Skillcast Group (LSE:SKL) — H1 2025 results

0:01 Good afternoon, and welcome to the SKILLCAST GROUP PLC 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 received 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 Vivek Dodd. Good afternoon to you. Thank you, Alex, and thank you, everybody, for joining us today for the SKILLCAST GROUP h one twenty twenty five interim results. I'm Vivek Dodd, the CEO of the company, and I'm joined by Richard Steele, who's our CFO.

0:52 Just a quick introduction. As some of you might not be familiar with SKILLCAST, we provide GRC software and content to help companies digitize, automate, and consolidate many of their staff compliance processes such as training, policy management, staff declarations, submissions, etcetera. We have offices in London and in Malta. We have around a 125 employees. We have over 1,400 corporate clients, mostly in The UK, but also increasingly in The EU, and we've got some of their logos here on the screen.

1:40 And the reason why these clients choose SKILLCAST is because we make compliance simple. We do that by providing an excellent technology platform, ready made content that they can easily customize, and an exceptional level of service that takes away their admin hassle. The demand for our services is relatively resilient as compliance for many firms is a nondiscretionary spared, and our retention rates are high because of the level of service we provide. Our business model is b to b SaaS. That's you might be familiar with. We have high net retention, which produces growing annual recurring revenues and strong operational gearing.

2:36 This is reflected in our h one results. So it should be on the screen now. Our total revenue was up 18% year on year. This growth was entirely organic and driven by a 23% increase in our SaaS subscription revenues, which account for 85% of our revenue mix now. Our annual recurring revenue or ARR was also up 23%. Our EBITDA continued to grow as expected. If you've been following us, in h one last year is when we reached breakeven point. In h two, our EBITDA was not 500,000. And in h one this year, that's grown to not point 7,000,000.

3:24 We've also improved our score on the rule of 40, which is effectively the sum of ARR growth rate and EBITDA margin. In h one last year, we were at 27% on this measure, and this year, we've reached 32%. And at this point, I'll hand over to Richard to take you through further details. Thank you, Vivek. Good afternoon, everyone. Just finishing the financial highlights, moving on from EBITDA. We also are fortunate to have a strong net cash position, which increased to 11,500,000 at the end of June this year, and that increased in the period by 2,200,000 in terms of free cash flow.

4:11 And we have always paid a dividend. And last year, we changed our dividend policy having returned to profitability to state that we would broadly increase our dividends in line with subscription revenues every year. So therefore, this interim, we are posing a 20% increase in our interim dividend to just under 0.2p, which is just under a third of the EPS. So looking at some of the operational statistics in a bit more detail. So we have now grown our client base in total by 17% to just over 1,400 clients. This includes the the core compliance customers, the customers that buy direct from our b to b ecommerce website.

5:02 Our ARR increased by 1,100,000 in the period, and that was purely from new clients. So by by difference, therefore, our net retention in the period was exactly a 100%, which is the same as it was in the previous half in h one twenty four, however, for different reasons. We're delighted to see that our churn has reduced to more normalized levels of 7% compared with 12% last year. We we we'd like think that our churn on is normal in the in the high single digit figures, and we've returned to that level. And, conversely, our upsells have sort of reduced on last year as well. The main reason for that reduction in the upsells is that we only increased prices in 2025 by 3% compared with 7% in 2024 on the back of 10% in 2023.

6:01 So while our churn is not that sensitive to prices or or our offer overall is not that sensitive to prices, I think after two years of sort of 107% growth, our clients are relieved to see that we're we've we have returned to more sort of lower levels of price increase. Overall, the average ARR per client has increased by 12% to 10,629, and this is a combination of new clients, bigger bigger ARR from new clients, but also from upsells to existing clients. So in terms of our product progress and and upsells, we've we've typically got four four sort of offers and products. We've got our standard compliance product, which is a combination of elearning libraries and ad hoc red RedHawk and a elearning an enhanced learning modules.

6:59 We then introduced beginning of this year what we call our enhanced learning package, which is our content libraries and our learning management system plus other factors such as a fast track module that enables, if you're a competent professional, to to reduce your learning time at an our AI digital assistant and our nudge learning compliance by product. And then we have our premium plan, which are all inclusive, top of the range, if you like, library that includes all our e our elearning libraries, all our enhanced learning products, and all our regulatory tools. So for example, policy hub, statute statute declarations and registers. And in these in these modules, we're delighted we've started to see some significant growth come through. So our premium plan, which we which we launched at the beginning of twenty twenty four, has increased from 2.9% of ARR last year in the period to 7.4% of ARR this year.

