Docebo Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 10, 2023

There are 12 speakers on the call.

Operator

You, operator. Before we begin, Doceva would like to remind listeners that certain information discussed today may be forward looking in nature. Such forward looking information reflects 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 Docebo's public filings, which are available on SEDAR and EDGAR.

Operator

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 are in U. S.

Operator

Dollars. Now, I'd like to turn the call over to Docebo's CEO, Claudio Herba.

Speaker 1

So So everybody, and thank you for joining us for our Q2 earnings call. With me today are Esther Tufo, our President and COO and Brandon Faber, Our senior Vice President of Finance. Brandon is filling in for Sukarn Mehta, our CFO, who is with his wife for the arrival of their first child. We wish Sukarn and his wife the very best. This morning, I will begin with a high level summary of our results.

Speaker 1

We are pleased to report revenue growth of 25% in the June quarter that exceeded the upper end of our guidance range. Our profitability also exceeded our guidance with an adjusted EBITDA margin of 7%. From a macro perspective, we saw trends consistent with the prior quarter. Enterprise segment spending is showing signs of Sub inflation where our pipeline is healthy, while SMB customer took a more cautious approach due to macroeconomic impacts. Geographically, we are seeing activities in U.

Speaker 1

S. Beginning to pick up, while Europe remains flat. After successfully partnering with Amazon, Docebo is proud to announce that in Q3, We signed a major deal with another big 5 U. S.-based global technology leader as a customer. This partnership will support their multiple use cases, including a large external audience.

Speaker 1

Additionally, We will leverage their generative AI services to transform the delivery of personalized learning at scale and integrate cutting edge features and functionalities into the Table's learning platform. As well To further advance our leadership in AI, we acquired EduGo. This acquisition enhanced Our capability in large learning language model technology that also brings a team of expert AI engineers on board. We anticipate that this acquisition will contribute to our disruptive innovation engine, which has Made Docebo a leading player in artificial intelligence and learning automation. We look forward to providing more Updates about our AI development roadmap at Ducebo Inspire in September, our annual customer conference.

Speaker 1

In thermal channels, we are becoming increasingly excited about our expanding presence in the government vertical, also known as Fed and Zled. In Q2, we continued to demonstrate the viability of our platform through successful wins with municipal, provincial and state level customers. To further And our customer base to include federal and state government customer, we are beginning the process of becoming federal compliant in the United Within the next two quarters, as previously discussed, we see deal market as an excellent pillar for long term growth. We have made strategic hires to form government specific vertical team and are building a focused channel partner relationship We highly regarded firms such as Carahsoft and other large system integrators to expedite our access to the government space. Our capital allocation strategy focuses on 2 areas selective merger and acquisition and efficient return of capital to shareholders.

Speaker 1

As valuation has become more favorable, we completed the SeaTaken acquisition this quarter. We will continue to evaluate opportunities based on their potential to address a broad spectrum of use cases that complement our platform. Before concluding my remarks this morning, I want to thank Martino Baggini, previously Chief Corporate Development Officer, A long time partner and friend for his service, as he decided to embark on a new chapter of his life, we wish him all the best on behalf of the entire company. Martino's corporate development responsibility will be reassigned to the finance organization, where we will leverage Sukara's private equity And these teams' strong capabilities. They will work closely with me on future corporate development opportunities.

Speaker 1

In conclusion, despite ongoing macroeconomic challenges that have become the new normal, our customer recognize that learning solutions Our strategic necessity to drive top line growth and core components of their tech stack. Docebo's strong financials, Operational efficiency and improving profitability position us for well sustainable balanced long term growth. As we emerge from this economic cycle, the investments we make today will further strengthen our position and accelerate the achievable growth. Now, I would like to turn the call over to Alessio, who will give you an operational update.

Speaker 2

Thank you, Claudio, and good morning, everyone. In quarter 2, the company wide average contract value increased over 8% to 48,100 dollars from around $44,500 at the end of quarter 2, 2022. ACV for new customers in the quarter was about 61,000 compared to 50,000 in quarter 1. Growth in ACV is driven by increased penetration among enterprise customers, with deal values of $100,000 in ARR accounting for approximately 50% of gross ARR generated in quarter 2. 50% of these new customers have chosen Vachevo for 3 or more use cases, which further highlights the strength of our platform and our ability to serve various complex audiences with 1 docebo.

Speaker 2

We saw healthy contributions from mid market and large enterprise customers, both during the Q2 and within our sales pipeline as we look out through the end of this year. Our Commercial segment or SMB has been more impacted by the cautious spending and market environment, resulting in some SMB churn that affected our net New customer adds in the June period. Regardless, gross retention held relatively flat quarter over quarter. Our focus remains on capturing optimal unit economics in our mid market and enterprise pipeline. This is demonstrated through our strategy of: Number 1, supporting external and hybrid use cases where almost 50% of our pipeline is external use case facing and where we have the highest win rates.

