Earnings Call Transcript - DCBO Q3 2022

Operator, Operator

Good morning, everyone, and welcome to the Docebo Inc. Q3 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 would now like to turn the conference call over to Docebo's Vice President of Investor Relations, Mr. 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 related 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 US dollars. Now, I'd like to turn the call over to Docebo's CEO and Founder, Claudio Erba.

Claudio Erba, CEO and Founder

Hello everybody and thank you for joining us for our third quarter earnings call. With me today is Alessio Artuffo, our President and COO, and Sukaran Mehta, our CFO. Docebo continues to perform well despite the increasing challenges posed by macroeconomic factors. Even with these difficulties, we achieved strong revenue growth and free cash flow. We are particularly pleased to report a positive adjusted EBITDA that exceeded our expectations and consensus estimates. Adjusted for foreign exchange, our year-over-year growth in ARR was 44%, consistent with last quarter, although decision-making was prolonged in some segments due to global economic issues. The primary focus for Docebo, which is also critical for us, is to demonstrate operational leverage and drive profitability, thereby unlocking value for our shareholders. This aligns with Docebo's long-term path, characterized by balanced growth, a strong balance sheet, capital efficiency, and a large untapped total addressable market. While our competitors offer legacy solutions in businesses that are consolidating, we have a first-mover advantage that is fostering organic growth and transforming how customers implement Docebo's modern architecture. We see this as an opportunity to strengthen our competitive position in a disciplined manner. We are focusing on several key areas: first, leading with innovation and demonstrating how our solutions meet customer-specific needs to achieve business outcomes, particularly in customer education, franchises, and quick-service restaurants; second, concentrating on our enterprise segment, where we continue to see significant opportunities; and finally, making strategic and responsible hires to support long-term growth goals in both R&D and sales and marketing. As some of you may have seen during our user conference last month, we appointed Fabio Pirovano as Senior Vice President and Chief Product Officer. He brings extensive experience in product design and strategy from Workday, where he was part of the product leadership for their core HCM product. With Nina Simosko and Ryan Brock stepping into senior leadership roles in sales and marketing, I am pleased to share that we have expanded Alessio's role as our President and Chief Operating Officer. He will collaborate more closely with me to enhance operational efficiency and revenue growth for Docebo. We also express our gratitude to Rudy Valdez for his contributions and wish him the best in his future endeavors. In closing, I want to stress that we remain dedicated to growth. We are committed to achieving sustainable growth while steadily improving profitability. Although the near-term outlook may present more challenges, our customers, employees, and shareholders can trust that we will proactively implement necessary adjustments to meet our objectives. Now, I'll turn the call over to Alessio.

Alessio Artuffo, President and COO

Thank you, Claudio, and good morning, everyone. I want to express my gratitude to my colleagues and board members for giving me the opportunity to serve as President and Chief Operating Officer. Sales and marketing will still report to me through the strong leaders we've appointed. Moving forward, I will work more closely to align Docebo’s daily operations with Claudio's strategic vision. Now, let’s discuss our third quarter results. Q3 was another successful quarter for Docebo, demonstrating our ongoing commitment to innovation and execution. This is particularly evident with our larger customers who are utilizing our external and hybrid capabilities along with our internal solutions. This approach helps them simplify their technology stacks and achieve better returns on investment during uncertain times. Q3 is usually a seasonally slower quarter, and similar to Q2, we observed longer deal cycles. We are adjusting our execution to match the changing macro environment. Looking ahead, we are confident in the strength of our increasing pipeline and our strong win rates. Currently, about half of our customer base is engaged with us across three or more use cases. These customers also exhibit top-tier growth retention and net retention exceeding 120%. Many of these use cases position Docebo in crucial strategic areas that our customers target to enhance existing revenue streams while creating new ones. These data points also underscore the significant land-and-expand cross-sell opportunities we are now strategically pursuing. From a go-to-market standpoint, we are focusing our investments in specific key areas. First, we are establishing a strong connection between use case needs and the Docebo platform. This solution-oriented approach to use cases, such as customer education, sales enablement, and partner training, packages the Docebo learning suite to deliver desired business outcomes for our customers. Second, we are incorporating value engineering resources to collaborate with our sales teams to document and demonstrate ROI tied to our platform. Lastly, we are enhancing our digital demand generation engine alongside a comprehensive investment in branding. With new marketing leadership in position, we are improving the necessary systems and processes. During the quarter, we welcomed 139 net new customers, including three major enterprise deals. The first is Sonos, a leading sound experience company known for inventing multi-room wireless home audio. They selected Docebo for various internal and external use cases, including compliance, self-enablement, and training for customers and partners. Next, we have Advanced Auto Parts, a prominent automotive aftermarket parts supplier, which chose Docebo for multiple internal use cases like sales enablement, leadership training, onboarding, and compliance. The third significant deal involved a leading sports authority based in Europe, which opted for Docebo to implement a unified digital learning solution for both internal and external stakeholders. Upsells continue to thrive for us, as customers who already use Docebo discover further advantages by applying our platform across multiple use cases and expanding their current offerings. This includes Deliveroo, an innovative food delivery service operating in 11 countries. Previously, Deliveroo utilized various legacy and internally developed systems. Today, Docebo provides them with a single LMS for all stakeholders. We also noted considerable growth with MHR, one of our OEM partners in the UK, where we are offering additional products and modules beyond our core LMS. Geographically, North America remains our largest market, with external and multi-use case opportunities presenting excellent growth potential. In EMEA and APAC, we are progressively expanding in a strategic manner that aligns with our long-term balanced growth strategy. I am very happy to see strong profits in the Nordics as we increase our presence in that region through strategic partnerships like TikTac. In conclusion, we are in a demand environment where our key growth drivers are more robust than the short-term economic challenges. Our priority is to control what we can to enhance our position and execution. Our long-term balanced growth strategy is just beginning to yield the results we want, and we will continue to evolve Docebo to ensure we are ready for the next phase of our journey. I will now turn the call over to Sukaran for a review of our financial performance.

