Docebo Inc. Q1 FY2022 Earnings Call

Good morning, everyone and welcome to Docebo's Inc. First Quarter 2022 Earnings Call. All participants are currently in a listen-only mode. Following the presentation, we will conduct a question-and-answer session for analysts. Instructions will be provided at that time for research analysts to ask questions. And now I return the conference call over to Docebo's Vice President of Investor Relations, Mr. 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 financial 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 US dollars. Now, I'd like to turn the call over to Docebo's CEO, Claudio Erba.

Sorry, everybody. And thank you for joining us for our first-quarter earnings call. With me today are Alessio Artuffo, our President and CRO, and Sukaran Mehta, our CFO. We are extremely pleased to start another strong quarter this morning. The reason why is we continue to see strong demand for our products and services across all market segments. We are particularly excited about the accelerating momentum in the proprietary segment that is enabling Docebo to lead the charge in the fast-growing market, characterized by challenges in macroeconomics and scalability. Their growth continues to benefit from the availability of our complete suite of products and momentum in the enterprise segment. We saw growth in distributor representation across industry verticals and continue to see more than 60% of our customers using our platform to enable external training and hybrid training use cases. These use cases are strategically important to us as they reflect how our customers are using our solutions to solve critical requirements. These add to creating more intimate and stickier relationships that lead to increased annual contract value (ACV) and drive a higher lifetime value for our customer relationships. Consistent with prior quarters, almost half of our net annual recurring revenue (ARR) came from customers with an ACV over $100,000. It is also worth noting that we have seen an 83% year-over-year increase in the number of clients generating ARR of more than $100,000. Finally, profitability continued to improve as we remain on track to turn adjusted EBITDA positive as we exit the year. We are maintaining capital efficiency and growth at the right cost, which remains our DNA. Sukaran will discuss our financial performance in more detail momentarily. But let's take a moment to discuss why we are so excited about the future regarding our operations in the macro environment, which is characterized by sustained demand for enterprises, challenges of inflation, increasing competition, and skill gaps. All while navigating a changing environment, we're engaging with employees, customers, and partners in a hybrid work environment. As a result, they are focused on investing in technologies like Docebo to drive critical business outcomes, whether it's improving efficiency in executing daily workforce tasks or strengthening customer and partner relationships. We see this trend cutting across industry verticals and regions. It is becoming clear that learning and training are critical investments. The horizontal nature of the Docebo platform supports the diversity of scenarios. It eliminates the challenges that customers face while supporting multiple revenue management systems across different departments and learning models. The adoption of learning technologies is accelerating, and we believe we can grow from the $100 million company we are today to a billion-dollar company in the future. Speaking of customer contracts in this quarter, we signed a new customer agreement with a leading company in retirement sustainable mobility solutions that selected Docebo to manage employee and external channel partner training. We will deliver learning experiences to more than 20,000 retail employees. We continue to see the retail business applying external training as a key pillar of their customer growth and engagement strategy. In addition, we have secured partnerships with influencers in the global workflow automation software space, which focuses on enhancing employee experiences. They recognized our Learning Suite as essential for an excellent end-user experience and integrated capabilities for a more streamlined deployment across the ecosystem. Customer expansions were also strong contributors to this quarter, and we are seeing continuous traction in our expansion strategy. We believe that our goal to transform customers into raving fans will become critical to our long-term growth strategy. For instance, we recently expanded our partnership with a leading North American luxury retailer just six months after the initial agreement. This new customer expanded their use of our solutions into their entire retail group for onboarding and upskilling store associates, resulting in a 127% growth in subscription value. We continue to witness positive contributions from our product attachments and partnerships, as seen by significant uptake across our advanced solutions. An example is our Connect product being utilized by a major cryptocurrency exchange for automating user learning processes. We are delighted to see advancements in our team structure as we welcome significant hires who bring additional depth to our leadership. One such addition is Neena from Moscow, who joined us as our Chief Sales Officer. Neena has a history of success with companies like SAP and Nike and will be key in scaling our direct and indirect sales organization to meet future growth objectives. Likewise, Nicole Williams has joined our team to oversee our revenue strategy and operations, bringing years of industry experience. We are proud to announce that Docebo is finalizing our first-ever year-to-year report to be published before our shareholder meeting in June. We recognize the impact that learning has on organizations, and we take our responsibilities seriously. We are proud that our platform is utilized by many customers to advance learning objectives that yield positive environmental, social, and governance (ESG) outcomes. We look forward to sharing more insights when we publish this report. I will now pass the call to Sukaran to discuss financials.

