D2L Inc.

Welcome to the D2L Inc. Fiscal 2022 Third Quarter Results Conference Call. At this time, all participants are in listen-only mode. Following the presentation, we will conduct a question and answer session. You may ask a question by pressing star followed by one on your telephone keypad. If anyone has any difficulty hearing the conference, you may press star zero for operator assistance at any time. Listeners are reminded that portions of today's discussion will include statements that contain forward-looking information. Any such statements are subject to risks and uncertainties that could cause actual results to differ materially from a conclusion, forecast or projection in the forward-looking information. Further, certain material factors or assumptions were applied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking information. For identification and discussion of such risks, uncertainties, factors and assumptions, as well as further information concerning forward-looking statements, please refer to the summary of factors affecting our performance section of the companies MD&A for the three and nine months ended October 31st, 2021, and in the risk factors section of the company's IPO perspectives, which are both posted under the company's profile on SEDAR. In addition, during this call, reference will be made to various non-IFRs financial measures, including annual reoccurring revenues, or ARR, adjusted gross profits, adjusted gross margin, adjusted EBITDA, free cash flow and free cash flow margin. These non-IFRs financial measures do not have any standardized meanings prescribed by IFRs and may not be comparable to similar measures presented by other public companies. Please refer to the company's MD&A for the three and nine months ended October 31st, 2021 for more information about these and certain other non-IFRs financial measures including, where applicable, a reconciliation of historical non-IFRs financial measures to the most directly comparable IFRs financial measures from our financial statement. This morning's call is being recorded on Thursday, December 9th, 2021 at 8.30am Eastern Time. I would now like to turn the call over to Mr. John Baker, President and Chief Executive Officer of D2L. Please go ahead, sir.

Thank you, Operator. Good morning, and thank you for joining us today on our inaugural earnings call. I'm pleased to be joined by Melissa Howison, our CFO. After the close of markets yesterday, we released our Q3 fiscal 2022 financial results for the period ending October 31st, 2021. You can find these results on our investor section of our website at d12.com. I will highlight at the outset that the results we discussed today are in US dollars, unless we indicate otherwise. Now, before we get started, I wanted to quickly acknowledge the incredible work of our D2L team for helping us complete this successful IPO and for their enthusiasm in our next chapter as a public company. We're also excited to welcome our new shareholders and analysts. Thanks to your support, we're well positioned to make the most of favorable long-term market conditions. We're seeing accelerating growth in digital adoption and growing demand for improved learning experiences. The past two years of Shawna Light on the need for a better, more resilient learning system, both in education and in adult learning. Our team is helping to navigate this change and build the future of work and learning, whether it's working with educators to tackle learning loss or supporting employers to meet the pressing need for better onboarding experiences and upskilling. We believe our work to transform learning has never been more important to help people around the world to achieve more with their life. And the demand outlook is robust. The learning environment market, as defined by Holland IQ, is expected to more than triple from 2019 to 2025, reaching $43 billion. And against this market backdrop, we're having a strong year at D2L and a momentum continued during the third quarter. Our subscription and support revenue grew 20% to $35 million this quarter, and our annual recurring revenue increased by 20%, or by $25 million to just under $150 million at the end of Q3. In our view, ARR is the best leading indicator of continued strength in the expansion of our business. Our revenue and ARR growth reflect an increase in number of new customer wins and growth within existing customers. We're expanding our go-to-market teams and seeing returns from these investments. We have achieved meaningful scales, We have strong growth in ARR, and at the same time, we've continued to generate free cash flow. And Melissa will provide more details on this shortly. We serve well over 1,000 customers today, and through them, we reach over 15 million users globally. Our customer base and pipeline have been growing across all markets. And as a reminder, we target three core markets, K-12 education, higher education, and corporate. And we're unique in how we support all markets, and all stages of digital adoption with one learning platform called Brightspace. In education, we serve more than 700 organizations across K-12 and higher education. While some segments and regions are better established with digital