Press Releases & Coverage

SSI Investments II Limited Reports First Quarter Fiscal 2014 Results

NASHUA, N.H.--()--SSI Investments II Limited ("SSI II" or the "Company"), a parent company of Skillsoft Limited (formerly Skillsoft PLC), a provider of cloud based learning solutions for customers worldwide, today announced financial results for its first quarter of fiscal 2014.

Basis of Presentation

On May 26, 2010, SSI Investments III Limited, a wholly owned subsidiary of SSI II, completed its acquisition of Skillsoft PLC (the "Acquisition"), which was subsequently re-registered as a private limited company and whose corporate name changed from Skillsoft PLC to Skillsoft Limited ("Skillsoft").

On October 14, 2011, the Company announced that its indirect subsidiaries, Skillsoft Corporation and Skillsoft Ireland Limited, completed their acquisition of the Element K business from NIIT Ventures, Inc., an indirect subsidiary of NIIT Limited (the "Element K acquisition").

On September 25, 2012, the Company announced that it completed its unconditional cash offer made by its indirect subsidiary, Skillsoft Ireland Limited, for the entire issued and to be issued share capital of ThirdForce Group plc as structured under Irish law (the "ThirdForce acquisition").

The Company's management has furnished in this press release and the accompanying financial information certain financial measurements that are not in accordance with generally accepted accounting principles (GAAP) in the United States. As used herein, non-GAAP revenue and days sales outstanding ("DSOs") from non-GAAP revenue exclude fair value adjustments to acquired deferred revenue in purchase accounting related to the Acquisition, the Element K acquisition and the ThirdForce acquisition. Additionally, DSOs from non-GAAP revenue include revenues from the business prior to the Element K acquisition and the ThirdForce acquisition. Non-GAAP deferred revenue excludes the unamortized fair value adjustments to acquired deferred revenue from the aforementioned acquisitions.

EBITDA represents net income (loss) plus (i) interest expense, (ii) (benefit) provision for income taxes and (iii) depreciation and amortization, less interest income. Non-GAAP adjusted EBITDA is calculated by adding to EBITDA certain items of expense and deducting from EBITDA certain items of income that the Company's management believes are not indicative of the Company's future operating performance, including stock-based compensation expense, merger and integration related expenses, revenue reductions and incremental expenses related to purchase accounting as a result of the Acquisition, the Element K acquisition and the ThirdForce acquisition and business realignment strategy charges.

These non-GAAP financial measures are not in accordance with, or an alternative to, financial information prepared in accordance with GAAP and may not be comparable to similar non-GAAP financial measures used by other companies. These non-GAAP measures should not be considered in isolation from, or as a substitute for, the financial results prepared in accordance with GAAP. The Company's management uses these non-GAAP financial measures as alternative means for assessing the Company's results of operations and believes that they may also provide useful information to the Company's investors. In addition, certain covenants in the Company's senior credit facilities are based on non-GAAP financial measures, such as non-GAAP adjusted EBITDA, or adjusted EBITDA as defined in our senior credit facilities, and evaluating and presenting these measures allows the Company and its investors to assess the Company's compliance with the covenants in the Company's senior credit facilities and the Company's ability to meet its future debt service, capital expenditures and working capital requirements. The Company's management believes that DSOs are useful as a comparison of DSOs from the current period to the prior period in order for the Company's management to adequately assess the Company's collection efforts, taking into account the seasonality of the Company's business.

In the fourth quarter of the fiscal year ended January 31, 2013, the Company recognized $14.2 million of stock based compensation expense within research and development, sales and marketing and general and administrative expenses, which included $8.1 million of stock-based compensation attributable to services performed in prior periods, which should have been recognized in those periods. The correction of the cumulative expense that was reported in the Company's fourth quarter of the fiscal year ended January 31, 2013 was not considered material to the Company's consolidated financial statements and had no impact on non-GAAP adjusted EBITDA. In the first quarter ended April 30, 2013 of the fiscal year ending January 31, 2014, the Company will continue recognizing stock-based compensation expense within research and development, sales and marketing and general and administrative expenses prospectively on a quarterly basis.

