Docebo Inc. Q4 FY2021 Earnings Call

Good morning, everyone, and welcome to the Docebo, Inc. Fourth Quarter and Year End 2021 Earnings Call. All participants are currently in a listen-only mode. Following the presentation, we will open the line for a question-and-answer session for analysts. Instructions will be provided at that time for research analysts to ask questions. We ask that analysts please limit themselves to two questions and return to the queue for any follow-ups. I'd now like to turn the call over to Docebo's Vice President of Investor Relations, Mike McCarthy. Please go ahead, Mike.

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 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. 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&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. dollars. Now I'd like to turn over the call to Docebo's CEO, Claudio Erba.

Good morning and thank you for joining us on our 2021 year-end earnings call. With me today is Alessio Artuffo, our President and CRO, as well as Sukaran Mehta. I'm happy to share that Sukaran, who has been an incredibly valuable leader at Docebo since prior to our TSX IPO in 2019, has been promoted to CFO from Interim CFO. Congratulations Sukaran. Before I begin my prepared remarks this morning, I wanted to first take a few moments to express our concern and support for the people of Ukraine. While our business presence in Ukraine and Russia is extremely small, as a global company with a European heritage and roots, many Doceboians, including me, have deep ties to the people of the region. We have made a corporate donation, and we are making employee donations to the International Committee for the Red Cross, which is helping people affected by the conflict, and we are supporting the work of the Ukrainian Red Cross. We will continue to support them where we are able. While we find ourselves in bad, volatile times, we have been standing for the purpose of continuing to deliver consistent operating results, and I think we successfully accomplished this in 2021. Revenues for the full year grew 66%, a significant improvement from the also strong 52% growth in revenue we generated in 2020. A big reason for our success has been the resultant nature of our platform, which is industry-agnostic and content-agnostic. We are winning in environments that exhibit both employee and customer softness and are now in the second stage of our land-and-expand strategy. We achieved record new logo performance, which included 169 net new customers, and this momentum we saw from enterprise customers in the third quarter continued during the quarter. At the same time, our traditional sweet spot of mid-sized enterprises and departmental wins continued to be a steady growth engine for us, accounting for more than half of our new logo business, while we focus on setting the stage for our land-and-expand strategy. In Q4, we signed a new customer agreement with a global medical device company, Align Technology. Align chose Docebo to provide external training for their orthodontic firm, resulting in a customized learning experience for their internal teams. Dine Brands Global, the company behind IHOP and Applebee's franchise selected Docebo to train their team members across their restaurant chain. In the fourth quarter, we signed a new customer agreement with the NCAA to deliver solutions to scale its learning and development programs for up to 40,000 athletes, coaches, and school administrators. Large implementations like these prove the scalability of our platform at the enterprise level, allowing us to service some of the leading organizations in the sports world. Additionally, through the strong new logo performance, we have seen great success in our land-and-expand strategy. By leveraging our content offering, including Docebo Shape, we expanded our relationship with BMW to train all departments at their manufacturing facility in Greensville, North Carolina. We are pleased to have expanded our agreement with the United Nations Global Compact, the world's largest corporate sustainability initiative. These expanded agreements will drive training for more than 30,000 of its members. We have also signed a new customer agreement with SolarEdge, a global leader in smart energy technology and the developer of an intelligent worker solution that changes how solar power is harvested and managed. They will be using Docebo for both employee and customer training. In January, we signed a strategic partnership with Pavilion, the world's leading private membership community for high-growth professionals. As part of our partnership, Docebo will provide Pavilion its complete suite of products to create, deliver, analyze, and measure the impact for its 7,000 members. In 2021, we introduced new products and modules as part of the Docebo Learning Suite, many of which were launched in the second half of the year. Some of those new products have exceeded expectations right out of the gate, and for others, we are adjusting our approach. Those adjustments are the types of learning we expected, and we are pleased to see new products now starting to contribute nicely to our ACV growth. Our product innovation has also received great recognition this year from a number of independent third parties. We were ranked first in the category of Enterprise Corporate LMS and leader in European LMS per the G2 Crowd Winter Report, which is based on reviews from our core customers. We won nine Brandon Hall Group Excellence in Technology Awards, including awards for the Learning Suite, Learn LMS, Shape, Learning Analytics, and Learning Impact, with six of the awards being gold. With the addition of Rudy Valdez as our COO last fall, we continue to build our team in a way that more closely aligns our core product development and research and development. In January, we announced the addition of a new Chief Product Officer, who had a change in personal circumstances and will not be joining us. Leadership of our product development will continue to be the joint responsibility of Rudy and our CTO and co-founder Fabio Pirovano, and we will continue to invest in top talent to remain at the forefront of learning innovation. The general turnover in the labor market has presented us with challenges as well as opportunities. We have been able to add seasoned sales and marketing professionals that will help elevate the next leg of our growth. North America accounted for more than 70% of our sales in 2021 and grew more than 70% year-over-year. It is our largest market and continues to be our greatest source of growth. However, we also see expansion opportunities for Docebo around the world that we intend to capture. In 2021, we established a new office in Germany, which is showing early traction. We believe Germany, in particular, can become one of our largest markets outside of the U.S. In January, we also acquired Skillslive in Australia, which enhances our capabilities in the APAC region. Lastly, I have talked about the importance of ESG in past conference calls. We hope to have our first ESG report published by the time we speak to you on our next earnings call. That report will share some of the work we do to empower our people, maintain integrity for our stakeholders, manage our environmental footprint, and contribute to the community. Docebo has an opportunity to make the greatest impact as a corporate citizen to innovate and provide learning technology that helps other organizations achieve some of their own ESG objectives. This is work we already do for many of our customers, and we will provide additional details over time. With that, I will now pass the call to Sukaran to speak about the financials.

