Docebo Inc. Q2 FY2024 Earnings Call

Good morning, everyone, and welcome to the Docebo Q2 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, operator. Earlier this morning, Docebo issued its Q2 2024 results. The press release, which included a link to management's prepared remarks and our quarterly investor slide deck, was 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 this morning. 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 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 U.S. dollars. Now, I'd like to turn the call over to Docebo's Interim CEO, Alessio Artuffo, and our CFO, Sukaran Mehta. Operator, we're ready for the first question.

Our first question today comes from Suthan Sukumar with Stifel.

Congrats on a strong quarter. For my first question, I wanted to touch on the Deloitte partnership. This is obviously a major name in the government space, so great to see that name called out as a key partner here. Just going through your prepared remarks, it sounds like this might be more of a strategic relationship than expected, one that covers both government and commercial and reseller opportunities. Can you share a little more color on the current scope and potential of this partnership?

We are very excited about our channel partnership advancements and our relationship with strategic partners. You are right that Deloitte is a significant partnership and a leader in the industry. They have an outstanding human capital practice in North America, active in both government and commercial sectors. Notably, they employ over 15,000 individuals in their CTS practice within the government and public sector, which is impressive. We have been collaborating on this partnership for several months, and it has taken some time to develop. To clarify, CTS, or certified to sell, certifies Docebo as an asset of Deloitte, which they will white label and market through their commercial channels in both the government and commercial sectors. We anticipate this will significantly enhance our pipeline in both areas over time. We are also thrilled because Deloitte emphasizes process diligence. Their systematic approach to qualifying opportunities means we can focus our resources on deals that are already vetted, making our efforts more efficient. Lastly, I want to emphasize how enjoyable it has been to work with the leaders at Deloitte. They are exceptional HCM professionals, and we take great pride in collaborating with them to build a long-term, successful relationship.

For my second question, I wanted to touch on guidance. It's good to see the higher guidance this quarter. Can you help unpack some of the moving pieces that underline your strength? I'm kind of just curious if this is more a function of sustaining customer win activity going ahead or the larger size of customers, because I did notice an uptick there in ACV from large customers? Or are you seeing a lower impact from the SMB side?

Suthan, Sukaran here. Yes, the guidance we provided reflects our performance in the latter part of this year. We are observing relative strength, particularly in our enterprise segment and among some government customers that may contribute in the latter part of the year. I'm taking this into account in my guidance to highlight that strength in our segment. This aligns with our previous statements, as we've consistently focused on targeting larger markets. We anticipate some strength as we finish the year in that area, while on the SMB side, caution remains. We've discussed this, and those assumptions are largely in line with our expectations.

If I just squeeze in one last question. On Dayforce, it sounds like you guys have come to a positive resolution here. Can you speak to the current state of the relationship and the potential going forward?

Yes. So, in regards to Dayforce, as you can understand, in Q2, we settled the terms, which are confidentiality bound. But the legal action was resolved with Dayforce. It was initiated by Docebo when they first acquired Illumina, a small competitor in Europe. The dispute allows us to resolve and move forward and achieve three primary goals: one, protecting the IP of Docebo; number two, supporting our revenue base and continuity of our revenue base; and number three, preserving a good partnership and working relationship going forward. As you think about our channel partners, including Dayforce and others, it's not only MHR, EY, and Darwinbox. What Alessio just alluded to in response to the Deloitte partnership, we are now creating multiple channel partnerships that will provide us with a diversification and opportunities to grow these revenue streams. You can expect that our goal is to continue to grow these channel partners. With the addition of our new leader, Travis Burke, who has joined the company as EVP of Corp Dev and Partnerships, we are certainly focusing our investments to drive more and more channel partners in the future.

Our next question comes from the line of Ryan MacDonald with Needham.

Congrats on a great quarter. Maybe just to start with the topic of AI and generative AI. It was great to see in the prepared remarks sort of all of the new solutions that are available or becoming available in the short term here. But I was intrigued by the comments around AI monetization. Can you just talk about your conversations with customers and their appetite to pay for generative AI solutions with Docebo? How you might start thinking about pricing some of these new solutions like the AI authoring solution?

