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spk01: Good morning, everyone, and welcome to the Decebo Q1 2024 earnings call. All participants are currently in listen-only mode. We will open the line for a question and answer session momentarily. Analysts can ask questions by pressing star followed by the number one on your telephone keypad. To withdraw your question, please press star one again. We ask that analysts please limit themselves to two questions and return to the queue for any follow-ups. I'd now like to turn the call over to Docebo's Vice President of Investor Relations, Mike McCarthy. Please go ahead, Mike.
spk00: Thank you, Brianna. Last night after the markets closed, Docebo issued its Q1 2024 results. The press release, which included a link to management's prepared remarks, and our quarterly investor slide deck were all posted to our investor relations website. This morning's call will allow participants to ask questions about our results and the written commentary that management provided last evening. Before we begin this morning's Q&A, Docebo would like to remind listeners that certain information discussed may be forward-looking in nature. Such forward-looking information reflects the company's current views with respect to future events. Any information is subject to risks, uncertainties, and assumptions that could cause actual results to differ materially from those projected in the 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 CDAR 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 as measures and do not have standardized meanings under IFRS. Please see our MD&A for additional information regarding our non-IFRS financial measures, including 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 Derek Chabot as an ERM CEO, SUR Tufo, and our CFO, Sukarn Mehta.
spk01: At this time, we will open the line for questions. If you have dialed in and would like to ask a question, please press star followed by the number one to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. If you are called upon to ask your question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Again, we kindly ask that you limit yourself to two questions and re-queue for any follow-up. Our first question today comes from Suthan Sukumar with Stifel. Please go ahead.
spk07: Good morning, guys.
spk11: Now, from our first question, I just wanted to touch on, you know, you guys flagged the SMB weakness in their remarks. But, you know, from the KPIs and results, you're clearly seeing continued strength and momentum in enterprise and green shoots in the government space. You know, how should we be thinking about the durability of these trends that you're seeing
spk07: Look, can you hear me? Hello? Hello? Yep, yep. You can hear me now. Okay. Okay. Sorry. Sorry, Susan. Alexis, go ahead, please.
spk02: Susan, hi. I would say, look, this is a quarter in which we thought that our performance, you know, I want to underline and really focus on it being another beat on revenue and EBITDA and underscore really our solid cash flow performance. You are correct in terms of impact from a macro. We're seeing a more elevated in the past couple of months in the S&D and mid-market segment where churn and in general seat optimization, we had more pressure than in the past. And, um, you know, we expect, we expect this to diffuse over time. Um, when, when you, when you combine that with the, what we shared on the, on the large customer impact, uh, that we had, um, however, just for clarity, a customer that we have supported for over nine years. Um, I would say that's kind of a little bit of the summary. on the performance of the quarter. But all of this is literally by design in the sense that our enterprise segment and our Gov segment had very remarkable performance. Among other things, our new logo ACV increased by almost, I think, 20% customers with $100,000 in ARR and above grew over 30%, I think over 36%. Almost 50% of our ARR in quarter one came from enterprise and government segments. And then, you know, 50% of our pipeline is enterprise and external hybrid use case, which by design is what we want more for better unit economics. So we remain very, very optimistic about the trend moving forward on the basis of this. Sokata, anything you want to add?
spk13: Yeah, I think this is a good summary. I think in general, I would say that as we look at some of the factors that I provided in the guide, we're being cautious as we look at some of the macro pressures, especially on the SMB side, I would say. Of course, the effects on the U.S. dollar movement has an impact as we translate those revenues into U.S. dollars. And I think At a high level, what's important to understand, which Alessia alluded to, is that if you read through the print, this is a solid quarter across the board from a revenue EBITDA. We've actually done incredibly well in the enterprise segment and continue to speak to some of those numbers that Alessia talked about. At the end of the day, the company will still continue to grow as we talked about in our guide and we provided that annual guide, you know, just under 20% and at the same time increasing our EBITDA and free cash flow. So, you know, as we think about the medium to long term, you know, we are now, you know, with the free cash and the EBITDA leverage that we are delivering, this also gives us enough firepower to invest in areas of growth and support, you know, our build versus buy strategy in terms of innovation. And I think the most important part, even in this operating leverage and growth story is that we will continue to invest in research and development at innovation and sales and marketing throughout the year. And I think the leverage that you're seeing now come through the system is mostly from GNA. So what that really tells you is that we are focused on driving high quality growth with best in class unit economics.
spk07: And that's the consistent story from the past three quarters. Great, guys.
