Docebo Inc. (DCBO) Earnings Call Transcript & Summary

Good morning, everybody. Welcome to Docebo Inspire 2023's Analyst Investor Presentation. I'm Mike McCarthy, Vice President of Investor Relations. This morning, we have presentations by Claudio Erba, our CEO; Alessio Artuffo, our President and Chief Operating Officer; and Sukaran Mehta, our CFO. After which, we'll tackle some questions. [Operator Instructions] Joining us today for the Q&A, in addition to the exec team, will be Fabio Pirovano, our Chief Product Officer; Giuseppe Tomasello, who is Head of AI, many of you probably heard their presentation this morning as well; and Harvey Morrison, who heads up our Government Sales Unit. So with that, I would just remind you that during the presentation and during the Q&A, we will be making some forward-looking statements. And please make note of the cautionary statements here on the screen and in the presentation on the website. So with that, I'd like to hand the clicker off to Claudio.

Thank you. So first of all, welcome, and happy to have you here finally in person because I think we met in person with very few of you, but we've been in touch since now 4 years. Quick story. Really, Docebo is an outlier in terms of the kind of company that went public and became now the best of breed in the learning management system space, now that our biggest competitors are having their own troubles and we have a lot of RFPs coming from theirs, stuff like that. And we always approach -- the strange thing, for myself and Fabio, is that we started the company without being a subject matter expert. And this probably have been the biggest competitive advantage because it allowed us to approach the learning space with a fresh mind, without the bias of the other players that, at the time, they were like IBM Learning Space and those dinosaurs or fossils. Then when we met Alessio, and the story was nice, I know I'm going to tell you now, but Alessio was already working in the United States, selling learning content management system, which is a very similar segment to us. And I provided him $65,000 to open the Athens office, true story. He is saying $45,000, it was $65,000. And the market was so interested to buy our solution that we never recapitalized the United States entity. We were self-sufficient. And then we have opened the Atlanta office. And in 2014, we signed the first American customer, thanks to Alessio. And if I'm not wrong, it was Zendesk, that churned 1 year after. Why churn 1 year after? Because we had to learn how to serve United States-based customers. Professional services and support was delivered from Italy, and this didn't work. So the journey from 2014 to 2016 was to set up the best team in town, to set up the sales organization, and everything went well. And then we started working with Klass Capital and then with Intercap. In 2016, we raised another few millions. You all know that to create $1.3 billion, $1.4 billion of market cap, we have invested only USD 14 million. So first IPO, second IPO, et cetera, et cetera, et cetera. We started in 2021 to launch what was the Docebo Learning Suite that now have been reshaped into modules for the Docebo Learning Management System. And those, the technologies that we have built, have been the result of what you have seen in the product stage. Because the Docebo Flow is now the underlying technology for Microsoft Teams integration. The Docebo [ Insight ] was part of the technology that we have built because of the acquisition of forMetris. And also, by the way, this is not -- this was not celebrated enough, but Docebo [ Insight ] is also thanks to an alliance of Amazon AWS. I mean we are probably the main contributor on the ideas that have been bring inside the AWS road map. So we have a lot of leverage on what QuickSight is doing on -- in terms of road map. And then we have acquired PeerBoard and Edugo. What I was impressed about the presentation today is that what we have seen for Docebo Shape is 3 months of work. We have closed the deal 3 months ago, and then we already have a prototype in our hands. PeerBoard were closed probably 5 months ago, and we are already adding in our end something tangible that is proving that Docebo is capable to execute and digest and integrate tuck-in acquisition very quickly. So we have deployed capital, but it's not an investment that is going to pay in 5 years. It's something that is happening already. I think that this was better crafted in Alessio's slides where -- one of my first customer in 2008 was Technogym. Technogym was -- which you all know because they do gym equipment, this gym, Technogym equipment. And this started training -- we used Technogym as external training for the Beijing Olympic Games to train all the people in Beijing on how to explain how the hardware training machine works in -- during the Olympic Games. That was an early glimpse of external training, but that was an outlier. Like, another outlier was Ducati, that was training in 2008 all