Earnings Call Transcript - SKIL Q1 2026

Operator, Operator

Greetings. Thank you for standing by, and welcome to Skillsoft's First Quarter Fiscal 2026 Results and Conference Call. Please note that today's call is being recorded. I would now like to hand the conference over to your first speaker, Stephen Poe, Investor Relations. Thank you, Stephen. You may begin.

Stephen Poe, Investor Relations

Thank you, operator. Good day, and thank you for joining us to discuss our results for the first quarter ended April 30, 2025. 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 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 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 Hovsepian, Skillsoft's Executive Chair and Chief Executive Officer; and John Frederick, Skillsoft's Chief Financial Officer, will be available for Q&A. With that, it's my pleasure to turn the call over to Ron.

Ronald W. Hovsepian, Executive Chair and CEO

Thanks, Stephen. Good afternoon, and thank you for joining us. I'm very pleased to start today's call with the introduction of John Frederick as our new CFO. Since rejoining Skillsoft in August of last year, he has overseen the company's business planning, working closely with the leadership team to refine and help drive the implementation of our transformation plan. From 2018 through 2021, he served as Skillsoft's Chief Administrative Officer, which included leading the finance team and previously, he held executive positions at SumTotal Systems, a Skillsoft business acquired by Cornerstone in 2022, among others. John is deeply familiar with Skillsoft. His experience leading finance organizations and a growth-oriented mindset make him a natural choice to serve as our next CFO. I look forward to continuing to work closely with John as we build on our recent progress, drive success for our customers and learners and unlock further shareholder value as we execute our strategic plan. I'd also like to extend a sincere thank you to Rich Walker for his significant contributions and dedication to Skillsoft over the past 4 years. Rich has been a key member of the Skillsoft management team, and we wish him all the best in his future endeavors. In addition to welcoming John as our CFO, we expanded our leadership team with the addition of our new Chief Marketing Officer, Raianne Reiss. Raianne is responsible for overseeing our global marketing efforts, helping drive demand and enhance brand awareness among organizations and learners who are on their talent transformation journey. She has extensive experience in the technology sector, and her passion for powerful storytelling and driving transformation will help accelerate our go-to-market strategy, which is a key focus for Skillsoft going forward. Collectively, these leadership additions bring renewed focus and execution strength. With that, let me jump into our first quarter, which, as a reminder, is our seasonally smallest revenue quarter of the year. As expected, we experienced macro uncertainty, which translated into lower discretionary spending by our customers and slightly elongated decision-making. This directly impacted our live learning revenue in the quarter, which includes our global knowledge instructor-led training and TDS coaching products. Yet we saw a continuation of growth within our TDS segment, a trend we've seen since the third quarter of last fiscal year. Additionally, we delivered improvement in our adjusted EBITDA and free cash flow. While we continue to drive improved financial results, we're also delivering strong progress against our transformation commitments. Let me provide you an update on our progress in a few key areas. We are actively investing capital into our business. With reinvestment happening predominantly in the first half of this fiscal year, we expect to see positive free cash flow and top line growth for the full fiscal year, both of which we committed to at our July 2024 Investor Day. We expect most of this growth to come in the back half of this year. We continue to execute our go-to-market strategy. In Global Knowledge, for the first quarter, we