Thinkific Labs Inc. (THNC) Earnings Call Transcript & Summary

Good afternoon. My name is Ina, and I will be your conference operator today. I would like to welcome everyone to Thinkific's Second Quarter Fiscal 2026 Financial Results Conference Call. [Operator Instructions] This call is being recorded on August 5, 2026. And I would now like to turn the conference call over to Joo-Hun Kim, Head of Investor Relations. Thank you. Please go ahead.

Thank you, and good afternoon, everyone. Welcome to Thinkific's second quarter fiscal 2026 financial results earnings call. Joining me today are Greg Smith, CEO and Co-Founder of Thinkific; and Leigh Ramsden, CFO. After the prepared remarks, we will open up the call to questions. During the call today, we will discuss our business outlook and make forward-looking statements that are based on assumptions and therefore, subject to risks and uncertainties that could cause actual results to differ materially from those projected. These comments are based on our predictions and expectations as of today. We undertake no obligation to update these statements, except as required by law. You can read about these risks and uncertainties in our regulatory filings that were filed earlier today. Our commentary today will include adjusted financial measures, which are non-IFRS measures. They should be considered as a supplement to and not a substitute for IFRS measures. Reconciliations between the two can be found in our regulatory documents, which are available on our website. In addition, our commentary today will include key performance indicators that help us evaluate our business, measure our performance, identify trends affecting our business, formulate business plans and make strategic decisions. Such key performance indicators may be calculated in a manner different to similar key performance indicators used by other companies. I should also note, we have a slide deck that supports our remarks available to download on the webcast interface or on our website. And finally, all dollar amounts discussed today are in U.S. dollars, unless otherwise indicated. I will now turn the call over to Greg Smith, CEO and Co-Founder of Thinkific. Good afternoon, everyone, and thank you for joining us today. We are pleased to report Q2 results that demonstrate early success of our strategic focus to move upmarket. As I acknowledged last quarter, we're undergoing two significant changes. The first is our strategic shift upmarket. The second is our rapid transformation to embrace AI, both in how our teams are building products and working and in the capabilities we give customers to build and scale their businesses. We are making continued progress in both of these areas. In Q2, with respect to our upmarket shift, we are seeing continued improvements in key retention and acquisition metrics for our larger upmarket logos. A strong quarter in Plus was offset by Self Serve this quarter. I see this as a step in the right direction as we focus our efforts on the cohorts of customers that represent growth in our future. On the call today, I will detail the product innovations and go-to-market execution fueling these improvements and conclude with our commitment to achieving higher levels of profitability even as we accelerate growth in our strategic high-value segments into 2027. We are all in on AI. Since taking direct oversight of our product and technology teams, I have challenged them to push the boundaries of our AI capabilities and accelerate the pace at which we deliver high-impact value to our customers. Personally, I can say that helping our customers build and scale their businesses through product enhancements and features delivered in weeks rather than months it would have taken previously has reenergized me. I cannot remember a time when I've been this excited about the work ahead. Last year's product innovation was largely foundational. That work continues, but engineering productivity gains are now letting us ship high-impact customer-facing capabilities faster than ever before. These features improve how customers run their businesses day-to-day and will deliver value they can see in their daily workflows. We're now increasingly adding products and capabilities with clear demand and a path to near-term ROI. These updates empower customers to run large-scale operations with ease on Thinkific. We've also accelerated our AI integration into the platform. Users can now leverage natural language requests to design their sites, generate reports and analyze their data. This makes it easier and faster for them to run their businesses, saving them time and earning them more revenue. A key highlight this quarter was the rollout of the Thinkific Learner Hub, a unified destination that brings courses, memberships, community, events and resources into one modern personalized branded learner experience. This replaces admittedly fragmented legacy dashboards with a clean, customizable interface that helps customers deliver a more cohesive learning environment. With Learner Hub, learners benefit from progress tracking, tailored recommendations and a more engaging layout that reduces friction, supports completion and creates a stickier end-to-end experience. Hub also sets up deeper integrations with Thinkific