Docebo Inc. Q2 FY2022 Earnings Call

Good morning, everyone, and welcome to the Docebo Inc. Second Quarter Earnings Call. All participants are currently in a listen-only mode. Following the presentation, we will open the lines for a question-and-answer session for analysts. Instructions will be provided at that time for research analysts to ask questions. I'd now like to turn the 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.

Hi, everybody, and thank you for joining us for our second quarter earnings call. With me today is Alessio Artuffo, our President and CRO and Sukaran Mehta, our CFO. Revenue for June represented another quarter of consistent execution and solid overall performance for the company. Adjusted for the impact of foreign exchange, ARR and revenue for the quarter was in line with our expectations, and we are pleased to report positive free cash flow generation based on our commitment to balance growth with profitability. We did experience some impact from certain enterprise deals that are being stretched out of the quarter. We continue to watch the evolving macro dynamics. Let's say that demand for our solutions suite is solid and our fundamental growth drivers are intact and healthy, anchored by our ability to support the complex external, internal, and hybrid needs of our customers’ learning journey. This provides us a long runway for organic growth that is supported by a total addressable market that enables our enterprise customers to deliver external learning that is core to their revenue-generating operation and continuous productivity enhancement. It is important to note that the total addressable market for our external training, where the table is best in class, is about twice as big as the internal use case. In addition to the high-profile labor training and retention challenges being accelerated by the macroeconomic environment, there are several fundamentally strategic drivers we will keep you focused on; these include training to drive customer and partner success, as well as revenue enablement. Our customers have a growing reliance on training with their own partner ecosystem and they require considerable offerings that are easy to deploy and cost-effective. Such drivers showcase that one size fits all legacy centralized systems are unable to meet the needs of today and tomorrow, certifying greenfield, upsell, and displacement opportunities. Simply layering on a nice pickup ability cannot drive a lack of feature of their ability to integrate into a complex evolving software stack. It’s here that an innovative disruptor like Docebo is eagerly positioned to gain mind and market share. We're implementing our solution. Customers are not weighted down by silos, but instead can leverage the federated ownership model where a single LMS serves as a multi-department system with multiple owners, both external and internal use cases, as well as displacement and greenfield opportunities. This federated ownership expands our horizontal platform reach across multiple buyer personas inside the organization, each with their own unique voices and nuances. In addition to creating stickier customers, this has also been evident through the number of internet customers engaged in the sales process, including the CTO or CSO whose focus is either to streamline and consolidate their tech stacks. And while this makes for a longer sales cycle, it brings in the nature of the strategic partnerships that those customers are looking for. In short, our opportunities are many and we are executing well against the growth strategy we have set in place to capitalize on them. We are doing this by gaining share in a large under-penetrated market where the macro environment provides an opportunity to gain valuable market share. Keeping our priority focused on growth and making the investment to drive that outcome without compromising profitability, maintaining a strong balance sheet now supported by positive free cash flow generation. Through our balanced investment, we have positioned ourselves extremely well for the upcoming cycle and we are genuinely excited about how this environment will serve as a catalyst for further innovation and disruption to the legacy LMS status quo. Now I would like to turn the call over to Alessio who will give you an operational update.

