D2L Inc.

Hello everyone and welcome to the D2L Incorporated Q3 fiscal 2025 financial results conference call. My name is Emily and I'll be coordinating your call today. After the presentation you will have the opportunity to ask any questions which you can do so by pressing start followed by the number one on your telephone keypad. I will now turn the call over to our host Craig Armitage to begin. Please go ahead.

Good morning, ladies and gentlemen. 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 the conclusion, forecast, or projection in the forward-looking information. Further, certain material factors or assumptions were applied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking information. For identification and discussion of such risks, uncertainties, factors, and assumptions, as well as further information concerning forward-looking statements, please refer to the company's annual and interim management's discussion and analysis and the most recently filed annual information form. And each case is filed on the company's profile on CDARplus at www.cdarplus.com. In addition, during this call, reference will be made to various non-IFRS financial measures, including constant currency revenue, adjusted EBITDA, adjusted gross profit, adjusted gross margin, and free cash flow. These non-IFRS financial measures do not have any standardized meanings prescribed by IFRS and may not be comparable to similar measures presented by other public companies. Please refer to the company's MD&A for the three and nine months ended October 31st, 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 statements. I'd now like to turn the call over to John Baker, Chief Executive Officer, D2L. Please go ahead, John.

Thank you, Craig, and thank you, everyone, for joining us for our Q3 earnings call. We released financial results after the market 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. I'm pleased to report that it was another strong quarter for D2L, highlighted by healthy growth in subscription revenue and significant margin expansion, as we successfully balanced growth and market share gains with improving profitability. Subscription and support revenue grew 13% year-over-year to $46.8 million in a quarter. Our services revenue increased to $7.5 million in the quarter. Annual recurring revenue grew 12% year-over-year, and for the first time in our history, ARR has surpassed $200 million in the quarter at $201.7 million. And adjusted EBITDA for the quarter was $10.4 million, and adjusted EBITDA margin was 19.2%, benefiting from strong subscription revenue growth, disciplined expense management, and a significant contribution for professional services, which Josh will explain later. Over the course of the fiscal 2025, we have meaningfully advanced our Rule of 40 performance through a combination of strong SAS revenue growth and margin improvements, reaching 25% for the fiscal year to date. This demonstrates our continued progress as a company, and I want to thank the entire D2L team for their hard work and commitment to building the market-leading product to providing truly exceptional client experiences. We continue to execute well, delivering efficient growth as we navigate the broader macroeconomic conditions. At the same time, as we increase profitability, we're making disciplined investments that will support our long-term growth ambition to be the market leader. We're staying focused on innovations that will improve the learning experience and make it easier for faculty and our clients to engage and inspire learners to achieve more than they ever dreamed possible. And these innovations are hitting the mark. This is showing in our pipeline generation, and it comes through in my discussions with customers. Over the past quarter, I've visited with many dozens of customers and prospects in key markets around the world, from the Netherlands to South Africa to Singapore and many other locations. These discussions are reinforcing how well the market is embracing our core learning platforms and our new product offerings, including our AI offering D2L Lumi, and Creator+. It's clear from those conversations that our roadmap is aligned with customer priorities and how much customers value the partnership with D2L and our role in transforming learning experiences and helping them achieve their strategic goals. In addition to this on-the-ground feedback, the impact of our work continues to be validated by powerful customer outcomes. For example, the American College of Financial Services has seen an 18% year-over-year increase in conferrals of undergraduate professional designations and certifications and a 13% bump in graduate degree conferrals through D2L Brightspace. ACFS was also an early adopter of our Creator Plus content offering tool and has leveraged our AI with D2L Lumi. And the results are that our faculty are seeing a material increase the speed of course design and creation and student outcomes are outperforming expectations with lumi we are strategically integrating ai into the everyday workflows within our learning platform and additional products to enhance them in meaningful ways while keeping humans at the core of everything that we do not surprisingly ai is at the top of the list in my discussions with customers and they love the thoughtfulness and the approach that we have taken with it As adoption increases, we believe AI will act as a broader catalyst for renewed market activity and investments in better learning platforms and experiences. We look forward to continuing this important work in building better learning moments and delivering delightful experiences across our growing product portfolio. We're building products that advance our goal to be the category leader in learning. With no debt, a strong balance sheet, growing cash flow, and a great team, We have the capacity to make the right investments, take market share in more markets, and advance a new one as we invest to win and continue to balance our growth and profitability. And with that, I'll turn the call over to Stephen.

