Skillcast Group (LSE:SKL) — Results for the six months ended 30 June 2022

0:01 Good morning, ladies and gentlemen. 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 via the q and a tab that's just situated on the right hand corner of your screen. Please 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 all of the questions that are submitted today and publish responses where it is appropriate to do so. These will be available via your investor meet company dashboard. Before I begin, I would like to submit the following poll. And if you could give that your kind attention, I'm sure the company would be most grateful. And I'd now like to hand you over to CEO, Vivek Dodd. Good morning, sir. Thanks, Jake. Good morning, everybody, and thank you for joining us today.

0:48 I'm Vivek Dodd, the CEO of SKILLCAST, and we've got an excellent set of h one results to share with you today. We appreciate that many of you will be new to SKILLCAST, so we'll give you a quick background or after going over the financial highlights of the first half. Just on the next slide, we just have a quick legal disclaimer. And following that, the presentation team, that's myself. I'm one of the cofounders and CEO of SKILLCAST. I have decades of experience, in our business, having personally delivered solutions to some of our top clients like Tesco, Barclays, UBS, and Royal Mail. And I have joining me today, Richard Steel, who stepped in as our CFO midway through the first half. Richard?

1:40 Good morning, and, thank you all for joining us. My name is Richard Steel. I joined, as SKILLCAST's first full time CFO back in May this year, and I was previously CFO of Mind Gym PLC, and I took them onto their end market in June 2018. And prior to that, I've had thirty years in various different commercial finance roles and very much I'm I'm looking forward to working with Vivek and the team in growing the business over the next few years. Thanks, Richard. So next, we've got, here, our full board of directors, which includes, myself and Richard and Katrina Rasic, our chief commercial officer, Anthony Miller, our CTO.

2:33 Anthony, Katrina, and myself founded SKILLCAST several years ago, our three new not our nonexec directors, pardon, Richard Amos, our chairman, Sally Tilray, our chair of audit committee, and, Isabel Napper, our chair of REMCOM. Our board has, decades of experience, in growing innovative companies in the fields of, compliance, law, and training. So with that, let's jump straight into the h one highlights. Just a reminder here on the left about who we are. We are a b to b software as a service provider.

3:18 We help companies, to digitize their compliance processes, primarily elearning, but also other processes, and I'll go over that, on the slide next. The demand the requirement for compliance, is, pretty much discretionary, nondiscretionary with, which allows us to have annual contracts with our clients, which bring in recurring revenues. We have offices in London and Malta. We have over 800 clients growing at the rate of, around 20 per month. The vast majority of these clients are in The UK with smaller numbers in The EU and the rest of the world.

4:04 And here in the middle, we have our financial performance for the h one. Our overall revenues up 20% from £3,700,000 in h one last year to 4,500,000 in the first half of this year. The vast majority of this growth, almost the entire amount of this growth, came from the rise in our subscription revenues, which were up 33% to £3,100,000. And as a result of this growth, our revenue mix moved from 63% subscriptions to 70% subscriptions as shown by the pie chart in the center of the screen. Our EBITDA did fall in line with our expectations as we invested the proceeds of our IPO in December last year.

4:59 Whereas for the first half of twenty twenty one, we had a positive EBITDA of naught 600,000. For the first half of this year, we had naught 200,000 EBITDA loss. This also led to a cash burn of £300,000, which was well within our means given our cash in the bank of £7,500,000 at the end of first half. Another important statistic, for us, and Richard will go over this in detail, is our ARR or annual recurring revenue that grew by 26% off the back of new client wins and net retention.

5:48 We had at the end of this half, our board declared an interim dividend of a £150,000 that works out to naught point, $16.08, pennies per share. Again, this was in line with what we've guided to the market, since our IPO. At this point, I'll take a step back, to explain our business and our purpose for those who are, new to SKILLCAST. We help companies, as I said earlier, by helping them digitize and streamline their compliance processes and manage them from a single compliance portal.

6:34 Our legacy and, the top selling business line is our compliance elearning on a wide range of topics, including those that you see here on the left. We provide course libraries or content and technology in the form of learning management system to enable our clients to train their staff and evidence the training to their regulators and auditors. And along with elearning, as we show here on the right, we provide tools to digitize other processes such as policy attestations, staff declarations, employee surveys, CBD tracking, and compliance registers for all manner of things like, gifts, hospitality, PA delaying, whistleblowing, and breaches.

