Earnings Call Transcript - DCBO Q4 2022

Operator, Operator

Good morning, everyone and welcome to Docebo Inc. Q4 2022 Earnings Call. All participants are currently in a listen-only mode. We will open the line for a question-and-answer session for analysts following the presentation. Instructions will be provided at that time for research analysts to ask questions. We ask that analysts please limit themselves to two questions and return to the queue for any follow-ups. I'd now like to turn the call over to Docebo's Vice President of Investor Relations, Mike McCarthy. Please go ahead, Mike.

Mike McCarthy, Vice President of 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 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 CEO, Claudio Erba.

Claudio Erba, CEO

Hi, everybody and thanks for joining us for our fourth quarter earnings call. With me today are Alessio Artuffo, our President and COO; and Sukaran Mehta, our CFO. Let's get right into the results. On a constant currency basis, revenue for the year was up 41%, while the fourth quarter revenue grew at 35%. I'm also pleased to announce that adjusted EBITDA margin for the fourth quarter was 6% and 1% for the full fiscal year 2022. Our ability to deliver strong revenue growth and improving profitability is a reflection of our consistent execution and operating discipline with Q4 results again exceeding analyst estimates. Our performance throughout 2022 was strong when set against the macroeconomic headwinds. In terms of the demand environment, not much has changed since the last quarter. We continued to see longer deal cycles, more C-suite involvement in decision-making, and increased budget scrutiny. These trends carried into the fourth quarter, but it's noteworthy to share that they did not get worse. Looking ahead to 2023, growth remains a top priority for Docebo. This is well within our reach given the size of our market opportunity, the strength of our balance sheet, and our improving profitability. Docebo continues to prioritize high growth with extreme efficiency. We emphasize high performance for our employees and maintain a flat organizational structure with fewer layers of middle management. Additionally, we are deploying technology internally to our tech stack to scale and gain operating leverage for the next phase of growth. For example, in Q1 2023, we implemented a major CRM system upgrade for our quote-to-cash process that will drive further efficiency. Sukaran will provide further details on efficiency initiatives in 2023. In terms of innovation, Docebo has been investing in AI for the past four years. We see the next wave of investment in Generative AI as fundamental for how Docebo delivers its e-learning solutions. We were early to this market with solutions like Docebo Shape, our generative AI-based content creation model. Docebo Shape had its best attachment rate in Q4, and we are glad to see the strategic investments that we have made are starting to pay off. Next week, I will be hosting a webinar to discuss in more detail how Generative AI will impact learning automation. Registration details for this event are available on our Investor Relations website. During the quarter, we also launched Docebo learning data, a powerful enterprise solution that seamlessly integrates our customer business intelligence ecosystem through Docebo learning data and provides KPIs for broader analysis, faster insight, and high-quality decision-making. In terms of M&A, we believe that a well-designed tuck-in strategy that supports our build versus buy methodology will be accretive to our shareholders. Our M&A roadmap is carefully thought through and continues to deliver value. We commit from the lens of solving by case, such as customer education, onboarding, and sales enablement. We prioritize investments to provide first-hand to market and to deliver new capabilities to our customers. In 2023, we expect evaluations in the private market to become more reasonable, and we are taking a closer look at tuck-in deals that support two principles: first, great adjacent products and features, and second, innovative teams that fit the Docebo culture. In closing, I want to emphasize that we are very excited about the year ahead. Our investments have built a strong foundation for Docebo, and it is our disciplined execution that will enable us to remain a disruptor in the market for enterprise learning. Now, I would like to turn the call over to Alessio, who will give you an operational update.

