Docebo Inc. Q4 FY2023 Earnings Call

Good morning, everyone, and welcome to the Docebo Q4 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 the forward-looking statements. For more information on 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 measure. 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.

Hello, everybody, and thank you for joining us for our fourth earnings call. With me today are Alessio Artuffo, our President and COO; and Sukaran Mehta, our CFO. I will begin our call this morning with a short summary of Docebo's success over the past year. Alessio will provide a more detailed overview of Q4 highlights, and Sukaran will review our financial performance. Our key growth metrics showed continued improvement as a result of the investments we are making. Docebo is becoming more effective in identifying the needs of enterprise customers and progressing through their organization to close deals. Overall, our profitable growth strategy resulted in a strong subscription revenue growth of 28% in Q4. Additionally, we achieved an adjusted EBITDA margin of 13.2%, and a free cash flow margin of 14.2% as we ended the year. I'm also proud to say that during the year, we completed two important tuck-in acquisitions that brought strategic technology and valuable domain expertise to our product development team, particularly in the field of AI. PeerBoard and Edugo have been successfully integrated within the expected timeline, and their contributions to the Docebo platform will start to be visible in the marketplace later this year. This positive financial and operational result enables us to make strategic investments in our future growth and maintain our industry leadership position through innovation. It's from this position of strength that the leadership team and I felt it was the right time for me to transition into the role of Chief Innovation Officer. In my role, some of the key areas we will focus on include: identifying novel ideas and trends in the L&D space and finding ways for Docebo to leverage them; advising Alessio and Fabio on the innovation ideas for early-stage products, including product positioning, feature creation, and improvement; leading and doing deep research serving as one of the Docebo industry experts in positioning Docebo as a leader in innovation; and providing ongoing mentorship to the executive leadership team and Board on important technology development and positioning matters. As I pass the baton to Alessio, I'm filled with excitement as I transition into my new position. It's exhilarating to think about the future and the incredible possibilities that lie ahead. As Docebo continues to grow and develop, I am certain that there will be even larger and more exciting achievements waiting to be realized. Now, I would like to turn the call over to Alessio.