Ryan, Alessio speaking. We're very active, and we have been for years on the AI front as we have discussed many times. Shape was our, let's call it, first mover attempt at entering the Gen-AI content creation market. We did that well before the Gen-AI buzz of the past several months. In that time frame, since 2021, we sold Shape to hundreds of customers. With that alone, that's an advantage for us. We have learned a lot. We've taken many of those lessons and brought them back into the maturity model of our product on the AI side towards what we will be releasing shortly. We can think about that in the context of taking Shape and evolving it. It's making Shape even stronger thanks to the feedback that our customers gave us. We have high expectations for our AI offering in terms of success. We think about those expectations in two ways: one, increasing our right to win; and two, increasing our retention as customers increasingly request more advanced and sophisticated offering solutions. But it doesn't stop at AI offering in terms of monetization; that's just our upcoming first step. The next steps we are working on are many fronts. One we've spoken to and we're excited about is a solution that allows for virtual role play and virtual coaching. This solution is very much Gen-AI focused, and we're already at work on it. We have said that this will be an early new year development, and we expect it to be highly monetizable. You can expect an acceleration of additional AI capabilities and features in Docebo. In general, we think about AI features also strengthening our core platform. We've already introduced several things that are AI-based, and we'll do even more. But things like semantic search, recommending content, auto-tagging content, and a big topic, skills ontology management, meaning the ability to translate skills, taxonomies across varying systems, is a complex capability that we are going to offer and invest even further because the skills economy is here and it's a pervasive need that large organizations have. We are also looking at generating quizzes with AI and AI-generated voiceovers and translations. There's a lot that's coming up. I would wrap the topic of AI by saying that we are noting a trend where customers are becoming increasingly educated on this front. There’s now a greater demand for business benefits rather than flashy features. This makes me very happy, as the Docebo team is focused on building products to solve business problems. We will excite our customers with the products we are building currently.

I appreciate the insight and content and looking forward to more updates on AI at Inspire later this year. As a follow-up, I wanted to ask about your continued roll-out of the new pricing methodology and strategy to net new customers and existing upon renewal. I'm just curious to hear what feedback you've been getting from customers on the methodology thus far. Any pushback? I think there's a goal here to simplify the buying process and shorten the sales cycle. So to what extent are you seeing those benefits?

Yes. Sukaran here. I'll take that. The pricing changes we enacted went live at the start of Q2. What’s important to highlight is that historically, the company has looked at the pricing models on an a la carte basis. We’ve moved to what we call a core bundle that we sell to customers based on their actual use case. Enhancements they require are part of an add-on. What this has done is effectively moved from an a la carte model to driving value that benefits the customer. This has meant we are now discussing the problems we can solve with the customer and the value Docebo brings to them. The new pricing methodology has been quite successful, especially at the onset. It's only the first quarter, so we'll provide more insight as we progress through the year. I'm certainly seeing two things. One, as we position our capabilities to the customer, we’re discussing value and providing incremental capabilities as part of the package, making discussions more meaningful. Two, objection handling and overall deal discussions are accelerating deal cycles. On the net new business where this was initially rolled out, we've seen a positive impact in our approach to customers from a go-to-market perspective. As for the renewal book of business, this is a much longer exercise due to the various terms and conditions that must be considered based on previous agreements. However, we see an opportunity to move a substantial part of our business to the new pricing model, given the capabilities we've introduced and continue to roll out this year.

Our next question comes from the line of George Sutton with Craig-Hallum.

Nice results. I'm curious to discuss FedRAMP timing. You mentioned it's on track. Can you provide a best guess as to when that would go live? Could you also remind us of the potential opportunities that could expand from that?

