D2L Inc.

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the D2L Inc Fiscal 2025 Second 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. The instructions will be provided for you at the time for questions. If anyone has 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 risk 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, uncertainty factors and assumptions, as well as further information concerning forward-looking statements, please refer to the company's annual and interim management discussion and analysis and most recent filed annual information form. In each case, as filed under the company's profile on CEDAR at www.cedarplus.com. In addition, during this call, reference will be made to various non-IFRS financial measures, including consistent currency revenue, adjusted EBITDA, adjusted growth profit, adjusted growth margin, and free cash flow. These non-IFRS financial measures do not have any standardized meaning prescribed by the IFRS and may not be comparable to similar measures presented by other public companies. Please refer to the companies MD&A for the three and six months ending July 31st, 2024. 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 September 5th 2024 at 8 30 a.m eastern time I would now like to turn the conference call over to Mr. John Baker, Chief Executive Officer of D2L. Please go ahead, sir.

Thank you, operator, and thank you, everyone, for joining us for our Q2 earnings call. We released financial results after markets closed yesterday, which you can find on the investor relations section of our website at D2L.com. Please note that the results we're discussing today are in U.S. dollars. I'm joined this morning by Stephen Laster, our president, and Josh Huff, our CFO, and I'm pleased to report it was another strong quarter for D2L. We achieved important milestones on our key growth pillars, and our financial results put us squarely on target for fiscal 2025. Total revenue increased 11% to $49.2 million, and our SaaS revenue grew 12%. New customer growth was strong, and importantly, adoption with existing clients continues to grow. Just recently, we surpassed 20 million users on our platform, evidence of our growing scale and impact. Annual recurring revenue grew 11% year over year to 198.3 million, and 12% on a constant currency basis. Adjusted EBITDA increased to 4.2 million, up from a loss of a half a million in Q2 of last year. And we're seeing strong cash flow growth For the trailing 12-month period, free cash flow rose to $24 million, a $22 million increase from the equivalent 12-month comparative period. In short, our team continues to execute well on our plan of balancing growth and profitability, and this sets us up well for the second half of this fiscal year. As Josh will review, we raised our fiscal 2025 guidance, and we have a clear path to exiting this fiscal year with low to mid-teens adjusted EBITDA margin, and even higher free cash flow margin, which is typically several percentage points higher. In July, we held our annual Fusion Users Conference, this year sold out. It was in Toronto, and nearly 1500 people from across the globe joined this in-person event. An additional 1800 people attended virtually. It was an inspiring opportunity to meet and connect with so many world-class experts, educators, and leaders, and to explore how we can create an even greater impact in achieving better outcomes and deepening the human connection to learning. The conference theme was built around our learning transformation, and the agenda highlighted how learning can be transformed with product innovation, improved accessibility, greater personalization, and a more human-centric approach to artificial intelligence. We unveiled exciting product announcements, including the launch of D2L Lumi, our next-gen AI capability, and other new products that underscore our commitment to being a partner of choice in learning transformation. We also closed our latest acquisition and our largest to date with H5P, which is a leading SaaS learning solution and provider of interactive content creation software. Stephen is going to elaborate on this acquisition in a moment. With an expanded product portfolio, we're bringing even more value to our customers and end users, helping them solve important challenges. And at the same time, we're growing the addressable market and revenue opportunities for D2L, positioning us for even better win rates and a higher net revenue retention as we continue to grow with our customers over time. gaining market share rapidly in higher education adding these capabilities gives us new growth leads and continues to strengthen our moat our strong balance sheet and growing cash flows allows us to make organic and inorganic investments in products that delight customers while balancing our growth and profitability this is a formula we're going to continue to lean on to strengthen our leadership among our competitors and to become the clear category leaders A special thanks to all detailers for their work in delivering these important milestones in Q2 and for helping us with a very successful back to school launch this fall. It was also gratifying to deepen our partnership with key customers this quarter at Fusion and all around the globe. It's clear they see us as a key strategic partner in transforming their learning experience. And with that, I'm going to now turn over the call to Stephen.

