D2L Inc.

Hello everyone. Thank you for joining us and welcome to D2L Inc. Second Quarter 2027 Financial Results Digital Conferencing Call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. I will now hand the conference over to Craig Armitage, Investor Relations. Craig, please go ahead.

Good morning. Thank you. Listeners are reminded that portions of today's discussion will include statements to contain forelooking information. Any such statements are subject to risks and uncertainties that could cause actual results to differ materially from a conclusion, forecast, or projection in the forelooking information. Further, certain material factors or assumptions were applied in drawing a conclusion or making a forecast or projection as reflected in the forelooking 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 discussion and analysis and the most recently filed annual information form, in each case is filed under the company's profile on CR+. In addition, during the call, reference will be made to various non-IFRS financial measures, Thank you for joining us. 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 Mr. John Baker, Chief Executive Officer of D2L. Please go ahead, John.

Thank you, Craig, and good morning, everyone. Thank you for joining us for our second quarter fiscal 2027 earnings call. We released our financial results after market closed yesterday. and you can find those materials in the investor relations section of our website. Please note that all amounts discussed today are in US dollars unless otherwise stated. I'm pleased to be joined this morning by Josh Huff, our CFO. Our second quarter results reflect both strong bookings quarter and the anticipated impact of the previously disclosed US K-12 customer churn. While this affected our headline growth metrics for Q2, the underlying performance of our core business remains solid. and with this headwind now behind us, we expect improved revenue growth and profitability as we move through the second half of fiscal 2027. For the second quarter, subscription and support revenue increased 2% to $50.9 million. Annual recurring revenue, or ARR, increased 5% to $223.4 million. Adjusted EBITDA was $6.5 million. and we repurchased approximately 2 million subordinate voting shares during this quarter, all maintaining a strong balance sheet with $106.4 million of cash and no debt. As you will see in our Q2 disclosure, we've adjusted revenue guidance for the full year based upon softness in our advisory services and the delayed launch of a new customer. Josh will get into this in more detail shortly. Importantly, excluding the K-12 market, ARR grew more than 10% year over year, our fourth consecutive quarter of double-digit ARR growth across our core higher education and corporate markets, which account for more than 90% of our revenue. This performance reflects healthy bookings, strong competitive win rates, and our success in expanding customer relationships through the broader G12 platform. In our largest market, higher education, Our competitive position continues to strengthen. We continue to displace each of our major competitors as institutions globally look to modernize their learning environments and prepare for the future of learning. In North America higher education, our new customers in the quarter included the School of Professional Studies at Brown University, a member of the Ivy League, as well as Golden Gate University and Southwestern Michigan College. These wins reinforced the importance of our platform and product roadmap among institutions as they make big, long-term decisions about their learning technology. Internationally, our momentum continues to build in key markets. During the quarter, we added customers including the Continuing Professional Development Unit at the University of Leeds in the United Kingdom, Van Lang University in Vietnam, and the IESB in Brazil. And subsequent to quarter end, UNSW Sydney selected D2L Brightspace as its next generation learning platform. UNSW is one of the top 20 ranked universities globally. This is a flagship win for D2L as we start Q3. We see a significant long-term opportunity internationally