Thank you, Claudio. Good morning, everyone. For those interested, a detailed breakdown of our financial results for the three months ended March 31, 2022, can be found in our press release, MD&A, and financial statements, which are now available on our website and filed on SEDAR and EDGAR. The slide deck accompanying this earnings call was made available on our Investor Relations website this morning. Q1 was a great demonstration of the continued momentum in our business after a record Q4. This is a great time to be an innovative and disruptive force in the learning industry. Enterprises are investing in learning technologies to drive favorable business outcomes across their organizations. These customers are at the core of the long-term secular growth opportunity that we are well-positioned to capitalize on, regardless of the economic environment. Given the tremendous value we provide to our customers and our current market penetration, we continue to be excited about our future. Now to the result. Despite FX headwinds, total revenue for the first quarter grew to $32.1 million, an increase of 47% from the prior year. Subscription revenues were $29.1 million, representing 91% of total revenue for the quarter. Professional services in the first quarter were $2.9 million, an increase of 49% from the prior period. We added $11.6 million in net new ARR during the first quarter, bringing our total ARR to $129.3 million, an increase of 55% year-over-year. We are especially pleased with this performance, as Q1 comes off our seasonally strongest quarter. New and cross-sell logos with ARR greater than $100,000 represented approximately 50% of the net new ARR, underscoring continued momentum with larger commercial and enterprise customers, and we take confidence in the fact that our pipeline continues to be strong. Total customers at the end of the first quarter of 2022 were 2,947. Our company-wide average contract value or ACV increased to approximately $44,000, up 23% from $36,000 at the end of the first quarter of 2021. ACV for new customers in the quarter was approximately $60,000, driven by our continued shift in mix towards enterprise-sized deals and the addition of incremental products. As we add more enterprise customers, the quality of our ARR base continues to strengthen. We believe the lifetime value of these customers reflects positively on our business growth, including expansion opportunities within our current customer base. Gross profit margin for the quarter was 80% of revenue, which is consistent with previous quarters. We expect to maintain gross margins in the low 80% range over time as we continue to invest in best-in-class enterprise support, customer success, and implementation services. Total operating expenses for the first quarter increased to $32.4 million compared to $23.5 million for the prior year period. Included in the $32.4 million of operating expenses is a foreign exchange loss of $3.4 million that relates primarily to the cash on our balance sheet and is therefore mostly unrealized. Operating costs, excluding this loss, were $29 million, slightly higher than the $26.6 million reported on a comparable basis in the fourth quarter of 2021. A full summary of operating expense lines is presented in our Investor Day materials. SG&A expenses have continued to decline as a percentage of revenue to 23% for the first quarter compared to 24.4% sequentially. This area continues to deliver operating leverage, and as previously noted, we anticipate ongoing leverage as we scale. Sales and marketing expenses increased slightly to 42.9% of revenue from 42.4% for the fourth quarter. We expect our unit economics to remain efficient as we continue investing in our sales engine. This includes hiring senior quota-carrying executives and adding depth to our account management team to drive expansion and higher net dollar retention. We also added a number of sales and marketing personnel as part of our Skillslive acquisition, which will enhance growth in the APAC region. R&D investments in the first quarter were $6.2 million or 19.3% of revenue, compared to 18.5% in the fourth quarter. In the fourth quarter of 2021, we recognized a one-time year-end benefit from R&D tax credits of approximately $800K. Adjusted EBITDA came in with a loss of $1.3 million for the first quarter of 2022 compared to a loss of $2.5 million in the prior year period. We reported a net loss of $7 million for the first quarter of 2022 compared to a net loss of $5.6 million for the prior year period. Our strong capital structure is reflected in our healthy balance sheet, showing net cash and cash equivalents of $212 million at the end of the quarter. Free cash flow was negative $2.3 million in the first quarter. In closing, I want to emphasize that we believe we are extremely well-positioned to capitalize on what Claudio referred to as a macro trend that is creating a prolonged demand environment for Docebo. We will continue to invest responsively in a manner that maximizes high-quality growth while ensuring our ability to maintain our best-in-class unit economics and sales efficiency. This will be matched with continued operating leverage that will naturally lead us to turning EBITDA and free cash flow positive as we exit the year. That concludes my prepared remarks, and I would like to turn it over to the Operator now to take some questions from the analysts.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Your first question comes from Josh Baer with Morgan Stanley. Please go ahead.

And congrats on a great quarter. I wanted to start high level; you mentioned the ability to reach $1 billion in ARR. Thinking about the bigger picture and longer-term, just wanted to get some context on what it would take to get there. Any insight on products, segments, geographies, and customer profiles would be helpful.

Josh, first welcome to the digital world; I know this is your first earnings call. From an organic perspective, I would focus my answer solely there, not considering any transformative event. The industry is highly fragmented, and the total addressable market is vast, as it now includes external training in addition to internal training, which broadens our market significantly. What actions are we taking? First, product innovation: continue to enhance both our core LMS products and expand into new offerings. We recognize that multimedia content delivery, including coaching and informal sharing, is crucial to elevating our user training experience. Second, we see a lot more potential in verticals where we have not yet penetrated deeply, such as government sectors. Additionally, geographic expansion will be key; while we focus on Europe as our home base, we have significant revenue coming from North America. By committing to product innovation, exploring new verticals, and expanding into new geographies, we see a lot of pathways available to grow towards that $1 billion mark.