Thank you, Claudio, and good morning everyone. In my prepared remarks for you today, I want to lay out three points upfront. First, the business of customer education and revenue enablement are priority investments for our increasing base of enterprise customers. Second, external use cases are particularly stronger in our analysis of the market, with a large greenfield opportunity to capitalize on and the TAM that is twice as large as the internal use case market. Third, customers that adopt more than one use case yield better unit economics and are exponentially more sticky. During the quarter, we saw deal cycle lengthening in the enterprise segment, with more decision-makers, specifically CTOs and CFOs, being pulled in for approvals. We do expect to see this trend continue as a result of the wider macroeconomic pressure. That said, we're engaging more frequently with corporate executive teams to provide a learning platform that spans across the wider organization. The move to consolidate a technology stack in this economic environment plays really well to our strengths as follows. First, learning solutions must be flexible enough to integrate into and serve the needs of both internal employees and their customers' network, effectively handling multiple use cases on a global scale. Second, we are increasing productivity and efficiency for our customers as they look to move away from unsustainable old-school legacy LMSs in favor of a more modern architecture. Finally, Docebo provides ease of deployment and delivers favorable ROI and fast time-to-value. During the June quarter, we added 159 net new customers with more than 60% of our deals coming from our mid-market and enterprise segments. Cross sells and upsells both performed well as our sales team improved their effectiveness in how they position our expanded learning suite. While our go-to-market motion is improving, we know we have a tremendous opportunity for upside, especially as we focus on ramping our sellers and upscaling our organization. A good example of the excellent progress we made this past quarter is Chipotle’s decision to implement our platform to replace their existing LMS. Their goal is to offer immersive learning and development opportunities by upscaling their employees for future roles within the company. With this win, we are emerging as a leader in the quick service restaurant industry, where we've signed over 15 customers. In addition to Chipotle, other notable customers include Dennis, IHOP, Smoothie King, and one of the largest burger fast food chains in the world comprising several well-known name brands. Geographical expansion has always been one of our pillars of growth. A demonstration of our increased presence in the European markets is the fully loaded deal we signed with British United Provident Associations Limited, more widely known as BUPA. BUPA is an international healthcare service company serving over 38 million customers worldwide that showcases Docebo’s full suite offering for its innovative design and easy-to-visualize analytics. We were extremely happy to displace a legacy competitor and win the onboarding use case of a large publicly traded US-based mortgage services organization. We initially signed with this customer a year ago for an external solution for training their customers. In quarter two, we expanded this relationship to support their internal onboarding compliance and professional development use cases. It is a combination of our selling motion, product architecture, and functionality that enables us to displace a legacy incumbent in this project. This is a great example of how we work to create a very sticky long-term relationship with large enterprise customers. Lastly, a week ago, Amazon Web Services went live with the launch of AWS skills builder subscriptions, powered by Docebo. AWS introduced this premium paid subscription for individuals and teams looking to bolster their cloud computing skills. This launch demonstrated that the Docebo learn platform is enabling the success of one of our most advanced customer environments and is a testament to the dedication of our product, engineering, and professional services organization. Turning to our product investments and strategy. The past two years have served as a tremendous learning cycle for our entire product management and development. We're improving new module performance with direct customer feedback on the learner experience and our roadmap is focused on both harmonization of capabilities within use cases and innovation, which is core to our DNA. We're also seeing new and existing enterprise customers choosing to include products like Docebo Connect, Docebo Content, and Shape for their training programs right from the start, especially after having made a commitment to upgrade from their underfeatured legacy system. Geographically, North America continues to be our strongest and best-developed market with the largest greenfield opportunity. Turning to Europe, traction in both the UK and Nordics market has been excellent, characterized by some large enterprise deal wins. We will leverage this success as we look to other European markets, such as our recently formed DACH region. We’re seeing our modern architectures stand out incredibly well. The team we have built in Australia is particularly strong and works exceptionally well with a growing partner network across Australia, New Zealand, and the wider APAC region. OEM partners delivered a very solid quarter, adding quality to our pipeline as they expand our reach into the enterprise space. We're pleased that Aaron Craft has joined Docebo to lead the OEM technology partnership practice. Aaron brings over 25 years of SaaS and software sales and partnership experience across many industries and technologies from startups to mature companies such as SAP. Aaron will concentrate on increasing existing partnered value as well as bringing onboard select net strategic partners. Turning more directly to our sales team, we're pleased with the key people additions we've made and the traction they've delivered so far. The executive talent that we've been able to recruit will further mature our go-to-market motion and customer experience. More recently, this has included investments in marketing where Ryan Brock was named our new CMO. Ryan joins our team after serving in marketing leadership roles at companies like Dataminer and ADP. His immediate focus will be on driving demand generation and elevating our brand visibility as well as partnering tightly with our Chief Sales Officer, Nina Simosko, to accelerate growth and enhance our go-to-market machine. In conclusion, I want to summarize why we're so excited about the future of our company. Through the Docebo learning suite, we're uniquely positioned to support our customers' end-to-end learning needs. While others in the tech industry are slowing or even stopping investments in hiring, Docebo will continue to invest responsibly by managing performance very closely and hiring key talent to drive long-term growth.