AI agents, so customers can deploy custom teaching assistants trained on their own content available naturally in the hub or across their sites. In July, we launched new certification capabilities integrated across the platform. Customers have long asked for this, and it's a capability we previously explored acquiring. It's built for more rigorous programs that larger organizations often run. These tools help verify learner mastery and uphold education standards. It also unlocks new revenue opportunities for our customers. Feedback on our Q1 release of Thinker, our AI teaching assistant, has been fantastic. Early adopters report a 2x increase in learner completion rates, demonstrating Thinker's ability to drive engagement, completion and retention at scale without the need for our customers to increase headcount. Together, Thinker, the Learner Hub certifications and the AI capabilities we're building into the platform strengthen our differentiation, improve learner engagement and retention and better position us with upmarket customers who want enterprise-grade integrated solutions. That product progress is already showing up in how we sell and win. As the platform becomes a more deeply integrated learning experience, we are sharpening our go-to-market motion for larger upmarket customers. In Q2, a stronger product release schedule helped directly with customer revenue retention and acquisition, which combined with sharper execution against our ideal customer profile, drove a strong increase in net ARR for Plus. This quarter, we welcomed some marquee organizations, including a Top 25 American bank and Iron Man, the world's largest operator for participation sports, most of whom will be using Thinkific to train thousands of learners. That Top 25 U.S. bank chose Thinkific Plus after a rigorous 16-month evaluation, citing our combination of enterprise-grade security, ease of use for their teams and readiness to meet the compliance demands of a regulated financial institution. Iron Man selected Thinkific Plus after a competitive evaluation where the ease of use and quick time to go live were the deciding factors. From the time of signature, our professional services team were able to get them started in weeks, not quarters that it would have taken on our arrivals. These wins reinforce 2 pillars of the go-to-market strategy, stronger sales and marketing execution and building a brand and product story that resonates with more sophisticated buyers. In both cases, buyers pointed to our integrated learning experience and our ability to move quickly with them. We are also expanding enterprise readiness. We launched offerings for health care and higher education, including HIPAA compliance services and WCAG compliant accessibility auditing, already adopted by major institutions such as SUNY, the State University of New York. Our new Thinkific services, including white-glove implementation is a real differentiator and was a primary factor in the Iron Man win this quarter. As we lean into this high-value segment, we remain disciplined on Self Serve. We are driving operational efficiencies there and accepting that churn may run higher. The exact level is hard to predict, and it stood out this quarter, causing the first year-over-year drop in Self Serve revenue. That said, since embarking on our new strategy, it was expected as we've previously communicated to the Street. One year into the strategy shift, go-to-market is beginning to show we're on the right track. Q2 was encouraging, but it was only one quarter. Our job now is to build on that momentum and prove we can deliver consistently. That consistency is what we believe will support top line growth acceleration in 2027. While we lean into this momentum, I am also committing to improve the profitability of the business. Thinkific has been profitable for most of its history, and candidly, that's the kind of business I'm most comfortable running. With the right people, process and strategy in place and with early proof points that we're turning the corner, we're now in a position to prioritize improved profitability and cash flow. We have been investing ahead of growth. We now believe it's more appropriate to better align our investments with near-term opportunities we see, largely by leveraging our productivity gains to moderate cost increases while prioritizing those with the highest near-term ROI. Importantly, this does not mean we are stepping back from accelerating growth. On the contrary, our sharpened focus on projects with clear, well-defined and near-term revenue potential is already delivering results and helped drive our growth this quarter. I'm happy to have Leigh, who officially joined us at the beginning of this quarter on board to help guide us through this journey. He shares that commitment and has the experience to drive higher profitability while still maintaining the right level of investment to build on the success we have achieved. Over the long run, a more profitable Thinkific is a stronger, more durable partner for our customers. It gives us the flexibility to keep investing in the products, services and support they need to build and scale, and it builds a healthier company for our shareholders. And with that, I'll pass the call over to you, Leigh.