Thank you, Claudio, and good morning, everyone. As I step into this interim CEO role at Docebo, I would be remiss if I did not mention how fortunate Docebo has been to be led by Claudio and what an honor it is for me to continue to grow the company following its legacy of success. Before discussing the business performance and our improved market position, I would like to briefly share our strategic perspective on the macro trends we saw this quarter. After that, I will go over some of our key performance indicators for the quarter. Macro trends in quarter four aligned with our expectations, and we expect that 2024 will follow a similar pattern. We expect that significant enterprise deals will continue to receive close scrutiny from the C-suite. Our improved execution within the enterprise go-to-market ecosystem is helping us tackle these challenges. Our larger customers, who have multiple use cases, now view their investments in learning as strategic and mission-critical. SMB and first-time LMS customers continue to approach their decisions with caution. That said, we continue to penetrate mid to large organizations with complex and multiple use cases, leading with a solution that delivers a fast ROI and adds value to our customers. Geographically, we observed a positive trend in Europe, indicating a potential improvement in the market. We will continue to monitor this closely as the year progresses. North America, on the other hand, continues to maintain its strong performance, showcasing its resilience in the face of broader challenges. Now to the quarter four highlights. We're excited to report that subscription revenue increased by 28%, and total revenues grew by 27% in quarter four, with total revenues exceeding the upper end of our guidance range. ARR, as of December 31, 2023, of $194.3 million increased 24% or 23% after adjusting for the positive impact of approximately 1 percentage point, given the weakening of the U.S. dollar relative to foreign currencies. ARR growth was a result of our improving execution in the enterprise customer segment and our strong appeal across industry verticals. Adjusted EBITDA of 13.2% well exceeded our guidance. Our discipline to drive optimal growth at the right cost has helped us deliver quality growth with operating leverage. Enterprise customers with ACV over $100,000 in ARR accounted for approximately 56% of growth ARR generated in fourth quarter. Additionally, ACV for new customers in the quarter was about $71,000 compared to $70,500 in the September period. External and hybrid use cases continue to account for more than half of our pipeline. In addition to the progress our enterprise sales team is making, we're steadily increasing our presence with large system integrators. They're helping us access a great number of high-quality deals in both enterprise and government segments. Now, I would like to highlight a few customer wins, upsells, and cross-sells this quarter. We're thrilled to share that Docebo has recently secured a major customer win with one of the top four U.S.-based global banks. This prestigious bank has chosen Docebo to replace their outdated LMS provider in order to meet the onboarding and compliance learning needs of their vast global workforce. This collaboration marks a significant milestone for us as we continue to revolutionize the world of learning and development. Other notable large enterprise wins include Special Olympics International, three major Italian brands in the luxury goods and performance automotive industries, including Valentino and Pirelli, and a leading e-commerce company. Special Olympics International, which serves more than 4 million athletes and unified partners in over 170 countries, chose Docebo to address several hybrid use case requirements, including memberships, associations, and continuing education management. In more exciting news from Europe, we recently partnered with Pirelli to revolutionize partner learning and with Valentino to enhance various external learning initiatives. This includes empowering our customers and partners through education, offering exclusive memberships, and providing comprehensive training programs for the retail and franchisee networks. Turning to our amazing customers. We very quickly leveraged our early franchisee and internal use case momentum with Bojangles having just signed them back in quarter three. Then there is Stanley Black & Decker, a global leader in tools and outdoor operating manufacturing facilities worldwide. This customer's iconic brand includes DEWALT, BLACK+DECKER, CRAFTSMAN, and STANLEY. During the quarter, the company expanded the scope of their external use case of Docebo platform to support both customer and brand training. And lastly, a big five U.S.-based technology company that we signed in August is expanding their use of Docebo platform. Their partnership supports their multiple use case needs, including a large external audience. Now, to our government segment. We're increasingly optimistic about our ability to secure a FedRAMP sponsor as well as obtain our FedRAMP certification. Our government sales team is fully staffed and actively selling, establishing relationships that are crucial for Docebo to create a strong pipeline in this important area of growth. Having a clear path to FedRAMP certification, our collaboration with a big four system integrator and our preferred distributor, Carahsoft, positions us well to succeed in both federal and SLED opportunities. In quarter four, one of our notable wins came at the state level, as the Texas County District and Retirement System chose Docebo for their onboarding and professional development use case needs. Now, to OEMs. Performance during the quarter met our expectations. We're excited about the opportunities and progress being made with our partners as they expand our platform further into their enterprise customer base and into new geographies for Docebo, including APAC countries, where our partner is growing rapidly. As Claudio noted, innovation will remain a critical part of why we win. In H1 2024, we will be providing better access to Learn Insights, a comprehensive and modern analytics experience with a new generation of customizable dashboards embedded into Learn LMS. This will provide increased data visibility and analytics engagement for our customers. Learning sites utilize Snowflake and AWS QuickSight to deliver advanced filtering, drill-down, and sharing features that can be fully customized to meet the needs of different use cases for which a customer is using our platform. We will also be launching Learner Communities this year, a module that enables customers to create and activate around a digital community where they can seamlessly embed