Stephen, over to you. Thanks, John, and good morning. I'll touch on our go-to-market activities and innovation highlight. It was an eventful quarter in both areas. There was a solid period for new customer acquisition and booking, despite the general macro trend of lower RFP activity. We're sustaining high win rates in our major markets, which is supporting our growth, and we're really proud of the great new clients our team has added this past quarter. In our largest market, higher education, These include University of Texas at Rio Grande Valley, which services roughly 30,000 students. They're replacing a legacy vendor with Brightspace because, in their words, of its outstanding features and functionality, as well as its widespread adoption by other prominent universities. And Stark State College in Ohio is a new customer of D2L as well. They also switched to Brightspace from a legacy vendor because of our track record in innovation, specifically in areas such as mobile responsiveness and the ability to support flexible learning and different pedagogies. Our platform was an optimal choice for Stark State because they differentiate on offering multiple approaches to learning, including 24 fully online degrees, and short noncredit and microcredit credentials. Internationally, we're solidifying our market leadership in key countries, such as Singapore and the Netherlands, where we are now at more than 60% market share in higher education. Building on this success, we recently added Hans University of Applied Sciences, the largest university of applied sciences in Northern Netherlands. In our corporate market, our team continues to expand the customer base in employee learning and in training organizations. We recently won the Ontario Nurses Association, the trade union representing more than 60,000 registered nurses and health professionals across Ontario. We also were selected by a large healthcare not-for-profit serving 50,000 members. In both cases, user experience and ease of use were critical win themes for us, as was our approach to partnership, including our professional service offering and the openness of our platform with respect to integrations. It was a highly productive quarter on the innovation side, culminating at our fusion conference, as John mentioned, where we launched two new product packages, D2L Lumi, a powerful set of human-centric AI capabilities that function across our platform to build better content, assessment, and activities, and that save our educators valuable design and development time. Early adoption stories are compelling, as you can see on our website. And we launched Achievement Plus. Achievement Plus helps our customers make it easy to implement competency-based learning so that their learners advance and master the material and capabilities at a pace that suits the learners best. DTO is gratified to have played a leadership role in competency-based education over the past 20 years. Working in partnership with a world-class organization and with the introduction of Achievement Plus, we've now removed barriers to implementation, make it easier for our customers to adopt this transformational approach to learning. And there's a lot more on our roadmap. We continue to make the right investment in product innovation, doubling down on the voice of the customer and our focus on the learning moment. At the same time, we're also focused on increasing the efficiency of our technology and of our operations. John also highlighted the acquisition of H5P in the quarter. We believe strongly in the power of helping our customers create easy to use learning experiences and providing the creation tools that allow them to evolve the learning moment. We identified the creator space as a strategically important area with the release of the Creator Plus product. And this acquisition propels our offering and roadmap forward considerably. We add best in class suite of over 60 interactive content types. And more importantly, add a talented team to the D2L community that is enabling us to double down on this strategy. We've integrated with H5P for many years and witnessed how well loved their products are. Now with the support of our go-to-market engine, we're excited to put the full capabilities of H5P in the hands of more users around the world and to strengthen our leadership position in the growing interactive learning space. The customer response to this acquisition has been highly encouraging. And we've had early success selling H5P's enterprise product to several Brightspace customers. As you all know, it's back to school time for many of our customers around the world. And we're seeing strong increased utilization by those customers as learners return to their learning environments and campuses. And we're seeing healthy adoption and positive customer satisfaction with our service offerings. From our learning services teams to technical account managers to end user support, we want to give a big thank you to our services support and cloud teams that have partnered with customers to make this back to school highly successful. Our people continue to be the most important part of differentiating D2L, and we can't thank them enough for their persistence, their patience, and their commitment to our customers. I will now turn the call over to Josh for an expanded discussion of the financials.

