Q2 2025 Skillsoft Corp Earnings Call
Speaker Change: [inaudible]
Speaker Change: Thank you for standing by, and welcome to Skill Saw 2nd Quarter Fiscal 2025 Results Conference Call. At this time, all participants are in a listen only mode.
Speaker Change: After the speakers present, there will be a question and answer session.
Speaker Change: Please note that today's call is being reported.
Speaker Change: I will now hand the call over to your first speaker, Stephen Poe and best your relations. Thank you, please go ahead.
Speaker Change: Thank you, operator. Good day and thank you for joining us to discuss our results for the second quarter and did July 31, 2024.
Speaker Change: Before we jump in, 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.
Speaker Change: The school is looking statements and all statements that are not historical facts for flock management's current beliefs and expectations as of today and therefore our subject risks and uncertainties that could cause actual results to differ, materialy.
Speaker Change: For a discussion of the material risks and other important factors that can affect our actual results. We refer you to our most recent form 10K filing with the Securities and Exchange Commission.
Speaker Change: We assume no obligation to update any forward-looking statements or information, which speak as of their respective dates.
Speaker Change: During the call, unless otherwise noted, all financial metrics we discuss will be non-gap financial measures, which are not prepared in the court in sub-generally accepted accounting principles.
Speaker Change: Reconciliation of the non-gap financial measures included in today's commentary to the most directly comparable gap financial measures.
Speaker Change: As well as how we define these metrics is included in our earnings press release, which has been furnished to the SEC and is also available on our website at www.skillsoft.com
Speaker Change: Following today's prepared remarks, Ron Hovsepian, Bill Soft's executive chair and chief executive officer and rich Walker, Bill Soft's chief financial officer will be available for Q&A. That's my pleasure to turn the call over to Ron.
Speaker Change: Good afternoon, everyone. I appreciate you joining us today to discuss our fiscal second quarter.
Speaker Change: Our performance on the top line and on adjusted EBITDA, or in line with our expectations for the quarter.
Speaker Change: Our leadership team remains fully engaged in the considerable work to operationalize our targets.
Speaker Change: Howardville, we've made note of the progress and I'm encouraged by the early signs of operational execution.
Speaker Change: Most of our initiatives planning took place late in the second quarter and we expect to see the benefit in future periods.
Speaker Change: As we outline during our July 2024 investor day, our strategy is centered around two fundamental principles.
Speaker Change: Fix the basics and invest to grow.
Speaker Change: These strategies have been carefully crafted to strengthen our core operations while strategically channeling resources into areas with significant growth opportunities.
Speaker Change: More specifically, our fix-of-a-ase strategy is focused on how we can improve internal operations and our go-to-market strategies to better serve our customers specifically by transitioning to a dual business unit structure.
Speaker Change: This structure aligns us more closely with our customer needs and allows us to reallocate a portion of the $45 million expense reduction to support our growth initiatives.
Speaker Change: By executing on these foundational improvements, we are positioning ourselves to achieve profitable growth in the next fiscal year.
Speaker Change: Let me share more details on where we stand in implementing these strategies.
Speaker Change: We have fully operationalized our new business unit structure and are making progress in breaking out business unit detailed financials.
Speaker Change: We've moved away from our functionally driven model and transition to a structure where two general managers now lead their respective units with clear accountability and P&L responsibility.
Speaker Change: This brings decision making closer to our customers and markets and has already driving improved outcomes.
Lyne: Lyne, our corporate support functions more efficiently as well.
Ted: Ted differently, this structure is better for our customers and better for our company.
Speaker Change: Early indicators show that this transition is laying a strong foundation for the next phase of our journey.
Speaker Change: To accelerate our efforts, we've hired three key positions that are critical to fix the basics.
Speaker Change: First, we've hired a Chief Transformation Officer, who will oversee and guide the execution of our operational plan, working closely with functional leaders across the organization.
