Skillcast Group PLC

LSE:SKL

Earnings Call Transcript

[Operator]

:

Good afternoon, and welcome to the Skillcast Group plc Investor Presentation. [Operator Instructions] 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.

[Vivek Dodd, executive]

Thank you, Alex, and thank you, everybody, for joining us today for the Skillcast Group H1 2025 Interim Results. I'm Vivek Dodd. I'm the CEO of the company, and I'm joined by Richard Steele, who's our CFO. 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, et cetera.

We have offices in London and in Malta. We have around 125 employees. We have over 1,400 corporate clients, mostly in the U.K., but also increasingly in the EU. And we've got some of their logos here on the screen. 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 spend, and our retention rates are high because of the level of service we provide. Our business model is B2B SaaS that you might be familiar with. We have high net retention, which produces growing annual recurring revenues and strong operational gearing.

And this is reflected in our H1 results. 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 H1 last year is when we reached breakeven point. In H2, our EBITDA was GBP 0.5 million. And in H1 this year, that's grown to GBP 0.7 million.

We've also improved our score on the Rule of 40, which is effectively the sum of ARR growth rate and EBITDA margin. In H1 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.

[Richard Steele, executive]

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 GBP 11.5 million at the end of June this year, and that increased in the period by GBP 2.2 million in terms of free cash flow. 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 proposing a 20% increase in our interim dividend to just under 0.2p, which is just under 1/3 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 core compliance customers, the customers that buy direct from our B2B e-commerce website. Our ARR increased by GBP 1.1 million in the period, and that was purely from new clients. So by difference, therefore, our net retention in the period was exactly 100%, which is the same as it was in the previous half in H1 '24. 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'd like to think that our churn is normal 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. So while our churn is not that sensitive to prices or our offer overall is not that sensitive to prices, I think after 2 years of sort of 10% to 7% growth, our clients are relieved to see that 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 ARR from new clients, but also from upsells to existing clients. So in terms of our product progress and upsells, we've typically got 4 sort of offers and products. We've got our standard compliance product, which is a combination of e-learning libraries and ad hoc, Red Hawk and eLearning and enhanced learning modules.

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 reduce your learning time and our AI digital assistant and our Nudge learning compliance product. And then we have our premium plan, which is our all-inclusive top of the range, if you like, library that includes all our e-learning libraries, all our enhanced learning products and all our regulatory tools, for example, policy hub, statutory declarations and registers.

And in these modules, we're delighted we've started to see some significant growth come through. So our premium plan, which we launched at the beginning of 2024 has increased from 2.9% of ARR last year in the period to 7.4% of ARR this year. Our core compliance product, which is a buy with your credit card directly from our website online with no managed service for up to 50 users is -- has gone from sort of 0.3% to 1.2%, but has a much lower average contract value of around GBP 1,000 compared with our new ARR clients from standard enhanced and premium, which averages around GBP 8,500.

We're delighted 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 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 our learning libraries with the new courses to help support our clients and training to -- against failure to prevent fraud, which is the new legislation that I believe comes in from a week from today.

And as always, we continue to ensure our products and our client experience and user experience is as good as ever. So we're on a plan to improve the UI/UX of our product and our authoring tool and 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 6-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 leading to more sales.

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 click-through and the response from that search.

In terms of our financials in a bit more detail, our P&L is now on the screen. And as you can see for the 6 months to the 30th of June, our total revenues are up 18% on the year, driven by subscription revenues were up 23% on the year. Our professional services revenues declined by 7% on the back of a 9% decline the year before. As we said, these are always sort of more nonstrategic services. 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 1/3. And that is the reason why our gross profit margin has increased by 3.8 percentage points on 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 -- in the period by 9% against revenues of 18% -- 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 in 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 GBP 700,000 worth of EBITDA, representing a 10% to revenue margin and making more EBITDA in the 6 months of this year than we did in the full 12 months of last year.

As you can see in the graph on the bottom left, we've continued the trend of increasing the percentage of revenue mix that have come from our recurring revenues of subscription services up to 85%. 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 grown to GBP 12.8 million, up 23% on the year. As you noted, we've got a healthy cash balance ending the end of June at GBP 11.5 million and generating GBP 2.2 million worth of free cash. There are 3 main elements where this GBP 2.2 million worth of cash came from. GBP 0.8 million 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 30 days. So as long as our ARR is growing, so is our cash.

We've also generated GBP 700,000 worth of profit to support that cash, and we've had a significant reduction or 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 GBP 300,000. We've also seen another GBP 0.5 million of improvement from a legacy payment of Maltese withholding tax from our subsidiary over there. So that healthy cash generation has helped to sort of justify and fund the increase in the interim dividend.

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 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 elements on that area. We have no bad debt at all and have increased our cash by GBP 3.2 million between June 2024 and June 2025. Just to reiterate, our strategy remains the same and consistent and that we want to keep focusing on growing the ARR, which leads to our subscription revenue growth stream. And we'll continue doing that through innovating our products, obsessing about our customer service and maintaining client retention.

