Earnings Call Transcript - DCBO Q2 2021

Operator, Operator

Good morning, everyone, and welcome to the Docebo, Inc. Second Quarter 2021 Earnings Call. All participants are currently in a listen-only mode. After the presentation, we will open the lines for a Q&A session for analysts. I would now like to turn the call over to Docebo's Investor Relations, Dennis Fong. Please go ahead, Dennis.

Dennis Fong, Investor Relations

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 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 that these measures provide useful supplemental information about our financial performance, they are not recognized measures and do not have standardized meanings under IFRS. Please see our MD&A for additional information regarding our non-IFRS financial measures, including for reconciliations to the nearest IFRS measures. Please note that unless otherwise stated, all references to any financial figures are in U.S. dollars. Now I would like to turn the call over to Docebo's CEO, Claudio Erba.

Claudio Erba, CEO

Good morning, everyone, and thank you for joining us on our second quarter 2021 earnings call. With me today is Ian Kidson, our Chief Financial Officer, and Alessio Artuffo, our President and Chief Revenue Officer. This strong momentum that we demonstrated in the first quarter continued through the second quarter, and in fact, began to accelerate, resulting in our second consecutive quarter of record revenue and ARR growth. For the last two years, we have consistently stated that enterprises are investing in the Docebo platform for strategic reasons and not out of short-term requirements that will reverse once we recover from the pandemic. The truth in these statements has been clearly demonstrated in our performance over the past six months. Further, we continue to believe the long-term adoption trend for digital learning tools like ours is accelerating, and we expect these will contribute to our future success. Unlike a traditional LMS, which is specifically designed for use in an HR environment for employees, soft skills training, and compliance, our customers are using Docebo as a productivity enablement tool across a wide range of use cases, from internal upskilling to sales enablement, and importantly, as a tool to strengthen relationships with customers and partners through online training. This has been a fundamental differentiator for us that also significantly expands our total addressable market and potential ACV. The rate of our customer growth and size of our ACV continue to increase as more and more organizations became aware that platforms like Docebo exist. In the second quarter, we added 152 net new customers, including some great new logos that exemplify the traction we're getting across many industry verticals. One great example is RE/MAX, the leading global real estate franchisor. RE/MAX selected Docebo as their learning solution to grow user adoption, address user management needs, and create a custom dashboard for their use cases. With Docebo, RE/MAX will be able to service their rapidly growing user base and create impactful learner experiences. We're also seeing business pick up in industry verticals that are recovering from the pandemic and adjusting to the new normal, sectors like retail, travel, and manufacturing. In the second quarter, Lululemon, the world's leading athletic apparel retailer, selected Docebo to provide a comprehensive learning solution to train and engage their employees around the globe. We also added three new logos in the travel industry, including the Red Roof Inn. Red Roof is an award-winning leader in the lodging industry, with more than 650 properties in the U.S., Brazil, and Japan. Red Roof selected Docebo as their learning suite to enhance the entire customer experience. With a simple sign-on process, organization of content, mobile accessibility, automated reporting, and more, Docebo allows Red Roof to allocate more of its resources to the development and delivery of content instead of spending excessive hours managing the platform. We added JELD-WEN, a leading global manufacturer of high-performance interior and exterior building products. JELD-WEN employs approximately 21,000 people and has manufacturing and distribution in showroom locations across the U.S. and 24 countries. They selected Docebo to consolidate their learning systems to deliver worldwide learning, instruction-led training, and a combination of tools and microlearning for ongoing professional development. Most of you will recall that last quarter we talked about the launch of Docebo Learning Suite, which was an important milestone for us. At the end of the first quarter, we started selling Docebo Learning Impact, and we launched Docebo Shape, our AI-powered content offering tool as a free trial. Shape is now transitioning out of the trial phase, and we're selling it to customers. In addition, Docebo Analytics, our most recent product launch, will also begin to sell by the end of the third quarter. We're still very early with the launch of the Learning Suite, but I am happy to share that we have already passed threshold licenses for each of Docebo's products, even ahead of some of the official releases. Although Learning Impact is not expected to be a material contributor for several quarters, we are pleased with the traction so far, and we were able to sign several new customers. One of those new customers was an upsell to SkinCeuticals, who has been a Docebo customer since 2018. After finding great success launching their training platform to their internal team, clients, and global partner distribution network, SkinCeuticals will be expanding their agreement with Docebo to include Learning Impact. Our new learning suite products are designed to be both integrated with our LMS or sold as a standalone product. In the second quarter, TotalEnergies, a leading French multinational integrated oil, gas, and new energies