Dollarama Q2 2025 Earnings Call Transcript

Quartr
Provided by Quartr
April 2, 2025

There are 8 speakers on the call.

Operator

Good day, and thank you for standing by. Welcome to the Franklin Colby Second Quarter Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there'll be a question and answer session. To ask a question during the session, you'll need to press 11 on your telephone.

Operator

You will then hear an automated message advising your hand is raised. To start your question, please press 11 again. Please be advised that today's conference is being recorded. I would now like to turn the conference over to Derek Hatch, Corporate Controller. Please go ahead.

Speaker 1

Thank you. Hello, everyone, and thanks so much for joining us today. We appreciate having the opportunity to connect with you. As we get started, please remember that this presentation contains forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward looking statements are based upon management's current expectations and are subject to various risks and uncertainties, including but not limited to the ability of the company to grow revenue, the acceptance of and renewal rates for our subscription offerings, including the All Access Pass and Leader in Me memberships, the ability of the company to hire productive sales and other client facing professionals, general economic conditions, competition in the company's targeted marketplace, market acceptance of new offerings or services and marketing strategies, changes in the company's market share, changes in the size of the overall market for the company's products, changes in the training and spending policies of the company's clients, and other factors such as governmental contracting actions that are identified and discussed in the company's most recent annual report on Form 10 ks and other periodic reports filed with the Securities and Exchange Commission.

Speaker 1

Many of these conditions are beyond our control or influence, any one of which may cause future results to differ materially from the company's current expectations. And there can be no assurance the company's actual future performance will meet management's expectations. These forward looking statements are based on management's current expectations and we undertake no obligation to update or revise these forward looking statements to reflect events or circumstances after the date of today's presentation, except as required by law. With that out of the way, we'd like to turn the time over to Mr. Paul Walker, our Chief Executive Officer and President.

Speaker 2

Thank you, Derek. Good afternoon, everyone. We're happy to have the opportunity to speak with you today and to share an update on the continued progress of the business. The current external economic environment is turbulent and uncertain. We're not entirely immune to what's going on in the broader economic and political environment.

Speaker 2

However, we are pleased, first, that the importance of the opportunities and challenges we help organizations achieve are mission critical to them, and our business and business model are strong. Second, we're pleased that the traction we're already achieving in the implementation of our go to market transformation in our Enterprise North America business is significant. And third, we're pleased that our education business continues to be strong. As a result, we continue to be confident in the actions we've undertaken to accelerate future revenue growth. And with this growth in revenue, we also expect to achieve significant growth in adjusted EBITDA and cash flow.

Speaker 2

Over the next few minutes, I'd like to briefly address the following questions you can see shown on Slide four. The first question is what are the areas in which we have been seeing some impact from the external environment? And I want to lay those out. Second, what are the key metrics that reflect both the continued underlying strength and durability of our business model and the significant traction we're already achieving in the implementation of our new go to market acceleration actions in our North America enterprise business. And then the third question I want to answer, layout and answer is what are the key factors that are driving the continued strength and growth in our education business?

Speaker 2

So, let's get into each of these first. What are the areas in which we've been seeing some impact from the external environment? While we feel good about progress across the vast majority of our business, we are experiencing direct and indirect impact from the actions being taken by the federal government and by the results in economic uncertainty. And while this impact is on the margin for our overall business, nevertheless, it is impacting our revenue growth in the year and is the primary reason why our results will be down this year compared to expectations. We're seeing the effect primarily in the areas you can see shown on slide five.

Speaker 2

The first is in our government business. Roughly 6% or 17,000,000 of our total business is in some way tied to governmental entities such as the Department of Defense, Veterans Affairs, and state and local entities. Approximately $5,000,000 in government revenue has already been canceled or postponed as the federal government looks to cut spending in nearly every category. We expect government revenues to be down by at least $5,000,000 this year compared to the low end of our original guidance. The second area in which we're seeing some impact from these same government actions and trade tensions is in our international direct and licensee operations.

Speaker 2

A significant portion of this impact is being felt in China, where the threat of escalating tariffs and other potential factors and political factors is causing a sensitivity by national and even local companies in China to being viewed as doing business with US firms. In a small number of cases, we've also had clients in Europe and Canada postpone or cancel engagements either as a defensive or nationalistic response to the threat the reality of tariff actions or as a response to the uncertainty of the economic conditions in their own country. While these pressures have not been widespread, they are having an impact on the margin. And we expect that they could result in our international revenues being down by as much as $4,000,000 compared to the low end of our guidance this year. Third, we see the potential for some impact in our Education business.

Speaker 2

To date, we've seen little measurable impact from concerns about the potential disruption of the Department of Education. And I think it's important to note that almost all of our education revenue comes from state level funding. We sell to schools and districts and not to the Department of Education. However, because the Department of Ed has historically provided approximately 14% of state level education funding, we're mindful that uncertainty about potential federal level changes within the Department of Ed could cause some uncertainty at the state level, which could slow down school's speed of decision making this spring. We think this could have as much as a $3,000,000 impact to education revenue.

Speaker 2

While we haven't yet experienced any real negative impact here, we are monitoring the situation closely. Looking out a little bit of the future ultimately, it appears that any funding changes at the federal level are likely to be reallocated to the state level, and from there to the local school districts to which we sell. But short term disruption is a possibility. Finally, the same government related actions also have the potential to create some headwinds for some of our clients in The United States. And we think that this could create an approximately $3,000,000 of additional impact here.

