D2L Inc. (DTOL) Q4 2026 Earnings Call Transcript

Hello, everyone, and thank you for joining the D2L Inc. Q4 2026 Financial Results Call. My name is Lucy, and I'll be coordinating your call today. During the presentation, you can register a question by pressing star followed by one on your telephone keypad. If you change your mind, please press star followed by two. It is now my pleasure to hand over to your host, Craig Armitage, to begin. Please go ahead.

Thank you, and good morning, everyone. Listeners are reminded that portions of today's discussion will include statements that contain forward-looking information. Any such statements are subject to risks and uncertainties that could cause actual results to differ materially from a conclusion, forecast, or projection in the forward-looking information. Further, certain material factors or assumptions were applied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking information. For identification and discussion of such risks, uncertainties factors and assumptions as well as further information concerning forward-looking statements these refer to the company's annual management's discussion and analysis and the most recently filed annual information form in each case is filed under the company's profile on cedar plus at www.cedarplus.com in addition during the call reference will be made to various non-ifrs financial measures including adjusted adjusted margin adjusted gross margin and free cash flow These non-IFRS financial measures do not have a standardized meaning prescribed by IFRS and may not be comparable to similar measures presented by other public companies. Please refer to the company's MD&A for the years ended January 31, 2026, and 2025 for more information about these and other non-IFRS financial measures, including, where applicable, a reconciliation of historical non-IFRS financial measures to the most directly comparable IFRS financial measures from our financial statements. With that, I'll turn the call over to John Baker, Chief Executive Officer at D2L. Please go ahead, John.

