Docebo Inc. Q3 FY2023 Earnings Call

Good morning, everyone, and welcome to Docebo's 2023 Third Quarter Earnings Call. All participants are currently in a listen-only mode. We will open the lines 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 would now like to turn the call over to Docebo's Vice President of Investor Relations, Mike McCarthy. Please go ahead, Mike.

Thank you, operator. Before we begin, Docebo would like to remind listeners that certain information discussed today may be forward-looking in nature. Such forward-looking information reflects the company's current views with respect to future events. Any such information is subject to risks, uncertainties, and assumptions that could cause actual results to differ materially from those projected in the forward-looking statements. For more information on the risks, uncertainties, and assumptions relating to forward-looking statements, please refer to Docebo's public filings, which are available on SEDAR+ and EDGAR. During the call, we will reference certain non-IFRS financial measures. Although we believe these measures provide useful supplemental information about our financial performance, they are not recognized measures and do not have standardized meanings under IFRS. Please see our MD&A for additional information regarding our non-IFRS financial measures, including reconciliations to the nearest IFRS measures. Please note that unless otherwise stated, all references to any financial figures are in US dollars. Now, I'd like to turn the call over to Docebo's CEO, Claudio Erba. Claudio?

Hi, everybody, and thank you for joining us for our third quarter earnings call. With me today, Alessio Artuffo, our President and COO; and Sukaran Mehta, our CFO. I will begin our call this morning with a short summary of our Q3 results and business update. We are pleased to report that subscription revenue increased by 27% and total revenues grew by 26% in the September quarter, with the total revenues exceeding the upper end of our guidance range. Net ARR added during the quarter was $10.1 million, after adjusting for the impact of foreign exchange. ARR growth was solid, reflecting our strength in horizontal go-to-market motion across the enterprise segment as well as the government vertical. The table continued to demonstrate a profitable, high-growth business with adjusted EBITDA exceeding our guidance. We delivered an adjusted EBITDA margin of 9.7% and a solid free cash flow of 18% of revenue during the quarter. In general, global macroeconomic trends have remained consistent through the year, with larger, more complex deals still taking time to finalize, but we did not see any notable deterioration in our pipeline in the enterprise segment as it remains strong. SMB customers continue to be cautious. Geographically, the US was a more active market compared to Europe, which was seasonally slower during Q3. After three years of rapidly increasing relationships, we hosted a record number of participants at our annual customer conference, Docebo Inspire in Nashville. It was exciting to see this community of current and potential new customers bring with them their interest in learning and their appreciation for the Docebo platform. During this event, we announced four new platform updates: the Docebo for Microsoft Teams, Docebo Community Hub, Docebo Learning Site, and the preview of Docebo Shape 2.0. The Docebo for Microsoft Teams enables learning in the flow of work. It helps streamline learning, communication, and collaboration by eliminating the need for separate platforms while saving time and ensuring a productive experience for the learner. A customizable dashboard with Teams can be personalized for different internal and external use cases, driving higher adoption. Docebo Community Hub is an expansion of our platform designed to allow customers to create communities of knowledgeable individuals. Its purpose is to facilitate knowledge sharing, enhance collaboration and engagement, and empower our customers to expand their internal and external learning programs through connections. This update was led by the PeerBoard team, which we acquired in the first half of 2023. It showcases our efficient M&A strategy, illustrating Docebo's quick integration and utilization of newly acquired technology and engineers. As our platform expands in depth and breadth, we are collecting an increasing amount of data about learner and customer training program outcomes. With the launch of Docebo Learning Site, powered in partnership with QuickSight from Amazon Web Services, we are helping our customers utilize this data efficiently within the learning ecosystem. By simplifying the creation of custom dashboards and providing relevant reports, we are empowering our customers to track the impact of their training programs more efficiently. Finally, as some of you have seen at Docebo Inspire, Docebo Shape will fundamentally change how training material is created and consumed. We announced a number of features that we will start rolling out in 2024. Two features that I'm particularly excited about are interactive scenarios and AI-driven assistance. In Shape, users can create role-play scenarios with AI assistance. This allows learners to practice specific conversation skills. Regarding the AI-driven assistance, we have focused on sales enablement skills, creating supportive AI modules that help sales representatives practice their sale pitch. We see multiple use case applications that will be integrated into our product roadmaps. Moreover, with Shape's AI-driven assistance, customers have full control over how they produce, use, and share materials among their learners. Now, to capital allocation. Our balance sheet strength and financial profile enable Docebo to invest in innovation while gaining market share, even as competitors are consolidating and cutting costs. Our capital allocation strategy remains unchanged and is focused on two areas: selective M&A and the efficient return of capital to our shareholders. In conclusion, despite facing macroeconomic and global political challenges, our priority is to provide innovative and efficient solutions for our customers. Our customers' view, both external and internal learning, is crucial in this environment. We continue to strive to deliver cutting-edge innovation to our customers with the goal of providing quality, profitable growth for our shareholders. 