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.