Docebo Q3 2023 Earnings Call Transcript

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Provided by Quartr
November 9, 2023

There are 11 speakers on the call.

Operator

Good morning, everyone, and welcome to the Deutsche Bank's 2023 Third Quarter Earnings Call. All participants are currently in a listen only mode. We will open the lines for question and answer session for analysts following the presentation. Instructions will be provided at that time for research analysts to ask questions. We ask that analysts please limit themselves to 2 questions and return to the queue For any follow ups, I would now like to turn the call over to Docebo, Vice President of Investor Relations, Mike McCarthy.

Operator

Please go ahead, Mike.

Speaker 1

Thank you, operator. Before we begin, Docebo would like to remind listeners that certain information discussed today may be forward looking in nature. Such forward looking information reports the company's current views with respect to future events. Any such information is subject to risks, Uncertainties and assumptions that could cause actual results to differ materially from those projected in the forward looking statements. For more information on the risks, uncertainties and assumptions relating to forward looking statements, please refer to Dolcebo's public filings, which are available on SEDAR Plus and EDGAR.

Speaker 1

During the call, we will reference certain non IFRS financial measures. Although we believe these measures provide useful supplemental information about our financial performance, They are not recognized measures and do not have standardized meanings under IFRS. Please see our MD and A for additional information regarding our non IFRS financial measures, including reconciliations to the nearest IFRS measures. Please note that unless otherwise stated, all references to any financial figures Now, I'd like to turn the call over to Xcebo's CEO, Claudio Herba. Claudio?

Speaker 2

Hello, everybody, and thank you for joining us for our 3rd quarter earnings call. With me today are Alessio Tufo, our President and COO And Sukara Mehta, our CFO. I will begin our call this morning with a short summary of our Q3 results and business update. We are pleased to report that subscription revenue increased by 27% and total revenues grew by 26% in September Quarter with the total revenues exceeding the upper end of our guidance range. Net ARR added during the quarter was 10,100,000 After adjusting for the impact of foreign exchange, ARR growth was solid, reflecting our strengthening horizontal go to market motion Across the Enterprise segment as well as the government vertical.

Speaker 2

Docebo continues to demonstrate a profitable high growth business With adjusted EBITDA exceeding our guidance, we delivered an adjusted EBITDA margin of 9.7% as well as a solid free cash flow of 18% of revenue during the quarter. In general, global macroeconomic trends Have remained consistent through the year with larger, more complex deals still taking time to finalize, but we did not see any noticeable The deterioration in our pipeline in the Enterprise segment remains strong. SMB customer continue to be cautious. Geographically, the U. S.

Speaker 2

Was a more active market compared to Europe, which was seasonably slower during Q3. After 3 year in the photovoltaic rollout, we hosted a record number of participants at our annual customer conference, Lucie will inspire in Nashville. It was exciting to see this community of current and potential new customer Bring with them their enthusiasm for learning and their interest in Docebo platform. During this year event, we announced 4 new platform updates That included the Cboe for Microsoft team, the Cboe Community Hub, the Cboe Learning site and the preview of the CboeShape 2.0. The team of our Microsoft team enable learning in the globe work.

Speaker 2

It has to streamline learning, communication and collaboration By eliminating the need for separate platforms, while saving time and ensuring a productive experience for the learner, Customizable dashboard with Teams can be personalized for different internal and external use cases, driving higher adoption. The Cebu Community Hub is an extension of our platform designed to allow customers to create community Of knowledgeable champions and Sergeant Medreich sir. Its purpose is to facilitate knowledge sharing, enhance collaboration and engagement And then power our customer to expand their internal and external learning programs through connections. This update Was led by the Peardot team, which we have acquired in the first half of twenty twenty three. It showcases our efficient M and A strategy, Illustrating the table's quick integration and utilization of newly acquired technology and engineers.

Speaker 2

As our platform expands in-depth and in breadth, we are collecting an increasing amount of data about learners And the outcome of our customer training programs. With the launch of the Table Learning site powered in partnership with QuickSight from Amazon Web Services, We are helping our customer utilize this data efficiently within their learn element. By simplifying the creation of custom data boards And providing relevant report, we are empowering our customer to track the impact of their training programs more effectively. Finally, as some of you have seen at Deutsche Bucharest Fire, Deutsche Bucharest will fundamentally change how training material is created and consumed. We announced a number of features that we will start rolling out in 2024.

Speaker 2

2 features that I'm particularly excited about are virtual role play And AI panel features. EShape users can create a role play scenario with an AI virtual agent. This allow learners to practice specific conversation skills. Initially, we have focused on the sales enablement use case, Creating a virtual role play AI brain that helps the sales reps practice their sales pitch, but we see multiple use case application that we're incorporating in our product roadmap. Moreover, with Shape AI Panel, customer have full control over Now to capital allocation.