Thank you, Craig, and thank you, everyone, for joining us for a Q4 earnings call. We released financial results after the markets closed yesterday, which you can find on the Investor Relations section of our website at D2L.com. Please note that the results we're discussing today are in U.S. dollars. I'm joined this morning by Josh Huff, our CFO, and we look forward to taking you through the results today and addressing any questions. Last year, fiscal 2026 was a strong year of execution and progress for D2L across our growth markets. We delivered 10% subscription and support revenue growth, ending the year at 198.4 million increased ARR to roughly 220 million generated 44.4 million of free cash flow and we strengthened our balance sheet with 119 million in cash and no debt last year our platform supported more than 21 million users globally across our customer base of more than 1500 100 organizations in over 40 countries. At the same time, the year was not without challenges. Namely, we experienced higher churn in our U.S. K-12 customer base. While K-12 is the smallest of our three main markets, this dynamic is weighing on near-term revenue growth. For context, K-12 represents 10% of our ARR at year end, and roughly half of that is in the U.S. To give investors a better view of the underlying performance in our core growth markets, higher education, corporate, and international, we've included KPIs that exclude K-12 for some of our data points this quarterly update. Demand across these markets remain strong. ARR grew by 14% and almost 11% in constant currency. Our sales and marketing team since traded another strong quarter of execution in a year that's had lower than normal deal volumes in North America higher education. That said, we're seeing good demand signals across our core growth markets pipeline generation exceeded expectations last year and remains healthy entering this new fiscal year reinforcing our confidence in our future growth turning to the q4 operating highlights it was a solid quarter for new bookings and customer additions in north america higher education we saw a gradual improvement in market conditions with a modest uptick in full campus rfps and increased interest in continuing education and adult learning applications for upskilling we believe our competitive position is stronger than ever and that's reflected in win rates consistently above 50 percent this past quarter we won business from all three of our main competitors with new customers that included henry ford college a large community college in michigan with a strong focus on workforce development the university of colorado colorado springs a public research university known for engineering health sciences and expanding digital programs and okanagan college british columbia's largest regional post-secondary institution which serves over 20 000 learners in k-12 we continue to provide great service to the largest school districts in north america and in q4 we added hudson global scholars a k-12 organization delivering u.s curriculum and diploma programs to K-12 students globally. Internationally, we entered the new year with good momentum. Year over year, international ARR growth exceeded 15% in fiscal 2026, and we're seeing strong pipeline as we look ahead. Recent new customer wins include the University of Free State in South Africa, one of the largest public universities serving 37,000 students through a significant online learning presence the university of prince mugrin in saudi arabia a private institution focused on english language education white cliff college in new zealand a leading creative arts and design institution and building on our market leadership in singapore we also added singapore university of social sciences which specializes in lifelong learning for working adults. After my recent trip to Singapore, it's clear our clients in that region are on the leading edge when it comes to adopting new AIs for this new era. In corporate learning, we're also expanding our customer portfolio to include a large statewide public health agency serving millions of residents. This win reflects the strength of our platform in supporting large, highly regulated organizations with complex needs and we added the American Society of Interior Designers which represents more than 25,000 professionals and educators nationwide. In addition to these new customers, we continue to win third-party recognition for D2L's product leadership. During the quarter, D2L Brightspace was recognized as the top learning management system by training industry and one of the best enterprise learning management systems by talented learning. We also received multiple Brandon Hall group awards through both D2L Brightspace and D2L Lumi. We appreciate the efforts of the D2Lers who have partnered with our clients so closely to build amazing learning experiences that helped us win these awards. Now before I talk about the latest AI milestones, I want to frame this through the lens of D2L's long-term vision. For more than 25 years we've been unified in our mission to transform the way the world learns and we've done that through multiple technology shifts the move to mobile then to cloud and we've learned to stay focused on what matters the most to educators and learners over this period we've had the vision to deliver personalized learning at scale and we see ai as a powerful enabler the work that we're doing with our clients we're implementing ai in the way that our customers have asked for within the core learning platform that always sits at the center of teaching and learning g2l brightspace is a system of record and a system of engagement for more than 21 million users many use it for hours each day and because our customers operate in a regulated mission critical environment we've built a foundation of responsible ai giving them a trusted platform that is built to operate safely and reliably at scale and we're in the center of a broader ecosystem that supports thousands of third-party products in 2025 for example there were 2.1 billion integration links from our platform into partner sites with this as a foundation our ai strategies focused on embedding ai into the core workflows educators and learners use every day to improve outcomes while at the same time delivering better efficiency. This past year, we've had a 4X expansion of AI capabilities across more workflows for educators supporting new languages and into new experiences for learners, such as tutoring, feedback, and just-in-time interventions. We continue to see strong interest from customers for D2L Looney. ARR was more than 3.5 million at the year end, up from roughly 2 million at the end of Q3, and the attach rate is accelerating, reaching over 40% now for new higher education customers. Importantly, our position as an AI-first, next-generation platform is resonating in our markets. It's helping us win new customers and secure renewals, supporting both a high retention rate and increasing win rate, and it's against this backdrop that we see an opportunity to accelerate our market share gains globally and we're investing to capitalize on this momentum in addition to customer facing applications we're increasingly developing ai through all aspects of the company on a foundation of responsible adoption we have extended ai into internal workflows across engineering go to market customer support and customer success and we're already seeing a positive impact among all of our teams for example our learning services group cut the cost of converting old word documents into engaging highly interactive learning by over 80 percent what took days is now taking minutes and it has a big impact on the quality of learning for students these innovations are focused on supporting higher revenue per employee over time while improving customer outcomes this operational leverage will become more visible as these improvements continue to scale supporting margin expansion and increasing profitability in future years with that i'll turn the call over to josh to walk through our financial results and our outlook in more detail over to you josh Thanks, John, and good morning.