7:59 Our core compliance product, which is buy with your credit card directly from our website online with no no managed service, for up to 50 users, is has has gone from sort of 0.3% to 1.2, but has a much lower average contract value of around £1,000 compared with our new ARR clients from standard enhanced and premium, which averages around 8,500. We'd like that within our enhanced and our core and our premium packages, we've also launched our AI digital assistant after successful trials, and we're now planning on working with our existing premium plan holders to to roll that out in the second half of this year. We are always responsive and receptive to change in regulation, and we have built an enhanced style learning libraries with the new courses to help support our clients and training to against failure to grant forward, which is the new new legislation that I believe comes in from a week from today.

9:10 And as always, we continue to ensure our our products and our client experience and user experience is as good as ever. So we're in a on a plan to improve the UI UX of our product and our authoring tool to build courses, which should be done by the end of this year. The other area where we've made some significant improvements is in our marketing, typically an area that's been underinvested in previous years. So we've seen a 35% increase in spend in the in the six month period. A lot of that, as some of you might have noticed, has come from a revamped and rebranded website. That's not just to sort of make things look prettier, but also, really, it's all about the engineering as we're a content driven business. It's all about how can we get more people engaging in our website, clicking through, and ultimately improving our funnel and and leading to more sales.

10:03 So we've seen at the top of the funnel that our domain authority engagement scores have increased and coupled along with more PR activity that we've done, we've seen a higher share of voice that's come through in our marketplace. Also, we are responding to the very live real change in search behavior as more and more people choose generative AI tools like ChatGPT over traditional search engines like Google. And this means we need to change how we build and interact our content online so that we optimize the the click through and the and the response from that search. In terms of our financials in a bit more detail, our p and l is now on the screen. And as you can see, for the six months for the June 30, our total revenues are up 18% on the year, driven by subscription revenues of 23 percent on the year. Our professional services revenues declined by 7% on on the back of a 9% decline the the year before. As we said, these are always sort of more nonstrategic services.

11:14 They are a bit more lumpy in nature and harder to predict and plan for. Typically, they're from sort of larger financial services organizations that have had the budget and, arguably, increasingly less budget to sort of commission bespoke courses. It is a small reduction. And last year, we made you may remember we made some significant reduction in the headcount of that team, reducing it by approximately a third. And that is the reason why our gross profit margin has increased by 3.8 percentage points in the year to 75.5%. Our SaaS margins have stayed relatively consistent with the previous year at 80%. Our overheads have grown in the year by in in the period by 9% against revenues of 18%.

12:05 Most of that overhead growth is from people. We've only increased our headcount by an average of 3%, and we increased the average cost per headcount and salaries, bonuses and commissions in the period by 5%. So we're delighted to see, as guided and as expected, a significant increase in profitability coming up to just short of £700,000 worth of EBITDA, representing a 10% to revenue margin and making more EBITDA in six months of this year than we did in the four twelve months of last year. As you can see in the graph on the bottom left, we've continued the trend of increasing the the percentage of revenue mix that have come from our recurring revenues of subscription services up to 85%.

12:53 And the ARR, as you can see, has continued to grow, which is the main driver and lead indicator of our subscription revenue growth has has grown to 12,800,000, up 23% on the year. As you noted, we've got a healthy cash balance ending the end of June at £11,500,000 and generating £2,200,000 worth of free cash. There are three main elements that where this £2,200,000 worth of cash came from. No 800,000 came from an increase in deferred income. So well over 90% of our clients contract with us on an annual basis, invoiced upfront, and paid over thirty days. So as long as our ARR is growing, so is our cash.

13:38 We've also generated 700 k's worth of profit to support that cash, and we've had a significant reduction or an improvement in our receivables By introducing auto renewal terms in 2024, we've seen a reduction in the quote to cash period, which has had an impact on reducing our debtor days and helping our trade debtors by 300 k. We've also seen another naught 500,000 of improvement from a legacy payment of Maltese withholding tax from our subsidiary over there. So that that healthy cash generation has has helped us sort of justify and and fund the increase in the interim dividend.

14:25 Moving on to our balance sheet. Just to say, we are very pleased. It's very clean and easy. We don't capitalize any of our tech and our our product development spend. We expense a source. Apart from our debtors and our cash, we have deferred income on the balance sheet, and that's effectively the main the main elements on that area. We have no bank debt at all and have increased our cash by 3,200,000 on between June 2024 and June 2025. Just to reiterate, our strategy remains the same and consistent that we want to keep focusing on growing the ARR, our subscription which leads to our subscription revenue growth stream, we'll continue doing that through innovating our products, obsessing about our customer service, and maintaining client retention.