company, selected Docebo to help measure and improve the effectiveness of their learning programs with Docebo Learning Impact. We are happy to have one of the largest companies in Europe select one of our new learning suite products in a use case working alongside another LMS. It also serves as a testament to our expanding French operations. With the development of those new products, we are also investing to advance the customer experience. In the second quarter, we were pleased to launch our new Docebo Community. Docebo Community enables customers to connect with other customers, partners, and Docebo experts to share best practices, get answers, and find inspiration to get the most out of their Docebo experience, all while leveling up their skills and opening career options. It allows our product team to prioritize requests based on customer feedback. And this is a centralized place for our growing base of customers around the world to network, collaborate, and grow. The growth of our partner business is also beginning to accelerate as more partners come on board, as the potential market is broader than just the HCM world. Since we last spoke in May, we have added four OEM partnerships that demonstrate the breadth of opportunity we have to expand our geographic reach and that there are different pockets of the enterprise market. We are working with a leading multinational IT consulting service firm to develop an agent service based under Docebo LMS. This will be offered to their global customer base. We signed a partnership agreement with KOLABORI to develop and offer a unique software and service solution for learning technology in Brazil and South America. Brazil is by far the largest market in South America for corporate training, and KOLABORI's local and strategic technology expertise makes them an equal partner to continue our global expansion in what is a new and growing market for us. We signed an OEM agreement with Workspan, a business management platform that helps technology companies manage and maximize the value of their partner ecosystem. These new partners embed Docebo's market-leading learning management services, not only in Workspan, allowing enterprise organizations to seamlessly add new partner programs to the thousands of partners in the Workspan network. We also signed an OEM partnership agreement with OrchestrateHR, an HR technology and consulting company with over 5,000 customers and offices in 13 states. We now have more OEMs that are outside of the HR space than OEMs that are in it, proving that the opportunity to embed learning technology in the enterprise environment is universal. Lastly, I want to speak about the investment we are making to position Docebo for our next phase of growth. Today, we have over 630 people in our organization, and since the third quarter of last year, we have increased our headcount by more than 50%. This growth has been critical to accommodate the increasing revenue we have experienced over the past year and the growth we expect over the next 18 months. Managing such rapid organic change is not easy, but it is something we continue to get better at, and we think this is being reflected by the consistency of our results. Hiring great and talented people is paramount to our success. And we are adding transformational leaders to help set the foundation for our next phase of growth. Last week, we were pleased to announce the appointment of Rudy Valdez as our new COO. Rudy spent the past 16 years at Amazon, AWS, where he helped establish and build their phased business development function at AWS, working closely with their largest cloud customers through the transformational growth years. More recently, he led the development of the AWS training and certification programs, helping to educate millions of customers in parallel in the AWS ecosystem on cloud technologies and approaches. With Rudy's appointment, we will be able to move Martino Bagini into the newly appointed role of Chief Corporate Development Officer. Before joining Docebo, Martino had a background in venture capital, and this will allow us to put greater emphasis and focus on advancing and executing our M&A strategy as another growth factor for Docebo. Before I pass the call to Ian, I want to touch on a topic that is very important to me and to our board, and that is ESG. We understand our responsibility as a global technology company to make a positive impact on our employees and customers that we touch. We have a number of programs in place, for example, two of our six offices have transitioned to 100% renewable energy. We work and support a number of organizations that promote diversity and inclusion to reduce the gender gap in technology. This year, before Congress announced its historic discussion, Docebo made June 19th an official holiday and encouraged our employees to take the day to learn more about this historic milestone and to reflect on the past so we can build a better future for tomorrow. We care about our external impact, but it is the health and well-being of our employees that are critical to our success. We have a family-focused culture and want to make Docebo a destination of choice for employees and career growth. Many of our HR policies extend well beyond statutory requirements. For example, we provide supplemental benefits and pay for U.S. employees on maternity leave at 100% of gross wages for up to 20 weeks and for paternity leave at 85% of gross wages for up to 12 weeks. We understand that our stakeholders, including our investors, care about the impact we have on our employees, customers, and the rest of the world. This year, under the direction of the board, we have engaged with an experienced consultant to help advise and embed best ESG practices into our business. And we look forward to more formally reporting to you on our ESG achievements in the future. With that, I will now pass the call to Ian to speak to the financials.

