Thanks everyone for joining us here at the 46th Annual Growth Conference in Boston. The conference is successful every year because we get great companies like Docebo to come and join us, so thank you for doing that. My name's Rob Young. I'm one of the Canadian technology analysts with Canaccord, and today I'm your moderator. The session, it's going to be a fireside chat, so by all means, jump in with any questions that you have. I have lots of questions here, but I would love to get you involved. To my left, I have Alessio Artuffo, who's the CEO. And to his left is Brandon Farber, the CFO. And then here, front and center, Mike McCarthy, who runs IR, who'd be very happy to follow up with you, I'm sure. Alessio has been an important part of the business now since prior to the IPO.
He was the head of sales, the person I think who was the first U.S. employee and opened that up and now runs the business. Brandon, likewise, has been part of the business since the IPO. So these two have been part of the business for a long time. I'm going to hand over the floor to Alessio, just maybe some introductory comments on the Q2, and then we'll get into questions. Just the most meaningful things that have happened recently.
Well, hello everybody, first of all. Q2 was another strong quarter for us. We had underlying growth accelerating for the second quarter in a row. Over the past couple of years, we've been working to really double down on our enterprise success. We're seeing really the results of that work pay off over the past three or four quarters. We've seen acceleration in pipeline. Earlier this year, we've completed two acquisitions, one of a skills intelligence platform called 365Talents out of France, and one smaller in size of an AI native enterprise search company called Zive. In Q2, we start to seeing the results of 365 integration. Some of our biggest customers are buying into the skills plus learning story. Q2 was also a story of shipping products. We've released numerous new capabilities with AI. We've accelerated product development very meaningfully. We brought on board some amazing customers.
I know we don't do logos because logo rights are old-fashioned these days, but tech leaders, manufacturing leaders. I would say the big takeaway for us is Docebo's continuing to accelerate our progression into becoming more and more of a strategic enterprise focused platform as opposed to mid-market and SMB, which is where we started as a public company back in 2019 when we first went public.
Okay. Lots of worry these days around AI, but quietly behind the scenes, you've seen ARR accelerate the last couple of quarters. What is it that's driving that acceleration? If you could talk about the puts and takes around ARR, it'd be helpful. Then it felt from the call that you have a lot of confidence on the second half, that that acceleration's going to continue. Maybe give us a sense of what gives you that confidence.
I'll do some.
Do you want me to take that one?
Brief intro, then I'll pass you on some considerations on numbers.
Sure.
Just one point on ARR acceleration. There's really two factors that are driving it. One is enterprise re-accelerating. Mid-market is continuing to do really good, and our international business is kicking into gear very nicely. We also have some considerations around, let's say, headwinds that are reducing, and I'll have Brandon address some of that. One other thing that I think it's meaningful in the context of re-accelerating is we're signing bigger customers at bigger tickets, and that's making a ton of difference. I'll pass to you, Brandon.
Yeah, I think from an ARR perspective, there's two numbers to think of. First of all is the reported top-line ARR grew 9.5%, and then we report what we consider core ARR, which excludes effects, it excludes acquired ARR, and excludes the Dayforce wind down. Just for context, Dayforce wind down, we were at this conference last year. They're about $19.5 million of ARR, roughly 10% of our overall book of business. Flash forward today, they're about $16.5 million, so we've lapsed about $13 million of headwind, and that ARR re-accelerated to 13.9%. At some point, those two numbers are going to have to converge. Why we're excited is that we finally see Q3 as being the time for our top line to re-accelerate.
Why am I saying that? Well, Q3 of last year, Dayforce churned roughly $5 million of ARR. Q4 of last year, we had AWS churn $4 million, Dayforce on top of that. So we're starting to lap some easier comps. You can't report higher core ARR growth with top line at a lower amount forever. At some point, those have to converge. We see these next two quarters a point where they start to converge.
Right. Q3 seasonality, the FedRAMP business, which you've been investing in quite aggressively for the last several years. There's some seasonality.
Yes.
You've also just acquired 365Talents, and you're going to be able to cross-sell. Those two pieces seem as though there's some upside in the second half of the year. Maybe if you could.