15:20 We will continue to develop our products and to encourage our clients to upsell and to maintain net retention of at least a 100%. We'll focus on building our funnel, our inbound market funnel through the continued marketing activity and initiatives, and we'll continue to focus and look for opportunities to grow the core compliance ecommerce self serve option. And we'll continue to develop our AI digital assistant within the in the products to to make it more user friendly for everybody in the marketplace. We've also launched our remote services to larger companies that can't or won't want our current platform. In in some some type tenants clients, particularly the larger one, there's there's pressure to consolidate learning platforms across organizations into one platform, excuse me, the likes of Cornerstone.

16:21 And in that instance, we have a remote services option where we can plug in seamlessly to these other platforms, but still give the data to the the the compliance officers and the learning management to understand what's going on. We we are still committed to professional services despite being non nonstrategic because we believe there's a good way of understanding the market intelligence and what are the key technology and content insights that the big financial services clients are considering. And as as our cash continues to grow, our primary priority for that cash, if we can find it, is to look for acquisitions, small acquisitions of around a million ARR of content digital content in adjacent verticals.

17:12 And we've recently engaged a deal origination company to help us find. So since the end of June, we've continued to grow ARR and trade in line with expectations. We are rolling out the AI aided digital assistance to our clients that have subscribed for it. We are improving our UI UX and our authoring tool. We held a a sold out client and culture seminar last week at the Institute of Charter Counters Hall, which is very well received. And we are growing offering and improving our offering to EU clients by launching EU library in the second the last half quarter of this year.

17:58 And in terms of profitability, we continue to expect to see benefit from operational gearing and see the growth in sales filtered down to the bottom line. Thank you for listening, and I think we just hand back now while we assess what questions you've raised. That's correct, Richard. Thank you very much indeed for your presentation. Ladies and gentlemen, please do continue to submit your questions using the Q and A time situated on the right hand corner of the screen. The company take a few moments to review those questions submitted today, I would like to remind you that a recording of this presentation along with a copy of the slides and the published Q and A can be accessed via our investor dashboard. I'm Vivek Richard. As you can see, we have received a number of questions throughout today's presentation.

18:47 If I may now hand back to you and kindly ask you to read out the questions where appropriate to do so, and I'll pick up from you both at the end. Thank you. Thank you, Alex. Vivek, would you like to take this first one? Yes. Indeed. It's about how material could the EU expansion be in terms of new ARR contribution over the next two to three years. Well, I'd like to remind everyone that we already are present in the in the EU. Around a third of our colleagues are based in Malta. We've always done business there. It's been more of the professional services variety than subscriptions. However, we've got just under a 100 subscribers that produce ARR.

19:36 Somewhere around the full set of our total ARR is coming from EU clients. What we are doing in the second half of the year is bringing out an EU compliance library that will provide multilingual pan European compliance elearning on all the key topics that we see our clients demanding. And that is, first and foremost, to provide a better product fit for our existing clients. We are quite hopeful that that will find traction. And if it does, it could be a real driver of growth. Of course, given the economies that we're dealing with over there, that increases our total addressable market by a few multiples. But we'll report back on that in January release.

20:34 So thanks, Vivek. The next two are around free cash flow and and cash generation, so I think I'll take them. One, how should we think about cash generation going forward, especially with increased marketing spend and potential acquisition? We certainly expect to continue to generate free cash because, ultimately, as long as the ARR is growing, we should be cash generative because of the nature of our contracts and payment profile. However, I do think that the cash the free cash flow in the h one of this year was stronger than would be the normal underlying position, boosted partly because of the £500,000 mortise credit rebate. But we you would expect that to continue with as the profits increase.

21:21 The in terms of how you mentioned exploring acquisitions in adjacent verticals. What valuation discipline and strategic fit criteria will guide your approach? It's a very good question. We we believe we've got very strong technology. So we're not looking for technology buys. We're looking for content that we believe we can leverage onto our existing infrastructure, both of people, our sales team, and our client support type team, and our technology. And we're looking at companies probably of around a million pounds worth of ARR that maybe have not advanced or invested in technology or feel they've got they can afford to invest in technology.

22:11 In terms of our valuation, we'd be looking at, we are really capped by the current valuation of ourselves, and our current valuation is the the three times a or o max. So that would be our that would be our max. So consider yeah. Could I add to that that we're quite prudent in our approach, and you've probably been a bit too strict with our criteria in the past. We're not changing that stance, but we are becoming more proactive about scanning the market as Richard mentioned earlier. So so we are proactively looking there, and there are interesting opportunities. However, given our strict criteria, we will proceed prudently whenever we do.