as institutions around the world modernize their learning platforms. Before moving on, I'd like to briefly touch on the K-12 project. This has been a challenging last 12 months with the U.S. K-12 market where we've experienced significantly more churn than normal. We don't take that lightly, and we're committed to delivering better results moving forward. Beginning in Q3 of this fiscal year, we expect the retention and growth trends to continue to normalize in K-12, and we're pleased to report that our remaining K-12 customer portfolio is strong. Engagement remains healthy, and we're seeing encouraging new opportunities and new logos emerge. Beyond education, we further expanded our presence in the corporate market. New customers this quarter included the American Society of Safety Professionals, the Royal College of Anesthetists in the United Kingdom, and the Public Service Alliance of Canada, one of Canada's largest unions representing close to 250,000 workers. These wins highlight our ability to support workforce development, professional education, and member learning at scale. New customer acquisition remains an important growth driver and we're also creating value through the expansion of the D12 platform with our existing customer base. Creator Plus continues to gain traction as customers look to create more engaging, interactive and accessible learning experiences, highlighted by an adoption rate of more than 35% among existing customers. We're also seeing increasing momentum for our AI offering, D12 Looney. During the quarter, D12 Looney surpassed 5 million of ARR and is attached on greater than 40% of new customer deployments and we're working hard to broaden adoption with existing customers as well. This demonstrates that AI is contributing to both sides of our growth strategy. It's strengthening the value proposition for new customers while creating additional opportunity to expand relationships with existing customers. We also see evidence that educators are moving beyond the initial exploration and discussions about AI to now focusing on practical implementations. In research conducted by our team earlier this year, educators consistently emphasized the importance of AI tools that improve learning outcomes, enhance teaching effectiveness, and are deployed in a trusted and responsible manner. We believe this feedback validates our strategy of embedding AI in ways that help educators and learners achieve better outcomes while maintaining strong foundations of trust, privacy, and accessibility. These themes will reinforce at Fusion 2026, our annual customer conference, where we welcome more than 1,100 attendees from all around the world. One of the clearest messages from our customer conversations was that institutions are looking for a practical path forward as AI continues to reshape learning. Customers recognize the potential of AI, but they want to move forward thoughtfully to focus on responsible implementation, protecting institutional and learner data, and ensuring that technology contributes to meaningful learning outcome improvement. More broadly, institutions are looking for a trusted partner that can provide both stability and innovation as they navigate this evolving learning landscape. At Fusion, we introduced new AI-powered innovations and platform enhancements across C12 Brightspace, Lumi, Gator Plus and H5P. These included new capabilities designed to help customers transform existing learning content, to be more engaging and to improve outcomes, translate content into new languages, and provide learners with a looming learner mode for more personalized support and embedded knowledge checks. Overall, we're encouraged by the performance across our core markets, and while our current growth profile has been affected by the previously disclosed U.S. K-12 attrition, we continue to see strengths in bookings, customer expansion, and AI adoptions. We are well positioned to improve revenue growth and profitability through the balance of fiscal 2027 and into fiscal 2028. With that, I'll turn the call over to Josh to review the financial results and to talk about their look in more detail.

