Skillcast Group plc (SKL) Earnings Call Transcript

Good afternoon, and welcome to the Skillcast Group plc Annual Results 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.

Thank you, Alex, and thank you all for joining us today for our full year results for 2024. I'm Vivek Dodd. I'm the CEO of the company, and I'm joined today by Richard Steele, our CFO. And I'll just go quickly over the financial and operational highlights with you, and then I'll hand over to Richard to take you through the details of the financials. So 2024 was an eventful year for us. We kept up our ARR growth, got back to profitability whilst generating very strong cash flows, as you see here on this page. These give an indication of further performance to come. Our book of annual subscription contracts, which is essentially captured by our ARR, grew by 25% in the year, ending at GBP 11.6 million, which incidentally is exactly twice the level with which we went to market 3 years earlier. This resulted in a 29% growth in subscription revenues to GBP 11 million, which, in turn, raised our overall revenue by 17% to GBP 13.2 million. The overall revenue was -- increase was slightly held back by professional services -- we'll talk about that later on in this call -- which, although are nonstrategic, still very important to us. However, our revenues now are totally dominated by subscriptions that have grown from around 60% of our total revenue mix at the time of the IPO to 83% at the end of 2024. In 2024, we also saw the end of our investment phase, whereby we used the IPO funds to accelerate investments in our infrastructure, governance, team leadership, senior roles, product development, sales and marketing. With that phase now over, you can start to see that operational gearing really come through. So whilst our revenues grew by 17%, our overheads grew by only 9%, which took us from an EBITDA position of minus 5% in 2023, the year before, to plus 4% EBITDA or GBP 0.5 million in 2024. We expect this operational gearing to continue driving up our EBITDA profitability in future periods. This also, of course, helped our free cash flows bounce back from slightly under 0 in 2023 to GBP 2 million in 2024. In light of these improvements and the return to profitability, we declared a final dividend up 25%. The total dividend for 2024, including the interim we paid in October last year is, therefore, up 16%. So just turning over to the operational front. I'm delighted to report that the Premium plan we launched last year that bundles together many of our GRC tools accounted for 6% of our ARR book by the end of the year. The Premium plan gets us embedded more firmly as a GRC solutions provider with our clients. It has a revenue uplift for us as well as better client retention. I'm also encouraged by the progress we made with CoreCompliance, our preconfigured, no-frills solution for cost-sensitive smaller businesses. This got up to 1% of our ARR book, and we see a huge potential for this product ahead. We're also very excited about our AI-powered compliance assistant. I spoke about this briefly in our presentation in September last year. This AI-powered tool is something we call Aida, and it's now in our beta testing with clients and has been well received by compliance officers. It allows essentially employees to ask compliance-related questions within our courses as well as on their compliance portals. And it gives them answers based on content that we've created at Skillcast and that our clients have provided in the form of their policies and other documents. If Aida cannot find an answer within this document, it declines to answer. This way, it reduces the risks associated with some of the public AI bots. We've also made progress on a few other fronts, which I reported back in September last year. That's our marketing. You will have noticed that our website has a new look. It's been rebranded. It's also had a fresh back end to drive data-driven marketing. We've maintained our client service record with the Platinum Service Award, our accreditations in the cybersecurity areas and our new terms of service, which have now pretty much been rolled out to all of our existing clients incorporating auto renewal. One area where we had to reduce our headcount was professional services to bring it in line with the reduced revenues and reflect lower demand. However, we bore the full cost for the year 2024, and these reductions will only be reflected going forward in 2025. At this point, I'll hand over to Richard to take you through the financial performance.