Speaker 2

Number 2, we continue to expand our partnership with large system integrators to penetrate both commercial and government enterprise contracts. And number 3, almost 30% of our wins this quarter came from RFPs, where customers are switching to the Cebo and moving away From legacy competitors who are more focused on the role of strategy and only serve internal use cases. So I would like to highlight this with a few new customer wins, upsells and cross sells. In terms of new customer wins, in Germany, We were selected by Rolls Royce Power Systems for our ability to address multiple use cases, including customer training, franchisee training, Internal onboarding and sales enablement. In North America, we signed a deal with Unity Health Toronto, a Catholic hospital network Serving the Greater Metropolitan Area of Toronto.

Speaker 2

This organization selected Docebo to address their onboarding and ongoing training initiatives for their physicians, Nurses and staff and medical university students. Also in the healthcare vertical, the Royal College of Physicians and Surgeons of Canada Chose Ocebo as its future platform to provide its members with flexible access to continuing education, communities of practice and its maintenance of certification program. HEI, Hotels and Resorts, a hotel investment and management company With over 100 properties with brands that include Hyatt, Hilton, Marriott, Sheraton and Westin, chose the chamber for our functionality, scalability and content offerings to support our brands. Among the noteworthy upsells is in VMware, who is using the Chebo for a variety of internal and external use Including customer training, channel training and membership training. As Claudio called out earlier, we're making very good progress in the government vertical.

Speaker 2

In the Q2, we were selected by large provincial government agency in Ontario, Canada. They chose Ocebo for our AI powered global search and concentration capabilities, including Shape, as well as for our track record service. We will be supporting their internal use case for onboarding and professional development. While in the U. S, Working closely with a large big four system integrator, we won an external compliance use case for a major department with the state of Georgia.

Speaker 2

They selected Dochevo for our robust functionality and needs of use for their targeted learners. We believe that Dochevo can do very well within the government For a number of reasons. Number 1, elevating the performance of human capital is one of the largest focus areas at every level of government today. Number 2, the first steps in this process will be to transition from outdated legacy platforms. We have experienced this in the commercial segment and are now executing to repeat the success of swapping out outdated incumbents in the broadband sector.

Speaker 2

Number 3, the ability to address internal and external use cases that governments are bringing forward, giving local, state and federal agencies Sustainability to consolidate their tech stacks. Number 4, initiating FedRAMP certification Allows us to compete in more RFPs at the federal, but also state and local levels in which state ramp certifications are more frequently required, opening up additional high value growth opportunities. For now, I want to frame out our government vertical strategy by saying that we're working with our channel and select system integrators who have well established government business units and are able to accelerate our right to win in this space. Additionally, we're aligning with other key players, including distributors like Carahsoft, who can help us to safely and efficiently carry over the table's success from the private sector. As a reminder, this process takes time before FedRAMP certification is achieved.

Speaker 2

However, our initial investments are showing traction. During the quarter, we notably added to our roster of OEM partners. 1st, we entered into global OEM alliance with a Big 4 system integrator, which will white label the Chevaliern LMS technology as the underlying technology used to address their customers and workforce upskilling and reskilling requirements. We also added Darwinbox, a fast growing HCM solution provider focused in India and Southeast Asia. With their intimate understanding of the working cultures of this region, We believe that this partnership can open up new geographical opportunities for us at an accelerated pace.

Speaker 2

We're especially excited about our presence in India, A young workforce with a large and fast moving market for which the Chivo solution is ideally suited for. Our OEM alliances are a core pathway into both the enterprise segment and new geos, and we're pleased with how these new partners expand these pillars of growth. Both opportunities will be in a ramp up mode over the next 12 months and we look forward to seeing their contributions add to our OEM and partnership results. Moving forward, we will continue to prioritize innovation, customer satisfaction and enterprise segment growth. We're confident that our strategic planning, effective execution and commitment to excellence will enable us to continue delivering the results that our customers has come to expect from the Shebo.

Speaker 2

With that, I would like to hand the call over to Brandon.

Speaker 3

Thank you, Alessio, and good morning, everyone. For those interested, a detailed breakdown of our financial results for the 3 6 months ended June 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 revenues for the Q2 grew to $43,600,000 an increase of 25% from the prior year and exceeded our guided range of $42,900,000 to $43,200,000 Subscription revenues We're $40,800,000 representing 94% of total revenue for the quarter and an increase of 28% from the prior year. Annual reoccurring revenue was $172,900,000 an increase of 25%. In the Q2, we gained 85 net customers, bringing our total customer count to 3,591.

