SKIL - Skillsoft: Very Cheap Digital Learning Play

Summary

• Skillsoft Corp. offers courses and content, online educational software, and platforms with pre-recorded materials and live classes.
• I assumed that the current Skillsoft Corp. business strategy will likely be successful, including inorganic growth, enterprise subscriptions, and other opportunities.
• If Skillsoft successfully signs more partnership agreements with third parties, and the restructuring efforts are beneficial, future growth will likely bring the stock price up.

Digital learning player Skillsoft Corp. (SKIL) has global presence, and is currently integrating several acquisitions, which may bring significant free cash flow ("FCF") generation. In my opinion, if management continues to sign new agreements with content creators, and more targets are acquired, the fair price is worth much more than the current market price. There are risks from failed restructuring, strategy, and M&A integration, however the stock price appears too low.

Skillsoft's Business Model

With active operations in more than 160 countries and more than 90 million users globally interested in its digital learning course offerings, Skillsoft Corp. appears as one of the business leaders in the industry.

Skillsoft offers courses and content, online educational software and platforms with pre-recorded materials and live classes, and personalized planning and design for its client corporations, facilitating educational paradigms at the inner core of companies besides professional training for their employees.

Its learning area is divided into five large branches: Percipio, Global Knowledge, Codecademy, Pluma, and SumTotal. All of them are aimed, in different ways, at digital education, be it the design of software, technical and personalized support for professionals, or education for companies in relation to the future of teaching and professional training in the digital field.

Massive Target Market

I believe that Skillsoft will likely benefit from the increase in target market. For the next few years, the digital learning industry is expected to report 10% compound annual growth rate through 2025, evidencing the rise and favorable projection for Skillsoft.

Skillsoft's clients include Fortune 1000 corporations, government agencies, small corporations, and individuals, who take the courses of the company currently available in more than 25 languages ??throughout the world. Hence, the target market for many of the courses is pretty large. Although each segment of its business model has its particularity in relation to the offer of services, Skillsoft acquires immediate profits for each course sold as well as downloading the company's content.

Skillsoft Appears To Have A Stable Balance Sheet

As of October 31, 2022, management reported cash worth $174.708 million, accounts receivable worth $102.440 million, prepaid expenses of $38.027 million, and total current assets of $322.497 million. Goodwill stands at $462 million, with intangible assets of $769 million and total assets of $1.59 billion. The asset/liability ratio stands at close to 1.49x, so I would say that the balance sheet appears quite stable.

Regarding the liabilities, SKIL reported borrowings worth $41.461 million with accounts payable of $20.950 million accompanied by accrued expenses of $31.578 million. Deferred revenue stands at $197.907 million with total current liabilities of $329.429 million.

Long term debt stands at $582.870 million, with deferred tax liabilities worth $77.055 million and long term lease liabilities worth $11.979 million. Other long term liabilities stand at $17.410 million, and total long term liabilities are worth $692.097 million.

Analysts Expect A FCF Margin Close To 8.49% And 21% EBITDA Margin

I believe that mentioning some 2023 outlook figures would interest investors. They seem beneficial. In the last quarterly report, Skillsoft reported guidance of $598 million in bookings and an adjusted EBITDA close to $115 million.

Analysts expect 2025 net sales to be close to $571 million accompanied by a net sales growth of 5.16%. In addition, 2025 EBITDA would be close to $130 million with an EBITDA margin of 22.77%. 2025 Operating profit would stand at -$42.3 million with an operating margin of -7.40%. Finally, 2025 pre-tax profit would be -$89.6 million with a net income of -$51 million.

I appreciate quite a bit that analysts are expecting net income growth, however the best in my view is the free cash flow. Expectations include free cash flow of $62.2 million by 2025 and a FCF margin of 10.89%.

Best Case Scenario

Skillsoft's growth strategy is based on three main pillars: new learning platforms, content creation, and going to market. The latter includes the purchase and acquisition of other products as well as small companies. Under this case scenario, I assumed that the current business strategy will likely be successful including inorganic growth, enterprise subscriptions, and other opportunities. In line with this rationale, one of the most relevant slides I have seen from Skillsoft is the following.