As John noted, we had a solid fourth quarter, highlighted by healthy bookings and continued strength in pipeline generation, which in part was offset by churn within our U.S. K-12 customer base. Total revenue increased 5% in Q4 to $55.8 million and 6% for the full year to $217.5 million. Subscription and support revenue increased 9% in Q4 to $51.1 million, driven by new customer growth and expansion from existing customers, and was partially offset by U.S. K-12 churn. For the fiscal year, subscription and support revenue increased 10% to $198.4 million. Annual recurring revenue grew by 10% to $219.8 million and 7% on a constant currency basis. We saw continued strength in new ARR bookings from our global higher education and corporate markets. Q4 ARR growth was approximately 11% in these markets combined on a constant currency basis. Q4 professional services and other revenue decreased 27% to $4.7 million, in part due to a $0.9 million one-time revenue adjustment in the prior year and a generally cautious spending environment in the U.S. market. Turning to margins, this is an area where we've made significant progress over the past several years, and in Fiscal 26, we expanded margins while absorbing additional costs related to the database technology migration. In the second half of the year, this database technology migration had an approximately 200 basis point impact on adjusted gross margin. We expect the impact to scale down over the course of Fiscal 27 as the work is completed, putting us back on the path to gross margin expansion in Fiscal 28 and beyond. Adjusted gross margin for Q4 was 68.7% compared to 69.6% in the prior year period, and subscription and support gross margin was 71.9% versus 73.2% last year. For the full year, adjusted gross margin expanded 60 basis points to 69.6% and subscription and support gross margin improved 50 basis points to 73.3%. In terms of earnings and cash flow in the quarter, adjusted EBITDA in Q4 was 8.1 million, compared to $9.4 million in the prior year period, primarily reflecting the year-over-year comparison in professional services and the database migration costs. For the full year, adjusted EBITDA increased 17% to $32.9 million, with an adjusted EBITDA margin of 15.1% for the full year. Free cash flow was $12.2 million in the quarter, up from negative $0.6 million in the same period last year, reflecting strong working capital management in the current period. And for the fiscal year, we are pleased to report free cash flow grew 63% to $44.4 million as the company continues to scale its profitability and optimize working capital management. Below the line, our Q4 net loss was $1.4 million versus prior year net income of $19.9 million, with the change being explained primarily by a 15.8 non-recurring income tax recovery in the prior year and a non-cash fair value adjustment of $4.3 million on the loan receivable from SkillsWave Corporation. For the full year, income was $9 million. Lastly, our financial position remained very strong at fiscal year end, with no debt and and $119.2 million in cash and cash equivalents on our balance sheet. In terms of uses of cash, in Q4, we repurchased and cancelled approximately 350,000 subordinate voting shares under our NCID program, bringing the total for the fiscal year to nearly a million shares as of January 31, 26, for an aggregate price of $11 million, representing the cancellation of 3.6% of the opening subordinate voting shares outstanding and roughly doubling the utilization of the NCIB this year. We continue to put great focus and effort into growing our annual recurring revenue balances, both from new customer acquisitions, as evidenced by some of the examples John provided, as well as our ability to grow and retain our existing customers. Growth in ARR is a strong indicator of future growth in revenue and future margin expansion through operating scale. In the current year, our overall ARR growth and related metrics were impacted by our US K-12 market. Excluding this market, our ARR grew 11% year-over-year on a constant currency basis, or 14% on a reported basis, and our GRR was 94.4% and net revenue retention was 103.7%. Metrics that collectively give us confidence in our ability to invest into our growth drivers and deliver corresponding strong returns and outcomes. Looking forward for the current fiscal year, we are guiding to subscription and support revenue of $212 to $214 million, or growth of 7% to 8%. Total revenue of $231 to $234 million, or growth of 6% to 8%. An adjusted EBITDA of $33 million to $35 million, implying an adjusted EBITDA margin of 15% at the midpoint. We expect revenue growth and adjusted EBITDA margin to increase as Fiscal 2027 progresses, enabling performance to improve in the second half of the year relative to the first half of the year. While we continue to make operating efficiency improvements, the overall operating margin guidance for Fiscal 2027 is affected in part by the flow-through of the U.S. K-12 churn at a time when we are seeing strong investment returns in our core growth markets of global higher education and corporate. In Fiscal 27, we are carefully balancing near-term operating efficiency with appropriate investment levels to most effectively meet our medium-term objectives and position the company for our long-term goal of market leadership. • Furthermore, in addition to the Fiscal 27 guidance, we reiterated our medium-term target operating model of 10% to 15% revenue growth and 18% to 20% adjusted EBITDA margin by Fiscal 28. We recognize that our Fiscal 27 outlook remains below these targets, reflecting the impact of near-term headwinds we discussed today. From a revenue perspective, our confidence in accelerating growth is rooted in several factors. One, our strong ARR growth and new customer acquisition in our core growth markets as evidenced by 11% year-over-year constant currency ARR growth in our global higher ed plus corporate markets. Two, a gradual improvement in overall global higher education activity levels where D2L operates with very high competitive win rates. And lastly, progress in customer expansion, including upsell of add-on solutions developed organically or added inorganically. From an adjusted EBITDA perspective, we have high visibility into margin expansion, driven by increases in gross margin as technology migration costs moderate and operating leverage as revenue grows supported by scale and productivity gains across the organization we are excited about the progress we are making as a business and confident in our path forward as we work towards our goal of becoming the market leader for learning globally with that we will open the call to questions operator thank you if you would like to ask a question please press star followed by one on your telephone keypad now if you change

your mind please press star followed by two to withdraw yourself from the question queue when preparing to ask a question please ensure your device is unmuted locally the first question today comes from Erin Kyle of CIBC your line is now open please go ahead hi good morning thanks for taking the questions um I just want to start with the ARR growth You noted 14% ARR growth ex-K to 12, or almost 11% in constant currency, so you called out healthier pipeline, slight uptick in RFP activity, just want to know where you think, how sustainable you think that growth rate is exiting Q4, and maybe what's embedded in the fiscal 2027 guidance, excluding K to 12?