Thank you, Claudio, and good morning, everyone. For those interested, a detailed breakdown of our financial results for the three months and the fiscal year ended December 31, 2021 can be found in our press release and financial statements, which are now available on our website and are also filed on SEDAR and EDGAR. The slide deck accompanying this earnings call was made available on our Investor Relations website this morning. We were very pleased with our strong results for the fourth quarter and the fiscal year 2021. This performance sets us up for another year of strong growth with a natural transition to positive adjusted EBITDA as we exit 2022. Total revenue for the fourth quarter grew to $29.8 million, an increase of 59% from the prior year. Subscription revenues were $27.5 million, representing 92% of total revenue for the quarter, and equating to growth of 64% from the prior year. Net new ARR was $14.2 million in the fourth quarter and is approximately 40% higher than the net ARR we added in the third quarter of 2021, continuing the robust trend of quarterly net new ARR additions, as shown in Slide 4. We exited 2021 with $117.7 million in ARR, an increase of 59% over the $74 million reported at the end of 2020. With over 2,800 customers at the end of the fourth quarter of 2021, our company-wide average contract value (ACV) increased approximately to $42,000, up 24% from $34,000 at the end of the fourth quarter of 2020. As Claudio noted, we continue to see traction from enterprise customers as Docebo is being selected for more complex, multiple-use case deployments. This is reflected in the ACV for new logos and cross-sells added in the fourth quarter, which was close to $60,000. Additionally, approximately 45% of the ARR generated from new and cross-sell logos this quarter came from deals valued at over $100,000, with no single transactions being recorded in excess of $1 million. This growth in ACV from new logos tells only the beginning of the story with our customers because it captures the size of the relationship we have at the onset. The metric that best highlights ACV expansion after we land a customer is the net dollar retention rate. In 2021, we recorded a net dollar retention rate of 113%, an increase from 108% in 2020. The investments we've made in our talent executives and customer success teams are bearing fruit as our NDRR continues to expand, but I would like to make two additional points on the NDRR. First, we have continued to add more enterprise customers to our base, and these accounts naturally have more divisions and opportunities for upsells and cross-sells. Second, our upsell cross-sell motion has been historically driven by the expansion of the use cases for Docebo Learn LMS. Now with the launch of the Learning Suite, there are other avenues for expansion. The gross profit margin for the fourth quarter was 80% of revenue, which compares to 79% for the third quarter and 84% for the prior year period. As we have said in previous quarters, we made investments this year in our customer success and professional services teams to facilitate the rollout of our multi-product strategy and to further enhance customer support. We are starting to see leverage on these investments, resulting in sequential improvements from the third quarter, and we expect to maintain low 80% gross margin profit levels over time. On Slide 6, you can see a summary of our operating expense lines. Total operating expenses for the fourth quarter increased to $26.7 million compared to $20.2 million for the prior year period. G&A expenses have continued to decline as a percentage of revenue to 24.4% for the fourth quarter compared to 25.2% for the third quarter, as we continue to realize efficiencies from increased scale. Sales and marketing expenses increased as a percentage of revenue to 42.4% from 41.2% for the third quarter. The sequential increase was partly due to seasonal investments in marketing activities during the fourth quarter, which included our annual Docebo inspired conference. R&D expenditure was $5.5 million, or 18.5% of revenue compared to 20.2% in the third quarter. In the fourth quarter of 2021, we also recognized a one-time year-end benefit from R&D tax credits of approximately $800,000. We reported an adjusted EBITDA loss of $1.5 million for the fourth quarter of 2021 compared to income of $0.1 million in the prior year period. We reported a net profit of $1.4 million for the fourth quarter of 2021, compared to a net loss of $4.1 million for the prior year period. Finally, free cash flow was essentially neutral in the fourth quarter, and we continue to have a very healthy balance sheet, with net cash and cash equivalents of $215 million. Looking forward into 2022, we continue to focus on growing the business as fast as we can responsibly. We're continuing to recruit the high-performance talent we need to support our growth targets. However, like every other technology company, we find ourselves in a competitive market and are experiencing the same pressures from wage inflation. Notwithstanding this, we expect to reach a point where the growth in our revenue will naturally transition us into positive adjusted EBITDA and free cash flow as we exit 2022. As you would expect in a maturing company, we will continue to see operating leverage in G&A improve. In terms of R&D, we expect our expenditure to remain within 18% to 20% of revenue. Sales and marketing is an area that we will continue to invest as long as our unit economics remain attractive. In the near term, we will likely operate in the low 40% range. At these levels, our CAC ratios continue to be best in class, with $1 invested in sales and marketing generating $1 in ARR. For the full year 2021, we invested $43.3 million in sales and marketing and added $43.7 million in ARR, with nearly 80% of our new logo and cross-sell contracts being multi-year deals. That concludes my prepared remarks. I'd like to turn it over to the operator now to take some questions from the analysts.