Sukaran Mehta, CFO

Thank you, Alessio, and good morning, everyone. For those interested, a detailed breakdown of our financial results for the three and nine months ended September 30, 2022, can be found in a 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 was made available on our Investor Relations website this morning. As reported, total revenue for the third quarter grew to $37 million, an increase of 37% from the prior year. Total revenue increased by 42% after adjusting for the impact of foreign exchange. Subscription revenues were $34.3 million, representing 93% of total revenue for the quarter. Annual recurring revenue was $144.6 million, an increase of 44% after adjusting for foreign exchange impact from the strengthening of the US dollar, which was about 4%. Our company-wide average contract value, or ACV, increased 17% after adjusting for the impact from foreign exchange. As reported, company-wide ACV was up 13% to approximately $45,000 from $39,000 at the end of the third quarter of 2021. New and cross-sell logos with ARR greater than $100,000 represented approximately 30% of the net new ARR in Q3 as the elongation of the enterprise sales cycle previously discussed extended through the quarter. Customers using Docebo for external or hybrid training increased to 65% of our total ARR. Importantly, these multi-use case customers drive best-in-class gross and net retention rates. Gross profit margin for the third quarter improved sequentially to 81% of revenue. This was in part driven by continued focus on optimizing our hosting architecture and higher subscription revenue. Total operating expenses for the third quarter increased to $20.8 million from $19.9 million for the prior period. Included in the $20.8 million of operating expenses is a foreign exchange gain of $10.2 million that relates primarily to the cash on our balance sheet and is therefore for the most part unrealized. Operating costs, excluding this gain, were $31 million, slightly higher than the $30.8 million in operating costs reported on a comparable basis in the second quarter of 2022. A full summary of operating expense lines are presented in our investor deck. G&A, as a percentage of revenue declined to 21.2% for the third quarter compared to 21.7% for the second quarter, as we continue to drive incremental benefits from scale. This is an area that we will continue to manage to drive leverage going forward. Sales and marketing expense decreased slightly as a percentage of revenue to 42% from 42.6% for the second quarter, and we expect to naturally drive efficiency in this area as we scale. R&D investments in the third quarter were $6.1 million or 16.5% of revenue. R&D investments were flat on an absolute basis compared to the second quarter. As the US dollar strengthened, we experienced a 2 percentage point benefit as a percentage of our revenue due to the core R&D operations being based in Europe. We are extremely pleased to report a positive adjusted EBITDA of $0.6 million for the third quarter of 2022 compared to an adjusted EBITDA loss of $0.3 million for the second quarter. We reported a net income of $10.3 million for the third quarter of 2022 compared to $2.1 million in net income for the second quarter. We generated positive free cash flow for the second consecutive quarter of $0.6 million. At the end of Q3, we held cash and cash equivalents of $213 million. Our strong capital structure gives us the flexibility to invest strategically and navigate through this challenging macroeconomic environment. Share-based compensation as a percentage of Q3 revenue was a very modest 2.7%. Before opening the line to questions, I want to close with these thoughts. We are committed to delivering steadily improving operating leverage and profitability as an essential part of our healthy Rule of 40 performance. Consistent execution and operational excellence have enabled us to achieve our positive adjusted EBITDA target a full quarter early. We are not only pleased to be adjusted EBITDA positive, but with our intense focus on shareholder return, we are also GAAP net income positive for the period that includes the impact of share-based compensation, and even after excluding the foreign exchange gain. Finally, as we look forward in these uncertain times, if we see a marked slowdown in growth, we have the discipline to drive operational efficiency and profitability to remain above the Rule of 40. That said, Docebo remains a long-term growth story, and we will lean towards growth as being the primary contributor to the Rule of 40. 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. Your first question comes from Rob Young with Canaccord. Please go ahead.