Yeah, thanks, Erin, good question. We're pleased with the progress in Q4, as we highlighted specifically within global higher ed and corporate, we continue to see strong bookings. And as we look forward, we expect that to continue. If you look back over the past two to three years, we've sort of been operating within that range. And, you know, we As we look forward in F-27, we still have some of the offset coming from the U.S. K-12 market, as we disclosed. But as we look forward, that core growth rate that effectively is on 90% of our ARR, we're confident in continuing into the future.

That's helpful. Maybe I'll switch gears just to the net cash balance. ended the year with close to 120 million in cash, no debt. So how should we think about, you know, buyback pace in fiscal 2027 versus a piece of reinvestment and possibly potential M&A from here?

Yeah, good question. Again, we were pleased with the free cash flow generation in the quarter as well as the year now, exceeding 40 million on a full year basis. And that's equating to a strong balance sheet, as you mentioned, which is giving us flexibility from a capital allocation perspective. We continue, as we look over the near and medium term and long term, we see a mix of growing the business through M&A as a way of complementing the organic growth. But we also see a very attractive price point from a buyback perspective. We've been using the NCIB more significantly. In the past year, we more than doubled the usage of the NCIB. We're increasing the level of usage and the capacity here in F27. And we also recognize that there are additional ways to buy back stock, and we actively evaluate that as well.

Maybe I'll just squeeze a quick follow-up on that one. on on mna um if that is um you know something you're considering maybe you can just give us some color and maybe what type of targets you'd be looking at would it be more tuck-in acquisitions or something more substantial and you know kind of geared towards the corporate markets um and growing that opportunity or or more in the higher education space uh that's a great question aaron um you know i think we continue to evaluate a number of different opportunities in that space uh as you can imagine uh for us uh it's really important to bring in companies that can really help us solve really important problems for our clients you know a good example would be the h5p acquisition that we did a couple years ago now

that enabled us to really open up not only higher education as a market but uh really plays well in our corporate marketplace as well so things that have a natural halo effect across all of our key growth markets is ideal something that's driving an accelerated growth uh helping us expand our gross margin helping us contribute to evita these are ideal candidates for us to to talk into d2l uh and you know we're looking at a broader m a set as you can imagine in the year ahead thanks very much i'll pass the line thank you the next question comes from gabin fairweather of atb callmark your line is now open please go ahead oh hey good morning thanks for taking my questions and your prepared remarks you talked about displacing all of your you know major competitors this quarter i'm curious what the key deciding factor was on the canvas takeaway i think uh when you look at the factors for uh all three takeaways really from all of our three main competitors it's fairly consistent it's having a very clear roadmap uh for the future in terms of where the technology is going it's providing exceptional support to the customer to help them through the transition, and having the capability that's going to be needed for the next generation of learning. Many of these clients are trying to also support, at this stage, many modalities of learning on campus, online, staff upskilling, supporting the workforce market, you know, in the core education market that we're serving today, being able to support all of those at once with one common platform is a compelling differentiator. and then there's a number of others too gavin um you know we're still seeing pretty consistently our win rate tick up well above 50 percent in higher education uh and and i think uh the thing that's really standing out for a lot of our clients is is the innovation that we're putting into the platform uh ai is also helping it's not showing up in rfps yet uh but it's certainly contributing as you know the ux in our platform leveraging ai is just so much easier to create quizzes create content create interactive learning experiences take you know old courses that might be using word documents or powerpoints or pdfs and turn them into really engaging modern web experiences for students to really drive better outcomes that deliver better retention better learning experiences so i i feel like we're waiting on all fronts to be honest gavin And, you know, I think the work that we have ahead of us is really trying to drive that replacement cycle for all three of these competitors, position all of them as legacy technology and help our clients really recognize that we are the leader when it comes to AI and this next wave of learning. And it's built on a strong foundation of responsible AI, leadership on learning science, and really delivering an amazing learning experience for students.

Appreciate that. Very helpful. And in your prepared remarks, you also talked about leaning in on sales. Maybe you can just talk about which regions or business lines are getting further investment and what you're seeing in kind of the demand and competitive environment that's telling you to lean in now.