Thank you, sir. The first question comes from Robert Young with Canaccord Genuity. Please go ahead.

Hi, good morning. My first question will be around the sustainability of this strong incremental ARR added in the quarter. You said there were no transactions over $1 million. So I guess that's implying that there are no materially large deals, but I'm curious if larger deals were a big driver behind the incremental ARR. Is it sustainable? Did that come near the end of the quarter? That's the question.

Hello, Robert. Alessio speaking here. The mix of deals in quarter four was according to plan. What we're seeing, Robert, is the continued success in our strategy of adding a healthy mix across our three main commercial segments, those being commercial, or small business, mid-market, and enterprise. It is no secret that we are seeing an uptrend in success in the enterprise segment. However, our strategy has never been to pursue necessarily the very large deals upfront, because as stated multiple times, our goal is to win the customer and grow it over time with our new products. On the point of ACV mix, for the past four consecutive quarters, so for the entire fiscal year 2021, our deals exceeding $50,000 in ACV remain well above 50% of our ARR in terms of units. That to me is a metric that shows incredible consistency in execution and an alignment of the entire go-to-market machine towards the average customer size that we really prefer, which is that $50,000 to $100,000 average ACV. Still, we're investing heavily in enterprise and we're seeing tremendous market fit. You should expect in the future that deals above $100,000 in ACV will continue to be a recurring event and those will continue to grow over time, thanks to multi-use case and multi-products.

Yes, Rob. I'll just speak to Alessio's point just around that. If you, you know, the number we talked about is that almost half of the ARR coming in the quarter is from these deals over $100,000 in ACV. So, we're moving nicely up the enterprise market. What we also like is the consistency, right? Because there are no seven-figure deals, but there's a lot of deals that are above $100,000 that are adding almost 50% of what we have in the quarter. So for me, and as we think about consistency, this continues to show traction as we penetrate the enterprise segment of the market.