7:29 Next, let's look at the, investment case for our company, and this remains unchanged from, the time we went public ten months ago. I'll start by retraining that the the requirement for staff compliance is pretty much nondiscretionary, especially in the regulated sectors like financial services. There is a shift in compliance from head internal headcount towards technology and an external spend to reduce costs and improve the compliance experience. Several studies have noted this trend and projected very healthy growth rates, for compliance training as well as other technologies.

8:17 And our own growth rate is at the top end of the market projections because of the breadth and depth of our offering. We help to, bring, several compliance processes onto a single, platform. And in doing that, we help our clients streamline their, user and administrator experience. We help them to consolidate the data in one place, which reduces the overall risk of compliance failures, and we thereby also help them to reduce direct and indirect costs. Our growth rates are are also testament to our business model, which is based on annual subscriptions, which gives us great scalability, excellent revenue visibility, and compounding growth with strong cash generation.

9:15 And also gives us the confidence to look ahead and invest in that growth. So on the next slide here, we've just got a quick summary of the nonfinancial progress that we've made in the first half of the year. As we said at the time of our IPO and at the announcement of our full year 2021 results, we have been investing the proceeds of the IPO, in our people, to fuel our future growth. And we started at the top end by strengthening our executive team, by bringing on, Richard, as well as, many other team leaders and specialists, especially in the area of, technology.

10:08 Our employee count, went up during the first half of the year, to 95, and the largest area of investment there, was sales and marketing. And this has, led to an increased marketing activity. Prior to the IPO, we relied primarily on content marketing, which involves, blogs and downloadable res resources and free courses to bring in the the prospects. We've carried on with that work, but we've now added a SKILLCAST engine of growth there with our engagement marketing, which includes, face to face events, with, chief compliance officers, and we're in the process of formalizing that activity, with our SKILLCAST, connect community initiative, which will be launched on the thirteenth of this month.

11:10 As a result of that, our pipeline of prospects remains very strong for this time of the year, and, we we expect to hit our eventual numbers that are, expected in the market. We've also invested in our technology. The biggest project here as we've guided, earlier on this year has been to migrate our clients from our physical infrastructure, to Microsoft Azure cloud. This process is underway and should be completed by the end of this year. And our product development pipeline, has also been ex expedited as a result of, new hires, especially the spec the specialists that I mentioned earlier.

11:58 Another point to mention here is that, in the first half, we also, increased our prices by, 10%, on account of, the inflation and also the improvements that we made to our product, both in terms of technology and content. And as a result of those improvements, we've had no material objections from our clients. So at this point, I'll hand over to Richard to take us through the details. Thanks, Vivek. Yes. I'm just gonna give you a bit more of an update in terms of the the financial numbers. So our revenue comes from two main main areas. The first is revenue, which is recurring revenue, and that drove all our growth in the first six months of this year compared to the first six months of last year.

12:53 And we saw the subscription revenue growth 33% to £3,100,000 in the six months. And this came from a combination of new clients continuing to buy our elearning libraries and our hosting platform. And this came from both financial services sector clients and non financial services. You may recall that the business was founded over twenty years ago primarily to target sort of elearning in the financial sector financial services sector. But one of our growth strategies is to to broaden broaden that remit, and indeed many of the courses that we have are are relevant to nonfinancial services as well. And we've seen the mix of our revenue from nonfinancial services client grow from 41 percent last year to 44% this year.

13:47 We've also continued to upsell to existing clients, and that can be either through increased active user base as more as they grow their employee base potentially, and also through what we what we refer to as of of of upselling of our regtech products. So this is these are products that are complementary to our elearning libraries and hosting platform and help companies manage their compliance. So we have products like SMCR three sixty and Policy Hub where employees and and those that are taking the courses are asked potentially to sort of attest to having read the read the policy and all that information that it can then get compiled for for the management for l and d departments or compliance managers to actually see and understand who who is who is doing the training and who is attesting to policies and who isn't. So there's a there's a complete sort of management system that really helps the the the employees and and and the client sort of manage the process and takes away a load of admin and increases the efficiency. It also makes our products much more sticky because it becomes sort of a platform that they become quite reliant on.

15:08 Our ARR, our annual annual rides recurring revenue did grow as Vivek said by 26% to 6,300,000 against the 5,000,000 we were at at June last year. And that grew in two stages. That grew by 8% from December where it was 5,800,000. So we have seen a slightly more growth in the second half of last year than we saw in the first half of this year. We've also seen that our net retention was at around 95% and included in that, a churn of 7%, which was in line with where we were last year. The other part of our business is our professional services revenue, which accounts for 30% of revenues in the year.