spk11: Thank you for that color. My second question, I want to touch on the partner channel. Can you guys provide some color on the current day force partnership and any changes that you may have seen in that relationship since the last update? And on the other front, it sounds like you're seeing pretty healthy traction with new partners
spk02: both the enterprise and the government side so it would uh love your thoughts on some puts and takes that that you see with the partner channel going forward yeah i'll um get started feel free to to chime in um look um from regarding um your question regarding day force As you're aware, we're currently engaged in a legal action and so we're unable to make any specific comments about the relationship at this time. However, I would say from our perspective, we remain focused on divesting our focus. We're very focused on making sure that we have a good differentiation about our partnership in terms of revenue and distribution of those. In terms of the OEM book in general, our execution continues. We have added three OEMs since last summer, which was consistent with our strategy. With regards to some existing partners, EY, and Darwin Box in particular continue to scale, and we expect them to have a healthy performance in the second half of the year. Additionally, you're correct. When we think about partnerships, we think a lot about beyond OEMs. We think about SIs. We think about the broader partnership ecosystem opportunities. In this regard, our SI focus is very significant. We are putting our energies in it, you know, from a perspective of era of improvement. We want to do even more and even better because we believe it's a very, very promising area where we have a lot of leverage to gain from. In this regard, we actually staffed our team even further to grow and mature everything partnerships OEM, but not only. We brought on board a new seasoned executive named Travis Burke, who has a longstanding, you know, great experience in the HCM space and will be leading our partnerships and corp strategy function. And yeah, we, you know, OEM and partnerships in general remain one of our growth and growth pillars and growth vectors. and we plan to acquire more and continue to partner and generate more revenue with the ones that we have already.
spk13: Yeah, and the only thing I'll add, Susan, to that point quickly is on the large SIs that are ramping, that are important to what we deliver this quarter and in the future. You know, we spoke about they have continuously supported us in a number of deals in the past and government being one that we called out, but I think Beyond government, we're certainly seeing that even in the commercial segments or enterprise segment, I should say, they are ramping up significantly to larger size specifically that we work with. And I think 1 of the things I would call out as part of my guidance in general is that we have some healthy opportunities that are in play. We are being cautious in terms of how timing of the deals will play out and how when they'll close. But we are render a choice in a number of these deals working with these some larger size. And that's an important part of how we, you know, attribute our source attributes a significant amount of our pipeline as we look forward to the growth of the company.
spk07: Great. Thank you for that for the color, Jen. Thank you.
spk01: Our next question comes from Ryan McDonald with Needham. Please go ahead.
spk15: All right, thanks for taking my questions and creating a nice quarter. Maybe first to start with you, Sikaran. First of all, thanks for sort of a full year guidance. I think that helps provide some additional context of how you see things playing out through the end of the year here. But as we think about the headwinds that you've called out across FX, SMB, and then obviously the unexpected customer churn, can you maybe help us frame up maybe the magnitude of of impact across all three of those in terms of, you know, where the, you know, your initial annual guidance is relative to maybe where consensus was prior to that? Thanks.
spk13: Yeah. Yeah, Ryan, good question. I think if you just, just to simplify the answer, which you'll be able to calculate, is if you look at where the consensus was versus where we've guided to the range, high end of the range even, the differential will be basically one third, one third, one third between each of these components. And so what I would speak to just in terms of the macro, specifically I want to call out in the SMB side, is that we've called out in the past the fact that this is a customer that's a first-time buyer, macro sensitive, requires resources from an implementation perspective. And I know Alessia will speak to in a second around some of the initiatives that were to streamline that segment. but i think what we're certainly seeing is that that that smb customer is more impacted in the past couple of months with some of the macro pressures that they're seeing and and we're seeing uh you know a bit more on this i would say not on the churn but on the downgrade side where seed optimization is happening in that segment um and so as we look through as the the the macro to us the later part of this year we think we're just being cautious to make sure that we have enough visibility, at least for the remaining part of the year, to be cautious around that segment. And then the FX segment, as you know, 30% of our revenue comes from outside the U.S., and that certainly has an impact with the U.S. dollar strengthening. This large customer, one thing that's worth noting is that The large customer that we support over nine years, we are still going to support them for one of one of their use cases. The portion that I said went to a company that had an in-house, had a content business in-house LMS that they all of this happened suddenly. But what happens in our world is that because the numbers are relatively, you know, we're not at the scale, but these type of downgrades will impact us towards the latter part of this year just because of our size and scale that impacts growth in the year. So to answer your question, FX, SMB, macro pressure, and then the large customer impact, you can basically attribute one-third, one-third, one-third impact from the differential, from the consensus to what we guided.
