Docebo Inc. Q2 FY2020 Earnings Call

Good morning, everyone, and welcome to the Docebo Inc. Second Quarter 2020 Earnings Call. I would now like to turn the call over to Docebo's Investor Relations, Dennis Fong. Please go ahead, Dennis.

Thank you, operator. Before we begin, Docebo would like to remind listeners that certain information discussed today may be forward-looking in nature. Such forward-looking information 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 these forward-looking statements. For more information on the risks, uncertainties and assumptions relating to the forward-looking statements, please refer to Docebo's public filings, which are available on SEDAR. 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're not recognized measures and do not have standardized meanings under IFRS. Please see our MD&A for additional information regarding our non-IFRS financial measures, including for reconciliations to the nearest IFRS measures. Please note that, unless otherwise stated, all references to any financial figures are in U.S. dollars. Now I'd like to turn the call over to Docebo's CEO, Claudio Erba.

Thank you, Dennis, and good morning. I hope everyone is keeping safe and well. Thank you for taking the time to listen to our second quarter earnings call. Joining me on today's call is Ian Kidson, our Chief Financial Officer; and Alessio Artuffo, our Chief Revenue Officer. Before we begin discussing the quarter, I want to take a moment to acknowledge the challenging times we are facing as a society and to voice our dedication and support for social justice and racial equality. As an organization founded and built on the principle of learning and personal development, we believe collaboration and innovation should never be stifled by inequality and hatred. We are committed to strengthening an anti-racist plan and to encourage awareness and action to create a more balanced and cultural context. This past quarter, we have made contributions to the ACLU and implemented initiatives at the corporate level. We will also observe June 10 as a corporate holiday and are reviewing our list of holidays to create a more balanced and cultural context. These are some of the initiatives we have taken so far, and we will endeavor as an organization to constantly improve and create a safe and inclusive environment. This was our first full quarter under a COVID-impacted economy, and I'm pleased to report a continuation in the strong growth momentum we have seen since becoming a public company last fall. This demonstrates the resilience of our business even in this new normal environment. Our ARR grew to $57 million at the end of the quarter or 54% as compared to the second quarter of 2019. This was supported by our year-over-year subscription revenue growth of 55% and total revenue growth of 46%. We now have over 2,040 customers, and our average contract value increased both quarter-over-quarter and year-over-year to nearly USD 28,000. For new customers added in the second quarter, our average contract value was approximately $37,000, reflecting the ongoing shift in our customer base to midsized enterprises and departments within large organizations. This area is considered a weak spot within the LMS marketplace. Overall, these growth metrics show that our business is tracking right in line with our performance over the past three quarters since our IPO. As expected, we did see more revenue churn in the second quarter, primarily from smaller companies and those operating in industries directly impacted by the COVID crisis. However, this was more than offset by strong customer momentum, as we realized our highest quarter in new logo sales and upsell performance in our company's history. We are seeing demand for our products across a number of fronts, from use cases requiring external training for customers and partners, where we have always had strength, to companies having to transition from classroom-led in-person training programs to virtual training. We are increasing our sales focus across those industry verticals, and I will highlight a few examples. One example of a new logo in the second quarter that is evolving in the way they train is LEGO Education. LEGO Education chose Docebo for a very exciting new learning project, expanding their in-person teacher learning program to the virtual world. LEGO Education will use the Docebo platform to deliver online professional development, supporting teachers' success in the classroom. We were pleased to sign LEGO Education in the U.K. and are now under implementation in France, making this a notable upsell win for us as well. We are focusing our go-to-market efforts in key industries where we can grow, and in the second quarter, we added several customers in the financial services sector. These include TD Ameritrade and BPER Banca. The financial services sector is a good target vertical for us with large and dispersed internal and external workforces that need to meet compliance training obligations and are consistently upskilling. In the second quarter, Docebo brought on TD Ameritrade as a new customer. The company will be using Docebo to improve the educational experience it provides for independent registered investment advisers on their platform, enhancing their professional development, increasing their knowledge of TD Ameritrade's services, and enabling advisers to leverage learning opportunities that can help keep their team sharp and engaged. Close to my home is BPER Banca, one of the largest Italian banking groups, who selected Docebo to relaunch its training and communication project for all of the company's employees. BPER Banca will use Docebo to improve the learning experience for over 10,000 learners. Mobile learning and social learning