Docebo Inc. Q1 FY2024 Earnings Call

Good morning, everyone, and welcome to the Docebo Q1 2024 Earnings Call. 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, Brianna. Last night, after the markets closed, Docebo issued its Q1 2024 results. The press release, which included a link to management's prepared remarks and our quarterly investor slide deck, were all posted to our Investor Relations website. This morning's call will allow participants to ask questions about our results and the written commentary that management provided last evening. Before we begin this morning's Q&A, Docebo would like to remind listeners that certain information discussed may be forward-looking in nature. Such forward-looking information reflects the company's current views with respect to future events. Any 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 as 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 U.S. dollars. Now I'd like to turn the call over to Docebo's Interim CEO, Alessio Artuffo; and our CFO, Sukaran Mehta.

Our first question today comes from Suthan Sukumar with Stifel.

For my first question, I just wanted to touch on, you guys flagged the SMB weakness in the remarks. But from the KPIs and results, you're clearly seeing continued strength and momentum in enterprise and green shoots in the government space. How should we be thinking about the durability of these trends that you're seeing?

Can you hear me?

Suthan, this quarter demonstrated strong performance, with notable achievements in revenue and EBITDA, as well as solid cash flow. You are right about the macro impact; we have observed a rise in churn within the SMB and mid-market segments over the last couple of months. We faced more pressure on seat optimization than in previous periods, but we anticipate this will improve over time. It's important to note a specific customer we've partnered with for over nine years. This summary reflects our quarterly performance. Our Enterprise and Government segments have shown exceptional results. For instance, our new logo ACV grew by nearly 20%, and customers generating over $100,000 in ARR increased by more than 36%. Approximately half of our ARR in the first quarter originated from the Enterprise and Government segments. Additionally, 50% of our pipeline consists of enterprise and external hybrid use cases, which aligns with our focus on better unit economics. Therefore, we are very optimistic about the ongoing trends. Sukaran, do you have anything to add?

Yes. And I think this is a good summary. I think, Suthan, in general, I would say that as we look at some of the factors that we have provided in the guide, we're being cautious as we look at some of the macro pressures, especially on the SMB side, I would say. Of course, the FX on the U.S. dollar movement has an impact as we translate those revenues into U.S. dollars. At a high level, what's important to understand, what Alessio alluded to is that if you read through the print, this is a solid quarter across the board from a revenue EBITDA perspective. We've done incredibly well in the Enterprise segment and continue to speak to some of those numbers that Alessio talked about. At the end of the day, the company will still continue to grow, as we talked about in our guide, providing that annual guide just under 20%, and at the same time, increasing our EBITDA and free cash flow. So as we think about the medium to long term, with the free cash flow and the EBITDA leverage that we're delivering, this also gives us enough firepower to invest in areas of growth and support our build versus buy strategy in terms of innovation. The most important part in this operating leverage and growth story is that we will continue to invest in research and development and innovation and sales and marketing throughout the year. The leverage you see now come through the system is mostly from G&A. What that really tells you is that we are focused on driving high-quality growth with best-in-class unit economics, and that's the consistent story from the past few quarters.

Great, guys. My second question, I wanted to touch on the partner channel. Can you guys provide some color on the current Dayforce partnership and any changes that you may have seen in that relationship since the last update? And on the other front, it sounds like you're seeing pretty healthy traction with new partners on both the enterprise and government side. So I would love to hear your thoughts on some puts and takes that you see with the partner channel going forward.

I'll start by saying that, regarding your question about Dayforce, we are currently involved in legal action, which prevents us from making specific comments about the relationship at this moment. However, we remain focused on divesting and ensuring that we have clear differentiation in our partnerships concerning revenue and distribution. With respect to our OEM strategy, we have successfully added three OEMs since last summer, aligning with our strategy around existing partners. Both EY and Darwinbox continue to grow, and we anticipate strong performance from them in the latter half of the year. Additionally, when considering partnerships, we look beyond OEMs to include systems integrators and broader ecosystem opportunities, which are significant for us. We are dedicating resources to enhance our annual recurring revenue in this area, as we see much potential for growth. To support these initiatives, we have brought on Travis Burke, an experienced executive in the HCM space, who will be leading our partnerships and corporate strategy. OEMs and partnerships remain fundamental to our growth strategy, and we aim to further our collaboration with existing partners while pursuing new opportunities.