Yeah.
Walk us through those two factors.
Yeah. Generally, we exclude $1 million+ ARR deals from our guide. If you think about the FedRAMP business, these are inherently large chunky deals. Within our guide, we do have an embedded, an assumption that we're going to do well in FedRAMP because we have deals, we have certainty, and line of sight in. There is potential for it to be a great FedRAMP quarter. It's just dependent on will we land these large deals or not.
Right.
From a SLED perspective, Q2 was our strongest quarter from a SLED perspective. We're starting to see FedRAMP not only benefit that FedRAMP specific product, but it's also given us more credibility in the SLED space.
I think one of the things that you'd said is that the 365Talents ACV is roughly similar to the LMS business, yet the business you acquire is small, and so there appears to me to be a very large opportunity to cross-sell that.
Yeah, it's not only that, it's the two deals that we talked about is the large telecom, the auto. These had a large skills first requirement, so not only did it double the ACV, this is a deal that we would have not even won the LMS last year because the skills was such a critical component. If it wasn't tied into one solution, they wouldn't have even considered Docebo last year.
Right. So 365Talents getting into a broader swath of opportunities. When you look at the pipeline, I think, Alessio, you've said recently that there's more big deals in the pipeline than at any other point. I don't want to put words in your mouth. How much of that would be influenced by the Skills acquisition?
It plays an important role. Having Skills in the mix allows us to increase the value. I don't think that's exclusively that. We are just working with organizations that have bigger numbers, but the Skills SKU helps tremendously.
Yeah, for sure.
Then, I guess the next piece I think probably we need to talk about is your, I guess, fairly aggressive move into AI. I think it's fair to say Docebo has been an early entrant there, and it's always been part of the product mix. Even going back to the Canadian IPO, I remember Shape was being shown to customers. Maybe we could just talk through some of what makes you excited in the second half, because there's a bit of a product cycle here in the second half of the year.
Mm-hmm. It's not anymore as evident to call out what I was trying to describe to somebody recently. We used to distinguish what was AI from what is not AI, and that divide is blending more and more as we bring gen AI, frankly, everywhere in the platform. With that said, there's a few places in the product that are very AI centric. The first one that comes to mind is a module that has now become pretty mature, which is our AI role play technology. It's actually really effective. You can create your own custom rubrics and model out virtual avatar scenarios and train yourself against any context, whether you want to train as a bank teller or you want to train as a sales enablement use case. You can inject objections or tone of the speaker. There's so much configuration that can be done.
That's been really effective in our customers. The adoption and the usage of that has been growing very significantly. Upcoming, though, more importantly, as a result of the acquisition that we did not too long ago, this fall, we're going to have live for the first time our AgentHub, as well as our Enterprise Knowledge. Both are two sides of the same coin, so to speak. Enterprise Knowledge is designed to turn enterprise knowledge sources, whether it's a CRM, a document management system, whether it's your Notion, Google Drive, and it integrates on an index basis, so with context retrieval, with your learning management. From Docebo, you can do queries and search, extrapolate knowledge, and transform that knowledge into learning assets. That's something that we are very excited about.
The customers are loving. We have private betas going on right now. In October, it's going to go live. AgentHub is our first official product to automate workflows and entire business processes that surround any specific workflow you can think of for internal, external training, and that's also going to go live in October. I think the one thing that I would say about AgentHub is it opens up a lot of possibility for us to go on the forward deployment side. Our end goal is to be able to work with some of our top customers and really work deeply with them to create highly personalized workflows and tie them to agents.
Yeah. Maybe I'll touch a little bit on that. The forward deployment element of your strategy is emerging. I guess it strikes me that many of the users of Docebo aren't very technical, and so I think this is a strategy, if I'm reading it right, to maybe give the incentive or to give the nudge that they need to see the opportunity that's coming out of AgentHub, maybe out of MCP Server and all these pieces. Maybe you could talk about why that's necessary for Docebo, for its customer base, et cetera.