Speaker 2

So let me now speak to how this translates into our revised guidance for the year. First, I would just say that the objectives of our go to market transformation that we've talked about the last few calls remain unchanged. Despite the on the margin interruptions in revenue in our government and international operations that I just described, the engines in our enterprise division in North America and in our education business remain strong and durable. Our go to market transformation is tracking a bit ahead of expectation, and I want to talk about that here in a minute. And our go to market transformation is expected to drive significant acceleration of our overall company revenue growth, moving us from single digit to double digit revenue growth in the coming years and with significant a significant flow through of this incremental revenue to increases in adjusted EBITDA and cash flow.

Speaker 2

With that said, due to the impacts of the government actions just outlined, we are adjusting our guidance for this fiscal year. As shown on Slide six, last year, we achieved revenue of $287,200,000 generating adjusted EBITDA of $55,300,000 Our original guidance for fiscal twenty twenty five provided that at the low end, we would grow revenue by approximately $8,000,000 and generate adjusted EBITDA of $40,000,000 with the reduction from the prior year reflecting the $16,000,000 of incremental growth investments being made this year. Due to the impact of government actions we just discussed, we now expect revenue will come in between $275,000,000 and $285,000,000 or $7,000,000 or 2.5% lower than last year and $15,000,000 or 5% lower than the low end of our original guidance in constant currency. With this, we expect adjusted EBITDA to be between 30,000,000 and $33,000,000 primarily reflecting the gross profit we expect to be lost related to the decline in revenue, again, to the government actions previously discussed. While the $16,000,000 of incremental growth investments were always going to have a direct impact on this year's adjusted EBITDA, we expected they would establish a solid foundation for accelerated future growth and we still do.

Speaker 2

As noted, we're pleased with the traction we're getting and both fully committed to these investments and confident they will do exactly what they were expected to do, which is to accelerate our growth. We, of course, did not anticipate the impact of the government actions, but are taking quick action to reduce our cost structure in government, in our international operations, and other areas of our business. We expect these actions will partially offset some of the government related impact and result in an even higher percentage of incremental revenue flowing through to adjusted EBITDA next year. Therefore, we expect this will be an approximate one year step back and that next year, adjusted EBITDA will be back to approaching where we thought it would be this year. We'll provide specific fiscal twenty twenty six revenue and adjusted EBITDA guidance in November, which has been our pattern.

Speaker 2

So, having talked about the external environment and our updated guidance for the year, I'd now like to turn a different topic, which is to address the strength we're seeing across the majority of our business right now. Despite the potential near term impact in the areas just discussed, the strategic strength of our overall business and our business model continues to be evident. We're also pleased with the significant early traction, as I mentioned, that we're achieving in our new go to market in our enterprise North America. I'd like to first address the strength of our strategic position and business model. Our strategic strength derives from the importance of the opportunities and challenges we help organizations address.

Speaker 2

Opportunities and challenges which are very durable for clients in good times and in more challenging times. This strategic strength and the strength of our business model continue to be reflected in the following metrics in our North America enterprise business as you can see shown on slide seven. First, our revenue continues to renew at high rates. Apart from the government action related headwinds we've addressed, a majority of our clients continue to expand and renew even amid a more uncertain environment. This strong retention is driven in part by our clients' continued interest in expanding the duration of their contracts with us to ensure the ongoing achievement of their critical objectives.

Speaker 2

At the end of the second quarter, '60 '1 percent of our subscription revenue was under a multiyear contract, equaling the high percentage we'd achieved at this same point last year. Second, our clients continue to expand with us. Over time, the average revenue per All Access Pass client has expanded significantly from $39,000 to more than $85,000 reflecting both the growth of the populations being served within our clients and the expansion of incremental offerings that they purchase. The third area of strength is that our clients are continuing to purchase significant amounts of services to help them achieve their mission critical objectives. Despite the uncertainty, it is significant that excluding our government business, in our business in The United States and Canada, our advanced bookings for new services have increased 5% year to date over the same period last year.

Speaker 2

This reflects our clients' commitments to achieving a performance outcome. Importantly, this momentum in bookings will translate into increases in services revenue in the coming quarters. Fourth, we're pleased with the indicators of significant traction we're already achieving in the implementation of our new go to market acceleration in our enterprise business in North America. And I'd like to talk about this here just for a couple of minutes. This is an initiative into which, as previously discussed, we've invested an incremental $16,000,000 this year.

Speaker 2

It's been just ninety days since we launched our transition and the traction and early results we're seeing are very encouraging. The focus of our go to market transition is on achieving significant increases in two key outcomes, which will drive our accelerated growth. The first objective is to significantly increase our new logo sales, and this is off to a very good start. We won more new logos in the second quarter, both in terms of dollars generated and number of clients than in any of the last five quarters, and we expect another strong quarter ahead in Q3. We exceeded our new logo plan by more than 50% in the second quarter.

Speaker 2

And while we did not start the transition until the second quarter, we're pacing to achieve approximately 40% growth in new logo sales for the year. Importantly, we've also had a higher purchase of services by new All Access Pass clients this past quarter than we've seen in previous quarters. I'm going to come back and touch on that in just a second. Our second objective is to increase our expansion within existing client organizations. This is also off to a strong start.