Ian Kidson, CFO

Thank you, Claudio, and good morning, everyone. For those interested in a detailed breakdown of our financial results for the three and six months ended June 30, 2021, 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. The slide deck accompanying this earnings call has been made available on our Investor Relations website this morning. For those who want to follow along, I'm going to start my remarks on Slide 3. The strong momentum that we demonstrated in the first quarter carried over nicely into our second quarter, with total revenue for the period growing to $25.6 million, an increase of 76% from the prior year. Subscription revenues also grew 76% from the prior year and were $23.6 million, representing 92% of total revenue for the quarter. Professional Services revenue in the second quarter was $2 million, even an increase of 75% from the prior year period. As we noted in our press release, this quarter's results included $1.1 million of revenue resulting from a one-time catch-up related to a customer contract signed in 2020. IFRS accounting rules did not allow us to begin formally recognizing this revenue until this quarter. This contract was an unusual situation that we currently do not have with any other such agreements. Excluding this catch-up amount, our revenue growth was 69% over the prior year, and we are very pleased with this rate of increase. Furthermore, as we look forward, all signs support our confidence in continued momentum over the foreseeable future. The acceleration in our business becomes apparent when you consider the net growth in our quarterly ARRs, as shown on Slide 4. We achieved $93.4 million in ARR at the end of the second quarter, an increase of 64% over the $57 million in ARR at the end of the second quarter of 2020. When compared to the first quarter of 2021, we added $10 million in revenue in ARR in the most recent quarter, an increase from the $9.4 million in ARR that we added in the first quarter. Importantly, there were no large deals driving our ARR growth this quarter, and it supports our contention over the past year that there is a growing awareness of the applicability of the Docebo platform to both internal and external departmental learning objectives. We had 2,485 customers at the end of the second quarter, and their company-wide average contract value or ACV increased to approximately $38,000, up 27% from $30,000 at the end of the second quarter of 2020. The ACV from our new customers added this quarter was approximately $46,000, and nearly 78% of our new logo and upsell contracts are now multiyear deals. Moving to Slide 5, you can see that our gross profit margin for the second quarter was at 80% of sales, flat compared to the prior year period and a slight decline from 82% for the first quarter. The decline in gross profit margin was due to the significant investments we have continued to make in staffing to support the increased volume and complexity for the implementation team as we adapt to become a multi-product vendor as well as costs related to new seller arrangements. I remain comfortable with our longer-term gross margin targets being within the 80% to 85% range, and we expect to get back to those levels over the next two to three quarters. On Slide 6, you can see a summary of our operating expense lines. Total operating expenses for the second quarter increased to $26.8 million as compared to $14.9 million for the prior year. Included in the $26.8 million of operating expenses is a foreign exchange loss of $3.2 million that relates primarily to the cash on our balance sheet and is therefore, for the most part, unrealized. Operating costs excluding this foreign exchange loss were $23.6 million, slightly higher than the $21.5 million that we reported on a comparable basis in the first quarter of this year. G&A expense was $6.9 million, declining as a percentage of revenue from $34.2 million in the first quarter to 27% for the second quarter as we resumed being able to realize benefits of increased scale on the revenue side. When compared to the first quarter, sales and marketing expense declined as a percentage of revenue to 40.8% as compared to 41.9% for the first quarter. R&D expense increased slightly in the second quarter as a percentage of revenue to 20.4% as compared to 19.1% for the first quarter. Our medium-term expectations for sales and marketing expense as a percentage of total revenue remain unchanged at 35% to 40%. And our R&D expenditures continue to remain near our expectations of 20% of revenue. We reported an adjusted EBITDA loss of $2 million for the second quarter compared to a loss of $0.9 million in the prior-year period. We also reported a net loss of $7.2 million for the second quarter compared to a $3.5 million net loss for the prior-year period. As already noted, please recall that the net loss for the second quarter does reflect the $3.2 million foreign exchange loss. Finally, free cash flow margin was negative $0.8 million in the second quarter. Our balance sheet remains healthy with net cash and cash equivalents of $216 million. Going forward, our primary focus will be to continue to drive our growth, but we're finally getting to the point where we expect to begin to realize greater benefits from our scale. We will likely take a breather in our expansion in the third quarter as we start thinking about our hiring plans for next year, and our hiring will resume later in the fourth quarter as we enter 2022. At the same time, I want to reiterate that I don't see anything in the near to medium term that would suggest the strong momentum we've been seeing in our sales pipeline and reflected in our ARR performance has materially changed. We have multiple growth levers that are all tracking well, including new logo sales, upsells and cross-sells, and OEM partnership revenue. In the coming quarters, likely Q4 this year or the first quarter next, we expect to have more specific information to share on the progress of our new products, and we will look forward to doing so. With that, I'll turn it over to the operator now to take some questions from the analysts.

