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spk11: Good afternoon. My name is JP and I will be your conference operator today. I would like to welcome everyone to Thinkific's second quarter 2023 financial results conference call. As a reminder, this conference call is being broadcast live on the internet and recorded. All lights have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one in your telephone keypad. If you would like to withdraw your questions, please press R2. Thank you. I would now like to turn the conference call over to Janet Craig, Head of Investor Relations. Please go ahead.
spk01: Thank you, JP, and good afternoon, everyone. Welcome to Thinkific's earnings call for the second quarter of 2023. Joining me today are Greg Smith, Co-Founder and CEO, and Corinne Waugh, CFO. After the prepared remarks, we'll open up the call to questions. During the call today, we will discuss our business outlook and make forward-looking statements that are based on assumptions and therefore subject to risks and certainties that could cause actual results different materially from those projected. These comments are based on our predictions and expectations as of today. We undertake no obligations to update these statements except as required by law. You can read about these risks and certainties in our regulatory filings that were filed earlier today. Our commentary today will include adjusted financial measures, which are non-IFRS measures. They should be considered as a supplement to and not a substitute for IFRS measures. Reconciliations between the two can be found in our regulatory documents, which are available on our website. In addition, our commentary today will include key performance indicators that help us evaluate our business, measure our performance, identify trends affecting our business, formulate business plans, and make strategic decisions. Such key performance indicators may be calculated in a manner different to similar key performance indicators used by other companies. I should also note, we have a slide deck that supports our remarks, available to download on the webcast interface or on our website. And finally, all dollar amounts discussed today are in U.S. dollars, unless otherwise indicated. I'll now turn the call over to Greg Smith, CEO of Thinkific. Greg?
spk10: Thank you, Janet. Hello, and welcome to our earnings call. Thank you for joining us. In the second quarter, we continued to execute against our strategy and remain focused on helping creators succeed. We delivered revenue of $14.4 million, which was above the top end of our guidance range. Adjusted EBITDA was also better than what we guided to, improving to a loss of $1.2 million. Other notable results included total paying customers, which were 34,300, the third consecutive quarter of customer growth. Thinkific Payments continues to perform well with a penetration rate of 30%, and GPV, that's the amount of payments processed on Thinkific Payments, of $31.4 million. Our achievements reflect the clear priorities we have for this year. As always, we are maniacally focused on helping our creators succeed. We do this by making it easier for them to get started and make their first sale, helping creators sell and earn more to grow their businesses, and continuing to drive success with larger customers on Thinkific+. Our creator story this quarter is a great example of how Thinkific makes it easier for creators to get started and earn more with Thinkific. The team recently spoke with Halisi and Rick, the remarkable founding couple behind our Black Utopia. They are an incredible example of how well our platform is able to provide the resources and infrastructure to empower new creators to build and scale amazing new businesses. Halisi and Rick joined Thinkific in May 2022, Starting on the free version of the platform and growing from there, they quickly became members of our Thinkific Accelerator program, an education program run by Thinkific on Thinkific that provides all the tools, methods, coaching, and a peer group to help creators launch and build their business much faster. After launching their course, Beyond the Bling, designed to help those in the Black community aged 45 to 65 achieve financial freedom, they saw a return on their initial investment in just the first week of sales. Through building an engaged audience on YouTube and taking advantage of a mailing list from a previous profession, Halisi and Rick were able to quickly monetize their audience, enabling them to experience life-changing success as online teachers. Not only has Beyond the Bling very quickly become a powerful tool for helping their growing audience achieve financial freedom, they've been able to retire 10 years ahead of schedule and grew their net worth to a million dollars, now living in the sunny paradise of Portugal. This is a great example of the success of the Thinkific Accelerator program and helping creators launch quickly and achieve new levels of success in their business. We believe early stage creators present an enormous opportunity for future growth, and we remain keenly focused on providing the very best tools and support that they need to get their business started and help them grow and thrive. And this is where a new product we are officially launching in September comes in. To give you a bit of a sneak peek, The Leap, is a product that will help creator educators that are in a similar position to that of Halisi and Rick when they got started. These creators may post on YouTube, TikTok, or Instagram, and they have a following, but they're finding it challenging to find ways to monetize their knowledge, or perhaps it's daunting for them to build a course. That's where the leap comes in. Fueled by AI, we support creators building their knowledge into a digital product in minutes. This builds on the concepts of micro-learning and the growth of learning on micro-content platforms like TikTok, accelerating the trend towards everything mobile and micro-learning. Learning on demand where you want it and consumable nuggets. The leap provides tools to help creators