Alessio Artuffo, President and COO

Thank you, Claudio and good morning, everyone. Throughout 2022, Docebo executed effectively as we invested to support the future growth of our business in an environment shaped by economic headwinds and longer enterprise deal cycles. As Claudio noted, we saw the deal elongation trends carry into the fourth quarter, but it did not get worse. In Q4, our company-wide Average Contract Value or ACV increased 10% to just over $46,000 from approximately $42,000 at the end of the fourth quarter of 2021. ACV for new customers in the quarter was approximately $53,400 compared to $41,700 in the previous quarter. We signed 149 net new customers during the quarter, including several notable enterprise deals. In North America, enterprises continued to select Docebo for our ability to seamlessly support multiple use cases. One of these customers was VMware, an enterprise cloud computing company also well known for their performance and innovation. They are using Docebo to support their customers and partner training. We also landed Haier U.S. Appliance Solutions; the company that acquired the appliances business from General Electric. They selected Docebo for multiple external and internal use cases, including customer and partner education, sales enablement, and onboarding. In Canada, we won a major enterprise deal with a large entity within the Government of Quebec. This organization selected Docebo because of our ability to provide configurable learning solutions that are tailored to multiple audiences that include external customer and internal employee training. And finally, in Europe, we closed the deal with Agria, a pet healthcare insurance company. Agria chose Docebo to educate their 5 million-plus customer base by integrating Docebo directly into their own insurance portal. This was a channel deal brought to us by our European partner, TicTac. This is a flagship deal for us in several ways. It is the largest deal we have closed in the Nordic region and is one of the largest Docebo Flow deals being implemented in Europe today. Docebo Flow is a solution that brings online learning directly into any software, providing learners with the knowledge in their flow of work. What makes this implementation unique is that customer education is expected to increase insurance claims, a measurable economic benefit to Agria, while also resulting in more attractive premiums for the customers; a true win-win. In terms of geographies, North America continues to be our largest and strongest market, with Europe and Asia continuing to scale into the investments we have made in those regions. OEM partners delivered another solid quarter, led by Ceridian. We continue to see good traction with our customer base, adding depth and quality to our pipeline while expanding our reach into the enterprise space. As we move into the first half of 2023, we see a healthy level of demand and are focused on investing in areas that provide resiliency to grow our business in the current macroeconomic environment. Let me frame out a couple of strategic initiatives that will enable this for 2023. First, we're focusing on the productivity and efficiency of our business development organization. While doing this, we brought in leadership and senior operators with very valuable enterprise selling experience. We expect these investments to pay off in 2023 and prepare us for a strong 2024. Second is the use of channel partners, system integrators, and partnerships to replicate the success we've had across the EMEA region. Our channel partners have been effective in sourcing more deals at the local country level, where they have a better feel for the nuances of a country's culture and how to optimize the positioning of our solution. TicTac in Europe is a very good example of one such channel relationship. Earlier this week, we announced our partnership with ELB Learning, a company focusing on bespoke learning development and learning experiences for enterprises with a strong presence in the Fortune 500. The combination of the two companies' core businesses provides our customers with an end-to-end service and technology solution that is unique in the market. Although this partnership is still in its very early stages, we expect it to grow throughout the year. In conclusion, I want to emphasize two reasons why we are excited about 2023. First, our market is large and ripe with greenfield opportunities, especially for external use cases, while we continue building on our leadership position and product focus every day. Second, we're making the strategic investments necessary in both innovation and systems, processes, and people needed to continue to disrupt the enterprise learning market. With that, I would like to hand the call over to Sukaran.