Operator, Operator

Thank you. We will now begin the question-and-answer session. Your first question comes from Robert Young with Canaccord. Please go ahead.

Robert Young, Analyst

Hi, good morning. I wanted to discuss your statement about not having any large deals this quarter. It's a singles and doubles quarter, but you've announced several notable clients like Lululemon and RE/MAX. Can you provide more insight into what you mean by a large deal? Understanding this is important for assessing the pace of incremental ARR you're adding each quarter and the impact of these large deals. Any additional details would be appreciated.

Claudio Erba, CEO

Yes. It's Claudio Erba. Can you hear me, Claudio speaking? Robert, can you hear me?

Robert Young, Analyst

Yes.

Claudio Erba, CEO

Yes. Great to meet again. So this quarter, in the quarter, which I like to define very healthy because there are not outliers; it's all logos. The logos, not in terms of the size, it's our sweet spot. And it's proving that we are continuously growing organically and our efforts consistently. From a quarter framework perspective, I'll leave that to Ian to detail the size of the logos and the deal section.

Ian Kidson, CFO

When I consider an outlier, I am referring to a contract worth over $1 million. In this quarter, we did not secure any contract exceeding $0.5 million. If I’m not mistaken, Alessio, we had about four or five contracts that ranged in the hundreds of thousands of dollars, which as Claudio mentioned, is right in our target range. These are the types of transactions that we truly prefer.

Robert Young, Analyst

That's really helpful. Do any large deals mentioned in the release extend into Q3, similar to RE/MAX with 80,000 users that seems like a larger deal? Does anything fall out of the quarter?

Ian Kidson, CFO

I'm not sure. When you mention fall.

Robert Young, Analyst

Would anything be driving ARR in Q3 instead of Q2?

Ian Kidson, CFO

No. No. Any transactions that we've talked about have been signed in Q3.

Robert Young, Analyst

Okay. And maybe another point.

Ian Kidson, CFO

Sorry. Sorry. Sorry. Q2, Q2.

Robert Young, Analyst

Correct. And so do you expect larger deals in the back half of the year as Q2 just a slower quarter for large deals?

Ian Kidson, CFO

We are always pursuing large transactions, but those can take anywhere from six months to a couple of years to finalize. Therefore, when assessing the health of our business, we pay more attention to what I would describe as smaller transactions, which are still quite important. I'll hand it over to Alessio to provide more specific details.

Alessio Artuffo, President & CRO

I want to address a point, Rob, regarding this quarter being considered low. For me, this quarter is actually quite healthy. While people often prefer large deals, I believe that having ten contracts totaling $1 million is more indicative of the effectiveness of our sales and marketing efforts compared to just one $1 million contract. You can't rely on outliers to predict growth; it's important to base forecasts on consistent performance. So, I'm quite pleased that you're measuring our performance and defining this quarter as a low one based on those metrics.

Robert Young, Analyst

Okay. That's all great figures.

Ian Kidson, CFO

Hey Rob, and just to seal this for a second, we're actually really happy about the numbers at each and every segment level. We spoke about this multiple times. We are looking at the market for our smaller and medium-sized customers, and a medium and large sized customers, and our large customers. We're not in the business, of necessarily doing the big scale upfront. We're in the business of long-term value. We're in the business of customer experience. We're in the business of building a long-term relationship with customers and upselling them. So we're totally happy starting with a few hundred thousand dollars and growing relationships later on in the millions, rather than starting with, say the big bang and having to realize value immediately, which is harder down over time.