Thanks, Stephen, and good morning. As John highlighted, our Q2 results demonstrate a balance of solid top-line growth with significantly improved profitability. Total revenue for Q2 was $49.2 million, an 11% increase over the same period last year. Growth was led by subscription and support revenue, which was up 12% in Q2 to $44 million. Our professional services and other revenue was modestly ahead of the prior year at $5.2 million in the quarter. And it was a solid quarter for new bookings, which helped drive annual recurring revenue up 11% year over year, or roughly $20 million to $198.3 million. I will also highlight that constant currency ARR rose by 12% to 200.6 million. There were several components to the ARR growth this period relative to the Q1 balance. We added roughly 4 million of net ARR from the core business, and we added another roughly 4 million to ARR net of the acquisition of H5P and the divestiture of Shields Wave. Looking at gross profit and gross margin, Q2 gross profit increased by 12% to $33.4 million and gross margin for Q2 came in at 67.9% up from 66.7% in Q2 of last year. Subscription and support gross profit grew 12% in Q2 and subscription gross margin rose to 72.9% in Q2 from 72.5% in the prior year based on ongoing cost optimization efforts in our cloud technology delivery. A few quick comments on operating expenses. Operating expenses for the second quarter were $34.9 million flat year over year. As a percentage of revenue, total OpEx was 71% this quarter versus 78% of revenue in last year's Q2. a 700 basis point improvement in operating leverage. A reminder that expenses are elevated in the second quarter each year due to our annual Fusion Conference, which drew record attendance this year and offers a strong opportunity to connect with existing customers and prospective customers. The two largest expense categories, sales and marketing and R&D, were lower year over year and have benefited from productivity and efficiency gains. I would note that we expect fewer non-recurring expenses in Q3 and Q4, with the wave and H5P transactions completed in Q2. We're pleased with our ability to generate double-digit revenue growth while driving operating efficiency, helping us make substantial progress on both profitability and cash flow. We reported adjusted EBITDA of $4.2 million, or 8.6% margin, in Q2. up from adjusted EBITDA of negative 0.5 million or negative 1.2% margin last year. This represents a 980 basis point increase in margin year over year. Looking at our profitability improvement over the first half of this year, the 8.2 million in adjusted EBITDA is more than we generated over the full 12 months in fiscal 2024 and represents a 600 basis point increase in margin year to date over the prior year. As John highlighted, our outlook calls for a meaningful lift in the back half of this year with an exit rate of low to mid teen adjusted EBITDA margin as we recognize further operating scale in our business. Loss for the period improved to 0.3 million compared with a loss of 4.8 million for the same period of the prior year. We reported free cash flow of $31.2 million in Q2, an improvement of close to $11 million from the same period in the prior year. A reminder, cash flows from operations historically have a seasonal low in the first quarter each year and a seasonal high in the second quarter each year. Based on this seasonality, it's also helpful to look at trailing 12-month results. Free cash flow for the 12-month period ended July 31, 2024, with $24.4 million, up $22 million from $2.1 million for the comparable period in the prior year. We're pleased with our progress in improving our efficiency of operations and cash flow generation while making the right investments for growth. Additionally, this seasonally strong free cash flow generation enabled us to maintain a healthy cash balance of $98 million at quarter end, offsetting the initial purchase price from the acquisition of H5P. Lastly, with the Q2 results, we increased our fiscal 2025 guidance, reflecting a combination of continued progress in balancing top line growth with operating efficiency improvements, as well as the partial year contribution in the third and fourth quarter from the acquisition of H5P Group inclusive of the effects of fair value business combination accounting. Subscription and support revenue is now expected to be in the range of $178 million to $181 million, an increase of $1 million at the midpoint from previously issued guidance. We are expecting total revenue in the range of $199 million to $202 million, an increase of $1.5 million at the midpoint from previously issued guidance. An adjusted EBITDA is expected to be in the range of $22 million to $24 million, an increase of $1 million at the midpoint from previously issued guidance. In closing, we're really impressed with how the team is executing our balanced growth and profitability strategy. Our strong balance sheet and growing cash flow affords us the financial flexibility to make disciplined investments to support future growth and deliver strong customer experiences. With that, we'd be happy to take your questions. Operator?

Thank you. If you'd like to register a question, please press star followed by one on your telephone keypad, ensuring that you are unmuted locally. If you'd like to withdraw your question at any time, you can do so by pressing star followed by two. Our first question comes from the line of Doug Taylor of Canaccord Genuinuity. Your line is now open. Please go ahead.

Yeah, thank you. Good morning, everyone, and congrats on another quarter of solid execution. First question is for, I guess, either John or Stephen. With the H5P acquisition now in the fold for a couple months, can you refresh us on your monetization plans for the expanded portfolio of interactives that you've now got and perhaps maybe you could update us on the penetration rates existing for some of your modules just to help us understand the cross-sell potential.

Good morning, Doug, and great to speak with you again. We're quite excited about the H5P acquisition. For us, we saw great evidence that our Creator Plus strategy in terms of improving the learning experience through building interactives and practices and engagements Right on the page is a very big step function improvement in the learning moment. For some of our clients, we've now got efficacy studies showing the number of students getting A's and B's going significantly up in a controlled trial comparison group. We've also seen a client demonstrate almost a tripling of completion rates in tough bottleneck courses. It was a real impact on the quality of the experience. And that's what we're trying to do here at D2L is build better learning experiences to support our clients. H5P as a reminder enables us to now have dozens of more interactive and ways to engage students in great learning experiences. So it pulls our roadmap forward significantly on that strategy for that product launch that we do with Creator Plus. So for us, it's about enhancing that roadmap so that we can actually do more things with Creator Plus with our clients beyond just building the interactives and creator experiences. And so that's going to be a huge opportunity for us to increase our win rate with existing clients, driving better adoption of the technology and attach rate. We're seeing good attach rate there now with that product. And I think with H5P, I think we're going to continue to see that accelerate. The early feedback from clients has been phenomenal. We've got a number of our key marquee clients already buying the enterprise agreement of H5P now that they've come on board as a part of D2L. And we see no reason why every university and college or even companies around the world that are using H5P technology today that's open and free for them not to upgrade to the enterprise version. So we see a tremendous opportunity as our go-to-market teams really engage to bring a better solution to the whole industry.