Speaker 3

This represents a 16% increase from the prior year. Average contract value for the Q2 was approximately $48,000 an increase from 47,000 from the Q1 of 2023 and an 8% year over year increase. Gross profit margin for the Q2 improved by 70 basis points year over year to 81% of revenue and was consistent with the prior quarter. Total operating expenses for the Q2 increased to $42,700,000 from $25,900,000 in the prior year. During the Q2, we recorded $4,100,000 in one time costs related to severances, transaction costs and acquisition related earn out that is excluded from our adjusted EBITDA calculation.

Speaker 3

We expect our restructuring activities to be completed during Q3 2023. G and A as a percentage of revenue increased to 21.4% In acquisition related costs, G and A represented 18.3 percent of revenue. Sales and marketing as a percentage of revenue increased to 41.4 percent for the Q2 compared to 40.5 percent for the Q1 of 2023. Adjusting for the $1,500,000 of restructuring costs, Sales and marketing represented $37,800,000 of total revenues. With the investments we made in the IT systems at the beginning of the year, We anticipate to continue to gain operating leverage in sales and marketing over the next few quarters.

Speaker 3

The Q2 results in the Q2 were $8,800,000 or 20.2 percent of revenue, an increase from $7,400,000 for the Q1 of 2023. Adjusting for the $1,000,000 of previously mentioned one time costs, R and D represented 17.9% of total revenue. We expect R and D to be closer to 19% of revenue in the next quarter as a result of our acquisition of PeerBoard and EDGGo. Adjusted EBITDA performance was $3,100,000 for the Q2 of 2023 or 7% of revenue, which is above our guided range of 5.5 percent to 6.5 percent of revenue. We reported a net loss of $5,700,000 for Q2 of 2023 compared to $2,100,000 net loss for the Q2 of 2022.

Speaker 3

Adjusted net income for the Q2 of CAD7.9 million increased compared to adjusted net loss of CAD800 1,000,000 for the Q1 of 2022. We generated positive free cash flow of CAD7 1,000,000 and also earned CAD2.4 million in interest income. Given our strong cash flow generation, since announcing our NCIB, we deployed $10,200,000 towards repurchasing 279,000 676 common shares. Share based compensation accounted for a modest 3% of second quarter revenues compared to 4.4% in the Q1 of 2022. Now for our Q3 2023 outlook.

Speaker 3

Due to the large deal we signed with the U. S. Big 5 Tech customer, we anticipate higher incremental revenue within the quarter. We expect total revenues ranging between $45,900,000 $46,100,000 We expect gross margin to range between 80% 81%. We expect adjusted EBITDA margin to range between 7.5% and 8%.

Speaker 3

A few noteworthy points on the 3rd quarter.

Speaker 2

We expect

Speaker 3

Quarter over quarter, the macro environment that we are operating in remains consistent with what we've experienced the past several quarters. In conclusion, I want to hit on 3 points. As we look forward to the next few quarters, we are seeing encouraging trends in the enterprise, government segment, as well as our OEM channels. We are successfully moving towards a balanced approach to growth and profitability as we continue to expand our adjusted EBITDA margins even while investing in our AI roadmap, expanding our go to market teams in the government sector and incurring costs to become FedRAMP compliance. Lastly, We reiterate our profitability guidance that Docebo will exit Q4 2023 with adjusted EBITDA margins of 10%.

Speaker 3

That concludes my prepared remarks. Operator, please open the line so that we could take questions from the analysts.

Speaker 4

Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. Please stand by for your first question. Your first question will come from Souphan Sukumar at Stifel. Please go ahead.

Speaker 5

Thank you. Good morning, gents. Congrats on another solid print year. Firstly, I just wanted to touch on your global tech customer win. I think that serves yet another key endorsement Post your announcement with Amazon, firstly, I just wanted to see if you can share some color in terms of what you're seeing in terms of changes over recent quarters with respect to the enterprise sales cycle.

Speaker 5

And on the Big Tech deal itself, any color you can share on sort of the size of the deal and what use cases are in focus and From a competitive perspective, was this a displacement opportunity or would you say a broader sort of competitive win here?

Speaker 1

Yes. Claudio speaking. The more we move up market, the more we discover that our Enterprise customer are happy with Docebo because we provide sophisticated solution to deal With sophisticated tech ecosystems. So the customer are happy when They buy a solution that can, for example, handle internal and external use cases Can you synchronize the user database from different data sources? For example, if you have an internal training, Your user provisioning is coming from HR platforms, but then the external can come from CRM.