Robert Young, Analyst

Okay. Thanks. That's all really good. Maybe the second question would just be related to the expansion components. It sounds like that's more balanced, last quarter the expansion of existing customers seemed to be driven by one large deal with the QSR. And so is that getting more balanced? Is there a positive trend to highlight there around growth with existing customers? I'll pass the line.

Claudio Erba, CEO

It is balanced, and it is according to design and according to plan, the introduction of new products is supporting our strategy, but really our philosophy about creating long-lasting value for customers that we started selling Docebo Learning Impact, and we're excited about the results we're getting out of it. It's very, very, very early days for shipping analytics, but the signals in the early-stage pipeline are all good and positive for sure. There's a lot of work to do on structuring our sales machine and that was very focused on LMS only to now selling the learning suite. I will not deny to you. There is the change management to do and this takes time, but we're really excited about what's ahead.

Operator, Operator

Your next question comes from Stephanie Price with CIBC. Please go ahead.

Stephanie Price, Analyst

Hi, good morning. I want to dig into the OEM strategy a little bit more here. Just curious if you can give us an update on the MHR OEM agreements and whether you're seeing a similar ramp-up to what you saw with Ceridian once it was implemented.

Claudio Erba, CEO

Hi, Stephanie, and good morning back to you. The question about MHR and Ceridian, these partners are the ones that have also been for the longest time active. For sure Ceridian for a way longer than MHR. Those two relationships continue to be very strong. The results and the performance are according to the plan established with the firms. We expect our integration capabilities with their products to continue to get better and expand. As a result, we're going to create incremental value at an accelerated pace. At this point, Ceridian and MHR constitute the larger majority of our OEM revenue. But as you have seen in the press release, we are quite consistently adding new partners in different categories, not only HR like Ceridian and MHR and Orchestrate, and we believe that that a mix of strategies in which we add good shape productivity enablement technology to companies like Workspan and others we've also mentioned the silent lobe. I'm sure you've seen all the relevant systems integrators that will be using Docebo for a managed services practice. We believe that the channel business of OEM is really powerful for us. I hope that answers your question, Stephanie.

Stephanie Price, Analyst

It does. Thank you. And maybe just a follow-up to that, just curious around what areas outside of the HR space that you're kind of focused on. It sounds like the systems integrators and IT services are focused, how do you kind of see that strategy rolling out going forward?

Claudio Erba, CEO

Yes, yes. We're working on this actively. We actually have a vision where we view the OEM business really in terms of territories, industries, and their products. And we can approach all these markets with a different value proposition depending on what these vendors need to accomplish in their respective industry. With that in mind, we've seen increased interest in the SI space. We've seen a lot of interest in other markets that are not HR, like risk. For example, we've signed Vartopia and Workspan, which are in the business of helping companies leverage partners. We really believe that the future is bright there. I think as we mature those industries and categories in the future, we'll be able to be even more, if you will, clear as to which segments and industries we're seeing more traction.

Operator, Operator

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

Richard Tse, Analyst

Yes. Thank you. So you had some really impressive wins here. Just wondering if you could provide us a bit of color in terms of these wins. Are they competitive displacements or something else here?

Claudio Erba, CEO

Alessio, are you going to take it?

Alessio Artuffo, President & CRO

Sure, sure. And thank you for the question on displacement replacement. Look, we've said in the past that essentially when we win business from somebody, there are really three categories that we see are more prevalent. The first one is replacement from Tier 1; I would say light point LMS solutions. These are those vendors that perhaps are in the earlier stages of experience of the customer with the learning suite or learning platform. They usually are outgrown within a certain amount of time. The second category, and we see this category more in smaller and mid-size companies, is homegrown solutions. Oftentimes we displace customization on top of open-source software or SharePoint or other artifacts that used to facilitate learning. This is true in certain industries and generally broadly speaking in the mid-market. In the enterprise market, I mean, we're displacing enterprise competitors. That's the reality. Customers that we speak to are looking for better customer experience; they're looking for better software for software that is more flexible. They're looking for a focus on learning, and we're winning business from companies that perhaps have a focus that is not just on learning, but more on talent, and these enterprises see value in Docebo.