Okay, great. So nothing out of the ordinary for the quarter, just strong demand. And then my second question would be around the sales efficiency that you were talking about. You said it was $1 for $1 of ARR, but that was lower this quarter, despite, I think you said that there was a seasonally higher level of sales and marketing spend. So I get around $0.90 for each incremental dollar of ARR. Is that why you're trending towards positive free cash flow in 2022? Is there actually a little bit of a lower level of investment in sales and marketing, or should we expect that to bump up through the year a little bit?

I'll speak to it first and then Alessio you could jump in. You are right. So if you look at just Q4 in isolation, the CAC ratios are slightly more efficient, but overall for the full year the CAC ratio is around $1 spend to generate $1 in ARR. You've got to take into account that as you think about CAC ratios that these do not read right, so you have sales and marketing expenses coming in, but you may have achieved not only in terms of ARR performance between the quarters. So I prefer to look at it from an annual perspective. As we think about 2022, we would say that there are certainly investments we will continue to make to support this initiative as we penetrate the enterprise segment of the market, as well as the things that we are doing, and Alessio can speak to it, around making sure that the 2,800 customers that we have are managed with the right strategy and the right team in place from an account management and customer success perspective. Alessio, I'll leave it to you to kind of expand a bit more on that.

The strategy around extracting the maximum amount of value from the customer base along with ensuring high levels of customer satisfaction is core to our growth strategy. We've said it multiple times. Happy customers renew, happy customers grow with us. We have made investments to ensure a good level, a really good mature level, of relationship and ratio between our customers and our account management organization. This will bear fruit in the future as we get a better picture of our customers' needs, we're also going to see a return in the level of penetration of these customers, not only from an upsell standpoint but also from a cross-sell standpoint. So, in summary, better ratios mean better presence, better intimacy, and better unit economics in the future.

Thanks for taking the question.

Thank you. Your next question comes from Daniel Chan with TD Securities. Please go ahead.

Oh hi, good morning. I'd like to discuss your geographic expansion plans. You acquired Skillslive to enhance your APAC presence. Can you talk about your organic expansion plans internationally and what role partners play in this? I think some of your partners are also focused on expanding geographically, thanks.

Yes, Daniel, this is Claudio. First of all, our first market is North America, followed by Europe and Australia, and New Zealand. These are the core markets we are investing in for several reasons, especially because we can leverage our marketing and sales machine in countries that have a culture similar to our own cultural footprint in North America and in Europe. Germany, in particular, is enhancing its standing with a lot of additional investment in almost everything in this geopolitical rebalance, and as you know, we opened an office in Germany six months ago, and the Nordics are also interesting markets. You're right, other markets, especially in Asia Pacific, are covered by partners and resellers. But I want to emphasize that most of our revenues come from Western countries as well as Australia and New Zealand. This is where we are investing, particularly in direct sales. Alessio, do you want to add something on that?

Sure. We believe that our recent acquisition of Skillslive will accelerate our growth. We have gained valuable experience from establishing offices in the UK, North America, and Germany. Additionally, the forMetris acquisition allowed us to set up a physical presence in France. We've realized that building a new office from the ground up takes considerable time; it involves hiring leadership, onboarding them, and ensuring they are acclimated to our product and culture. The Skillslive team presented a fantastic opportunity because they are exceptional individuals, skilled learning and development professionals with a strong network in the region. This acquisition has enabled us to quickly bring on board people who already have established networks and relationships. Within just a few months, they have started operating in sales, reporting on pipelines, and developing business. We have a sales leader in place, a feat that would typically take years. On the support and implementation side, it allows us to rapidly establish 24/7 coverage, which is crucial for our global expansion goals and for meeting the expectations of enterprise clients that require round-the-clock support. We are now positioned to provide that.

Thanks, that's very helpful. I wanted to change gears a little bit. Throughout the pandemic, you provided some metrics that showed customer engagement was elevated. Just wonder if you can give us an update on some of those metrics; has customer engagement with the platform remained at that level even as things start to normalize? Thank you.