Well, the leading indicator for us is really pipeline. And over the course of the last year, we've seen pipeline continue to perform incredibly well, exceeding our expectations for the full year, also trending well even into the new year here. And so we are definitely seeing good momentum on that front. Our win rate continues to take up in our core markets. So we were excited about that, actually across all of our markets. So we think there's a real opportunity to lean in now to both education and into corporate. And so both key growth markets are actually getting investment at this stage.

Just lastly for me, just on K-12, can you touch on the renewal book for fiscal 27 and kind of how much of that 10% of ARR is kind of up for renewal this year?

Yeah, well, maybe I'll split this with Josh. What's interesting with K-12 is you've got sort of a story of two markets. You know, K-12 U.S. has seen some challenges with retention, and we'll get into that in a second. That's about 5% of our ARR. That said, we still have some great U.S. clients. We're actually growing it. Hudson Global Scholars is a great example of a real thought leader in the space, adopting us as a platform and and what's also interesting is the pipeline continues to build so feel confident uh on the rest of k-12 outside of the u.s um those clients are engaging really well adopting more leveraging the platform in bigger ways and so you know while it represents you know now 10 of our business uh it's not the fastest growing part of our business it's it still feels very solid as a as a book of business and and i think a long term will be market that we want to see bounce back from where it is today. Josh, I don't know if you want to get into specifics.

Yeah, no, that was a good answer. Good color. As John mentioned, from a renewal perspective, like given it is now roughly 10% of ARR, we typically see about a third of the base be up for renewal in a year, and we see similar dynamic this year. And as we progress through F-27, we'll start to see the impact of the pressure we've articulated start to moderate, and that's part of what gives us confidence effectively in F-28, is as we get into F-28, the core growth rate from our markets starts to effectively represent itself in our consolidated results in a more pronounced way.

Thanks so much, and congrats on the strong bookings.

Thank you. It's been a lot of hard work by the team, so I appreciate it.

The next question comes from John Schau of TD Cohen. Your line is now open.

Please go ahead. good morning guys thanks for taking my question so some of the customers talked to last year were actually a bit cautious towards ai so right now do you think you spend enough time educating the market so they're getting incrementally more comfortable with ai yeah i think uh our client base certainly is getting more comfortable with ai and you know the leading indicator for us is going to be the change in rfp activity that uh specifically calls out ai functionality which we've not yet seen take up just want to be clear about we're seeing the occasional mention but it's not not consistent uh that said as uh as we pointed it in the and the call uh 40 attach rate for new clients adopting our our ai capability end of the gate lumi which is impressive um you know typically when people are doing an rfp they're just looking for the for the base product and so now seeing attached of lumi creator all these other different add-ons continue to grow speaks to how important this technology is to transform the experience for our clients. You know, I also pointed out on an earlier call that we saw about an 80x increase in the adoption, so those clients had adopted. We saw about an 80x increase year-over-year with the utilization of our AI in the platform. We haven't seen 80x this year, but it's up closer to 8x increase in adoption for those that have adopted the platform again this year so it's you know we're seeing some really good momentum within the adoption uh for clients and i think as we continue to roll out more and more capability uh i think you'll see that confidence continue to grow and i think it's all rooted in the impact that we're having and so if if through these technologies it makes it you know tenfold easier or even twice as easy to build really high quality courses and and create assessments that really lead to better outcomes for students, I think you'll see more clients needing this technology, not just desiring it.

For the color, I think that 40% attached rate is quite impressive. And how should we think about Lumi versus external AI model like ChatGBT? Do you think they're gonna co-exist together or they're kind of mutually exclusive for users?

I think you're gonna see them co-exist. I think, you know, OpenAI is really a great consumer app, and I think many users will use that. I think you'll see, well, in our case, we use over 12 different models inside our platform to support all the different AI applications within Brightspace. And so you're going to see us harnessing these technologies. And then you're going to see us fine-tune models to support personalizing the learning and taking all of the data and the insight that we have around learning science in improving these AI models to provide a better experience on the learning side for our clients. And then I hope that you'll see us lean into this even more in the year ahead as we try to embrace new ways of thinking about AI. And if you think of it at the heart of AI is learning. And so I hope that we've become a very significant player in the AI world as we go forward, not just in terms of the technology, but in terms of the human impact, in terms of upskilling with our clients to support the transformations in the workplaces, to support preparing students for the next generation of jobs, the changing entry-level roles that people are going to have to, you know, find as they look for jobs. We're at the heart of solving many of these critical problems, and I'm quite excited with the team's motivation, excitement about digging in and getting this all done.

