Docebo Inc. (DCBO) Earnings Call Transcript & Summary

All right. My name is Josh Baer, software analyst at Morgan Stanley. This is the last session for me this week, so make it a good one. We have the pleasure of having the CFO of Docebo, Sukaran Mehta here today. Thank you so much for joining us.

Thanks, Josh.

I have some disclosures -- for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. And if you have any questions, please reach out to your Morgan Stanley sales representative. So for those that might not have been plugged in this morning, you did report earnings, so maybe that's a good place to start with key takeaways from your report, yes.

Sounds good. Hi, everyone. Yes, good we printed this morning, good revenue growth 35%, 36%. We've also printed 6% EBITDA margin and free cash flow of 5%. If you think about the business, we're -- we continue to -- the story of Docebo is different and I'd like to give that perspective from a learning management software and how it's playing in our environment. 65% of what we do from a customer perspective is support them from an external learning, meaning that anything beyond your employees, so whether it's your customers, whether it's your partners, whether it's your suppliers, et cetera. And as you know, we announced number of customers, such as VMware, a large entity within the province of Quebec, which is somewhere from Canadian. So we signed a major federal or provincial contract with the Quebec government. There's a lot of investments happening both on the external learning side and certainly on the internal employee type of learning. We're seeing a lot of [ FED ] and SLED investments that are going there. One thing that we did see in terms of trends that are slightly different because it's our industries that when you think about the external learner, whether it's AWS doing the customer academy with Docebo or Zoom or Lululemon and others, is that everyone is focused on increasing adoption from a customer perspective or protecting their revenue base. So we're seeing investments from an enterprise perspective that are enabling that. I've heard some notes from calls or the meetings that you guys have today from ServiceNow and others are doing similar things, they are customer of ours. We're doing some supporting exercise with them too. And so more and more on the enterprise segment, which is customers that we call in our world, $100,000 ACV and above, that pipeline is starting to look interesting on the mid-market and SMB. There's some pressure, but I would say it's normalized. We haven't really seen it deteriorate from Q4 onwards or Q3 onwards, I should say. But on the enterprise side, we're seeing pipeline becoming interesting is the word, I will say, the Fortune 500s is an area where we've moved up market and we're seeing a lot of interesting opportunities on -- especially the external learning, customer education being the forefront of that kind of use case.

Great. That's a great overview. On the profitability side, could you review some of what you said about your goals for this year and sort of the path to profitability and how you get there?

Yes, so I'll give folks some perspective. We grew at plus 35% or so for the year. And you -- if you take that in terms of unit economics, we're 80% gross margin business, 5% free cash flow, 6% EBITDA is a proxy for free cash flow for me and 2% is an important number. I call out 2% -- 2.8% share-based comp as a percentage of my total revenue. So we're extremely focused on driving high performance. Now if I take that into 2023, even if we leave the Street, I'm just leaving in revenue, I don't give revenue guidance right now, but we're giving quarterly guidance. But even let's just say the Street is at 30% or so growth for the year, we're a business that without touching sales and marketing and R&D can drive operating leverage from that 6% EBITDA margin by just driving that G&A, which is 19% or 18% today. If I just brought it down to what I should be at scale, which I'll take a Canadian peer, which is relevant because we are dual-listed on the NASDAQ and the TSX. Kinaxis, a great company is at 10% to 11% G&A, which is reasonable as we scale up. And if I just deliver that in the next 2 years and half of that this year, I'm going to be double -- low double digits on EBITDA free cash flow margin. And this business without touching R&D and sales and marketing is a 15% to 20% free cash flow EBITDA margin business, just by focusing on discipline we've delivered. And Josh, as you know, my background as at Vista Equity Partners, the only thing I'm good at is actually controlling costs in which we do well and we'll continue to show operating discipline whilst investing in the enterprise sales motion and R&D, which is an important aspect. This is a founder-led company still and has always been and Claudio is a product guy and we spend a lot of time on innovation.