Thanks, John, and good morning, everyone. As John noted, our second quarter results reflect continued growth across our core markets, together with the anticipated impact of the previously disclosed U.S. K-12 customer turnover. As expected, Q2 represented the period of greatest impact on our reported growth rates. While these factors affected our near-term financial performance, the underlying performance across our core higher education and corporate markets remained solid. Total revenue increased 2% to $55.6 million. Subscription and support revenue increased 2% to $50.9 million, reflecting growth from new customers and expansion with existing customers. partially offset by higher than typical U.S. K-12 churn experienced over the past 12 months. In addition, the current quarter was affected by the delayed go-live of a new customer deployment, resulting in approximately $0.8 million impact to subscription and support revenue in the quarter and is anticipated to be live by the end of this fiscal year. Annual recurring revenue increased 5% to $223.4 million, and in constant currency increased 6%. Reported ARR in Q2 was impacted by the final major component of U.S. K-12 churn as previously disclosed and in line with our expectations. As John highlighted, excluding the K-12 market, ARR increased 10% year-over-year and on a constant currency basis increased 11% year-over-year. Professional services and other revenue was 4.7 million. consistent with the prior year. We continue to see a softer demand environment for advisory engagements within our professional services practice while remaining confident in the value these services can provide to clients. Turning to margins and profitability, adjusted gross margin was 70.4% compared with 70.6% in the prior year period. As previously disclosed, the database technology work was completed during the second quarter. including the associated incremental costs incurred over the past 12 months. This positions us to report improved gross margins in the second half of fiscal 27 and moving forward. Adjusted EBITDA was 6.5 million or 11.6% of revenue compared with 7.5 million or 13.7% of revenue in the same period last year. Adjusted EBITDA reflected the previously discussed revenue impacts as well as planned investments in sales and marketing, including our annual Fusion Customer Conference held in Q2. Importantly, the broader progression of our business remains consistent with the first half, second half framework we outlined at the beginning of this fiscal year. As we move through the second half of fiscal 27, we continue to expect higher revenue growth, expanding gross margins, and meaningful adjusted EBITDA margin expansion. The midpoint of our updated guidance implies approximately 7% subscription and support revenue growth and a 16% adjusted EBITDA margin in the second half of the year, a significant improvement relative to our Q2 results. Moving to net income, we reported a net loss of 3.1 million in the second quarter, compared with net income of 2.7 million earned in the prior year period. The primary driver of this change was a non-cash fair value loss of $4.8 million related to the loan receivable from SkillsWave. As required under IFRS, the loan is measured at fair value each quarter. Updated assumptions reflecting SkillsWave operating results, financing environment, and credit risk resulted in the fair value being reduced to nil as of July 31st. This fair value adjustment does not change the underlying loan which remains in place and secured. Turning to cash flow, cash flows from operating activities were $28.8 million in the second quarter compared with $15 million in the prior year period. And free cash flow was $28.5 million in the second quarter compared with $15.2 million for the same period last year. The year-over-year increases primarily reflect working capital movements We believe the trailing 12-month period provides a more representative view of the underlying cash generation as it normalizes working capital movements between quarters. For the 12-month ended July 31st, free cash flow was $42.7 million versus $24.1 million in the comparable trailing 12-month period, showing significant progress in scale. Our financial position remains strong as we ended the quarter with $106.4 million of cash and cash equivalents and no debt on our balance sheet. In terms of capital allocation, we completed our previously announced substantial issuer bid during the quarter, repurchasing approximately 1.9 million subordinate voting shares. We also repurchased about 131,000 shares under our normal course issuer bid during the period. As a result, we repurchased a total of approximately 2 million shares during Q2 and will continue using the NCIB over the balance of this year. Looking across a longer period, we have now repurchased more than 3 million subordinate voting shares through the SIB and NCIB combined over the trailing 12 months. This represents 11% of the opening subordinate voting shares outstanding during that period. We believe our use of these programs reflect a disciplined approach to capital allocation. We have been able to meaningfully reduce our share count and return capital to shareholders while maintaining a debt-free balance sheet and significant financial flexibility to continue investing in our organic and inorganic growth opportunities. Turning to our outlook, we have revised our revenue guidance for fiscal 27. We now expect subscription and support revenue of $211 million to $213 million representing growth of 6% to 7% over fiscal 26 compared with our previous range of $212 million to $214 million and total revenue of $228 million to $231 million representing total growth of 5% to 6% over fiscal 26 compared with our previous range of $231 million to $234 million. The revised revenue outlook reflects softer demand within our advisory professional services practice as well as the delayed go-live of a new customer deployment and the corresponding impact on subscription and support revenue in the current fiscal year. Ongoing optimization of our cost of goods sold and operating efficiencies is offsetting the impact of the lower revenue outlook allowing us to maintain our adjusted EBITDA guidance of 33 million to 35 million, representing an adjusted EBITDA margin of approximately 15% at the midpoint. As John highlighted, we continue to expect meaningful improvement in our financial profile during the second half of fiscal 27. Looking beyond the current year, our fiscal 28 target operating model remains unchanged. We continue to target revenue growth of 10% to 15% and adjusted even a margin of 18% to 20%. We recognize that achieving these targets requires a meaningful step up from our fiscal 27 performance to date. Our competence is grounded in four consecutive quarters of double-digit ARR growth in our core markets, a strengthening competitive position, continued international expansion, increasing customer value through products such as Crater Plus and D12 Lumi and the diminishing impact of the churn and COGS headwinds that have affected our reported results the past few quarters. These targets remain a clear priority for the team, and our focus is squarely on executing the plan to deliver higher revenue growth, expanding margins, and increased cash generation. With that, we'll open the call to questions.