Fiscal 2014 First Quarter Results

The Company reported revenue of $100.5 million for its first quarter ended April 30, 2013 of the fiscal year ending January 31, 2014 (fiscal 2014), which represented an $11.2 million net increase from the $89.3 million reported in its first quarter ended April 30, 2012 of the fiscal year ended January 31, 2013 (fiscal 2013). The reconciliation from non-GAAP revenue to GAAP revenue is as follows (amounts in millions):

First Quarter

First Quarter

Fiscal 2014

Fiscal 2013

Non-GAAP revenue $ 103.2 $ 94.8
Fair value adjustments to deferred revenue from purchase accounting (3.1 ) (5.5 )
ThirdForce products excluded from non-GAAP revenue 0.4 -
GAAP revenue $ 100.5 $ 89.3

Of the $11.2 million increase in revenue, approximately $5.1 million is related to revenue generated from the ThirdForce business following the ThirdForce acquisition and approximately $3.3 million is related to additional revenue generated from current and prior period bookings, as compared to revenue generated from bookings for the same period in fiscal 2013. In addition, approximately $2.4 million is related to a net reduction in the fair value adjustments to acquired deferred revenue in purchase accounting and approximately $0.4 million of revenue is related to ThirdForce products excluded from non-GAAP revenue as these offerings will not be replaced for customers upon renewal.

The Company's deferred revenue at April 30, 2013 was approximately $225.0 million, which represented a $10.9 million increase from the $214.1 million reported at April 30, 2012. The reconciliation from non-GAAP deferred revenue to deferred revenue on a GAAP basis is as follows (amounts in millions):

April 30,

April 30,

2013

2012

Non-GAAP deferred revenue $ 229.5 $ 220.1
Unamortized fair value adjustments to deferred revenue from purchase accounting (4.5 ) (6.0 )
Deferred revenue on a GAAP basis $ 225.0 $ 214.1

Of the $10.9 million increase in deferred revenue, approximately $12.0 million is related to deferred revenue from the ThirdForce business and approximately $1.5 million is related to a net decrease from the unamortized fair value adjustments to acquired deferred revenue in purchase accounting. The aforementioned increases were partially offset by a $2.6 million decrease from current and prior period bookings.

The Company's net loss was $10.5 million for the first quarter of fiscal 2014 as compared to a net loss of $26.7 million for the first quarter of fiscal 2013. The Company's net loss in the first quarter of fiscal 2014 includes the impact of the Acquisition, the Element K acquisition and the ThirdForce acquisition, the significant components of which are as follows (amounts in millions):

First Quarter

First Quarter

Fiscal 2014

Fiscal 2013

Fair value adjustments to deferred revenue in purchase accounting $ 3.1 $ 5.5
Amortization of intangible assets related to content and technology 14.0 17.7
Fair value adjustments to prepaid commissions in purchase accounting (0.1 ) (0.5 )
Acquisition related expenses 0.3 0.4
Restructuring expenses 2.4 0.5
Stock-based compensation expense 1.5 -
Merger, integration and related costs 2.6 4.1
Loss from discontinued operations, net of tax - 0.7
Amortization of intangible assets 13.7 15.4
Interest expense from new borrowings 15.8 16.6
$ 53.3 $ 60.4

Gross margin was 77% for the Company's fiscal 2014 first quarter as compared to 69% for the fiscal 2013 first quarter. The increase in gross margin for the fiscal 2014 first quarter is primarily due to a $3.7 million decrease in the amortization of intangible assets, which relates to fully amortized assets from the Acquisition. In addition, there was a $0.9 million decrease in cost of sales from transitional employees and outside services pertaining to Element K content, which are no longer required.

Research and development expenses decreased $0.1 million to $13.9 million in the fiscal 2014 first quarter from $14.0 million in the fiscal 2013 first quarter. This decrease reflects the net impact of a $1.2 million reduction in outsourced software and content development costs, which was partially offset by increased compensation and benefits of $0.9 million and stock-based compensation expense of approximately $0.2 million. Research and development expenses were 14% of revenue for the fiscal 2014 first quarter as compared to 16% for the fiscal 2013 first quarter, primarily due to the increase in revenues as well as the decrease in expenses.

Sales and marketing expenses increased $1.0 million to $34.4 million in the fiscal 2014 first quarter from $33.4 million in the fiscal 2013 first quarter. This increase reflects the net impact of $0.7 million in incremental compensation and benefits costs, $0.4 million of stock-based compensation expense and a $0.8 million increase in commission expense, which was partially offset by a reduction of $0.5 million in consulting fees. Sales and marketing expenses were 34% of revenue for the fiscal 2014 first quarter as compared to 37% for the fiscal 2013 first quarter, primarily due to the increase in revenues, which were partially offset by the aforementioned increase in expenses.

General and administrative expenses increased $0.9 million to $9.9 million in the fiscal 2014 first quarter from $9.0 million in the fiscal 2013 first quarter. This increase is related to $0.9 million of stock-based compensation expense and $0.5 million of additional compensation and benefits, which were partially offset by a decrease in administrative taxes of $0.5 million. General and administrative expenses were 10% of revenue for both the fiscal 2014 and fiscal 2013 first quarters, primarily due to the increase in revenues, which were offset by the aforementioned increase in expenses.

