Sometimes, boring is better. If you follow me on twitter you’ll know that over the past week I’ve been talking about the soon-to-be-public company Skillsoft, which recently announced a deal with Churchill Capital Corp (CCX), a spac. As this deal is not related to EV / batteries / sustainability, CCX shares basically went nowhere. I believe this creates an attractive opportunity to acquire a position in a profitable company which a much improved balance sheet on the brink of accelerating growth.
Skillsoft is an eLearning company focused on corporates. The company’s offering is very broad, with over 180,000 (online) courses, books and related materials. 90% of this content is proprietary. The (e)learning space is generally split in four learning categories, which are also Skillsoft’s business units: Leadership, Business Skills, Tech. & Dev. and Compliance. Skillsoft is either the #1 or #2 player in each category. Competition is plenty and generally category specific, as companies tend to focus on one of the business segments. Some known competitors are Harvard Business Publishing, LinkedIn Learning, Pluralsight and CornerStone.
(e)Learning companies have been gathering plenty of interest over recent years. One reason has been the consolidation of the market, as many smaller players got acquired by larger participants in order to expand their product offering and become more of a one-stop-shop. The main reason however is digitization. Where learning companies used to provide in-house and/or on-site classes, the industry has quickly moved online. In addition, moving towards digital and subscription-based revenues results in much improved financials, with a more recurring, visible revenue stream and much higher margins. While traditional learning companies have ~10% ebitda margins, eLearning companies are able to generate >30% ebitda margins.
This transition to online has obviously been noticed by incumbents and recognized both as a threat to their legacy business as well as an opportunity. New entrants such as Learning Technologies (LTG) have grown rapidly and taken market share, while legacy players have seen top-line growth slow down and margins deteriorate. As such, larger incumbents have been acquiring companies and assets like crazy, sometimes in desperation, trying to compensate and adapt to the new environment.
Skillsoft applied the latter strategy, and that worked out so well that earlier this year they filed for bankruptcy after accumulating $2bn in debt. It was a combination of ‘too much’ and the covid-crisis, which sent companies‘ budgets into lock-down and caused income to dry up while interest and debt were still due. After just a couple of months, Skillsoft emerged from bankruptcy with the lenders now as new owners, a much improved balance sheet where debt had been reduced by $1.5bn (to ~$500m net debt) and new management.
In the meantime, Skillsoft continued its transformation. In the past, all clients where onboarded onto Skillport, Skillsoft’s 20 year old legacy platform from a time when physical classes and content where the standard. During this year, Skillsoft has continued to migrate clients onto its new digital platform Percipio. Percipio was built from scratch specifically focused on eLearning and is an open, cloud-based platform which provides much more flexibility and many more features. Users experience is much improved compared to the legacy platform; Percipio delivers four times the learning engagement and retention rates are ~100%, compared to ~70% for Skillport.
Importantly, revenue is subscription-based and marginal ebitda has >30% margins. Today, ~2/3 of revenue is already subscription based. Generally, as a company moves to subscription-based revenues, margins are impacted in the short-term, as revenue is recognized over the lifetime of the contract (instead of at signing) while costs remain more or less the same. Skillsoft has seen this impact as well and ebitda margins are now poised to strongly increase over the next few years, from ~23% currently to >35% in the next five years.
In addition to listing via a spac, CCX also acquired Global Knowledge which will be merged with Skillsoft. Global Knowledge is a leader in IT training which today is almost entirely virtual and on demand. Bringing both companies together in Tech. & Dev. will make Skillsoft the #1 in the sector and will add a sales team of 300 focused on Tech. & Dev. This combination will result in both revenue and cost synergies.
So we have a company which has very recently been restructured, with a clear path to much improve its financials and on the verge of accelerating growth. Based on this, management provided the following guidance, which to me seems reasonable.
2020 will be a transition year, due to the continued migration to Percipio. By the end of this year ~75% of business will be on Percipio and dual migration (clients that are still on both). ~25% of the business will still be on Skillport, which has a much lower retention rate (70%), so Skillsoft will still experience some leakage. 2021 will see full conversion to Percipio and by 2022 Skillport is expected to be retired.
In short, growth in the short term will be the consequence of:
- Continued transition to Percipio (with a lift in retention rates)
- New revenue on Percipio platform, much due to a new and improved sales team focused on new customer acquisition (instead of retention)
- Revenue and cost synergies resulting from the integration of Global Knowledge
- The lapping of covid, which will provide good yoy comparables
2021 revenue will be slightly lower due to the continued move towards subscriptions. 2022 is expected to see an initial acceleration of growth in the MSD range resulting from this transition. From 2023 onward, top-line growth will accelerate towards ~10%. ebtida growth will follow, in the short term due to synergies and longer term due to higher margins from digital and revenue based subscriptions.
Longer term, growth will come from:
- The impact of more visible subscription revenue
- Higher organic growth, as new offerings are easier to add on the Percipio platform
- Acquisitions, with a particularly focus on new content
On the last point, including a $530m investment (~30% of co.) from tech-investor giant Prosus (PRX), Skillsoft will list at <1x net debt/ebitda, with a target range of 3.5x-4.5x at some point in the future. In addition to the cash flow Skillsoft will generate, this is a lot of fire-power for add-on acquisitions.
To make a long story short, Skillsoft now has moved most of clients to Percipio, has already 2/3 of revenues coming from subscriptions, ~23% ebitda margins and very little debt. Growth will accelerate and visibility will improve. >30% margins (peers have >35% margins) and 80% free cash flow conversion in three years is not a stretch. ebitda could easily CAGR at 15%-20% over the next five years.
Based on 2022 (31/01/2023) revenue and ebitda estimates, Skillsoft will list at ~2.5x 2022e ev/revenue and <8x 2022e ev/ebitda. This is cheap in absolute terms, particularly if you take into account that ebitda growth after 2022 should be >15% p.a. Also, these are much lower multiples compared to peers and almost half the multiples of CornerStone, which is very levered after recent m&a and will face some years of integration and stagnating revenue and ebitda growth. Cornerstone currently trades at ~4.5x 2022e ev/revenue and ~13x 2022e ev/ebitda. To provide some perspective on the potential, Learning Technologies – which already reached ~10% top line growth and 35% ebitda margins – is trading at ~8x 2022e ev/revenue and ~22x 2022e ev/ebitda.
We can buy an already cash generative company, currently at through earnings, right before an inflection point and at very attractive multiples. CCX shares could double over the next few years and warrants much more. The deal is expected to close by end of January.
* To note. Determining the number of shares outstanding after a spac transaction is always a bit complicated, given public and private warrants, earn-outs, etc. CCX provides us with a neat overview on p.32 of their presentation.
The Skillsoft presentation.