Q3 2022 Skillsoft Corp Earnings Call
[music].
Ladies and gentlemen, thank you for standing by and welcome to Skillsoft third quarter of fiscal 2022 results conference call.
At this time all participants are in a listen only mode.
After the speakers present, there will be a question and answer session.
Please note that today's call is being recorded.
I would now like to hand, the conference over to your first speaker today, Jim Griskin interim head of Investor Relations. Thank you. Please go ahead.
Good afternoon, and welcome to <unk> third quarter fiscal 2022 earnings call.
Today, we will be discussing the results announced in our press release issued after the market closed.
With me are still soft CEO, Jeff <unk> and CFO Gary Ferrera.
Today's call will contain forward looking statements about the company's business outlook and expectations, including statements concerning financial and business trends, our expected future business and financial performance and financial condition.
And our guidance for fiscal 2022.
These forward looking statements and all statements that are not historical facts reflect management's beliefs and predictions as of today and therefore are subject to risks and uncertainties that could cause actual results to differ materially from expectations.
For a discussion of the material risks and other important factors that could affect our actual results. Please refer to the risks described in the safe Harbor discussion found in the company's SEC filings.
During the call. We will also discuss certain non-GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles.
Now a few comments on the required GAAP presentation of <unk> financial statements. Following the merger and destock on June 11th 2021.
GAAP requires accounting periods before and after June 11th to be separated into predecessor, and successor periods to reflect the change in ownership and lack of comparability between periods due to different ownership and investment basis.
In addition, global knowledge activity is only reflected in the GAAP financial statements. After June 11.
References on this call to combined GAAP results reflect the combination of the predecessor period before June 11th that excludes global knowledge with the successor period After June 11th.
For all non-GAAP measures in the supplemental materials filed with the SEC today and in today's commentary.
The company is providing normalized results as if skillsoft and global knowledge had been combined for all periods presented which we believe is useful to investors to show the trends of the go forward company.
A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures as well as how we define these metrics and other metrics is included in our earnings press release, which has been furnished to the SEC and is also available on our website at www <unk> Dot com.
With that I will turn the call over to Jeff.
Thanks, Jim Good afternoon, and thank you all for joining us today.
I want to begin by welcoming Gary Ferrera to his first earnings call as our new CFO.
Gary and I have worked closely together before and I am excited he chose to join our leadership team.
In his 16 years as a CFO. He has taken two companies public and completed numerous strategic transactions.
Since joining skillsoft three months ago, Gary is rapidly come up to speed on the business and as expected has proven to be a tremendous partner to the leadership team and me.
Well not on our call I'm equally pleased that during the quarter, we were joined by Christy Hummel, our new Chief people Officer.
Christy comes from Dell, where she was SVP of HR.
She was previously chief Human resources officer at BCE, and VP of HR operations EMC.
The HR leadership role is especially critical in a company focused on helping customers unleash human potential through learning.
Christi is a recognized HR thought leader and will materially advance our culture of leadership and learning with benefits for team members and customers alike.
Before I discuss our results I want to thank our entire team for delivering another quarter of bookings and revenue growth that came in ahead of our expectations.
I also want to thank our customers and learners, who are at the heart of our purpose.
Our headline message is clear.
Since returning Skillsoft a public markets in June we've made tremendous progress executing our plan.
The foundation of our business is strong and getting stronger.
We began by recapitalizing, our balance sheet assembling a world class management team and board of directors and completing two acquisitions.
We have since extended our industry, leading reach within the enterprise market.
And strengthened our content offerings and platform capabilities.
Our migration to precipitate our innovative learning experience platform is on track.
Tension and net new business are up and bookings and revenue growth are again ahead of our expectations.
To reflect this momentum I am pleased to report that we are again, increasing bookings and adjusted revenue guidance for the full year fiscal 2022.
Given our confidence in the size and growth of the market for corporate digital learning and our team's ability to execute.
We plan to continue investing in driving top line growth, both organically and through M&A.
I'll first share a few highlights from the quarter and then briefly discuss our market opportunity and our recent progress.