Robert Young, Analyst

Hi, good morning. You mentioned the lengthening of sales cycles as an impact. Could you elaborate on the pipeline? Are you still focusing on external LMS use cases that lead to higher ROI? Additionally, do you see potential for closing larger deals in the pipeline?

Mike McCarthy, Vice President of Investor Relations

Hey, Rob, this is Mike. Can you repeat that question for us, please?

Claudio Erba, CEO and Founder

Louder?

Robert Young, Analyst

Sure, sure. Okay. So you already noted the change in customer behavior around deal closing times and slower signings. And so I'm just curious about what that means relative to the pipeline. Are you still seeing the same strength of pipeline? Is there still an emphasis on external LMS use cases and higher ROI use cases? And are you seeing opportunities for those deals in the pipeline still?

Alessio Artuffo, President and COO

Hey, Rob. Alessio here. Thank you for repeating. We had an audio issue that we've resolved since. Rob, our pipeline remains very good. It is a pipeline that, as we explained in the past, we have a good grasp on over the next one to two quarters ahead of us. The mix across segments remains very healthy. The combination of use cases across the pipeline is consistent with what we're seeing all along. In terms of opportunities to continue to win large deals, there is an opportunity, and historically, it's fair to say that Q3 is less of an enterprise quarter than Q4 and Q1 tend to be. We're truly looking forward to delivering great news about incredible outcomes in the near future. But that said, we remain very optimistic and satisfied with both the quality and the quantity of our pipeline.

Claudio Erba, CEO and Founder

Alessio, on top of that, is it fair to say that we love multi-department deals, especially when they blend internal and external? A dynamic that we are seeing is also that on top of the pyramid, I mean, they are very big, big deals. We are seeing a shift from other vendors to us due to the consolidation that is happening between legacy players that are now creating a single entity. There are customers that are not happy about that and they are shifting, and we are seeing an inflow of those kinds of records of migration.

Alessio Artuffo, President and COO

100%.

Robert Young, Analyst

Okay, great. Next question for me would just be around the cost of acquisition in the quarter. The sales and marketing relative to the incremental ARR that you brought in in the quarter, it's a very high level of spend for each incremental dollar of ARR. I'm curious, as you look into Q4, you noted that the seasonality is intact. How do we think about this cost of acquisition going forward?

Sukaran Mehta, CFO

Rob, morning. Sukaran here. I'll start this, and I will let Alessio come in. Firstly, when you look at CAC, I would say CAC is relative; you want to focus it on an annual basis rather than quarterly due to seasonality between quarters. As you think about moving forward, you've seen this in the results; we will continue to show discipline. We've made some investments at the start of the year in sales and marketing. As we've gone through the latter part of this year, we've shown discipline across other areas. You should see some of those investments bear fruit as we move into next year. Alessio, if you want to comment on anything else.

Alessio Artuffo, President and COO

Not a lot to add, other than we're extremely focused and spending a lot of time tuning both our sales and marketing machine to reap the benefits of the investments we've already made. We're truly focusing our investments on the areas that matter. I personally am spending a lot of time with our new CMO, Ryan Brock, on this optimization and calibration of the machine. And again, consistent with the pipeline comment, we believe we are setting up the engine for long-term growth.

Robert Young, Analyst

Okay. Thanks for the questions.

Claudio Erba, CEO and Founder

Thanks, Rob.