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. Let me first go over some of our key KPIs this quarter. Company-wide average contract value increased 11% to $49,400 from around $44,600 in the third quarter of last year. ACV for new customers in the quarter was about $70,500 compared to $61,000 in the June period. Enterprise customers, with deal values over $100,000 in ARR, accounted for approximately 55% of gross ARR generated in the third quarter. 41% of these new customers have chosen Docebo for three or more use cases, again, highlighting the real impact of our platform, as well as our ability to meet the complex needs of our customers. External and hybrid use cases make up more than half of our pipeline. Expanding our reach into these enterprise customers is also enabled by our growing partnerships with large system integrators, who play a strategic part in both enterprise and government contract wins during the third quarter. From a customer retention perspective, growth and net retention KPIs held relatively flat from the second quarter. In terms of customer acquisition costs (CAC) and sales efficiency, we achieved significant improvements in our third quarter results. Sales and marketing accounted for 34.9% of total revenue, a decrease from 37.8% in the previous quarter. These improvements are a result of specific actions taken earlier this year, which focused on enhancing the effectiveness of our enterprise go-to-market strategy and optimizing the design of our global sales organization. These actions include: number one, significant improvements in our demand generation results in the enterprise segment through business development and account-based management (ABM). However, there is still plenty of room for further improvement in other areas. Secondly, we're benefiting from the successful implementation of our data and overall go-to-market systems, including, but not limited to, our updated CRM Salesforce. These systems were introduced at the start of the year and enable our team to access actionable data faster, increasing productivity and reinforcing a customer-centric organization. Finally, we're strengthening our relationships with system integrators, strategic technology companies, and OEMs. These partners significantly broaden our reach to the largest and most demanding enterprises worldwide across various use cases. Now, I would like to highlight this with a few new customer wins, upsells, and cross-sells. The most significant win of the quarter was a substantial deal we finalized and reported to you in August. Together with large system integrators, we secured a contract with a top five US-based global technology leader. This deal allows us to support the diverse use case needs, including providing training for vast external audiences. Other notable large enterprise wins included Enterprise Holdings, a leading provider of mobility solutions, including car rental, fleet management, car sharing, van pooling, truck rental, luxury rental, retail car sales, and vehicle subscriptions, as well as travel management and other transportation technology services and solutions. Enterprise has selected Docebo for their onboarding, compliance, and professional development learning requirements. Founded in 1924, Milwaukee Tool, a global leader in providing innovative solutions to professional construction trades to improve productivity and safety, decided to partner with Docebo for multiple use cases. Leveraging our leadership in the quick-service restaurant vertical, we signed Bojangles, a North Carolina restaurant chain known for its classic main Southern food served at approximately 800 locations. They selected Docebo for franchisee and internal use case training. In Europe, we signed a deal with a leading international operator in the regulated gaming sector. Active in Italy, Morocco, and Turkey, they have offerings that include lotteries, betting, online games, and amusement machines. They selected the Docebo learning platform to address the external use cases of retail and franchisee learning, as well as several internal use cases. During the quarter, we had several significant upsells. One notable customer is AWS, where we expanded our relationship as they increase their use of our products and services. Additionally, we cross-sold into TWS Engineering, marking a new department win for Docebo. As we called out during our investor session at Inspire, we expanded our four pillars of growth to five when we started to focus on the public sector and began the process to achieve FedRAMP certification. As a reminder, those four pillars include: external use cases and the continued greenfield opportunity where Docebo is the leader; expanding our presence in large enterprise customers, as demonstrated by the wins highlighted in the quarter; upselling and cross-selling into the installed base; and finally, expanding our partnerships with OEMs and system integrators. On FedRAMP certification, the project is on track. As indicated before, we expect this to be completed in 2024, which will enable us to participate in more federal and state-level opportunities where this is a requirement. From a government business development standpoint, our work with a big four system integrator and our preferred distributor, Kerasoft, continues to help us build a very healthy funnel ahead of achieving FedRAMP certification. We have closed and expanded deals in several different US states during the quarter. One such deal was with the US Department of Energy for one of the 17 national research labs that they manage, with more than 5,700 researchers and support staff focused on innovation in nuclear research, renewable energy systems, and security solutions. This national lab is using Docebo for both external and internal use cases. Now to OEM. We were extremely pleased with the contribution from our OEM partners, Ceridian and MHR, during the quarter. With the signing of Darwinbox last quarter, our OEM alliances represent another strategic channel into both the enterprise segment and new geographies, representing yet another way for us to leverage multiple growth pillars simultaneously. We also signed a global OEM alliance with a big four system integrator in quarter two, Ernst & Young (EY). They are white labeling Docebo as the underlying technology used to address their customers' and workforces' upskilling and reskilling requirements. In conclusion, while navigating the challenging macroeconomic landscape, our commitment remains to be focused on driving growth while ensuring efficient execution, creating value for our customers, diligent performance management, and overall optimization of every operational area we can control. In short, by applying discipline in our execution and focusing on customer needs, we're confident in our ability to continue to drive sustainable long-term growth. 