15:56 And this is level on the in terms of absolute cash terms of 1,400,000 with the prior year as as was our as in our strategy and we intended to do so. While this revenue is non nonrecurring, it is by its nature very often repeat. And that we have a lot of very loyal clients that that ask us to customize some some of our work for them or and that could be on an ongoing basis. And therefore, we we retain many many high big clients, the likes of Tesco's, Barclays, UBS that that have have been lower clients with us for many years. But but because of their size, prefer to have some of our products customized for them. Moving on to our our p and l and how that is how that has dropped down. So as as we said, total revenue is up four up to 4,500,000, which is 20% growth from the prior year, all driven by the growth in subscription revenue.

16:57 Our gross profit as a percentage increased by 1% from 69% last year to 70% this year, primarily due to the fact that we'd increase the subscription revenue mix, which is much more profitable than the professional service revenue in our in our business. The subscription is is literally sort of deploying the courses that we've got, and the professional services business is is the is is is needing specialist custom people to sort of help support support that, so it's less profitable. We have invested, as Vivek said, in our in our cost base, which brought us to a a loss in EBITDA of of 165 k in the six month. And that that's compared to sort of a a a profit of 553,000 the in the prior year.

17:45 And nearly all of this increase in overheads has gone into of of 50% of 3,200,000 has gone into increased headcount. We've seen our headcount increase on average during the half by 32% to 95 compared with 72 last year. And the largest area has been the investment in our in our sales and marketing functions. Functions. And as you can see, the the the graph is showing the ARR continuing to grow from 5.8 to 6,300,000. And the and the proportion of revenue coming from a subscription revenue is growing, to 70% from 63% in the prior year. Looking at our, balance sheet, it's a very simple clean balance sheet. I'd like to remind everybody that we do not capitalize any of our intellectual property, be that be it content or technology, and we expense it as it's incurred through the p and l.

18:43 In terms of our balance sheet, we've got quite a high receivables balance of £4,000,000, which is growing from 2,400,000 at the same time last year. And within that, we've seen trade debt has increased 41% on the on the prior year to 2,500,000. That is a figure that is that is higher than we'd like and is is is a focus of mine to to to bring down as we move forward. Now that the business is in the in the public domain, there's there's increased focus on on cash conversion in in that area. There is also a large and not insignificant figure of £1,000,000 due from our multi subsidiaries in relation to withholding tax rebate. Again, we we have we see no risk in the recovery of that figure, the bureaucratic and administration administrative nature of of the organizations in Malta means that it's going to not be a a quick recovery.

19:45 As you say, the cash, we've seen boost to 7,500,000 primarily because of 3,500,000 of IPO proceeds we we we received in December last year. And just to remind everyone, we have no debt in the business either. In terms of the the balance sheet and the liabilities, the only other major major figure is our deferred income, which is at 3,400,000. This is made up of two main areas. This is this is the sort of annual subscriptions that have yet to to be recognized in in in the p and l, plus it's also the the the value of ink incomplete work from our professional services contract. So it's a good indicator up 52%. It's a good indicator of our of our future business success.

20:35 Our cash flow statement is is is quite straightforward as well. We we saw a net cash burn in the half of 300 k, and this is primarily due to the the loss that we saw coming through plus the increase in working capital from for higher sales as that come through into into trade receivables. There there was a slight timing difference in terms of dividends paid. As Vivek mentioned, we do have a policy to maintain paying dividends, and we've guided to £400,000 per year on a full year basis as in previous years with a 150,000 being paid in the interim period. I will now hand back to Vivek to give you an update on on current trading and outlook.

21:26 Thanks, Richard. So in, the the quarter, following the first half of the year, our trading has been, in line with the full year expectations. As I said earlier, our pipeline remains strong. We are on course for delivering on our expectations there. As I mentioned earlier, we have preferentially hired the top management, the team leaders, the specialist roles. And going forward, the the the challenge that we face in recruitment is somewhat smaller. We we now are mainly filling, roles in, our operations area and more junior roles in general.

22:18 On the technology development funds front, which is all important, we've made great progress with the first item shown over here, which is the migration to Microsoft Azure, and that is the enabler for further developments, especially in the area of self-service, which will enable us to reduce the cost of acquisitions, onboarding, and maintenance. We've also made great progress on the integration front. This is integrating our application with other HR and human capital management applications, ERP applications, ID managers like Okta and Azure, and collaboration applications like Slack and Microsoft Teams.

