Q3 2025 Skillsoft Corp Earnings Call
Thank you for standing by and welcome to Skillsoft third quarter's fiscal 2025 results conference call.
Speaker Change: 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, Steven Po Investor Relations. Thank you. Please go ahead.
Steven Po: Thank you operator, good day and thank you for joining us to discuss our results for the third quarter ended October 31 2024.
Steven Po: 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 our 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.
Steven Po: 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 filing with the Securities and Exchange Commission.
We assume no obligation to update any forward looking statements or information, which speak as of their respective dates during the call unless otherwise noted all financial metrics. We discussed will be 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 today's.
Steven Po: His commentary to the most directly comparable GAAP financial measures 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 Dot Skillsoft dotcom.
Speaker Change: Following today's prepared remarks, Ron Hovsepian, Skillsoft executive Chair, and Chief Executive Officer, and Rich Walker Skillsoft, Chief Financial Officer will be available for Q&A with that it's my pleasure to turn the call over to Ron.
Ron Hovsepian: Thanks, Steven Good afternoon, and thank you for joining us.
I am pleased with our fiscal third quarter results, which demonstrate the real progress we are making on the transformation plan, we laid out earlier this year.
Ron Hovsepian: As a reminder, our transformation strategy focuses on two key principles.
Ron Hovsepian: Fixed the basics and invest to grow.
Ron Hovsepian: Picks the basics aims to improve operational execution for growth and margin expansion.
Ron Hovsepian: Invest to grow reallocate resources strategically to achieve above market growth rates.
Ron Hovsepian: As we work towards becoming the number one talent development partner for both organizations and learners. Our near term commitments include the following.
Ron Hovsepian: Driving at least $45 million in annualized expense reductions this fiscal year on a run rate basis.
Ron Hovsepian: With 40% to 50% of these savings are being invested back into the business.
Ron Hovsepian: Turning to top line growth and continued margin expansion in fiscal year 2026.
Ron Hovsepian: And generating positive free cash flow for the full year full fiscal year 2026.
Putting it all together, we expect to deliver above market growth and deliver a leading financial profile in the coming years.
Ron Hovsepian: Let me update you on our progress and actions so far.
Ron Hovsepian: We've implemented the new business unit structure with two general managers now accountable for their business unit performance.
Ron Hovsepian: We're making quicker decisions closer to the customer end markets and early results are promising.
We're able to do this while staying on track with our resource allocation efforts and we are seeing customer validation of our strategy.
Ron Hovsepian: During the quarter, we delivered key new customer wins, including a successful customer upgrade solution. There was fuelled by Skillsoft AI accelerator program.
Ron Hovsepian: NTT data, a global business and technology services organization.
Set out on a journey to build a curricula to upskill their global leaders frontline teams consultants and add more in AI.
Ron Hovsepian: Understanding AI technology was only half the story.
Ron Hovsepian: They were determined to get ahead of the curve to better serve their clients leveraging our investment in AI training resources. This skill sauce European team and North American team.
Ron Hovsepian: Teams collaborated with the global NTT data talent development teams on a role based solution with tiered learning programs from beginner to expert.
Ron Hovsepian: The Microsoft AI program powered by Skillsoft helped as our proof point and our expertise in this area.
Skillsoft also secured a seven figure multiyear deal with a top 30 global brand and media and entertainment with over 200000 employees. The company is in a transformation to become a skills based organization and Skillsoft will assist with the skills strategy skill measurements.
Ron Hovsepian: In a customized AI role play simulations, which as we referred to as Casey.
Ron Hovsepian: These are two examples of customers that are working with skillsoft to achieve workforce transformation and create analytics to inform workforce planning along with the talent development lifecycle.
Ron Hovsepian: Now I would like to give an update on some of our product innovations and go to market improvements.
Ron Hovsepian: In the TTS business unit that serves the individual learner in the organization.
Ron Hovsepian: We have delivered four new innovations to the market.
Ron Hovsepian: First.
Ron Hovsepian: AI coaching assistant.
Ron Hovsepian: Helps leaders develop a personalized coaching plan.
Ron Hovsepian: The average time to complete a coaching plan decreased from 13 days to just three days to 77% reduction.
Ron Hovsepian: Skillsoft launched two AI assistance to personalized a learning experience.
Ron Hovsepian: One curates learning in response to questions across our organizational platform precipitate any other helps teach to learn how to code on our learner toolset codecademy.
Ron Hovsepian: Third we introduced the new compliance suite that simplifies the process of managing our compliance cycle and improves the user experience.