and integrate into their learning platform. Later this year, we will release several exciting new AI capabilities. Docebo Shape will be enhanced and monetized with a new chatbot interface powered by GenAI. This integration brings improved AI content generation capabilities to our amazing products. The AI creation add-on now supports vertical page outputs in addition to horizontal slide formats. In addition, we will be launching a new virtual role-play technology, showcased during our last Docebo Inspire. It is currently in beta and will be available for early access in April and general availability in late quarter three 2024. This product offers a video-based role-play learning experience for sales enablement and has potential for other use cases like customer support and onboarding in the future. It will be sold to customers on an annual licensing model. In conclusion, I want to express my gratitude to the global Docebo community for their support and contributions to a highly successful 2023 for Docebo. As we look to 2024, we will continue to focus our execution on these five pillars of growth. Number one, continue to lead in the external use case, large greenfield opportunity for Docebo. Number two, expand our presence where we will continue to grow our base of enterprise customers worldwide. Number three, introducing our robust learning platform to the lucrative and underserved government sector. Number four, scaling up our partnerships with strategic partners throughout the year. Number five, improving our expansion meaning upsell and cross-selling efforts with our current customers. Our goal is to achieve growth by consistently and methodically executing our plans. We're dedicated to promoting innovation and using it as a crucial factor in our success. By leveraging innovation, we aim to distinguish ourselves from our competition and constantly enhance our products and services to meet the changing demands of our customers. With that said, 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 and fiscal year ended December 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. Subscription revenues were $46.5 million, representing 94% of total revenue for the quarter, and an increase of 28% from the prior year. Total revenue for the fourth quarter grew to $49.3 million, an increase of 27% from the prior year and exceeded our guided range. Annual recurring revenue at the close of Q4 was $194.3 million, an increase of 24% or 23% after adjusting for the positive impact of approximately 1 percentage point given the weakening of the U.S. dollar relative to other foreign currencies. We added 80 net new customers in Q4 and ended the quarter with a total of 3,759 customers, an increase of 11% year-over-year. Average contract value was approximately $52,000 for the fourth quarter, an increase from $49,000 in the third quarter of 2023 and an increase of 12% year-over-year. The growth in average contract value is being driven by our continued expansion into the enterprise customer segment with average contract value of $100,000 and above. Net retention for the year came in at 104%, down from the prior year. Gross retention remained relatively flat compared to the prior year, and gross profit margin for the fourth quarter improved by 40 basis points year-over-year to 81.2% of revenue and was relatively consistent with the prior quarter. Total operating expenses for the fourth quarter increased to $38.9 million from $31.5 million in the prior-year period. G&A as a percentage of revenue decreased to 17.4% for the fourth quarter compared to 17.9% for the third quarter of 2023. We expect G&A expenses to continue to drive operating leverage while remaining relatively flat in absolute dollar spend. Sales and marketing expense as a percentage of revenue was 32.8% for the fourth quarter compared to 34.9% for the third quarter. Our investments in IT systems and workforce optimization have resulted in improved productivity and efficiency, leading to improvements in our sales and marketing efficiencies. R&D investments in the fourth quarter were $9 million or 18.3% of revenue, a decrease from $10.3 million for the third quarter. As a result, adjusted EBITDA was $6.5 million for the fourth quarter of 2023 or 13.2% of revenue, above our guided range of 10% to 10.5% of revenue. We reported net income of $3.2 million for the fourth quarter of 2023 compared to $1.6 million for the fourth quarter of 2022. Adjusted net income for the fourth quarter was $8.3 million compared to $3.4 million for the fourth quarter of 2022. We generated positive free cash flow of $7 million or 14.2% of revenue compared to 18% for the third quarter of 2023 and 5.1% for the fourth quarter of 2022. In addition, as part of our NCIB and SIB programs, during the fourth quarter we repurchased approximately 2 million common shares for cancellation at an average price of $47.90 for the total cash consideration of $108.2 million, which includes transaction costs. Share-based compensation accounted for 3.3% of fourth quarter revenue compared to 2.8% in the fourth quarter of 2022. More importantly, the net dilution impact for the fiscal year 2023 was less than 1%. Now, for our Q1 2024 outlook, where our guidance is above the Street's consensus for both the top and bottom line. Here are the key takeaways. We expect total revenue to range between $51 million to $51.3 million. We expect gross margin to range between 81% to 81.5%. We expect adjusted EBITDA margin to range between 12.5% to 13.5%. A few additional points to note in regards to our first quarter guidance. We expect subscription revenue to be about 1 percentage point higher than overall company revenue, while professional services to remain relatively flat sequentially from Q4. This is being driven by our increasing work with system integrators who are a critical part of both expansion into the large enterprise accounts and the government business, which is Fed and SLED. Before turning the call over for Q&A, I would like to highlight several key points as we enter this new year. First, our top priority remains growth, and we aim to position the company to consistently deliver profitable growth regardless of the economic cycle. We are successfully pursuing a balanced approach to growth and profitability by expanding our adjusted EBITDA margins, and we will continue to invest in our AI roadmap and expanding our go-to-market teams, including government-related costs to achieve FedRAMP compliance. Second, we anticipate continuing to show operating leverage and achieving an adjusted EBITDA of approximately 15% for the full fiscal year 2024. That concludes my prepared remarks. Operator, please open the line so that we can take questions from the analysts.