23:11 And we are at the final point here being around ESG As a corded company, we're very conscious of our, obligations, and we are, aligning with the QCA guidelines for ESG and are on track for achieving a net zero status in 2022. At this point, it's very important for us on the commercial front as well, since effectively the service that we're providing is all about environmental, social, and governance aspects of companies. So helping companies to govern better, to improve their social relations with their employees and their communities, and also reducing their environmental footprint.

24:01 So with that, I'll move to just a quick summary of where we are. We've achieved 20%, top line growth with 33% growth in the all important recurring subscriptions segment. Our ARR is up 26%, and we achieved a gross margin of 70% across, our revenues. The market for our products, is vast, and we continue to see a great opportunities for growth, with companies wanting to digitize their compliance processes.

24:48 At this point, we'll open up for questions. Are Richard, thank you very much indeed for your presentation this morning. If I may just jump back in there and give you a moment. Ladies and gentlemen, please do continue to submit your questions just by using the q and a tab that's situated on the top right hand corner of your screen. But just while the team take a few moments to review those questions that were submitted already, I would 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. Richard, Vivek, as you can see in the q and a tab, we have received a number of questions throughout today's presentation. So firstly, thank you to all of those invested in the call for taking the time to submit their questions. And, Vivek, Richard, if I could just hand back to you to run through the q and a tab and respond to those where it's appropriate to do so, and then I'll pick up from you at the end. Thank you.

25:42 Thanks very much. Yes. Vivek, I'm happy to take the the the first question, which I will read out for everybody to hear because I don't think everyone can see it. But the first question is, with the AR picking up from new clients, what does the pipeline look like? Do you see the cost base staying around current levels, therefore, delivering strong operational gearing? So we are we are glad that we are we're seeing that the ARR is continuing to grow. We're still getting new clients coming across the line, and we are we are still renewing a healthy volume of our of our existing clients. In terms of the the cost base staying around this current levels, I think there's there's there's two things there.

26:28 I think, first of all, what you've what we've been doing during h one this year is increasing and building that cost base. In h two, you're gonna see the full effects of that cost base in h one coming in, plus we've continued to increase it further with some more highs in h two. So I I I I would I'd probably ask to refer to the the guidance out there that to to actually understand the exact sort of level where we expect it to increase that to. But I would you know, we the the guidance is effectively looking at looking at it not us sort of maintaining sort of a loss making position until at least 2024, on on that basis. Yes. What I'd add to that is that we've hired the more expensive people first. So the more, experienced the the the ones bringing in specialist knowledge.

27:27 And, going forwards, the people we'll be hiring will be there mainly to support growth. So as I mentioned earlier, our challenge in recruitment has reduced, but our cost base will keep growing. You'll start seeing the the the strong operational gearing, as Richard said, from 2024 onwards. Another question over here is about how much growth do we see from landing a new client and then upselling to them. Well, our upsells across the entire portfolio are in the region of 15%. Some of this comes from increases in, user numbers for our clients, and the rest comes from selling them new products.

28:21 The question does ask for for any examples, we can give to help you understand the potential inbuilt growth opportunity from existing clients. Well, I think a good one is a challenger bank that we acquired as a client a few years back, on ARR of £6,000, delivering only elearning. And within a couple of years, we had brought on other compliance processes. We had become their effectively, platform for induction, which included many other things like staff declarations, policy attestations. And that account went from approximately 6,000 to £18,000 ARR.

29:14 So that's a really good example. I'm not saying that we're able to convert all of our clients in that kind of time frame, but that does show you the potential. There's another question here about, our acquisition plans, to accelerate growth. And would we do so using debt rather than paper? Well, at this point, I'll say that we constantly come back to this question in our board meetings, but we have decided not to pursue any acquisitions. So we have no active plans in this area. If we were to pursue anything, that would probably be using our cash resources.

30:05 We we've never really had debt even pre IPO in our company. So as a legacy, we are quite debt averse. But we don't see going back to the market, to raise further funds either. So although acquisitions is something that we will continue to continually look at, it's something that we're shying away from because we see huge opportunities for organic growth. Richard, do you want to take The the next question is directed at me, so I will I will take that one, Vivek, if that's okay. So there's a question to me saying, Richard, what excited you most to join SKILLCAST, and what's your key priorities over the next six to twelve months?