Not the only thing you're good at, one of the things, right? Why don't you take a step back and talk a little bit about strategy and market and product and maybe starting with the long-term vision, is there ambition for Docebo to offer solutions in other areas that are in like one thing about the broader HCM market, there's core HR, there's talent management, talent acquisition? Or do you stick with being the best within talent development?

Yes. Great question. I will split this answer in terms of what's going to drive growth on a long-term basis, what are my pillars over which we can deliver. Pillar #1, which is kind of the focal point and is, I talked about external learner. And this is -- I'll give an example, so folks get a real perspective on the opportunity. Even if you take one of our customers such as AWS or Thomson Reuters, they use us for their customer education use case. AWS in the historical LMS space, if you were just serving your employees would have been 15,000, 20,000 employees give or take, we're selling close to 6 million users on the external use case on the Customer Education Academy, that's a much bigger total addressable market when you think about who we're serving on the external side. That opportunity on its own right just in the U.S., let's -- some numbers based on the work we've done is close to $5.6 billion on the external use case and 70% of that is greenfield. I don't need all of that $5.6 billion in the U.S., even if we do 5%, 10% as a market leader in this space, that gets us to close to $0.5 billion ARR just by executing on the new logo business as we do today. Pillar #2, which you talked about is where Docebo cannot participate in an internal HR buying, HR platform such as a workday or a Ceridian or a cornerstone where you are buying an employee experience platform where LMS is one module, we participate with our friends at Ceridian or our friends at MHR as Dayforce learning is Docebo. That is close to 10% of our total book of business today. And what is interesting is that, that business is growing 70% year-over-year and we've only had 2 or 3 of these HCM players that we white-label our product with. This enables us to participate in the market with the best-in-class learning management solution and there's multiple opportunities in that space. It doesn't require a lot of headcount investment, it's tactical hunters and strategic partnership. We're double down in that area. You should expect that to be a long-term pillar of growth. And then third, I will say that as we've moved from a -- we spent a lot of time in the U.S., and this is where whole market is growing at a faster rate than Europe is. But we are also a European entity, so as you think about geographical expansion, there will be certain elements where we're seeing as a deal we announced this morning, one of our largest deals in Nordic with Agria, which is a pet insurance company. We've signed another one in France in Q1, [ Ciminar ] where we're supporting them to as 8 million customers Agria, reducing the pet insurance by doing pet insurance, learning to that customers reduces the premium, reduces the exposure that the insurance company has from overall exposure perspective, it's a win-win scenario and we're doing a lot of those scenarios in Europe now and we're seeing lot of traction. So we spent some money and time in France, Nordic area and we'll see some fruits of that investment come through in the future years. And finally, I'll just talk as we think about solutioning by use case and also upskilling that's happening in the federal select sector, we are looking at that area more closely in the future, but it's a long-term bet. I would not forecast that in '23, '24, but this is something that even if you look at the province of Quebec contract that we talked about this morning, there's a lot of investment happening in the overall infrastructure of federal and public sector where they're uplifting the organizations and upskilling is going to be instrumental. So there are some avenues that I'm giving that will continue to drive the growth at a good healthy CAGR in the next few years while still delivering close to 15%, 20% in the -- let's just call it 2 to 3 years in free cash to EBITDA margin.

Great. A lot of interesting areas to dig into. One is pillar #2, the OEM partnership strategy there. Just wanted to dig in a little bit, how do those partnerships work? What are the economics? And I guess you helped with the impact with some of those numbers that you provided already?

Yes, so the way when you partner with someone like a Dayforce, Ceridian which is Dayforce, Dayforce Learning is Docebo, we have a revenue share arrangement with our friends at Ceridian. In a nutshell, once you have the plumbing, the exercise you do from an initial go-to-market perspective and we ensure their sellers and their services team are enabled, it's literally autopilot from a Ceridian perspective. We, of course, support them and we have a regular cadence of catching them, but there's not a lot of work or cost on my side other than just the hosting fees. I will just say at a high level, my margins are very -- I still maintain my 80% margin even after that rev share with these partners because we have nuances on how we price it and how they go to market is slightly different from an HR buyer and it's a registered user model, I can still maintain my 80% gross margins. When you think about the HCM space, it takes you, give or take 6 to 12 months to do this initial exercise. And when it -- now that we've been with Ceridian from 2019, that business has been continuing to grow and we still only captured close to 15% of the current book that they service today. So there's enough opportunity just within the current customer base of Ceridian itself that we can continue to expand more and more. And similarly, MHR in the UK dominates the UK payroll space, they have 40% market share, including public sector. And we've grown pretty rapidly with them from the learnings of Ceridian and we've got an interesting pipeline of OEM partner, [ Ciminar ].