Thank you, Alessio, and good morning everyone. For those interested, a detailed breakdown of our financial results for the three and six months ended June 30, 2022 can be found in our press release, MD&A, 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 pleased with the results for the quarter with revenue growth and profitability reflecting the balanced approach to the way we invest and manage our business. Despite the weight of the macroeconomic factors, there is one thing our new and existing customers are making very clear: technology investments, more specifically, software investments that increase productivity, enhance sales enablement, and drive revenue generation are the investments they're committing to their organization. With this secular trend as a tailwind, we remain confident about our long-term growth prospects. Now to the results. Total revenue increased by 47% after adjusting for the impact of foreign exchange and excluding a one-time cumulative catch-up of $1.1 million that was previously disclosed in our Q2 2021 filings. As reported, total revenue for the first quarter grew to $34.9 million, an increase of 36% from the prior year. Subscription revenues were $31.9 million, representing 91% of our total revenue for the quarter. Annual recurring revenue for the quarter was $138.2 million, an increase of 51% after adjusting for the negative impact of approximately 3 percentage points, given the significant strengthening of the US dollar relative to foreign currencies. Our company wide average contract value, or ACV, increased 21% after adjusting for the impact of foreign exchange. As reported, company-wide ACV was up 18% to approximately $45,000 from $31,000 at the end of the second quarter of 2021. ACV for new customers in the quarter was approximately $45,000. New and cross-sell logos with ARR greater than $100,000 represented approximately 30% of the net new ARR. ACV from new customers declined sequentially as a result of the lower contribution from deals valued over $100,000. This is a direct result of the elongation of the enterprise sales cycle we previously discussed. Although this percentage may fluctuate from quarter to quarter, the sales pipeline in the enterprise segment remains healthy, and our win rates are strong, particularly when external and hybrid use cases are involved. For a bit of additional context, more than 80% of our ARR comes from customers with multiple use cases, with 61% of our total book of business coming from external hybrid use cases. These reflect the stickiness of our platform and the strategic role we play with our customers. Gross profit margin for the second quarter improved sequentially to 80% of revenue, which is consistent with the prior year period. Total operating expenses for the second quarter decreased to $25.9 million from $26.8 million for the prior year period. Included in the $25.9 million of operating expenses is a foreign exchange gain of $4.9 million that relates primarily to cash on our balance sheet and is therefore for the most part, unrealized. Operating costs, excluding this gain, were $30.8 million, slightly higher than the $29 million in operating costs reported on a comparable basis in the first quarter of 2022. G&A as a percentage of revenue declined to 21.7% for the second quarter compared to 23% for the first quarter. Sales and marketing expense decreased slightly as a percentage of revenue to 42.6% from 42.9% for the first quarter. R&D investments in the second quarter were $6.1 million, or 17.5% of revenue compared to 19.3% in the first quarter of the current year. With the bulk of our R&D team residing in Europe and the strengthening of the US dollar, we experienced a 2 percentage point benefit in our R&D organization. Adjusted EBITDA came in at a loss of $0.3 million for the second quarter of 2022 compared to the adjusted EBITDA loss of $1.3 million for the first quarter. We reported a net income of $2.1 million for the second quarter of 2022 compared to a $7 million net loss for the first quarter. We ended the quarter with a healthy cash position with net cash and cash equivalents of $212 million. While the cash continues to generate positive interest income in this rate cycle, our strong capital structure gives us the flexibility to invest strategically. I'm also pleased to report positive free cash flow of $0.9 million in the second quarter, which was ahead of plan. The natural growth in our business has allowed us to achieve the level of scale that is beginning to deliver operating leverage. Before opening the line to questions, I want to close with some thoughts on three items. First, share-based compensation, a question that has been coming up more frequently since we reported Q1 results back in May as investors evaluate some of the embedded costs high-growth companies have had to bear to attract and retain top talent. Our share-based compensation as a percentage of revenue was approximately 4% in the second quarter, a relatively modest number when compared to peers with similar high growth rates to Docebo. To ensure interests are aligned, we will always balance the use of equity compensation to drive performance with the goal of maximizing value for our shareholders. The second point I want to leave you with is that, as the US dollar continues to strengthen into the second half of the year, our as-reported revenues and expenses will be impacted. With rates at current levels, revenue growth will see similar headwinds, while R&D investments will see some benefit as these roads are mostly located in Europe. Lastly, we expect to deliver modest improvements in EBITDA and free cash flow as we move forward through the second half of this year. Our focus remains on making investments that will drive long-term growth while maintaining optimal unit economics. 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. Ladies and gentlemen, we will now begin the question-and-answer session. Your first question comes from Daniel Chan with TD Securities. Please go ahead.