Speaker 2

Our balance sheet strength and financial profile enables the table to invest in innovation and gain further Ground while competitors are consolidating and cutting costs. Our capital allocation strategy remains unchanged and is focused on 2 years, selective M and A and the efficient return of capital to our shareholders. In conclusion, despite facing macroeconomic and global Our priority is to provide innovative and efficient solutions for our customer. Our customer view Both external and internal learning is crucial in this environment. We continue to strive to deliver cutting edge innovation to our customer With the goal of providing quality, profitable growth for our shareholders.

Speaker 2

Now, I would like to turn the call over to Alexio, We will give you an operational update.

Speaker 3

Thank you, Claudio, and good morning, everyone. Let me first go over some of our KPIs this quarter. Company wide average contract value increased 11% to $49,400 from around $44,600 in quarter 3 of last year. ACV for new customers in the quarter was about $70,500 compared to $61,000 in the June period. Enterprise customers with deal values over $100,000 in ARR accounting for approximately 55% of gross ARR generated in the 3rd quarter.

Speaker 3

41% of these new customers have chosen Docebo for 3 or more use cases, again highlighting the real impact of our platform as well as our ability to meet the complex needs of our customers. External and hybrid use cases make up more than half of our pipeline. Expanding our reach into these enterprise customers is also enabled by our growing partnerships with large system integrators, We're a strategic part of both enterprise and government contract wins during quarter 3. From a customer retention perspective, growth and net retention KPIs held relatively flat from quarter 2. In terms of customer acquisition costs, CAC, and sales efficiency, we achieved a significant improvement in our quarter three results.

Speaker 3

Sales and marketing accounted for 34.9 percent of total revenue, a decrease from 37.8% in the previous quarter. These improvements are a result of specific actions taken earlier this year, which focus on enhancing the effectiveness of our enterprise go to market strategy and optimizing the design of our global sales organization. These actions include: number 1, significant improvements in our demand generation results In the Enterprise segment through Business Development and Account Based Management, ABM. However, there is still plenty of room for further improvement in other areas. Secondly, we're benefiting from the successful implementation of our data and overall go to market systems, including but not limited to our updated CRM sales force.

Speaker 3

These systems were introduced at the start of the year and enable our team to access actionable data faster, increasing productivity and reinforcing customer centric organization. Finally, we're strengthening our relationship with system integrators, strategic technology companies and OEMs. These partners significantly broaden our reach to the largest and most demanding enterprise worldwide across various use cases. Now I would like to highlight this with a few new customer wins, upsells and cross sell. The most significant win of the quarter was a substantial deal we finalized and reported to you in August.

Speaker 3

Together with the large system integrators, we secured the contract of a top 5 U. S.-based global technology leader. This deal allows us to support a diverse use case needs, including providing training for advanced external audience. Other notable large enterprise wins included Enterprise Holdings, a leading provider of mobility solutions, including car rental, fleet management, car sharing, van pooling, truck rental, luxury rental, retail car sales And vehicle subscription as well as travel management and other transportation technology services and solutions. Enterprise selected the table for their onboarding, compliance and professional development learning requirements.

Speaker 3

Founded in 1924, Milwaukee too, a global leader in providing innovative solutions to professional construction trades To improve productivity and safety, we decided to partner with Achebo for multiple use cases. Leveraging our leadership in the quick serve restaurant vertical, We signed Bojangles, a North Carolina born restaurant chain known for its crash made southern food served at approximately 800 locations. They selected Docebo for franchisee and internal use case trading. And in Europe, we signed Cisal, 1 of the leading international operators in the regulated gaming sector. Active in Italy, Morocco and Turkey, They have an offering that includes the lotteries, betting, online games and amusement machines.

Speaker 3

They selected a digital learning platform To address the external use cases of retail and franchisee learning and for a number of internal use cases. During the quarter, we had Several significant upsells. One notable customer is AWS, where we expanded our relationship as they increase their use of our products and services. Additionally, we cross sold into AWS Engineering, marking a new department win for the Chebo. As we called out during our investor session at Inspire, we expanded our 4 pillars of growth to 5 When we started to focus on the public sector and began the process to achieve the FedRAMP certification.

Speaker 3

As a reminder, those 4 pillars include External use case and the continued greenfield opportunity where Dochevo is the leader, expanding our presence in large enterprise customers As demonstrated by the wins highlighted in the quarter, upselling and cross selling into our installed base, land and expand and finally, Expanding our partnership with OEMs and systems integrators. On FedRAMP certification, the project is on track. As indicated before, we expect this to be completed in 2024, which will enable us to participate in more federal and state level opportunities where this is a requirement. From a government business development standpoint, Autoworks with a big four system integrator and our preferred distributor Carahsoft Continues to help us build a very healthy funnel ahead of achieving FedRAMP certification across both SLED and Fed. We have closed or expanded deals in several different U.