Speaker Change: Next, we've hired a chief analytics officer who will drive the implementation of our enhanced performance management systems.
Speaker Change: A key initiative in our fixed-sabasics strategy.
Speaker Change: This role is crucial to measuring our performance against key operational metrics, surfacing actionable insights, and enhancing our data-driven decision making.
Speaker Change: Last, we've added a senior vice president of sales to help strengthen our discipline and execution of our sales strategy in North America.
Speaker Change: Alongside these operational adjustments
Speaker Change: A reallocation efforts include a revised resource allocation framework to ensure the prioritization in the funding of a key value drivers that align with our long-term objectives.
Speaker Change: We are now near in completion of our operational plan and look forward to sharing more about our progress.
Speaker Change: This level of focus and discipline will serve as the foundation for the next steps in our journey.
Speaker Change: As we work towards becoming the number one global talent skills champion for both organizations and learners, we're not just making temporary fixes.
Speaker Change: We're reshaping the company for sustainable long-term success.
Speaker Change: How to our investor day, we laid out our goals of growing at or above market rates while building and maintaining an industry-leading financial profile.
Speaker Change: While it is still early days, we remain committed to the plans we laid out back in July.
Speaker Change: We are seeing early validations, particularly through customer wins and product innovation.
Speaker Change: Recently, we delivered a scalable, multi-lingual solution for a global professional services firm that empowers over 700,000 employees.
Speaker Change: By integrating our offerings seamlessly with their existing HR systems.
Speaker Change: We will help them achieve their workforce transformation goals while also consolidating their learner partner costs.
Speaker Change: This is a splendid example of how we're delivering value at scale.
Speaker Change: We also reconnected with a key customer in the cybersecurity sector.
Speaker Change: After facing challenges with other providers, they came back to us, recognizing the unmatched learner and administrator experience we provide.
Speaker Change: This renewed relationship is already enhancing customer satisfaction and accelerating go to market efforts.
Speaker Change: In addition, we've regained the trust of a major financial services institution by delivering a modernized comprehensive learner experience tailored to their needs.
Speaker Change: This engagement not only facilitates the reskilling and upskilling of their workforce, but will empower their leadership team by introducing the talent skills champion.
Speaker Change: The renewed commitment is already fostering a culture of adaptive, customer-centric innovation.
Speaker Change: As part of our ongoing focus on partners and driving innovation, we're excited about our collaboration with Microsoft.
Speaker Change: Our partnership, along with the launch of AI Accelerator Program, position skill soft to lead large-scale AI transformation amongst talents champions.
Speaker Change: This is just the first of many AI learning experiences we'll offer, helping everyone from end users to business leaders and AI developers.
Speaker Change: Game the skills they need to thrive in the age of AI.
Speaker Change: We're also pushing the boundaries of AI-led learning experiences with exciting new releases.
Speaker Change: TDS learner offering Code Academy, now features an AI assistant that offers AI-driven hints during the coding practice.
Speaker Change: and we've also launched KC for you, which allows companies to customize AI simulations to align with their values and needs for more tailored training.
Speaker Change: Examples of our customers and partners like this give me confidence that the strategies we've implemented and the value drivers we're focusing on are resonating with our customers and starting to deliver tangible results.
Speaker Change: To help guide our journey, we welcome three new directors to our board.
Speaker Change: Each brings a wealth of experience and fresh perspective that will be invaluable as we continue delivering on our strategic priorities.
Speaker Change: These appointments reflect our commitment to continuing the company's advancement towards shareholder value creation.
Speaker Change: We'll continue to provide regular updates on our progress and we're confident that our strategic initiatives will yield positive results in the coming quarters.
Speaker Change: With that, let me now hand the call over to Rich to cover our financial results in more detail. Rich? Thank you, Ron, and thank you everyone for joining today's call.
Speaker Change: As Ron shared in his opening comments, it was an active quarter for the company, as we push ahead on our journey to pivoting to consistent top-line growth in all areas of the business.