With regards to previous M&A operations, let's note the acquisition of Codecademy in 2021 for close to $386.0 million including a net cash payment of $198.6 million. I am optimistic about this deal, because the target appears innovative and offers courses for students in a promising industry.

On December 22, 2021, the Company announced a definitive agreement to acquire Codecademy, a leading online learning platform for technical skills. Source: 10-Q

The Codecademy acquisition closed on April 4, 2022 for total consideration of approximately $386.0 million, consisting of the issuance of 30,374,427 common shares and a net cash payment of $198.6 million. Source: 10-Q

Under my best case scenario, I assumed net sales growth of 4%, an EBITDA margin of 21%, a FCF margin close to 8%, and a WACC of 9%. The net present value of future free cash flow would stand at $342 million. Also, with a 2032 EV/EBITDA multiple of 7.2x, the terminal value would stand at $1.1 billion, and the net present value would be $440 million. Moreover, the implied enterprise value would be $783 million, and the equity valuation would be $335.1 million. Finally, the fair price would be $2 per share with an IRR of 5.03%.

More Goodwill Impairments Or lack Of Partnership Agreements With Content Creators Could Bring The Fair Price To Around $1.125 Per Share

Even though it demonstrates a large-scale solvency and an absolutely scalable business aligned with the needs of current users, educators, and professionals, Skillsoft has to get involved in the risk factors typical of this type of market.

First of all, as stated in its last 10-k, Skillsoft are developing strategies to effectively include both Pluma and Codecademy within its current business model. The possible inability to integrate these segments into its current development can cause material damage to the company. If management reports an impairment of goodwill like it did in the case of Global Knowledge, I believe that the stock price could decline.

During the three months ended July 31, 2022, our Global Knowledge instructor led training business experienced a significant decline in bookings and GAAP revenue compared to the corresponding period in the prior year. In accordance with ASC 350, we considered whether there were any indicators of impairment for Global Knowledge goodwill, concluding that triggering events had occurred, necessitating an interim goodwill impairment test as of July 31, 2022. Source: 10-Q

Also, as digital education for corporations is still new to the market, Skillsoft runs the risk of unforeseen changes in this regard as well as the inability to read trends and offer quality services to localized clients. The volatility of this market also plays a role in relation to risk factors, since the variation in quarterly results in more than one case makes it impossible to make correct calculations and prepare future strategies. Failed strategies could bring less revenue than expected, which may lead to lower equity valuations.

We can also add the direct dependence that Skillsoft has in some branches on the content creators regarding the quality of the content as well as the commercial relationships that must be maintained over time. The same happens with the effectiveness of its software as well as its maintenance and the possibility of offering mobile solutions to its users.

Finally, the most recent restructuring efforts undertaken by Skillsoft are worth consideration. In my view, if these efforts don't lead to free cash flow margin improvements, investors may lose their optimism. As a result, I would be expecting the cost of equity to be a bit more expensive, which may bring Skillsoft's valuation down.

During the three and nine months ended October 31, 2022, we recorded restructuring charges of $2.0 million and $10.3 million, respectively, for the severance costs and the abandonment of right-of-use assets. Source: 10-Q

With net sales growth of 3.75% and an EBITDA margin of 21.2%, the implied EBITDA would be $157 million. I also assumed a FCF margin of 5.5% and a WACC of 9.5%, which implied a net present value of future FCF of $228 million. Now, if we also assume an EV/EBITDA of 6.2x-7x, the net present value of TV would be $404 million. Finally, the implied enterprise value would be $633 million, and the equity valuation would be $185 million. The implied fair price would be $1.125 per share, and the IRR would be 1.715%.

Conclusion

Skillsoft Corp. does not only enjoy a large target market, management has also undertaken several acquisitions, which may bring FCF acceleration in the coming years. In my view, if Skillsoft Corp. successfully signs more partnership agreements with third parties, and the restructuring efforts are beneficial, future growth will likely bring the stock price up. I see risks from failed content creation or M&A integration failure, however Skillsoft's current stock price, in my view, is too low. In my opinion, Skillsoft Corp. appears undervalued.

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