Certainly. Your first question comes from Ryan MacDonald with Needham. Please go ahead.

Hi. Thanks for taking my questions, and congratulations on a great quarter. To start off with the strong performance in the quarter, there are many impressive new customer acquisitions with a top four U.S. financial services company, along with significant expansions. I'm curious about the pipeline and the success anticipated in the fourth quarter. What factors do you see driving that improvement in execution and productivity from the direct sales team compared to the advantages gained from the enhancing relationships with the systems integrators? How do you view the balance in the pipeline as we look forward to 2024?

Good morning, Ryan, and thank you for the question. Alessio speaking. I'll take your question. So, a few things on the enterprise motion. The one thing that I'd like to emphasize is that as we mentioned in prior calls, one of the big factors for us has been maturing our execution by demonstrating value at the point of sale. The way we do this today is a lot better than we used to do it one year ago. How do we do this? It's via value engineering methodology and a team that is fully ramped in the company. This has helped us achieve really good results with logos that we closed in quarter four. You mentioned the significant financial services organization that we won, but I would also include in this upsells of the caliber of Pirelli, where we had to demonstrate specific value in order to add certain use cases. As we think about the pipeline, I think our job is to continue to extract value from the business. There's a lot of greenfield available, and we are really doubling down on our execution on the demand side, not only with our stronger branding and marketing team execution but also by adding our sales in the territories, working the territories really in a very well-coordinated manner. We've been focusing on this a lot. I hope this helps.

Yes, absolutely. Very helpful. Maybe just as a follow-up then. Wanted to discuss sort of the OEM channel. Obviously, about last month's Ceridian, which is obviously a big OEM channel partner for you, acquired a business called eloomi, which is the sort of LMS/LXP provider at the low end of the market. Obviously, I think the OEM channel has been an important one for you in terms of driving growth. As you think about sort of expectations into '24, I know you're not guiding for the full year, but maybe what your sort of thoughts were in terms of the growth algorithm of how much growth you're expecting to be driven from the OEM channel this year? And how that changes, if at all, in your mind now that Ceridian is sort of buying, I guess, a competitive solution to maybe go to market with internally or more directly than through partnership going forward? Thanks.

First off, I want to emphasize that Docebo and Dayforce have built a strong and lasting working relationship since partnering years ago. Additionally, it's important to note that the leadership teams of both companies are collaborating on the mentioned positioning, and we anticipate further discussions with them. At this moment, we do not expect any significant impact on revenue for fiscal year '24. Regarding other partnerships, we are actively developing a robust pipeline of new OEMs. Collaborations with organizations like E&Y, Darwinbox, and MHR are highly significant, and we are seeing strong momentum. We are also excited about Darwinbox’s focus on the APAC market, which is strategically important for us. Lastly, I want to highlight our efforts in strategic partnerships and our channel approach, as we are experiencing substantial traction in this area. While we don’t provide specific guidance on OEM channels versus others, the overall channel remains a key priority and growth driver for us moving forward.

Appreciate the color. Congrats on...

Thanks, Ryan. I was just going to jump in just to clarify that, from our perspective, like Alessio said, we do not anticipate any material impact to revenue for FY 2024, and we are comfortable with how the consensus has been built.

Excellent. Thank you.

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

Hi, good morning. Thank you for the questions. I noticed that you added $12.5 million of ARR with only 80 customers. I'd like to explore that trend further. Is there any underlying churn, as it appears the average customer value is significantly higher, around $71,000 for the new customers? There seems to be a discrepancy there. Additionally, could you elaborate on the notable increase in average customer value this quarter?

Sukaran, would you like to take this?

Good morning, Rob. That's an important point, and it aligns with what we've discussed in recent quarters. We've been consistently focused on supporting our sweet spot, which lies between mid-market and large enterprise customers, including our efforts in the government sector. Notably, we had a significant win with Texas State, as mentioned in our press release. As we target the upper market, you can expect Docebo to concentrate on enhancing unit economics within the mid to large enterprise segment. We are strategically focused on increasing sales in the SMB space, where we see potential for customers to expand their use cases and drive higher annual contract values. We've addressed this from a unit economics standpoint and will allocate our growth funds to maximize ACV in categories where we can offer numerous products and modules to our customers. This strategy is reflected in our numbers from a channel perspective, showing that more enterprise and mid-market clients have contributed to growth over the last few quarters, which has positively impacted ACV. There is a small element of churn associated with our less emphasis on SMB customers, which generally have a lower ticket value. While we aim to extract more value from these customers, there may be some minor churn due to this focus. However, the majority of our growth stems from our concentration on mid to large enterprise clients, which emphasize quality over quantity from an ACV perspective.