Thanks, John, and good morning. I'll touch on our go-to-market activities and recent product milestones. It was a solid period for new and existing customer bookings despite the general macro trend of lower RFP activity. Our win rates remain high, which is supporting our growth and market share expansion. In higher education, we continue to win roughly 50% of new opportunities coming to market. In Q3, these included Prairie View A&M University, the second oldest public university in the state of Texas, which selected D2L Brightspace to support their continuing education strategy, highlighting the flexibility of our platform for all higher ed use cases. And Cincinnati State Technical and Community College in Ohio is also transitioning its 10,000 students to Brightspace, shifting from a legacy vendor. The win themes consistently highlight our platform's ease of use, the flexibility to address multiple learning modalities, and our track record and commitment to innovation, which I'll come back to in a moment. And we're pleased to see this validated by influential third parties. The Tambolini Group, a leading industry and advisory firm focused on higher education, recently ranked D2L Brightspace highest among LMS competitors for usability and innovation in its inaugural four quadrant star chart. Internationally, we continue to build our footprint in established markets and in newer ones such as Brazil and India. One of the highlights of this quarter was the addition of XP College in Brazil. an innovative organization that is focused on accreditation and learning opportunities in areas including AI, cybersecurity, and finance, and as you might expect, is very focused on the online learning experience. In our corporate market, we continue to expand the customer base in employee learning and in training organizations. We recently won Becoming Institute, a global educational and practice institute that trains nurses and healthcare practitioners to become certified trauma recovery specialists. And in Q3, we were selected by the leading organization in North America focused on professional development in the field of trauma surgery. Our team continues to establish Brightspace as the leading platform for associations and training organizations, which is reflected in a strong sales pipeline. we continue to build our product and go-to-market motion within employee learning and look forward to strong growth ahead our corporate sales efforts are supported by increasing industry recognition during q3 brightspace was named one of the top lms companies by training industry a well-regarded source on the business of learning and we're a winner in the 2024 learning systems award for best enterprise LMS by Talented Learning. It's been a highly active period in the expansion of our learning platform. This summer, we introduced two new important product packages, D2L Lumi and Achievement Plus. And we acquired H5P, to which we've added best-in-class suite of interactive engagement software and a talented team that is enabling us to double down on our creator strategy. We've seen excellent customer response to these new offerings, translating to healthy pipeline generation, bookings, and attach rates within the first full quarter from launch. John highlighted the impact of AI within his opening remarks. Customers love what we're doing with Detail Lumi. It's helping educators and training partners greatly simplify course creation and delivery while making learning more engaging and more accessible and more efficient. We're seeing stronger customer engagement and interest, and expect this to grow with further time in the market. There's also a productive quarter on the integration of H5P and the advancement of our Creator offering. The operational integration with H5P is going well, and within months, our team brought to market an all-new Creator Plus offering, which is enhanced with the power of H5P. including its deep array of interactives driving better learning outcomes. CreatorPlus gives educators and course creators the freedom to create content without the need for coding skills, and it gives administrators a cost-effective, scalable solution that enriches learning. The customer response to the acquisition has been highly positive, and we've had several larger customers, like the University of Hawaii System, adopt the new CreatorPlus product already. The pipeline is building nicely. With this expanded product portfolio, we're bringing more value to our customers and users, helping them solve important challenges. And for D2L, we're growing our addressable market and revenue opportunity. We believe these products will allow us to realize more revenue per customer as we look out to fiscal 26 and beyond. To complement our world-class products, we're seeing healthy adoption and positive customer satisfaction to our services offerings, from our learning services, technical account managers, to end user support. Thank you to the D2L services support and cloud teams that partnered with our customers on a successful back to school and fantastic year so far. I'll now turn the call over to Josh for an expanded discussion of the financials. Josh?