Hi, good morning, guys. So, you commented on the macro uncertainty lengthening the deal sales cycle. Can you comment on the pipeline, however, are you seeing a change in the composition of your pipeline in terms of enterprise mix?

Sure, Daniel. Claudio speaking. Actually, the pipeline is growing. We were focusing on the pipeline in the past few days because we wanted to understand if the macro environment has impacted the demand or only extended the sales cycle, especially in the larger enterprise deals, which we see as deals above $100,000. Usually, CTO and CSO step in to negotiate better the deal and the contract. So, this month we see an extension in the procurement phase; we do not see any decrease in the pipeline in terms of growth. This is due to the fact that the total addressable market, especially the internal use case, is mostly greenfield. So, there is demand for the product. There are only buyers that are a little bit more careful because they don't know where inflation is heading or how the macroeconomic situation will shape in the next few quarters.

Yes, 100% on top of what Claudio shared. I'd like to add that not only we're seeing pipeline remain strong, we're also recognizing that we have margins for improvement and upside. We have instilled a new CMO, and we're bolstering our demand generation and business development teams, investing in these teams to really continue to focus on pipeline creation. So net-net, the pipeline continues to grow. We have margin for upside and we're working very hard on it.

And Alex, sorry, one point to you. You chime in; you said a good point, which is, yes, the pipeline is growing, but do we have the opportunity to make a bigger pipeline if we work better internally with the coordination between sales, marketing, demand generation, etc.? Yes, internally we do have room to improve, and the hiring we made with Ryan, Nina, and Alessio is still growing and is allowing us to increase the pipeline, because it's still a greenfield market, especially for the external use case. The total addressable market is so big that we have all the leverage we need to improve internal operations and create a bigger pipeline. That said, the pipeline today compared to the past year is impressive, and we are happy about that.

That's very helpful. Thanks, guys. You also mentioned that the OEM channel was very strong. Can you just give us an update on how meaningful Ceridian is to your sales? They continue to perform very well last quarter, with a large proportion of their customers taking on their full suite, which I believe includes your solutions. So just wondering if they are still a large contributor as they had been in the past? Thank you.

Yeah. Dan, I'll take this one, Sukaran. Good morning. On the OEM side, we had really strong performance across the board from Ceridian, which you mentioned, and MHR; they both scale well. We had a pretty good quarter with Ceridian, and I can generically say that they remain one of the bigger contributors to the ARR story, and this has stayed consistent.

Thanks.

Your next question comes from Martin Toner with ATB Capital Markets. Please go ahead.

Good morning, everyone, and thanks for taking my question. Guys, we've had this question so many times, maybe in the past. It's great to see you guys give some detail on the size of external enterprise. Can you kind of unpack that TAM a little bit for us and give us some further details?

Sukaran, can I say something or are we moving this to the investor relation?