Ron Hovsepian: This change resulted in a 48% increase in net promoter score, which will aid in improving our retention.
Ron Hovsepian: Finally, we introduced new end to end certification paths, both on our organizational platform recipient and our learner platform Codecademy. The guide learners end to end and getting a globally recognized certification from companies like AWS, Microsoft and many others.
Ron Hovsepian: Skillsoft helps learners prepare for 90 different strategic certification programs.
Ron Hovsepian: And the global knowledge business unit, where we deliver interactive learning experiences virtually or physically.
We moved the go to market resources to a more regionally focused model.
Ron Hovsepian: This new approach aided in the stabilization as demonstrated by the sequential revenue improvement.
Under the new general managers focused leadership.
Ron Hovsepian: The year over year decline in <unk> revenue improved to a 10% drop as compared to a 20% drop in the previous two quarters.
Ron Hovsepian: So overall our execution in Q3 continues to grow my confidence in the business. We delivered two critical proof points in this quarter first we delivered positive free cash flow.
Ron Hovsepian: Secondly, we demonstrated go to market improvement and GK.
Ron Hovsepian: Therefore, we are raising and tightening our fiscal year 'twenty five revenue guidance range.
Ron Hovsepian: In closing, while we still have much more to do the actions taken to realign our organization are taking hold.
Ron Hovsepian: And are evident in our financial results.
Ron Hovsepian: We made significant strides forward this quarter.
With that said, let me now hand, the call over to rich to cover our financial results in more detail rich.
Rich Walker: Thanks, Ron and welcome everyone and thanks for joining today.
Rich Walker: As Ron shared in his opening comments it was a notable quarter for skilled solved as we executed across all facets of our transformation plan, which benefited our financial results and allows us to continue allocating resources to drive our future growth.
Rich Walker: While our transformation journey will span multiple quarters I am pleased that we delivered revenue ahead of our expectations improved profitability and delivered strong free cash flow performance.
Rich Walker: Turning now to a detailed review of our financial results starting with revenue.
Rich Walker: Talent development solutions or T. D. S revenue of $103 million was up 2% year over year, primarily due to our efforts to capitalize on the market shift from learning and skills to talent development.
Rich Walker: Our LTM dollar retention rate or D. R. R. For Q3 stayed flat sequentially with the second quarter at 98% compared to approximately 101% in Q3 of last year.
The year over year decrease was primarily the result of two elements.
Rich Walker: Softness in our coaching and compliance product offerings.
Rich Walker: We are addressing the challenges and coaching through a revised product and pricing approach, where we are moving to a subscription model in a way from a seat licensing model.
And our compliance area as Ron mentioned earlier, we recently released our new integrated compliance platform that we expect to have a near term impact on our retention rates going forward.
I am confident we understand the challenges have identified the proper action plans and have sufficient resources dedicated to improving the trend line.
Rich Walker: Our full year outlook is aligned to the current trends and our efforts to improve on this critical metric and it remains one of our highest strategic priorities moving into Q4.
Rich Walker: Global knowledge revenue of $34 million was down approximately $4 million or 10% year over year as.
Speaker Change: As Ron commented earlier G. K made good sequential progress and stemming the rate of revenue declines importantly, GK over delivered with respect to our internal expectations for the third quarter. This is an important first step for the GK business unit on there.
Speaker Change: Transformation journey.
Speaker Change: Total revenue of $137 million was down approximately $2 million or 1% year over year.
Walking through our expenses cost of revenue of $34 million or 25% of revenue was favorably down 6% year over year, primarily due to the cost savings from resource reallocation actions.
Speaker Change: Content and software development expenses of $14 million or 10% of revenue, we're favorably down 4% year over year, primarily due to resource reallocation actions.
Speaker Change: Selling and marketing expenses of $38 million or 28% of revenue, we're favorably down 9% year over year, primarily due to resource reallocation actions.
Speaker Change: General and administrative expenses of $19 million or 14% of revenue increased by $3 million or 17% year over year.
Speaker Change: While we made continued progress on resource reallocation actions and disciplined cost management.
One time cost related to the C. E O employment agreement signed in September and targeted retention awards for critical roles offset those actions.
Speaker Change: Additionally, there was no short term incentive award accruals in the prior year period.
Speaker Change: Total operating expenses were $105 million or 77% of revenue and were favorably down $4 million or 4% year over year.
Speaker Change: Similar to last quarter, despite a lower revenue base compared to the prior year period, we delivered higher profitability adjusted EBITDA of $32 million or 23% of revenue was up $2 million compared to the $30 million or 22 per.
Speaker Change: <unk> margin profile, one year ago.