We will continue to develop our products and to encourage our clients to upsell and to maintain net retention of at least 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, e-commerce self-serve option. And we'll continue to develop our AI digital assistant within the products 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 platform in some attendant clients, particularly the larger one, there's pressure to consolidate learning platforms across organizations into one platform. The likes of Cornerstone. 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 compliance office and the learning management to understand what's going on.

We are still committed to professional services despite being nonstrategic because we believe there's a good way of understanding the market intelligence and what the key technology and content insights that the big financial services clients are considering. And 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 GBP 1 million ARR of content -- digital content in adjacent verticals.

And we've recently engaged a deal origination company to help us find. So since the end of June, we've continued to grow our ARR and trade in line with expectations. We are rolling out the AI Aida digital assistance to our clients that have subscribed for it. We are improving our UI/UX and our authoring tool. We held a sold-out client and culture seminar last week at the Institute Chartered Accountants Hall, which is very well received. And we are growing our offering and improving our offering to EU clients by launching an EU library in the second -- the last half quarter of this year. And in terms of profitability, we continue to expect to see benefit from operational gearing and see the growth in sales filter 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.

[Operator]

:

That's correct, Richard. Vivek. Thank you very much indeed for your presentation. [Operator Instructions] I would like to remind you that a recording of this presentation along with a copy of the slides and the published Q&A can be accessed via investor dashboard. Vivek, Richard, as you can see, we have received a number of questions throughout today's presentation. 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.

[Richard Steele, executive]

Thank you, Alex. Vivek, would you like to take this first one?

[Vivek Dodd, executive]

Yes, indeed. it's about how material could the EU expansion be in terms of new ARR contribution over the next 2 to 3 years, where I'd like to remind everyone that we already are present in the EU. Around 1/3 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 100 subscribers that produce ARR, somewhere around the 4% 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 e-learning 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.

[Richard Steele, executive]

So thanks, Vivek. The next 2 are around free cash flow 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 H1 of this year was stronger than would be the normal underlying position, boosted partly because of the GBP 0.5 million Maltese credit rebate.

But you would expect that to continue with as profits increase. 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 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 the people, our sales team and our client support type team and our technology. And we're looking at companies probably of around GBP 1 million worth of ARR that maybe have not advanced or invested in technology or feel they've got they can afford to invest in technology. 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 around the 3x ARR max. So that will be our max.

[Vivek Dodd, executive]

Yes. Could I add to that, that we're quite prudent in our approach, and we've probably been a bit too strict with our criteria in the past. We are not changing that stance, but we are becoming more proactive about scanning the market, as Richard mentioned earlier. So we are proactively looking there, and there are interesting opportunities. However, given our strict criteria, we will proceed prudently whenever we do.

[Richard Steele, executive]

The next question is about what do you see the EBITDA margin in the next 1 to 3 years? I mean I can't really answer that too specifically, but I 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 you want to take that one Vivek?

[Vivek Dodd, executive]

Yes. So there's a sweet spot for us between 100 and 2,000 user companies, so companies with employees between 100 and 2,000. And of that demographic, we have around 3%, just over 3% market share. And we do want to expand a lot more 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, those with over 2,000 employees, once again, we have a few percent market share.

[Richard Steele, executive]

The next question, what markets do you operate in? And do you plan to enter any other markets or segments within the same market?

[Vivek Dodd, executive]

So yes, so the vast majority of our ARR is coming from companies in the U.K. As I mentioned earlier, only about 4% from those in the EU, and then we have a smattering of other clients outside globally that might be exposed to U.K. regulations. In the U.K., the vast majority of our clients are 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. So we do see opportunities there.

[Richard Steele, executive]

Any specific areas that you're looking for an acquisition in your general opinion on the possibility of an acquisition would be appreciated since your last meeting. So as I said earlier, we've now engaged in some deal origination people 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 sellers' value expectations as to how successful we will be.

[Vivek Dodd, executive]

So I can take the last one here, which is about what we -- who we think are the main competitors of Skillcast -- and how do you see the competitive landscape developing? Is it getting more competitive? I'd rather not name any names on this call, but you can do a quick check and find out that in financial services sector where we are very strong, there's really just 2 competitors of ours that we come up against often. So there's 3 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 the way we have it. 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 we are 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. However, we do see that the threat level from competition has, if anything, just reduced a little bit over the past few years, apart from those -- the AI-led offerings. And those vendors are more successful in the sort of the skills space, so skills e-learning. 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. So we feel that the competitive landscape is quite steady.

[Operator]

:

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 view all questions submitted today, and we'll publish those responses on the Investor Meet Company platform. But Vivek, before I redirect investors to provide you with their feedback, which you know is particularly important to the company, could I please ask you for a few closing comments?

[Vivek Dodd, executive]

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 B2B SaaS revenue growth model. We have good underlying profitability at all levels, gross, EBITDA and net profit levels. 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.

[Operator]

:

Fantastic, 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 and also that the team can better understand your views and expectations. 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.