Thank you, Greg. I'm pleased to join you today on my first earnings call as CFO at Thinkific. Having been on board for the past 60 days, I've been deeply impressed by the dedication and professionalism of our finance team and the overall commitment of the broader team here at Thinkific. I want to thank everyone for their assistance as I've been getting up to speed. I am confident we have the capability and discipline to execute the strategic shift we are undertaking. As CFO, my focus is twofold: one, aligning our organization behind the momentum we're building upmarket and accelerating our Plus segment; and two, doing so while ensuring we are disciplined and efficient on resource allocation, leveraging AI-driven productivity gains to drive sustained profitability. Longer term, I also see an opportunity to optimize our pricing and packaging, potentially including outcome-based pricing models, ensuring that as our customers grow and succeed, we will also grow alongside them. While it is the early innings, this quarter, we saw indications that we are turning the corner with our upmarket strategy. There remains significant work ahead to fully unlock our growth potential and to maximize profitability, but I am fully committed to the disciplined execution required to meet our goals. With that, let's review our financial results for the quarter. For the second quarter, total revenue was $18.6 million, up 3% from Q2 of 2025. This improvement was largely driven by growth in our Plus segment, where, as Greg discussed earlier, improved sales execution, optimization of pricing and packaging and an accelerated and better targeted product road map helped drive stronger retention, upsells and acquisition of new customers. Plus revenue grew to $5.3 million in the second quarter, a 14% year-over-year increase and an acceleration from the 12% growth seen in the prior quarter. As anticipated, the strength in Plus was partially offset by the Self Serve segment. Revenue was $13.3 million, down 1% year-over-year. This decline reflects our strategic shift in managing spend on our noncore ideal customer profile. As a part of our focus on operational efficiency, we have reallocated customer acquisition spend away from lower lifetime value tiers toward our more durable upmarket segments. We are continuing to examine our go-to-market motion in Self Serve to ensure we are efficiently acquiring Plus customers that will be successful on our platform. Commerce revenue reached $3.4 million in Q2, a 4% year-over-year increase, driven by a 900 basis point improvement in penetration to 67%. As we have noted in previous quarters, we believe our current feature set has brought penetration rates to a plateau in the mid- to high 60% range, and we expect this to remain relatively stable in the near term. Gross payments volume was $71.4 million, up 10% year-over-year, but down sequentially from $75.7 million in Q1. The year-over-year growth aligns with our improved penetration rate as more of our customers are processing payments through our platform, while the sequential decline reflects typical seasonality. Historically, commerce revenue tends to peak during the holiday season and at the beginning of the new year. ARPU reached $177 this quarter, reflecting a 5% increase year-over-year and a $2 improvement sequentially. This growth underscores the execution of our upmarket strategy as we continue to attract customers at higher unit prices as they partner with us and scale their businesses. Gross margin was 73%, roughly flat year-over-year, but up approximately 100 basis points from the prior quarter. The improved gross margin was primarily driven by our commerce product, which benefited from improved operational efficiencies in our payments platform. Turning now to operating expenses. Total OpEx for the quarter was $14.3 million, roughly flat from the prior year, which represents a reduction of approximately $1 million from Q1. At a high level, the sequential decrease reflected onetime AI investments in our R&D organization in the first quarter, in addition to operational efficiencies throughout the organization that more than offset costs associated with our annual company kickoff in May. Sales and marketing expense was down approximately $800,000 year-over-year due to the aforementioned focus on operational efficiency, where we have reallocated customer acquisition spend away from lower ROI and lower lifetime value tiers in Self Serve toward our more durable upmarket segments in Plus. R&D expenses were $6.2 million, up from $5.3 million in the prior year, driven by increased headcount as we have invested in our engineering teams. These expenses were, however, down from $7.1 million in Q1, which saw significant onetime investments to accelerate AI-driven productivity improvements in our engineering teams. G&A costs in the quarter increased year-over-year as we moved company kickoff from January to May. Sequentially, however, these costs declined, reflecting the nonrecurring management transition expenses recorded in the first quarter. Adjusted EBITDA was $273,000, comfortably outperforming our guidance range of a 2% to 5% loss. This result was driven primarily by better-than-expected revenue performance, coupled with the impact of cost discipline and lower-than-expected headcount as we exited the quarter. As Greg discussed, having largely completed the significant critical investments to support our strategic pivot, we are well positioned going forward, where we will be focused on driving sustainable improved profitability. Cash and cash equivalents at June 30 were $51 million, up $1.6 million from the prior quarter. The increase was the result of $1.7 million of cash generated from operations, partially offset by cash used in the NCIB of approximately $350,000. I will end my prepared remarks with a few comments on guidance. For the third quarter of 2026, we expect revenue in the range of $18.6 million to $18.9 million, representing approximately 1% year-over-year growth at the midpoint. This outlook reflects continued growth in Plus subscriptions, partially offset by ongoing attrition in our noncore lower lifetime value Self Serve customer base as we have reduced our investment in inefficient customer acquisition and shifted our focus upmarket. On adjusted EBITDA, we are committed to driving higher levels of profitability as we progress through the balance of the year. In Q3, we expect to see an improved adjusted EBITDA margin of 2% to 5% of revenue. With that, we are now ready to take your questions. Operator, please open the line for Q&A.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] And your first question comes from the line of Todd Coupland from CIBC.