Speaker 2

The second quarter was a strong quarter in terms of client expansions and we beat our planned expansion target by 8%. Underpinning the strength of this early traction are two important factors. First, that our new go to market organizational structure is fully aligned, fully staffed and working. Every role is filled and we've added top tier talent in critical roles to go along with the already tremendous talent we had in place. All 44 of our new logo sales people are in place today.

Speaker 2

42 of the 44 were in place by December 1. And the other two, so all 44 were in place by February 1, which is a full month ahead of what our planned staffing plan indicated. 21 of the 24 brand new new logo hunting salespeople closed business in the second quarter '20 '1 of 24 closed business in the second quarter, which is their first quarter. That's an unprecedented ramp speed for us. And our new logo pipeline exceeded plan by 30%, and our conversion rates were 300 basis points above our targeted conversion rates in the second quarter.

Speaker 2

The second factor underpinning our traction and momentum is that the important investments we've been making into content, technology and delivery capabilities over the past years are enabling us to serve even more clients more broadly and more effectively than ever before. As I mentioned a minute ago, we're also seeing attachment rate of services to new logo wins, and this is a bit of a shift for us. We're intentionally driving this with these new logo sellers. And this is not only increasing deal size, but we anticipate it will also boost client retention as our clients who buy services renew at higher rates. I'd like to share a quick win story from the second quarter that highlights the win of a new logo that also had more of these services attached.

Speaker 2

We closed a large hospital system in the Midwest for $253,000 in annual contract value. So that's a very nice new logo win for us. And this contract had, it was a hundred and $44,000 All Access Pass subscription with a hundred $9,000 in services attached to that subscription. The deal, this is interesting, the deal began with interest from the hospital system CEO. And he'd asked for a single keynote on the speed of trust.

Speaker 2

And we quickly expanded that initial interest into a rollout that covered a few hundred of their leaders to instill trust across teams and within patients in each of their hospitals. This deal was closed in just forty four days by one of our new logo sellers who was new enroll. It was her third month in seat. Finally, I'd like to, as I touched briefly on a minute ago, just discuss for a second the ongoing strength we're seeing in our education business. As shown on Slide eight, education revenue grew 3% in the second quarter and is up 7% year to date.

Speaker 2

Importantly, year to date invoiced amounts in education are up 13%, positioning us well for the seasonally stronger second half. We're seeing strong demand for Leader in Me driven by success in delivering the outcomes that educators, parents, and communities care about, such as leadership development, student engagement, and character building. This strong demand is fueling our transition from selling initially to individual schools to selling to entire districts. And we now, in a handful of cases, serving statewide contracts. We're pleased there are now 7,800 leader in these schools around the world.

Speaker 2

And we're just getting started in growing that number to even larger heights. So we feel quite good about the progress that's being made with the transformation of our North America operation. We feel good about the continued momentum in education. And with that, I'd like to turn the time over Steve and ask Steve to share a little bit more detail on our financial results, also share a little bit of specific Q3 guidance.

Speaker 3

Thank you, Paul. Good afternoon, everyone. It's a pleasure to be with you today. You'll find on Slides nine through 12 and in the appendix the second quarter financial details I've typically shared verbally on these calls. But today, I'll take the time to highlight a few encouraging trends we're seeing in the business that continue to support our confidence moving forward.

Speaker 3

First, a few high level financial results. The second quarter revenue was $59,600,000 or $60,100,000 in constant currency, slightly below the $61,300,000 we achieved in Q2 last year, with more all of the difference reflecting the impact of the government related cancellations in the last sixty days. Adjusted EBITDA for the quarter was $2,100,000 or $2,600,000 in constant currency, landing at the top end of our expectations despite the government disruptions. Gross margin and SG and A were in line with projections, including the second quarter share of our $16,000,000 in incremental growth investments in North America. We feel good about the results given the canceled government revenue and the related shortfall in international sales and it being the first quarter of our go to market transformation Paul just described.

Speaker 3

Second, I'd like to highlight that we're seeing continued strength in the number and value of multiyear contracts being signed. In fact, additions to unbilled deferred revenue, which reflects multiyear contracts secured but not yet invoiced, was up 10% in the second quarter and is also up 10% for the first half of this year compared to the first half last year. This momentum is also evident in our All Access Pass contracts in North America. As of the end of Q2, the percentage of All Access Pass contracts that are multiyear was a strong 55%. And as Paul mentioned, the percentage of our subscription revenue associated with this multiyear agreement was also a strong 61%.

Speaker 3

These results reflect our clients' long term commitment and belief in the value and strategic impact of our solutions. In the midst of a more challenging macroeconomic environment, we're also pleased that the vast majority of our clients are renewing their contracts, expanding their usage and expressing confidence in the work we're doing together. This gives us continued confidence in both the future trajectory of the business and the early returns we're seeing from our go to market transformation. Third, as Paul mentioned, our services booking rate in The United States and Canada, excluding government, is up 5% year over year. This is a strong indicator that we're not only landing new clients, but that we are a trusted partner in delivering solutions that drive real outcomes and lasting value.