Speaker 3

S. States during the quarter. One such deal was with the U. S. Department of Energy For 1 of 17 National Research Labs they manage with more than 5,700 researchers and support staff focused on innovations in nuclear research, Renewable Energy Systems and Security Solutions, this national lab is using the Cheboca external and internal use cases.

Speaker 3

Now to OEMs. We were extremely pleased with the contribution from our OEM partners, CIRIGION and MHR during the quarter. With the signing of Darwin Box last quarter, our OEM alliances represent another strategic channel into both the enterprise segment and new geographies, representing yet another way for us to leverage multiple growth pillars simultaneously. We also signed the global OEM alliance with a big 4 system integrator in quarter 2, Ernst and Young, They are white labeling the Chebo as the underlying technology Used to address their customers and workforce's upskilling and reskilling requirements. In conclusion, While navigating the challenging macroeconomic landscape, our commitment remains on being focused on driving growth, but doing so with efficient execution, Creating value for our customers, diligent performance management and overall optimization of every single operational area in our control.

Speaker 3

In short, by applying discipline in our execution and focusing on customer needs, we're confident in our ability to continue to drive Sustainable long term growth. With that, I would like to

Speaker 4

hand the call over to Sukara. Thank you, Alessio, and good morning, everyone. For those interested, a detailed breakdown of our financial results for the 3 9 months ended September 30, 2023 can be found in our press release, MD and A And financial statements, which are now available on our website and are also filed on SEDAR and EDGAR. Total revenue for the Q3 grew to $46,500,000 an increase of 26% from the prior year and exceeded our guided range. Subscription revenues were 43,600,000 representing 94% of total revenue for the quarter and an increase of 27% from the prior year.

Speaker 4

Annual recurring revenue added during the quarter was $10,100,000 after adjusting for the negative impact of $1,200,000 given the strengthening of the U. S. Dollar relative to foreign currencies. ARR at the close of Q3 was $181,800,000 an increase of 26%. We added 88 net new customers in Q3 and ended the quarter with a total of 3,679 customers, an increase of 13% year over year.

Speaker 4

Average contract value was approximately $49,000 for the 3rd quarter, An increase from 48,000 in the Q2 of 2023 and an increase of 11% year over year. The growth in average contract value is being driven by our continued expansion into the enterprise customer segment with ACV of $100,000 and above. Gross profit margin for the 3rd quarter improved by 40 basis points year over year to 81.1 percent of revenue and was relatively consistent with the prior quarter. Total operating expenses for the Q3 increased to $34,600,000 from $20,800,000 in the prior year period. During the Q3, we recorded $1,600,000 in one time costs mainly related to the acquisition related earn out that are excluded from our adjusted EBITDA calculation.

Speaker 4

Our restructuring activities were completed during the quarter. G and A as a percentage of revenue decreased to 17.9% for the Q3 compared to 21.4% for the Q2 of 2023. Adjusted for the transaction related expenses, G and A represented 17.2% of revenue. Sales and marketing expense as a percentage of revenue was 34.9% for the Q3 compared to 37.8% for the 2nd quarter. Given our investments made in IT systems, restructuring activities and reduced seller attrition, We have seen an increase in productivity per headcount resulting in improved CAC and sales and marketing as a percentage of revenue.

Speaker 4

That being said, we will continue to incrementally invest in areas to drive growth such as the enterprise and government vertical. R and D investments in the 3rd quarter were $10,300,000 or 22.1 percent of revenue, an increase of $8,800,000 for the 2nd quarter. R and D expense included $1,300,000 of the previously mentioned one time costs and excluding these costs, R and D represented 19.4 percent of total revenue. Adjusted EBITDA performance of $4,500,000 for the 3rd quarter Of 2023 or 9.7 percent of revenue was above our guided range of 7.5% to 8% of revenue. We reported net income of $4,000,000 for the Q3 of 2023 compared to $10,300,000 for the Q3 of 2022.

Speaker 4

Adjusted net income for the Q3 was $5,000,000 compared to $1,500,000 for the Q3 of 2022. We generated free cash flow of $8,400,000 or 18 percent of revenue compared to 16.2% for the Q2 of 2023 and 1.7% for the Q3 of 2022. We also earned $2,000,000 in interest income in Q3. In addition, as part of our NCIB program, at the end of the 3rd quarter, we had repurchased a total of 1,333, 3.51 common shares for cancellation at an average price of $38.43 for a total cash consideration of $51,200,000 Share based compensation accounted for a modest 4% of 3rd quarter revenue compared to 2.7% in the Q3 of 2022. For the trailing 12 months, the post dilution impact was less than 1%.