Richard Tse, Analyst

Okay. Super helpful. Thanks. And then in terms of the partnerships, there's a notable increase in partnerships across the board, SI and OEMs. So given that you've had the growth rate you've had up until now without this meaningful scale up in partnerships, is it fair to say that as we look out maybe 12 months from now, we're actually going to see a step function up in terms of the accelerating growth profile because of those partnerships?

Claudio Erba, CEO

So Claudio speaking. I think, I mean, it's a correct statement saying that the more partners we onboard at Docebo, the more partners will bring value in the future. I don't know when this will happen. We have some benchmarks with HR with Ceridian that can happen in nine months or I don't know 15 months. Another point is that we hope that every partner will be extremely successful, but based on the market size of different sectors and on the efficiency of the partnership, some partners will perform better than others. So that said, what makes me happy is the absolute number of partners. If you remember, in 2019, 2020, in our first earnings call, we had one partner only. And now we have like, more than five, six, seven, and we are continuously feeding the pipeline of new partners. We are also evolving the technology to support new partners because not every partner implements the solution for the same use case or in the same way. So when I start speaking about the product, I get nervous, so sorry, and I hope that will make you happier despite the answer.

Operator, Operator

Your next question comes from Daniel Chan with TD. Please go ahead.

Daniel Chan, Analyst

Hi, good morning. Congrats on the strong quarter. I want to dig into the channel partner channel as well. You've got a number of partners now to help you address different global opportunities. Ceridian just closed their acquisition of Ascender in March, which really builds out their Asia-Pac presence. So can you give us an update on what your global expansion strategy is? And whether you're going to be leaning on some of these partners to help you get into some of these geographies you're not currently in? And then maybe in addition to that, is your product ready for these new markets? Or is there still work to be done?

Claudio Erba, CEO

There are significant challenges to consider. We recognize some easier opportunities based on geography. We are establishing an office in Germany, which will be a direct presence for us. Germany is quite familiar to me, and similarly, Italians may feel that Italy is close to them. We also see potential in the Nordic countries, as well as Australia and New Zealand. These markets align well with our marketing and communication style, making it easier for them to engage with the way Western companies operate. If we need to prioritize, Australia, New Zealand, Germany, and the Nordics will be our main focuses. Expanding into other areas of Asia-Pacific should also be relatively straightforward from Australia and New Zealand. However, penetrating these markets amidst COVID involves significant preparation, including numerous deals to establish an office and extensive local networking. This is where our value-added reseller strategy proves effective, particularly through our partners like Ceridian in specific countries. Furthermore, we can support regions beyond those I previously mentioned, especially since Docebo has successfully accommodated 32 languages for around a decade, including right-to-left text and non-Western characters like Arabic and Chinese. Our collaboration with AWS enables us to operate similarly to a local vendor. We are also prepared for the implications of Brexit, having established data centers in Ireland and Canada. Thanks to our relationship with AWS and our technological capabilities, we can address data compliance effectively, which is often overlooked. For instance, the data center in the UK adheres to UK privacy data regulations. We are ready to move forward in a practical manner and are focusing on which countries offer the best potential for success based on our data capabilities and ability to communicate.

Daniel Chan, Analyst

That's very helpful. Thank you. I also want to dig in on the ACV growth. I mean, that was a really good metric too. Is that mostly being driven by new modules, more seats, or a combination of the two? Thank you.

Ian Kidson, CFO

It's. Sorry, Alessio, do you want to take that?

Alessio Artuffo, President & CRO

It's not solely driven by more seats. Instead, it's a combination of larger use cases leading to increased annual recurring revenue embedded in the contracts. Currently, I would say that's about 90% of it. Looking ahead, we hope that upsells will contribute a larger share of that. What we observed this quarter certainly supports that perspective.

Operator, Operator

Your next question comes from Phillip Leytes with Berenberg Capital. Please go ahead.

Phillip Leytes, Analyst

Hey guys, thanks for taking my questions. Just based on your prepared remarks, it sounds like you hinted that M&A would become a bigger part of your strategy for the company going forward. Can you give us some color on maybe what kind of M&A targets or assets would be of interest?