in building mini-courses, growing their email list, planning their digital products, monetizing their audience, including on TikTok, and driving engagement via creator group chats. These are just some of the ways we'll be supporting the creators through the leap. Up until now, The Leap has used blog content, social media, and other resources to support creators. But we saw an opportunity to allow them to get started and achieve results more rapidly. Creators are able to get started in minutes or hours, not days or weeks. The Leap is currently in beta testing, but officially launching in mid-September. You can check it out at theleap.co. For making it easier for creators to get started, we also wanted to ensure they are able to sell more and spend less time on administrative functions. That's where Thinkific Commerce comes in. Thinkific Commerce is a growing suite of tools built on top of our hugely successful Thinkific Payments platform. It is designed to help customers on Thinkific sell more and more easily manage and measure their business. We continue to bring new features to market with growing a suite of integrated business management and payment solutions. Most recently, we launched Buy Now, Pay Later, powered by Stripe and offered through Affirm, Klarna, and Afterpay. Buy Now, Pay Later allows creators to sell higher priced products while providing their students with more flexible payment options. Buy Now, Pay Later transactions on Thinkific were 40% larger than average during an ongoing beta program, evidence that Buy Now, Pay Later helps creators sell higher priced products and increase their ability to sell and earn more. Localized pricing is an addition that makes it easier for creators on our platforms. In both the UK and EU, we have introduced pricing and local currency rather than US dollars, removing a barrier for new creators to get started in these countries. And we didn't stop there. We've also launched Thinkific Analytics, which includes a suite of new dashboards that provide valuable insights to creators, helping them earn more and provide more impactful learning experiences. The analytics tool offers superior performance and usability, including data on enrollments, orders, revenue, and course engagements. Early in Q2, we launched our mobile apps. The reception has been strong, and as a result, we are broadening Branded Mobile, our customizable solution, to be available as an add-on for all of our paying customers. Some of the reasons creators are choosing the Branded Mobile solution include incremental revenue via in-app purchases, acquisition of new students via the App Store and the Play Store, brand and reputation building through a customizable look and feel, and of course, improved student engagement in both courses and communities via the mobile experience. Customer success as well as product and technology innovation are key, but as a business, we must also ensure that we are run efficiently and ultimately profitably. And we are doing this without losing focus on the importance of continued innovation, which includes working with AI to empower more creators, as well as our recent launch of our mobile apps, which I just mentioned. To sum it up, we're pleased with the progress we have made in our key metrics, the successful launch of mobile, along with continued advancements in our core platform and payments offerings. We're excited to launch The Leap and believe it solves a key barrier for new creators. We are executing on the path we laid out for ourselves late last year and are encouraged by the progress to date. Over the past several quarters, we have reduced our expense run rate, increased our revenue per employee, and improved marketing efficiency. We look forward to the sustained, consistent execution of our plan to deliver both growth and profit. Now, to speak about our current results in more detail, I'm going to turn the call over to Corrine.
spk07: Thanks, Greg. Good afternoon, everyone. We were pleased with our second quarter results. We not only beat the high end of our range of revenue, but also exceeded expectations on our path to profitability, where we beat the midpoint of our EBITDA guidance range by 50%. We're seeing momentum across all our KPIs, specifically growth in average revenue per user per month and the success of Thinkific Payments and our growth in servicing businesses with Thinkific+. Our unrelenting focus on strategic priorities, including helping creators get started, helping more customers sell more, and growing up market is yielding results. In the second quarter, revenue came in at $14.4 million, a 14% increase compared to the previous year. This was driven by customers adopting higher tier plans, including Thinkific Plus, and I want to specifically call out the increase in expansion revenue this quarter from features like branded mobile and the continued success of Thinkific Payments. Payments revenue growth is unique because it both increases the average revenue per user and the lifetime value of a customer without increasing the customer acquisition cost. As our customers' businesses grow, Thinkific grows. We continue to see strong quarter-on-quarter growth in ARR, increasing a million this quarter to 15.3 million with steady gains and a stable base, specifically driven by Thinkific Plus, and we are encouraged by the opportunity to grow up markets. We ended the first quarter with over 34,300 paying customers, an increase of 3% compared to last year. Building on the increases, we saw both in Q4 and in Q1. Moving to ARPU, or average revenue per user, ARPU grew to $141 per month in the second quarter, up 12% year-over-year. The GIFIC payments and the GIFIC Plus were key factors here. We believe that ARCU will be a near-term driver of our business as customers join our platform and adopt additional products like Thinkific Payments and Branded Mobile. Now let's dig further into Thinkific Payments. This is an important growth lever for our business with both short and long-term upside potential. In Q2, we achieved 30% penetration, up from a penetration rate in Q1 of 26%. 