Okay. Thanks. And then, second question for me will be on the expansion with the large big five technology company. It seems as though these expansions on these large deals are coming quicker. And so, if I'm right on that, what's driving it? Is it just better go-to-market with your cross-selling effort, or is it some market function, or is it consolidation? What's happening? And are you seeing this sort of cross-sell come through more quickly than in the past? And I'll pass the line.

Yeah. No, actually, I would say, Rob, that in the instance of this expansion that's relatively quick on this customer, it's not uncommon for us to uncover further needs in the initial phases of, if you will, onboarding implementation, and integration especially with large customers that have complex use cases and an organizational complexity of needs that may arise at the point of sale, but also sometimes surface after the point of sale. So, we actually see this quite frequently. With that said, what we are referring to as expansion here is additional modules, right, additional modules, additional technology, additional SKUs to the existing contract and not necessarily selling into, say, subs and/or separate entities of the customer. We just essentially became even more sticky and added more technology to the original contract.

Okay. But is the trend towards faster cross-sell, is that not a function? It seems like Bojangles this quarter, this large cut, it just seems as though you're expanding more quickly than in the past in the same customer.

It is intentional. There is more intentionality in continuing to execute on the expansion side. This is one of the, if you will, outputs of the work we're putting into it. As Sukaran said before, the land-and-expand strategy with the amazing customer that we have is a pillar of growth and these are a couple of good applied examples.

Okay. Thanks a lot. I'll pass the line.

Thank you so much.

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

Good morning, gents, and congrats again on another impressive quarter. The first question for me is on the U.S. government opportunity. Could you guys provide an update on kind of how you're thinking about the timeline is here for full certification and the progress on the pipeline build side of things that you're able to do in the meantime? And do you guys foresee any impact here from the U.S. election?

Hello, Suthan. This is Alessio. We are highly focused on this significant effort, and our teams are doing an excellent job. Regarding our federal certification, which is our main topic, we are making good progress and are quite optimistic about securing the sponsor soon. We have multiple options available for this. We want to express cautious optimism about securing the sponsor. This is important because obtaining a sponsorship can lead to a quicker timeline for certification compared to the standard application process, which can take several months longer. Even before we get the certification, I want to highlight that we are continuing to secure substantial business and deals, particularly in the state and local government sector. Collaborating with specific strategic SIs has been essential for us, and our partnerships with them are becoming increasingly deeper and extending to the commercial side as well. Interestingly, our focus on government has allowed us to establish strong relationships with SIs through government projects, opening doors in the commercial sector that were previously less accessible, and we are benefiting from both areas.

Thank you for that insight. My second question relates to the cross-sell traction you've been experiencing. Can you provide an update on the recent adoption trends across your learning suite, particularly regarding the recent product innovations you launched, such as the one introduced during the quarter? I'm interested to know how that is trending.

Sure. So, in terms of adoption of technology that we've launched, I want to underscore that we really are very satisfied with the trend that we have seen with regard to Docebo Shape. Docebo Shape is primed to be a strategic technology and platform for us moving forward. We emphasized on the Shape side, the AI and GenAI capabilities. We're pushing very much into that. Customers are liking it more and more as we improve it. I would say an example of that since you were just asking about government, we mentioned a customer win in Texas on the government side. One of the key differentiators in that deal was Shape in order to repurpose existing material that the agency had and being able to recreate content using Shape. But Shape, in our view, has even further opportunity, Suthan. We want to push further the content creation offering side of it. And the GenAI side, we're working very much on it. So, on Shape, I would say already great results. However, the amazing stuff is yet to come. So, we're incredibly bullish on that technology. We're seeing an uptick in the sale and the pipeline creation of the module Microsoft Teams, which we launched a few months ago and is starting to do really well for us. And in general, look, I would say the best answer that I can think of to your question is we continue to think about providing value to our customers and focusing on how our products meet the customers' needs. There is a concerted focus on the customer experience and understanding really where we need to do better, how we're doing better swiftly makes it into our product roadmap to stay on top of the market trends. That's a big focus we have. Yeah, we're becoming bigger, but we don't want to lose that agility and nimbleness of being able to continue to improve our product for our amazing customers. That is a priority that we have now and we're going to continue to have in the future.