Claudio Erba, CEO

Yes, this is Claudio. My focus is on avoiding mistakes. With Bagini Martino, who previously served as COO and is now in Corporate Development, I feel encouraged that he can now dedicate his full attention to exploring new opportunities. We have a more tailored approach to evaluate every opportunity that comes our way or that we choose to pursue. There are various options available, including acquiring businesses in adjacent markets, partnering with local vendors, and expanding into specific regions. We will carefully assess all possibilities without rushing to invest our capital inefficiently. Our capital will only be deployed when we are confident of significant potential returns and benefits for shareholders. What boosts my confidence is our success in exceeding expectations even before integrating Matrix. I've witnessed my teams—HR, finance, sales, professional services, IT, and operations—collaborate effectively to integrate another company into our ecosystem, which reflects our people, culture, and products. This gives me hope that our next acquisition will be as successful as the first. However, we are not in a rush and are committed to avoiding mistakes.

Operator, Operator

Your next question comes from Nick Agostino with Laurentian Bank. Please go ahead.

Salman Zia Rana, Analyst

Yes. Good morning, and good afternoon, Claudio. This is Salman on behalf of Nick Agostino. So a few questions from my end. First of all, it's about the competitive landscape. Have you seen any changes lately because some competitors seem to be returning to the public markets again, citing high growth in the learning space, e-learning space? Does that signify strong prospects and thereby strong competition ahead?

Claudio Erba, CEO

So the markets are still fragmented and these are not tied only to the learning management system space. In training, it can happen everywhere now. Most of the training that is becoming easier relates to performance enablement and experience and it's coming from other sources. For the standard competitor, because every company at the end of the day needs a learning ecosystem inside their IT ecosystem. It's made by the same competitors that we usually disclose every quarter. The big news was Cornerstone that was taking private, and I do like a couple of companies out there, but these are the old competitors that we say.

Salman Zia Rana, Analyst

Okay, that's very helpful. And my second question is about your scaling comments. You already mentioned that the company continues to scale up and increase headcount. Are you facing any headwinds or issues with finding talent, especially tech talent, where there has been a tech crunch lately? Do you see this as a 30-year growth?

Claudio Erba, CEO

Foreign competition in technology is intense. Every organization is in need of software engineers and sales directors, and nearly every position is experiencing a shortage of qualified candidates. When we consider our employees, we do notice some turnover, but it's not alarming. The turnover tends to occur in departments that typically experience high attrition. The competition for talent is definitely increasing, particularly as geographical boundaries no longer restrict hiring. You can recruit engineers from anywhere, be it Iceland, India, or Switzerland. The ability to work remotely has become a significant advantage in attracting talent. As a result, other companies are also likely to experience heightened competition for skilled individuals.

Operator, Operator

Your next question comes from Paul Steep with Scotiabank. Please go ahead.

Paul Steep, Analyst

Great. Good morning. I'm just going to toss them both in one here. The first one would be just can you talk a little bit about the go-to-market for upsell or how you've organized the sales force? More importantly, how do we think about the timing of the ramp in revenues, which obviously end up preferred to in the Q4/Q1 update, but just how meaningful do you think that is in terms of contribution coming on? Second, quick follow-up would be on extranet type deals for Ian. Can you just remind us on the scaling of those versus typical deals, but how do we think about revenue recognition and also the rollout of those? Thanks, guys.

Claudio Erba, CEO

Hello, we are speaking about how to scale your sales machine. Maybe it's better to listen from the guru.

Ian Kidson, CFO

Sorry, guys. I was muted. I'm sorry, guys. I was talking, and nobody was paying attention to me; now I realize why. All right. So can you guys hear me okay? Yes. So the question on the organization of the account management team and lead and expense strategy. First, I'd say our goal is to create demand with similar approaches both in the base and in the Greenfield. When we think of the base, we think of the base in a couple of different ways. For one, we think of a customer and an organization having multiple buyers within the same organization. Practically, what that means is that whenever we sign a company, say, Lululemon, which we announced this quarter, we understand that in that same company there are multiple stakeholders that are receptive to conversations for Docebo products and services. We can categorize that as upsell activity, which is tasked and assigned and owned by the account manager in a proper account planning exercise that we do. Furthermore, there's an additional layer. We look at every organization in a 360 way, we mapped out not only the internal individuals that may have a need for learning we're looking at the 360 structure of the company in terms of sister companies and affiliated partners. We create a wider net which we approach with digital marketing, account-based marketing, and targeted strategic marketing with our account developing team. That would not be possible or better stated we would not have positive results if we didn't have a strong focus on the customer experience. So we have a CX team that is in charge of the adoption side, making sure that the actual customer is using the software, is being helped to go live, and not just configured, but we go from soft launch to go live and from go live to real adoption. When you do that and you have good account planning strategies, good business development strategies, and good demand generation strategies in our base, our addressable market becomes huge. Look, we're relatively new to this engine. It's not hyper mature. We're working very hard to make it better and better. I think all the efforts we're making will pay dividends in the quarters to come. Paul, does that answer the first part of the question?