30% penetration was our original target for this business line, and we achieved this as a nice new milestone. We believe we have further runway here. In our primary markets of the US and Canada, more than 75% of our customers earn their first dollar on the GIFIC payments. These customers will leverage that first dollar into many more, creating a cycle of ongoing success for themselves and for GIFIC at the same time. Gross payments volume, or GPV, which is the total value of GMV processed on the GIFIC payments, was $31.4 million for the quarter, compared to $14.3 million in Q2 of 2022. Quarter over quarter, GPV grew by over $2 million. Our take rate on GPV is 3.6%, and our margin on this ranges between 25% and 30%. For example, for every $100 of GPV, we earned $3.60 of revenue and a margin of roughly $1. As we continue to add more tools that reduce the complexity for our creators and students alike, the attractiveness of this platform grows. In the near term, we have exciting new features, some of which are in beta, including buy now, pay later, additional payment methods, complete sales tax management, and the embedding of Stripes App Store in our platform. Our priority here is to deliver features that give our creators all the commerce tools they need to build their businesses and to remove any unnecessary administrative burden. Features like these will increase our take rate and improve our margins. GMB overall was at 106 million, our highest ever for the second quarter. Customers experienced growth broadly across our customer base, and it was a combination of both more customers monetizing for the first time and existing customers experiencing a higher average transaction size. Moving now to our P&L. As mentioned earlier, our revenue grew 14% year over year to 14.4 million. This exceeded the high end of our guidance range of 14.1 to 14.3 million, and was driven by strong expansion revenue, which was in turn driven from add-ons like Thinkific Payments and Branded Mobile, along with stable retention of our largest customers. Gross margin at 75% was slightly lower than the 76 gross margin recorded the same quarter last year. This was the result of continued success on Thinkific Payments, which carried a structurally lower gross margin in the 25 to 30% range and non-recurring transitional costs in the customer support team. as we continue to move towards a more efficient model. Our subscription gross margin was just below 80%, largely in line with last year. Our focus on cost efficiency and operational leverage continues, and as a new proof point along these lines, we've recently crossed an important benchmark, breaking through the $200,000 in annual revenue per employee. We believe we have the right team with the mindset to grow our business, drive product innovation, and deliver on our cornerstone of helping customers reach their highest levels of success. Sales and marketing expense decreased year-over-year by over $1 million, or 15%, and was $5.5 million in Q2, or 38% of revenue. Let's just pause here for a minute because this is quite an important point. We've been able to hold and expand our customer base, drive significant improvements in ARCU, and launch a slew of new products and features, all while significantly decreasing our costs. Turning to R&D, a reduction year-over-year of 2.2 million, or 31%, to 4.9 million was achieved due to our laser focus on ROI and properly aligning our R&D teams to the projects which will have the most impact for our customers. We achieved this reduction in expense and continue to produce high-quality, in-demand products like mobile features, commerce tools like sales tax management, as well as new analytics features on our platform. Generally, administrative expenses came in at $4 million, which was a slap compared to last year. As we continue to focus on growing the top line while making progress towards adjusted EBITDA breakeven, we made significant progress again this quarter. Our adjusted EBITDA loss improved for the fifth consecutive quarter, and in the second quarter was $1.2 million, which is an 83% improvement compared to Q2 of last year. you'll find a summary table of the calculations for adjusted EBITDA in our press release, MD&A, and investor presentation on our website. Turning to our balance sheet, our cash and cash equivalents on June 30th was $84.7 million with no debt. We believe the strength in our balance sheet in combination with our declining cash requirements for operating needs is an asset that provides us with the stability and the flexibility to execute on our long-term strategy A relentless focus on managing our cost structure and in maintaining our path to profitability should result in us exiting 2023 with a profitable adjusted EBITDA run rate, benefiting from both top line growth and a continued reduction in our cost structure. For the third quarter of 2023, specifically, we expect revenue in the range of $14.5 to $14.7 million and adjusted EBITDA loss in the range of $0.6 to $1.2 million. While ARPU is a key driver of our top line growth in 2023, Executing on our strategies of supporting creators getting started and earning their first dollar, enabling them to sell more on our platform than anywhere else, and helping businesses find success with the features and services available on Picific Plus will position us well for long-term growth and sustainable profitability. And to wrap up the call, I'll now turn it back over to Greg.
spk10: Thank you, Corinne. In closing, we are executing on our strategic priorities and getting very close to our profitability targets. We're truly bringing everything together with the successful launch of our mobile apps, our impending launch of the leap, the use of AI both in our business as well as to support creators. Business tools like Thinkific Payments and Thinkific Commerce as well as analytics to help creators sell more and the continued growth of Thinkific Plus. All of these underscore our confidence that our path is the right one. And we're doing all of this as a more streamlined organization. We'll now take your questions.
spk06: Thank you.