spk15: Super helpful, Kala, there. I really appreciate it. Maybe we wanted to switch gears to the new pricing strategy that you talked about in the prepared remarks, and it sounds like you've got three new pricing tiers. Can you provide, to the extent you're able to at this point, a bit more color on sort of what those three tiers entail relative or compared to sort of the prior, you know, pricing strategy. And, you know, depending on how long you've been in the market, you know, with this strategy so far, any feedback from customers thus far or are you able to measure sort of or quantify what the impact is on, you know, what a new land looks like under this pricing strategy relative to the prior one? Thank you.
spk13: Yeah. So, yeah, so just to kind of give some background on the pricing, the way, you know, historically, as we price our go-to from a customer perspective, we would price historically on a, as we say, a la carte basis, where there are a number of products and modules that were offered to the customer. And we've done a lot of work over the last 12 to 18 months in terms of reviewing how our customer interacted, what the market is, a lot of benchmarking, a lot of competitive intelligence, and to really understand how we can help our customers based on their needs. And specifically, the pricing is focused in the world that we call offering a core platform and then solving the problems around the specific needs, the use cases. And so what you will find here is that our pricing has now moved to more of a core platform that bundles key products and services that we know the customer requires. And it's separated between, you know, I would call SMB customer versus mid-market and enterprise customers. And then beyond that, what we do is beyond the core package, the customer will have now capability of adding incremental use case specific needs, whether it's e-commerce capabilities, whether it's content offering capabilities, whether it's, you know, if they have an external extended enterprise the need for having dedicated architecture, so on and so forth. And so we've created incremental packages that the customer can benefit from by acquiring that beyond the core offering. But even in the core offering, what we've been able to do is to package more products and features and capabilities. And all of this effectively will help us from our ability to how we talk to the customer, how we solve their problems, and more so We expect that this will help from a deal velocity and win-win perspective as the conversations and how we propose the customer from a go-to-market perspective will be much more simpler relative to what it was historically in a la carte basis. And I think one thing that I will call out, as you know, Ryan, is I also was listening to how HubSpot had done it recently. These things take time, right? So with the new customers, you can imagine that this new pricing went out live in April. these quotes when these are the you know any new net new quotes have been created you can expect that they'll start impacting us in q4 of this year because that's like three to six months uh deal cycles for at least mid-market and and then on the renewal book of business we will be extremely sensitive as you know it's a longer journey you have to make sure that each and every customer and their previous terms and previous pricing and you make sure that you can move them into the new book of pricing will generally take a few years um as they kind of renew through the cycle. Alessio, I don't know if you want to add anything to that.
spk02: Just a couple of things. I would say this pricing exercise redesign was a process that we took our time to define. I think our starting point was really to introduce pricing concepts that line up with how buyers buy and be less, if you will, company-centric, but more customer-centric and reduce friction in the cycle. And because we are a story of segments where different buying behaviors happen across different segments, we felt that it was appropriate the appropriate time to introduce the pricing and packaging that better reflected the discount market story as opposed to an a la carte that was you know took uh had created the deal slow down as opposed to this one we our anticipation is we will have better deal velocity that's one of the goals um and the second concept i think As we plan on releasing more capabilities in the near future, this pricing supports that. As opposed to adding more a la carte in a manner that could cause confusion, we want to streamline the packaging of our future products as well so that our customers better understand them and we can position them in the right segments in the right way. So all in all, You know, we're very happy of the job done so far, but it's a little early to make statements or, you know, analysis, like Sukharin said. But over the next few months, we're going to start to see the benefits of this, and we have great conviction in our pricing exercise.
spk07: Thanks a lot. Appreciate the color.
spk01: Our next question comes from Stephanie Price with CIBC. Please go ahead.
spk09: Hi, good morning. Just wanted to focus in on the large SIs. You mentioned that they were starting to open up opportunities outside the government sector. Just hoping you can talk a little bit about what you're seeing with the SIs outside of government and how you're kind of thinking about that segment over time.
spk07: Sure.
spk02: Stephanie, great question. Yes, the SI motion is one that supports well we started focusing on it in the beginning on the as a reflection of certain strategic deals that happened in corporate and then as we started executing in the government space and certain relationship with certain size accelerated now those same relationships have sort of stick cascaded on the corporate side and you know, what we're seeing is a definite support, a better support of larger customers. We're seeing SI's very interested in working with us in, you know, implementing services on top of these customers and in general, you know, contributing to the pipeline, to our pipeline. I would say, you know, Over time, this is a great opportunity. At this point, I would say our efforts have started relatively over the past few months. We now have a new executive owner of this function that has many years of experience in growing large-scale SI programs. I believe that we've done really well, that we can do even better. We're, you know, we're Sukarno said it before, we have some significant opportunities in sight. We want to be cautious because this is a complex market which is not always predictable as to the exact months, as to when these large opportunities may come to fruition. But these opportunities are in place thanks to these assays. our job is to continue expanding those relationships and grow in the portfolio of these exercise. We currently work with a couple very closely, and we have a few others that we are developing.