will facilitate engagement and increase adoption. Strong UX and AI capabilities will guide users through all training and internal communication activities. The Docebo Learning platform will also be utilized by BPER to facilitate internal content creation. In addition to new logos, we are very focused on expanding our business within our existing customer base. After Walmart's selection of Docebo in the first quarter to enhance its walmart.com training program, in the second quarter, Walmart Media Group chose Docebo to help with their internal and professional development needs. Walmart Media Group will also be looking to use Docebo to extend their training to external audiences, including advertisers and the agencies that work with Walmart. This is a significant proof point as our upselling and cross-sell team has ramped up, demonstrating the flexibility of the Docebo platform and the large opportunity we have to address various learning use cases across departments in a large organization. I'm also pleased to report that we hit an important milestone in the second quarter as our main OEM partner became our largest customer concerning our ARR. OEM partnerships are a strategic area of growth for Docebo, and we have learned a lot in the past 2 years while working with this partner. Today, we have a streamlined process for cultivating and onboarding new OEM relationships that we intend to leverage and expand. In our last quarterly earnings call, we announced that we had added our second OEM partner, Phenom People. Last month, we added our third OEM partner, MHR International. MHR is an exciting partner for us as the leader in HCM software in Europe that supports the management, development, and payment of just over 10% of the U.K. workforce. MHR will offer Docebo's best-of-breed workforce learning and development tools alongside their market-leading integrated HR and payroll platform. When we reported our first-quarter 2020 results, we also spoke about the accelerated hiring we completed prior to the broader COVID lockdown. At that time, we indicated we had put on hold any additional hiring until we had better visibility into how the COVID situation was unfolding. Based on the demand we have seen in the second quarter and our current pipelines, we feel comfortable cautiously resuming our growth investment in the second half of this year, albeit at a reduced rate compared to original plans. This means we will begin to resume our expansion program in sales, marketing, support, and R&D as we look to position the company for growth in 2021 and beyond. Ian will provide some additional color on our expenses this quarter and outlook, but we believe that the current market environment is supportive of our continued investment into growth. As always, we will take a responsible approach to how we deploy capital with our investments to strike the proper balance between revenue and expense growth. Lastly, I want to acknowledge the work of our development team, which has done an incredible job in keeping pace with our planned deliverables and product updates throughout the COVID lockdowns, setting the foundation for our continued success and growth. During the second quarter, we introduced a new customer reporting tool that helps admins better measure the impact of their training programs, allowing them to do it faster, which is critical. We also redesigned the front end of our learning platform to conform as closely as possible to WCAG guidelines to provide learners with a more accessible user experience for individuals with disabilities. Docebo will be accessible for learners to navigate with a screen reader or a keyboard to complete formal training without extra configuration needed, helping to bridge the gap in delivering meaningful and functional learning experiences for all users who may have a disability. You have heard us talk about our focus on our land and expand or upsell strategy, as well as our innovation and investment in R&D. I want to update you on some of the exciting new product releases we currently have in beta. The first is Shape, which is a groundbreaking product in its category and industry that works to automate the process of creating training content at scale. Shape is the first full AI-based training video builder, allowing companies to create video content in seconds, in just a few clicks, and then apply corrections to the assets that are created. Our plan for Shape is to become a new standard in the AI-based self-content creation space. Second, we know how complex it is to build an enterprise-grade learning program and how difficult it is to measure its effectiveness and ROI. Learning and development leaders want to manage learning investments and performance and correlate them to an ROI. To accomplish this, we built learning analytics and intelligence products that blend business intelligence principles with the L&D buyer in mind. Shape is expected to have a phased launch as early as the first quarter of 2021, and we are currently in testing with some of our existing customers. The initial feedback from our test customers has been great, indicating strong potential to significantly expand our addressable market both with new and existing customers, helping to increase our ACV over time. In summary, the second quarter was not without its challenges, but we have been able to execute effectively as an organization, maintain our growth trajectory, and I'm excited and optimistic about the opportunities we see both in the near and long term. We will still have to keep a close eye on how broader market economies perform as COVID restrictions lift, but the interest in our platform and pipeline has never been stronger. With that, I will now pass the call to Ian to speak to the financials.