solutions, there is a huge runway for growth. Remember that the global education market is less than 5% digitized. In higher education, which represents the largest portion of our revenue, we support more than half the top universities in Canada, leading institutions like the NYU, Vanderbilt, Purdue, University of Arizona, and hundreds of other top universities and colleges globally. Our win rate has improved across all markets, and in higher education, it's more than tripled. Why are we winning? Simply put, we make it easier to learn with a better cloud offering, better accessibility for students who are blind or deaf, and a better mobile experience. And our people matter. we ranked number one for customer experience in the entire ed tech sector as awarded by the Software and Information Industry Association for the service that we're providing our clients. And during three, we've added some great new customers. We won a highly competitive process for the largest comprehensive university system in North America, higher education. That's the State University of New York, or SUNY for short. And after all our main competitors were being used, SUNY selected D2L Brightspace to support their 400,000 learners across 64 colleges and universities. International expansion is another important growth pillar for the company. And in Q3, we signed a new agreement with the University of Groningen, one of the oldest in the region and one of the most prestigious universities in the world. They're located in the Netherlands and they serve more than 34,000 students. Brightspace was selected to replace a legacy platform. And with the addition of the University of Groningen, We now have more than 40% of the top-tier universities across the Netherlands as customers. In the K-12 category, we work with over 150 different virtual schools and school district clients, including the largest districts both in Canada and in the United States, such as the Ministry of Education in Ontario and the New York City Department of Education, which is by far the largest school district in the U.S. They signed an enterprise deal this summer for their 1.1 million students. In K-12, the stakes are high. The World Bank estimated that learning loss from this pandemic could materialize into more than a $10 trillion impact in terms of lost earnings potential for this next generation. We're working to turn learning loss into learning growth through the innovations in our platform and the work that we do with our customers. Our pipeline in K-12 is building, and this is in a market that's largely greenfield if you look globally. We announced another significant win in November as British Columbia's Ministry of Education selected D2L Brightspace for up to 670,000 learners across the province. BC school districts and the government were looking for a modern learning platform that delivered the very best learning experience for the learners and educators in and outside of the traditional classroom. In addition to solving important challenges in the education market, we're helping over 300 employers transition to the future of work. This is a fast-growing market for our company, and among the highlights during the third quarter, we signed a new customer agreement with Lee Valley Tools, a Canadian business serving customers around the world, to help them onboard, train, and engage employees across the country using our D12 Brightspace learning platform. We also extended a customer agreement with the Energy Safety Canada Group. This is a national safety association for Canada's oil and gas industry. D12 Brightspace will be used to help develop and deliver health and safety training courses to ensure workers are ready to work safely. There's a huge addressable market in corporate, and we're working hard to build our pipeline. Most companies are just getting started on upskilling, moving from watching videos for compliance to a better model that targets developing the right new competencies and skills mastery. We are complementing new wins with a land and expand strategy with our client base. More than a third of our customers buy two or more of our products. We now have over 40 customer success professionals who are helping our clients derive full value from our platform while also generating new opportunities within our large client base. We can grow in multiple ways with new products, new users, higher adoption, and by supporting new use cases. With customers in both education and corporate markets on a common platform, Over time, we also expect to capture value at the intersection of these markets. D2L Wave is our new offering designed to help organizations develop their employees with upskilling from our academic client base. One of the first priorities with this product is to build out our academic partnerships. During the third quarter, we welcome the University of Manitoba, McMaster, the University of Guelph, and York University to our catalog of top tier academic partners. Adding university offerings drives interest from our corporate customers, and we're now starting to sign up companies to adopt D2L Wave. I'll pause here to introduce Melissa, who's going to discuss our financial results in more detail. Thanks, Melissa.