We will now begin the question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Erin Kyle with CIBC. Erin, your line is open. Please go ahead.

Hi, good morning. Thanks for taking the questions. I guess first one here is just on the K-12 churn in the quarter. I think that the magnitude of the churn was larger than what we had anticipated. So maybe if you can kind of comment on the size of the contract there or average contract size across K-12 in your broader markets. And then maybe just as a follow-on, do you have any other large contracts that are similar in size to this one that could be up for renewal in the next few quarters here?

Yeah, as we have discussed in previous quarters, Q2 effectively had that sort of final tranche of churn during this sort of 12-month period where we've had higher levels of churn than normal. And so the amount of churn from K-12 in the quarter was actually in line with our expectations and plans. We are pleased to report that go forward, we do expect to return to normal retention and growth effective Q3 and sort of have this ARR headwind behind us. I think the other sort of mechanical thing within ARR is always FX as well. So in the quarter, just to be clear, there was a $2 million haircut on ARR from FX. And so When you sort of reconcile each of those data points, we actually added net $6 million of ARR from our core business in the quarter, which is a decent Q2.

And then, Aaron, just to add a little color to the K-12 market, I've spent a lot of time visiting other clients over the course of the last 12 months as well, and by and large, the client base is very solid. So there are other large clients, you know, for example... Most of Canada uses K-12 as a learning platform, New Zealand, New York City, many others. And so there are still large clients, but the clients that remain are very solid, growing and engaging heavily in terms of new technologies to support a better learning experience. So we're confident in our go-forward strategy with K-12. And keep in mind, this is now less than 10% of our overall revenue.

Maybe just a follow-up to that, John, just on the differences in the U.S. K-12 market and Canada and internationally, is there anything you can call out more specifically on why you have the confidence that this is contained to U.S.? The nuances of the U.S. K-12 market, I imagine, are different than Canada, for example, so maybe if you could just put some color around that.

Yeah, I think just generally speaking, it's no secret that the overall U.S. K-12 ed tech spend is down significantly year over year. In our case, what we're seeing in markets like Canada, Canada's ranked number three in the world, for example, in education for K-12. There's a real investment in making sure that their students have the best technology to support a really great learning experience that helps them achieve even better results year over year. and we're seeing that in other markets around the world. It's not to say that that's not existing in the U.S. I just want to be clear on that. There's just been a general pullback on technology spending across the U.S. in the course of the last two years. And at some point, we hope that that will bounce back. And in the meantime, we're digging in deeply with the clients that really care deeply about improving educational outcomes for their students.

That's helpful. Thank you. And then maybe I'll just ask one more on the deferred implementation that you called out. Can you expand a bit more on the reason behind that deferral? And then in your view, is the delayed implementation or do you feel it's company-specific or customer-specific to that particular account? Or do you think it could be expanded to other contracts as well? Okay.

This is very specific to one individual account. It's a very large one, as you can tell by the change in guidance for the year. It's just sliding the go-live into end of Q3 from where we expected it to be much earlier. And it's just a very large, complex implementation that required custom software development. And there was a fairly significant change of scope of that software development. So until that implementation is done, it's very hard to sort of go live with all this, you know, in this case, close to a million users. And so when that does go live later this quarter, we're quite excited to start to recognize the revenue after that point forward, which is part of why we're seeing the confidence in the revenue acceleration at the end of the year.

Thank you. I'll pass the line.

Your next question is from the line of Doug Taylor with National Bank. Doug, your line is open. Please, go ahead.

Yeah, thank you. Good morning. John, I'll ask you to maybe comment on the pipeline. You obviously had a strong Q2 for core higher education growth. Can you talk about the momentum and the conversion rates that you think about and what's required to get to your refreshed guidance now for this year as we think about next?

The guidance change for this year really has very little to do with the pipeline. It's really just recognizing revenue in-year. What I'm excited about is actually the pipeline. Even in a tough macro market with RFP volume down, we're seeing our web rates continue to climb in our core higher education market in particular. We're seeing flagship wins like UNSW. Sydney is a great example of the top 20 university globally. and it's not just in one region we're seeing wins in many different regions around the world and so I'm very bullish on the team's work on the pipeline we're not done yet Doug there's a big effort ahead of us to really fire up our business cycle to encourage clients to move to an AI first learning platform but I'm confident over the course of the next few months we'll get that really started to fire up because, you know, what we're seeing now with our clients is close to an order of magnitude improvement. So the combination of our learning services with Lumi, with Creator Plus is really having a major impact on improving educational outcomes. So completion rates are going really high up, which for a university, for example, if they can improve completion rates for a retention of students by 10%, that's tens of millions, possibly hundreds of millions for some of our bigger clients. And so that's compelling just by itself, but we're also safe. All of these are going to turn into a tailwind for us as we look ahead. and that's starting to show up in the pipeline. We're seeing healthy pipeline generation but the work's still being done to really start this business cycle in the market. That will drive our P volume with our high win rates. That will be a very compelling event.

You've talked about these high win rates and a lot of the success you've had has come I guess at the expense of some of your legacy competitors but as you use Lumi and AI as A competitive differentiator in future new wins. Can you maybe talk about whether there's been a change here in the budget that some of these institutions are willing to allocate towards investment in that technology versus just replacing legacy systems?

