Q3 2024 Skillsoft Corp Earnings Call
Greetings and welcome to the Skillsoft Corp's third quarter 'twenty 'twenty four financial results conference call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded it is now my pleasure to introduce your host Chad Lyne head of Investor Relations. Thank you Chad you may begin.
Thank you operator, good afternoon, and thank you for joining us today for Skillsoft earnings call to discuss our results for the third quarter ended October 31 2023.
Participating on today's call are Jeff Carr, Skillsoft CEO, Richard Walker skillful CFO.
Today after market close Skillsoft issued a press release announcing its financial results, which is available on our Investor Relations website.
Before I hand, the call over to Jeff I want to remind you that 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 financial condition and market outlook.
These forward looking statements and all statements that are not historical facts reflect management's current beliefs and expectations as of today, and therefore are subject to risks and uncertainties that could cause actual results to differ materially.
For a discussion of the material risks and other important factors that could affect our actual results. We refer you to our most recent Form 10-K and Form 10-Q filings with the Securities and Exchange Commission.
We assume no obligation to update any forward looking statements or information, which speak as of the respective dates.
During the call. We will also discuss certain non-GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles.
A reconciliation of the non-GAAP financial measures included in todays commentary 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 Dot Skillsoft at dotcom.
After our prepared remarks, Jack and rich will be available to take questions.
With that it's my pleasure to turn the call over to Jeff.
Thanks, Chad.
Good afternoon, everyone and thank you for joining us.
Our team delivered another quarter of revenue and bookings growth in our high margin SaaS based content and platform.
Our LTM dollar retention rate was 101% up three percentage points, highlighting our progress in growing share of wallet within existing customers.
Adjusted EBITDA margins were 21% up 100 basis points.
Our instructor led training segment remained stable sequentially, but was down year over year in part due to a non core product line that we are exiting.
Rich will cover our results in more detail.
I'll focus my remarks on how we are positioning skillsoft to seize the substantial growth opportunity in front of us.
In my recent discussions with business leaders across a range of industries skills gaps in workforce transformation challenges are a consistent theme.
And the generative AI is almost always a topic of conversation.
According to the World Economic Forum future of jobs report nearly one quarter of all jobs will be disrupted in the next five years due to new technologies, including generative AI.
According to Goldman Sachs. Two thirds of occupations are exposed to at least partial automation.
In the face of this wide ranging disruption to the labor market more than eight out of 10 companies view investments in learning as the most promising strategy to deliver on their business goals.
Are these organizations effective upskilling and Reskilling initiatives, our C suite priorities.
This is where scale soft is winning.
Over the last two years, we've transformed skillsoft.
Vendor of video E learning content and to a provider of transformative multimodal learning experiences that deliver measurable results.
We built skillsoft recipient to a best of breed AI enabled learning experience platform that integrates with nearly every major LMS and E learning content provider.
We added skilled assessments benchmarks and curated learning journeys to our platform.
We enhanced our leadership and business skills solution with ICF accredited coaching at scale.
We grew our compliance practice with important platform enhancements and thought leadership.
Revitalizing historically dry training with dramatic emotional abuse scenarios grounded in sound instructional design and interactivity has proven to change behavior.
We acquired Codecademy to add interactive learning and hands on labs to serve many of the fastest growing occupations and skills in AI data science cloud cyber security and web development.
And most recently, we launched tasty a powerful generative AI based simulator.
Learners develop their skills to engage in crucial business conversations across a rapidly growing range of scenarios.
These strategic moves have positioned us as the leading provider of transformative learning experiences the world's largest and most sophisticated organizations.
Organizations with acute and complex reskilling, upskilling and workforce transformation needs.
These customers are focused on realizing demonstrable business outcomes.
Unit economics for Skillsoft from this group are attractive.
All sizes are typically six or seven figures contracts are usually multiyear and dollar retention rates are often north of 110%.
Taken together these metrics are indicative of our success cross selling and up selling solutions.
And the potential for growth across our customer base overall.
For example, a leading international supplier of integrated technologies and systems for the defense industry.
Operating in 130 countries chose Skillsoft decentralize and enhance its global training program.
Skillsoft one the accounts on the breadth of our multimodal solution integration capabilities with their LMS compliance with their it security requirements and broad language coverage.
In another example, we were chosen by one of Europe's leading ICU transformation providers more than 3 billion in revenue and deliver a unified experience to a highly technical workforce of more than 5000 employees.
