult few years. We have a terrific team. We have some terrific colleagues who have worked their socks off and have deserved a lot more success than we've been able to give them. But I think there is a view that it's beginning to change now and I think that as, you know, when you tell your colleagues, we just run our biggest executive search product from a competitor for over five years, you make comments like that. Churn on our executive search product is going be a lot lower next year than it was this year.

32:19 People actually start to see that we are coming out the other side. So hopefully that is that's something that as this continues, people feel more and more positive. Thank you for your question. Okay. That I think was my final question. So thank you all very much indeed for your time. I know many of you have supported us for a number of years and we really do appreciate that support. I know it's been it's not necessarily been the most exciting or pleasurable of rides for the last few years. Those of you that were with us a bit longer, a bit earlier, you know, may have a different perception. Certainly, last few years have been difficult. Thank you for sticking with us. Thank you for joining us. Those of you that are here for the first time, we do appreciate your interest and thank you all very much indeed for your time. Thank you. Bye bye. That's great, Jason.

33:06 Ian, thank you very much indeed for addressing those questions and for updating investors today. Great to hear from you guys. Could I please ask investors not On behalf of the management team of DILLISTONE GROUP PLC, would like to thank you for attending today's presentation, and good afternoon to you all. Thank you.