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 and nine months ended September 30th, 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. Total revenue for the third quarter grew to $46.5 million, an increase of 26% from the prior year and exceeded our guided range. Subscription revenues were $43.6 million, representing 94% of total revenue for the quarter and an increase of 27% from the prior year. Annual recurring revenue added during the quarter was $10.1 million after adjusting for the negative impact of $1.2 million given the strengthening of the US dollar relative to foreign currency. ARR at the close of Q3 was $181.8 million, an increase of 26%. We added 88 net new customers in Q3 and ended the quarter with a total of 3,679 customers, an increase of 13% year-over-year. Average contract value was approximately $49,000 for the third quarter, an increase from $48,000 in the second quarter of 2023 and an increase of 11% year-over-year. The growth in average contract value is being driven by our continued expansion into the enterprise customer segment, with ACV of $100,000 and above. Gross profit margin for the third quarter improved by 40 basis points year-over-year to 81.1% of revenue and was relatively consistent with the prior quarter. Total operating expenses for the third quarter increased to $34.6 million from $20.8 million in the prior year period. During the third quarter, we recorded $1.6 million in one-time costs, mainly related to the acquisition-related earn-outs that are excluded from our adjusted EBITDA calculation. Our restructuring activities were completed during the quarter. G&A as a percentage of revenue decreased to 17.9% for the third quarter compared to 21.4% for the second quarter of 2023. Adjusted for the transaction-related expenses, G&A represented 17.2% of revenue. Sales and marketing expense as a percentage of revenue was 34.9% for the third quarter compared to 37.8% for the second quarter. Given our investments made in IT systems, restructuring activities, and reduced seller attrition, we have seen an increase in productivity per headcount, resulting in improved CAC and sales and marketing as a percentage of revenue. That being said, we will continue to incrementally invest in areas to drive growth, such as the enterprise and government vertical. R&D investments in the third quarter were $10.3 million, or 22.1% of revenue, an increase over the $8.8 million from the second quarter. R&D expense included $1.3 million of the previously mentioned one-time costs, and excluding these costs, R&D represented 19.4% of total revenue. Adjusted EBITDA performance was $4.5 million for the third quarter of 2023, or 9.7% of revenue, which was above our guided range of 7.5% to 8% of revenue. We reported net income of $4 million for the third quarter of 2023 compared to $10.3 million for the third quarter of 2022. Adjusted net income for the third quarter was $5 million compared to $1.5 million for the third quarter of 2022. We generated free cash flow of $8.4 million, or 18% of revenue, compared to 16.2% for the second quarter of 2023 and 1.7% for the third quarter of 2022. We also earned $2 million in interest income in Q3. In addition, as part of our NCIB program, at the end of the third quarter, we had repurchased a total of 1,333,361 common shares for cancellation at an average price of $38.43, for a total cash consideration of $51.2 million. Share-based compensation accounted for a modest 4% of third quarter revenue compared to 2.7% in the third quarter of 2022. For the trailing 12 months, the post-dilution impact was less than 1%. Now, for our Q4 2023 outlook where our guidance is above the Street's consensus for both the top and the bottom line. Here are the key takeaways: we expect total revenues to range between $48.3 million and $48.5 million. We expect gross margin to range between 80.5% and 81.5%. We expect adjusted EBITDA margin to range between 10% and 10.5%. A few additional points to note regarding the fourth quarter guidance. We expect subscription revenue to be about two percentage points higher than overall company revenue while professional services revenue is expected to decrease sequentially from Q3. This is being driven by our increasing work with system integrators who are a critical part of both our expansion into the large enterprise accounts as well as the federal government space. In conclusion, I would like to highlight these three key points: One, our market-leading position and stabilization in the enterprise space drove improved unit economics across our business during the quarter. This is further evidenced by the fact that the number of customers who generated more than $100,000 in ARR increased 55% year-over-year. Two, we are generating meaningful free cash flow. Using this metric, combined with subscription revenue growth, we have exceeded the Rule of 40 for the past two quarters. Our cash allocation strategy remains focused on strategically investing into our five pillars of growth, tuck-in acquisitions that align with our innovative product strategy and returning excess cash to shareholders through our NCIB program. Finally, we now have a clear path to exceed the profitability guidance we provided earlier this year, as we now expect to exit the year with adjusted EBITDA between 10% and 11% while continuing to maintain incremental investments in innovation, FedRAMP certification, and our go-to-market motion in both government and enterprise sectors. That concludes my prepared remarks. Operator, please open the line for questions from the analysts.

