Skillcast Group (LSE:SKL) — Interim Results

0:01 Good morning and welcome to the SKILLCAST GROUP PLC investor presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged and can be submitted at any time by the Q and A tab situated in the right hand 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 it receives during the meeting itself. However, the company will review your questions submitted today and publish responses as it is appropriate to do so. Before we begin, I'd like to submit the following poll. I'd now like to hand you up to Richard Still, CFO. Good morning to you, sir.

0:33 Good morning, and thank you, Alessandro, for the introduction, and welcome everybody to our interim update for the six months to the end of June twenty twenty three. My name is Richard Steele, CFO, and I joined in May 2022. And Vivek is on the call as well, and we're here to answer questions at the end and is the CFO clearly. So in a nutshell, just to remind everybody, we are a b to b software as a service business. It's been around for twenty years. We we specialize in compliance elearning and associated regulatory tech. We believe we're very much a nondiscretionary demand offer, and we've seen that with our growing recurring revenues. We've just growing our employee base. We've now got over a 120 employees with offices both in London Malta, and we've got over a thousand clients buying our software and services.

1:30 We did raise 3,500,000 at an IPO in December 21 at a £30,000,000 valuation to help us accelerate our growth. So in the six month period that ended, our total revenues were 5,200,000, up from 4,400,000 or 15% from the previous year. We have made a small loss in terms of EBITDA expected because of the increased investments we're planning to make. Despite that, our cash remains very resilient at 7,600,000 in the bank with no debt, and our key lead indicator ARR is up at 8,100,000. Clearly, we want to keep growing our subscription revenues and we've seen that increase to 75% of total revenues.

2:16 We also plan to, as announced this morning, pay an interim dividend of 0.16p per share in line with previous years and our dividend policy that we outlined at IPO. In terms of operating highlights, we are supporting the growth in our ARR by we launched three new products in the first half of the year. We increased our commercial activity. We've invested in our technology environment. And we've started to see evidence that all these investments we're making is starting to help a return to profitability. At the same time, we've managed to maintain our very high award winning customer service to all our clients. So just talking about our operating highlights in a bit more detail.

3:01 So we had a we've had a very busy first half. We've launched three new products. The first one was in February, a product called Fast Track. This is effectively a facility where learners that that can undertake a pre assessment. And if they pass that, it helps it reduces their learning time. So for the the regulatory courses they need to to do every year, this is reduces the amount of time they need to spend on them, which is been very well received. We've also launched in March 2023 some global compliance and risk libraries, which is a lot of the lot of the products we have is very UK specific legislation, but these these global libraries don't aren't restricted by that. And and the aim is to help boost our upsells by selling sort of non non UK specific libraries to some of our multinational clients.

3:54 In April 2023, we launched we launched a new sort of format micro learning called compliance bytes, which are sort of short animated videos designed to improve employee retention. We've also continued to see more activity on the commercial side. We've increased our marketing activity by having large stands at two major trade events, one in The UK, one in Europe in the first half of the year. We've continued to have hold face to face events, breakfast seminars, dinner seminars, which we found hugely successful and and popular with our compliance officer client forum. And we've continued our heavy sort of launch of sort of blogs and webinars that that really has a positive impact on driving inbound leads to to increase our funnel.

4:49 We've invested in technology. One of the things we mentioned when we were at IPO was to invest and migrate all our thousand clients from our server based system to to the Microsoft Azure cloud, which all completed without hitch in March this year. We've also really invested in cyber prevention. We've got two dedicated employees internally, plus we've bought in extra software tools around endpoint detection and secure access this year. And we've started to really leverage AI in both our product development and tools in the wider business to improve productivity. We put in a tool recently to sort of help forecast our pipeline growth. We put in a tools to help reduce our language conversion costs and and and other tools that we're using in product development too.

5:40 So we really feel halfway through the year that we are really poised for growth now. We filled most of the main growth roles that we identified. We've really started to embed sort of governance reporting frameworks with the non execs and other key hires in the business. And despite doing all that, we've managed to maintain our excellent platinum service award of 4.9 out of five. So ARR, annualized recurring revenue, is our is our key key measure as it is for many SaaS businesses. And as you can see from the graph on the top left of the screen, this has increased to 8,100,000 or 27% up from where it was at 06/30/2022 and one point 3,000,000 or 20% up on where it was at December 2022.

6:29 Most of this, unsurprisingly, this growth has come from new customers and we've really seen that go over the a thousand customer mark which is a real landmark for us. But despite that, we've also seen that retention hold hold up at a 104%. Admittedly, there is an element of price rises in that. We put our price rise prices up at the beginning of the year to to renewals and at May last year to new customers. So we're seeing some of that impact come through in our ARR. But despite that, we've still also seen a reduction in our churn on the year from 7% last year to 3% this year. You can also also see that one of our sort of strategies that was to increase our portion of subscription sales that are coming from regtech, which is sort of the stickiest of add on tools we have more than just elearning.