spk11: Ladies and gentlemen, we will now conduct a question and answer session. If you have a question, please press star followed by the number one on your touchtone phone. You will hear a three-tone prompt acknowledging your request. If you would like to cancel your request, please press star too. Please ensure you lift the handset if you are using a speakerphone before pressing any keys. One moment please for your first question. Your first question comes from the line of Thanos Mastropoulos from BMO Capital Markets. Your line is now open. Hi, good afternoon.
spk14: Greg, just expanding on the leap, I apologize if you referenced it, but when would you expect the launch to happen? And just to provide more color in terms of the implications, is this basically about you know, making it easier for removing some of that latency in terms of people thinking about launching courses versus going ahead, you know, doing it. And this is kind of a way to help bridge that gap and accelerate that process. Or how do we think about the implications?
spk10: Thanks, Thanos. Yeah, great question. So the leap really started out about a year ago as more of a media property, really starting to validate a segment of our TAM. And we saw a lot of opportunity there in terms of people who are a little earlier in the journey. And in part of validating that we saw both that there's a large audience there for us to help. But also that that group in particular, all of our audience, I think struggles a little bit with this, but that group in particular, I think struggles with getting their first product built up and running and making that first sale. And so a lot of what the leap is about, especially with this product that's coming out in September. And it's currently been released to a small group of customers and playing around with it and seeing good results. And so broader release in September. But what that will do for them is just make it really easy for people who have some level of existing audience. So they're not starting from zero, but there's a significant number of people who have some kind of audience and they're looking to get something launched and built, monetize that audience and giving them the tool to build a product very quickly and easily and immediately start monetizing that audience without having to go through the much longer journey of what would conventionally take building out a course or a larger product and going to market with it.
spk14: Does that cover what you're looking for? Yeah, I think it does. And there's kind of a separate pricing structure for this relative to the platform or is this kind of like an out of the platform? How do we think about the pricing?
spk10: Yeah, so we're offering it initially as an entry point that is free and then there is monetization opportunities within that as well as the ability for people then to upgrade to the full Thinkific platform. So it's connected into the platform in terms of, say, customer journey, but does have a sort of standalone pricing initially as well.
spk14: Okay, that makes sense. In terms of the pavement penetration, I presume it's still the case that the ramp is driven predominantly by new customers. Any traction as far as converting the existing base, or is the focus really more about just ensuring you have a good attach rate on the new ones?
spk07: That's a good question, Donna. We have seen really good uptake from new customers, but also continuing to see more and more from existing customer base. The key has been releasing new features that are unique to Thinkific Payments and, you know, things like Buy Now, Pay Later and our new sales tax management solution is a big opportunity for us to do just that. And I think we're seeing some good growth. There's more opportunity there.
spk14: Okay. And then as far as new customers coming to the platform, are you seeing any changes in terms of, you know, customer type, sort of kind of the verticals in question, anything of that regard, or is it kind of consistent with prior trends?
spk10: Pretty consistent. And, you know, in fact, we're excited as well by sort of what we're seeing on the success of customers, the acceleration of of growth in GMV over the last three quarters and expecting that acceleration to continue into Q3. And when we looked within that, we looked at, you know, is this different vertical segments, customer sizes, customer types, and we're really seeing that success happen across the board. So we have more people monetizing and more transactions. One thing that hasn't shifted across the majority of customers is the size of the transaction or order value they're processing. So it's really more people and making more sales. The one place where we are seeing the average order value increase is in the people who are using Thinkific payments, because that's where we have those features like order bumps and other things we've released that are actually helping them drive up the average order value. But then sort of as an extension of that and back to your original thing in terms of customer acquisition, not really seeing a change in industry demographic of customers overall. Except more in the leap, as we talked about, is a lot of that right now is more people who are a little earlier in the journey. But I think the opportunity there, as that product matures, it'll also be a place that even more mature customers can utilize the benefits of that tool as well.
spk14: Great. I'll pass more. Thanks.
spk11: Thank you, Thanos. Your next question comes from the line of Todd Coupland from CIBC. Your line is now open.
spk13: Good evening, everyone. Greg, it seems like the business execution overall has been steadily improving the last few quarters. You're talking about a stable staff base and good blocking and tackling across the platform. What is that doing to culture and, I guess, focus and what that says to future periods? How are you thinking about that?