Sukaran Mehta, CFO

Thank you, Alessio and good morning, everyone. For those interested, a detailed breakdown of our financial results for the three months and fiscal year ended December 31st, 2022 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. As reported, total revenue for the fourth quarter grew to $39.0 million, an increase of 31% from the prior year. Total revenue increased by 35% after adjusting for the impact of foreign exchange. Subscription revenues were $36.3 million, representing 93% of total revenue for the quarter. Annual recurring revenue was $157.1 million, an increase of 36%, after adjusting for the foreign exchange impact from the strengthening of the U.S. dollar, which was about 2%. Customers using Docebo for external or hybrid training represented 65% of our total ARR, flat with Q3. In 2022, we reported a net dollar retention rate of 109%, down from 113% in 2021. The decrease was primarily related to macroeconomic conditions that impacted the expansion of the current customer base. However, gross retention actually improved year-over-year. We can attribute this improvement to a couple of key factors. First, external use cases are tied to revenue-generating activities that are strategic in supporting core operations with key stakeholders such as customers, channel, and supply chain partners. Second, we have an all-in-one solution that is designed to handle both internal and external use cases. About 80% of our ARR is derived from customers using Docebo for two or more use cases, where we become embedded in their tech stack as a core platform to their operations. Gross profit margin for the fourth quarter improved by approximately 100 basis points year-over-year to 81% of revenue. This was, in part, driven by our ongoing work to optimize hosting architecture efficiency and higher subscription revenue. Total operating expenses for the fourth quarter increased to $31.5 million from $26.7 million for the prior year period. G&A as a percentage of revenue declined to 19% for the fourth quarter compared to 21.2% for the third quarter. Growth and scale are driving natural leverage in the G&A line, and I will speak to some of these 2023 initiatives later in my remarks. Sales and marketing expenses decreased as a percentage of revenue to 39.8% from 42.0% for the fourth quarter. The sequential reduction in expense reflects cost discipline and timing of certain marketing events in Q3 compared to Q4. R&D investments in the fourth quarter were $6.4 million or 16.4% of revenue, flat as a percentage of sales compared to the third quarter. As a reminder, our core R&D operations are based in Europe. During Q4, the strong U.S. dollar resulted in a 1 percentage point benefit as a percentage of revenue to the R&D cost structure. Moving on from the expense line, we are extremely pleased to report a positive adjusted EBITDA of $2.3 million for the fourth quarter of 2022, compared to an adjusted EBITDA of $0.6 million for the third quarter. This equates to an adjusted EBITDA margin of 6% for the fourth quarter. We are deeply committed to driving performance in the areas we can control and expect to exit Q4 2023 with a low double-digit adjusted EBITDA margin. We reported net income of $1.6 million for the fourth quarter of 2022, compared to $10.3 million in net income for the third quarter. Adjusted net income for the fourth quarter of $3.4 million increased sequentially compared to $1.5 million for the third quarter. We generated positive free cash flow for the third consecutive quarter of $2 million, which equated to 5% of revenue. At the end of Q4, we held cash and cash equivalents of $216 million. Share-based compensation accounted for a modest 2.8% of Q4 revenue, flat to the Q3 quarter. Adjusting for the impact of share-based compensation, free cash flow would have been 2.2%. We are acutely aware of the impact of equity compensation on cash and dilution and we'll continue to be responsible stewards to ensure that equity grants are selectively given to high performers that align with our long-term objectives. Starting with the reporting of our Q4 results, we're going to begin providing quarterly guidance. So, let's turn to our Q1 2023 outlook. We expect total revenues to range between $41.3 million to $41.6 million, representing 29% growth at the midpoint. Adjusting for foreign exchange impact, this represents 32% growth. We expect gross margin to range between 80% and 81%. We expect adjusted EBITDA margin to range between 4% and 5%. Our guidance reflects two noteworthy points. There are two fewer days in the first quarter compared to the prior quarter impacting subscription revenue by $800,000, and we are impacted by the timing of payroll taxes, which are higher in H1 of each fiscal year. Before opening the call to questions, I want to emphasize a few points. Our top priority is still growth, and we have set up Docebo to achieve this while delivering a balanced rule of 40 performance over the long term. Operationally, our focus is on improving profitability by controlling what we can. This starts with aligning our workforce to scale with our profitable growth strategy. We have created a high-performance environment with a relatively flat structure that reduces middle management to accelerate decision-making and innovation. One of the key drivers of efficiency is our investments in technology. Docebo utilizes its own platform and leading partner vendors to automate its processes and systems. One example is the major Salesforce CRM system upgrade implemented in Q1 2023 to automate a large portion of our quote-to-cash process and to provide greater visibility to our organization in one place. This, in effect, enables smart and faster decision-making, and we have several similar initiatives planned for 2023 that will drive even greater operating leverage. In addition, we have optimized our real estate portfolio to better serve our hybrid employee strategy by consolidating leases and partnering with WeWork. In conclusion, I would like to highlight the fact that as we approach the end of Q4 of this year, we are confident that we can deliver low double-digit EBITDA margin levels while maintaining investments to drive future profitable growth. That concludes my prepared remarks, I'd like to turn it over to the operator now to take some questions from the analysts.

