Half Year 2025 3P Learning Ltd Earnings Call Transcript

Feb 17, 2025 / 11:30PM GMT
Operator

Thank you for standing by and welcome to the 3P Learning's 2025 half year results investor and analysis briefing. Today you'll hear from Mr. Matthew Sandblom.

Executive Chairman Mr. Jose Palmero, CEO, and Adam McArthur, CFO, as they present to you 3P Learning's 2025 half year financial results. At the end of the presentation, we will invite participants to ask questions. We will prompt you with that opportunity at the end of the presentation.

(Operator Instructions)

I'll now hand the presentation over to Matthew, Jose, and Adam from 3P Learning.

Matthew Sandblom - 3P Learning Ltd - Executive Chairman of the Board

Welcome to the 3P Learning first half of the financial year 2024 to '25 results presentation. My name is Matthew Samblom, executive chair of 3P Learning, and joining me today are CEO Jose Palmero and CFO Adam McArthur.

The overall story of the first half has been about keeping profitability up and sales steady while we undertake a significant business transformation that we believe will set us up well for future consistent top and bottom line growth.

3PL has made good progress in transitioning to the new resents business model that we flagged in our last investor update. This is where we integrate all of our key learning programs in reading, writing, and maths into a unified teacher and student interfaces.

The first real test has been rolling over several million student and teacher accounts to the new system in the last few weeks as schools in the APAC region return for the new academic year. This has been an all hands on deck effort as we clean up large volumes of duplicate and obsolete account data. Now that we have mostly completed this task, we can now expose teachers and students to all of our programs from the one simple homepage.

For the next six months and beyond, we will continue to release more three essentials functionality to teachers and students. The aim is to make it easy for teachers to assign tasks and track student progress across the key learning areas. We want to become an indispensable aid for teachers where they teach the skills and our programs provide the practice and homework tasks to ensure long term retention of key skills.

During this time, we have also restructured our sales team in APAC and EMEA to strengthen the size and selling ability of our frontline sales force. We have seen some early successes in selling the three essentials to APAC schools, even though we did not have a working integrated resent program to demonstrate to schools until now. Even so, over 200 schools have so far signed up with an average increase in school revenue of 47%. We expect a number of schools.

Adopting the three essentials to grow more significantly over the course of this calendar year, this will not greatly increase revenue in the '24, '25 financial year due to delayed revenue recognition.

We closed on the purchase of LiteracyPlanet at the beginning of January. This was a small acquisition that complements our product suite for less than 1 times revenue. We plan on incorporating LiteracyPlanet into our three essentials offer to strengthening our literacy offering in the higher primary school grades.

In the direct to consumer market, we have maintained our year on year sales levels, which is a reasonable result given the economic headwinds parents are facing in all of our key markets. We think the best way to grow this market is to create a more complete offering for the large homeschooler market in the USA.

We have started work on this project and expect to start releasing key elements in the second half of the 2025 calendar year. We also believe that we have passed the peak of our large investment in new products such as riding legends and product renewals such as mathematics and that this shift from the investment phase will result in continued EBITDA margin improvement in the second half.

I will now hand you over to Jose for his CEO update.

Jose Palmero - 3P Learning Ltd - Chief Executive Officer

Thank you, Matthew, and good morning everyone.

I'll start with the key results and segment performance for the first half and then provide an update on our main growth initiatives, including the launch of the three essentials in APAC and EMEA and sales in the US market where we have been distributing reading Xs directly to the US schools for 12 months now since reacquiring the rights from Adam.

I'll also cover in more detail our rationale for the recent acquisition of LiteracyPlanet before passing on to our new CFO, Adam McArthur for the financials and cash flow section.

We have worked with Adam before, but it's his first results presentation as CFO of 3P Learning. So welcome Adam.

Looking at the first half results, just as a reminder, 3P generates about half of its revenue from APAC. Billings and cash receipts are therefore stronger in the second half of the financial year. This has a corresponding effect on revenue because most schools in APAC are invoiced in February and March each year.

On the expenditure side, we expense most of our product development costs and only capitalize new product development. Revenue for the first half was $52.7 million or 2% lower than in the prior corresponding period, mainly due to the initial transition of reading ex school customers from Admentum in the US being lower than expected.