Alessio speaking. Sure. FedRAMP and government, in general, are a very hot topic these days in Docebo. They are a big area of excitement for us. Our efforts in terms of expectations and timing are very consistent with our planning. Regarding an exact date, it's hard to predict because there are many external factors we can influence but not fully control. Our goal is to secure a sponsor and swiftly move to be granted an authority to operate, which opens the gates for FedRAMP opportunities in the market. Over the past few months, we have completed our systems and processes and controls' readiness, so we are ready for a sponsor to select us and proceed through the process together. The great news is we believe we’re having the right conversations with agencies that will yield the desired outcome. In terms of impact, in the past three years alone, over $200 million has been allocated to new LMS initiatives that we were able to identify. This does not include recurring data. That gives us a clear perspective on the massive opportunity, particularly because the competition in this space does not perform to the same standards as in the commercial space. Yes, during the quarter, we had the success with Deloitte, which will accelerate further our opportunities with them thanks to the CTS program and further evolution of that partnership. More importantly, Docebo has built a government team that is firing on all cylinders, not just in federal but also in state and local education, where we're winning business and expanding our pipeline. The percentage of revenue from this area relative to total revenue continues to grow. So yes, FedRAMP is a big priority for us. We are on it, but I want to remind you about the substantial opportunities available in the here and now.

Another thing that I found interesting is the communities module. It seems like a very practical way to expand more aggressively into the external market, which is crucial. Can you just give us a sense of what this is replacing or its significance as a new capability?

Communities were, from a thesis standpoint, designed to support our customer experience capabilities. If I look back at this quarter's new logos, as well as significant upsells, there's a lot of CX on my whiteboard. This reflects our strategy to become the platform that meets the needs of organizations on both the CX and EX sides. LMS primarily allows for learning delivery and dissemination. However, it doesn't necessarily support deep collaboration among audiences involved in learning processes. We've learned of various scenarios and use cases where a community technology is necessary for the learning experience. We have top-tier system integrators who implemented these use cases. Docebo itself has its own community for our customers. It was clear that this capability is a pervasive need, which led us to acquire PeerBoard, a small company, and build upon it. The market readiness and ability to market communities will start on August 15. We are very excited about this initiative. We're focusing on its success at launch and continuing to iterate to build features for our customers promptly. Beta programs have been running for these new modules, and early results have been encouraging, with many companies expressing intentions to buy during beta. While it’s early to give exact figures for this module, I hope you appreciate how it ties into our long-term strategy, further differentiating us and creating opportunities to increase our competitive edge and average ACV.

Our next question comes from the line of Josh Baer with Morgan Stanley.

Congrats on a great quarter. Looking at the growth pillars, you've got external and enterprise, government, broader distribution partnerships, and channels. I wonder where wall-to-wall LMS deployments fit in. Is that a focus area? Are you seeing traction in ripping and replacing legacy vendors for wall-to-wall LMS? Or is the focus more on land and expand, adding use cases, departments, and products over time?

Josh, our focus is really to position ourselves as the platform that suits the needs of large organizations across multiple use cases. An interesting data point is for every ten customers we have signed in the past quarter, eight of them have chosen Docebo for two or more use cases. The investment we're making is in order to grow our average customer profile, making Docebo more suitable for companies wanting to implement multiple use cases. In the last 24 months, our new logo ACV grew about 70% to this quarter’s $71,000. That’s consistent with our decision to focus on EX and CX use cases. We understand that maintaining our competitive advantage means growing our platform capabilities across both areas. Our job and focus are to continue enhancing our platform capabilities to keep that bar high, which is increasingly harder for competitors to reach.

I was hoping you could comment; I know enterprise and government are very strong. I'd like an update on what you're seeing in the SMB space, particularly regarding seat optimizations and whether there is any stabilization there.

Josh, Sukaran here. Yes, it remains consistent with what we saw last quarter - a cautious buyer. The macro environment is probably more sensitive to this type of customer. Our focus has been on moving upmarket, especially to mid to large enterprise customers and government. The pipeline is driving in the right direction, where we have a strong right to win and multiple use cases to support these organizations. It's important to note that every company is working to ensure they have enough pipeline coverage, which leads to a slightly higher pipeline. However, we're doing this efficiently, with system integrators and others driving pipeline mainly outside of the low-end market, which includes mid-market, large enterprise, and government. They also contribute advanced pipeline stages. Our focus remains on the quality of the revenue we bring in and hope to sustain it over an extended period.

Our next question comes from the line of Robert Young with Canaccord Genuity.

I wanted to get more context on the steady decline in customer additions per quarter. I know you addressed that around the shift towards mid-market and larger customers. For someone looking at these numbers, who might take away a more negative conclusion here, and given that ACV hasn't inflected up over the last couple of quarters, how do you look at this decline on a quarter-over-quarter basis?