Thank you all for joining us. Your first question comes from Suthan Sukumar from Stifel. Please go ahead.

Good morning, guys, and congrats on the very strong results this morning. Pretty impressive to see the net new ARR adds coming quite strong along with a nice uptick in your ACV. I had a question that brought our overall go-to-market. It's good to hear that your direct sales motion is having more impact. But it also sounds like there's a growing role that your SI partners are playing here. How are they sort of helping you evolve your overall go-to-market strategy in the enterprise? And as you work with these partners, are they providing you with more visibility into next year just given where enterprise spending trends are going? Just thoughts there?

Hello, Suthan, thank you for the question, and I appreciate the nice words. Partnering with SIs has always been a goal of ours. This required some overarching maturity, product, and services-wise because in order to be a compelling partner for SIs, you have to have a certain size of the company, certain target customers, and a product that suits itself to delivering high value for these companies that are looking to maximize their services revenue and consulting capabilities. With that said, there is no doubt that working with these companies gives us a longer-term view on our enterprise opportunities when we work on deals with them. I believe we're quite early in our journey of working with SIs, and there's still a lot of work that needs to be done. In the area of SIs, one of the latest pieces of evidence of early success is what we are accomplishing not only in the commercial segment but also in the government segment, where we are working extremely closely with a top four SI consulting firm. This partnership gives us the ability to really accelerate our entry into both the state and federal market. Overall, I would say our view of the SI market is an area of investment that is already generating results, but we believe has even greater returns for the future.

Great. Thank you for that color. My next question is really on the opportunity that you guys have ahead in the public sector. You announced the US Department of Energy this quarter. It sounds like you're still on track from a FedRAMP certification process. Can you provide an update here in terms of what you're able to do today from a market, from a go-to-market motion perspective in the US government? It sounds like you are able to win deals today, both on the federal and state side, without FedRAMP in hand. Can you talk a little bit about some of that progress there and really what changes once you do have FedRAMP?

Well, as we stated in the past, for us, winning in the state and local government market is not completely new. We already had a relatively healthy portion of our customer base in that segment. What's exciting to us is that we accomplished that percentage with minimal to no deep focus in that area. Whenever you focus, you usually improve an operating machine. That's what we did by establishing our government capability. Specifically in the state and local government, the opportunity is enormous. It is time-accelerated because not all state and local government organizations require a FedRAMP-like or StateRAMP-like certification. Some do, and we will reap the benefits of FedRAMP in the case of any state requirements as well. We are not only deep into deals in the state and local government sector, thanks to the partner I mentioned before, but in general, we have brought onboard individuals like our VP in government who have deep knowledge of the space and know how to execute on teaming agreements that are essential for executing even more complex state deals. So, we have been at work on developing, on one hand, our overall marketing capabilities and messaging. We've learned a lot about what state-like organizations need, and we have further conversations with many partners and distributors like Kerasoft that are enhancing our preparedness for large scale deals. I believe we are on the right track, and when FedRAMP is completed, we will be in an even better position.