Speaker 4

Now for our Q4 2023 outlook where our guidance It's above The Street consensus for both the top and the bottom line. Here are the key takeaways. We expect total revenues to between $48,300,000 $48,500,000 We expect gross margin to range between 80.5% 81.5%. We expect adjusted EBITDA margin to range between 10% 10.5%. A few points in addition to note regarding the 4th quarter guidance.

Speaker 4

We expect subscription revenue to be about 2% points higher than overall company revenue, while professional services revenue to decrease sequentially from Q3. This is being driven by our increasing work with system integrators who are a critical part of both of our expansion into the large enterprise account as well as the Fed and Fed space. In conclusion, I would like to highlight these three key points. 1, Our market leading position and stabilization in the enterprise space drove improved unit economics across our business during the quarter. This is further evidenced by the fact that the number of customers who generated greater than $100,000 in ARR Increased 55% year over year.

Speaker 4

2, we are generating meaningful free cash flow. Using this metric Combined with subscription revenue growth, we have exceeded the rule of 40 for the past two quarters. Our cash allocation strategy remains focused on strategically investing Into our 5 pillars of growth, tuck in acquisitions that align with our innovative product strategy and returning excess cash to shareholders through our NCIB program. Finally, we now have a clear path to exceed The profitability guidance we provided earlier this year as we now expect to exit the year with adjusted EBITDA between 10% to 11%, while continuing to maintain incremental investments in innovation, FedRAMP certification and our go to market motion in the government and the enterprise sector. That concludes my prepared remarks.

Speaker 4

Operator, please open the line so that we can take some questions from the analysts.

Operator

Thank Your first question comes From Sutin Sukumar from Stifel, please go ahead.

Speaker 5

Good morning, gents, and congrats on the very strong results this morning. Pretty impressive to see the net new ARR adds Coming quite strong along with a nice uptick in your ACV. I had a question to sort of just broader overall Go to market, it's good to hear that your direct sales motion is having more impact. But it also sounds like you're there's a growing role that your SI partners are playing here. How are they sort of helping you evolve your overall go to market strategy in the enterprise?

Speaker 5

And is your work with these partners, Are they helping you provide you guys with more visibility into next year just given where enterprise spending trends are going? Just curious any thoughts there.

Speaker 3

Hello, Sudan. Thank you for the question and appreciate the nice words. Partnering with the size has always been a goal of ours. This required some overarching maturity Product and services wise, because in order to be a compelling partner for an SI, You have to add a certain size of the company, certain target customers and the product that suits itself To delivering high value for these companies that are looking to maximize on their services revenue and consulting capabilities. With that said, there is no doubt that working with these companies gives us a longer term view on our enterprise When we work with them on deals, I believe we're quite early in our journey working with SI.

Speaker 3

There's a lot more work that needs and will be done That needs to be done and will be done. I would say in the era of SI is one of the latest evidences Of early success is what we are also accomplishing not only in the commercial segment, but also in the government segment where we have gotten Extremely close with the top 4 SI consulting firm that is giving us the ability to really Accelerate our entry in both the slat and fed market. So overall, I would say our View of the SI market is not of investment that is already returning results, but we believe as great, great, great return for the future.

Speaker 5

Great. Thank you for that color. My next question is, is it going to be

Speaker 6

on the opportunity You guys

Speaker 5

have ahead of you in the public sector. You guys announced the U. S. Department of Energy win this quarter And you guys are still sort of in that it sounds like you're still on track for from a FedRAMP certification process. Can you Provided update here in terms of what you're able to do today from a go to market From a go to market motion perspective in the U.

Speaker 5

S. Government, it sounds like you are able to win deals today both on the federal and Stateside, without FedRAMP in hand, can you talk a little bit about some of that progress there And really what changes once you do have FedRAMP?

Speaker 3

Well, as we stated in the past, for us, winning in this led The portion of the government market is not completely news. We already had a relatively healthy portion of our What's exciting to us is that we accomplished that percentage with minimum To know a deep focus in that. And so like whenever you focus, you usually improve an operating machine. And that's what we did by standing up the government capability. On the Zladd side specifically, The opportunity is enormous.

Speaker 3

It's time accelerated because not all SLAD organizations Require a FedRAMP like or a state ramp like certification. Some do and we will reap the benefits of FedRAMP in the on the state side. We are not only deep in deals in SLED, thanks to the partner that I mentioned before. But in general, we brought on board individuals like our VP in government They have a deep knowledge of the space and know how to execute on teaming agreements that are essential For the execution in more complex, even state deals. And so what we've been at work On Deeply, it's really developing.

Speaker 3

On one hand, our overall marketing capabilities, messaging, We've learned a lot about what state like organizations need and we have further conversations with many partners and distributors Like Carahsoft, they are making this is preparedness for large scale, I would say. And I believe we're on the right track. And once FedRAMP completes, we will be even more in a better position.