No, Claudio, we can say some of the stuff to understand. Go ahead.

Okay. Martin, you made me happy, because speaking about macroeconomic trends and total addressable market is exciting. What we see is, first of all, you have to know that 61% of our revenues and 80% of our use cases, Sukaran correct me if I'm wrong with the numbers, are hybrid, which means that we are covering at least one external use case. So two departments, one internal, one external is common for us. In the external use case, only in the United States, the market is two times bigger than the internal one. When we see the total addressable market in learning, North America only, US and Canada mainly has $8 billion; two thirds of this is external, and the exciting data is that 70% is greenfield. I was speaking with the BBR team yesterday in Toronto, and they said every time a customer comes for an internal use case, they are shocked to learn that there is an external training opportunity, and for us, it is a great segue to increase the ACV during our sales pitch. So just to recap, $8 billion in North America, two-thirds external, of this two-thirds, 70% is a greenfield market, meaning customers that are not yet using our platform to train their partners, customers, or other audiences.

Hi, Martin. I’ll just say we'll leave some of the finer detail for our Investor Day, which will happen in the latter part of this year, and there are some more details we will unpack at that point.

That's great. I'll give a follow-up to the technology vertical, which is quite significant for you guys. And I believe it skews to less mature companies; those companies are, I think, sharpening their pencil more than most. Can you talk a little bit about the strength or if you're seeing any weakness in that vertical?

Alex, do you want to take it?

Yes. Look, when we talk about our ability to manage multiple use cases, we also oftentimes refer to the concept of the hybrid use case. We use that terminology internally to refer to the ability of an organization to effectively consolidate multiple needs. Whether it's various internal use cases, such as onboarding, enablement, compliance, to name a few, or external use cases, customer training, partner training, others to name a few, into an all-in-one solution. We've referred to this all-in-one solution as a federated solution, meaning a platform that effectively manages multiple cost centers' learning needs in one platform. That itself is a recession-proof approach to the market because it allows an organization that may have different point solutions to reduce complexity and work with one quality vendor with one quality platform to deliver effectively the same goals. So our, let's say, recession-proof response is to navigate those customers that are having challenges or concerns and actually transforming that concern into an opportunity for us.

Okay, great. Thank you. And that's all from me. I'll pass the line.

Your next question comes from Stephanie Price with CIBC. Please go ahead.

Good morning, and congrats on the Chipotle win. The press release mentioned that it was a replacement. Can you talk a little bit about why Chipotle chose Docebo? And maybe as a follow-up, can you talk a bit about the percentage of wins that are full LMS systems versus the more targeted use cases that I think you typically provide?

Stephanie, I’ll answer the last part of the question and then next we will go directly on the use case. I see the marketing – we don't like this, I mean, it's a business that for us is legacy, the centralized project which you define pure LMS. We are excited about departmental customers, which means customers that are buying Docebo to train on hard skills; we are ultra-excited about external training. If you define LMS in general as a global project, this is not our sweet spot.

Sure. Stephanie, we're also super proud of winning the business of Chipotle, and whilst you can appreciate I can't say which vendor we have displaced, I can tell you it is one of the more frequent enterprise-based vendors that we deal with. The theme around displacement is also very coherent and consistent with others that we see, particularly in the enterprise space. Those themes are our ability to flex architecture, to provide a distributed environment, to be generally speaking more agile in both deployment and in the capabilities of the system. I could oversimplify it by saying it’s a modern system versus an old-school legacy system that is more rigid. More interestingly, perhaps from a QSR standpoint, and so kind of double-clicking on the specifics of Chipotle, QSRs have certain needs in the area of reporting and in the area of analytics management that are quite specific to how they run their business, manage the franchisees, and then run analysis of productivity of their people on a location basis, for example. Docebo provides a certain type of management in our organization chart grouping, making it fairly hard to do that, which positions us from a capability standpoint in a very unique place. It is not a surprise that, as we quoted in the script, we have won a lot of business in QSR and we believe that space continues to be really hard for us, and we're making intentional marketing efforts to win more of it. I hope that answers your question, Stephanie.