Okay. Great. Thank you for the color, gents, and congrats again on the quarter. I'll pass the line. Thank you.

Thank you, Suthan.

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

Great. Thank you for the question. I wanted to ask about the expansion that you talked about in your prepared remarks with Amazon. Just wondering if that was new in the quarter, if you could talk a little bit more about the use case, the timing, and the impact of that expansion?

Thanks for the question. Amazon is a flagship customer for us. We started with Amazon AWS, and we've added on several areas of the business within Amazon. The latest Amazon SMB is another example of that. Overall, I would say the biggest project in terms of size and scope remains our Amazon AWS initiative. However, the Amazon SMB project, while smaller in size, is just one of a few that we have targeted within Amazon. So, our job is to continue penetrating this account. In order to do that, our focus is on making AWS very happy, and we are strategically focused on it.

And just to add, good morning, sorry, I wanted to add quickly on that, just from an AWS perspective, we have the major installation of AWS Skills Builder, where we could, this is not a win on the engineering side, which is the department that we won within AWS, but we also expanded within the current contract that we have on the AWS Skills Builder, which is a customer academy. So, we continue to build and expand within the current contract and other departments. So there are several approaches we are taking.

Excellent. I wanted to ask one more on competition, thinking about it from the lens that Gen AI continues to evolve and impact the world. The need for skilling and reskilling is increasing. And I'm wondering if you're seeing any changes from the broader HCM suite players, if they're more focused on their learning modules and generally if those larger HCM suites are putting more attention on the learning segment of the market? Thank you.

Yes, Claudio speaking. First of all, we are capitalizing on mistakes that some competitors are making, mainly learning LMS players, not HCM. The dynamic we see in the HCM space is that they give year one, their LMS component focuses on legacy training topics, like soft skills, compliance, and language training. But customers are starting to have sophisticated needs in terms of scalability, multi-user provisioning, multi-audience capabilities, and other essential requirements that only a vertical LMS player can satisfy, deploying horizontally in the market. The small LMS models from HCM providers are not meeting these complex enterprise needs. Often, we see customers adopt these small components for a year, and then they realize that while it is free or almost free, it does not meet their complex training needs.

And Josh, just to also add, some reference ability is that if you look at a couple of wins specifically, such as Milwaukee Tool and Enterprise, these are companies doing exactly what Claudio mentioned. They reach a moment at which they need to migrate to a platform that can serve their needs from a learning perspective better than legacy HCM platforms.

Your next question comes from Kevin Kumar from Goldman Sachs. Please go ahead.

Alright, thanks for taking the question. I wanted to ask about the enterprise—how are sales cycles trending and what is the shape of the pipeline? Any color there would be helpful. And as it pertains to that, can you talk a little bit about the recent significant deal with the big five US-based technology company, the main use cases there, the process of winning that deal, and anything related to the deal's size would also be helpful. Thanks.

Hello, Kevin, thank you for the question. We are extremely proud to be serving one of the worldwide leaders in their respective tech space. While we are unable to share the exact company name, I'll highlight a few key points regarding this prospect. We have been navigating a deep degree of complexity due to various needs being addressed in terms of use case requirements. The primary targets were sales mastery, sales enablement, and customer training; this reflects the hybrid positioning we have in the market. I would also emphasize that during this process of working with this organization, we developed a relationship with the system integrator, which played a crucial role in winning the selection during the RFP process. All that to say, we are proud to be the choice of the best-in-class, amongst the largest companies in the LMS space, and to substitute and displace technologies in learning that had served this company for many years. That's as much detail as I can provide without breaching our NDA. In general, with respect to enterprise, our positioning is strong, and our business development team is achieving excellent results.

Also, from a product perspective, our roadmap is focused on supporting very sophisticated enterprise needs from several angles, including features, security, and scalability. Just recently, I saw a very large enterprise customer migrate to the new database architecture that our engineering team has built. Although they were delayed for their own reasons, once we deployed the new solution, we saw scalability skyrocket. The technology we have is extremely scalable and ready for millions of users.