Speaker 5

Okay, great. Thank you for the color, gents, and Congrats again on the quarter. I'll pass the line. Thank you.

Speaker 3

Thank you, Suthan.

Operator

Your next question comes from Josh Bair from Morgan Stanley, please go ahead.

Speaker 7

Great. Thank you for the question. I wanted to ask about the expansion that you talked about in your prepared remarks with Amazon. Just wondering if that was new in the quarter, if you could talk a little bit more about the use case and the timing and the impact of that expansion?

Speaker 3

Well, thank you for the question. Amazon He's a flagship customer for us. We started with Amazon AWS, And we've added on several areas of the business within Amazon and latest Amazon SMB is another example of that. Overall, I would say, the Biggest project in terms of size and scope remains our Amazon AWS initiative. But This latest Amazon SMB project, which is relatively smaller in size, is just one Of a few that we have targeted within the Amazon Corporation.

Speaker 3

So our job is to continue penetrating this account. And in order to do that, our focus is on making AWS very happy, and we were strategically focused on it.

Speaker 6

And I'll ask good morning, Squire. I just wanted to add quickly on that. Just from an AWS perspective, it was we, of course, have The major installation, which is AWS Skills Builder, where we could this is not a win on the engineering side, which is a department that we won within AWS, but we also And within the current contract that we have on the AWS Skills Builder, which is the customer academy. So we continue to build And expand within the current contract and other departments. So there's several ways to expand.

Speaker 7

Excellent. I wanted to ask one more on competition and thinking about it from the lens that Gen AI continues to evolve and impact the world. The need for skilling and reskilling is increasing. And so I'm wondering if you're seeing any changes from the broader HCM suite players, If they're more focused on their learning modules and generally if those larger HCM suites are putting more attention to the learning Segment of the market? Thank you.

Speaker 2

Yes, Claudio speaking. So Also, we are capitalizing on mistakes that some competitor is doing, mainly Learning LMS players, not HCM. The dynamic we see in the HCM space is they give Year 1, their LMS component that focus on legacy training topics So like soft skills compliance and language training. But The customers start having sophisticated needs in terms of Scalability, multi user provisioning, multi audience and you name it, all the really sophisticated needs The only vertical LMS player playing horizontal in the market can provide The HCM small LMS modules are not satisfying this need, which are enterprise needs. Sometimes we do see that customer adopt these small components, let's say, year And then they realize that, okay, it's free or almost free, but it doesn't satisfy complex training needs.

Speaker 6

And Josh, just to also add to that, just some referenceability is that if you look at a couple of wins specifically that Whether it's Milwaukee Tool and secondly, I would say Enterprise, these are folks exactly doing what Claudia spoke about. They hit a moment at which they need to move to a platform that can serve their needs from a learning perspective from legacy ATM platforms.

Speaker 2

Great. Thank you.

Operator

Your next question comes from Kevin Kumar from Goldman Sachs. Please go ahead.

Speaker 8

Hi, thanks for taking the question. I wanted to ask about the enterprise. How are sales cycles Trending in shape of the pipeline. Any color there would be helpful. And as it pertains to that, if you can talk a little bit about the recent Big five U.

Speaker 8

S.-based technology company that you won, I guess kind of the main use cases there and the process of winning that deal and anything on the relative

Speaker 3

Hello, it's Alessio. Thank you for the question. So look Kevin, I'll start from the latter part To the question on the strategic deal that you referenced, whilst we are unable to share the exact logo name, We are extremely proud of serving 1 of the worldwide leaders in their respective tax Space in which they play into. I will say a few things with this prospect in particular that he highlights With the we've been navigating a deep degree of complexity that is an organizational complexity of the customer, A deep degree of complexity due to the various needs that were being Addressed in terms of use case, you were asking which ones and the primary targets were sales mastery, sales enablement and customer training. So the perfect equation of hybrid positioning that we have in the market.

Speaker 3

And I would say the 3rd degree of complexity, but also leverage was whilst we were working with this Organization also developing the relative relationship with the system integrator that had a strong end the company In order to win fundamentally their selection, because the SI was also utilized for A selection opinion during the RFP, RFI phase. All that to say, we were proud to be the best in class largest Companies in the LMS space and to substitute and displace Technologies in Learning that had been serving this company for many years. That's I think as much as I can say without entering into specifics that would otherwise Kind of the beyond our NDA. With the more general enterprise posture, we are We're so excited. We believe that we are positioned in a really ideal way To continue to win the best companies in the world because of this ability to adapt to multiple Use case, you see referenceability is a really huge thing in advocacy in enterprise.

Speaker 3

And so being able to demonstrate and deployments like the ones we just discussed, it goes well beyond any demos or any product conversation. Our product, notwithstanding that, has matured as our operation globally has matured. So overall, the company posture is just in an ideal space to continue to win, share of wallet in the enterprise space. And our demand is reflecting that because Our business development team is crushing results on our Enterprise segment. You find me extremely excited and we continue we will continue to deliver results.

