Skillsoft Q3 2025 Earnings Call Transcript

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Provided by Quartr
December 10, 2024

There are 5 speakers on the call.

Operator

Thank you for standing by, and welcome to Skillsoft's Third Quarter Fiscal 2025 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, Stephen Poe, Investor Relations.

Operator

Thank you. Please go ahead.

Speaker 1

Thank you, operator. Good day and thank you for joining us to discuss our results for the Q3 ended October 31, 2024. 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 and expectations as of today 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 ks filing with the Securities and Exchange Commission.

Speaker 1

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 discuss 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 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.skillsoft.com. Following today's prepared remarks, Ron Hovsopian, Skillsoft's Executive Chair and Chief Executive Officer and Rich Walker, Skillsoft's Chief Financial Officer, will be available for Q and A. With that, it's my pleasure to turn the call over to Ron.

Speaker 2

Thanks, Stephen. Good afternoon and thank you for joining us. I am pleased with our fiscal Q3 results, which demonstrate the real progress we are making on the transformation plan we laid out earlier this year. As a reminder, our transformation strategy focuses on 2 key principles, Fix the Basics and Invest to Grow. Fix the Basics aims to improve operational execution for growth and margin expansion.

Speaker 2

Invest to Grow reallocates resources strategically to achieve above market growth rates. As we work towards becoming the number one talent development partner for both organizations and learners, our near term commitments include the following: driving at least $45,000,000 in annualized expense reductions this fiscal year on a run rate basis with 40% to 50% of these savings being invested back into the business Returning to top line growth and continued margin expansion in fiscal year 2026 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. Let me update you on our progress and actions so far. We've implemented the new business unit structure with 2 general managers now accountable for their business unit performances.

Speaker 2

We're making quicker decisions closer to the customer and 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. During the quarter, we delivered key new customer wins, including a successful customer upgrade solution that was fueled by Skillsoft's AI Accelerator program. 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 more in AI. Understanding AI technology was only half the story.

Speaker 2

They were determined to get ahead of the curve to better serve their clients. Leveraging our investment in AI training resources, the Skillsoft's European team and North American teams collaborated with the global NTT DATA talent development teams on a role based solution with tiered learning programs from beginner to expert. The Microsoft AI program powered by Skillsoft helped as our proof point and our expertise in this area. Skillsoft also secured a 7 figure multi year deal with a top 30 global brand in media and entertainment. With over 200,000 employees, the company is in a transformation to become a skills based organization and Skillsoft will assist with the skill strategy, skill measurements in a customized AI role play simulations, which is we refer to as Casey.

Speaker 2

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. Now I would like to give an update on some of our product innovations and go to market improvements. In the TDS business unit that serves the individual learner and the organization, we have delivered 4 new innovations to the market. 1st, AI Coaching Assistant helps leaders develop a personalized coaching plan. The average time to complete a coaching plan decreased from 13 days to just 3 days, a 77% reduction.

Speaker 2

Skillsoft launched 2 AI assistants to personalize the learning experience. 1 curates learning in response to questions across our organizational platform, Precipio, and the other helps teach the learner how to code on our learner toolset, Codecademy. 3rd, we introduced the new compliance suite that simplifies the process of managing a compliance cycle and improves the user experience. This change resulted in a 48% increase in Net Promoter Score, which will aid in improving our retention. Finally, we introduced new end to end certification paths, both on our organizational platform, Precipio, and our learner platform, Codecademy, that guide learners end to end in getting a globally recognized certification from companies like AWS, Microsoft and many others.

Speaker 2

Skillsoft helps learners prepare for 90 different certification programs. In 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. This new approach aided in the stabilization as demonstrated by the sequential revenue improvement. Under the new general manager's focused leadership, the year over year decline in GK revenue improved to a 10% drop as compared to a 20% drop in the previous two quarters. So overall, our execution in Q3 continues to grow my confidence in the business.

Speaker 2

We delivered 2 critical proof points in this quarter. First, we delivered positive free cash flow. Secondly, we demonstrated go to market improvement in GK. Therefore, we are raising and tightening our fiscal year 2025 revenue guidance range. In closing, while we still have much more to do, the actions taken to realign our organization are taking hold and are evident in our financial results.

Speaker 2

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?

Speaker 3

Thanks, Ron. Welcome, everyone, and thanks for joining today. As Ron shared in his opening comments, it was a notable quarter for Skillsoft 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. 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. Turning now to a detailed review of our financial results, starting with revenue.