their dealers. So -- but the real market in early 2000 was centralized HR, soft skills and maybe some compliance. And now we started -- we have seen this shift on departmental adoption, which is multi use cases, where we are -- where our biggest competitive advantage is that we are horizontal enough and customizable enough to support multiple use cases. And now external training and training monetization is the main topic. And by the way, you -- there is a partner called Honorlock here, which we are working for the big deal with one of the tech companies -- I know it's recorded -- with 1 of the 5 big tech companies. And they are running certification. So they needed a proctoring system. And the feedback is 50 customers of ours that are here, they have asked an integration with Honorlock. That means that the external training is what is happening now. And very little companies are still monetizing. But when I say very little, then I do see that our e-commerce system run 131 million of transactions every year. I mean the number is something, and we are still in the early stage. So this is where the -- sorry, the LMS market is going. Total addressable market is shifting towards internal and the total addressable market for -- to the external. I do think that the real opportunities sit not only in North America, but especially in Europe and in other areas, especially now that the world is decoupling, that India is becoming a big, big, big super power. And Fabio is busy in many things. He's now deploying the FedRAMP environment. He's now deploying this big infrastructure for this big customer we have signed. But not only, we are opening an AWS region in India to serve our new OEM partner that we have announced, Darwinbox. So I mean, we -- our ambition is to be global by any means, geographically, covering multi use cases, and so on and so on and so on. I do see trends, which are the classical ones that are at the bottom, upskilling and reskilling. I mean the problem now geopolitically and demographically speaking, and no one is realizing yet, is that the population is shrinking, not in terms of total population, but especially in terms of employable population. There are less workers. I was speaking with someone today at breakfast, and he said, "You know, I do see that all your partners are stealing employees across themselves because there are no resources." And the fact that there is a short -- a smaller number of employable people require as a strategy of attraction and retention that you prove to invest in people. And then optically -- guys, give me the time. Mike, give me the time because -- if I'm going to -- can I go? Okay. We have built in Docebo our internal coding school because the idea is to give them internal career opportunities that are not only bottom-up. I mean, otherwise, everyone is competing to become the next Docebo CEO. 1,000 employees, 1 prize, what about the other 999 people? So we decided to create also horizontal career path through -- especially regarding technology and software. So we have created a Docebo coding school internal, where quality assurance, quality control, support people can become cloud engineers, AI engineers and software developers. And the number of people that have enrolled in the academy is 20% of the workforce. Part of them want to change their role. Part of them want to learn more to better perform in their career. So the workforce upskilling and reskilling is a secular macro trend. And this is the only way you have to do -- you can do it is through a learning management system. Authoring capabilities is heavily tied to AI. AI, in my opinion, will have 2 different impacts. One is on productivity. Automation of the admin part of the learning management system, which is tied to the decrease of employable people because if there are less people that can -- less LMS admin because they can find the job in 2 hours going in some other company, so there is lack of resources, we need to ask AI to do some work. But the second is in content production. I like to use, but Alessio don't like it and Alessio is the man of the brand, the concept of GLMS, generative LMS, where GLMS, thanks to generative AI, can create content on its own without the need to connect with content libraries. And this is not something that's going to happen tomorrow, but you have seen already a glimpse of what can be achieved. Just giving AI some instruction, it will build the content, without the need of going to buy content from other libraries. The other topic is extended enterprise. Now learning is decentralized. Decentralized means that the stakeholders that manage learning management system are different with different skills, different need, different success -- KPI of success, and so on and so on and so on. And providing multi experience and multi admin capability is the only way to train people without a centralized bureaucratic, slow, HR-driven learning strategy. And by the way, we have announced Project Aria... [Audio Gap]