spk10: Yeah, I think culturally, if I'm totally honest, it's still a big shock to the system in a company like ours to have layoffs at all. And so even when we bring that up and say, how do people feel about that? There's still a little bit of a small cultural hangover from that, just if I'm being honest about the sentiment within the team. And we're very aware of that. And we continuously and have always taken an approach of kind of continuous innovation on culture. And so what that looks like for us is asking people and then responding and figuring out what we can do to continuously improve our culture. Part of that is as we add new people to the team, we see it as not always just fitting in, but what do you bring and what do you add to the team? And so as we added new leaders into the team, they brought in new improvements to the culture, but also just feedback from the team. So like all areas of our business, it's an area that faces continuous integration, innovation and improvement. And really that's just by, you know, our customers in that sense are our teammates, and asking them what we can do to improve. So overall, though, the sentiment is up. I think what the team is seeing is that we're delivering, I think, the excitement within the team very much so about our alignment here of reaching this goal of profitability and what that can unlock for us in terms of our balance sheet and our continued investment and growth is really exciting. So overall, the sentiment is up. I think it also gives us confidence that we're on the right track strategically. And then there's a lot of really exciting things we're working on Combined with the fact, I think, culturally that one of the benefits on slimming down the overall organization size and team size is that in many ways we become a lot more efficient in some of the things that we're doing. And so I'm super impressed with the volume that we're producing, especially on, say, the R&D side with the smaller team that we have. So that's been impressive and I think really encouraging for the team. I think it opens up a lot more doors for what we can do in the future with tools like AI.
spk13: Great, that's helpful. Secondly, I wanted to ask you if you could sort of step back from the KPIs, the payments in the quarter, what is, you know, you hit your goal now for Attach, you know, what's the potential for payments Attach and Take Rate as you think about the product roadmap for features? What could that look like in two or three years?
spk07: Grace, why don't I take the first part of that question, then I'll let you take the innovation side of it. So from opportunity going forward, we're really pleased with hitting 30% so early in the launch of this product and believe there's still a ton of upside. Seeing upwards of 75% in our key target geographies is really encouraging to us, and that probably gives us a sense of how far we can take this. And we're really now focused much more on how far can we grow our take rate As I mentioned in the prepared remarks, we're sitting at a 3.6% take rate, but have a few things that we've got in beta that will continue to drive that up. And we see an opportunity for us to grow as high as 5% in the near term. So we're excited about what the opportunity is there. I'd like Greg to talk a little bit about new product features coming to market.
spk10: Sure. Thanks, Corrine. Yeah. So Todd, your question about the longer term, where we see that going, I think Corrine highlighted that seeing the attachment rates of 75 to 80% shows us where we could take it in terms of overall penetration. I think there's further we can go beyond that, even that there's, as we've talked about before with GMV, there's a whole bunch of payments being processed that are not currently recorded within our GMV that we could bring back in as we grow the feature set that we offer and people see more value in kind of an integrated payment solution that has all the features they need. And we're seeing a bit of that already. And then in terms of the take rate, I think because of the nature of our industry, The fact that the margins of our customers are so much higher than when selling physical products, with the digital products, you have really high margins. So the appetite for us to have a take rate is quite strong. So I think in the future, we're looking at 5% to 10% take rate there. But the way we're doing that and looking at that is we want to give value for value. So we really want to be able to contribute features, things like order bumps, in-app transactions within mobile apps, things like bulk selling and the ability for our customers to go and sell bulk licenses in their programs where we're helping deliver revenue to them that they otherwise wouldn't get in a way that is unique to the Thinkific platform. And that allows us the opportunity to have a take rate within that transaction. So we bring them new revenue and they're happy to write a piece to us. And so that's what allows us, I think, to get
spk13: both a really high overall penetration but also a much higher take rate than what you'd see in other industries great uh thanks for that greg and then um um my my last question is on on ai um you know lots obviously discussion you know the past few months in the overall market do you see um existing customers being able to use this um you know either you know to make their businesses more efficient or just drive a better customer experience? Or is this something that's going to take a while? Maybe just talk about your early thoughts on how this is going to get used. Thanks a lot.
spk10: Sure. Thanks, Todd. Yeah, on the AI front, there's a few things. So there's a combination of sort of short-term, mid-term, long-term for us. There's a few things we've already done. So we have some tools around building products and courses using AI. We have some marketing tools around AI that are just available publicly on our website. We have now a funnel building tool using AI to build sales funnels. And some of these are in beta releases right now. So a smaller subset of customers using them and a larger release coming shortly. The Leap product has AI built into it that allows people to launch products much faster. So that's a fun one for people to play around with. And there's a lot more in the works leveraging our proprietary data. On that front, I was just speaking with some of the engineers on the team there. We are being very measured in our approach and moving as quickly as we can, but being careful about the thing. We have heard stories of other companies who've moved too quickly in it and had to dial back in part because of the cost of supporting servers. There's a certain way of how we can support or store things like text and the volume that we store and how we use the data here that can keep costs under control while ensuring that we deliver customer value. So I'm really impressed with the way the team is taking AI forward and that we have some really quick wins that customers are using today. And we have a lot more coming kind of each quarter looking out into the near and long-term future. that I think is going to be very exciting and transformational in terms of how customers are able to both build new products, make their first sale, make more ongoing sales, and just generally manage their business in a much easier way with some of the tools we're able to give them. And then, of course, with the proprietary data we have from millions of students who have gone through all of the products that we have on Thinkific, Combined with the tens of thousands of creators and all of the things they've created, we can look at that and then recommend best practices to our customers over time to help them improve their businesses. So really excited. And, you know, for those who are playing along at home, I'll just throw out the word AI one more time because it's very exciting about our future.