Sure. I think there's a few parts to that equation. First, what you said is correct. It's not a product that addresses an IT team, like a ServiceNow would have a CIO office as a counterpart. L&D is not always the most funded and technical. The second part is, for us, we recognize that in order to have these customers tight and really attached and retained for the long time, the best way to do it is to really give them an experience that is frictionless. The learning management component and the skills component actually talk to a number of different systems. The amount of integration, data exchanges, and workflows that exist, it's incredibly significant. It's not uncommon for customers to have to do manual operations, extractions, reimporting, frankly, some band-aids in order to support their own custom workflows.
We want to go in, whether in their offices or remotely in their offices, and truly build that level of stickiness together, and then we can extrapolate those workflows, at QSR level, at banking, insurance, and extrapolate the things that we can generalize and productize for other customers.
Okay. Where's the best way, place to go? I think maybe in the past you've highlighted that there is a data asset, there's a proprietary data asset inside of Docebo which you can leverage. I think skills accelerates that. It moves it to another level. Maybe just talk about, for those investors that might be worried about AI and think of proprietary data as a hedge, what does Docebo have?
Sure. Depending on the use case, Docebo is used for various use cases, and it is a system of record of all learning activities that occur in a company. If you are running a healthcare business and you are recording the completions of courses by nurse practitioners and/or other members that operate within a hospital facility, every single data asset constitutes something that is auditable and regulated by a body, and you cannot fabricate that. You need to have that in a certain way. You need to keep records for a certain amount of time, and there has got to be a system of record where all of this can be demonstrated. That is just one example on the regulatory side.
On the customer side, if you run an academy over at a large technology company, i.e., simple Databricks, that is a simple example of a customer that is very tech forward, and you have data about your customers and their certifications and their learning completions, and you can tie that back to their growth or partners that are actually your resellers and what they have done over a period of time. All of that data is invaluable because it tells you who is doing what and how they are performing, and it also cannot be fabricated. The system of record of learning is very important for our customers.
Right. As you said, very important in regulated industries. You said this quarter that you are going to put some investment dollars to work to enter, in a more aggressive way, the healthcare sector. I think there is a lot of shared knowledge with the FedRAMP experience.
Yeah.
This regulated data, the certification, all this seems to pull together. Maybe talk about what you see as the opportunity in healthcare. What the competitive set is like there would be another.
Yeah. There's a lot of parallels to the time in which we made the decision of verticalizing government. We see healthcare valued $2 billion-$3 billion market for our space. It is a market where, like you said, it's very regulated. We have already about $10 million or so of ARR that we've won opportunistically. We don't have a sales team dedicated to that or have been intentional at all about building capabilities for that vertical. But we've started over time, and we actually believe at a macro level that if we, having been always horizontal, we can develop this gene of becoming more efficient in certain target markets, and win at a higher rate, and have products that address the specific needs in an agentic way or natively, we're better off. As a result, we're going to be putting some capital to work.
It's not a big amount of capital. We're probably going to invest $1 million-$1.5 million on run rate cost across GTM product and staff to build a verticalized function like we did for government. Look, we love the ticket size. We have already four or five customers that are in our top 20, and we have acquired those with no specialization. Which means that once we have a sales team that all they do day in, day out is really operate on that healthcare business, we're going to be much more efficient and productive. So we're starting now. We're going to be live in January.
When you go into one of these healthcare customers, are you replacing one of the large LMS that you would run up against in FedRAMP and in enterprise, or is it a fragmented industry? Maybe just talk about you know, how it differs competitively.
Yeah, there's very few alternatives. That's the reality. What we hear from customers that engage with us in sales cycles, there's the usual suspects, incumbents that have been there for a while that they want to get out of, but they don't have a portfolio of options to go to, and so there's a very interesting opportunity for us. Similarly to government, the competition is not as wide as it would be in other sectors.
Coming from enterprise into this sector, you feel like you've got a more competitive position.
Yeah, we're already in a good position. I think we have a good amount of coverage. We think that with the incremental work on the product side over the next couple of quarters, we're going to have some key features that currently we don't possess, that are going to help us. And our goal is to double our win rates that are currently reasonable, not excellent. But if we can do those three to four things that are very critical, doubling win rates, dedicating a sales team, exploiting really that market, it's going to be a really incremental source of efficient growth for us.