Yes, Rob, that's a good question. For us as a business, as I mentioned in response to Josh earlier, we're focused on driving our business where we see the best unit economics and growth from an ACV perspective. Notably, ACV has gone up since last quarter from $59,000 to $71,000. If you look at Q4 as our strongest quarter, we are at the same level from Q2 of this year in terms of ACV. Adding fewer customers does not necessarily indicate negative growth. For example, growing our enterprise customer cohorts grew 30% year-over-year. A few large enterprise customers could potentially replace 10 to 20 SMB customers in one win. Therefore, customer adds will become less relevant than the overall revenue growth of the business moving forward.

You had some large deals in the quarter. In the press release, it looked like you had larger deals. Looking at your pipeline, do you see very large deals, like mega deals with companies like Amazon or Google, that are still pending? Are there any deals in the current quarter that would be close to that size? Can you break out the different cohorts of the size of customers in your pipeline?

Yes, Rob. As you think about the customer deals in the pipeline, these are large six-figure deals. We have been continuing to expand with existing customers, which is essential. For instance, Databricks continues to be a significant name, and we are expanding our relationship. It's not just about the initial sale; we are witnessing more expansion as our customers utilize our products and their end-users. For this quarter, we have several healthy six-figure deals, all close to seven figures. Regarding our pipeline, there are indeed large opportunities, which we refer to as strategic - meaning seven figures and above. Please note that while we have large opportunities in our pipeline, we will not forecast them until we are closer to the closure. There are several opportunities in our pipeline that we are excited about, both from government and enterprise customers.

Our next question comes from the line of Erin Kyle with CIBC.

It's Erin Kyle on for Stephanie Price. If I could ask a question on your capital allocation priorities when it comes to M&A versus share buybacks? How are you thinking about tuck-ins at this point? If you could discuss your appetite for M&A versus making organic growth investments?

Sure. Erin, look, we have not approached M&A with sizable acquisitions in the past. Our efforts have focused on continuing to build our platform from within and acquiring smaller entities like PeerBoard and Edugo, accelerating our strategic advancements. Where we sit today, we have both our capital structure and free cash flow generation to provide us great opportunities and flexibility. We have brought on board a senior corporate development professional, Travis Burke, to help define and execute our corporate plans. At this point, we are thinking deliberately about quality investments that fit our long-term vision for the business. The priority is creating value that benefits our customers and prospects and expanding our solution and market share. We are not keen to layer overlapping capabilities, as we've seen the negative reception from customers who have experienced that with other companies.

I can switch gears, Sukaran. On cost optimization, it looks like your G&A expense declined as a percentage of revenue by about 50 basis points this quarter. Is that the pace you should model for G&A optimization quarter-over-quarter? Or how should we think about that? Is there a long-term target you can point to?

Yes, that's a good question. I think you can think of G&A and its optimization as something that should ideally be modeled as flat or potentially declining on an absolute dollar basis over the next six to seven quarters. This reflects the operational leverage we expect as we continue to grow revenue. We are seeing significant efficiencies from our past major system investments across finance, HR, sales, and marketing. The G&A will continue to deliver operating leverage as we progress, especially with the Salesforce 2.0 rollout last year. I’ll provide more details at Inspire. We expect G&A to hold relatively flat as we expand our revenue and the operating leverage improves.

Our next question comes from the line of Daniel Chan with TD Cowen.

You're doing better than what we've seen from some HCM peers. Why do you think that is? Do you anticipate potentially higher unemployment to be a headwind to your momentum?

Daniel, thanks for the comment. It goes back to the strategy I've mentioned. We focus strategically on the wall-to-wall or end-to-end logic. We've reaped the benefits of growing within organizations and addressing the varied needs of customers, be they employees, partners, or other stakeholders. If I look at successful wins like Axon, that reflects a combined customer education and employee use case. If we consider U.S.A. Hockey, that is a partner-driven play. With Databricks, we see a massive customer experience play. Notably, 65% of our ARR is tied to CX and hybrid use cases. That means well over 50% of our business leverages this capability and is fundamental to the mission-critical elements of companies we work with. This, I believe, is a key ingredient for us to maintain an advantage over those HCM players who focus solely on the employee persona.