Operator, Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Your first question comes from Robert Young, Canaccord Genuity. Please go ahead.

Robert Young, Analyst

Great. Thanks, good morning. Thanks a lot for the Q1 guidance. Can you just give us a sense into how you are constructing that guidance given it's new? Is that based on current deals or are you projecting what will close by the end of Q1? And then the EBITDA margins are down a little bit quarter-over-quarter; I don't know if that's FX, maybe just give us a sense of how that's constructed?

Sukaran Mehta, CFO

Yes. Good morning, this is Sukaran. I'll discuss how we develop our guidance, starting with revenue. For revenue, the process is quite simple. We take the Annual Recurring Revenue from the previous quarter, divide it by 365 to get our base subscription revenue. Approximately 70% of our deals typically close in the last month of the quarter, which is common for enterprise companies. Therefore, we account for a minimal amount of revenue from deals that close during the quarter. Regarding professional services, our revenue depends on onboarding new deals and some custom Statements of Work. Generally, you can view it in terms of the prior quarter's Annual Recurring Revenue that will transition into the next quarter from a professional services standpoint. Regarding your query on expenses and the EBITDA margin, there are two main points to consider. First, Q1 has two fewer days compared to the previous quarter, which results in a revenue impact of nearly $800,000. Secondly, in North America, the first half of the year incurs higher social payroll taxes, influencing the beginning of the year, but this levels out as the year progresses. Without these two factors, you would see a slight improvement on a like-for-like basis.

Robert Young, Analyst

Okay, great. Thanks for that color. My second question, Claudio, you gave a little bit of color on your efforts in Generative AI in the prepared remarks. That's a rapidly changing, exciting, and evolving space clearly. For those investors who are tracking your AI roadmap, you already, I think you said that you had record attach on Shape. I'm not sure if I heard that right. But if you could tell us or give us a sneak peek on where Docebo is heading on this Generative AI roadmap, that'd be really helpful. And I'll pass the line.

Claudio Erba, CEO

Yes, Rob. Thank you for the question. This is a funny question for me, you know, I am a product guy. So, actually, we have invested initially in Docebo Shape at least, we started the R&D four years ago when generative AI was not a thing. The first papers in generative AI were published probably in 2020 or 2019. So, we have deployed many algorithms in Docebo. I think you can categorize the AI that will have an impact in the organization into two main categories. One is increased automation, meaning AI does the work of humans, and gives the algorithm we have in place are keyword tagging, skills tagging, transcripts, translations. This is an improvement on productivity which will provide direct ROI to our customers. There is another segment, which is much more disruptive: content generation, where generative AI plays a role. Content generation is not only you ask a question and ChatGPT or any other algorithm create training for you, but allows you to create, modify, and provide direct feedback. This is where the industry is going. We have discovered that ChatGPT is powerful in certain areas, like it provides reliable outcomes when the text they are working on is very low quality. Our algorithm, for example, the keyword tagging now performs better than ChatGPT when the text is sophisticated and longer. That said, we think that ingesting ChatGPT and others like we are working with DALL-E, which is the image generation of OpenAI, will increase the potential of Docebo Shape as we already work on some initiatives specific to some use cases. I want to emphasize that we are in an early stage of adoption in the world of these technologies. These technologies are not plug-and-play; they require a deep understanding and years of deployment. It means the scalability requires us to create algorithms and parse massive amounts of data. It is complex work for companies that have not yet deployed AI inside their software.