All right, thank you for that. The next question, the rest of world geography eclipsed Canada in terms of revenue contribution this quarter, I think for the first time ever, which obviously demonstrates the effectiveness of your efforts to penetrate certain regions and use the space to expand. So perhaps, John, you can give us an update on how you're thinking about near-term priorities for additional markets to penetrate, assuming that you've you know, you're emboldened by the success that you've had to date.

Thanks, Doug. I think we're, again, international and corporate are two of our fastest growing markets. We see international as a tremendous opportunity long term as more and more folks attend higher education globally. That should be a good tailwind for us to continue to accelerate our growth as we look forward. And as you point out, we're doing a very good job going into key markets. I think we articulated, as Josh pointed out, over 60% market share now in Netherlands, in Singapore, in other markets around the world, where we're taking sort of a number one position with top tier one institutions. And so it's time for us to now take a look at going even deeper with additional adjacencies, whether it's into K-12, into corporate and some of those markets where we're seeing great adoption. But also to now branch out into other countries to take the next steps in growing our corporate and also higher education strategy globally. So as a reminder, in our core market higher education, more than 70% of the market still legacy technologies, old on-prem software that we want to replace very quickly in many of these countries around the world. And so the team's right now going through the exercise of identifying key next markets for us to jump into, while at the same time expanding the market so we're already strong.

Can I maybe bait you into talking about what you think is a low hanging fruit out there for new countries to potentially enter?

So what we've tried to do is really zero in on key gateway countries, and we're still in an expansion phase with those gateway countries, whether it's India or Mexico, or in the cases of like Asia would be Singapore. I'm actually making a trip to Singapore later this month, also to Hong Kong, other markets globally to try to figure out not only how to continue to expand in those particular regions, but also take the next steps with other countries in the surrounding area. We're already seeing some of that success playing out in Asia where we're expanding out from Singapore into Philippines, into Malaysia, into Indonesia. And we do think there's an opportunity for us to double down on that strategy as we continue to win market. Okay.

Maybe one last question for Josh. You referenced the purchase accounting impact. Maybe I'll ask you if you could help quantify what the impact is on your guidance. and the change here versus the impact of H5P being added to the ARR. And just so everyone's understanding this right, is the full amount in the ARR, but you'll have to lapse some renewals to get the full revenue recognition? Am I thinking about that right?

Yeah, thanks, Doug. Yeah, so you're right. The annual recurring revenue has sort of the annual cash value of these contracts. As you know, from a GAP perspective on business combination, there's a fair value adjustment to deferred revenue, which is what you're alluding to, and so that takes about half of what would otherwise be the revenue from H5P out of our sort of GAP rep rec in the back half of the year.

So I mean, if you know rough math, you're talking about maybe a small know a million maybe a million plus in terms of revenue impact from that yeah you're in the right neighborhood yeah okay uh thanks very much i'll pass the line thank you the next question comes from the line of gavin fairweather of hallmark your line is now open please go ahead

Oh, hey, good morning. Thanks for taking my questions. Maybe just to start with John, he obviously had the chance to speak with a lot of customers at Fusion. Any kind of further color or takeaways from those discussions on kind of their priorities or concerns or propensity to purchase more products? Anything along that would be helpful.

Fusion was a delight this year. We sold out the main event, sold out the exec conference. I think the one thing that stood out for me is clients saw the launches of new products, saw the deep dives, spent a lot of time doing demos, and then what are the next steps of how do I buy this now and get it implemented? You know, that velocity of new launch to wanting to roll it out with their faculty, with their students, I've not seen that in the past. I think that really speaks to the trust the team has built by delivering really solid products that really hit the mark with the clients. You know, in terms of concerns, I think there was an initial reaction to the H5P acquisition, you know, wanting to understand what does it mean for folks that are not Brightspace users. So there were a number of prospects that were there that were big fans of H5P and just wanted to make sure that we weren't taking away their tools. And we reassured the market that we continue to expand. We will continue to expand H5P, even for folks that are using our competitors' learning platforms. And so that put those concerns to rest. And I think will help us strengthen our ability to win those clients long term because we're really delivering the tools and strengthening the tools the faculty and these organizations really love to use. You know, I think whether you're talking about corporate, we saw a huge increase in the number of folks that were coming in from the corporate market. Over 400 folks attended Fusion. from our corporate clients. That was fantastic to see them really engaging and thinking about new ways to doing upskilling. We had a number of our big higher education clients committed to doing further co-development with D2L to really shape the future of our product and roadmaps of our technology. That was really telling. I think we've become a very strategic partner for many of these organizations around the world. And I think the general excitement around how we hit the mark with AI being very thoughtful around how to do this in a way that keeps the human in the loop, that engages the faculty, that helps them as a productivity tool, was really well received by the market. I continue to see us being a key partner for many of these organizations around the world. And that building of connection and engagement at that event, I think is going to strengthen our ability to build a really significant pipeline post-fusion, both growing adoption of new products, but also to go deeper with the ones that they have. And I know, Gavin, one of the things that we're seeing as we return back to school for a lot of the clients is we are seeing a very significant uptick in terms of adoption for many of our largest clients. The overwhelming majority are seeing a very significant increase in the usage of our technology this fall. And so all that is a good sign that our technology is becoming more and more important on these campuses around the world.