Acquisition related expenses for the fiscal 2014 first quarter were $0.3 million as compared to $0.4 million in the fiscal 2013 first quarter. The fiscal 2014 first quarter acquisition related expenses related primarily to professional fees incurred in connection with the ThirdForce acquisition and the fiscal 2013 expenses related to the Element K acquisition.

Merger, integration and related expenses for the fiscal first quarter were $2.6 million as compared to $4.1 million in the fiscal 2013 first quarter. The fiscal 2014 first quarter expense includes approximately $1.7 million of costs associated with exiting vendor obligations, professional fees and headcount costs associated with transition activities and process integration activities from the Element K acquisition and the ThirdForce acquisition and approximately $0.9 million of expenditures related to cost savings initiatives, which can be added back to non-GAAP adjusted EBITDA under our debt covenants This compares to the fiscal 2013 first quarter expense, which includes $2.3 million of costs associated with exiting vendor obligations, professional fees and headcount costs associated with transition activities and process integration activities from the Element K acquisition and approximately $1.8 million of expenditures related to cost savings initiatives, which can be added back to non-GAAP adjusted EBITDA under our debt covenants.

Restructuring expenses of approximately $2.4 million in the fiscal 2014 first quarter primarily relate to vacated facility costs of approximately $1.1 million incurred in connection with the ThirdForce acquisition and the Element K acquisition and a workforce reduction plan of approximately $1.3 million as a result of the ThirdForce acquisition and organizational changes made in the fiscal 2014 first quarter.

Interest expense decreased to $15.8 million for the fiscal 2014 first quarter from $16.6 million in the fiscal 2013 first quarter. The decrease in interest expense is primarily due to the reduction of interest rates in connection with the repricing of the Company's borrowing in the fiscal 2013 third quarter, which was partially offset by incremental borrowings under the senior credit facilities incurred in connection with the ThirdForce acquisition.

For the fiscal 2014 first quarter, the Company's tax benefit from continuing operations was $4.5 million and consisted of a cash tax provision of $3.6 million and a non-cash tax benefit of $8.1 million. This compares to a $5.1 million tax benefit from continuing operations for the fiscal 2013 first quarter, which consisted of a cash tax provision of approximately $1.5 million and a non-cash tax benefit of $6.6 million. The decrease in the current year tax benefit was primarily due to the lower loss from operations.

Non-GAAP adjusted EBITDA for the fiscal 2014 first quarter was $40.9 million as compared to $31.9 million for the fiscal 2013 first quarter. The reconciliation of net loss to non-GAAP adjusted EBITDA is as follows (amounts in millions):

First Quarter

First Quarter

Fiscal 2014

Fiscal 2013

Net loss, as reported $ (10.5 ) $ (26.7 )
Interest expense, net 15.5 16.5
Depreciation and amortization 1.6 1.4
Amortization of intangible assets 27.7 33.1
Benefit for income taxes (4.5 ) (5.1 )
EBITDA 29.8 19.2
Stock-based compensation expense 1.5 -
ThirdForce products excluded from non-GAAP revenues (0.4 ) -
Other expense, net 0.2 0.9
Retention bonus 0.8 -
Sponsor fees 0.4 0.4
Consulting and advisory fees 0.3 0.7
Acquisition related expenses 0.3 0.4
Merger, integration and related costs 2.6 4.1
Restructuring expenses 2.4 0.5
Loss from discontinued operations, net of tax - 0.7
Fair value adjustments to prepaid commissions in purchase accounting (0.1 ) (0.5 )
Fair value adjustments to deferred revenue in purchase accounting 3.1 5.5
Non-GAAP adjusted EBITDA $ 40.9 $ 31.9

The Company's senior credit facilities require the Company to comply on a quarterly basis with a single financial covenant for the benefit of the revolving credit facility lenders only. The financial covenant requires the Company to maintain a maximum secured leverage ratio tested on the last day of each fiscal quarter (but failure to maintain the required ratio would not result in a default under the revolving credit facility so long as the revolving credit facility is undrawn at such time). The maximum secured leverage ratio will reduce over time, subject to increase in connection with certain material acquisitions. The Company's senior credit facilities and senior notes also include various nonfinancial covenants. As of April 30, 2013, the Company was in compliance with this financial covenant and all nonfinancial covenants.