spk13: All right. Thanks for the color. Appreciate it.
spk06: Thank you.
spk11: Your next question comes from the line of Rob Young from Canaccord Genuity. Your line is now open.
spk02: Hi, thanks for taking the questions. First question for me would be on the incremental $1 million of ARR in the quarter, which I thought was notable. Is there any one-time items that would be a driver there, or is there any seasonality to think about in this quarter that might have driven this quarter? I remember a few quarters back, you had some price changes that bumped ARR. Is there anything notable in there to understand?
spk10: Not that I'm aware of at the moment. No, I don't think so. I think we want to continue to drive that up further and to, you know, over the midterm to accelerate that. So we've seen three quarters in a row now of incremental growth in the amount of ARR that we're adding. We did have about five quarters ago, a one-time pricing moment that had a bigger bump in ARR. If anything, the lagging impact of that has actually slowed a bit of our ARR growth, but we've managed to continue to grow it from there just because we pull forward some revenue into that quarter. I think there are opportunities for us to continue to improve our pricing and packaging in the future that could actually accelerate ARR growth, not so much in one-time bumps, but more in terms of ensuring we align our success with the success of our creators and And that is allowing us to grow with their success and alongside them for a slower but consistent ARR addition over time. And nothing seasonal this quarter.
spk02: Okay. Okay. And then my second question would be around the trend in free to paid conversion. I see you added customers, incremental customers in the quarter. Is there any... trend to call out in the churn metrics between free and paid, or maybe if there's any insight you can give us on the growth in the free premium customer side, any color there would be helpful.
spk10: Yeah, I do watch that and nothing to call out in that our churn's been relatively consistent as has been our conversion free to paid. I do think there are opportunities in both of those. And one way we're leaning in is really our monomaniacal focus within the business is how do we help more creators to sell more? And as long as we're doing that for them, that should drive a reduction or an improvement in retention and also an improvement in acquisition and conversion to paid because it's a great story to continue to be telling that you sell more through Thinkific. And I think we're seeing that start now with a lot of what we've released on Thinkific Commerce, where we're seeing people who are taking advantage of our Thinkific Commerce features built on Thinkific payments are actually seeing larger transaction sizes. And so that's exciting to see, because I think as we start to go to market with that, that'll create more and more opportunities for us to change our conversion rates and improve our retention as customers see more success. But Up to today, we haven't seen a real, those metrics have been relatively steady, which is still a good thing for our business because they're in a good place, but it's always a place that we want to improve upon.
spk02: Okay. And then I think you mentioned a couple of times the call some data points around think of it plus. I think I mentioned, I think you called it out as a key driver of ARR growth in the quarter. And maybe if you could just give us a sense of the relative size if possible, but any thoughts around how much of a driver Thinkific Plus is in the quarter and maybe over the next year?
spk07: I'll take that question, Rob. Plus has been a great driver for us in the last few quarters, and I think there's a ton of upside. These are really sticky customers with strong retention, and they're many of our largest customers. And while the overall transaction size doesn't make them specifically material in any one case, there's still a lot of large customers there. The total plus business is quite small from a customer account perspective, but about 20 to 25% of our total revenue and is really moving the needle on ARR and revenue growth. And we're seeing that success come through from an ARPU perspective. So I think there's still a lot of opportunity for us to grow in this market and it continues to be a good driver for us going forward.
spk02: Okay. Last question for me, thanks for that, would be, around the buy now, pay later. I think in the release it said that Stripe heuristics suggest that there's a 25% lift on average. Did you give any data on that in the prepared comments on the beta? And then I'll pass the line.
spk10: Yeah, I don't think we've actually – I can speak to it. We're seeing a bigger lift than the 25%. Um, and, uh, it's, it's fluctuated a lot while running the beta, but generally it's been either much higher or slightly higher than that. So currently I think the numbers are, and it is a beta project. So, um, but we're getting to statistics, strong statistical significance in the sort of 30 to 40% range or 35 to 40% range in terms of lift in, in transaction size. So that's been really exciting to see. And then of course, across all the features we've offered within Kific commerce, seeing good results of, increasing transaction size for the customers who are taking advantage of those feature sets.
spk02: Okay. Thanks. I'll pass on. Thanks.
spk11: Your next question comes from the line of Richard Tse from National Bank Financial. Your line is now open.
spk09: Yes. Thank you. You know, on the buy now, pay later, and I suppose this is probably applicable to other sort of financial products, do you have to be on Thinkific Payments to access that product?