saw a decline in U.S. public sector discretionary live learning spending. However, we saw an increase in large-scale non-U.S. public sector deals, where we are investing in international growth. Common themes were upskilling in AI, cloud computing, software development, cybersecurity, and data analytics. We saw an example of a large European bank that is working with Skillsoft to introduce a blended program that leverages Skillsoft's full capabilities of digital learning, live learning, hands-on learning, and skill measurement. This demonstrates our differentiated value proposition to our customers through our multimodal interactive learning experience offerings. Within our TDS segment, we have had 3 consecutive quarters of revenue growth. We believe our value proposition is resonating, especially with customers that are transitioning to become a skills-based organization. One example of this is a leading financial services company that is undergoing a significant strategic evolution aimed at enhancing agility and future readiness. As part of this initiative, they have partnered with Skillsoft to deliver a comprehensive skills development program, leveraging Skillsoft's content, platform, and services to identify and bridge skill gaps across the organization. This effort is key to their vision for a dynamic talent ecosystem, one that prioritizes continuous learning, empowers employees, and strengthens the company's competitive edge in a rapidly changing business landscape. As it relates to our product strategy, we continue to expand our product offerings in the first quarter. Let me highlight a few key examples of how we are delivering comprehensive interactive learning experiences on a global scale for both organizations and learners. First, Skillsoft's Percipio robust AI capabilities continue to build differentiation and strong learner engagement. Skillsoft's CAISY, our award-winning AI-powered coach, is now available for learners in over 40 languages. Our AI assistant is also now localized and available in all languages that our platform supports. Second, Skillsoft's Percipio certification dashboard was released. Clients can now see how many learners are pursuing certifications, how much time it is taking, and the progress each learner is making. Third, in addition to offering a world-class one-on-one coaching experience, our platform allows clients' coaching programs to administer and operate with both internal and external coaches. This Skillsoft coaching platform offering and open approach to learning allows organizations to scale their internal coaching programs through coach selection, scheduling, and dashboards that measure success. Lastly, Skillsoft's Codecademy was a launch partner for uConnect's class module product, which helps students fill skill gaps and gain industry-specific knowledge. uConnect provides career center services for over 400 universities. Codecademy is also evolving to better meet the needs of upskillers with an end-to-end certification hub and granular skill tracking. Collectively, these transformation actions are driving improved financial results and delivering better outcomes for our clients and learners. During this past quarter, we hosted several customer events across the globe with multiple key accounts and prospects. These conversations provided me with further confidence in our business strategy and validate the key actions we are taking. Looking forward to the balance of our fiscal 2026, we are closely monitoring the macroeconomic environment as certain verticals are experiencing heightened customer caution. While we are seeing some elongation in decision-making and softening in discretionary spending, we are continuing to strategically focus our resources in key growth areas. And as John will touch on shortly, we are reiterating our outlook for the full fiscal year. I am confident we will return the company to top-line growth and deliver continued margin expansion this year while generating positive free cash flow. With that, now let me hand the call over to John to cover our financial results in more detail. John?