spk13: And I think the only thing that adds to that stuff is that we, one of the interesting dynamics also that you may have heard we've talked about in the past few quarters is from a competitive landscape as well we're seeing that some of these larger size are moving to the you know best in brief platforms like gochevo uh relative to the historical or legacy platforms that that you know we compete with so there's also momentum from that perspective that customers are looking to the best in brief technologies and now these larger size are seeing that with participating with us relative to the historical competitors that have legacy platforms
spk09: Thanks, that's good color. And then just my second question is hoping you could talk a little bit more about the macro headwinds that you're seeing impact customer seats and renewals. I mean, I'm a bit surprised that you weren't seeing at the enterprise level, just given what some other software companies are saying. Maybe you can talk a bit about your visibility into enterprise and what you're seeing more specifically there in terms of customer cost efficiencies, etc.
spk13: Yeah, no, it's a good question. So, Stephanie, in our world, you know, we think about SMB, mid-market, or enterprise. What you'll find is that, you know, mid-market and enterprise segments are more hybrid, external leading, and so you generally what you find there is that we have more departments to serve more use cases to solve. So our ability to retain or expand those customers is in a much superior position relative to the SMB customer who is a first time adopter of 1.0 LMS buyer we're not a strategic, don't necessarily have strategic resources assigned to their use cases or use case in general. You know, the SMB customer may not be always multiple use case opportunity for us. And so that's where the seed optimization and any of the impact you're seeing from the macro is more felt because we, you know, because you have in the enterprise segment an ability to retain in multiple use cases or expand. And so that's kind of really the dynamic and why we've been calling out in the past year. So our focus to continue to move up market and support, you know, you saw this quarter, unless you spoke about at the start of the call, you know, new logos, ACV increased year over year by almost 20%. You know, a good majority of that is coming from mid-market enterprise segment and government. Customers over $100,000 and above ARR grew 36% year over year. 50% of the number we delivered in the quarter came from enterprise and government segments. So, you know, if you look at some of those critical data points, you'll realize that the underneath, you know, all the, all the customer cohorts that we support, it's really the mid-market enterprise customer that gave us the best in class unit economics relative to the SMB customer. And, and we have, we have some, you know, plays in terms of how we will support the SMB customer still without, you know, by optimizing some of our, operating structure, but generally that's how we think about the strategy going forward.
spk09: That's great, Collin. Thank you.
spk01: Our next question comes from Josh Baer with Morgan Stanley. Please go ahead.
spk10: Great. Thanks for the question. A couple follow-ups on some of the headwinds for this year. Just wondering if there's any theme or pattern to some of the optimizations that you're seeing in SMB and lower mid-market You know, whether it's departments or cross-use cases, is it internal, external? Thanks.
spk07: Yeah, Josh, I'll continue unless you want to. Go ahead. Go ahead. Sorry. Go ahead.
spk13: Go ahead. Sorry.
spk02: Yeah, I think it's a little bit of a continuation of what Sukaran was addressing before Josh. What we're seeing is smaller organizations where learning was not more integrated in a more complex ecosystem and where learning wasn't strategic. They may reduce seats or altogether leave it for you know, different ways of delivering content. I would say our focus has always been working with organizations that use Decebo for what it's great for and Decebo are positioning in the market more and more. We want to, you know, our right to win is with organizations that execute in a multi-use case strategy. We have a great penetration with customers that have used Bocebo for at least two, three, and four use cases. That's where best unit economics are. And I would say organizations, especially sub-thousand employees that have a point in need and smaller use case are the ones where we have seen the biggest patterns. So, Carl, I don't know if there's anything else you would add.
spk13: No, I think I think, Josh, the only thing I'll add is to your question on the use case specifically, I think the majority, the significant amount of the pressure that we're seeing on the feed is on the internal use case market. And so that's kind of relative to also where folks are optimizing their headcounts in their companies, et cetera.
spk10: Okay, great. And second question, just on the strong free cash flow, the margin there, 18%. Anything one time in the quarter should we expect free cash flow margin to track ahead of EBITDA margin for the rest of the year? How should we think about that sustainability of that free cash flow margin?
spk13: Yeah. So if you look at the EBITDA guide that we gave, we get high end of the range, 15.5%. Generally, I would say free cash flow, if you look at it on a 12-month basis, would be 1% or 2% higher relative to our EBITDA. That's kind of the rule of thumb in our world. And to your question, if there's any specific items in Q1, not necessarily. They're just always payments with some customers in the billing cycles with annual cycles that we would have collected some cash. But even on a 12-month basis, Josh, you're safe to presume that our free cash flow will be 1% to 2% higher than what we guided for EBITDA.