Great. So that's the OEM channel. Thinking about other channels within go-to-market, can you tell me a little bit about your sales force. How is it structured? How is your sales force incentivized?

Yes, so we look at our business in 3 segments, what we call commercial, which is any deals between 20,000 to 50,000, 50,000, 100k average contract value is mid-market and then enterprise segment is anything over 100,000, all the way till 7 figures. Almost half of the business we generate in a given quarter comes from deals over $100,000 and above. That's important because that's also driving the efficiency from a CAC perspective in the system and going upmarket. That's how we structure the sales team in terms of the marketing team, how we look at the business is the organic engine I'm talking about. Almost 50% to 55% of the deals are driven through inbound, mostly on the SMB commercial, sorry, SMB mid-market side, outbound plays close to 30% in that ratio. And then we have 15 or so percent with partners and SIs that bring us those deals. So what you will see as we move up market more and more with some of the deals that are in the pipe that we should close as we move through this year is that large SIs are becoming more and more interesting and interested ultimately, economics for them, they take the services revenue, you take the subscription revenue. But when you are designing a solution for Fortune 50s or Fortune 500s, you need to work with folks, maybe an Accenture or Deloitte and others, no different to what other friends at Qualtrics and others have done as you move upmarket, these partners bring you the similar opportunities and everyone wins in that ecosystem. And so you should expect some more of that from us as we move forward. And there are certain partners in nuance industries like automobile that we are also similarly working with to win some of that business.

Great. That's helpful. And when you think about moving upmarket, so how do you land? Is it usually with a specific use case or in a specific department, wall-to-wall?

Yes. Great question. I mean I would say that if it's -- it depends, but I think a lot of the times, you will find us that we will land external because external is specifically a story of build versus Docebo, I'm not even saying by. When you have an AWS, that was a decision of build them self, which AWS loves to do or Docebo and they decided Docebo. And as you think about these folks that I think -- that are implementing core customer education strategies on a multi-year basis, as you thought about Andy Jassy announced AWS Skills, that was a 6 million user platform, spike in the platform in one day we had, so you got to be thinking about scalability of the platform too. And so we tend to win -- listen all the times, but certainly, that's the sweet spot. But as more and more this macro environment has turned out, one of the positions that we are benefiting from is we can solve all their problems under one Docebo, meaning we can do the external use case and the internal learning. So for example, Bridgestone was a contract we announced in 2022 was an external use case. CIO stepped in and says, well, why aren't we using Docebo for internal to? We can consolidate the tech stack, reduce the compliance risk and save cost. At the same time, I have 4 different business partners within Bridgestone that are using my platforms are much more stickier in that environment. So that's happening quite a bit and that's one of the positioning plays that will make us more successful as we move forward in the cycle.

Is that dynamic the end goal to become sort of the core platform, the core learning management system? Or does it work out? Are you happy sitting alongside a legacy vendor that might be used for compliance or x, y, z?

I would say that is certainly an element of what we are focused on because the more use problems you solve for a customer, customer education, partner education, onboarding compliance, you are more in multiple departments and multiple ecosystems over the organization. And if you remember one example I gave this morning was, almost 80% of our customers use us for 2 or more use cases. But every time I go over 3 or more use cases in a customer base, meaning they use me for customer education, partner education and onboarding, my gross retention becomes as good as ServiceNow and Salesforce. And so we are focused on penetrating that organization more and more not only to drive value for their organization, but also it makes us integral to the ecosystem and we're in multiple departments at the same time.