John Wilbert Frederick, Chief Financial Officer

Thank you, Ron, and good afternoon, everyone. I'm pleased to join today's call as Skillsoft's new Chief Financial Officer. I'm excited to continue working alongside such a talented and dedicated team and look forward to further accelerating our growth transformation. While we're still progressing through our multi-quarter transformation journey, I'm pleased that we once again delivered improved profitability and positive free cash flow. Let me turn to a detailed review of our financial results, starting with revenue. Revenue for Talent Development Solutions, TDS, was $99.1 million in the first quarter, up 1% year-over-year. Our TDS performance continues to benefit from our efforts to capitalize on the evolving market shift from traditional learning and skills development toward more comprehensive talent development solutions. Global Knowledge revenue of $25.1 million in the quarter was down approximately $4.7 million or 15.7% year-over-year. As Ron commented earlier, we saw softer demand within the public sector, which impacted GK in the quarter. We also had a higher mix of reseller business for GK in this quarter, which is recognized net of fees. More importantly, GK remains on track with its transformation journey, and we're excited by our pipeline of opportunities, especially large global public sector deals. Provided the market stabilizes, we expect continued improvement, which should support our goal of returning the total company to growth. Total revenue of $124.2 million in the first quarter was down approximately $3.6 million or 2.8% year-over-year. Our TDS LTM dollar retention rate, or DRR, for the first quarter was 99%. This compares to 100% last quarter and 99% 1 year ago. Now I'll walk through our expenses, which saw a reduction across the board as a result of our cost reduction initiatives that we executed in the back half of last year. Cost of revenue of $32 million for the first quarter or 26% of revenue was down approximately 6.5% year-over-year. These decreases were driven primarily by lower variable costs and the impacts of our cost reduction efforts. Content and software development expenses of $12.9 million in the quarter or 10% of revenue were down approximately 8.4% year-over-year. These improvements were driven by the continued productivity gains we're seeing from our investment to leverage AI. Selling and marketing expenses of $38.4 million in the quarter or 31% of revenue were down approximately 5.5% year-over-year. General and administrative expenses were $18.8 million in the first quarter or 15% of revenue, down approximately 6% year-over-year. Total operating expenses of $102.1 million in the first quarter or 82% of revenue were down approximately $6.8 million or 6.2% year-over-year. Despite the lower revenue base compared to the prior year period, we once again delivered higher profitability. Adjusted EBITDA of $22.1 million or 17.8% of revenue was up $3.2 million compared to $18.9 million or 14.8% of revenue in the year-ago period. Cost reduction efforts in the back half of last year drove further margin improvement in the first quarter. GAAP net loss was $38 million in the first quarter compared to $27.6 million in the prior year. GAAP net loss per share was $4.57 per share compared to $3.42 per share in the prior year. Adjusted net income of $2.5 million in the first quarter compared to an adjusted net loss of $390,000 in the prior year. Adjusted net income per share of $0.30 for the first quarter, compared to an adjusted net loss of $0.05 in the prior year. Moving to cash flow and balance sheet highlights. As we've continuously highlighted, one of our key focus areas is improving free cash flow and getting the company to generate consistent positive free cash flow. In Q1, we generated $31.3 million of cash flow from operations and invested $5.1 million in capital expenditures and capitalized internally developed software, resulting in free cash flow of $26.2 million compared to $10.4 million in the prior year period, an improvement of $15.8 million. While we're encouraged by our strong free cash flow in the quarter, I want to make 2 points as it relates to free cash flow. The first has to do with normal seasonality. Our first quarter is our highest seasonal free cash flow quarter, whereas our second quarter is traditionally our lowest. Secondly, in Q1, we benefited from the timing of collections and certain disbursements, and would expect to see much of that benefit reverse in the second quarter, in fact, causing a cash usage in the second quarter. However, we remain on track for our free cash flow expectations for the full fiscal year 2026. Cash, cash equivalents, and restricted cash was $131 million at quarter end. Total gross debt, which includes borrowings on our term loan and accounts receivable facility, was $580 million at the end of Q1, down slightly from approximately $581 million at the end of fiscal '25. With a strong cash flow performance in the quarter, we kept borrowings on our accounts receivables facility to the minimum amount of $1 million and, in fact, built cash. Total net debt, which includes borrowings on our term loan and accounts receivable facility, net of cash, cash equivalents, and restricted cash, was approximately $449 million, down from approximately $477 million at the end of the fourth quarter. Turning to our outlook for the full year. As Ron already mentioned, we're reiterating our previously communicated guidance ranges for fiscal '26. As a reminder, we expect revenue in a range of $530 million to $545 million and adjusted EBITDA of $112 million to $118 million. We will continue to monitor the current market conditions and the policy changes that could potentially materially impact the business. While we expect to reverse most of our first quarter free cash flow generation in the second quarter and use cash in that quarter, we remain confident in our ability to again drive positive free cash flow in fiscal '26 and reiterate our expectation of free cash flow in a range of $13 million to $18 million for the full year. With that, operator, please open up the call to questions.

Operator, Operator

Our first question comes from Ken Wong with Oppenheimer & Company.

Hoi-Fung Wong, Analyst

Fantastic. John, congratulations on the role, and welcome to the team. I think this question could go to either you or Ron. But you guys called out heightened macro uncertainty, a little erosion on discretionary spend, and longer sales cycles. I guess what are you seeing in the underlying KPI or if there's deals that have closed since the quarter ended that gives you confidence in reiterating that full year target?