I want to add a quick point regarding 2024. As we implement changes and position Docebo in the market, we will focus on packaging our offerings based on the features and capabilities that address customer problems, rather than on individual products and modules as we have done historically. We believe that introducing various packaging and pricing options for our customers will not only enhance our sales efficiency but also ensure we emphasize driving value and resolving customer issues. This will definitely be an area of focus as we consider modules moving forward.

That's great. Thank you, gents. Appreciate the color, and congrats again on the quarter. I'll pass the line.

Thank you, Suthan.

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

Great, thanks for the question. I was hoping you could talk a little bit about the competitive landscape. Just thinking about the legacy LMS vendors, is the competitive environment getting easier, tougher, or staying the same? And then, I have a follow-up. Thank you.

Good morning, Josh. A couple of comments from my side on the competitive landscape. No notable changes or something very new that changes our views on our strategy, in general. Notably, on the customer wins that we have executed this time in this quarter, I would say the bank that we referred to, I think, in the script, we indicated that they felt like their system was outdated. We continue to see a trend that we have described before where especially large organizations that have providers with overlapping assets constitute an opportunity for us to be crisp and clear in our value proposition and offering. And as a result, to stand out and clear that confusion and come in with a very well-defined value prop, and in that case, that was a big strength that we've leveraged. We believe we have much more opportunities to do the same thing across some of the best companies that have that same issue. The other trend that is the opposite of competition, the lack of competition we're seeing in the external use case side, it's a very big greenfield opportunity. Pirelli that we've mentioned in our script, for example, was an expansion that allowed us to win the business of partner training. Now, this technology was built in-house, it was not competitive before. Why? Because, as we mentioned before, the business of external training, oftentimes is still greenfield. And so, we love that because it makes our job a little bit easier in a way, but yeah, definitely less competitive. And then look...

Okay. Please continue.

The markets, the non-enterprise markets remain noisy. There are a lot of small vendors, and in general, the SMB space tends to be a race to the bottom space in terms of pricing. And that is also one of the reasons why we remain focused on higher-value ACV and more complexity given the capabilities of our product.

Got it. Really helpful. And that was kind of my follow-up was around the different market segments. I think you answered it for SMB. So, maybe just like thinking about your evolution as a company and maybe thinking about enterprise versus mid-market or upper mid-market, like where are you prioritizing your resources? And when you think about sales reps going after opportunities, like how are they balancing the potential to land bigger with like a broader LMS deployment versus potentially landing for a specific use case or a single department, like balancing that versus a bigger displacement opportunity?

Sure. Sukaran, please add any additional thoughts, but I have a couple of points regarding your question. Historically, we have maintained a balanced approach across small, mid-market, and enterprise segments. In recent years, we have positioned ourselves so that our product capabilities and platform differentiation are more appreciated by organizations that may not be strictly small or large but have more complex use cases, meaning they have more jobs to be done. This complexity can be found in a large bank as well as in a smaller association, which may still have intricate needs that we can address, leading to a high annual contract value. So, the first point I'd like to emphasize is that employee size does not always determine the complexity and thus the value we can provide and derive. Secondly, regarding where we are focusing our efforts and resources, we are dedicated to building a platform that is scalable, secure, stable, and high-performing in complex environments. I am referring to aspects such as concurrency and high user volumes. While we acknowledge that the LMS market is competitive, when you examine the players capable of handling complex scenarios, multiple use cases, and managing millions of users while enabling learning at scale—the potential for significant revenue—there are not many who can achieve that. Therefore, we are concentrating our resources on becoming that singular platform that addresses all needs related to learning technologies and serves as a strategic partner for companies rather than merely an LMS tool. We aim to be recognized as a strategic partner rather than just a commoditized technology solution.

Josh, I just want to add to Alessio's point that it's clear you're noticing this trend across the board. In the decision-making process, we've seen efforts to enhance our approach over the past few years, especially with more attention from C-suite executives. This change means you have more opportunities now than in the past to potentially consolidate the technology stack from the beginning. We're open to starting with specific use cases or multiple ones and expanding over time, based on the needs of each customer. A key strategy we employ is to track the needs of our mid-market and enterprise customers based on various use cases, and we put in the effort to engage other departments beyond the ones we currently serve. In this market, consolidating the tech stack across multiple use cases and focusing on those that drive and protect revenue for organizations provides us with an excellent opportunity, and this is a prevalent theme we're observing.