Thank you, Claudio, and hello, everyone. Before I start, I'd like to remind folks that you can find a detailed breakdown of our financial results for the 3 and 6 months ended June 30, 2020, in our press release, MD&A, and financial statements, which are now available on our website and on SEDAR. This quarter, we've also introduced the slide deck to accompany our earnings call discussion, which is available on our Investor Relations website. For those who want to follow along, I'm starting my remarks on Slide 4. As Claudio indicated, the second quarter presented certain challenges for us, no different from most other companies. Overall, though, we are very pleased with our results. Total revenue grew to $14.5 million, an increase of 46% from the prior year's period. Subscription revenues grew by 55% from the prior year and were $13.4 million, nearly 92% of total revenue for the quarter. Professional services revenue in the second quarter was $1.1 million, which is actually down 12% from both the prior year and the first quarter of 2020. Professional services revenues are generally associated with new local signings and, more specifically, new logos signed in the preceding quarter. That is why we often have higher professional services revenues in the first quarter related to the busy fourth quarter of the preceding year. In addition, the amount of professional services associated with each contract can fluctuate significantly, so this variation is not unexpected and will happen from time to time in the future. Our ARR at the end of the second quarter was $57 million, an increase of 54% from the $36.9 million at the end of the second quarter of 2019. Although ARR is not an accounting measure, it is the key metric we use to evaluate our progress, as it is the best predictor of future revenue. Consistent with past quarters, the significant growth in ARR was driven by new customers, resulting in our number of customers increasing to 2,046 at the end of the second quarter of 2020, up from 1,651 at the end of the second quarter of 2019. The disproportionate growth in ARR compared to the increase in the number of customers reflects our jump in ACV over the same period. We added $4.8 million in net ARR in the second quarter, which is similar to the net ARR we added in the first quarter of 2020 as we continue to see strong sales momentum. As Claudio mentioned, we were very pleased with our new logo additions and upsell performance in the second quarter, which was a record for us. Average contract values, or ACV, increased to approximately $28,000 at the end of the second quarter, up 25% from $22,000 at the end of the second quarter last year, and up from $27,000 at the end of the first quarter of 2020. Slide 5 shows gross profit for the second quarter, which was $11.7 million, compared to $7.8 million in the prior year period, an increase of 49%. As a percentage of revenue, gross profit margin was 80.4% of sales, up from 78.9% in the prior year period. The improvement in gross margin was due to lower professional services as a percentage of our overall revenue, partially offset by higher AWS costs associated with higher utilization rates on our platform. On Slide 6, you can see that total operating expenses for the second quarter increased to $14.9 million compared to $9.6 million for the prior year period, which is up by 55%. Included in our second quarter results is a foreign exchange loss of $1.7 million that relates primarily to cash held on our balance sheet and is, for the most part, unrealized. Operating costs, excluding this loss, were $13.3 million and generally in line with the $13.7 million in operating costs, excluding foreign exchange impact, that we reported in the first quarter of this year. Sales and marketing expenses for the second quarter were $5.9 million compared to $3.7 million for the comparable period in 2019. As a percentage of revenue, sales and marketing expenses were 40.4% compared to 37.3% last year. When compared to the first quarter of 2020, sales and marketing expenses were flat at $5.9 million, with higher payroll due to the hiring completed in the first quarter offset by lower travel and entertainment charges that we incurred. Our sales and marketing expenses remain within the 35% to 40% range that we are currently targeting, and we don't expect this to change significantly even as we begin to hire cautiously over the next two quarters. General and administrative expenses for the second quarter were $3.4 million compared to $3.5 million in the prior year period, a year-over-year decrease of $100,000. As a percentage of revenue, G&A for the second quarter came in at 23.3% compared to the 35.5% reported in the second quarter of 2019. It's important to note that in 2019, we were incurring considerable consulting and professional fees associated with our IPO preparations, and we emphasized that these were nonrecurring. Our G&A costs this quarter were also down from what we reported in the first quarter results. This successive quarterly decline was driven by lower travel and entertainment costs as well as lower consulting and legal fees. Going forward, we're comfortable that G&A costs will continue to decline as a percentage of revenue, targeting to be in the mid-teens in the long run. R&D expense for the second quarter of 2020 was $3.3 million, compared to $2.2 million in the prior year period. As a percentage of revenue, R&D expense was up slightly to 22.7% compared to 22.1% for the prior year. Investing in product development remains a priority for Docebo, and we are comfortable with our current levels of R&D spending, but we still expect a long-term targeted investment rate of 18% to 20% in sales. We reported an adjusted EBITDA loss of $900,000 for the second quarter of 2020 compared to a loss of $1.6 million in the prior year. We reported a net loss of $3.3 million for the second quarter this year, compared to a net loss of $2.3 million for the prior year period. As noted earlier, the net loss for the second quarter included a $1.7 million foreign exchange loss. An important implication of the reduced EBITDA loss in our second quarter was that Docebo generated positive cash flow from operating activities for the second quarter of $0.2 million, and free cash flow was near breakeven at negative $35,000. Cash at the end of the second quarter on our balance sheet was $43.0 million, and we continue to carry no debt. As Claudio mentioned, we will start cautiously resuming our hiring to support our ongoing growth over the next two quarters, and I expect our operating expense base to grow modestly over the remainder of the year. This decision reflects our confidence in Docebo's fit in the post-COVID world and its effect on our business. The increase in investment we'll be making will primarily focus on sales and marketing and R&D groups. From our perspective, the increase in headcount is not expected to exceed 50 additions, but we will obviously provide an update in our Q3 reporting. I will leave my remarks at that. Thanks for listening. Operator, we'd be happy to take some questions from the analysts at this point.