Speaker 1

So the more we move up market, the more our customer are a fit for us Because they deal with sophisticated environment, sophisticated subscription rules, sophisticated tracking And this is becoming more and more our sweet spot. So If you are a very big company with very sophisticated use cases and scalability needs and so on and so on, This is where do Cibo thrive. Alexis, do you want to add something, Brandon?

Speaker 2

So then, We're excited for this win. It's one that's been in the works for a while. You were asking about value. We can say it's a healthy 7 figure Project, additionally, I can share since you're asking that the primary drivers of SaaS where alongside what Claudio was saying, driving game or modern, highly personalizable Experience for various learners across multiple use cases, whether those are more on the enablement side or externally facing. And frankly, the idea here is that we are very proud to Have spent a lot more time, if you will, on navigating the processes of purchasing of this A great organization.

Speaker 2

Then we have beaten competition during the selection process. We found that our capabilities aligned exactly what the company was looking for. And therefore, the selection process was relatively simple when compared to more the extensive contracting phase. Having said that, we're happy to announce this and yes, looking forward to more.

Speaker 1

Yes. And Ale, couple of points. First of all, this deal It's been done in partnership with Big 4 System Integrator. I mean, we partner with them because it's not only a matter of technology. When you deal with complex Environment and complex needs, you need to partner with those guys.

Speaker 1

Point number 2, I mean, We love to work with technology customers because we can also leverage their own technology. And I'm Very boring when I speak about AI, which is my main interest. And this is Another opportunity to partner on AI.

Speaker 5

Great, Noah. Thank you for that color. Just kind of question I had was on the public sector. It sounds like you guys are seeing some It's pretty strong, but early momentum here. Can you talk a little bit about what the opportunity you see overall And from a public sector perspective, what's the TAM potential here?

Speaker 5

And what is your go to market approach here. It looks like it's more direct, could partners play a key role here? Any color there will be appreciated.

Speaker 1

Yes. So, Thiago speaking, Vivek Sutan. The idea of the public sector, we discussed with Alexia probably 2 years ago, it was like we need to cover the public sector because first of all, The competition there is almost non existent or very legacy. Customers were locked in on the 10 years contract and now There is this moment where they are renegotiating and changing the technology with some modern technology. Third point is, you want to sell the public sector because it's resilient on economic cycles.

Speaker 1

I mean, when there is a downturn, usually is where Public sector spend more and that's what we needed to make the business more resilient and less volatile. Public sector is very big. For me, it was an incredible learning opportunity to discover the size of the market, which is very different from federal to State, for example, and we are referring only to U. S. Than there is Canada.

Speaker 1

Another couple of points, This is a business that you approach together with system integrator. And this is the most beautiful partnership we are Doing now is with those vendors that can complement our offering. What's point? We are exploring with the new company we have acquired at the goal with the former CEO Giuseppe, The possibility to build our own learning, large learning language models to run AI Inside government cloud without going outside in non federal compliant Environment. So and this is a key differentiator.

Speaker 1

I mean, not only we are a modern vendor, But we bring the AI in an environment which is highly protected Without going and connecting APIs outside the FedRAMP certified environment. Sorry if I'm going technical, but This is very important because I believe that government also needs a lot of innovation. Ale, you can take the rest.

Speaker 2

Yes, Kvaa, thank you. Suthan, again, great momentum here across federal and SLAD or state local education. Just for clarity, we've already been mildly successful in the SLED side without a whole lot of specialization in the past. So our incremental focus on SLAD, we believe will yield higher win rates and better results. This is proven by Recent success with closing State of Georgia working closely and to do that, we had to work closely with large system integrator and other success with the larger provincial government agency in Ontario.

Speaker 2

I think one of the things that we'd like to Clarify is SLAD is an opportunity that is shorter term for us. We're working very closely with When we think about federal, it's a little bit Of a different path in the sense that it takes a little longer. We have less experience in it, but we're taking all the right steps. Just last year alone, I think, federal spending LMS was close to US200 $1,000,000 And so we believe that we have, thanks to our technology, like Claudio said, an enormous amount of right to win. And our process of FedRAMP is, if you will, the compliance step To reaffirm ourselves in a market that necessitates new technology, which we have, so if we close that gap, we'll be able to tap into it effectively.

Speaker 2

And we're already bidding and are very aggressive in it. So we're very optimistic and we see the great momentum.

Speaker 5

That's great. Thank you for that color. I'll pass the line.

Speaker 4

Your next question will come from Robert Young at Canaccord Genuity. Please go ahead.

Speaker 6

Good morning. I think you just said that the U. S. Tech deal was 7 figures. So I guess that could be 250,000 In the Q3 guide, are there any other one time items?