Many questions you've asked in earnings calls. And today, I'm going to talk to you a little bit about our strategic initiatives from the go-to-market standpoint, how they attach to our product strategy and so on and so forth. Let's dive in. First and foremost, the chart is self-explanatory. All of you are pretty good at math. So you can see percentages right there. And the reason why that's happening is we've been running the company with a posture from a GTM standpoint, decisions we're making on people and marketing and really in sync with Fabio's organization to build a company that succeeds and focuses on winning the best brands in the world. Claudio has been a little cheeky in the reference to our big customer that we announced, although unnamed in a way, but that really is just an example of a more pervasive strategy that across the company means that we're extremely focused on winning more strategic enterprise business. And Docebo Enterprise is currently defined as an organization that has more than 5,000 employees. We recognize that there's even another layer perhaps from a segmentation standpoint, above 10,000 employees, where organizations are rather complex and their complex needs reflect then an opportunity for us to serve them with multiple use cases, which I'll address in just a minute. From a market perspective, this chart outlines a little bit our coverage in terms of ARR distribution against industries. What I'd like to emphasize here is we are distributing our efforts, our successes, across various industries. We've been able -- over the past year or so in which we've seen softening in the tax spend, we were very fortunate of the business that was succeeding tremendously in other industries, that we are actually growing. And so our efforts continue to become really good at marketing, selling and executing in professional services, in industries and getting really specific about it. What does that mean? It means that while -- and it's been very organic by serving the needs of organizations in that segment that needed an LMS. But the reality is, let me just be very clear, we treated that segment up until now just like every other commercial segment. We were not very intentional in the way we went about it. We went about it uneducated or now you actually commercialize in gov. And just by doing that, it's already 5% of the revenue of the company. Imagine a world in which we knew what we're actually doing. Imagine a world where we understand that the buying cycle of a state is very different from a commercial enterprise. And that world is starting to be now. We brought onboard Harvey that has been in the government space for software companies and consulting companies for his entire career. And his the biggest job in the first few months at Docebo was to educate us, to understand all the dynamics that occur across state, local education and federal, which we haven't even scratched the surface of that because we haven't even sold a single dollar in federal. However, when you look at the past 5 years' spend in LMS in federal, which is massive, you will notice that the vendors that play in that space are rather, how can I be clear but not demeaning toward those vendors, legacy. How about legacy? Not exciting. And contrary to the perhaps myth that government organizations are not as innovation-driven, they actually are very, very, very focused on bringing onboard technologies that are more modern, different and up-to-date with the commercial standards that exist out there. So here comes Docebo. We're going to go in that market. We're going to disrupt it. We're going to win out those legacy players. Because we already do on the commercial side. It's not going to be different. We just got to be smarter in the way we manage the bids. We're going to have to have FedRAMP, which we're acutely aware of. We have a plan to achieve it. We already started working on it. We have engaged with UberEther as our provider to an accelerated FedRAMP ATO. And our product team, IT teams, security teams, are all over it. We have time lines, the project governance management, and we've already bid several federal opportunities in search for a so-called sponsor that's going to allow us to actually have our FedRAMP certification in the marketplace. That's exactly how I feel with all the things we got to do. But this is really exciting, and it's a tremendous opportunity for us to grow and to hedge against any volatility in the commercial markets, commercial markets in which we're seeing specialization opportunities in a few sectors. We're not going to be clear to just spend a lot of resources and create expensive organizations where we now create a banking segment and a retail segment, a health care segment, not outright. We're going to be intentional about developing playbooks and naming certain reps that are going to be more specialized in certain areas. And then when we get the traction and we have evidence that it's time to make slightly bigger bets for these verticals, we will do it, but it will be gradual. We've been studying playbooks from Salesforce.com. We're a customer of theirs. We've been studying a lot on how they actually have chosen to do verticalization over the course of a 10-year strategy. And we believe we have now what it takes to commence that journey, and it will be a long-term journey, and it starts now. We're extremely fortunate and the job is challenging altogether, which makes the job real fun. We're fortunate because every time we get in a company, you heard me say this multiple times, we have multiple buyers, not just one. Challenging because marketing a product to multiple personas that have sometimes very different needs and underlying motives, emotions can be different. If you sit down in a room with a customer education organization and with a compliance organization, you're going to have very different conversations. Now their end goal is still the same: training people. The outcomes that they expect are different. So what are we getting good at? We're getting good at injecting value engineering and value services inside our GTM team. So when we sit down with a compliance officer or with a customer ad officer, we don't just talk about features and functions, which is great, but we talk to them about what they're going to be accomplishing, thanks to us. That's what's elevating the conversation, and that is necessary as we work with these big enterprises. I spoke about government already a little bit. Harvey is the subject matter expert. He's going to be here to answer any specific questions you have. I was very fortunate to learn a lot from him and by, so to speak, rolling up sleeves and getting hands dirty in this world over the past few months. And I'm more than ever excited to share a few things. Some of these points are already covered. There's a focus on Fed and SLED opportunities. The second point is extremely important. We -- some of you may have been in the room with our partners at Deloitte. [ Eric ] was presenting onstage. And that relationship is extremely solid. We are building together a very material pipeline across both Fed and SLED. I don't like to use the word exclusive because, in this world, nothing is exclusive. But I would say it's a preferential, is that good terminology, choice that Deloitte's been making in the federal and state and local space and recognizing that our capabilities in the commercial market can reflect in big money for them in the government space, as an asset that can replace a legacy incumbent vendor that they used to use as a preferred and take us to market in these agencies where they're in already. And so we're going to bear the benefits of that in 2 ways. One way, we're going to be with them across multiple agencies that are going to open new bids. The second one is we already know which of those companies that Deloitte is already in as a legacy vendor, we know how to swap them out, and we're going to be after that. I spoke about FedRAMP certification. And listen, yes, we believe that while the Deloitte relationship is extremely meaningful, the partnership traction is equally really good. We are working also with a company that was here today. If you haven't met them, you should. They're really, really experts at both the business of learning and government. They call this e-skills. They're fantastic. And we're doing work together with them. They are -- used to be our -- also a Cornerstone on-demand practice and a couple of other assets. They've chosen to get closer to Docebo because they believe in our technology. And together with them, we are bidding on significant state and local and federal agencies. And again, it's a partner's motion. We are acutely aware of that and we're not going to stop at just these 2 partners. There's a lot more to do. Just zooming back out for a minute. The -- it was covered today in the product keynote. But the reality is, as we think about the future of the company, we recognize that our strategy of building products that yield more usage from a use case standpoint eventually lands itself in better unit economics. That's why we're doing it. We're not just doing the PeerBoards and the Edugos of the world for the sake of being technologically advanced, which we want to be, but it's with the end goal in mind of increasing our penetration and satisfying more buyers. Because we have proof in the pudding that if we do that, then we have way better unit economics. And the data that we're presenting today says that customers with more than 3 use cases have 95%-plus gross retention and a way higher, and I would say top quartile, net retention rate. With that in mind, I'll pass it over to Sukaran and I look forward to your questions later. Thank you.