Your first question comes from Robert Young at Canaccord Genuity.

Maybe just continuing that line you ended with, Ian. What are the changes in your stance getting more aggressive on spending and the savings expected in G&A? What does that imply for your free cash flow breakeven point? I think you said by the end of 2021, should we still think of that?

Rob, Claudio speaking. I hope you are good and safe. I want to let Ian answer that, but I want to mention that the demand and pipeline, along with all the positive signals from the market, make us optimistic about investing in our growth.

Thanks, Claudio. Rob, the reason I thought it was important to point that out was that I wouldn't be comfortable if folks simply took our Q2 cost base and rolled it forward, then made a revenue increase assumption and thought, 'Oh, my goodness, you guys will generate lots of cash in the immediate future.' I just wanted to raise awareness that because of what we're seeing on the revenue growth side, our expense base is going to start to increase for two reasons: one, to support where we are today, but also as we begin thinking about our budgets for 2021 and how to position the company going forward.

Okay. The second question would be about the AWS fees being higher, which suggests higher activity, even though the gross margin bounced up. Are you still seeing that high level from earlier in the year continuing?

In terms of usage, we are. Part, in part, our margin increase was mathematical this quarter. If you look at the relative proportions of professional services and subscription revenue, as you know, the margins that we earn on professional services are nowhere near the margins we earn on subscription revenue, and that helps our margins.

Yes. Rob, a couple of points here. First of all, with the coronavirus, we have seen our actual customer base increase the adoption of the platform. This means that on AWS, they are also consuming more resources. It's not material, but it does impact costs. However, it is a great sign as it indicates they are adopting the platform more, which makes me happy. We're also releasing new features which slightly increase AWS consumption. Every time we release a new AI algorithm or new reporting system to improve performance, it requires new technology based on data lakes. This slight increase in our cost base does not concern me because it reflects our innovation efforts, which make me more happy.

Great. And then maybe just one last quick one because Alessio is on the call. The investments in sales to existing customers seem to be really benefiting, particularly at the larger customer end. Can you talk about the investments and how those are working out? And I'll pass the line.

Thanks, Rob. We're very pleased with the pipeline and sales execution overall, and the ramp of the resources we've brought on board. While we love large customers, we focus tremendously on departmental adoption. We enjoy entering large organizations, affirming ourselves on a single use case, creating successful momentum, and growing from there. That is what we are mastering and operationalizing.

Next question comes from Suthan Sukumar from Eight Capital.

It's actually Adhir on for Suthan here. One of the questions I wanted to ask was, are the customer wins in the quarter coming from legacy platforms, or are they generally net new customers to e-learning? How is that mix evolving?

Yes. I'll let Alessio handle this answer.

Fantastic question. There is a great mix across our customer acquisition. I would say there are prevalently two scenarios and two types of customers. One is net new logos; companies using Docebo for the first time, often replacing their existing legacy systems. We certainly see certain large vendors losing momentum, particularly in the mid-market and enterprise segments. The second stream is our existing customers from whom we are cross-selling. These two streams significantly contribute to our new customer acquisitions.