Could we double-click on the gross retention for those that weren't on the call, gross retention improved in '22 versus 2021. From my perspective, I don't think many people would have guessed that just thinking about the macro environment. And so wanted to dig in a little bit about some of the customer behaviors around that gross retention improvement?

Yes, it's a factor of 2 things. One is, this is -- goes back to the more you're serving the external use case of a customer, if I am supporting generating revenue for a customer or protecting revenue for a customer, meaning customer academy or partner training, where it's integral for your supply chain, that is a very critical need for the business. That's an important factor why we are integral. The second part is, the more and more I have multiple use cases, meaning that even though it's one Docebo and that bridges to an example, I have 4 different parties that don't talk to each other that are using Docebo, I have the Head of Customer Education, Head of Partners sorry, Head of Supply Chain, Learning, HR and compliance team. Totally 4 different partners do not talk to each other, but are using one platform Docebo. So I am much more integral in that story. And the more we do this, the more we become stickier and sticky and that's why our gross retention has improved year-over-year. Just a simple summary of how that works.

That's helpful. I wanted to shift the conversation to competition. If I look at the broader corporate learning landscape, there are a lot of vendors, it's crowded. So I guess the first question, who do you view as your core competitors?

I would say that it depends in segments. It's a segment story, it's a geographic story, but let's start with some big boys in growth that we compete with. Our friends at Cornerstone, that's an interesting story, a great business, but it's a business that has 4 different platforms. What are you getting Cornerstone Saba, sum total, EdCast, what are we getting is the question I ask myself if I was a customer. So what we're seeing more and more in the competitive landscape is that not only it's a legacy platform, but it's also a roll-up story, so the customer wants to understand what are they going to actually get on a long-term investment basis, why are they making investment from an R&D perspective. And that's really a business on the internal use case for us. It's a switcher market and we're seeing more and more RFPs come out. I'll just say that gross retention isn't that great as what I've heard and there's certainly an opportunity for us to actually capture and we target some of that market. The others, you have the usual, the Workdays and others. But listen, that's a platform, which is internal. If it's a big HR, HRS check, really Docebo would not participate unless I go with Cornerstone, Ceridian in that example. So that's really how we see the legacy market. It's an employee -- not legacy, I should say. The larger players are in the business of employee experience, they're not really necessarily built a platform from learning beyond the HR buyer. They have built a platform that serves a big HR check where LMS is one module in the middle. That's the legacy players. When you think about the lower end the market as in commercial and mid-market, you have individual vertical players that do well, companies like Skilljar and others. But the moment you go beyond that one use case, which is sales enablement and the moment you want to scale it to the scale that those enterprise customers I name such as AWS and ServiceNow with millions of users go through the platform, that's when the story becomes Docebo story. True enterprise grade, not necessarily there's anyone that can do at the scale we do today and we are the leaders there and we'll continue to dominate that space. I think the challenge that the smaller vendors are now having is, a lot of them are private, lot of investment needed, now you got to tie it in the belts. And the reason that was why we made some comments on M&A. We're not in the business of acquiring competitors or large companies, but we're also seeing even in Series A, Series B now, there's -- funding is not happening, so we're seeing a lot more inbound. So what we're seeing is our competitive landscape is also being impacted from the fact that they now have to tighten their belts versus we never got ahead of our skis and our in a profitable domain and can we invest that dollar in via R&D.

You previously had mentioned, that when thinking about the external use case, it was a build versus Docebo decision. Do any of these competitors in your view have capabilities around external training that are close to parity with yourself?

I mean in individual nuance use case, so let's say, customer, I gave you that one name that skill job may have some capabilities, but the moment you have to go beyond one scale and second, you have to go beyond just that individual use case and do sales enablement and do partner training and do supply chain, that's when the story falls apart at enterprise level. We certainly feel that competitive landscape, I would say, sub $50,000 contracts. Now that's close to 1/4 of what I generate in the quarter. But we want to be playing there, the reason we play in that market is that's where we watch for innovation and we are a shop where once we understand what -- from our road map, we need to do in terms of that before anybody else we will innovate ourselves and build that road map if we learn from something happening in the low end of the market. That's really where the competition helps us understand innovation.