Claudio speaking. I am not sure we can share this data on a numeric basis, because we shared it anecdotally during the pandemic, but I think we haven't shared specific numbers. That said, the usage of the system is becoming more sophisticated, because our users are now accustomed to using the learning tools more than pre-pandemic levels, leading to more use cases, more ways to learn, and more synchronization in the data exchange with other systems. So, it's not only about how many users are logged into the system, but also the way they use it. For example, they use our learning impact system to assess not only the usage but the quality impact of learning, which is an example of how we measure not just the quantity, but also the quality of the training that our customers deliver. That said, we can provide some data post-call if necessary.

Thanks, that's helpful.

Thank you. Your next question comes from Richard Tse with National Bank Financial. Please go ahead.

Yes, thank you. As you make incremental gains into the enterprise, does it change how you operationally organize the business when it comes to functions like R&D and sales and marketing?

Yes, Claudio speaking. Absolutely, the more we create new products and the more we approach different markets and industries with different needs require a transformation, a continuous transformation inside the organization. When I say continuous transformation, Alessio is working hard on the sales and marketing team to better cover vertical use cases, industries, and products, because selling learning analytics products requires different skills compared to selling learning management systems. On the product side, the same. We require different leaders with diverse skills and different product line managers for different products because they have different expertise. Simultaneously, you need to recognize that these two primary clusters in the organization create silos, therefore saving the marketing and product teams requires communication channels between them to work better together, understand market needs, and prioritize solutions. So absolutely, yes. I believe that once we have reshaped and built the organization to accommodate multi-products and multi-industry requirements, we will reshape the organization again due to another layer of complexity. Alessio, if you want to add something.

Yes, Claudio, just in addition to that, the question from Richard was about sales and marketing and R&D. I would also add our general posture with regard to support and implementation, which are a part of the overall supply chain. There’s certainly an adjustment in methodology of selling. There are specific investments and techniques in marketing, say ABM as a reference, but when it comes to implementing the customer, you need to have methodologies that adapt to implementing larger orders, which may require a different phased approach than you would take with a smaller customer. We understand that and we have to develop playbooks to satisfy that. Within an enterprise organization, the support expectations are quite different from those of smaller size organizations. What we're doing there to support this trend is also creating best-in-class support services as incremental value to our professional services, which will allow us to also improve our unit economics with these customers, similar to best-in-class companies like Salesforce. We're designing dedicated elite support services, which not only provide 24/7 support but also go to a deeper level of customer assistance. We certainly expect this service to be a paid option in the future and we're working hard to staff for that, and this work is well in progress.

Okay, great. And my second question is related. You are obviously adding a lot of new logos here. Can you talk about the source of these new wins? Traditionally you've been very effective with your web campaigns, but as you engage bigger enterprise customers, how are these logos finding you in terms of generating these wins?

It is a mix. Our strategy really looks quarterly at the balance of our sourcing channels, which vary across the various segments and the strategy of demand and lead generation varies depending on the markets, the specific segments, and industries. However, we can simplify it by saying that a significant portion of our traffic remains inbound, which is what you are referring to. However, we are boosting our outbound efforts. That means we're growing our outbound capabilities and integrating them with more account-based marketing logic. These strategies are more fruitful and calibrated to target accounts specifically in the enterprise segment. The channel is another great contributor to the pipeline. As we continue to work with organizations to grow our OEM book of business, we also have a relatively large referral and bar program, allowing us to gain market advantage and position our brand even in regions where we are not physically present. Finally, there are certain alliances. We announced Pavilion in quarter four, which are extremely strategic in particular markets. Pavilion, as a phenomenal organization, has established itself as a point of reference for every revenue growth professional in North America, and possibly worldwide. So, it is no secret that we were very interested in that partnership because a large majority of the thousands of members are buyer personas for us. The mix of sourcing is very varied. Our marketing strategy is pretty complex and articulate, and it ranges across all market sizes.

Alessio, I'll add another point here. Docebo, during these last two years, has been recognized more and more as the best of breed in the industry. Large enterprises are usually inclined to purchase from recognized vendors, and actually we are competing with those recognized in the past as best-of-breed brands. Paradoxically, in the past six months, we have been approached by big vendors in other spaces asking for integrations with us, based on the fact that many of our customers are also theirs, and they need deep integration. These interactions have become increasingly frequent over the past six months, and these are good signals supported by the fact that our enterprise segment is growing faster than others.

