Docebo Inc. (DCBO) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to the Docebo Q1 2023 Earnings Call. [Operator Instructions] I'd now like to turn the call over to Docebo's Vice President of Investor Relations, Mike McCarthy. Please go ahead, Mike.

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 forward-looking statements. For more information on the risks, uncertainties and assumptions relating to forward-looking statements, please refer to Docebo's public filings, which are available on SEDAR and EDGAR. During the call, we will reference certain non-IFRS financial measures. Although we believe these measures provide useful supplemental information about our financial performance, they are not recognized measures and do not have standardized meanings under IFRS. Please see our MD&A for additional information regarding our non-IFRS financial measures, including for reconciliations to the nearest IFRS measures. Please note that unless otherwise stated, all references to any financial figures are in U.S. dollars. Now I'd like to turn the call over to Docebo's CEO, Claudio Erba.

And thank you for joining us for our first quarter earnings call. With me today are Alessio Artuffo, our President and COO; and Sukaran Mehta, our CFO. I will start my comments this morning with a brief high-level summary of our results. We are pleased to report revenue growth with March quarter results coming in at the upper end of our guidance range, up 32% on a constant currency basis. Our profitability exceeded our guidance with our adjusted EBITDA margin reaching 5.3%. As Docebo expand its reach, we saw a wider customer base in Q1 across various industry and learner types. Our platform versatility allows us to take advantage of global opportunities across use cases. In terms of regions, our business had a good mix, and we are happy to see our investment in new European markets gain momentum. We closed some of our largest enterprise deals in Q1 with companies in Germany and France, including the major transportation and logistics solution provider that operate in over 160 countries worldwide. From a product perspective, our generative AI-based content creation model, Docebo Shape, maintained its performance from Q4 and achieved high attachment rate in Q1. Docebo offers AI technology that is essential to delivering learning distinct solution. Over the past 4 years, our work in AI has enabled us to fine-tune our offering in data model, particularly in content automation and the embedded search with leveraging multiple languages. As customer data moves through the LMS, enhancement to our product will ensure every learning journey is hyper-personalized. This is, in turn, boost productivity for our customers. Furthermore, we are continuing to enhance our AI control panel that will give our customer authority on how their internal company data can be used. The management of proprietary data is an important requirement for enterprise customer and the Docebo [ debug ] technology is built around this key need. As we look at the broader operating environment, we continue to see longer deal cycles, especially in the enterprise segment. We are pleased that in the face of such headwind, we have largely executed our growth strategy and are positioned to deliver revenue growth with stable improving profitability as we move through this year. Looking forward, our main goal is to grow the company effectively no matter what the economic condition may be. We are also focused on improving operational efficiency. At the start of this quarter, we took actions that we believe will optimize the performance of our organization. A key aspect of this involves flattening our organization hierarchy, which allows for faster decision-making closer to the customer. By streamlining processes and reducing middle management layer, we are better positioned to quickly respond to customer need, drive innovation and foster a culture of high performance. Regarding our capital allocation, our strategy remains focused on tuck-in deals that support 2 principles: First, we see great adjacent products and features that support our build versus buy needs; second, we look for innovative team that builds Docebo culture. Shortly after the end of the quarter, we announced the acquisition of PeerBoard. This acquisition aligns with our strategy of seeking out great technology that complements the Docebo core offering, while also adding engineering talent to our team. With the community learning assets PeerBoard bring, we are materially strengthening our customer and partner training use case as we bring the best community learning features to a growing number of enterprise customers being served by the Docebo. In regard to future M&A opportunity, we will evaluate each option based on its potential to address multiple use cases that leverage our increasing use of AI. This will enable us to deliver new innovation in areas such as hyper-personalized learning, sales enablement, reskilling and upskilling. In conclusion, although the macroeconomic environment might continue to be challenging, we are well placed to take advantage of opportunities that provide sustainable balance and growth. Our emphasis on growth, combined with operational efficiency and adherence to stricter, more demanding performance standard, will only serve to strengthen our position as a clear win emerging from this economic cycle. Now I would like to turn the call over to Alessio, who will give you an operational update.