Thank you. I'll talk a lot.

Thank you. The next question comes from Stephen Mackelson of BMO Capital Markets. Your line is now open. Please go ahead.

Hi, thanks for taking my question. I just want to dig in a bit on the growth algorithm, specifically the new logo ads versus expansions. um do you see that mix changing in your fiscal 27 assumptions and uh does that mix need to change going to you know going into 2028 and getting back to that 10 to 15 growth well i think i think we might actually see um a bit more uh action with our clients this year ahead because i actually do think the adoption of like products like lumi creator plus and and others will will accelerate

quite quickly. And so maybe it's slightly more clients and new logos, but I expect a number of new logos to continue to accelerate in the year ahead, just given the pipeline and given the work that our teams are doing. And then beyond North America, in international markets, the teams are working really well to drive deeper penetration into existing markets and also start to open up new markets, which should see accelerated global growth as well too. So I'm not saying one or the other is going to be my favorite child, but I really do think both should be firing at a good level this year, which we'll set up next year in terms of revenue rack really well.

Yeah, we've been operating on 50-50. Steven, just to add a bit of color. Sorry, there's a lag. We've been operating at a roughly 50 50 mix uh in f26 we'd expect that to continue over the medium term if you look back in the history of d2l two three four years ago it was more of a two-thirds one-third new logo orientation the existing customer upsell motion as we've talked about for many quarters is a strategic priority of the business and and adding things like H5P, Creator Plus, Lumi to our portfolio that add incremental value to customers, but also help that upsell commercial motion has been a priority and is showing really good progress. But to answer your question, it's a 50-50 mix is sort of the way to think about it.

Okay. That's very helpful. Now, looking into the fiscal 27 EBITDA guidance, it implies that – well, it doesn't really imply much in the way of operating leverage. Now, I know there's additional expenses related to the database migration, but I'm guessing there's some investment in there as well. I wonder if you could give us a bit more color on where you expect that spend to go again, and how much of that additional spend could fall off going into fiscal 28.

Yeah, thanks, Stephen. So a couple of things. As we mentioned, the second half profile does accelerate. So we'll exit the year with a margin profile that's higher than sort of the average full year guide of 15%. mechanically there's kind of two near-term headwinds one is the the database migration costs which which moderate as we exit the year and that's about 100 basis points and the second is just foreign exchange rates specifically the strengthening of the canadian currency given a majority of our expenses are canadian and that has a roughly 100 basis point impact on our margin profile. And then if I just sort of pan out, as we've been working through strategic planning, going into fiscal 27, you know, we did carefully consider the right balance of investment and operating leverage in the near term. And, you know, seeing the progress in our core growth markets, as we mentioned, growing 11% and NRR rate of 104%, and then also seeing good progress with Lumi, you know, we made the decision to, in F27, make what we feel is appropriate investment into those growth drivers where we're seeing strong return, while also balancing operational improvements that are, in some respect, being offset by those near-term headwinds I mentioned before.

So that's sort of the mechanics of the F27 margin profile. all right that's uh it's very helpful i'll pass the line thank you oh sorry go ahead john no i just want maybe just that josh did a good answer there uh but i just maybe just add a bit more color you know the work that we're doing on the growth margin improvement is progressing really well i i've been quite impressed with the team's work there as tracking well as we articulated before kind of wrap that work up as quickly as we can in the first half of this year and feel like the team's doing a good job on that front uh and then you know there is there is a lot of ai investment uh as you can imagine that's going into the both the product but also in turn

in terms of internal adoption uh and and that should have a pretty big impact on our ability to constantly hit our numbers for that share for even though all right very good to hear all right thank you thank you the next question is from paul treber of rbc capital markets your line is now open please go ahead oh thanks very much and good morning you mentioned that the database migration has been going well just you know can you just dig a little bit deeper in it and and the point of my question is is really around like the the magnitude of the change that's involved you know particularly uh you know have been able to utilize ai to help smooth that transition you You know, because we've heard lots of stories of, you know, apps being, you know, vibe-coded on the weekend and things like that. Like, you know, the migration has been going for a couple quarters now. You know, just give us an extent, explain the degree of complexity that's been involved in that migration.