Our offering spanning leadership and business skills technical training and compliance all deliver on our industry, leading learning experience platform allowed this customer to consolidate down from five vendors and deliver a better learning experience at lower total costs.
We're a global leader in memory and storage technology, we broadened the scope of a preexisting relationship beyond leadership and business skills with a new three year deal that added our compliance solution and a competitive takeaway.
And the financial services industry, we secured a three year agreement spanning leadership and business skills compliance and coaching to support our leading digital consumer and corporate bank.
For our global energy and chemicals company, we doubled the size of our relationship with a multi year extension and upgrade to our full solution suite, allowing the customer to rationalize multiple vendors and achieve a higher ROI by centralizing their learning experience under Skillsoft recipient platform.
Within the U S federal government, our ability to offer the only digital coaching solution that is fed ramp authorized through a precipitous platform.
Led to the award of a high six figure contract to provide leadership coaching and custom assessments. So department of the interior.
And finally, we had a sizable land and expand success story.
Growing our content and platform customer win from earlier this year by adding a seven figure commitment to deliver instructor led training to support this technology companies culture of innovation through skills growth and talent development.
The unifying thread behind these success stories is our focus on winning with customers for whom Reskilling and Upskilling is a strategic imperative and where the breadth and scale of our capabilities delivers differentiated value and measurable outcomes.
We believe our recent investments in talent and product will position us to capture more of this growing market opportunity.
We recently attracted new senior leaders to accelerate our growth, including a new seasoned CLO new heads of customer success and customer acquisition and new leaders for our coaching and tech and Dev businesses.
We are seeing good early returns from this infusion of new talent and I look forward to the positive impact they will have on our business in the future.
We've also continued to invest in our platform and content.
Typically in areas related to generative AI, which we believe is creating a long term structural tailwind for our business.
Generally the AI is rapidly changing what we teach how we teach and how we work and we're moving quickly to seize this compelling opportunity.
During the quarter, we announced the general availability of skilled sauce Casey.
Our AI powered skills trainer it delivers personalized and contextualized leadership coaching at scale.
Customer reaction and market feedback the Casey, it's been exciting validating our position as a forward thinking and innovative industry pioneer.
Casey's initial launch included 10 scenarios focused on developing effective interpersonal and leadership communication skills, including employee performance management customer negotiations and customer service challenges.
All of which can be modified for a wide range of personality styles.
We're partnering with customers to rapidly develop additional scenarios with 50 scheduled for launch this quarter as well as powerful new capabilities, creating innovative and immersive learning experiences.
Another example of our use of Jared AI transform how we teach his role adviser.
We'll advise you as an AI powered skill building concierge. Furthermore.
Identifies top skills required for a specific role assesses the skills to identify gaps and serves targeted learning recommendations to close gaps build proficiency.
Much as AI is transforming how we teach it is also changing what we teach.
Our new generative AI aspired learning journeys offer multimodal learning paths. The promote subject literacy with courses ranging from generative AI foundations, and guardrails to AI and ml for decision makers and.
During that learners are equipped with the fundamentals needed to use generative AI effectively.
We also launched additional skill benchmarks, which assess learner proficiency and knowledge in general who they are.
These benchmark scoring level orders from the August two advanced with personalized learning recommendations that progressed the learner from foundational literacy subject matter mastery.
On an enterprise wide basis organizations, we're able to ensure that AI skills gaps or Quantifiably bridge and that their employees are prepared for the future of work.
Beyond our market facing generate an AI investments. We're also leveraging this important technology to change how we work for.
For example, our content production teams are using January with AI to help author content and assessment questionnaire reducing development.
Development time, and shortening content release cycles.
Our marketing teams are using it to rapidly build and localized marketing campaigns webpages collateral.
And our shared services teams are using it to automate workflows that were previously time and labor intensive.
I'm proud of our team's progress to strengthen our position as a market leader innovator and workforce transformation partner for the enterprise, while seizing the exciting opportunity created by generative AI.
I'm encouraged by the progress I'm seeing across the company the.
The entire organization is currently laser focused on closing our important fourth quarter on a strong note that set us up for a promising fiscal 2025.
With that I'll now turn the call over to our CFO Rich Walker to review our financial results rich.
Thanks, Jeff and welcome everyone and thanks for joining today.
Covering our financial results, let's turn first to our content and platform segment, which accounts for nearly three fourths of our business as.
As we've discussed in the past given its quarterly seasonality, it's best to view bookings and retention rates and this is primarily subscription based segment on an LTM basis.