Thank you, Claudio, and good morning, everyone. In quarter 1, our company-wide average contract value, or ACV, increased 7% to $47,000 from approximately $43,800 at the end of the first quarter of 2022. ACV for new customers in the quarter was approximately $50,000. During the quarter, we signed 112 net new customers, including several valuable enterprise deals. This is reflected in our continued growth in annual contract value, ACV. Customers continue to drive a measurable value from the Docebo's Learning Platform, particularly in multiple use case environments. Notable customer wins in quarter 1 include Vimeo, a platform for innovative video experiences. Vimeo has chosen Docebo to help compliance, professional development and onboarding needs. Docebo also partnered with Terex Corporation, a global manufacturer of materials processing machinery and aerial work platforms. Terex chose Docebo to address their customer and partner training needs as well as onboarding and professional development for their employees. In addition, Docebo Learning Platform has been selected by Freedom Mortgage. One of the largest full-service mortgage companies and a top Veterans Administration, VA, and Federal Housing Administration, FHA, lender in the United States. Freedom Mortgage chose Docebo for multiple internal and external use cases. In Europe, we landed one of our biggest enterprise deals in the region when we signed a large French-based transportation and logistics solutions company operating in over 160 countries, who partnered with Docebo to address a combination of internal and external learning use cases that include customers, partners and employees. Finally, in Germany, we signed a deal with Knauf Gips KG, one of the world's leading manufacturers of construction materials for interior design, building insulation and design ceilings. Knauf Gips KG chose Docebo to address multiple internal and external learning use cases, including sales enablement and retail, customer and channel partner training requirements. It is important to note that Germany and France are large and important new markets for Docebo. We are very pleased that we see our early investments in this country continues to build momentum with this large enterprise base. It's important to note that the company is partnering with Docebo and diverse needs for training both internal and external learners across different industries. When viewed together, this demonstrates the broad horizonal appeal of our solutions. Despite economic challenges and longer deal cycles, Docebo executed effectively and invested in supporting future business growth. Though deal elongation remained consistent in the quarter, it did not worsen, and Docebo navigated well to deliver healthy growth. This highlights the company's resilience and ability to adapt to the changing business environment, while staying focused on its growth objectives. In his previous comments, Claudio discussed actions we have taken to improve operating efficiency and to hold ourselves to more demanding performance parameters. Allow me to elaborate on these actions and provide further context on what we're doing. Our sales and marketing focus is on operating more efficiently as we move forward. We examine our cost of customer acquisition, CAC, lifetime value to CAC and other leading indicators that drive these results. Although we don't judge performance based on a single quarter, we will make adjustments necessary to achieve higher growth combined with better CAC efficiency. As you may recall from the previous quarter, we have invested in technology, systems and processes to gain operating leverage. This has enabled us to operate as a more leaner organization and at the same time, eliminate nonproductive layers of management. We've also optimized our inbound and outbound lead generation engines. These actions aim to strengthen our pipeline coverage and support our most productive sales executives. Back in March, I concluded my prepared comments by sharing two reasons why we are excited about 2023. These reasons are unchanged as we position Docebo for the future. First, our market is vast and presents numerous greenfield opportunities, particularly when considering the external learner. As the leading platform for customers with multiple use case needs, internal employees and external learners, Docebo is a trusted partner for consolidation of tech staffs and delivering better returns on invested dollars for our customers. And second, we are making the strategic investments necessary in both innovation and systems, processes and people that are needed to continue to disrupt the enterprise landscape. Partnerships like ELB and acquisitions, such as PeerBoard, are making a strong Docebo even stronger. With that, I would like to hand the call over to Sukaran.