7:25 And we've seen that increase from 10% last year to 11 this year and actually grow by 34% from its slightly lower base. All that is really helping, as you see on the bottom left to to continue the the the very strong trend of increasing our amount of, recurring subscription revenues as total revenue, which is now up to 75% of our of our total revenue stream. And what you can see on the top right is that lead indicator of growing ARR feeding into growing subscription revenue with subscription revenues going up from 3,100,000 in H1 twenty two to 3,900,000 this year or 23%. So looking at the P and L, as you can see, as I've just said, subscription revenue is driving all the growth up 23% on the year. Professional services staying pretty much flat. As we said at IPO, it's a lower margin revenue stream and a harder revenue stream to manage and to forecast.

8:30 So total revenues overall are up 15% to 5,150,000. Our gross profit did drop from 69.8% last year to 66.5% this year. The main reason for that drop is due to the fact that while we were transitioning from our servers to Azure, we we had some sort of higher transitional cost with Azure. We've recently entered into sort of a a semi fixed term contract with Azure so we can cap an element of those costs. So we do expect that that gross profit margin to it to to rebound and increase again in the second half of this year and next year. Our overheads have increased by 26% on the year to 4,300,000, but importantly is we're seeing that rate of overhead growth decrease from 50% this time last year to 26% as as the level of investment is slowing and and as we fill all our growth roles.

9:24 So on that basis, our l bit da has increased from minus 200,000 to minus 700,000 this year, but very much in line with our plan. And because of our cash reserves and our dividend policy, we're going to maintain our maintain our dividend payment of a £150,000 cash or 0.168 per share. Just at the bottom, I've highlighted our our headcount statistics. The vast majority of our overheads are in people and that's both in the overhead line and the gross profit line in the cost of sales line, sorry. And we've seen our average headcount increase by 20% this year to 114, again down on the 32% increase last year. And our total people costs have increased by 29%, again down from the 41% last year.

10:13 In terms of the balance sheet, we have a very sort of healthy and clean balance sheet. We don't capitalize any of our R and D. We expense it as it's incurred. Our receivables have reduced from million pounds at June last year to £3,700,000 this year, despite the increase in sales and revenue. Our cash has remained pretty much constant despite the loss at 7,600,000 and our deferred income on the other side of the balance sheet has increased 24% from £3,400,000 to £4,200,000 which is really a reflection of all the growth in ARR and all the revenue that we've not yet recognized but we've invoiced to clients.

11:02 So in terms of cash, I'm really pleased that we, only burnt, just about a £100,000 worth of cash in the six month period despite a loss of 800,000. And the main reasons for that is we have improved our working capital on our our our debtor days, reduced our debtor days on the year. Plus, as as I mentioned, we, you know, we we most of our subscription clients invoice we invoice annually upfront and they pay within thirty days. So so by growing the ARR really helps accelerate the cash that become that comes through. Moving on to our strategy, just to remind everybody where we're at. We are very much focused on growing organically, focusing on building what we've already got.

11:51 And as we've proven that since the IPO, despite the market turbulence we've seen, especially in the tech sector, we're we're we're continuing to sort of grow and and deliver very much on on the guidance that was given at the time and a very what we believe is a very resilient and growing market. We are still very much focused on subscription growth. As you've seen, that's continuing to grow as a percentage of total revenue and is now at 75% of total revenues. We are still planning to keep and maintain some level of professional services. We have some great logos out there that helps sort of improve brand awareness and also gives us great insights on the key trends with the big logos that we can potentially use and adopt into our core products.

12:40 We are in terms of new clients with that is still the main area of growth. We are still very much focused on the mid sized regulated market which is where we're seeing a lot of our growth. But we are targeting and we believe there's a big opportunity on the at the smaller end of the market and we are about to start targeting smaller clients with a e commerce self serve offering that we are looking at launching later this year. In terms of supporting our ARR net retention with existing clients, we are continuing and obsessed with our level of customer service and that really is helping to minimize churn. We also continue to sort of sell and upsell our what we call our sticky more regtech products like PolicyHUB and we continue to maximize upsells with new products like the three products we launched earlier this year.

13:36 However, we're still continuing to look at, selling more new products, and, developing the whole and supporting and getting behind the whole micro learning trend and AI inside our products to remain competitive, relevant and efficient.

13:55 So, since since the end of June, we've continued to, trade very well, and we're really pleased, with with with how we're progressing and that our rate of year on year ARR growth is has started is is accelerating since the end of June. So that's that's bodes very well for full year subscription revenues and for this year and into 2024. We expect our overhead growth rate to continue to slow now that we've filled the key senior roles, but we do still expect to hire new people, but very much in a volume basis reason. And we do plan to increase our prices again around the end of the year to offset the continuing inflationary pressure.

14:41 Our product pipeline remains strong and we are are as I said, we we are very excited about launching this sort of low cost self serve ecommerce solution in in the second half of the year. And just to reiterate, despite the whole technology crash situation that happened just after we floated in December 21, we are we're proving that we're resilient and continue to trade in line with our long term plans that we set out at IPO. As a as a summary, SKILLCAST is a business that operates in a very in a growing fragmented market of corporate compliance learning. We target nondiscretionary spending, which offers resilience as we've proven in challenging times.

