Skillsoft Corp. — Q2 FY2024 Form 10-Q
Reporting period: Three and six months ended July 31, 2023; comparisons are to the corresponding 2022 periods. Amounts are in U.S. dollars unless stated otherwise. The financial statements are unaudited.
Business context
Skillsoft provides enterprise learning content, SaaS learning platforms and instructor-led technology training. Its reportable segments are Content & Platform and Instructor-Led Training. Results reflect continuing operations; SumTotal was sold in August 2022 and is reported as discontinued operations in the prior-year comparison.
Financial performance
| Metric | Q2 FY2024 | Q2 FY2023 | Six months FY2024 | Six months FY2023 |
|---|---|---|---|---|
| Revenue | $141.2 million | $140.6 million | $276.7 million | $275.4 million |
| Operating loss | $25.3 million | $110.8 million | $60.7 million | $156.0 million |
| Net loss | $32.0 million | $121.5 million | $76.2 million | $143.1 million |
| Loss per share, basic and diluted | $0.20 | $0.74 | $0.47 | $0.93 |
| Cash from operating activities | — | $2.0 million | $(13.0) million |
Revenue increased 0.4% in Q2 and 0.5% for the six-month period. Approximate gross margin, calculated as revenue less cost of revenues, was 71.3% in Q2 versus 75.1%; for the six months it was 71.7% versus 73.5%. The filing does not present a separate adjusted or non-GAAP margin in the supplied text.
- Revenue mix: Q2 SaaS and subscription revenue rose 4% to $98.0 million; Instructor-Led Training revenue fell 9% to $38.0 million. For six months, subscription revenue increased 7% to $191.9 million and Instructor-Led Training declined 14% to $75.0 million.
- Segment results: Q2 Content & Platform revenue was $103.2 million, up from $98.8 million; its operating loss narrowed to $18.9 million from $37.8 million. Instructor-Led Training revenue was $38.0 million, down from $41.8 million; its operating loss narrowed to $6.4 million from $72.9 million.
- Balance sheet and liquidity: Cash and cash equivalents were $147.9 million, down from $170.4 million at January 31, 2023; restricted cash was $4.9 million. Current assets of $312.4 million were below current liabilities of $343.4 million. Deferred revenue was $226.6 million, down from $282.5 million.
- Debt: Term-loan principal was $597.8 million, with $6.4 million classified as current; an additional $40.1 million was drawn under the accounts receivable facility. The term loan matures in 2028, bears variable interest, and had a stated SOFR-based margin of 5.25% plus the applicable credit premium. The company reported compliance with debt covenants.
- Cash flows and investment: Six-month investing cash outflow was $14.5 million, including $6.0 million of capitalized software costs; financing cash outflow was $11.7 million. Cash, cash equivalents and restricted cash decreased by $24.7 million to $152.8 million.
Changes versus prior period
- Operating and net losses improved substantially, partly because the prior-year quarter included a $70.5 million goodwill impairment charge. Lower acquisition-related costs and the absence of prior-year SumTotal discontinued-operations income also affect comparisons.
- Content & Platform growth was offset by weaker Instructor-Led Training, which management attributed mainly to changes in training programs at two large technology partners during fiscal 2023.
- Interest expense increased to $16.3 million in Q2 from $11.5 million, and to $32.2 million for six months from $23.0 million, reflecting higher rates and, for the six-month comparison, additional acquisition-related borrowing.
- Operating cash flow improved from an outflow of $13.0 million to an inflow of $2.0 million, primarily due to working-capital changes.
Outlook, risks and unusual items
- Management said available internal and external liquidity was expected to fund operations and anticipated needs for at least the next 12 months. The filing provides no specific revenue, earnings or cash-flow guidance.
- Management reported no impairment indicators from its six-month qualitative assessment, but warned that higher discount rates, weaker market inputs, lower profitability expectations or a prolonged gap between estimated reporting-unit fair value and market capitalization could prompt further impairment reviews and possible charges in fiscal 2024.
- Interest-rate exposure remains material: a hypothetical 100-basis-point rate change was estimated to affect annualized pretax interest expense by approximately $3.5 million, after considering swaps. Swaps covering $300 million of variable-rate debt are not designated for hedge accounting; Q2 and six-month results included noncash gains of $6.9 million and $7.2 million, respectively.
- Restructuring charges were $2.5 million in Q2 and $7.7 million for six months, primarily severance, with six-month charges also including $4.4 million of lease termination and impairment costs. The company reported no material litigation accruals and did not expect known proceedings to materially affect its financial position, results or cash flows.
- The $30 million share-repurchase authorization expired September 7, 2023. No shares were repurchased during Q2; $8.0 million of repurchases had occurred in the six months ended July 31, 2023.
- Management concluded disclosure controls were effective as of July 31, 2023. It said it continued to evaluate remediation of a previously identified material weakness.
Investor verification priorities
- Assess whether subscription growth can offset continued Instructor-Led Training weakness and pressure on gross margin.
- Review debt terms, variable-rate exposure, facility availability and covenant headroom, particularly given the current-liability shortfall versus current assets.
- Monitor cash generation, deferred-revenue trends and the use and availability of cash, including restrictions associated with prior SumTotal sale proceeds.
- Track impairment assumptions and potential further charges, as well as the costs and expected benefits of restructuring and integration efforts.
- Check the full filing and subsequent disclosures for developments in the previously identified internal-control weakness and other risk factors.