Thank you, Alessio, and good morning, everyone. For those interested, a detailed breakdown of our financial results for the 3 months ended March 31, 2023 can be found in our press release, MD&A and financial statements, which are now available on our website and are also filed on SEDAR and EDGAR. As reported, total revenue for the first quarter grew to $41.5 million, an increase of 29% from the prior year. Total revenue increased by 32% after adjusting for the impact of foreign exchange. Subscription revenues were $38.8 million, representing 94% of total revenue for the quarter. Annual recurring revenue was $164.9 million, an increase of 29% after adjusting for the foreign exchange impact from the stressing of the U.S. dollar. We added 112 net new customers in the first quarter as we ended the quarter at 3,506 customers, an increase of 19% year-over-year. Average contract value was approximately $47,000 for the first quarter, an increase from $46,000 for the fourth quarter of 2022 and a 7% year-over-year growth. We continue to see Docebo being adopted as multiuse-case platform with almost 80% of our customers using Docebo for 2 or more use cases and 55% of customers using Docebo for 3 or more use cases. Gross retention was flat compared to the prior quarter, and net retention declined modestly in Q1, driven by slower fee and module expansion. Gross profit margin for the first quarter improved by 120 basis points year-over-year to 81% of revenue and was consistent with the prior quarter. Total operating expenses for the first quarter increased to $33.8 million from $32.4 million for the prior year period. G&A as a percentage of revenue declined to 18.2% for the first quarter compared to 19% for the fourth quarter of 2022. Adjusted for onetime acquisition costs, G&A was 17.6% of revenue. As we go forward this year and next, investors can expect that G&A is an area where we will demonstrate the highest operating leverage. Sales and marketing expense as a percentage of revenue was 40.5% for the first quarter as compared to 39.8% for the fourth quarter, mainly due to higher seasonal payroll taxes in Q1 of each year. The streamlining actions Claudio and Alessio spoke to earlier, occurred at the start of Q2 with a headcount reduction of approximately 5%, and this primarily is related to sales and marketing and G&A. There will be a partial impact of savings in the second quarter, but the full impact of savings start to come through in the third quarter. R&D investments in the first quarter was $7.4 million or 17.8% of revenue, an increase from $6.4 million from the first quarter. The sequential increase was primarily as a result of the strengthening of euro. Moving on from the expense line. Even with the fewer revenue days and with seasonally higher social taxes, we are pleased to report a beat in our adjusted EBITDA performance to $2.2 million for the first quarter of 2023. This equates to an adjusted EBITDA margin of 5.3%, which is up 9% compared to the prior year. Reiterating what was said in March, we are deeply committed to driving growth and performance in the areas we can control and expect to exit Q4 2023 with a low double-digit adjusted EBITDA margin. We reported net income of $1.2 million for the first quarter of 2023 compared to $7 million net loss for the first quarter of 2022. Adjusted net income for the first quarter of $3.2 million increased compared to a net loss of $1.3 million for the first quarter of 2022. We generated negative free cash flow of $2.3 million in the first quarter, which was driven by the timing of annual bonus, prepaid insurance and software expenses in Q1. At the end of Q1, we held cash and cash equivalents of $216 million. Shared-based compensation accounted for a modest 3.1% of first quarter revenue compared to 3.4% in the first quarter of 2022. In April 2023, the company acquired PeerBoard, a plug-and-play Community-as-a-Service platform for a total purchase consideration of $4 million. We do not expect the acquisition to materially impact the fiscal year 2023 revenues or adjusted EBITDA. Now for our Q2 2023 outlook. We are operating in a difficult macro environment with deal elongation similar to the second half of 2022. Our guidance is based on the assumption that current unfavorable macroeconomic conditions will continue. We expect total revenues to range between $42.9 million and $43.2 million. We expect gross margin to range between 80% and 81%. We expect adjusted EBITDA margin to range between 5.5% and 6.5%. A few noteworthy points on the second quarter guidance. We expect subscription revenue to be 4% to 5% points higher than the overall company revenue, while professional services revenue will decline sequentially due to lower customer adds. During the second quarter, we expect to incur approximately $3.5 million in onetime charges related to the organizational streamlining initiatives that we discussed earlier. This is not reflected in the adjusted EBITDA margin guidance. In conclusion, I want to focus your attention on a strategic point that is foundational to Docebo's DNA. Growth is always our top priority, and we have equipped our team to deliver good, profitable growth regardless of where we are in any economic cycle. I also want to emphasize that we are bringing material competitive strength to bear as we execute this profitable growth strategy. First, we have a strong debt-free balance sheet with $250 million in cash. Second, we have delivered profitability ahead of our schedule and our steadily improving adjusted EBITDA and free cash flow every quarter. What is most notable about this performance is that we are realizing these results without compromising key investments in sales and marketing and R&D. And third, dilution from stock-based comp is one of the lowest in the SaaS universe today. We are dedicated to aligning our team's performance with the expectations of our shareholders. That concludes my prepared remarks. Operator, please open the line so that we can take some questions from the analysts.