spk07: Okay, great. Thank you.
spk01: Our next question comes from Robert Young with Canaccord Genuity. Please go ahead.
spk08: Hi, good morning. Some of your past comments have suggested you want to operate the business at a rule of four year better, kind of with an emphasis on growth. And so this annual guide for 24 suggests that the emphasis is more on EBITDA margins. And so I was curious if you could maybe revisit that target. And then if you could also talk about your aspiration for annual growth over time. Some of the things you're calling out here driving this change seem to be, depending on your view, could be temporary in nature. And so if you're looking out over a three-year horizon, are you still looking at building this business for like a 20% or higher growth
spk13: Profile or maybe we just talked about your aspirations long term Yeah, I'll start with I'll start with your specific question on the margin and then I'll get a lesson to speak about the long-term strategy Firstly first and foremost the operating leverage that you're seeing in in our that we delivered this quarter and will continue to deliver a part of my guidance is that Mitch you know we are focused on driving growth as the primary and objectives of our strategy and high quality growth with best in class unit economics being underscored in that statement. If you look at the delivery of the operating leverage we've done over the past few quarters, I say this, GNA is the gift that keeps giving and will continue to. We will continue to show operating discipline in our GNA functions, which is where you're seeing the majority of this leverage come from. We will continue to invest. Sales and marketing and R&D at levels, you know, you can expect sales and marketing will be relatively flat to what we have right now, around 32%, give or take. And we will continue to invest in R&D and innovation, which was close to, I think, 20% as a percentage of revenue this quarter. I'll be slightly lower than that, but what I'm trying to get to is that we are not going to compromise investments in sales and marketing and R&D, and growth remains our primary objective. And as you think about the growth of the business still at where we delivered this quarter at 23%, the natural operating leverage from G&A will get us to a position where this company, as we look through 24-25 cycle, is more of a balanced rule of 40 where EBITDA free cash flow naturally is getting closer and closer to the 20% mark. And I'll let Alessio come in on the growth side, but like I said, we are focused on driving a rule of 40 with balanced growth and balanced EBITDA.
spk02: Look, Robert, great question, and thanks, Sukaran. I think our thesis, as Sukaran said, of remaining extremely focused on growth doesn't change. The investments in sales and marketing, the investments on product are the reflection of that thesis. Now, all together, you know, there's a tremendous opportunity because in tougher market times, it gives you an opportunity to create improvements even further to the execution. And we're very focused on that. You know, we're turning it our attention more and more and more on our existing accounts. From a pipeline standpoint, we love what we're seeing in terms of our ability to generate pipeline within our base. We've been focusing on that a lot because it generates a really healthy pipeline relative to CAC. Our long-term plans, as I was mentioning, are supported by investments and products. in 2024 alone in h2 we're going to be releasing multiple modules that we are modeling contributing to our growth in the future communities are authoring our insights capabilities um so so our thesis of growth is is unchanged we're very focused on executing across the board on the growth pipeline side of the business and on the product side of the business and on improving our internal functions in order to really get the best out of every single unit economic.
spk08: Okay, that's very helpful. Maybe if I could just dig into a little bit on your answer, Alessio. Yeah. What are the elements that we might think of as excluded from the current guidance? Like the multiple modules, the product release, the pricing changes, large deals, FedRAMP. I mean, it might be helpful if you could call out some of the things that might be upside to the guidance you're giving here that you're not concerned because maybe they're too hard to understand or too hard to time. And then I'll pass the line. Sure.
spk13: Yeah, Rob, I'll take that one. Sure. I think the way to think about our guide is, you know, I've said this in the past, you know, we generally, as we're building a healthy pipeline with these larger sites, there are a number of deals that are large where we are, you know, in a good position. But it is, as we've always said, on large deals, we generally tend to stay cautious in putting that in our in our overall thought of growth because we want to see execution and get very close to finish line. And as you know, large enterprise deals take time and it's not easy to pinpoint which exact month they'll close on sometimes. And so that's one factor. I would say that 2024 specifically, also the pricing changes are not going to materially impact 2024. They are more geared towards 2025 as you think about uh you know new pricing that came into play generally at six three to six month uh sales cycle on net new deals that are coming through from april onwards will mean that you're not going to see the benefit of it necessarily until late 24 early 25. um and i think in in in the other one item that would say that on the government side similarly you know on any large opportunities or the opportunities we'll have subject to our fedram certification are also more of a 2025. There may be some benefit in 24, but we're generally cautious in calling out large deals until we feel very certain on the timing of their closure. And that's really basically I would say is some of the upside that may be there. But I think more importantly, I think we're looking to more of a 12 to 18-month cycle from just re-accelerating some of the initiatives that may help from a growth perspective, including the product initiatives that Alessio talked about that, you know, we have a number of products that are going to start rolling out in Q3, Q4, and you can expect that that's more of a benefit into 25 cycle.