Thanks Steven and good morning. As John highlighted, our Q3 results demonstrate a balance of strong revenue growth with a step function improvement in operating margins. The second half ramp in profitability that we forecasted and continued progress against our commitment of balancing growth and profitability. Subscription and support revenue increased by 13% year over year to $46.8 million. Subscription and support revenue in the quarter included roughly $500,000 of accelerated usage-based revenue that was originally expected to land within Q4. Professional services revenue increased to $7.5 million in the quarter. This figure included a $1.2 million lift from reevaluating the year-to-date completion progress of certain professional services engagements. Normalized services revenue increased by $1.6 million. or 36% relative to the same period of the prior year. This reflects the advancement of several large services engagements and general demand for our professional services as customers lean into their online learning strategies. Of course, this services revenue also has a positive impact on adjusted gross profit, adjusted EBITDA, and income as disclosed within our MD&A. Lastly, it was a good quarter for new bookings in light of the market conditions, which helped drive annual recurring revenue to $201.7 million, up 12% year over year, or close to $22 million added year over year. On the margin front, we continue to show meaningful gross profit margin improvement. Subscription and support gross profit margin rose to 72.7% in Q3, from 71.3% in the prior year based on ongoing cost optimization efforts in our cloud technology delivery. A normalized gross profit margin for our professional services was 34.9% up from 22.2% in the same period of the prior year. A few quick comments on our operating expenses. Operating expenses for the third quarter were $32.6 million up one percent year over year as a percentage of revenue total opex was 60 this quarter versus 70 of revenue in last year's q3 a 1000 basis point improvement in operating scale the two largest expense categories sales and marketing and r d were relatively flat year over year and while gna expenses increased this was largely due to non-recurring legal and professional fees and transaction-related expenses from the acquisition of H5P and the transaction of SkillsWave. Excluding the impact of these costs, G&A increased 4% year-over-year. Healthy top-line growth and operating leverage is allowing us to make substantial progress on profitability and cash flow. We reported adjusted EBITDA of $10.4 million or 19.2% margin in Q3. Normalizing for the professional services lift, this equates to an adjusted EBITDA margin in Q3 of 17.4%. An income for the period improved to $5.5 million compared with a loss of $0.4 million for the same period of the prior year. We reported free cash flow of $11.3 million in Q3 compared to $14.2 million from the same period in the prior year. Free cash flow for the fiscal year to date was $27.6 million an increase of 11.6 million from the comparable period in the prior year. This strong free cash flow generation enabled us to maintain a healthy cash balance of 108 million at quarter end, up from roughly 100 million at the end of Q2. In terms of capital allocation, we continue to be active with the NCIB. During the quarter, we bought back 68,600 shares under this program. and we have renewed the NCID for another year commencing on December 9th. Our previous guidance at the midpoint called for approximately $15 million of adjusted EBITDA in the second half of this fiscal year, and we are executing well to plan, allowing us to increase our fiscal 2025 guidance again this quarter. Subscription and support revenue is now expected to be in the range of $180 to $181 million, an increase of $1 million at the midpoint from the previously issued guidance range. We are expecting total revenue in the range of $204 million to $205 million, an increase of $4 million at the midpoint from the previously issued guidance range. Adjusted EBITDA is expected to be in the range of $25.5 million to $26.5 million, an increase of $3 million at the midpoint from the previously issued guidance range. In closing, I want to acknowledge the efforts of the D2L team. It has taken focus and disciplined work to increase our top line growth rate while generating this meaningful step up in profitability. We move forward on an even stronger foundation, financially and operationally, in pursuit of our goal of long-term market leadership. With that, we'd be happy to take your questions. Operator?

Thank you. We will now begin the question and answer session. As a reminder, if you would like to ask a question today, you may do so now by pressing start followed by the number one on your telephone keypad. If you change your mind or you feel like your question has already been answered, you can press start and then two to withdraw yourself from the queue. Our first question today comes from the line of Gavin Fairweather with Cormark Securities. Gavin, please go ahead.

Thanks, guys. This is actually Graham Smith on for Gavin. So could you just give an update on the progress in some of the newer gateway countries like India, South Africa, the ones in the LATAM? Any color on that would be great.

Well, great to hear from you. And we are definitely seeing some good interest in these gateway countries. Our team was actually just in India. I personally visited South Africa in the last quarter. and many other different markets. We're seeing good momentum building. It's still a little slower than we'd like, given the broader macro conditions, but I'm very excited about the interest that the clients have in the region, both for expansion with new clients, as well as with adoption of new technologies like Lumi and Creator+. All these countries are scrambling to put in place better learning experiences, better stability post-pandemic, And we're a great partner for them to take those next steps with.

That's great, thanks. And then just when you're looking into the pipeline for, you know, Creator Plus and Lumi, what's your sense, you know, the speed of adoption and how those kind of will progress versus prior product releases?