Okay, appreciate it. My second question was just around the OEM opportunity. With your recent wins, do you see any potential acceleration in that channel? Have you seen a new level of interest or higher level of interest from partners approaching you?

Selling to OEMs is challenging, not because our product is not mature, but quite the opposite. Our product is sophisticated and modular, which means prototyping and OEM integration takes time. Enabling the customer also takes time. However, we are finding new ways to OEM our product, and early in 2021, we will release what we call pervasive learning. This means not just an LMS embedded inside an HCM platform, but modular pieces of LMS or training content integrated within other software. This expansion will allow OEM potential partners more opportunities to train their customer base or distribute Docebo in various formats. Yes, we are talking with other vendors, and yes, this is a strategy to sell globally, which is far easier than opening an office in Asia. However, it is a long sales process.

Yes. We love these long-term strategic partnerships. But Claudio, you're right; these are not 3- to 6-month sales processes. They require deep organizational discussions at the executive level. We're seeing a trend in demand and requests from sectors like HRIS and HCM, talent management, and customer success. These vendors are succeeding in their markets but are realizing that learning is a critical component in offering solutions to their customers.

The next question is a follow-up from Robert Young at Canaccord Genuity.

Sorry, can you hear me now?

Yes, we got you, Rob.

Okay, great. Last couple of quarters, you mentioned that you were putting more thought into how you qualify the funnel to try and drive better conversion given the high level of new interest. Have those steps yielded any benefits? Are they helping you focus on larger customers?

Yes. I'll let Alessio answer because we take pride in this.

Rob, the inbound traffic and overall pipeline remain strong, and we're very happy with it. You're correct that March and April, in particular, presented an all-time high in volume as the world adjusted to remote work. This reality is gradually normalizing. However, the inflow of companies looking to change their existing solutions has remained very solid. When we thoroughly qualify our leads, we see two outcomes: one, our win rates increase because we’re engaging better leads; two, our sales cycle decreases because we’re working with the right leads. Creating that engine that we aspire to have is crucial to our growth, and we've been focusing on operationalizing these efforts in detail.

Yes. That’s great. I wanted to ask a bit more about the sales process. There was a significant influx of salespeople hired in January and February. You've mentioned that efficiency takes 6 to 9 months. Are you seeing that? Should we expect that the benefits of this hiring will pay off toward the end of the year?

Yes. Six to nine months is a fair average for ramping new salespeople. When assessing ramp-up, we consider the markets these salespeople operate in. The difference between a commercial segment versus mid-market enterprises affects the time to first and second deals. We're closely monitoring the ramp, time to first deal, and time to second deal to understand the productivity of new sellers. It’s also critical we invest in enablement to ensure our new hires are trained adequately.

Regarding the churn, you mentioned seeing some from smaller customers. Is that intentional? Should we anticipate churn continuing through this year?

I'll pass this to Ian.

Yes, Rob, before passing this to Ian, I want to remind everyone that we are still in the middle of the worst global crisis ever. The business situation for Docebo presents both headwinds and tailwinds. This churn can be considered a headwind. The future remains unpredictable, but Ian can provide more context on our customer stability and adoption.

Thanks, Claudio. Rob, as you know, our contracts renew throughout the year, and our customers pay upfront. Thus, the churn experienced in one quarter will likely continue over the next two to three quarters if the pandemic persists. That said, we're seeing improvements, particularly in Europe, which has improved dramatically in the last three months. The U.S. is still facing challenges, and whether they return to previous highs is yet to be seen. Our churn levels will likely remain higher than historical rates over the next two quarters.

For the Shape product, I'm impressed you've maintained the R&D roadmap during COVID. Has there been any impact on the timing of R&D rollouts? Could you discuss the administrative benefits of this platform?

Yes, Rob. I'm pleasantly surprised by our productivity in meeting our planned product releases. We only had two weeks' delay on a small module over the past six months, which is impressive. Regarding Shape, we are concluding the data program with customers next week. We’re gathering requests and assessing the best use cases. The potential for Shape is incredible; it’s performing better in English and Chinese due to volume. We are expanding language capabilities and enhancing AI algorithms for dynamic subtitling.

There are no further questions at this time. I will now turn the call back over to Claudio Erba for closing remarks.

Thank you, everyone, for your participation, and we look forward to connecting in the next quarter.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines.