Docebo Inc. Q1 FY2023 Earnings Call

Good morning, everyone, and welcome to Docebo Q1 2023 Earnings Call. All participants are currently in listen-only mode. We will open the line for a question-and-answer session for analysts following the presentation. 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 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 for reconciliations to the nearest IFRS measures. Please note that unless otherwise stated, all references to any financial figures are in U.S. dollars. Now, I'd like to turn the call over to Docebo's CEO, Claudio Erba.

Thank you for joining us for our first quarter earning call. With me today, Alessio Artuffo, our President and COO; and Sukaran Mehta, our CFO. I will start my comments this morning with a brief high-level summary of our results. We are pleased to report revenue growth with March quarter results coming in at the upper end of our guidance range, up 32% on a constant currency basis. Our profitability exceeded our guidance with our adjusted EBITDA margin reaching 5.3%. As Docebo expands its reach, we saw a wider customer base in Q1 across various industries and learner types. Our platform versatility allows us to take advantage of global opportunities across use cases. In terms of regions, our business has a good mix, and we are happy to see our investment in new European markets gain momentum. We closed some of our largest enterprise deals in Q1 with companies in Germany and France, including a major transportation and logistics solution provider that operates in over 160 countries worldwide. From a product perspective, our generative AI-based content creation model, Docebo Shape, maintained its performance from Q4 and achieved a high attachment rate in Q1. Docebo offers AI technology that is essential to delivering distinct learning solutions. Over the past four years, our work in AI has enabled us to fine-tune our offering in data models, particularly in content automation and embedded search by leveraging multiple languages. As customer data moves through the LMS, our announcements to our product will ensure every learning journey is hyper-personalized. This, in turn, boosts productivity for our customers. Furthermore, we are continuing to announce our AI control panel that will give our customers authority on how their internal company data can be used. The management of proprietary data is an important requirement for enterprise customers and the Docebo debug technology is built around this key need. As we look at the broader operating environment, we continue to see longer deal cycles, especially in the enterprise segment. We are pleased that in the face of such headwinds, we have largely executed our growth strategy and are positioned to deliver revenue growth with stable and improving profitability as we move through this year. Looking forward, our main goal is to grow the company effectively no matter what the economic conditions may be. We are also focused on improving operational efficiency. At the start of this quarter, we took actions that we believe will optimize the performance of our organization. A key aspect of this involved flattening our organizational hierarchy, which allows for faster decision-making closer to the customer. By streamlining processes and reducing middle management layers, we are better positioned to quickly respond to customer needs, drive innovation, and foster a culture of high performance. Regarding our capital allocation, our strategy remains focused on tuck-in deals that support two principles. First, we seek great adjacent products and features that support our build versus buy needs. Second, we look for innovative teams that build the Docebo culture. Shortly after the end of the quarter, we announced the acquisition of PeerBoard. This acquisition aligns with our strategy of seeking out great technology that complements Docebo's core offerings while also adding engineering talents to our team. With the community learning assets PeerBoard brings, we are materially enhancing our customer and partner training use case as we bring these community learning features to a growing number of enterprise customers. In regard to future M&A opportunities, we will evaluate each option based on its potential to address multiple use cases that leverage our increasing use of AI. This will enable us to deliver new innovation in areas such as hyper-personalized learning, sales enablement, re-skilling, and up-skilling. In conclusion, although the microeconomic environment might continue to be challenging, we are pleased to take advantage of opportunities that provide sustainable balance and growth. Our emphasis on growth combined with operational efficiency and adherence to stricter, more demanding performance standards will always strengthen our position as a clear winner emerging from these economic cycles. 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 quarter one, our company-wide average contract value or ACV, increased 7% to $47,000 from approximately $43,800 at the end of the first quarter of 2022. ACV for new customers in the quarter was approximately $50,000. During the quarter, we signed 112 net new customers including several valuable enterprise deals. This is reflected in our continued growth in annual contract value, ACV. Customers continue to derive measurable value from the learning platform, particularly in multiple use case environments. Notable customer wins in quarter one include Vimeo, which has chosen Docebo to help with their compliance, professional development, and onboarding needs. Docebo also partnered with Terex Corporation, a global manufacturer of materials processing machinery and aerial work platforms. Terex chose Docebo to address their customer and partner training needs, as well as onboarding and professional development for their employees. In addition, the Docebo learning platform has been selected by Freedom Mortgage, one of the largest full-service mortgage companies and a top Veterans Administration and Federal Housing Administration lender in the United States. Freedom Mortgage chose Docebo for multiple internal and external use cases. In Europe, we landed one of our biggest enterprise deals in the region when we signed a large French-based transportation and logistics solutions company operating in over 160 countries, who partnered with Docebo to address a combination of internal and external learning use cases that include customers, partners, and employees. Finally, in Germany, we signed the deal with Knauf Gips KG, one of the world’s leading manufacturers of construction materials for interior design, building insulation, and design ceilings. Knauf Gips KG chose Docebo to address multiple internal and external learning use cases, including sales enablement and retail, customer, and channel partner training requirements. It is important to note that Germany and France are large and important new markets for Docebo. We are very pleased to see our early investments in this country continue to build momentum with these large enterprise deals. It’s important to note that the companies partnering with Docebo have diverse needs for training both internal and external learners across different industries. When viewed together, this demonstrates the broad horizontal appeal of our solutions. Despite economic challenges and longer deal cycles, Docebo executed effectively and invested in supporting future business growth. Though deal elongation remained consistent in the quarter, it did not worsen, and Docebo navigated well to deliver healthy growth. This highlights the company’s resilience and ability to adapt to the changing business environment while staying focused on its growth objectives. In his previous comments, Claudio discussed actions we have taken to improve operating efficiency and to hold ourselves to more demanding performance parameters. Allow me to elaborate on these actions and provide further context on what we’re doing. Our sales and marketing focus is on operating more efficiently as we move forward. We examine our cost of customer acquisition, CAC, lifetime value to CAC, and other leading indicators that drive these results. Although we don’t judge performance based on a single quarter, we will make adjustments necessary to achieve higher growth combined with better CAC efficiency. As you may recall from the previous quarter, we have invested in technology, systems, and processes to gain operating leverage. This has enabled us to operate as a leaner organization and at the same time eliminate non-productive layers of management. We have also optimized our inbound and outbound lead generation engines. These actions aim to strengthen our pipeline coverage and support our most productive sales executives. Back in March, I concluded my prepared comments by sharing two reasons why we are excited about 2023. These reasons are unchanged as we position Docebo for the future. First, our market is vast and presents numerous greenfield opportunities, particularly when considering the external learner. As the leading platform for customers with multiple use case needs, internal employees, and external learners, Docebo is a trusted partner for consolidation of tech stacks and delivering better returns on invested dollars for our customers. And second, we are making the strategic investments necessary in both innovation, systems, processes, and people that are needed to continue to disrupt the enterprise landscape. Partnerships like ELB and acquisitions such as PeerBoard are making a strong Docebo even stronger. With that, I would like to hand the call over to Sukaran.

Thank you, Alessio. And good morning everyone. For those interested, a detailed breakdown of our financial results for the three months ended March 31, 2023, 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. As reported, total revenue for the first quarter grew to $41.5 million, an increase of 29% from the prior year. Total revenue increased by 32% after adjusting for the impact of foreign exchange. Subscription revenues were $38.8 million, representing 94% of total revenue for the quarter. Annual recurring revenue was $164.9 million, an increase of 29% after adjusting for the foreign exchange impact from the strengthening of the U.S. dollar. We added 112 net new customers in the first quarter, as we ended the quarter at 3,506 customers, an increase of 19% year-over-year. Average contract value was approximately $47,000 for the first quarter, an increase from $46,000 for the fourth quarter of 2022 and a 7% year-over-year growth. We continue to see Docebo being adopted as a multi-use case platform with almost 80% of our customers using Docebo for two or more use cases and 55% of customers using Docebo for three or more use cases. Gross retention was flat compared to the prior quarter and net retention declined modestly in Q1 driven by lower fee and module expansion. Gross profit margin for the first quarter improved by 120 basis points year-over-year to 81% of revenue and was consistent with the prior quarter. Total operating expenses for the first quarter increased to $33.8 million from $32.4 million for the prior year period. G&A as a percentage of revenue declined to 18.2% for the first quarter compared to 19% for the fourth quarter of 2022. Adjusted for one-time acquisition costs, G&A was 17.6% of revenue. As we go forward this year and next, investors can expect that G&A is an area where we will demonstrate the highest operating leverage. Sales and marketing expense as a percentage of revenue was 40.5% for the first quarter compared to 39.8% for the fourth quarter, mainly due to higher seasonal payroll taxes in Q1 of each year. The streamlining actions Claudio and Alessio spoke to earlier occurred at the start of Q2 with a headcount reduction of approximately 5%, and this primarily is related to sales and marketing and G&A. There will be a partial impact of savings in the second quarter, but the full impact of savings shall come through in the third quarter. Currently, investments in the first quarter were $7.4 million or 17.8% of revenue and increased from $6.4 million from the first quarter. The sequential increase was primarily as a result of the strengthening of Euro. Moving on from the expense line, even with the fewer revenue base and with seasonally higher social taxes, we are pleased to report an upbeat in our adjusted EBITDA performance to $2.2 million for the first quarter of 2023. This equates to an adjusted EBITDA margin of 5.3%, which is up 9% compared to the prior year. Reiterating what was said in March, we are deeply committed to driving growth and performance in the areas we can control and expect to exit Q4 2023 with a low double-digit adjusted EBITDA margin. We reported net income of $1.2 million for the first quarter of 2023 compared to a $7 million net loss for the first quarter of 2022. Adjusted net income for the first quarter of $3.2 million increased compared to a net loss of $1.3 million for the first quarter of 2022. We generated negative free cash flow of $2.3 million in the first quarter, which was driven by the timing of annual bonuses, prepaid insurance, and software expenses in Q1. At the end of Q1, we held cash and cash equivalents of $216 million. Share-based compensation accounted for a modest 3.1% of first quarter revenue compared to 3.4% in the first quarter of 2022. In April 2023, the company acquired PeerBoard, a plug-and-play Community-as-a-Service platform for a total purchase consideration of $4 million. We do not expect the acquisition to materially impact the fiscal year 2023 revenues or adjusted EBITDA. Now for our Q2 2023 outlook, we are operating in a difficult macro environment with deal elongation similar to the second half of 2022. Our guidance is based on the assumption that current unfavorable macroeconomic conditions will continue. We expect total revenues to range between $42.9 million and $43.2 million. We expect gross margin to range between 80% and 81%. We expect adjusted EBITDA margin to range between 5.5% and 6.5%. A few noteworthy points on the second quarter guidance: we expect subscription revenue to be 4% to 5% points higher than the overall company revenue, while professional services revenue will decline sequentially due to lower customer adds. During the second quarter, we expect to incur approximately $3.5 million in one-time charges related to the organizational streamlining initiative that we discussed earlier. This is not reflected in the adjusted EBITDA margin guidance. In conclusion, I want to focus your attention on a strategic point that is foundational to Docebo DNA. Growth is always our top priority, and we have equipped our team to deliver good profitable growth regardless of where we are in any economic cycle. I also want to emphasize that we are bringing material competitive strength to bear as we execute this profitable growth strategy. First, we have a strong debt-free balance sheet with $215 million in cash. Second, we have delivered profitability ahead of our schedule and are steadily improving adjusted EBITDA and free cash flow every quarter. What is most notable about this performance is that we are realizing these results without compromising key investments in sales and marketing and R&D. And third, dilution from stock-based compensation is one of the lowest in the SaaS universe today. We are dedicated to aligning our team's performance with the expectations of our shareholders. That concludes my prepared remarks. Operator, please open the line so that we can take some questions from the analyst.

Thank you. Ladies and gentlemen, we will now take questions from analysts. Your first question will be from Robert Young at Canaccord Genuity. Please go ahead.

Hi, good morning. The two questions, first one, higher level during this reporting cycle, those a bit of concern raised around the negative impact of AI on e-learning and given that you’ve been working on AI for a long time and have products in the market. I thought you’d it’d be great to get your thoughts on the near-term impact you see positive or negative from AI on Docebo.

Hello, Rob, Claudio speaking. First of all, I think that if I was a publisher, I would be very scared about the impact of AI because AI will generate content on its own. But do not forget that the LMS is a delivery system that now is also becoming an AI-driven content generating system. So that’s why I’m incredibly excited about AI because Shape is becoming the competitor of the companies that have been challenged this quarter by AI innovations, because Shape is the content generating system, and we are adding features. Let’s say I think that AI is not only limited to content. For example, we are embedding in Docebo a skill matching system that will integrate all talent management and ATS and skill management systems inside Docebo through a matching system where AI will synchronize the skill ontology of all the platforms out there with Docebo, allowing the customer to use their own ontology inside Docebo. On top of that, and I understand it’s not very flashy, but what we are working on is an AI control panel that will give the customer full control over how the AI will use the data. Before implementing any AI strategy, we need to be very careful about how we do it and ensure complete alignment. We know that compliance varies globally, as regulations differ between Europe and North America. So AI is a broad topic, but it’s a topic we love because it is allowing Docebo to explore new ways to train people, moving beyond the very traditional click-and-learn training approach and adding simulations and new ways to interact with the content, hyper-personalizing content based on the user's learning style. So I view AI as an opportunity. I see AI as something that personally excites me, and from Docebo's standpoint, it’s something we will benefit from greatly.

Okay. Thanks for all that. The second question is more specific to the quarter. The incremental amount of ARR added and the incremental customers added were lower than we’d seen before, so if you could talk about that, particularly the cadence through the quarter. Was that the regional banking crisis at the end of the quarter, and so should we think of most of the deals coming at the front of the quarter or the back of the quarter? Just any comments there on the slower amount of customers added in the cadence? I’ll pass it on.

Rob, Alessio speaking. Hello. Rob, Q1 does have some seasonal components built within, and in addition to that, we've experienced some macro noise, particularly in the North American region affecting small and mid-customers. With that said, I’d like to draw your attention to two facts. Number one, we have increased average ARR and new logo ARR, both ACV. And in addition to that, our gross retention rates have remained consistent with quarter four 2022. So with that said, we have work to do to reboot the performance in the small and mid-market, but our pipeline growth that we’re seeing makes us extremely confident.

Did that answer your question, Mr. Young? Thank you. Next question will be from Josh Baer at Morgan Stanley. Please go ahead.

Great. Thank you for the question. I was hoping you could expand a little bit on the efficiency actions and headcount reduction referenced in the prepared remarks. Just wondering if they were previously contemplated in the prior forward commentary on margins.

Claudio speaking. I provide the first part of the answer, and I think that Sukaran can go deeper on that. From the entrepreneurial perspective, I founded the company, and I find it frustrating that the great ideas that come from the field contributors in terms of everything: products, methodologies, M&A, and so on, were halted in the middle of the organization because of over-bureaucracy and broken communication channels between executives, high-level managers, and contributors. Contributors are the foundation of the company. So I thought, let’s keep the organization more in touch with the team, let's fluidify communication by reducing the layers. So from an entrepreneurial philosophy perspective, this is the reason for this action. But I will leave the rest to Sukaran, who can articulate it better from his point of view.

Yes. Thanks, Claudio. Good morning, Josh. I would say that, to start with, we regularly review the operating efficiency of the organization, and I think part of the efforts this quarter involve a couple of factors. One is that as you may have noted in the last quarter, we implemented significant technology investments that went live in our CRM and our order-to-cash processes, providing us opportunities to streamline and make our organization more efficient. To that extent, that was factored in, but I would say there are incremental efficiencies that we have implemented at the start of this quarter, which is April, to make the organization leaner and more efficient. So I would say there is a reasonable element that will not be felt specifically in sales and marketing and G&A.

That's helpful. And just any sense of what the plan is for headcount growth in 2023 incorporating these actions?

Yes. So when we think about headcount, you should think about it mostly as, if I break it down between the various operating lines as we grow customers, we will ensure that from a services and customer support perspective, we have the right infrastructure as we grow our book of business. So we’ll see some incremental hiring there. And then generally, you will see this year as tactical investments in R&D as we are investing in AI and other areas. But overall, you should expect us to be net neutral, slightly higher, but predominantly hiring to be mostly flat across the board in sales and marketing and G&A, where you will see significant efficiencies.

Great. And just one quick one on the opportunity side. Sounds like a lot of interest in Docebo Shape. Just wondering if a customer, for example, is spending $100 annually, what happens to that annual contract value when a customer adds Shape? Thank you.

Yeah. First, good question. So we don’t disclose the breakout of individual products and attach rates, but you can expect that as part of learning, Docebo Shape has a reasonably good attached rate and a reasonably good ARR contribution. And what differentiates Docebo Shape compared to the industry in offering tools is that we also market it from the perspective of enabling social learning for the whole organization rather than just having a number of individuals creating that content. So what we do with Docebo Shape is empower the organization to utilize Shape and create content, making them champions of social learning. This results in higher ticket sizes in terms of seats and licenses for our customers. That’s also a differentiator, not just in terms of the attach rate.

Yes. Sukaran, regarding Shape, something is happening, and I’ve seen such an interesting attachment rate that was not there two quarters ago. What we have and how to understand is how our learners are using it and who the trainers are using Shape, as it’s not the classical trainers that create the old school learning objects but more users, trainers that are in the field, want to automate leveraging generative AI inside Shape. What I want to provide them from a tool perspective—sorry if I’m using old school words like tool, as a functional feature perspective—is to go beyond the standard reading approach to learning something, including simulations and working on the globe, pitching something to the AI, and getting AI feedback. This is where the industry is heading and where we are investing in Shape. The attachment rate is speaking for itself. When I observe the attachment rate this quarter, I see that something significant is happening after four years. We are facing an inflection point, and I’m pleased to see that after four years of building a great product, it is finally paying off.

Thank you. Really appreciate it.

Thank you. Next question will be from Suthan Sukumar at Stifel. Please go ahead.

Good morning, gents. Just want to touch on the global expansion opportunity. Last quarter, you talked about encouraging traction in certain European markets, and you also highlighted a large deal that you closed this quarter in the region. Can you talk a little bit about what’s driving this momentum? And really what are your expectations for growth here over the near to midterm?

Sure. Our investments in Europe have happened over time. We started with our investments in the UK and Nordics, of course, after having a heritage where we had an office in the southern region in Italy. More recently, as you’re aware, we invested in France and the Benelux region and also in the Dach region in Germany. We know that it takes time for the brand to affirm itself in regional markets that are fragmented. They buy slightly differently, and there is a different language in the region. The shorter answer to your question is it’s a matter of execution in the field to bring the brand to the attention of buyers. I believe that the logo we announced in France, a very significant organization, is just the natural consequence of our investments there over time. Now we’re also noticing that Docebo is effectively solving problems in the platform. The multi-use case scenario in the European market is solving issues with more legacy competitors. I think we’ve learned how to win from a more institutional install base. These are starting to pay dividends not only in the small- and medium-market but we are seeing enterprise pipeline growth even in this region, and we’re very pleased with that.

Yes, and Ale, I mean, we have such a healthy balance and strong KPIs that we can be ambitious about expanding abroad like we did with the German office and the Australian office. We have learned from the French office and the UK office that becoming a prominent player in those countries takes a little bit of time, but ultimately pays off. The formative acquisition allowed us to land in France, put boots on the ground, sell, and secure great contracts, which is what we are executing both in Australia and Germany now.

We are looking forward to sharing more wins in the newer regions in the coming quarters.

Okay, great. Thank you for the feedback. My second question is on the partner channel. Can you guys share an update on the impact the partner channel had on the quarter? And what you’re seeing there in terms of pipeline of opportunities going forward?

Lots of exciting things. The partner channel is gaining momentum in the sense that we’re very active on all fronts of the alliances partner wheel ecosystem. On one end, many organizations have demonstrated interest, and we have identified targets for integration opportunities with adjacent players in the form of ISV partnerships and forming a framework of mutual marketing. We announced a partnership with a services and software vendor called ELB not too long ago. From this partnership, we have been seeing very good early outcomes because there’s an incredible opportunity in working with companies that have adjacent offerings, which benefits our customers and processes. That’s one update. The other thing I’m really pleased about is our current OEM partners. The ones we are already working with continue to perform in line with or above expectations, which makes us happy. We believe we have a very solid roster of candidate prospects for OEM, and we look forward to sharing more as we have the right to do so. Finally, we've been very active on the content side, and we have initiated and evolved conversations that position us even stronger in our Docebo Content offering. We plan to continue to see growth from this module that has done really well for us, and based on our plans to increase the penetration of that product in our install base. Overall, this is valid for all partners I haven’t mentioned, but what is very strategic for us and we are very happy about is the partnerships with system integrators. While we don't have the right to disclose names yet, they’re very stringent on that, we have premier prospects and logos where we are teaming up with significant system integrators. These partnerships are just the beginning of a long-term deep relationship, and we are seeing that across the board from commercial enterprises through government opportunities. So the world of alliances has been incredibly active, and we're very focused on it.

That's perfect. Thank you for taking my questions. I'll pass the line, guys.

Thank you. Next question will be from Daniel Chan at TD Cowen. Please go ahead.

Thanks. Hi, good morning, Sukaran, last quarter you mentioned that the revenue guidance provided is driven by the ARR. So if we look at your Q2 revenue guidance, the midpoint is looking for about 23% year-over-year growth, but ARR grew about 28%. So just wondering what's accounting for the difference? I know you called out professional services there. Just wondering if there’s anything else in there.

No, that's it, Dan. It's primarily related to professional services. We should still see reasonably in line subscription revenue growth for the year. As you think about the number of units coming through from a services perspective and how we strategically invest in our customers as we onboard them, professional services is really what's driving us down predominantly.

Okay, thanks for that. And just given that we're halfway through Q2, just any changes to the overall market sentiment that you can call out?

Claudio, did you want to take that? Just overall market sentiment?

Sorry, yes. Claudio speaking here. Actually, we are seeing different trends depending on different segments and different regions. Europe is performing incredibly well. We are incredibly excited about the performance in Europe, the solidness of the team selling in Europe, and so on. As you know, Europe sometimes is more resilient. They don’t grow in moments of prosperity. They don’t decline in moments of crisis. They remain more stable. What we are seeing in the large enterprise segment is a flow of opportunities coming from other vendors, which is also a reason for forming alliances with larger consulting firms. They want to shift from legacy vendors to our offerings. Australia seems to be performing well in Q2. Yes, they are active. We are now at an exhibition in Singapore with partners. I don't want to provide any guidance about Australia, sorry. But when good things happen, I'm excited. Another thing to note is that our BDR lead generation is increasing significantly compared to inbound. This is a direct consequence of us moving upmarket: our market is not an inbound generation segment and is more focused on outbound generation activity. That’s why we have also reorganized the team to be more aggressive on outbound initiatives. On the mid to long-term, we are excited to have a material business with a lot of initiatives, new partners, and segments we are investing in, along with some M&A opportunities on the table. I'm happy about that. That's it.

Thank you.

And your next question will be from Stephanie Price at CIBC. Please go ahead.

Hi, good morning. Docebo has very strong CAC, and I'm just curious if you could give us some more details on the sales and marketing optimization, and how you think about affecting the CAC going forward?

Absolutely. Stephanie. Docebo, yes, has always had very good CAC metrics that are derived. I think primarily from an overall focus and cultural performance. You heard the discussion about the desire to focus on creating efficiency. As we grow that concept of efficiency, we want to maintain it. Having said that, we continue to monitor very carefully and closely our win rates. Certainly, the elongation of deals, particularly in the Enterprise segment, is not always beneficial to CAC. But at the same time, I want to emphasize that elongation has not been in addition to notable deal losses, which is very important because the pipeline continues to grow and has actually been growing. I have previously referenced the significant quarter-over-quarter as well as year-over-year growth in our outbound efforts. Efficiency is a factor of bringing the deals in and having good enough demand to serve our capable sales executives. We’re focused on doing everything possible to give the right opportunities to the right salespeople and on the other hand, feeding the funnel with the demand needed to maintain their efficiency. There’s a lot of work on that. I would also add that we realized in this environment that in order to be more efficient, we need to better articulate the story during the sales cycle, focusing more on return on investment. You’ve heard me talk about our desire to implement value selling—this initiative is well underway. So we will soon be able to approach particularly our needs in the large enterprise market with stories that are more value-focused versus just feature-focused. This gives us a strong assumption that our CAC will continue to improve over time.

Yes, and Claudio, I want to add one thing about CAC. CAC is also impacted by the investments that you make in the sales organization and opening offices abroad to conquer the world. It impacts CAC but may not pay back for a couple of years. If you want to look at it from another angle, we are so capital-efficient that we can sacrifice some points of CAC to open new offices in challenging moments because we are not approaching the markets only from a short-term perspective, which we can do because we are efficient with capital. We are also being strategic and trying to cover markets which are big opportunities. For example, the sales force in Germany is selling $1 billion. There are incredibly appealing markets for us.

Thanks for the color. And then for my second question, I'm curious around the PeerBoard acquisition and how you think about folding it into Docebo and what it brings?

Yes. As you know, we are investing in external training, customer and partner communities. Partner communities need collaboration, and we see a lot to do with the Docebo customer community forum, starting from a forum and then moving to learning. Collaboration between customers and partners is incredibly important because they help each other. We found PeerBoard, which was led by Mikhail and is already a plug-and-play option for LMSs that want to create a community. We acquired it because the implementation time is quick, but also because Mikhail was the manager behind a large social network community. The second step of this integration is to improve or rebuild Docebo Coach & Share, which is our social learning segment, thanks to Mikhail's knowledge and the technology from PeerBoard. So it’ll be done in two phases: Phase one is to build the community for our customers that use Docebo for customer and partner training, and part two is to rebuild the social learning module, Docebo Coach & Share, in collaboration with Mikhail and PeerBoard.

And Stephanie, in addition to that, when we think about the customer makeup of Docebo, of the 3,000-plus customers, we’ve stated in the past that more than 50% of our customers use Docebo for at least one external use case. And when you think about those using Docebo externally, the large majority of those, roughly 80%, Sukaran, keep me corrected, are using it for the purpose of customer and partner education. Now, in that cohort of hundreds of customers, the demand for community technology is top of mind. We have found that this is the most requested capability. Finally, at Docebo, we have Docebo community under the initiative of the Docebo academy. Up until now, we’ve used a third-party vendor, frankly, because we didn’t have that capability. We have experienced the need and benefits of community technology and the resulting savings, motivating us to want to own that technology. Now that we have it, we can go to all those customers and tell them that story, show them the product, and we can also utilize it within our own teams.

Thank you so much.

Thank you. Next question will be from Christian Sgro at Eight Capital. Please go ahead.

Hi, good morning. I wanted to ask a question about your longer-term view on growth and profitability. I think you'd like to think of a business as a 'Rule of 40' company approach, approaching that software profile. So my question is, is the default way to think of the next couple of years as a steadily expanding margin profile? Or will you see how a normalized environment looks before you make that growth versus profitability decision? What are your thoughts longer term?

Good morning, Christian. Sukaran, I'll take this one. I think that, when you think about Docebo, we've always said that growth is the number one priority for this organization, but we've also emphasized that profitable growth is part of the story. As you look at the operating leverage that has developed over the last two quarters, you'll realize that we've hit that inflection point, and you are seeing consistent operating leverage primarily arising from slight improvements in the cost of goods sold, but the majority comes from our discipline in G&A and certain discipline you will also see in sales and marketing. As you consider the current macroeconomic cycle, as we continue to invest in our future product roadmap in terms of R&D—while also investing in sales and marketing to drive that long-term growth—we can achieve good consistent growth even in a challenging macro environment, but deliver better operating leverage. That reflects the benefit of being an 80% gross margin business as well. So I would say that there's nothing changing from our perspective. What we will deliver is consistent execution on growth, and we will do what is within our control to deliver quality growth in this macro environment. As we exit this cycle, we will emerge as true winners, given our technology, the strength of our balance sheet, and all the investments we are making in R&D. At the same time, we will provide consistent EBITDA growth. That is straightforward math; my G&A as a percentage of revenue has been declining by about a percent every quarter and perhaps slightly higher this quarter. So that should stabilize in the 10% to 12% range long-term, and you will see the greatest operating leverage this year and next.