Speaker Change: Continued expense discipline drove 6% growth and 150 basis points of margin improvement and our primary profit metric adjusted EBITDA.
Speaker Change: GAAP net loss was $24 million compared to get GAAP net loss of $28 million in the prior year.
Speaker Change: GAAP net loss per share of $2.86 compared to GAAP net loss per share of $3.45 in the prior year.
Speaker Change: Adjusted net loss of $15 million improved from adjusted net loss of $23 million in the prior year.
Speaker Change: Adjusted net loss per share of $1.82 improved from adjusted net loss per share of $2.82 in the prior year.
Moving to cash flow and balance sheet highlights.
Speaker Change: A critical focus is improving our free cash flow profile and getting the company to generate consistent positive free cash flow as soon as possible.
Speaker Change: As a reminder, the second and third quarters have historically consumed cash however, as Ron already mentioned, we delivered positive free cash flow in the third quarter of $4 million the.
Speaker Change: The improvement was driven primarily by disciplined collections management.
Speaker Change: Improved performance management systems have led to the introduction of centralized metrics and dashboards, the resulting impact is enhanced and in alignment between our collections and customer facing organizations I am pleased with the progress we made in the third.
Speaker Change: Good quarter and confident we will maintain this level of collections efficiency going forward.
Speaker Change: For the nine months ended in the third quarter, we generated $12 $2 million in cash flow from operations and invested $13 8 million in capital expenditures and capitalized internally developed software.
Speaker Change: Resulting in negative free cash flow of $1 $6 million and.
<unk> of $18 $9 million from the prior year period.
Speaker Change: As we introduced to you last quarter, the nonrecurring costs associated with our transformation of the business have had a material impact on free cash flow of the company, but were essential to aligning our cost structures integrating systems and operations and creating the capacity to <unk>.
Speaker Change: Self fund our growth investment initiatives.
Speaker Change: Those costs were particularly acute in the third quarter as we implemented our resource reallocation plans.
Speaker Change: Accordingly, adjusting for the cash impact of restructuring charges in this nine month period of $17 $2 million, we generated positive adjusted free cash flow of $15 6 million, an improvement of $26 million compared to the prior.
Speaker Change: Near year period.
Speaker Change: Our adjusted EBITDA to adjusted free cash flow conversion was 20% for the nine month period, we will continue to aggressively manage this metric.
Speaker Change: Additionally, we successfully renegotiated the terms and extended the maturity of our $75 million accounts receivable facility, which was due to expire at the end of December this year.
Speaker Change: We lowered our sulfur spread by 50 basis points lowered our minimum draw requirements from $10 million to $1 million and enhance the administrative flexibility of monthly borrowing and repayment provisions.
Speaker Change: As we progressed to consistent free cash flow generation, we can begin to use the facility more like our revolver to smooth out cash cycles in the business.
Speaker Change: Finally, the maturity of the facility was extended to FY 'twenty nine to align with the term loan b maturity.
Speaker Change: As a result of these actions we closed the quarter, maintaining a healthy balance sheet and a strong cash and liquidity position.
Speaker Change: Cash cash equivalents and restricted cash was $102 million.
Speaker Change: Total gross debt, which includes borrowings on our term loan and accounts receivable facility was $591 million at the end of Q3.
Down from approximately $622 million at the end of Q2.
Speaker Change: Year to date in FY 'twenty five we have lowered our gross debt leverage profile from six times to five five times.
Speaker Change: More specifically as we saw improved cash flow in the quarter, we lowered borrowings on our accounts receivable facility.
Speaker Change: Total net debt, which includes borrowings on our term loan and accounts receivable facility net of cash cash equivalents and restricted cash was approximately $489 million down.
Down from approximately $492 million at the end of the fiscal second quarter.
Speaker Change: Turning to our outlook for the full year, given our strong revenue execution in Q3, primarily from global knowledge and the progress we're making on our transformation journey, we are now raising and tightening our full year revenue guidance range. We now expect revenue of 500.
Speaker Change: $20 million to $530 million for the full year fiscal 'twenty five.
Speaker Change: As you know from Investor Day Global knowledge revenue has a slightly lower profit margin profile than the Tds segment. Additionally.
Speaker Change: Additionally, our improved revenue performance will drive additional accruals to our short term incentive plans a critical element of our overall compensation and retention philosophy.
Speaker Change: As a result of these two factors we are reaffirming our adjusted EBITDA outlook of $105 million to a $110 million.
Speaker Change: We have made significant progress in our resource reallocation efforts and the onetime cost associated with those actions, which impact free cash flow, but not our adjusted EBITDA. These.
