Skillsoft Corp. — Q3 FY2023 Form 10-Q
Business context and reporting period. The unaudited quarter ended October 31, 2022; fiscal 2023 year-to-date covers the nine months ended that date. Skillsoft provides enterprise learning through Skillsoft/Percipio, Global Knowledge and Codecademy. SumTotal was sold on August 15, 2022 and is presented as discontinued operations. Comparisons are affected by acquisitions, the SumTotal disposal and successor/predecessor accounting; year-to-date comparisons are not fully like-for-like.
Key financial metrics
| Metric | Q3 FY2023 | Comparable period |
|---|---|---|
| Revenue from continuing operations | $139.4 million | $140.2 million; down 0.5% |
| Gross profit and margin | $102.7 million; 73.7% | $101.1 million; 72.1% |
| Operating loss | $608.7 million | $10.4 million |
| Loss from continuing operations | $583.3 million | $48.8 million |
| Net loss | $528.3 million | $42.9 million |
Q3 operating results included a $570.9 million goodwill impairment. The quarter also included a $53.8 million preliminary gain on the SumTotal sale, $9.1 million of warrant fair-value gains and $20.3 million of interest-rate-swap fair-value gains. These items substantially affect reported earnings; the swap is not designated for hedge accounting.
- Revenue mix: SaaS subscription revenue was $93.1 million, up 12.8%. Global Knowledge revenue, primarily instructor-led training, was $41.4 million, down 22.1%. Management attributed the overall revenue decline mainly to Global Knowledge.
- FY2023 nine-month results: Revenue was $414.8 million; operating loss was $764.7 million; continuing-operations loss was $733.7 million; and net loss was $671.5 million. The filing’s prior-year periods are not directly comparable because they cover different successor and predecessor intervals. Pro forma continuing revenue was $422.9 million versus $440.6 million for the comparable nine-month period; pro forma continuing net loss was $100.5 million versus $111.8 million.
- Cash flow: Nine-month operating cash use was $23.6 million, investing cash use was $40.2 million and financing cash provided was $83.7 million. Investing cash flows included $172.0 million of net SumTotal sale proceeds and $198.8 million paid for Codecademy. Cash, cash equivalents and restricted cash ended at $182.0 million.
- Liquidity: Cash and cash equivalents were $174.7 million; restricted cash was $7.3 million. Current assets were $322.5 million and current liabilities $329.4 million. The company reported $41.5 million drawn under its accounts-receivable facility.
- Debt: Term-loan principal was approximately $602.6 million, with $589.3 million in total current and long-term carrying value after discounts and financing costs. Including accounts-receivable-facility borrowings, carrying debt was approximately $630.7 million. Term loans mature in 2028; $575.4 million of scheduled principal is due thereafter. Interest expense was $14.6 million for the quarter and $37.5 million year to date.
Material changes versus prior period
- Q3 revenue was nearly flat, as 12.8% growth in SaaS subscriptions was offset principally by the 22.1% decline in Global Knowledge revenue.
- Global Knowledge’s instructor-led training business faced weaker bookings and revenue. Management cited customer caution amid recession concerns, sales-capacity challenges and changing post-COVID training preferences.
- Goodwill impairment charges were $70.5 million in the quarter ended July 31, 2022 and a further $570.9 million in the quarter ended October 31, 2022; nine-month impairment totaled $641.4 million. Goodwill declined to $462.1 million from $795.8 million at January 31, 2022.
- SumTotal sale proceeds were $180.0 million net, with $8.0 million reserved for working-capital contingencies. The company made a required $31.4 million debt prepayment; the remaining $140.6 million is subject to reinvestment provisions and generally cannot be used for general corporate purposes.
- Codecademy was acquired in April 2022 for approximately $386.0 million, funded with cash and shares, alongside additional term-loan borrowing. The acquisition added 30.4 million shares.
Outlook, risks and unusual items
- Management said it expects available internal and external liquidity to fund operations and anticipated needs for at least the next 12 months and the foreseeable future. It expected qualifying expenditures to avoid an additional mandatory prepayment from remaining SumTotal proceeds. No quantified revenue or earnings guidance is provided in the filing text.
- The company fixed the cash interest rate on $300 million of variable-rate debt at 8.94% through interest-rate swaps, according to management. The swaps mature in June 2027.
- Management lowered projected operating results in its impairment analysis, citing foreign-exchange effects, Global Knowledge underperformance and macroeconomic uncertainty. A substantial stock-price decline, lower market multiples and higher discount rates also contributed to impairment testing.
- Risks include economic weakness and reduced corporate spending, continued Global Knowledge weakness, integration and acquisition execution, significant indebtedness and restrictive covenants, foreign-exchange movements, and the possibility of further impairment. SumTotal’s preliminary sale gain remains subject to post-closing adjustments.
- The company was in compliance with debt covenants at October 31, 2022. Management reported effective disclosure controls and no material change in internal control over financial reporting. A putative stockholder lawsuit related to the Codecademy proxy statement was dismissed; the company reported no material legal proceedings.
- The board authorized up to $30 million of share repurchases through September 7, 2023. The company repurchased about 645,000 shares for $1.4 million during the quarter; the program is discretionary and may be suspended or ended.
Important facts for investors to verify
- Whether Global Knowledge bookings and instructor-led training revenue stabilize, and whether SaaS growth continues to offset that weakness.
- The assumptions and sensitivity underlying the $641.4 million year-to-date goodwill impairment, including future cash flows, market multiples and discount rates.
- Cash generation, working-capital trends and the availability and cost of borrowing under the accounts-receivable facility.
- Use and timing of the restricted $140.6 million of remaining SumTotal proceeds, and any final sale-price or working-capital adjustments.
- Debt repayment capacity, interest costs and compliance with credit-agreement covenants as maturities and cash needs evolve.
- Codecademy integration progress, acquisition-related costs and any eventual contribution to growth or profitability.