Thank you. That's all very helpful. And my second question will switch over to both the partner channel and your professional services work. It's probably an active strategy to shift some of the work to partners and system integrators. Do you see Docebo long-term at a 90/10 subscription prof-services business, or could that over time continue to tilt more subscription as you scale, finding more ways to offload some of that work?

Sure. There's no doubt in my mind that maintaining a high gross margin remains a focus for us. However, our goal is to balance that with providing more value to our customers. What we increasingly recognize is that learning projects—especially those related to high-end mid-market and enterprise businesses—require more services and greater sophistication in consulting. While yes, we have leveraged partners and will continue to do so, services like managed services are a continued request. We believe a healthy mix of direct provisioning with some strategic partnerships is the right angle to achieve this. Also, we evaluate services not just by revenue split, whether at 90/10 or 80/20, but also as a leading factor to maintain high growth retention. A learning platform is only as effective as the strategy behind it, and when there isn’t a solid strategy in implementation, particularly at the enterprise level, it impacts retention. We believe that a balanced mix with partners will continue to exist, but we also believe there are more opportunities to provide valuable services that affect both revenue and retention.

Hey, good morning. Thanks for taking my question. Just on NDRR, I think you mentioned that it moderated a little bit this quarter. Can you just discuss kind of how the upsell environment is evolving and how you're tweaking your tactics to navigate that? That's it for me. Thank you.

Sure. We are extremely focused on maintaining strength with our customers, ensuring that our renewals perform at the expected rate. The top priority is maintaining healthy customer relationships. We are also working to expand our base in two primary ways: by adding users and modules for existing customers and through cross-selling. Cross-selling is an area where we believe we have not yet realized sufficient benefits, and we are very focused on changing that trend. But I also want to acknowledge that our gross retention is flat compared to the previous quarter. We continue to have approximately 80% of our customers engaging with Docebo for two or more use cases and nearly 55% utilizing it for three or more. So when you assess the challenges and the retention metrics and the problems we solve for our customers, it assures us we are positioned as a more secure solution.

And I think the one quick point to emphasize, Gavin, is while gross retention is steady quarter-over-quarter, we continue to see opportunities to improve our upselling capabilities across the installed base, and we have plans to address that.

Thanks so much. Is the macro causing growth in the pipeline to slow? In addition to elongating sales cycles?

Martin, we are seeing the pipeline remaining strong. For sure, there are different ways we are accomplishing growth in the pipeline. As mentioned by Claudio, our success right now is primarily derived from our outbound motion. That’s a result of our upward move in targeting the upper market. Another effort to counterbalance the current frothy inbound channel is investing in in-person events. We are seeing fantastic outcomes. Just last week, we had one of the largest learning events in the world in London, where we collected a number of leads more than we have in the history of that conference. We doubled our leads taken from the event. Overall, I would say we are seeing a different dynamic in demand, and we are responding accordingly through agility in our outbound efforts and events.

Yes, and Ale, events and outbound are indeed the channels driving needs for large enterprise buyers, who are certainly not the ones that will click Google and ask for a demo. Moving our offerings upmarket with sophisticated products like Docebo Connect and Learn Data have changed the pipeline's composition. It is now increasingly made up lately of mid-ent enterprise deals compared to the prior commercial segment. While this naturally leads to longer sales cycles, it’s important to note this is also a result of engaging with different customers and reflects our growth in ACV.

That’s great. Thanks so much. That’s all for me.

Thank you. And at this time, I would like to turn the call back to Mr. Erba. Please go ahead.

Thank you for being here again. I don’t remember how many earning calls we’ve conducted so far, but it’s probably around 16 or 14. Thank you again for speaking with me this quarter. Thank you so much.

Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending, and we do ask that you please disconnect your lines.