Speaker Change: These costs were well managed and actually came in below initial estimates. Additionally, as a result of the important progress.
Speaker Change: Management and collections, we now expect to be at or near breakeven free cash flow for the full fiscal year.
Speaker Change: With that operator, please open up 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 zero on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
Press Star two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Speaker Change: Thank you. Our first question comes from the line of Ken Wong with Oppenheimer. Please proceed.
Ken Wong: Great. Thanks for taking my question.
Speaker Change: Ron I wanted to touch on the GK stabilization.
Speaker Change: Sounds like the new GM regional sales model is starting to work.
Besides.
Speaker Change: This wasn't early data point are there any other proof points that you saw within the quarter that gives you confidence that we maybe finally, turning the corner on this business.
Speaker Change: Good to hear your voice.
Speaker Change: Thank you for the question.
Speaker Change: The answer is yes, there were a lot of a lot of us.
Speaker Change: Singles and doubles hit not a homerun in terms of one transaction. So when you look underneath the transaction base of what the team did and what they delivered it had two attributes the range and size of the.
Speaker Change: The transactions, but then the second part was also it built momentum throughout the quarter as well. So to me. That's those are really two big important pieces of what we what we want to what we wanted to accomplish there.
Speaker Change: On the product side of it.
We received partner of the year from.
A number of prestigious companies and organizations.
<unk> in particular in the EC The European Council.
Where two of the big ones, but then you get to the countries you get you get Cisco.
Speaker Change: Yet.
Palo Alto networks, you get a number of those players associated with that.
Speaker Change: Part of it so.
Speaker Change: I see the right signals, but it's one quarter as I told the team and we need to continue to work.
Speaker Change: Worked really hard at the way the way we are and it's I wouldn't say, we're there yet in any way shape or form, but I sure feel very good about that first quarter that they've put together.
Got it perfect.
Speaker Change: And then rich I just wanted to follow up on the you mentioned for the coaching of compliance a little bit of headwinds there, but youre also changing the way you guys licensed that product.
Speaker Change: Any potential additional headwinds we should be thinking about whether it's further erosion of the business or just some sort of transition.
Speaker Change: Some transition on certain days on transition risks that that could come about as you try to move customers to the new model.
Yes.
You captured it Ken.
Speaker Change: No change sequentially from the second quarter. It is always best to look at it on a.
Speaker Change: On an LTM basis, so still at about 98 300 basis points.
Different from prior year.
Speaker Change: Some context within that our large accounts our largest customers are at about 105%, obviously midmarket and SMB have made very different <unk> profile, the softness in Cochin and compliance together explain most of.
Speaker Change: That delta on a year over year basis.
Speaker Change: On coaching that is where we're moving.
Speaker Change: From a subscription away from our seat license model to a subscription model, we think that will allow customers to utilize the coaching.
Speaker Change: More consistently than just more of a programmatic.
Speaker Change: Push from their HR teams on the compliance side.
As you alluded to we think that platform is going to be much improved experience for customers. We saw almost a 48% increase in PFS for those customers that have migrated.
Speaker Change: All of those activities remain a strategic priority as we go into the fourth quarter, but feel that we are.
Speaker Change: We're aware of where the challenges are and we've got the right resources focused on improving those trend lines.
Speaker Change: Yeah.
Speaker Change: Okay perfect. Thanks, a lot guys.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: Anyone else has any additional questions. Please press star one at this time.
Speaker Change: Alright, I'm not seeing any questions.
Speaker Change: I would like to pass the call back over to Ron for closing remarks.
Ron Hovsepian: Great. Thank you operator, and thank you everyone for joining us just in closing for this quarter.
Ron Hovsepian: Our actions in this quarter really really helped drive a reduction in the cost structure and the expansion in the margins, which really is allowing us to reposition the company for the bigger growth initiatives and fund them appropriately while returning while returning value to the shareholders I feel very good about where we are with that.
Ron Hovsepian: <unk> expense targets I feel that the appropriate notable in this of what we see inside of Gk's overall performance.
Speaker Change: It is a very good first step in my language.
Speaker Change: And I am excited about where it could go.
Speaker Change: Confident we're building a very strong financially sound business right now and you're just seeing that very first return against that work.
We have a very clear roadmap also for free.
Speaker Change: Strong free cash flow generation as we continue to look at this quarter by quarter.
Speaker Change: And I look forward to sharing our progress with you. After our Q4 performance. So thank you all very much for joining today.
Speaker Change: Yeah.
Speaker Change: Thank you. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation.
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Yes.
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