That's very helpful. Thank you for that, Sean. And maybe for Stephen, you cited a little bit of a shift in the pace of RFPs. I'm curious if that's just kind of timing coming off a pretty active period or is there being some other kind of shift in the market that you've noticed?

No, we're not seeing any significant market shifts. We think obviously there's a lot of uncertainty in the world that's had a little bit of impact on RFP activity. So it's more timing than anything we believe, but mostly we're really excited by our win rate. So we're doing very well in competing within the market. You're seeing that in our growth. You're seeing that in our activity going to 20 million users. So the market tends to be a little bit lower than we had hoped. We're still having great success in gaining market share within this market and growing.

Okay appreciate that and then lastly just on the margins, I mean the profitability certainly came in better than expected this quarter curious. I guess two questions curious if you maybe realizing cost energies, a little bit earlier than you had expected and then Secondly, are you starting to I you know some areas for additional investment as as your margins start to trend towards those mid teens levels.

Yeah, thanks, Gavin. Good question. You're right. We're pleased with sort of the operating efficiency we're seeing. We mentioned 700 basis point improvement in operating leverage, which is nice to see. And it's really executing well on our plans. Some of the efficiency work that we had planned for the year, we were actually able to implement a little bit earlier than anticipated, which was nice. And as we look forward to the back half of the year, As we've discussed, we see low to mid-teen EBITDA margins. And so really the benefit of the work we've been doing over the past 12 months starting to really show itself in the back half of the year through increased profitability. And then as we plan for next year, we are absolutely looking at areas of growth investment. Of course, being disciplined and measured with those investments, but looking for opportunities to grow the business.

That's it for me. Thanks so much.

Thank you.

The next question comes from the line of Paul Treiber of RBC. Your line is now open. Please go ahead.

Oh, thanks very much. Good morning. Just a follow-up question on the competitive environment and your win rates. This quarter, we've seen a couple of players in the space announce acquisitions that are getting acquired. How do you think that'll change the competitive environment? What have you seen in the past when there's been consolidation?

Thank you very much for the question, Paul. It's not new for us. We've definitely seen our competitors go through this type of transformation in the past. We do see creating uncertainty for our competitors' clients, and we see that as an opportunity to pick up momentum with new prospective clients. D2L being very committed to maintaining our public markets home as a differentiator. We're doubling down on our innovation and client experience. That's a winning combination for continuing to grow our win rates in the markets that we're competing in globally. And as we build new products that open up new addressable markets for us, we see this as a tremendous opportunity to continue to grow market share through new client logo ads, while at the same time picking up our work on net revenue retention through adding new products to take to existing clients to solve even more important problems with them. So I think we're in a very healthy spot relative to our competitors in terms of our ability to invest, to grow, and to drive better win rates. Um, you know, we're, we're highly focused. We've never been more differentiated. Uh, and I think that, uh, that product innovation strategy, along with a better customer experience is going to help us win a lot more in the market in the, in the years ahead.

And then with, with profitability improving and free cashflow rising, how do you think about popular deployment here? Uh, you, you made the H. 5P acquisition, you sound quite enthusiastic on it. Do you see other opportunities to deploy capital on acquisitions like that? And how else do you think of our share buybacks?

Yeah, I think I'll split that with Josh. You know, we definitely are weighing our options in terms of capital deployment. As we've seen good growth in terms of cash flow over the course of the last 12 months, up now more than 22 million year over year. We will continue to see that cash flow continue to increase next year. So we will be looking to deploy that capital in ways that are really going to help cement us as a market leader in this space. Some of it will probably continue to go towards the NCIB. As you can imagine, where we're trading today is not reflective of the real value of D2L. And we see that as a good return on the capital that we would deploy in that particular area. But we're also going to continue to look at different opportunities for acquisition in the space. There are a lot of problems our clients are trying to tackle. If we can find great products, great teams that can help us build world-class products that solve some of these challenges, they would make a natural fit here at D2L. So again, we'll be very measured in terms of how we make those investment decisions. We want to make sure that we're doing the right things in terms of supporting our clients, but also making sure that we're balancing our growth and profitability.

