D2L Inc.

Hello and thank you for your patience. The D2L Incorporated first quarter fiscal 2020 year three year financial results will begin momentarily. Thank you. ¦ ¦ ¦ Thank you. Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the D2L Incorporated Fiscal 2023 First 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 the time. 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 forecasts a projection that reflects 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 and analysis of most recently filed annual information form. In each case, as filed under the company's profile on CDAR at www.cdar.com. In addition, During this conference, reference will be made to various non-IFRS financial measures, including annual recurring revenue , adjusted EBITDA and free cash flow. These non-IRFS financial measures do not have any standardised 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 first three months ended April 30, 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 mostly directly comparable IFRS financial measures from our financial statements. This morning's call is being recorded on June 9, 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, and thank you, everyone, for joining us this morning for our Q1 earnings call. I'm joined by Melissa Howitson, our CFO. After markets closed yesterday, we released our Q1 fiscal 2023 financial results for the period ending April 30th, 2022. You can find this information on the investor section of our website at D2L.com. Please note that the results we're discussing today are in U.S. dollars, unless we indicate otherwise. It was a solid start to fiscal 2023 against a favorable market backdrop. Our total revenue for Q1 was up 21% to almost $42 million. Our Q1 annual recurring revenue increased by $23 million, or 17%, over the same period last year, and we ended the quarter at $159.3 million in ARR. We're also pleased to see even faster growth in our gross profit, up 26% over the last year. Overall, we see continued healthy demand environments as more schools, universities, and businesses invest in digitally-enabled learning, consistent with the view that we've had since the IPO. Our conversations with academic and business leaders reinforce the pressing need for investments in better learning experiences. During past economic cycles, our business has benefited from the resilience of our end markets, and our expectation is that investments in improving learning outcomes will be largely unaffected by the macro conditions. In fact, in the corporate setting, labor market tightness is emphasizing the importance of better onboarding and upskilling for employees. You don't have to look hard for evidence. For example, Statistics Canada recently reported that on-field job positions reached record levels at the end of March. And you can see the same trend in the U.S. This intense competition for talent bodes well for a corporate business. It's acting as a tailwind. As we work to capture the market demand, the war for talent that most of the technology industry is currently experiencing has been a headwind as it's taken us time to build our sales and marketing capacity globally. Identifying recruiting and training sales and marketing personnel always requires significant time and attention, and that's even more pronounced today. Nevertheless, we're competing well in the circumstances and scaling the team, supported by our mission-driven culture and with the help of Brightspace to support an exceptional onboarding experience. These delays, along with the impact of foreign exchange, have affected our revenue growth outlook for fiscal 2023. Melissa is going to go through the details in a minute. While it's disappointing to lower our growth expectations for the year, I want to be very clear, this is not a reflection of the market opportunity changing. The market dynamics we've talked about remain strong, and we continue to expect healthy, organic new bookings growth for fiscal 2023. It's just expected in the back half of the year. Bottom line is that we're adding the capacity we need to drive our sales pipeline and cultivate customer relationships. These near-term challenges aside, we are adding great new clients to the D2L Learning Innovation Platform, while continuing to strengthen the value proposition for our users through our investments and our platform enhancements. Our new implementation win rates in markets like higher education continue to climb year over year as we invest in our platform to pull ahead of our competitors. It was another active and productive period in higher education. Domestically, we signed new customer agreements with Brock University, one of Canada's top post-secondary institutions, to deliver D2L Brightspace to more than 19,000 students. In the U.S., we signed agreements with two prestigious universities along the East Coast to deliver D2L Brightspace to tens of thousands of students. Building on our strong footprint in the Netherlands, Breda University of Applied Sciences selected D2L. Now, more than half of the top universities in the country use D2L. Also on the international side, the University of Limerick chose Brightspace to build a flexible technology-enhanced learning platform for more than 16,000 students. In K-12 education, Among many other new customer wins, we recently welcomed Orange Youth Lutheran High School, which chose D12 Brightspace to support flexible, personalized approaches to online schooling. And we're working hard to efficiently onboard one of our largest customers, British Columbia's Ministry of Education, with the majority of school districts indicating they'll start the rollout this summer. Our teams in education continue to be encouraged by the prospects and the outlook. In corporate, our fastest growing market, we also had a good start to 2023. Among many new customer wins, we welcomed the National Payroll Institute, which sets the professional standard of excellence and sharing of critical expertise. The Institute will soon be providing their digital designation programs through D12 Brightspace. We also signed up Reading in Motion, a nonprofit organization dedicated to helping young learners read to deliver programming for students and professional development for staff. I spend a lot of time talking to business leaders, and I can't recall a period when the topic of talent acquisition and retention has been more front of mind. Given these challenges, organizations are increasingly investing in technology tools to support a better onboarding experience and a more modern competency-based upskilling that helps them retain and attract talent. We continue to make investments to pull away from our competitors as we deliver best-in-class experiences for our clients. Market-leading customer support and product innovation have always been key success drivers for D2L. On the services side, during Q1, we expanded the suite of personalized offerings to provide D2L Brightspace customers with enhanced management of learning administration, learning and creative services, and better insights from data to support better learning experiences and improved outcomes for our clients. And on the product side, we recently introduced Brightspace Creator Plus as an early access program CreatorPlus makes it easy for subject matter experts to build highly engaging learning experiences. It includes a package of beautifully designed templates, drag and drop interactives, video capture, and practice exercises that allow creators to craft inspiring and instructionally sound content with ease. We're also enhancing the Brightspace platform through our growing partner ecosystem of over 1,800 integrated technologies. D2L has always kept the learner and educator at the center of our platform design. We believe this is a key reason why Brightspace is regularly recognized as the best in class offering. We proudly announced that D2L Brightspace was the finalist or award winner in nine categories, including Best Learning Management System and Best Personalized Learning Solution at this year's Software and Information Industry Association CODI Awards, the industry's only peer-recognized awards program. At this point, I will pass it over to Melissa, who will discuss the financial results in more detail. Thanks, Melissa.

