Skillcast Group plc (SKL) Earnings Call Transcript

Good afternoon, and welcome to the Skillcast Group plc H1 2026 Results Investor Presentation. [Operator Instructions] Before we begin, I would like to submit the following poll. I would now like to hand you over to CFO, Richard Steele. Good afternoon.

Thanks for the introduction, and good afternoon, everybody, and thank you for joining and expressing interest in Skillcast. I look forward to giving an introduction and update on our business. So I'm joined by our CEO, Vivek, who will be here to help and answer questions at the end, but I'm going to be running through the CFO of the major part of the presentation today. So here are our financial highlights for the 6 months ending the 30th of June 2026. We're pleased to show another period of double-digit revenue growth. Our subscription revenues lifted 15% on the same period last year to GBP 7.4 million. Total revenues were up to GBP 8.2 million, and our total revenue growth was 10%. Our ARR, annualized recurring revenue, was up 14% to GBP 14.5 million. 90% of our revenues are now recurring revenue. Our gross margins lifted 1.6% to 77.7% and our EBITDA grew 48% to GBP 1.0 million and a margin of 12% from 9% last year. We continue to build our cash reserves going up to GBP 13.6 million of net cash and no debt as of the 30th of June 2026, GBP 2.1 million more than last year and increased our free cash flow by GBP 700,000 in the period. We increased our dividend as per our policy, in line with subscription growth by 15% to 0.232p per share. And our Rule of 40, the SaaS metrics that looks at adding the ARR growth and the EBITDA margin together was 26% for the period, 6% below the H1 last year due to lower ARR growth. Thank you. I'm sorry, I can't actually see how I can move the slides at the moment. Thank you. That's the one. So in terms of our H1 '26 ARR breakdown, as I said just now, we grew that by 14% to GBP 14.5 million. Our total client numbers, excluding the smaller clients that just store the metrics on our self-serve core compliance platform grew 6% to 1,250. Our average ARR per client also increased by 7% to just over GBP 11,400, and our net retention remained at 100%, in line with last year. The variables and the factors within the net retention were -- we had 5% price rises that most customers accepted within the period compared to 3% last year. We did have slightly higher churn of 9% rather than 7% the year before. While slightly disappointing, there's no one factor that's particularly driving this, and it's nothing that's causing management any undue concern. We were also -- net retention is also supported by our product upsells. And the graph on the right shows that our nonstandard plans, so our enhanced plan, our premium plan and our core compliance plan increased their representation of total sales by total ARR by 78%, so up to 15% of total ARR, and we believe there's still a long way to go on this upside trajectory. I just now want to talk about some of the sort of strategic and operational progress we've made during the period. Our major focus and something we're very proud and excited about is how we have developed our products, which have all been developed in-house over the last 25 years with the adoption of AI. So just to remind you all, in 2025, we launched our first AI product, and that was called Ask Aida. Aida is our sort of generic sort of user name for any of our AI products within our courses and technology. And we launched that as a compliance assistant that provides instant access to trusted compliance guidance within the product. So any training course you're doing or any of our RegTech tools you're looking at there is an ability to ask a chat assistant any questions on any of the content or anything about the course or tools that you want and get an instant response. Just after the end of the half, we launched in July our next tool, which is called Edit with Aida. Now this is a tool that enables our clients to effortlessly customize our trusted compliance courses in minutes. And we're really excited that within 2 months of launching, by the end of September, 15% of all clients were using this tool and had used this tool. So we feel this is a really exciting tool to support our business and explain the rationale why clients carry on using a proven trusted provider to supply their compliance needs. And later this year, we're going to launch our next product, which is called Learn with Aida. This is a conversational learning tool. So it's taking the sort of the Ask Aida assistant and making it much more interactive. So the AI tool within the courses will ask the learner questions about the course and make those questions specific to how the interaction with that learner is going to help them build understanding and confidence in a controlled environment. It will also enable greater knowledge retention of the courses. In later this year, we're also going to launch Translate with Aida, which is an AI tool within any courses, so you can -- the compliance manager or the L&D manager is able to translate any of our courses into any other language using AI. On the road map for next year, we're excited to launch Create with Aida, and this is taking our AI Edit with Aida to the next level where rather than editing an existing course, it will let you build courses from scratch using secure sources. So all of this, all of our AI, I have to remind everyone, is within a secure environment. You can only look at documents and sources of information that you choose. We also hope to build on our extensive dashboard reporting with some AI analytics and insights to support learners and managers, as well as adoption of -- and development of our AI products. We've maintained our and excelled with our customer service, and every client in our organization has a dedicated human customer support representative. They still do use AI to enhance their productivity, but we know one of our USPs is the fact that there is always a human being that can talk to any clients if need be, on any issues they might have. We effectively kept our headcount the same, 1% more than last year, and this is something we feel we can continue doing in the near future. We've seen productivity gains as not only as we've developed AI in our products, we've also developed AI tools within our organization to enhance our productivity, both -- which has enhanced both our cost of sales and our overheads to increase at a slower rate than our sales, thus improving our margins. And we're excited that we're -- at the progress we're making on multiple acquisition opportunities as the main use of our surplus cash. So just looking at the income statement, as you can see, subscriptions revenues