On the government timing, do you anticipate any impact from the coming U.S. elections on your government opportunities? Is there a risk for things to pause from here regarding FedRAMP certification or RFP perspective?

We don't believe so. As we discussed, nobody can predict exact timing. However, we believe our processes are independent of the election outcome and thus don’t anticipate a major impact.

Our next question comes from the line of Richard Tse with National Bank Financial.

As you continue this shift towards larger enterprise customers, can you help us understand the timing? How do you see your existing base of smaller customers tailing off? I imagine it's not immediate, but I'm trying to figure that out from a modeling perspective.

Yes, Richard. Sukaran here. I want to underscore that we will continue to play in the lower end of the market. This market will help us learn more about the competitive landscape and understand the next capabilities of Docebo, keeping us on our toes. Therefore, we will still play here while driving incremental growth and investments towards mid-market, large enterprise, and government. This allows us to ensure that unit economics remain our priority. While we will still improve features for the low-end market, our primary goal is to focus on the quality of revenue that can be sustained for extended periods. This doesn't imply a complete exit from the smaller customer base, as it’s also a factor for our competitive edge.

Regarding net new wins, can you help us understand which channels they are coming from or the mix of channels: partner versus direct or otherwise?

In terms of net new wins, we continue to source most of our business directly. We are excited by the trend in pipeline growth for the coming quarters, with an emphasis on mid to large enterprises. Importantly, system integrators (SIs) continue to make a significant contribution. As we mentioned, we are working with Deloitte and several SIs across multiple areas and geographies. Our enterprise posture is strengthened by collaborating with these integrators, not just in generating opportunities but also providing services. This partnership enhances our ability to address the complex needs of companies engaged in broader digital transformations.

Our next question comes from the line of Kevin Kumar with Goldman Sachs.

I wanted to ask another question regarding Dayforce. I'm trying to understand the impact to the model here. Can you share how large the partnership is today and your thoughts on the short and medium-term revenue contributions moving forward?

Kevin, Sukaran here. As indicated, we settled the legal action with Dayforce, but the terms are confidentiality bound. While we resolved the action for mitigated risks, our focus has remained on protecting the IP, continuing the revenue base, and preserving a strong partnership moving forward. Discussions that stem from these settlement terms will be embedded in 2024 guidance. As we unfold these, we’ll provide more guidance in the coming months. Our focus on creating channel partners is crucial, including EY, Darwinbox, MHR, and now Deloitte, as we foster diversification in our revenue streams.

Our next question comes from the line of Martin Toner with ATB.

Can you talk about your incremental ARR number in the quarter? Can you also discuss what your pipelines look like? Has it improved this quarter, and what are your thoughts looking forward?

Sure. Martin, Alessio speaking. Pipeline trends continue to grow positively. Last year's operational enhancements to our demand and business development engine have started manifesting as expected in qualitative enterprise pipelines heading into H2 this year. I would emphasize a few key themes: firstly, we’ve always been strong in software and IT verticals. Cybersecurity has become particularly robust, with two worldwide leaders tagged this quarter. Secondly, post-COVID, there’s been a resurgence in onshoring activities, offering us great opportunities to support reskilling and upskilling efforts. Furthermore, we've noticed an increasing interest from customers in implementing a go-to-market revenue strategy. Our e-commerce capabilities have been essential, with hundreds of millions in transactions happening through Docebo. I want to stress that Docebo is not just a training platform but also acts as a monetization platform. Finally, I’d like to highlight a focus on specialization within certain targeted segments; for instance, financial services have required modernization efforts that we’ve been investing in. Government contributions to our pipeline are also on track, and we expect further growth as we expand it.

We have no further questions at this time. I will now turn the call back to Docebo's CEO, Alessio Artuffo, for any closing remarks.

Well, we thank you for being with us today in yet another earnings call. We always love to share our story and keep you posted with our success in building the best leading company in the world. I want to remind you that we have our customer conference set for September 9 through 11 in Dallas, U.S. We warmly await the analyst community to join us there and learn more about what we're up to. We will be unveiling some interesting initiatives that Docebo is undertaking for the future, and we really look forward to seeing you there. Thank you for your participation today.

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