John Wilbert Frederick, Chief Financial Officer

Ken, this is John. I'll respond to your question and I appreciate your kind words. I’m excited to be here. I'll provide a broad answer and then go into more detail. In considering our outlook, I've been on the job for about three weeks, and whether we can meet our guidance for the year has been a major focus for me. When I look at our two business segments, I feel good about TDS, which has shown growth for three consecutive quarters. We also had some solid recurring revenue from our Q4 bookings, which boosts my confidence. My focus for answering your question really centers around GK. Last year, we experienced mid-teen declines for the full year, but there was a positive trend in the second half, indicating that the declines were beginning to soften, which provided us with some confidence. However, the market uncertainty in Q1 led to a reversion to last year’s decline rates. Considering the challenges with live learning that Ron mentioned, our performance in GK underscores the strength of our initial strategy adjustments and particularly highlights the resilience of our go-to-market team. When I assess my confidence, I look at our deal pipeline, which is strong in GK with some good recurring relationships providing visibility. If the live learning market stabilizes, there’s a strong case for GK to improve. Overall, assuming the macro market stabilizes, we have decided to reaffirm our P&L guidance.

Hoi-Fung Wong, Analyst

Got it. And in your underlying assumptions, I guess, is there some component of GK is maybe a little worse, TDS a little better? And on the balance, you can arrive at the reiteration? Or is this kind of the business dynamic remains similar to how you were thinking a couple of months back, and hopefully, things stabilize, and then we get there? Does that question somewhat make sense or happy to reword if necessary?

Ronald W. Hovsepian, Executive Chair and CEO

Yes, this is Ron. I’ll briefly add to that. Looking at the business, as John mentioned, discretionary spending was impacted in Q1. I've heard similar feedback from others; there’s significant activity within discretionary spending. Specifically, this relates to our live learning category, which includes GK and our coaching business. These two areas experienced challenges in Q1. However, I want to point out that in the last month of the quarter, we noticed positive trends returning. This is where my confidence comes from, indicating that we are navigating through this situation. I hope that this uncertainty becomes a normal aspect of the market, similar to how we managed with COVID, and that’s my current perspective. This is why we are maintaining our guidance as John indicated.

Hoi-Fung Wong, Analyst

Okay. Perfect. And then Ron, maybe sticking with you, you guys have done a fantastic job in terms of cleaning up the business. It feels like we have stabilized for the most part. What's next? Like how should we think about what's Phase 2 of this process? And any thoughts on how we should think about a timeline there?

Ronald W. Hovsepian, Executive Chair and CEO

This year is incredibly significant for the company. As we progress, it’s crucial to focus on delivering results. Our aim is to increase the growth rate, and I’m enthusiastic about the strategy we’ve developed. After hosting two customer dinners, one in London and one in New York, I've received very positive feedback from the CHROs and Chief Learning Officers of major companies. The London dinner included 15 prospects, and their insights on market trends were encouraging. We need to transform that feedback into our go-to-market and product strategy. Initiatives like Raianne taking charge of marketing signal that we recognize the need for improvement in that area. We didn’t want to rush it before solidifying our strategic approach, which is now defined. Our focus is now on product plans, go-to-market strategies, and enhancing sales coverage. Although building these strategic capabilities may take some time, we are simultaneously laying the foundation while delivering this year’s objectives.

John Wilbert Frederick, Chief Financial Officer

And when you think about how we're sequencing this, and Ron summarized it nicely that we came up with a way to pay for all the transformation efforts that we needed to do. We did that through the resource reallocations last year. That's fully implemented. We're seeing the benefits. You saw that in operating expenses coming down year-over-year. The first half of the year is really all about investing in our go-to-market and products, as Ron discussed. And then in the back half, that's where we start to see the benefits from what should be a multi-year set of benefits from the investments we're making in growth today. So we're really focused on trying to get through this investment phase as quickly as we can so we can have the proper go-to-market coverage, the proper tools in market, the proper marketing, and market to grow revenue.

Hoi-Fung Wong, Analyst

Got it. Got it. And then, John, I wanted to touch on free cash flow. Obviously, a very strong quarter. You highlighted maybe a little bit of kind of collections timing benefited, and you already laid out the 2Q dynamics of reversing. I mean, when we cut through all of that commentary, is the right interpretation that free cash flow was still kind of above expectations? And to the extent that it was, maybe help us think through some of the moving pieces besides the kind of the earlier collections that might have caused that? Was it bookings upside? Was it just more aggressive spend management? How should we think through, like what the back half could look like as we lap that 2Q downtick seasonally?