Paul Steep, Analyst

Yes, that's great. Thank you.

Ian Kidson, CFO

And, Paul, the second part, if you could restate it, because I just wasn't positive what you meant by the extranet revenue?

Paul Steep, Analyst

I guess I'm just referring to organizations, while they might be employees; a number of them are franchise-type models, like a large QSR or real estate type organization where you presumably have to get the franchise owner on board? Or should we think of those wins as embedded in the core franchise fees? Thus you don't have to go and win in hand-to-hand combat for each deal. Thank you.

Ian Kidson, CFO

Right. So specifically with respect to that type of transaction, correct me if I'm wrong, Alessio, but I am all of the ones that we have signed along that line have been fixed up front for an absolute dollar amount. So it's not on us to go win the franchise. It's the franchise or deals with their franchisees.

Alessio Artuffo, President & CRO

Yes. We implement the framework agreement, which then enables holdings to do deals with the franchisees separately. We don't control that.

Ian Kidson, CFO

Right. But there is an element to your question, Paul, that I think is really good and important. When we think about the OEM side, we have announced some significant OEM partnerships this quarter. Our ARR associated with those relationships today is zero because they are using us to go create a business how that business unfolds will be yet to be determined. We will work with them to support the development of that business. So something like a Ceridian, our ARR with Ceridian isn't a pre-determined bucket like it is with a typical customer. We partner with Ceridian and ARR grows overtime.

Operator, Operator

Your next question comes from Christian Sgro with Eight Capital. Please go ahead.

Christian Sgro, Analyst

Hi, good morning. Thanks for taking my questions. I just wanted to ask one this morning. When you guys think about the direct sales pipeline, where have you seen interest these days, either geographically or by vertical? What's been strong anyway?

Alessio Artuffo, President & CRO

Hello Christian, Alessio speaking. We manage pipeline by looking at it. Our pipeline for instance, tells us that our position of horizontal players that addresses the learning needs across many multiple industries remains unchanged. Now, what we look at is also the constitution of the pipeline in terms of average deal size per segment. What we're seeing is that we have a fairly linear constitution of deals. What that means is we have companies at each and every commercial segment are in a range and value that is within the expectation for that business segment. Now we like that linearity because we don't like peaks and valleys that then eventually result in peaks and valleys also on the booking side. Verticals wise, I said, or horizontal and that's true. But strong momentum remains in technology; stronger momentum continues to exist in manufacturing. It seems interesting growth and return of demand from hospitality, we believe. We announced Red Roof, think about that. Retail as well. Lulu is another good example of that; it continues to perform very strong. Now if you look at our pipeline, and you take the top 10 verticals technology companies, consulting companies, and companies that really leverage the table, as it go-to-market technology are the ones that make up the largest amount of ARR or volume. What's interesting is that we're seeing that ability to turn learning into leverage or enablement for activity technology is something that makes money, whether it's to retain it or make it across many verticals. It used to not be the case; it used to be that SaaS companies had academies to retain customers or sign up new customers. But now we see the same logic applied across thousands of verticals, and that's fascinating. That's why we think our addressable market in a ways huge.

Operator, Operator

There are no further questions at this time. Please proceed.

Claudio Erba, CEO

Can you hear me guys?

Ian Kidson, CFO

Perfect.

Claudio Erba, CEO

So I just want to thank you, everyone. Today, I think we repeat both a record quarter and record questions from analysts. So we performed well in both of them. Thank you so much; it was a pleasure having you here as usual. Let's speak in November, where we hope to do it in person from Toronto.

Alessio Artuffo, President & CRO

Thank you, everyone.

Ian Kidson, CFO

Thank you all.

Operator, Operator

Thank you, ladies and gentlemen. This concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a great day.