Description

Brief History

Skillsoft participates in the corporate learning space and first IPO'd in 1999.  It was sold to Berkshire Partners in 2010 and was again sold to Chartherhouse Capital Partners for US$2.0 Billion on April 28, 2014.   Later that year, Skillsoft acquired Sumtotal Systems.

Not long after in 2015, Skillsoft experienced a revenue decline as competition increased.  Due in part to Skillsoft’s overleveraged balance sheet and high debt servicing costs, the company was unable to fully invest to keep up with venture-backed competitors like Degreed and Pathfinder, ultimately leading it to cede market share. Those companies focused more on user engagement and new features like badging which eroded the user base of Skillsoft's Skillport product. Fast forward to 2020 with Skillsoft having invested $75mm in a new Percipio platform over a 3 yr period and proactively addressed its leverage issues.

SPAC deal (June 2021 transaction) with solid, committed partners

Skillsoft came public again recently via special purpose acquisition company (SPAC) Churchill Capital II, which raised $690mn at $10/unit in its IPO in June 2019. In October of 2020, Churchill Capital II announced its agreement to merge with Skillsoft for $1.3bn and concurrently acquire Global Knowledge for $233mn, for a total transaction value of approximately $1.5bn. Churchill partnered with Prosus, a global consumer internet group and large technology investor, which invested $100mn in the PIPE and later invested an additional $400mn after receiving CFIUS regulatory review clearance. Lodbrok Capital LLP also committed $20mn via PIPE investment, and funds affiliated with Rhone Capital (previous owner of Global Knowledge) agreed to invest $50mn in Class A shares at $10/share. Both Churchill Capital II and Prosus received board representation following the transaction, with Prosus Group COO Patrick Kolek serving as Chairperson.

Attractive business profile:

74% of CEOs are concerned about key skill availability and believe that 40% of workers will require up to six months of reskilling by 2025. This seems particularly true in the age of work from home.

Salient Skillsoft highlights:

90% subscription revenue

Presence 70% of Fortune 500 companies

45mm learners

180k+ content assets

98% revenue from business customers

Low Capex (<3% of revenue; approx $25mm/yr to refresh content)

Here is the link to the most recent presentation:

https://d1io3yog0oux5.cloudfront.net/_6cdbc9e50be0c67fbca3352a48cb4b5f/skillsoft/db/1155/9708/presentation/Skillsoft+Investor+Presentation+-+9+14+21+-+FINAL.pdf

Percipio migration has a good chance of accelerating top and bottom line growth

Most recent metrics show 100k active users, 3,000 companies live on the platform, 4x more learning hrs than legacy platform, 11M badges issued, 100% dollar retention rate.

Skillsoft has been ramping up its sales efforts and has added 20 new direct salespersons, leading to

a total of approximately 600 salespersons following the Global Knowledge acquisition.

Previously, the company’s sales force was almost entirely focused on renewals, resulting in lost opportunities to acquire new logos. It is logical to expect some cross-sell opportunities between the Skillsoft Content and Global Knowledge

segments, along with cost synergies that will aid growth and profitability.

The most recent call indicated Skil is on track to complete the Percipio migration by YE2022

Percipio margins are higher than legacy Skillport's so margins should eventually move upward once the heavier investment period slows down.  Skillsoft EBITDA margins were in the 40% zone when the company was private so there is plenty of upside from Q2' 2022 levels of 24%.

Other paths to value creation

SumTotal Systems is an LMS (learning management system) and human capital management (HCM) software company that helps companies with recruiting, onboarding, performance, compensation and analytics.  SumTotal also offers compliance, digital transformation, and career planning & development services primarily to the financial services, public sector, healthcare and manufacturing industries for both SMB and enterprise customers. The company has 3,500+ customers, including American Airlines, Edward Jones, and 3M, 49mn users on its platform and total revenue of approximately $100mn in 2021.

One could argue that this is a non-core asset as it was acquired under previous management and when the Percipio strategy had not been fully developed.  I estimate that it could be sold for anywhere between $60-120mm based on comparable EBITDA margins (discount to CDAY which is the blue chip name in the space) and private transaction revenue multiples.  The Median multiple in the space was 4.9x revenue (according to a 2019 Houlikan study) with higher mutilpes correlated with higher revenue growth.  Since Sumtotal looks flattish to slightly down , I am assuming a much lower than average multiple.  I estimate that would take down more than a half turn of EBITDA leverage even with the dilution and should help the multiple on the remaining faster growing businesses. 

Accretive M&A opportunities: Fragmented e-learning space offers plenty of opportunities to roll up assets.  There are 1000 companies with less than $100mm in revenue.

Recent acquisition Pluma provides live one-on-one coaching and is growing quickly. Seems like good synergistic deal but likely has 3-5 year investment horizon to become meaningful.

Recent results have been positive (unlike many Spacs out of the gate)

Skil raised bookings and revenue guidance twice since the SPAC deal was announced

18% bookings growth with good momentum

104% dollar retention rate greater than Skillport legacy product

Global Knowledge rebounded sharply in Q2 with 30% bookings growth and a favorable business mix weighted towards  virtual versus classroom revenues

Outlook constructive:

$700mm bookings

$165mm 2022e EBITDA

Recent insider buying under $11

Attractive Capital Structure provides flexibility for capital allocation

$376mm net debt, 2.3x 2022e EBITDA

Cheap Valuation for high-quality, growing business

Earnings understate cash flows given the high intangible amortization.  Trades at 12x 2023e FCF of $.96/share and close to 2.5x revenues while Pluralsight and Cornerstone were taken out at 7x revenue and 6x revenue respectively and the former had negative FCF.

2 Yr base case model                  FY 2022e    FY2023e   FY 2024e

Revenue                                     $650          $670        $705

Ebitda Margin                              25.4%       26.1%       28.4%

FCF/share*                                  $.90          $.96          $1.10           

*Shares Outstanding at various share prices based on warrants:

Public shares Total shares

$10.00 34.3 133.1

$12.00 35.3 135.6

$14.00 38.4 144.1

$16.00 40.8 150.5

$18.00 42.6 155.4

$20.00 42.6 156.9  

Target of 15x FCF ($16.5) is not unreasonable for an accelerating SAAS business that is profitable.  That would still be an EV/Revenue multiple much lower than comparables.  

Risks

Free services like Google Career Certificates and Coursera could threaten the pricing power of paid platforms. Skillsoft’s breadth of offerings offer some protection from that threat as internally developed content assets (30% of total) have driven the vast majority of platform usage, 

Sources:  Company reports/website.  SEC filings.

Catalyst

Acceleration in revenue growth

Accretive M&A

Potential sale of non-core assets