That's a great question, Graham. So we are monitoring the attach rates pretty closely. So the attach rates for new clients are going in a very positive direction. So upwards of over 50% for new clients coming on board, buying one of these products. And then with existing clients, it's going to take a bit of time. We only released Lumi in the last three months. And so we've put in place addendums to support artificial intelligence. The next step up is really driving the procurement process for these clients. but the pipeline is building very nicely i'm excited to drive a great attach rate we're not sure exactly where it's going to land next year but what i can tell you is as i visited these clients all over the world whether it's here in the us or internationally this is the key topic is both driving better student experiences with creator plus as well as driving better efficiencies and making the workflows delightful using artificial intelligence, and the product seems to be hitting the mark. There's a lot of interest from clients now, we just have to translate that into growth for next year.

That's great, thanks. And then I guess just on the adjusted EBITDA, the margins were obviously a big positive surprise in the quarter, even when considering that additional services revenue. And, you know, the implied Q4 guide has margins coming back down to sort of more what we'd previously anticipated as a normal expansion trajectory. So maybe can you help bridge the gap on, you know, whether costs were a bit lower than expected in the quarter or if you're, you know, going to toggle up growth investments more. And I guess in what areas would you be toggling those up in specifically? Thanks, guys. And then I'll pass the line.

Yeah, thanks, Graham. Good question. So when after Q2, we had guided to 15 million of EBITDA in the second half of the year. And so we're certainly pleased with our execution against that when we look at the second half of the year in totality. And as you mentioned, we had guided to low-teen to mid-teen margins in the second half, and Q4 will operate within those levels. And Q3 did have a bit of a step up from the catch-up, as we discussed. So Q4 for us is a meaningful year-over-year increase relative to Q4 of last year. And it just continues on that path of growth and profitability and making sure we're adequately investing in, you know, the ability to win in our markets and also making sure we continue to stay focused on operating discipline.

Thanks, guys, and congrats on the quarter. I'll pass the line.

The next question comes from Doug Taylor with Canaccord Genuity. Doug, please go ahead.

Yeah, thanks. Good morning, and I'll echo the congratulations on a strong quarter. I'd like to start by talking about the subscription and support revenue guide being now at the top end of your range with a bit of an uptick in some of the metrics in Q3. That guidance suggests Q4 will look a lot like Q3, so I just want to unpack some of the sequential elements there from what appears to be steadily strengthening overall recurring You know revenue growth profile, you know anything to call out there in terms of you know Q3 to Q4 and are there any seasonal elements related to maybe H5P that we should now be considering?

Yeah, Doug, thanks for the question, I think. As you mentioned it in our history, you tend to see a bit of a left in Q3 with semester start new customers going fully online and then Q4 you know tends to sort of piggyback off that and. The one thing that we're mindful of in Q4 is the foreign exchange environment. You know, the strengthening of the US dollar relative to our non-USD revenue as we look out into Q4 certainly plays a role as well. But yeah, it's really a combination of Q3 being a step up from semester start and then Q4 having a bit of foreign exchange that we're aware of and making sure we're factoring.

That same foreign exchange, I was going to ask about that anyways, should provide some sequential benefit to your bottom line, though, in Q4 as well, if I'm not mistaken. Yeah, there's a benefit on the bottom line. You're right. Next question, professional services, even if you back out the $1.2 million. This was still one of the strongest quarterly performances I think ever, if not in several years. I guess I just want to ask what we should tie that to if it was just the sequential or the seasonal launch of a couple of new customers or if there is any other way that we should make an inference on your growth profile or the number of new customer wins or anything like that that we should tie to what we saw in P.S. revenue this quarter.

Steven Moawad- yeah this is Stephen I think the PS strength is really twofold obviously our new logo wins and are also attached to our new products is helping drive demand for PS. Steven Moawad- And, more importantly, our professional services skill and expertise is helping our clients accelerate their innovation and transformation. Steven Moawad- And through seeing a real strong uptake and really customer delight with our ability to help them implement their strategies. and make the most of their Brightspace and other D2L product licenses. It's a combination of two.

So would you tie any of this to the Lumi and or the Creator Plus new suite of products? Is there additional training and elements there that you would tie that to?