That's great. Thank you very much, guys.

Thank you. Your next question comes from Christian Sgro with Eight Capital. Please go ahead.

Hi, good morning, everyone. The first question today I wanted to ask: when you think about, let's say, a typical ideal enterprise win of $100,000 or larger in ACV, what's the best type of win that sets you up for land and expand? Is that just one department at the beginning, or is that just the core Learn LMS? What's the best way to get in out of the gates to set you guys up for expanding?

Christian, thank you for the question. There are a couple of answers to your question. First, when we enter an enterprise customer where we believe we have a unique proposition, our product has a very high win rate for organizations wanting to implement hybrid or blended use case strategies, aiming to consolidate efforts or platforms and technologies that may already exist or don't exist yet. The capability of offering both internal and external use cases on one platform shows that we are incredibly strong at that. So when we enter a customer, our goal is to understand the state of their technology from a learning delivery standpoint and if a possibility exists to approach both internal and external use cases by promoting our capabilities right from day one. The second answer is that an organization may not be ready to adopt more sophisticated views of the learning programs that our analytics offering, but knowing that we can grow with them in that direction gives them the comfort that we are the provider of choice for the long run. Finally, I will add we are seeing recently that add-on products, such as Docebo Connect and Docebo Content, allow us to tell a story of integration that other competitors don’t provide as effectively. Docebo Content allows you to avoid establishing another contract with another content vendor, providing a single relationship with Docebo. Docebo Connect ensures that when you buy Docebo, you can grow with it and integrate it with multiple systems without custom integrations or expensive mechanics. I hope that answers your question.

The answer is very helpful, Alessio. I'll ask just one more question this morning. Regarding the OEM partner program, can you provide any updates on that channel? It's something that we have tempered our expectations for as it will take time to grow. Have there been any updates on how some of the newer partners are trending? Thanks for taking my question.

OEM remains a growth vector for us. We have doubled down our investments in building OEM and strategic alliances, and we're extremely confident that there will be a steady pipeline of partnership business in the future. One thing we've learned in the past 12 months, which isn’t surprising, is that very small organizations can be very enthusiastic initially to integrate new capabilities and skills. However, it becomes challenging for these smaller organizations to bring it to market due to juggling many priorities. Our strategy with our bigger OEM team is to focus on more mature organizations that have either already OEMd before or have the resources to effectively execute a joint market plan with us. With that said, Ceridian and MHR not only continue to deliver exceptional performance, but we are confident that we will be able to grow that performance in the future by providing them with access to capabilities that we have developed in the meantime. Additionally, we have exciting leads in the OEM sector that align more closely with our ideal OEM profile, and I believe we will be able to report more material results from Docebo in this area in the future.

That's all very helpful, Alessio. Thanks for your time.

Thank you.

Thank you. Your next question comes from Paul Steep with Scotia Capital. Please go ahead.

Yes, good morning. I'll be quick here. Just on staff growth, Sukaran, you talked about growing staff, can you provide some thoughts around the balance between wage inflation as well as the pace of hiring? We've seen strong hiring performance by the company over the last couple of years, and then I've got one quick follow-up.

Yes, good morning, Paul. I would say there’s no secret that wage inflation is a real concern and that this is perhaps one of the most competitive job markets out there. Like every other tech company, we’re facing the same issues here. In terms of adding personnel to the organization, we'll continue to invest in our sales and marketing engine to support the enterprise account management space. As we expand into the enterprise segment, we have doubled our efforts as Alessio spoke about in the OEM side of the business, but we also need to enhance our support segment regarding professional services and customer support as we grow the business. So, we will continue to hire, maintaining the ratios that I've discussed in my prepared remarks. While this environment is competitive from a talent perspective, it also provides momentum from a customer perspective, where the LMS is one of the best tools to engage and retain employees. Therefore, we are facing challenges in the labor market, but we also have momentum as a result of these conditions.

Yes, sorry. I’ll try it a different way and I’ll skip the other follow-up. Should we think of ARR growth in employees being below that of 2020 ARR year-on-year growth? If we look to 2021, we saw you slightly over-index on employee growth versus ARR growth. Should we think of 2021 more as a catch-up year in terms of big investments? You're going to sustain that growth, but it's not going to match ARR growth going forward? That was a better way to phrase it.