[Operator Instructions] Your first question will be from Robert Young at Canaccord Genuity.

Two questions. First on higher level. During this reporting cycle, those a bit of concern raised around the negative impact of AI on e-learning. And given that you've been working on AI for a long time and have products in the market, I thought you'd -- it would be great to get your thoughts on the near-term impact you see positive or negative from AI on Docebo?

Hello, Rob, Claudio speaking. First of all, I think that if I was a publisher, I will be very scared on the impact of the AI because, I mean, AI will build courses and content on, but do not forget that LMS is a delivery system that now is also becoming the content AI-driven generating system. So that's why I'm incredibly excited about because I mean, Shape is becoming the competitor of the companies that have been punished this quarter by this AI move Because the Shape is the content generating system, and we are adding features. That said, I think that AI is not only limited to content. And for example, we are embedding in Docebo a skill matching system that will integrate all the talent management and ATS and skill management system inside Docebo through a matching system, where AI will synchronize the skill ontology of all the platform out there with Docebo allowing the customer to use their own ontology inside Docebo. On top of that, and I understand it's not very effective. But what we are working is an AI control panel that will give the customer full control on how the AI will use the data. Before implementing every AI strategy, we need to be very careful on how we do it and be completely aligned with all the compliances all over the world, the regulations are different between Europe and North America. So AI is a broad topic. But it's a topic we love because it's allowing Docebo to experiment a new way to train people and go over the 20 years old very boring click and leap training approach, adding simulations are the new way to interact with the content, hyper-personalizing the content based on the user learning style. So I don't see AI as a threat. I see AI is that personally makes me excited. And from a Docebo standpoint, it's something we will benefit a lot.

Okay. Second question for me is more specific to the quarter. I mean the incremental amount of ARR added and the incremental customers added were lower than we've seen before. And so if you could talk about that, in particular the cadence through the quarter, was that the regional banking crisis at the end of the quarter? And so should we -- when we look at how to model ARR, should we think of most of the deals coming at the front of the quarter or the back of the quarter is spread evenly? Just any comments there on the slower amount of customers added and the cadence. I'll pass the line.

Rob, Alessio speaking. Robert, Q1 does have some seasonal components built within. And in addition to that, we've experienced the results of some of the macro noise, banking noise, the challenges in the North American region, particularly affecting the small and mid-customers. With that said, I'd like to draw your attention to two facts. Number one, we have increased average ARR and new logo ARR, both ACV. And in addition to that, our gross retention rates have remained consistent with quarter 4 2022. So with that said, we have work to do to reboost the performance on the small- and mid-market, but our pipeline growth that we're seeing and experiencing makes us extremely confident.

Did that answer your question, Mr. Young? Thank you. Next question will be from Josh Baer at Morgan Stanley. Please go ahead.

I was hoping you could expand a little bit on the efficiency actions and headcount reduction referenced in the prepared remarks. Just wondering if they were previously contemplated in the prior forward commentary on margins?