Operator, Operator

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

Stephanie Price, Analyst

Hi, good morning. Your prepared remarks mentioned the MHR relationship and that they've added some Docebo solutions. Hope that you could maybe expand on that and talk a little bit about that relationship here.

Claudio Erba, CEO and Founder

Sure. Hi, Stephanie. We are absolutely thankful for the partnership with MHR. What we like about partners like MHR is that they operate in an environment and with a type of buyer persona that does not raise any channel conflict. MHR is a leader in their market and in their space in the region, and we naturally complement their offering with something that was native to their technology. With that said, additional color on MHR per se is that we maintain a great connection with the leadership team. We continue to nurture the relationship like we do with every strategic partner and customer. That's as much as I can share about MHR.

Alessio Artuffo, President and COO

On top of the relationship with MHR, MHR is operating in a segment which for us is not familiar, specifically government. They sell a lot to government and they are signaling that government spending in learning is becoming very interesting as a segment. We are studying these segments to invest in the future in areas that are almost untouched.

Stephanie Price, Analyst

That's good color. Thank you. You mentioned several customer wins, where they are using Docebo for both internal and external use cases. Hope you can touch a bit more on this opportunity. Are you seeing vendor consolidation, and what's the cross-sell opportunity there for internal use cases?

Claudio Erba, CEO and Founder

Sure. The trend of consolidation not only continues but becomes an element of strength in an environment where companies, particularly enterprises, are looking to extract more value and rationalize. This means that CIOs, but also CFOs, are looking for economies of scale. When they analyze their learning tech stack, they try to manage expenditures to extract more value from a single vendor, resolving multiple problems rather than just one. Our ability to solve various challenges through our platform enables us to win business in this context.

Sukaran Mehta, CFO

Stephanie, just to add to that, that's why one of the numbers that Alessio already spoke about was we went from 61% to 65% in terms of our total book of business, which is external and hybrid use case. What we're trying to highlight is that the more you use multi-department external/internal use cases, the better it drives gross and net retention.

Mike McCarthy, Vice President of Investor Relations

Thank you, Stephanie.

Operator, Operator

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

Richard Tse, Analyst

Yes, thank you. With respect to the strategy to kind of move upmarket and larger enterprises, you've obviously had quite a bit of progress there. How does that change your go-to-market model? I recognize that you are spending a bit more but tactically, it seems a little bit different from what you were doing years ago. If you could elaborate a little bit on that, that'd be helpful.

Claudio Erba, CEO and Founder

Thank you, Richard. We are adjusting our approach to align with the recent changes in the market. I see these changes as more reflective of the current environment rather than a shift in our strategy. We have been focusing on the enterprise segment for several years, which underscores the strengthening of our brand in the market. We are deliberately working to engage with C-suite executives and senior leaders more effectively and efficiently. This involves training our team to communicate our unique value clearly, showcasing benefits earlier in the sales process, and simplifying our sales approach to enable our sellers. Additionally, we are collaborating closely with strategic partners who are achieving great success alongside us, including leading system integrators within the Fortune 1000.

Sukaran Mehta, CFO

That's well said, Claudio. Yes. Nina Simosko, our CSO, brings that expertise from her previous roles and we're really relying on her to help execute these changes.

Richard Tse, Analyst

That's great, super helpful. Thanks for all that color. My second question ties into that one. When it comes to the new wins, I'm guessing most of them are competitive displacements. Can you give us a sense of who you may be displacing the most?

Claudio Erba, CEO and Founder

No, it's a very good question. We face three main challenges: we beat complacency and non-decision, which is particularly relevant now as CFOs take an active role in making educational decisions. We defeat single-point solutions that may address specific needs but fail to offer long-term value. Finally, we beat legacy vendors by focusing on building great products that are well-integrated and serve multiple functions across organizations. We know our strategy is working and our customers hear our message.

Richard Tse, Analyst

That's great. Super helpful. Thank you very much.

Operator, Operator

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

Suthan Sukumar, Analyst

Good morning, gentlemen. I wanted to touch on the strong expansion activity you guys described in the opening remarks. Can you touch on what use cases are seeing more traction now with the new broader product suite? And how is net new customer behavior evolving? I mean, ACV growth was fairly healthy on a constant currency basis. Is there more interest in some of these additional use cases right out of the gate with an initial sale?