Robert Young, Analyst

Thanks. I look forward to the webinar.

Operator, Operator

Thank you. The next question comes from Josh Baer of Morgan Stanley. Please go ahead.

Josh Baer, Analyst

Great. Thank you for the question. You mentioned that the elongating deal trends continued in Q4 but did not get worse from Q3. Just wondering how those trends have gone into Q1, now that we're almost done with the quarter. Are they stabilizing, better, or worse? Thanks.

Alessio Artuffo, President and COO

Good morning. Alessio speaking. We haven't seen material changes in those trends. The one thing that I'd note is, we've continued and frankly doubled our efforts in generating and strengthening our enterprise pipeline quantity and the quality of execution. We are focused constantly on outlining value. The answer to your question is, no specific changes in that trend, growth in our enterprise pipeline, and a focus on winning the business of enterprise customers by being excellent at value engineering and outlining value.

Josh Baer, Analyst

That's really helpful. Follow-up is on a point that you brought up about nice to have versus must-have. I think that dynamic is reflected in the comment that you made that gross retention rates actually improved this year. Just wondering if that piece of the results for this year was a surprise to you or any other context for an actual improvement in gross retention in a really tough macro environment? Thank you.

Sukaran Mehta, CFO

Yes, I can go first and then, sorry, Ale, you can continue.

Alessio Artuffo, President and COO

Please go ahead, Sukaran. I may add something if you don't address it. But please carry on.

Sukaran Mehta, CFO

Yes. So Josh, you picked up nicely. The important factor to consider about gross retention improving year-over-year reflects that the majority of our customers, 65%, we are supporting on external and hybrid use cases. About 80% of our customers use us for two or more use cases. The more problems we solve for our customers, the more embedded we become in their core operations generating revenue and protecting revenue. These companies take a lot of time and thought on how to run their learning programs. That is a reflection of what you're seeing in terms of gross retention from our perspective.

Josh Baer, Analyst

Great. Thank you.

Alessio Artuffo, President and COO

Sukaran, I wanted to add two things just to wrap on this. First, the advantage of being a horizontal player as a hedge against any particular one industry, has allowed us to reap the benefits of that positioning in the market. The other thing that I would also mention regarding value and retention — in companies like Det-Tronics, they reported cutting down employee churn by about 40% since they implemented us, which is significant for a company of that size. If you think about Zoom, they reported saving hundreds of hours per year per customer success manager due to using our technology. These are real topline savings. In the context of our university solution, we have seen savings in support costs alone of over $1.5 million because of our software leading to reductions of implementation efforts by more than 15% and achieving a 20% time saving for customer success managers. The area we need to improve is recognizing the economic value and returns for our customers, and we're enhancing our efforts to recognize the benefits we deliver.

Operator, Operator

Thank you. The next question comes from Stephanie Price, CIBC. Please go ahead.

Scott Fletcher, Analyst

Hi, good morning. This is Scott Fletcher on for Stephanie Price. I wanted to ask a question over just the pace of margin improvements. You talked about ending the year at a double-digit margin. Should we expect sort of a consistent increase from sort of 4% to 5% in Q1 over the course of the year?

Sukaran Mehta, CFO

Yes, good morning. Sukaran here. I would say the way to think about the trajectory has, looking at the past year as well, the biggest improvement will come from the G&A line. As a company scales, you should be able to drop that closer to lower double digits where we are today at 19% or much lower, maybe by 8% or 9%. I'm not saying that is going to happen this year in its own right, but on G&A, a company of my size or scale will be close to 10%, 12% G&A margin over the medium to long term. So there's going to be that. GM is going to be the biggest area from where the leverage will come in. Even as you've seen, small incremental improvements in our COGS line where we've done an incredible amount of work optimizing our hosting architecture, which leads to improved gross profit. And in sales and marketing, you will also see efficiencies come through.