Speaker 6

I think PeerBoard and EduGo, are those smaller? Should we And when you look at the pipeline, are there other larger deals, 7 figure deals Still out there to win, are you still working on these type of deals or is this something that we should expect only once in a while?

Speaker 3

Hey, Rob, Brandon here. I'll take the first part on the guidance. So, with signings subsequent to quarter end, Obviously, we're able to recognize more in quarter revenue than our typical trend of signing majority of our enterprise deals over the last 60 days a quarter, so your color is correct. But it also speaks to the visibility in our enterprise and mid market Pipeline, which gives us confidence as we look to the remaining half of the year. Also wanted to point out, if you look at the midpoint of our guidance, it roughly represents 25 Growth, which is equal to our Q2 growth.

Speaker 3

On the EBITDA side, although we are making investments in Q3, We did want to reiterate that we will exit Q4 with 10% EBITDA margins. So as we absorb the Edge Go And peerboard cost, from an R and D perspective, we will still finish strong in Q4.

Speaker 2

Brandon, I would only add that enterprise momentum continues, Rob. You were asking if we should expect more 7 figure deals. We certainly have incredible names in our pipeline of large deals. I would caution only the fact that this Big five deal that we closed was 18 months in the making. It elongated beyond our initial Views and so deals remain elongated and it's hard for us to say on these deals when they will close exactly.

Speaker 2

But in terms of pipeline being there and great companies and enterprise move up market, we're very, very excited.

Speaker 6

Okay. Thanks for that. Definitely nice to see the guide, not common to see people giving good guidance this quarter. You said that their customers are seeing 3 plus use cases and then 30% coming from RFP. And I just want to Dig into that a little bit.

Speaker 6

Is that consolidation of existing customers or is it I think you said it was competitive takeaway in the Prepared comments. But you just talk about those 2 items and whether they're connected or whether there's The stack consolidation is something that's a big driver of the business. Then I'll pass the line.

Speaker 1

Yes. Robert Claudio speaking. Short answer, the Cebo is now the best of breed out there. And if you want to switch from legacy vendors, the RFP that

Speaker 4

Your next question will come from Josh Bair at Morgan Stanley. Please go ahead.

Speaker 7

Great. Thank you for the question. Some of your prepared remarks pointed to signs of stabilization. I guess, I'm just wondering if when you think about the growth potential of your company, is it fair to say that you'd hope to reaccelerate Growth, not looking for specific numbers or time line, but when you think about your growth profile in a better macro, is it higher than current levels?

Speaker 1

Yes, Claudio speaking. I love profits because that means that we are running a healthy business that Justify the fact that the business need to exist because makes profit. But on the other side, if you say that I'm a CEO that is excited with 20 5% growth? No, absolutely. I want to challenge myself, my team and all the company to be ambitious because we are in a moment Well, we are the best of breed.

Speaker 1

We are penetrating new markets, new geographies. The top addressable market is pretty high. I think that strategically we are opportunistic. We are positioning ourselves to reaccelerate growth If and when the macro environment will be will become friendly again. On the other side, the business is incredibly healthy and we love an

Speaker 7

Great. That's really helpful. And then sort of with that positioning for acceleration in a better environment, 2nd part of the question, should we expect to see a step back in margins when that time comes to like are there investments needed for that reacceleration in growth or are the resources in position for that opportunity ahead? Thank you.

Speaker 1

I think that, Brendon, yes, okay.

Speaker 3

Yes. Hey, Josh. I think I'd simply position as we View ourselves as a rule of 40. So as we see growth reaccelerate, we'll adjust our EBITDA margins and make sure that we're Making the investments that are necessary to continue to operate in the growth. Obviously, if we want to reaccelerate growth, we feel that We do have the necessary headcount at the moment, but to keep up with large of law of large numbers, we'll have to continually invest And then last to make sure that we're maintaining sufficient growth rates.

Speaker 2

Got it. And then like with Josh, I was just going to add, Josh, that and one of our focuses Really is to create continued more efficiency in our sales and marketing machine. We believe that there is more value to extract and that we're taking specific steps like value engineering and others to achieve better unit economics, both in pipeline and in funnel execution.

Speaker 7

Okay, great. Thank you.

Speaker 4

Your next question will come from Kevin Kumar at Goldman Sachs. Please go ahead.

Speaker 8

Hi, thanks for taking my question. I wanted to ask about the new OEM partnerships. Great to see. Maybe just how did the relationships develop and anything you can add in terms of how impactful you expect them to be in terms of contribution over time?

Speaker 1

Yes, Kevin. First of all, great video. I believe it's your first question with us, correct?

Speaker 8

Yes. Thanks for having me.