Claudio Erba, CEO and Founder

So Suthan, we are excited to get logos from every opportunity. There are areas that strategically will be more important than others. Multi-department and external training provides real value because it offers direct ROI to businesses. Training your customers and sales organizations creates measurable outcomes, which we appreciate. The total external market is very large, and we believe training your customer is the way forward. Our expansion in that direction is vital because that fosters revenue growth.

Alessio Artuffo, President and COO

Claudio, to add on, we are seeing learning monetization gaining traction with companies learning how to monetize from training, even integrating with e-commerce solutions. It's a trend we are seeing continue and it is reflected in our plans and roadmaps to bolster that capability.

Claudio Erba, CEO and Founder

Yes, and it's interesting; I spoke to someone involved in monetization who noted that training customers starts as an awareness effort, creating an experience that proves its value before opening to monetization opportunities.

Suthan Sukumar, Analyst

Great. Thank you for the color. I want to touch on the partner channel next. Could you just provide an update on the partner ecosystem, particularly the OEM channel in terms of what was the impact contribution this past quarter and how has that channel been progressing?

Alessio Artuffo, President and COO

Suthan, first of all, I want to express that our focus on our partner strategy is holistic. I'm very pleased with the renewed interest in our OEM pipeline within sectors such as HCM. We're actively working on promising opportunities with our OEM partners, and I’m optimistic about the contributions from this channel in the future.

Claudio Erba, CEO and Founder

Alessio, just to clarify, it's TicTac, not TikTok. Pairing our efforts with strategic partnerships helps to build our brand effectively.

Suthan Sukumar, Analyst

A great clarification. Appreciate you guys. Thanks for taking my questions.

Operator, Operator

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

Josh Baer, Analyst

Great. Thanks for the question. I see that you’re continuing to add an impressive number of customers quarter over quarter. I was hoping you could provide a little context there. What are you seeing as far as churn versus gross adds? Where are these new customers coming from in terms of geographical or use case perspective? Any color would be appreciated. Thanks.

Sukaran Mehta, CFO

Good morning, Josh. Sukaran here. I'll address retaining customers first, and then Alessio can give you insight on new adds. We excel at providing multiple use cases, which drives customer loyalty and retention, as we integrate deeper into their operations. This strategy correlates directly with strong retention rates.

Alessio Artuffo, President and COO

We believe in net dollar retention, and we consistently aim to grow our base healthily. We're satisfied with our retention metrics. In terms of new customers, while we cannot disclose names due to confidentiality, we are acquiring numerous logos and entering larger companies. This is a strategic evolution where we will focus on account planning and expansion within these companies, dedicating resources to ensure long-term engagement and success.

Josh Baer, Analyst

Great, great. Thanks for the color.

Alessio Artuffo, President and COO

Thanks, Josh.

Sukaran Mehta, CFO

Thanks, Josh.

Operator, Operator

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

Daniel Chan, Analyst

Hi, good morning. Related to the NDRR, ACV continues to grow nicely year-over-year but has been steady quarter-over-quarter after many quarters of sequential expansion. How do we reconcile the flat quarter-over-quarter ACV against comments on upsell doing well and NDRR?

Alessio Artuffo, President and COO

Dan, the flat ACV indicates that a more substantial enterprise segment influence can affect our numbers. In Q3, the enterprise segment contributed slightly less than in previous quarters. The ACV also reflects currency headwinds, which could skew perceptions of growth.

Daniel Chan, Analyst

I was wondering if there was anything to read into that as it relates to whether your customers or sales team is descoping some deals to get them over the line, is that due to macro issues or budget reductions?

Claudio Erba, CEO and Founder

No, none of that, Dan. The way to think about ACV is that if the enterprise segment contributes meaningfully, you should see a pickup in that figure. The fluctuation you see in Q3 is normal.

Daniel Chan, Analyst

Great. Thank you.

Operator, Operator

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

Christian Sgro, Analyst

Hi, good morning. I'll continue on the topic of seasonality for my first question. The Q3 quarter can be late in the summer. Did any deals slip, or is there anything to call either way? Earlier, you mentioned Q4 and Q1 could both be strong on the enterprise side.

Claudio Erba, CEO and Founder

Christian, I appreciate your attention to prior responses. The answer is yes to everything you just said. We imply that we saw deal cycles elongating, and this is common in Q3 due to summer holidays. Yes, we have had some slips. As for Q4 and Q1, while we don't disclose numbers, we work hard to deliver good results and like what we have in the pipeline.