This also affected annual recurring revenue for B2B, but the acquisition of LiteracyPlanet contributed $2.2 million to bring ARR in line with last year at $64.4 million. B2C billings increased 1% to $22 million which was a reasonable result given the tougher economic environment in the consumer market.

The bigger positive of this half was underlying EBITDA, which was $6.8 million or 98% higher than in the prior corresponding period. This reflected the $5 million in cost reductions we implemented in May last year as we transitioned from product investment phase to marketing and sales.

Cash generation was also good at $1.4 million for the first half, an improvement of $3.8 million over PCP, and as I mentioned before, still expecting a stronger second half for both cash generation and underlying EITA.

Looking at segment performance in more detail, B2C billings improved 1% overall, with Google Play and the App Store as the main contributors for mobile, up 6% and 2% respectively on PCP. Direct website sales were steady at $10.1 million bringing total billings for B2C to $22 million.

In the regions, we saw marginal increases in APAC and Amar and a small decrease in the me. And improved our contribution margin to 52%, which was 2% points higher than this time last year.

In the schools market, revenue was $30.9 million which was $1.3 million lower than PCP, mainly due to the transition from momentum in the US, which I will explain in a subsequent slide.

In general, the schools market has been affected by budget cuts in the three regions, with some uncertainty over US schools funding for this calendar year following the US federal election result. In that context, overall, in the past six months, we have seen steady sales results from our products compared to June 2024.

Annual recurrent revenue was therefore in line with June 2024 at $62.2 million but has increased $2.2 million with the acquisition of LiteracyPlanet to $64.4 million.

We started marketing and selling our combined product offering the three essentials in APAC in July 2024 and in October 2024 in EMEA, and have just released the integrated product landing page, class management, and single sign-on features in APAC.

Sales in the first half were $1.5 million from 214 schools in APAC, representing an increase of 47% in subscription fees from those schools upgrading to the three essentials from either one or two products, typically reading X and mathematics.

AMER has also started off well with $100,000 in sales from 30 schools as the package price represents best value for schools.

It's early days, but initial results are encouraging. We will continue developing features to make navigation and class management easier and to provide consolidated reporting for the three essentials and expect a greater impact in financial year 206.

Looking at the US now, we reacquired the Reading ex US schools distribution rights from momentum in April last year. But started the transition in February 2024, so we have now been selling directly for 12 months.

The main renewal period was between April and June 2024, and we retained 74% of billings, which was a bit lower than the expected 80% as we unbundled the customer relationships with Adventum. Offsetting that we achieved the 135% increase in new business and cross sale billings of reading eggs and mat seeds with our expanded sales teams in the US.

We have also built a stronger new business pipeline than last year, so we believe that our overall position and prospects in AMER are positive.

In terms of the addition of literacy Planet, this is a small acquisition that at the product level brings more spelling, grammar. Strategically we see LiteracyPlanet as a good fit for 3% in the school's market as part of the three essentials.

LiteracyPlanet has similar attributes to reading X in terms of student engagement, look and feel, and making it simple for teachers to use when tracking student progress or assigning class tasks.

The investment in literacy Planet was $1.4 million which is less than 1 times the expected sales of $2 million in financial year '25. It brings annual recurring revenue of $2.2 million that is incremental to our business, and we expect it to be profitable and cash flow positive in the 1st year.

LiteracyPlanet also operates in APAC and EMEA and has a strong crossover with schools already using reading eggs. So we will start integrating it with the three essentials as soon as possible during financial year '26.

In terms of our product roadmap, as Matthew mentioned earlier, we have passed the peak of our large investment in new products and upgrades. Our product roadmap will therefore now concentrate on smaller incremental investments that are aligned with the product and markets with the best growth potential and opportunities.

This includes more focus on making the three essentials compelling and easy to use for teachers in APAC and EMEA and delivering the integration and reporting features that are required to make us more competitive in the US and EMEA markets. That concludes the CEO section of today's presentation.

I will now pass on to Adam for an update on the financial results and cash flow. Thank you.