That's great, appreciate the color there. And then I wanted to ask about the SMB churn impacting the new customer ads. Is that persisting, and is it affecting any of the other metrics like ARR growth or retention? Thank you.

Yeah, Kevin, I'll take that one. When considering SMB in our world, almost 50% of what we do in the quarter is from the large enterprise segment, specifically contracts of $100,000 and above, while SMB makes up less than 20% of our total. Our experience has shown that the SMB customer base tends to primarily rely on inbound processes. They are often first-time adopters, which requires significant touchpoints from a unit economics perspective. There are opportunities, but the unit economics are not as strong as they are for mid-market or higher enterprise customers. Moving forward, we will continue to engage in the SMB space to the extent that the unit economics make sense while keeping an eye on innovation in that space. This is where significant growth can come from. We are closely monitoring the competitive landscape, and our focus is increasingly on the mid-market and enterprise where we've seen impressive gross retention and net retention metrics. As I mentioned earlier, retention metrics have held relatively flat compared to the previous quarter, reflecting our movement up-market.

Great. Thanks for taking the questions and congrats on the quarter.

Thank you.

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

Thanks so much for taking my question. You have typically given NRR with Q4 print, but can you give us a bit of a sneak preview?

Martin, I love the question, but as you know, we provide that at the end of the year annually, so we will provide that number when we report Q4. However, from a perspective of gross retention holding flat, I can share that we had one of our best quarters for upsell and cross-sell activities throughout the year.

Great. Thank you very much. When I look at your guidance going into Q4, it appears somewhat conservative at first glance. I was wondering if you could provide some clarity on how Q4 is shaping up and how incremental ARR might look relative to some of the previous year's Q4s.

From our point of view, Martin, when considering ARR and subscription revenue, it is relatively straightforward. You look at the ARR at the start of the quarter, which gives you a sense of what the subscription revenue would be at a minimum. To the extent that we close a sufficient number of deals earlier in the quarter, it can also enhance additional subscription revenue during the quarter. We always strive to ensure that our revenue guidance reflects our confidence while remaining able to exceed it as necessary. From a profitability standpoint, we have demonstrated significant solid performance, and I believe if you've seen the numbers relative to consensus, we've outperformed by 170 basis points. I had indicated to the street that I would be at 10% EBITDA margin in Q4, and we are essentially at 10% at this juncture. We will likely make some investments specific to SubRAMP and R&D in Q4, but we feel very comfortable about the numbers provided for revenue, gross margin, and EBITDA.

That's great. Thank you very much. Last question from me. Has there been any change to timing for FedRAMP approval compared to what you communicated at the customer conference?

Alessio, do you want to take that?

Sorry, could you repeat that real quick? Sorry.

Questions around timing—has it changed?

Yes, I'm just wondering, has there been any change compared to what you communicated at the customer conference?

No changes.

Martin, regarding FedRAMP, we have communicated that we expect this in 2024, however, there are factors that could accelerate or potentially delay the process. An important aspect is that if we secure sponsorship for the process, it could accelerate the timeline. If no sponsor is available, it could take a quarter or two longer. But generally, 2024 is the year we expect to achieve this, and we will share any updates on sponsorship with our investor base.

Thank you very much and congrats on a good quarter.

Your next question comes from Robert Young from Canaccord Genuity. Please go ahead.

Hi, good morning. You've already talked a lot about your success with large enterprises across multiple use cases. I wanted to dig into a flavor of that. It appears that with enterprise, specifically Milwaukee Tool this quarter, the entry point is changing a bit. I think you said 50% of the pipeline is external, but previously, external has always been your entry point in enterprises as I understand it. Now it looks as though you're broadly expanding that. I'm curious what is driving that? Is it just the outbound effort? Is it the way the market's looking at you? Or are partners pulling you into these internal opportunities?

Claudio speaking. What is happening is a shift in the industry regarding who is recognized as a leader and best in breed. Now if you want to have the best LMS in the world, you have to choose the not just the cheapest. For sure, the partnership with SIs has helped us to be endorsed this way. However, when a customer writes an RFP, it is common that we are not just seen for a single department, where we start and then cross-sell into other departments. It is also common now that a budget is pooled together for global projects that can be approached in a couple of ways. One is through a single decision-maker who wants to deploy a global LMS, or as it occurred a few weeks ago with the major technology firm, a federated group of people gathered together to pool their budgets to acquire a single LMS that supports different learning experiences based on department. So that dynamic allows us to not only apply our product to internal cases but also scale up effectively across multiple business units.