Speaker 3

Fourth, we're seeing good momentum in our education business, particularly in the number of large state and district level opportunities we're actively pursuing. This pipeline strength together with the base of 7,800 schools gives us confidence in the demand for the kind of outcomes our Leader in Me solution delivers and provides confidence in continued growth as we move through the second half of the year, which is historically education's strongest period. Finally, our business continues to produce strong, reliable cash flow. And today, we still have more than $100,000,000 in liquidity. We've continued to use this strength to return value to shareholders.

Speaker 3

From 2022 to today, we have invested approximately $105,000,000 or 83% of free cash flow to purchase 2,600,000.0 shares. In the first half of this year, we've invested $14,700,000 to purchase 397,000 shares. We expect to continue allocating excess cash toward accelerating growth, M and A activities, and share purchases. We remain committed to being disciplined stewards of capital while staying focused on driving long term value creation. Now just a little bit more on guidance.

Speaker 3

As Paul shared earlier, our revenue guidance for the year is to be between $275,000,000 and $285,000,000 with adjusted EBITDA between 30,000,000 and $33,000,000 in constant both in constant currency. Our guidance for the third quarter is that revenue will be between 67,000,000 and 71,000,000 and adjusted EBITDA will be between $4,000,000 and $6,500,000 reflecting both the expected continued revenue disruption from government related activities impacting our direct government, international, education and other revenues, as well as the third quarter's portion of our growth investments. So Paul, back to you.

Speaker 2

Thanks, Steve. Thanks for taking us through that. And we'll now invite the operator to open the line for questions as we do. Just want to again thank everybody for being here today and look forward to answering your questions.

Operator

Thank you. And our first question will come from the line of Alex Paris of Barrington Research. Your line is open.

Speaker 4

Hi, guys. Thanks for taking

Speaker 2

to talk to you today.

Speaker 4

Yep, same here. I guess we'll start with the external impacts, doge and tariff related and so on. I think I understand it. There's direct federal government agencies in law's business. There's impact on your international business because of the response to the increased tariff talk from this end.

Speaker 4

And there is an expected impact on your education business as well. So focusing first on on the federal government. I I think you said in your prepared comments that it's 6% or $17,000,000 is government revenue on a full year basis, DOD, VA, and then state and local. Is that correct?

Speaker 2

Yeah, but the majority of it being federal. Yeah.

Speaker 5

Okay, that's what

Speaker 4

I was gonna ask. The majority is federal. And you called out DOD and VA. Are there any other agencies that we should be aware of?

Speaker 2

Yeah. So, do work with pretty we are USAID has been an agency we've had a long, long relation, had a long relationship with in the past. We've done stuff with a health and human services. We've had a nice government business for a long time doing work across a number. We do work with the treasury, then work with Congress in the past.

Speaker 2

So it's been fairly broad over the years, Alex.

Speaker 4

Got you. And then you said, I think Steve said that the entire year over year decline in revenue was due to canceled government contracts and then the related impact on your other businesses.

Speaker 2

Yes. Yes, that's right.

Speaker 3

Yeah. Particularly in q the impact was reflected in q two of the cancellations just in the last sixty days. That's right.

Speaker 4

Gotcha. All right. And then on the education, obviously, there's nothing you can do about that. There hopes to win the business back in the future? Certainly, your guidance assumes that you don't win it back this year.

Speaker 2

Yeah. Yeah. So staying on government for a second. Our guidance and our and our the view right now is that we don't win that back this year. I don't I don't see a scenario where that happens.

Speaker 2

And and so what we're doing, one of the things we're doing is we're just taking a look at that government and saying, Okay, over the next bit of time here, assuming the trajectory of what's happening within the government doesn't change, how do we structure that business so that we can be as profitable there as possible on less revenue? That's an action we're taking immediately. Longer term, if things settle down, a big part of what we do as a company is we help organizations become more efficient, get more out of their people, do more with less. We have a whole set of offerings, as you know, around execution. There could be an opportunity to get back in and help on some of those things.

Speaker 2

Right now, the environment is such that there's not a lot of appetite to buy anything new in the government. But I think that we'll see as we go into next year whether that looks different. But at the moment, that's how we see it.

Speaker 4

Gotcha. Thank you. And then on the education side, 86% of funding comes from state and local governments. Only a small component, 14% comes from the federal government overall. I'm not saying your revenue.

Speaker 4

And that would be things like title one and individuals with disability. What percentage of your education division revenue comes from the Department of Education?

Speaker 2

So we don't the Department of Education for us is not actually a client. And so they'll they dole out 14% of the state's budget comes through them. And like you said, it is directed towards Title I, towards some of those programs that you mentioned. And so we're not selling to them. We don't have a relationship with the Department of Education, never had.

Speaker 2

The fact that that agency is being cut, cut in half, however far it gets cut back, that itself doesn't have any impact on us. And we don't actually think, Alex, over time, there's not from everything that we can see right now, the dollars that have been flowing from the Department of Education to the states, we expect those dollars are still gonna flow. They might come from a different agency than the Department of Ed. They might be as as administration is trying to actually shut down the Department of Ed. And so, long term, we don't actually see that creating a funding challenge for us.

Speaker 2

What we're trying to highlight here in this call, that just so happens that it might throw just a bit of sand in the gears in our third and fourth quarter, which is the time of the year when schools are making decisions to start Leader in Me. Right? The second half has always been our biggest half of the year. And so it's just the thought that there might be just enough uncertainty during our third and fourth quarter as the dollars are being shifted from the federal government to states that it might cause some slippage in the timing of decisions. Decisions in that business are usually made in school board meetings.