Content and platform bookings were $420 million on an LTM basis up 4% compared to the prior LTM period with growth across all areas of the content and platform portfolio.
Retention rates in our content and platform segment remains strong.
Demonstrating the value, we deliver to our customers and our team's ability to upsell and cross sell our broad range of solutions.
Our LTM dollar retention rate was 101% up 300 basis points from the comparable prior period.
And marking our third consecutive quarter at this level.
In an environment, where many SaaS companies are facing higher levels of churn and erosion. Our dollar retention rates are trending positive.
Content and platform third quarter revenue was $101 million up 3% year over year and marking another quarter of growth for this segment semi.
Similar to my bookings commentary all areas of the portfolio contributed to the revenue growth.
Let's turn now to a more transactional Iot segment, where bookings were stable and roughly flat sequentially at $46 million, but down 4% year over year.
Iot revenue was a similar story flat sequentially at $38 million, but down 9% year over year, which was consistent with the second quarter comparison.
The demand environment for in person and virtual instructor led training continues to be choppy as we seen corporations shifting some of their training priority.
Budget resources, we've also seen the current macro impact Ilc's European operations more acute.
While performance in our North America, Middle East and Asia operations trended reasonably well in the quarter.
Our teams are focused on multiple initiatives to accelerate growth.
We are now prudently, taking a more measured view of the Iot business for the remainder of the year on.
On a combined basis total revenue for the company was $139 million.
Down marginally year over year as the content and platform segment growth was offset by IL two.
Shifting to profitability, we remain committed to building a lean operating model and instilling a disciplined culture of fiscal stewardship.
We continue to sharpen our focus to drive greater efficiency, freeing up capacity to invest in areas that will drive customer value.
Also we're creating more to the bottom line.
Third quarter was another example of us investing in our most important growth initiatives, particularly around generative AI.
Leading our industry peers by a wide margin in terms of adjusted EBITDA profitability.
Walking through our expenses all of my references will be on a non-GAAP basis with the GAAP to non-GAAP reconciliations included in our earnings press release.
Cost of revenue of $36 million or 26% of revenue was flat year over year with facility related savings, partially offset by higher personnel and hosting costs to support the revenue growth and our content and platform segment.
Content and software development expenses of $14 million or 10% of revenue, we're favorably down 6% year over year with more efficient internal resource utilization, partially offset by timing of third party spend.
Selling and marketing expenses of $42 million or 31% of revenue were flat year over year general and administrative expenses of $17 million.
Or 12% of revenue, we're favorably down 6% year over year as we continue to focus on streamlining the organization.
Total operating expenses were $109 million.
Or 79% of revenue.
On a year over year basis, operating expenses were favorably down $2 million or 2% on a sequential basis compared to Q2 total operating expenses were favorably down $7 million or 6%.
At the bottom line, we generated higher profitability on both the dollars and margin basis third quarter, adjusted EBITDA was $30 million or 21% of revenue compared to $28 million or 20% of revenue in the prior year over.
Over the course of this year, we have expanded adjusted EBITA margins, approximately 500 basis points from 16% of revenue in Q1 to 18% in Q2 to 21% in Q3.
Our GAAP net loss was $28 million or $3 45 on a per share basis, our adjusted net loss was $23 million.
Or $2 82 per share.
Moving to cash flow and balance sheet highlights on a year to date basis cash flow from operations was negative $9 million, while we invested $12 million in capital expenditures and capitalized internally developed software.
As a result year to date free cash flow was negative $20 million favorably compared to negative $37 million in the prior year to date period.
For the third quarter itself free cash flow was negative $13 million and in line with our expectations for quarterly seasonality.
We closed the quarter with a healthy balance sheet, and a strong cash and liquidity position with cash and cash equivalents of $130 million and restricted cash of $7 million.
We had $40 million drawn against our $75 million.
Accounts receivable facility that matures in December of 2024.
We had $585 million outstanding on our term loan facility net of original issue discount and deferred financing costs. As a reminder, this facility matures in July of 2028 with quarterly amortization payments of $1 6 million until maturity.
Total net debt, which is net of cash cash equivalents and restricted cash was approximately $489 million, resulting in net leverage of approximately four nine times, our LTM adjusted EBITDA.
To wrap up we delivered a good quarter in the context of a more challenging market environment with another consecutive quarter of growth in our content and platform segment.
Flat sequential performance in our Iot segment and meaningful improvements in adjusted EBITDA and free cash flow.