I'll, then hand, the call over to Gary to review our results in more detail.
We grew bookings, 7% in the quarter with solid growth in each of our segments.
On a year to date basis bookings were up 9%.
We added 126 net new logos during the quarter a metric that is up sequentially for the second straight quarter.
And we've increased our penetration of the fortune 1000 from 70% at the start of the year to approximately 75% today.
We also made solid progress on our migration to the precipitous platform with 86% of annual recurring revenue on percipiere or dual deployment at the end of the third quarter.
Up from 81% last quarter.
The feedback we receive from customers, who transition continues to validate our belief that this next generation immersive AI driven platform is delivering on the complex learning needs of many of the worlds largest and most sophisticated companies.
In addition, we hit the ground running with our new alliances strategy.
By making it easy for customers to integrate third party content from an even wider variety of sources, along with skillsoft content in their own custom content.
We are making precipitate even more valuable and integral to our customers' organizations.
To that end, we entered into a number of important strategic alliances in the quarter, including you to me get abstract and good habits.
These partners joined a growing list of content providers available through precipitous.
Over time, we.
Backed by allowing customers to integrate more third party content.
Along with customer own content into precipitate out we will drive further improvements in retention and growth.
Turning now to the market opportunity.
Online learning has become an important C suite topic with Ceos, and Chief people officer intently focused on addressing skills gaps labor shortages and the great resignation.
According to our annual it skills and salary report.
76% of it decision makers face critical skills gaps.
This astounding number is up two and a half times since 2016.
Importantly, 56% of I T managers plan to address these gaps with training.
Our women in Tech survey revealed a similar need for what we do with 86% reporting the professional development and training are extremely are very important to them, while only 42% said their employers currently offer this as a benefit.
Gil soft addresses these challenges head on.
Positioning the company as a leader in an addressable market that is estimated to be $28 billion growing at 10% annually.
With our large enterprise customer base and sales force, we believe skillsoft is well positioned to capture this attractive and growing market opportunity.
As I discussed last quarter, our blueprint for growth is built on six key pillars.
I can't leadership platform leadership.
The market leadership operational excellence disciplined M&A, and our culture of leadership and learning.
I'll spend a few minutes today on the recent progress we've made in the first three of these.
First content leadership.
<unk> is a leading content creator with strong positions across the three largest categories of corporate digital learning.
Leadership and business skills Tech and Dev and compliance.
This differentiates us as a one stop shop.
They bring a complete solution to both the customer and the learner and giving us an incredible competitive advantage.
During the quarter, we made important strides building on our content offerings across all three of these product categories.
Specifically, we integrated content from Skillsoft and global knowledge more than doubling our tech and Dev collection to 8000 courses.
We added new content, and agile management workforce safety and diversity equity and inclusion.
We're also making investments to translate hundreds of additional courses into more languages to better meet the needs of global clients.
Turning to our second pillar platform leadership.
One of our most important initiatives is the migration of customers to our industry, leading percipient platform.
With its dramatically higher dollar retention rates.
As I mentioned, 86% of our revenue base is now on precipitate a dual deployment up from 81% at the end of Q2 and 68% a year ago.
With that progress, we anticipate continued momentum delivering higher retention and faster growth into next year.
During the quarter our platform team also successfully integrated live instructor led training into precipitous.
Enriching our aspire learning journeys and setting the stage for the realization of additional synergies.
In addition, we expanded our relationship with Microsoft with the release of Presidio App for Microsoft teams integration with Microsoft VEBA and integration of Ms Laurie content into Percipient.
We believe fed ramp certification is imminent and continue to expect integration with workday by Q2 of next year, joining cornerstone Saba SAP Successfactors and other LMS partners.
Now to our third pillar go to market leadership.
Our Chief revenue Officer, Eric Stine continued to advance our sales force transformation.
Evolving our sales organization from one that was optimized to retain customers and migrate them to precipitate out to one that is optimized to deliver growth.
In October Angelique Slagle previously head of SAP Successfactors, North America joined Us as our new SVP of Americas, and Asia Pacific and.
In September adjacent Chatman and experienced enterprise sales.
