D2L Inc.

Good morning and thank you for standing by. Welcome to the D2L Incorporated Fiscal 2022 Fourth Quarter Results Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question and answer session. Instructions will be provided for you at that time for questions. 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 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 risks identified in the company's annual management discussion analysis or initial public offering final prospectus, in each case as filed under the company's profile on CEDA at www.ceda.com. In addition, during this call, reference will be made to various non-IFRS financial measures, including annual recurring revenue or ARR, adjusted gross profit, adjusted gross margin, adjusted EBITDA, free cash flow and free cash flow margin. and net revenue retention. 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 3 and 12 months ended January 31, 2022 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 statements. This morning's call is being recorded on March 29, 2022, at 8.30 a.m. 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 Q4 earnings call. I'm joined by Melissa Howison, our CFO. After markets closed yesterday, we released our fourth quarter and full year financial results for fiscal 2022, our year ending January 31st. You can find details on the investor website at d2l.com. And please note that the results we're discussing today are in U.S. dollars, unless we indicate otherwise. This is our first year as a public company, and I'm happy to report that the fiscal 2022 was an outstanding year for D2L We successfully completed our public listing at the start of Q4, which provided us a fortified balance sheet to pursue our growth strategy to capture the growing demand for better learning experiences. We had a record fourth quarter. Q4 revenue was up 22%, and full-year revenue rose 20%, achieving our target for the year. We grew Q4 subscription revenue by 20% to $36 million, and full-year subscription revenue was up 19%, to $135 million. We added $25 million in net new annual recurring revenue for the full year. That was up 41% from the prior year. And we ended the year with $154.5 million in ARR. Our results speak to the excellent execution of the D2L team, building great client relationships and the tailwinds in our market. During the year, we built on our strong customer base adding more than 180 great new clients across our main markets and in all regions. We're up over 19% over the prior year to 1,150. And through these customers in over 40 countries, we reach over 15 million users globally. In higher education, our largest market, recent brands include the University of Phoenix that selected Detail Brightspace to support and deliver a wide range of their upcoming competency-based education offerings. They're one of the largest universities in the U.S. We signed a new agreement with the University of Florida's Lassenger Center, an education innovation hub that blends cutting-edge academic research and practice to transform education. And our international team signed a new customer agreement with the University of Cape Town. It's a top research university and the oldest higher education institute in South Africa. They will use Brightspace to support nearly 29,000 students 100 countries. And a quick update, the State University of New York, a deal that we signed in fall 2021, recently made Brightspace available to the full network of campuses. And I'm happy to report 57 campuses representing about 370,000 students started the implementation process at the end of Q4. SUNY is the largest comprehensive system of universities, colleges, and community colleges in the US. When we look more broadly at higher education, our pipeline is growing. as the need for a modern learning platform remains top of mind with educators. A study we published earlier this year, polling 171 higher education leaders across North America, revealed that boosting enrollment rates and establishing new technology to support online and better on-campus experiences are the key pain points that we need to solve. And our win rates in this market continues to improve. According to a recent report from a leading industry analyst, D2L is the only major learning platform vendor That's growing market share in North American higher education today. In the K-12 market, which represents roughly 20% of our business, and a market that's largely greenfield, our prospect pipeline continues to grow nicely. A key highlight in the fourth quarter was agreement with the British Columbia's Ministry of Education, which selected D12 Brightspace for up to 670,000 learners across the province. They are now starting to implement for the new school year. In the corporate market, which represents just over 20% of our revenue, and this is our fastest growing customer group, it was another productive quarter. We signed up dozens of clients, including the International Sports Sciences Association, which is a leading fitness and exercise certification association, and the Supporting Families Together Association. They're delivering employee training and continuing education programs to membership agencies across the U.S. that will improve the lives of children, children, parents, and child care providers. And last month, a relatively new corporate client, Canada School of Public Service, went live with Brightspace after a rigorous testing phase. They selected Brightspace to support the ongoing education and professional development of the entire Canadian public service across nearly 100 federal departments and agencies. The client is happy to report that the D2L implementation is the first enterprise-wide modern platform in the entire public service. We are thrilled that we can help deliver on their mission to support the best possible learning experiences. The corporate market is a massive addressable market. We are running in part through targeted use cases such as onboarding, leadership development, and competency-based skills development, where we're uniquely positioned. Plus, we just launched a new offering in the market, G2 Away, to provide a better, smarter way to support upskilling for employees. We are still early days in this venture. As our first client just went live, at the end of the quarter, and we continue to expand the academic offerings of micro-credentials and other high-value programs that are meeting the needs of employees and employers. On the customer retention side, once we land a new customer, we are very effective at retaining them and growing our relationship over time. During Q4, we renewed agreements with the University System of Georgia, Minnesota State, and many other large clients, as we continue delivering on exceptional learning experiences Revenue is being retained in our long-term contracts as evidenced in the remaining performance obligations, often called backlogs, which stood at $359 million at the year-end. That represents 33% year-over-year growth. Another good measure of success with clients is net revenue retention, which was 107% for the fiscal year-end. This is a great result, and we are emboldened by the fact that we're at the early stages of our upselling strategies as we continue to invest in new offerings. Our strong NRR and large backlog provide us with a stable and predictable recurring revenue base. For our go-to-market team, I'm happy to report that we grew the direct sales team by 30% last year, and that includes the customer success team of over 40 people who are helping their clients derive full value from our platform as they also generate new opportunities within the large install base. We're investing in indirect channel partner programs, and that set of partners has doubled over the past two years, and we've been rewarded with a 2X increase in bookings from those partners. With the proceeds from our IPO, our biggest areas of investment this year include the building out of our sales and marketing organization, which is reflected in the outlook that we presented today. The second major area of investment is our R&D to enhance and expand our platform to bring even greater value to educators, employers, and learners, and to help us deliver new use cases to open up new addressable markets. One recent example of how we continue to lead the market in innovation is our use of artificial intelligence to generate closed caption videos in multiple languages and to automatically stream them on different types of devices. This makes it easier than ever to use video to create engaging learning experiences. I'm also excited to report that we have now onboarded Steven Laster, who joined the company in Q4 as our new Chief Operating Officer to lead our R&D and services team and to support the expansion and evolution of the platform and our offerings. Steven has over 25 years of leadership experience in digital transformation, product development, and technology enablement with a focus in both education and corporate markets. He's been a great addition to the team. At this point, I'll pass it over to Mursa, who will discuss the financial results in more detail Over to you, Melissa. Thank you.