Speaker 2

Yes, Alessio. From another angle, from the product angle, our roadmap is also focused on Supporting very sophisticated enterprise needs from several point of view, features, Security and scalability. Undoubtedly, I've seen a customer, a very large enterprise customer a couple of weeks ago late On migrating to the new database architecture that Fabio and the team have built, they were late for their own reason. And when we deployed the new solution, we have seen the scalability going Skyrocketing. I mean, the technology we have is super scalable and raised for a very, very For a very large amount of users, 1,000,000 and 1,000,000 and 1,000,000.

Speaker 8

That's great. Appreciate the color there. And then I wanted

Speaker 3

to ask about, I think last quarter there was

Speaker 8

a comment on SMB churn Kind of impacting kind of the new customer adds and so curious if that's persisting and if it's impacting any of the other metrics like ARR growth or retention? Thank you.

Speaker 6

Yes, Kevin, I'll take that one. So I think just to kind of remind, so when you think about SMB in our world, just from Effective overall, almost 50% of what we do in the quarter is from the large enterprise segment. That's contracts of $100,000 and above. And SMB would be sub 20% of what we've done in the past. The way we've spoken about in the past as well as is consistent is that SMB is a customer that's primarily driven through inbound.

Speaker 6

It is a first time adopter, Requires a lot of touch from a unit economics perspective. There are certainly, I would say, it is not as optimal as the Mid market or high enterprise customers are. And what you will see from us is that we will continue to play in that space To the extent that the unit economics makes sense as well as we watch for innovation in that space because that's really where the next We really want to understand if there are certain areas where we can we watch for from a competitive landscape. But otherwise, the first time We will continue to focus from an inbound point of view, but primarily the higher investments that are paying off as you can see in the cycle Our earnings in the past quarter is focusing on mid market, on enterprise, moving up market because that's where the gross Net retention, the ability for us to be in multiple use cases. If you look at the statistics that I spoke to, 80% of our customers are in 3 or more departments 2 or more departments, that's 50% in 3 or more departments, and that really gives you the stickiness.

Speaker 6

Gross retention is held relatively flat to the prior quarter As I spoke, and that's a reflection of us moving up market. Great. Thanks for taking the questions and congrats on the quarter.

Speaker 9

Thank you.

Operator

Your next question comes from Martin Toner from ATB Capital Markets. Please go ahead.

Speaker 7

Thanks so much for taking my question. You have typically given NRR with the Q4 print. Can you give us a bit of a sneak preview there?

Speaker 6

Martin, I love the question, but As you know, we provide that at the end of the year annually. So we will provide that number when we report Q4. But I'd like to say, if you from a perspective of gross retention holding fat, we are I can the only thing I can add that may help you is that We had a very strong one of the best quarters we had in upsellcross promotion during the year.

Speaker 7

Great. Thank you very much. When I look at your guidance going into the big Q4, Looks a little looks kind of conservative at first glance. Just wondering if you can Just give us some color on how Q4 is shaping up, how incremental ARR Might look relative to some of the previous year's Q4s.

Speaker 6

Yes. No, listen Martin, from our point of view, listen, When you think about ARR and subscription revenue, it's relatively straightforward. You take ARR at the start of the quarter and it gives you a sense of what the subscription revenue at a minimum would be. And really to the extent that we close a number of the deals that will be in Q4, that come in earlier in the quarter that can have some impact into adding some revenue during the quarter, but we of course always try to make sure that our guide when we guide from a revenue We feel confident about it and have the ability to do as best as we can to exceed it. From a profitability point of view, I would say that I think we've demonstrated, I think if you've seen the numbers related to consensus, we were 170 basis points ahead.

Speaker 6

So I had spoken to The Street that I would be at 10% exiting Q4, but we are pretty much at 10% at this point. We will probably make some investments as we think about some FedRAMP investments that we talked about in Q4. That will be more Q4 specific Items and some things in R and D, but we feel pretty confident about the number I put out there in the consensus for EBITDA. We'll see if we can do better than that, but we feel very comfortable where we are in terms of the number we provided both for revenue gross margin and EBITDA.

Speaker 7

That's great. Thank you very much. Last one for me. Has there been any change to the timing for FedRAMP approval that you communicated at the

Speaker 6

Alessi, do you want to take that? All right. I can kind of give an insight.

Speaker 3

I'm sorry. Could you repeat that real quick, sorry?

Speaker 7

Yes, just wondering has there been any change Compared to what you communicated at the customer conference.

Speaker 3

No changes.

