Skillcast Group (LSE:SKL) — Interim Results

0:00 Good afternoon, and welcome to the SKILLCAST GROUP PLC investor presentation. Throughout this quarter presentation, investors will be in listen only mode. Questions are encouraged and can be dismissed at any time. For the q and a tab, situate in the right corner of your screen, just simply type in your questions and press send. The company may not be in a position to answer every question received in the meeting itself. However, the company can review all the questions submitted today and publish responses where it's appropriate to do so. Before we begin, I'd like to submit the following poll. I'd now like to hand you over to Vivek Dodd, CEO. Good afternoon to you, sir.

0:32 Thank you, Alessandro. Let me just introduce myself. I'm the CEO of the company. I was one of the cofounders many years ago. And with me today is Richard Steele, who is our CFO. I'll just take a few minutes to cover the financial and operational highlights and then I'll hand over to Richard to go in deeper into the details. So here you see that we've had a first good very good first half of the year with ARR growing, getting back into profitability and generating very strong cash flow. We had a 100% retention rate during this half and the ARR growth came entirely from adding new subscription clients.

1:24 Subscription revenues grew by 35% year on year. The total revenues grew a bit less at 24 percent that's due to the performance of our non core professional services. Richard will talk a bit more about that in his part. The recurring subscription revenue therefore are now accounting for over 80% of our revenues. Also notably in this half, we managed to limit the overhead growth to 99% and got back into profitability. And that difference between the revenue and the cost growth that you see there demonstrates our operational gearing and that will drive our profitability very strongly in the future periods.

2:12 Also for this half, we've declared a dividend that is unchanged from the same period last year.

2:24 Just some operational highlights here. So we launched two new initiatives at the start of this year. The first was called Premium that bundles together many of our add on features for our standard clients. This gives us an annual contract value uplift of up to 100% and also leads to better client retention. That initiative got off to a really good start in the first half and already accounts for over 3% of our ARR. The second initiative is called core compliance. This provides a cost effective self-service compliance portal for smaller businesses of up to 50 employees.

3:11 This did also get some traction but not as much as we expected. However, we see this as a huge potential market and we are in the process of repositioning this product. We have a lot of hope in this product as well. We also made progress on the marketing front generally and the results of that will show in the second half of the year and particularly next year when we bring out our new website. We received our certifications for Cyber Essentials Plus and SOC two and set up a trust center that really elevates us as a SaaS vendor of choice for the larger, more security conscious buyers, the larger firms.

3:59 We also started rolling out our new standardized auto renewal terms of service earlier this year and they've been well received as we've got here up on the screen and 95% of our clients renewing have renewed on those terms. We've also enhanced our customer services experience, which is something that we're well known in the market for, because we offer not just a platform but a managed platform, for those companies that don't have the in house expertise. So we do really rely on that and we've enhanced that this year by adding a new platform which gives faster first response times to our customers and also gives us insights for making further improvements and driving efficiency.

4:48 On the product front front, we're most excited about AI. Now, of course, this is much hyped, and some of you may be getting a bit cynical about it, but we do see a huge opportunity here, to drive learner experience, reduce compliance overheads, and really help companies to, build a culture of compliance, with the use of AI which can combine a more engaging experience with a more informative one whereby we don't overload the employees in the first instance but we stand ready to answer questions. There are several hurdles to be overcome in this respect but we believe we've done that. We want to be able to, satisfy our very demanding clients, who are typically compliance officers.

5:37 Currently, we are testing, an AI tutor, for our courses, for example, and moving into client acceptance testing in q four this year. So hopefully, this is a feature that will come up in our 2025 performance. I've got a few other points here on infrastructure and people that I won't go over individually, but I'd like to add that we're looking constantly at ways to improve our employee as well as customer experience. And at this point, I'll hand over to Richard to share with you more details on the financial performance.

6:19 Thanks, Vivek. Good afternoon, everybody, and thanks for joining our update today. ARR or annualized recurring revenue is one of our lead performance indicators which we track rigorously. And as you see, we've reported a milestone for us getting through the 10,000,000 barrier to report 10,300,000 pounds of ARR at the end of June this year, which is 27% up on the same time last year and 11% up on the beginning of the year. Our average ARR per account also increased by 14% on the previous year. As Vivek alluded to, our net retention in the first half of this year was exactly a 100%.