I would just add one thing: In the macro environment, the shift in personnel roles, especially CFOs and CIOs, has increased in these strategic decisions. As a result, we engage more often with individuals focusing not strictly on internal or external perspectives but making the best corporation-wide technology decisions. We often find ourselves working with CAOs who say they have a solution on the internal side and a vision for implementing a customer academy in the future, and thus, we need a product that performs very well in both areas. Our sales teams are adjusting to these personas, which in the past were perhaps less relevant, but we are seeing great results.

Okay. Thank you for that. And a follow-up related to that would be regarding opportunities in HRIS systems or broader HR tools where learning is just one component. How does Docebo approach that? Or is it something you'd walk away from entirely to focus on best of breed applications for training and learning?

I think we presented this well before, but I'll let you cover the topic.

Actually, we deal with HRIS systems in two ways. For OEM, most players, typically local, cannot build their own LMS in different regions of the world, so they are integrating with Docebo. The other part is via ChaiBot Connect. We have a broad marketplace of integrations that connect all of the HCM systems out there and the wider HR ecosystem because the HR ecosystem is not limited to just HCM. There are aspects of talent and many other areas that need integrating within an organization. The strength of our integrations is our ability to provide dynamic, custom integration solutions that cater to customer-specific needs. Therefore, we approach the HCM software ecosystem from two angles: OEM partnerships or direct integrations.

Okay. Thanks for taking the questions.

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

Yes, thank you. It is apparent from your conference that you've built incredible momentum and are still in the early days. I want to understand if you can provide us a sense of your current market share to help assess the runway ahead. As you add more markets, how should we view your share figures?

Yes, Richard, I'll share some numbers with you. A few quarters ago, we printed data that provides our perspective on the U.S. market and our status there. The external versus internal use case dynamics we've spoken about previously reveals that 50% of our pipeline originates from external use cases where our win rates are the highest. As we've previously mentioned, in the last three years, the U.S. market anticipates about $8.5 billion going forward, with almost 70% of that being untapped greenfield opportunities. Additionally, roughly one-third of this market corresponds to what we call the switcher market, largely focusing on internal use cases, such as employee onboarding and the like. When simplifying our mathematical perspective, our market leadership at around 5% to 10% translates into a significant ARR potential. If we succeed in maintaining market leadership in these areas, we could potentially generate around half a billion dollars or more in ARR while executing effectively.

Okay, super helpful. Thank you. Considering your comments regarding EBITDA and continuing investments, how do you approach capital allocation as an organization? What is your perspective on the run rate of EBITDA? At this point, have you proven your ability to leverage operations, or are you planning to maintain or increase your growth investment over the next 12 months?

I'll start with that, and please feel free to jump in, Claudio. First, growth is our primary goal. Our investments in R&D and marketing are focused on areas like enterprise and government, which we discussed, especially in relation to FedRAMP. We are making these investments while also delivering EBITDA. It shows that although I might give up about 2% of my EBITDA for FedRAMP certification, these investments are necessary for long-term revenue growth. Although I can’t provide a comprehensive outlook, we indicated at Inspire that we expect this company to maintain healthy revenue growth rates while maintaining a G&A reduction plan and operating leverage. By 250 million plus ARR, we would envision achieving around 10% G&A consistently. Hence, from a historical backdrop, our company may target EBITDA in the range of 18% to 20% in upcoming years, as initially shared during our investor presentation.

From a capital allocation perspective regarding M&A, we have become highly proficient in executing M&A transactions. Following the successful acquisitions of PeerBoard and Edugo, we quickly integrated the teams and released the first alpha version of the product in less than four and a half months post-acquisition. We have achieved this swiftly, and as we remain open to exploring other opportunities, we will ensure to effectively digest the acquisitions made during 2023.

Thank you very much. I appreciate your thoughts today.

I will now turn the call back over to Claudio Erba, CEO for closing remarks.

Yes, thanks everyone and let's speak again next quarter.

Ladies and gentlemen, this concludes your conference call for today. We thank you for joining and you may now disconnect your lines. Thank you.