It does. Thank you very much.

Thank you, Stephanie.

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

Yes, thank you. So it looks like you are still fairly motivated in terms of spending to serve harvest opportunity. What are your thoughts here on LTV to CAC as you sort of move up? Can you maybe share some trends that you've seen internally and perhaps what you're sort of targeting for as we look ahead?

Yeah, Richard. I'll take that question. Sukaran here. I think in general, we will provide some more information about our LTV to CAC when we report at Investor Day. But some data points that will help you think about it. Without getting too deep on the CAC which we haven't disclosed publicly yet, I think one channel a data point that will help you is that as we think about how we are tracking from a net dollar retention perspective we're tracking consistent or slightly higher than what we had reported last year. Of course, we disclose that once a year. But that gives you a flavor that we continue to see strength on the expansion side of the business. What's important to note is that 80% of our customers use us for multiple use cases, with 61% of that customer base using us for external and hybrid use cases. That drives our net retention ratio strong for us, effectively gross retention is extremely strong for us. When we consider the investing phase, the cornerstone of our long-term strategy has always been and will continue to be to operate Docebo under the rule of 40 and we're committed to that even as we balance growth and profitability.

Sukaran, let me add one point that you mentioned when you see this, there is a direct correlation as to the number of use cases we cover and KPI performance, every KPI performance. That means, the more use cases we cover, the more all the positive KPIs go up. I mean from conversion, LTV, CAC, retention, and everything. So there's a direct correlation and this is why I'm happy with Docebo, not only cover internal but internal plus external.

Thanks. And then my follow-up question is sort of tied to that. If I sort of look at the name, let's say, four, five years ago when we started looking at it, it seems like you've made some meaningful changes as you get bigger in terms of the go-to-market. Can you maybe talk about how that's evolved over time? And then what we should expect here going forward over the next 12 to 24 months?

Well, actually there is a dual correlation from product capabilities and the market you can cover. Docebo is a very sophisticated solution in a positive way. The more sophisticated you become, the more you cover the needs of sophisticated buyers. Small businesses, 30-people companies don't need Docebo. Complex businesses require scalability and multi-use cases. You know that we started stressing the market with the concept of federated learning, which means one technology that covers multiple use cases, and that from the internal uses, then points to the admin as perceived as old technology because it's so tied to give use case that the admin perceives Docebo as its own technology while another peer in another department is using the same technology with a different solution or use case. So, the more we evolve, the more we go upmarket. The next challenge is not only going up market but the more we evolve, the more we want to cover multiple use cases in the organization. If I have to say what is the biggest duty of Docebo in the next year is expand use cases across customer organizations. So not only expanding up market in terms of size, but expanding use cases in all the organizations that we have.

Great. Thank you. That's helpful.

Your next question comes from Josh Baer with Morgan Stanley. Please go ahead.

Hi, it's Matt Wilson on for Josh Baer. Thank you for taking the question. Back to the elongating sales cycle. It sounds like it's mostly impacting larger customers at this point; you talked about expectations for longer sales cycles to persist throughout the year. Do you think this trend could move down market and impact your smaller customers? And maybe just a little bit more detail about the nature of the deals that are getting pushed back. Is there certain customer verticals or geographies where you're seeing these elongating sales cycles more frequently?

Thank you so much. Alessio speaking. Elongated sales cycles have been a theme in this environment. You're absolutely right. The reason why we're seeing them in deals, generally speaking, is deals above $100K, and/or you can associate that with our more enterprise customers we're seeing companies changing the buying process. We know among those changes is the inclusion or introduction of the C-Suite that wasn't previously involved in certain spend thresholds at all levels. This is causing more authoritative metrics involvement that do affect how sellers bring a deal over the finish line. We believe this type of behavior is more typical of larger companies rather than smaller companies, and we attribute the fact that we haven't quite seen that issue in the smaller market again due to the same reason I just mentioned. I can't predict the future, and I don't know that anybody really can, and I can't say whether this is going to change also in the small market and mid market or not. As of right now, we haven't seen that signal, but if we do, we will certainly report that. With regards to what we're doing about it, we are getting earlier in the cycle to understand exactly what the process in the company is and we're not just checking but we're double-checking and triple-checking what the road to signature is. We find it interesting that sometimes buyers in this environment don't even know themselves because things are changing on their end without clear communication inside those companies. The elongated cycles are partly a product of the confusion that governs inside these companies where three months ago you used to buy in one way and now it's different. But we remain optimistic because we believe it's a timing factor, and we will control everything that we can.