Speaker 2

And so if you miss a school board meeting, you're up for the next one. And there could just be enough of that. Right now, we're not seeing it really widespread at all at the moment. We're just trying to highlight that there's a possibility there could be a few million dollars of impact there. Generally speaking, it's really on the margin.

Speaker 2

That business is doing quite well. And we expect that it will continue to be. Highlighting, is that risk, that potential.

Speaker 4

Just a couple more. So, if I understand it correctly, some of these internal impacts are kind of masking the success and the traction and the trajectory resulting from your North American enterprise sales force restructuring. Just to be clear, I think in Q1 of that $16,000,000 incremental investment, I think you spent a little bit less than $3,000,000 in the first quarter. And I think you were expecting to spend a little bit more than $4,000,000 in the second quarter, and then $4,500,000 in each Q3 and Q4 to get us to 16,000,000. Are we still pretty much on that schedule in terms of incremental spending?

Speaker 2

We are like really right on that schedule. I'm looking at Steve here, he's nodding. Yeah. So that set of bets, those investments are right on track. We've we've we've made those investments.

Speaker 2

So the people are it's it's it's primarily people. The people are here, they're in role. And so that penciling out you just did of around three going to four, and then four going to four and a half and four and a half. Those are with us now and that's a conscious decision we're making here. We're saying we like the early momentum that we're seeing, the traction that we're beginning to see.

Speaker 2

We're only ninety days in, but we like what we're seeing and that's not an area where we want to cut back. That's the area we believe, that's the engine that pulls the company's overall growth rate higher and higher that we've talked about and that we're excited about. And so, see making some doing some trimming in some other places, but we don't want to trim there. We're quite pleased with what we're seeing in the early days here.

Speaker 4

Great. And then the last couple would be regarding guidance. So you kind of spelled out the guidance there and the delta from previous guidance and year over year. You gave third quarter guidance, so we have implied guidance for the fourth quarter. In the text of the press release, you said that the company expects this to be a one year step back and the company's adjusted EBITDA will approach 2025 original 2025 expectations in 2026.

Speaker 4

So, that suggests there's been a reduction in expectations in 2026, given these external factors. And then what does that do to '27 and '28? Because you had given long term guidance through 2028 previously.

Speaker 2

Yeah. It's a great question. I would say, will, as has been our pattern, we're gonna go ahead and update that in November as we kinda see how the next couple of quarters play out. I will say that just two more comments on your question there. One, as we take takes as we expect to accelerate some of our invoicing growth and whatnot in the back half of this year.

Speaker 2

And we take some of the costs, we take a look at some of the costs that aren't related to our growth. We do see ourselves next year even on modest revenue growth getting pretty good flow through on that having had a big investment year this year not needing to make anywhere near the same level of incremental investments next year. Plus, the flow through on some of the things we would do on the cost side in the back half of this year, setting ourselves up for a good flow through year next year. Flow through like we used to have, like you've been accustomed to us having. And that's the comment about setting up next year to getting back, to approaching getting back to where we would have been this year on the adjusted EBITDA side.

Speaker 2

As far as the longer term outlook on revenue and adjusted EBITDA, we'll give a good update on what we think in November. I will say that fundamentally, as we think about just the underlying thesis here, we still do very much believe that this is a business that there's great demand for what selling. Our clients need what we have. We have good strength in this business. And that the transformation we're making in our North America enterprise operation coupled with the good momentum we've had for a long time in education, that over time, the revenue growth accelerates.

Speaker 2

With that, we drop through revenue to increases in adjusted EBITDA and cash flow. And that underlying thesis remains intact. As we get a little more visibility, we'll share more about what that when and by how much. But that's the trajectory where we still think we're on.

Speaker 4

Okay, got you. And then lastly, guess, again, the positive effects are somewhat masked by the external impacts. I think you said on the last conference call, the things we should look for in terms of milestones would be size of pipeline, that's where it would show up first Growth in invoice sales, that's where we'd see it second. I think it was down still in Q2. I realize we're only ninety days in.

Speaker 4

And then ultimately, reported revenues. I wonder if you could just give comment on those three milestones or a little additional color.

Speaker 2

You bet. So, yes, growth in pipelines and just a couple couple of comments there. As we mentioned in our North American business, we exceeded our pipeline target by about 30% in the second quarter. We had a better close rate than we thought. So I think if you think about the new logo side for a minute, the factors that drive new logo are can our marketing organization generate more leads, more pipeline, more opportunity?

Speaker 2

Can our sales organization qualify that advance and close it? We saw that in the second quarter at rates that were above what our plan suggested would have been great success. So we were ahead on those. And then on the other side, it's can we take the client on the expand side, can we take those clients who've now landed at greater rates? And can we expand them and retain them?

Speaker 2

And we had good. We beat our expansion plan by 8% in the quarter as well. Those happened even with the noise we saw with some of our contracts and some of the government is part of North America. So despite some of the headwinds we saw in the quarter, began to see in the second quarter, our second quarter happened to be January, February, December, January, February. The leading indicators were positive and as you mentioned, we're only ninety days in.

Speaker 2

And we look forward to reporting on that again as we get to Q3, Q4. We'll just keep reporting on those as we go along here.