Perfect. Thank you.

I want to add a point to what Alessio and Sukaran mentioned. I want to highlight the competitive barrier we have in sophisticated and complex use cases. This advantage exists because building a horizontal learning management system that operates across multiple departments, is certified FedRAMP, and can scale to millions of users takes five to seven years. If I were an entrepreneur looking to earn money quickly, I would create a vertical learning management system focused on a single use case. I wouldn't attempt to change Docebo due to its complexity and associated risks. It's important to remember that this company has been around for 18 years and 11 months. Our success is partly due to the time we have had to thrive in the market, as well as the partnerships we have formed with transformational customers like Thomson Reuters, Banca Intesa, and Amazon AWS, who have presented us with complex requirements over time. Our strongest asset in safeguarding Docebo is our complexity, which makes it attractive for competitors to navigate within a sophisticated environment. Furthermore, our competitors are not innovating quickly enough. When you consider both innovation and our complex offerings, you'll see that competitive pressure is reduced, but we also have substantial challenges associated with large, complex cases that are difficult to change.

Your next question will come from Kevin Kumar with Goldman Sachs. Please go ahead.

Hi, thanks for taking my question. I wanted to start with just maybe asking about overall macro trends that you're seeing. How are enterprise sales cycles trending? And when you talk to your customers, how are they talking about this overall kind of learning development budgets for '24? Thanks.

Good morning, Kevin. Regarding enterprise trends, we are noticing some ongoing elongation in processes, and the trends we've previously discussed remain relatively stable. However, there are certain sectors showing positive signals, yet we still maintain a cautious outlook on sales cycles. In terms of current trends, it's clear that GenAI is a significant topic of discussion. One notable aspect is the strong desire for education in this field. I believe that 2024 will be pivotal for education and realization in Learning and Development, focusing on what is genuinely possible and how to achieve real value. In recent years, many have leveraged GenAI either as a core capability to enhance platform functions or more as a marketing tool. From our viewpoint, GenAI has consistently been an investment, embedded deeply within our system with features aimed at facilitating easier and faster adoption. With our intensified focus on shaping this technology, we're generating incremental value, especially highlighted in our creation roadmap. Additionally, L&D leaders express ongoing concerns about skills transformation. We frequently encounter projects aimed at upskilling and training workforces, whether they are established workers or new generations entering the workforce. The challenge of managing skills translates into a business problem for us. We tackle this by helping customers navigate complex skill set ontologies using AI. Our advanced technology offers significant value to our clients. I see GenAI and skills management as key macro trends. There is also a growing concern about how GenAI might disrupt the content industry and impact the business of content. Learning leaders are actively discussing these changes. Our role is to be part of the educational framework that guides customers, supporting them with our technology or solutions from our partners.

Thank you for the information; it’s very useful. I wanted to ask about net dollar retention, which seems to have declined a bit in 2023. Could you clarify that figure for me? Did churn play a role, or did the rate of expansion slow down? Additionally, what is your perspective on the sustainable range of retention rates for the business moving forward? Thank you.

Sure. Sukaran, you want to...

Hey, Kevin, good morning. Yeah, will do. Good morning, Kevin. So, net retention, I think the way I would kind of speak to this here is generally it's a bit of a consistent trend you probably seen across macro. What's baked into our net retention at a high level just to kind of give you some macro points here, specific to Docebo is that the cautious spending, and we talked about some of the deliberate move that we've made in the past two years around mid-market enterprise. So, if you combine cautious spending and the SMB space impact in 2023, as well as just general macro trends from a seat compression or flat seat compression, especially on the internal use case side, I think those two factors combined is where net retention kind of was. I would say that as we always are frank, this is an area where we will call out ourselves as a management team will be one of our important focus areas as we move forward. We'll certainly look to improve this as we move into the 2024-2025 cycle. But I think what's important to also remember is that from a gross retention perspective, our gross retention was relatively flat year-over-year, slightly below. But where you continue to participate in mid to large enterprise customers, expand multiple use cases, and as we look to pricing and packaging these more effectively into the latter part of this year, you should expect us to not only be focused on driving healthy expansion opportunities, not just from a cross-sell perspective, but more from an upsell perspective. And then we, of course, have a number of new products that we spoke about at Docebo Inspire in Q3 of last year, that will kick in, whether it's in late H1 and H2 of this year, that will show some more meaningful impact, I would say, as we look into 2025, but some impact in 2024 as well. But combining the use case expansion, new products and modules, and the new packaging that we're doing, I think in a nutshell, what we'll say is that while the macro was what it was, and it certainly had some pressure on seat expansion and cautious spending in the lower end of the market, I think we're going to be highly focused on driving this avenue of growth as we look into '24-'25.