spk10: Right now, yes, I believe that is the case. Corrine, would you correct me if I'm wrong there?
spk07: You're correct. It's one of the features on Thinkific Payments.
spk09: Great. Okay. And then just, Greg, I'm wondering if you maybe update us a little bit on the competitive landscape over the last 12 months in terms of how it's changed or whether it's even changed at all.
spk10: Yeah, in terms of, say, market share, haven't seen a big shift there. It seems to relatively been holding steady in that sense of it and haven't seen a lot of new entrants into the space or much in the way of new entrants in the space that we've become aware of. So there hasn't been a real shift in our data in terms of how we're perceiving that. We are seeing strength on our side in terms of overall brand recognition and SEO, which has been good. And I think that's a lot of strength in our go-to-market team and a lot of the work we're doing on the SEO front. So thanks to the crew there. But no major shift in terms of what we're seeing in terms of competitive trends.
spk09: Yeah, like it's sort of in a related question. If your currency were stronger, do you think there's an opportunity here to kind of consolidate the sector a bit, given it is quite niche to build some scale?
spk10: Yeah, definitely opportunities for that. I think you're right. There is a potential currency issue there, depending on the size. I mean, we do have a strong balance sheet. So depending on the size of a player in the space, our balance sheet might be sufficient. And then, of course, continued improvement in our share price starts to unlock more opportunities. And as a good board, we always and always have been exploring all opportunities in terms of what we could be doing there to continue both organic and inorganic growth.
spk09: And then with respect to the app store, I kind of noticed that there wasn't really much discussion in your release nor the MD&A on that. Is there any update there?
spk10: Yeah, honestly, really impressed with the volume of work our R&D team has been releasing. And so there was a moment in our, you know, preparing our disclosure where we sort of had to figure out What are we going to focus on in terms of sharing? There is continued innovation on our API in particular, which is what powers that app store. We're seeing a lot of improvements in terms of the API we are offering, the endpoints we're offering, how we're offering it, some of our movements towards GraphQL, which is a better technology in terms of how we offer that out to app developers and customers to use it, and some further improvements we're working on in terms of access to the API. there's a lot of work that is continuing to go on. That work also empowers us in other areas, both, you know, internally, even in terms of how we unlock features we can build with AI and other features that our teams can use. So lots of improvements there. We just didn't have one particular launch or release to focus on this quarter, but I expect we'll have more in the near term to talk about on that front.
spk09: Okay. And just the last one for me. Thank you for providing the guidance and sort of the outlook for the remainder of the year. Just from a modeling perspective, Corinne, I'm wondering if you could help us kind of parse out the stock-based compensation here for the remainder of the year.
spk07: I was wondering if I could get a question on that. It's a good question. We did have higher stock-based comp expense in the quarter than we had previously, and there was a few reasons for that. I do think that we're at a bit of a high watermark right now, and we'll see it come down slightly over the next two quarters as we get towards year-end, but nothing material. It's more of very slight declines.
spk04: Thank you.
spk12: Your next question comes from the line of Martin Toner from ATB Capital Markets. Your line is now open.
spk05: Hi, thanks for taking my question. How has customer growth trended so far this quarter?
spk10: Oh, so you're looking for in terms of Q2 reporting on customer growth or looking forward into projecting for Q3?
spk05: Yeah, just wondering if you can give us a little update on how Q3 has gone so far.
spk10: Yeah, sure. So looking into the future in terms of this, and I don't want to give guidance on numbers that we haven't given guidance on, but We do typically see a little bit of seasonality in the summer with entrepreneurs being slower in their starts in July and August. So this year is no exception to that. But then we often see a recovery that outbalances that coming in September. And we have plans around our go to market for September that should see a similar result there. So expect to see sort of similar results as we've seen in prior Q3s based on some seasonality in July and August and as well as a resurgence in September with sort of the It's not like we're an education back to school concept, but it does seem to have this sort of back to business September bump for us. So expect to see something similar there across the quarter and then projecting further into the future. I think from what we're seeing from our go to market, the products we're releasing, we expect to continue to grow customer count. I think there is opportunity in a lot of the things we're releasing in terms of both mobile and the leap and a lot of other products. or product improvements that should start to unlock even further customer growth beyond the steady but relatively nominal improvements that we've made over the last few quarters.
spk06: That's it for me, thanks. Thank you so much.
spk11: Ladies and gentlemen, as a reminder, if you have any questions, please press star 1 on your telephone keypad. Your next question comes from the line of Gavin Fairweather from Cormark Securities. Your line is now open.
spk08: Hi, this is Graham on for Gavin Fairweather. So my first question is on the progress towards break even. So you guys have it pegged for the end of this year. I'm just sort of curious on the trajectory of margins after you guys hit break even. So should we expect those margins to rise naturally or will you see maybe a bit of an increase in investment that might moderate that margin trajectory slightly?