Speaker 7

Perfect. Thank

Speaker 6

you. Martin, in terms of that, just to make sure we understand this is that on the FedRAMP side, we are we've spoken about 2024s, but there's Obviously, factors that can either accelerate or not, are beyond be in 2024 because One of the important aspects to remember, just want to call it out for The Street not to get too ahead, is that we there is a program where you To the extent you get a sponsor, there's a possibility that can accelerate. But if there is no sponsor, then it takes a quarter or 2 longer. But generally, 2024 is the year where we should We've indicated we will get there. And as we to the extent we get any news on sponsors, we will share that with the investor base.

Speaker 7

Thank you very much and congrats on a good quarter.

Operator

Your next question comes from Robert Young from Canaccord, Jr. Please go ahead.

Speaker 10

Hi, good morning. You've already talked a lot about your success With large enterprise across multiple use case, I wanted to dig into a flavor of that. It appears with enterprise in Milwaukee here in the quarter that The entry point here is changing a bit. I think you said 50% of the pipe is external. But in the past, The external has always been your entry point in enterprise as I understand it.

Speaker 10

It now looks as though you're very much Broadening that out, I was curious what's driving that? Is that just the outbound effort? Or is it the way that the market is looking at you? Or is it Partners that are pulling you into these sort of internal, non external, large enterprise opportunities.

Speaker 2

Clausius speaking. So what's happening is that there is a shift in the industry On who is the recognized leader and the best of breed. So now if you want to Have the best LMS in the market in the world, by the way. And you want You have to choose the table. That's it.

Speaker 2

For sure, the partnership with F5 helped us to be endorsed Like this. But usually, when a customer write an RFP, and you are right, not for a single department When we start and then we upsell and cross we cross sell through other departments, it's a common now Then Chembo is also the choice for the global projects. Global projects can approach it in a couple of ways. Or where there is a single decision maker that want to deploy a global LMS or and as it It happened in a few weeks ago with the big technological sales, a federated group of people That goes together, put their budget together to have a single LMS with different Experience is learner experience is based on the department that logs in inside the Deutsche Boy. I don't know if Sukara or Ale want to provide more flavor on that.

Speaker 3

Yes, I would just add one thing. In the macro environment, The other shift in addition to what the one that Clara was mentioning is the role of CFOs and CIOs has increased And the impact of that trend is that we're sitting more often With individuals that come from a perspective that is not necessarily the internal perspective or the external perspective, But it's making the best decision for the corporation, in order to get the best technology that has the best Path forward towards being really a shared technology among the group. So We're sitting often with CIOs that say, hey, I have a point solution on the internal side, and there's a vision of doing Customer Academy in 2 years. I need a product Tim, that does both really well. And oftentimes, that is even CFO push.

Speaker 3

So From a business development standpoint, the impact of that is we are testing personas, so to speak, or buyer personas that in the past were less Perhaps relevant for us, but we're working those a lot and we're seeing great results.

Speaker 10

Okay. Thank you for that. And maybe just a corollary to that would be around if the entry point is the CFO or the C suite, I mean, obviously, that's success on the retooling of your sales go to market. But I'm also curious of Where the opportunity is an HRIS system or a broader HR tool and learning is one element of it, How does Docebo deal with that? Or is that something that you would walk away and focus on best of breed application of training and learning?

Speaker 3

I think, Pal, you go ahead. I was going to say, Pal, I think we presented it really well before, But I'll let you go ahead and cover kind of the topic.

Speaker 2

Actually, the way we deal with the HSPAN Systems is in 2 ways. Our OEM, where those players and usually are Also local players that cannot build their own LMS in different areas of the world Are integrating the cable. The other part is the cable connect. I mean, we have these big marketplace of integrations that connect with all of the HCM out there Or with the HR ecosystem, because HR ecosystem is not only HCM. There is talent, there is many there are many other angles That you need to integrate organically inside the organization.

Speaker 2

What is powerful about Connected, it's clear, We do not provide static integration. Static integration means this is the integration, Go and use it. But this is the standard integration, we can change it for you based on your needs. So different workflows, different rules, based on the customer needs. So we approach the HCM Software Ecosystem from 2 angles or OEM or integrate.

Speaker 4

Okay. Thanks a lot for taking the questions.

Operator

Your next question comes from Richard Sei from National Bank Financial, please go ahead.

Speaker 9

Yes. Thank you. So it was pretty clear from your conference that you've got an incredible amount of momentum and Still very early days, but what I'm trying to understand is that if you can give us a sense of your market share today, really trying to assess the Runway here in front of you and as you add sort of more markets, I'm trying to get a grasp on what that share would be.

Speaker 6

Yes, Richard, I'll speak to some numbers. I think you printed and we'll be happy to kind of recirculate a few quarters ago just to give you some perspective and we did some work in the U. S. Market and then just globally, but I'll even just speak to the U. S.