Yes, that's a good point. In 2020 we did pause hiring due to COVID, and there was a catch-up that began in late 2020 through early 2021. As we consider 2022, it shouldn’t match the same level, but there is certainly a maturity in our hiring practices, particularly for VPs and senior-level positions in sales, marketing, and R&D. We need to ensure that our company is structured correctly for future growth. To answer your question directly, yes, 2020-2021 did exhibit higher growth hiring compared to what we'll see in the future.

I'll push my luck with one last clarification, just on the older cohorts, Sukaran. You now have the data to capitalize the contract costs for sales over five years, which we didn't have in the past. Can you, and I know we've got net expansion, but can you speak to the experience you've seen in those early cohorts and how you're thinking about the long-term uptake in renewal rates? I'll leave it there. Thank you.

Paul, the question is about renewal rates? I just want to clarify the question.

Yes, it's just the renewal on those early cohorts, because obviously you've now got the data to capitalize the contract costs for sales over five years, and I know we've got net expansion, but can you maybe just speak to some experience that you’ve seen in those early cohorts regarding renewals and how this plays out as we look at the waterfall going forward?

Yes, I mean, I think we don't specifically break out renewals, but I'll give you some color on it. We talked about net dollar retention ratio, and that gives you insight into renewals. The net dollar retention ratio includes expansion with churn and downgrade embedded in it. As that has improved, which includes the cohort of customers historically as well as those onboarded in 2021, you are seeing that book of business continue to expand, which effectively tells you that the renewal or churn rate in the business is continuously improving. It's below industry standards. I believe that provides sufficient color, but we don't specifically disclose renewal rates.

No problem. Thank you.

Thank you. Your next question comes from Suthan Sukumar with Stifel. Please go ahead.

Good morning, gents. A couple of questions from me. First, I want to touch on the pipeline and some of the momentum you're seeing in the enterprise segment. Has there been any change in the profile or types of prospects you are seeing now and what they're looking for? I think you talked about seeing more complex requirements come in, so just curious what you're seeing with respect to how demand is evolving.

Suthan, hello. With regards to the pipeline, of course we don’t provide financial guidance at this time, but I am happy to share some thoughts regarding our forward-looking pipeline at a high level. Demand remains strong and meets our expectations. In terms of complexity, the interest in consolidating learning strategies is strong among organizations, while some are reducing their vendor roster towards a more all-inclusive solution capable of addressing both internal and external needs. When this occurs, we are uniquely positioned since our product is modular and well-designed to meet these multi-use case capabilities. We find that our win rates in these scenarios are indeed very favorable and well above industry standards. Regarding any specific changes in the makeup of the pipeline, there is nothing particularly noteworthy, other than that our commercial segment remains strong and our mid-market segment faces pressures from commoditized point solutions available in the market. Our enterprise segment is growing wonderfully and we are in an excellent position to win significant business there. I believe we are leading this market for both external and internal training needs combined.

Yes, and Alessio, this is a kind of self-fulfilling prophecy. It's not that our customers become more complex as we go to market; rather, customers are choosing us because we can support very complex use cases. It’s a little bit of the opposite.

Okay, great. Thanks, guys. That's helpful. The last question from me is how the expansion opportunity with the new product suite is unfolding. It's clear that this is helping generate demand and you're seeing good uptake from new customers, but can you speak about the traction within your existing base for these new products?

Sure, Suthan. As you know, we don't disclose attach rates. However, I can provide a general sense of where we are satisfied, ecstatic, and where we feel there is more work to be done. We're satisfied with most of the products we've released, and by satisfied, I mean we had hypotheses that are holding true. We are ecstatic about certain capabilities and add-on products, particularly the extended enterprise suite of use case coverage that's performing exceptionally well. You should expect our intent to bolster that even further. Additionally, we believe that the maturity of a product called Docebo Content is providing us with excellent metrics regarding attach rates, along with early signals from Docebo Connect. However, I must underscore that this is only a quarter of data in our history, which is quite limited. We have more work to do with our learning analytics product. This doesn’t imply performance issues, but rather that this product is more complex and has only been in the market for around six months. Nevertheless, we are very focused on achieving product-market fit and evolving the roadmap based on customer feedback. We anticipate that as we make these adjustments, our attachment rates, even for that product, will continue to grow significantly.