30:59 Well so I was very excited to join SKILLCAST because for two reasons. Firstly, the opportunity, and secondly, the culture. So it's a business that's been going twenty years. I think it's been a it's ahead of its game in way before elearning and the digital revolution sort of became, you know, so so opportunistic as it is now accelerated by the all the issues we saw during COVID. SKILLCAST saw this opportunity out there. It's it's clearly a great business model. It's it's got growing its client base by 20 a month. Clients very rarely leave. We've got very little churn, and this is sort of really brought home by the phenomenal customer service, the 4.9 out of five FIFA ratings, and that's endorsed in the culture and the business. Everybody in the business is obsessed with making sure every client experience is as good as it possibly can be. So I always thought there were great foundations on which to build a business. I mean, I think I'm sure that that would also agree though that there are also opportunities in that there is around bringing some governance structure and sort of some robustness. It's like this that critical sort of inflection point where it it needs sort of more structure and delegation and of or within the business to enable it to scale and to grow.

32:29 And on that basis, we you know, I'm focusing the business of bringing information and analysis to help, which is make make finance much more forward looking as an organization. So we're looking at forecast. We we've got a strategy day, the first of our strategy day for the business with the non execs coming up next month where we're gonna start planning the objectives and how we can drive growth and what initiatives we need to sort of support growth and and how how we're going to do that profitably and and get a return on investment on that. So there there are just a few things that that that that we're looking at over the next few months. But thank you very much for the question. I'll take the next one, which is kind of related to the previous one about acquisitions.

33:15 This one is say, if we've got such a strong, cash balance, could we be more aggressive on international ex expansion? Could that be something on the cards for 2023? And I'll go back to what Richard has just said about our our strategy today. This is definitely an item on that agenda. One thing I will say in this regard, though, is that the move to Microsoft Azure really improves our scalability, our ability to keep our data in The UK for our UK clients and in The EU for our EU clients. Our current physical infrastructure keeps all the data in the in The UK. So, definitely, the move to Azure is a real enabler for expansion.

34:04 We're also investing in the product to make it more amenable for self-service and hence, improving our ability, to serve this, in in The EU. Having said that, we do see great growth opportunities in the domestic market. UK is our prime focus for for now and should remain, for the foreseeable future. Another question here is, asking us, for, some insights about our marketing and marketing effectiveness. This is an interest a very interesting area for us right now. We're taking a lot of, interest in coming up with our KPIs.

34:57 Whereas in the past, we were only happy, for our marketing to produce the, the leads, the MQLs, the marketing qualified leads, the sales qualified leads, if you have it. And and and and we were pursuing that business. More recently, we've taken on, more specialists in this area of, sales ops and, rev ops. And we're looking forward to analyzing the effectiveness of marketing, especially the channels where, that money is going. But going back to what I said earlier, we are very, pleased with, our initial efforts around engagement marketing. So whereas previously, we had done mainly content marketing, putting out content, their free content to attract people. Now we are more engaged with them at a more personal level in a pretty wide audience, if you will.

36:08 So this involves hundreds of people joining our webinars, scores of them showing up at our event. So we should have around a 150 people at our event next Thursday in the city. So that that's also leading us to get connected in the networks of the chief compliance officers. So really happy about that, but we are getting more scientific with our new hires. Vivek, Rich, if I may just jump back in there. Thank you very much indeed for addressing all of those questions that came in from investors this morning. And, of course, if there are any further questions that do come through, we'll make these available to you immediately after the presentation has ended for you to review and then add any additional responses where it's appropriate to do so. Vivek, perhaps before redirecting those on the call to provide you with their feedback, which I know is particularly important to yourself and the company, if I could please just ask you for a few closing comments to wrap up with, that'd be great.

37:12 Thanks, Jake. And thank you everybody again for joining us today. As you heard from us, we had an excellent, first half of the year with 20% top line growth and 33 recurring revenue growth. And we're really excited, for the next, six months. So thank you again, and we look forward to engaging with you again in the future. Vivek, that's great. And, Richard, as well, thank you once again for taking the time to update investors today. Could I please ask investors not to close this session as you'll now be automatically redirected for the opportunity to provide your feedback in order the management team can better understand your views and expectations? This may 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 would like to thank you for attending today's presentation.

37:59 That now concludes today's session. So good morning to you all. Thanks. Thank you.