Good afternoon, everybody, and thank you, Vivek. Just a little bit more information on our financials for the year ending 31st December 2024. As you can see on the screen, looking at our income statement, our revenues grew 17% on the year, and this was all from the increase in our subscription revenues, which grew to almost GBP 11 million or 29% increase on the year. This is a similar growth rate to the previous year. The graph on the bottom left shows the increasing trend of our subscription revenues as a percentage of total revenues go from sort of around 50% 6, 7 years ago to over 80% in the last year. As Vivek mentioned, our nonstrategic professional services revenues have been impacted and have declined by 18% on the year, have been impacted by clients being more hesitant to commit to bespoke projects. It is still an important part of our business, though it is our subscription revenue that we are focused on strategically to keep growing. Our gross profit percentage increased almost 4 percentage points from 69.7% in 2023 to 73.6% in 2024. This was primarily as a result of operational gearing as our cost of sales sort of grew at a slower rate than our revenues. Our overheads also increased at a slower rate than our revenues, increasing by 9% on the year to GBP 9.5 million. This is primarily through some people cost increases and increased marketing activity. All of this enabled us to return to profitability by generating GBP 500,000 of EBITDA, which is GBP 1.1 million more than the previous year. And in light of that, we are looking at increasing our dividends by 16% on the year by paying a final dividend 25% up on the year. This chart looks at our overheads as a percentage of our ARR, or annualized recurring revenue, and we show this as an indicator of our future profitability. In the second half of 2024, or H2 '24, on the right-hand side of the chart, our overhead as a percentage of ARR had fallen to 40%. As you can see, this is lower than the 43% and 44% pre-IPO in December '21 and gives an indication that our profits in 2025 and beyond should continue to grow. The increase to 58% of overheads in H2 '22 was, as Vivek mentioned, during our period of post-IPO investment in overheads, primarily in the commercial and organizational structure to support the future growth that we are now seeing. The business is highly cash generative. As well as producing GBP 550,000 of PBT in the year, it generated GBP 2 million worth of free cash compared with a loss of GBP 300,000 the year before. The business is cash rich. It has GBP 9.1 million in the bank at the end of December. And from this, we generated over GBP 300,000 of interest from cash and deposit. The business model is primarily from subscription revenues where clients contract for 12 months and are invoiced upfront and typically pay on 30 days. So therefore, the -- as the business grows and the ARR grows, the cash grows, as you can see in the increase in trade and other payables through deferred revenue. The group's policy, as we said, is to increase dividends broadly in line subscription revenues now that we've returned to profitability. In 2023, a final dividend of GBP 250,000 was paid during the year in July 2024. And in October '24, we paid an interim dividend for 2025 of GBP 150,000. And we're now paying a final dividend for 2024 of 25% up on the year on GBP 312,000, which we're declaring to pay in July of 2025. Our balance sheet grew and remains very healthy. We have a few noncurrent assets or fixed assets, and we do not capitalize any of our product and tech development. Our receivables and including debtors remained GBP 3.1 million on the year despite a 17% growth in revenues, as you saw improved working capital and debt reduction during the year. Our net cash, therefore, grew in the year from GBP 7.2 million at December '23 to GBP 9.1 million at December '24. We just thought we'd just spend a moment to sort of reflect on the 3 years of progress we've made since our IPO in December 2021. As you can see on the left, we have doubled our annualized recurring revenue from GBP 5.8 million in December '21 to GBP 11.6 million in December '24, which is a compound annual growth rate of 26%. This has also led to a doubling of subscription revenues to GBP 11 million over the same period. Our gross profit margins have increased from 70.5% in 2021 to 73.6%. The dip in the intermediate years were primarily due to the investment in cloud-based computing for all our clients and the migration to Microsoft Azure. The EBITDA margin is on a recovery path, as you can see. We've not got back to the 15% of 2021, but we have got to 4% in 2024. And as I indicated earlier, on the chart of overhead as a percentage of ARR, we anticipate that this margin will continue to grow. And free cash flow has increased from GBP 1.1 million in 2021 to over GBP 2 million in 2024. The main milestones that we've achieved in this period are, in 2021, we IPO-ed and constituted a Board. In 2022, we started our investment phase. We strengthened our governance and executive team. We expanded our sales and marketing overheads, and we started to build out and improve our RegTech registers. In 2023, we migrated all 1,300-plus clients from our -- into the Microsoft cloud environment. We developed new embedded learning fast-track products like FastTrack and microlearning to support and improve the learning environment and the experience of our clients. In 2024, we crossed the GBP 10 million ARR milestone. We launched our Premium plan offer that Vivek mentioned earlier, and we also launched our CoreCompliance entry-level self-serve e-commerce offer. 2025 has started well. Having developed Aida, our AI digital assistant in 2024, we started the year with some successful initial trials. We've launched our Enhanced plan offer for people that want to use Aida, our digital assistant as well as FastTrack and our other microlearning products. And we've launched our new remote services offer for clients that do not want to take our learning management system, but do want to benefit from all the analytics we can provide. Current trading in the first 3 months of 2025, we've seen a solid start to the year with our ARR continuing to grow and reach over GBP 12.1 million and remain above 20% year-on-year at the 31st of March. We've increased our prices from the 1st of January by 3%, which has been well received by clients. Our professional services are slight below expectations, but it is inherently lumpy and has poorer visibility than our subscription revenue, but is performing okay at the moment. Our product and marketing activity continues to increase. We had an annual summit in January, which is a complete sellout, and we had to create a virtual room for those that were not able to attend in person to attend. Our AI digital system, Aida, was trialed by over 87 clients, and we intend to launch that later this year. Our sales of Premium and CoreCompliance offers continue to grow, and we launched our Enhanced offer in January 2025. And as Vivek said, and hopefully, you've noticed, we rebranded and launched our new website in March 2025. In terms of profitability, we continue to trade in line with expectations and continue to hope to see benefits from operational gearing with profitability weighted towards H2 as it was in 2024 due to the pay rise and rebrand marketing costs hitting H1. Now I'd like to hand back to Vivek to talk a bit more about the strategy.