Sukaran Mehta, CFO

Yes, Chris; as we said, we have a couple of quarter view on where the pipe is. Q4 is a seasonally strong quarter. Some of the comments Alessio made are in light of what we see for the next two quarters ahead of us. In Q3, we strengthened our win rates and our pipeline remains strong.

Christian Sgro, Analyst

Great. Lastly, Alessio made reference earlier to investments in the company's branding and marketing strategy. While it's evolving, do you have early thoughts on how you may position Docebo, possibly rebranding towards more enterprise focus?

Alessio Artuffo, President and COO

Certainly. We aim to evolve our branding in two key ways. One, we want to transition from messaging focused on products and capabilities to solving real business problems for our customers and presenting our capabilities as a means to achieve those solutions. Our execution will strike a balance between communicating our innovative DNA while targeting the issues our customers face. Secondly, we are engaging more with enterprises by presenting our solutions at venues where CIOs of Fortune 500 companies engage. We recognize an opportunity to strengthen our image in these industries, where we already conduct business.

Christian Sgro, Analyst

Perfect. Thank you for the color, Alessio. Thanks for taking my question this morning.

Alessio Artuffo, President and COO

Thank you.

Operator, Operator

Your next question comes from Kevin with Scotiabank. Please go ahead.

Unidentified Participant, Analyst

Hey, there. Good morning. I'm not sure if this was disclosed, but could you remind us what the ACV from new customers was in the quarter?

Alessio Artuffo, President and COO

I'm going to double check that, Kevin. I think not on top of mind. Let me come back to you on that.

Unidentified Participant, Analyst

I guess where I'm going with this as we think about going forward, we should expect to see that go up quarter over quarter given the mix of ads will likely skew better towards enterprise in Q4?

Alessio Artuffo, President and COO

Yes, Kevin; generally, the mix can shift. As you move into Q4, larger enterprise deals could cause that figure to increase, as larger segment contributions typically impact ACV positively.

Unidentified Participant, Analyst

I'm just trying to understand for modeling purposes, we can reasonably assume that that goes up?

Alessio Artuffo, President and COO

Correct. The 42 was a weaker net new ACV number since the commercial mid-market segment is contributing to that. As we approach Q4, the enterprise segment's influence will likely increase ACV.

Unidentified Participant, Analyst

Got it. On the commentary, just to be very clear here on the sales cycle being elongated, is it relative to Q2 and Q3? Did you see it getting even longer? How do you think about that going into Q4, and is that reflected in both net ads being pushed out and/or perhaps the starting point of ACV at a new end?

Alessio Artuffo, President and COO

Hi, Kevin. Alessio speaking. It's primarily where a more substantial spend for the company is made; there is more scrutiny on new processes. Buyers often lose track of the processes, leading to delays in decision-making.

Unidentified Participant, Analyst

Okay, understood. Thank you. Appreciate the color.

Claudio Erba, CEO and Founder

Thanks, Kevin.

Operator, Operator

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

Nick Agostino, Analyst

Good morning, everybody. You talked earlier about increasing spend on the sales and marketing side earlier this year. You put greater emphasis on outbound sales. Can you talk about where you are today as far as team size and the contributions you saw in the quarter from your outbound activity, and what further improvements are needed?

Claudio Erba, CEO and Founder

Hi, Nick. Thank you for the question. Outbound is contributing around 20% to 30% of our overall pipeline based on segments. We believe integrating outbound efforts more closely with our sales machine will yield further benefits.

Sukaran Mehta, CFO

Additionally, it’s critical to highlight that our enterprise sales are benefiting from self-sourced deals and partnerships that are also bringing in business to our top line.

Nick Agostino, Analyst

Great. Just one follow-up regarding the MHR expansion partnership. Where are you in context with your other OEMs like Ceridian? Are you gaining more traction with MHR?

Alessio Artuffo, President and COO

The way to think about it is that while Ceridian was our first OEM partner, MHR is progressing more rapidly. They are still smaller compared to others, but our penetration opportunities with them are expanding. We are also integrating more products into our offerings which will enhance our position within their customer base.

Claudio Erba, CEO and Founder

MHR holds a significant share in the UK market and serves the public sector, which is attracting increased demand.

Nick Agostino, Analyst

Okay. Great. Thank you.

Claudio Erba, CEO and Founder

Thanks for attending this earnings call. Let's meet in one quarter. Thanks, everyone, and thanks team.

Operator, Operator

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.