drove all of the revenue growth, up 15% to GBP 7.4 million. We saw a reduction of professional services. Our nonstrategic professional services revenues fell 22%, and they've fallen 7% from the year before. This is not a whole -- a complete surprise to us in the current market in the current world of AI. There are still some people that want to spend lots of money on people like us to actually write bespoke courses from scratch, but it's understandably reducing and it's something we expect will probably continue to plateau. So total revenues are up to GBP 8.2 million, 10% growth on the year. As stated, our gross margin increased by 1.6 percentage points, and this is a factor due to our subscription revenues now representing 90% of all revenues, which are at a higher margin, plus we've also actually increased the margin within the subscription business too as well. Our overheads increased by 7% to GBP 5.3 million (sic) [ GBP 5.5 million ], and our average headcount increased 3% behind that. That led to an EBITDA of just under GBP 1 million or 48% up on the year. On that basis, as we know, we always paid dividends, and we said a few years ago that we're going to increase our dividend every year in line with the subscription revenue growth. So we are proposing to pay in October an interim dividend of 15% higher last year -- than last year of 0.232p per share. We retain and continue to grow our balance sheet. It's a fairly straightforward balance sheet. Our noncurrent assets increased from GBP 0.6 million at this time last year to GBP 1.1 million as we recognized the renewal of our London office lease. Just to remind everybody, we don't capitalize any of our product and tech development. It's always all expensed purely for simplicity, and that would have equated to about GBP 0.7 million in the period. Our receivables, including trade creditors were GBP 2.8 million and 4% above 30th of June last year due to higher revenue growth, supported by auto renewal terms. Debtor days increased marginally from 52 to 54. GBP 0.2 million of receivables relates to Maltese withholding tax, which was paid just after the half in July. So net cash overall has increased to GBP 13.6 million, GBP 2.1 million up on the same time last year. And just to remind, we have no bank debt in the business. Trade credit and other payables were GBP 0.3 million lower than this time last year, partly due to the correction and repayment of a VAT payment from HMRC. Deferred income at the 30th of June was up 11% from the same period last year, driven by 10% higher annual SaaS subscriptions and 27% higher professional services. Deferred income at the 30th of June was materially the same as at the 31st of December 2025 due to GBP 200,000 worth of uninvoiced contracts renewals and GBP 0.3 million of overages not being reflected in deferred income at the balance sheet date. In terms of cash flow -- apologies -- here we go. So there's a bit of a delay on the slides, apologies. Here we go. In terms of the cash flow, we generated GBP 700,000 of free cash flow in the period. This came as we've generated GBP 300,000 more PBT, but we've seen more of that to be to go to -- tied up in working capital in the same period last year. Part of that was the GBP 0.5 million worth of historic Maltese tax settlement received in H1 '25, GBP 0.8 million was due to a lower increase in deferred revenue, partly due to slower ARR growth in H1 '26 than H1 '25, but also due to a higher amount of uninvoiced renewals and overages and also partly due to that correction received in H2 '25. In terms of our strategy, just to remind everybody of our strategy, our strategy is to continue to grow our ARR by 15% to 20% per annum, primarily through a combination of new logos and upsell, supplemented by content acquisitions and with continued operational gearing to consistently achieve the Rule of 40 in the medium term. So we're going to continue to grow our new ARR to attract new logos, both in the FS sector and other sectors, increase our presence and continue to develop our market around self-serve and core compliance and expand into other markets. We will maintain our net retention of at least 100% and continue to expand our ARR from upsells to enhanced and premium. We continue, as we've just evidenced to innovate our products and strengthen our differentiation by developing agentic AI and non-AI tools to simplify compliance for all our clients. We will maintain a PS presence or we'll continue to expect that nonstrategic area not to continue to grow. But we will continue to develop operational gearing benefits to further strengthen our EBITDA margin, and we'll continue to invest in technology and own and third party to drive further productivity improvements in product development, customer support and commercial administration areas. We'll maintain a strong balance sheet and optionality to support primarily M&A. And we seek -- continue to seek and have made progress, we believe, in looking for acquisitions in the digital compliance training sector that could leverage our technology platform and operational infrastructure and provide cross-sell opportunities. Our business model is to digitize, automate and consolidate compliance and make it simpler for organizations. We believe we operate in a large and resilient market with demand growing as companies seek to streamline and automate staff compliance. And we believe that we have a high drop-through rate of incremental ARR through to EBITDA. We offer extensive content and GRC tools and 4 subscription plans. We have market-leading client support with in-house content and technology. We have an established infrastructure and headcount in place to support growth. And we have AI and non-AI technology embracing culture to maximize our productivity to support all that. In terms of current trading and outlook, we see and are confident the GRC markets remain strong. We've had a very encouraging early reaction from our adoption of Edit with Aida, which was launched in July with a 15% client take-up, as already mentioned. We're excited about launching Learn with Aida this half. And we expect ARR in H2 to grow at similar levels to H1 '26 in absolute terms, but that will have a slight impact on the year-on-year growth rate due to a stronger growth in H2 last year. Professional services, we will continue to serve as and when there is an incoming need, but we do have limited visibility of that. And we expect our EBITDA to continue to grow and benefit from operational gearing and enhanced productivity from AI. And we continue to expect full year revenue and profit to be in line with expectations. So thank you for listening, and I think we're -- I'll now hand back to -- open the floor to questions.