Okay. If anybody has a question, by all means, jump in, but another thing that came up on the earnings call is potentially the beginning of some contraction in sales cycle. I think you're seeing that get a little better.
That was Brandon fighting over the question. He was trying to defend a point with somebody.
Did I hear that right, or is that?
I do not know if I heard it right. I think that is the big debate. All jokes inside. Yes, we are seeing sales cycle.
Compress.
Compress, as the question was asked, or sales cycles decreased, specifically in the enterprise market. To call out one specific thing is very hard to do because there are millions of variables that go into sales cycles. It is execution, it is macro, it is what verticals are in there, how mature, what comes in the top of the funnel. Generally, I would say execution is a big driver of that.
Okay. When you say execution, it is just better the go-to-market adjustments you have made.
Yeah.
The CRO, the CMO. This is working better and moving things through the pipeline faster and more efficiently, or there is a market push, or the market is helping.
I think it is a combination of a lot of different variables, but I would say the biggest variable is execution. Also, we have a better product, better product positioning with skills. There are better macros. There are a lot of things that contribute to sales cycles, but I think the one tangible that we can control, and that we have controlled, is execution.
Okay. We have three minutes left, so again, any questions, let me know. Maybe we talk a little bit about balance sheet. You have been active on buyback, very active on buyback. You have also been very active on M&A.
Yep.
You've decided to maybe potentially embark on a higher level of debt, depending on how the special issue completes right now, that's running right now. Maybe just talk about how you think about the balance sheet over the next year and where your priorities for capital deployment, because you are generating quite a bit of cash.
Yeah. We got into about $55 million of EBITDA free cash flow conversion, because we're not paying taxes for the next couple of years, is close to 100%. So strong cash generation. Just as a reminder, we ended the quarter, and I'm just going to use clean, round numbers. We ended $45 million of cash, $90 million in debt, so net debt position of $45 million on a $55 million of EBITDA is still pretty comfortable. We did announce a $70 million SIB, which would get funded $60 million in debt and $10 million into cash. Now, we are trading at roughly a 10% premium to the SIB price, so a logical investor would assume that's not going to get filled. So we're still going to sit roughly at $45 million net debt.
From a capital allocation perspective, M&A is not a high focus for the next 12 months. We're really focused on digestion, execution of the two acquisitions we've done. From there, we really take it on a day-to-day basis. Like, what's happening in the market? Do we feel like the stock price is dislocated from our internal valuations? Are interest rates going up? How's macro? So, it's something we talk about on a daily basis, and sometimes our minds shift very fast. I would generally say buybacks is still a high focus for us because we do believe our stock is still cheap.
You've done a lot of investment over the last two years. You've expanded AI product. You're entering FedRAMP, you're entering healthcare now, but you haven't really changed the target model.
Yep.
It seems to me as though there is still opportunity to grow EBITDA margins. The middle of the target model is 27%.
That's correct.
EBITDA margins, which is quite a bit ahead of where you are right now. How should I think about that target model? Is that still something, are we still going to see operating leverage and margin expansion and better cash flow?
Yeah. Generally, we're thinking about 2% EBITDA leverage per year, so we're at 20% this year. That kind of gets you the math on when we think we could get to 27%. When we think about the leverages, G&A, we roughly hold that absolute spend flat. Let's call it inflationary increases and minor investments. So we still have 3 to 4 percentage points of leverage just in G&A. R&D is probably the one area we're not going to sacrifice in the near term, just because it's a very important time with AI and some FDEs investments. Sales and marketing is another opportunity for leverage. Just ACV going up means quotas go up, increase efficiencies, and you have some areas in S&M that it is a little bit more fixed in structure. You talk about sales operations, enablement, and event spend.
We certainly see leverage in S&M as the years go on.
All right. We're at the end of the session. Accelerating ARR, looks like NRR is going to get better this year.
Yep.
You've got a good balance sheet and margin expansion. All things that seem to be very healthy. Congrats.
Thank you.
We'll end it there.
Thank you.
Thank you.