Scott Fletcher, Analyst

Okay, thanks. And then I wanted to ask on the partner piece of the business. Obviously had a nice one which you announced in the quarter. Can you sort of speak to what is driving that improvement in the partner experience? Is it more just them getting more comfortable selling your product, or is there a different strategy or approach that you've worked with them to take to help improve performance?

Alessio Artuffo, President and COO

We are maturing our overall posture and vision of our partner business well beyond OEM. That remains a critical area of focus for us to continue to win the business of enterprises like Ceridian and MHR. We are making significant progress with a continuously growing pipeline. That said, OEM is not the sole area of focus anymore. We believe that in an environment where creating demand becomes more costly, there are avenues to optimize demand creation in a more efficient way, creating pipeline that is partner-friendly. We recently announced our partnership with ELB, formerly known as eLearning Brothers, as an example of partnering with companies that are adjacent to our capabilities. This can be products that complement our solutions, such as rewards products or coaching platforms. Finally, partners can also enhance implementation capabilities. We understand that in an enterprise model of implementation, adding consultative capabilities is necessary. We are strengthening our ability to implement complex projects directly while leveraging the best companies in the world that can add value.

Claudio Erba, CEO

And Ale, I will add something about this integration ecosystem because OEM partnership and product integration are part of a big network of ecosystem, including adding training capabilities to software. For example, our prototype of Docebo for Microsoft Teams attaches the software to the enterprise software stack where people can train inside other software. So I mean the OEM is one angle, the ISV and partnership is another, and integration with software is part of the broader strategy.

Scott Fletcher, Analyst

Great. That's really helpful color. Thank you.

Operator, Operator

Thank you. The next question comes from Daniel Chan of TD. Please go ahead.

Daniel Chan, Analyst

Thanks. Good morning. ACV expanded nicely. Just wondered if you could provide any color on what drove that expansion. I think you mentioned that new customers came in much higher than the average ACV. Did existing customer expansion go, and high ACVs, is a lot of that coming from more seats or customers taking on more products?

Sukaran Mehta, CFO

I'll start that, Sukaran here. Good morning, Dan. I would say from an ACV perspective, it's a mix of items. In terms of the ACV number referred to, new logos and enterprise were contributing to higher deals this quarter as expected. Some of the deals we talked about also in the enterprise space drove some of that higher ACV. Within the in-quarter ACV that I also gave in my prepared remarks, that is more so driven because that only includes new logos and cross-sells. It was primarily driven by larger enterprises. The mix between sales from SMB and major and enterprise can drive that number up or down, but the more enterprises you have in a quarter, the higher that ACV will be. Ale, do you want to add to that?

Alessio Artuffo, President and COO

Yes, agreed on the general sense that it's a mix of a few factors alongside the fact that Q4 usually lands with more enterprise impact. Given the comments made before, our enterprise pipeline continues to grow; we certainly look forward to performing well in terms of ACV averages as we land more enterprise deals in the future.

Claudio Erba, CEO

Yes, and Ale, there is another point. We now have many large enterprise deals in the pipeline, and the tariffs will leap from one quarter to another. Perhaps in the future, we will land more enterprise deals, creating a spike in the ACV, and we will see this ACV going back down, because you know these macroeconomic downturns are not killing deals; they are just delaying them. However, the pipeline inflow continues, so there is a sedimentation of large enterprise deals that are still healthy in the pipeline.

Daniel Chan, Analyst

That's very helpful. Thank you so much for that. And then maybe just any more color on the pipeline. You talked about it growing. Any metrics you can provide around that? You also talked about 65% using it for external, 80% coming in with two or more use cases. When you look at the pipeline, would you say that the customers in there are actually using your offerings?