Speaker 3

Talent Development Solutions or TDS revenue of $103,000,000 was up 2% year over year, primarily due to our efforts to capitalize on the market shift from learning and skills to talent development. Our LTM dollar retention rate or DRR for Q3 stayed flat sequentially with the 2nd quarter at 98% compared to approximately 101% in Q3 of last year. The year over year decrease was primarily the result of 2 elements: softness in our coaching and compliance product offerings. We are addressing the challenges in coaching through a revised product and pricing approach, where we are moving to a subscription model and away from a seat licensing model. In 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.

Speaker 3

I am confident we understand the challenges, have identified the proper action plans and have sufficient resources dedicated to improving the trend line. 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. Global Knowledge revenue of $34,000,000 was down approximately $4,000,000 or 10% year over year. As Ron commented earlier, GK made good sequential progress in stemming the rate of revenue declines. Importantly, GK over delivered with respect to our internal expectations for the Q3.

Speaker 3

This is an important first step for the GK business unit on their transformation journey. Total revenue of $137,000,000 was down approximately $2,000,000 or 1% year over year. Walking through our expenses, cost of revenue of $34,000,000 or 25% of revenue was favorably down 6% year over year, primarily due to the cost savings from resource reallocation actions. Content and software development expenses of $14,000,000 or 10% of revenue were favorably down 4% year over year, primarily due to resource reallocation actions. Selling and marketing expenses of $38,000,000 or 28% of revenue were favorably down 9% year over year, primarily due to resource reallocation actions.

Speaker 3

General and administrative expenses of $19,000,000 or 14% of revenue increased by $3,000,000 or 17% year over year. While we made continued progress on resource reallocation actions and disciplined cost management, onetime costs related to the CEO employment agreement signed in September and targeted retention awards for critical roles offset those actions. Additionally, there was no short term incentive award accrual in the prior year period. Total operating expenses were $105,000,000 or 77% of revenue and were favorably down $4,000,000 or 4% year over year. Similar to last quarter, despite a lower revenue base compared to the prior year period, we delivered higher profitability.

Speaker 3

Adjusted EBITDA of $32,000,000 or 23 percent of revenue was up $2,000,000 compared to the $30,000,000 or 22% margin profile 1 year ago. Continued expense discipline drove 6% growth and 150 basis points of margin improvement in our primary profit metric adjusted EBITDA. GAAP net loss was $24,000,000 compared to GAAP net loss of $28,000,000 in the prior year. GAAP net loss per share of $2.86 compared to GAAP net loss per share of $3.45 in the prior year. Adjusted net loss of $15,000,000 improved from adjusted net loss of $23,000,000 in the prior year.

Speaker 3

Adjusted net loss per share of $1.82 improved from adjusted net loss per share of 2 point $8.2 in the prior year. Moving to cash flow and balance sheet highlights. 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. 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 Q3 of $4,000,000 The improvement was driven primarily by disciplined collections management.

Speaker 3

Improved performance management systems have led to the introduction of centralized metrics and dashboards. The resulting impact is enhanced end to end alignment between our collections and customer facing organizations. I am pleased with the progress we made in the Q3 and confident we will maintain this level of collections efficiency going forward. For the 9 months ended in the Q3, we generated $12,200,000 in cash flow from operations and invested $13,800,000 in capital expenditures and capitalized internally developed software, resulting in negative free cash flow of $1,600,000 an improvement of $18,900,000 from the prior year period. As we introduced to you last quarter, the non recurring 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 self fund our growth investment initiatives.

Speaker 3

Those costs were particularly acute in the 3rd quarter as we implemented our resource reallocation plans. Accordingly, adjusting for the cash impact of restructuring charges in this 9 month period of $17,200,000 we generated positive adjusted free cash flow of $15,600,000 an improvement of $26,000,000 compared to the prior year period. Our adjusted EBITDA to adjusted free cash flow conversion was 20% for the 9 month period. We will continue to aggressively manage this metric. Additionally, we successfully renegotiated the terms and extended the maturity of our $75,000,000 accounts receivable facility, which was due to expire at the end of December this year.

Speaker 3

We lowered our SOFR spread by 50 basis points, lowered our minimum draw requirements from $10,000,000 to $1,000,000 and enhanced the administrative flexibility of monthly borrowing and repayment provisions. As we progress to consistent free cash flow generation, we can begin to use the facility more like a revolver to smooth out cash cycles in the business. Finally, the maturity of the facility was extended to FY 'twenty nine to align with the term loan B maturity. As a result of these actions, we closed the quarter maintaining a healthy balance sheet and a strong cash and liquidity position. Cash, cash equivalents and restricted cash was $102,000,000 Total gross debt, which includes borrowings on our term loan and accounts receivable facility was $591,000,000 at the end of Q3, down from approximately $622,000,000 at the end of Q2.