22:59 The next question is about what do you see the EBITDA margin in the in the next one to three years. I mean, I can't really answer that too specifically, but I would would advise you to look at the guidance in the marketplace by Cavendish as an indication of where that could be. Our estimated market share, and where do you see us in the medium term? Do want to take that one, Vivek? Yes. So there's a sweet spot for us between a 102,000 user companies, so companies with employees between a 102,000. And of that demographic, we have around a 3% just over 3% market share. And we do want to expand a lot more in the in with the smallest businesses, even the nano sized businesses with our core compliance product. There's a lot of progress to be made over there. And in amongst the very largest clients, with those with over 2,000 employees, once again, we have a few percent market share.

24:05 The next question, what markets do you operate in, and do you plan to enter any other markets or segments within the same market? Mhmm. So we So, yes, so the vast majority of our ARR is coming from companies in The UK. As I mentioned earlier, only about 4% from those in The EU, and then you have a smattering of other client clients outside globally that might be exposed to UK regulations. In The UK, the vast majority of our clients so somewhere in excess of 50% of our clients and 50 in excess of 50% of our ARR comes from firms in the financial services sector. So that's our big sector exposure. Outside that, we don't have an exposure in any of the other areas. We do see opportunities through acquisitions and through our own organic marketing to enter other sectors in professional services, social care, public sector.

25:07 So we do see opportunities there. Any specific areas that you're looking for an acquisition in? Your general opinion on the possibility of an acquisition will be appreciated since your last meeting. So as I as I said earlier, we've now engaged in some deal origination people to to look more seriously at this. We have got a list. We are making approaches, and we are we've got some meetings happening. It's still fairly early days. I think the market is heavily fragmented. There's an awful lot of players in the market, many small players, and we remain optimistic that there is a chance to acquire some things, but it really does depend down on the the seller's value expectations as to how successful we will be.

26:03 Yep. So I could take the last one here, which is about what we who we think are the main competitors of SKILLCAST and how do we see the competitive landscape developing? Is it getting more competitive? I'd rather not name any names on this call. You can do a quick check and find out that in financial services sector where we are very strong, there's really just two competitors of ours that we come up against often. So there's there's three very strong players. Outside of financial services, as Richard just said, there's a lot of small companies with a few clients each and not very strong technology at the way we have it.

26:55 When we win new clients, it's far more likely than not that they tend to be greenfield. So companies that have not yet put in place a proper compliance platform of the type that we offer to our clients. So so we're really still dealing with greenfield clients most often. In financial services, we do win clients against our competitors. And the way we see the competitive landscape developing is certainly there are new entrants excited by artificial intelligence or AI offerings. We have our own AI offerings.

27:40 However, we do see that the the the threat level from competition has, if anything, just reduced a little bit over the the the past few years apart from those the the AI led offerings. And those those vendors are more successful in the so the SKILLS space, so SKILLS elearning. In the compliance domain where we operate, clients still want robustness, long track record, care and cautiousness, which is what we offer to our clients.

28:27 So we feel that the competitive landscape is quite steady. That's great, Vivek, Richard. If I may just jump back in there, and thank you for addressing all those questions from investors today. And, of course, the company can review your questions submitted today, and we'll publish those responses on the investment company platform. Vivek, before I redirect investors to provide you with their feedback, which one is particularly important to the company, could I please ask you for a few closing comments? Certainly. I'd like everyone to sort of take away some of the salient points that we discussed today, namely that we operate in a large and very resilient marketplace. We have a consistent b to b SaaS revenue growth model. We have good underlying profitability at all levels, gross EBITDA and net profit levels.

29:18 We're well placed in the changing marketplace, and we've got a robust operation to deliver high quality service to our clients. So we at SKILLCAST are on a journey to help companies build more ethical, compliant, and resilient workplaces, and we're making good progress on that. Thank you all for joining, and thank you for the investors who have believed in us and are here on this journey. Fantastic, Vivek. Richard, thank you once again for updating investors today. Could I please ask investors not to close the session as you now be automatically redirected to provide your feedback in order that the team can better understand your views and expectations?

30:06 This will only take a few moments to complete, and I'm sure will be greatly valued by the company. On behalf of the management team of SKILLCAST GROUP PLC, we would like to thank you for attending today's presentation, and good afternoon to you all.