I'm wondering if you could talk about the Plus pipeline in light of those customer examples that you gave. Talk about how it's improved either quarter-over-quarter or year-over-year and the types of customers that are in it, how you expect to harvest it?

Sure. Yes, happy to take that. And Leigh, I know you've been looking at this. So if you have more to add, jump in. The quantity of the pipeline, I would say, has been fairly steady over the last year, but the quality has shifted. So the volume of leads and opportunities has been quite similar. But what is we see shifting is the size of customers, the size of the opportunities coming in, and that's partly from a shift of brand and messaging and marketing and also some of the product development we're able to do to now attract and retain and properly serve customers that operate at just a different level of scale operations. Did that cover what you're looking for, Todd? Or is there more --

I'm just interested in getting a feel for the interest. It's obviously good to see Iron Man in a U.S. bank, but just wondering profile of customers, why they're picking you that kind of thing, given the pivot in the business.

Yes. And I think while we do -- we can always do more on pipeline, it's strong enough that we could see acceleration in our growth just from the pipeline. I think we could, as a first win, do more even on the win rates, which we saw some acceleration, great job on the sales team in this past quarter. But I think there's opportunity to sustain that and do even better and support them better with what we're delivering on the product in the near term here where we can extract more even from a similarly sized pipeline. But there's also -- some of the ways we're looking at this, too, is the shift in reducing the Self Serve inefficient spend, which we've done already, and there's more we can do and shifting more of that over into more effective, productive and better unit economic plus marketing.

Okay. My second question had to do with R&D expense stepping down. I guess you've made the investment now in the Anthropic tools that you talked about before. Is this a good run rate to think about in terms of that spend looking forward?

Yes. I mean we've given some guidance around EBITDA. I think there's further improvements we can make in EBITDA go forward -- or sorry, in both EBITDA and in R&D spend. I think as a benchmark, we're still high there, and I think that's something I'm going to look to continue to improve.

And your next question comes from the line of Stephen Machielsen from BMO Capital Markets.

Yes, this renewed focus on profitability, I guess you kind of touched on it with Tom's question. But I guess in the near term, like let's just say, four to eight quarters out, I mean, what would be a comfortable level of EBITDA for you?

Leigh, do you want to jump on that one?

Yes. So thanks very much for the question. I think that we've come off a low, and we're now targeting in the low to mid-single digits range of EBITDA as we get through the balance of this quarter and outlooking for the rest of the year. I think as we think into 2027, we want to start thinking about raising that at least into the double-digit range.

Okay. And just in terms of like pricing and ARPU trajectories, could we get some color on any divergence between the Plus and non-Plus ARPU trajectories? It sounds like Plus is growing well, but is Self Serve still growing? And it also looks like there were some price increases during the quarter? Or when should we be seeing the full impact of those?

Yes. So in terms of our performance on ARPU, I think that the majority of the increase this quarter was certainly driven in the Plus segment. And I think the remarks reflect that. In the third quarter, we did have a small price increase on Self Serve. And I think that, that we're in the very early innings of seeing the impact of that on the business, and we'll have more to report in the future. I think more generally speaking, I do see an opportunity to continue to work to optimize our pricing and packaging across the entire stack. And this is really to make sure that our customers are the ones that are achieving the most value out of the product are -- that we're participating in that value creation alongside of them. So I think there are certain levers that we haven't looked at in the past that we'll continue to look at moving forward to help optimize there.

And your next question comes from the line of Gavin Fairweather from ATB Cormark.

Maybe just on GMV to start, it was down about 4%. Can you discuss how much of that was based on just maybe some Self Serve churn? Or was there just less activity with your base of clients?

Yes. On a year-on-year basis, that was down really as a result of a significant customer that moved off platform. And sequentially in the quarter, it was really just down on seasonality. So there's a little bit of a mix of those two issues impacting GMV.

Very helpful. And then just on using AI internally, can you discuss any kind of metrics you might have around R&D productivity per head or how much additional kind of code you're shipping, just to give us a sense of the pace of development with the new tools.