As we look to the balance of the year are more cautious economic backdrop has prompted us to temper our near term outlook.
Particularly with respect to Iot.
We now expect to deliver full year bookings and revenue approximately at the bottom of our previous guidance.
But are confident in our ability to deliver at the high end of adjusted EBITDA.
We expect our continued focus on profitable growth will allow us to reduce gross leverage to below four times adjusted EBITDA within the next three years.
Looking forward, we're more optimistic than ever about the opportunity in front of US we've moved quickly to address a large and growing market need for workforce reskilling and the age of generative AI and we remain confident in our ability to unlock value for all of our stakeholders as we.
Our long term strategy.
With that let me hand, the call back to Jeff Thanks Rich.
Im excited by the opportunities in front of us.
Skillsoft has assembled the industry's most complete suite of learning solutions for the enterprise.
We are leveraging those capabilities to grow our share of wallet within the world's largest and most sophisticated organizations.
And we're addressing our customers' most critical skills gaps with measurable outcomes.
These strengths are reflected in our improving dollar retention rates, especially at the high end of our market, where <unk> is 110%.
And a healthy pipeline of new opportunity.
Our team is firmly committed to translating this progress into improved profitable growth and meaningful shareowner value creation.
With that operator, please open the call to questions.
Thank you.
We will now be conducting a question and answer session.
If you would like to ask a question. Please press star one on your telephone keypad.
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One moment, please while we poll for questions.
Thank you.
Our first question comes from the line of Ken Wong.
With Oppenheimer. Please.
Please proceed with your question.
Fantastic Thanks for taking my question.
But Jeff maybe I wanted to first touch on the softness we saw in Europe maybe.
Maybe give us some details in terms of.
Okay.
What you guys saw on the Kpis, what what equal what you're seeing from customers in terms of what's causing that particular down pressure and then just Richard as far as foot guide down was that specifically just Europe or have you embedded potential.
In other regions as well.
Yes.
Yes.
Sure.
Yes.
We are we feel good about the platform and content business, we've seen acceleration in the LTM growth of platform and content.
And good metrics there so on the Iot side early in the quarter, we were seeing good metrics and.
Some real momentum in that business.
Installed in the second half of the quarter.
Or at least softened such that we were able to deliver a good.
Sequential performance, but year over year, we were down we had hoped to be.
In general I'd say overall the market for that product is is softer and because it's a transactional business has a little less visibility than the rest of the company.
Rich Yeah, I would I would echo we had expected to see the growth in the second half accelerated.
And we've heard from our largest tech partners that <unk> spending is down overall year over year, and we experienced that same trend.
But the platform and content business is healthy.
Operator.
Thank you.
Our next question comes from the line of Raimo <unk> with Barclays.
Please proceed with your question.
Hi, This is Sean on for Raimo. Thanks for taking our question I wanted to ask a little more on what youre seeing on that content and platform side like you said on the on the call. You know retentions are remaining healthy around that 101%. So wanted to ask what you're seeing on sales cycles for new business and anything to.
To call out there or maybe by region and are you doing anything on value selling or.
Trying to package together may be smaller deals to help increase the velocity on the net new side a quick follow up.
Well I can I can tell you, where we're seeing strength and where we're seeing.
Relative softness first overall the platform and content business is performing well and we're seeing momentum in that business you can see that in the LTM metrics you can see that in the dollar retention rates all of which are trending in the right direction in terms of where we see the greatest strength.
It's at the high end of our market, it's with our larger customers, it's where the needs for Reskilling and Upskilling are particularly complex and where our ability to deliver integrated global solution.
Is competitive competitively very strong that's where we're seeing the growth.
At the lower end of the market we're seeing.
Price competition as we've seen over the last few years and we're taking steps to address that with with a competitive entry level offering, which we recently launched and we're investing in our inside sales capabilities. So that we can address that low end more efficiently, but net net we believe that.
We are performing well.
And.
High growth segment of the market and that's the upper end of that market and feel good about how we're positioned.
Got it great.
I wanted to ask how how is Casey trending and you know when you're talking to customers in the early stages.
That reviving.
Customer interest to engage more meaningfully with skillsoft.
Absolutely.
Yes, I'm glad you're back absolutely, but we're seeing from customers and analysts as a very strong reception. There is a few that we have a market leading offerings.
And Casey.
Learn by doing and Casey is enabling our learners to do just that.
Very exciting we're partnering with customers to create new scenarios, so they're highly engaged.
In terms of how that drives revenue.
Embedded in a higher tier subscription offering along with a number of other capabilities.