Rich: In light of the significant changes we've implemented in the quarter, I am pleased we delivered total company revenue in line with the expectations we outlined at investor day.
Rich: Our longer term goal remains unchanged to grow at or above market rates.
Speaker Change: Continued expense discipline across the company drove and proved adjusted EBITDA and margin expansion year over year.
Speaker Change: From a timing perspective is important to note the resource reallocation efforts we articulated at investor day.
Speaker Change: had only a minimal impact on Q2 financial results, as we didn't begin implementation of those actions until early August, following the quarter end.
Speaker Change: and System with our strategy, we are so funding the important investments to fix the basics.
Speaker Change: and activate key value drivers that run out-life in his comments.
Speaker Change: These investments are essential for setting a durable foundation for sustainable growth. And we look forward to updating you on continued progress in the coming quarters as their impact will become more evident.
Speaker Change: From an internal management reporting perspective, we made good progress on building out our dual business unit financial reporting structure.
Speaker Change: Another step in our journey that we shared that investor day.
Speaker Change: This level of business unit performance at nearly a fully allocated expense level is essential to aligning our resources with our most profitable opportunities.
Speaker Change: Driving improved efficiencies at the most fundamental level and improving overall company financial performance.
Speaker Change: This exercise has allowed us to inspect every dollar of our shared services spend, better design allocation methodologies between the business units and drive decision making and P&L stewardship deeper into the organization.
Speaker Change: We're excited about the visibility we are creating and look forward to sharing additional details for each business unit, including contribution margin.
Speaker Change: on our year-end call where we will have validated comparability to prior periods for external reporting.
Speaker Change: Turning now to a review of our financial results starting with revenue.
Speaker Change: talent development solutions formerly known as content and platform revenue of $102 million was down 1% year over year. Primarily due to tighter budgets and the timing on some of our larger in-quarter renewables and upgrades.
Speaker Change: and softer consumer subscription performance.
Speaker Change: Our LTM Dollar Retention Rate, or DRR, was approximately 98% in the quarter compared to approximately 101% in Q2 of last year.
Speaker Change: The decrease was driven almost entirely by budget constraints at some of our public sector customers and some ongoing disruption created by our transitioning SMB customers success in house.
Speaker Change: We are monitoring these situations, but we believe these are one time and fit within the annual cycle of this business.
Speaker Change: Global Knowledge, formerly known as instructor-led training revenue of $31 billion, was down 20% year over year, which includes an approximately 3% impact.
Speaker Change: from the exit of our apprenticeship business in the United Kingdom in the second half of last year.
Speaker Change: Revenue in the quarter was impacted by a soft Q1 and a slow start in Q2, as well as weaker demand trends that we've discussed on previous calls.
Speaker Change: Darren has completed his initial review of our core operations.
Darren: Business Capabilities, talent and operating model, and has validated his initial beliefs around the significant opportunity that lies ahead.
Darren: The entire team is now focused on the operational plan to fix the basics.
Darren: which will contribute to overall company growth in FY26.
Darren: Total company revenue of $132 million was down 6% year over year.
Darren: Walking through expenses.
Darren: Cost of revenue of $32 million or $24% of revenue.
Speaker Change: was favorably down 19% year-over-year.
Speaker Change: Primarily due to cost savings from consolidation of our facilities and lower instructor and coursework cost related to lower revenue in the global knowledge segment.
Speaker Change: Content and software development expenses of $14 million or 11% of revenue were favorably down 10% year over year
Speaker Change: Primarily due to lower-head count, lower stock-based compensation and the consolidation of our facilities.
Speaker Change: Delling and marketing expenses of $40 million, or 30% of revenue, were favorably down 2% year over year.
Speaker Change: Primarily due to proactive reductions in paid media, T&E and third party spend.
Speaker Change: General and Administrative expenses of $18 million or 14% of revenue were down 8% year over year. Primarily due to cost savings from the consolidation of facilities and lower insurance costs.