I think that's the product we had to unlock back after this year. Thank you for joining us. Sticker Price Issues, our technology. Key now is trying to figure out the unlocks to get them to buy as quickly as possible. We're seeing good attach with new clients, which is very encouraging, over 40%, buying it right out of the gate. We're seeing the attach rate for existing clients picking up, but we want to see it pick up much, much faster. I know it sounds strange, but we're happy with the growth that we've seen so far in the first half of the year with Looney, but the back half, we're hoping to really start to accelerate the growth.

Okay, one more for me. Maybe this one's better suited for Josh. I think you've done a good job articulating the short-term headwinds that you've faced in recent quarters. You also did, in your prepared remarks, reiterate the 10% to 15% growth objective as we think about next year. You do have some lingering stubs you'll be lapping from K-12, FX, and perhaps the P.S., Professional Services Setup. Can I maybe just get you to talk through some of those things, the puts and takes, as we think about the growth profile into next year?

Yeah, absolutely. Appreciate the question. In Q2, as we mentioned, sort of always had a bit of this trough dynamic, and so as we looked forward into the second half of the year, we'll start to see some accelerants. This back half, implicit in the guidance, you kind of can map into a 7% subscription growth in the second half and a 16% EBITDA margin in the second half. But also, as you mentioned, those headwinds abating on the K-12 front, we'll see that most readily in ARR. starting Q3 and beyond. It'll effectively be a sort of clean representation of ads. And then on the margin front, the COGS work has actually sort of exceeded our expectations slightly. And so we start to see in the back half of this year already a bit of a step up in our margin profile and that will continue into next fiscal. And I'd say more importantly, it really comes down to looking at Thank you so much for joining us. with our plans to step up into that F-28 operating model, and certainly we're committed and focused as a management team to getting there.

Thank you. I'll pass the line.

The next question from the line of Gavin Fairweather with Cormark. Gavin, your line is open. Please go ahead.

Oh, hey, good morning. Thanks for taking my questions. Maybe just to start on Australia, you know, I think you've added some sales investments in recent quarters, and nice to see this. UNSW when coming through subsequent to quarter ends. Maybe you can just refresh us on your view of the market structure in Australia and your ambitions in that market in years ahead.

Yes, it's not just Australia. Australia is one of many markets which are now really coming to life for us as a company. What's interesting in Australia is up until recently we did not have a lot of wins in that region in higher education. We had great clients, great proof points The market was largely Canvas and Moodle, and we're now starting to see the momentum shift in that market to us with the most two big wins. UNSW is a fantastic one, a great school, very committed to really having a big impact on improving the student learning experience, a very prestigious institution, and I think it's a great partner. University of Otago, another great example of New Zealand, just for some fantastic new lands in that region, really great clients. and I think it's also a good example where all these institutions are also using H5P in that region as well too and so you get this cross-pollination of great experiences but that institution in particular did a very detailed diligence review of our platform and us as a company to make that decision and I think it's going to be hopefully an example for many other prestigious institutions from around the world to make similar choices in the year ahead. I think that market dynamic is playing out whether it's in Singapore or Netherlands or South Africa or many, many other countries around the world. It's not just an isolated spot or example, if you will.

That's great. And then maybe just turning to the corporate side, further momentum this quarter on the membership side. I know that a goal of the company is to push more into employee training. Maybe just you could provide us with an update there. I know there's been a lot of product work underway and you've hired new leadership. I know it's probably not going to impact the back half of this fiscal year, but maybe just update us on the strategy and progress heading into fiscal 28.

No, I think you're still seeing fantastic growth there, especially for training organizations. where their members need a fantastic learning experience to support. Those training organizations continue to support their mandates and drive additional revenue for those organizations. So that's a very strong part of our business and growing quite quickly. You know, we continue to invest across all of our markets in terms of developing new product, new technologies to really support us and making sure that we can continually expand the market opportunity that's in front of us. and I remain very bullish on corporate being a critical market for us because as you can imagine, anytime that all these industries are going through this big transformation, they're going to need upskilling and learning and we're the best platform for them to deliver that to their members and we're quite excited to see the new clients coming on board this past quarter and very bullish on the opportunities in front of us with the new leadership and also the expanded team.

Thanks so much for the hotline.

Your next question from the line of John Hsiao, TD Cowan. John, your line is open. Please go ahead.