I think we're actually through the bulk of it all. You know, this has been many years of us actually working on this transition. And so, you know, it's not been vibe-coded just for clarity. like we did try to use a whole bunch of different technologies to help make the transitions from from one version to another uh much easier much faster but this has been some of our best engineers working for many years to support this transition uh that work is largely done it's now a bit more of a paved path for the next quarter or two uh and so there is more work that we could do in the future and so there are additional gross margin improvements that we can make over the you know the following years but what i like is uh many of our best engineers are going to wrap this work up and get back to some of the other things they're going to really add a lot of value to us as a company so yeah no vibe coding at this stage uh but you know um hopefully we'll see more leveraging of ai in other ways so thank you that's helpful thanks the the um second question like you know big picture around you know r d and you know with the the use of AI internally.

Can you give us a sense or what's your sense in terms of like the productivity gains that you've seen with it? And then how do you look at the balance between taking those productivity gains and using it to drive more product innovation versus letting some of that fall to the bottom line?

Yeah, I think we're still early stages in terms of our own internal adoption of AI. The teams that have embraced it, I'll give you a couple of examples. Our learning services group have cut the cost, internal cost, developing courses by over 50%. We're even now offering services to our clients to help them understand how they can do similar work using our tool and using our team to help drive the cost of developing new programs and new courses by upwards of 50%, which is not small. Many of these clients will spend tens of millions on new program design in a year and so they can do twice as much for the same spin or they could uh or they could cut and drive efficiency uh dramatically for their university or college or for their training organization very compelling uh you know so i think that's an opportunity not just a cost saver and then internally like we did have one one of our teams leverage a lot of agentic ai and automation with ai and it managed to take the team you know as as they saw natural attrition we didn't let people go for clarity. But as we saw natural attrition, you know, the team is now less than half the size it used to be, but it's three times more productive. And so there are key workflows, there are key applications of AI within D2L that we want to see like that apply to many, many other parts of the organization to really improve the efficiency and automation. And maybe one last example, I can give you a hundred examples, but one last example is where our big effort right now has been trying to take uh implementation for new clients so we're removing all these folks from from all of our main competitors you know in the past it used to take many many months to convert a client over to us as a platform and then you know recently we've been saying three months not three years it takes some of our competitors three years to move from one system to theirs in our case it's now three months is our promise uh and we're trying to get down to you know three weeks like now that's an ambitious goal uh because as you can imagine changing a big enterprise system like this is not easy but the combination of people plus agentic plus ai is really going to help us solve a critical bottleneck which as you can imagine if there's a replacement cycle to move to more of a modern ai first learning platform which we expect to create a momentum around we want to be able to capture that momentum as fast as possible and so So, you know, we're definitely leaning into this this year. This is part of the investment that we talked about with Josh and myself earlier is investing to see the deployment of more of these technologies across the broader organization. I don't think – I can't think of a team that wouldn't benefit from leveraging these technologies in the future.

Thanks for taking the questions.

Thank you. The next question comes from Sethan Sukuma from Stiefel. Your line is now open. Please go ahead.

Good morning, gents. For my first question, I want to touch on corporate learning. It's good to see consistent traction here. Can you speak a little bit to some of the progress you've made on revamping your go-to-market process given their recent hires and where you stand on your product investment focus for employee learning use case and how that's tracking in? Would you expect that to start? Would you expect to make a more meaningful push on that front? So, I didn't quite catch that last part of the question there, the second part of the But I happen to speak to the first part first, but if you can sort of repeat the second part, The second part was more around, you know, where you stand from an R&D product perspective for the employee learning use case and, you know, how that's tracking and when do you expect to see more impact on that front?

Yeah. Those are all great questions. And so, you know, we, as we mentioned in the previous call, we're really, you know, if you look at our growth markets, education, higher education specifically, and corporate, in the past, we were very much focused on training organizations. uh think like professional accountants or nurses or others um interior designers is one another another one that we announced this this week uh that's all going well and we continue to make investments uh both on the go-to-market uh and also in terms of rd to support that push and those are growing very well as josh pointed out uh employee training is relatively new uh we have you know a lot of clients in that space already that adopted us but we still think we need to put a little bit more investment from an R&D perspective uh into that market uh the investment that we're making on the sales team underneath Kevin Capitani and his leadership is has been going well uh the team's building out uh I think I just approved his other hire this week uh and now it's about driving execution we're even chatting with some clients later today so I I think that's going to go well this year uh but the key now is uh making sure that uh the go-to-market month motion really fires up and that we support it quickly on the r d front now keep in mind all of the r d that we do for employee training is going to play incredibly well with our other markets because the functionality that we're building to close gaps there in that space are going to be features that are going to be loved by pretty much every other car that we've got so i i feel feel like it's a very worthwhile investment do you think for our color um uh for Second question, I want to touch on M&A.