Thanks, John, and good morning. As John mentioned, we had a strong fourth quarter to close out an excellent year at D2L. Our full statements and MD&A were filed last night, so I will focus my comments on the key storylines for the quarter. Total revenue for Q4 increased by 22% to a record $41.4 million. Recurring subscription and support revenue was $36.2 million, up by $5.9 million or 20% over the same period last year. For the full year, total revenue increased by 20% to $151.9 million, and subscription and support revenue grew 19% to $134.7 million. This growth reflects new customer wins, strong revenue retention and expansion from existing customers, and the broader effect of accelerating digital adoption. It was also a good fourth quarter for professional services and other revenue, which increased by 43% to $5.2 million, or 12.6% of total revenue. The results for the quarter reflect the significant growth in new customer implementations and content development work for new and existing customers. As we have discussed in the past, our customers really value these services, and we strongly believe there is a high correlation with customer retention and net revenue retention growth. For the full year period, professional services and other revenue grew by 28% to $17.2 million, or 11.3% of total revenue. Cost of subscription and support revenue was $11.1 million in the quarter, consistent with the prior year period. In Q4 fiscal 2021, we experienced increased system usage with learners engaging in fully online learning on our platform during lockdowns. COVID-19 restrictions were less impactful in fiscal 2022 as restrictions eased and many users moved to a combination of blended classroom and online learning. When paired with realized optimizations in our cost of delivery, this resulted in improved subscription and support margins of 69.2% for Q4, up from 63.8% for the same quarter last year. Our platform is well constructed for both fully online learning and blended learning, and we expect this to be the new normal. Cost of professional services and other revenue was $3.7 million in Q4, up 20% from $3.1 million in the prior year. The increase was driven by higher employee headcount period over period, combined with higher subcontractor expenses, which has allowed us to increase our professional services capacity. Growth profit for Q4 increased by 34% to $26.5 million, and growth margin was 64%, up from 58.5% last year. The year-over-year improvement reflects growth in revenue outpacing related increases in cost of revenue, in particular, lower cost of delivery for subscription and support revenue. We expect to generate sustainable growth margin improvements over time, driven partly by further optimization of our cloud delivery. Q4 operating expenses were $30.4 million, an increase of 36% over last year, mainly due to higher employee headcount to support the business growth. We had more than 1,100 employees at year-end. With a strong balance sheet, our plans call for further investment in talent this year, as John highlighted. In terms of operating profitability, Q4 adjusted EBITDA with a loss of $400,000. or negative 1 percent margin compared to a loss of 1.2 million or negative 3.5 percent margin in the same period last year. The Q4 EBITDA loss reflects the planned increase in our OPEX to support future growth. We reported negative cash flow loss from operating activities of 4 million in the current period versus negative 1.3 million in the prior year. 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. Q4 free cash flow was negative $4.1 million compared with negative $1.6 million in the prior year. The cash flow profile for the current period was affected by one large outstanding customer balance which you will see in higher trade receivables at year end. As we highlighted in our Q3 conference call, there were several notable changes to the balance sheet at year end. Most significantly, all our outstanding preferred shares, Class O common shares, and Class T shares were converted into subordinate voting shares or multiple voting shares. We finished the year with $114.7 million in cash and no debt, leaving the company well-positioned to take advantage of the favorable growth trends in our market. With today's results, we introduced financial guidance for fiscal 2023. Consistent with the expectations outlined during the IPO, we plan to make significant growth investments in fiscal 2023. Specifically for fiscal 2023, we are expecting total revenue in the range of $179 to $182 million, implying growth of 18% to 20% over fiscal 2022, and adjusted EBITDA loss in the range of $12 million to $14 million. These should be viewed as a supplement to the target operating model included in our MD&A, which reflects the operating levels we expect to achieve by fiscal 2025 for revenue growth, growth margins, adjusted EBITDA margins, and free cash flow margins. Thank you for participating in today's call. And with that, I'll pass it back to John.