Alessio Artuffo, President and COO

I'd say the following: we continue to see a very healthy mix of companies looking to solve a mix between internal training and learning issues, as opposed to external impacts. There is a healthy mix in terms of the use cases in the pipeline. One thing to point out is our focus on solutions and marketing on solutions; our joint product management and marketing function allows us to tell better stories of how we solve problems. We're not trying to win the business of every function in the company; we'd rather solve one problem at a time and create fidelity in accounts, growing them over time. This is our current approach.

Daniel Chan, Analyst

Thank you.

Operator, Operator

Thank you. The next question comes from Martin Toner of ATB Capital Markets. Please go ahead.

Martin Toner, Analyst

Thanks, everyone, and congrats on a good quarter. Most of my questions have been answered, but I think it might be useful to give you guys a chance to reiterate the conservative nature of how you build the Q1 guide. Can you repeat what is in the guide for the rest of the quarter from here? You mentioned minimal deals flowing into revenue in the remaining part of the quarter.

Sukaran Mehta, CFO

Yes, Martin. I'll reiterate that. When thinking about forecasting revenue for a quarter, your starting point is always the prior quarter's ending ARR. Subscription revenue perspective is about taking the ARR from the last quarter, dividing it by the number of days in the quarter and multiplying it. It gives you a baseline for your subscription revenue. In terms of in-quarter deals, as you know, much of our business is enterprise and closes towards the end of the quarter; therefore, you should expect a large portion of our ARR to close in the final month of the quarter; you don't see a benefit to revenue until the following quarter. Adding to that is professional services revenue, which is similar to the last quarter based on the onboarding packages we sell. It’s a three-to-six-month project duration — with this dynamic, you can get your revenue for the quarter. In short, subscription revenue is based on the prior quarter's ARR with some incremental revenue flowing in the current quarter, with professional services revenue following a ratable timeline.

Martin Toner, Analyst

Perfect. Thanks so much. Any thoughts on capital allocation going forward?

Sukaran Mehta, CFO

Yes, I'll start with this. I'm sure Claudio will have some thoughts on it as well. As you think about our cash, we've got $260 million on our balance sheet right now. We have talked about looking at M&A opportunities. This year will be interesting for us as we look for great products, modules, and teams that can support our organic engine. You should expect that we will keep our eyes much more open than before as we explore opportunities in 2023. There are certainly many interesting technologies to consider.

Claudio Erba, CEO

Yes. We do have a good thesis on how to improve our product to provide better value to our customers. We're primarily focusing on three main use cases: sales enablement, customer and partner education, which means external training, and onboarding. There's strong interest in employee onboarding right now. We are exploring tuck-in M&A opportunities to add functionalities, features, and new training experiences for our customers in those three use cases. That said, there are many other opportunities, but we want to focus on modern learning experiences for our customers. We need to invest and continue to innovate.

Martin Toner, Analyst

That's great. Thanks so much, Claudio. Last one from me. How confident are you that Europe will be a strong contributor to revenue growth for 2023?

Alessio Artuffo, President and COO

We actually have a high degree of confidence in this regard. Our teams have been staffing up, ramping leadership, and we've seen very good results from the growing regions. Our newest team is in the DAC region, showing very encouraging signs on demand and execution. The France and Benelux regions have had a positive uptick in terms of demand and pipeline. We've signed significant large deals in Europe, which historically have been mostly in North America. So now we continue to see large enterprise deals happening in Europe, which allows us to harness those successes and grow further in the region. The level of confidence is high; we're actively managing our performance tightly.

Claudio Erba, CEO

Also, the U.K. is holding up well.

Operator, Operator

Thank you. The next question comes from Suthan Sukumar of Stifel. Please, go ahead.

Suthan Sukumar, Analyst

Good morning, gents. Congrats on the strong Q4. It's good to see strong customer win activity despite what's going on in the macro. I was wondering if you could talk a little bit about what you're hearing from customers today regarding the new wins that you've secured and the expansion opportunities with existing customers, especially given it was a little softer this past year. You touched on vendor consolidation and the theme in the past; just curious if there's been any changes there?