Not so much training as they're very intuitive products to use. It's really scaling their ability to transform and their ability to innovate their curriculum You have to remember, approximately half of D2Lers are former educators, and we bring a really strong academic strength to our ed tech practice. And we're able to share that knowledge base with our customers as they reimagine their curriculum and reimagine their learning environment. And so it's us as partner to their transformation is a major driver of this work.

All right. Thanks for your insight, Stephen. I'll pass the line.

Thanks, Doug.

The next question comes from Susan Sukumar with Spiegel. Please go ahead.

Good morning, gents, and congrats on a strong quarter. For our first question, I wanted to touch on the competitive landscape. Just curious what you're seeing in the markets today. I mean, you're clearly still seeing high win rates sustained, so wondering what competitive response you're seeing in the market, And, you know, given the recent Canvas acquisition, you know, are you seeing potential for some distraction there? And, you know, could that fuel more displacement opportunities than you've seen in the past?

That's a great question, Susan. I think our effort right now is really just staying focused on our core mission. We're going out there and helping as many clients transition from these legacy technologies as possible in all the markets that we're competing in globally. You know, we're definitely still seeing the macroeconomic conditions still persisting. I think the election cycle probably did not help in the quarter, but we anticipated that. That said, the early indicators for increased demand are there. Our pipeline is growing across these different markets. We're seeing interest from all of our competitors' client base. And so we now need to translate that over the course of the next year, two, three. And so our teams are very focused. We're trying to drive this balance of growth and profitability, but we're really delivering products and services that are winning in the market. That's showing up at our win rates. It's showing up in the satisfaction with our clients and it's showing up now in efficacy studies and impact studies that we're doing with clients on driving better outcomes for them. I think that's going to spur demand in the future, whether it's the work that we've done around artificial intelligence, pulling away from all of the competitors set on AI. I really think the impact of AI combined with Creator Plus is going to be transformational for many organizations. We just put out a press release, for example, this past week, talking about how graduation rates have gone up between 13% to 18% for one of our clients. These are big impact measures, and if you're a university and you can retain millions in revenue through investing in the learning experience, and you see these types of step function improvements, it has a big impact in your organization. And so those investments that we are making, even though we're balancing this growth and profitability, are winning in the market, and we just now need to translate that to more and more clients and more logos next year.

Gotcha. Great. On the continued pipeline expansion and win rates, Um, can you talk a little bit about, you know, how having H5P now under the umbrella and, you know, your new AI centric product launches, Lumi, Achievement Plus, how are those helping with your net new business pipeline? Is this becoming more of a focus point in conversations with prospects?

It is it's actually been a fantastic acquisition it's really helped us accelerate our creator plus roadmap by several years so going from you know, several interactives to now closer to 60 year interactives in the actual platform. And I know it's kind of hard to understand the impact of that, but if you look at the efficacy studies with one of our clients where they did a controlled study showing here's a course with Creator Plus and here's one without, same students, just segmented into different cohorts, same educators, same everything, trying to control as many variables as possible. There was a significant increase in number of students getting A's and B's. The time it takes to actually build this content is negligible. Faculty that are experiencing these tools are delighted. They're building content that looks amazing, is mobile friendly, fully accessible, and really engages students and gives them a sense of feedback on the page. That has a meaningful impact on improving the student's experience, which drives results for the client. And H5P really pulled that roadmap forward. So that's first. That'll help us with win rates. That'll help us with product sales to existing clients. But really importantly, it's also opening up doors to clients that never used Brightspace or never knew about D2L in the past. H5P had about 200 million people globally using their product to build these interactive experiences. And we're now reaching out to many of them to see if they want to explore the broader portfolio that we can offer. So that cross-sell motion is relatively new for us. But H5P community is incredibly powerful and I think they'll have a big impact on our business over the long term.

Okay, great. And then the last question for me, guys, is really on the M&A side of things. As you think about your product roadmap going forward, could M&A still be a key lever to tap, you know, as you look at accelerating some of your product initiatives or potentially addressing some white spaces in the overall offering?