And I think the only point that I’d add to that is that, in this cycle this is from our perspective, it gives us a position of strength. As you think about Docebo as a federated LMS, where we can consolidate various platforms, what's also happening is that we see CTOs and CFOs stepping in and asking the question of why Docebo can serve all their needs and why they need to have multiple platforms. And firstly, where our platform solves their revenue-generating operations of their businesses, this from our perspective, the consolidation of the LMS space will also help us as we move through this kind of cycle of more C-suite stepping into the approval process.

Thank you. That was helpful. And then maybe one more, we saw the Chief Marketing Officer announcement yesterday, and congrats on announcing that. And you hired a Chief Sales Officer earlier this year. Can you kind of talk about the strategic priorities going forward for your go-to-market? Where are the incremental areas of investment?

Great question. Really appreciate it. First off, I just want to reiterate how proud we are to have those folks joining us: Ryan, Nina, and other senior management leaders. At a very high level, we're preparing the organization for the next phase of growth. We started in the past where 100-plus million in ARR; what do we need to get to the 500 stage and beyond? So that's point number one. Two, of course, Claudio’s point is also paramount, right? The general need for seniority. Point number two is preparing the company to continue in what is needed to execute at scale and continuing to go up market. Creating a true enterprise motion implies a lot of work on many fronts, not only sales; we need to revise overtime and improve how we show up and need to work hard on continuing to affirm our brand globally. This is a lot of work and requires people that know how to do it and build the teams around that. Definitely continuing to scale demand is hard and balancing demand with sellers in seat is a job that requires deep alignment between CMO and CSO, and we believe that with Ryan and Nina we have the right people to execute on that. I'd say Nina brings experience of working in large organizations like SAP, like NTT, and when you work with these leaders, you understand quickly the opportunities of scale. So all in all, it's a lot of opportunities focusing on verticals, focusing on approaching certain markets like government that we just need to execute with the leaders that have been there, that have done it, to go faster.

Thank you.

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

Hi. Good morning, and thanks for taking my questions. I just wanted to ask on the competitive landscape there. Maybe you could frame down the context of how many bidders you're seeing at Docebo and win rates. Are you seeing any changes in the competitive landscape for your product?

So, we see competitors that are becoming more and more aggressive and better, which means that they are learning how to compete against us. This is a great thing because competition also puts pressure on us to improve our sales. Just to better give you a picture use case by use case: legacy LMS, global use case is a consolidation game; cornerstone has eaten all the legacy players, which are mostly dinosaurs or legacy competitors. So, now they are part of this organization and there is only one other player, SAP SuccessFactors, but this is a game that we play, and we aim it with HR vendors, which is a strategy that pays back very well. Departmental use case, we see stronger competition in one vertical segment specifically, which is sales enablement. It's a big fragmented market with many players and it's not only in LMS name. Sales enablement is a set of tools from coaching to content to orders that when you have great storytelling speaks only one language, which is the language of the sales enablement training department. We sometimes suffer against those competitors. The same with the consolidation of a multi-department purchase; those players cannot extend horizontally inside the organization. Also, customer community and external use cases require vertical features and specific knowledge. This is the competitive landscape in a competitive area. That said, I think that the future gap compared to sales enablement is a little; we think that we are especially well positioned for this. But if I have to imagine the competitive landscape, I would say that the biggest pressure is the sales enablement and customer community space.