spk01: Our next question comes from Richard Say with National Bank. Please go ahead.
spk12: Yes, thank you. It seems like the business is being sort of de-emphasized a little bit on SMB, whether it's natural or intentional. So how should we think about the mix of SMB to enterprise on ARR as we sort of look forward to over the next, call it 12 to 24 months?
spk02: Well, Richard, our focus for quite a while has been on mid-enterprises and enterprises, meaning mid-market organizations above 1,000 employees. For sure, the environment and what we're communicating is that we're seeing more pressure in the SMB segment, which coincides also with an area of less focus for us. From an ARR standpoint, I think what you can expect is that the company will continue to perform better on the enterprise side of the house, and with deals above 100K, continue to track along how we have in this quarter. In this quarter, I think we, again, as we said, almost 50% of our ARR in the quarter came from our enterprise and government segments. And customers with 100K and above in ERR, they grew 36% year over year. So our goal is to continue on those trends, and we are running the business in that direction.
spk12: Okay. And then with respect to government, you're already having a tremendous amount of momentum there in that business, and it sort of continues on what you talked about at your conference last year.
spk02: so when you do get that said ramp certification should we expect a sort of further acceleration or is that just momentum kind of following along the path kind of under the assumption that you're going to get that fairly soon yeah look our our gov business is exciting uh and and very promising it's not just very promising it's already been delivering significantly in quarter one and this As a reminder, it's a relatively new initiative for Docebo. We haven't been doing the government business or focus for years. With that said, we look at the government opportunity, as we have commented in the past, in two tranches, as you correctly outlined. One that we're executing on right now, the state local education or SLED, and the FERO, which we currently are not in deals yet because of of FedRAMP certification, which we're pursuing and talking to agencies about. It's hard for us to model something before obtaining the certification. We can certainly expect that once we will have the certification and we will start to see a trend of winning deals an acceleration is conceivable, but we can't forecast something that we don't have yet. With that in mind, the reason why we're working very hard in that direction is that because we have big objectives in that area. But in the meantime, I want to underscore how the size of deals in SLED is also growing significantly and now working with partners and distributors like Kerasoft is paying significant dividends in a relatively short time frame and the only thing Richard I'll ask for that is you know we've historically spoken about this segment you know we we were we were deliberate as well in regards to when we talked about it in 20 late 22 early 23 our investments in
spk13: in government, this is a segment or vertical, I will call it, that has more resiliency in different macro environments. and generally tends to do well more consistently. So, you know, we are also mindful that, you know, as we looked at that strategy in 23, relative to some of the macro pressures we talked about, a government segment is important to us even in the future because it provides us healthy growth opportunities and consistent revenue for a long period and high-quality revenue.
spk07: Okay. Thanks, guys. Appreciate it.
spk01: Our next question comes from Daniel Pan with TD Cowan. Please go ahead.
spk04: Hi, good morning. Just digging in on that FedRAMP. What's left to do to get that FedRAMP certification, and any update on the timeline there?
spk02: So it's certainly a very complex project in itself. We have done a lot of work internally on the controls side of the house we have committed resources to doing this then in terms of the material steps we're talking to to sponsors achieving fedramp through a sponsor it's our preferred pathway there are pathways that also are available without sponsors that are slightly harder but you know In short, in summary, our plan is on track. It's subject to more audit-type work and identifying the agency which will invest the resources with us to effectively put this through and act as a sponsor. So we're full on it and pretty excited about the progress so far.
spk04: Thanks. So, Karin, you talked about the free cash flow margin moving up nicely. You also renewed the NCIB, so just wondering what your priorities are for capital deployment.
spk13: Yeah, I mean, unless you feel free to jump in, I'll just say that, you know, we are showing reasonably good EBITDA and free cash flow performance and consistent performance. As I spoke earlier, if you look at the EBITDA guide, it's, you know, at the high end of the range, 15.5% for full year. which obviously means that exiting Q4 2020 for EBITDA will be higher and probably getting closer and closer to the 20% mark, which also is a, why I'm speaking to that is also guides you through the fact that our free cash flow generally is 1 or 2% higher than that. What I like about our setup is that we are generating significant amount of free cash flow to give us the ability to invest in areas, which I'd like Alessia to speak on, but in areas that will continue, you know, whether we want to invest in Fed Tram, internal innovation, or build versus buy opportunities, generally will take priority in our kind of strategy going forward. But having an NCIB, you know, this is a renewal of our NCIB that was already in play. It's more relative to we want to have that flexibility if we deem necessary. But generally, I would say that investments in growth initiatives, organic and inorganic, is more strategically important to us. Alessio, I don't know if you want to comment on that.