Thank you, Alessio. My slides are with a different color but the same theme basically. I just have 2 slides. I know that -- I'm mindful of time. I want to give some time from a Q&A perspective. I want to summarize in 2 slides. One, what's the pillars of growth? When you think about pillars of growth, what drives revenue growth over the next horizon? When you think about the 3- to 5-year cycle, what are the 5 pillars of growth that are going to do it? I'm just trying to put it together in what we heard this morning. External use case, we talked about it. If you look at the TAM numbers earlier, when you look at the external use case opportunity, and 70% of the opportunity is greenfield, that's what drives consistently our pipeline. That's where we have the highest win rates. And if we continue to be the leaders in that space, we can continue to maintain that momentum from a growth perspective. For us, this is one of the most important pillars of growth, combined with the second part, which is moving up to the Enterprise segment, moving upmarket into large organizations, such as the big techs and other customers that use our platform. As you know, 65% of our customers use our platform beyond the employees. At a minimum, they're using us for a customer, partner, retail, external user, which is tied to revenue generation or tied to some sort of customer retention exercise, very different profile than just onboarding your employees or retaining your employees. To the extent we can combine all of that, we think the external use case and moving upmarket, that 2 pillars combined, have consistently given us good growth over time. I won't spend too much time on the enterprise, into the third piece, which is the government segment, but I think some numbers are helpful. These are all publicly available. In the last 3 years, in the federal space, $261 million was spent by the federal government, legacy players that we talked about that have won some of that business. There's a lot of interesting opportunities with some of the legacy players that also have not delivered on those opportunities, and we certainly see an -- see ourselves as leaning into that, as we've talked about this morning. Land and expand is important. We've got 3,600 customers, give or take, today. We have an interesting -- you've heard a lot of product road map items. We have an interesting opportunity, not only to retain the customers but grow that base over time. There's a few ways. You can see the expansion. People ask a lot of questions around that. There's seat expansion, and there's cross-selling. What I say is when you start from 1 burger chain that's owned to sell to multiple burger chains of that -- multiple -- sorry, another franchisee of that burger chain. Or you start from an AWS and you went Amazon Logistics, Fannie Mae internal use case to external, that is what we call a land-and-expand strategy. It's not just about seat expansion. It is about going to different divisions or multiple subsidiaries of that parent entity. And finally, I think this is -- we spoke about it, but the role of OEMs and system integrators, I think we -- this is one area that we've talked about in the Q2 print. We announced, firstly, that we partnered with Darwinbox. It's a market where -- personally, it's not a market that Docebo can enter themselves. India is a very difficult market. But partnering with folks like Darwinbox, we have an opportunity with a player in the market to be able to sell into one of the biggest populations in the world and growing at a faster pace than any other country. And at the same time, we also announced a partnership with a Big 4 consulting firm where they will white label our product in terms of their Future of Learning exercise. So the OEM channel with some of the initiatives that Alessio has started, and the team, is starting to now come back. And then the role of system integrators. I think we've talked about the fact that, as you think about the source attribution and how we will continue to grow this business, the business from an outbound and system integrator perspective is going to materially -- that's what contributes to the expansion in the enterprise segment, too, as well as the government side. You've heard from our friends at Deloitte present yesterday. But that is how you drive that motion of moving upmarket as well as moving into certain verticals where we need to partner with an SI. We are not an organization that can support the requirements of managed services and doing all the content management that has to be done for federal agencies. That is what the world of our partners do from a system integrator perspective, too, such as Deloitte. Finally, this is the one, that will be helpful for folks. It's a bit of a refresher. We will -- I wanted to give some perspective of where we see operating leverage on a 3-year goal basis. I'll start with -- I did have gross margin here, I'm sure you guys will ask me some questions. You should expect our gross margin to be relatively stable. And that is irrespective of the investments we are making from an AI perspective. We are confident in our capabilities to deliver the margin that we have today, but we are also mindful that we have to invest in our services, professional services, customer support organization. As we win with these large customers, I'm not going to drive higher operating leverage in gross margin because it's at 81%. We're very confident to maintain that, maybe a small bit of operating leverage comes through there. But I'd rather we invest that in terms of maintaining that gross margin where it's at to support happy implementation, happy customer, happy expansion. I'd just keep it simple that way. Sales and marketing, there's an interesting dynamic. I would say that -- and Alessio will chime in as well -- is that there's some dynamics that have changed since 2021, 2020 era. Of course, there's -- events are back. This is an incredible event. This is the first time being back. There's costs that are coming back such as events, being in person. But being in person also drives higher quality leads, being in person also drives higher retention. If you meet a customer once a year, there's an incredible statistic that you have a 3x probability of retaining that customer over time. But that said, from a sales and marketing perspective, this year, we will exit 2023 Q4 with the lowest attrition we have seen in the past 3 years. What that really tells you is that if it takes us 9 months to fully ramp a quota carrier, and that inefficiency from a quota capacity is not there anymore, plus the fact that on the inbound -- plus the fact that the SIs are also helping us drive that pipeline, alongside the fact that the auctioning on the lead gen spend is no longer as competitive than it used to be because you were competing with the private capital market on lead gen spend, you are going to start seeing efficiency in the sales and marketing engine. And we've started to see that in Q2 where sales and marketing as a percentage of revenue showed efficiency, but this is a reasonable place where we feel confident to deliver quality growth. This is just natural leverage of some of the smart moves we've made from how we work with SIs and others as well as seeing the market not being as crazy from a hiring perspective, too, and productivity gains. R&D, I like my job, and Claudio needs to -- I just enjoy making sure that I'm employed, so I give Claudio whatever budget he requires in life. But in general 16% to 18% of revenue is a good range to consistently invest. I would remind folks because there's a lot of -- all of you guys are North American-based, but one of the biggest benefits we have from an R&D perspective is we have an incredible team in Milan and in Paris primarily at a much lower cost base compared to -- forget about U.S., even Canada, north of the border, that number will be 25% to 30% if we had that same workforce in North America. So people have to be mindful of the fact that not only that workforce is from a cost perspective, beneficial, but from an attrition perspective, it has -- I talked about sales and marketing have the lowest attrition, our R&D team has the lowest attrition in the history of the company. We have an incredible brand in Italy, and we are able to retain and get talent that we don't have to compete with the Shopifys and the LightSpeeds and the Kinaxis of the world in Toronto. I'm not even talking about the U.S.. Finally, G&A. I mean I've said this a few times, this is the part that is straightforward. If you look at companies that scale, we're a sub-$200 million ARR companies, at $300 million ARR, give or take, have 10% to 11% of G&A as a percentage of revenue, the simple math is here, for the last 4 quarters, if you look at my numbers, G&A has been held flat. We have made investments in technology. Some of the work that we've done in my prior roles is what we've executed here where we've invested in the infrastructure that maintains that G&A cost flat, relatively flat. And as you look forward, this is the one area that you should consistently every quarter see operating leverage come through. If you do the math, overall, you get a good perspective of where, from an EBITDA free cash flow perspective, we've already said to the Street that we will exit Q4 2023 10-plus percent EBITDA free cash flow. And as you move forward, you can figure out, I'm sure I'll get some questions, but our final point and most important point, we are a company that focuses on growth -- sorry, on rule of 40 where growth is the primary factor. All of what I've said here has nothing to do with cutting any investments. This is just the natural operating leverage that you're going to see in the system just come through as we scale our business and we maintain those investments. Without compromising investment in sales and marketing and R&D, you are going to see a healthy rule of 40 business where growth will be a primary contributor and the remaining coming from EBITDA free cash flow. With that, I'll pause, and I'll leave it to questions.