Speaker 4

And has there been any impact on the commercial side of the business within enterprise? Like extended sales cycles due to uncertainty, tariffs, recession worries, things like that?

Speaker 2

I think that's what certainly, as alluded to, we've seen that internationally. In fact, in three of the countries in which we operate in our international direct offices, they've had snap elections in the last ninety days. So there's some uncertainty there and so we see some of the prolonged decision making happening in international. And that's why we've tried to reflect that in our updated guidance. And then we've provided a little bit of in The US, expecting a little bit of headwind there as well, which is where the we've also accounted for about $3,000,000 of potential headwind there in The US as well.

Speaker 2

So haven't seen a lot of it yet, but expecting that we might see a little bit of that.

Speaker 4

And that's in guidance?

Speaker 2

That's in guidance, yes.

Speaker 4

Okay, great. Well, thank you. I'll get back into the queue. Appreciate your answering my questions.

Speaker 2

Thanks, Alex.

Operator

Thank you. One moment for the next question, please. And our next question will be coming from the line of Jeff Martin of Roth Capital Markets. Your line is open.

Speaker 2

Hi, Jeff.

Speaker 6

Thanks. Good afternoon, Paul and Steve. Hope you're well.

Speaker 2

You too. Thank you. Good to talk to you.

Speaker 6

So Paul, was just curious if you could clarify the $17,000,000 in government related revenue, 6% of revenue. Does that include non government organizations that are influenced by government agencies or is that a commemorative that and are you seeing any impact there?

Speaker 2

Yeah, the 17,000,000 is governmental agency direct. The 17,000,000 is direct. The broader as far as government representing a good share of the GDP and how that spills to companies who do a lot of work with the government, etcetera, etcetera. That's what we're trying to point to in the $3,000,000 or so of impact we might see in The U. S.

Speaker 2

And Canada. So not yet seeing a lot. I think we're not seeing a lot of that yet. We're obviously directing our sales force towards those organizations that trying to assign them to highest and best use to the types of accounts that we think will do well in these times. But haven't seen a lot of that yet, Jeff.

Speaker 5

Yep. Okay. And then

Speaker 6

I was curious if you could characterize the project starts among your clients who are subscription, purchasers, are those largely starting on time? Are they starting to infuse some delays related to uncertainties, you know, need to focus on other areas of the business, the impact of tariffs, etcetera.

Speaker 2

You know, we we as we we we mentioned, the second in the second quarter, we actually had a better new logo quarter. So for us, when we sell when we bring on a new client, we sell a new logo, we're starting right away with them. Their subscription starts, the clock is running on that first year subscription. And so we're seeing we haven't seen any slowdown in terms of project starts, Jeff, at this point.

Speaker 6

Okay. That's encouraging. And then if the economy does roll into a recession here, I know in the past you've spoken about the durability of the subscription model. Obviously moving to multi year contracts helps but how do you see that in terms of potential impact on new logos? I know you just had a really strong first ninety days under the new go to market strategy, but just was curious if you have the same level of conviction if the economy does do roll into a recession here.

Speaker 2

Yeah. So you highlighted two important things. First, would say, the subscription business helps us in situation like that where we need to roll into a recession in that we've got all the clients that we've got that portion of clients that are on a multi year contract. So about 55% of our contracts are multi year, meaning two years or longer. 61% of the subscription revenue is under a multi year contract, again two years or longer.

Speaker 2

So you get a nice there's a bridging effect there. A lot of the base is bridged and in place in that experience. In the past, when we've seen a downturn like that, usually there's a couple of quarters where there's a lot of uncertainty. And so we've got some good built in durability there just in those multi year contracts. We also for all those clients that are on a multi year, they're on a one year contract.

Speaker 2

And so you've got a good number, a good percentage of clients that are in their first quarter, second quarter, they're only a portion of the way into even the single year. So there's some increased strength and durability built into just the way that All Access Pass and Leader in Me are contracted in the form of minimum one year contracts. To your second question around new logo, I think so again, I was pleased in the second quarter. It wasn't like the second quarter didn't have some external noise in it and we had a good quarter. Right now, our pipeline is in the early indicators for Q3, even in this environment, suggests that Q3 is going to be another good, strong new logo quarter for us.

Speaker 2

And we feel good about that right now. We are, of course, as we've done in the past, we direct our sales force even a little bit more to the solutions like the four disciplines of execution, our sales performance solutions, those topics that we fortunately cover that really become even more critical and important to clients and to organizations when they're trying to grow their own businesses. And so we'll direct our sales forces there and remains to be seen. But right now, we're encouraged by what we saw in Q2 and the early indicators for Q3 on new logo.

Speaker 6

Okay. And then last for me is your guidance implies roughly, this is roughly speaking, 14,000,000 to $16,000,000 of adjusted EBITDA in Q4. I'm just curious your level of conviction, happen to exceed that number? What could you foresee that might pressure that number?

Speaker 2

Steve, do you want to make any comments on that?

Speaker 3

Hi, Jeff. Since any subscription sale, only a portion of that is recorded to actual revenue. The fourth quarter especially is impacted a lot by the amount of services that we deliver and the amount of coaching days that we deliver, especially in education. So one of the important areas that Paul talked about related to the fourth quarter is that there isn't some thing that we cannot imagine that would significantly impact the education days. We don't see that and we don't anticipate it, but that's the kind of thing that could be a disruption.