And we are actively upselling from from our entry level offering into the subscription that has has casey and other other elements of interactivity.
Great. Thank you.
Thank you.
Our next question comes from the line of Raj Sharma with B Riley.
Please proceed with your question.
Okay.
Hello, Thank you for taking my question.
I wanted to understand either for Jeff or which just isn't easy or tough to measure the contribution in general do AI on revenues.
Today.
Over the near to medium term in.
In the future.
Thanks Raj.
It's not it's measure just the impact of generative AI isn't really possible because the biggest impact is on the curriculum side. So we've been actively developing.
Learning journeys and courses.
That are designed to give people the skills to use generative AI across the enterprise across all functions across all content areas.
And there has been a really strong uptake in fact, just to give you a metric we leave this.
This year alone, we've delivered $17 million AI related forces year to date and that's a strong metric. It's important we're investing but that's across the entirety of our portfolio and so it's difficult to measure how the actual impact on on <unk>.
Growth.
Where we may be able to get some some.
Quantified some impact as is our success up selling higher value subscriptions, but even then.
As I mentioned Casey as part of the higher value subscription, but it's not the only element of interactivity in the higher value subscriptions.
Rich anything to add yeah, just a quick one Jeff talks Raj about what we teach how we teach that last piece I think it was directed to me how we operate the business and while it's very early days.
I think over time key areas of <unk>.
Marketing and content development.
It's going to be part of the reason, we will continue to see margins expand.
And absolute EBITDA growth.
Yes.
Got it.
It's very helpful. Just in terms of the bookings.
And whether it's weakness or strength.
And how it varies across the market across the customers larger customers doing better or could you add more color to that and also could you mentioned.
Jeff You mentioned the idea of our sectors could you talk about what the who those customers are.
Yes, when we look at our largest customers.
Our retention rates are north of 110% so odd.
Obviously, if you then.
<unk> got our dollar retention rate is a little over 100% for the company overall that at the low end of the market. The dollar retention rates are lower and that's where we have an opportunity.
Two.
Meaningfully improve our customer retention at the high end, we believe we have substantial headroom.
To grow share of wallet, because we're really just cross.
Scratching the surface of the cross sell and up sell opportunity.
Yeah Raj I'd add one thing in the content and platform.
Another reason why it's so important to look at the business on an LTM basis. So the content platform that bookings were up 4%. This quarter. If you go back to the first quarter on an LTM basis, they were 1% last quarter, 2% on an LTM. So we're seeing acceleration.
And the content and platform business and also converting into revenue has seen nice revenue growth and content platform.
Got it.
I wanted to just touch upon Dakota Catamenia does it is it. So I just wanted to understand is it a standalone product or is it integrated into <unk> and how is that performing in terms of its organic growth.
Is that a way to measure it now or.
The consumer product as Standalone, the b to B product, which is where most of the growth is.
<unk> integrated in fact, we've.
<unk> rebranded the entirety of our tech and Dev offering as Codecademy for enterprise. So it's not possible to break it out but we can tell you that.
It contributed.
Two to growth in the in the quarter rich Yeah, I'd I'd just add that while we the segment. We report on dosing good granularity down to the individual products.
On an LTM basis and content platform all three of those segments grew and contributed to that growth.
Certainly codecademy enterprise, our tech and Dev offering with.
It was part of that.
And I would say the b to B is.
Growing stronger than the BDC, which the beta b market has been has been softer for it for everyone.
<unk> is strong.
Okay.
Got it and then just on the guidance is that correct you said.
It's the earlier guidance range, but the revenues would be the low end of guidance and EBITDA would be at the upper end of guidance is that did I read that correctly.
That's correct.
We didn't have the date the range.
For both bookings and revenue.
We said approximately at the low end.
The bottom of the range.
And on the adjusted EBITDA, pointing you to the high end.
Got it. Thank you. Thank you so much I'll take my questions offline. Thanks.
Thank you.
There are no further questions at this time.
I'd like to turn the floor back over to Jeff for closing comments.
Well I just want to take this moment to thank everyone I wanted to thank our team members who have been.
And working really hard to set us up for a <unk>.
Really solid Q4 and from what they delivered in Q3 I want to thank our analysts for the hard work that you're doing and our investors.
And of course, our customers, we look forward to connecting with you over the coming days and I will look forward to giving you an update when we wrap up the year.
Thanks very much.
This concludes today's teleconference.
You may disconnect your lines at this time.
You for your participation.
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