Yeah, I think, Paul, John hit it on the head. I think the only thing I might add is obviously the acquisition of H5P, as we've talked about, is highly strategic for us. And so in the near term, we're really focused on getting the value to our customers from H5P and integrating H5P as well as we possibly can.

All right. Thanks for taking the questions.

Thank you. The next question comes from the line of Anas Moshapala of BMO. Your line is now open. Please go ahead.

Hi, good morning. Could you speak to the opportunity for H5P in the corporate markets and I guess what the current traction is and how you see that potential?

Yeah, so we see H5P in corporate as a tremendous opportunity. Oh, go ahead, John.

No, you, Stephen, go ahead. I'm glad to get that on.

Yeah, I was just going to say that in corporate, we see a tremendous opportunity for H5P as our corporate partners and customers are focused on engaging and efficient learning to help shape their workforce. The integration of H5P with Creator Plus and Brightspace really results in a market-leading, easy-to-use set of capabilities to rapidly design courseware that's right targeted for corporate learning as well as higher education in K-12. And we're seeing a good response to the introduction of that into our corporate learning market. John?

Yeah, thanks, Stephen. I think just building on that, if you talk to anyone in the corporate space, Patrick Barnard, My large when you ask them a simple question do you like the learning experience delivered by your learning platform, they all laugh it's. Patrick Barnard, it's incredible they do not like the learning experience most of the standards or ways of building content rely on standards from 20 years ago. Patrick Barnard, very bad content creation experiences and most of our competitors solutions in corporate. We see this as a tremendous opportunity to go in with a step function improvement in the quality of the learning experience for companies around the world. And I can tell you the creator experience combined with H5P will have a major impact in improving the satisfaction rates for employees around the world that use this new experience to do everything from compliance training to onboarding to leadership development to other types of upskilling. it will have a big impact in improving the quality of learning for many companies around the world. And so I can't wait to get it into the hands of more and more companies. I think the companies that are already embracing D2L technology today are seeing a significant impact in terms of quality of experience for their people. And I see this as a big opportunity for us to grow much faster in the corporate space.

Great. TAB, Looking at the Canadian revenue was down year over year we got to some noise related to professional services timing or anything to call out there.

TAB, Sorry, then, if that was Canadian revenue.

TAB, yeah. TAB, Was that. TAB, Just down if you're here yeah.

Yeah, largely professional services. And I think as we've talked about in the past, like we look at the North America market as sort of one. And so seeing, you know, North America being around that 10% mark is sort of how we think about it in North America education. But yeah, largely professional services, and then also a little bit of foreign exchange pressure on the Canadian dollar in the first half of the year.

Okay, great. And then finally, just from my perspective, presumably we should see the same typical seasonal dip in subscription margins heading into the fall or should be any different this time?

Yeah, we see, like in history, we always see in the fall when there's semester start and greater utilization of the platform, we'll see a bit of an impact on gross margin. But by and large, the team has done some fantastic work to improve the scalability of the platform. And so relative to the summer, you'll see a bit of a change, but pretty minor at this point, Thanos. OK.

And then kind of longer term, more room as we think about the potential to expand that a bit more into 26.

Yeah, on the gross margin side, we continue to focus here. We've shown some pretty significant improvement over the past two years expanding our gross margin. And you'll recall it's not always linear. Patrick Corbett- These are sort of engineered optimizations, and so the team's busy working on more of those and we're pleased with the progress and we expect an opportunity to improve further as we scale as we look forward.

TAB, Great. TAB, Thanks. TAB, Thank you.

The next question comes from the line of Dan Chan of DDTD Cowen. Your line is open. Please go ahead.

Hey, this is Justin on for Dan. Thanks for taking my questions. So it's still early days, but has there been any, you know, initial customer feedback with Lumi and, you know, AI capabilities in general? How is customer adoption trending there?

So customer adoption is good. As you know, we built Lumi in partnership with early adopter, early adopting customers. And we're pleased with the results we're seeing where Lumi is applied. We're saving customers time in their course development, course management tasks. We're seeing high quality courseware as a result with our human in the loop approach to AI. And we're, you know, this first phase of Lumi was how to make things easier on the delivery of education. Michael Rhoadsley- Future phases of lumi lumi will continue on really helping students succeed. Michael Rhoadsley- But the core of lumi is really human in the loop and we're hearing from our customers and our development partners. Michael Rhoadsley- That this is the right approach and they're seeing good success with it so we're very excited for limits progress at this point and the roadmap is rich and we're excited for future deliveries.