Thanks, Melissa. Our strong fourth quarter financial results concluded a truly remarkable year at D12. I want to thank the D12 team for their great efforts last year. Education is vastly under digitized globally, and we are leading the digital transformation of learning. Building the future of work and learning is exciting, and it's never been more vital to our communities, companies, campuses, and countries. And now at this point, we'll be happy to take your questions. Operator, back to you.

Thank you very much. If you would like to ask a question, you may do so now by pressing Start followed by 1 on your telephone keypad. If you change your mind and wish to withdraw your question from the queue, please press Start followed by 2. I would like to remind you that when preparing to ask your question, please ensure that your device and your microphone is unmuted locally. Our first question today comes from Daniel Chan from TD Securities. Daniel, please go ahead. Your line is open.

Hi. Good morning, guys. The revenue guidance for growth for next year is, like you said, 18% to 20%. That's a little bit lower than the 20% to 25% per year guide you were providing during the IPO. Any color on what's driving that slightly lower growth rate?

Hey, Dan. So first off, we did achieve 20% for last fiscal year. And we also did see 19% ARR growth last year, which is up from 16% the prior year. And that gives us great confidence in the future. But some of the larger deals, they are going to take longer to translate into revenue, which is why we are guiding to 18% to 20%. And our midterm model of 20% to 25% remains unchanged.

Okay, so I just want to make sure that the guide is largely due to the timing of these large deals converting, and it's not because you're seeing any change to the sales pipeline or demand environments?

That's correct.

Okay, that's great. And then the 20% to 25% revenue growth midterm target, that's still per year beyond fiscal 23, correct? It's not something that you're trying to achieve by fiscal 25?

Yes, that's right. Our midterm target for both fiscal 24 and 25 remains unchanged.

Okay, that's great. Margins this quarter came in a little bit better than expected. Just curious what was the driver behind that?

Yeah, so we're really pleased that we're tracking ahead on our gross margins. We've seen continuing progressive quarters of improvements in gross margins. Our cloud migration was completed two years ago, and so that's allowing us to make that focus on those ongoing optimizations. We've also seen product usage patterns starting to normalize compared to what they were at the beginning of COVID. The users are still in the system, but as they change between the blended and online, that does have some impact. So we're pleased with that.

Thank you. I'll pass the line.

You're welcome.

Our next question today comes from the line of Christian Sigro from H Capital. Christian, please go ahead.

Hi, good morning. For my first question today, I wanted to ask, your opportunity to expand ARR within the current base? I know there's some bigger deals out there like SUNY and NBC, but quantitatively or even qualitatively, what do you see as the opportunity to just expand within all of your customers today?

Thanks, Christian, for the question. We definitely see an opportunity within our base to expand ARR, both by an upsell strategy that's in the very early stages as we continue to develop these new offerings around Engagement Plus, and Performance Plus, which will drive the better experiences for our clients. As that strategy kicks into gear, that's an opportunity for us to grow the net revenue retention with our clients and to continue to expand within the base. And then as per the big deals that you spoke to, including like SUNY and BC, some of those do take time to translate both to ARR and into revenue as the implementations progress and as the adoption picks up. But there's significant opportunity and room for expansion there. BC is a good example. This is a usage-based contract, which means as they go to implement and as they start to use the product, that's when we're going to start to recognize them in both ARR and revenue. But until that point, we leave them out.