Operations leader and former bank consultant joined as global head of go to market operations and.
And shortly after close David Osborn joined as our new SVP of global Tech and Dev sales, bringing experience as a former chief revenue officer, and general manager of $500 million revenue training and E learning business.
We are continuing to advance our coverage model strengthened talent and enhance other aspects of our go to market strategy to further accelerate top line growth.
In addition, I.
I'm pleased that our focus on new customer acquisition has resulted in the addition of more than 350 net new logos since the start of the year.
These wins were geographically diversified with 70 in EMEA and 26 in APAC underscoring the reach of our global sales force.
Wins in this quarter included notable names such as Siemens digital industry software Lenovo Zee scalar U S. A I D and cinryze.
With our average sales cycle running approximately six to nine months. We believe this early progress is just the beginning.
Given our early top line success and the size of the market opportunity. We have made a deliberate decision to focus on foundational investments and content platform and go to market to drive future bookings and revenue growth.
While maintaining EBITDA margins that lead our peer group.
I'll now turn the call over to Gary to share his initial observations and discuss our financial results and updated outlook in greater detail.
Thanks, Jeff I appreciate the kind words, it's an absolute pleasure to be working with you again.
It feels great to work at a company that is a clear leader in a growing sector with an opportunity to create significant value for shareholders.
Although the only been on board a couple of months during that time I've been impressed with the caliber of our highly motivated team.
I look forward to accomplishing great things together.
Now lets focus on our consolidated results.
Bookings for the quarter were $169 million up $12 million or 7% compared to the prior year and.
And year to date bookings were $453 million up $37 million or 9% compared to last year.
Turning to revenue.
GAAP revenue was $171 million in Q3 and for the year to date period combined GAAP revenue was $401 million.
Adjusted revenue in Q3 was $179 million, an increase of $10 million or 6% over the prior year.
And year to date adjusted revenue was $521 million, an increase of $4 million or 1% as compared to last year.
This quarter, you will notice that there was a much smaller difference between adjusted revenue and GAAP revenue.
This relates to our adoption of a new accounting standard during the quarter.
ASU 2021 Dash zero, eight accounting for contract assets and contract liabilities.
While non-GAAP revenue adjustments will be significantly smaller due to this change we will continue to adjust GAAP revenue gross up global knowledge reseller fees, which are accounted for on a net basis.
Our GAAP net loss was $43 million for the quarter and for the year to date period, our combined GAAP net loss was $104 million.
Q3, adjusted EBITDA was $49 million flat to the prior year.
Year to date, adjusted EBITDA was $130 million down $4 million or 3% compared to the prior year.
Adjusted EBITDA margin for Q3 was 28% and year to date it was 25%.
Our adjusted EBITDA margin benefited from lower expenses during the quarter and year to date due to the seasonality of bookings.
We anticipate a lower margin in the fiscal fourth quarter as we increased investment in the business to generate future growth.
We also have natural increases in expenses such as commissions in the quarter that accompany the typically higher Q4 bookings.
A note regarding the timing of cash flows during the year as I. Just mentioned Q4 is by far our highest billing period.
Cash is typically collected in the first few months after buildings such as we expect more cash flow in our fourth and first fiscal quarters.
Our current gross debt balance is $480 million, excluding original issue discount and issuance costs.
Our cash balance at quarter end was $81 million.
While we have no maintenance covenants in our credit agreement. Our current gross leverage is three times and net leverage is two five times based on the last 12 months adjusted EBITDA of $160 million.
We also have outstanding $11 million of our $75 million accounts receivable facility.
Let's now move to the individual segments.
Looking for skill salt content for Q3 were $78 million, an increase of $5 million or 6%.
Year to date bookings were $181 million, an increase of $10 billion or 6%.
Our Q3 content dollar retention rate is 98% and importantly, the combined recipient dual deployment dollar retention rate is 101%.
At the end of Q3, 86% of our annual recurring revenue was on Principia or dual deployment.
As we continue to migrate business to precipitate, we expect to see improving renewal rates.
Year to date bookings from new customers to the content business were $14 million.