That's great to hear. And then just kind of staying on the AI trend, has there been any, you know, regulatory pushback from educators kind of incorporating Gen AI into their workflows or hesitancy from, you know, other education educators?

Yeah, I think one of the things that distinguishes D2L and it's, go ahead, Jeff.

You got to see it. Go ahead. Thank you.

Yeah, you know, one of the things that distinguishes all of our product development at D2L is we do develop our technologies in partnership with leading educators and learning providers in corporate, in higher ed, in K-12. And as part of that development process, we've been very cognizant of the value and power of AI, but using it in ways that really fit not only just regulatory, but pedagogy, and teaching and learner success. And so the capabilities that you've seen us deliver are square in that neighborhood. And we really have taken an approach of ensuring that we're helping, that we're propelling access to education, that we're making it more efficient, more engaging, easier to deliver, and easier to consume. And for those reasons, we're seeing very positive uptake in the capabilities that we've delivered.

Great to hear. Thanks so much. That's all. Thank you.

The next question comes from the line of Kieran Saffron of 8 Capital. Your line is open. Please go ahead.

Hey, good morning guys. Congratulations on the quarter and thanks for taking my questions. Another starter. Can you talk to the recent growth in your ACV and how either improve attach rates, new customers, international business, or other considerations are push and pull factors here.

Sorry, Kieran, can you just repeat that?

Yeah, just would like to color on the ACV and some of the push and pull factors that's changed that line.

Sure, yeah. ACB, meaning sort of the average deal size. So we've seen it be relatively steady, but moving up to the right a little bit as we bring more products to the market and attach more products with new customers as well as existing customers. So I would say, by and large, we're seeing it up to the right in sort of a trend that we would have expected. So yeah, nothing to to new or novel to report there.

Okay, that's good to know. And then on M&A, you know, your recent targets have been coming out in Europe. As you look at the acquisition pipe, can you compare the opportunities between North America versus abroad? And any contrast on product offerings or valuations in this region would be helpful.

So our thesis for M&A, as we've said before, is really our focus on helping to drive access to learning and really delivering the tools and technologies that accelerate the design and the delivery of world-class courseware and learning environments. Globally, we are very aware and actively in evaluating M&A opportunities. We don't speak to specific targets. I would also tell you that we're very focused currently on creating maximum value for our past M&A H5P, but we continue to be involved with and evaluating opportunities for the design and the delivery of learning based on the needs and goals and problems we can solve for our current and future customers within the learning moment.

Okay, thanks, Steven. And then my last one here. We're seeing recent influence from governments in Canada and abroad on student caps. Just wondering how you're looking at these developments and what your customers in those regions are seeing. Thanks.

Sorry, Kieran. I didn't quite catch the question there. Could you repeat again? Sorry. Maybe we just have a bad line.

Just in the news, with some recent developments from governments in Canada and abroad on student caps, Being implemented, just wondering if that's leading through into customer conversations and if there's any developments there, please.

I think it's a concern, not having a big impact in terms of overall enrollment or utilization of our platform. As I look at the numbers for this back to school season, we're seeing significant increases in utilization, increases in the number of users across the overwhelming majority of our largest clients. And so we're not seeing it have an impact on the clients that we're serving today. But I think anytime that we're putting a cap on access to higher education anywhere in the world, it's not a great outcome. I do think it's short-term challenges, but if you look at the broad trend, you're going to see an increase in higher education globally year over year over year. As we open up access to great learning experiences to more and more people, I think it's good for the globe to really embrace education.

Absolutely, John. Thank you. I'll pass the line.

Yeah, no problem. Thank you. Good question.

Thank you. The next question comes on the line of Brian Peterson of Raymond James. Your line is now open. Please go ahead.

Thanks, guys. I'll keep it to one. John, historically, there have been some periods where lagging competitors have been bad actors in terms of pricing. I'm curious, as you complete the 2024 selling season, how would you characterize the higher ed pricing environment in North America? And do you think price has actually become less relevant, more relevant, about the same in terms of ultimately impacting vendor selection? Any thoughts there? Thanks, guys.