Thanks, John, and good morning. Q3 was another strong quarter for D2L, and with new growth capital from the IPO, we moved forward in a very solid financial position to take advantage of the tailwinds in our industry. To begin, I will highlight that two sizable one-time non-cash charges had a significant effect on the reported results for the quarter. In particular, we recognized a non-recurring stock-based compensation expense of $65.8 million related to the unwinding of the Employee Stock Trust as part of the IPO. These charges are in several places throughout the income statement. To help readers understand our underlying performance, we have quantified these charges and presented adjusted numbers. I will focus my comments mostly on the adjusted numbers and would encourage you to refer to the specifics in our MD&A. Total revenue for Q3 increased by 18% to $39.1 million. Recurring subscription and support revenue, which is just under 90% of the total, was $34.9 million. up by $5.7 million or 20% over the same period last year. This continues a trend of robust growth this fiscal year. For the year to date, total revenue increased by 20% to $110.5 million and subscription and support revenue grew 19% to $98.5 million. This growth reflects new customers, strong revenue retention, and expansion from existing customers and the broader effect of accelerating digital adoption. This success is also reflected in our ARR, which reached $149.6 million at quarter end, up 20%. Growing ARR, when combined with our long-term contracts and high revenue retention, gives our business high revenue visibility and stability. Our year-to-date performance puts us on track to achieve our target of approximately 20% top-line growth for the full year as we outlined with the IPO. Professional services and other revenue reached $4.2 million in the quarter, an increase of 7% over the prior year. We will see variability in the specific revenue line from quarter to quarter. For the year-to-date period, professional services and other revenue grew by 22% to $12 million. Moving down the income statement, cost of subscription and support revenue was $11.5 million in the quarter, consistent with the prior year period when you exclude the impact of the one-time charges. In last year's Q3, we experienced increased system usage with learners spending much more time on our platform during lockdowns. COVID-19 restrictions were less of a factor in the current period, resulting in decreased relative hosting and support costs, which are among the largest expenses. Cost of professional services and other revenue included a $7.6 million charge for stock-based compensation. Excluding this impact, cost of professional services and other revenue was consistent with the same period last year. These one-time stock-based compensation charges impact reported gross profit, so we have included adjusted gross profit and adjusted gross margin in our disclosures. Adjusted gross profit increased by 30% to $25.1 million, and adjusted gross margin was 64.2% up from 58.1% last year. As I mentioned, the gross margins in last year's Q3 were impacted by higher costs of delivery during lockdowns and closures, whereas hosting and support costs to serve were lower in the current period. For the fiscal year to date, adjusted gross margin was 63% versus 62% in the comparable period last year. We continue to focus on sustainable gross margin improvements over time, driven partly by further optimization of our cloud delivery. However, we may see some modest variability quarter to quarter as we have this fiscal year. Operating expenses increased substantially from prior periods due to the recognition of the stock-based compensation expense of $57.7 million, which is spread among the key OPEX categories. Excluding this impact, operating expenses were $26.6 million, an increase of 46% over last year, mainly due to higher employee headcount. We are investing heavily in growth, which is reflected in the increases in sales and marketing, R&D, and G&A. With the IPO behind us, our plans call for further investments in talent. Another key difference to highlight in the year-over-year performance is interest and other income, which was a $25.8 million gain this quarter compared to an expense of $29.4 million last year. This was due to a fair value gain of $25.9 million on the redeemable convertible preferred shares in the current period compared to a loss of $28.7 million last year. With the closing of the IPO, these preferred shares were automatically converted to subordinate voting shares or multiple voting shares, so you will no longer see these fair value gains and losses in the income statement. In terms of operating profitability, Q3 adjusted EBITDA was a loss of 0.3 million or negative 0.7% of revenue, compared to a gain of 2.1 million or 6.3% of revenue last year. The decrease reflects the planned increase in our OPEX to support our growth plans. We generated cash flow from operating activities of 3.5 million in the current period versus 10.1 million in the prior year. The year-over-year difference reflects the timing of cash receipts from two larger customers combined with our growth investments. Cash flows from operations generally have a seasonal low in the first quarter each year and a seasonal high in the second and third quarters, due to the timing of annual invoicing with our end customers. Because of the low capital intensity of our business model and the structure of our contracts, we have historically generated healthy free cash flow even during periods of investment. Q3 free cash flow was $3.2 million or 8.2% margin, compared with $9.5 million or 28.5% margin in the prior year. Our balance sheet will look quite a bit different the next time we report, given we closed the IPO just a few days into our fourth quarter. A few key differences. One, the shareholder loan under current assets was repaid. Two, all our outstanding preferred shares, Class O common shares, and Class T shares were converted into subordinate voting shares or multiple voting shares. And third, while we finished the quarter with $42.9 million in cash, Subsequently, we generated net proceeds of $88 million Canadian with the IPO, putting us in a solid cash position. In summary, we are financially very well positioned to take advantage of the favorable long-term growth trends in our market. Thank you for participating in today's call, and with that, I'll pass it back to John.