spk07: we're really pleased with the progress that we've made towards hitting break even and have been looking out further in terms of, you know, how are we structuring our business? And we're very top line focused from a growth perspective. But, you know, from the beginning of the history of the business until the IPO, we always kind of ran it at profitability. We kind of ran it around break even. And so I consider us doing that as we go forward. We have been looking at, you know, kind of like low to mid single digit profitability, like adjusted EBITDA margin rates. And so that's kind of been where our mind's been at. But, you know, we do want to be able to save room for us to invest in opportunities ahead of profitability if something was to come up that has a near-term ROI. But it would have to be something exceptional for us to go back into a lost position. We do plan to continue to run the business in a profitable state.
spk08: That's great. Thank you. And then just a second question on payments. So we saw the payments penetration rise this quarter. So just we've seen some peers announce a surcharge on those third-party payments. I was just wondering if you have any thoughts on this as a lever to drive payments adoption.
spk07: We do have a number of levers available to drive payments adoption, including what you've mentioned and other things. I think the real focus that we have today is to really deliver value to our customers, and then we're sharing in their successes. They benefit from the value we've provided. So things like Buy Now, Pay Later, our sales tax management tools, both give us the opportunity to attract people to Thinkific Payments and then provide value where we can increase our take rate. And so that's our new focus. Like you mentioned, there are other levers that are always available to us, but really want to lead with value to our customers.
spk06: That's great. Thanks so much. That's it for me. Thank you, Graham.
spk11: Your next question comes from the line of Daniel Chan from TD Cowen. Your line is now open.
spk00: Hey guys, I was just wondering if you could share with us how the economics on the buy now, pay later works. You've got quite a few partners in there, so just thoughts on how you guys are sharing that revenue.
spk07: This is a product that we're leveraging through Stripe and I just can't say enough what a great partner they are in terms of, you know, building out a really powerful roadmap for us to continue to share in the opportunity there. We earn an additional take rate on the buy now, pay later transactions. And it helps increase us above the 3.6, but not significant, not like something we've built ourselves. And so we do share in some of that with Stripe as well as the other partners. So you can imagine there's a few players in there. But the pricing is no different than you'd have anywhere else. It's market priced.
spk00: Okay. Thanks, Tori. And then your margin came in better than you're expecting. I think it's been a few quarters you've done that now. What were the key differences between what materialized throughout the quarter and what you're expecting at the beginning?
spk07: When you're saying margin, you're saying EBITDA margin, not gross margin, right? Just to confirm the question you're asking. That's correct. Okay. I kind of assume so. There have been a number of things that have been helpful. Probably the most important one, though, is our whole team's really focused on driving towards profitability and And so across the company, we're seeing lots of people taking on projects that just help us move the needle forward every single quarter. And that really speaks to the power of, you know, transparency for the team on what the goal is and getting everyone aligned behind what we can do. So, you know, majority has been, you know, a whole bunch of smaller projects. Things worth calling out is the work we've done on our hosting costs. Our R&D team's done just a great job of, you know, helping us, you know, bring those, you You know, just a whole bunch of things across the board in terms of, you know, how we're negotiating contracts and how we're looking at delivering, you know, value to our customers. Sometimes that value improves the bottom line as much as it improves the top line. And so a whole bunch of things across the board. We have benefited from some significant beats on that. As we get closer to break even, you know, little numbers, little projects can move the needle quite significantly. And so I want to be careful that, you know, we don't get ahead of ourselves in terms of expectations, but we are on track. to have a break-even run rate at the end of Q4 to have break-even. So we're on track for that path.
spk04: Great. Thanks, Corrine. There are no more questions at this time.
spk11: I will now turn the call back over to Greg Smith for closing remarks.
spk10: Thanks, JP, and thanks, everyone, for sitting around for a call. Just a few things to highlight here as we look forward. We've been able to expand our customer base drive significant improvements in average revenue per user and ARR, increase our payment penetration, launch a variety of new products and features to help our customers and do all this while significantly decreasing our costs and with a smaller team. We've got a strong outlook for Q3 showing continued strength and consistency in our results. We have significant product improvements that have come and yet to come even with this smaller team. Our customer count is showing steady growth and we have near and midterm opportunities to accelerate this. We continue to add increasing amounts to ARR over recent quarters. Our GMV has three quarters of accelerating growth and we expect that to continue in Q3, showing the success in our customer base. Our EBITDA improvements continue to track towards profitability and our payments attach and ARPU growth are strong. In summary, we've dramatically cut costs to reach profitability while continuing to grow. We have a strong balance sheet with profit in sight, and so we can lean into more growth initiatives. And I'm personally very excited for the future of Thinkific. Thank you all for coming.
spk11: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
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