Yes. The only thing I'll add, Suthan, is on the large SIs that are ramping, that are important to what we delivered this quarter and in the future. They have continuously supported us in a number of deals in the past, with government being one that we called out. Beyond government, we're certainly seeing that in the Enterprise segment, they are ramping up significantly, specifically two large SIs that we work with. One thing I would call out as part of my guidance in general is that we have some healthy opportunities that are in play. We are being cautious in terms of the timing of these deals will play out and when they'll close, but we are a vendor of choice in a number of these deals, working with decent larger size. That’s an important part of how we attribute to a significant amount of our pipeline as we look forward to the company's growth.

Our next question comes from Ryan MacDonald with Needham.

Maybe first to start with you, Sukaran. First of all, thanks for sort of a full year guidance. I think that helps provide us some additional context of how you see things playing out through the end of the year here. But as we think about the headwinds that you've called out across FX, SMB, and then obviously the unexpected customer churn, can you help maybe help us frame up maybe the magnitude of impact across all three of those in terms of where your initial annual guidance is relative to maybe where consensus was prior to that?

Yes, Ryan, good question. I think if you look at where the consensus was versus where we've guided to the high end of the range, the differential will be basically one-third, one-third, one-third between each of these components. In terms of the macro specifically, I want to call out on the SMB side, we've noted in the past that this is a customer that's a first-time buyer, macro-sensitive, requiring resources from an implementation perspective. I know Alessio will speak to in a second around some of the initiatives to streamline that segment. What we're seeing is that the SMB customer is more impacted in the past couple of months with some of the macro pressures that they're encountering. We're seeing a bit more on the downgrade side where seat optimization is happening in that segment. As we proceed through the macro towards the latter part of this year, we think we're just being cautious to ensure that we have adequate visibility, at least for the remaining part of the year, to be cautious around that segment. Regarding the SI segment, as you know, 30% of our revenue comes from outside of the U.S., and that's certainly affected by the strengthening U.S. dollar. One thing worth noting is that the large customer, supported over 9 years, we will still support them for one of their use cases. That portion went to a company that had an in-house content business, an LMS. All this happened suddenly. Our numbers are relatively small, but downgrades will impact us toward the latter part of this year due to our size and scale affecting growth. Therefore, FX, SMB macro pressure, and the large customer impact can be attributed one-third, one-third, one-third from the consensus to what we guided.

Super helpful color there. I really appreciate it. Maybe want to switch gears to the new pricing strategy that you talked about in the prepared remarks. It sounds like you've got three new pricing tiers. Can you provide, to the extent you're able to at this point, a bit more color on what those three tiers entail compared to the prior pricing strategy? Depending on how long you've been in the market with this strategy so far, any feedback from customers thus far or are you able to measure or quantify what the impact is on what a new land looks like under this pricing strategy relative to the prior one?

Yes. To kind of give some background on the pricing. Historically, as we priced from a customer perspective, we would price on an a la carte basis where there are a number of products and modules offered to the customer. Over the last 12 to 18 months, we've done a lot of work reviewing how our customers interact, looking at the market, conducting benchmarking, and competitive intelligence, to really understand how we can help our customers based on their needs. Specifically, our pricing now focuses on offering a core platform and solving their problems around their specific needs, their use cases. Our pricing has moved to a core platform that bundles key products and services that we know the customer requires, separated between SMB versus mid-market and enterprise customers. Beyond that, what we do is, beyond the core package, customers can add additional use case-specific needs—whether it's e-commerce capabilities, content authoring capabilities, or dedicated architecture for external extended enterprise needs. We've created incremental packages that benefit the customer by acquiring beyond the core offering. In the core offering, we've packaged more products and features. This helps us with how we communicate and address customer needs. We expect this to improve deal velocity and win rate, making conversations more straightforward than the previous a la carte model. It's important to note that this new pricing went live in April; any new net quotes will start impacting us in Q4 of this year due to the 3 to 6 months deal cycle for mid-market. Renewal business will also take time to adjust gradually. Alessio, I don't know if you want to add anything.