Alessio Artuffo, President and COO

Yes, sure. The trends we're seeing are consistent with macro aspects. The aspect of consolidation is frequent, meaning companies are trying to reduce the complexity of their training and centralize operations to create a more efficient environment. Hence, we're engaging more with CIOs and CFOs than ever before. On one hand, Docebo is increasingly recognized as a leader in training that supports not only internal teams; we're having significant go-to-market projects with very large companies, maximizing their training capabilities in various scenarios. Furthermore, we see a strong trend among large institutions in financial services and automotive looking for modern learning platforms as they grow tired of outdated systems. We are in active conversations with major players in those industries for internal projects, which is quite positive.

Sukaran Mehta, CFO

And Suthan, I'll just add that if you take a step back, consider the deal with Agria as a good reminder of external use cases. Our focus on training not just employees but also the external customers, for example, Agria is a great example for training their millions of pet insurance customers using our platform. This effectively expands our total addressable market significantly beyond just the employee count of clients. It demonstrates the greenfield opportunity for us where external use cases comprise a larger part of our market.

Suthan Sukumar, Analyst

Appreciate the color, guys. The platform is intriguing, especially the win with the Government of Quebec. Can you talk about the public sector as an end market? Just curious, how much does that account for in terms of business mix today? And what opportunities do you see in the public sector longer term?

Alessio Artuffo, President and COO

Yes. Right now, Docebo accounts for a material sub 5% of total business across various government segments, including state, local, and education, but not necessarily including large federal agencies. We believe this is a very interesting market. Wins like the Government of Quebec show that our solution meets these organizations' needs. We are actively researching overall government opportunities and early findings support that it's an intriguing space for us. But today, we remain opportunistic — we will pursue RFPs that we are well-suited to win. In the mid-term, we see this as a market that can yield significant success for us.

Suthan Sukumar, Analyst

Great. Thank you for taking my questions. I'll pass the line.

Operator, Operator

Thank you. The next question comes from Christian Sgro of Eight Capital. Please go ahead.

Christian Sgro, Analyst

Hi, good morning. I wanted to ask a question about winning new enterprise business and the use cases sold at the time of deal signing. On average, is it common to win a new enterprise customer with one, two, or three use cases in place? What trends are you seeing with the number of use cases taken on at the onset?

Alessio Artuffo, President and COO

Sure. It is common to see an enterprise come in with a very large user base for a single use case. However, what we see as we progress and gain trust in that account, the departments connect our capabilities to what they do, often leading to introducing us to other functions. Thus, we often start with one unit but quickly evolve into a multi-use case setup over time as our relationship grows deeper. We approach this methodically to close the deal, then continue to grow it. But we do navigate the reality that a multi-audience dynamic can elongate the sales cycle, delaying closure but resulting in larger future deals.

Christian Sgro, Analyst

That's a good problem to have. For my follow-up, could you provide examples of the most common first use case for new business and what becomes the natural up-sell in follow-up conversations? Where do your sales start and where do they go?

Alessio Artuffo, President and COO

We started analyzing this but currently don’t have a definitive single trend. We see a mix of entry points for new enterprise clients; many start with external use cases involving customer or partner projects. However, they often open up their internal initiatives like sales onboarding or training as our relationship matures. We see different dynamics depending on the particular industry as well, so it’s challenging to pin down a definitive path, but we like the flexibility as it mitigates reliance on single industry behaviors.

Christian Sgro, Analyst

Thank you very much for that. That's all very helpful. Thanks for taking my questions this morning.

Alessio Artuffo, President and COO

Thank you so much.

Operator, Operator

Thank you. There are no further questions at this time; I will turn the call over to Claudio Erba for closing remarks.

Claudio Erba, CEO

Thanks again for listening to our Q4 call. We look forward to having you join us on the generative AI and ChatGPT webinar on March 14; registration information is available on our IR website docebo.inc. Thank you so much.

Operator, Operator

Ladies and gentlemen, this does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.