7:10 So in in that is actually down on a 105 last year. And that's really due to two factors. The first of all is we've seen a higher churn this year from customers leaving us than we did last year. This is nothing that we we see as a particular issue or challenge. It is a bit lumpy. It goes up and down from one year to the next. There's several different reasons. And probably the the main reason for this churn is we've seen change in sort of reorganization and corporate m and a from our clients which affects by decisions at their end. We've also noted that we're putting prices up this year by 7% compared with 10% last year. So that that's another reason why the net retention is quite is quite as high.

7:55 So all of our ARR effectively, our net ARR growth in the first six months of the year came from new customers. On average, we're we're we're gaining about 20 a month. And subscription revenues overall now are over 80% or 81% of revenues. So our predictable revenues are are continue to grow as a percentage of total revenues.

8:22 Looking at our P and L in more detail, you can see that all of our revenue growth was driven by a growth in the subscription revenues, lifting 35% in the year to 5,200,000, up from 3,800,000 last year. Our professional services revenues, which we've been saying ever since the IPO in December 2021, are also non strategic, variable, and hard to see and predict revenues, fell 9% to 1,200,000 on the year. We've we've probably seen this is again something we're not too too worried about. We've seen some of our bigger clients, some of the big major banks sort of delaying spending and putting projects on hold around this area. And we've actually taken steps in the second half of this year to reduce our cost base in the professional services team to reflect that reduced revenue.

9:19 And we'll see the impact of that reduced headcount in the next financial year. Our gross profit increased significantly from 66.5% last year to 71.7% this year, 5.2 percentage points up. Part of that was due to sort of a hit we had last year on the one off transitional cost of migrating all our clients into a much more robust secure as your hosted environment. But also, it really starts to see the benefits of operational gearing and our service team and our content team that are supporting our revenues. In terms of overheads, we've really continued to slow our growth of overheads increasing by only 9% on the year compared to 26% last year.

10:07 And that has led us to come back to obey a small profitable position for the first six months of the year, but a significant increase on the 750,000 loss we made for the same period last year. So we're really pleased that we've continued to sort of show that return to profitability and underlying business improvement. Most of that overhead growth has come from our headcount increase, which again has slowed. Headcount has increased 5% from the year in terms of average number of heads and our total people cost have increased by 5%. We've seen significant interest receivable from the large cash deposits we have in the business.

10:55 As Vivek said, we've declared an interim dividend in line with last year of a 150 thou pound thousand pounds or 0.168p per share. And after after a small tax charge related to prior years and the dividend, we are reporting a small loss after tax.

11:18 This chart really just sort of emphasizes the ongoing trend towards the reduction in overheads as a percentage of IRR, which which gives a good indication that we remain on track to grow profits more in in h two and then for the full year for 2024 and beyond. In terms of cash flow, we are highly cash generative as a business. Just to remind everybody, our subscription customers typically sign up for a twelve month contract and they and we invoice them upfront. So as we're growing growing our sales and growing our ARR, we it's a highly cash generative process.

12:03 So despite a a PBT of £41,000 in the year, we actually generated £1,100,000 of cash. And that all came from or mainly came from the the increase in trade and other payables from the increase in deferred revenue. In terms of our balance sheet, it remains very healthy and very strong. As you can see, 8,300,000 worth of cash compared to 7,600,000 last year. And the only other real items to note are trade receivables and our deferred income, which have grown in line with revenue growth on the previous year. As a reminder, we keep our balance sheet very clean. We have no intangible fixed assets on our balance sheet, and we expense all our r and d as incurred.

13:01 To remind everybody of our key strategic points, we we remain focused on organic growth. We believe it's a large fragmented market and there's still plenty of opportunity ahead for us in our core area. And it's a it's a remains a resilient and growing compliance market. And we've remained focused on the mid sized regulated clients. We do need to focus on the churn and our excellent customer service maintains is a great help to that. And we often see, for example, that we're winning clients back from from competition because of the strength of our customer service. And we continue to develop and upsell our regtech tools such as policy hub and such new registers and declarations are a good add on and help our compliance officers and learning development managers manage their compliance.

13:58 And we're excited by the the launch in beginning of this year, the soft launch, should I say, of our first foray into sort of a self-service ecommerce module. We targeted this very small customers, clients with 50 users or less, potentially IFAs and other people like that, where they can get an indication or they can effectively try a a complete self-service learning and management module where they can buy straight from our website with the use of a credit card. There's no added service to that that they get from this and if they want that, they have to upgrade to our standard product. As Vivek mentioned earlier, we continue to be excited about the AI opportunities and development developments with our products and looking at an AI in course tutor that we've built in the first half and we're currently testing and hope to relaunch next year.