Good morning, guys. Thanks for taking my question. So, in terms of the Lumi ARR, it's good to see that 40% growth in just two quarters, and I understand that tax rate for new customers is relatively high. So, my question is, how do you plan to, you know, drive a higher tax rate among your existing cohort? Is more of a conversation at renewal, or is it some – or the conversation already happened?

The conversation is typical for renewal. That said, the impact that Lumi has now with clients is so significant, they should be embracing it today. They shouldn't be waiting. And so, you know, I'm actually personally sitting down with the team to understand all the key objectives that get in the way of people trying to buy Lumi today and seeing if we can figure out how to mark them back as quickly as possible. You know, John, this is a technology where if they implement it, all of a sudden you can do things like translate this content into different languages. You can automatically take a Word document and convert it into a beautifully engaging interactive learning experience with interactives and flashcards and quick knowledge checks on the bottom of every page. It just makes learning so much better for students. We now have closing in on 10 different efficacy studies that demonstrate the impact that it has in terms of improving educational outcomes. and then our learning services team has actually figured out ways to really drive down the cost of developing all of these courses as well. So the combination of those two things is so compelling for clients. It's literally almost 10x better than the way that they've been doing it so far to date. And anytime you can get a product to the point where it's 10x, that's compelling enough to put in place the purchase today. There's little to no risk attached to these clients putting this technology. The guys that have embraced it have had a tremendous impact on their businesses, and we just need to get the word out, I think.

And in terms of your PS revenue guidance this quarter, I'm just curious, is the weakness largely discretionary or cyclical? Does it reflect a structural change in how customer purchase or PS services? My understanding is that you have shortened the deployment cycles. What is the implication maybe for future PS revenue going forward?

It's largely just on advisory services. It's not on the implementation side of it. I just want to be clear on that. And it's largely just softness in the particular quarter. It's not an overall major trend here. I think the overall services for professional services has just largely been flat for a couple of years now. We saw a big spike up during the pandemic, as you can imagine. I'm not sure why it isn't going up to the right, to be honest. It doesn't need to if we can drive the AR adoption without it going way up. We're counting on services, if you will, as a big revenue driver. But we think there's tremendous value in that team. That team, as I said earlier, can unlock the ability for you to 10x improve the educational outcomes for your students. And so why wouldn't you engage with them? and so similar to Lumi, I'm sitting there with a team to try to figure out what are the blocks in terms of getting this adopted more widely. And again, for clarity, there are great clients that are engaging with this team to drive really incredible results with their programs and they come back and buy that service over and over again. So it's not like there's not great case studies, just fantastic case studies there. We just need to make more of our clients be aware of this great service Sometimes it's not just the technology, it's the combination of technology and people that really have a big impact. And I think one of the things that we're going to try to do is really think about how the advisory services group could be thought of almost as four deployed engineers that are out there helping clients embrace these new AI technologies, these new approaches to building courses. And that might be part of the way that we spike that revenue back up in the back half a year and into next. That's a great caller.

Thank you. I'll pop the line.

Your next question from the line of Thanos Mishopoulos with BMO Capital Markets. Thanos, your line is open. Please go ahead.

Hi, good morning. John, with respect to your increasing win rates, and if you look at some large marquee wins you've had, like in Australia, I imagine these are very complex RFPs where there's a lot of criteria that come to the selection process, but Is there, you know, is a lot of the increased win rate been due specifically to some of the new capabilities like Lumi or are there a lot more ingredients that go into it encompassing the overall strength of the platform and other factors?

I think similar to other wins that we've seen in the past, it's many factors that are playing into why they're selecting us. Lumi is certainly a big factor. It may not be in the actual RFP itself. as you're looking at implementing technologies today, you want to pick a partner that's going to have the right solution in place for those 5, 10, 15, 20 years. And so you want to pick somebody that's not just got the right product today, but has the right engineering, the right mindset, the right approach to design, the right approach to AI that's going to be able to be successful many years into the future. And I think we spoke about the University of Ottawa previously where they did a major renewal over a decade long. after doing a similar in-depth review. So it's across all these factors, support, partnership, innovation, roadmap, AI, the learning experience. I think the other big factor that's playing in is the work that we're doing around the content experience. So students are looking for a better educational journey. They don't want to read just big blocks of text or big PDF files or big Word documents anymore. And so the ability for us to take that and transform that into a really engaging, interactive experience is something that's very popular with a lot of our clients today. And we have, again, very compelling differentiation there with Creator Plus, with HIP, and now with Lumi as an AI agent that's helping them leverage these other technologies. You're getting this beautiful stacking of these technologies together to really have a big impact for these clients. I wish there was just like one thing that's compelling to everybody, but it's actually all these factors that are super compelling for them.