One point about investment in product and SIs, the new technology that you have seen during the product keynote have been built, keeping in mind that SIs can create value on top of those new features. And let me give you a couple of examples. Example number one, Docebo Insight. Docebo Insight is a system where SIs can help the customer to create as many reporting as they want. Project Aria is the framework where SIs can build additional user experience or front-end experiences for enterprise customers. AI, there is an underestimated problem, which is content curation on how to train AI and which content to use and which not to use, which is a consulting project. So now Docebo is becoming, over time and more and more, an SI-friendly platform because we are giving them the possibility to make a shipload of money out of that.

We'll have to edit that part slightly, but -- in the transcript. But folks, I know, mindful of time, from our perspective, we can stay longer, and we'll be happy to take questions and answers. Suthan, please.

This is Suthan Sukumar from Stifel. Obviously, we heard a lot of pretty compelling product innovations this morning, but I'm going to leave with a financial question. It sounds like -- what I'm hearing, it sounds like you have a lot of levers here to manage this visibility that you have into margin expansion. If you were to sort of think about pulling that forward, what would be implications from a top line growth perspective?

Yes, it's a good question. I mean, so if you do the math, it's pretty straightforward. If you -- if I'm going to exit 10% -- I'm just going to start from a rule of 40 perspective. We haven't -- we don't give revenue guidance as of this moment, but this will help perhaps position from a long-term CAGR where you may want to think about it. If you think about a healthy rule of 40 company, which is exiting 10% EBITDA, free cash flow Q4 2023, and you look at the numbers specifically in G&A and sales and marketing, if you have another, let's call it, 7% to 8% coming from G&A, and you've seen perhaps we've dropped a quarter -- sorry, 1% a quarter in G&A in terms of operating leverage, then you look at sales and marketing sitting today at 38%, give or take, and if it's going to give you some interesting -- sorry, some more operating leverage as we move forward, this is a business that is well positioned to be close to 18% to 20%, if not higher at some point, in terms of EBITDA free cash flow just through natural operating leverage. What I'm trying to get to is that helps you understand that we can consistently drive healthy revenue CAGR over the next 3 years where growth will be a higher contributor to the rule of 40, but the components that I just explained give you the aspects of how much of that rule of 40 can come through EBITDA, free cash flow. I like the word free cash flow because that's just my style. But EBITDA is -- EBITDA and free cash, in our words, I use that all the time, is the same thing, which basically follow each other, give or take.

We have another hand raised there for -- is it -- do you still want to go with a question? I saw your hand raise before anybody else.

Thanks for the presentation. It's Matt Wilson, Morgan Stanley. When you think about the comments that you just made around the potential for margins and the fact that you're targeting rule of 40, from a top line perspective, that outlook for you, are you accounting for any FedRAMP in that today when you think about the growth rate?

Listen, mate, this is our world. In my world -- or our world, I should say, Claudio has been very clear, if you've heard us in the past calls, Matt, is that those are large elephant deals that we do not like to forecast in our numbers because they are -- there's a lot of things that need to happen and need to be successful. And we certainly -- when we think about our capabilities on the federal level specifically, these are large opportunities. And for me to forecast them, because there's a lot of risks or puts and takes that happen by the time we close these deals, we do not forecast large elephant deals that may be in the pipeline generally as a principle because they can -- anything can happen. Even in the large customer win we did this quarter that we preannounced, that was a deal 18 months in making that took a lot more effort. And we thought it would close probably 6 months earlier than in reality, but you just -- that's the reality of the world. But generally, we do not forecast them.

Let me add one thing to that. We will not -- what we will do, we will get really good at learning our federal territories. And as we work with partners, we're going to learn and educate ourselves as to what the top federal agencies are using and are planning on. And when they're planning on going up for renewal, everything will be public. So I think over time this will take a while. We're... [Audio Gap]

These departmental wins. So just curious from kind of the sales force perspective, what are they doing to really kind of drive that land and expand and attack all those different multiple personas?

Sure. Well, it all starts with building champions among the customers. In order to expand the customer, it's really important that the people that made the choice, number one, say, a given use case, say, starting with a sales enablement function or an onboarding function, to gain the trust of the other departments, you have to make those functions successful so that they can tell a story of success. And even actually more realistically, they don't even go and tell a story. Folks in the organization see their success, and they go to them and say, "Hey, we want in." This is the conversation I've been having over the past few days with customers that I've met with. There's an interesting -- this organization in the medical health care software space that has started with a really large number, more than 400,000 users, and they've been working very hard to manage the platform and make it incredibly productive. And they're now onboarding. And sales enablement teams that are running on a legacy vendor are going to them and say, "Hey, we want in," and they're saying, "Hey, okay, 1 second." And so we're there to really foster all of that. The way you do that is great products, sure. Then the second thing is having great customer success on the account alongside account management. What I was trying to -- with our enterprise teams, we're going to bear more results. By doing that, we can do it directly or we have awesome partners. And then finally, I will mention one thing that we haven't spoken about that really is important for the enterprise motion. That is the concept of leveraging our ISV world. We work with so many companies today that are -- yesterday, sorry, we had partners, number 37 or so in the room when we had Partner Day. Some of them were not [ bars ] and resellers. Some of them were pure-play technology vendors, like Totango. Totango is a 150, 200 employees company that's really disrupting the customer success space. Now why is that important? It's important because when we have conversations with customers that are doing customer adds, we can speak from a place of authority by having a list of partners and related integrations where we can say, hey, we can help you directly with this and indirectly by introducing you to them. And by the way, our technologies are -- did play really nicely together, and this is how. And that conversation builds a ton of trust and solves your problems and saves them months in selection. And so I think it's multifaceted, the enterprise motion. It goes across sales, product, services, implementation, customer success, partnerships, and we just get smarter every day.

Dan Chan with TD Cowen. Nice to see that gen AI is a big part of the road map going forward. But we know gen AI can be very costly. In some workloads, we've seen it be 10x more than traditional ways of doing things. But you've committed to getting gross margins to be consistent. So can you talk about how you're thinking about pricing your gen AI solutions to offset some of these higher costs to maintain that gross margin? And at the same time, maybe talk about your software architecture, how you're doing that differently to manage those costs.

Why don't we talk, Claudio, to the software architecture and the cost side, and I'll come back on the rest.

Yes. I mean about the cost, and Fabio can give us some clue or comfort, we don't see this big impact into the architecture and spending on AWS or other. For sure, if you buy everything as a PI service from OpenAI, which now is the vendor, probably there is some cost, but we have our own algorithm already in place. We have partnered with other vendors. And tied to governmental space, Giuseppe is now building open source version of LLM models. Because if you want to run AI inside the government space, you need to stay inside a federal certified environment. So we don't see an impact so material that moves the needle into our cost of AWS infrastructure or other services.

Yes. I would just like to add to what Claudio just said. In terms of cost, the reason why we are able to mitigate the cost is because we are having an approach of this actually multiple... [Audio Gap]

Government, there's a lot of talk today about government as being a bit of a focus for you. But the interesting comment you made was that, without doing anything, you got to 5%. Can you maybe talk about like how that happened, like the source of that? Like why did this kind of just turned on all of a sudden if you weren't doing anything?