Speaker 3

Then the improvement could be simply that, again, in education and in everywhere else, some of the disruption that we're anticipating might happen just doesn't. And there is a need for those delivered days and the services and the content and the companies just go ahead with what they need would be an improvement to what we're projecting.

Speaker 2

And just on that, think that's a great point, Steve. So far, of all of the factors that I walked through that kind of give the basis for the new guidance, the government piece, is lost business we've already incurred there. The others are just as we look out in the future and try to think about what we think might happen. But we're working every day to figure out how to do better than what that might be. So international, where we think we might be down as much as $4,000,000 compared to plan this year, no one's be happy that we hit the number we just gave out today.

Speaker 2

We're trying do everything we can to do better than that. Hopefully, hopefully, we'll be able to be what we shared here today. And that's certainly our expectation.

Speaker 6

That's helpful. Thank you for taking. Thank you for the time.

Speaker 1

Thanks, Jeff.

Operator

Thank you. One moment for the next question. And our next question will be coming from the line of Dave Storms of Stonegate. Your line is open.

Speaker 7

Hi, Afternoon. Appreciate you taking my questions. Just wanted to start, while we're looking at the external environment, is there any ability or appetite to maybe band down the axes a little bit and shift focus a little more internally towards more focused on product development, more focused on enhancing AI capabilities, any internal projects like that?

Speaker 2

So we have a great product development roadmap. On that product development roadmap includes how we're going to incorporate AI into our products and we're already doing that. We've talked about that in the past. Internally, there's also an opportunity to just continue to make our own internal operations more efficient, more streamlined. I think there's obviously the ability for AI to help with that.

Speaker 2

One of the things I mentioned in my remarks was just that we recognize that we're taking our EBITDA guidance down as well, primarily the function of the revenue going down and then not wanting to cut the $16,000,000 of growth investments. We will look for other places that aren't tied to the things that are going to grow the business in the future and try to look for ways to become as efficient as we can. We've done that for years And we'll continue to certainly do that and look inward on those things, Dave.

Speaker 7

Understood. Very helpful. Thank you. And then just looking at some of your go to market strategy kind of outpacing goals, it does look like, as you mentioned, new logos is up 100% over goals, where the expanders is, call it, like 108%. Looking past the market uncertainty, do you see a point where you will need to hire more expanders faster than landers?

Speaker 7

And I guess, of how are you thinking about the balance between those two roles?

Speaker 2

Yeah. Great. It's a great question. So first of all, stepping back for a second, long long term as we we zoom out for a second and think about what happens over the long period of time, we've done a nice job of expanding. Once we land a new client, expanding that client and we take them on a journey, the journey to date has been to move an average of $39,000 over time to an average of a little over $85,000, and we expect that to continue.

Speaker 2

Even if that didn't grow by a lot more, and they just went from 39 to 85,000, The fact that we could be landing a lot more new clients in the future, that's gonna generate a lot of growth. And so we do expect in the coming years, next year and going into years after that, to grow the landing side of the organization and continue to grow that. There are about 16,000,000 potential clients we could sell to. That includes SMB, but there's huge market of clients out there to which we should be selling to who could be users of our content and our solutions. And so, we see a lot of headroom to keep growing on land side.

Speaker 2

So those account executives who are out hunting for new business and we expect to do that. We also will, as we're successful, need to grow the expand side, but not the same rate. Those expanders, the way we've got capacity there, in fact, we don't think we need to actually expand, add any expand, very many, if any expanders this next year because of the capacity that's there to receive the accounts we're throwing over to them. And so, over time we'll need to, but I think the expand side will be able to grow at a slower rate than the land side. We also have on the expand side, the customer success organization, the implementation strategists we've talked about in the past that help provide some of those account management duties so that those expanders can focus on looking for new opportunities to expand the usage of our solutions inside our existing accounts.

Speaker 2

So both will grow, but I think we'll be growing the land side even ahead of the expand side. And therefore, ought to get even better flow through on those existing clients because our cost structure doesn't have to change won't have to change as much on that side. You remember that those those one more point here. Sorry. That those those expanders used to have the responsibility to also land new business.

Speaker 2

Now now their full job is to take care of the existing clients and try to expand them. And so we can we can we can increase the number of accounts per expander without disrupting that expansion play.

Speaker 7

That's all very helpful. Thank you.

Speaker 2

Thanks, Dave.

Operator

Thank you. One moment for the next question. And our next question will be coming from the line of Nehal Chokshi of Northland Capital Markets. Your line is open.

Speaker 2

Hello, Nehal.

Speaker 5

Yeah. Hello. Hey, thank you for the questions. Congrats on the strong land and expand metrics within the quarter. Clearly, the big topic though is the fiscal year revenue reduction.

Speaker 5

On slide five, you did have a line item here of 3,000,000 additional impact in the year. I didn't hear any color on what that additional impact is. Could you repeat it if you already did talk about it?

Speaker 2

Oh, sorry. Yeah, it's just spillover of the government actions, tariff related news, things like that, that will create, we expect, some headwinds for our clients here in The US. And just the presumption and expectation that there'll be some of that this year that will be up against the back half of the year.