I'd say this pricing exercise redesign was a process that we took our time to define. Our starting point was to introduce pricing concepts that align more with our buyers' needs and reduce friction in the process. Our focus is to encourage customers with different buying behaviors across different segments. It was the right moment to introduce pricing that reflects our go-to-market story, as opposed to an a la carte model that slowed down deals. We anticipate achieving better deal velocity with this approach. In the near future, as we plan to release more capabilities, this pricing supports that as opposed to complicating matters with more a la carte options. Overall, we're very pleased with the progress so far, but it's early to make definitive statements; however, in the upcoming months, we expect to see the benefits of this pricing approach.

Our next question comes from Stephanie Price with CIBC.

Just want to focus in on the large SIs. You mentioned that they were starting to open up opportunities outside the government sector. Just hoping you can talk a little bit about what you're seeing with the SIs outside of government and how you're thinking about that segment over time.

Sure, Stephanie, that's a great question. The SI motion is something we've begun to focus on as a result of specific strategic deals in the corporate sector, and as we've made progress in the government area, certain relationships have intensified. These same relationships are now translating to the corporate side. We're observing better support from larger customers, with SIs showing interest in collaborating with us to deliver services for these customers, which is aiding our pipeline. This presents a significant opportunity over time. Our initiatives have only started in the last few months, and we now have a newly appointed executive in this role with extensive experience in expanding large-scale SI programs. I believe we have achieved a lot, but there's still more potential to unlock. As Sukaran mentioned, there are substantial opportunities within the organization. However, we need to approach this cautiously due to the complexities in the market, as the timing for these large opportunities can be unpredictable.

One interesting dynamic is that we have discussed in the past few quarters is, from a competitive landscape, we're seeing some of these larger SIs moving to best-in-breed platforms like Docebo, compared to the historic or legacy platforms that we compete with. There's momentum from that perspective, as customers look for best-in-breed technology, and larger SIs recognize that by collaborating with us, they are aligning with current industry needs.

That's good color. And then just my second question, I was hoping you could talk a little bit more about the macro headwinds that you're seeing impacting customer seats and renewals. I'm a bit surprised that you weren't seeing it at the enterprise level, given what some other software companies are saying. Maybe you can talk about your visibility into enterprise and what you're seeing more specifically there in terms of customer cost efficiencies, etc.

It's a good question. When considering SMB, mid-market, or enterprise, you will find that mid-market and enterprise segments are more hybrid and externally-driven. Our ability to retain or expand customers is better in these segments than with SMB customers, who are usually first-time adopters of basic LMS solutions without dedicated strategic resources. The SMB segment encounters optimization effects due to budget constraints, leading to a more significant impact. In contrast, retention in the enterprise segment benefits from multiple departments to engage with, whether internal or external, which strengthens our position there. We will still support the SMB segment while optimizing our operating structure, but our strategy focus remains on mid-market and enterprise customers.

Our next question comes from Josh Baer with Morgan Stanley.

A couple of follow-ups on some of the headwinds for this year. Just wondering if there's any theme or pattern to some of the optimizations that you're seeing in SMB and lower mid-market, whether it's departments or across use cases; is it internal, external?