Sure. Well, look, what I -- the way I can best define it is we treated them SLED opportunities, or state, local and education opportunities, with the same operating life cycle in the company that we would treat an opportunity coming in from a tech company or a bank. We put it through an inbound BDR organization that would receive either an RFP or a lead by an individual. And we treated it with account executives that at that time didn't have a specialization or a training in how public officers go about buying software for specific regulations they obey by. There's -- we have a couple of funny stories from the older days of Docebo in which maybe some VP of sales would send an e-mail to the head of a given country or city, tried to accelerate a deal, right, with a tone and a language that it's normal in the commercial space but perhaps not appropriate in the way these more public entities buy. And we learned over time that you need to treat these differently. And today, when we started true government practice, while our training was, let's say, learning by mistake, when Harvey joined us, he introduced us to certain pieces of the puzzle that we're missing. I'll give you an example. We didn't know anything about the world of government sector software distribution. We partnered with Carahsoft. For those of you that don't know Carahsoft, it's a genius. I mean, I sat with their CEO for 1 hour, I wanted to hug him. He runs a $13 billion company, adds $1 billion a quarter. Is that...

They added $2 billion a year in the last 3 years.

Sorry, yes. Yes.

The last week of the government year, so the federal government year ends October 1, they'll do over $1 billion in just that last week in government sales.

What that means, that these guys have built an infrastructure that is so deep across every single agency and they have -- they work with AWSs, Salesforces, the NetSuites, the Palo Alto Networks of the world, and generate hundreds of millions of dollars for these companies just by distributing. And so we now finally got in their ecosystem. We have access to contracting vehicles. We didn't even know what a contracting vehicle was, frankly. I didn't know what NASPO was. I mean I'd Googled it in the past. But now we're in it. We have customers that come to us and say, hey, I can't -- I can buy from you, but I can only buy if you have access to this contracting vehicle. We now have it, and we've done deals like that. And it's just scratching the surface. We're at the first 5 and 10. Imagine, now that we have this preparedness and we have this knowledge, what can happen by being very intentional and educated?

Yes. And also, the buyer at the government space at any level is becoming more sophisticated because what we are seeing now is that they are starting deploying solution for external training. I mean government trying to train their citizens, their educators. And not only in North America, there is Banca d'Italia, which is the Federal Reserve of Italy, whatever, that is now -- there is an RFP to train all the Italian population about financial awareness. So they are approaching external training where Docebo is the best in the market, the best of breed.

Yes. If you look, the Biden administration has released 2 memos telling agencies that interact with citizens that they have to improve the interaction that they have with citizens, improve that experience. So we call it customer experience here, they call it citizen engagement in the government. And they're really grading agencies and agency directors around how are you engaging with citizens. And so VA is a really good example. They've got an LMS. And they're looking to not only train internal employees, but if you're a veteran, you're all going to go, hey, how do I access all of my benefits? What am I -- where do I go in this system or that system? That's an external training use case. Department of Education has external use cases, financial service administration. How do I sign up for a student loan, what are the systems, how do I use those, all those are external use cases. And these agencies are getting graded on, hey, what's the feedback you're getting from citizens, how easy is it to access, how easy is it to use. So it really plays well with Docebo's message.

And we're always concerned with maintaining a very high sales efficiency. Sales efficiency is defined by the ability to maintain a CAC per plan. And I really like the government business in the way that it's shaping up because we put together certain resources dedicated to it, starting again very conservative. But in just a few months we've been able to load the pipeline up in same way, right? We're seeing a clear trajectory where these sellers will be widely successful, and we -- it's just a matter now of ramping up that model.

Rob Young, Canaccord Genuity. I just wanted to get into some of the growth implied in the model you're presenting here. If I just do the math on the ranges here, it looks like 15% EBITDA would be the model here, if I think of gross margins of 80%. And so are you implying that a Rule of 40 company, the growth would be 25% plus large deals? Would that be a good summary of what you've already talked about?

I don't give guidance, Rob, at this point, but I would say that I think the EBITDA probably just at a high level is lower, if you kind of look at the math out there. From a G&A perspective, you got 8%, and then if you get another few percent, so if you exit 10% this year, and let's say, it's another 6% or 7% in G&A, plus maybe another few percent, probably gets you more closer to the 20% than the 15% from an EBITDA free cash flow perspective. But the -- without commenting on the kind of long-term revenue CAGR because I've got my legal counsel listening to this, but I would say, in general, when you think about a healthy Rule of 40, maintaining that revenue CAGR at that kind of give or take range, which you can come back to the math is, yes, it is something we are looking to consistently deliver without the large federal opportunities factored into that number. And I want to repeat one point, I want to be clear, we are very comfortable with our 81% to 82% gross margin. What I'm not going to do is try and drive that leverage in the 81% to 82% to 85% because we need to consistently think about the upmarket motion support from investments we are making and costs around AWS Gov, right? Even in this year's number, just overall, I think people have kind of maybe heard me say this, we said we're going to exit 10-plus-percent EBITDA free cash flow in Q4 2023. We're probably -- with even giving that number, we're probably investing 2% in this year into our FedRAMP strategy. That's an investment I'm making from a 3-year, 5-year cycle, but I will still exit Q4 2023 10%.

And maybe one little one clarification there. When you say big deals in reference to the last question about...

I'm specifically talking large federal contracts, large federal contracts that are -- that we are not factoring to that.

Just federal, not larger deals in general?

No. Federal, specifically.

Harvey, can you give us a sense of what means a large deal in the federal space?

Sure. I mean software-wise, VA, for example, is probably an interesting one.

And this is publicly available.

They'll do a 1-year base plus, say, 5 option years, and it will scale to be million users potentially. So I mean, we're talking a base year maybe 3.5 million per software and in the out-years, it could be 7 million plus per software. I mean that's an enterprise federal government deal. State and local opportunities, we've seen RFPs coming out across state and local that are 100,000 to 120,000 users. And some of these deals can be up to 10 years in length, where they'll do a base year plus 8 or 9 option years. If you see what an agency has to go through to even release an RFP and go through a process, the cost of switching is astronomical. So once you get in and you get integrated, I mean you really have to screw up to have them go, 'We're not going to pick up those option years." So that's the goal. They'll never do -- the federal will never do or commit to anything other than an option year because the budgets have to get reapproved every year by Congress, so they won't do that. But if you get the option years on the contract, you really have to screw up not to pick those up.