That's great, Richard. Thank you very much indeed for your presentation. [Operator Instructions] I would like to remind you that recording of this presentation along with a copy of the slides and published Q&A can be accessed via Investor dashboard. Richard, Vivek, if I may hand back to you to take us through the questions, and I'll pick up from you both at the end. Thank you.

Thank you. So the first question, which was pre-submitted is, can share buyback be an option to generate much needed shareholder value? Oil and gas companies reward shareholders, why can't you? So absolutely, it is an option. It's probably not an option we're focusing on in the short term. As stated, our priority is to use our surplus cash to look at acquisitions. And we believe -- while we can't say too much now, we believe we're making significant progress in that arena. But obviously, if that doesn't happen, we will have to address the cash in other ways. The second question is, is the company taking proactive steps to improve the short-term share price? We are maintaining our focus on what we can control in the short term, which is driving our revenue and improving our sales as much as possible. And we believe by doing that, that the market will recognize the efforts and the strength of our business model. Can the company improve visibility by doing interviews? Very good question. Thank you for that. We will certainly take and [indiscernible] consider that. Just to remind everybody, what we regularly attend the Mello Investor Events that are held twice a year. And our broker and NOMAD, Cavendish, also have a research portal where we have research on it, and we've also got a video demonstration of our tech stack and our products on that, just to remind everybody. The next question is with GBP 13.6 million in net cash representing over 35% of your market cap and the share price trading at a deep discount to your fair value of 90p, what is the specific time line for deploying the capital? If earnings accretive M&A opportunities don't materialize in H2, will the Board consider the structured share buyback to support the equity value? So absolutely similar question to what we've had. Yes, we are aware that we've got a significantly large cash balance. In the short term, we will be looking at hopefully spending this on M&A. And if that doesn't happen, I'm sure sometime during or by the end of 2027, we'll have to come up with other ways. Share buyback may be one option, but also a larger dividend could be an alternative option. We are very well aware of liquidity on -- particularly on the AIM market and within our stock overall. And we are aware that a share buyback could sort of negatively impact that. What are you doing to attract new investors? Again, we're -- we do a roadshow twice a year with our in-house broker. We do attend retail investor events like Mello to attract retail investors, and we'll consider doing more like-minded events for that. What would an attractive acquisition need to offer in terms of strategic fit and ARR growth to justify the valuation and any near-term EBITDA dilution? So the type of acquisition we're looking for is a content acquisition. We believe and are confident that we've got the technology needed and the infrastructure in place to support any acquisition. So what we're really looking for is buying revenue or buying ARR to support and leverage our cost base. And that could be within our own sector or it could be with adjacent sectors. So it could be a GDPR training provider. It could be a provider in the public sector. It could be a provider in a health and safety sector or other sectors where there is digital compliance training and where perhaps there are owners that are looking to retire or to derisk or have not been able to keep up the advance of technology and so are concerned about their future and they're looking to get out that way.

That's great. And Richard, if I may just jump back in as you have addressed all those questions from investors today. But Richard, before I redirect investors to provide you with their feedback, which is particularly important to yourself and the company, could I please just ask you for a few closing comments?