Yes, I think it's a continuation of what Sukaran was addressing before, Josh. Smaller organizations where learning wasn't integrated into a more complex ecosystem and wasn't strategic are reducing seats or moving toward different methods of delivering content. Our focus has always been on organizations that use Docebo effectively. Our right to win is with organizations that execute a multi-use case strategy. We have great penetration with customers utilizing Docebo for at least 2, 3, and 4 use cases, demonstrating the best unit economics. Organizations with fewer than 1,000 employees are where we've observed the most significant patterns.

The majority of the pressure we're experiencing on seat optimizations is from internal use cases. This is related to companies optimizing their own headcounts as they navigate challenges.

Okay, great. And second question, just on the strong free cash flow margin, 18%. Anything one-time in the quarter? Should we expect free cash flow margin to track ahead of EBITDA margin for the rest of the year? How should we think about the sustainability of that free cash flow margin?

If you look at the EBITDA guidance we provided, at the high end of the range, 15.5%, generally, for trailing twelve-month basis, free cash flow would be 1% or 2% higher than our EBITDA. Regarding any specific items in Q1, not necessarily. There are always payments with some customers in the billing cycles, as we collected cash from annual cycles. On a trailing twelve-month basis, you can safely presume that our free cash flow will be 1% to 2% higher than what we guided for EBITDA.

Our next question comes from Robert Young with Canaccord Genuity.

Some of your past comments have suggested you want to operate the business at a Rule of 40 or better, with an emphasis on growth. So this annual guide for '24 suggests an emphasis more on EBITDA margins. I was curious if you could revisit that target. Then if you could also talk about your aspiration for annual growth over time. Some of the things you're calling out here seem temporary. So looking at a 3-year horizon, are you still targeting a 20% or higher growth profile? Or could you discuss your long-term aspirations?

Rob, I'll start with your specific question on margins, and then I'll have Alessio discuss the long-term strategy. First, the operating leverage delivered this quarter, which we’ll continue to provide part of my guidance, focuses on driving growth as our primary objective, with high-quality growth and best-in-class unit economics being underscored. The delivery of operating levers over the past few quarters shows that G&A provides ongoing benefits and will continue to do so. We will maintain investments in sales and marketing and R&D at levels you can expect; our aim remains to deliver growth at what we achieved this quarter at 23%. The natural operating leverage from G&A will likely allow the company to reach a balanced Rule of 40, getting closer to the 20% mark for EBITDA and free cash flow. I'll let Alessio address growth, but we are focused on having a balanced approach.

Rob, great question, and thanks, Sukaran. Our thesis of remaining extremely focused on growth doesn't change. Investments in sales and marketing, product development reflect that. There are significant opportunities because tougher market times offer chances to enhance execution further. We're focused on our existing accounts; generating pipeline within our base is key. Our long-term plans are supported by product investments. In 2024 alone, we will release multiple modules that will contribute to our future growth. Our thesis of growth is unchanged; we are committed to executing across the board on growth pipeline and product while improving our functions to get the best out of every unit of economics.

Okay, that's very helpful. Maybe if I could just dig into a bit on your answer, Alessio: what are elements that we might see excluded from the current guidance, like the multiple modules, product releases, pricing changes, large deals, FedRAMP? It would be helpful to pinpoint areas that could add upside to your guidance and your confidence in that process.

Sure. The way to perceive our guidance is the healthy pipeline building with large SIs. There are numerous large deals where we are positioned well. But we tend to be cautious in incorporating large deals into our growth estimates until we have clear execution visibility. Specifically for 2024, pricing changes won’t materially impact this year; they are more aimed toward 2025. Given the 3 to 6-month sales cycle, we can expect benefits only late in '24 or early '25. Large opportunities or government opportunities subject to FedRAMP certification are more likely to yield results in the 2025 timeframe. However, we anticipate achieving a 12- to 18-month cycle in reaccelerating growth initiatives, including product launches in Q3 and Q4, contributing positively to the '25 cycle.

Our next question comes from Richard Tse with National Bank.