Speaker 6

Market, which is in the top of my head and the numbers are. If you think about the external versus internal use, because we've always spoken about that, 50% of my pipe will lead from an external use case where the win rates are the highest. And as Claudio spoke about and last year in terms of the internal use case, we're A lot of opportunities come to our desk because CIOs are thinking about long term multiple problems, not just one problem. And so Some numbers. If you think about the U.

Speaker 6

S. Market next 5 years, dollars 8,500,000,000 up for grabs, almost 70% of that is greenfield in the external use case. And then one third of that number is what we call the switcher market, but it's primarily the internal use case, employee onboarding and so on and so forth. And so the way I just simplify the math in that aspect is that if we continue to be the leaders on both external and internal use case, but multiple use cases, we do not need You know the whole market, but if we continue to maintain the leadership and our 5%, 10% of that market leadership, that is a significant number still ahead of us. That will be close to $500,000,000 or more in ARR if we just continue to do that and execute.

Speaker 6

So I'm just giving you high level numbers, but I think What is also important to note is that the breadth of our horizontal nature, if you look at this quarter, what I generally look at more closely also and pleased is that if you look at 2021 to 2023 and now we continue to be in multiple horizontal departments this quarter. Yes, we call out the big five tech Customer win, but we had major wins with Enterprise Car Rental, Milwaukee Tool. We also had some wins that we didn't call out like the World Anti Doping agency, so we have a multiple horizontal framework and then government is coming into that foray, which again as we highlighted during Inspire It's a large market. The U. S.

Speaker 6

Federal government last year spent $230,000,000 in the last 3 years spent $230,000,000 in LMS spend. So it gives you a perspective of that market once we get into FedRAMP certification and that will open up multiple pipeline opportunities, which we can't participate in today, but it's A matter of few quarters when we will.

Speaker 9

Okay. Super, super helpful. Thank you. And thanks for those comments today with respect to EBITDA and sort of giving a perspective even with the investments. But as you look ahead even beyond next quarter As an organization, how are you thinking about sort of capital allocation and the run rate of EBITDA?

Speaker 9

Like is that kind of You're at the point now that you've sort of proven that you can surface that operating leverage and now you're going to sort of continue to sort of maybe pick up your investment in growth or How should we think about that over the next 12 plus months here?

Speaker 6

I'll start then and feel free, Claude, unless you I will say 1st and foremost, before we speak to EBITDA, growth is the number one and primary objective, which we start with. And our investments in R and D and in sales and marketing, specifically as we called out enterprise segment, government, FedRAMP, We are making those investments and still delivering this EBITDA. So it gives you a sense that I kind of gave some numbers to folks that probably give up 2 And to my EBITDA this year in FedRAMP certification, which tells you I could have been higher than that if I didn't make those investments, but those investments are necessary to drive the long term revenue CAGR. Now I don't provide long we provided some guidance in terms of what we've said at Inspire that you can expect this company is more closer to if you are an 81 Margin business and we are exiting in north of 10%, 10.5% that I called out in Q4 in next quarter, Then you should expect that this business can continue to demonstrate leverage. And the easiest part here to kind of simplify the math is that you are seeing G and A drop 1% a quarter, there's probably another you should expect us at a $250,000,000 plus ARR to be a business Generating has a G and A of close to, let's say, 10% or so.

Speaker 6

So what I'm really saying is that 7% to 8% coming from G and A and operating leverage without even touching Sales and marketing R and D, but as we've spoken about in the past, I think we feel pretty confident about maintaining a healthy revenue CAGR Where growth is the higher component of the rule of 40% and adjusted EBITDAfree cash flow should be as we called out in our investor Presentation at Aspire, 18% to 20% is not unreasonable in the next few years.

Speaker 3

Okay. And one follow-up, Richard, also.

Speaker 6

I also look at free cash flow. My apologies. Just a quick point. Free cash flow is also important to me. Free cash flow per share is equally important to me.

Speaker 6

And as you can look at it, That's an important discipline that we've shown that free cash flow was 18% this quarter and 16% last quarter.

Speaker 2

Yes. And about capital allocation from the M and A angle, We have been we became very, very good on tuck in M and A. I mean, anecdotally, After the acquisition of PeerBoard and Edugo, we have been capable to integrate the team And to release the first alpha version of the new product in less than 4 months and a half After the acquisition, we have executed this at the speed of light. So for us, takin M and A It's something we are becoming extremely good. So probably, we are also open To explore other opportunities without after we have well digested The acquisition that we have made in 2023.

Speaker 9

Okay. Thank you very much. Appreciate it.

Operator

Thank you. I will now turn the call back over to Claudio Ereba, CEO for closing remarks.

Speaker 2

Yes. Thanks, everyone, and let's speak again next quarter.

Operator

Ladies and gentlemen, this concludes your conference call for today. We thank you for joining and you may now disconnect your lines. Thank you.

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Earnings Conference Call
Docebo Q3 2023
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