Stephanie Price with CIBC. So I want to switch a little bit and maybe move more towards your more traditional business. One of the themes of the conference seems to be the integration between HR and learning, just given the focus on skills development and hyper-personalized learning. Just curious how that changes Docebo's competitive advantage within the internal use cases and how you think about HR and the potential to move outside maybe even LMS and offer additional services there.

Yes, philosophically speaking, we don't want to move into HR, but we want to leverage the data that HR can provide to optimize and personalize the internal training. And I may be referring to a couple of points. One is skills. Usually, you don't measure -- if you are a mid, large enterprise, you have your own tools to measure your skill assessment systems and -- or you have models of big platforms like the Workday of the world and whatever or you have best-of-breed like [ Bloomfield 50 ]. They assess the skills. But then when you have assessed the skills, to increase the skills or to fill a feature -- skill gaps -- sorry, feature gap is a software thing -- you need to do some action. Usually, one of the actions is training. So you need to feed the LMS with this data, and the LMS can suggest the right training for you to fill the feature gap. Second is career planning, which is also tied to skill gaps. But the ATS portal or stuff like that, if you want to apply for a specific role inside the organization, reaching from a previous role, you have some new skills to develop. So those systems need again to feed the LMS, saying, "Hey, look, the user Stephanie want to move from a financial market analyst to AI, what are the feature gaps." So the skill gaps. So the platform is taking charge of the -- of building a curricula that build the necessary skills for you to apply for the new role you want to have in the company. So this is where HR talent need to communicate with LMS. How we are doing this? We are doing this building through the Docebo Connect, integration recipes to receive and to send back the data when the skill is mapped and then we needed to tell the LMS that there is some job to do. And when the job has been done, we need to send back the result to the other HR software in the organization.

Martin Toner, ATB Capital. What's a good range for when you'll achieve FedRAMP?

Fabio.

It's not just me because it's a motion that goes through sales, finance, as well as internal IT and security and product. We selected UberEther as a partner because it can give us an accelerated path given that they are able to lift some of the control on their side because they provide us a pre-configured environment that takes care of a lot of the documentation and similar functionality changes that will be needed on our side to achieve FedRAMP. So we are confident this will greatly reduce the time to be able to apply and then be certified as FedRAMP moderate. It's going to -- I'm looking also at Harvey, I think it's going to be...

I think we can generally say -- we've said in the earnings call in the next few quarters, looking into 2024, give or take. But I think, Harvey, it will be helpful to kind of give a perspective of how you actually get to that between a sponsor or not, that would be great.

Yes. So what we're in the process now is just being FedRAMP-ready. So if you think about it, there's three pieces to that. There's FedRAMP-ready, and then in process, and then you've got your certification. So FedRAMP-ready really has two pieces to it, two tracks. One is getting all your documentation put together, which we'll have that done mid-October, is where we're targeting right now. So it's a software security plan. It's about a 400-page document that outlines everything that we're doing. The next piece of that is you have to get your software into the AWS hardened environment. And then you have to start having logs come out of that environment, so they can start to run audits on those logs. That should happen for us in the November-December time frame. Once we get those logs starting to come out and we have the SSP in place, we can then go find a FedRAMP sponsor, an agency that would say, "Hey, we'll sponsor you for this FedRAMP certification." We secure that sponsor, and then we're considered FedRAMP in process. Once they go through their internal process, which will take 3 to 4 months potentially, then they can turn all of our documentation over to FedRAMP program office who then reviews all that and stamps us we're in the FedRAMP marketplace. Now from our perspective, where we really want to get to is FedRAMP-ready, documentation done, all the logs done, because every agency in the world knows it's just a process to get it done, and they'll give us provisional ATOs to be able to operate in those environments and be able to sell and buy those solutions. So we're really hoping by end of year, I think we've got everything from our documentation and our logs in place, and we can start actively pursuing. We are now agencies to these sponsors for us.

It just opens more opportunities for us to participate because if you have that, then the RFPs that we can participate will enlarge.

And just for clarity, while there are some RFPs right now that have been exiting that state you can apply if you have achieved already, there are equally many RFPs that keep that option open. And as long as you can prove that you're processing your FedRAMP process, we're still bidding. So that is how we're building our pipeline of agencies that are going to be candidate sponsors to be ready to have them join us in the final certification once our, yes, bid is won.

I've been with multiple companies through this process. And where you'll get shut down is if an agency says, "Okay, you're not FedRAMP, where are you in the process?" And you go, "Well, we're looking for a sponsor, we haven't started anything yet." They know that's going to take 6 to 8 months. So just send in with a contract vehicle, "Hey, how do we buy you?" "We don't have a contract vehicle, but we can get one." They know that's a 6 to 8 [ months ] process, they'll say, "Go away." So we're putting all the foundations in place, so when they say, "Hey, where are you in FedRAMP?" We can look right back and go, "We need a sponsor. We're ready. Would you be that sponsor for us?"

Yes. And the last building block is hiring people. I mean we have a local team of American people living on American soil that are ready to deploy the customer in the AWS Gov Cloud because we cannot do it from other places. And those hiring have been already done.

Still exiting 10% EBITDA free cash flow.

We're actually starting to see because we're getting -- I've been on a couple of calls here recently where there are commercial clients that actually are doing business with the government that say, "Hey, we feel like it would be a differentiator for us as a commercial client if we were on your FedRAMP cloud. When is that going to be available for us? What do we have to do to get into that cloud?"

Harvey, also about the state, just FedRAMP from a state perspective also.

Yes. And so it helps with the states as well. But state -- more and more, we're seeing state ramp certification as a requirement. But really, from our perspective, once we get our FedRAMP certification, we can walk right into the StateRAMP office and they'll grandfather that right in for us. So we'll be able to have both the FedRAMP and the StateRAMP. And I know it was on the slide, you may have missed it, but we're also going after a CJIS certification, which is the Criminal Justice Information System. So we'll be able to work with like all law enforcement agencies because we'll be able to handle that criminal justice data as well.