At the time of the merger announcement, we estimated bookings from new customers to be in the range of 22% to $30 million for the full year.
We continue to believe we are on track to deliver this result.
Adjusted revenue for skilled salt content in Q3 was $87 million.
<unk> from Q3 last year and year to date adjusted revenue was $255 million a decrease of $3 million.
This decrease was driven by lower bookings in the prior year given.
Given the delay between the bookings and GAAP revenue recognition for annual subscription contracts a significant portion of bookings flow into revenue in the following year.
We expect the growth in current year bookings to support an improving trajectory of GAAP revenue as we move into fiscal 2023.
Bookings for global knowledge in Q3 was $62 million, an increase of $6 million or 11%.
Year to date bookings were $190 million, an increase of $29 million or 18%.
The global knowledge improvement was driven by a shift to digital and to recovery from Covid headwinds experienced in the prior year.
Virtual instructor led training represented approximately 80% of total bookings in Q3.
Adjusted revenue for global knowledge for Q3 was $62 million, an increase of $11 million or 21%.
Year to date, adjusted revenue was $177 million, an increase of $15 million or 9%.
Now turning to some total.
Bookings were $29 million, an increase of $1 million or 3% year.
Year to date, some total bookings were $82 million a decrease of $2 million.
Adjusted revenue was $30 million, a decrease of $1 million from Q3 last year and year to date adjusted revenue was $90 million a decrease of $7 million.
Some total continues to maintain a strong market position in particular with an LMS business, serving the talent development needs of customers with complex learning and compliance reporting requirements.
I will wrap up with some comments on our rates of fiscal 2022 full year outlook.
We are raising our bookings outlook for the year by $10 million at the top and bottom ends of the range.
We have not narrowed the range as it is at the mid point almost 40% of our full year bookings come in the fourth quarter.
We now expect bookings of $700 million to $720 million.
We are increasing the bottom end of our adjusted revenue outlook for the year by $15 million and the top end of the range by $10 million. This.
This narrows the range of $15 million, resulting in full year adjusted revenue outlook of $685 million to $700 million.
Finally, we've narrowed the range for adjusted EBITDA, and now expected to approximate $165 million for the full year as we continue to invest in the business to drive future growth.
With that I'll turn it back over to Jeff.
Thanks, Gary.
We are proud to operate what we believe is the largest corporate digital learning business and the world expected to generate at least $685 million and adjusted revenue in fiscal 2022.
For more than 12000, corporate customers and more than 45 million learners.
We are profitable and growing.
And with our strong leadership team and recent enhancements to content platform and go to market. We believe we are well positioned to drive continued growth and create substantial value for our shareholders customers learners and other stakeholders.
Operator, you can now open the call for Q&A.
Thank you.
At this time, we'll be conducting a question and answer session.
If you'd like to ask a question. Please press star one on your telephone keypad.
Confirmation tone will indicate your line is in the question queue.
You May press star two if you'd like to remove your question from the queue.
For participants using speaker equipment and may be necessary to pick up your handset before pressing the starkey.
Our first question comes from the line of Raimo <unk> with Barclays. Please proceed with your question.
Thank you and congratulations from me and nobody is great.
Come back quarter, So that's really good to see.
First question just on global knowledge, Jeff.
We saw last quarter and this quarter again like a really good return of growth could.
Good return off a bit.
This activity do you like how do you see this.
And the more broader context is this just kind of just easier comps and to come back or do you see like the more fundamental.
Its found its new roles around more virtual and structure and kind of what you see there in terms of momentum is something that is kind of just a little bit of a recovery.
And then on the.
The one question I always ask us and all our four exclusive content, 101%, it's a pretty good solid number.
What are the puts and takes that we should be aware of.
So for me again, thank you.
Thanks Raimo.
So first of all on.
Global knowledge.
Certainly last quarter.
When global knowledge was up about 30% that was in part due to easier kind of Covid comparison as the prior year.
But it is on a growth trajectory.
Now strung together three straight quarters of solid double digit year over year growth and importantly, we've done that with a vastly improved mix from one a mix that was.