Speaker 3

Year to date in FY 2025, we have lowered our gross debt leverage profile from 6 times to 5.5 times. More specifically, as we saw improved cash flow in the quarter, we lowered borrowings on our accounts receivable facility. Total net debt, which includes borrowings on our term loan and accounts receivable facility, net of cash, cash equivalents and restricted cash was approximately $489,000,000 down from approximately $492,000,000 at the end of the fiscal Q2. Turning to our outlook for the full year. Given our strong revenue execution in Q3, primarily from Global Knowledge and the progress we are making in our transformation journey, we are now raising and tightening our full year revenue guidance range.

Speaker 3

We now expect revenue of $520,000,000 to $530,000,000 for the full year fiscal 2025. As you know from Investor Day, Global Knowledge revenue has a slightly lower profit margin profile than the TDS segment. 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. As a result of these two factors, we are reaffirming our adjusted EBITDA outlook of $105,000,000 to $110,000,000 We have made significant progress in our resource reallocation efforts and the one time costs associated with those actions, which impact free cash flow, but not our adjusted EBITDA. These costs were well managed and actually came in below initial estimates.

Speaker 3

Additionally, as a result of the important progress we made in working capital management and collections, we now expect to be at or near breakeven free cash flow for the full fiscal year. With that, operator, please open up the call to questions.

Operator

Thank you. We will now be conducting a question and answer Thank you. Our first question comes from the line of Ken Wong with Oppenheimer. Please proceed.

Speaker 4

Great. Thanks for taking my question. Ron, I wanted to touch on the GK stabilization. It sounds like the new GM regional sales model is starting to work. But besides kind of this one 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 2

Good to hear your voice and thank you for the question. The answer is, yes, there were a lot of singles and doubles hit, not a home run-in terms of one transaction. So when you look underneath the transaction base of what the team did and what they delivered, it had 2 attributes, the range and size of the transactions. But then the second part was also it built momentum throughout the quarter as well. So to me, those are really 2 big important pieces of what we want to accomplish there.

Speaker 2

On the product side of it, we received Partner of the Year from a number of prestigious companies and organizations. CompTIA in particular in the EC, the European Council were 2 of the big ones. But then you get to the countries, you get Cisco, you get Palo Alto Networks, you get a number of those players associated with that as part of it. So I see the right signals, but it's 1 quarter as I told the team and we need to continue to work really hard at 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 Q1 that they put together.

Speaker 4

Got it. Perfect. And then, Rich, I just wanted to follow-up on the you mentioned for the coaching and compliance, a little bit of headwinds there, but you're also changing the way you guys license that product. Any potential additional headwinds we should be thinking about whether it's further erosion of the business or just some sort of transition, some transition uncertainties and transition risks that could come about as you try to move customers to the new model?

Speaker 3

Yes. You captured it Ken. No change sequentially from the Q2. It is always best to look at it on an LTM basis. So still at about 98, 300 basis points different from the prior year.

Speaker 3

Some context within that, our large accounts, our largest customers are at about 105%. Obviously, mid market and SMB have a very different DRR profile. The softness in coaching and compliance together explain most of that delta on a year over year basis. Quickly on coaching, that is where we're moving from a subscription away from a seat license model into a subscription model. We think that will allow customers to utilize the coaching more consistently than just more of a programmatic push from their HR teams.

Speaker 3

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 NPS for those customers that have migrated. All of those activities remain a strategic priority as we go into the Q4, but feel that we're aware of where the challenges are and we've got the right resources focused on improving those trend lines.

Speaker 4

Okay, perfect. Thanks a lot guys.

Speaker 2

Thank you.

Operator

Thank you. All right. I'm not seeing any questions. I would like to pass the call back over to Ron for closing remarks.

Speaker 2

Great. Thank you, operator, and thank you everyone for joining us. Just in closing for this quarter, our actions in this quarter really, really helped drive the 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 value to the shareholders. I feel very good about where we are with that reallocation expense targets. I feel that the appropriate notableness of what we see inside of GK's overall performance is a very good first step in my language.

Speaker 2

And I'm excited about where it could go. 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 strong free cash flow generation as we continue to look at this quarter by quarter. And I look forward to sharing the progress with you after our Q4 performance.

Speaker 2

So thank you all very much for joining today.

Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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