I'd just like to add incrementally that from changes in the real rate, Christian, we remain really, really happy about our win rate, which is well above industry standards, and we continue to watch it and monitor it, but we're very positive despite the dynamics that Claudio mentioned. Win rates are still really good.

That’s great. Thanks for the color. And I’ll ask one follow, maybe more for Sukaran. Just on the gross margin profile of the business, maybe in the near term help us think about the model where gross margins can land. And I imagine that would be balancing scale with support work, where do you think this could trend from this quarter?

Yeah, I think, Christian, we generally don't provide guidance. But I think in general, I've been consistent, and we stay consistent in messaging; we're very comfortable where the gross margin is: low 80%. We'll see some operating leverage as we move into the future. Not in the immediate future, but where we landed this quarter, we're very happy with it. We're more than happy to leave it there and continue to help our customers by investing in professional services as we assist them from a customer success perspective that yields long-term opportunities to make sure that we have happy customers who continue through their learning journey and expand them over time. So more than happy to give our gross margin in low 80%.

That's helpful. Thanks for taking my questions.

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

Good morning, guys, and congrats on the quarter. I want to touch on EBITDA and cash flow for a second here. I think you said in your opening remarks that you do expect to see modest improvements in EBITDA and free cash flow in the quarters ahead, which I believe is that obviously had a schedule. I'm just wondering if there's been any change or timing change in kind of pace or timing of investments or is this really just a reflection of the operating leverage that's building in the business?

Thank you for the question, Suthan. From our perspective, as we consider the operating leverage in our system, we're focused on optimizing our unit economics. The majority of the leverage reflected in our numbers is coming from General and Administrative expenses, as well as some Research and Development. Looking ahead to future quarters, we expect this operating leverage to primarily continue to stem from G&A, with a minor contribution from R&D and Cost of Goods Sold. Regarding free cash flow, I prefer to assess it on an annualized basis; we experienced some prepayments in the first quarter that may affect the figures, making it somewhat unpredictable. However, I believe that, overall, free cash flow and EBITDA will see incremental improvements as we progress.

Okay, great, that's helpful. And you guys touched on some metrics with respect to cross-sell. Can you talk a little bit about the traction you're seeing on the expansion front, especially with the new product suite? And I’m curious to know what sort of products and modules you going to see the strong attach rates with?

Sure. Hi, Suthan, Alessio speaking. When it comes to extension, I think you correctly sort of implied we view that world in upsells, meaning the ability to grow in existing customers and cross-sells will develop relations in that new contracts that stem from an existing entity. I think both fronts are going really well. The second one is a slightly different sales motion; it is a lot closer to what one would call a net new logo. We're adding conversations with buyers that aren’t effectively using the platform yet, and it's not one of their sister companies or affiliated entities. So we leverage that and we are getting better and better at doing that. On the scale basis, we've introduced technologies and methods for proper account planning. That's a tactic that is a prerequisite to scaling true and proper cross-selling. We're pleased with the initial results of that effort. On the upsell front, you're correct that new products and new modules are a big driver of it. It's not the only one because we monitor and manage the adoption of our software, and we like to report that many of our upsells are actually usage plan increases, which is a testament to the fact that our customers not only buy our software; they use it, they adopt it, and they exceed their user plan and come back for more usage. What we'd like to improve in the future is the ability to really tie our increased use cases to the job done, which yields incremental value and incremental monetization. So, that's a little bit how we are thinking about it. Products like Connect, products like Docebo Content, are performing really well. Shape started off as a relatively new product but continues to evolve and capture market share. Those are the ones we're seeing success with, alongside our existing offerings like Extended Enterprise, Coach, and Share, which continue to perform well.

Great. Thank you for the color.

Mr. Erba, there are no further questions at this time. Please proceed.

I want to say thank you for attending the earnings call. Secondly, we've got many questions, so we had a very busy day today, which is good because this is great. And thank you so much for attending this earnings call. Let’s meet next quarter. Thank you so much.

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.