Yeah, no, great question. And we are a firm believer, as we've demonstrated with disciplined M&A. I mean, just stepping back and building on what John said, we are the only competitor out there who has just doubled down on helping our customers focus solely on that learning moment, driving better student outcomes, helping faculty and instructors in corporate, higher ed, and K-12 optimize their impact and maximize their time. And we look at M&A through those lenses, and H5P was a great example of that. H5P not only helps the business, but more importantly, helps our mission of transforming the way the world learns. We are active in the marketplace. We're very aware of opportunities that are out there. Thanks to our operating efficiency, we're in a really good position to take advantage of that for the right opportunity. And so disciplined M&A is certainly on the agenda. And we're certainly always out there evaluating the possibilities. But right now, it's about focusing on creating the value of the M&A that we have done. And we're really pleased with that. Those have really helped our customers achieve their goals. And so again, it's about M&A to create value and discipline in the learning moment.

Great. Perfect. Thank you for taking my questions. I'll pass the line.

The next question comes from Brian Peterson with Raymond James.

Brian, please go ahead.

Thanks, gentlemen, and congrats on the strong quarter. So, John, you know, I'd love to understand your thoughts as we head into 2025. I know we had a little bit of a macro slowdown in 24. Your win rates are really, really strong, but any help in understanding what that RFP pipeline looks for calendar year 25?

Patrick Corbett- yeah great question Brian you know it's it's hard to say that the macro conditions are going to change instantly and in the next year. Patrick Corbett- So we're not you know we're not planning on that we've got to make sure that we're planning our business for the environment that we're seeing here today. Patrick Corbett- That said, I am seeing interesting new momentum in the market. As I've traveled around the world for the last year plus, I can tell you there's been nothing but conversations around AI and the adoption of our AI technology. That, I think, could become a driver for new logos coming to RFP next year. I think there's a client satisfaction issue with all of our competitors right now in the market. That could become another driver for change and restore the RFP market to a bit more of a normal level. I also think the work that we've done with Creator Plus, I know it seems like just one tool in the tool belt, if you will, but I've never seen these types of impact numbers on improving educational outcomes. And if you can roll out a reasonably priced tool and have this kind of impact on improving student educational outcomes or making it more efficient for your corporate learners to get through their programs, It is a tool I would race to embrace as an organization, especially if you're facing tougher times yourself in terms of austerity in certain parts around the world. These types of efficiency tools that drive better outcomes are a winning investment. And so I hope in the new year, we're working hard at turning hope into reality, making these new products real drivers for RFP activity. It has not shown up yet, Brian. So there's still work ahead of us to see that translate.

I appreciate the color, John. And maybe just a follow up, like as you guys have built up a broader product portfolio, is there any shift in the go to market internally, maybe to focus more on a back to base motion? Just any thoughts on that? Thanks, guys.

That's a great question. Our client sales team has always had capacity to sell more to existing clients. But we don't really think about selling more to existing clients. We think about working with our clients to figure out what are the toughest problems they're trying to solve. And then we're bringing these tools to bear to address those concerns. And I don't know about you, Brian, but when I talk to clients, driving better student outcomes, so more students getting A's and B's is high on the list. driving better retention, which is what we're seeing with these tools. We had one client with a bottleneck course go from 30% completion rate to 85%, nearly tripling. These can have massive impact on these organizations as they scale it across a university, a company. And I think the client sales execs are excited about the opportunity that they're seeing. That's without a doubt. Every interaction I've had with them, no matter where I am in the world, tells me that the products are hitting the mark with client demand. We just now need to, you know, we need to now translate that into a procurement to getting them adopted and driving better attach rates. And that's the work that we have in the next year, two, three down the road.

Very well said. Thanks, John.

Thanks, Brian.

The next question comes from Paul Tribner with RBC Capital Markets. Paul, please go ahead.

Thanks very much and good morning. I just wanted to discuss the longer term growth and profitability algorithm. The press release mentions rule of 40. Is that the level of performance that you're targeting or you'd like to target in the long term?

Yeah, thanks, Paul. It's a good question. Yeah, certainly that balance growth and profitability orientation for us is something that we will continue to build upon and scale. And so we do feel like we're making really strong progress against that goal. And we look back over the past 18 months like that is a commitment we made and we've stayed true to that to continue to increase profitability while continuing to make disciplined investments in growth. And we very much see these two things as complementary to one another. And so for us, it is continuing to move ourselves up on a sort of consistent trend line on that rule of 40 balance. And so, yeah, you'll continue to see more of that from us over the medium term.

That's great to hear. And the quote is quite solid across the board. One thing I wanted to hone in on is international revenue. It looks like it was a bit of a slower quarter this quarter. Is that primarily FX or is there something else other than FX that may have had an impact on international revenue?