Speaker Change: Total Company operating expenses were $104 million or 79% of revenue and were favorably down $12 million or 10% year over year.
Speaker Change: Despite 6% less revenue from the prior year period, adjusted EBITDA was 28 million dollars or 21% of revenue compared to 25 million dollars and 18% of revenue in the prior year.
Speaker Change: Continued expense discipline drove 12% growth and 300 basis points of margin improvement in our primary profit metric adjusted EBITDA.
Speaker Change: Gap NetLoss of $40 million compared to Gap NetLoss of $32 million in the prior year.
Speaker Change: Gapnet loss per share of $4.84 compared to Gapnet loss per share of $4.00 in the prior year.
Speaker Change: A justed net loss of $20 million, improved from a justed net loss of $30 million in the prior year.
Speaker Change: Adjusted net loss per share of $2.40, improved from adjusted net loss per share of $3.68 in the prior year.
Speaker Change: Moving to cash flow and balance sheet highlights.
Speaker Change: As we highlighted in investor day, our unrelenting focus is on improving our free cash flow profile and getting the company to generate positive free cash flow as soon as possible.
Speaker Change: To that end, I have consolidated all elements of cash flow management under our Chief Accounting Officer.
Speaker Change: Creating the tighter interlock between accounting, finance and treasury.
Speaker Change: As we've highlighted previously, the talent development solutions business segment has pronounced cash flow seasonality throughout the fiscal year.
Speaker Change: Specifically.
Speaker Change: Given that 40% of annual bookings occur in the fourth quarter, we typically generate positive free cash flow in Q4 and Q1 as we collect on seasonally higher customer invoicing activity.
Speaker Change: Alternatively Q2 and Q3 typically consume cash.
Speaker Change: Beginning this quarter, we believe it will be insightful for investors to understand how pre-cash flow is impacted by the various restructuring or one-time transformation charges that are excluded from our adjusted EBITDA.
Speaker Change: These investments are essential to our transformation journey, and we believe this metric will bring improved transparency to measuring our progress against our free cash flow objectives.
Speaker Change: In addition to free cash flow, we will begin to report adjusted free cash flow, adding back the impact of restructuring or one time transformation charges.
Speaker Change: For the six months ending in the second quarter, we generated $3.5 million in cash flow from operations.
Speaker Change: and invested $9.2 million in capital expenditures and capitalized internally developed software.
Speaker Change: Resulting a negative free cash flow of $5.7 million, an improvement of $1.7 million, or 23% from the prior year period.
Speaker Change: year over year improvement was driven by $4 million less in cash taxes, which was partially offset by changes in working capital.
Speaker Change: A justing for the cash impact of restructuring charges in this six-month period of $7.1 million. We generated positive adjusted free cash flow of $1.4 million and improvement of $1 million from the prior year period.
Speaker Change: As I noted previously, we didn't begin implementation of the Resource Reallocation Initiative until early August following the quarter end.
Speaker Change: The impact of pre-cash flow from those actions will be primarily realized in the third quarter with some modest additional impact in the fourth quarter.
Speaker Change: Cash in Cash Equivalence and Restricted Cash was $130 million.
Speaker Change: Total Net Dept, which includes borrowings on our term loan and accounts receivable facility. Net of cash, cash of equivalents and restricted cash was approximately $492 million.
Speaker Change: Up from approximately $476 million in the first quarter.
Speaker Change: Before we turn the call over to questions
Speaker Change: I want to come in on our outlook for the full year.
Speaker Change: We are reaffirming the outlook ranges we provided on July 11th at investor day.
Speaker Change: which called for full-year revenue of $510 million to $525 million and it just did to $110 million to $110 million.
Speaker Change: Additionally, we expect free cash flow for the full year to be approximately negative $15 million, inclusive of the full year impact of the restructuring or one-time transformation charges.
Speaker Change: that we are incurring in our journey to pivoting to consistent top-line growth in all areas of the business.