Great. On K-12, recognizing that it's a small portion of the business now, now that you're through this term, would you expect that segment to still remain the drag on overall corporate growth, or is there an opportunity for that to be the approach of a growth that's more similar to the overall corporate average?

I think it's an opportunity for it to return to the average. The base that we have is very strong. The impact that we're having with those clients is big. And K-12 is going through a very similar transformation as every other sector that we're working in in terms of how they deliver their great educational experiences. And so our technology is perfectly suited for that market. But again, it's a small base. It's much easier to grow on a small base with and we do believe our product is a great fit for that market long term. So does it get the same attention as the other 90 plus percent of our business? You know, it's proportionately, I think it's a fair investment that enables us to keep that base very strong and enables us to potentially return to it not being a drag but hopefully supporting the growth long term.

Great, that's fine. Thank you. Your next question from the line of Brian Peterson with Raymond James. Brian, your line is open. Please go ahead.

Hey, gentlemen. Thanks for taking the question. Josh, one for you. Just on the K-12 churn side, is there any way to kind of help us understand when that was reflected in ARR over the last few quarters? And I say that not because you guys size it, right, so we can kind of look at the ARR growth rate, but I just want to make sure I'm tracking kind of the sequential change When that started to impact results, maybe a few quarters ago versus now?

Yeah, for sure. So Q2 was sort of the final tranche. And as we sort of articulated the data points in an earlier question, was sort of the largest batch. And so we started to see that impact, REBREC, in Q2. and so there would have been a bit of a gradual step up over the past sort of three quarters where we would have seen an impact on RevRec. We still see a bit of that obviously impact in the back half which is why as mentioned implicit in our guidance is a 7% subscription growth profile and not something more reflective of our ex-K-12 ARR growth rates just yet. But that's sort of the timeline and magnitude and impact.

Okay. Thanks, Josh. And, John, maybe one for you. Can you just remind us, like, and I understand, like, you and maybe Intrush had pretty good market share in North America, but as I think of that internationally, like, how much of those systems are still on legacy platforms? And as you think about that pipeline to move to kind of cloud-based solutions, has AI accelerated that growth? I just would love to understand maybe the size of that opportunity and any momentum you're seeing there. Thanks, guys.

Yeah, that's a great question, Brian. So, like, international, we've seen, again, be about 15% growth rate for us on ARR, which is fantastic. I think that can continue to maintain or accelerate even. Thank you very much. I want to be clear, it's not just cloud. It's this transition to an AI-first learning platform. In the past, we would compete and we would try to be like 3% better or 5% better. I think the combination of our learning services plus Lumi, plus Creator Plus, plus some of these other technologies that we brought to bear is now putting us in a position where we can almost be 10x better. Not 3% better, but significantly better than what they're using today. in terms of improving educational outcomes and driving down costs. So that, I think, opens up a big replacement cycle globally because, you know, if an institution can save that much money or retain that much revenue, then the cost of our technology becomes almost free. And so we do want to lean into international in a much bigger way. and with that said, we still see tremendous opportunities for growth in North America. It's been held back a little with the K-12 turn in the U.S. Thanks, John.

Your next question from the line of S.E. Thursday with Staple. S.E., your line is open. Please go ahead. Your next question from the line of Ty Sullivan with RBC Capital Markets. Ty, your line is open. Please go ahead.

Hi, morning, guys. Thanks for taking the questions. Just on the light revenue for the quarter, you called out the $0.8 million Blade Go Live, as well as software advisory services. Were those sort of the two main contributing factors, or was there anything else at play during the quarter?

Yeah, the sort of bridge from a lower subscription growth profile in Q2 versus The norm would be a combination of the K-12 drag, the delayed go-live, and then relative to initial expectations, the non-USD foreign exchange rates have had more pressure relative to what and so that's taken a chunk out of sort of Q2 as well as full year expectations on subscription.

Okay, thanks. That's helpful. And just on the guidance for the year, obviously revenue guidance was lowered but EBITDA guidance was maintained. Where specifically do you expect the offsets to come from in the back half of the year and do you expect more contribution from the gross margin side or the OPEX side?