In this backdrop, do you see increased opportunity for acquisitions? And in general, how have your priorities changed? And I'm kind of curious as to what might be becoming incrementally more exciting for you guys more recently.

Yeah, it's definitely changed what we're looking at in terms of M&A. I do think M&A is still an important driver for us to accelerate growth and also to support our ambition from a profitability perspective. And I think our team is hungry for additional products, even though we've got a number of them already, to be able to take it to our base because our clients have no shortage of challenges. They want a company like ours to help them solve. and so i i do think there's capacity for us to continue to push on that lever uh and so you know in terms of what's different i i think we're you know we're thinking about the market differently in this new age of ai uh we want to really look at things that are going to really help us strengthen the platform uh and that are very defensible in this new market and so you know in our case we're also seeing a thousand applicants for a job and so it's not about uh so much the talent it's really about the combination of a great team solving really important problems that really strengthen our platform story okay great thanks signal there questions guys i'll pass the line thank you the

next question comes from brian peterson of raymond james your line is now open please go ahead good morning this is jessica on for brian um really good to hear about a positive commentary and pipeline generation coming out of last year so i'm just thinking in light of that how should be considering the current pipeline mix like a rough like a rough like high level view of it between what would be considered more like an early stage interest or opportunities that are further along in the current procurement evaluation process oh and by the way i think it's jessica right is that is that right yep yeah oh thanks jessica sorry you got introduced to brian i wasn't

wasn't quite sure uh so i think i think um when you look at her i know appreciate it when you look at our pipeline uh we we have a uh it's basically across the board you know uh we certainly have a lot more early stage pipeline but that pipeline you know as you can imagine we the team works through pretty aggressively to move it through the conversion stages conversions at each of the stages has continued to take up like we mentioned with the win rate uh at the final stage it's still taking longer uh to take people through that uh journey if you will maybe slightly less than it was this time last year um but it's still it's still a journey there's no no no questions it's still a full court press the team is working very hard to sort of convert everything but what i do like is the pipeline is growing conversions growing the team's really dialed in in terms of really looking at the data in new ways and better ways uh and i feel very good about our ability to go off and win that business that we're generating in terms of interest. So I'd say a gradual improvement, and we will hopefully pick up speed as we get through Great to hear.

And also sort of a follow up. In the past, international markets have been slower to adopt cloud LMS compared to the North American market.

But as we're having these developments in AI, have you been seeing the new technologies helping with um just expanding the market there internationally and winning deals yeah that's a great question uh because it's it's a very much a a challenge in international right because you're right uh they've been a lot slower to adopt cloud um but i think they've come around uh you know we've announced a bunch of events there internationally that historically we wouldn't have seen because they were not ready for cloud in the past but they are today uh and then ai is I think a compelling driver internationally you know and but more importantly responsible AI they want to like they want to make sure that the partner they're working with are really thinking carefully about how to implement these technologies in ways that are going to improve the educational outcomes for students and make the jobs of the faculty and the administration that much easier and so it's not it's not just AI it's making sure that we implement it in ways that are really going to have a really positive impact which is why we're putting so much work into developing efficacy studies and partnering closely you know we just announced for example five different grants with the suny system to really look at different nuanced uses of this technology to support the classroom experience and so it's that combination of these things that are really driving international adoption and i think internationally many of these schools want to leapfrog they you know they've been using old legacy platforms for a very long time and they're ready for a change and when they want the change these clients tend to want to embrace a lot of different technologies not just the core learning platform and so i'm actually quite excited about the international market um and in some regions not all just for clarity some regions have an abundance of capacity but other reasons where there's not a lot of capacity as they have not learned how to build a lot of online courses this is they're relatively new in a good example would be india who's just opened up the market for online you know our ability to go in and not only help them with the great platform but also help them through the how do you actually build a great online program is highly impactful you know there's a good case study that we just put out where we took a university from zero online students to 50 000 uh just over a handful of years and so that kind of growth doesn't happen without a great partner and so i think our team is well positioned to support these clients globally that's really great to hear thank you thank you we have no further questions at this time so i'd like to hand back to john for closing remarks well thank you everyone for joining us for the call today we're really looking forward to updating you following our q1 results have a great day everyone and happy easter This concludes today's call.

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