That's helpful. Thank you, guys.

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

Thank you for taking my question. I'm interested to know how the business has evolved as it seems you're targeting higher-value customers. What is the breakdown of new wins between direct sales and partners, and how has this changed compared to last year?

Sure. I will pass it to you, Sukaran.

Thank you, Alessio. Richard, looking at the overall changes over the years, we've discussed on the growth side that the major shift Alessio mentioned at the beginning of the call highlights how different our approach is now compared to when we went public. Back then, our company relied heavily on inbound sources for attribution, with some outbound components on the partner side. In contrast, 2023 shows that to succeed in the mid-market and enterprise areas, we've worked diligently to transition towards a more robust outbound strategy. We've made substantial investments from our partners, including those in the OEM channels and partnerships like E&Y, as well as other systems integrators in the government sector, with Carahsoft being a key partner helping us secure business and generate pipeline in that space. Our significant partnerships, including major systems integrators, have aided us in winning large deals, like the notable tech opportunity we mentioned in Q3. This shift, coupled with our investments over the last two to three years, has enhanced our ability to engage large enterprise clients effectively. It's crucial that our technology remains not only innovative but also reliable and meets the expectations of Fortune 500 companies. Overall, we have a clear winning approach. We know what our product accomplishes, how we can assist our customers, and the use cases that lead to returns on investment for them. Our focus is to maintain our efforts on channels and source attributions that will enable us to generate new business while also expanding our current operations in an efficient manner concerning customer acquisition costs.

Okay. And just to relate a question to that, it seems like you've certainly become a lot more efficient. So, in that context with everything you're doing here, what's the order of magnitude in terms of the change that you've picked up on the LTV to CAC side? My guess is that it's improved, but can you give us a sense of the degree of that improvement?

Yes, it's definitely improved significantly. I want to emphasize some points regarding the margin profile before I return to CAC. One key aspect to note, Richard, is that our investments in R&D, sales, and marketing have remained consistent on a relative basis. The most noticeable impact comes from our operating leverage, which is evident as our business scales with an 81% gross margin. As we've indicated previously, G&A continues to provide operating leverage. Regarding sales and marketing, 2023 saw higher quota capacity and increased investments in technology, including upgrades to our CRM and order-to-cash processes. Additionally, attrition levels are no longer as chaotic as they were during 2020-2021. You can expect to see natural efficiencies arising from the elimination of those past inefficiencies. What I'm trying to convey is that growth is our main focus, and our investments in sales, marketing, and R&D will continue to drive growth as our primary goal. The positive results we’re seeing in EBITDA are simply a natural progression of the business along with specific optimization efforts. However, most of this can be attributed to our model showing operating leverage through scale. In terms of sales and marketing related to LCV to CAC, you can expect that we are comfortably above 7x to 8x in that area. While I won’t disclose it on a segment basis, it is significantly better when comparing different segments.

Okay. Great. Thank you.

This will conclude the question-and-answer session on today's call. I will now turn it back over to Claudio Erba for any closing remarks.

Hello. As you all know, this is my last earnings call. And I would like to take a minute to thank you all. I want to thank all the analysts that provide top coverage, Stefan, Martin, Robert, Gavin, Christian, Josh, Richard, Ryan, Kevin, Suthan, Daniel, the two Kevins, I have learned a lot, a lot from you. I want to also thank small and big shareholders, asset managers, pension funds, hedge funds, family offices, and the individuals that invested in Docebo, giving us your trust. I want to thank the Board, the executive team, and those of Docebo employees, partners, and their families. You are now in the good hands of the best of the best, Ale, supported by a rock star like Sukaran, and don't get taxed. Thank you all.

This concludes today's conference. Thank you for your participation. You may now disconnect.