Yeah, so a good chunk of the revenue reduction was professional services, which has a lower gross margin profile, so sort of a less impactful flow through to EBITDA. But the dynamic really that we see on the adjusted EBITDA side is in the back half of the year, you have a higher revenue and gross margin profile. flowing across a sort of flat off X profile. And so you see more throughput to EBITDA, but then also the gross margin profile itself is a step higher in the back half of the year than the first half of the year based upon lapping that database work and also sort of delivering on that work slightly better than sort of our original plans had anticipated.

Okay, great. Thank you. I will pass the line.

Your next question from the line of Susan Sukumar with CECL. Susan, your line is open. Please go ahead.

Hey, good morning, guys. This is SA speaking on behalf of CECL. For my first question, I wanted to talk about U.S. growth. It looked like it was down year over year, and I was curious if that was a function of a slip deal or... There's some lumpiness there. What are you seeing in the broader demand environment for the U.S.?

I think the main decline in the U.S. is the U.S. K-12 churn coming out. We're seeing similar muted demand in higher education in terms of RFP volume, but our win rate continues to tick up and higher education seems to be pretty strong actually in the U.S. It's really just the U.S. K-12 churn and then maybe some Lightness in our learning services work that's been done traditionally in the U.S. So those are probably the two main factors. Overall, the U.S. K-12 ed tech spend has trended down for a couple years now. I do think that's normalizing, and so the hope is that we will start to see some new logo ads in the near future, both in the U.S. and other K-12 markets around the world. You know, long-term, I think the trend is a replacement cycle for old legacy platforms that are not really AI-enabled because you can get this maybe for 5X improvement or 10X improvement with the technology and the services that we're kind of providing for these clients to support this learning transformation that they're all going through. And so the hope is that that's already starting to show up in the pipeline. The pipeline continues to grow quarter over quarter over quarter. And so we need to do the work now of translating that into a real replacement cycle in the U.S. market.

Got it. Sounds good. For my second question, I want to touch on AI. Good to see the ARR milestones. I know that may not be in RFPs yet, but maybe just a question on how AI overall is taking part in pricing discussions. And yeah, just how AI has been a factor in that.

You know, we charge an additional amount for living. So far, that price point has not been a barrier for any of the clients that we're engaging with. It either comes with this savings So if, for example, a client's spending $10 million a year on program development, make it out, either spend $5 million a year and get the same productivity, or that $10 million goes twice as far. And so there's a huge ROI attached to it that dwarfs the investment that's being made. And so pricing has not been a major factor there. And I think as the adoption continues to pick up, last year we talked about an 8x increase, the year before an 80x increase in terms of the adoptions. and many more. Great. And my last question.

I want to talk about just quickly on the international growth. It looks like it decelerated versus the last quarter. I just want to see what the gap was between the ARR growth being 15% and that. And then if I can also tie in just a quick question on just capital priorities post the SIV. Thank you.

Yeah, thanks. I appreciate the question. Yeah, no, there isn't any deceleration in our international growth profile. We continue to view it as a 15% growth business. It's been doing that the past several years and in line to do that this year. I think what you can see from kind of quarter to quarter is some sort of imperfect fluctuations, mainly on the professional services side. were potentially on the FX side as well. But overall, as John mentioned earlier, we see tremendous opportunity internationally and globally, and we're seeing some really good evidence points. Even just this past quarter, some really key wins in Asia and in Australia and other parts of the globe. And then your second question, if you don't mind just repeating it just to make sure I heard correctly.

Yeah, thank you. I just have a question on capital priorities post the SIV.

Yeah, so for us, it's really been consistent. So we've always looked at organic investment buybacks, disciplined M&A. That continues to be the case. Obviously, the past 12 months, we've leaned into buybacks more strongly. The last 12 months, we've done about 3 million shares for 11% of the opening subordinate voting shares. And we've reinstated our NCIB. We plan to make full use of that for the remainder of this year. But we continue to actively review capital allocation as a management team and as a board and would expect to continue to do so for the balance of the year.

Thank you so much. And I'll pass the line.

We have reached the end of the Q&A session. I will now turn the call back to John Baker for closing remarks.

Thank you, operator, and thank you, everyone, for joining us on the call today. We're looking forward to updating you following our Q3 results. Have a great day, everybody.

This concludes today's call. Thank you for attending. You may now disconnect.