Adam McArthur - 3P Learning Ltd - Chief Financial Officer

Thanks, Jose. I'm pleased to be here to present our first half results for FY25. I'll present our P&L, B2C, and B2B segment performance and cash position.

On slide 18, our P&L is presented. The key financial highlights are that total revenue was $52.7 million, which is down 2% on prior comp comparative period. The B2B segment generated revenue of $30.9 million down 4% on PCP, primarily impacted by declining license numbers during the transition from our distributor Edmentum in the US to our own sales team.

However, the B2C segment shows stability with revenue of $21.8 million achieving modest growth through increased buildings for reading eggs and math sheets. Through this period we were able to make our gross margin at 95%.

Expenses were managed carefully as we saw the impact of the May 2024 $5 million dollar cost out initiative and the cost efficiencies gained from direct selling to schools. This delivered an underlying EBITDA result of $6.8 million up 98% on PCP, and an underlying net profit after tax result of $3.6 million.

Our statutory net loss after tax was $0.7 million and this was an improvement from the $12 million dollar loss in PCP. The half year results include several one-off items including $0.7 million from the unwinding of the legacy Edin and distributor costs, the $2.9 million for purchase price allocation of depreciation and amortization related to Blake and Bright path acquisitions and associated pro forma expenses.

On slide 19, we can see the operational performance of our B2C segment. The B2C segment demonstrated resilient performance in the first half of '25 with several key metrics showing improvement. Gross billings increased 1% to $22 million driven by growth across Apple and Google platforms. The average revenue per user grew 5% to $78.6 per user, up from 74.9% in the PCP.

Net billing's contribution margin improved to 52%, up from 50% in the prior period. This contribution margin reflects the effective management of direct sales and marketing costs, platform commissions, and the infrastructure expenses.

Commission costs increased by $0.5 million to $2.6 million reflecting the growing proportion of business through our Apple and Apple and Google platforms. Despite this increase, the business demonstrated improved operational leverage with sales and marketing costs, excluding commissions, decreasing by $0.6 million to $9.3 million.

On slide 20 are the B2B performance metrics. The B2B segment demonstrated improving fundamentals despite revenue declining 4% to $30.9 million. This was primarily impacted by the Aum transition in the USA.

Annual recurring revenue increased to $64.4 million as of the December 31, '24, up $2.3 million from the June 30. The increase included $2.2 million in ARR contribution from the literacy Planet acquisition completed on the January 3, 2025. New business contributed $3.1 million to ARR while net upsells added $1 million.

Other operational metrics for our B2B segment show exit ARPU increased 7% to $13.30, up from $12.40 in the prior comparative period, driven by the inclusion of literacy planner and the strategic renewal pricing management. Total licenses for B2B were $4.9 million. This reflects a 6% decrease from $5.2 million in the first half of 24.

Contribution margins strengthened to 51%, which was up from 47%, primarily reflecting cost efficiencies gained through direct selling to US schools. Also, early indicators from our introduction of the three essentials are positive, with the benefits expected to materialize in FY26 and beyond.

On slide 21, the cash bridge shows that the company's cash flow position strengthened during the first half, with underlying cash flow from operations before tax improving to $1.4 million. This represents a $3.8 million dollar improvement from the prior comparative periods outflow of $2.4 million. The net cash position was $1.9 million at the December 31, and at this time we had $9 million of borrowings.

With our strong cash flows in the second half, we will repay these borrowings in full by the end of March, and we'll end the financial year with a healthy cash balance.

Now I'll hand over to Matthew to provide the outlook and concluding comments.

Matthew Sandblom - 3P Learning Ltd - Executive Chairman of the Board

Thank you, Adam. Before we invite questions, I will provide our outlook for the medium term. As I mentioned earlier, we believe that we have passed the peak of our large investment in new and updated product development.

Our focus now is on improving our EBITDA margin and cash generation in the '25 to '26 financial year, even if revenue growth is only in the low single digits. We do want to grow revenue at a higher rate than this. Regardless, we want a healthy level of EBITDA and cash so that we can either fund acquisitions or return funds to shareholders in the form of buybacks or dividends.

This concludes our presentation today, and we now invite questions. Thank you.

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