spk07: Nope. Pretty good. Thank you. Thank you.
spk01: Our next question comes from Kevin Kumar with Goldman Sachs. Please go ahead.
spk05: Hi, thanks for taking my question. I wanted to ask about the enterprise customer that divested. Were they using Dogevo for multiple use cases in terms of external and internal? I think you touched on this a bit, just for clarification. How are they replacing that lost functionality?
spk07: Yeah.
spk02: The customer that downgraded was a customer that we have onboarded about nine years ago that had a complex set of use cases, both internal and external. Now, this organization divested a significant part of the company and the acquirer of that technology that was primarily in the content business also um was was the owner of a proprietary light delivery technology and so what they what the the new entity decided to do was to pretty simply uh um leverage their own existing technology instead of the the chebel for those specific use cases and and the part that did not get acquired, that did not get divested, continued to the chevo. Now, I think I would like to underscore a couple of things of this experience. Number one, I think a customer of this magnitude and complexity demonstrates that we kept them very happy and satisfied for almost 10 years. And to me, that's a testament to our capabilities to execute complexity in extended enterprise and internal hybrid. Secondly, and quite importantly, we learned a lot. We were able to extract a lot of value out of the experience with this customer. And we've really leveraged this experience across multiple current customers. So look, And we wish that they stayed with us for the next 10 years again. Absolutely. But we understand, you know, there's a nine year lifetime value is not bad. And we certainly understand the customer that gets acquired by somebody that has its own technology. They want to use their own technology now. Who knows? Maybe they will realize that their technology is not as good as ours, and maybe they'll come back. We'll try every possible angle, but those are the facts.
spk13: And I think the only thing I'll add here is that this customer still remains a customer outside of the divested portion and is still a meaningful customer to us. And we will continue to work in expanding our capabilities with them. So the portion that remains with them is still material. And we're very thankful for this customer for over the years, how they've supported us.
spk05: Understood. That's helpful. And then I wanted to ask about maybe an update on the cross-selling motion and how that's trending.
spk02: shape continues to see some you know functionality improvements so curious kind of how the messaging on that solution is resonating with customers as well thank you yeah uh so let's say i would i would address the question in two different ways from the perspective of our engine of growing our customer base in terms of pipeline We're extremely focused on it. I mentioned that before. What we have done specifically in that area is we have increased our investments in the so-called account development area. We have dedicated more resources into prospecting in the base with the goal of generating more upsell and cross-sell pipelines. Of course, in order to generate more of cell and cross-cell pipeline, you need to address needs that are uncovered. And we're leveraging existing new products, newer modules. And as we release new ones over the next few months, we're building the engine to support the penetration of those new products, such as communities, You mentioned shape. We're extremely focused on the authoring component of shape and the AI authoring component of it. Very important to us and to our customers. We get a lot of demand for it. And insights are analytics product upcoming. And one thing that we haven't quite touched on is the concept of extensions that we're working on in order to differentiate Docebo even more from the LMS point solutions. So our work on strengthening our in-the-days BD engine is not only to obtain results immediately, but also propedeutic to the launch of the new products.
spk07: Yep. Thank you so much. Appreciate it.
spk01: Our next question comes from Christian Scro with 8 Capital. Please go ahead.
spk03: Hi, good morning. I wanted to ask on the mix of business across new logo activity versus expansion activity. You're selling more across existing clients. Would you say in Q1 you saw more expansion activity than normal in this environment? And I don't know how you think of your pipeline. But could you comment on how that's balanced, again, between new logos and some predictable upsell and cross-sell?
spk07: Yeah, Christian, I'll start with that.
spk13: So, yeah, generally, I would say that our expansion business and new business, From a segmentation perspective, it's focused similarly in terms of mid-market enterprise customers. As I spoke earlier, if you think about mid-market large enterprise customers, generally supporting customers with two, three, four or more use cases is only really possible at the mid-market enterprise customers, which have at least 1,000 or more employees in their organization if it's And that's a benchmark just from an internal use case perspective, but also that's the size of the company that reflects the ability to support them, whether it's customer education, partner education, onboarding compliance, but then revenue enablement, sales enablement. So for us to serve these multiple departments where Docebo is the one platform that solves multiple departments problems without each of these departments interacting with them on a daily basis. that realistically is where, why we've continued to articulate our focus on mid-market and large enterprise, because that is really where you can do that. So I would say that to your question around segments, even on expansion, it's exactly the same story, right? If you think about cross-sell or up-sell opportunities from a use case business perspective, that those are the types of customers where we can focus and do that. And it makes us much, much more stickier, as you can imagine in those segments. As we look forward as well, the other area that we look at cross-sell is where we have entities where instead of departments, they have multiple AWS lease to Amazon logistics. It's kind of the examples we look at to win from unrelated subsidiaries or departments. that are not just uh just you know supporting hr or sales but we're also trying to win customers across the multitude of their portfolio so we go about that in multiple ways but i would say that generally it is a mid-market large enterprise play where we can expand both on a both on the current base on a new base on the onset with multiple use cases okay great and then for my second question the services
spk03: Revenue, I think, tracked a little bit higher than your own expectations in the quarter. Wondering if there's anything you'd call out there and any change to the longer term subscription services mix that you guys are targeting.