It seems like the business is being sort of deemphasized a little bit on SMB, whether it's natural or intentional. How should we think about the mix of SMB to enterprise ARR as we look forward over the next, call it, 12 to 24 months?

Our focus has been on mid-enterprises and enterprises, meaning mid-market organizations above 1,000 employees. The environment indicates more pressure in the SMB segment is coinciding with our reduced focus. You can expect that the company will continue to perform better on the enterprise side, and deals above $100,000 will track along. In this quarter, almost 50% of our ARR came from our enterprise and government segments. Customers with $100,000 and above in ARR grew 36% year-over-year. Our goal is to sustain these trends as we steer the business in that direction.

With respect to government, you're already having a tremendous amount of momentum there in that business and it sort of continues on what you discussed at your conference last year. When you obtain that FedRAMP certification, should we expect a further acceleration or is that simply a continuation of your momentum, presuming you'll obtain it soon?

Our government business is exciting and promising. It's already been delivering significantly in quarter 1. Just as a reminder, it's a relatively new initiative for Docebo. We haven't been focused on government business for years. With that in mind, we look at the government opportunity in 2 tranches: state, local education or SLED, and federal. We currently have no deals in the federal sector due to FedRAMP certification, which we are pursuing. It's challenging to model projections before obtaining certification. We expect that once we obtain certification and start winning deals, an acceleration is conceivable, but we can’t forecast that without it. Nonetheless, the size of deals in SLED is also growing, with partnerships and distributors like Carahsoft yielding significant dividends in a short timeframe.

We've historically addressed this segment deliberately. We discussed it in late '22, early '23, emphasizing our investments. This segment provides resiliency during fluctuating macro environments, allowing us to pursue healthy growth while ensuring consistent revenue for extended periods.

Our next question comes from Daniel Chan with TD Cowen.

Just digging in on that FedRAMP, what's left to do to get that FedRAMP certification and any update on the timeline there?

There's a complex project involved. We've completed extensive internal work on controls and allocated resources effectively. Specifically, we are working with sponsors to achieve FedRAMP through a sponsor, which is our preferred path. There are options available without sponsors but are harder. In summary, our plan is progressing well, subject to more audits and identifying the agency that will invest resources with us to support this process. We are enthusiastic about our progress so far.

Sukaran, you spoke about the free cash flow margin moving up nicely. You also renewed the NCIB. Just wondering what your priorities are for capital deployment.

Alessio, please feel free to jump in. We are demonstrating solid EBITDA and free cash flow performance. Referring to our EBITDA guidance, the high end is 15.5%, indicating higher EBITDA exiting Q4 2024, trending closer to the 20% mark. We are generating a significant amount of free cash flow, allowing us to invest in areas of preference, whether internal innovation or build versus buy opportunities, which are strategically important. The renewal of our NCIB allows us the flexibility to utilize it if deemed necessary. However, investments in growth initiatives, both organic and inorganic, take precedence in our strategy.

No, I want to echo that. Thank you.

Our next question comes from Kevin Kumar with Goldman Sachs.

I wanted to ask about the enterprise customer that divested. Were they using Docebo for multiple use cases in terms of external and internal? And for clarification, how are they replacing that lost functionality?

Yes. The customer that downgraded was someone we onboarded about 9 years ago who had a complex set of use cases, both internal and external. This organization divested part of the business, and the acquirer of that technology, primarily in the content space, decided to leverage their existing technology for those specific use cases instead of Docebo. The remaining part that did not get divested continues working with Docebo. I’d like to emphasize a couple of things about this experience. Firstly, a customer of this scale shows we kept them satisfied for nearly 10 years, indicating our ability to handle complexity with extended enterprise and internal hybrid needs. Secondly, we've learned much from this experience and applied those insights with current customers. We wish they had stayed with us for another decade, but we acknowledge that a 9-year customer lifetime value is satisfactory. While they may find value in their technology, experience could lead them to re-evaluate.