The Company had approximately $87.1 million in cash, cash equivalents and restricted cash as of April 30, 2013 as compared to $39.2 million as of January 31, 2013. This $47.9 million increase is primarily due to cash provided by operations of $52.3 million, which was partially offset by purchases of property and equipment, net of dispositions, of $3.6 million and principal payments on the senior credit facilities of $1.2 million.

In order to adequately assess the Company's collection efforts, taking into account the seasonality of the Company's business, the Company believes that it is most useful to compare current period DSOs to the prior year period. Given the quarterly seasonality of bookings, the deferral from revenue of subscription billings may increase or decrease the DSOs on sequential quarterly comparisons.

The Company's DSOs from non-GAAP revenue were in the targeted range for the fiscal 2014 first quarter. On a net basis, which considers only receivable balances for which revenue has been recorded, DSOs from non-GAAP revenue were 9 days in the fiscal 2014 first quarter as compared to 7 days in the fiscal 2013 first quarter and 11 days in the fourth quarter of fiscal 2013. On a gross basis, which considers all items billed as receivables, DSOs from non-GAAP revenue were 81 days in the fiscal 2014 first quarter as compared to 87 days in the fiscal 2013 first quarter and 154 days in the fiscal 2013 fourth quarter.

Supplemental financial information will be available on Skillsoft's web site www.skillsoft.com at the time of the earnings call.

Conference Call

In conjunction with this release, management will conduct a conference call on Tuesday, June 11, 2013 at 8:30 a.m. EDT to discuss the Company's fiscal 2014 first quarter financial and operating results. Chuck Moran, President and Chief Executive Officer, and Tom McDonald, Chief Financial Officer, will host the call.

To participate in the conference call, dial (800) 322-9079 or (973) 582-2717 for international callers and use the following passcode: 89991629. The live conference call will be available via the Internet by accessing the Skillsoft Web site at www.skillsoft.com. Please go to the Web site at least fifteen minutes prior to the call to register, download and install any necessary audio software.

A replay will be available from 12:01 a.m. EDT on June 12, 2013 until 11:59 p.m. EDT on June 19, 2013. The replay number is (855) 859-2056 or (404) 537-3406 for international callers, passcode: 89991629. A webcast replay will also be available on Skillsoft's Web site at www.skillsoft.com.

About SSI II

SSI Investments II Limited is an indirect parent of Skillsoft Limited, a pioneer in the field of learning with a long history of innovation. Skillsoft provides cloud based learning solutions for its customers worldwide, ranging from global enterprises, government, and education to mid-sized and small businesses. Skillsoft's customer support teams draw on a wealth of in-house experience and a comprehensive learning e-library to develop off-the-shelf and custom learning programs tailored to cost-effectively meet customer needs. Skillsoft's courses, books and videos have been developed by industry leading learning experts to ensure that they maximize business skills, performance, and talent development.

Skillsoft currently serves over 5,000 customers and more than 13,000,000 learners around the world. Skillsoft is on the web at www.skillsoft.com.

Skillsoft courseware content described herein is for information purposes only and is subject to change without notice. Skillsoft has no obligation or commitment to develop or deliver any future release, upgrade, feature, enhancement or function described in this press release except as specifically set forth in a written agreement.

Skillsoft, the Skillsoft logo, Skillport, Search & Learn, SkillChoice, Books24x7, ITPro, BusinessPro, OfficeEssentials, GovEssentials, EngineeringPro, FinancePro, AnalystPerspectives, ExecSummaries, ExecBlueprints, Express Guide, Dialogue, Quickskill and inGenius are trademarks or registered trademarks of Skillsoft Ireland Limited in the United States and certain other countries. All other trademarks are the property of their respective owners.

From time to time, including in this press release, we may make forward-looking statements, including but not limited to statements relating to such matters as anticipated financial performance, business prospects, strategy, plans, regulatory, market and industry trends, liquidity and similar matters. You can identify these statements by the fact that they do not relate strictly to historic or current facts. They use words such as "anticipate," "estimate," "expect," "project," "intend," "plan," "believe," "will," "target" and other words and terms of similar meaning in connection with a discussion of future operating or financial performance. We note that a variety of factors, including known and unknown risks and uncertainties as well as incorrect assumptions, could cause our actual results and experience to differ materially from the anticipated results or other expectations expressed in such forward-looking statements. These risks and uncertainties include, among others, that we are highly leveraged; that our debt agreements contain restrictions that limit our flexibility in operating our business; that our quarterly operating results may fluctuate significantly; the effect of past and future acquisitions on our operations; volatility in the global market and economic conditions; that increased competition may result in decreased demand for our products and services; our ability to meet the needs of a rapidly changing, developing market; our ability to introduce new products; that our business is subject to currency fluctuations that could adversely affect our operating results; that we may be unable to protect our proprietary rights and other factors, including those discussed under "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended January 31, 2013, as filed with the SEC on April 30, 2013. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider any such list to be a complete set of all potential risks or uncertainties. Accordingly, investors should not place undue reliance on those statements. The forward-looking statements contained in this press release reflect our expectations as of the date hereof and, except as required by applicable securities laws, we undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise.