Claudio speaking. I provide the first part of the answer, and I think that Sukaran can go deep on that. From the entrepreneurial perspective, I founded the company. And I found frustrating that the great ideas that come from the field contributors, in terms of everything, product, methodologies, M&A and so on and so on were started in the middle of the organization because there was the sign that there was too much bureaucracy and too much communication channel broken between executives and high-level managers and contributors. Contributors are the foundation of the company. So what I'm impressed was less -- let the organization, let's stay more in touch with the team, let's fluidify the communication reducing the layers. So from an entrepreneurial philosophy perspective, this is the reason of this action, but I will leave the rest to Sukaran that can articulate better from his point of view.

Yes. Thanks, Claud. Good morning, Josh. I would say that to start with we regularly review the operating efficiency of the organization. And -- I think part of the efforts this quarter, there's a couple of factors. One is, we -- as you may have noted out, in the last quarter, we implemented some significant technology investments that went live in our CRM and our order to cash process that gives us some opportunities to streamline and make our organization efficient. So to that extent, -- that is -- that was factored in. But I would say there is incremental efficiencies that we have implemented at the start of this quarter, which is April, to make the organization leaner and more efficient. And so I would say there is an element of -- a reasonable element of that cost that will be more -- not in the ecosystem, specifically in sales and marketing and G&A.

That's helpful. And just any sense for what the plan is for headcount growth in 2023 incorporating these actions?

Yes. So when we think about headcount, you think about mostly -- if I kind of break it down between the various operating lines as we grow customers, we still look at making sure that from a services -- sorry, just from a customer support and enterprise support perspective, we have the right infrastructure as we are growing our book of business. So we'll see some incremental hiring there. And then generally, across the board, what you will see is this year is it will be some tactical investments in R&D as we are investing. Claudia spoke about from an AI perspective and other areas. But overall, you should expect us to be net neutral, slightly higher, but in terms of the hiring, mostly flat across the board. And sales and marketing and G&A is where you'll see significant efficiencies.

Great. And just one quick one on the opportunity side. It sounds like a lot of interest in Docebo Shape. Just wondering if, like a customer, for example, is spending $100 annually, what happens to that annual contract value when a customer adds Shape?

Yes. So good question. So we don't give this out, Josh, in terms of the breakout of individual products and attach rates. But you can expect that as part of Learn, Docebo Shape has a reasonably good attach rate as well as a reasonably good ARR dollars. And Docebo Shape, as you think about the differentiation in our model compared to the industry in offering tools is that we also go to market from a perspective of enabling social learning to all of the organization, rather than having only a number of individuals that create that content, which is the administrators or the content offers. But what we do with Docebo Shape is empower the whole organization to utilize Shape and create content and be the champions of social learning. So that gives us higher -- what effectively that means is that gives us higher ticket in terms of seats and licenses to our customers and that's also a differentiator, not only just the attach rate.

Yes. And Sukaran, about Shape, something is happening and something is boiling because I've seen such an interesting attachment rate that was not there 2 quarters ago. What do we have now to understand is how our learners are using and who are our -- the trainers that are using Shape because it's not the classical trainer that creates the old school learning objects are more users, trainers that are on the field and wanted to automate a leveraging generative AI inside Shape. What I want to give them from a tool perspective and sorry for using the old school words like tool, as a functional -- as a future perspective, is go beyond the standard reading as live to learn something simulation, simulation, working on the globe work, [ pitching ] something to the AI and get the AI feedback. This is where the industry is going. And this is where we are investing in Shape. That's rate -- the attachment rate is speaking on its own. When I'm saying the attachment rate, this quarter, I'm saying, okay, this is happening after [ full year ]. We are in front of an inflection point, and that was happy at the end. We struggled for years to build a great product. But at the end, this is paying.

Next question will be from Suthan Sukumar at Stifel.