Speaker Change: with that.
Speaker Change: Operator, please open the call for questions, and then Ron is the back person closing comment.
Speaker Change: Thank you. Now we can do something in question and answer questions. If you would like to ask you a question please press star one on your telephone keypad.
Speaker Change: A confirmation column will indicate your line is in the question tube. You may press star or show if you'd like to remove your questions from the tube. For participants, there's a speaker, equipment, and maybe necessary to pick up your hands at the full press and miss star or keep. One moment please while we call for questions.
Speaker Change: Thank you, our first question from Ken Wong with Open Hymer and Company. Please proceed with your question.
Ken Wong: Great, thank you for taking my question. Ron, the first one's for you. I mentioned three new hires.
Speaker Change: When we think about the operational changes you're trying to put in place
Speaker Change: You know, would you say that you have...
Speaker Change: All the executives in place now to implement that plan and then considering it just rolled out in Q3, would Q3 be too early to get a read on how things are going? Are we going to have to wait until the end of the fiscal year?
Speaker Change: Hey Ken, how are you? It's Ron. Thank you for the questions. In terms of the three new hires that I highlighted there, I think that helps us get the team and the ground at the most senior level that we need in the company to execute the things we talked about it in best of day and beyond.
Speaker Change: and in terms of timing, I look forward to giving you a proper update on the next call. And I believe we will have some early directional returns at a minimum to share with you.
Speaker Change: Okay, okay, perfect. And then, Rich, just a quick one on cash flow.
Speaker Change: Considering the impact of the implementation, don't take it until 3Q, is that the quarter where you would experience it?
Speaker Change: Assume that free cashflow will be a little trough and then I get to the extent that you have any quantification and any rough sense of what the potential headwinds from the implementation cost might be.
Speaker Change: Yeah, a couple of comments on packing at the...
Speaker Change: In the quarter itself, as you said, Ken, there were no impacts to the realized financials. What we enjoyed and even the margin expansion is just further validation of our continuous managing our expense base.
Speaker Change: So, in the second half of this year, we're going to get the benefit of the expense actions that we've identified. We'll be concurrently redeploying a lot of that resource to both fixing the basics.
Speaker Change: and Investing to Grow.
Speaker Change: and at reaffirming our full-year guidance kind of gives you the context around those pieces and how they come together.
Speaker Change: We've done $47 million of EBITDA in the first half of the year between the two quarters and reaffirming our guidance.
Speaker Change: What we had said publicly around reinvestment is as much as 40 to 50% of that resource for funding capability will go back into the business and as Ron said we look forward to giving you updates on the next call where we're deploying that capital.
Speaker Change: Okay, great, thanks for that, go.
Speaker Change: Thank you. Our next question is from Rob Sharma with B-Wightly Security. Please participate with your question.
Rob Sharma: I think you've taken my questions, I have to, the first is...
Rob Sharma: [inaudible]
Speaker Change: are these a reduction of the excess cost base or is this an alignment of the cost structured to a lower potential sales level in the industry, you know, if there's a structural decline that you're forcing and the talent and development solutions business and also if you could comment on.
Speaker Change: The global knowledge turned around and how that is going, the decline still year on year, sort of a similar level to last quarter.
Speaker Change: Great, this is Ron. Ron, how are you?
Speaker Change: Hovsepian.
Speaker Change: Thanks for watching!
Speaker Change: Good, thank you. The two, three questions. I'll take the last two on the TDS and the GK question, and I'll let Richard trust the cost, the structure piece of it. So that, that, that is no indication, quite the opposite of what we see for the potential in TDS.
Speaker Change: We do anticipate and had projected to you the opportunity in front of us in TDS and creating more of these.
Speaker Change: Talent Champions as we refer to him in short-hand.
Richard: These are customers that are addressing very complex issues in their organizations.
Richard: and this allows us to see growth there. We see the market data that we're looking at.