And because we are not -- we don't hold any PII, we also, just for clarification, we are moderate IL4.

IL2.

IL2. IL4 will be phased out of the DoD.

One piece of information as well. It is pretty common practice for software companies that develop their own gov version to actually have very interesting unit economics from a revenue standpoint and have increased or better pricing on the gov version as a result of the fact that there are investments related to it. And so we -- actually, in our new website of docebo.com, you will notice under the Solutions page that is now called, under Products, Learn Gov Version, that will be priced relatively to our calculations and market benchmarks we're seeing out there.

Yes. I understand we are stressing the concept of FedRAMP and stuff like that. But it's new and makes us excited to learn something new. We are still -- we are learning as individuals. But is it correct to say that some private entities, especially banks, are willing to run their instance because of security and compliance inside the FedRAMP environment? But this is not the juicy part. The juicy part is that they are willing to pay a premium on the infrastructure to run inside FedRAMP.

We don't want to sugar coat it too much. We're just saying what the sheer facts are, and then we'll see. We're at the beginning of this journey. We have achieved this. We have a time line, a plan, a project. The market is ripe. Competition is -- we like the makeup of the competition, and -- yes.

I think I just want to reiterate one point. It's about the pillars. It's not about all the pillars firing. It gives us opportunities and be able to execute in multiple pillars and drive consistent growth. It always comes down to that.

That's great. Once you're ready, how long are sales cycles typically?

So from a federal government perspective, right, being FedRAMP-ready doesn't shrink the sales cycle for you. It's still an RFI, an RFP, similar sorts of things. When it gets to contracting, having your FedRAMP and having a contracting vehicle that we're working with makes that part of the equation so much quicker, so much faster, so much more predictable as well for us. That is the nice thing about a government business. When they release an RFP, they're going to make an award. They won't release an RFP unless there's monies the bank and they can do it. Very rarely do they pull it back. So it won't be a situation where we invest in it, we submit the RFP, and they go, "We're not going to award anything." So when we talk about predictability of the business, we can start to look at the RFPs that are coming out and know those things are going to be awarded, and that's the market that we're going to go after.

Kevin Krishnaratne at Scotiabank. Maybe for Sukaran, on revenue growth, land and expand. How do we think about how pricing might figure into that? You announced a bunch of product releases today. Do we see any uplift there? Can you also talk about how pricing might figure into your relationship with partners? And is there any sort of sharing there? Just a clarification.

Yes. Yes, good question. I would say in terms of pricing, when you think about -- when you think about the uplift in terms of annual increases, that's just relative to what the inflation give or take is, right? I think a lot of the companies have done, reasonable lifts in the past 2 years, I don't think there's going to be a lot more of that. There will be reasonable pricing lift in terms of the book that the market is willing to accept going forward. That's our perspective. But this is -- from a pricing perspective, our viewpoint is this: as you move forward, you're going to see us position ourselves based on solving the problem for the customer, bundling the solution they need, not the products and modules. So as we look into January of next year where we price our new customers, it will be more around here's a prob, here's what they find a solve for, has a bundle of products and modules that they will receive. But some of the features and functionalities that you saw, for example, today, AWS -- sorry, the Data Learn Insight as an example, where we are giving certain functionality to the customer embedded in the learn platform, but there is an incrementally much more valuable proposition that will be an additional module that the customer will be able to purchase. Similarly, in the customer education use case, there are certain features and functions that are not part of the bundle, that are incremental from a module perspective. So the -- as you think about us in the future, we will package bundling, add more features with the customer that drives higher adoption because they're not doing products and modules. But at the same time, based on the use case of the customer and the value we drive in certain instances like customer community, Learn Insights and so on and so forth, there will be certain modules that will be incremental to even those bundles. I don't know if you guys want to add anything to it. Ale or Fabio.

I think you said it well. I think we...

And you move your hands like a real Italian, by the way.

there's -- the one thing I will say is that as we think about our new modules, it's not just a pricing uplift direction, it's to increase or to improve our win rates and to improve our retention strategy as well because we're -- the more problems we solve for them, the more we get sticky in the base. And so we view that as a multifactor choice as opposed to just a single one, it being upselling. We haven't even spoken, by the way, today about expansion in the logic of cross-selling, which is an additional layer that we really think about a lot, because we are working with the companies and those big companies' multi-subs and/or dependent brands. We tackle that today to an extent successfully, but it is our view that there's a lot more to be done from a cross-selling standpoint, and we're focusing on designing even better organization to extract more value out of it.

And I think your question around -- so the last part of the question was partners. It's an important one. We called it in Q1, if my memory is right. The reality on the partner side is pretty straightforward. Services is their work. Like even the government sector, they're going to make 3, 4, 5x, I have no idea, but they will -- this is Deloitte's world. Where our focus, and it's an important part, we are constant -- we will think about services and investment because we know from an LTV to CAC perspective, that customer is going to be 7 to 8x over time, and we will continue to invest on services, like do everything right to get them onboarded, be on multiple use cases, be on multiple departments because that's where the stickiness comes from. We are concentrating ourselves from a subscription point of view. And if I have to give up some of my services revenue, which is, what, 6% of my total base, we will do that because that drives the pipeline, that drives the higher software revenue. I think we'll wrap it there. We appreciate everyone coming in. I don't know, Claudio, if you're going to say some final words. But I just want to say we appreciate everyone coming in person. And I hope you enjoyed. And there's still more to go today, so there's more sessions, please -- and we're also going to be around for any Q&A afterwards off-line. But we sincerely appreciate you coming in person. And this has been great, and we'd love to take any feedback as well.

Yes. Don't forget to go to -- speak with our partners as well. I mean, they have all the booth, and so you can understand the logic of ecosystem. And asking for specific demo, there is a demo corner there. You will have demo of Docebo's size, shape, and every new feature.

You can do virtual role playing there.

We appreciate you very much. Thank you.

Thank you.

Thank you so much.