That's helpful. So I want to ask you a question on how Docebo is differentiated? I know we talked about a lot of the differences in use case, but wanted to maybe bring it back to the product within your suite and sort of address it through that way. So the question is, how is Docebo differentiated and would love to hear about some of the different products outside the core within your suite?

Yes. Well, so when you think about Docebo as a platform, you have the core learn LMS, which is the main epicenter of everything we do. And then beyond that, we have -- the next problem we solve for a customer from a learning perspective is a problem of content creation or content, let's just call it. In that regards, we talked about 2 products specifically today, Docebo Shape is AI, everyone is generative AI, this was launched 4 years ago. So it's just not -- I didn't come up with generative AI today, but we were doing this 4 years ago. And what Docebo Shape effectively does is if you're a Walmart or AWS and you have 2 intellectual properties sitting in your ecosystem and you want to convert that into content, you would use Docebo Shape, load the content. It creates -- it gives you an output, which you can distribute to your whole organization within seconds, which is what effectively what people are trying to do today with generative AI. And that, as we move forward will become even more -- even more powerful and we've had the best quarter in terms of attach rate for Docebo Shape. The other way we solve the problem of content is working with some partners such as offering the content library of GO1 and other folks. That's the typical learner where if you're a bank, Morgan Stanley and you want to do anti-money laundering, health and safety courses, that's very regimented type of learning. So that's the catalog we basically sell. So that's the problem of content with those 2 products we solve. Beyond that is performance management -- measurement, sorry, at course level, as well at company strategy level. At course level, there's a product called Docebo Learning Impact and then at strategy, overall strategy, how is the organization doing? What's the learner adoption, all the benchmark to the industries is Docebo Learning Analytics. And a lot of our enterprise customers will take that data from learning analytics from our Snowflake to their Snowflake and they build it with the benchmarks and with the KPIs and they build it within their own BI tool. So we're effectively selling data in that scenario or we can also -- we also sell to a number of customers, the front end with a beautiful dashboard. But a lot of enterprise customers want to just pull it in and move it into their BI. That's 2 other products. And then the ones that excite me out, I'll give you the one that is interesting to watch as we move forward is Docebo Flow, what we call is learning in the flow, is the TikTok way of learning in the future. You're in your job -- you have -- I'm going to give you an example. You're someone like a service or Lululemon, both customers, Lululemon employee get stuck on a refund. They watch that video, how to do a refund on the TIL and they move on with the job. It's still being powered by the LMS in the back end, but the future of learning will be snaps, short snippets, learning what you're stuck on and move on in your workflow and that's what we launched with Docebo Flow, which is also a great OEM capability because we can embed that within platforms that require learning for them to be accessible. ServiceNow is one customer that is using, that effect is starting to use that effectively and it gives you a sense of the power of the platform. And then the last one is Docebo Connect, which is a module that connects our platform to a number of open systems out there. So when you think about the open systems meaning, you can connect it to CRM, Workday, up spot, et cetera, that's how we become core embedded in the ecosystem. If you're running a sale enable -- if you're running a franchisee business like IHOP or Chipotle, Chipotle, I'm not sure is our franchisee, but if you're running a franchisee business and you want to tie it to your CRM and then see what happens to revenue per store, revenue per franchisee or attrition rates, you can connect the systems with their CRM and others and make sure you can run real-time analysis on the learning programs that are happening to our customers. So all in all, Docebo is a shop which serves the 360 view of the learner. And the most important part about our platform, sorry, I'm passionate of the product is, you can have multiple use cases. So if you're a Bridgestone, that example, we have 4 use cases, customer education, supply chain training, onboarding and compliance, 4 different users of the owners of those because HR owns one customer education was up. Each platform can have a touch, feel, look, totally different -- total -- you could be the end user learner on 2 different platforms and you would have a total different experience because each person is in charge of their own destiny, the admin, the reporting, how you actually design it, the platform we have, for example, with TikTok Learning Academy, you [Technical Difficulty] it's fully white label. You think you're in the TikTok academy itself. So it gives you a perspective that our customers -- and on top of it -- sorry, I'll shut up after this, mobile is extremely important. A lot of our customers like L'Oreal, all the hairdressers in the world learn all things L'Oreal using our mobile app, but it's L'Oreal branded, you will never realize Docebo on the back end. So that's the power of both white labeling it, but also on the mobile because a lot of organizations are mobile first.