And let's just move to the next slide. So our strategy is very firmly centered around growing our ARR book organically. And we do this in several ways. Firstly, our focus on product innovation, continuous improvement and proactive customer service to maintain client retention. That's the base layer of our business. With add-ons and upgrades, we are moving our existing clients up, giving ourselves ARR uplift there. This helps to keep our net retention, which is the sum of the -- which includes the churn, downsells, upsells and upgrades, upsells are all included in there above 100%. On top of that, we're adding new client logos using our well-established inbound marketing and sales funnel. We also are exploring other areas, as I mentioned, CoreCompliance, which is our no-frills, preconfigured compliance e-learning solution for the smaller, more price-sensitive businesses. We've spoken about Aida, our AI-powered digital assistant. And we're using this as an incentive, as Richard mentioned as well, to incentivize the take-up of our Enhanced and Premium plans. Also, we brought in remote services to help us reach companies that can't or won't move their LMS platform to Skillcast. We still remain committed to professional services. These are nonstrategic. Of course, our strategic priority is all around ARR. But they are still important in client retention because we help our clients with our professional services to customize our content, make it more relevant for their employees and make it more sticky. Professional services also provides to us market intelligence, both in the areas of content and technology by working with some of the leading firms in the world. We are also open to using our cash to make acquisitions in adjacent verticals, slightly challenged at the moment with the valuation gap that exists between our own valuation and what we see in the private market, but we are still looking at opportunities there. So before we end and take questions, I just want to reiterate our investment case. We're operating in a market that is large and resilient. We've seen that in the several downturns in the market and the one that's currently going on that we can continue to grow at pace. The size of the market allows us quite a long runway ahead in terms of growth. And we're building this growth based on that solid net retention rate above 100%, having a consistent sales pipeline of new ARR, keeping a very diversified customer base, so no one customer loss. It has a major impact on us. Also, in line with that, we've got our operational gearing, which started to show through in 2024 and should carry on in the future, which means improving gross margins, improving EBITDA margins, running ahead of our overall revenue growth. We are well placed in the changing marketplace with this focus we've got on several ends of the market from the smallest, most price-sensitive end with CoreCompliance, and the larger, less price sensitive end of clients that want the full GRC solution with our Premium plan offer. We are -- we believe that we have a fantastic offering with our AI-powered tool, Aida, to help the upgrades to Premium and Enhanced plans. We are also entering areas not previously available to us using remote services. And finally, we have strengthened our operations and our governance since the IPO with the Board and management, all of us having a minimum of 25 years' experience. Myself and my co-founders each have over 25 years of experience in the compliance sector. We also maintain high employee retention by looking after our people, and that drives customer service, continuous innovation and knowledge retention in the company. Another strength of ours is that all of our technology and content IP is owned by us and internally generated by us, which allows us the agility to react to market trends and stay ahead of competition. With that, I think we can turn to the questions that have come in.

That's great, Vivek, 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 the published Q&A, can be accessed via investor dashboard. And Vivek, Richard, as you can see, we have received a number of questions in today's presentation. And if I may now hand back to you and kindly ask you to read out the questions where appropriate to do so, and I'll pick up from you both at the end. Thank you.

Thank you, Alex. The first question is, why has churn increased so much over the past 2 half year periods? Our churn is a little bit cyclical. If you look at the sort of 3- to 4-year history, on the whole, we tend to have a high single-digit churn. So 2024 was slightly higher than we have seen previously. And good to see that in 2025, it has come back down so far to single-digit figures because there's no particular strong reason as to why the churn increased in that year. We are at the mercy of clients being bought and sold by other companies in the market. And quite often, it is beyond their control, and it can be if they've been bought by someone that they could lead to a churn. We remain fairly competitive in our marketplace. Sometimes there's a churn because the client might feel that our offer isn't complete -- isn't broad enough. And occasionally, it's for price reasons. But generally, there is nothing in our churn. While slightly higher than we would like in 2024, there's nothing in that churn figure that is of any real concern to us at this point in time.

Yes, I can take the next question. It's saying, can we elaborate on the type of content and tech assets we're targeting for bolt-on acquisitions? And how would these be integrated? Well, we're very focused and very clear internally on the type of acquisitions we would consider. And these are very much in the area of buying content providers who have -- who can give us an entry, a solid entry. They've got reputable product, and they can give us a solid entry into an adjacent sector. So sectors like professional services, outside financial services, where we're pretty strong already, social care, blue light government sector. So it is in those areas. We are unlikely to make an acquisition of tech assets. We are not looking for -- doing that. We believe we have got -- we've already got a fantastic, comprehensive and compelling offering on the technology side. And by acquiring smaller content providers, we believe we can cross-sell our technology in there.

The next question is, is a share buyback program under consideration given the disconnect between valuation and operational progress? Obviously, we discussed various issues on the uses of our cash and our surplus cash. Our primary objective maintains to use that cash for M&A activity if we can. We've also, as you've noticed, started to increase our dividends now that we've returned to profitability. At this moment in time, though, a share buyback scheme is not something that we are looking at as the fact as it will probably make the impact on liquidity, which is already relatively small, increasingly challenging. The next question is, can you talk about your M&A strategy? Have you done any DD on any? You stated in your finals that price expectations amongst private companies are considerably in excess of those we are experiencing in the public markets. Does that mean you will no longer be looking to bolt-on acquisitions? Again, I'm happy to get that one, Vivek, if you are, if that's okay.