I think it really depends on the client. Some clients weight pricing pretty aggressively. But overall, I'd say pricing is less of an issue today than it has been in the past. largely because the differences between our competitors and us are so stark. You've got to make choices on total cost of ownership. I remember when one of our legacy players was offering to give a client free access for five years to their technology, and the client said no because they simply wouldn't have the improved outcomes that they're striving for in terms of improving retention, which would save them tens of millions So by selecting a lower cost option, it actually would cost them more in the long term. And so I think clients have become more sophisticated as they look to these types of technologies supporting all these different modalities of learning on campus, online, workforce upskilling, staff development. And when you look at improving retention and saving an institution many, many millions, far more than the cost attached to the actual solution that we're providing, There's a significant reason to avoid just simply looking at price and focus on ROI and total cost of ownership.

Appreciate the call. Thanks, John. You're welcome, Brian.

Thank you. The next question comes from the line of . I'll stifle. Your line is now open. Please go ahead.

Good morning, Jens, and congrats on a nice quarter. For my first question, I want to touch on the spending environment. As you guys head into the back half of the year, what changes in demand trends or priorities are you seeing as the year play out, and what are you seeing on the pipeline build relative to last year?

Great question, Susan. So, Lee and Brian, our CRO and CMO, are doing an excellent job building a great strategy on the go-to-market side that's resulting in a very healthy pipeline. You'll see variability month over month, but overall we're very happy with how they're producing pipe for the future. Fusion was a great example. I don't think I've ever seen more excitement around the new products that we're launching or more prospect pipeline being influenced at that event than I did this year. So I think the team is doing a fantastic job executing in what still remains to be tough macro conditions for the whole industry, broadly speaking. If we can continue to focus on customer experience and the innovation, and that drives our win rates, I'm very happy with how we're going to perform in the back half of the year if current trends continue to persist.

Great. On the international market, of momentum here, is this strength more of a function of perhaps some incremental improvements in the spending environment globally, or is this more a function of early benefits from the recent go-to-market refinements and focus that you guys are having on key markets?

I think why we're seeing success globally is these technologies are becoming more strategic, more mission critical for the organizations we're selling into. So in the past, they could have gotten by with a minimum viable solution just to support some basic use cases. But those use cases are becoming far more sophisticated as they try to support online programs on campus, workforce upskilling, staff development. There's a lot more use cases that are in demand, and that's going to spark a long-term growth for us in many, many markets around the world. And for folks that benefited a little bit from stimulus funding, as that stimulus funding fit for us because in some countries like india as an example they have subsidized other competitors solutions for learning those subsidies are now coming out which is making our technology look more attractive and so i actually think the current conditions and current adoption rates with our clients the usage of the platforms by clients all good indicators that the the long-term demand globally will continue to increase

Okay, great. And then just a last one for me, guys, just on the product priority front, what are some of the top remaining pain points and solution gaps that you guys are looking to address on the platform, either through internal product innovation or M&A?

I actually really like what Kane is doing right now. Oh sorry, there's a bit of a lag between myself and Stephen, so I apologize. I'll take it first, Stephen, and then I'll toss it over to you. You know, I really like what the team is doing in terms of executing on the roadmap today. The things that are big drivers for a lot of our clients are around engagement. And so the solutions that we're bringing to market with Creator Plus and H5P are great examples on how we can build better engagement, inspiration for students, better feedback mechanisms. that really lead to the persistence and better outcomes for students and give them a more modern learning experience that they've come to expect. Doubling down on that strategy is important for us. I also think AI is going to be another driver for our long-term growth and ability to differentiate in the market. And the team's doing an excellent job working with clients to deliver exactly what they're looking for. And we'll continue to evolve and grow new tools around AI to broaden that portfolio to support clients in new and innovative ways. We don't need to go off and solve a whole bunch of new problems. I think the problems that we're working on right now are the most important problems that our clients are trying to solve today that will have the biggest impact on the learning experience. But as we see other opportunities to sort of engage on the M&A side to round out the solution, we'll take a hard look at great teams that are trying to solve really important problems that will have a big impact on the student experience. Stephen, sorry, I didn't mean to cut you off. I'll pass it to you if you want to add anything to that.

No, I think that was really well said, John. The only thing I would add is we're particularly pleased with our increasing rate of delivery of capabilities. And so building on what John said, you know, the way we're operating today, we've never been more closely aligned with our current and future customers. The co-development we're doing, the input we're getting is immensely helpful from our leading customers. And as you saw in fusion, our ability to really innovate and deliver quickly has never been better. And we're very excited about the progress that we're making.

Thank you. Appreciate the feedback, gents. Let's go back again. I'll pass the line.

Thank you. As there are no additional questions waiting at this time, I'd like to hand the conference back over to Mr. John Baker for closing remarks.

Thank you everyone for joining us on today's call. We're looking forward to updating you following our Q3 results and if we don't see you then have a great day and enjoy the back to school season. Thank you everybody.

Ladies and gentlemen, thank you for joining today's call. You may now disconnect your line.