spk13: Yeah, I'll take that as well. So basically, the way to think about services in Q1 is it's a bit of a reflection on Q4. So we had a strong Q4 quarter. So as you look to implement those customers, in the first quarter of 2024, you'll see a higher revenue. The reason it's also higher to our expectations is that what we're also seeing with our customers as part of our value added services and white glove services, our customers are looking for us to support them in beyond just the onboarding. We're helping them in a number of ways around whether it's just doing, not customizing anything, but customizing the needs of their use case and helping them in that journey. And so we're more hands on deck is what happened as well in Q1. And I think that is kind of what Alessia spoke about around some of the extensions and being the one place where customers feel like we can support them for the end-to-end journey. And so on the large customers, we certainly saw that as well play out in Q1. But at a high level, services from Q4 ARR implementation has a higher impact to services in Q1. some additional services that we're providing to large enterprise customers. And as you think about, you know, Q2, I would say it's probably going to be in line or slightly higher than prior.
spk03: That's great context. Thanks for taking my questions.
spk01: Your next question comes from Kevin Krishnarantani with Scotiabank. Please go ahead.
spk14: Hey there. Hey, good morning. Just one for me. What I look historically, you know, through 21 and then into early 22, there were a lot of logo ads added then. I know you've got three-year contracts. So I think, you know, these are the ones that are, you know, sort of probably coming up for renewal now. Can you confirm that were a lot of those logo ads SMB, you know, back then? How to think about that and just confirm too that this sort of seat optimizations that you're seeing, that you're calling out an SMB that you're not necessarily seeing that in enterprise. I just want to get an understanding of your visibility on some of the renewals from that strength in logo ads from about three years ago.
spk07: Thanks. Yeah, Kevin, I'll take that.
spk13: So the way to think about in terms of the segment differential is that in the mid-market to enterprise segments where we're supporting multiple use cases, If it's primarily supporting an internal use case and the company is going through headcount optimizations themselves, we may see impact there. But there we do continuously work, as we just spoke about in the previous question, in our ability to expand in multiple departments. And so if I'm in multiple departments, especially external use case departments, we tend to do much better in terms of expansion or retention. And then if it's just purely internal use case and that tends to compound a bit more in the SMB segment is that if it's internal use case, then the customer and the SMB segment specifically is budget sensitive. If it is a strategic or not for their business plays out a bit more. And that's where we're seeing more of a know more seed optimization where we also don't necessarily have the opportunity to go out and win or expand into different departments uh just because of the size of those customers and the complexity of those customers and so that's kind of how we um kind of work through the the cohorts of our customers i would say that the comment around you know the multi-year and how many smd customers we had in 2020 21 era i would say roughly 25 30% of our book of business still is SMB. So as we move through the cycle in the next few years, I would say that you can expect that that continues to, as the enterprise book moves up, that will continue to move as a percentage lower. And I think we are also doing certain things in that regards in terms of our offering with the new pricing. We've had a very nuanced targeted pricing towards that type of customer and the support we give them to simplify and also improve our operating leverage in terms of how much we want to spend to support that customer.
spk14: Thanks a lot. Just a real quick one. I know your ARR in the quarter was 22% company-wide, but any way to think about what enterprise ARR growth looks like?
spk13: Yeah. Let me, yeah, I don't have it at the top of my head, but I would just say one number is that 50% of the number that came from this quarter was from Enterprise and Gov.
spk14: Okay, thanks. We'll follow up on that one. Thank you. Thanks.
spk01: This will conclude the question and answer session on today's call. I will now turn it back over to Alessio and to Karin for any closing remarks.
spk02: Well, thanks, everyone. Thanks for attending. Thanks for your very good questions. We are super excited going into the next quarter about our continued execution. We believe we have an amazing business and we are very focused on our long-term success. Thanks again and see you next quarter.
spk01: This concludes today's conference call. Thank you for your participation. You may now disconnect.
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