Speaker 5

Okay. And so the way I kind of understand this guidance, Todd, is that $9,000,000 has been realized already and $6,000,000 is being anticipated. Yeah,

Speaker 2

the $5,000,000 has been realized. The four isn't fully realized yet. It's the expectation of what we think happens across the year in international. And then Ed and the additional headwinds. So it's laying out the 15,000,000, But the five is lost business already in the federal government.

Speaker 2

The others are just kind of our view into what we think could happen here in the future. And again, we'll try to do better than that, certainly.

Speaker 5

Great. Okay. Alright. And then moving on to the EBITDA guidance. The EBITDA guidance has cut 70%.

Speaker 5

It's cut 70% at the low end of the revenue cut while the high end of the EBITDA cut is only cut 50% of the revenue cut. Right? So amount of flow through is less as we go to the more extreme portion of the new guidance range. Why is that?

Speaker 3

Neha, yes.

Speaker 5

I'm sorry. It's the other way around. The amount of guidance cuts is less as we go to the lower end of the new revenue and EBITDA ranges. That's what I'm going say. Sorry.

Speaker 3

Yes, Nehal. We see it the same as you do. That is we clearly identified that the numbers, the difference that we're talking about is related to the low end of the guidance versus the full guidance. And if we did the calculation based upon the high end of the guidance, it would be a different level of growth. So we're agreeing with exactly what you said.

Speaker 3

We did the comparison to the low end of the ranges just because knowing clearly identifying it. So anybody wanted to do the calculation based upon the high end, all the numbers are available to easily do that. But we see it the same way you see it now.

Speaker 5

Okay. What I was trying to say was that the low end of the new guidance range relative to the high end of the new guidance range for the EBITDA. The EBITDA cut is not as severe as a percentage of the revenue cut as it is for the high end. And so you're expecting not as much of a profitability impact as you get to a more extreme revenue cut scenario here. So was the question, not which baseline to utilize.

Speaker 3

Yeah, Nehal, if I understand correctly, I think the thing included there is we're including an anticipation of having some reasonable controls of our SG and A. So those SG and A adjustments to adjusted EBITDA are the same or they're talking about the low end or the high end of the range. It's the same number rather than a proportional adjustment based upon the change in revenue. And I think that's what's changing a different percentage. Does that make Yes.

Speaker 5

That makes a lot of sense. Yes, that makes 100% sense. Okay. And then it looks like in the quarter, you did have negative free cash flow. What's the driver of that?

Speaker 3

Well, there's a couple of things going on with free cash flow. And obviously, Nehal, as you look, you'll see that free cash flow is meaningfully below last year. A couple of significant things going on there. One is that we paid over $6,000,000 in taxes this year that we normally haven't paid. We've signaled that for quite some time that those tax payments were coming because we're out of net operating loss carry forwards and foreign tax credits.

Speaker 3

So we had an increase in cash paid for taxes. And we also, last year, had a meaningful amount of customer deposits added to our cash flows. And those are really lumpy. And that's because we don't often have customers prepay for their services. But sometimes in education, and especially at the state and district level, if they have cash available, then they can make a pretty significant prepayment to us.

Speaker 3

And that affects our cash flow meaningfully. So there's like a $7,000,000 difference in the deposits that we received. And then net income is the other part. So those are the things that are primarily the level of profitability And then the sales level impacts our accounts receivable and our deferred revenue. But the things that are really different is the profitability of the company, the customer deposits, and the taxes.

Speaker 5

Okay. That's really helpful. And then clearly, you guys are signaling high confidence in the business fundamentals by deploying about $8,000,000 in buybacks during the quarter. Can you give us a sense as to whether or not you will continue to do so given where the stock is indicating here?

Speaker 3

Nehal, as you know, we never really say exactly what we're going to do. But we do look at the share price and we have shown a willingness to buy back shares. So I think that's an indication that our strategy going forward will be similar to the past. And that is we in any scenario to be actually generating positive cash flow even at these reduced levels. And if we can have meaningful acquisition activity that will really increase the value of the company over a longer term, then we'll look seriously at that.

Speaker 3

And then we'll amid all of that, we'll obviously look at the share price and other factors that we can see and the cash that we have available and look at buying back shares.

Speaker 5

Okay. What's your degree of confidence that the remaining EBITDA that you expect to generate for this year will generate positive free cash flow?

Speaker 3

We think it'll be for positive free cash flow. We don't get as you know, don't give an estimate on that. We think even with these reduced forecasts, we'll have a positive free cash flow for the year.

Speaker 5

For the full fiscal year or you're talking about for fiscal 2H twenty five?

Speaker 3

For the full year and some additions to the first half in the second half. Maybe not that much, but still some free cash flow for the year and most likely a little bit in the second half.

Speaker 5

Great. Thank you very much.

Speaker 3

Even given these numbers.

Speaker 5

Great. Okay. Thank you.

Speaker 2

Thanks, Nehal.

Operator

Thank you. And that does conclude today's Q and A session. I would like to go ahead and turn the call back over to Paul for closing remarks. Please go ahead, Paul.

Speaker 2

Thank you. Thanks again, everyone, for joining today. It's great to be with you and to share an update on where the business is. We're pleased with what's happening in our go to market transformation and also what's happening in our education business and look forward to talking to you again in the quarter. Have a great afternoon.

Operator

Thank you all for joining today's conference call. You may now disconnect.

Remove Ads
Powered by Quartr
Earnings Conference Call
Dollarama Q2 2025
00:00 / 00:00
Remove Ads