John Wilbert Frederick, Chief Financial Officer

Yes, that's an excellent question, Ken. If you consider the seasonality of our bookings, TDS typically sees 45% to 50% of its fourth-quarter bookings collected in Q1. There is significant seasonality involved. I would say our cash collections performed exceptionally well this quarter, really outstanding. Looking ahead, it will likely be challenging to replicate that performance. Regarding our disbursement timing, we experienced some large payments that went out in the early weeks of May, which impacted our timing on that front. As we progress through the year, I mentioned that some of this will reverse in Q2. When we provide guidance at $13 million to $18 million, that suggests we will need to utilize cash for the remainder of the year. The positive aspect is that we have collected cash upfront, allowing us to manage business operations with that cash as the year goes on. The significant bookings in Q4 were indeed the main driver behind our strong Q1 results.

Hoi-Fung Wong, Analyst

Okay. Understood. And then perhaps just a little context on the government business. I think that seems to be kind of one area that you called out maybe seeing a little more softness than anticipated. Any context you can provide us? Has that started to pick back up now that maybe DOGE is no longer a thing or maybe it still will be. But what might have been the contributors to that slower government spend and how we should think about it going forward?

Ronald W. Hovsepian, Executive Chair and CEO

There are two aspects to the government journey that we've discussed, one of which is DOGE. The first aspect was the executive orders we've previously talked about. Currently, we are not observing a significant impact on our overall revenue from this. However, we did notice some effects in the Fed space, particularly where discretionary spending affected our live learning segment, significantly due to the federal sector in the U.S. On the other hand, we've seen positive activity in Europe’s public sector, indicating a growth in that area this quarter. For now, our position regarding the executive orders seems stable. Regarding the workforce reduction, we are still evaluating the situation as it evolves, given its fluidity in regards to the number of government employees. We are closely monitoring this and maintaining a steady approach until we gain more clarity. Government operations are substantial in our business, and while it is an important segment for us, we are not overreacting; we are staying steady and observing carefully. The discretionary spending was primarily what affected our revenue, and the impact from DOGE is still to be determined.

John Wilbert Frederick, Chief Financial Officer

It's also interesting to note the pressure we observed on discretionary spending, including the coaching aspect of the business. Despite these pressures, TDS still managed to achieve growth independently. This highlights its resilience. While we are looking at a full year of performance, it's both interesting and reassuring to witness the strength of that business.

Hoi-Fung Wong, Analyst

Last thing for me, I don't want to completely monopolize the time today. John, obviously, you've been here before. You're now taking the rank in the CFO seat. Anything that you're specifically focused on? Any either changes, improvements that we can expect now that you're helming the finance office?

John Wilbert Frederick, Chief Financial Officer

So I think there's kind of a broader conversation around the company around transforming the business, around getting everything aligned and organized really to work as an integrated unit across the company. So that integration piece is going to be something that the team has already heard and that we're all working together to try to drive, which is to say we want to infuse finance into every decision that we make in the company, but do it in a way that connects with what we have to do from a go-to-market and from a product perspective. So just absolutely everything that we do is going to be go-to-market driven with us acting as a support feature to the team.

Stephen Poe, Investor Relations

Operator, I believe that is it for our analyst.

Operator, Operator

Great. And I'd like to pass it back to Ron Hovsepian for closing remarks.

Ronald W. Hovsepian, Executive Chair and CEO

Thank you. I appreciate everyone. As I reflect on the first quarter and look ahead to the second quarter, it was an interesting time given the market signals we received, particularly due to the macroeconomic uncertainties. That said, I believe the business performed quite well. There are areas for improvement, and we are actively working on those. Our go-to-market strategy remains our top priority, as John emphasized, and we will continue to focus on that throughout the year. John mentioned several investments that we expect to yield benefits in the third and fourth quarters, and I am enthusiastic about what I see in those areas, both in terms of recruiting and customer responses. With that, we will return to work on the second quarter, and I appreciate your attention. We'll talk soon. Thank you.

Operator, Operator

Thank you. And with that, this does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time.