Speaker 1

Welcome. So I would like to Highlight how our OEM technology works, then you can enter into the execution part. But Karen, you need to know that The Chebot has built an OEM technology that makes every vendor From HCM vendor to payroll to ERP and many others, Easy to integrate the cable from 2 ways. 1 is we embed the cable white label, enable your own disabling Features, because giving the OEM partner full control on the part of the DuChevola mass wants To show and what don't want to show because different vendor have different training models. The second part is a very sophisticated solution that allows our partner to synchronize the release cycle with their release cycle.

Speaker 1

So we become part of their technology software stack and this allows OEM partner To easy embed the user resell the cable. So from a technology standpoint, we are ready to Expand our OEM partnership like this quarter happened. Amit, you can take.

Speaker 2

Yes, amazing. Thank you, Kla. Yes, so in terms of the two names that we've shared, there were actually one name. The other one was a big four firm. What I'd like to underscore with regards to Darwinbox is that In terms of ramping up time frame, we should expect this to take about 3 to 4 quarters that will essentially allow The company to fully operationalize our technology and their commercial offering, enabling their field team and effectively starting to produce results that were reflecting incremental revenues for us.

Speaker 2

Additionally, on the big four name, look, this is I'm particularly proud of that. This is the product of Investments in our channel organization and in general maturity in the way we Continue to manage system integrators. We believe our technology, as Claudio just described, aligns perfectly with the system integrators goals. And similarly, we expect these efforts to produce results over the next few quarters.

Speaker 8

Great. Thanks for the color there. And then it sounds like gross retention was fairly stable this quarter. Curious on maybe the cross selling motion within the enterprise and maybe in particular shape, How much is maybe increased conversations around AI helping maybe drive higher attachment rates there? Thanks for the question.

Speaker 2

Sure. So Look, we are extremely focused on growing our base, whether it is upselling or cross selling. And both are incredibly high priorities in our list and execution. You are accurate and correct in saying that the cross selling opportunity is higher on the enterprise side, And we pay special attention to this. Even in this quarter, we announced great results in expanding our relationship with VMware.

Speaker 2

So yes, we have a lot of focus on this and we're executing very, very specifically.

Speaker 8

Thanks for taking my questions.

Speaker 1

Yes, and I want to chime in about Shape. Shape is my baby. Actually, Shape is already positioning in the large enterprise needs Because we have been successful on solving one big problem with the AI, so I love the automation part, That bigger companies have. When you build when you are a multinational company and you build a content The need to be deployed in 10 languages. Your problem is not translation.

Speaker 1

It's what happened when you needed to modify 5 its content in public version number 1.1 or 2.0, where you need to retranslate everything. So the advantage of using Deutsche Borseape in this context allows customers to reduce from 40 workman days To like 20 minutes, the speed of deploying fast learning live in multiple languages. And this is what large enterprise needs from a productivity standpoint, reducing with sensibly In a manner where 40 days become 20 minutes, the effort to train their people and to distribute content. So this is where Dolcebo is already positioning that market and this is because our customers started asking those kind of

Speaker 4

Your next question will come from Stephanie Price at CIBC. Please go ahead.

Speaker 9

Good morning. I just want to follow-up on the last question. Just curious To dig a little bit more deeper, when customers choose 3 or more services from Diccebo, what are the biggest drivers there? Is it typically internal and external use cases or is it different modules in the platform?

Speaker 2

Stephanie, good morning. First of all, we love talking about the blend of use cases in what often Times we refer as hybrids, meaning the capability of solving for both internal and external use cases. In terms of the mix, we like the external business As we've shared multiple times, because it's very differentiated and yields better unit economics, and we win at a higher rate in that space, where competition tends to be more focused on the legacy side on solving for internal problems. Let's say that the very frequent use cases that come to that we solve for Around the onboarding side and professional education side, but also there is an uptick in on the sales enablement side, even with very large organization, which we are very excited about. And acquisitions like the one of EDUGO We'll further strengthen our positioning in some of those capabilities.

Speaker 2

On the external side, similarly, the move of Increasing our capabilities also thanks to technology like PeerBoard is to really strengthen our capabilities on the customer education side. And the notable win that we have mentioned, I would say that this ability to solve for Sales enablement and external facing capabilities has been probably, from a differentiated standpoint, The one element that has led us to winning this very large deal.

Speaker 9

That's great color. Thanks. And maybe related just on you mentioned EDGECO there. Obviously, it's been a bit more acquisitive than usual lately with EDGECO and PeerBoard. Just curious if you could talk a little bit about the M and A environment and what you're seeing in the market here?