Richard: shows continuing growth in those spaces.
Speaker Change: Even with the shifts within the 400 billion of spending across all categories in this space, the ones that we're selecting can range from growth anywhere from a low of about 7% to a high of 13 or 14% in very small and smaller sub-signants.
Speaker Change: So again, these are the sub segments within that number. So we see growth and where we're going and that's what we've focused on from a TDS perspective.
Speaker Change: Cooper. So you shouldn't read any indication of a cyclical or a market segment cycle happening there in my perspective.
Cooper: on the G-tapies, I'll be...
Speaker Change: Yeah, great. I'm a GTA piece of it very specifically on that piece of it. This is really just letting Darren get ramped up and get the team.
Speaker Change: and I look forward to really reporting where we are progressing in that business in the next quarter, but from a structural perspective.
Speaker Change: That market is still growing. I'll be at a slower rate. That particular one is at the lower end of the growth rate. And as a subsegment, it's shifting from being an in-class room to virtual.
Speaker Change: What's exciting that we see though is the marriage of...
Speaker Change: That virtual piece is part of the blended learning journeys is part of multi-modal approach that we see happening inside the market And that's what customers are demanding more of as that blended learning journey So we really do see the opportunity to get that business corrected and I think we'll we'll talk about it in more detail in this up and coming calls
Speaker Change: So again, that one, I think it's just a little early to get into any of the early returns there, I will say, I do see, I do know of...
Speaker Change: One situation that I just described to you where it's bringing both of pieces together and a customer where we won over in Europe
Speaker Change: and it was really great to see how that impact really could be as an example of the two businesses working together as a go-forward piece of what's happening inside the company. So I'm excited about what I'm seeing in that example where they're bringing the parts together, where they're courseware, fit in with GDS content, and then we're bringing all the pieces together with even code Academy as part of that learner journey. So we're seeing that those very, very early moments of it right now.
Speaker Change: Thank you.
Speaker Change: and on the expense, I would say, cost to revenues, you identified initially, yes.
Speaker Change: in that case as GK's revenue base shrunk in the quarter on a comparative basis year over year.
Speaker Change: The most significant cost to revenue for GK is both instructor and our coursework costs, so as that revenue has declined, we benefited from lower expenses in those areas.
Speaker Change: All other areas of the expense discipline are where we're taking proactive measures.
Speaker Change: to prioritize where we're spending, where we're deploying resource.
Speaker Change: It is a big global growing market, and our longer term objective is to grow at the market and ultimately above market, and this exercise is to make sure that we're investing for those growth initiatives that we see in front of us.
Speaker Change: and right-sizing the company for the opportunity we're managing against in the near term. Our enthusiasm for the market and the opportunity for us and it is not changed. We're just being good stewards of financial resources.
Speaker Change: to prioritize and align to that growth.
Speaker Change: Great, thank you. I think you were the color I'll take it offline. Thanks.
Speaker Change: Thank you, thank you, thank you there are no further questions at this time I would like to hand the four back over to Rob Hobsepian for any clothing comments.
Rob Hobsepian: I'm a great thank you operator and thank you all for joining. As Rich highlighted, we reaffirmed the guidance that we gave you for year-end and I think the importance of understanding that as we do look at this business.
Rob Hobsepian: on the annual basis in a quarterly basis as we report it and our confidence was reaffirmed as part of that journey over the last 90 days.
Rob Hobsepian: and I feel very good about the early things that I'm seeing inside the business. We'll like that example I just shared with you. We're seeing the pieces begin to work better across the business.
Rob Hobsepian: and we saw a number of opportunities that were generated because of the business units structure, the two business units, and the full focus that it brings to the company.
Rob Hobsepian: So I look forward to sharing more of those examples with you as time goes on and we'll talk more about the details of the execution and the milestones that we had set with you as part of our journey. So thank you all very much and stay tuned and talk to them. Thank you.
Speaker Change: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
Speaker Change: The End