15:01 As well as organic growth from the core compliance market, we are excited about two other potential areas of building our revenue streams. The first one is through partnerships. It's an area that we've never really focused on as a business, but in June of this year, we recruited our first ever partnership to manager. So we're busy sort of exploring the opportunities in all sorts of areas of partnerships, whether that's referral partnerships, white label technology partners, or even looking at sort of marketplaces like the Microsoft Azure marketplace to sort of put our products on for availability. We also spoke about at the year end about opportunities around mergers and acquisitions.

15:46 We've got, obviously, as you've seen, a significant amount of cash. We have certainly started looking at opportunities in that area, and in the first half of this year, we we got very close on a couple of opportunities that didn't come off. But it hasn't put us made us undeterred. It's something that we remain focused on and

16:07 we'll keep you updated with progress in that area. So in terms of current trading, we we are very confident of continuing to trade in line with expectations. Our ARR is a very strong indicator of our future subscription revenues. Our non strategic professional revenues are still remain slightly slower than last year, and we feel we're helping to derisk any risk there anyway by making the changes we've and the actions we've done on the headcount reductions and redeployment. And we remain focused on our cost control to ensure that we remain focused on returning to profitability. We're also very excited about our marketing initiatives.

16:53 Vivek mentioned at the beginning of the presentation where we're at on that, and we're currently redeveloping our website and expect to launch that at the beginning of next year. As I said, we are we all remain excited about the opportunities around the part our partnership higher and what additional revenues that can do to support our core revenue growth next year, as well as everything we're doing on the product side around AI.

17:23 So at the moment, that's everything I've got to to update on, but very willing to look at all the questions that have been posted. And we'll have a look at that now and respond in a minute. Thank you. That's great. Vivek, Richard, thanks very much for your presentation. Ladies and gentlemen, please do continue to submit your questions. You can do that just by using the q and a tab, which is situated on the top right hand corner of your screen. But just for the company, take a few moments to see the questions that have been submitted today. I'd like to remind you that recording of this presentation along with a copy of the slides and the published q and a can be accessed via your investor dashboard. As you can see, we have received questions throughout today's presentation. If I can hand back to you guys just to read out those questions and give responses where it's appropriate to do so. You both at the end. Thanks, Vivek. I'll so I can take the first one. The first question is with net retention of 100% and rising churn, what steps are you taking to improve customer retention?

18:17 Thanks for that question. First of all, I think our our churn is quite cyclical. So we don't see that as an ongoing trend. Secondly, we are reducing the level of price rise that we're going to put into our products next year to a more reasonable 3% inflation level.

18:37 Secondly, we are we are we've employed what we call a solutions architect this year, who is someone that's a real specialist in our product that's helping us work with clients and give them a much more detailed demonstration of our products. And we're continuing to work and develop the content and refresh the the quality of the the courses and and and engage people and remind them of of that as as we continue to grow. Second question is what challenges do you foresee in achieving profitability in the second half and how will you address them? So the main the main variable in terms of h two profitability is the level of our professional services revenues.

19:27 We've we've start we had a we had a relatively slow July and August as I believe everybody else did, but we so far, we've had a we've had a stronger September in that area. But it does remain quite hard to see. We've done what we can in terms of cost to sort of reflect that, but ultimately, we've we've got we've got our internal team of people that develop and manage the work that the professional services revenue stream brings in. So there's a fairly fixed cost in the short term to the resource. So, the biggest variable is around the professional services revenue, But we don't think that the range of variability is that great to have a material impact on our profit levels compared to what the market is currently forecasting.

20:16 Richard, I'll take the next one. So, this is about how we plan to sustain the impressive, 24% revenue growth moving forward. Are there new sectors or geographies that SKILLCAST is looking to expand

20:31 into, to drive further growth? Well, on this one, I'd say that some of this growth is the natural outcome of our SaaS model whereby we have very high net retention as you can see at 100% even with a slightly elevated churn for this half. We don't we see the churn coming back down to normal levels keep the net retention rate that is NRR over 100%. So all the new client wins simply add to that. So there is an inbuilt growth engine over there. Second point out over here is that our current ARR is only around 2% of the serviceable obtainable market as we have ascertained.

21:27 So this is a huge pool that we're fishing in if you will. Of the client new clients that we win, only around an eighth of them come from our competitors, seven eighth of them come from the pool of companies that have really not put together a compliance portal in place. So there's a huge potential yet, unmet demand in this market, for a company like us. As for, new sectors and geographies, well, at the moment we are focused very much on The UK. We do have clients in The EU and we value their custom.