Speaker 2

Yes, absolutely. Before I pass M and A To Claudio, one thing that I forgot and want to make sure to address, Stephanie, is that One of the things that we consider most strategically about this blend of use cases is not only on the acquisition side, but it's also on the retention side. We see unit economics of excellence, top quartile, when customers use Ocebo for more than 3 use cases. And so we don't just think about it in the context of winning at a higher rate, but also retaining an increasing lifetime value. Claudio, Brandon, I'll pass you the M and A question.

Speaker 1

Yes, Stephanie. Claudio speaking. Rule number 1 in M and A do not make mistakes. So we are very careful on analyzing the market On finding the best technologies that can be embedded inside the table, if I'm referring to tuck in M and A's, and complement the chip offering. The 2 acquisition, Edouard was an acquisition To inject more AI and faster inside the chamber reusing their Own proprietary large language data modeling.

Speaker 1

And with that goal, I can promise That we are going to destroy the in earning content market that is 20 years old made of passive videos Because we are building something that finally will make the learner excited to learn. And this is consistent with our roadmap ambition. About PeerBoard, we have acquired a community system That works very well with our thesis of external training. When you have a customer Academy or a partner academy. You don't want only to train those partner with content, but you want those customer and partner interact and learn through social learning dynamics.

Speaker 1

And this is incredibly consistent on Fabio's roadmap That is focusing on adding features for the external training. We are continuously exploring The market from any angle, literally any angle, but we are extremely careful. We want to pay a fair price And we have to digest those acquisition, onboard people, embedded technologies and stuff like that. So we are not back to make a decision just to deploy the capital, but we want to digest acquisition and find the right opportunities.

Speaker 9

Thank you for the color.

Speaker 4

Your next question will come from Richard Tse at National Bank Financial. Please go ahead.

Speaker 8

Yes. Hi. It's James sitting in for Richard right now. Good job on the quarter. And I was just wondering, should we Back to R and D as a percentage of revenue to continue moving up, as you guys continue to invest in AI or do you see the partnership with that big tech company kind of offsetting those incremental investments?

Speaker 3

Hey, it's Brandon speaking. You should expect in Q3, R and D will tick up as a percentage of revenue, Roughly to 19% as we made some incremental investments, but over time that will stabilize. So you should not Expect that R and D will continue to climb as a percent of revenue. We see kind of 19%, 20% to be the high mark and then over time we'll gain leverage there But even with those investments that we're making, We're still very confident that we'll hit our adjusted EBITDA margins of 10% by Q4. And also sorry, one last point is even in R and D as well, in Q3 and Q4, we have to Some significant investments in FedRAMP in order to become compliant.

Speaker 3

So some of those costs as well are impacting our R and D in the next couple of quarters.

Speaker 8

Okay, great. Thanks. I'll pass the

Speaker 4

line. Your next question will come from Evan Chow at TD Securities. Please go ahead.

Speaker 8

Hi, there. My question was on the system integrators pipeline. I'm just wondering if you could share any details on that, on whether we can expect any more big partnerships or even any more big 4th?

Speaker 2

All right. Well, details perhaps is hard, but I will do my best here. How about that? We are super excited about our work on SI. This is a work that has been going on for a while.

Speaker 2

I would say I would characterize our work in 2 segments. Segment number 1, commercial space. We recognize that working with the top enterprises in the world requires A deeper relation in the form of alliances or teaming agreements with the biggest firms and system integrators in the world. And the great news is we are developing those relationships to a deeper level than we ever have. And I would say with a high degree of confidence that had we not done that, the big five win that we announced With this big SI that led to that win, but also we continue to work with the peer group of greater size, Not only the big four, there are more to tap into the enterprise market because they are very present.

Speaker 2

The second comment is on the government space. The government space, as we have outlined before, Is a partner's world. This means not only local partners that play Very favorably in the jurisdiction, in the states, in the cities, in the counties. But more broadly, there are certain size, there are practices They are very government focused and they are already in those organizations for since a long time. They have a view, they Stand out the federal agencies by and our ability to work closely with them gives us not only more credibility, Not only an accelerated path, but what we love is it gives us a longer term view on pipeline of opportunities That is very healthy for our ability to be predictable in the future in the government space.

Speaker 2

So our efforts are being coordinated under our A renewed alliance organization, we've made some investments in terms of people and we're extremely Excited about it and more news to come.

Speaker 8

Okay, great. Thanks for that answer. My next question is on In your prepared remarks, you mentioned some churn in the SMB space. I was wondering if you could comment on that, whether you see it Continuing or maybe you've seen the bulk of the churn happen in that space given the macro?