Thanks, Claudio. That’s helpful. A follow-up on a different note: should we expect changes to the go-to-market strategy following some recent leadership additions on the sales side?

Firstly, I'm pleased to have Ale, who I consider a founder of this company, among us. We're evolving his role, as it’s not just about revenue anymore; he’ll oversee the entire organization, including areas like marketing and professional services, to ensure we have a comprehensive strategy that ties these functions together. We want to leverage his expertise across various functions to optimize our revenue potential and ensure each team is aligned effectively. Ale, do you want to add something?

Thanks, Josh. As we grow, we need to focus on the next 3 to 5 years, not just on hitting a revenue milestone, but on building a robust organization capable of scaling. Human capital will play a critical role. The addition of leaders like Neena and Nicole strengthens our ability to scale effectively, helping us navigate the path from $100 million to $1 billion in revenue. We understand what it takes and are ready to leverage our human resources to get there.

Thank you.

Good morning, and congrats on the strong quarter. I wanted to touch on the higher level of net new ARR this quarter. It seems significantly stronger compared to last year’s seasonally slower period. What demand trends are you seeing that keep you excited about the outlook and buyer behavior?

Suthan, let’s talk about the outlook first. Companies right now are concerned with both economic slowdown and talent shortages. These are driving forces for adopting online learning systems, which help mitigate talent gaps due to 'The Great Resignation' and remote work trends. Companies are wisely investing in tools that support both employee development and customer relationship management, and Docebo is well-positioned to support those needs. I have witnessed companies investing in their workforce during economic downturns historically.

To add to that, we printed $11.6 million in net new ARR this quarter, which is an improvement from $9.4 from last year—even including a significant seven-figure deal. We're really pleased with this outcome. Factors like deeper use cases from clients and broader solution capabilities have contributed to this improvement.

Thanks, Alessio. For my follow-up, could you provide an update on demand trends regarding the indirect channel and OEM partners?

Sure! We've consistently experienced year-over-year growth in our OEM business, which has increased by 70%. We're currently centered on forging strong partnerships that yield substantial future results. Our pipeline remains robust, and we’re optimistic about executing plans with these partners.

Good morning. I have a question about the divergence in the growth rate of ARR and revenue. It seems different compared to past quarters; what's causing this dynamic?

Morning, Rob. There are a couple of reasons for this divergence. As we ascend to the enterprise segment, customer procurement teams negotiate contracts more toward the end of the quarter, delaying some revenue recognition. Additionally, when it comes to enterprise deals, they can be ramped, with revenues recognized gradually over the contract duration, while ARR is calculated based on upfront commitments.

Thanks. Another quick question: have any thoughts on the EdCast acquisition by Cornerstone?

Congratulations to EdCast on their new journey with Cornerstone. For Docebo, our capabilities are solid, and we remain focused on executing our strategic road-map regardless of competitive changes. We’re excited about what’s next for us.

I agree with Ale. We believe that competitors taken over by private equity often undergo internal restructuring, which may provide temporary opportunities for us in the market.

I noted that you forecast positive EBITDA for the year. Given rising costs due to wage inflation, how do you ensure this?

Yes, we've accounted for wage inflation in our approach. We believe we’ll exit Q4 with positive EBITDA. We've always operated efficiently and will ensure we manage our growth while maintaining those unit economics.

Hi, good morning. On the sales side, how are you seeing customers coming onto the platform, especially since transitioning more to enterprise sales?

Our lead generation strategy is multifaceted; while larger enterprises may require more outbound marketing, we continue to see large client acquisition from inbound as well. It's testament to our brand strength—our enterprise clients are leveraging our assets even in a crowded space.

Good morning. Gross margin saw a slight decline year-over-year; could you speak to the drivers of that margin?

Gross margins have remained steady around 80%. Although last year's margins were at 82%, we believe we'll achieve those levels again soon as we scale and implement best practices in serving our enterprise clients.

With much discussion around geographic expansion, could you share which regions you see as needing more focus?

Easter regions tend to exhibit first-time adoption of learning tools. We aim to solidify our presence in Germany and France. While exploring Middle-East expansion, we want to ensure we focus on a few regions to prevent overextending ourselves.

As Claudio mentioned, North America remains a focal point, with significant momentum still evident. We recognize that establishing a brand in new geographies takes time, and we must prioritize our efforts accordingly.

Just a follow-up on Skillslive; how has the integration progressed since acquisition?

To summarize, we have effectively built a capable team from Skillslive and are already generating pipeline activity in Australia. The ambition is to drive growth, supported by expert personnel at the helm.

Thank you everyone for your participation. Have a nice day, stay safe, and speak soon.

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.