22:13 However, we are sticking very much to The UK at the moment. In terms of sectors,

22:19 we have bias towards financial services which is where our legacy lies, but beyond that we're quite secular. Now with an acquisitions opportunity, we may get a significant weighting in another sector. But at the moment, when you slip outside financial services, we are looking for all the opportunities we can get in in every sector without any bias. The next question says, also with an increase in cash reserves to 8,300,000, will this be reinvested into the business for growth initiatives or used for M and A activities? I think we've said that we really see we've come to the end of this sort of significant internal investment phase.

23:09 We are now looking supplementing our organic growth with M and A offers and opportunities. And just to elaborate on that, what we are not looking for is any sort of tech players in the marketplace. We we're very keen that and and believe that we've got a very strong platform and technological offer. What we're looking for potentially

23:30 is digital compliance content learning in similar or adjacent verticals that would naturally bolt on to our platform and our infrastructure. The next question here is related to a previous one that I answered. So I'll just take this one quickly. This is about SKILLCAST originally targeting financial services sector, but now only 40% of well, rather but 40% of our revenues now come from other sectors. How are we prioritizing our efforts across different industries?

24:04 And are there any sectors we see a particular particularly promising for future growth? To answer this question, well, I've part answered it already. Yes, it's true that 40 or even more than 40% of our revenues now come outside the financial services sector. We think there's a huge potential out there. Financial services only accounts for 10 to 15% of The UK economy. But it is a sector where we find rich pickings because there is a regulator there which drives compliance training and there's a high level of maturity within the financial services sector and hence it's just easier to get the client wins there. However, we are increasingly focused outside financial services and what I'd say is that rather than prioritizing individual industries or sectors, we're prioritizing legislations as they come in.

25:06 So for instance next month companies across all sectors will be obligated to take steps to prevent sexual harassment in the workplace. We have a great suite of courses to help companies to raise awareness and understanding of this issue in their firms. Indeed, we also have technology features to run surveys, declarations, registers for this purpose as well. And so it's those kind of regulations that will drive our growth rather than the focus on particular industry sectors. Notwithstanding that, of course if we do acquire a company then of course we will make an entry into other non financial sectors.

25:57 Thank you. And then question six: Any progress with looking into acquisitions? Is it something you are very keen on at this stage? Just just to reiterate, yes, we are looking at acquisitions and it is something we are keen on, but we don't want it to distract materially from the core organic growth of the business. The next question is, what is the ideal fit in terms of acquisition, e g n sector and also rough size? So again, we're looking for content players of in digital compliance training either in our sector or sub sector. So whether it could be cyber training, health and safety training, or other areas similar to that. And we're looking at probably probably, we're looking at something in the in the region of 1,000,000 in terms of revenue ARR at the current size and we would finance it from our our cash reserves.

26:51 This this would be our starting place. I mean, I'm not saying we wouldn't have larger acquisitions later down the road, but we want to bid for the first acquisition of the business, we want to make it of a size that's not going to detract or derail the core organic business. So the next question here is asking should we model consistent ARR growth with roughly 60% drop down to the EBITDA? This is hard for us comment on in that exact nature. We did allude or I did allude earlier to the operational gearing whereby our cost growth will be much lower than revenue growth.

27:38 But we don't want to speculate on any exact number there. There are market expectations out there that you can access. The one from Allen Bay is something, you could possibly look at. But, just the general trend is, yes, our ARR growth is driven by our SaaS model whereby we, expect to achieve a net retention of, over a 100% and any new clients add on top of that. Our operational gearing is something that you've seen, demonstrated in the first half. We expect to repeat that in the second half and in the coming periods. So I think at this moment, I think that's all the questions we can answer at this point in time. Thank you very much. Thank you very much for answering those questions from investors. Of course, the company can review all the questions submitted today and we will publish those responses on the Investor Me company platform.

28:47 Just before redirecting investors to provide you with their feedback, which is particularly important to you both at the company. Wirt, could I just ask you for a few closing comments? Well, thank you all for joining us today for these interim results. In wrapping up, I'll say that we are very pleased with our results for the first half and really excited about the developments we have for the rest of this year and next year. Thank you again. Okay, Richard. Thank you once again for updating investors today. Could I please ask investors not to close this session? As you know, we automatically redirected to provide your feedback in order the management team can better understand your views and expectations. This will take a few moments to complete, but I'm sure it'll be greatly valued by the company. On behalf of the management team of SKILLCAST GROUP PLC, we'd like to thank you for attending today's presentation, and good afternoon to you.

29:37 Thank you. Thank