Predominantly classroom to one that now is predominantly virtual and as we all know that virtual business carries a higher margin now. It's also a somewhat lumpier business in terms of because it's more transactional than the rest of our revenue and.
And so that's just an aspect of <unk>.
That business, but it's a good business and one that we expect to get better as we tightened the integration with <unk> and with our subscription content business. So more to come on that and I am pleased with the progress we've made.
Second question on the.
Improvement in retention rates.
<unk> thoughtful halcyon, Gary has any others.
But first of all the biggest driver in the improvement in retention rates as are our continued progress.
Migrating from <unk> for <unk> and as we do that we just structurally drive higher dollar retention rate now I am pleased also is that precipitous plus dual deployment retention rate is improving slightly year over year and we also look at the last 12 months.
Retention rate as an important indicator because there is some lumpiness to the dollar retention rates, but we see them trending up we see them continue to trend up.
And that is because our sales team and customer success team is continuing to improve the product continues to improve both the platform and the content.
And overall, we're excited about where we can take that dollar retention rate over time.
Thank you.
Thank you Raimo.
Our next question comes from the line of Brian Schwartz with Oppenheimer. Please proceed with your question.
Hi, This is ari if we'd been subbing in for Brian Schwartz.
I was just wondering how your sales hiring has been going.
And if you could give some puts and takes on that.
Sales hiring has gone well, we staffed up that new customer acquisition team pretty early in the year and we're now seeing that can produce results. Some of those results have come in the form of a net new logos that we share today.
And then across the business, we're not we're doing talent upgrades, replacing replacing.
Vacancy vacancies in certain parts of the world, but we haven't been adding to the size of our sales force.
Since the 30 that increase of 30, we've been more focused on.
Training development compensation coverage model and I believe youll see the impact of the changes that we're making next year.
Thank you.
As a reminder, if you'd like to ask a question. Please press star one on your telephone keypad.
Our next question comes from the line of Raj Sharma with B Riley. Please proceed with your question.
Hi, This is Kelly on for Raj Shanghai.
Just wondering if you guys could give a little bit more color on the bookings increase in your guidance are you seeing new customers.
Customers purchasing more.
Yes.
The answer is yes, we're seeing dollar retention rates move up.
And so that dollar retention rate, which is a net dollar retention rate reflects upgrades.
It also reflects downgrades, which is why it's not vastly higher than that.
But what we're seeing we're seeing growth in new customers and we're seeing the addition of net new logos. So that combination is is driving up the bookings.
Great. Thank you I missed on that.
Okay.
Thank you. Our next question comes from the line of Arvind Ramani with Piper Sandler. Please proceed with your question.
Hi, Thanks for taking my question, Yeah, I wanted to ask you about.
These dynamics, where you mentioned.
Sort of increased levels of turnover at Hum at southern firms are kind of across the board. But then also kind of this increased levels of demand.
Uh huh.
Our employers employer and enterprises looking at <unk> now something.
Essential to.
Kind of can provide to their employees in terms of retention or kind of what what's driving that increased demand.
And with the backdrop of like a higher level of turnover.
Yes, it will certainly higher levels of turnover is creating a number of.
Needs within our customers.
So first and foremost.
Turning and development is a benefit.
And the survey work that we've done has shown that when people do leave their employer more often than not it's for training and development more so than compensation.
And so we're finding that.
Those who purchase our products inside the enterprise now realized that learning and development.
Is mission critical for retention.
It is also essential to fill skills gaps. So for example, one of our one of our customers, which was which is in the printing business that office printing business got hit incredibly hard by Covid right because people werent using office printers.
So what they did is we work with them to retrain, a large number of printing technicians for other technical jobs.
And that's played a key role in that business as turnaround as they've shifted their mix of their revenue from office.
Office printing to a more broad suite of services.
We're seeing that everywhere across our business demands like that.
We're excited by what we're seeing because we believe that we can make a real difference we make a real difference for learners and we make a real difference for the enterprise that's seeking to combat the great resignation.
Skill and Reskill to train new employees for their jobs.