That's helpful. I'll ask a follow-on there on the upsell of different products. I think at the time of the IPO, one-third of customers had subscribed to Brightspace Core and then at least one other add-on package. So, John, could you talk about any other trends here? Are you seeing more uptake of those other modules?

That's still consistent quarter over quarter. It's still a third of our customers have one or more modules added to their Brightspace core. As I said earlier, it's very early days in terms of our upsell strategy. And as we continue to invest in those products, which is a big priority for our R&D teams this year, we should start to see that attach rate continue to grow over time. which will drive revenue, which will drive ARR.

Okay, perfect. And then one more question from my end. There's been good traction today with the Canadian government there with CSPS. And I saw on their Twitter, they're through 100,000 accounts live on D2L, and they're calling it a success from their end so far. Just want to hear from your perspective, talking about the scaling there and what you're seeing with that customer.

Yeah, it's a great customer. It's, from what I understand, the first enterprise modern cloud platform the government has rolled out. So it's a great success story for both us and for the government. And it also opens up a brand new market for us. As you can imagine, that market requires a considerable investment to support a big enterprise rollout, security, data privacy, and so on. And for us, that means opening up the broader government markets throughout not only Canada, but globally. and certainly opening up other markets like regulated industries like the banks or other groups that really care deeply about having a very reliable platform to use to support learning. So we're very excited about the opportunity that presents, and there are many other agencies within government we can now go leverage that contract with. Perfect.

A good proof point for sure. Thanks for taking my questions, John. Thank you.

Thank you.

Our next question comes from Thanos Moshapoulos from BMO Capital Markets. Thanos, your line is open.

Hi, good morning. John, you referenced strong RFP activity, which is consistent with commentary from your peers. So if you look at the pipeline and how that's evolved over the last three months, I mean, any key trends you would call out? Has it been sort of consistent growth? Has there been any sort of uptake in certain areas? In terms of the RFP activity, any themes that you would call out there or just with the overall secular trends that you previously talked about?

Well, we are definitely seeing an increased tailwind in our core higher education market. So as you can imagine, as COVID hit, most universities weren't rushing out to buy an LMS and switch from one platform to another. But what we're seeing now as students return to campus, as these universities and colleges have more time to be more planful to put in place better learning infrastructure, and faculty, as they return to campus, are not going to want to teach both online and face-to-face at the exact same time. So there's a need for these universities to put in place a better support system for their faculty, better supports for their students, be able to deliver an exceptional experience both on campus and online. and that demands investments. And that's what we're seeing. We're seeing an uptick in the RFPs. We're seeing our clients having more conversations with us about projects that were put on hold for the first couple of years of COVID. That activity is now returning, and we're excited about that being a new tailwind for D2L.

Great. And then as far as international geographies, I mean, obviously you had the wind in South Africa. Can you speak to how the pipeline is evolving I mean, outside of Europe, I mean, certainly Europe, obviously, biggest part of international. But beyond that, I mean, where are you seeing growing level of pipeline?

So we're seeing good growth in pipeline in almost every one of our regions internationally. So certain regions will be up or down depending on the quarter. But overall, international still set for good outperformance for this fiscal year that we're in. and also well-demonstrated good results last year as well, too. I think if I remember correctly, I gave you examples in previous conversations, Thanos, around the Philippines or Latin America, the Netherlands, and many other different markets globally that we're competing in. These are markets that are, again, very early days in terms of their adoption of high-quality digital learning experiences. The competitor set is weaker than what we see in North America. And it's on us to go out there and capture as much of that opportunity as quickly as possible, move them to a modern cloud platform that gives them a better learning experience. And the team is very excited to really accelerate that again this year.

Great. And then finally, you obviously gave us guidance for the full year, but as we think about the OPEX ramp and the timing of hiring, anything to call out in terms of that cadence? I mean, should the ramp and headcount be pretty linear throughout the year? Is it more front-end loaded? Just any thought on that would be helpful. Thanks.

In terms of the hiring, it's obviously a very competitive market on the hiring front, but our team is doing a really good job in terms of outperforming. As we saw last year, growing our headcount to 1,100 people. We do expect the headcount to, in many cases, be front-end loaded. In certain departments, it may take a while to ramp into a full headcount that they're looking for for the year. But we are certainly trying to front load some of the work that we're doing on sales and marketing to make sure that we've got lots of time for those folks to ramp throughout the year. I think the other maybe point that we should make is that we just hired our COO at the end of Q4. He's now very focused on executing his hiring plans for the organization. So we are expecting to move fairly swiftly on the hiring that we need to execute well this year.