Yeah. So thanks, Paul. We've been talking about international as 15 to 20% growth. And so the quarter kind of fell within that. that range. And so we continue to see a really strong opportunity within international. The other thing I'll point out is, you know, there is always some sort of service revenue and FX in comps, but continues to execute within that 15 to 20% range continues to be a really key focus for us moving forward. And we continue to see really good bright spots as we penetrate further in existing markets, but also you know, start to open up new opportunities as well.

All right. Thanks for taking the questions.

The next question comes from Sanos Moshapoulos with BMI Capital Markets. Please go ahead.

Hi. Good morning. Just to clarify, the 1.2 million of – Rational services revenues, did that fall entirely into the U.S. region, or was that distributed across multiple regions?

Yeah, no, that's right, Thanos. It was a vast majority within the U.S.

Great. And you called out half a million of usage-based subscription revenue that was pulled from Q4 into Q3. Can you just provide more color on that?

Tristan Marquez- yeah sure I mean so from time to time, you know some customers will really ramp up given programs and that can drive sort of. Tristan Marquez- usage and adoption beyond what they had sort of contracted for, and so it can be a little bit more challenging to predict, but we thought we had a good read on that happening in Q4 and you know it happened in Q3 so there's there's this sort of a little bit of a. a timing thing there that we wanted to make sure folks were aware of as they look at the Q3 versus Q4 comp.

Great. And finally, just building on that too.

Oh, yeah.

Mm-hmm. Oh, sorry, Sam. I didn't mean to interrupt there. I just want to add a little bit more color. We are, generally speaking, seeing a really nice trend with, if we look at our top 100 clients in terms of increased platform usage this fall. And so I think that's yet yet another sign that there's a growing demand for online and for the types of experiences that we can provide in the traditional class. And across upscaling of the workforce, all these different modalities are starting to kick into higher gear. But I was surprised to see such consistent step up for adoption across all our client base. It was really nice to see this fall.

Great. And finally, can you provide some more color on the recent CSAW partnership, just recognizing that they have quite a large footprint?

Yeah, well, I think what you're seeing in certain markets around the world, our K12 footprint is, you know, in some cases over 50% of the market. And so you're seeing a growing number of K-12 partners coming to the fore, just trying to make sure that they're doing the best job that they can to service a joint client base. And so Seesaw has been a great partner. Looking forward to doing a lot more with them and growing our businesses together.

All right. That's fine. Thanks.

The next question comes from Kiran Sriratharan with A-Capital.

Please go ahead.

Hey, morning, guys. Hey, morning, guys. Congratulations on the call. Thanks for taking my questions. I'll just start with this one. Can I have some commentary on what you're seeing with consumption patterns with the new school year? We thought gross margins are influenced here, but on an adjusted basis, it actually jumped up sequentially. So maybe you can unpack that relationship as well.

Yeah, no, we continue to make optimizations to drive gross margin in a good direction. So even with increased adoption, we are seeing gross margin still ticking in the right direction. And we have a long tail of things that we're continuing to do there to continue to improve gross margin. The increased adoption is, I think, a general trend across all of our clients. If I look at the top 100, 95 of the top 100 are seeing a major step up in terms of adoption of the platform. And I think as we look at the usage trends, a lot of it's attached to supporting learning in all these different modalities. In the class, online, combination of the two, new growth factors for institutions like workforce upskilling. You're seeing corporate adoption growing in terms of being able to support upskilling their people across the companies, both in the office as well as online for remote. And so this good general trend across all segments, all markets globally, and it's really good to see. Clients actually use our product and they love the experience and it's actually driving better results. These are good things. And then our engineering teams are doing an amazing job continuing to optimize the platform to drive the gross margin in a good direction as adoption is hitting all-time highs.

Thanks, John. And I'll probably... follow on with a question on the corporate markets that you were just talking about, just your growth and product strategy there. How would you compare the pace of growth versus what you expect from the academic market and what are some of your priorities with regard to the evolution of that product offering into that market?