And ongoing training within the enterprise so it's an exciting opportunity to be in this particular business.
Great and then.
I just wanted to ask quickly on on <unk>.
On guidance right I mean, you had a rough here.
$13 million, our Q3 beat.
And then when I look at.
And that's sort of the guidance range.
<unk> tightened the range by about 5 million and then.
I can see.
The another call Goodbye 13 million.
Sort of given given sort of you're seeing really good momentum in Q3 is there some level of conservatism.
Built into Q4.
Or are there certain aspects in Q4, where you feel like the guidance is that there's a lot more realistic.
It's not like a whole lot of conservatism built into it.
Yeah, Hi, Erinn this is Gary.
Yes, so obviously I've been here less than three months so.
What I do with guidance is tell you what I.
No.
Conservatism I wouldn't say conservative that is built into that bookings, obviously still 40% left to go in the core in Q4 revenue the tighter range with revenues a lot more known at this point in time, and we were able to narrow down adjusted EBITDA.
It comes in a couple of million dollars in either direction, but obviously bookings is the biggest question at this time, because it's still 40 more et cetera.
Yes.
Perfect.
Thank you very much.
Yeah.
The other is looking forward to connecting with you all the new year.
Thanks Arvind.
Our next question comes from the line of Peter Heckmann with D. A Davidson. Please proceed with your question.
Hey, good afternoon, gentlemen, just one quick housekeeping item about how much.
Or are they blew my added in the quarter.
Immaterial in the quarter.
This was our first full quarter with blow them up we're very pleased bookings are ahead of our original expectations and acquisition model, but we're still early days on what is a small business that we expect to be a meaningful contributor going forward, what I will tell you.
In addition is that that when I'm out talking to customers.
Talking to customers at the CEO and Chr one level, a puma really resonates with the value proposition, we're seeing our pipeline build and we think it will make a real difference over the long term for our company.
Great Great and then just can you give us an update on the competitive dynamics here, we all know that there's been a lot of it.
Relatively new entrants or maybe our awareness of those new entrants is higher given some recent ipos in.
Yeah.
Some content players some direct competitors, but how would you talk about that in the overall demand versus any other changes in in.
And let's say pricing or willingness to bundle by competitors and how you deal with that.
Well, we love the competitive environment, what I'll tell you what I'm not.
Speaking to customers and analysts listening closely to what they have to say what I'm hearing time and time again is the single biggest change in the competitive environment over the last year is the new scale soft. We are we have a new management team we have new sales leadership, we have new product.
Bought three companies together, we integrated those offerings and we are having a huge impact in the marketplace and if you look closely at the <unk>.
Publicly available data on the competitive set what you see is when it comes to the enterprise the corporate market.
Our scale is vastly larger than the competition and if you look behind the numbers and you look at such metrics as what's the average revenue per account. For example, you can see that we're not playing in a small way in the corporate market. We're playing in in a big way at the corporate center on an enterprise scale and <unk>.
We tend to continue to do so and grow our business.
The one final point I'd make is there's a lot of consumer oriented learning.
Offerings out there and what we've been finding is that those are great partners for us because we can take those offerings and make those available through presidio to our customers and that's a real win win for for the numerous players who otherwise would not have access to the enterprise.
<unk> market and it's a win for our customers who rely on us to curate.
The CEO of early stage offerings out there and bring the best of breed to them in a fashion that's integrated into our aspire learning journeys.
Into persist in a way that works for learners. So I'm excited by what I see in the competitive environment.
Alright, good to hear thank you.
Thank you Lee.
Ladies and gentlemen, we have reached the end of our question and answer session. I will now turn the call over to Jeff Tarr for closing remarks.
Thanks, everyone I really appreciate you joining the call today.
Pleased with the early results of our investments and platform content and go to market I'm grateful for the strong execution that our team has been delivering and I believe we are well on our way to achieving our vision of becoming the most highly valued provider of learning solutions.
Sharing the workforce of today with the skills for tomorrow looking forward.
Speaking with you next quarter and sooner than that.
Any callbacks, so thanks, very much and have a great day.
This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.