You must remember that Docebo Content named as Discover Content took nearly two years to ramp following its launch in 2016. Therefore, launching new products is a journey, essentially a learning journey requiring fine-tuning of the offering and positioning. It's an art form, not something that can be done within a couple of quarters.

Got you. Great, guys. Thank you for the color here, and congrats again on another solid quarter.

Thank you.

Thank you. Your next question comes from Gavin Fairweather with Cormark Securities. Please go ahead.

Oh, hey. Good morning. I just wanted to chat for a second on the net dollar retention rate. We saw a nice five-point acceleration in 2021 to 113%. Given your enhanced focus on customer success and enterprise customers, are you curious if you see some headroom to accelerate that further in the years ahead?

One sec, one sec, Alessio. Gavin, you are never happy. I mean we have grown this for three years in a row, and thanks Gavin for pushing us for more.

Yes, Gavin, about net dollar retention, in 2021, the net dollar retention rate has primarily been driven through land and expand in the Learn LMS, which continues to grow the business. We expand our book of business, whether that’s increasing monthly active users or landing subdivisions of other companies, etc. Today, the new products and modules we launched in 2021, which were more towards the latter part of the year, are not meaningfully contributing to that number yet. So, to your point as we advance into helping our customers using the Docebo Learning Suite and catering to their learning needs with new products, including in 2022, we expect NDRR to rise. Our expectation is that NDRR should increase as we continue to expand both with existing customers and help sell to other subsidiaries.

Thank you, and just to clarify, I am very happy, Claudio. Can you just, maybe just secondly, there seems to be more buzz about software user training and embedding training for user insights offer. Can you just maybe speak specifically about Docebo Flow and how you view your competitive positioning as this trend begins to take off? And that's it from me. Thank you.

Philosophically, I view learning technologies as building blocks that can be installed, implemented, and deployed inside every single software. Learning is everywhere: it happens in your partner portal, customer academy, and also because companies want to nurture their future employee pipeline. There are many ways to do this. Right now, we’re implementing in three main ways. One is the LMS-centric platform where people can log in and learn. Second is OEM, where the LMS is embedded inside another software, but it’s still an independent page or feature. The third part is Docebo Flow, which can be a building block installed inside other functions, pages, or apps. Our comfort zone lies in the LMS and OEM where our technology has proven successful and scalable. Docebo Flow is a new product, and we are learning how to implement and deploy it. Docebo Flow should not be seen as a substitution of the LMS, but rather another option on how to consume and digest content without having to enter the LMS directly.

Thank you. Due to time constraints, we are taking the last question from Martin Toner with ATB Capital Markets. Please go ahead.

Thanks very much, gentlemen, and congrats on another good quarter. Is the comment regarding free cash flow and EBITDA positive by the end of the year an indicator of philosophical shift?

Martin, good morning. I'll take that first, Claudio. There’s no philosophical change here. The way to think about it is that the business is naturally transitioning through the revenue growth we have and the operating leverage we're observing within G&A and other areas specifically that I talked about. This will get us to a point where as we exit 2022, we will transition into a positive free cash flow and EBITDA position, so no change in philosophy. Just business driving us to that point.

Excellent, thank you very much. I was hoping Claudio might be willing to expand on the comments that new product launches are an art. I'm just wondering what you mean by that?

What I mean is that when you have an idea and build a product, you can conduct all the market validation you want, but the product you launched and the organization supporting these products will not align with what you had envisioned on the day of the launch. Launching products requires fine-tuning from a product perspective, pricing perspective, and sales model perspective until you identify something that is significantly better than the idea you had when you first launched the product. This is what we have done with Docebo Discover, Coach, and Share. We launched those products, made adjustments to the pricing structure, ultimately bundling them completely inside the Docebo LMS.

Thank you. There are no further questions at this time. Mr. Erba, you may proceed.

Yes. Thank you, everyone, for staying with us again this quarter. This is probably our ninth or eighth earnings call. Thank you for staying with us. Stay safe. Speak in May. Bye.

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