Okay, great. Thanks, John.

You're welcome.

Our next question comes from Brian Peterson from Raymond James. Brian, your line is open.

Thank you. Good morning. Hey, John, I wanted to start with you just maybe following up on that RFP commentary for higher ed. And I'd be interested to know if the university prospects are maybe looking at things a little differently post-COVID, right? I think there's been a traditional demand for LMS to replace on-premise solutions, but are they looking at doing things differently, different types of learnings where maybe your product would be in a better position? I'd just be curious to hear your thoughts on that.

It's a great question, Brian. And the quick answer is yes. The presidents and leadership that I'm talking to within the universities and colleges are looking to invest today to improve the educational experience, both on campus and online. So new models of learning, like competency-based education. I think we gave a great example there today with the University of Phoenix selecting D12 to support a competency-based framework for their online learning. The University of Phoenix, as you know, is a leader in online learning. And they're now selecting D2L to support that next wave of innovation, moving up that adoption curve to really drive a better experience for their students. That's what we're looking for today. We're looking for clients that really want to invest now to provide that best quality experience for their students, both online and on campus. And that's a big pivot. Most campuses in the past would have been looking for minimum viable just to support faculty on campus. This is a big change and bodes well for D2L. And I think that shows up in the reports that we're seeing from the analysts showing our win rate continuing to improve in this space.

Good to hear. And maybe a follow-up for Melissa. Just on the outlook, how should we think about that in terms of being maybe a reasonable bogey for this year, or would there be potential conservatism? And if we were to see any upside, would that be reinvested in growth, or would we see that fall to the bottom line? Thank you.

Yeah, great question. So I think when you look at our growth in our ARR over last year, we did add $25 million. That's up 41% from the prior year's number. So the ARR that we have is good forward-looking information in terms of giving confidence in future revenue. And so is there potential upside? There always could be some potential upside, but with that forward-looking visibility, we do want to make sure that the numbers we're giving, we can feel very confident in them. And if we were to overachieve on that, we would look at the reinvestment, but really we've already set out the plans for the reinvestments we think we need to drive the growth. the likelihood would be that they would start to fall out into bottom line EBITDA sooner than what our plans otherwise would have had us do.

Excellent. You're welcome.

Our next question comes from John Cho from National Bank. Your line is open.

Hey, good morning, guys. My first question is, I'm just curious about the relationship between your SaaS revenue and professional services revenue, which is quite strong this quarter. So to what extent is the PS revenue leading indicator to the subsequent SaaS revenue?

That's a great question. I think it exemplifies the fact that we've built a great relationship with our clients, but they're now leaning in to do these special projects to help them outperform in terms of at support for a great experience both for on-campus and online. And it is largely a leading indicator for future growth as more professional services tend to mean more adoption of new technologies in the future.

Okay. Thanks, John. And the other question from me is for your newly added tech count in sales and marketing, how long does it take for new salespeople to break even and potentially generating new leads and revenue contributions?

We have really done a good job in terms of building a world-class enablement organization within D2L. We continue to make improvements, as you can imagine, year over year. But the typical sales rep as they come on board is around two or three months, if they're really good. Six months, it would probably be on the outside. So two to six months would be a good range to give for getting a new sales rep fully productive in our market.

Okay. And last one for me is with additional headcount and resources in sales and marketing, should we expect the sales cycle to be shortened or relatively stable over time?

We're seeing good growth in pipeline. And as we add more sales and marketing resources, it should have a positive impact on growing our pipeline even more. as we launch these new campaigns, as we fully deploy the new branding that we've just done, building that awareness and seeing that translate to better digital conversions, if you will. These are all good investments to help us grow pipeline and have high-quality opportunities flowing into the sales organization. So yes, those investments will translate into better pipeline in the future.

Okay, thanks, John. I'll pass the line.

Thank you.

As a reminder, if anyone has any further questions, please press Start followed by 1 on your telephone keypads now. If you change your mind and wish to withdraw your question, please press Start followed by 2.

As a final reminder, that is Start followed by 1 on your telephone keypads now for any further questions today. We have no further questions in the queue, so I'll hand back to John for any concluding comments.

Thank you, Emily. Thank you for joining us this morning, and thank you for your support and interest. We are very much looking forward to updating you on our progress after our next quarterly call for Q1 results. Thank you, everyone. Have a great day.

Thank you, everyone, for joining our call today. This concludes the conference call, and you may now disconnect your lines.