SSI Investments II and Subsidiaries
Condensed Consolidated Statements of Income
(Unaudited, In thousands)
Three Months Ended April 30,
2013 2012
Revenues $ 100,519 $ 89,304
Cost of revenues 9,562 10,428
Cost of revenues - amortization of intangible assets 14,024 17,668
Gross profit 76,933 61,208
Operating expenses:
Research and development 13,929 13,987
Selling and marketing 34,379 33,357
General and administrative 9,933 8,977
Amortization of intangible assets 13,686 15,386
Acquisition related expenses 265 399
Merger and integration related expenses 1,728 2,305
Restructuring 2,351 467
Total operating expenses 76,271 74,878
Other (expense) income, net (217 ) (922 )
Interest income 272 27
Interest expense (15,773 ) (16,561 )
Loss before provision for income taxes (15,056 ) (31,126 )
Provision for income taxes - cash 3,631 1,478
Benefit for income taxes - non-cash (8,159 ) (6,563 )
Net loss before discontinued operations $ (10,528 ) $ (26,041 )
Income (loss) from discontinued operations, net of an income tax benefit of $0 and $416 for the three months ended April 30, 2013 and 2012, respectively 4 (655 )
Net loss $ (10,524 ) $ (26,696 )

SSI Investments II

Condensed Consolidated Balance Sheets

(Unaudited, In thousands)

April 30, 2013 January 31, 2013
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 86,918 $ 39,048
Restricted cash 156 136
Accounts receivable, net 102,404 188,682
Deferred tax assets 1,360 1,360
Prepaid expenses and other current assets 32,485 34,741
Total current assets 223,323 263,967
Property and equipment, net 12,499 13,654
Goodwill 636,050 637,524
Intangible assets, net 416,180 444,748
Deferred tax assets 10,090 10,090
Other assets 21,356 22,445
Total assets $ 1,319,498 $ 1,392,428
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long term debt $ 27,492 $ 3,311
Accounts payable 6,287 11,650
Accrued expenses 51,790 62,766
Deferred tax liabilities 15,153 15,153
Deferred revenue 225,003 262,452
Total current liabilities 325,725 355,332
Long term debt 730,082 755,034
Deferred tax liabilities 18,331 26,646
Other long term liabilities 10,733 10,016
Total long-term liabilities 759,146 791,696
Total stockholders' equity 234,627 245,400
Total liabilities and stockholders' equity $ 1,319,498 $ 1,392,428

SSI Investments II

Condensed Consolidated Statements of Cash Flows

(Unaudited, In thousands)

Three Months Ended

Three Months Ended

April 30,

April 30,

2013 2012
Cash flows from operating activities:
Net loss $ (10,524 ) $ (26,696 )
Adjustments to reconcile net loss to net cash provided by operating activities:
Share-based compensation 1,484 -
Depreciation and amortization 1,623 1,393
Amortization of intangible assets 27,710 33,054
Provision of bad debts 49 -
Benefit for income taxes - non-cash (8,159 ) (6,979 )
Non-cash interest expense 1,335 1,307
Loss on disposition of assets 13 152
Changes in current assets and liabilities, net of acquisitions
Accounts receivable 85,403 87,850
Prepaid expenses and other current assets 1,933 5,256
Accounts payable (2,033 ) (8,388 )
Accrued expenses, including long-term (10,115 ) (12,924 )
Deferred revenue (36,435 ) (28,890 )
Net cash provided by operating activities 52,284 45,135
Cash flows from investing activities:
Purchases of property and equipment (3,555 ) (2,565 )
Proceeds on disposition of assets - 96
Increase in restricted cash, net (20 ) (37 )
Net cash used in investing activities (3,575 ) (2,506 )
Cash flows from financing activities:
Principal payments on Senior Credit Facilities (1,162 ) (225 )
Net cash used in financing activities (1,162 ) (225 )
Effect of exchange rate changes on cash and cash equivalents 323 225
Net increase in cash and cash equivalents 47,870 42,629
Cash and cash equivalents, beginning of period 39,048 28,908
Cash and cash equivalents, end of period $ 86,918 $ 71,537

Contacts

SSI Investments II Limited
Tom McDonald, (603) 324-3000, x4232
Chief Financial Officer