Yeah, no, we definitely see corporate market growing faster than our core education market, not to take away from our education market. Our education market is growing very well and win rates are very high. But the corporate market really likes the product, whether it's our training organizations that are using it to support the best possible education, professional development for their memberships, or employee learning that's using it to drive better onboarding, better upskilling for the people, using our competency-based engine to do things like competency-based compliance, which is a far better way to do compliance within these large companies. These trends are going to continue. I think as we continue to invest in the product, opening up new use cases, being able to support multiple more integrations, I think you're going to see our strengths in corporate continue to grow in the years ahead. So we're early days in corporate, very happy with the 15 to 20% growth rates that we're consistently putting up on the boards. But as we continue to invest in that product to support, and again, reminder, it's one product across all of these segments that really reinforces itself. But as we continue to invest, I think you're going to see your growth continue to take up in that space.

Thanks, John. And then finally here on the inorganic strategy, you know, you previously mentioned how the acquisition of H5P pulled forward your product roadmap there. Just curious as you consolidate the market and given the success you're seeing with H5P, if there's any other opportunities you'd maybe call out as low-hanging fruit that you would like to acquire and integrate as you look into the future?

So our acquisition strategy, as I said before, is really focused on the learning moment. We're not going to comment, obviously, on specific targets. But we really look at how we can best service the needs of our corporate or higher ed and K 12 customers of our association. How we can drive that learning intimacy and learner engagement, how we can help optimize and make more efficient engaging course development and delivery. And how we can use technology to great personalized feedback loops. Those are some of the themes that we look for both in our own development and in our M&A opportunities. We clearly know ease of use is critical. We're a market leader in ease of use. We're a market leader in accessibility. Those are other factors we look for. But it really starts with a customer value-centric view and our ability to really scale that. And that's what we're actively in the market evaluating.

Thanks, Aaron. I'll pass it on.

Our final question today comes from Daniel Chan with TD Cohen. Please go ahead.

Hey, good morning. John, you talked about the election potentially having an impact on RFPs in the quarter. Now that a decision has been made, any budgets or policy changes that we should be mindful of going forward?

Well, I think there's definitely going to be some policy changes in the U.S. market. We're going to try to navigate those waters. But I am optimistic, I always am, by the way, Daniel, that we can navigate it very well. At the end of the day, we're here to support our clients through whatever transition they're going through. But I've seen consistency in terms of a push for better educational outcomes for all students that they're serving, better retention, better engagement, better productivity measures, adoption of AI to drive more efficiency and to transform the learning experience. I don't see that broad trend changing. But yes, election cycles have always had sort of a macro impact. And what's healthy is we are seeing great pipeline build. We're seeing really satisfied clients. They're coming to us to drive better adoption of new online programs and courses through our services teams. All the indicators are showing a positive return to

the market in at some point in the future we're just not sure exactly when the macro conditions are going to change but certainly seeing the early indicators that there is change happening thanks for that john and just on that improvement potential improvement any of that coming from the take private of your two main competitors just wondering if you're seeing any change in the increased inbounds or if there's an opportunity for you guys to lean into some growth there

Oh, I think whenever there's change in the market, it has a temporary downward impact. But longer term, I think it actually will have a really positive impact for us. If our competitors do what they've done in the past, which is pull back on investments in R&D, not deliver as many product innovations, drop customer support and service like we've seen consistently in the past as well, we've got to go through these transitions or put pricing hikes into place. you know, the traditional standard playbook that we've seen play out now multiple times in our space, that will be a very positive driver for folks to look at D2L as a clear winner in this market. And that will continue to drive our win rates up. And I hope our P volume will take back up to a normal rate as well. And that, you know, I think you'll see people give people time to sort of digest the change. But if you're not seeing the results, I think you'll see the market respond pretty quickly in the course of the next year or two.

Thank you. And then, Josh, the free cash flow continues to take up here. We talked about M&A. You reviewed your NCIB. Just thoughts on priorities for capital allocation. Thank you.

Yeah, thanks, Dan. I'd say we're constantly sort of evaluating the appropriate mix. But for us, I think what you've seen the last year of making use of the NCIB buyback program and then really leaning into that opportunity as a platform and some of these M&A opportunities to add incremental value to the customer base, you'll see that same sort of mix play out here. over the near term, so it'll be a balance of the buyback program and looking for opportunities inorganically to add value to the customers and help grow our business.

Thank you.

We have no further questions, and so I'll hand the call over to John Baker for closing comments.

Well, thank you, operator, and thank you, everyone, for joining us on the call today. We're looking forward to updating you in the new year following our Q4 results. And in the meantime, I hope you all finish the year strong and enjoy the holidays. Thank you.

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