Thanks, John, and good morning. Our full Q1 statements and MD&A were filed last night, so I will focus my comments on the key highlights for the quarter. Total revenue for Q1 increased by 21% to $41.9 million. Recurring subscription and support revenue was $35.8 million. up by $5.2 million or 17% over the same period last year. This growth reflects new customer wins coupled with revenue retention and expansion from existing customers. While the total revenue growth was above 20%, the subscription and support revenue for Q1 could have been stronger and we're working hard to make up this ground in the back half of the year. It was a particularly good first quarter for professional services and other revenue which increased by 54% to 6.1 million. The results for the quarter were driven by several significant delivered professional services engagements, including new customer implementations and content development work for new and existing customers. This higher level of activity speaks to larger implementations underway with a positive impact on subscription and services revenue emerging in the back half of the year. A high level of professional services engagement typically drives better experiences and outcomes for our customers and greater retention for D2L. As John mentioned, another highlight in the period was the gross profit and gross profit margin performance. Gross profit increased by 26% to $26.4 million and gross margin was 62.9% up from 60.5% last year. The year-over-year improvement reflects growth in revenue outpacing related increases in cost of revenue, in particular for subscription and support revenue. Gross profit margin for subscription and support increased by more than 400 basis points to 68% in the current period. The increase is due to our engineering team continuing to optimize our cloud technology, which improves our cost of delivery. It also reflects easing COVID-19 restrictions and the return to more in-person learning which meant our platform was used for both blended and online learning rather than a more fully online experience in the prior period. Q1 operating expenses were $30.8 million, an increase of 35% over last year, mainly due to higher employee headcount to support the business growth. With a strong balance sheet, fiscal 2023 will remain a year of investment for D2L. At the same time, as we presented in our updated outlook, we are strategically prioritizing our investments and placing a heightened focus on cost optimization across the business. We are investing in growth with confidence born from our established history of disciplined spending and profitability. In terms of operating profitability, Q1 adjusted EBITDA was a loss of $1.5 million or negative 3.6% margin compared to a loss of $95,000 or negative 0.3% margin in the same period last year. the Q1 EBITDA loss reflects the planned increase in our OPEX to support future growth. We reported negative cash flows from operating activities of 15.3 million in the current period, a 23% year-over-year improvement from negative cash flows of 19.8 million in the prior year. Q1 free cash flow also improved to negative 16.2 million compared with negative 19.9 million in the prior year. As we have stated previously, 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 higher education customers in the United States. We finished the quarter with $98.1 million in cash and no debt, leaving the company very well positioned to take advantage of the favorable growth trends in our markets. With today's results, we updated guidance for fiscal 2023 to reflect lower revenue growth and reduced adjusted EBITDA loss. Specifically for fiscal 2023, we are expecting total revenue in the range of $175 to $178 million, implying growth of 15 to 17% over fiscal 2022, and adjusted EBITDA loss in the range of $9 to $11 million. The change in the expected revenue growth for fiscal 2023 mainly reflects the time required to ramp our sales and marketing teams, in addition to the impact of changes in foreign exchange rates, in particular the strengthening U.S. dollar. Recall that roughly 45% of our revenue is from outside the U.S. In addition, we are now expecting a lower adjusted EBITDA loss in fiscal 2023, reflecting disciplined cost optimization and prioritization of our investments. thereby putting us on an accelerated path to profitability. I will now turn it back to John for closing comments.