Awesome. That was great, a great run through.

So I'd say, our product overview...

This was really helpful. Let me pause for a minute and see if there's any questions from investors.

You made some investments in sales and marketing through this year. How do you feel about them paying off as the macro environment eases?

Yes, it's good question. So I would say that -- you mean 2022 and then into '23? Yes, I would say that one of the interesting things -- 2 things that are happening in the market. One was, as you started the year 2022, there was a lot of like, let's call it, sales -- a lot of attrition that we had because of our own success, let's just call it, even 10%, 15% of the sales force that just recycle was slightly higher, but it takes you close to 6 to 9 months to fully ramp that seller. And now what's good in this market for folks like us is that not only it's normalized, we are the employers in charge. And as you think about exiting 2022, we have -- our quota capacity is fully ramped as we move into 2023. So from an efficiency perspective, we're in a much better position compared to the bubble that was in 2020 and '21. The second thing that we're seeing, which is interesting to see what others said this week was, on the inbound side, marketing, this is an interesting thing that we're observing is during the pandemic, with all the capital that was available on the private and public companies, there was a lot of money being thrown and these auctions were actually almost tripled in terms of inbound lead generation. And so through optimizing search or from a Google spend or Facebook spend, we're certainly seeing those auctions are no longer as competitive as they used to be. So there's certainly some benefit we're going to see in sales and marketing as a result of our -- because 55% of leads we generate are through inbound. And then I would say, moving into account management and expanding the customer with the products and modules we have, sorry, the cheapest CAC is, of course, gross retention. The next cheap is from my perspective, is expansion of the current customer. And then with some benefit we're seeing with quota capacity fully ramped and not the same level of attrition as we had seen in 2021 and lead gen coming down. You should expect us to start and deliver some operating leverage, which we did this quarter too.

Another question here.

Yes, on the external customer education front, big TAM, mostly greenfield, how much of evangelism or kind of customer education do you need to do? I mean, are they doing something today? Or is this kind of like category defining for them?

I think it's a bit of -- it's an industry question. Sometimes it depends on the industry and you can expect all major software companies in the tech side, biotech, automotive, we're certainly seeing a lot more ahead in terms of what they need to do versus I would say, some sectors in the financial services, I should be mindful. We certainly see it's not as you have to do some of that education. So it's a story of the industry more so than anything else. I will say that even if you did a simple search on Head of Customer education on LinkedIn for -- and looks a data for the last 5 years, it's actually gone exponentially higher. I'll give you a real example, real ROI for us. Docebo launched the Docebo Customer Academy, 2.5, 3 years ago. On an annual basis, we've reduced our customer tickets by 30%, that's a $5 million investment I would have made instead, if I had to hire those many customer service reps. That is just one example of why and it's just reduction of cost for me, but if you imagine what it does from an adoption perspective from -- if you are the customer, whether it's AWS, Zoom or any of the customers that we have, it drives higher adoption of your platform, plus it reduces, in my example, it reduces cost too because I didn't have to support those 30% tickets, which went down because we launched the Docebo Customer Academy. So you're seeing people becoming much and much more aware. We certainly see a lot of industries that come -- like the last 5 years has been a dramatic shift. There's still some education needed in oil and gas, for example, is one area, but that's our job. Our sales cycle can be -- so the -- I'll start with enterprise like, start with commercial anywhere from 2 to 4, one to 3 months, mid-market is 2 to 5 months and then 6 to 12 months for enterprise, these over $100,000.

Right. We are over time. Really appreciate the conversation, Sukaran. Thank you so much.

Thanks, Josh. Appreciate it.