I just want to touch on the global expansion opportunity. Last quarter, you talked about encouraging traction in certain European markets. And you guys also highlighted a large deal that you closed this quarter in the region. Can you talk a little bit about what's driving this momentum? And really, what are your expectations for growth here over the near to long, midterm?

Sure. Our investments in Europe, Suthan, has happened over time. We started with our investment in the U.K. and Nordics, of course, after having an heritage where we have an office in the market in the Southern EMEA region in Italy. More recently, as you're aware, we invested in France and Benelux region as well as the very most recent investment in the [ Dachau ], German office region. And we know we have learned that it takes time for the brand to affirm itself in the regional markets that are fragmented. They buy slightly differently. There is a different language in the region. And so the short answer to your question is, it's a matter of execution in the field of bringing the brand to the top of mind of the buyers. And I believe that the low growth that we have announced in the France region, very significant organization, is just the natural consequence of our investments in the region for quite some time now. Now -- we're also noticing that Docebo is solving problems with a platform. There is multiuse case that in the European market, frankly, is solving the problems from more legacy competitors. And so I think we have -- we are learning how to win from a more institutional installed base, and these are starting to pay fruits not only in the small and medium market, which, frankly, was the majority of our wins in the European region, but we're starting to see enterprise pipeline growth even in this region, and we're very pleased with that.

Yes. And Ale, on top of that, I mean we have such an healthy balance and healthy KPIs that we can be ambitious on expanding abroad, like we did with the German office and Australian office. But we have learned with the French office and the U.K. office that start ramping and becoming a prominent player in those countries take a little bit of time. But at the end of the day, it paid back. I mean, at the end of the day, the formative acquisition allowed us to lend new [ friends ], boot on the ground, sell and get great contracts. And this is what we are executing both in Australia and in Germany now.

We are looking forward to sharing more wins in the newer regions in the coming quarters.

Okay. Great. Thank you for the feedback. My second question is on the partner channel. Can you guys share an update on the impact of partner channel had on the quarter and what you're seeing there in terms of pipeline of opportunities going forward?

Lots of exciting things. The partner channel is gaining momentum. Momentum in the sense that we're very active on all front of the alliances partner, if you will, ecosystem. On one hand, many organizations have demonstrated an interest, and we have identified targets for integration opportunities with adjacent players in the form of [ ISV ] partnerships and forming a framework of mutual marketing. We have announced not too long ago a partnership with a services and software vendor called ELB. And from this partnership, we have been noticing very good outcomes from the very early days because at the end of the day, there is an incredible opportunity in working with companies that have adjacent offerings, and it's a very nice catch and demand generation and value for our customers and prospects. So that's one update. The other thing that I'm really pleased about is our current OEM partners. First of all, the ones that we are already working with have continued to perform in line and passed our expectation, which makes us very happy. And we believe that we have a very solid roster of candidate prospects of OEM and are looking forward to telling you more as we have the right to share so. Finally, I also want to share that we've been very active on the content side, and we have initiated and, if you will, evolve conversations that position us even stronger in our Docebo content offering. We plan to continue to have growth from this module that has done really well for us. And based on our plans and increased partner offering, we plan to improve even more the penetration of that product in our installed base. Overall, this is valid for all partners. I haven't mentioned what is very strategic for us, and we are very happy with, is the partnership on the system integrator front. Whilst we don't have the right names yet because they're very stringent on that. We have the premier prospects and logos where we are teaming up with the significant system integrators. These teaming up motions are just the beginning of a long-term through deep partnership relations. And we're seeing that across the board from commercial enterprises throughout government opportunities. So the world of alliances has been incredibly active, and we're very focused on it.

Next question will be from Daniel Chan at TD Cowen.

Sukaran, last quarter, you mentioned that the revenue guidance that you provided is driven by the ARR. So if we look at your Q2 revenue guidance, midpoint is looking for about 23% year-over-year growth, but ARR grew about 28%. So just wondering what's accounting for the difference? I know you called out professional services there. Just wondering if there's anything else in there.