Kevin, only thing I’ll add is that this customer remains with us outside of the divested portion, which is still significant. We continue working on expanding our capabilities with them, and we are grateful for their support over the years.

Understood. That's helpful. I wanted to ask about the cross-selling motion and how that's trending. Shape continues to see some functionality improvements. So, I'm curious how the messaging on that solution is resonating with customers as well.

I would address the question in two different ways. Our engine for growing our customer base in terms of pipeline is significant. As I mentioned previously, we are increasing our investments in account development and dedicating resources to prospecting our base to generate upsell and cross-sell pipeline. To achieve this, we need to address uncovered needs, leveraging existing new products and newer modules. As we release new offerings in the upcoming months, we are building the engine to support greater penetration of these products, including the community features. Regarding Shape, we're focused on the authoring component and integrating AI functionalities. It’s crucial for us and our customers, as there is considerable demand for it and for Advanced Insights, our upcoming analytics product. An area we haven't discussed yet is our work on extensions to differentiate Docebo further from LMS point solutions. Our focus on strengthening our existing base development engine aims to yield immediate results and long-term growth through product launches.

Our next question comes from Christian Sgro with Eight Capital.

I wanted to ask on the mix of business across new logo activity versus expansion activity. You're selling more across existing clients. Would you say in Q1, maybe some more expansion activity than normal in this environment? And I don't know how you think of your pipeline; could you comment on how that's balanced between new logos and predictable upsell and cross-sell?

Yes. Our expansion business and new business segmentation are focused similarly on mid-market and enterprise customers. From my previous remarks, mid-market large enterprise customers generally support clients with two, three, four or more use cases due to their size. From an internal perspective, that's the benchmark for supporting multiple departments. Our expansion, whether through cross-sales or upselling, takes place primarily with those types of customers, which enhances our stickiness. Furthermore, we aim to win across subsidiaries and unrelated departments to maximize our portfolio with multiple use cases, which is a clear focus for us. Overall, our strategy prioritizes mid-market and large enterprise clients for both expansion and new business growth.

For my second question, the services revenue tracked a bit higher than expected in the quarter. Wondering if there's anything worth noting and any change to the longer-term subscription services mix that you're targeting.

The way to think about services in Q1 is it reflects Q4 performance. We saw strong performance in Q4, leading to robust implementation revenue in Q1 2024. The higher-than-expected figures this quarter stemmed from our customers valuing additional support through our value-added services and white-glove services. We're assisting them beyond mere onboarding processes. We’re deeply involved in customizing their use case journeys, ensuring hands-on support. This resonates significantly with larger clients. As we look to Q2, I expect service revenue to stay in line or become slightly higher than last year.

Your next question comes from Kevin Krishnaratne with Scotiabank.

Just one from me. Reflecting on the logo additions from '21 into early '22, I assume many are coming up for renewal now. Can you confirm that? Were many of those logo additions SMB at that time? How should we approach thinking about the renewals from those strengths and logo additions from about 3 years ago?

Yes, Kevin. Significant portions of mid-market and enterprise utilize various use cases. Renewal impact in SMB reflects optimizations within internal use cases; mid-market and enterprise customers demonstrate broader retention and expansion, yielding more opportunities. Historically, I would estimate that 25% to 30% of our book of business remains SMB. As the enterprise segment expands, you can expect that proportion to decrease over time. We've also implemented targeted pricing strategies to simplify customer support while optimizing our operating structure to reduce expenses. Thus, we're confident in navigating potential challenges.

I know that your ARR in the quarter was 22% company-wide, but is there any way to assess the growth of enterprise ARR specifically?

I don’t have the specific number offhand, but I can tell you that 50% of the total revenue in this quarter came from the enterprise and government segments.

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

Thanks, everyone. Thanks for attending. Thanks for your very good questions. We are super excited going into the next quarter about our continued execution. We believe we have an amazing business and we are very focused on our long-term success. Thanks again, and see you next quarter.

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