15:31 Our product portfolio is deep and getting deep, deeper and broader. We are increasing the level of revenue coming from subscription, which gives us more resilience and more forecastability, higher forecastability. We've got an experienced management team. We've got a great non exec board that's supporting us.

15:55 And we've got a proven track record of growth, profit and cash generation with a strong balance sheet. And we will continue to unusually for sort of small growing SaaS business, will we plan to continue paying a dividend which is yielding currently 2.2%.

16:16 So thank you very much and just handing now back to Alessandro. Perfect. Richard, thank you very much for your presentation. Ladies and gentlemen, please do continue to submit your questions just by using the q and a tab which is situated on the top right hand corner of your screen. But just while the company take a few months to review those questions 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 investor dashboard. As you can see, we've received a number of questions throughout today's presentation. And Vivek, if I could just hand over to you just to read out the questions and get a response when it's appropriate to do so. I'll pick up from you at the end. Alessandro. So the first question we have here, is about, the management, confirming if, we're on track to meet the market expectations for the full year 2023.

17:08 This is not, clearly mentioned in the results that we released this morning. And there is a reason for that. We are confident. We're broadly in line with market expectations, on our cost front and and the subscriptions, right, that are growing very strongly. They have continued to grow as, Richard mentioned earlier. The bit that is not certain is the professional services. We're quite confident about that as well,

17:42 but but that can introduce a bit of variability towards the year end. So that that's the only variable thing. We are certainly in line with market expectations on the growth of our ARR. That's the main component. So the next question here is asking whether the ARR at 8,100,000 will deliver profits through for the full year and beyond based on the small loss on 5,200,000 in revenues in the first half and no increase in costs. Just wanna correct that impression. We've never said that our costs will not increase.

18:30 It's just that we feel that we're at the inflection point where our revenue curve is growing faster than our costs. So our costs have slowed down certainly. Richard mentioned the point that we've hired in our key growth roles, which are always more expensive, and the the overheads will grow mainly in right line with the with the revenues at the deli in the delivery roles. So we do expect the cost to slow down. We do expect the second half of the year to be profitable. That is in line with market expectations. But for the full year, the the market expectations are remain for a small loss.

19:20 So we we we should start to claw some profit back in the second half of the year. But overall for the year, we should still be in a loss according to market expectations. So the third question we have here is about the sales process. How has this changed to see the increases that we have in sales and are recurring? Well, we have tweaked the sales process somewhat. Richard again mentioned how we're changing the mix, drawing more traffic through blogs, doing more outbound calling for certain products that are that are right appropriate for outbounding.

20:08 So they there are some changes there, but the the increase in revenue really comes from the fundamental economics of our SaaS sales model. Right? Because if we can retain our existing sales from the previous year, and we're running at about a 105% retention rate, which means that we're drawing 5% more revenues from the, from the clients that we had in the past year. And we continue to add clients on top of that, so that compounding effect just gives us that steady growth in ARR. So that that that process is, is what is delivering the growth and and strong growth, this year.

21:03 Vivek, maybe maybe I could add to that as I think one of the key investments we made since IPO is invest in revenue operations. So we've we've got a key person that has really helped drive measurement of the whole sales funnel and pipeline and the metrics we've engaged in in within the the whole commercial team has really helped focus, on on on conversion of of of the pipeline, generation of the pipeline into into higher sales as well. Indeed. Yes. So the those are, the kind of improvements that we're making to the sales, the sales process. Right. So the next question is, what is the ongoing maintenance investment to keep the content relevant, and is this all internally generated? Firstly, we do outsource quite a bit of the content expertise or rather insource it from experts out there.

22:04 We don't hold these experts on payroll because they are some of the leading names in the in the various areas of expertise, lawyers, trainers, compliance consultants, for instance. So, yes, there's certainly an ongoing maintenance, to keep that content relevant, updated, and indeed grow that over time, fill out the areas where, which we're missing. And we're largely driven by, client comments, feedback, for for doing that. We also, of course, have ongoing investment in maintaining our technology, similarly adding to it with new features, again, based on client requests.

22:56 The technology work is all done in house. That's that bit is not outsourced at all. That investment is is something that's pretty steady. It's not growing over time, so it's not growing in line with the with the with the revenues. And and therefore, the revenue curve should get ahead of the the cost curve sometime in the second half. Perfect. Vivek, Richard, thank you very much. I think you've addressed all those questions from investors. And, of course, the company will review all the questions submitted today, and we'll publish those responses on the investor meet company platform. But just before redirecting investors, Roger with their feedback, which is particularly important to the company, Vivek, could I just ask you for a few closing comments?

23:44 Thanks, Alessandra. So I just want to highlight once again our ARR growth, which was 20% in the first half of this year alone. That's all organic, and that was achieved with a pretty minimal cash burn. So we have a lot more firepower. We're delighted with how the second half of the year has started. Got some really good, growth plans both with products and ex entering into areas of the, the market as, Richard, earlier alluded with our, low cost solution. So thank you very much everybody for joining us today, taking the time to to hear us out. Perfect. Vivek, Richard, thank you once again for updating investors today. Could I please ask investors not to close this session as you'll now be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations.

24:38 This will only 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 morning to you all.