Speaker 2

We believe that this is very consistent with our strategy and go to market over the past Yes. We recognize that the SMB logos have less maturity and intend to churn at a higher rate than enterprise customers. And listen, we are focused On building a system that really succeeds in the mid enterprise space. Now with that said, With the right level of automation training and skill and upskilling, we can make successful All Sesame customers, but we believe that this churn in the lower part of The customer base is really by design. I don't know if Claudio or Brando, you want to add something on this topic.

Speaker 4

Your next question will come from Martin Toner at ATB Capital Markets. Please go ahead.

Speaker 10

Thanks very much for taking my question. You guys mentioned churn. Can you talk a little bit about what the customers that are churning look like And look into your ARR and tell us what percentage of that ARR looks like those customers that are currently churning?

Speaker 3

Hey Martin, I'll take that. So one One thing Richard mentioned is that our gross retention did remain flat quarter over quarter. So although we see Some churn in the SMB market, which is high switcher market, cautious, always going for the lowest price. Given that our book of business continues to shift more to mid market and enterprise, As SMB churn comes, we're still seeing gross retention remain relatively flat. And also, when we look at SMB from gross retention and also expansion opportunities.

Speaker 3

SMB is a bit suboptimal. We See most of our expansion opportunities in the mid market and enterprise space as well. So we'll continue to just focus on customers with Our optimal unit economics and happy to see that gross retention is remaining flat.

Speaker 10

Great. Thanks. Congrats on the Whale and also congrats on Rolls Royce announcement. Can you talk a little bit about the European opportunity? How is that coming along and how much could it contribute to growth going forward?

Speaker 2

Absolutely. That's a market that, as We continue to invest in with the most recent growth and setup for the DACH region, Winning Rolls Royce in a relatively short time frame from launching our DACH operation was an incredibly encouraging sign. And we continue to see remarkable pipeline growth in Europe, particularly in the UK, France and Benelux, as well as good momentum in pipeline in the APAC region, not just in Europe. We remain focused on launching These new, if you will, entities and focusing on these markets, but we also recognize that it takes time And we're hoping to continue to announce great logos like Rolls Royce in the quarters to come.

Speaker 3

Just one other point as well, with our OEM win with Darwin Box, we're also adding the Indian market, which We're not in today. So with that OEM play, that gives us an access to a market that we're not in today.

Speaker 10

That's great. Thank you very much. That's all for me.

Speaker 4

Your next question will come from Christian Schrow at 8 Capital. Please go ahead.

Speaker 11

Hi, good morning. I'll ask just one 2 part question on a topic Claudio is very passionate about and that's artificial intelligence. So part 1, more from a financial perspective. Would you say that Shape is the only product It's commercialized in market and upsold separately right now. And then part 2 and a little bit more open ended, what across The entire portfolio, our customers most excited about, what are you showing them in demos?

Speaker 11

Give us a little bit of color on what you're working on in AI.

Speaker 1

Sorry, I got the first question of the second. Can you repeat the second one, please?

Speaker 11

Yes, cardio. It'd be There are some references to AI in the release and prepared remarks, but what are you selling to customers? What are you going to customers with Just show the power of those AI integrations.

Speaker 1

Yes. So, about AI, Now everyone is I mean, now it's super easy to build something new using Open API is like OpenAI or others. So there are a lot of experiments How dare to build everything, including shape like products That can be interesting products. This said, we started investing on AI 4 years ago. And what we have learned is that the biggest problem of AI is not creating a nice product.

Speaker 1

But first of all, make it scalable. I mean, you needed to build AIs that can serve 1,000,000 of learners. And this is More complicated than creating an appealing content generator. And second, you need to be compliant We on how the customer uses data to train the AI. So there is an incredible level of complexity.

Speaker 1

And before startups can catch up, this level of complexity takes time. And in this meantime, we have such a Competitive advantage that, Shape will become something else. So I have the confidence that the Shape integrated with The Ducebo ecosystem will be something that large enterprises will love to use. But by the way, we are demoing some new shape features at the table Thanks. We do see mainly 2 main areas.

Speaker 1

1 is automation. That means AI doing some routine works That now are done by humans like content tagging, skill tagging, skill matching, Semantic search, suggestion, you name it. And then there is a part related to the content Where the generative AI will disrupt an industry that is 20 years old Legacy, because we're still tied to passive videos to watch pretending that you learn something.

Speaker 11

Perfect. Thank you very much for taking my question. Thank you.

Speaker 4

There are no further questions. So at this time, I will turn the conference back to Claudio for any closing remarks.

Speaker 1

Perfect. Thank you everyone for joining this earning call. I think it's my 13th one,

Speaker 4

Ladies and gentlemen, this does conclude your conference call for this morning. We would like to thank you all for participating and ask you to please

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Docebo Q2 2023
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