Release Date: September 17, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Adjusted EBIT increased by 5%, indicating improved profitability.
- Margins have modestly increased and are expected to continue trending upwards.
- Strong cash generation has resulted in negligible net debt as of August 2024.
- All major contracts above $5 million were successfully renewed in H1 2024.
- Continued investment in AI and positive feedback from AI-enabled products like ContentAIQ.
Negative Points
- Organic revenue declined by 3.8% on a constant currency basis in the first half of 2024.
- Softness in SaaS subscriptions and transactional revenues, particularly in Content & Services.
- Higher-than-expected churn in PeopleFluent and lower revenue in Reflektive.
- Challenges in winning new customers for GP Strategies, with significant revenue reduction in US government contracts.
- Regulatory issues with the US Defense Counterintelligence and Security Agency (DCSA) affecting classified contract work.
Q & A Highlights
Q: How do you plan to stem the decline in software? Are there any remedies at PeopleFluent or shall we assume this is going to continue?
A: Good morning, Kai. I think I might have touched on it already. Yes, we've seen a greater decline in PeopleFluent in H1. We don't think necessarily that will continue at the same pace in H2. We are implementing a major product revamp initiative using new technologies. This will likely improve retention more than new sales, but we are targeting both. PeopleFluent is still a large revenue base, and we believe it will stabilize around $30 million.
Q: Is the US regulatory issue affecting current revenues, or is it just preventing new contracts? Could a resolution here be positive for growth next year?
A: We are de-authorized from winning new classified work and are not bidding for it. However, existing classified customers continue to work with us. The timing might be helpful as there is a general slowdown in new government work. We hope to be validated in our new government subsidiary by next year, which would allow us to pursue new opportunities.
Q: Have you considered a share buyback over potential M&A given the low valuation of your shares?
A: We now have the mandate to do a share buyback, which we did not have until the AGM in May. Our priority was swift deleveraging, and we have achieved that with GBP1 million of net debt as of the end of August. While we are considering share buybacks, we would feel less comfortable using debt to purchase our own shares. However, if we are net cash, share buybacks will be more towards the top of the agenda.
Q: Can you provide more details on the AI initiatives and their impact on the business?
A: We are making significant investments in AI across various products. For example, ContentAI is curating and analyzing content for customers, and we are rolling it out faster than expected. We are also developing AI tools to assist with skills identification and gap analysis. These initiatives are receiving positive feedback and are expected to drive future growth.
Q: What are the main challenges and opportunities you see in the current macro environment?
A: Inflation and cautious spending are affecting budgets, especially in discretionary areas like DE&I training. We are also impacted by global growth trends and the uncertainty around AI. However, there is a strong demand for upskilling and reskilling, and industries undergoing significant change, like automotive and energy, are driving learning requirements. We are well-positioned to capitalize on these opportunities as the environment improves.
Q: How is the performance of your different business segments, particularly Content & Services and Software & Platforms?
A: Content & Services saw a 2.9% revenue decline due to the challenging macro environment, but we renewed all major contracts above $5 million. Software & Platforms experienced some softness in SaaS subscriptions, but Rustici continues to perform strongly. We are focused on cost optimization and AI investments to drive future growth.
Q: Can you elaborate on the restructuring of GP Strategies and its impact?
A: We are creating a government subsidiary within GP Strategies to comply with US regulations. This will separate government work from commercial work, reducing regulatory burdens on the commercial side. The restructuring will have modest cost implications but will allow us to focus on growth opportunities in both segments.
Q: What is the outlook for the rest of the year and beyond?
A: We have adjusted our guidance due to FX headwinds and some adjustments in GP's expectations. We expect to trend towards the bottom end of the EBIT range. We remain focused on portfolio management and deleveraging. With negligible net debt and strong cash generation, we are well-positioned for future growth as the macro environment improves.
Q: How are you addressing the challenges in the US government contracts?
A: We are working closely with the DCSA to resolve issues related to foreign ownership and data access by foreign nationals. We are moving federal contracts to a new government-approved ERP system and creating a separate government subsidiary. This will allow us to comply with regulations and focus on growth opportunities in the government sector.
Q: What are the key drivers for future growth in your business?
A: Key drivers include AI initiatives, geographic expansion, and cross-selling opportunities. We are investing in AI to enhance our products and services, which is receiving positive feedback from customers. Our global footprint allows us to serve multinational organizations, and we are focused on cross-selling to existing clients. As the macro environment improves, we expect these drivers to contribute to significant growth.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
